UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-29291
CORILLIAN CORPORATION
OREGON | 91-1795219 | |
(State or other Jurisdiction of | ||
Incorporation or Organization) | (I.R.S. Employer Identification Number) |
3400 NW John Olsen Place Hillsboro, Oregon (Address of principal executive offices) |
97124 (Zip Code) |
(503) 629-3300
(Registrants telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [ X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [ X]
The number of shares of the Registrants Common Stock outstanding as of October 31, 2004 was 38,231,880 shares.
CORILLIAN CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CORILLIAN CORPORATION
Condensed Consolidated Balance Sheets
(unaudited, in thousands)
September 30, | December 31, | |||||||
2004 |
2003(1) |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 34,420 | $ | 26,243 | ||||
Investments |
| 601 | ||||||
Accounts receivable, net |
6,366 | 6,103 | ||||||
Revenue in excess of billings |
2,451 | 1,258 | ||||||
Other current assets |
2,369 | 1,545 | ||||||
Total current assets |
45,606 | 35,750 | ||||||
Property and equipment, net |
4,010 | 5,765 | ||||||
Investment in joint venture |
282 | 941 | ||||||
Other assets |
465 | 362 | ||||||
Total assets |
$ | 50,363 | $ | 42,818 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 3,485 | $ | 3,276 | ||||
Deferred revenue |
14,509 | 15,560 | ||||||
Current portion of capital lease obligations |
9 | 19 | ||||||
Current portion of long-term borrowings |
783 | 1,510 | ||||||
Other current liabilities |
1,444 | 968 | ||||||
Total current liabilities |
20,230 | 21,333 | ||||||
Capital lease obligations, less current portion |
6 | 12 | ||||||
Long-term borrowings, less current portion |
688 | 1,063 | ||||||
Other long-term liabilities |
659 | 856 | ||||||
Total liabilities |
21,583 | 23,264 | ||||||
Shareholders equity: |
||||||||
Common stock |
129,424 | 127,414 | ||||||
Accumulated other comprehensive income |
60 | 48 | ||||||
Accumulated deficit |
(100,704 | ) | (107,908 | ) | ||||
Total shareholders equity |
28,780 | 19,554 | ||||||
Total liabilities and shareholders equity |
$ | 50,363 | $ | 42,818 | ||||
(1) Derived from Corillians audited consolidated financial statements as of December 31, 2003.
See accompanying notes to condensed consolidated financial statements.
CORILLIAN CORPORATION
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
For the Three-Month Period Ended September 30, |
For the Nine-Month Period Ended September 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Revenues |
$ | 13,517 | $ | 11,586 | $ | 37,643 | $ | 33,916 | ||||||||
Cost of revenues |
4,499 | 5,094 | 14,294 | 15,088 | ||||||||||||
Gross profit |
9,018 | 6,492 | 23,349 | 18,828 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
1,846 | 1,501 | 5,358 | 4,771 | ||||||||||||
Research and development |
1,641 | 1,390 | 4,619 | 4,767 | ||||||||||||
General and administrative |
1,826 | 1,654 | 5,061 | 5,243 | ||||||||||||
Impairment charge |
491 | | 491 | | ||||||||||||
Amortization of deferred
stock-based compensation |
| | | 35 | ||||||||||||
Total operating expenses |
5,804 | 4,545 | 15,529 | 14,816 | ||||||||||||
Income from operations |
3,214 | 1,947 | 7,820 | 4,012 | ||||||||||||
Other expense, net |
(122 | ) | (198 | ) | (506 | ) | (910 | ) | ||||||||
Net income before income taxes |
3,092 | 1,749 | 7,314 | 3,102 | ||||||||||||
Income taxes |
20 | 100 | 110 | 100 | ||||||||||||
Net income |
$ | 3,072 | $ | 1,649 | $ | 7,204 | $ | 3,002 | ||||||||
Basic net income per share |
$ | 0.08 | $ | 0.05 | $ | 0.19 | $ | 0.08 | ||||||||
Diluted net income per share |
$ | 0.08 | $ | 0.04 | $ | 0.18 | $ | 0.08 | ||||||||
Shares used in computing basic net income per share |
37,947 | 36,451 | 37,432 | 36,331 | ||||||||||||
Shares used in computing diluted net income per share |
40,429 | 38,356 | 40,403 | 37,154 |
See accompanying notes to condensed consolidated financial statements.
CORILLIAN CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
For the Nine-Month Period Ended September 30, |
||||||||
2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 7,204 | $ | 3,002 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,824 | 2,932 | ||||||
Amortization of deferred stock-based compensation |
| 35 | ||||||
Impairment of long-lived assets |
491 | | ||||||
Equity in losses of joint venture |
659 | 885 | ||||||
Provision for (recovery of) bad debts |
(75 | ) | (116 | ) | ||||
Loss on sale of assets |
2 | | ||||||
Income tax benefit of equity transactions |
64 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
| 1,003 | ||||||
Accounts receivable |
(196 | ) | (1,955 | ) | ||||
Revenue in excess of billings |
(1,193 | ) | 387 | |||||
Other current and long-term assets |
(927 | ) | 1,148 | |||||
Accounts payable and accrued liabilities |
227 | (445 | ) | |||||
Deferred revenue and other current and long-term liabilities |
(772 | ) | 1,331 | |||||
Net cash provided by (used in)
operating activities |
7,308 | 8,207 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(562 | ) | (488 | ) | ||||
Proceeds from the maturities of investments |
601 | 910 | ||||||
Investment in joint venture |
| (1,000 | ) | |||||
Net cash
provided by (used in) investing activities |
39 | (578 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from the issuance of common stock |
1,946 | 390 | ||||||
Proceeds from long-term borrowings |
| | ||||||
Repayments of long-term borrowings |
(1,102 | ) | (636 | ) | ||||
Principal payments on capital lease obligations |
(16 | ) | (329 | ) | ||||
Net cash provided by (used in)
financing activities |
828 | (575 | ) | |||||
Effect of exchange rate fluctuations on cash and cash equivalents |
2 | 5 | ||||||
Increase in cash and cash equivalents |
8,177 | 7,059 | ||||||
Cash and cash equivalents at beginning of period |
26,243 | 16,721 | ||||||
Cash and cash equivalents at end of period |
$ | 34,420 | $ | 23,780 | ||||
See accompanying notes to condensed consolidated financial statements.
