<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 July 31, 2000.
[ ] 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 Corporation
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1622836
----------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4055 Valley View Lane, #1000
Dallas, Texas 75244
----------------------------------------- -------------------------------------
(Address of principal executive office) (Zip Code)
(972) 458-1981
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Carreker-Antinori, Inc.
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(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 --- 18,658,299 shares as of August 31, 2000.
<PAGE>
CARREKER CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at July 31, 2000 and January 31, 2000 3
Condensed Consolidated Statements of Operations
for the three and six months ended July 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the six months ended July 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARREKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, January 31,
ASSETS 2000 2000
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 21,867 $ 25,973
Short term investments 11,989 13,563
Accounts receivable, net 39,003 30,843
Prepaid expenses and other current assets 2,347 733
Deferred income taxes 1,269 831
----------- -----------
Total current assets 76,475 71,943
Property and equipment, net of accumulated depreciation 4,796 4,197
Software costs capitalized, net of accumulated amortization 10,307 6,349
Other assets 895 334
----------- -----------
Total assets $ 92,473 $ 82,823
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,819 $ 2,089
Accrued compensation and benefits 3,230 2,030
Other accrued expenses 2,704 2,583
Income taxes payable 2,010 2,310
Deferred revenue 6,708 6,401
----------- -----------
Total current liabilities 17,471 15,413
Deferred income taxes 3,750 2,004
----------- -----------
Total liabilities 21,221 17,417
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000 shares
authorized, none issued -- --
Common Stock, $.01 par value, 100,000 shares authorized,
18,657 and 18,540 shares issued, respectively 186 185
Additional paid-in capital 45,404 44,564
Deferred compensation (106) (183)
Retained earnings 25,768 20,846
Less treasury stock, at cost:
1 common shares, as of January 31, 2000 -- (6)
----------- -----------
Total stockholders' equity 71,252 65,406
----------- -----------
Total liabilities and stockholders' equity $ 92,473 $ 82,823
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
CARREKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
--------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Consulting and management service fees $ 21,766 $ 13,039 $ 34,876 $ 21,363
Software license fees 1,840 2,762 6,013 5,855
Software maintenance fees 2,713 1,764 4,995 3,266
Software implementation fees 2,311 1,232 4,806 2,675
Hardware and other fees 32 75 32 197
-------- -------- -------- --------
Total revenues 28,662 18,872 50,722 33,356
COSTS OF REVENUES:
Consulting and management service fees 9,912 6,162 18,485 11,433
Software license fees 1,239 380 2,376 848
Software maintenance fees 798 671 1,333 1,335
Software implementation fees 1,239 808 2,456 1,454
Hardware and other fees 25 60 31 161
-------- -------- -------- --------
Total cost of revenues 13,213 8,081 24,681 15,231
-------- -------- -------- --------
GROSS PROFIT 15,449 10,791 26,041 18,125
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 8,821 6,114 16,419 10,932
Research and development 1,445 1,356 2,429 2,674
-------- -------- -------- --------
Total operating costs and expenses 10,266 7,470 18,848 13,606
Income from operations 5,183 3,321 7,193 4,519
Other income 374 316 746 557
-------- -------- -------- --------
Income before provision for income taxes 5,557 3,637 7,939 5,076
Provision for income taxes 2,112 1,351 3,017 1,827
-------- -------- -------- --------
Net income $ 3,445 $ 2,286 4,922 $ 3,249
======== ======== ======== ========
Basic earnings per share $ 0.19 $ 0.12 $ 0.27 $ 0.18
======== ======== ======== ========
Diluted earnings per share $ 0.18 $ 0.12 $ 0.25 $ 0.17
======== ======== ======== ========
Shares used in computing basic earnings per share 18,549 18,477 18,524 18,423
Shares used in computing diluted earnings per share 19,417 19,078 19,442 18,961
</TABLE>
See accompanying notes.
