<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended October 31, 1998.
[ ] 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 0-24201
--------------
Carreker-Antinori, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1622836
- ---------------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14001 N. Dallas Parkway, #1100
Dallas, Texas 75240-7304
- ---------------------------------------- -------------------------------
(Address of principal executive office) (Zip Code)
(972) 458-1981
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value --- 16,633,293 shares as of October 31, 1998.
<PAGE>
CARREKER-ANTINORI, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
at January 31, 1998, and October 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended October 31, 1997
and 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended October 31, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARREKER-ANTINORI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 31,
ASSETS January 31, 1998
1998 (Unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,975 $31,404
Accounts receivable, net 12,755 25,228
Inventory 26 23
Income tax receivable 199 ----
Prepaid expenses and other 646 827
Deferred income taxes 546 476
------- -------
Total current assets 16,147 57,958
Furniture, equipment, and leasehold improvements,
net 1,580 2,172
Software costs capitalized, net 2,263 3,056
Other assets 329 123
------- -------
Total assets $20,319 $63,309
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,036 $ 1,609
Accrued compensation and benefits 1,652 501
Other accrued expenses 849 953
Taxes payable ---- 1,549
Deferred revenue 4,176 3,858
------- -------
Total current liabilities 8,713 8,470
Deferred income taxes 982 1,232
Common Stock subject to put 2,000 ----
------- -------
Total liabilities 11,695 9,702
------- -------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000
shares authorized, none issued ---- ----
Common Stock, $.01 par value, 100,000 shares
authorized, 12,007 and 16,801 shares issued,
respectively 120 168
Additional paid-in capital 2,078 42,773
Less treasury stock, at cost:
367 and 168 shares, respectively (510) (193)
Deferred compensation (754) (565)
Retained earnings 7,690 11,424
------- -------
Total stockholders' equity 8,624 53,607
------- -------
Total liabilities and stockholders'
equity $20,319 $63,309
------- -------
------- -------
</TABLE>
See accompanying notes.
3
<PAGE>
CARREKER-ANTINORI, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- ---------------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Consulting and management service fees $ 5,724 $ 7,273 $16,640 $18,876
Software license fees 2,979 3,624 5,403 10,570
Software maintenance fees 920 1,016 2,652 3,040
Software implementation fees 936 1,938 3,031 4,880
Hardware sales 289 37 1,516 459
------- ------- ------- -------
Total revenues 10,848 13,888 29,242 37,825
COSTS OF REVENUES:
Consulting and management service fees 3,298 4,211 9,191 11,760
Software license fees 564 303 1,049 806
Software maintenance fees 448 479 1,200 1,363
Software implementation fees 1,154 986 2,824 2,631
Hardware sales 250 29 1,309 326
------- ------- ------- -------
Total cost of revenues 5,714 6,008 15,573 16,886
------- ------- ------- -------
Gross profit 5,134 7,880 13,669 20,939
------- ------- ------- -------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 2,761 4,726 8,012 12,359
Research and development 1,035 896 2,105 3,238
------- ------- ------- -------
Total operating costs and expenses 3,796 5,622 10,117 15,597
Income from operations 1,338 2,258 3,552 5,342
Other income 14 359 76 562
------- ------- ------- -------
Income before provision for income taxes 1,352 2,617 3,628 5,904
Provision for income taxes 543 933 1,458 2,171
------- ------- ------- -------
Net income $ 809 $ 1,684 $ 2,170 $ 3,733
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per share $ 0.07 $ 0.10 $ 0.19 $ 0.26
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share $ 0.06 $ 0.10 $ 0.17 $ 0.24
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing basic earnings per share 11,556 16,435 11,448 14,405
Shares used in computing diluted earnings per share 13,515 17,528 13,050 15,842
</TABLE>
See accompanying notes.