CORILLIAN CORPORATION
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Corillian Corporation have been prepared pursuant to Securities and Exchange Commission rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Corillians annual report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 24, 2004.
The condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the three- and nine-month periods ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year.
The preparation of condensed consolidated financial statements requires Corillian to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Corillian evaluates its estimates, including those related to revenue recognition, bad debts, investments, income taxes, financing operations, restructuring, contingencies and litigation. Corillian bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
(2) Principles of Consolidation
The unaudited condensed consolidated financial statements include the financial statements of Corillian Corporation and its wholly-owned subsidiaries, Corillian Services, Inc., Corillian International, Ltd. and Corillian South Asia Sdn Bhd. All intercompany balances and transactions have been eliminated in consolidation. As of December 31, 2003, Corillian dissolved Corillian Services, Inc. and incorporated its remaining business and personnel into Corillian Corporation.
(3) Revenue Recognition
Corillian recognizes revenues from software licensing agreements in accordance with the provisions of Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions. Corillians software arrangements generally include software licenses, implementation and custom software engineering services, post-contractual customer support, training services and hosting services. Corillians software licenses are, in general, functionally dependent on implementation, training and certain custom software engineering services; therefore, software licenses and implementation and training services, together with custom software engineering services that are essential to the functionality of the software, are combined and recognized using the percentage-of-completion method of contract accounting in accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Corillian has determined that post-contractual customer support and hosting services can be separated from software licenses, implementation, training and custom software engineering services because (a) post-contractual customer support and hosting services are not essential to the functionality of any other element in the arrangement, and (b) sufficient vendor-specific objective
evidence exists to permit the allocation of revenue to these service elements. The hosting element can be accounted for separately from the license element, as the customer can take possession of the software without significant penalty, in accordance with Emerging Issues Task Force (EITF) 00-3, Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entitys Hardware.
The percentage-of-completion is measured by the percentage of contract hours incurred to date compared to the estimated total contract hours for each contract. Corillian has the ability to make reasonable, dependable estimates relating to the extent of progress towards completion, contract revenues and contract costs. Any estimation process, including that used in preparing contract accounting models, involves inherent risk. Profit estimates are subject to revision as the contract progresses towards completion. Revisions in profit estimates are charged to income in the period that the facts giving rise to the revision become known. Corillian reduces the inherent risk relating to revenue and cost estimates in percentage-of-completion models through various approval and monitoring processes and policies. Risks relating to service delivery, usage, productivity and other factors are considered in the estimation process. Cumulative revenues recognized may be less or greater than cumulative billings at any point in time during a contracts term. The resulting difference is recognized as deferred revenue or revenue in excess of billings, respectively. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Vendor-specific objective evidence has been established on post-contractual customer support and hosting services using the renewal rate. Corillian allocates revenue to the elements using the residual method. The difference between the total software arrangement fee and the amount deferred for post-contractual customer support and hosting services is allocated to software license, implementation, training and custom software engineering services and recognized using contract accounting.
Revenues for post-contractual customer support are recognized ratably over the term of the support services period, generally a period of one year. Services provided to customers under customer support and maintenance agreements generally include technical support and unspecified product upgrades deliverable on a when and if available basis. Revenues from hosting services for transactions processed by Corillian are recognized ratably over the hosting term.
Pursuant to SOP No. 81-1, on projects where ultimate recoverability is questionable due to inherent hazards, Corillian limits revenue recognition in the period to the amount of project costs incurred in the same period, and postpones recognition of profits until results can be estimated more precisely. Under this zero profit methodology, equal amounts of revenues and costs, measured on the basis of performance during the period, are presented in Corillians condensed consolidated statements of operations.
Due to certain triggering events included in a customers contract, beginning with the three-month period ended September 30, 2002, Corillian applied the zero profit methodology discussed above to three existing projects for one customer. Both revenues and expenses recognized from these projects accounted for under the zero profit methodology during the three- and nine-month periods ended September 30, 2003, were approximately $99,000 and $714,000, respectively. Additionally, as one of this customers projects was completed and accepted during the third quarter of 2003, Corillian recognized an additional $724,000 of gross profit related to this project during the third quarter of 2003, which had been previously deferred until completion of the project. The final two of this customers projects were completed and accepted during the fourth quarter of 2003. No further revenues were deferred on these projects as of December 31, 2003.
Corillian generally licenses Corillian Voyager on an end-user basis, with its initial license fee based on a fixed number of end users. As a customer increases its installed base of end users beyond the initial fixed number of end users, Corillians software license agreements require customers to pay Corillian an additional license fee to cover additional increments of end users. Revenues from additional license seat sales are generally recognized in the period in which the licenses are sold.
In arrangements where Corillian does not have an obligation to install its products, but may become involved in the installation of these products, Corillian recognizes non-refundable license fees over the estimated implementation period for the customer or resellers project. If Corillian determines that the customer or reseller can successfully install Corillians products in a production environment without Corillians involvement, Corillian will recognize non-refundable license fees in the period in which collectibility of the license fees is probable, assuming all other SOP No. 97-2 revenue recognition criteria are met.
Corillian also provides professional services in which Corillian customizes existing software based on a customers specifications on a stand-alone basis. Revenues from these professional services in which Corillian has an obligation to successfully complete specified activities are deferred until acceptance by the customer, whereas agreements in which Corillian is providing services on a best-efforts basis are recognized as services are performed. Arrangements where customers fund expedited development of software products are accounted for as funded research and development. In arrangements where Corillian retains and reserves title and all ownership rights to the software products, Corillian recognizes these funds as a reduction of research and development expense.