4
<PAGE>
CARREKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
July 31,
-----------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 4,922 $ 3,249
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization of capitalized software 1,694 583
Depreciation and amortization of property and equipment 1,186 1,026
Amortization of deferred compensation 132 156
Deferred income taxes 743 50
Provision for doubtful accounts 960 133
Changes in assets and liabilities:
Accounts receivable (9,120) (7,197)
Prepaid expenses and other (1,291) (574)
Accounts payable and accrued expenses 1,690 (1,052)
Taxes payable (300) 928
Deferred revenue 269 (366)
---------- ----------
Net cash provided by (used in) operating activities 885 (3,064)
INVESTING ACTIVITIES:
Purchase of short-term investments (9,300) --
Sales and maturities of short-term investments 10,874 4,172
Acquisition of AIS and XPORT, net of cash acquired (5,268) --
Purchase of property and equipment and leasehold improvements (1,732) (2,301)
Computer software costs capitalized (358) (1,719)
---------- ----------
Net cash provided by (used in) investing activities (5,784) 152
FINANCING ACTIVITIES:
Purchase of treasury stock -- (4)
Proceeds from stock options exercised 793 209
---------- ----------
Net cash provided by financing activities 793 205
Net decrease in cash and cash equivalents (4,106) (2,707)
Cash and cash equivalents at beginning of period 25,973 20,701
---------- ----------
Cash and cash equivalents at end of period $ 21,867 $ 17,994
========== ==========
Supplemental cash flow information:
Cash paid for interest $ 16 $ --
========== ==========
Cash paid for income taxes $ 2,545 $ 809
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
CARREKER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART I
1. GENERAL
Effective June 20, 2000, we changed our name from
Carreker-Antinori, Inc. to Carreker Corporation.
2. 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, 2000, 1999, and 1998 included in the Company's Form 10-K
for the fiscal year ended January 31, 2000 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.
3. CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with maturities of
three months or less from the original purchase date to be cash
equivalents. At July 31, 2000, cash equivalents consisted principally
of highly liquid debt securities of corporations and municipalities.
4. SHORT TERM INVESTMENTS
We consider investments with maturities of greater than three
months, when purchased, to be short-term investments based on the
freely tradable nature of the investments, and management's expectation
that they will not be held for greater than one year. Short-term
investments consist primarily of tax-exempt municipal bonds. Management
determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance
sheet date. All debt securities have been determined by management to
be available for sale. Available for sale securities are stated at
amortized cost, which approximates fair value. Fair value of debt
securities is determined based upon current market value price quotes
by security. As of July 31, 2000 all short-term investments mature in
less than one year.
5. 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).
6
<PAGE>
The following table sets forth the computation of basic and
diluted earnings per share for the three and six months ended July 31,
2000 and 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 3,445 $ 2,286 $ 4,922 $ 3,249
======= ======= ======= =======
Weighted average shares outstanding 18,549 18,477 18,524 18,423
======= ======= ======= =======
Basic earnings per share $ 0.19 $ 0.12 $ 0.27 $ 0.18
======= ======= ======= =======
Diluted earnings per share:
Net income $ 3,445 $ 2,286 $ 4,922 $ 3,249
======= ======= ======= =======
Weighted average shares outstanding 18,549 18,477 18,524 18,423
Assumed conversion of employee
stock options 868 601 918 538
------- ------- ------- -------
Shares used in diluted earnings per share
calculation 19,417 19,078 19,442 18,961
======= ======= ======= =======
Diluted earnings per share $ 0.18 $ 0.12 $ 0.25 $ 0.17
======= ======= ======= =======
</TABLE>
6. MANAGEMENT SERVICES
For the three and six months ended July 31, 2000 and 1999, we
recognized revenue for management services provided to related parties
in the following amounts (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Infiteq, LLC $ -- $ 30 $ -- $ 51
Payment Solutions Network, Inc. 5 180 14 359
Electronic Check Clearing
House Organization 209 238 421 505
</TABLE>
The Company had net receivables from related parties at July 31 in the
following amounts (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -----
<S> <C> <C>
Infiteq, LLC $ -- $ 79
Payment Solutions Network, Inc. 57 330
Electronic Check Clearing House Organization 85 91
</TABLE>
7
<PAGE>
7. SEGMENTS
During January 2000, the Company revised its segment disclosures to
reflect our focus on e-finance segments. As a result of this revision,
segment disclosures for the current and prior periods have been
restated.