4
<PAGE>
CARREKER-ANTINORI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
----------------------------
1997 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,170 $ 3,733
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization of capitalized software 484 319
Depreciation 438 951
Amortization of deferred compensation --- 189
Deferred income taxes 564 320
Changes in assets and liabilities:
Accounts receivable (4,826) (12,473)
Inventory 205 3
Prepaid expenses and other 329 25
Accounts payable and accrued expenses (250) (1,474)
Taxes payable 637 1,748
Deferred revenue (108) (318)
------- --------
Net cash used in operating activities (357) (6,977)
INVESTING ACTIVITIES:
Purchase of property and equipment (774) (1,543)
Capitalized software costs (1,794) (1,112)
------- --------
Net cash used in investing activities (2,568) (2,655)
FINANCING ACTIVITIES:
Purchase of treasury stock (4) (8)
Proceeds from sale of stock (net) 72 35,837
Proceeds from stock options exercised 159 3,232
Proceeds from borrowing 21 ----
------- --------
Net cash provided by financing activities 248 39,061
------- --------
Net increase (decrease) in cash and cash equivalents (2,677) 29,429
Cash and cash equivalents at beginning of period 3,443 1,975
------- --------
Cash and cash equivalents at end of period $ 766 $ 31,404
------- --------
------- --------
Supplemental cash flow information:
Cash paid for interest $ 24 $ 43
------- --------
------- --------
Cash paid for income taxes $ 1,131 $ 121
------- --------
------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART I
- ------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect, in the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows of the Company. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations
promulgated by the Securities and Exchange Commission. These statements
should be read in conjunction with the audited financial statements and
notes thereto for the years ended January 31, 1996, 1997, and 1998 included
in the Company's Prospectus, dated May 20, 1998 on file with the
Commission. The results of operations for the interim periods shown herein
are not necessarily indicative of the results to be expected for any future
interim period or for the entire year.
The Company adopted Statement of Position No. 97-2, "Software Revenue
Recognition" (SOP 97-2) for all software license transactions entered into
by the Company subsequent to January 31, 1998. The adoption of SOP 97-2
did not have a material impact on the Company's revenues and earnings for
the three month and nine month periods ended October 31, 1998.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less from the original purchase date to be cash
equivalents. At October 31, 1998, cash equivalents consisted principally
of highly liquid debt securities of corporations and municipalities.
3. EARNINGS PER SHARE
Basic earnings per share is computed by using the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is computed using the weighted average number of shares
of common stock outstanding during each period, and common equivalent
shares consisting of stock options (using the treasury stock method).
The following table sets forth the computation of basic and diluted
earnings per share for the three months and nine months ended October 31,
1997 and 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 31, Oct. 31,
------------------ -----------------
1997 1998 1997 1998
------ ------- ------- ------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 809 $ 1,684 $ 2,170 $ 3,733
Weighted average shares outstanding 11,556 16,435 11,448 14,405
Basic earnings per share $ 0.07 $ 0.10 $ 0.19 $ 0.26
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share:
Net income $ 809 $ 1,684 $ 2,170 $ 3,733
Weighted average shares outstanding 11,556 16,435 11,448 14,405
Assumed conversion of employee stock options 1,959 1,093 1,602 1,437
------- ------- ------- -------
Shares used in diluted earnings per share calculation 13,515 17,528 13,050 15,842
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share $ 0.06 $ 0.10 $ 0.17 $ 0.24
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
6
<PAGE>
4. CREDIT ARRANGEMENTS
The Company has a revolving credit agreement ("the Revolving Credit
Agreement") with a bank which expires on December 15, 1998. The maximum
amount of borrowings allowed under the Revolving Credit Agreement is $3.0
million against which no borrowings were outstanding as of October 31,
1998. Borrowings under the Revolving Credit Agreement bear interest at the
prime lending rate (8.5% at October 31, 1998).
5. MANAGEMENT SERVICES
For the three month and nine month periods ended October 31, 1997 and
1998, the Company recognized revenue for management services provided to
related parties in the following amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31 October 31
(In thousands) (In thousands)
------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Infiteq, LLC (1) $---- $158 $ 244 $1,007
Payment Solutions Network, Inc. 335 296 952 900
Electronic Check Clearing
House Organization 265 234 757 763
</TABLE>
(1) Includes $570,000 for the nine months ended October 31, 1998 for
management services performed in prior periods.
The Company held net receivables at October 31 in the following amounts:
<TABLE>
<CAPTION>
Accounts Receivable
October 31,
(In thousands)
-------------------
1997 1998
---- ----
<S> <C> <C>
Infiteq, LLC $ 23 $ 82
Payment Solutions Network, Inc. 623 322
Electronic Check Clearing House Organization 490 433
</TABLE>
6. INITIAL PUBLIC OFFERING AND MERGER
On May 19, 1998, the Commission declared effective the Company's
Registration Statement on Form S-1 to sell 5,100,000 defined in MD&A as
"IPO" shares of the Company's Common Stock through an initial public
offering (the Offering). Of the shares offered, 3,650,000 shares were
sold by the Company and 1,450,000 shares were sold by certain selling
stockholders. The shares were offered by an underwriting group managed
by BancAmerica Robertson Stephens, Hambrecht & Quist LLC, and Lehman
Brothers Inc. After giving affect to the deduction of underwriting
discounts and to other offering expenses, the Company generated net
proceeds of $35,837,373 from the IPO, which it intends to use for working
capital and other general corporate purposes, as well as possible strategic
alliances and acquisitions.