(4) Concentration of Credit Risk
Results of operations are substantially derived from United States operations and substantially all significant assets reside in the United States. A majority of Corillians revenues are generated from banks and other financial institutions. Accordingly, Corillians near-term and long-term prospects depend on its ability to attract the technology expenditures of these companies. The market for Internet-based financial services is intensely competitive and rapidly changing. Additionally, the sale and implementation of Corillians products and services are often subject to delays because of Corillians customers internal budgets and procedures for approving large capital expenditures and deploying new technologies within their networks. Corillians financial condition, results of operations and liquidity could be materially affected if adverse conditions in the industry developed, such as a reduction in technology expenditures or a delay in the sales or implementation timeline. An inability of Corillian to generate demand for its product, whether as a result of competition, technological change, economic, or other factors, could have a material adverse result on Corillians financial condition, results of operations or liquidity.
Corillian is exposed to concentration of credit risk principally from accounts receivable and revenue in excess of billing. As of September 30, 2004, two customers individually accounted for 39% and 17% of consolidated accounts receivable. Four customers individually accounted for 30%, 16%, 15% and 15% of Corillians consolidated revenue in excess of billing balance as of September 30, 2004. As of December 31, 2003, three customers individually accounted for 22%, 17% and 15% of consolidated accounts receivable. Three customers individually accounted for 26%, 25% and 13% of Corillians consolidated revenue in excess of billing balance as of December 31, 2003.
Corillian is also subject to concentrations of credit risk from its cash and cash equivalents and investments. Corillian limits its exposure to credit risk associated with cash and cash equivalents and investments by placing its cash, cash equivalents and investments with major financial institutions and by investing in investment-grade securities.
(5) Comprehensive Income
Corillian has adopted the provisions of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No. 130, Reporting on Comprehensive Income , (Statement No. 130). Comprehensive income (loss) is defined as changes in shareholders equity exclusive of transactions with owners. To date, only foreign currency translation adjustments are required to be reported in comprehensive income (loss) for Corillian and have not been material to Corillians financial position or results of operations.
(6) Supplemental Disclosures of Cash Flow Information
For the Nine-Month Period Ended |
||||||||
September 30, 2004 |
September 30, 2003 |
|||||||
(in thousands) | ||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 93 | $ | 199 | ||||
Taxes |
99 | |
(7) Deferred Stock-Based Compensation
As of September 30, 2004, Corillian had various stock-based compensation plans, including stock option plans and an employee stock purchase plan. Corillian applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is generally recorded on the date a stock option is granted if the current market price of the underlying stock exceeded the exercise price. Statement No. 123, Accounting for Stock-Based Compensation and Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, Corillian has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of Statement No. 123, as amended. Corillian recorded no amortization of deferred stock-based compensation during the three-month periods ended September 30, 2004 and 2003, or the nine-month period ended September 30, 2004, as all deferred stock-based compensation was amortized as of March 31, 2003.
The amortization of deferred stock-based compensation relates to the following items in the accompanying condensed consolidated statements of operations:
For the Nine-Month Period Ended |
||||
September 30, 2003 |
||||
(in thousands) | ||||
Cost of revenues |
$ | 7 | ||
Sales and marketing |
14 | |||
Research and development |
5 | |||
General and administrative |
9 | |||
$ | 35 | |||
The following table illustrates the effect on net income and net income per share if Corillian had applied the fair value recognition provisions of Statement No. 123, to stock-based compensation:
For the Three-Month Period Ended |
For the Nine-Month Period Ended |
|||||||||||||||
September 30, 2004 |
September 30, 2003 |
September 30, 2004 |
September 30, 2003 |
|||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net income, as reported |
$ | 3,072 | $ | 1,649 | $ | 7,204 | $ | 3,002 | ||||||||
Add: Stock-based
compensation expense
determined using the
intrisic value method |
| | | 35 | ||||||||||||
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of tax |
(461 | ) | (769 | ) | (1,698 | ) | (2,371 | ) | ||||||||
Pro forma net income |
$ | 2,611 | $ | 880 | $ | 5,506 | $ | 666 | ||||||||
Net income per share: |
||||||||||||||||
Basic as reported |
$ | 0.08 | $ | 0.05 | $ | 0.19 | $ | 0.08 | ||||||||
Diluted as reported |
$ | 0.08 | $ | 0.04 | $ | 0.18 | $ | 0.08 | ||||||||
Basic pro forma |
$ | 0.07 | $ | 0.02 | $ | 0.15 | $ | 0.02 | ||||||||
Diluted pro forma |
$ | 0.06 | $ | 0.02 | $ | 0.14 | $ | 0.02 |
(8) Net Income Per Share
Corillian computes net income per share in accordance with Statement No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98 (SAB No. 98). Under the provisions of Statement No. 128 and SAB No. 98, basic net income per share is computed by dividing the net income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted-average number of shares of common stock and potential dilutive common shares outstanding during the period.
The following is a reconciliation of basic and diluted weighted-average shares:
For the Three-Month Period Ended |
For the Nine-Month Period Ended |
|||||||||||||||
September 30, 2004 |
September 30, 2003 |
September 30, 2004 |
September 30, 2003 |
|||||||||||||
(in thousands) | ||||||||||||||||
Shares for basic net income per
share: |
||||||||||||||||
Weighted-average common
shares outstanding |
37,947 | 36,451 | 37,432 | 36,331 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options and employee
stock purchase plan |
2,482 | 1,905 | 2,971 | 823 | ||||||||||||
Shares for diluted net income
per share |
40,429 | 38,356 | 40,403 | 37,154 | ||||||||||||
The following shares issuable under stock options and a warrant were excluded from dilutive shares under the treasury stock method as the exercise price of the stock options and warrant exceeded the average fair market value of the underlying common stock for the periods presented below:
For the Three-Month Period Ended |
For the Nine-Month Period Ended |
|||||||||||||||
September 30, 2004 |
September 30, 2003 |
September 30, 2004 |
September 30, 2003 |
|||||||||||||
(in thousands) | ||||||||||||||||
Shares issuable
under stock options |
1,342,164 | 1,642,136 | 1,205,701 | 3,150,108 | ||||||||||||
Shares issuable
under a warrant |
| 250,000 | | 250,000 | ||||||||||||
1,342,164 | 1,892,136 | 1,205,701 | 3,400,108 | |||||||||||||
(9) Segment Information
Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information related to operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to shareholders. Statement No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions about how to allocate resources and assess performance. Corillians chief operating decision maker, as defined under Statement No. 131, is its chief executive officer. Corillian operates in a single segment.