We have three reportable segments: PaymentSolutions, CashSolutions
and BusinessSolutions. The segments are unique due to the focus of the
products and services being offered. We evaluate performance and
allocate resources based on profit or loss from operations before
income taxes, not including gains and losses on our investment
portfolio.
PaymentSolutions consists primarily of eXceptions software, eTrac
software, eRM Software and consulting, Float Management, Recon
Solutions, eInform solutions, eTransactions consulting and software,
FraudLink consulting and software and ECCHO management services.
CashSolutions consists primarily of eiService, eCashPro and
eCashInventory consulting and software and Transportation consulting.
BusinessSolutions consists primarily of Revenue Enhancement consulting,
along with, Enterprise Solutions consulting and Strategic Services
consulting (eFinancial Services).
Due to the solution approach to delivering products and services
from multiple business segments, contracts are broken down by segment
with few transactions between reportable segments.
Included in corporate and unallocated are costs related to selling
and marketing, and unallocated corporate overhead expense. Business
segment results include costs for research and development as well as
product royalty expense. Receivables, property and equipment and other
assets are not included in the measures reviewed by our chief operating
decision-maker (in thousands):
<TABLE>
<CAPTION>
Three months ended July 31, 2000
-----------------------------------------------------
BusinessSolutions
------------------------
Revenue eFinancial Corporate
PaymentSolutions CashSolutions Enhancement Services Unallocated Total
---------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Consulting and management service fees... $ 1,057 $ 30 $ 14,763 $ 5,916 $ -- $ 21,766
Software license fees.................... 1,579 261 -- -- -- 1,840
Software maintenance fees................ 2,015 698 -- -- -- 2,713
Software implementation fees............. 1,506 805 -- -- -- 2,311
Hardware and other fees.................. 32 -- -- -- -- 32
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ $ 6,189 $ 1,794 $ 14,763 $ 5,916 $ -- $ 28,662
=========== =========== =========== =========== =========== ===========
Operating income (loss).................... $ (2,640) $ (189) $ 11,485 $ 1,679 $ (5,152) $ 5,183
<CAPTION>
Three months ended July 31, 1999
-----------------------------------------------------
BusinessSolutions
------------------------
Revenue eFinancial Corporate
PaymentSolutions CashSolutions Enhancement Services Unallocated Total
---------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Consulting and management service fees... $ 1,569 $ 772 $ 6,245 $ 4,453 $ -- $ 13,039
Software license fees.................... 2,150 612 -- -- -- 2,762
Software maintenance fees................ 1,390 374 -- -- -- 1,764
Software implementation fees............. 1,037 195 -- -- -- 1,232
Hardware and other fees.................. 75 -- -- -- -- 75
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ $ 6,221 $ 1,953 $ 6,245 $ 4,453 $ -- $ 18,872
=========== =========== =========== =========== =========== ===========
Operating income (loss).................... $ 17 $ 223 $ 4,829 $ 1,648 $ (3,396) $ 3,321
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Six months ended July 31, 2000
-----------------------------------------------------
BusinessSolutions
------------------------
Revenue eFinancial Corporate
PaymentSolutions CashSolutions Enhancement Services Unallocated Total
---------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Consulting and management service fees... $ 2,327 $ 73 $ 20,484 $ 11,992 $ -- $ 34,876
Software license fees.................... 4,590 1,423 -- -- -- 6,013
Software maintenance fees................ 3,756 1,239 -- -- -- 4,995
Software implementation fees............. 3,173 1,633 -- -- -- 4,806
Hardware and other fees.................. 32 -- -- -- -- 32
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ $ 13,878 $ 4,368 $ 20,484 $ 11,992 $ -- $ 50,722
=========== =========== =========== =========== =========== ===========
Operating income (loss).................... $ (2,283) $ 23 $ 14,800 $ 3,871 $ (9,218) $ 7,193
<CAPTION>
Six months ended July 31, 1999
-----------------------------------------------------
BusinessSolutions
------------------------
Revenue eFinancial Corporate
PaymentSolutions CashSolutions Enhancement Services Unallocated Total
---------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Consulting and management service fees... $ 2,889 $ 1,604 $ 9,251 $ 7,619 $ -- $ 21,363
Software license fees.................... 4,005 1,850 -- -- -- 5,855
Software maintenance fees................ 2,553 713 -- -- -- 3,266
Software implementation fees............. 2,252 423 -- -- -- 2,675
Hardware and other fees.................. 197 -- -- -- -- 197
----------- ----------- ----------- ----------- ----------- -----------
Total revenues...................... $ 11,896 $ 4,590 $ 9,251 $ 7,619 $ -- $ 33,356
=========== =========== =========== =========== =========== ===========
Operating income (loss).................... $ 337 $ 1,275 $ 6,655 $ 2,383 $ (6,131) $ 4,519
</TABLE>
Revenues of $17,730,000 from two major customers accounted for
61.9% of total revenues in the three months ended July 31, 2000.