Subsequent to January 31, 1998, the Company's Board of Directors and
Shareholders authorized the merger of Carreker-Antinori, a Texas
corporation ("Carreker-Antinori, Texas") into the Company. The merger was
effected through the conversion of each outstanding share of Class A voting
Common Stock of Carreker-Antinori, Texas into 7.7 shares of Common Stock of
the Company. Additionally, all options and rights to acquire shares of
Class A and Class B Common Stock of Carreker-Antinori, Texas were converted
into rights to acquire shares of Common Stock of the Company on a basis
consistent with the Common Stock conversion ratio. The accompanying
financial statements reflect the merger and resulting change in
capitalization as all share and per share amounts have been retroactively
restated to reflect the merger.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, founded in 1978, is a leading provider of integrated
consulting and software solutions that enable banks to increase their
revenues, reduce their costs and enhance their delivery of customer
services. In February 1997, the Company acquired Antinori Software, Inc.,
and through that acquisition, the Company was able to significantly enhance
its portfolio of software products.
MARKETS: A substantial majority of the Company's revenues are
generated from contracts with Tier I Banks (bank holding companies with
assets over $50 billion) and Tier II Banks (bank holding companies and
independent banks with assets of between $5 billion and $50 billion). The
Company also targets smaller bank holding companies and independent banks
with assets of between $550 million and $5 billion.
SOURCE OF REVENUES: The Company derives its revenues from consulting
and management service fees, software license fees, software maintenance
and implementation fees and hardware sales. While many customer contracts
provide for both the performance of consulting services and the license of
related software, some customer contracts require only the performance of
consulting services, or only a software license (and, at the election of
the customer, related implementation services and/or annual software
maintenance services). The Company enters into these contracts with its
customers on a project-by-project basis. The Company also derives
management service fees from the performance of comprehensive management
services for the Electronic Check Clearing House Organization ("ECCHO"),
Payment Solutions Network, Inc. ("PSN"), and INFITEQ, LLC. ("INFITEQ").
PRODUCTS AND SERVICES: The Company's services and technology
applications fall into five categories: 1) Revenue Enhancement Solutions -
designed to quickly increase a bank's revenues through improved operational
work-flows, pricing structures and liquidity and cash management, 2)
Payment Systems, and 3) Payment Electronification Solutions - (2) and (3)
are both designed to reduce check-processing costs through procedural and
technological improvements and reduced check fraud and other risks of loss,
4) Enabling Technologies Solutions - converting leading-edge technologies
and ideas into practical banking solutions, and 5) Management Services -
providing management services for three banking organizations - ECCHO,
PSN, and INFITEQ. The Company's solutions are sold individually, or
complementary solutions may be sold together (similarly, software products
may be sold individually or as part of a product suite).
PRICING METHODS AND REVENUE RECOGNITION: The Company employs varying
pricing methods for each of its four sources of revenue, resulting in a
number of different revenue recognition practices. Consulting and
management services are priced on (i) a time and materials basis (revenue
is recognized as the services are performed), (ii) a fixed-price basis
(revenue is recognized on a percentage-of-completion basis) and (iii) on a
value-priced basis. In the case of value-priced contracts, the Company is
paid, on an agreed upon basis with the customer, either a specified
percentage of the projected increased revenues or decreased costs that are
expected to be derived by the customer over a period of up to twelve months
following implementation of the Company's solution, or the actual increased
revenues and/or decreased costs experienced by the customer over a period
of up to twelve months following implementation of the Company's solution,
subject in either case to a ceiling, if any is agreed to, on the total
amount of payments to be made to the Company. Revenues generated in
connection with value-priced contracts based upon projected results are
recognized only upon completion of all services and agreement upon the
actual fee to be paid (even though billings for such services may be
delayed by mutual agreement for periods generally not to exceed six
months), and revenues generated based upon actual revenues or savings to
the customer are recognized only upon the completion of all services and as
the amounts of actual revenues or savings are confirmed by the customer.
Software license fees are priced on a fixed-price basis (with revenue
recognized upon delivery, subject to certain conditions), on a value-priced
basis (with revenue recognized in a fashion similar to that for consulting
and management service fees) and in some cases on a per-transaction basis
(with the related revenue being recognized and due on a monthly basis).