(a) Geographic Information
Results of operations are substantially derived from United States operations and substantially all assets reside in the United States. In 2002, Corillian closed its office in London, England, and elected to pursue international sales primarily through resellers, partners and selective direct sales efforts.
Corillians international operations generated a total of approximately $116,000 and $199,000 of its consolidated revenues during the three month periods ended September 30, 2004 and 2003, respectively. Corillians international operations generated a total of approximately $485,000 and $476,000 of its consolidated revenues during the nine-month periods ended September 30, 2004 and 2003, respectively.
(b) Revenues
Corillians chief decision-maker monitors the revenue streams of licenses and various services. There are many shared expenses generated by the various revenue streams. Because management believes that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary, management has not made such allocations internally. The chief decision-maker does, however, monitor revenue streams at a more detailed level than those depicted in the accompanying condensed consolidated financial statements.
Revenues derived from Corillians licenses and services are as follows:
For the Three-Month Period Ended |
For the Nine-Month Period Ended |
|||||||||||||||
September 30, 2004 |
September 30, 2003 |
September 30, 2004 |
September 30, 2003 |
|||||||||||||
(in thousands) | ||||||||||||||||
License and
professional services |
$ | 9,544 | $ | 8,877 | $ | 26,663 | $ | 25,821 | ||||||||
Post-contractual support |
3,046 | 2,127 | 8,331 | 6,459 | ||||||||||||
Hosting |
927 | 582 | 2,649 | 1,636 | ||||||||||||
$ | 13,517 | $ | 11,586 | $ | 37,643 | $ | 33,916 | |||||||||
(c) Customer Concentration
Corillian continues to experience a high degree of customer concentration during some fiscal periods. During the three-month period ended September 30, 2004, two customers individually accounted for 27% and 16% of consolidated revenues. During the three-month period ended September 30, 2003, two customers individually accounted for 21% and 15% of consolidated revenues. During the nine-month period ended September 30, 2004, two customers individually accounted for 25% and 12% of consolidated revenues. During the nine-month period ended September 30, 2003, two customers individually accounted for 14% and 13% of consolidated revenues.
(10) Commitments and Contingencies
(a) Litigation
Corillian is engaged in legal proceedings incidental to the normal course of business. Although the ultimate outcome of these matters cannot be determined, management believes that the final disposition of these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Corillian.
(b) Operating lease
On August 23, 2004, Corillian entered into an amendment to its lease for office space at its corporate headquarters in Hillsboro, Oregon. This amendment reduced the space leased effective January 1, 2005 to approximately 100,000 square feet, from the approximately 122,000 square feet previously leased. The amendment also extended the lease expiration date to September 2010.
Pursuant to 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, Corillian recognized an impairment charge of $491,000 in the three- and nine-month periods ended September 30, 2004 to write off the remaining book value of long-lived assets in the space Corillian has abandoned and ceased to use.
Minimum payments on the lease, before and after amendment, are as follows:
After | Before | |||||||
Amendment |
Amendment |
|||||||
(in thousands) | ||||||||
Years ending December 31: |
||||||||
2004 |
$ | 2,757 | $ | 2,757 | ||||
2005 |
2,300 | 2,818 | ||||||
2006 |
2,351 | 2,881 |
After | Before | |||||||
Amendment |
Amendment |
|||||||
(in thousands) | ||||||||
Years ending December 31: |
||||||||
2007 |
2,355 | 2,198 | ||||||
Thereafter |
6,317 | | ||||||
Total |
$ | 16,080 | $ | 10,654 | ||||
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. These statements relate to future events or Corillians future financial performance. In some cases, you can identify forward-looking statements by terminology including intend, could, may, will, should, expect, plan, anticipate, believe, estimate, predict, potential, future, or continue, the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described below and in greater detail in Exhibit 99.1 to this Report, Corillians registration statements and reports filed with the Securities and Exchange Commission, and Corillians press releases from time to time. You are advised to read the more detailed and thorough discussion of the following risks Corillian faces in its business contained in Exhibit 99.1 to this Report.
| While Corillian has generated net income in each of the most recent six fiscal quarters, Corillian has a history of losses and may incur losses in future periods if Corillian is not able to, among other things, increase its sales to new and existing customers. |
| Corillians quarterly results fluctuate significantly and may fall short of anticipated levels, which may cause the price of Corillians common stock to decline. |
| A small number of customers account for a substantial portion of Corillians revenues in each period; Corillians results of operations and financial condition could suffer if Corillian loses customers or fails to add additional customers to its customer base. |
| If Corillian, or its implementation partners, do not effectively implement Corillians solutions at financial service providers facilities, Corillian may not achieve anticipated revenues or gross margins. |
| Corillians products lengthy sales cycles may cause revenues and operating results to be unpredictable and to vary significantly from period to period. |
| Corillian may not achieve anticipated revenues if Corillian does not successfully introduce new products or develop upgrades or enhancements to its existing products. |
| Corillians partners may be unable to fulfill their service obligations and cause Corillian to incur penalties or other expenses with its customers. | |||
| Corillian may need to raise additional financing to fund its operations and may not be able to raise funds on beneficial terms or at all. |
| Corillians facility and operations may be disabled by a disaster or similar event, which could damage Corillians reputation and require Corillian to incur financial loss. |
| The market price for Corillians common stock, like other technology stocks, may be volatile. |
| Competition in the market for Internet-based financial services is intense and could reduce Corillians sales and prevent Corillian from achieving profitability. |
| Consolidation in the financial services industry could reduce the number of Corillians customers and potential customers. |
| If Corillian loses key personnel, Corillian could experience reduced sales, delayed product development and diversion of management resources. |
| If Corillian does not develop international operations as expected or fails to address international market risks, Corillian may not achieve anticipated sales growth. |
| Acquisitions by Corillian may be costly and difficult to integrate, divert management resources or dilute shareholder value. |
| If Corillian becomes subject to intellectual property infringement claims, these claims could be costly and time consuming to defend, divert management attention or cause product delays. |
| Network or Internet security problems could damage Corillians reputation and business. |
| New technologies could render Corillians products obsolete. |
| Defects in Corillians solutions and system errors in Corillians customers data processing systems after installing Corillians solutions could result in loss of revenues, delay in market acceptance and injury to Corillians reputation. |
| Corillians products and services must interact with other vendors products, which may not function properly. |
| If Corillian becomes subject to product liability litigation, it could be costly and time consuming to defend. |
| If Corillian is unable to protect its intellectual property, Corillian may lose a valuable competitive advantage or be forced to incur costly litigation to protect its rights. |
| Increasing government regulation of the Internet and the financial services industry would limit the market for Corillians products and services, impose on Corillian liability for transmission of protected data and increase its expenses. |
Corillian does not guarantee future results, levels of activity, performance or achievements. Corillian does not plan to update any of the forward-looking statements after the date of this document to conform them to actual results or to changes in its expectations.
