e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 0-29291
Corillian Corporation
(Exact name of registrant as
specified in its charter)
|
|
|
Oregon
(State or other
Jurisdiction of
Incorporation or Organization)
|
|
91-1795219
(I.R.S. Employer
Identification Number)
|
3400 NW John Olsen Place
Hillsboro, Oregon
(Address of principal
executive offices)
|
|
97124
(Zip
Code)
|
(503) 629-3300
(Telephone number)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
Common Stock, no par value
|
|
The Nasdaq Global Market
|
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934
Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or in any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the Registrant was approximately $131,186,154
as of the last business day of the most recently completed
second fiscal quarter (June 30, 2006), based upon the
closing price on the NASDAQ National Market reported for such
date. Shares of Common Stock held by each executive officer and
director and by each person who beneficially held more than 5%
of the outstanding Common Stock and was deemed to be an
affiliate have been excluded. This determination of executive
officer or affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 2007, 45,285,245 shares of Common
Stock were issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the
extent not set forth herein, is incorporated herein by reference
from the Registrants definitive proxy statement relating
to its 2007 annual meeting of shareholders.
FORM 10-K
TABLE OF
CONTENTS
1
PART I
Special
Note Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
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 Annual Report on
Form 10-K
are forward-looking including but not limited to, expectations
and beliefs regarding the acquisition of the company and its
timing; statements regarding industry prospects; future results
of operations or position; our expectations and beliefs
regarding future revenue growth; the future capabilities and
functionality of our products and services; our strategies and
intentions regarding acquisitions and their integration; the
outcome of any litigation to which we are a party; our
accounting and tax policies; our future strategies regarding
investments, product offerings, research and development, market
share, and strategic relationships and collaboration; our
dividend policies; our future capital requirements; and our
intentions and expectations regarding credit facilities. These
statements relate to future events or our 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 in greater detail
in Part 1, Item 1A,Risk Factors, our
registration statements and reports filed with the Securities
and Exchange Commission, and contained in our press releases
from time to time.
We do not guarantee future results, levels of activity,
performance or achievements. We do not intend to update any of
the forward-looking statements after the date of this document
to conform them to actual results or to changes in our
expectations.
The following discussion should be read in conjunction with
our Consolidated Financial Statements and the related notes and
other financial information appearing elsewhere in this Annual
Report on
Form 10-K.
Overview
We are a leading provider of solutions that enable banks, credit
unions, brokers and other financial service providers to rapidly
deploy Internet-based financial services. Our solutions allow
consumers to conduct financial transactions, view personal and
market financial information, pay bills and access other
financial services on the Internet. We provide a set of
applications for Internet banking, electronic bill presentment
and payment, online fraud prevention, targeted marketing, data
aggregation, alerts and online customer relationship management.
Our solutions integrate into existing database applications and
systems and enable our customers to monitor transactions across
all systems in real time. Our solutions are also designed to
support multiple lines of business, including consumer banking,
small business banking, corporate banking and credit card
management, and to scale to support millions of users. Our
current customers include J.P. Morgan Chase, The Huntington
National Bank, Capital One, Wachovia Bank and SunTrust Bank.
We were incorporated in Oregon in 1997.
You can access information about our company on our website on
the Investor Relations page. The address is
www.corillian.com/investors/. The contents of this
website are not intended to be incorporated by reference into
this report or any other report we file with the SEC. We make
available, free of charge, copies of our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to these and other reports filed or furnished by
us pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (the Exchange Act) as soon as
reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC. To request a copy, send a
written request to Corillian Corporation, Attention: Investor
Relations, 3400 NW John Olsen Place, Hillsboro, Oregon 97124,
and include the address to which the document should be mailed.
2
Pending
Acquisition of Corillian
On February 13, 2007, we entered into an Agreement and Plan
of Merger (Merger Agreement) pursuant to which
CheckFree Corporation (CheckFree) will acquire all
of our outstanding shares of common stock for $5.15 per
share in cash. CheckFree is a publicly traded Nasdaq company
headquartered in Norcross, Georgia and is a provider of
financial electronic commerce services and products. We expect
the acquisition to close in the second quarter of 2007, subject
to approval by our shareholders and certain regulatory matters,
although there can be no assurance that the merger will be
consummated in a timely manner, if at all. We intend to file a
proxy statement and other relevant materials with the SEC,
including a detailed description of the terms of the Merger
Agreement, as well as other important information about the
proposed transaction.
SHAREHOLDERS
ARE URGED TO READ THE PROXY STATEMENT AND OTHER RELEVANT
MATERIALS FILED WITH THE SEC AND POSTED TO OUR WEBSITE REGARDING
IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS.
Our company, our directors, and certain of our executive
officers, may be deemed to be participants in the solicitation
of proxies from our shareholders with respect of the proposed
transaction. Our shareholders may obtain information regarding
the names, affiliations and interests of such individuals in the
proxy statement.
All forward-looking statements in this Annual Report on
Form 10-K,
including those in the Managements Discussion and Analysis
of Financial Condition, Results of Operations and Risk Factors,
are based on managements plans for future operations
without consideration given to the pending transaction.
Industry
Background
The Internet has become an integral part of the daily lives of
millions of consumers because of the functionality and
convenience it offers. In addition to more traditional uses such
as email, the Internet is being increasingly used to conduct
financial transactions and deliver financial services. Internet
users are increasingly demanding more Internet-based financial
services, such as the ability to move money into various
accounts and to various companies and individuals, to see all of
their accounts with a financial institution in one place, and to
purchase new products online. The benefits that consumers derive
from Internet-based financial services include:
|
|
|
|
|
twenty-four hour, real-time, secure access to information and
financial services from any Internet device;
|
|
|
|
convenient and inexpensive money movement tools;
|
|
|
|
improved personal finance management; and
|
|
|
|
the presentation of comprehensive consolidated financial data.
|
The growth in Internet usage and the popularity of personal
finance content have changed the competitive landscape of the
financial service industry by requiring financial institutions
to compete based on the features they offer in the Internet
channel as well as other delivery channels while focusing on
lowering the expenses of their technology infrastructure. Within
this environment, we believe many financial institutions are
recognizing they will require more cost-effective Internet-based
financial solutions with greater functionality to help them
differentiate their service and product offerings and expand
their market share. In addition, financial institutions will
need these solutions to easily integrate with disparate systems
and applications and provide technological efficiencies and
time-to-market
advantages.
Significant challenges are involved in deploying Internet
finance solutions. Most notably, multiple diverse computing
environments, including existing systems, packaged applications,
Internet application servers and other emerging technologies,
must be integrated and must be able to communicate with each
other to provide customers with real-time data and to allow them
to conduct financial transactions. In addition, external
systems, such as those of credit card companies and bill payment
providers, must be integrated with internal systems in a secure
and reliable manner. These technical challenges are magnified by
the speed with which these services must be brought to market.
Most financial institutions do not have the technical skills or
resources to rapidly design and deploy these services. In
addition, although some financial institutions have the
technical skills and resources to develop and deploy Internet
finance solutions, they are subject to significant
time-to-market
competitive pressures. For most of
3
these financial service providers, internally developing and
deploying Internet finance solutions can be expensive, take
years to complete and require significant ongoing expenses. As a
result, many of these financial service providers are realizing
that if they want to deploy an Internet-based financial product
or service and integrate disparate applications more quickly and
efficiently, they need a comprehensive, outsourced packaged
software and service solution.
The
Corillian Solutions
We are a leading provider of solutions that enable financial
service providers to deploy Internet-based financial services
and to integrate disparate applications across their multiple
delivery channels and lines of business. Our solutions include
comprehensive suites of software that may be combined with our
professional services to form a complete outsourced solution for
offering Internet-based financial services or combined with the
personnel of the financial institution to accelerate the
deployment of online services and reduce the risks and lower the
costs for the financial institution.
We believe our products and services provide the following
benefits to our customers:
Accelerated Time to Market. Using our
solutions, financial institutions can deploy Internet-based
financial services to their customers quickly and reliably. In
addition, we provide comprehensive systems integration and
implementation services and customer support to complement the
flexible architecture of our solutions.
Highly Scalable and Extensible Platform. Our
software platform has been designed to be highly scalable to
meet the evolving needs of our customers. Independent laboratory
test results indicate that Corillian Voyager can support
Internet banking programs for more than 20 million users.
In addition, Corillian Voyager has been designed using universal
standards, including eXtensible Markup Language for
communication and Open Financial Exchange for financial
transactions. This architecture enables our customers to deploy
new Internet-based financial services by adding applications to
our platform at any time and by integrating future applications
with any Internet connected
point-of-presence.
Flexibility and Control. We offer our
customers the ability to take total control of the development
and management of our solutions or to rely on us for these
services. Customers can use their own internal personnel for
implementation, a combination of our personnel and internal
personnel, just our personnel or other third parties. In
addition, customers have the option of hosting the Corillian
products on their own premises or having the solutions hosted in
our managed facility. Our customers may request that we host
their solution because they lack sufficient resources or the
appropriate systems to host the solution on their premises. In
addition, our customers can reduce their information technology
costs by outsourcing application hosting services with us. We
offer customers the opportunity to transfer operation of their
solution to their own premises at any time. This flexibility
provides our customers with the option to gain operational
control of a deployment over time as their needs and desires
change.
Advanced Technology and Continued
Innovation. We believe our solutions provide a
comprehensive solution with a broad range of applications across
multiple lines of business that can be delivered on the desktop
or by wireless access. We offer certified Internet financial
applications using the Open Financial Exchange data standard,
and we have helped to define industry standards through
organizations like the Web Services Interoperability
Organization.
Reduced Cost of Internet Operations. Our
products lower the costs associated with our customers
Internet banking operations primarily by reducing the cost of
internal development and hardware requirements. Our software
solutions provide all of the functionality for Internet-based
financial services in a single comprehensive package. This
eliminates the cost of purchasing, integrating and installing
separate solution components from multiple vendors.
4
Strategy
Our objective is to extend our leadership in Internet finance
solutions. To that end, we seek to establish Corillian Voyager
as the platform of choice for Internet finance. To achieve this
objective, we intend to pursue the following strategies:
Increase Market Share. To date, we have
focused our sales and marketing efforts to target the largest
financial service providers. We intend to continue targeting
large, industry-leading financial service providers by
increasing our sales and marketing efforts. We have also
successfully developed other markets, including small to
mid-size financial institutions, and we intend to continue our
efforts towards expanding our penetration of these markets.
Expand Breadth of Product and Service
Offerings. Our current financial applications
include features for Internet banking, electronic bill
presentment and payment, online money movement, identity
management, interfacing with personal finance managers through
the Open Financial Exchange data standard, consumer banking,
small business banking, corporate banking, credit card
management, alerts and data aggregation. We recently expanded
our product offerings to include cash management, identity
management and fraud detection, and we intend to expand our
product offerings to include new applications, particularly in
the area of credit card management and cash management.
Leverage and Expand Strategic
Relationships. We intend to leverage our
relationships with leading systems integrators and value-added
resellers to extend our reach and provide our customers with
more comprehensive, customized solutions. We intend to continue
to expand and build additional relationships with value-added
resellers. In addition, we believe that forging relationships
with key technology vendors is critical to delivering a
comprehensive solution to financial service providers. Our
strategic partners include Microsoft Corporation, NCR
Corporation and Matrix Ltd, one of the leading systems
integration firms in Israel. We intend to develop additional
relationships to expand the scope of our functionality, and for
co-marketing and distribution purposes.
Collaborate with Technology Leaders. Our
products and services adhere to existing industry standards and
have been designed to meet the openness and scalability required
of Internet solutions. We will continue to collaborate with
companies to develop new technologies and to encourage the
adoption and implementation of universal standards that can
foster and simplify the exchange of financial information
through the Internet. We intend to continue investing in
research and development to meet the needs of our customers as
they evolve their Internet offerings.
Products
and Services
Our solutions enable financial institutions and other Internet
financial service providers to offer their customers a variety
of financial services over the Internet, including Internet
banking, electronic bill presentment and payment, web content
management and data aggregation. We also offer a variety of
services to support our customers throughout the process of
implementing and maintaining our solutions. License and
professional services accounted for 65% of consolidated revenues
in 2006, 67% in 2005 and 71% in 2004. Post-contractual support
accounted for 29% of consolidated revenues in 2006, 26% in 2005
and 22% in 2004. Hosting accounted for 6% of consolidated
revenues in 2006 and 7% in 2005 and 2004, respectively.
Corillian
Voyager(tm)
Corillian Voyager is a highly secure and reliable software
platform upon which we have built a menu of applications to
support multiple lines of business within banking. Corillian
Voyager has been designed to be highly scalable to meet the
evolving needs of our customers. We currently support more than
20 million users on a single instance of Corillian Voyager
for our largest customer and can support even larger volumes. In
addition, Corillian Voyager has been designed using universal
standards, including eXtensible Markup Language for
communication and Open Financial Exchange for financial
transactions. This architecture enables our customers to deploy
new Internet-based financial services by adding applications to
our platform at any time and by integrating future applications
to any Internet connected
point-of-presence.
5
Line
of Business Applications
Consumer Banking. Corillian Consumer Banking
enables financial institutions to offer their retail customers
secure, real-time access to transactional banking services
through the Internet. These services can be delivered to the
desktop or accessed by wireless devices. Internet users can
receive their consolidated account information and transaction
history and conduct financial transactions, such as transfers
and loan payments, over the Internet 24 hours a day, seven
days a week. The financial institutions can choose standard
browser-based user interfaces or more customized Internet
templates and online screens.
Small Business Banking. Corillian Small
Business Banking enables financial institutions to offer their
small business customers secure, real-time access to account
details and money movement functions through an Internet browser
or accounting packages such as QuickBooks. Businesses can
control access to business banking features, accounts and
transaction levels to provide financial and audit controls for
their staff, and can reconcile accounts instantly.
Corporate Banking. Corillian Corporate Banking
provides financial institutions a way to deliver a complete set
of online money movement services to corporations. Corillian
Corporate Banking integrates seamlessly and in real-time with
financial institution back-office systems. As a result,
corporations can make treasury management decisions based on
reliable,
up-to-date
information, and act on them instantly. Corporate banking
customers can transfer funds, view and create information
reports, receive alerts on account activity, view positive pay
exceptions, access lockbox accounts, manage cash concentration
and delegate authority to conduct transactions and view
information across complex organizations.
Credit Card Management. Corillian Credit Card
Management enables financial institutions to offer their credit
card customers secure, real-time access to transactional credit
card services through the Internet. These services can be
delivered to the desktop or accessed by wireless devices. Credit
card users can receive consolidated account information and
transaction history, view statements, pay bills and conduct
other financial transactions over the Internet 24 hours a
day, seven days a week. The financial institutions can choose
standard browser-based user interfaces or more customized
Internet templates and online screens.
Wealth Management. Corillian Wealth Management
provides access to investment accounts within and across
financial institutions, and enables planning and financial
management based on that information. Wealth Management
customers can view their accounts, initiate trades, conduct
research, set up watch lists, make payments, and view stock
tickers, market data and electronic trade confirmations.
Further, Corillian Wealth Management enables advisors, or other
authorized representatives, to perform transactions on behalf of
their customers.
Enterprise
Applications
Corillian Payments. Corillian Payments enables
financial service providers to offer their customers electronic
bill payment services and to deliver bills to customers through
a standard Internet page, through supported personal finance
management software, such as Quicken or Microsoft Money, or as a
digital image of a scanned paper bill. A financial service
provider can choose to deliver its own bills, the bills of
direct billing businesses, or the bills of third-party bill
presentment providers, such as CheckFree Corporation, Princeton
eCom (recently acquired by Online Resources Corporation) or
Metavante Corporation. By consolidating all bill presentment and
payment options, Corillian Payments enables Internet users to
pay bills in the same program where they do most of their
financial transactions. This application also enables financial
institutions to extend their product and service features for
their customers and to present bills on behalf of their business
customers.
Corillian Alerts. Corillian Alerts enables
financial institutions to provide their customers with alerts on
various types of activities. Balance alerts allow customers to
define account balance thresholds (both high and low) that, if
exceeded, will send an alert. Customers can also define
notification rules based on transaction type, statement
availability, and receipt of a secure message. Enhanced alerting
and delivery options allow customers to receive notification for
extended transaction types, such as bill payment, Positive Pay,
ACH, Wire, and transactions awaiting approval via wireless
devices, fax, messenger, and via
text-to-speech,
with user specified priorities.
6
Corillian eStatements. Corillian eStatements
enables financial institutions to provide their customers with
online statements. The customers are notified when statements
are ready, can view their statement whenever and from wherever
they would like, and need not contend with a paper-based
statement.
Corillian OFX. Corillian OFX enables financial
institutions to offer their customers the ability to integrate
their financial information with personal financial management
software, such as Quicken, QuickBooks and Microsoft Money, or
Internet portals such as Yahoo! Finance and MSN MoneyCentral.
Each of our solutions was designed using the Open Financial
Exchange data standard. This data specification streamlines the
process that financial service companies must employ to connect
with financial data centers and to interface with personal
financial management software.
Corillian Personal Money Manager. Corillian
Personal Money Manager enables a financial institution to
provide its customers with a customer-driven online check
registry and personal financial management tools. As a result, a
financial institutions customer can categorize
transactions according to his or her defined preferences and
prepare budget, spending and cashflow reports.
ACH and Wire Transfers. ACH and wire transfers
allow corporate customers to move funds between accounts at any
financial institution, collect receivables from customers, or
electronically pay suppliers, employees, and others. Receivers
and templates improve the ease and efficiency of executing
transfers. Customers can also make electronic state and federal
tax payments using convenient templates that are kept
up-to-date
automatically.
Enterprise Entitlements. Corillian Enterprise
Access Management provides financial institutions and their
customers robust organizational modeling, user management,
business rules, approval workflow, audit logging and
on-behalf-of capabilities, in a simple, yet extremely powerful,
authorization system. Corillian Enterprise Access Management is
accessible via Web services for financial institutions seeking a
way to centrally manage user access across the enterprise.
Corillian Security Solutions. We have several
solutions that help clients reduce the risk of system compromise
and increase the confidence of their online customers. These
offerings are focused on assisting the client in deploying and
maintaining a secure online platform. Security Solutions include:
|
|
|
|
|
Corillian Fraud Detection System. Early
warning system for Internet-based attacks against web sites;
|
|
|
|
Corillian Intelligent Authentication. Solution
designed to provide multi-layered, multi-factor authentication
without sacrificing usability;
|
|
|
|
Web site Investigation &
Forensics. Tools and techniques for separating
normal from abusive or fraudulent web site activity;
|
|
|
|
Secure Coding Workshop. Workshop covering
state-of-the-art
secure coding techniques for web sites;
|
|
|
|
Delivery System Security Review. Delivery
system review to help ensure resistance to security
threats; and
|
|
|
|
Code-level Security Review. Code-level
review by Senior Security Engineers for potential security
issues (Voyager-Specific).
|
Corillian MultiPoint Integrator. Corillian
MultiPoint Integrator is an integration platform combined with a
suite of applications designed to simplify and enhance
integration between multiple applications and legacy systems for
financial institutions, service providers, and data processors.
Corillian MultiPoint Integrator allows over 300 clients to
quickly integrate legacy systems with Web and database
applications. The systems process online, real-time transactions
through the communications hub of Corillian MultiPoint
Integrator for home banking, loan origination, kiosks, teller
platforms, call center systems, or electronic funds transfer
networks.
Corillian
Member
Advantage(tm)
Corillian Member Advantage is a hosted solution targeted to the
credit union and community banking industries. This solution
consists of our
best-in-class
online banking solution, but is available in a shared hardware
and software environment in which we can lower the operational
costs considerably, thereby enabling smaller
7
financial institutions to enjoy the same industry leading
solutions that larger banks are able to deploy, but in a more
cost effective manner.
Professional
Services
We offer a menu of professional services designed to fulfill our
customers needs throughout the process of product design,
implementation and operation. Our services include:
Implementation Services. Our implementation
services begin during the pre-sales process. Our implementation
experts perform an analysis of a potential customers
product requirements and determine how these products can best
be integrated with the customers existing host
infrastructure. We then develop a site survey and a project plan
recommendation. Once we are chosen to install our applications,
our professional service team works with the customer to ensure
that every solution is integrated with the customers
existing financial transaction system for delivery over the
Internet. If necessary, we write custom interfaces to handle
transaction requests, validate those requests and convert them
to a standard format for Internet-based presentation or to the
Open Financial Exchange format for delivery to personalized
financial management software. We also customize our Internet
templates to provide our customers with a user interface that
complements our brand recognition, design elements, color
schemes and corporate logos. The implementation process is
generally completed in 3 to 9 months, depending on the
complexity of the project. The fees for our implementation
services vary from project to project, depending on the size of
the customer and the products and services selected by the
customer.
Hosting Services. We offer hosting services to
our customers that prefer to have us handle all of their
Internet-based financial systems. Under this service option, the
customers Corillian Voyager servers reside at our managed
facility, and our staff monitors and maintains the servers. Our
services include weekly log auditing, installation and
configuration of servers, and staff to help our customers manage
system performance and daily operations. We charge a monthly
hosting fee that varies based on the needs of the customer, the
scope of its online services and the solutions deployed.
Consulting Services. By consulting with our
staff, our customers can select and design an electronic
commerce strategy. In addition to consulting with our customers
on the range of products and services available to them, we help
our customers with product and Internet site design. For
customers that lack in-house network security professionals, we
help develop the appropriate network and security protection
features to ensure a secure system.
Support Services. We offer several levels of
technical and maintenance support for our customers. These
levels are designed to meet our customers needs and those
of their customers. Our support fees vary based on which level
of support the customer selects. In addition to technical
support, we provide annual maintenance support for each
customer. These maintenance services entitle the customer to
updates and modifications of our solutions.
Directory Management Services. Corillian
Directory Management Services enable a financial institution to
manage and consolidate the detailed information about billers
needed to effectively match and route payments to multiple
remittance processors. Directory management tools can be
licensed to automate and analyze the directory content allowing
the financial institution to obtain the highest possible
electronic payment rate. Alternatively, we offer a
subscription-based service that forwards a daily update to the
financial institutions biller directory that includes
biller adds, changes and deletions from all remittance
providers. The service also includes a monthly analysis of paper
payments that can route electronically with recommended payee
changes, enabling the financial institution to proactively
manage its bill payments, continually optimize payment routing
and improve electronic payment rates.
Training Services. We make available to our
customers a variety of training services and supporting
materials to help them use our applications. All courses are led
by our staff and can be conducted at the customers
location or our headquarters.
8
Systems
and Technology
Corillian
Voyager
Corillian Voyager is a scalable platform that uses a
three-tiered architecture, connecting end-users to the existing
host systems of financial institutions. Corillian Voyager routes
and validates requests, formats transaction responses, and
stores and forwards bill payment instructions.
The three layers of the Corillian Voyager architecture each have
a specific functional focus. The Web Server layer is responsible
for presentation interaction with the customer, handling
hyper-text
mark-up
language to the browser or the Open Financial Exchange data
standard to the connected financial software or wireless device.