Software maintenance and implementation fees are priced on a time and
materials basis or on a fixed-price basis, and the related revenues are
recognized on the basis consistent with that applied to consulting and
management service fees. Finally, hardware sales are priced on the basis
of the Company's cost plus a specified percentage, and related revenues
are recognized upon shipment of the hardware.
8
<PAGE>
All statements other than statements of historical fact contained in
this report, including statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning the
Company's financial position and liquidity, results of operations,
prospects for future growth, and other matters are forward-looking
statements. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, no assurance can be
given that such expectations will prove correct. Factors that could cause
the Company's results to differ materially from the results discussed in,
or contemplated by, such forward-looking statements include the risks
described under "Risk Factors" in the Company's Prospectus dated May 20,
1998 on file with the Commission. Such risks include, without limitation,
the risks associated with the Company's dependence on the banking industry,
fluctuations in quarterly operating results, the Company's limited
operating history as a combined company (with Antinori Software, Inc.),
customer concentration, customer project risks, the Company's ability to
manage growth, market acceptance of the Company's solutions, the absence of
long-term agreements with customers, the potential for software and/or
solutions defects, competition within the markets in which the Company
competes, the Company's use of independent contractors, the Company's
dependence on key personnel, the Company's ability to attract and retain
qualified personnel, the impact of technological advances on the Company's
business, the Company's dependence on proprietary technology and the risks
associated with infringement, Year 2000 issues, the potential for liability
claims, the risks associated with potential strategic alliances or
acquisitions, government regulation and the risks associated with
international operations. All forward-looking statements in this report
are expressly qualified in their entirety by the cautionary statements in
this paragraph, in "Risk Factors" (as set forth in the aforementioned
Prospectus) and elsewhere in this report.
9
<PAGE>
RESULTS OF OPERATIONS:
The following table sets forth for the periods indicated, the
percentages that selected items in the unaudited condensed consolidated
statements of operations bear to total revenues. The period to period
comparisons of financial results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 31, Oct. 31,
------------------ ------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Consulting and management service fees 52.8% 52.4% 56.9% 49.9%
Software license fees 27.4 26.1 18.5 27.9
Software maintenance fees 8.5 7.3 9.1 8.1
Software implementation fees 8.6 14.0 10.4 12.9
Hardware sales 2.7 .2 5.1 1.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Costs of revenues:
Consulting and management service fees 30.4 30.3 31.4 31.1
Software license fees 5.2 2.2 3.6 2.1
Software maintenance fees 4.1 3.5 4.1 3.6
Software implementation fees 10.7 7.1 9.7 7.0
Hardware sales 2.3 .2 4.5 .9
----- ----- ----- -----
Total cost of revenues 52.7 43.3 53.3 44.7
----- ----- ----- -----
Gross profit 47.3 56.7 46.7 55.3
----- ----- ----- -----
Operating costs and expenses:
Selling, general and administrative 25.5 34.0 27.4 32.7
Research and development 9.5 6.5 7.2 8.5
----- ----- ----- -----
Total operating costs and expenses 35.0 40.5 34.6 41.2
Income from operations 12.3 16.2 12.1 14.1
Other income (expense) 0.1 2.6 0.3 1.5
----- ----- ----- -----
Income before provisions for income
taxes 12.4 18.8 12.4 15.6
Provision for income taxes 5.0 6.7 5.0 5.7
----- ----- ----- -----
Net income 7.4% 12.1% 7.4% 9.9%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
REVENUES
REVENUES: The Company's total revenues increased 28.0% to $13.9 million
for the quarter ended October 31, 1998 from $10.8 million for the quarter
ended October 31, 1997. The Company's total revenues increased 29.4% to
$37.8 million for the nine months ended October 31, 1998 from $29.2 million
for the nine months ended October 31, 1997.
CONSULTING AND MANAGEMENT SERVICE FEES: Revenues from consulting and
management service fees increased 27.1% to $7.3 million for the quarter ended
October 31, 1998 from $5.7 million for the quarter ended October 31, 1997.
Revenues from consulting and management service fees increased 13.4% to $18.9
million for the nine months ended October 31, 1998 from $16.6 million for the
nine months ended October 31, 1997. Consulting and management service fees
have grown as a result of continued demand for time and material services as
well as value priced revenue enhancement consulting. The Company has
expanded the use of value priced engagements due to their improved margins as
well as their favorable reception from customers. Revenues related to value
priced opportunities tend to fluctuate period-to-period and are likely to
fluctuate in future periods.