Overview
Corillian is a leading provider of solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. Corillians solutions allow consumers to conduct financial transactions, view personal and market financial information, pay bills and access other financial services on the Internet. Corillian Voyager is a software platform combined with a set of applications for Internet banking, electronic bill presentment and payment, targeted marketing, data aggregation, alerts and online customer relationship management. Corillians solutions integrate into existing database applications and systems and enable its customers to monitor transactions across all systems in real time. Corillians solutions are also designed to support multiple lines of business, including small business banking and credit card management, and to scale to support millions of users. Current Corillian customers include J.P. Morgan Chase, Wachovia Bank, The Huntington National Bank, Charter One Bank and SunTrust Bank.
Substantially all of Corillians revenues are derived from licensing Corillians software and performing professional services for its customers, both through direct sales channels and indirect sales partners. These professional services include implementation, custom software engineering, consulting and training. Corillian also provides maintenance and hosting services for its customers. In most cases, Corillian recognizes revenues for licenses, implementation, training and custom engineering services using the percentage-of-completion method. Revenues relating to maintenance and hosting services are recognized ratably over the term of the associated maintenance or hosting contract. Revenues derived from consulting services are recognized as the services are performed. Corillian generally licenses Corillian Voyager on an end-user basis, with its initial license fee based on a fixed number of end users. As a customer increases its installed base of end users beyond the initial fixed number of end users, Corillians software license requires the customer to pay Corillian an additional license fee to cover additional increments of end users.
The market for new sales of Internet banking solutions continued to be challenging in 2003 and the first nine months of 2004 due to various factors, including conservative information technology spending and budget priorities of financial institutions. Despite these conditions, Corillian was able to sign a significant contract in the second quarter of 2004 with Wachovia Bank. However, most of Corillians license revenues in 2003 and the first nine months of 2004 came from sales to existing customers. During these periods, Corillian significantly improved its operating performance by increasing sales to existing customers and reducing and controlling operating expenses. To address the sales challenges experienced during 2003, Corillian restructured its sales force and marketing organization during the second half of 2003. Corillian believes its strengthened sales and marketing organization contributed significantly to the signing of the Wachovia Bank contract in the second quarter of 2004. Moving forward, Corillian will focus on developing additional applications to complement its market position within retail Internet banking and selling products and services to new and existing customers.
Revenues for the three-month period ended September 30, 2004 were $13.5 million, as compared to revenues of $11.6 million for the three-month period ended September 30, 2003. Revenues for the nine-month period ended September 30, 2004 were $37.6 million, as compared to revenues of $33.9 million for the nine-month period ended September 30, 2003. The increase in revenues was primarily due to an increase in license, maintenance and hosting revenues recognized from both ongoing project implementations and the delivery of software to two new customers through Corillians partner channel during the first two quarters of 2004.
Corillian continues to experience a high degree of customer concentration during some fiscal periods. During the three-month period ended September 30, 2004, two customers individually accounted for 27% and 16% of consolidated revenues. During the three-month period ended September 30, 2003, two customers individually accounted for 21% and 15% of consolidated revenues. During the nine-month period ended September 30, 2004, two customers individually accounted for 25% and 12% of consolidated revenues. During the nine-month period ended September 30, 2003, two customers individually accounted for 14% and 13% of consolidated revenues.
Gross profit as a percentage of revenues improved to 67% for the three-month period ended September 30, 2004, as compared to 56% for the three-month period ended September 30, 2003. Gross profit as a percentage of revenues improved to 62% for the nine-month period ended September 30, 2004, as compared to 56% for the nine-month period ended September 30, 2003. The increase in gross profit as a percentage of revenues was mainly attributable to an increased mix of high margin license revenues as a percentage of total revenues as well as increased margins on maintenance fees as a result of a higher base of maintenance fees on relatively consistent maintenance costs.
Corillian reported net income of $3.1 million and $7.2 million for the three- and nine-month periods ended September 30, 2004, respectively, as compared to net income of $1.6 million and $3.0 million for the three- and nine-month periods ended September 30, 2003, respectively. The increase in net income resulted from the increase in revenues and improved gross margins discussed above.
Corillians overall financial position strengthened significantly during the first nine months of 2004. Corillian generated $7.3 million in net cash from operations during the nine-month period ended September 30, 2004, and had $34.4 million in cash, cash equivalents and short-term investments as of September 30, 2004, as compared to $26.8 million in cash, cash equivalents and short-term investments as of December 31, 2003. Working capital improved to $25.4 million as of September 30, 2004, as compared to $14.4 million as of December 31, 2003. This increase in cash was primarily caused by the receipt of a large license fee payment near the end of September 2004, which will be recognized as revenue over the projects implementation period. The increase in deferred revenue caused by this license fee payment was more than offset by the recognition of revenue on several ongoing project implementations, which had been deferred as of December 31, 2003.