The Transaction Processor layer controls the business logic for
the users request, directs the request to the appropriate
host target, and assembles the results. The Host Server layer
interprets and formats the transaction for the existing host
system, then analyzes and returns the data fields from the
response. Optional applications provide incremental services,
such as batch processing of bill payment transactions or
collection of electronic bills.
Corillian
Technology
Our systems are designed to provide real-time data acquisition,
processing and presentation for applications used to offer
Internet-based financial services. Specific components and
features of the technology we use to provide these benefits
include:
|
|
|
|
|
Scalable Framework. Each of the layers of
Corillian Voyager is a software component that can be replicated
within the Corillian Voyager configuration for redundancy and
scalability. By adding an incremental component, work is
distributed among servers across a network.
|
|
|
|
Flexible Interfaces. Our solutions are
designed to integrate with virtually any existing host system,
providing a means for financial service providers to easily
bring existing applications to the Internet. Our host server
technology allows multiple simultaneous access to different
existing and third-party systems. In addition, browser
interfaces are customizable in form and function, allowing the
financial service provider to display unique branding,
advertising, and extended functionality.
|
|
|
|
Advanced Architecture. The open architecture
of Corillian Voyager enables flexible integration and rapid
deployment of our line of business applications, as well as
Corillian-certified applications from our partners. Powered by
Microsoft®
Windows Server 2003 and Microsoft.NET, Corillian Voyager is
built to incorporate emerging Internet finance technology. This
architectural standard allows our applications to interoperate
with other application servers, such as teller and call center
platforms and automated teller machine delivery systems.
|
|
|
|
Open Financial Exchange Data Standard. Our
solutions employ the Open Financial Exchange data standard,
which was developed by Microsoft, CheckFree and Intuit to
provide a unified specification for the electronic exchange of
financial data among financial institutions, businesses and
consumers over the Internet. This data specification
standardizes the connection to financial data centers and to
personal financial management software. By using the Open
Financial Exchange data standard, all financial information
retrieved from a financial institution can be quickly downloaded
to consumer software programs, such as Microsoft Money and
Quicken.
|
Customers
We primarily target banks and credit unions that are seeking
scalable, reliable and advanced solutions that enable them to
offer Internet-based financial services. We have provided our
solutions primarily to mid-sized and large financial
institutions (primarily banks) and large credit unions. In 2006,
Capital One represented 13% of our consolidated revenues.
Strategic
Alliances and Partnerships
We have marketing, technology, and resale alliances with a
number of companies in the technology and financial services
industries and will continue to pursue new alliances with
additional companies within these
9
industries. These alliances are intended to help us address new
vertical markets and market segments and to enable us to provide
our customers with access to additional resources and technology
to enhance and customize our solutions. Some of our more
significant strategic partners include:
CheckFree
Corporation
CheckFree designs, develops and markets services that enable
consumers to make electronic payments and collections, automate
paper-based recurring financial transactions and conduct secure
transactions on the Internet. CheckFree is our primary partner
for remittance processing and was a developer with Intuit and
Microsoft of the Open Financial Exchange data standard. We have
developed a number of Voyager interfaces to CheckFree systems
and resell a bill payment service provided by CheckFree called
CheckFree Web.
Microsoft
Corporation
Microsoft is the publisher of the Windows 2000 Server network,
the Microsoft Money personal financial management program and
Microsofts new Money Explorer and MSN Money Professional
products and services, and the provider of the MoneyCentral
financial portal. In 2001, we signed a multi-year alliance
agreement with Microsoft to deliver a joint enterprise eFinance
solution to financial institutions worldwide. The agreement
spans technology development, marketing, sales and support of
solutions based on the Corillian Voyager platform, Microsoft
Windows 2000 and 2003 Server network operating systems, and
.NET, Microsofts platform for XML web services.
NCR
Corporation
In February 2001, we entered into an agreement with NCR
Corporation that provides for NCRs use of the Corillian
Voyager platform as its core consumer banking component for mid-
to large-sized financial institutions. NCR is a leader in
providing Relationship
Technologytm
solutions to customers worldwide in the retail, financial,
communications, manufacturing, travel and transportation, and
insurance markets. NCR customizes the Corillian Voyager software
to allow financial institutions greater flexibility in
delivering Internet financial services to their customers.
NCRs Internet banking service is run in a managed server
model from its secure and high availability data centers in
Columbia, Maryland and Dallas, Texas.
In November 2003, we extended our distribution agreement with
NCR to provide NCR the right to license the Corillian Voyager
platform as a part of a shared-server Internet banking solution
to service small-sized financial institutions. Under the terms
of the agreement, NCR will market the Voyager-enabled solution
to its existing shared-server customer base, as well as new
prospects in the United States. The shared-server solution will
be hosted by NCR from its secure and high availability data
center in Columbia, Maryland.
In February 2004, we amended our distribution agreement with NCR
to provide NCR the right to market our Voyager-enabled solutions
to financial institutions in markets around the world.
Matrix
Ltd.
Matrix Ltd. is a leading systems integration
company in Israel. Employing 2,000 software professionals,
Matrix supplies advanced information technology services to over
500 clients. The company is part of the Formula Group,
Israels premier IT group, publicly traded in the United
States (Nasdaq: FORTY News). Matrix has partnered
with us to serve as a reseller and systems integrator to deliver
next-generation online banking services to Israeli banks.
Online
Resources Corporation
In 2006, Princeton eCom was acquired by Online Resources
Corporation. Since 1984, Princeton eCom has continuously
delivered Integrated Payment Solutions, driving growth in the
electronic bill payment industry. It offers an
end-to-end,
hosted solution in Electronic Bill Presentment and Payment
(EBPP) and bill pay for online banking and financial services.
Currently, over 1,400 financial institutions and 130 billers use
Princeton eComs hosted solution for bill presentment and
electronic payment. We securely integrate with the Princeton
eCom bill
10
payment and bill presentment-processing engine, providing our
financial services customers a complete Electronic Bill Payment
and Presentment solution. We resell the payment processing
services of Princeton eCom (now operating as Online Resources).
Quova,
Inc.
Founded in January 2000, Quova, Inc. is the leading provider of
geolocation services to online businesses, including five of the
worlds six largest global Internet companies. Quovas
patented technology provides the geographic location of website
visitors in real time, enabling businesses to detect fraud,
manage digital rights, target content, conduct site analysis and
ensure regulatory compliance. We embed Quovas technology
into our Corillian Fraud Detection System and Intelligent
Authenticationtm
products to help financial institutions proactively detect and
prevent online fraud.
Sales and
Marketing
We sell our software and services primarily through our direct
sales organization. As of December 31, 2006, our sales and
marketing force consisted of 34 personnel, including 9 in
marketing. Our direct sales efforts have historically been
focused on domestic financial service providers, such as banks
and credit unions. We complement our direct sales efforts
through joint sales and marketing arrangements with
Internet-based technology vendors, such as NCR Corporation and
Matrix Ltd.
Our sales process features a multi-tiered approach that requires
the involvement of our field sales personnel, our technical
professionals and members of our senior management. Our sales
process simultaneously targets senior business executives,
personnel responsible for Internet-based initiatives and systems
engineers. We employ this multi-leveled approach to accelerate
the purchasing cycle.
Our products are complex, and sales and implementations can be
delayed due to our customers procedures for approving
large capital expenditures and deploying new technologies within
their networks. As a result, our sales cycle can vary
significantly and typically ranges from three to nine months.
Research
and Development
Our research and development expenses totaled $13.5 million
in 2006, $10.8 million in 2005, and $6.7 million in
2004. As of December 31, 2006, our research and development
staff consisted of 89 personnel, including 68 engineers. Their
development efforts are focused on:
|
|
|
|
|
Enhancements to Existing Products and
Services. We continue to update and modify our
solutions to enhance quality, performance and scalability, to
extend functionality to address our customers changing
needs, and to take advantage of improved technology within our
industry.
|
|
|
|
Developing New Products and Services. We are
working to expand our product and service offerings. We intend
to expand our product offerings to include new consumer banking
functions, as well as applications for wealth management and
corporate cash management.
|
|
|
|
Participating in Technology Testing and
Collaboration. We have participated in the
development of industry data standards and will continue to
collaborate with companies to develop new technologies and to
encourage the adoption and implementation of open standards that
can foster and simplify the exchange of financial information
through the Internet.
|
Competition
The market for providing solutions to the Internet financial
services industry is highly competitive, and we expect that
competition will intensify in the future. We compete with a
variety of companies in various segments of the Internet-based
financial services industry, and our competitors vary in size
and in the scope and breadth of the products and services they
offer. In the area of Internet consumer banking, we primarily
compete with other companies that provide outsourced Internet
finance solutions to large financial institutions, including S1
Corporation and Financial Fusion, Inc. Within this market
segment, we also compete with companies that offer software
11
platforms designed for internal development of Internet-based
financial services software, such as IBMs WebSphere, and
the internal information technology personnel of financial
institutions that want to develop their own solutions. In
addition, vendors such as Digital Insight Corp. (recently
acquired by Intuit Inc.), FundsXpress, Financial Network, Inc.,
Fidelity National Information Services, Inc. and Online
Resources Corporation, who primarily target community financial
institutions, occasionally compete with us for large financial
institutions and compete with us regularly for smaller financial
institutions. Several of the vendors offering data processing
services to financial institutions, including Fiserv, Inc., Jack
Henry & Associates, Inc. and Metavante Corporation,
offer their own Internet banking solutions. Local competition
for Internet consumer banking services is provided by many
smaller Internet service outsourcing companies located
throughout the United States. Our primary competition for
providing the business banking services that financial
institutions offer their commercial customers are vendors of
cash management systems for large corporations such as FundTech
Corporation, Digital Insight Corp. (recently acquired by Intuit
Inc.) and Politzer & Haney Inc. (recently acquired by
Transaction Systems Architects, Inc.).
In the market for consumer online banking solutions, we estimate
that we routinely compete with six competitors. In terms of
providing consumer online banking solutions to the leading
financial institutions in the United States and supporting the
most consumers performing online banking transactions, we are
the leading provider of consumer online banking solutions. In
the market for business online banking solutions, we estimate
that we routinely compete with seven competitors. We recently
entered the market for business online banking solutions and are
building our position in this market.
We believe that our ability to compete successfully depends upon
a number of factors, including:
|
|
|
|
|
our market presence with financial service providers;
|
|
|
|
the reliability, scalability, security, speed and performance of
our solutions and services;
|
|
|
|
the comprehensiveness, ease of use and service level of our
products and services;
|
|
|
|
our ability to continue to interface with financial service
providers and their technology;
|
|
|
|
our pricing policies and the pricing policies of our competitors
and suppliers;
|
|
|
|
the timing of introductions of new products and services by us
and our competitors; and
|
|
|
|
our ability to meet our customers expectations.
|
We expect competition to continue to increase as new companies
enter our market and existing competitors expand their product
lines and services. In addition, many companies that provide
outsourced Internet finance solutions are consolidating,
creating larger competitors with greater resources and more
products than us.
Intellectual
Property
Although we believe our success is more dependent upon our
technical expertise than our proprietary rights, our future
success and ability to compete is dependent in part upon our
proprietary technology. We have received trademark registrations
for the name Corillian and our logo. None of our technology is
patented, but we have established an internal patent team of
engineers and in-house counsel to monitor and evaluate as part
of the new product development cycle our technologies and
business methods for patentability. We have several patent
applications pending in the United States Patent and Trademark
Office.
We rely on a combination of contractual rights and copyright,
trademark and trade secret laws to establish and protect our
proprietary technology. We require all of our employees to sign
an assignment of patents and inventions agreement and generally
enter into confidentiality agreements with our employees,
consultants, resellers, customers and potential customers. We
also limit access to and distribution of our source code, and
further limit the disclosure and use of other proprietary
information. We cannot assure that the steps taken in this
regard will be adequate to prevent misappropriation of our
technology or that our competitors will not independently
develop technologies that are substantially equivalent or
superior to our technology. We also cannot assure that we will
not infringe upon the intellectual property rights of third
parties.
12
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain or
use our products or technology. In addition, the laws of some
foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States. The costs of
defending our proprietary rights or claims that we infringe on
third-party proprietary rights may be high.
Government
Regulation
Numerous federal agencies have recently adopted rules and
regulations protecting consumer privacy and establishing
guidelines for financial institutions to follow in selecting
technology vendors for solutions such as our solutions. We
believe our business does not currently subject us to any of
these rules or regulations that would adversely affect our
business. However, these rules and regulations are new and may
be interpreted to apply to our business in a manner that could
make our business more onerous or costly.
As the Internet continues to evolve, we expect federal, state
and foreign governments to adopt more laws and regulations
covering issues such as user privacy, taxation of goods and
services provided over the Internet, pricing, content and
quality of products and services. If enacted, these laws and
regulations could limit the market for Internet-based financial
services.
If enacted or deemed applicable to us, some laws, rules or
regulations applicable to financial service activities could
render our business or operations more costly and less viable.
The financial services industry is subject to extensive and
complex federal and state regulation, and financial institutions
operate under high levels of governmental supervision. Our
customers must ensure their services and related products work
within the extensive and evolving regulatory requirements
applicable to them. We may become subject to direct regulation
as the market for our business evolves. Federal, state or
foreign authorities could adopt laws, rules or regulations
affecting our business operations, such as requiring us to
comply with data, record keeping and other processing
requirements. Any of these laws, rules or regulations, or new
laws, rules and regulations affecting us or our customers, could
lead to increased operating costs and could also reduce the
convenience and functionality of our services, possibly
resulting in reduced market acceptance.
A number of proposals at the federal, state and local level and
by the governments of significant foreign countries would, if
enacted, expand the scope of regulation of Internet-based
financial services and could impose taxes on the sale of goods
and services and other Internet activities. Any development that
substantially impairs the growth of the Internet or its
acceptance as a medium for transaction processing could have a
material adverse effect on our business, financial condition and
operating results.
Backlog
As of December 31, 2006, we had a backlog of unfilled
orders of $53.2 million, as compared to a backlog of
$43.0 million as of December 31, 2005. We expect
$39.2 million of our backlog as of December 31, 2006
will be filled during fiscal year 2007. Backlog represents
contractual customer commitments, including fees for licenses,
professional services, maintenance, hosting and subscriptions.
Backlog is not necessarily indicative of revenues to be
recognized in a specified future period. There are many factors
that would impact our filling of backlog, such as our progress
in completing projects for our customers and our customers
meeting anticipated schedules for customer-dependent
deliverables. We provide no assurances that any portion of our
backlog will be filled during any fiscal year or at all, or that
our backlog will be recognized as revenues in any given period.
Employees
As of December 31, 2006, we had a total of 316 employees,
consisting of 149 in operations, 9 in marketing, 25 in sales, 89
in research and development, and 44 in general and
administration. None of our work force is unionized. We have not
experienced any work stoppages and consider our relations with
our employees to be good.
Certain
Financial Information
Financial information relating to foreign and domestic sales and
assets for the three years ended December 31, 2006, 2005
and 2004, is set forth in Note 9 of the Notes to the
Consolidated Financial Statements attached hereto.
13
Certain risk factors may affect our business, financial
condition, results of operation and cash flows, or may cause our
actual results to vary from the forward-looking statements
contained in this Annual Report on
Form 10-K.
You should carefully consider the following factors regarding
information included in this Annual Report. The risks and
uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our
business, financial condition and operating results could be
materially adversely affected.
The
Announced Merger with CheckFree May Adversely Affect the Market
Price of Our Common Stock and Our Results of
Operations.
If the merger is not completed, the price of our common stock
may decline to the extent that the current market price reflects
a market assumption that the merger will be completed. In
addition, in response to the announcement of the merger, our
customers and strategic partners may delay or defer decisions
which could have a material adverse effect on our business
regardless of whether the merger is ultimately completed.
Similarly, current and prospective employees of our company may
experience uncertainty about their future roles with the
combined company. These conditions may adversely affect employee
morale and our ability to attract and retain key management,
sales, marketing and technical personnel. In addition, focus on
the merger and related matters have resulted in, and may
continue to result in, the diversion of managements
attention and resources. To the extent that there is uncertainty
about the closing of the merger, or if the merger does not
close, our business may be harmed if customers, strategic
partners or others believe that they cannot effectively compete
in the marketplace without the merger or if there is customer
and employee uncertainty surrounding the future direction of the
company on a stand-alone basis.
If the
Merger Does Not Occur, We Will Not Benefit from the Expenses We
Have Incurred in Preparation for the Merger.
If the merger is not consummated, we will have incurred
substantial expenses for which no ultimate benefit will have
been received by it. We currently expect to incur significant
out-of-pocket
expenses for services in connection with the merger, consisting
of financial advisor, legal and accounting fees and financial
printing and other related charges, many of which may be
incurred even if the merger is not completed. Moreover, under
specified circumstances we may be required to pay a termination
fee of $5,500,000, depending upon the reason for termination, to
CheckFree in connection with a termination of the merger
agreement.
We
Have a History of Losses and May Incur Losses in Future Periods
if We are Not Able to, Among Other Things, Increase Our Sales to
New and Existing Customers
We have a history of net losses and had an accumulated deficit
of approximately $96.8 million at December 31, 2006.
If we do not sign contracts with new customers or provide
additional software and services to existing customers, we will
incur significant operating losses in future years.
Our
Quarterly Results Fluctuate Significantly and May Fall Short of
Anticipated Levels, Which May Cause the Price of Our Common
Stock to Decline
Our quarterly operating results have varied in the past, and we
expect they will continue to vary from quarter to quarter in the
future. In future quarters, our operating results may be below
the expectations of public market analysts and investors, which
could cause the price of our common stock to decline. We may
also announce that expected financial or operating results for a
particular period will be less than what we anticipated, which
could cause the price of our common stock to decline. In
addition, we have difficulty predicting the volume and timing of
orders and recognize a substantial portion of our revenues on a
percentage-of-completion
basis. Any delays in closing orders or implementation of
products or services can cause our operating results to fall
substantially short of anticipated levels for any quarter. As a
result of these and other factors, we believe
period-to-period
comparisons of our historical results of operations are not
necessarily meaningful and are not a good predictor of our
future performance.
14
A
Small Number of Customers Account for a Substantial Portion of
Our Revenues in Each Period; Our Results of Operations and
Financial Condition Could Suffer if We Lose Customers or Fails
to Add Additional Customers to Our Customer Base
We derive a significant portion of our revenues from a limited
number of customers in each period. Accordingly, if we fail to
close a sale with a major potential customer, if a contract is
delayed or deferred, or if an existing contract expires or is
cancelled and we fail to replace the contract with new business,
our revenues would be adversely affected. During the year ended
December 31, 2006, one customer accounted for 13% of
consolidated revenues. During the year ended December 31,
2005, one customer accounted for 10% of consolidated revenues.
During the year ended December 31, 2004, two customers
individually accounted for more than 10% of consolidated
revenues, and, in total, these two customers accounted for
approximately 29% of consolidated revenues. We expect that a
limited number of customers will continue to account for a
substantial portion of our revenues in each quarter in the
foreseeable future. If a customer terminates a Voyager contract
with us early, we would lose ongoing revenue streams from annual
maintenance fees, hosting fees, professional service fees and
potential additional license and service fees for additional
increments of end users and for other Voyager applications.
If We,
or Our Implementation Partners, Do Not Effectively Implement Our
Solutions, We May Not Achieve Anticipated Revenues or Gross
Margins
Our solutions are complex and must integrate with other complex
data processing systems. Implementing our solutions is a lengthy
process, generally taking between 3 to 9 months to
complete. In addition, we generally recognize revenues on a
percentage-of-completion
basis, so our revenues are often dependent on our ability to
complete implementations within the time periods that we
establish for our projects. We rely on a combination of internal
and outsourced teams for our implementations. If these teams
encounter significant delays in implementing our solutions for a
customer or fail to implement our solutions effectively or at
all, we may be unable to recognize any revenues from the
contract or may incur losses from the contract if our revised
project estimates indicate that we recognized excess revenues in
prior periods. In addition, we may incur monetary damages or
penalties if we are not successful in completing projects on
schedule.
From time to time, we agree to penalty provisions in our
contracts that require us to make payments to our customers if
we fail to meet specified milestones or that permit our
customers to terminate their contracts with us if we fail to
meet specified milestones. If we fail to perform in accordance
with established project schedules, we may be forced to make
substantial payments as penalties or refunds and may lose our
contractual relationship with the applicable customers.
If Our
Goodwill or Amortizable Intangible Assets Become Impaired, We
May Be Required to Record a Significant Charge to
Earnings
Under generally accepted accounting principles, we review our
amortizable intangible assets for impairment when events or
changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at
least annually. Factors that may be considered a change in
circumstances indicating that the carrying value of our goodwill
or amortizable intangible assets may not be recoverable include
a decline in stock price and market capitalization, future cash
flows, and slower growth rates in our industry. We may be
required to record a significant charge to earnings in our
financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined,
which would have a negative impact on our results of operations.
The
Lengthy Sales Cycles of Our Products May Cause Revenues and
Operating Results to Be Unpredictable and to Vary Significantly
from Period to Period
The sale and implementation of our products and services are
often subject to delays because of our customers internal
budgets and procedures for approving large capital expenditures
and deploying new technologies within their networks. As a
result, the time between the date of initial contact with a
potential customer and the execution of a contract with the
customer typically ranges from 3 to 9 months. In addition,
prospective customers decision-
15
making processes require us to provide a significant amount of
information to them regarding the use and benefits of our
products. We may expend substantial funds and management
resources during a sales cycle but fail to complete the sale.
Subscription-Based
Licensing of Our Products and Services May Have An Adverse
Effect On Near-Term Revenue
A significant portion of our revenue is currently derived from
one-time license fees and related annual maintenance fees,
hosting fees, and professional service fees. We also derive a
portion of our revenue from licensing our products and services
on a subscription basis. In contrast to one-time license fees,
we must recognize fees for subscription licenses over the length
of the subscription period. We intend to increase our focus on
subscription-based licenses in the future, which may have an
adverse effect on revenue in the near term.
We May
Not Achieve Anticipated Revenues If We Do Not Successfully
Introduce New Products or Develop Upgrades or Enhancements to
Our Existing Products
To date, we have derived substantially all of our revenue from
licenses and professional and support services related to the
Corillian Voyager product and its related applications. We
expect to add new products by acquisition, partnering or
internal development and to develop enhancements to our existing
products. New or enhanced products may not be released on
schedule and may not achieve market acceptance. New products or
upgrades to existing products may contain defects when released,
which could damage our relationship with our customers or
partners and further limit market acceptance of our products and
services. If we are unable to ship or implement new or enhanced
products and services when planned, or fail to achieve timely
market acceptance of our new or enhanced products and services,
we may lose sales and fail to achieve anticipated revenues.