10
<PAGE>
SOFTWARE LICENSE FEES: Revenues from software license fees increased
21.7% to $3.6 million for the quarter ended October 31, 1998 from $3.0
million for the quarter ended October 31, 1997. Revenues from software
license fees increased 95.6% to $10.6 million for the nine months ended
October 31, 1998 from $5.4 million for the nine months ended October 31,
1997. Software license fees for the nine months ended October 31, 1998
continued at improved levels over the prior year period principally due to
the introduction of additional liquidity management and risk management
software applications late in fiscal year 1997. To date, sales of software
licenses have principally been derived from direct sales to customers.
SOFTWARE MAINTENANCE FEES: Revenues from software maintenance fees
increased 10.4% to $1.0 million for the quarter ended October 31, 1998 from
$920,000 for the quarter ended October 31, 1997. Revenues from software
maintenance fees increased 14.6% to $3.0 million for the nine months ended
October 31, 1998 from $2.7 million for the nine months ended October 31,
1997. Increases in software maintenance fees have been driven by increased
sales levels of software licenses resulting in growth in the number of
customers under maintenance contracts.
SOFTWARE IMPLEMENTATION FEES: Revenues from software implementation
fees increased 107.1% to $1.9 million for the quarter ended October 31, 1998
from $936,000 for the quarter ended October 31, 1997. Revenues from
software implementation fees increased 61.0% to $4.9 million for the nine
months ended October 31, 1998 from $3.0 million for the nine months ended
October 31, 1997. Increases in software implementation fees have been driven
by increased sales levels of software licenses, resulting in growth in the
number of customers requiring implementation services.
HARDWARE SALES: Revenues from hardware sales decreased 87.2% to $37,000
for the quarter ended October 31, 1998 from $289,000 for the quarter ended
October 31, 1997. Revenues from hardware sales decreased 69.7% to $459,000
for the nine months ended October 31, 1998 from $1.5 million for the nine
months ended October 31, 1997. The Company sells hardware at the request of
its customers, but does not consider hardware sales to be a meaningful part
of its business.
COST OF REVENUES
COST OF CONSULTING AND MANAGEMENT SERVICES: Cost of consulting and
management services increased 27.7% to $4.2 million for the quarter ended
October 31, 1998 from $3.3 million for the quarter ended October 31, 1997.
Cost of consulting and management services increased 28.0% to $11.8 million
for the nine months ended October 31, 1998 from $9.2 million for the nine
months ended October 31, 1997. Cost of consulting and management services as
a percentage of consulting and management service fees increased to 57.9% for
the three months ended October 31, 1998 from 57.6% for the three months
ended October 31, 1997. Cost of consulting and management services as a
percentage of consulting and management service fees increased to 62.3% for
the nine months ended October 31, 1998 from 55.2% for the nine months ended
October 31, 1997. Cost of consulting and management services as a percentage
of consulting and management services fees reflect growth in personnel costs
as well as growth in the number of personnel to support projected staffing
requirements. Cost of consulting and management services consists primarily
of personnel costs associated with time and material contracts and value
priced efforts.
COST OF SOFTWARE LICENSES: Cost of software licenses decreased 46.3% to
$303,000 for the quarter ended October 31, 1998 from $564,000 for the quarter
ended October 31, 1997. Cost of software licenses decreased 23.2% to
$806,000 for the nine months ended October 31, 1998 from $1.0 million for the
nine months ended October 31, 1997. Cost of software licenses as a
percentage of software license fees decreased to 8.4% for the three months
ended October 31, 1998 from 18.9% for the three months ended October 31,
1997. Cost of the software licenses as a percentage of software license fees
decreased to 7.6% for the nine months ended October 31, 1998 from 19.4% for
the nine months ended October 31, 1997. Costs of software licenses includes
amortization costs relating to capitalized software, as well as royalty costs
associated with sales of liquidity management, risk management and
consolidation software products. Decreases in cost of software licenses as a
percentage of software license fees reflect a reduction in royalties paid
resulting from changes in the mix of products sold during the period as well
as reduced software amortization costs from products whose development costs
reached full amortization.
11
<PAGE>
COST OF SOFTWARE MAINTENANCE: Cost of software maintenance increased
6.9% to $479,000 for the quarter ended October 31, 1998 from $448,000 for the
quarter ended October 31, 1997. Cost of software maintenance increased 13.6%
to $1.4 million for the nine months ended October 31, 1998 from $1.2 million
for the nine months ended October 31, 1997. Cost of software maintenance
consists primarily of personnel costs associated with providing customer
support for software products sold. Increases in costs associated with
software maintenance reflect staffing increases to support increased customer
support and maintenance revenue.