Since incorporation, Corillian has incurred substantial costs to develop and market its technology and to provide professional services. As a result, Corillian had accumulated a deficit of approximately $100.7 million as of September 30, 2004. Corillians limited operating history makes it difficult to forecast future operating results. As a result of the rapid evolution of Corillians business and limited operating history, Corillian believes period-to-period comparisons of its results of operations, including its revenues and cost of revenues and operating expenses as a percentage of revenues, are not necessarily indicative of its future performance.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations is based upon Corillians condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of condensed consolidated financial statements requires Corillian to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Corillian evaluates its estimates, including those related to revenue recognition, bad debts, investments, income taxes, restructuring, and contingencies and litigation. Corillian bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Certain of Corillians accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, income taxes and accruals for contracts in loss positions. Corillians policy and related procedures for software revenue recognition and income taxes are summarized below.
Revenue Recognition
Corillian recognizes revenues from software licensing agreements in accordance with the provisions of Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions. Corillians software arrangements generally include software licenses, implementation and custom software engineering services, post-contractual customer support, training services and hosting services. Corillians software licenses are, in general, functionally dependent on implementation, training and certain custom software engineering services; therefore, software licenses and implementation and training services, together with custom software engineering services that are essential to the functionality of the software, are combined and recognized using the percentage-of-completion method of contract accounting in accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.
The percentage-of-completion is measured by the percentage of contract hours incurred to date compared to the estimated total contract hours for each contract. Corillian has the ability to make reasonable, dependable estimates relating to the extent of progress towards completion, contract revenues and contract costs. Any estimation process, including that used in preparing contract accounting models, involves inherent risk. Profit estimates are subject to revision as the contract progresses towards
completion. Revisions in profit estimates are charged to income in the period that the facts giving rise to the revision become known. Corillian reduces the inherent risk relating to revenue and cost estimates in percentage-of-completion models through various approval and monitoring processes and policies. Risks relating to service delivery, usage, productivity and other factors are considered in the estimation process. Cumulative revenues recognized may be less or greater than cumulative billings at any point in time during a contracts term. The resulting difference is recognized as deferred revenue or revenue in excess of billings, respectively. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Pursuant to SOP No. 81-1, on projects where ultimate recoverability is questionable due to inherent hazards, Corillian limits revenue recognition in the period to the amount of project costs incurred in the same period, and postpones recognition of profits until results can be estimated more precisely. Under this zero profit methodology, equal amounts of revenues and costs, measured on the basis of performance during the period, are presented in Corillians condensed consolidated statements of operations.
In arrangements where Corillian does not have an obligation to install its products, but may become involved in the installation of these products, Corillian recognizes non-refundable license fees over the estimated implementation period for the customer or resellers project. If Corillian determines that the customer or reseller can successfully install Corillians products in a production environment without Corillians involvement, Corillian will recognize non-refundable license fees in the period in which collectibility of the license fees is probable, assuming all other SOP No. 97-2 revenue recognition criteria are met.
Income Taxes
Corillian records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Should Corillian determine that it would be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would either increase income or contributed capital in the period such determination is made.
Results of Operations
Revenues
Revenues for the three-month period ended September 30, 2004 were $13.5 million, as compared to revenues of $11.6 million for the three-month period ended September 30, 2003. This increase in revenues was mainly due to the recognition in the three-month period ended September 30, 2004 of a performance bonus classified as license revenue in excess of $2 million that was related to a product development project with a large customer. The increase was also driven by higher maintenance revenues resulting from a higher base of installed customers, and higher hosting revenues resulting from the addition of a large hosting customer in 2004. These increases were offset, in part, by decreases in revenues from sales of additional license seats to existing customers and from professional services. A majority of the revenues from additional license seat sales is generally recognized in the period in which the licenses are sold.
Revenues for the nine-month period ended September 30, 2004 were $37.6 million, as compared to revenues of $33.9 million for the nine-month period ended September 30, 2003. The increase in revenues was primarily due to an increase in license, maintenance and hosting revenues recognized during the nine- month period ended September 30, 2004 and the delivery of software to two new customers through Corillians partner channel during the first two quarters of 2004. These increases were offset, in part, by decreases in revenues from sales of additional license seats to existing customers and professional services revenues.
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 Corillians software and for maintenance and support personnel who are responsible for post-contractual customer support.
Cost of revenues for the three-month period ended September 30, 2004 was $4.5 million, as compared to cost of revenues of $5.1 million for the three-month period ended September 30, 2003. Cost of revenues for the nine-month period ended September 30, 2004 was $14.3 million, as compared to cost of revenues of $15.1 million for the nine-month period ended September 30, 2003. Cost of revenues decreased primarily as a result of lower professional services revenues.
Gross profit as a percentage of revenues was 67% for the three-month period ended September 30, 2004, as compared to 56% for the three-month period ended September 30, 2003. Gross profit as a percentage of revenues was 62% for the nine-month period ended September 30, 2004, as compared to 56% for the nine-month period ended September 30, 2003. The increase in gross profit as a percentage of revenues during both the three- and nine-month periods ended September 30, 2004, as compared to the three- and nine-month periods ended September 30, 2003, was mainly attributable to an increased mix of high margin license revenues as a percentage of total revenues as well as increased margins on maintenance fees as a result of a higher base of maintenance fees on relatively consistent maintenance costs.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses consist of salaries, commissions and related expenses for personnel involved in marketing, sales and support functions, as well as costs associated with trade shows and other promotional activities. Sales and marketing expenses were $1.8 million for the three-month period ended September 30, 2004, compared to $1.5 million for the three-month period ended September 30, 2003. Sales and marketing expenses were $5.4 million for the nine-month period ended September 30, 2004, compared to $4.8 million for the nine-month period ended September 30, 2003. The increase in sales and marketing expenses during both the three- and nine-month periods ended September 30, 2004, as compared to the three- and nine-month periods ended September 30, 2003, was mainly due to increased commissions, marketing, consulting and public relations expense during the first nine months of 2004.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related expenses for engineering personnel and costs of materials and equipment associated with the design, development and testing of Corillians products. Research and development expenses were $1.6 million for the three-month period ended September 30, 2004, compared to $1.4 million for the three-month period ended September 30, 2003. Research and development expenses were $4.6 million for the nine-month period ended September 30, 2004, as compared to $4.8 million for the nine-month period ended September 30, 2003.