Acquisitions
May Be Costly and Difficult to Integrate, Divert Management
Resources or Dilute Shareholder Value
We have considered and made strategic acquisitions in the past
and in the future may acquire or make investments in
complementary companies, products or technologies. We may not be
able to successfully integrate these companies or their products
or technologies. The failure to successfully integrate
InteliData and qbt and implement appropriate internal controls
and procedures could have a material adverse effect on the
results of operations and financial condition of the combined
companies. Furthermore, in connection with future acquisitions
or investments, we could:
|
|
|
|
|
issue stock that would dilute our current shareholders
percentage ownership;
|
|
|
|
incur debt and assume liabilities; and
|
|
|
|
incur amortization expenses related to intangible assets or
incur large impairment charges.
|
Future acquisitions also could pose numerous additional risks to
our operations, including:
|
|
|
|
|
problems combining the purchased operations, technologies or
products;
|
|
|
|
problems integrating the business models of acquisition targets
with ours;
|
|
|
|
unanticipated costs;
|
|
|
|
diversion of managements attention from our core business;
|
|
|
|
adverse effects on existing business relationships with
suppliers and customers;
|
|
|
|
entering markets in which we have no or limited prior
experience; and
|
|
|
|
potential loss of key employees, particularly those of the
purchased organization.
|
16
Our
Partners May Be Unable to Fulfill Their Service Obligations and
Cause Us to Incur Penalties or Other Expenses with Our
Customers
We resell products and services from other companies, such as
CheckFree and Princeton eCom (recently acquired by Online
Resources Corporation). If these vendors are unable to fulfill
their contractual obligations as a result of insolvency, a
disaster or similar event or are unable to provide the services
in a commercially reasonable manner, we may be required to incur
additional expenses to provide the services to our customers or
to pay penalties to our customers for the suspension or
termination of the services.
Our
Facility and Operations May Be Disabled by a Disaster or Similar
Event, Which Could Damage Our Reputation and Require Us to Incur
Financial Loss
Our primary communications and network equipment related to our
operations are currently located in Hillsboro, Oregon. We do not
currently have an alternate facility that can serve as a center
of business operations. We cannot assure that our data center
and facility will operate after a disaster. In addition, we may
experience problems during the period following a disaster in
reestablishing our systems and infrastructure. Although we have
a disaster recovery plan in place, we do not currently have the
technology or facilities to instantly recover full Internet
services if our facility is not functioning. A disaster, such as
a fire, an earthquake, a terrorist attack or a flood, at our
facility could result in failures or interruptions in providing
our products and services to our customers. In addition, our
systems are vulnerable to operational failures, losses in power,
telecommunications failure and similar events. We have
contracted to provide a certain level of service to our
customers and, consequently, a failure or interruption of our
systems in the future could cause us to refund fees to some of
our customers to compensate for decreased levels of service.
Competition
in the Market for Internet-Based Financial Services is Intense
and Could Reduce Our Sales and Prevent Us from Achieving
Profitability
The market for Internet-based financial services is intensely
competitive and rapidly changing. We expect competition to
persist and intensify, which could result in price reductions,
reduced gross margins and loss of market share for our products
and services. We compete with a number of companies in various
segments of the Internet-based financial services industry, and
our competitors vary in size and in the scope and breadth of the
products and services they offer. Our primary competitors for
software platforms designed to enable financial institutions to
offer Internet-based financial services, both domestically and
internationally, include S1 Corporation, Digital Insight
Corporation, Financial Fusion, Inc., Online Resources
Corporation and Metavante Corporation. We also compete with
companies that offer software platforms designed for internal
development of Internet-based financial services software, such
as IBM Corporations WebSphere. Within this segment of our
industry, many companies are consolidating, creating larger
competitors with greater resources and a broader range of
products.
We also compete with businesses delivering financial services
through Internet portals, banks marketing their own
Internet-based financial services, and non-bank financial
service providers, such as brokerages and insurance companies,
seeking to expand the breadth of their Internet product and
services offerings. In addition, our customers may develop
competing products. For example, a customer may choose to
develop its own software platform for Internet-based financial
services. Several of the vendors offering data processing
services to financial institutions, including Electronic Data
Systems Corporation, Fiserv, Inc., Jack Henry &
Associates, Inc. and Metavante Corporation, also offer Internet
banking solutions that compete with our solutions.
Many of our competitors and potential competitors have a number
of significant advantages over us, including:
|
|
|
|
|
a longer operating history;
|
|
|
|
more extensive name recognition and marketing power;
|
|
|
|
preferred vendor status with our existing and potential
customers; and
|
|
|
|
significantly greater financial, technical, marketing and other
resources, giving them the ability to respond more quickly to
new or changing opportunities, technologies and customer
requirements.
|
17
Our competitors may also bundle their products in a manner that
may discourage users from purchasing our products. Existing and
potential competitors may establish cooperative relationships
with each other or with third parties, or adopt aggressive
pricing policies to gain market share.
Consolidation
in the Financial Services Industry Could Reduce the Number of
Our Customers and Potential Customers
As a result of the mergers and acquisitions occurring in the
banking industry today, some of our existing customers could
terminate their contracts with us and potential customers could
break off negotiations with us. An existing or potential
customer may be acquired by or merged with another financial
institution that uses competing Internet-based financial
products and services or does not desire to continue the
relationship with us for some other reason, which could result
in the new entity terminating the relationship with us.
In addition, an existing or potential customer may be acquired
by or merged with one of our existing customers that licenses
our products under a contract with more favorable terms and that
can be applied to the acquired customers business
operations. This may result in a reduction in our anticipated
revenues from the acquired customer. In 2004, two of our largest
customers, J.P. Morgan Chase and Bank One, merged, and one
of our customers, Charter One Bank, was acquired by Citizens
Bank.
If We
Lose Key Personnel, We Could Experience Reduced Sales, Delayed
Product Development and Diversion of Management
Resources
Our success depends largely on the continued contributions of
our key management, technical, sales and marketing and
professional services personnel, many of whom would be difficult
to replace. If one or more of our key employees were to resign,
the loss of personnel could result in loss of sales, delays in
new product development and diversion of management resources.
We do not have employment agreements with our senior managers or
other key personnel.
If We
Do Not Develop International Operations as Expected or Fail to
Address International Market Risks, We May Not Achieve
Anticipated Sales Growth
To increase our revenues, we pursued direct international sales
opportunities and opened an international office. However,
international demand for our products and services did not grow
significantly during 2001 or 2002, so we significantly reduced
our direct investments internationally and are seeking instead
to expand international sales through resellers and selective
direct sales efforts. International expansion of our business
may be more difficult or take longer than we anticipate, and we
may not be able to successfully market, sell, deliver and
support our products internationally. In order to accomplish any
of the foregoing, we will need to form additional relationships
with partners worldwide. These activities require significant
investments of time and capital from us. If we are unable to
develop international sales on a timely basis or at all, we may
not achieve anticipated sales growth, gross margins or operating
results. If we are successful in developing international sales,
we will be subject to a number of risks associated with
international operations, including:
|
|
|
|
|
longer accounts receivable collection cycles;
|
|
|
|
expenses associated with localizing products for foreign markets;
|
|
|
|
difficulties in managing operations and partners across
disparate geographic areas;
|
|
|
|
difficulties in hiring qualified local personnel, finding
qualified partners and complying with disparate labor laws;
|
|
|
|
foreign currency exchange rate fluctuations;
|
|
|
|
difficulties associated with enforcing agreements and collecting
receivables through foreign legal systems; and
|
|
|
|
unexpected changes in regulatory requirements that impose
multiple conflicting tax laws and regulations.
|
If we fail to address these risks, our results of operations and
financial condition may be adversely affected.
18
If We
Become Subject to Intellectual Property Infringement Claims,
These Claims Could Be Costly and Time Consuming to Defend,
Divert Management Attention or Cause Product
Delays
We have in the past been, and may in the future be, sued for
allegedly infringing or misappropriating a third partys
intellectual property rights. One of our customers recently
requested that we defend and indemnify it for a claim by a third
party asserting that the customers internet banking
website infringes the third partys patent. Any
intellectual property infringement claims against us, or for
which we may be required to indemnify our customers, with or
without merit, could be costly and time-consuming to defend,
divert our managements attention, or cause product delays.
We expect that software product developers and providers of
Internet-based financial services will increasingly be subject
to infringement claims as the number of products and competitors
in our industry grows and the functionality of products
overlaps. If our products were found to infringe a third
partys proprietary rights, we could be required to enter
into royalty or licensing agreements in order to be able to sell
our products. Royalty and licensing agreements, if required, may
not be available on terms acceptable to us or at all.
There has been substantial litigation in the software and
Internet industries regarding intellectual property rights. It
is possible that, in the future, third parties may claim that
our current or potential future products infringe their
intellectual property.
Network
or Internet Security Problems Could Damage Our Reputation and
Business
We have in the past, and might in the future, experience
security incidents involving actual or attempted access to our
customers systems by unknown third parties. As a result of
these types of incidents, we may incur contractual or other
legal liabilities. Any security breach claims against us, or for
which we may be required to indemnify our customers, could be
costly and time-consuming to defend. Security risks may also
deter financial service providers from purchasing our products
and deter consumers of financial services from using our
products or services. We rely on standard Internet security
systems, all of which are licensed from third parties, to
provide the security and authentication necessary to effect
secure transmission of data over the Internet. Our networks may
be vulnerable to unauthorized access, computer viruses and other
disruptive problems. In addition, advances in computer
capabilities, new discoveries in the field of cryptography or
other events or developments may render our Internet security
measures inadequate.
Someone who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in
our Internet operations. We may need to expend significant
capital or other resources protecting against the threat of
security breaches or alleviating problems caused by breaches.
Eliminating computer viruses and alleviating other security
problems may result in interruptions, delays or cessation of
service to users accessing Internet sites that deliver our
services, any of which could harm our business.
New
Technologies Could Render Our Products Obsolete
If we are unable to develop products that respond to changing
technology, our business could be harmed. The market for
Internet-based financial services is characterized by rapid
technological change, evolving industry standards, changes in
consumer demands and frequent new product and service
introductions.
Advances in Internet technology or in applications software
directed at financial services could lead to new competitive
products that have better performance or lower prices than our
products and could render our products obsolete and
unmarketable. Our Voyager solutions were designed to run on
servers using the Windows NT, Windows 2000 and Windows 2003
operating systems. If a new software language or operating
system becomes standard or is widely adopted in our industry, we
may need to rewrite portions of our products in another computer
language or for another operating system to remain competitive.
Defects
in Our Solutions and System Errors in Our Customers Data
Processing Systems After Installing Our Solutions Could Result
in Loss of Revenues, Delay in Market Acceptance and Injury to
Our Reputation
Our software products are complex and may contain
currently-undetected errors or defects that may be detected at
any point in the life of the product. We have in the past
discovered software errors in our products. After
19
implementation, errors may be found from time to time in our new
products or services, our enhanced products or services, or
products or services we resell for strategic partners. These
errors could cause us to lose revenues or cause a delay in
market acceptance of our solutions or could result in liability
for damages, injury to our reputation or increased warranty
costs.
Our
Products and Services Must Interact With Other Vendors
Products, Which May Result in System Errors
Our products are often used in transaction processing systems
that include other vendors products, and, as a result, our
products must integrate successfully with these existing
systems. System errors, whether caused by our products or those
of another vendor, could adversely affect the market acceptance
of our products, and any necessary modifications could cause us
to incur significant expenses.
If We
Become Subject to Product Liability Litigation, it Could be
Costly and Time Consuming to Defend
Since our products are used to deliver services that are
integral to our customers businesses, errors, defects or
other performance problems could result in financial or other
damages to our customers. Product liability litigation arising
from these errors, defects or problems, even if it were
unsuccessful, would be time consuming and costly to defend.
Existing or future laws or unfavorable judicial decisions could
negate any limitation of liability provisions that are included
in our license agreements.
If We
are Unable to Protect Our Intellectual Property, We May Lose a
Valuable Competitive Advantage or be Forced to Incur Costly
Litigation to Protect Our Rights
Our future success and ability to compete depends in part upon
our proprietary technology, but our protective measures may
prove inadequate. We rely on a combination of copyright,
trademark, patent and trade secret laws and contractual
provisions to establish and protect our proprietary rights. None
of our technology is patented. We have obtained federal
trademark registration for some of our marks and our logo. We
have applied for, but have not yet obtained, patents on
technology we have developed. If we do not receive approval for
these patents, we may be unable to use this technology without
restriction or prevent others from using this technology.
Despite our efforts to protect our intellectual property, a
third party could copy or otherwise obtain our software or other
proprietary information without authorization, or could develop
software competitive to ours. Our competitors may independently
develop similar technology, duplicate our products or design
around our intellectual property rights. In addition, the laws
of some foreign countries do not protect our proprietary rights
to as great an extent as do the laws of the United States, and
we expect the use of our products will become more difficult to
monitor if we increase our international presence.
We may have to litigate to enforce our intellectual property
rights, to protect our trade secrets or know-how or to determine
their scope, validity or enforceability. Enforcing or defending
our intellectual property rights is expensive, could cause the
diversion of our resources and may not prove successful. If we
are unable to protect our intellectual property, we may lose a
valuable competitive advantage.
Increasing
Government Regulation of the Internet and the Financial Services
Industry Could Limit the Market for Our Products and Services,
Impose on Our Liability for Transmission of Protected Data and
Increase Our Expenses
Numerous federal agencies have recently adopted rules and
regulations protecting consumer privacy and establishing
guidelines for financial institutions to follow in selecting
technology vendors for solutions such as our solutions. We
believe our business does not currently subject us to any of
these rules or regulations that would adversely affect our
business. However, these rules and regulations are new and may
be interpreted to apply to our business in a manner that could
make our business more onerous or costly.
As the Internet continues to evolve, we expect federal, state
and foreign governments to adopt more laws and regulations
covering issues such as user privacy, taxation of goods and
services provided over the Internet, pricing,
20
content and quality of products and services. If enacted, these
laws and regulations could limit the market for Internet-based
financial services.
If enacted or deemed applicable to us, some laws, rules or
regulations applicable to financial service activities could
render our business or operations more costly and less viable.
The financial services industry is subject to extensive and
complex federal and state regulation, and financial institutions
operate under high levels of governmental supervision. Our
customers must ensure our services and related products work
within the extensive and evolving regulatory requirements
applicable to them. We may become subject to direct regulation
as the market for our business evolves. Federal, state or
foreign authorities could adopt laws, rules or regulations
affecting our business operations, such as requiring us to
comply with data, record keeping and other processing
requirements. Any of these laws, rules or regulations, or new
laws, rules and regulations affecting our customers
businesses, could lead to increased operating costs and could
also reduce the convenience and functionality of our services,
possibly resulting in reduced market acceptance.
A number of proposals at the federal, state and local level and
by the governments of significant foreign countries would, if
enacted, expand the scope of regulation of Internet-based
financial services and could impose taxes on the sale of goods
and services and other Internet activities. Any development that
substantially impairs the growth of the Internet or its
acceptance as a medium for transaction processing could have a
material adverse effect on our business, financial condition and
operating results.
|
|
Item 1B:
|
Unresolved
Staff Comments
|
None.
Our principal offices are located in Hillsboro, Oregon, pursuant
to a lease that expires September 30, 2010. We also occupy
additional office space pursuant to leases in Herndon, Virginia;
Toledo, Ohio and Omaha, Nebraska, as well as subleases in
Overland Park, Kansas and New York, New York.
We believe that the leased and subleased properties are
sufficient for our current operations and for the foreseeable
future.
|
|
Item 3.
|
Legal
Proceedings
|
We are not currently involved in any legal proceedings.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
21
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
Our Common Stock is traded on the NASDAQ Global Market under the
ticker symbol CORI. Public trading of the Common Stock commenced
on April 12, 2000. Prior to that, there was no public
market for the Common Stock. The following table sets forth, for
the periods indicated, the high and low sale price per share of
the Common Stock as reported by the NASDAQ Global Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.93
|
|
|
$
|
2.69
|
|
Second Quarter
|
|
$
|
4.12
|
|
|
$
|
2.68
|
|
Third Quarter
|
|
$
|
2.99
|
|
|
$
|
2.44
|
|
Fourth Quarter
|
|
$
|
3.82
|
|
|
$
|
2.58
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.95
|
|
|
$
|
2.82
|
|
Second Quarter
|
|
$
|
3.67
|
|
|
$
|
3.01
|
|
Third Quarter
|
|
$
|
3.46
|
|
|
$
|
3.02
|
|
Fourth Quarter
|
|
$
|
3.27
|
|
|
$
|
2.43
|
|
As of February 28, 2007, our common stock was held by
400 shareholders of record. Brokers and other institutions
hold many of such shares on behalf of shareholders.
We have never declared or paid any cash dividends on our Common
Stock. We currently intend to retain our earnings, if any, for
use in our business and do not anticipate paying any cash
dividends in the foreseeable future.
The graph below compares the cumulative total shareholder return
on our common stock with the cumulative total return on the
Nasdaq Composite U.S. Index and a peer group of companies
in our industry over the period indicated, assuming the
investment of $100 on December 31, 2001, and reinvestment
of any dividends. The stock price performance shown on the
graph below is not necessarily indicative of future price
performance.
Total
Shareholder Return
The selected peer group consists of S1 Corporation, Digital
Insight Corp. (recently acquired by Intuit Inc.), Online
Resources Corporation and Jack Henry and Associates, Inc. Such
companies have been selected for the peer group on the basis of,
among other factors, the similarity of their business to our
business and their market capitalization relative to our market
capitalization.
22
On April 19, 2006, we issued an aggregate of
2,730 shares of common stock in connection with the
acquisition of qbt Systems, Inc. on August 8, 2005 to a
former shareholder of qbt, in consideration for all of such
shareholders 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.
Item 6. Selected
Financial Data
The following selected financial data and other operating
information are derived from our audited Consolidated Financial
Statements. The tables shown below represent portions of our
Consolidated Financial Statements and are not complete. This
selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
Consolidated Financial Statements and related notes included
elsewhere in this report. Historical results are not necessarily
indicative of the results of operations in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Consolidated Statement of
Operations Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
60,958
|
|
|
$
|
49,220
|
|
|
$
|
50,794
|
|
|
$
|
46,132
|
|
|
$
|
39,141
|
|
Gross profit
|
|
|
30,675
|
|
|
|
28,924
|
|
|
|
32,345
|
|
|
|
25,631
|
|
|
|
18,719
|
|
(Loss) income from operations(4)(5)
|
|
|
(2,117
|
)(2)
|
|
|
1,856
|
|
|
|
11,185
|
(2)
|
|
|
6,396
|
|
|
|
(15,910
|
)(3)
|
Net (loss) income(4)(5)
|
|
|
(1,072
|
)
|
|
|
2,653
|
|
|
|
10,480
|
|
|
|
5,126
|
|
|
|
(17,257
|
)
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
0.28
|
|
|
$
|
0.14
|
|
|
$
|
(0.49
|
)
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
|
$
|
0.14
|
|
|
$
|
(0.49
|
)
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
44,938
|
|
|
|
41,039
|
|
|
|
37,727
|
|
|
|
36,431
|
|
|
|
35,477
|
|
Diluted
|
|
|
44,938
|
|
|
|
42,146
|
|
|
|
40,474
|
|
|
|
37,813
|
|
|
|
35,477
|
|
|
|
|
(1) |
|
Our Consolidated Financial Statements and notes thereto reflect
our acquisitions of qbt Systems, Inc. and InteliData
Technologies on August 8, 2005 and August 18, 2005,
respectively. The occurrence of the acquisitions in 2005 affects
comparability of financial information for 2006. |
|
(2) |
|
We recorded impairment charges of $396 and $491 during the years
ended December 31, 2006 and 2004, respectively. See
Note 10 to the Consolidated Financial Statements for
further discussion. |
|
(3) |
|
We recorded restructuring and litigation settlement charges of
$682 and $2,580, respectively, during the year ended
December 31, 2002. |
|
(4) |
|
In 2006, net income and net income per share includes
$2.3 million of stock-based compensation from the impact of
adopting Statement of Financial Accounting Standards
(FAS) No. 123 (revised 2004), Share-Based
Payment, (FAS 123(R)). See Note 6 to
the Consolidated Financial Statements for further discussion. |
|
(5) |
|
In 2006 and 2005, we had $1.6 million and $644,000 of
amortization of acquisition related intangibles from the
acquisitions of qbt Systems, Inc. and InteliData Technologies on
August 8, 2005 and August 18, 2005, respectively. |
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Consolidated Balance Sheet
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,166
|
|
|
$
|
16,722
|
|
|
$
|
29,200
|
|
|
$
|
16,943
|
|
|
$
|
13,221
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,003
|
|
Short-term investments
|
|
|
8,050
|
|
|
|
8,800
|
|
|
|
10,150
|
|
|
|
9,901
|
|
|
|
4,410
|
|
Working capital
|
|
|
22,793
|
|
|
|
20,393
|
|
|
|
29,417
|
|
|
|
14,417
|
|
|
|
5,924
|
|
Total assets
|
|
|
80,596
|
|
|
|
79,339
|
|
|
|
55,269
|
|
|
|
42,818
|
|
|
|
37,479
|
|
Debt and capital leases, long-term
portion
|
|
|
|
|
|
|
|
|
|
|
629
|
|
|
|
1,075
|
|
|
|
1,600
|
|
Total shareholders equity
|
|
|
56,761
|
|
|
|
54,733
|
|
|
|
32,602
|
|
|
|
19,554
|
|
|
|
13,121
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our Consolidated Financial Statements and notes thereto reflect
our acquisitions of qbt Systems, Inc. and InteliData
Technologies on August 8, 2005 and August 18, 2005,
respectively. The occurrence of the acquisitions in 2005 affects
comparability of financial information on December 31, 2006
and 2005. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks
described in greater detail in Part 1, Item 1A,
Risk Factors, and elsewhere in this
Form 10-K.
See Part I, Item 1, Business Special
Note Regarding Forward Looking Statements.
We do not guarantee future results, levels of activity,
performance or achievements. We do not intend to update any of
the forward-looking statements after the date of this document
to conform them to actual results or to changes in our
expectations.
Pending
Acquisition of Corillian
On February 13, 2007, we entered into a Merger Agreement
pursuant to which CheckFree will acquire all of the outstanding
shares of our common stock for $5.15 per share in cash. We
expect the acquisition to close in the second quarter of 2007,
subject to approval by our shareholders and certain regulatory
matters, although there can be no assurance that the merger will
be consummated in a timely manner, if at all. If we should
terminate the Merger Agreement under specified circumstances,
including a termination whereby we would enter into an agreement
to be acquired by another company, we would be required to pay
CheckFree a termination fee of $5.5 million.
All forward-looking statements included in this Annual Report on
Form 10-K,
including those in the Managements Discussion and Analysis
of Financial Condition, Results of Operations and Risk Factors,
are based on managements plans for future operations
without consideration given to the pending transaction.
Overview
We are a leading provider of solutions that enable banks, credit
unions, brokers and other financial service providers to rapidly
deploy Internet-based financial services. Our solutions allow
consumers to conduct financial transactions, view personal and
market financial information, pay bills and access other
financial services on the Internet. We provide 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. Our solutions integrate into existing database
applications and systems and enable our customers to monitor
transactions across all systems in real time. Our solutions are
also designed to support multiple lines of business, including
consumer banking, small business banking and credit card
management, and to scale to support millions of users. Our
current customers include J.P. Morgan Chase, Wachovia Bank,
The Huntington National Bank, Capital One and SunTrust Bank.