COST OF SOFTWARE IMPLEMENTATION: Cost of software implementation
decreased 14.6% to $986,000 for the quarter ended October 31, 1998 from $1.2
million for the quarter ended October 31, 1997. Cost of software
implementation decreased 6.8% to $2.6 million for the nine months ended
October 31, 1998 from $2.8 million for the nine months ended October 31,
1997. Cost of software implementation consists primarily of personnel costs
associated with implementation, training, and providing customer support for
software products sold. Decreases in costs associated with software
implementation reflect improved efficiency of implementation engagements.
COST OF HARDWARE: Cost of hardware decreased 88.4% to $29,000 for the
quarter ended October 31, 1998 from $250,000 for the quarter ended October 31,
1997. Cost of hardware decreased 75.1% to $326,000 for the nine months
ended October 31, 1998 from $1.3 million for the nine months ended October 31,
1997. Decreases for the quarter and nine months ended reflect reductions
in the amount of hardware sold during the respective periods over the prior
year periods.
OPERATING COSTS AND EXPENSES
SELLING GENERAL AND ADMINISTRATIVE: Selling general and administrative
expenses increased 71.2% to $4.7 million for the quarter ended October 31,
1998 from $2.8 million for the quarter ended October 31, 1997. Selling
general and administrative expenses increased 54.3% to $12.4 million for the
nine months ended October 31, 1998 from $8.0 million for the nine months
ended October 31, 1997. Selling, general and administrative expenses
generally consist of personnel costs associated with selling, marketing,
general management and software management, as well as fees for professional
services and other related costs. The increase in these expenses reflected
growth in additional management, marketing, and administrative staff over the
prior periods to support the Company's expanding operations.
RESEARCH AND DEVELOPMENT: Research and development expenses decreased
13.4% to 896,000 for the quarter ended October 31, 1998 from $1.0 million for
the quarter ended October 31, 1997. Research and development expenses
increased 53.8% to $3.2 million for the nine months ended October 31, 1998
from $2.1 million for the nine months ended October 31, 1997. Decreases in
research and development expense for the quarter ended October 31, 1998
reflect a temporary reassignment of development staff to implementation
efforts. Increases in research and development expenses for the nine months
ended October 31, 1998 reflect increased development activity.
OTHER INCOME: Other income increased to $359,000 for the quarter ended
October 31, 1998 from $14,000 for the quarter ended October 31, 1997. Other
income increased to $562,000 for the nine months ended October 31, 1998 from
$76,000 for the nine months ended October 31, 1997. Other income consists
primarily of interest income on tax exempt short-term investments. The
increases in the dollar amount of other income were primarily due to interest
earned on higher balances of cash, cash equivalents and short-term
investments resulting from net proceeds of the initial public offering of the
Company's common stock which was completed in May 1998.
PROVISION FOR INCOME TAXES: The provision for income taxes is based on
the estimated annual effective tax rate, and includes federal and state
income taxes. The Company's effective income tax rate was 40.2% for the
three and nine months ended October 31, 1997. Due to the inclusion of tax
exempt interest income, income taxes as a percentage of net income before
provision for income taxes decreased to 35.7% and 36.8% for the three and
nine months ended October 31, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998, the Company had $49.5 million of working
capital, including $31.4 million in cash, and cash equivalents, as compared
to $7.4 million of working capital as of January 31, 1998,
12
<PAGE>
including $2.0 million of cash and cash equivalents. Operating activities
consumed $7.0 million of available cash for the nine months ended October 31,
1998 as compared to $357,000 for the nine months ended October 31, 1997,
largely through growth in accounts receivable which amounted to $12.5
million, for the period, through reductions of accounts payable and accrued
expenses which amounted to $1.5 million for the period, and through
reductions in deferred revenue which amounted to $318,000.
Accounts receivable net of allowances for doubtful accounts, increased
to $25.2 million at October 31, 1998, from $12.8 million at January 31,1998,
primarily due to the timing of sales transactions and extended payment
programs associated with some value priced engagements.
Average days' sales outstanding fluctuate for a variety of reasons,
including the timing of billings specified by contractual agreement, and
receivables for non-revenue related activities.
The following table contains the quarterly days sales outstanding (DSO)
with a comparative column which adds reimbursed expenses to the revenue
portion of the computation:
<TABLE>
<CAPTION>
DSO Including
Expense
Quarter Ended DSO Reimbursements*
---------------------------------------------------------------
<S> <C> <C>
January 31, 1998 103 94
April 30, 1998 125 113
July 31, 1998 122 112
October 31, 1998 167 152
</TABLE>
*Includes reimbursements for travel and out of pocket expenses which are
not considered revenue, but are included in outstanding receivables.