The increase in research and development expenses during the three-month period ended September 30, 2004, as compared to the three-month period ended September 30, 2003, was mainly due to an increase in personnel related costs as Corillian increased its investment in engineering personnel to support new product and product upgrade initiatives across its product channels, including consumer, small business and corporate banking. The decrease in research and development expenses in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003, was mainly due to an increase in services provided by certain Corillian research and development personnel to Corillians customers, which is reclassified to cost of revenue. This decrease was partially offset by the increase in personnel costs described above.
Research and development expenses, to a certain extent, could fluctuate in future periods due to the additional funding of Corillians research and development activities by customers accounted for under the provisions of Statement No. 68, Research and Development Arrangements, as well as internal funding for the development of new products and enhancements to existing products and the use of Corillians research and development personnel to provide services for Corillians customers.
General and Administrative Expenses
General and administrative expenses consist of salaries and related expenses for executive, finance, human resources, legal, information systems management and administration personnel, as well as professional fees, bad debt expenses and other general corporate expenses. General and administrative expenses were $1.8 million for the three-month period ended September 30, 2004, as compared to $1.7 million for the three-month period ended September 30, 2003. This increase was due to higher costs incurred on Corillians Sarbanes-Oxley Act of 2002 compliance projects, which were partially offset by a corporate consulting project expensed in the three-months ended September 30, 2003.
General and administrative expenses were $5.1 million for the nine-month period ended September 30, 2004, as compared to $5.2 million for the nine-month period ended September 30, 2003. This decrease was mainly due to a $300,000 charge in the three-month period ended March 31, 2003 related to Ted Spooners severance agreement. Other factors that led to the decrease were savings realized from a decrease in Corillians corporate insurance premiums during the 2004 period and a corporate consulting project expensed in the nine-months ended September 30, 2003. These decreases were partially offset by the effect of a $250,000 insurance settlement that reduced general and administrative expense in the three-month period ended June 30, 2003, as well as higher costs incurred on Corillians Sarbanes-Oxley Act of 2002 compliance projects in the three-month period ended September 30, 2004.
Impairment Charge
On August 23, 2004, Corillian entered into an amendment to its lease for office space at its corporate headquarters in Hillsboro, Oregon. This amendment reduced the space leased effective January 1, 2005 to approximately 100,000 square feet, from the approximately 122,000 square feet previously leased. Pursuant to 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, Corillian recognized an impairment charge of $491,000 in the three- and nine-month periods ended September 30, 2004 to write off the remaining book value of long-lived assets in the space Corillian has abandoned and ceased to use.
Other Expense, Net
Other expense, net, consists primarily of interest earned on cash and cash equivalents and short-term investments, gains and losses recognized upon sale of Corillians assets, interest expense, Corillians share of losses in equity investments, and other miscellaneous items. Other expense, net, was $122,000 for the three-month period ended September 30, 2004, as compared to $198,000 for the three-month period ended September 30, 2003. This decrease was mainly due to a $60,000 increase in interest income resulting from higher cash and investment balances and higher interest rates earned on investments.
Other expense, net, was $506,000 for the nine-month period ended September 30, 2004, as compared to $910,000 for the nine-month period ended September 30, 2003. This decrease was mainly due to a $225,000 decrease in Corillians proportionate share of Synoran LLCs net loss, as well as a $100,000 decrease in interest expense incurred as Corillian continued to pay down its capital lease and line of credit obligations. Also contributing to the decrease was $100,000 of higher interest income resulting from higher cash and investment balances and higher interest rates earned on investments.
Income Taxes
Corillian expects to be profitable for the twelve-month period ended December 31, 2004, and, therefore, expects to incur an alternative minimum tax liability for this period. As a result, Corillian recorded income tax charges of $20,000 and $110,000 during the three- and nine-month periods ended September 30, 2004, respectively, related to estimated alternative minimum taxes for these periods. Corillian recorded an income tax charge of $100,000 in the three- and nine-month periods ended September 30, 2003. Alternative minimum taxes paid are available to be carried forward to reduce the excess of regular taxes over alternative minimum taxes in future years. Such alternative minimum tax credit carryforwards are includable in deferred tax assets. Corillian has recorded a full valuation allowance
against such credit carryforwards in addition to all other net deferred tax assets, as it believes it is more likely than not that these deferred tax assets will not be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to decrease the valuation allowance would increase income in the period such determination was made.
Liquidity and Capital Resources
As of September 30, 2004, Corillian had $34.4 million in cash, cash equivalents and short-term investments consisting mainly of cash and taxable municipal bonds, as compared to $26.8 million as of December 31, 2003. As of September 30, 2004, Corillian had a $5.0 million equipment line of credit with a financial institution. Approximately $1.5 million was outstanding under this line of credit as of September 30, 2004, and no additional amounts were available for borrowing as of that date. Under this line of credit, Corillian must comply with affirmative covenants that require it to maintain a specified tangible net worth value, debt coverage ratio and adjusted quick ratio. Corillian believes it was in compliance with these covenants as of September 30, 2004. If Corillian fails to comply with these covenants and cannot cure its noncompliance within the periods of time identified in the agreement, Corillian may be required to immediately repay all of its outstanding indebtedness under this line of credit.