24
We have historically focused our sales and marketing efforts to
target the largest financial service providers. We intend to
continue targeting large, industry-leading financial service
providers by increasing our sales and marketing efforts. We have
also successfully developed other markets, including small to
mid-size financial institutions, and we intend to continue our
efforts towards expanding our penetration of these markets.
Revenue was $61.0 million in 2006 as compared to
$49.2 million in 2005. The increase in revenues was
primarily due $8.8 million from customers in the
acquisitions of InteliData Technologies and qbt Systems in
August 2005. Net loss in 2006 was $1.1 million as compared
to net income of $2.7 million in 2005. Income in 2006 was
negatively impacted by $2.3 million of stock-based
compensation from the adoption of FAS 123(R) on
January 1, 2006, as well as an increase of $929,000 in
amortization of acquisition related intangible assets.
Critical
Accounting Policies and Estimates
The policies discussed below are considered by management to be
critical to an understanding of our annual audited Consolidated
Financial Statements because their application places the most
significant demands on managements judgment, with
financial reporting results relying on estimates about the
effect of matters that are inherently uncertain. Specific risks
for these critical accounting policies are described in the
following paragraphs. For all of these policies, management
cautions that future events rarely develop exactly as
forecasted, and the best estimates routinely require adjustment.
Allowance for Doubtful Accounts. The provision
for losses on accounts receivable and allowance for doubtful
accounts are recognized based on managements estimate,
which considers our historical loss experience, including the
need to adjust for current conditions, and judgments about the
probable effects of relevant observable data and financial
health of specific customers. At December 31, 2006 and
2005, the allowance for doubtful accounts was $100,000,
respectively. This represents managements estimate of the
probable losses in the accounts receivable balance at
December 31, 2006. While the allowance for doubtful
accounts and the provision for losses on accounts receivable
depend to a large degree on future conditions, management does
not forecast significant adverse developments in 2006. For the
years ended December 31, 2006, 2005 and 2004, we incurred
$0, $40,000 and $199,000 of bad debt expense, respectively.
Impairment of Goodwill and Intangible Assets and Long-Lived
Assets. We evaluate the recoverability of our
identifiable intangible assets, goodwill and other long-lived
assets in accordance with FAS No. 142, Goodwill and
Other Intangible Assets (FAS 142) and
FAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144). We
assess the recoverability of goodwill at least annually and when
events or circumstances indicate a potential impairment. To
determine whether or not goodwill is impaired, we compare the
book value of our company to its fair value. We evaluate
long-lived assets, such as property and equipment, and purchased
intangible assets, for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be
recoverable. We assess the fair value of the assets based on the
undiscounted future cash flow the assets are expected to
generate and recognize an impairment loss when estimated
undiscounted future cash flow expected to result from the use of
the asset plus net proceeds expected from disposition of the
asset, if any, are less than the carrying value of the asset.
When we identify an impairment, we reduce the carrying amount of
the asset to its estimated fair value based on a discounted cash
flow approach or, when available and appropriate, to comparable
market values. We incurred impairment charges of $113,000, $0
and $491,000 for the years ended December 31, 2006, 2005
and 2004, respectively, related to impairments of long-lived
assets as a result of lease abandonments in 2006 and 2004. See
Note 10 to the Consolidated Financial Statements for
additional information. Future impairment assessments could
result in impairment charges that would reduce the carrying
values of goodwill, intangible assets or long-lived assets.
Stock-Based Compensation. On January 1,
2006, we adopted FAS 123(R) which requires the measurement
and recognition of compensation expense for all share-based
payment awards made to employees and directors including
employee stock options and employee stock purchases related to
the Employee Stock Purchase Plan (the ESPP), based
on estimated fair values. Stock-based compensation expense
recognized under FAS 123(R) in 2006 was $2.3 million.
There was no stock-based compensation expense related to
employee stock options and employee stock purchases under the
ESPP recognized in 2005 and 2004. See Note 6 to the
Consolidated Financial Statements for additional information.
25
Upon adoption of FAS 123(R), we continued our methodology
of calculating the value of employee stock options on the date
of grant using the Black-Scholes model, which we also used for
the purpose of the pro forma financial information in accordance
with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(FAS 123). The use of a Black-Scholes model
requires the use of estimates of employee exercise behavior data
and other assumptions including expected volatility, risk-free
interest rate, and expected dividends.
We estimate volatility based on our historical stock price
volatility for a period consistent with the expected life of our
options. The risk-free interest rate assumption is based upon
federal treasury instrument rates equal to the expected life of
our employee stock options. The dividend yield assumption is
based on our history and expectation of dividend payouts. The
expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding based on historical experience of exercises and
cancellations. The historical experience of exercises and
cancellations were weighted against the estimated life of
outstanding options at December 31, 2006 using the
simplified approach as allowed under Staff Accounting Bulletin
(SAB) 107.
As stock-based compensation expense recognized in our
Consolidated Statement of Operations in 2006 was based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. FAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical
experience. In our pro forma information required under
FAS 123 for the periods prior to 2006, we accounted for
forfeitures as they occurred.
If factors change and we employ different assumptions in the
application of FAS 123(R) in future periods, the
compensation expense that is recorded under FAS 123(R) may
differ significantly from what we have recorded in the current
period.
Revenue Recognition. We recognize 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
(SOP No. 97-2).
Our software arrangements generally include software licenses,
implementation and custom software engineering services,
post-contractual customer support, training services and may
also include hosting services. Our software licenses are, in
general, functionally dependent on implementation, training and
certain custom software engineering services; therefore,
software licenses and implementation, training and custom
software engineering services 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
(SOP No. 81-1).
We have 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, (b) sufficient
vendor-specific objective evidence exists to permit the
allocation of revenue to these service elements and
(c) with respect to hosting, 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.
Vendor-specific objective evidence on post-contractual customer
support and hosting services is established by using the renewal
rate. We allocate revenue to certain 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.
The
percentage-of-completion
method is measured by the percentage of contract hours incurred
to date compared to the estimated total contract hours for each
contract. We have 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. We reduce the
inherent risk relating to revenue and cost estimates in
percentage-of-completion
models through various approval and
26
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
identified.
Pursuant to
SOP No. 81-1,
on projects where reasonable estimates cannot be made due to
inherent hazards, but where there is an assurance no loss will
be incurred, we limit 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 our Consolidated
Statements of Operations.
In certain arrangements, we 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 or an obligation to deliver software customized
to a customer specifications. At December 31, 2005, we
applied this methodology to one project. Total deferred project
costs under the completed contract method were $770,000 at
December 31, 2005. At December 31, 2006, we did not
apply this methodology to any existing projects.
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
are recognized ratably over the hosting term.
We generally license our products on an end-user basis, with our
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, our software license
agreements require customers to pay us 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 as
delivery has already occurred. Revenue from transactional
services are recognized as transactions are processed.
In arrangements where we do not have an obligation to install
our products, but may become involved in the installation of
these products, we recognize non-refundable license fees over
the estimated implementation period for the customer or
resellers project. If we determine that the customer or
reseller can successfully install our products in a production
environment without our involvement, we will recognize
non-refundable license fees in the period in which delivery
occurs, assuming all other
SOP No. 97-2
revenue recognition criteria are met.
Where our customers enter into arrangements to purchase our
software and services on a subscription basis, we recognize
revenue in accordance with SAB No. 104, Revenue
Recognition in Financial Statements. Under these
arrangements, we defer recognition of the implementation and
license revenue and recognize them ratably over the greater of
the initial life of the customer contract or the estimated life
of the customer service relationship. Costs associated with
implementation are deferred and recognized ratably over the life
of the arrangements.
Our contractual arrangements are evaluated on a
contract-by-contract
basis and often require managements judgment and estimates
that affect the classification and timing of revenue recognized
in the Consolidated Statements of Operations. Specifically, our
management may be required to make judgments about:
|
|
|
|
|
whether the fees associated with our products and services are
fixed or determinable;
|
|
|
|
whether or not collection of our fees is reasonably assured;
|
|
|
|
whether we have the ability to make reasonably dependable
estimates in the application of the percentage of completion
method; and
|
|
|
|
whether we have vendor-specific objective evidence of fair value
for our products and services.
|
27
Additionally, we may be required to make the following estimates:
|
|
|
|
|
percentage of labor hours incurred to date to the estimated
total labor hours for each contract;
|
|
|
|
provisions for estimated losses on uncompleted
contracts; and
|
|
|
|
the need for an allowance for doubtful accounts or billing
adjustments.
|
If other judgments or assumptions were used in the evaluation of
our revenue arrangements, the timing and amounts of revenue
recognized may have been significantly different. For instance,
if we determined that we cannot make reasonably dependable
estimates in the application of the percentage of completion
method, we would defer all revenue and recognize it upon
completion of the contract.
Recent Accounting Pronouncements. See
Note 2 to the Consolidated Financial Statements in
Item 8 for a full description of recent accounting
pronouncements, including the expected dates of adoption and
estimated effects on results of operations and financial
condition, which is incorporated herein by reference.
Results
of Operations
The following table sets forth for the periods indicated the
percentage of revenues represented by certain lines in our
audited Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
49.7
|
|
|
|
41.2
|
|
|
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50.3
|
|
|
|
58.8
|
|
|
|
63.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
14.4
|
|
|
|
15.9
|
|
|
|
14.3
|
|
Research and development
|
|
|
22.2
|
|
|
|
21.9
|
|
|
|
13.2
|
|
General and administrative
|
|
|
16.5
|
|
|
|
17.1
|
|
|
|
13.2
|
|
Impairment charges
|
|
|
0.7
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
53.8
|
|
|
|
55.0
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(3.5
|
)
|
|
|
3.8
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
1.9
|
|
|
|
1.7
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income
taxes
|
|
|
(1.6
|
)%
|
|
|
5.5
|
%
|
|
|
20.9
|
%
|
Income taxes
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(1.8
|
)%
|
|
|
5.4
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2006, 2005 and
2004
Revenues
Years
Ended December 31, 2006 and 2005
Revenues increased to $61.0 million in 2006 from
$49.2 million in 2005. This increase in revenues of
$11.8 million, or 24%, was primarily due to
$8.8 million from customers of companies acquired in 2005.
The remaining increase primarily relates to our ability to
generate revenues from existing customers as we expand our
product portfolio, as well as expand into additional markets,
including generating revenues from small to mid-size financial
institutions.
Our international revenues contributed $3.2 million, or 5%,
to our consolidated revenues in 2006, compared to $1.8, or 4%,
million in 2005. We do not expect our international revenues to
be significant in 2007. We continue to pursue ways in which to
increase international revenues through resellers. Until our
resellers are successful at
28
distributing and implementing our products internationally, we
do not anticipate that international revenues will comprise a
significant percentage of our consolidated revenues.
During 2006, one customer individually accounted for 13% of
consolidated revenues. In 2005, a separate customer accounted
for 10% of consolidated revenues.
Years
Ended December 31, 2005 and 2004
Revenues decreased to $49.2 million in 2005 from
$50.8 million in 2004. This decrease in revenues of
$1.6 million, or 3%, was primarily due to a
$9.9 million decrease in license revenue due to fewer large
license sales in 2005, which was partially offset by a
$6.9 million increase in professional services in 2005, as
compared to 2004, and a $1.7 million increase in
maintenance revenue in 2005, as compared to 2004. Professional
services increased due to an increase in implementation projects
in 2005, as compared to 2004, and the increase in maintenance
revenue is due to our customer base continuing to increase.
Our international revenues contributed approximately
$1.8 million, or 4%, to our consolidated revenues in 2005,
compared to $1.1, or 2%, million in 2004.
Backlog
As of December 31, 2006, we had a backlog of unfilled
orders of $53.2 million, as compared to a backlog of
$43.0 million as of December 31, 2005. We expect
$39.2 million of our backlog as of December 31, 2006
will be fulfilled during 2007. Backlog increased during 2006 as
we were successful in broadening our product portfolio and
expanding into other markets, including small to mid-size
financial institutions.
Backlog represents contractual customer commitments, including
fees for licenses, professional services, maintenance, hosting
and subscriptions. Backlog is not necessarily indicative of
revenues to be recognized in a specified future period. There
are many factors that would impact our filling of backlog, such
as our progress in completing projects for our customers and our
customers meeting anticipated schedules for
customer-dependent deliverables. We provide no assurances that
any portion of our backlog will be filled during any fiscal year
or at all, or that our backlog will be recognized as revenues in
any given period.
Cost of
Revenues
Cost of revenues consists primarily of salaries and related
expenses for professional service personnel and outsourced
professional service providers who are responsible for the
implementation and customization of our software and for
maintenance, hosting and support personnel who are responsible
for post-contractual customer support, as well as amortization
expense related to acquisition related intangibles and
stock-based compensation.
Cost of revenues increased to $30.3 million in 2006 from
$20.3 million in 2005, primarily due to increased revenues
and increases in the amortization of acquisition related
intangibles and stock-based compensation. Gross profit decreased
as a percentage of revenues to 50% in 2006 from 59% in 2005. The
decrease in gross profit as a percentage of revenue was
primarily due to an increase of $819,000 in the amortization of
acquisition related intangibles and an increase of $469,000 of
stock-based compensation related to employee stock options and
employee stock purchases under the ESPP in accordance with
FAS 123(R).
Cost of revenues increased to $20.3 million in 2005 from
$18.4 million in 2004. Gross profit decreased as a
percentage of revenues to 59% in 2005 from 64% in 2004. The
decrease in gross profit as a percentage of revenue was
primarily due to less high-margin license revenue in 2005, as
compared to 2004. Gross profit as a percentage of revenue also
decreased due to $579,000 of amortization of intangibles being
recorded to cost of revenues in 2005 as a result of the
acquisitions of InteliData and qbt in August 2005.
Operating
Expenses
Sales and Marketing Expenses. Sales and
marketing expenses consist of salaries, commissions, and related
expenses for personnel involved in marketing, sales and support
functions, as well as stock-based compensation and costs
associated with trade shows and other promotional activities.
29
Sales and marketing expense increased to $8.8 million in
2006 from $7.9 million in 2005. This increase of $900,000,
or 11%, was primarily due to higher payroll and payroll-related
expenses, stock-based compensation and amortization of
intangibles. Payroll and payroll-related expenses increased
$404,000 due to average headcount increasing by 4 due to our
increased investment in sales efforts. Sales and marketing also
increased due to $447,000 of stock-based compensation related to
employee stock options and employee stock purchases under the
ESPP in accordance with FAS 123(R), and $110,000 related to
amortization of acquisition related intangibles.
We anticipate higher sales and marketing expenses during 2007,
compared to 2006, due to increased investments in sales efforts.
As a result, we anticipate increases in sales and marketing
headcount and associated payroll and payroll-related expenses.
Sales and marketing expense increased to $7.9 million in
2005 from $7.3 million in 2004. This increase of $600,000,
or 8%, was primarily due to $0.8 million of sales and
marketing costs associated with the newly acquired companies
that increased sales and marketing headcount by 11.
Research and Development Expenses. Research
and development expenses consist primarily of salaries and
related expenses for engineering personnel, stock-based
compensation and costs of materials and equipment associated
with the design, development and testing of our products.
Research and development expenses increased to
$13.5 million in 2006 from $10.8 million in 2005. This
increase of $2.7 million, or 25%, was primarily due to
increased research and development payroll and payroll-related
expenses, stock-based compensation expense and consulting
expenses. Payroll and payroll-related expenses increased by
$2.1 million as the average headcount for research and
development increased by 15 due to our continued investments in
product development. Research and development expense also
increased due to $479,000 of stock-based compensation related to
employee stock options and employee stock purchases under the
ESPP in accordance with FAS 123(R). Additionally,
consulting expenses increased by $104,000 from overseas research
and consulting arrangements.
We anticipate research and development expenses to remain
relatively consistent during 2007, compared to 2006, as we
expect to maintain end of 2006 staffing levels for our research
and development department during 2007.
Research and development expenses increased to
$10.8 million in 2005 from $6.7 million in 2004. This
increase of $4.1 million, or 61%, was primarily due to an
increase of $3.8 million in payroll and payroll-related
expenses as average headcount increased by 21 in 2005. The
increase in headcount was due to a combination of our increased
investment in developing new and existing products as well as
headcount additions due to business combinations, which added 12
research and development employees.
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 stock-based compensation, professional fees, bad debt
expense and other general corporate expenses.
General and administrative expenses increased to
$10.1 million in 2006 from $8.4 million in 2005. The
increase of $1.7 million, or 20%, was primarily due to
$871,000 of stock-based compensation related to employee stock
options and employee stock purchases under the ESPP in
accordance with FAS 123(R). Additionally, accounting and
legal fees increased by $288,000 due to the timing of work
performed on various projects. The remaining increase is due to
individually insignificant items.
We anticipate general and administrative expenses to increase in
2007 due to increased legal fees from acquisition-related costs.
General and administrative expenses increased to
$8.4 million in 2005 from $6.7 million in 2004. The
increase of $1.7 million, or 25%, was due to a
$0.7 million increase in general and administrative
expenses as a result of the InteliData and qbt acquisitions, as
well as a $0.9 million increase of payroll and payroll
related expenses due to average headcount increasing by 5 in
2005.
30
Impairment Charges. In 2006, we subleased a
portion of the office space at our corporate headquarters to
extend through the current term of our lease on
September 30, 2010. We recorded an impairment charge of
$113,000 to write-off the remaining book value of long-lived
assets in the space we abandoned and ceased to use.
Additionally, the fair value of the remaining lease payments at
the cease-use date for the portion of the area subleased was
greater than the estimated sublease rentals to be received. We
recorded an additional charge of $283,000 associated with this
rent shortfall.
In 2004, we assigned a portion of the lease at our corporate
headquarters, reducing the space leased from approximately
122,000 square feet to 100,000 square feet effective
January 1, 2005. We recorded an impairment charge of
$491,000 to write-off the remaining book value of long-lived
assets in the space we abandoned and ceased to use during the
third quarter of 2004.
Other
Income (Expense), Net
Other income (expense), net, consists primarily of interest
earned on cash and cash equivalents and short-term investments,
interest expense, our share of losses in equity investments, and
other miscellaneous items.
Other income (expense), net, increased to income of
$1.1 million in 2006 from income of $858,000 in 2005. This
increase was primarily due to decreases in losses from a joint
venture and an increase in interest income. Our proportionate
share of the net losses in a joint venture (see Note 2 to
the Consolidated Financial Statements) decreased by $128,000 in
2006. Additionally, our interest income increased by $133,000 in
2006 due to higher interest rates on short-term investments.
During 2007, we anticipate other income will remain relatively
consistent with 2006 amounts.
Other income (expense), net, increased to income of $858,000 in
2005 from an expense of $545,000 in 2004. This increase was
primarily due to decreases in investment losses and interest
expense. Our proportionate share of the net loss in a joint
venture decreased by $685,000 in 2005 (see Note 2 to the
Consolidated Financial Statements) and our interest expense
decreased by $115,000 in 2005 due to us paying off our line of
credit in February 2005. Additionally, interest income increased
approximately $591,000 in 2005, as compared to 2004, due to
increasing interest rates on short-term investments.
Income
Taxes
We recorded income tax expense of $79,000, $61,000 and $160,000
for the years ended December 31, 2006, 2005 and 2004,
respectively. Although net operating loss carryforwards were
used to offset taxable income for regular tax purposes, we were
subject to alternative minimum tax because only 90 percent
of taxable income may be offset by net operating loss
carryforwards for alternative minimum tax purposes.
As of December 31, 2006, we had federal and state net
operating loss carryforwards of approximately $72.2 million
and foreign net operating loss carryforwards of approximately
$11.9 million to offset against future taxable income.
Additionally, we had alternative minimum tax credits of $317,000
and federal and state research and experimentation credits of
$4.1 million. These carryforwards expire between 2007 and
2026. We had deferred tax assets, net of deferred tax
liabilities, of $34.8 million as of December 31, 2006.
A full valuation allowance has been recorded against the net
deferred tax asset balance due to uncertainties regarding the
realizability of the asset balance.
Utilization of a portion of the net operating loss and credit
carryforwards may be subject to an annual limitation due to the
ownership change provisions of the Internal Revenue Code of 1986
and similar state provisions.
Liquidity
and Capital Resources
As of December 31, 2006, we had $25.2 million in cash,
cash equivalents and short-term investments, as compared to
$25.5 million as of December 31, 2005. Cash, cash
equivalents and short-term investments remained relatively flat
in 2006, primarily due to nearly to break even net income, as
well as no significant cash transactions during the year.
We acquired qbt Systems, Inc. on August 8, 2005 and
InteliData Technologies on August 18, 2005. These
acquisitions resulted in merger related transaction costs and
cash paid to shareholders of $3.3 million and
$4.5 million for qbt Systems Inc. and InteliData
Technologies, respectively. Additionally, net liabilities
assumed for qbt Systems Inc. and InteliData Technologies,
excluding goodwill and intangibles, were $919,000 and
31
$3.9 million, respectively. The combination of cash paid to
shareholders and payment of liabilities assumed for the
respective companies contributed to the decrease in cash, cash
equivalents and short-term investments at December 31,
2005, as compared to December 31, 2004.
Working capital increased to $22.8 million as of
December 31, 2006, as compared to $20.4 million as of
December 31, 2005. Cash provided by operating activities
was $1.5 million in 2006. In 2006, cash flow from
operations increased by $5.1 million due to the net loss of
$1.1 million, adjusted for $6.2 million in non-cash
items, including depreciation, stock-based compensation expense,
amortization of intangibles and impairment charges. These
amounts were offset by $3.6 million from changes in
operating assets and liabilities. This decrease was primarily
due to a combination of individually insignificant transactions
from the timing of billings, cash received from customers, cash
paid to vendors and revenue recognized throughout 2006.
Cash used in operating activities was $4.9 million in 2005.
In 2005, cash flow from operations decreased by
$9.9 million from changes in operating assets and
liabilities. This occurred primarily due to us paying down net
liabilities assumed in the qbt Systems, Inc. and InteliData
Technologies acquisitions in August 2005. Net liabilities
assumed for qbt Systems, Inc. and InteliData Technologies,
excluding goodwill and intangibles, was $919,000 and
$3.9 million, respectively. The remaining decrease from
changes in operating assets and liabilities was primarily due to
a combination of individually insignificant transactions from
the timing of billings, cash received from customers, cash paid
to vendors and revenue recognized throughout 2005 from both the
acquired companies and changes in our core transactions from
year to year.
Cash provided by operating activities was $12.4 million in
2004. In 2004, cash flow from operations increased primarily due
to $10.5 million of net income, adjusted for
$3.4 million of non-cash items, including depreciation,
impairment charges, equity losses in joint venture and recovery
of bad debts. The remaining difference relates to a combination
of individually insignificant transactions from the timing of
billings, cash received from customers, cash paid to vendors and
revenue recognized throughout 2004.