Cash used in investing activities during the nine-months ended October 31,
1998 was $2.7 million, and was related to the purchase of $1.5 million of
property and equipment related to growth in staff, and a $1.1 million
investment in capitalized software.
Cash generated through financing activities for the nine-months ended
October 31, 1998, was $39.1 million and resulted from the net proceeds of the
Company's recent initial public offering and option exercises, as well as
proceeds from the exercise of stock options.
The Company has a $3.0 million revolving credit facility (the
"Facility"). As of October 31, 1998, the Company had no amounts outstanding
under the Facility. Principal amounts outstanding under the Facility bear
interest at national prime (8.5% at October 31, 1998). Availability under
the Facility is calculated based on 70% of qualified accounts receivable. The
Facility matures on December 15, 1998. The Company has pledged its inventory
accounts receivable and certain intangible rights to secure indebtedness
under the Facility. Under the Facility, the Company is subject to certain
covenants regarding its operations and corporate actions.
In May 1998 the Company completed the initial public offering of its
Common Stock (the "IPO"). After giving effect to the deduction of
underwriting discounts and to other offering expenses, the Company generated
net proceeds of $35,837,373 from the IPO, which it intends to use for working
capital and other general corporate purposes. The Company may also use a
portion of the net proceeds for possible strategic alliances and acquisitions
of businesses, products and technologies that are complementary to those of
the Company. Pending such uses, the Company plans to invest the net proceeds
from the IPO in short-term, interest-bearing, investment-grade securities.
See also "Part II: Other Information, Item 2. Changes in Securities and Use
of Proceeds."
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FASB 131"), which supersedes existing
accounting standards related to disclosure of operating segment information
beginning fiscal 1998. Although the Company currently operates in only one
industry segment, the Company is in the process of evaluating the impact this
new standard will have on the Company's financial statement disclosures in
fiscal 1998. The adoption of FASB 131 will have no
13
<PAGE>
impact on the Company's consolidated results of operations, financial
position or cash flows and any effect will be limited to the presentation of
its Consolidated Financial Statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in years
beginning after June 15, 1999. Because the Company does not use derivatives,
management does not anticipate that the adoption of the new statement will
have an effect on earnings or the financial position of the Company.
YEAR 2000
STATE OF READINESS
Carreker-Antinori has performed a company-wide evaluation to assess the
ability of its products and its information technology ("IT") and non-IT
systems to properly function and execute transactions in the Year 2000. The
Company's Year 2000 Project is divided into three major sections: (a)
Infrastructure, which includes internal management information systems,
computers, servers, networks to support the business and any non-IT systems
used in the operation of the business; (b) Third Party Suppliers, which
includes those suppliers that provide the Company with software applications
that are used in concert with the Company's products and service suppliers,
such as Internet service providers and computer testing resources; and (c)
Company Products and Services, which includes those products and services
that generate revenue for the Company. The Project has been divided into six
phases: (1) Awareness and Communication; (2) Inventory; (3) Assessment;
(4) Renovation; (5) Testing; and (6) Rollout. As discussed below, the Company
has substantially completed the first two phases of the Year 2000 Project for
its Infrastructure, Third Party Suppliers and Customer Products and Services.
All phases of the Project are expected to be completed by the third quarter
of 1999.
INFRASTRUCTURE. The Company has completed an inventory of its IT and
non-IT systems and currently is in the assessment phase for these systems.
The Company has completed the assessment of its IT hardware and non-IT
systems, and expects to complete an assessment of its software systems by
February 1999. The Renovation, Testing and Rollout phases of the Project are
expected to be completed by September 1999. The Company has distributed a
letter to each of its vendors that supply systems or software for its IT and
non-IT systems to determine the vendors' Year 2000 status. A majority of the
recipients have responded to the letter, and most of the respondents have
given assurances that their products and services are able to function in the
context of the Year 2000 Problem. The Company is assessing these responses
and will continue to communicate with vendors that are material to the
Company's operations to gain satisfactory assurances. If such assurances are
not obtained, the Company will seek alternatives, including contracting with
other vendors.
THIRD PARTY SUPPLIERS. The Company has taken an inventory of the
applications from third party suppliers that are used in conjunction with the
Company's products. The Company has contacted significant third-party
suppliers in an effort to assess the state of their Year 2000 readiness.