Net cash provided by operating activities was $7.3 million and $8.2 million during the nine-month periods ended September 30, 2004 and 2003, respectively. Net income, adjusted to add back the effects of non-cash items such as depreciation, amortization and equity losses on the Synoran investment, increased by $3.4 million in the nine-month period ended September 30, 2004 over the nine-month period ended September 30, 2003. Various other items affected Corillians cash provided by operating activities, offsetting this increase. In the nine-months ended September 30, 2004, Corillian reduced its deferred revenue balance by $1.0 million, whereas in the nine-months ended September 30, 2003, Corillians deferred revenue balance increased by $1.6 million, both based on the timing of billings on large license sales in relation to the periods the revenue was recognized. During the first nine months of 2003, Corillian also satisfied certain contractual requirements that allowed for the release of $1.6 million of escrow funds that Corillian had previously recorded in other receivables and released restrictions on another $1.0 million of cash that Corillian had previously recorded as restricted cash. Both of these items were a part of Corillians cash provided by operations in the nine-months ended September 30, 2003.
Net cash provided by investing activities was $39,000 for the nine-month period ended September 30, 2004. Net cash used in investing activities was $578,000 for the nine-month period ended September 30, 2003. Net cash provided by investing activities during the nine-month period ended September 30, 2004 consisted primarily of $562,000 of property and equipment purchases offset by $601,000 in proceeds received from the maturities of investments. Net cash used in investing activities during the nine-month period ended September 30, 2003 consisted of $488,000 of property and equipment purchases and a $1.0 million cash investment in Synoran LLC, partially offset by $910,000 in proceeds received from the maturities of investments.
Net cash provided by financing activities was $828,000 for the nine-month period ended September 30, 2004. Net cash used in financing activities was $575,000 for the nine-month period ended September 30, 2003. During the nine-month period ended September 30, 2004, net cash provided by financing activities consisted of $1.9 million in proceeds received from the issuance of common stock under Corillians stock option and employee stock purchase plans, which was offset, in part, by $1.1 million in repayments on long-term borrowings and capital lease obligations. Net cash used in financing activities during the nine-month period ended September 30, 2003 consisted primarily of repayments on long-term borrowings and capital lease obligations of $1.0 million which was partially offset by $390,000 received from the issuance of common stock under Corillians stock option and employee stock purchase plans.
Working capital increased to $25.4 million as of September 30, 2004, as compared to $14.4 million as of December 31, 2003. This increase primarily resulted from positive cash flows from operating activities.
On August 23, 2004, Corillian entered into an amendment to its lease for office space at its corporate headquarters in Hillsboro, Oregon. This amendment reduced the space leased effective January 1, 2005 to approximately 100,000 square feet, from the approximately 122,000 square feet previously leased. The amendment also extended the lease expiration date to September 2010.
The following table presents the minimum payments on the lease, before and after amendment, and is an update to the commitment table presented in Corillians Form 10-K for the year ended December 31, 2003:
After | Before | |||||||
Amendment |
Amendment |
|||||||
(in thousands) | ||||||||
Years ending December 31: |
||||||||
2004 |
$ | 2,757 | $ | 2,757 | ||||
2005 |
2,300 | 2,818 | ||||||
2006 |
2,351 | 2,881 | ||||||
2007 |
2,355 | 2,198 | ||||||
Thereafter |
6,317 | | ||||||
Total |
$ | 16,080 | $ | 10,654 | ||||
Corillian had no material financial obligations as of September 30, 2004, other than $1.5 million in obligations under its line of credit facilities and operating and capital leases, as well as its obligation to pay Key Bank $175,000 in cash on November 16, 2004. Future capital requirements will depend on many factors, including the timing of research and development efforts and the expansion of Corillians operations, both domestically and internationally. Corillian believes its current cash and cash equivalents will be sufficient to meet its working capital requirements for at least the next 12 months. Thereafter, Corillian may find it necessary to obtain additional equity or debt financing. If additional financing is required, Corillian may not be able to raise it on acceptable terms or at all. Additional financing could result in dilution to Corillians current shareholders percentage ownership. If Corillian is unable to obtain additional financing, Corillian may be required to reduce the scope of its planned research and development and sales and marketing efforts, as well as the further development of its infrastructure.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Rate Sensitivity
Corillian develops products in the United States and markets its products and services in the United States, and to a lesser extent in Europe, Asia and Australia. As a result, its financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because nearly all of Corillians revenues are currently denominated in United States dollars, a strengthening of the United States dollar could make Corillians products less competitive in foreign markets.
Corillian does not use derivative financial instruments for speculative purposes. Corillian does not engage in exchange rate hedging or hold or issue foreign exchange contracts for trading purposes. Corillian does have foreign-based operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. Corillian has limited
operations in Europe, Asia and Australia and conducts transactions in various local currencies in these locales. To date, the impact of fluctuations in the relative fair value of other currencies has not been material.
Interest Rate Sensitivity
As of September 30, 2004, Corillian had $34.4 million in cash, cash equivalents and short-term investments consisting mainly of cash and taxable municipal bonds, as compared to $26.8 million as of December 31, 2003. Corillians short-term investments may be subject to interest rate risk and will decrease in value if market interest rates increase. A 10% change in interest rates would not have a material impact on Corillians financial position, results of operations or liquidity.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation conducted under the supervision and with the participation of Corillians management, including Corillians chief executive officer and chief financial officer, as of September 30, 2004, Corillians chief executive officer and chief financial officer have concluded that Corillians disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (Exchange Act) are effective to ensure that information required to be disclosed by Corillian in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
During the three-month period ended September 30, 2004, there were no changes in Corillians internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Corillians internal control over financial reporting.
Corillians chief executive officer and chief financial officer do not expect that Corillians disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Corillians chief executive officer and chief financial officer do believe Corillians internal control systems over financial reporting provide reasonable assurance that their objectives are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits listed on the accompanying index are filed as part of this Form 10-Q:
Exhibit No. |
Description |
|
31.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit No. |
Description |
|
31.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1
|
Risk Factors |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 15, 2004.
CORILLIAN CORPORATION | ||
By: /s/ Paul K. Wilde | ||
Paul K. Wilde | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
INDEX TO EXHIBITS
Exhibit No. |
Description |
|
31.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1
|
Risk Factors |