Cash used in investing activities was $1.8 million,
$7.4 million and $968,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. Purchases
of property and equipment were $2.6 million,
$1.1 million and $728,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. In 2005, we
paid $7.7 million for the acquisitions of InteliData
Technologies and qbt Systems, Inc.
We anticipate cash flows from investing activities to remain
negative in 2007 due to continued purchases of property and
equipment. However, cash flows from investing activities could
fluctuate from our decision to increase or decrease our
investment balance.
Cash provided by financing activities was $797,000 in 2006, cash
used in financing activities was $141,000 in 2005 and cash
provided by financing activities was $795,000 in 2004. Proceeds
from the issuance of common stock were $792,000,
$1.1 million and $2.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Payments on
line of credit borrowings were $0, $911,000 and
$1.7 million for the years ended December 31, 2006,
2005 and 2004, respectively.
We anticipate cash flows from financing activities to remain
positive due to proceeds from issuance of common stock under our
stock option plans. We do not anticipate raising additional
capital through financing activities or drawing on our line of
credit.
In November 2000, we obtained a $5.0 million equipment line
of credit with a financial institution. In 2005, we paid off the
remaining balance outstanding under this line of credit.
In March 2005, we entered into a new one-year revolving line of
credit facility with another financial institution that allows
us to borrow up to $4.0 million to assist with working
capital needs. In May 2006, we extended the terms of the line of
credit through June 1, 2007 and amended our quick ratio and
net income requirement covenants. The interest rate under this
line of credit is equal to either (i) the banks prime
rate; or (ii) LIBOR plus 2%. As of December 31, 2006,
we had not drawn amounts from this line of credit and do not
anticipate drawing from this line of credit for at least the
next twelve months.
32
We had no material financial obligations as of December 31,
2006, other than obligations under our operating leases and
minimum vendor commitments. Future capital requirements will
depend on many factors, including the timing of research and
development efforts and the expansion of our operations, both
domestically and internationally. We believe our current cash,
cash equivalents and short-term investments will be sufficient
to meet our working capital requirements for at least the next
12 months.
Contractual Obligations. We are contractually
obligated to make the following payments as of December 31,
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Thereafter
|
|
|
Operating lease commitments
|
|
$
|
10,175
|
|
|
$
|
2,784
|
|
|
$
|
5,204
|
|
|
$
|
2,128
|
|
|
$
|
59
|
|
Purchase obligations
|
|
|
1,686
|
|
|
|
771
|
|
|
|
913
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
11,861
|
|
|
$
|
3,555
|
|
|
$
|
6,117
|
|
|
$
|
2,130
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The future minimum lease obligations do not include $641,000 of
expected receipts from subleases through September 2010.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Foreign
Exchange Rate Sensitivity
We develop products in the United States and market our products
and services in the United States, and to a lesser extent in
Canada, Europe, Asia and Australia. As a result, our 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 our revenue is currently
denominated in United States dollars, a strengthening of the
United States dollar could make our products less competitive in
foreign markets.
We do not use derivative financial instruments for speculative
purposes. We do not engage in exchange rate hedging or hold or
issue foreign exchange contracts for trading purposes. We do
have foreign-based customers where transactions are denominated
in foreign currencies and are subject to market risk with
respect to fluctuations in the relative value of currencies.
Currently, we have customers in Europe and Australia where
transactions are subject to foreign currency adjustments. To
date, the impact of fluctuations in the relative fair value of
other currencies has not been material.
Interest
Rate Sensitivity
As of December 31, 2006 and 2005, we had $25.2 million
and $25.5 million, respectively, in cash, cash equivalents
and short-term investments. 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 and taxable municipal bonds and auction
rate securities. 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. We are not subject to interest rate risks on
our
available-for-sale
investments as these investments are all bought and sold at par
value. Our short-term
held-to-maturity
investments are subject to interest rate risk and will decrease
in value if market interest rates increase. We manage 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 2007, by a total of one percent, our interest income
would increase or
33
decrease by approximately $158,000, respectively. In 2007, we
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 8.
|
Financial
Statements and Supplementary Data
|
(a) The following documents are filed as part of this
report:
1. Annual Financial Statements
Our Consolidated Financial Statements are filed as part of this
Annual Report on
Form 10-K
as follows:
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-1
|
|
Consolidated Balance Sheets as of
December 31, 2006 and 2005
|
|
|
F-2
|
|
Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and
2004
|
|
|
F-3
|
|
Consolidated Statements of
Shareholders Equity for the years ended December 31,
2006, 2005 and 2004
|
|
|
F-4
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
F-5
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-6
|
|
|
|
|
|
2.
|
Financial Statement Schedules
|
Financial statement schedules have been omitted because the
information required to be set forth therein is not applicable
or is included in the notes to the Consolidated Financial
Statements.
|
|
|
|
3.
|
Selected Quarterly Results of Operations
|
The Selected Quarterly Results of Operations required by this
Item 8 are included in Note 12 to the Consolidated
Financial Statements.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
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. Our management, with the
participation of the Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the
end of the period covered by this annual report (the Evaluation
Date). Based on that evaluation, our 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 to ensure that
information required to be disclosed by us in the reports that
it files or submits under the Securities and Exchange Act of
1934 is accumulated and communicated to our management,
including our principal executive and principal financial
officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
(b) Managements report on internal control over
financial reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities and Exchange Act of 1934. Our internal
control system was designed to provide reasonable assurance to
our management and board of directors regarding the reliability
and fair presentation of financial reporting and the preparation
of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
34
Internal control over financial reporting includes controls
themselves, monitoring and internal auditing practices and
actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2006.
Management based its assessment on criteria for effective
internal control over financial reporting described in
Internal Control Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Managements assessment included an evaluation of the
design of Corillian Corporations internal control over
financial reporting and testing of the operational effectiveness
of its internal control over financial reporting. Management
reviewed the results of its assessment with the board of
directors.
Based on this assessment, management has determined that, as of
December 31, 2006, Corillian Corporation maintained
effective internal control over financial reporting.
KPMG LLP, independent registered public accounting firm, has
audited managements assessment of and the effectiveness of
our internal control over financial reporting as of
December 31, 2006 as stated in their report included in
(d) below.
(c) Changes in internal controls.
There was no change to our internal control over financial
reporting during the quarter ended December 31, 2006 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
(d) Report of independent registered public accounting firm.
35
The Board of Directors and Shareholders
Corillian Corporation:
We have audited managements assessment, included in the
accompanying managements report on internal control over
financial reporting appearing under Item 9A.(b), that
Corillian Corporation maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Corillian
Corporations management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Corillian
Corporation maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, Corillian
Corporation maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Corillian Corporation and
subsidiaries as of December 31, 2006 and 2005 and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2006, and our
report dated March 16, 2007 expressed an unqualified
opinion on those consolidated financial statements.
Portland, Oregon
March 16, 2007
36
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
We have adopted a code of ethics for our Chief Executive Officer
and senior financial officers, including our Principal Financial
Officer and Principal Accounting Officer. We have made the code
of ethics available in the Investor Relations section of our
website at www.corillian.com. If we waive, or implicitly
waive, any material provision of the code, or substantially
amend the code, we will disclose that fact in the Investor
Relations section of our website at www.corillian.com.
The other information called for by Part III, Item 10,
is incorporated by reference to the applicable information in
our Proxy Statement relating to our 2007 annual meeting of
shareholders.
|
|
Item 11.
|
Executive
Compensation
|
Information called for by Part III, Item 11, is
incorporated by reference to the applicable information in our
Proxy Statement relating to our 2007 annual meeting of
shareholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
|
Information called for by Part III, Item 12, but not
included below, is incorporated by reference to the applicable
information in our Proxy Statement relating to our 2007 annual
meeting of shareholders.
Equity
Compensation Plan Information
The following table provides information as of December 31,
2006 about our common stock that may be issued to employees,
consultants or directors under our current existing equity
compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Authorized for Issuance
|
|
|
|
Under Equity Compensation Plans
|
|
|
|
Number of Shares
|
|
|
|
|
|
Number of Shares
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Remaining Available for
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Issuance Under Equity
|
|
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
Compensation Plans
|
|
|
Equity compensation plans approved
by shareholders
|
|
|
5,863,737
|
(1)
|
|
$
|
3.78
|
|
|
|
1,277,137
|
(2)(3)
|
Equity compensation plans not
approved by shareholders
|
|
|
568,500
|
|
|
|
5.67
|
|
|
|
277,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,432,237
|
|
|
$
|
3.95
|
|
|
|
1,554,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes 390 shares of our common stock that are issuable
upon the exercise of outstanding options that were assumed in
connection with our acquisition of Hatcher Associates Inc., with
a weighted average exercise price of $6.41. |
|
(2) |
|
Includes 1,177,831 shares remaining available for issuance
under our 2000 Stock Incentive Compensation Plan. The 2000 Stock
Incentive Compensation Plan includes an evergreen formula
pursuant to which the number of shares authorized for grant will
be increased annually by the lesser of
(1) 400,000 shares, and (2) an amount equal to
one percent of the average outstanding shares of common stock as
of the end of the immediately preceding fiscal year on a
fully-diluted basis; plus any shares subject to outstanding
awards under our 1997 Stock Option Plan as of the effective date
of the 2000 Stock Incentive Compensation Plan that cease to be
subject to such awards other than by reason of exercise or
payment of such awards. Excludes 400,000 additional shares of
common stock that became available for purchase under the 2000
Stock Incentive Compensation Plan |
37
|
|
|
|
|
on January 1, 2007 pursuant to the evergreen formula.
Shares that remain available for purchase under our 2000 Stock
Incentive Compensation Plan may be granted as stock options,
stock awards, restricted stock awards or restricted stock units. |
|
|
|
(3) |
|
Includes 99,306 shares remaining available for issuance
under our 2000 Employee Stock Purchase Plan. The 2000 Employee
Stock Purchase Plan includes an evergreen formula pursuant to
which the number of shares authorized for grant will be
increased annually by the lesser of
(1) 333,333 shares, (2) an amount equal to two
percent of the average number of shares of common stock
outstanding on a fully diluted basis as of the end of our
immediately preceding fiscal year, and (3) a lesser amount
determined by our Board of Directors. Excludes 333,333
additional shares of common stock that became available for
issuance under the 2000 Employee Stock Purchase Plan on
January 1, 2007 pursuant to the evergreen formula. |
2003 Nonqualified Stock Incentive Compensation
Plan. In May 2003, our Board of Directors adopted
the 2003 Nonqualified Stock Incentive Compensation Plan and
authorized the issuance of 1,000,000 shares of common stock
under the plan. This plan was adopted as a retention plan for
our employees. Because we did not obtain shareholder approval
for this plan, we may not grant stock options under this plan to
any existing directors or officers. A significant number of
stock options outstanding under our previously approved stock
option plans had exercise prices that were significantly higher
than our stock price in May 2003, and we did not anticipate that
those stock options would be exercised in the near future or at
all, absent extraordinary stock price appreciation. The Board
carefully evaluated the alternatives available for providing
incentives for and retaining employees and decided to make
additional option grants rather than conducting a company-wide
option cancellation program or re-pricing. As a result of this
decision, the Board decided that it was necessary to adopt this
plan. The Board acted to keep the long-term interests of our
workforce tightly aligned with the long-term interests of
shareholders and to counter any financial incentive competitors
might offer to our employees. We do not intend to adopt or
materially modify any stock compensation plans in the future
without shareholder approval.
Our 2003 Nonqualified Stock Incentive Compensation Plan enhances
long-term shareholder value by offering opportunities to our
employees, consultants, agents, advisors and independent
contractors to participate in our growth and success, to
encourage them to remain in our service and to own our stock.
Our 2003 Nonqualified Stock Incentive Compensation Plan permits
both option and stock grants. The plan administrator will make
proportional adjustments to the aggregate number of shares
issuable under the 2003 Nonqualified Stock Incentive
Compensation Plan and to outstanding awards in the event of
stock splits or other capital adjustments.
The compensation committee serves as the plan administrator of
the 2003 Nonqualified Stock Incentive Compensation Plan. The
plan administrator selects individuals to receive options and
specifies the terms and conditions of each option granted,
including the exercise price, the vesting provisions and the
option term.
Unless otherwise provided by the plan administrator, options
granted under the 2003 Nonqualified Stock Incentive Compensation
Plan vest over a four-year period, and generally will expire on
the earliest of ten years from the date of grant; one year after
the optionees retirement, death or disability; notice to
the optionee of termination of employment or service for cause;
and three months after other terminations of employment or
service.
The plan administrator is authorized under the 2003 Nonqualified
Stock Incentive Compensation Plan to issue shares of common
stock to eligible participants with terms, conditions and
restrictions established by the plan administrator in its sole
discretion. Restrictions may be based on continuous service or
the achievement of performance goals. Holders of restricted
stock are shareholders of Corillian and have, subject to
established restrictions, all the rights of shareholders with
respect to such shares.
In the event of a corporate transaction, such as a merger or
sale, each outstanding option to purchase shares under the 2003
Nonqualified Stock Incentive Compensation Plan may be assumed or
an equivalent option substituted by the buyer. If the successor
corporation does not assume or provide an equivalent substitute
for the option, the option terminates, but the optionee has the
right to exercise the vested and unvested portion of the option
immediately before the corporate transaction. Some option
agreements may call for accelerated vesting in the event of a
corporate transaction even if the successor corporation assumes
the option or provides an equivalent substitute for the option
if the employee is terminated by the successor corporation
within one year after the transaction or if the employee
terminates his or her employment with the successor corporation
within one year after
38
the transaction for specified reasons, such as a reduction in
compensation or title. In addition, the plan administrator has
discretion to accelerate the vesting of options in the event of
a corporate transaction.
Unless terminated sooner by the Board of Directors, the 2003
Nonqualified Stock Incentive Compensation Plan will terminate
ten years from the date of its approval by the board of
directors.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information called for by Part III, Item 13, is
incorporated by reference to the applicable information in our
Proxy Statement relating to our 2007 annual meeting of
shareholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information called for by Part III, Item 14, is
incorporated by reference to the applicable information in our
Proxy Statement relating to our 2007 annual meeting of
shareholders.
39
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this Report:
(1) Financial Statements
The Consolidated Financial Statements as set forth under
Item 8 of this Report.
(2) Financial Statement Schedules
Financial statement schedules have been omitted because the
information required to be set forth therein is not applicable
or is included in the notes to the Consolidated Financial
Statements.
(3) Exhibits
The exhibits listed on the accompanying Exhibit Index
immediately following the financial statement schedule are filed
as part of, or incorporated by reference into, this
Form 10-K.
40
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 16, 2007.
CORILLIAN CORPORATION
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on March 16, 2007
by the following persons on behalf of the Registrant and in the
capacities indicated.
|
|
|
|
|
Signature
|
|
Capacities
|
|
/s/ ALEX
P. HART
Alex
P. Hart
|
|
Chief Executive Officer and
Director
Principal Executive Officer
|
|
|
|
/s/ PAUL
K. WILDE
Paul
K. Wilde
|
|
Chief Financial Officer
Principal Financial and Accounting Officer
|
|
|
|
/s/ ERIC
DUNN
Eric
Dunn
|
|
Director
|
|
|
|
/s/ TYREE
B. MILLER
Tyree
B. Miller
|
|
Director
|
|
|
|
/s/ JAMES
R. STOJAK
James
R. Stojak
|
|
Director
|
|
|
|
/s/ JAY
N. WHIPPLE III
Jay
N. Whipple III
|
|
Director
|
41
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger,
dated March 31, 2005, by and among Corillian Corporation,
InteliData Technologies Corporation and Wizard Acquisition
Corporation (incorporated by reference to Exhibit 2.1 of
our report on
Form 8-K
dated March 31, 2005)
|
|
2
|
.2
|
|
Agreement and Plan of Merger,
dated August 5, 2005, by and among Corillian Corporation,
qbt Systems Inc., Quantum Acquisition Corporation, Quarry
Acquisition LLC and the Shareholders of qbt Systems Inc.
(incorporated by reference to Exhibit 2.1 of our report on
Form 8-K
dated August 5, 2005)
|
|
2
|
.3
|
|
Agreement and Plan of Merger by
and among CheckFree Corporation, CF Oregon Inc., and Corillian
Corporation, dated February 13, 2007 (incorporated by
reference to Exhibit 2 of our report on
Form 8-K
dated February 13, 2007)
|
|
3
|
.1
|
|
Articles of Incorporation
(incorporated by reference to Exhibit 3.2 of our
Form S-1,
as amended, File
No. 333-95513)
|
|
3
|
.2
|
|
Bylaws (incorporated by reference
to Exhibit 3.4 of our
Form S-1,
as amended, File
No. 333-95513)
|
|
3
|
.3
|
|
Second Restated Bylaws of
Corillian, as amended April 10, 2006 (incorporated by
reference to Exhibit 3.1 of our
Form 10-Q
for the quarter ended March 31, 2006)
|
|
4
|
.1
|
|
Form of Common Stock certificate
(incorporated by reference to Exhibit 4.1 of our
Form S-1,
as amended, File
No. 333-95513)
|
|
10
|
.1*
|
|
Corillians Amended and
Restated 2000 Stock Incentive Compensation Plan (incorporated by
reference to Exhibit 99.2 of our
Form S-8
filed on November 1, 2001, File
No. 333-72652)
|
|
10
|
.2*
|
|
Corillians 2000 Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 99.1 of our
Form S-8
filed on November 1, 2001, File
No. 333-72652)
|
|
10
|
.3*
|
|
Corillians Amended and
Restated 1997 Stock Option Plan (incorporated by reference to
Exhibit 10.3 of our report on
Form 10-K
for the year ended December 31, 2005)
|
|
10
|
.4
|
|
Lease between CarrAmerica Realty
Corporation and Corillian, dated May 22, 2000 (incorporated
by reference to Exhibit 10.4 of our report on
Form 10-K
for the year ended December 31, 2005)
|
|
10
|
.5*
|
|
Form of Stock Option Agreement
with certain employees (incorporated by reference to
Exhibit 10.6 of our report on
Form 10-K
for the year ended December 31, 2005)
|
|
10
|
.6*
|
|
Form of Indemnification Agreement
between Corillian and its directors and executive officers
|
|
10
|
.7*
|
|
Form of Severance Agreement with
Executive Officers and Certain Other Key Employees (incorporated
by reference to Exhibit 10.1 of our report on
Form 10-Q
for the quarter ended June 30, 2002)
|
|
10
|
.8*
|
|
Corillian Corporation 2003
Nonqualified Stock Incentive Compensation Plan (incorporated by
reference to Exhibit 10.1 of our report on
Form 10-Q
for the quarter ended June 30, 2003)
|
|
10
|
.9*
|
|
Form of Stock Option Agreement
under Corillian Corporation 2003 Nonqualified Stock Incentive
Compensation Plan (incorporated by reference to
Exhibit 10.2 of our report on
Form 10-Q
for the quarter ended June 30, 2003)
|
|
10
|
.10*
|
|
Form of Stock Option Agreement
with certain employees under Corillian Corporation 2003
Nonqualified Stock Incentive Compensation Plan (incorporated by
reference to Exhibit 10.3 of our report on
Form 10-Q
for the quarter ended June 30, 2003)
|
|
10
|
.11*
|
|
Form of Amendment to Stock Option
Letter Agreements for Certain Employees under the 2000 Stock
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 of our report on
Form 10-Q
for the quarter ended September 30, 2003)
|
|
10
|
.12*
|
|
Form of Severance Agreement for
Certain Employees (incorporated by reference to
Exhibit 10.2 of our report on
Form 10-Q
for the quarter ended September 30, 2003)
|
|
10
|
.13
|
|
First Amendment to Lease Agreement
between CarrAmerica Realty Operating Partnership, L.P. and
Corillian Corporation, dated August 23, 2004 (incorporated
by reference to Exhibit 99.1 of our report on
Form 8-K
dated August 23, 2004)
|
|
10
|
.14*
|
|
Separation Agreement and General
Release between Corillian Corporation and an Executive Officer,
dated February, 17, 2005 (incorporated by reference to
Exhibit 10.1 of our report on
Form 8-K
dated February 17, 2005)
|
|
10
|
.15
|
|
Key terms of Executive
compensation arrangements
|
42
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.16*
|
|
Key terms of Director compensation
arrangements (incorporated by reference to Exhibit 10.20 of
our report on
Form 10-K
for the year ended December 31, 2005)
|
|
21
|
.1
|
|
Subsidiaries of Corillian
Corporation
|
|
23
|
.1
|
|
Consent of KPMG LLP, Independent
Registered Public Accounting Firm
|
|
31
|
.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Management contract or compensatory plan |
43
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Corillian Corporation:
We have audited the accompanying consolidated balance sheets of
Corillian Corporation and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of
operations, shareholders equity, and cash flows for each
of the years in the three-year period ended December 31,
2006. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Corillian Corporation and subsidiaries as of
December 31, 2006 and 2005 and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006, Corillian
Corporation adopted the provision of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment, and Securities and Exchange Commission Staff
Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Corillian Corporations internal controls
over financial reporting as of December 31, 2006 based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our
report dated March 16, 2007 expressed an unqualified
opinion on managements assessment of, and the effective
operation of, internal control over financial reporting.
/s/ KPMG LLP
Portland, Oregon
March 16, 2007
F-1
CORILLIAN
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,166
|
|
|
$
|
16,722
|
|
Short-term investments
|
|
|
8,050
|
|
|
|
8,800
|
|
Accounts receivable, net
|
|
|
12,659
|
|
|
|
12,063
|
|
Other receivables
|
|
|
1,112
|
|
|
|
780
|
|
Revenue in excess of billings
|
|
|
3,474
|
|
|
|
2,387
|
|
Prepaid expenses and deposits
|
|
|
2,151
|
|
|
|
2,527
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,612
|
|
|
|
43,279
|
|
Property and equipment, net
|
|
|
4,085
|
|
|
|
3,548
|
|
Goodwill
|
|
|
26,899
|
|
|
|
26,899
|
|
Intangibles, net
|
|
|
2,283
|
|
|
|
3,856
|
|
Other assets
|
|
|
2,717
|
|
|
|
1,757
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
80,596
|
|
|
$
|
79,339
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,411
|
|
|
$
|
2,672
|
|
Accrued liabilities
|
|
|
3,579
|
|
|
|
3,589
|
|
Current portion of deferred revenue
|
|
|
14,950
|
|
|
|
14,740
|
|
Capital lease obligations
|
|
|
|
|
|
|
3
|
|
Other current liabilities
|
|
|
1,879
|
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,819
|
|
|
|
22,886
|
|
Deferred revenue, less current
portion
|
|
|
1,299
|
|
|
|
782
|
|
Other long-term liabilities
|
|
|
717
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,835
|
|
|
|
24,606
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value;
150,000 shares authorized; 45,101 and 44,696 shares
issued and outstanding at December 31, 2006 and 2005,
respectively
|
|
|
153,517
|
|
|
|
149,447
|
|
Accumulated other comprehensive
income
|
|
|
46
|
|
|
|
61
|
|
Accumulated deficit
|
|
|
(96,802
|
)
|
|
|
(94,775
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
56,761
|
|
|
|
54,733
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
80,596
|
|
|
$
|
79,339
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-2
CORILLIAN
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
60,958
|
|
|
$
|
49,220
|
|
|
$
|
50,794
|
|
Cost of revenues
|
|
|
30,283
|
|
|
|
20,296
|
|
|
|
18,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,675
|
|
|
|
28,924
|
|
|
|
32,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
8,799
|
|
|
|
7,850
|
|
|
|
7,291
|
|
Research and development
|
|
|
13,533
|
|
|
|
10,789
|
|
|
|
6,690
|
|
General and administrative
|
|
|
10,064
|
|
|
|
8,429
|
|
|
|
6,688
|
|
Impairment charges
|
|
|
396
|
|
|
|
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
32,792
|
|
|
|
27,068
|
|
|
|
21,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(2,117
|
)
|
|
|
1,856
|
|
|
|
11,185
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,136
|
|
|
|
1,003
|
|
|
|
412
|
|
Interest expense
|
|
|
(22
|
)
|
|
|
(25
|
)
|
|
|
(140
|
)
|
Loss on joint venture
|
|
|
|
|
|
|
(128
|
)
|
|
|
(813
|
)
|
Other income (expense), net
|
|
|
10
|
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,124
|
|
|
|
858
|
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income
taxes
|
|
|
(993
|
)
|
|
|
2,714
|
|
|
|
10,640
|
|
Income taxes
|
|
|
79
|
|
|
|
61
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,072
|
)
|
|
$
|
2,653
|
|
|
$
|
10,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
0.28
|
|
Diluted net (loss) income per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
Shares used in computing basic net
(loss) income per share
|
|
|
44,938
|
|
|
|
41,039
|
|
|
|
37,727
|
|
Shares used in computing diluted
net (loss) income per share
|
|
|
44,938
|
|
|
|
42,146
|
|
|
|
40,474
|
|
See accompanying notes to consolidated financial statements.