Carreker-Antinori has received information, or tested all of the applications
from third-party suppliers used in the Company's products. Only one supplier
has not been willing to certify the Year 2000 compliance of its application
although internal tests have disclosed no Year 2000 problems with this
application. Because its bank customers require certifications regarding Year
2000 compliance, Carreker-Antinori is communicating with this supplier to
determine a solution to this certification issue and at the same time is
formulating a contingency plan in the event the Company is unable to resolve
this issue.
COMPANY PRODUCTS AND SERVICES. As of May 1998, all of the Company's
software products were tested and confirmed as compliant. The Company has a
Web site to identify each product and its compliant release number and
status. The Company also has transmitted letters to its customers notifying
them of their current Year 2000 readiness status and outlining the steps, if
any, needed for the customer to receive Year 2000 compliant software. As a
result of the stringent requirements placed on the Company's bank customers
by the Office of Comptroller and Currency (the "OCC") and the Federal
Financial Industry Examiners Council (the "FFIEC"), these customers are
requiring documented evidence of Year 2000 Compliance of the Company's
products. The Company currently is establishing a process to archive the
results of its compliance tests and to document this test information in a
format suitable for external distribution.
14
<PAGE>
COSTS
To date, the Company has spent approximately $560,000 relating to labor
costs for its Year 2000 Project. The Company has incurred no material
replacement costs for non-compliant systems because it did not accelerate its
replacement of any systems as a result of the Year 2000 issue. The Company
currently estimates that its costs through fiscal year 1999 relating to the
Year 2000 Project will be less than $700,000, the majority of which will be
spent on the documentation process required by the Company's bank customers.
Other costs, including replacement of non-compliant hardware and other
equipment, are expected to be less than $200,000. Funds for the Year 2000
Project are expected to be paid for out of operations.
RISKS
If the Company does not successfully complete its Year 2000 Project, it
could have a material adverse effect on the Company's ability to market, sell
and implement its software products and consulting services, which could have
a material adverse effect on its financial condition and results of
operations. The Company's customer base is primarily in the banking
industry. Because members of this industry are heavily regulated and audited
for their Year 2000 compliance efforts, the Company does not consider the
possibility of Year 2000 noncompliance by banks to be reasonably likely. The
OCC has published guidance criteria that all banks be complete with Year 2000
renovation and unit testing by December 1998, thus allowing the entire year
of 1999 for system testing. However, the operations and financial condition
of banks is significantly dependent on the results of operations and
financial condition of the their customers. If customers of banks experience
a material adverse effect as a result of Year 2000 issues, banks, and
consequently Carreker-Antinori, could be adversely affected. There can be no
assurance that third parties will be Year 2000 compliant in a timely manner.
The Company is anticipating that many of its bank customers will not move
any new systems into production during the last half of 1999. During this
period, only current system bug fixes and Year 2000 compliant releases will
be sent into the bank's production environment. Banks will continue to
contract for new business solutions, especially those that result in new bank
revenues. During this period, banks also will continue to initiate efforts
that precede the implementation of a new business software solution. The
Company is currently assessing the impact this will have on the Company's
operations.
CONTINGENCY PLAN
Although the Company has not adopted a formal contingency plan, it is
currently assessing alternatives, which may be implemented in the event Year
2000 issues arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NONE
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
15
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Commission declared the Registration Statement on Form S-1 (File No.
333-48399) relating to the Company's IPO effective on May 19, 1998 and
commenced on May 20, 1998 . The Company has used certain proceeds for
general corporate or working capital purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Exhibit Description
------ -------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARREKER-ANTINORI, INC.
By: /s/ John D. Carreker, Jr. Date: December 15, 1998
------------------------------ -----------------------
John D. Carreker, Jr.
Chairman of the Board and
Chief Executive Officer
By: /s/ Terry L. Gage Date: December 15, 1998
------------------------------ -----------------------
Terry L. Gage
Executive Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CARREKER-ANTINORI, INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 31,404
<SECURITIES> 0
<RECEIVABLES> 26,375
<ALLOWANCES> 1,147
<INVENTORY> 23
<CURRENT-ASSETS> 57,958
<PP&E> 4,612
<DEPRECIATION> 2,440
<TOTAL-ASSETS> 63,309
<CURRENT-LIABILITIES> 8,470
<BONDS> 0
0
0
<COMMON> 168
<OTHER-SE> 53,440
<TOTAL-LIABILITY-AND-EQUITY> 63,309
<SALES> 0
<TOTAL-REVENUES> 37,825
<CGS> 0
<TOTAL-COSTS> 16,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 632
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 5,904
<INCOME-TAX> 2,171
<INCOME-CONTINUING> 3,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,733
<EPS-PRIMARY> .26
<EPS-DILUTED> .24
</TABLE>