F-3
CORILLIAN
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Income
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, December 31, 2003
|
|
|
36,891
|
|
|
$
|
127,414
|
|
|
$
|
48
|
|
|
$
|
(107,908
|
)
|
|
$
|
19,554
|
|
Exercise of common stock options
|
|
|
1,009
|
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
1,969
|
|
Issuance of common shares under
employee stock purchase plan
|
|
|
508
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
505
|
|
Income tax benefit of equity
transactions
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,480
|
|
|
|
10,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
38,408
|
|
|
$
|
129,969
|
|
|
$
|
61
|
|
|
$
|
(97,428
|
)
|
|
$
|
32,602
|
|
Issuance of common stock in
InteliData acquisition, net of registration costs
|
|
|
4,917
|
|
|
|
16,309
|
|
|
|
|
|
|
|
|
|
|
|
16,309
|
|
Issuance of common stock in qbt
acquisition
|
|
|
643
|
|
|
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
2,059
|
|
Exercise of common stock options
|
|
|
334
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
Issuance of common shares under
employee stock purchase plan
|
|
|
394
|
|
|
|
620
|
|
|
|
|
|
|
|
|
|
|
|
620
|
|
Income tax benefit of equity
transactions
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,653
|
|
|
|
2,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
44,696
|
|
|
$
|
149,447
|
|
|
$
|
61
|
|
|
$
|
(94,775
|
)
|
|
$
|
54,733
|
|
Cumulative adjustment under
SAB 108
|
|
|
|
|
|
|
955
|
|
|
|
|
|
|
|
(955
|
)
|
|
|
|
|
Exercise of common stock options
|
|
|
169
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
Issuance of common shares under
employee stock purchase plan
|
|
|
233
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
595
|
|
Issuance of common stock in qbt
acquisition
|
|
|
3
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Stock-based compensation expense
under FAS 123R
|
|
|
|
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
|
2,266
|
|
Excess tax benefits from
stock-based transactions
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Deferred costs related to employee
stock-based compensation
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
(15
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,072
|
)
|
|
|
(1,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
45,101
|
|
|
$
|
153,517
|
|
|
$
|
46
|
|
|
$
|
(96,802
|
)
|
|
$
|
56,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
CORILLIAN
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,072
|
)
|
|
$
|
2,653
|
|
|
$
|
10,480
|
|
Adjustments to reconcile net (loss)
income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,924
|
|
|
|
1,534
|
|
|
|
2,200
|
|
Stock-based compensation expense
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
1,573
|
|
|
|
644
|
|
|
|
|
|
Impairment charges
|
|
|
396
|
|
|
|
|
|
|
|
491
|
|
Equity losses in joint venture
|
|
|
|
|
|
|
128
|
|
|
|
813
|
|
Recovery of bad debts
|
|
|
|
|
|
|
(41
|
)
|
|
|
(199
|
)
|
Loss (gain) on sale of assets
|
|
|
9
|
|
|
|
(8
|
)
|
|
|
(7
|
)
|
Income tax benefit of equity
transactions
|
|
|
|
|
|
|
20
|
|
|
|
81
|
|
Excess tax benefits from
stock-based compensation
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities, net of assets acquired and liabilities assumed
(see Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(596
|
)
|
|
|
(2,419
|
)
|
|
|
(1,925
|
)
|
Other receivables
|
|
|
(332
|
)
|
|
|
(326
|
)
|
|
|
20
|
|
Revenue in excess of billings
|
|
|
(1,087
|
)
|
|
|
(616
|
)
|
|
|
(105
|
)
|
Prepaid expenses, deposits and
other assets
|
|
|
(544
|
)
|
|
|
(899
|
)
|
|
|
(523
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(1,288
|
)
|
|
|
(4,463
|
)
|
|
|
190
|
|
Deferred revenue, current and
long-term
|
|
|
727
|
|
|
|
(1,697
|
)
|
|
|
1,070
|
|
Other liabilities
|
|
|
(473
|
)
|
|
|
550
|
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
1,495
|
|
|
|
(4,940
|
)
|
|
|
12,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,583
|
)
|
|
|
(1,095
|
)
|
|
|
(728
|
)
|
Proceeds from sale of property and
equipment
|
|
|
|
|
|
|
8
|
|
|
|
9
|
|
Purchase of
available-for-sale
investments
|
|
|
(3,200
|
)
|
|
|
(8,250
|
)
|
|
|
(19,000
|
)
|
Proceeds from the sales of
available-for-sale
investments
|
|
|
3,950
|
|
|
|
9,600
|
|
|
|
18,150
|
|
Purchase of
held-to-maturity
investments
|
|
|
|
|
|
|
|
|
|
|
(1,200
|
)
|
Proceeds from the maturities of
held-to-maturity
investments
|
|
|
|
|
|
|
|
|
|
|
1,801
|
|
Cash paid for acquisition of
InteliData, net of cash acquired
|
|
|
|
|
|
|
(4,509
|
)
|
|
|
|
|
Cash paid for acquisition of qbt,
net of cash acquired
|
|
|
|
|
|
|
(3,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1,833
|
)
|
|
|
(7,396
|
)
|
|
|
(968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
common stock
|
|
|
792
|
|
|
|
1,090
|
|
|
|
2,474
|
|
Registration costs associated with
shares issued in business combinations
|
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
Payments on line of credit
borrowings
|
|
|
|
|
|
|
(911
|
)
|
|
|
(1,662
|
)
|
Principal payments on capital lease
obligations
|
|
|
(3
|
)
|
|
|
(11
|
)
|
|
|
(17
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
797
|
|
|
|
(141
|
)
|
|
|
795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate
fluctuations on cash and cash equivalents
|
|
|
(15
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
444
|
|
|
|
(12,478
|
)
|
|
|
12,257
|
|
Cash and cash equivalents at
beginning of year
|
|
|
16,722
|
|
|
|
29,200
|
|
|
|
16,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
17,166
|
|
|
$
|
16,722
|
|
|
$
|
29,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
140
|
|
Taxes
|
|
|
70
|
|
|
|
113
|
|
|
|
97
|
|
Supplemental disclosures of
non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in InteliData
acquisition
|
|
$
|
|
|
|
$
|
16,618
|
|
|
$
|
|
|
Common stock issued in qbt
acquisition
|
|
|
9
|
|
|
|
2,059
|
|
|
|
|
|
Deferred costs related to employee
stock-based compensation
|
|
|
40
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(1) Description
of Company
Corillian Corporation (the Company) was incorporated
in Oregon in 1997. The Company is a provider of solutions that
enable banks, brokers and other financial service providers to
rapidly deploy Internet-based financial services. The
Companys solutions allow consumers to conduct financial
transactions, view personal and market financial information,
pay bills and access other financial services on the Internet.
Corillian Voyager is a software platform combined with a set of
applications for Internet banking, electronic bill presentment
and payment, targeted marketing, data aggregation and online
customer relationship management. The Company also offers a
variety of services to support its customers throughout the
process of implementing and maintaining its solutions.
(2) Summary
of Significant Accounting Policies
Use of
Estimates
The preparation of Consolidated Financial Statements in
accordance with U.S. generally accepted accounting
principles requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent
assets and liabilities. The Company 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. Estimates related to software revenue
recognition, stock-based compensation, allowance for doubtful
accounts, accrual for contracts in a loss position, valuation of
long-lived assets, including intangible assets, goodwill and the
valuation allowance for deferred tax assets require higher
degrees of judgment than others in their application. Actual
results may differ from these estimates under different
assumptions or conditions.
Principles
of Consolidation
The Consolidated Financial Statements include the financial
statements of the Company 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.
Revenue
Recognition
The Company 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. The Companys software arrangements
generally include software licenses, implementation and custom
software engineering services, post-contractual customer
support, training services and may also include hosting
services. The Companys software licenses are, in general,
functionally dependent on implementation, training and certain
custom software engineering services; therefore, software
licenses and implementation, training and custom software
engineering services 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. The Company 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, (b) sufficient vendor-specific objective
evidence exists to permit the allocation of revenue to these
service elements and (c) with respect to hosting, 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.
F-6
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Vendor-specific objective evidence on post-contractual customer
support and hosting services is established by using the renewal
rate. The Company allocates revenue to certain 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.
The
percentage-of-completion
method is measured by the percentage of contract hours incurred
to date compared to the estimated total contract hours for each
contract. The Company 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.
The Company 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 identified.
Pursuant to
SOP No. 81-1,
on projects where reasonable estimates cannot be made due to
inherent hazards, but where there is an assurance no loss will
be incurred, the Company 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 the
Companys Consolidated Statements of Operations.
In certain arrangements, we 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 or an obligation to deliver software customized
to a customer specifications. At December 31, 2005, we
applied this methodology to one project. Total deferred project
costs under the completed contract method were $770,000 at
December 31, 2005. At December 31, 2006, we did not
apply this methodology to any existing projects.
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
are recognized ratably over the hosting term.
The Company generally licenses its products 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, the
Companys software license agreements require customers to
pay the Company 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 as delivery has already occurred. Revenue from
transactional services are recognized as transactions are
processed.
In arrangements where the Company does not have an obligation to
install its products, but may become involved in the
installation of these products, the Company recognizes
non-refundable license fees over the estimated implementation
period for the customer or resellers project. If the
Company determines that the customer or reseller can
successfully install the Companys products in a production
environment without the Companys involvement, the Company
will recognize non-refundable license fees in the period in
which delivery occurs, assuming all other
SOP No. 97-2
revenue recognition criteria are met.
Where the Companys customers enter into arrangements to
purchase the Companys software and services on a
subscription basis, the Company recognizes revenue in accordance
with Staff Accounting Bulletin (SAB) No. 104,
F-7
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue Recognition in Financial Statements. Under these
arrangements, the Company defers recognition of the
implementation and license revenue and recognizes them ratably
over the greater of the initial life of the customer contract or
the estimated life of the customer service relationship. Costs
associated with implementation are deferred and recognized
ratably over the life of the arrangements.
Cash
and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts,
money market mutual funds and commercial paper with original
maturities of 90 days or less, which are carried at market
value, which approximates cost.
Short-Term
Investments
The Companys short-term investments consist of taxable
government agency bonds with original maturities between 90 and
180 days and taxable municipal bonds, and auction rate
securities. Taxable government agency bonds are classified as
held-to-maturity,
as the Company has the intent and ability to hold these
securities to maturity. All
held-to-maturity
investments are recorded at amortized cost. The Company
classifies taxable municipal bonds and auction rate securities
as short-term
available-for-sale
securities and reports them at cost which approximates market.
The Company views its auction rate securities as short-term
investments, even though the original maturity dates are greater
than one year, as they are bought and sold at par every 28 to
35 days and therefore are available for use in normal
operations.
The decline in the market value of any investment that is deemed
to be
other-than-temporary
results in a reduction in carrying amount to fair value. The
impairment charge is included in earnings and a new cost basis
for the security is established. To determine whether the
impairment is
other-than-temporary,
the Company considers whether it has the ability and intent to
hold the investment until a market price recovery and considers
whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. There have been
no impairments of
held-to-maturity
or
available-for-sale
securities identified or recorded by the Company and no
securities have been in an unrealized loss position for an
extended period of time.
The specific identification method is used to determine the cost
of securities sold. Premiums and discounts on
held-to-maturity
investments are amortized or accreted over the life of the
related security as an adjustment to yield using a method that
approximates the effective-interest method. Dividend and
interest income is recognized when earned. Unrealized holding
gains and losses have not been material to date. Realized gains
on
available-for-sale
securities are included in interest and other income in the
Companys Consolidated Statement of Operations.
Goodwill
Goodwill represents the excess of costs over fair value of
assets of businesses acquired. Goodwill from business
combinations is determined to have an indefinite useful life and
is not amortized, but instead tested for impairment at least
annually in accordance with the provisions of Financial
Accounting Standards Board (FAS) Statement
No. 142, Goodwill and Other Intangible Assets. The
Company performed its annual goodwill impairment analysis during
the fourth quarter of 2006 and identified no impairment. To
determine whether or not goodwill was impaired, a test was
performed comparing the book value of the reporting
unit to its estimated fair value.
Long-Lived
Assets Including Finite-Lived Purchased Intangible
Assets
The Company amortizes purchased intangible assets with finite
lives using the straight-line method over the estimated economic
lives of the assets, ranging from one to six years.
The Company evaluates long-lived assets, such as property, plant
and equipment and purchased intangible assets with finite lives,
for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable
in accordance with FAS No. 144, Accounting
for the Impairment or Disposal of
F-8
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Lived Assets. The Company assesses the
recoverability of the assets based on the undiscounted future
cash flow the assets are expected to generate and recognizes an
impairment loss when estimated undiscounted future cash flow
expected to result from the use of the asset plus net proceeds
expected from disposition of the asset, if any, are less than
the carrying value of the asset. When the Company identifies an
impairment, the Company reduces the carrying amount of the asset
to its estimated fair value based on a discounted cash flow
approach or, when available and appropriate, to comparable
market values.
Investment
in Joint Venture
Investments in businesses in which the Company owns less than a
50% interest and can exert significant influence over are
accounted for using the equity method of investment accounting.
EITF 03-16,
Accounting for Investments in Limited Liability
Companies, requires that investments in limited partnerships
be accounted for using the equity method when the percentage of
ownership is greater than 5%. Accordingly, the Company accounts
for its investment in Synoran LLC using the equity method of
accounting. Under the equity method, the Company records an
investment in the stock at cost, and adjusts the carrying amount
of the investment to recognize its share of the earnings or
losses of the business after the date of investment based on its
ownership percentage of the business as a whole.
On June 9, 2000, the Company entered into an operating
agreement with Huntington Bancshares Incorporated, Compaq
Computer Corporation and SAIC Venture Capital Corporation, a
division of Science Applications International Corporation to
form e-Banc,
LLC, a Delaware limited liability company. On February 12,
2004, e-Banc
changed its name to Synoran LLC. The business of
Synoran is to develop, produce and market solutions that enable
financial institutions to collect and coordinate their data from
all delivery channels including tellers, ATMs, web banking
sites, among others, on a real time basis, using existing
financial institution legacy systems as well as new channel
applications.
Pursuant to the agreement, the Company contributed
$3.0 million in cash in 2000. The Company invested an
additional $1.0 million in cash in Synoran during 2003. The
Companys ownership percentage of Synoran as of
December 31, 2006, was 12.3%. The Company has one
representative on Synorans board of managers. During the
years ended December 31, 2006, 2005 and 2004, the Company
recorded $0, $128,000 and $813,000, respectively, of losses
related to its investment in Synoran. During 2005, the
Companys investment balance was reduced to $0 and has
ceased applying the equity method. The Company does not have an
obligation to further fund Synoran and no additional monies
have been invested.
Accounts
Receivable
Trade accounts receivable are recorded at invoiced amount and do
not bear interest. The Company performs ongoing credit
evaluations of its customers financial condition. Credit
is extended to customers as deemed necessary and generally does
not require collateral. Management believes that the risk of
loss is significantly reduced due to the quality and financial
position of its customers. Management provides an allowance for
doubtful accounts based on current customer information and
historical statistics. The allowance for doubtful accounts is
the Companys best estimate of the amount of probable
credit losses in its existing accounts receivable. Account
balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery
is considered remote. The Company does not have any
off-balance-sheet credit exposure related to its customers. At
December 31, 2006 and 2005, the Companys allowance
for doubtful accounts receivable was $100,000.
F-9
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity in the allowance for
doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Beginning allowance balance
|
|
$
|
100
|
|
|
$
|
101
|
|
|
$
|
101
|
|
(Recovery) provision
|
|
|
|
|
|
|
(41
|
)
|
|
|
(199
|
)
|
Charge-offs
|
|
|
|
|
|
|
40
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful life of the
assets, generally three to five years. Equipment recorded under
capital lease agreements are depreciated over the shorter of the
estimated useful life of the equipment or the lease term.
Leasehold improvements are depreciated over the shorter of the
remaining term of the related leases or the estimated economic
useful lives of the improvements. Repairs and maintenance are
expensed as incurred.
Research
and Development
Research and development costs are expensed as incurred.
Capitalized
Software
The Company accounts for software development costs in
accordance with Statement No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. Software development costs are capitalized
beginning when a products technological feasibility has
been established by completion of a working model of the product
and ending when a product is available for general release to
customers.
Completion of a working model of the Companys products and
general release has substantially coincided. As a result, the
Company has not capitalized any software development costs
during the three-year period ended December 31, 2006 and
charged all such costs to research and development expense as
incurred.
Internal use software development costs are accounted for in
accordance with
SOP No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Costs incurred in the preliminary
project stage are expensed as incurred and costs incurred in the
application development stage are capitalized and amortized on a
straight-line basis over the estimated life of the asset.
Capitalized internal use software development costs have not
been significant to date.
Concentration
of Business and Credit Risk
Results of operations are substantially derived in the United
States and all assets reside in the United States. Banks and
other financial institutions accounted for a majority of the
Companys revenues during the three-year period ended
December 31, 2006. Accordingly, the Companys near 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
the Companys products and services are often subject to
delays because of the Companys customers internal
budgets and procedures for approving large capital expenditures
and deploying new technologies within their networks. The
Companys 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 the Company 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 the Companys financial condition, results of operations
or liquidity.
F-10
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is exposed to concentration of credit risk
principally from accounts receivable and revenue in excess of
billings. As of December 31, 2006, three customers
accounted for more than 10% of consolidated accounts receivable.
These customers, in total, accounted for approximately 40% of
the Companys consolidated accounts receivable balance as
of December 31, 2006. As of December 31, 2005, one
customer individually accounted for 18% of consolidated accounts
receivable.
Two customers individually accounted for more than 10% of the
Companys consolidated revenue in excess of billing balance
as of December 31, 2006. These customers accounted for
approximately 25% of the Companys consolidated revenue in
excess of billing balance as of December 31, 2006. Three
customers individually accounted for more than 10% of the
Companys consolidated revenue in excess of billings
balance as of December 31, 2005. These customers accounted
for approximately 47% of the Companys consolidated revenue
in excess of billings balance as of December 31, 2005.
The Company is also subject to concentrations of credit risk
from its cash, cash equivalents and short-term investments. The
Company 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.
Risk
of Technological Change
A substantial portion of the Companys revenues are
generated from the development and rapid release to market of
computer software products and enhancements. In the extremely
competitive industry environment in which the Company operates,
such product generation, development and marketing processes are
uncertain and complex, requiring accurate prediction of market
trends and demand as well as successful management of various
risks inherent in such products. Additionally, the
Companys production strategy relies on certain
employees ability to deliver implemented products in time
to meet critical development and distribution schedules. In
light of these dependencies, it is reasonably possible that
failure to successfully manage a significant product
introduction or failure of certain employees to deliver
implemented products as needed could have a severe impact on the
Companys growth, results of operations and liquidity.
Stock-Based
Compensation
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (FAS 123(R)) which
requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and
directors including employee stock options and employee stock
purchases related to the Employee Stock Purchase Plan (the
ESPP) based on estimated fair values.
FAS 123(R)supersedes the Companys previous accounting
under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) for periods beginning in 2006. In
March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (SAB 107)
relating to FAS 123(R). The Company has applied the
provisions of SAB 107 in its adoption of FAS 123(R).
The Company adopted FAS 123(R) using the modified
prospective transition method, which requires the application of
the accounting standard as of January 1, 2006. The
Companys Consolidated Financial Statements as of and for
year ended December 31, 2006 reflect the impact of
FAS 123(R). In accordance with the modified prospective
transition method, the Companys Consolidated Financial
Statements for prior periods have not been restated to reflect,
and do not include, the impact of FAS 123(R). Stock-based
compensation expense recognized under FAS 123(R) for the
year ended December 31, 2006 was approximately
$2.3 million. There was no stock-based compensation expense
related to employee stock options and employee stock purchases
under the ESPP recognized for the years ended December 31,
2005 and 2004. See Note 6 for additional information.
FAS 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized
F-11
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
as expense over the requisite service periods in the
Companys Consolidated Statement of Operations. Prior to
the adoption of FAS 123(R), the Company accounted for
stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed
under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(FAS 123). Under the intrinsic value
method, no stock-based compensation expense had been recognized
in the Companys Consolidated Statement of Operations
because the exercise price of the Companys stock options
granted to employees and directors equaled the fair market value
of the underlying stock at the date of grant.
Pro forma stock-based compensation expense for the years ended
December 31, 2005 and 2004 was $4.2 million and
$3.0 million, respectively, or $0.10 and $0.07,
respectively, per diluted share. On December 22, 2005, the
Companys Board of Directors approved the acceleration of
vesting of all employee stock options with an exercise price
equal to or greater than $5.00. The closing share price of the
Companys stock on December 22, 2005 was $2.80. The
acceleration of the vesting of these options did not result in
book compensation costs based on generally accepted accounting
principles under APB 25. However, for pro forma disclosure
requirements under FAS 123, the Company recognized
$1.2 million of stock-based compensation for all options
for which vesting was accelerated during the fourth quarter of
the year ended December 31, 2005. The Company took this
action to reduce future book compensation costs under
FAS 123(R). In addition, because these options had exercise
prices substantially in excess of current market values, the
accelerated vesting did not provide material value to the
affected option holders.
Stock-based compensation expense recognized during the period is
based on the value of the portion of share-based payment awards
that are ultimately expected to vest during the period.
Stock-based compensation expense recognized in the
Companys Consolidated Statement of Operations for the year
ended December 31, 2006 included compensation expense for
share-based payment awards granted prior to, but not yet vested
as of December 31, 2005 based on the grant date fair value
determined in accordance with the pro forma provisions of
FAS 123 and compensation expense for the share-based
payment awards granted subsequent to December 31, 2005
based on the grant date fair value determined in accordance with
the provisions of FAS 123(R). The Company amortizes the
fair value of awards over their applicable vesting period
(generally four years) using the straight line method. As
stock-based compensation expense recognized in the Consolidated
Statement of Operations in 2006 is based on awards ultimately
expected to vest, expense has been reduced for estimated
forfeitures. FAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. In the Companys pro forma information required
under FAS 123 for the periods prior to 2006, the Company
accounted for forfeitures as they occurred.
Upon adoption of FAS 123(R), the Company maintained its
method of valuation of employee stock options granted using the
Black-Scholes option pricing model, which was previously used
for the Companys pro forma information required under
FAS 123. For additional information, see Note 6. The
Companys determination of fair value of share-based
payment awards on the date of grant using an option pricing
model is affected by the Companys stock price as well as
assumptions regarding a number of variables, including the
risk-free interest rate, expected dividend yield, expected
option life, and expected volatility over the term of the awards.
Net
(Loss) Income Per Share
Basic net (loss) income per share is computed using the
weighted-average number of common shares outstanding during the
period. Diluted net (loss) income per share is computed using
the weighted-average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive
potential common shares primarily consist of employee stock
options.
Statement of Financial Accounting Standards No. 128,
Earnings per Share (FAS 128), requires
that employee equity share options, non-vested shares and
similar equity instruments granted by the Company be treated as
potential common shares outstanding in computing diluted
earnings per share. Diluted shares outstanding include the
dilutive effect of
in-the-money
options which is calculated based on the average share price for
each
F-12
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
period using the treasury stock method. Under the treasury stock
method, the amount the employee must pay for exercising stock
options, the amount of compensation cost for future service that
the Company has not yet recognized, and the amount of benefits
that would be recorded in additional paid-in capital when the
award becomes deductible are assumed to be used to repurchase
shares.
Comprehensive
Income (Loss)
The Company has adopted the provisions of Statement
No. 130, Reporting on Comprehensive
Income. Comprehensive income 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 for the
Company. All other amounts have not been material to the
Companys financial position or results of operations.
Income
Taxes
The Company accounts for income taxes in accordance with
Statement No. 109, Accounting for Income
Taxes. In accordance with Statement No. 109,
deferred tax assets and liabilities are recognized for the
future tax consequences of events that have been included in the
financial statements and tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to be recovered or
settled. Valuation allowances are established to reduce deferred
tax assets to the amount expected to be realized.
Fair
Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and
cash equivalents, short-term investments, accounts and notes
receivable, revenue in excess of billings, and accounts payable
approximate fair values due to the short-term nature of those
instruments. Fair value estimates are made at a specific point
in time, based on relevant market information about the
financial instruments when available. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision.
Reclassifications
Certain reclassifications have been made to prior-period
balances in order to conform to the current periods
presentation. In the current year, the Company reclassified
$782,000 of deferred revenue in the prior year balance sheet
from current to long-term liabilities.
Recent
Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement
No. 109. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income
Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for a tax position taken or
expected to be taken in a tax return and also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. The Company believes
that the adoption of FIN 48 will not have a material impact
on its results of operations.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (FAS 157).
FAS 157 establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and
expands on required disclosures about fair value measurement.
FAS 157 is effective for the Company on January 1,
F-13
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2008 and will be applied prospectively. The Company is currently
evaluating what impact, if any, this statement will have on its
financial statements.
In September 2006, the SEC (SEC) issued
SAB No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year
Financial Statements, which provides interpretive guidance
on how registrants should quantify financial statement
misstatements. Under SAB 108 registrants are required to
consider both a rollover method which focuses
primarily on the income statement impact of misstatements and
the iron curtain method which focuses primarily on
the balance sheet impact of misstatements. The transition
provisions of SAB 108 permit a registrant to adjust
beginning retained earnings for the cumulative effect of
immaterial errors relating to prior years. The Company was
required to adopt SAB 108 in the current year.
In the fourth quarter of 2006, management conducted a voluntary
review of its stock option grants from the Companys
inception through 2006. From this review, management noted the
following accounting errors:
|
|
|
|
|
Certain stock option grants had measurement dates that differed
from the recorded grant dates, primarily where the grantee began
employment services shortly after the grant authorization date
and therefore the correct measurement date would be the date of
commencement of employment. Corillian identified 13 option
grants that resulted in a measurement date that had a higher
stock price than the recorded grant date and 24 option grants
that resulted in a measurement date that had a stock price
either equal to or lower than the recorded grant date. These
grants were primarily issued from 2000 to 2003.
|
|
|
|
Management noted two option grants in 1999 to members of the
Companys board of directors who subsequently left the
board to serve the Company on an advisory board as consultants.
One of the individuals subsequently transitioned from the
advisory board to a full-time employee of the Company. The
Company did not appropriately account for the change in status
from a non-employee director to a non-employee or from
non-employee to employee.
|
|
|
|
Management noted one option grant in 1999 to a full-time
consultant who served as a contractor for three months prior to
becoming an employee. The Company did not appropriately account
for this award as a non-employee award and did not account the
change in status from non-employee to employee.
|
The errors noted above resulted in an understatement of
stock-based compensation from 1999 through 2005. The Company
noted no instances of fraud or intentional wrongdoing.
Historically, the Company has evaluated uncorrected differences
utilizing the rollover approach. The Company believes the impact
of these stock-based compensation errors were immaterial to
prior fiscal years under the rollover method. However, under
SAB 108, which the Company adopted for the year ended
December 31, 2006, the Company must assess materiality
using both the rollover method and the iron-curtain method.
Under the iron-curtain method, the cumulative stock option
errors were material to 2006 financial statements and,
therefore, we have recorded an adjustment to decrease our
opening 2006 retained earnings balance in the amount of $955,000
and increased common stock by the same amount pursuant to the
implementation guidance in SAB 108. There was no tax effect
to these adjustments, primarily due to Corillians loss
positions in the years impacted.
The impact on operations is comprised of the following amounts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Total
|
|
|
Measurement date
|
|
$
|
25
|
|
|
$
|
61
|
|
|
$
|
60
|
|
|
$
|
23
|
|
|
$
|
72
|
|
|
$
|
70
|
|
|
$
|
(35
|
)
|
|
$
|
276
|
|
Non-employee and change in status
|
|
|
60
|
|
|
|
420
|
|
|
|
146
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
|
85
|
|
|
|
481
|
|
|
|
206
|
|
|
|
76
|
|
|
|
72
|
|
|
|
70
|
|
|
|
(35
|
)
|
|
$
|
955
|
|
Net (loss) income
|
|
$
|
(10,096
|
)
|
|
$
|
(33,355
|
)
|
|
$
|
(49,301
|
)
|
|
$
|
(17,257
|
)
|
|
$
|
5,126
|
|
|
$
|
10,480
|
|
|
$
|
2,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net (loss) income
|
|
|
0.8
|
%
|
|
|
1.4
|
%
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
|
|
1.4
|
%
|
|
|
0.7
|
%
|
|
|
1.3
|
%
|
|
|
|
|
F-14
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(3) Balance
Sheet Components
Cash,
cash equivalents and short-term investments
As of December 31, 2006 and 2005, cash, cash equivalents
and short-term investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and money market funds
|
|
$
|
9,056
|
|
|
$
|
10,744
|
|
Investments, original maturities
less than 90 days
|
|
|
8,110
|
|
|
|
5,978
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
17,166
|
|
|
$
|
16,722
|
|
Available-for-sale
investments:
|
|
|
|
|
|
|
|
|
Auction rate debt securities
|
|
$
|
8,050
|
|
|
$
|
8,800
|
|
Investments held as
available-for-sale
are auction rate debt securities. As of December 31, 2006,
the auction rate debt securities have stated maturities through
2043 and have interest rates that reset periodically at
established intervals within 90 days. At each auction
reset, the Company has the option to hold its position, bid for
a new interest rate or sell. The Company has classified all
auction rate securities with an established interest reset
period of less than one year as short-term investments. At
December 31, 2006 and 2005, the fair values of the
available-for-sale
securities approximate cost.
There were no realized gains or losses on investments for the
years ended December 31, 2006, 2005 and 2004. There were no
restrictions on cash and cash equivalents or investments as of
December 31, 2006 and 2005.
Property
and Equipment, Net
Property and equipment, net, consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
15,392
|
|
|
$
|
13,076
|
|
Furniture, fixtures and other
equipment
|
|
|
2,568
|
|
|
|
2,758
|
|
Leasehold improvements
|
|
|
3,584
|
|
|
|
3,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,544
|
|
|
|
19,684
|
|
Less accumulated depreciation and
amortization
|
|
|
(17,459
|
)
|
|
|
(16,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,085
|
|
|
$
|
3,548
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1.9 million, $1.5 million
and $2.2 million for the years ended December 31,
2006, 2005 and 2004, respectively. During 2006 and 2004, the
Company recognized impairment charges of $113,000 and $491,000,
respectively, to write-off the remaining book value of
long-lived assets that it abandoned and ceased to use. See
Note 10.
F-15
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Liabilities
Accrued liabilities consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Payroll and payroll-related
expenses
|
|
$
|
2,294
|
|
|
$
|
2,337
|
|
Other accrued liabilities
|
|
|
1,285
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,579
|
|
|
$
|
3,589
|
|
|
|
|
|
|
|
|
|
|
(4) Income
Taxes
Domestic and foreign pre-tax income is as follows for the year
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(1,436
|
)
|
|
$
|
2,192
|
|
|
$
|
9,942
|
|
Foreign
|
|
|
443
|
|
|
|
522
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(993
|
)
|
|
$
|
2,714
|
|
|
$
|
10,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provided current federal and state tax expense of
$79,000, $61,000 and $160,000 for the years ended
December 31, 2006, 2005 and 2004.
The reconciliation of the statutory federal income tax rate to
the Companys effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Changes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss tax benefits
(realized) not realized
|
|
|
20.5
|
|
|
|
(31.4
|
)
|
|
|
(31.9
|
)
|
Impact of FAS 123(R)
stock-based compensation expense
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3.3
|
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
%
|
|
|
2.2
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences and net operating loss
carryforwards which give rise to the significant portions of
deferred tax assets and liabilities are as follow at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Research and experimentation
credit carryforwards
|
|
$
|
3,778
|
|
|
$
|
3,503
|
|
Accrued expenses and allowances
|
|
|
657
|
|
|
|
765
|
|
Deferred compensation
|
|
|
72
|
|
|
|
101
|
|
Domestic net operating loss
carryforwards
|
|
|
25,035
|
|
|
|
23,900
|
|
Foreign net operating loss
carryforwards
|
|
|
2,390
|
|
|
|
2,479
|
|
Goodwill and intangibles
|
|
|
1,023
|
|
|
|
1,161
|
|
Depreciable assets
|
|
|
1,140
|
|
|
|
1,074
|
|
Alternative minimum tax credit
carryforwards
|
|
|
317
|
|
|
|
254
|
|
Impairment charges
|
|
|
146
|
|
|
|
|
|
Deferred revenue
|
|
|
498
|
|
|
|
|
|
Stock-based compensation
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax asset
|
|
|
35,722
|
|
|
|
33,237
|
|
Less valuation allowance
|
|
|
(34,782
|
)
|
|
|
(31,722
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
940
|
|
|
|
1,515
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
897
|
|
|
|
1,485
|
|
Prepaid expenses
|
|
|
43
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax
liabilities
|
|
|
940
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax assets as of December 31,
2006 and December 31, 2005 have been reduced to reflect the
adoption of FAS 123(R). Post adoption of FAS 123(R),
net operating loss carryforwards created by excess tax benefits
from the exercise of stock options are not recorded as deferred
tax assets; if and when such net operating loss carryforwards
are utilized, stockholders equity will be increased. For
presentation purposes we are also electing to exclude the
historic deferred tax assets related to excess tax benefits from
stock option exercises. Deferred tax assets related to net
operating losses and tax credit carryforwards have been reduced
by $2.5 million and $2.3 million as of
December 31, 2006 and December 31, 2005, respectively.
As the deferred tax assets created by equity compensation are
fully offset with valuation allowances, there were no changes to
our deferred tax provision for any years presented.
The portion of the valuation allowance for deferred tax assets
for which subsequently recognized tax benefits will be applied
directly to goodwill is approximately $9.4 million.
The net change in the total valuation allowance was an increase
of approximately $3.1 million for the year ended
December 31, 2006 and an increase of approximately
$5.9 million for the year ended December 31, 2005. The
increase in the valuation allowance in 2006 was primarily due to
an increase in temporary tax differences, net of the utilization
of federal and state net operating losses. The increase in the
valuation allowance in 2005 was primarily due to the non-taxable
stock acquisition of InteliData Technologies in 2005 as the
company recorded a valuation allowance on the acquired net
operating loss carryforwards.
At December 31, 2006, the Company had federal and state net
operating loss carryforwards of approximately $72.2 million
and foreign net operating loss carryforwards of
$11.9 million to offset against future taxable income.
F-17
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additionally, the Company had alternative minimum tax credits of
approximately $317,000 and federal and state research and
experimentation credits of $4.1 million. These
carryforwards expire between 2007 and 2026.
Utilization of a portion of the net operating loss and credit
carryforwards may be subject to an annual limitation due to the
ownership change provisions of the Internal Revenue Code of 1986
and similar state provisions.
(5) Net
(Loss) Income per Share
The following table presents the calculation of basic and
diluted net (loss) income per share (in thousands, except
per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net (loss) income(1)
|
|
$
|
(1,072
|
)
|
|
$
|
2,653
|
|
|
$
|
10,480
|
|
Shares for basic net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
44,938
|
|
|
|
41,039
|
|
|
|
37,727
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and employee stock
purchase plan
|
|
|
|
|
|
|
1,107
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted net income per
share
|
|
|
44,938
|
|
|
|
42,146
|
|
|
|
40,474
|
|
Net (loss) income per
share basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
0.28
|
|
Net(loss) income per
share diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
|
|
|
(1) |
|
Net income (loss) for the year ended December 31, 2006
included stock-based compensation expense under FAS 123(R)
of approximately $2.3 million. There was no stock-based
compensation expense related to employee stock options and
employee stock purchases under the ESPP in accordance with
FAS 123 for the years ended December 31, 2005 and 2004
because the Company did not adopt the recognition provisions of
FAS 123. See Note 6 for additional information. |
Options to purchase employee stock options, including estimated
options to purchase shares under the ESPP, of approximately
6.7 million, 2.2 million and 1.2 million shares
for the years ended December 31, 2006, 2005 and 2004,
respectively, were outstanding, but were not included in the
computation of diluted earnings per share because the effect
would have been anti-dilutive.
(6) Employee
Stock Benefit Plans
2000
Employee Stock Purchase Plan
In March 2000, the Board of Directors approved the 2000 Employee
Stock Purchase Plan (the ESPP) that became effective
upon completion of the Companys initial public offering on
April 12, 2000. In 2006, 2005 and 2004 the Company issued
234,084, 393,460 and 507,628 shares, respectively, under
the ESPP. As of December 31, 2006, 2.1 million shares
were authorized for grant and 99,000 shares were available
for issuance under the ESPP. The ESPP includes an evergreen
formula pursuant to which the number of shares authorized for
grant will be increased annually by the lesser of
(1) 333,333 shares, (2) an amount equal to two
percent of the average number of shares of common stock
outstanding on a fully diluted basis as of the end of the
Companys immediately preceding year, and (3) a lesser
amount determined by the Board of Directors. In January 2007, an
additional 333,333 shares of common stock became available
for issuance under the ESPP pursuant to the evergreen formula.
Offering periods commence on February 1 and August 1 each
year and have a
24-month
duration. Each offering period consists of four consecutive
purchase periods of six month durations. Participants purchase
common stock on the last day of each purchase period. The
purchase price is the lesser of 85% of the fair market value of
the common stock on the first day of an offering period or 85%
of the fair market value of the common stock on the purchase
date. If the fair market value of the Companys common
stock on any purchase date of an offering period is
F-18
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
less than the fair market value of the Companys common
stock on the first day of the offering period, then every
participant shall automatically (a) be withdrawn from the
offering period at the close of the purchase date after the
acquisition of the shares of the Companys common stock for
the purchase period and (b) be enrolled in the offering
period commencing on the first business date subsequent to the
purchase period.
As a result of the execution of the definitive agreement to be
acquired by CheckFree Corporation, as discussed in Note 13,
the Company suspended the 2000 Employee Stock Purchase Plan on
February 13, 2006.
1997,
2000 and 2003 Stock Option Plans
Stock
Option Program Description
Stock option grants are designed to reward employees for their
long-term contributions to the Company and provide incentives
for them to remain with the Company. The number and frequency of
stock option grants are discretionary.
In 1997, the Companys Board of Directors approved and
adopted a Stock Option Plan (the 1997 Plan). Options
granted pursuant to the 1997 Plan may be either incentive stock
options or non-qualified stock options, at the discretion of the
Board of Directors. In March 2000, the Board of Directors
approved an amendment that capped the 1997 Plan at
3,453,193 shares, which was the number of shares subject to
options at that time. Shares under the 1997 Plan generally vest
in yearly installments over a period of three or four years
following the date of grant. Options under the 1997 Plan
generally expire five years from the date of grant, and
generally expire three months after termination of employment
with the Company.
In March 2000, the Board of Directors approved the 2000 Stock
Incentive Compensation Plan (the 2000 Plan). Options
granted pursuant to the 2000 Plan may be either incentive stock
options or non-qualified stock options, at the discretion of the
Board of Directors. Shares under the 2000 Plan generally vest
over a period of four years following the date of grant. Options
under the 2000 Plan generally expire ten years from the date of
grant, and generally expire three months after termination of
employment with the Company. The options generally become
exercisable for 25% of the option shares one year from the date
of grant and then ratably over the following 12 quarters. As of
December 31, 2006, 8.4 million shares were authorized
for grant and 1.2 million shares remained available for
issuance under the 2000 Plan. The 2000 Plan includes an
evergreen formula pursuant to which the number of shares
authorized for grant will be increased annually by the lesser of
(1) 400,000 shares, and (2) an amount equal to
one percent of the average outstanding shares of the common
stock of the Company as of the end of the immediately preceding
year on a fully-diluted basis; plus any shares subject to
outstanding awards under the Companys 1997 Plan as of the
effective date of the 2000 Plan that cease to be subject to such
awards other than by reason of exercise or payment of such
awards. In January 2007, an additional 400,000 shares of
common stock became available for grant under the 2000 Plan
pursuant to the evergreen formula.
In May 2003, the Companys Board of Directors adopted the
2003 Nonqualified Stock Incentive Compensation Plan (the
2003 Plan) and authorized the issuance of
1,000,000 shares of common stock under the 2003 Plan. The
2003 Plan was not approved by the Companys shareholders.
The Company may not grant stock options under this plan to any
existing directors or officers. Shares under the 2003 Plan
generally vest over a period of four years following the date of
grant. Options under the 2003 Plan generally expire ten years
from the date of grant or three months after termination of
employment with the Company. The options will generally become
exercisable for 25% of the option shares one year from the date
of grant and then ratably over the following 12 quarters. As of
December 31, 2006, approximately 278,000 shares
remained available for issuance under the 2003 Plan.
F-19
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
General
Option Information
A summary of option activity under the Companys stock
option plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Number of
|
|
|
Price per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Outstanding at December 31,
2003
|
|
|
6,602,248
|
|
|
$
|
3.51
|
|
Granted
|
|
|
565,999
|
|
|
|
4.93
|
|
Exercised
|
|
|
(1,009,226
|
)
|
|
|
1.95
|
|
Canceled/forfeited/expired
|
|
|
(763,516
|
)
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
5,395,505
|
|
|
|
4.01
|
|
Granted
|
|
|
1,856,250
|
|
|
|
3.09
|
|
Exercised
|
|
|
(333,958
|
)
|
|
|
1.41
|
|
Canceled/forfeited/expired
|
|
|
(542,468
|
)
|
|
|
3.42
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
6,375,329
|
|
|
|
3.94
|
|
Granted
|
|
|
606,500
|
|
|
|
3.30
|
|
Exercised
|
|
|
(168,998
|
)
|
|
|
1.17
|
|
Canceled/forfeited/expired
|
|
|
(380,204
|
)
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
6,432,627
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
The total pretax intrinsic value of options exercised in 2006,
2005 and 2004 was approximately $364,000, $679,000 and
$2.5 million, respectively. Upon the exercise of stock
options, the Company issues new shares of common stock from its
authorized shares. Net cash proceeds from the exercise of stock
options and purchases under the ESPP were approximately
$792,000, $1.1 million and $2.5 million in 2006, 2005
and 2004, respectively.
The following table summarizes significant ranges of outstanding
and exercisable options under the Companys stock option
plans as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Price per
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Price per
|
|
|
Intrinsic
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life (in Years)
|
|
|
Share
|
|
|
Value
|
|
|
Exercisable
|
|
|
Share
|
|
|
Value
|
|
|
$0.68-$2.71
|
|
|
971,745
|
|
|
|
6.25
|
|
|
$
|
1.09
|
|
|
$
|
2,604,277
|
|
|
|
811,872
|
|
|
$
|
1.07
|
|
|
$
|
2,192,054
|
|
$2.75-$2.87
|
|
|
918,583
|
|
|
|
7.14
|
|
|
|
2.85
|
|
|
$
|
845,096
|
|
|
|
562,396
|
|
|
|
2.85
|
|
|
$
|
517,404
|
|
$2.88-$3.00
|
|
|
1,507,375
|
|
|
|
7.38
|
|
|
|
2.97
|
|
|
$
|
1,205,900
|
|
|
|
922,251
|
|
|
|
2.99
|
|
|
$
|
719,356
|
|
$3.01-$3.32
|
|
|
695,042
|
|
|
|
8.26
|
|
|
|
3.18
|
|
|
$
|
410,075
|
|
|
|
258,484
|
|
|
|
3.18
|
|
|
$
|
152,506
|
|
$3.33-$3.77
|
|
|
842,168
|
|
|
|
6.84
|
|
|
|
3.55
|
|
|
$
|
185,277
|
|
|
|
404,722
|
|
|
|
3.63
|
|
|
$
|
56,661
|
|
$3.78-$6.08
|
|
|
916,922
|
|
|
|
7.12
|
|
|
|
5.34
|
|
|
|
|
|
|
|
814,082
|
|
|
|
5.46
|
|
|
|
|
|
$6.40-$19.50
|
|
|
580,792
|
|
|
|
3.83
|
|
|
|
12.30
|
|
|
|
|
|
|
|
580,790
|
|
|
|
12.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,432,627
|
|
|
|
6.84
|
|
|
$
|
3.95
|
|
|
$
|
5,250,625
|
|
|
|
4,354,597
|
|
|
$
|
4.39
|
|
|
$
|
3,637,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents
the total pretax intrinsic value, based on the Companys
closing stock price of $3.77 as of December 31, 2006, which
would have been received by the option holders had all option
holders exercised their options as of that date. The total
number of
in-the-money
options exercisable as of December 31, 2006 was
approximately $3.0 million shares.
F-20
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation
and Expense Information under FAS 123(R)
The following table summarizes stock-based compensation expense
under FAS 123(R) for the year ended December 31, 2006,
which was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
469
|
|
Sales and marketing
|
|
|
447
|
|
Research and development
|
|
|
479
|
|
General and administrative
|
|
|
871
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
2,266
|
|
|
|
|
|
|
As of December 31, 2006, approximately $40,000 of
stock-based compensation expense was capitalized as deferred
project costs and is included in other assets. There was no
stock-based compensation expense recognized for the years ended
December 31, 2005 and 2004.
The following table presents the impact of the Companys
adoption of FAS 123(R) on selected line items from the
Consolidated Financial Statements for the year ended
December 31, 2006 (in thousands, except per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
If Reported
|
|
|
|
Following FAS 123(R)
|
|
|
Following APB 25
|
|
|
(Loss) income from operations
|
|
$
|
(2,117
|
)
|
|
$
|
149
|
|
Net (loss) income
|
|
$
|
(1,072
|
)
|
|
$
|
1,194
|
|
Basic and diluted net (loss)
income per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
The following table illustrates the effect on net income if the
fair-value-based method in accordance with FAS 123 had been
applied to all outstanding and unvested awards for the years
ended December 31, 2005 and 2004 (in thousands, except
per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
2,653
|
|
|
$
|
10,480
|
|
Deduct: Stock-based compensation
expense determined under fair value value based method for all
awards
|
|
|
(4,138
|
)
|
|
|
(2,980
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income
|
|
$
|
(1,485
|
)
|
|
$
|
7,500
|
|
|
|
|
|
|
|
|
|
|
Basic net income per
share as reported
|
|
$
|
0.06
|
|
|
$
|
0.28
|
|
Basic net (loss) income per
share pro forma
|
|
$
|
(0.04
|
)
|
|
$
|
0.20
|
|
Diluted net income per
share as reported
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
Diluted net (loss) income per
share pro forma
|
|
$
|
(0.04
|
)
|
|
$
|
0.19
|
|
Stock-based compensation expense in the table above and for the
year ended December 31, 2006 does not include any tax
benefit associated with stock-based compensation due to the
Companys overall tax position and the uncertainty
surrounding the realizability of its deferred tax assets. As of
December 31, 2006, total compensation cost related to
non-vested stock options not yet recognized was
$3.4 million which is expected to be recognized over the
next 15 months on a weighted-average basis.
Upon adoption of FAS 123(R), the Company continued its
methodology of calculating the value of employee stock options
on the date of grant using the Black-Scholes model which it also
used for the purpose of the pro forma financial information in
accordance with FAS 123.
F-21
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of employee stock options was estimated using the
following weighted average assumptions and fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average fair value of
grants
|
|
$
|
2.08
|
|
|
$
|
1.86
|
|
|
$
|
3.06
|
|
Expected volatility
|
|
|
74
|
%
|
|
|
79
|
%
|
|
|
84
|
%
|
Risk-free interest rate
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
|
|
3.4
|
%
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (in years)
|
|
|
4.8
|
|
|
|
4.0
|
|
|
|
3.9
|
|
The fair value of employee stock options granted under the ESPP
was estimated using the following assumptions and fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average fair value of
grants
|
|
$
|
0.96
|
|
|
$
|
1.25
|
|
|
$
|
2.29
|
|
Expected volatility
|
|
|
35%-47%
|
|
|
|
46%-75%
|
|
|
|
66%-106%
|
|
Risk-free interest rate
|
|
|
5.0%-5.2%
|
|
|
|
3.5%-3.9%
|
|
|
|
0.99%-2.64%
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected life (in years)
|
|
|
0.5-2.0
|
|
|
|
0.5-2.0
|
|
|
|
0.5-2.0
|
|
The Company estimates volatility based on its historical stock
price volatility for a period consistent with the expected life
of its options. The risk-free interest rate assumption is based
upon federal treasury instrument rates equal to the expected
life of the Companys employee stock options. The dividend
yield assumption is based on the Companys history and
expectation of dividend payouts. The expected life of employee
stock options represents the weighted-average period the stock
options are expected to remain outstanding based on historical
experience of exercises and cancellations. The historical
experience of exercises and cancellations were weighted against
the estimated life of outstanding options at December 31,
2006 using the simplified approach as allowed under
SAB 107. Prior to 2006, the expected life and expected
volatility of stock options were based upon historical data.
As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the year ended
December 31, 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures.
FAS 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience. In the Companys
pro forma information required under FAS 123 for the
periods prior to 2006, the Company accounted for forfeitures as
they occurred.
Accuracy
of Fair Value Estimates
The Companys determination of fair value of share-based
payment awards on the date of grant using an option-pricing
model is affected by the Companys stock price as well as
assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the
Companys expected stock price volatility over the term of
the awards, and actual and projected employee stock option
exercise behaviors. Option-pricing models were developed for use
in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the
Companys employee stock options have certain
characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can
materially affect the estimated value, in managements
opinion, the existing valuation models may not provide an
accurate measure of the fair value of the Companys
employee stock options. Although the fair value of employee
stock options is determined in accordance with FAS 123(R)
and SAB 107 using an option-pricing model, that value may
not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
F-22
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(7) Commitments
and Contingencies
401(k)
Plan
The Company maintains a profit-sharing retirement plan for
eligible employees under the provisions of Internal Revenue Code
Section 401(k). Participants may defer their compensation
on a pre-tax basis, subject to annual maximum limits on
contributions set forth by the Internal Revenue Service. The
Companys contributions are equal to 50% of a
participants contribution, up to a maximum of 6% of each
participants annual compensation. Under this plan, the
Company made contributions of approximately $638,000, $502,000
and $348,000 during the years ended December 31, 2006, 2005
and 2004, respectively.
Lease
Obligations
Gross amounts of property and equipment and related accumulated
depreciation recorded under capital leases are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Computer and other equipment
|
|
$
|
34
|
|
|
$
|
34
|
|
Less accumulated depreciation
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company also has non-cancelable operating leases, which
expire over the next five years. These lease agreements
generally contain scheduled rent increases or escalations.
Rental expense under operating leases are recognized on a
straight-line basis over the lease term and were
$3.1 million, $2.7 million and $2.9 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
Future minimum lease payments under these operating leases as of
December 31, 2006 are as follows (in thousands):
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2007
|
|
$
|
2,784
|
|
2008
|
|
|
2,589
|
|
2009
|
|
|
2,615
|
|
2010
|
|
|
1,969
|
|
2011 and thereafter
|
|
|
218
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
10,175
|
|
|
|
|
|
|
The Companys operating leases expire at various dates
through May 2012. The future minimum lease obligations do not
include $641,000 of expected receipts from subleases through
September 2010. The Company has no remaining capital lease
obligations as of December 31, 2006.
F-23
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2006, the Company had long-term contracts
with minimum commitments with six vendors that provide various
services. These contracts include minimum annual commitments as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2007
|
|
$
|
771
|
|
2008
|
|
|
658
|
|
2009
|
|
|
255
|
|
2010
|
|
|
2
|
|
2011
|
|
|
|
|
|
|
|
|
|
Total vendor commitments
|
|
$
|
1,686
|
|
|
|
|
|
|
Payments made under these contracts amounted to approximately
$1.5 million, $958,000 and $595,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.
Environmental
liability
In connection with the acquisition of InteliData Technologies
Corporation (InteliData) in August 2005, the Company
assumed an environmental
clean-up
liability associated with prior tenants operations at
InteliDatas former New Milford, Connecticut property. In
January 2000, InteliData sold the property and the building. 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 the Company, to pay for
remediation costs up to $6,600,000 in excess of a retained
exposure limit of $600,000. As of December 31, 2006, the
$600,000 deductible had been exhausted. The amounts recorded as
estimated undiscounted future liabilities and receivables due
from the Companys insurance provider are as follows at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Receivable due from insurance
provider, current
|
|
$
|
852
|
|
|
$
|
589
|
|
Receivable due from insurance
provider, long-term
|
|
|
197
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
Total receivables due from
insurance provider
|
|
$
|
1,049
|
|
|
$
|
872
|
|
|
|
|
|
|
|
|
|
|
Estimated undiscounted future
liability, current
|
|
$
|
441
|
|
|
$
|
280
|
|
Estimated undiscounted future
liability, long-term
|
|
|
226
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
Total estimated undiscounted
future liability
|
|
$
|
667
|
|
|
$
|
572
|
|
|
|
|
|
|
|
|
|
|
The Company considers the collection of these insurance
recoveries to be probable. The Company recorded these amounts in
accordance with
SOP 96-1,
Environmental Remediation Liabilities, and as part of
purchase accounting in accordance with Statement of Financial
Accounting Standards No. 141, Business Combinations.
Due to the complexity of environmental laws and regulations, the
varying costs and effectiveness of alternative
clean-up
methods and technologies, the uncertainty of insurance coverage,
and the unresolved extent of the Companys responsibility,
it is difficult to determine the ultimate outcome of these
matters, however, any additional liability is not expected to
have a material adverse effect on the Companys financial
position, results of operations, or liquidity.
The Company has engaged a legal firm and an environmental
specialist firm to represent it regarding this matter. The
timing of the ultimate resolution of this matter is uncertain.
F-24
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Line
of credit
In November 2000, the Company obtained a $5.0 million
equipment line of credit with a financial institution. The
Company paid off the remaining balance outstanding under the
amended line of credit in February 2005.
In March 2005, the Company entered into a new one-year revolving
line of credit facility with another financial institution that
allows the Company to borrow up to $4.0 million to assist
with working capital needs. The interest rate under this line of
credit is equal to either (i) the banks prime rate;
or (ii) LIBOR plus 2%. The Company must comply with
affirmative covenants that require it to maintain a specified
tangible net worth value, quick ratio, liabilities to tangible
net worth ratio and certain levels of net income.
In May 2006, the Company extended the terms of this line of
credit through June 1, 2007 and amended its quick ratio and
net income requirement covenants. Under the amendment, the quick
ratio covenant was amended to 1.35 to 1.0 from 1.40 to 1.0. The
net income covenant was amended to require the Company to have
positive net income on a semi-annual basis beginning with the
semi-annual period ending December 31, 2006, as well as
have positive net income on a quarterly basis beginning for the
quarter ended December 31, 2006. Under the original line of
credit agreement, the net income covenant required the Company
to have positive net income on an annual basis and three out of
four quarters each year. As of December 31, 2006, the
Company had not drawn amounts from this line of credit.
Indemnification
The Companys product license and services agreements
include a limited indemnification provision for claims from
third-parties relating to the Companys intellectual
property. Such indemnification provisions are accounted for in
accordance with Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies. To date, claims
under such indemnification provisions have not been significant.
(8) Acquisitions
InteliData
Acquisition
On August 18, 2005, the Company acquired InteliData
Technologies Corporation (InteliData). 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 the Companys 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.
The Company acquired all of InteliDatas outstanding common
stock for $4.3 million in cash and 4,916,430 shares of
the Companys common stock plus merger related 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 the Companys 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.
F-25
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the total purchase price (in
thousands):
|
|
|
|
|
Cash paid
|
|
$
|
4,301
|
|
Stock issued
|
|
|
16,618
|
|
Merger related transaction costs
|
|
|
242
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
21,161
|
|
|
|
|
|
|
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
|
|
|
1,325
|
|
Unbilled accounts receivable
|
|
|
335
|
|
Prepaid expense and other current
assets
|
|
|
729
|
|
Property plant and equipment
|
|
|
166
|
|
Intangible assets
|
|
|
3,200
|
|
Goodwill(1)
|
|
|
21,892
|
|
Other long-term assets
|
|
|
458
|
|
Accounts payable and accrued
liabilities(2)
|
|
|
(6,197
|
)
|
Deferred revenue(3)
|
|
|
(489
|
)
|
Other long-term liabilities
|
|
|
(292
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
21,161
|
|
|
|
|
|
|
|
|
|
(1) |
|
No amounts of goodwill are expected to be deductible for tax
purposes. |
|
(2) |
|
Includes $1.4 million of accrued employee termination costs
pursuant to
EITF 95-03,
Recognition of Liabilities in a Purchase Business
Combination. All amounts were paid as of December 31,
2005. |
|
(3) |
|
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, InteliData did not have any in-process
research and development as InteliData was in between major
product development cycles. Accordingly, the Company did not
recognize any expense for in-process research and development in
its results of operations for the year ended December 31,
2005.
The following table presents the details of the intangible
assets purchased in the InteliData acquisition as of
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
Estimated Fair
|
|
|
Accumulated
|
|
|
|
|
|
|
(In years)
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Developed Technology
|
|
|
3
|
|
|
$
|
2,300
|
|
|
$
|
(1,049
|
)
|
|
$
|
1,251
|
|
Bank Customer Relationships
|
|
|
6
|
|
|
|
900
|
|
|
|
(205
|
)
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,200
|
|
|
$
|
(1,254
|
)
|
|
$
|
1,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for the years ended December 31, 2006
and 2005 for intangible assets purchased in the InteliData
acquisition has been recorded in the Consolidated Statement of
Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cost of revenues
|
|
$
|
767
|
|
|
$
|
282
|
|
Sales and marketing
|
|
|
150
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
917
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense of intangible assets
purchased in the InteliData acquisition in future years will be
recorded in the Consolidated Statements of Operations as follows:
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
917
|
|
2008
|
|
|
634
|
|
2009
|
|
|
150
|
|
2010
|
|
|
150
|
|
2011
|
|
|
95
|
|
|
|
|
|
|
Total
|
|
$
|
1,946
|
|
|
|
|
|
|
The Consolidated Statements of Operations include the results of
operations of InteliData since August 18, 2005.
qbt
Systems, Inc.
On August 8, 2005, the Company acquired qbt Systems, Inc.
(qbt), a provider of integration solutions, electronic funds
transfer networks and core data processors. qbts
MultiPoint product is an integration platform that allows
financial institutions to integrate their delivery channels and
account processing systems in one seamless network environment.
qbts technology provides a combination of flexibility,
reliability, throughput and security. The acquisition was aimed
at expanding the Companys 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.
The Company acquired all of qbts outstanding common stock
for $3.2 million in cash and 649,785 shares of the
Companys common stock, of which 6,388 shares remain
issuable as of December 31, 2005, plus merger related costs
and assumed liabilities of $0.2 million. Total shares
issuable of 649,785 were valued at $3.20 per share, based
on the Companys 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.
The following table presents the total purchase price (in
thousands):
|
|
|
|
|
Cash paid
|
|
$
|
3,160
|
|
Stock consideration
|
|
|
2,059
|
|
Merger related transaction costs
|
|
|
131
|
|
Liabilities assumed
|
|
|
38
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,388
|
|
|
|
|
|
|
F-27
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 and other receivable
|
|
|
240
|
|
Unbilled accounts receivable
|
|
|
73
|
|
Property, plant, and equipment
|
|
|
21
|
|
Intangible assets
|
|
|
1,300
|
|
Goodwill(1)
|
|
|
5,007
|
|
Other assets
|
|
|
2
|
|
Accounts payable and accrued
liabilities
|
|
|
(1,080
|
)
|
Note Payable
|
|
|
(100
|
)
|
Deferred revenue(2)
|
|
|
(100
|
)
|
Long-term note payable
|
|
|
(175
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,388
|
|
|
|
|
|
|
|
|
|
(1) |
|
$640,000 of goodwill is expected to be deductible for tax
purposes. |
|
(2) |
|
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, qbt did not have any in-process
research and development as qbt was in between major product
development cycles. Accordingly, the Company did not recognize
any expense for in-process research and development in its
results of operations for the year ended December 31, 2005.
The following table presents the details of the intangible
assets purchased in the qbt acquisition as of December 31,
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
Estimated Fair
|
|
|
Accumulated
|
|
|
|
|
|
|
(In Years)
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Developed Technology
|
|
|
2
|
|
|
$
|
900
|
|
|
$
|
(628
|
)
|
|
$
|
272
|
|
Backlog
|
|
|
1
|
|
|
|
300
|
|
|
|
(300
|
)
|
|
|
|
|
Customer Relationships
|
|
|
4
|
|
|
|
100
|
|
|
|
(35
|
)
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,300
|
|
|
$
|
(963
|
)
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2006
and 2005 for intangible assets purchased in the qbt acquisition
has been recorded in the Consolidated Statement of Operations as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cost of revenues
|
|
$
|
631
|
|
|
$
|
297
|
|
Sales and marketing
|
|
|
25
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
656
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
F-28
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated amortization expense of intangible assets
purchased in the qbt acquisition in future years will be
recorded in the Consolidated Statements of Operations as follows:
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
296
|
|
2008
|
|
|
25
|
|
2009
|
|
|
16
|
|
|
|
|
|
|
Total
|
|
$
|
337
|
|
|
|
|
|
|
The Consolidated Statements of Operations include the results of
operations of qbt since August 8, 2005.
Prior to the acquisition, the Company and qbt executed a Proof
of Concept whereby the Company could
sub-license
and install a qbt MultiPoint adapter at any two of the
Companys customers. As of the consummation date, the
Company had installed 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.
(9) Segment
Information
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information, (FAS 131) 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. FAS 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. The Companys chief operating decision maker,
as defined under FAS 131, is its chief executive officer.
The Company operates in a single segment.
Geographic
Information
Results of operations are derived from United States operations
and all assets reside in the United States. The Company pursues
international sales primarily through resellers and selective
direct sales efforts. Geographic information for 2006, 2005, and
2004 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Revenues from:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
57,759
|
|
|
$
|
47,408
|
|
|
$
|
49,742
|
|
All foreign countries
|
|
|
3,199
|
|
|
|
1,812
|
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,958
|
|
|
$
|
49,220
|
|
|
$
|
50,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Major
Customers
Revenues from the Companys major customers, accounting for
more than 10% of consolidated revenues in a particular year, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Customer A
|
|
$
|
8,111
|
|
|
$
|
|
|
|
$
|
|
|
Customer B
|
|
|
|
|
|
|
5,056
|
|
|
|
9,739
|
|
Customer C
|
|
|
|
|
|
|
|
|
|
|
5,160
|
|
Revenues
The Companys 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 financial statements.
Revenues derived from the Companys licenses and services
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
License and professional services
|
|
$
|
39,517
|
|
|
$
|
32,781
|
|
|
$
|
35,803
|
|
Post-contractual support
|
|
|
17,762
|
|
|
|
13,089
|
|
|
|
11,352
|
|
Hosting
|
|
|
3,679
|
|
|
|
3,350
|
|
|
|
3,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,958
|
|
|
$
|
49,220
|
|
|
$
|
50,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10) Impairment
Charges
In 2006, the Company subleased a portion of the office space at
its corporate headquarters in Hillsboro, Oregon through the
current term of its lease on September 30, 2010. In
accordance with Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, and Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company recognized an impairment
charge of $113,000 to write-off the remaining book value of
long-lived assets in the space the Company abandoned and ceased
to use. Additionally, the fair value of the remaining lease
payments at the cease-use date for the portion of the area
subleased was greater than the estimated sublease rentals to be
received. The Company recorded an additional impairment of
$283,000 associated with this rent shortfall. There were no
amounts paid related to these charges in 2006. As of
December 31, 2006, approximately $25,000 remained in
accounts payable, $87,000 remained in other current liabilities
and $171,000 remained in other long-term liabilities that
related to the rent shortfall impairment.
In 2004, the Company assigned a portion of its lease at it
headquarters. In accordance with Statement No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, and Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company
recorded an impairment charge of $491,000 to write-off the
remaining book value of long-lived assets in the space the
Company abandoned and ceased to use. Under the agreement, the
amount of the rent payments assigned equaled the proportion of
the area assigned.
(11) Related
Party Transactions
In January 2001, the Company extended a $300,000 short-term loan
to Alex P. Hart to assist him in purchasing a house in Portland,
Oregon while he was in the process of selling his house in
Bellevue, Washington and relocating
F-30
CORILLIAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to Portland to serve as the Companys President.
Mr. Hart is currently the Companys Chief Executive
Officer. The loan was interest-free through February 2004 and is
secured by all assets of Mr. Hart. Beginning in March 2004
the loan began accruing interest at four percent. As of
December 31, 2006, Mr. Hart has paid $255,000 of the
principal amount of the note, and $45,000 of the principal
amount remains outstanding. The outstanding principal balance is
included in other receivables on the Companys Consolidated
Balance Sheet at December 31, 2006.
(12) Quarterly
Financial Information Unaudited
A summary of quarterly financial information follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2006
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
14,273
|
|
|
$
|
14,625
|
|
|
$
|
15,567
|
|
|
$
|
16,493
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
7,306
|
|
|
|
6,001
|
|
|
|
8,246
|
|
|
|
9,122
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(1,219
|
)
|
|
|
(1,743
|
)
|
|
|
310
|
|
|
|
535
|
(1)
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(971
|
)
|
|
|
(1,470
|
)
|
|
|
590
|
|
|
|
779
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2005
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
11,236
|
|
|
$
|
12,287
|
|
|
$
|
11,937
|
|
|
$
|
13,760
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,877
|
|
|
|
8,136
|
|
|
|
6,626
|
|
|
|
7,285
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
572
|
|
|
|
1,868
|
|
|
|
(308
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
654
|
|
|
|
2,098
|
|
|
|
(60
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company recorded an impairment charge of approximately $396
during the quarter ended December 31, 2006. |
The four quarters for net income (loss) per share may not add
for the year because of the different number of shares
outstanding during the year.
(13) Subsequent
Event
On February 13, 2004, the Company entered into a definitive
agreement to be acquired by CheckFree Corporation
(CheckFree), a publicly traded company (Nasdaq:
CKFR) based in Norcross, Georgia, that provides electronic
billing and payment and online transaction services to banks,
billers and consumers. Under the terms of the agreement,
CheckFree will acquire all of the outstanding shares of the
Company at a price of $5.15 per share, for a total purchase
price of approximately $245 million on a fully diluted
basis. Under specified circumstances the Company may be required
to pay a termination fee of $5,500,000, depending upon the
reason for termination, to CheckFree in connection with a
termination of the merger agreement. The proposed acquisition is
subject to regulatory review, the Companys shareholder
approval, and other customary closing conditions, and is
expected to close on or about June 1, 2007.
CheckFree designs, develops and markets services that enable
consumers to make electronic payments and collections, automate
paper-based recurring financial transactions and conduct secure
transactions on the Internet. CheckFree is our primary partner
for remittance processing and was a developer with Intuit and
Microsoft of the Open Financial Exchange data standard. We have
developed a number of Voyager interfaces to CheckFree systems
and resell a bill payment service provided by CheckFree called
CheckFree Web.
F-31