Revenues of $8,743,000 from two major customers accounted for 46.3% of
total revenues in the three months ended July 31, 1999. Revenues of
$23,177,000 from two major customers accounted for 45.7% of total
revenues for the six months ended July 31, 2000. Revenues of
$14,729,000 from two major customers accounted for 44.2% of total
revenues for the six months ended July 31, 1999.
8. ACQUISITIONS
On February 10, 2000 we acquired all of the outstanding stock of
Automated Integrated Solutions, Inc., an Ontario Company ("AIS") for
$2.3 million in cash and additional cash payments to AIS shareholders
of up to $2.0 million based on achievement of specified revenue targets
over three years. The transaction was accounted for as a purchase
transaction with $2.3 million of the purchase price allocated to
capitalized software and will be amortized over a four year period.
On May 29, 2000 we acquired all of the outstanding stock of
X-Port Software, Inc., an Ontario Company ("X-Port") for $3.0 million
in cash. The transaction was accounted for as a purchase transaction
with approximately $3.0 million of the purchase price allocated to
capitalized software and will be amortized over a four year period.
In connection with the acquisition of X-Port, we entered into a
separate agreement with the former owner of X-Port for consulting and
development services through 2003. The payments for consulting total
$616,000 over the three year period and the development services fees
total $1.0 million with an additional $400,000 if certain project
milestones are met.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of integrated consulting and
software solutions that enable banks to maximize their electronic
finance (e-finance) opportunities, increase their revenues, reduce
their costs and enhance their delivery of customer services. We were
founded in 1978 to provide consulting services to banks, and
subsequently integrated software products into our banking solutions.
With our acquisition of Antinori Software, Inc. ("ASI") in 1997, we
were able to significantly enhance our portfolio of software products.
Additionally, we acquired Genisys Operations, Inc. in 1999, Automated
Integrated Solutions, Inc. ("AIS") in February 2000 and X-Port
Software, Inc. ("X-Port") in May 2000 which provided incremental
added-value to our product offerings. The acquisitions of ASI and
Genisys each were accounted for as a pooling-of-interests, and
accordingly, our Condensed Consolidated Financial Statements and notes
thereto, as well as all other financial and statistical data presented
in this Form 10-Q, have been restated to include the financial position
and results of operations for ASI and Genisys for all periods
presented.
MARKETS: A substantial majority of our revenues are generated
from contracts with banks with assets over $50 billion ("Tier I Banks")
and banks with assets of between $5 billion and $50 billion ("Tier II
Banks"). We seek to establish long-term relationships with our
customers that will lead to ongoing projects utilizing our solutions.
SOURCE OF REVENUES: We derive our revenues from consulting and
management service fees, software license fees, software implementation
fees, software maintenance and hardware and other 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). We enter into
these contracts with our customers on a project-by-project basis.
PRODUCTS AND SERVICES: We offer a wide range of
industry-leading solutions that enable banks to maximize their
e-finance opportunities, increase their revenues and reduce their
costs. Combining consulting services with proprietary technology
applications, we help banks improve their current operations and
realize their full potential from the Internet economy.
Our offerings, uniquely tailored to the needs of the banking
industry, fall into three complementary groups of powerful,
Internet-ready solutions. The three groups, PaymentSolutions,
CashSolutions and BusinessSolutions, offer a combination of products
and services that, when combined, deliver optimal benefits. These
products and services are:
<TABLE>
<CAPTION>
PAYMENTSOLUTIONS CASHSOLUTIONS BUSINESSSOLUTIONS
---------------- ------------- -----------------
<C> <C> <C>
FraudLink eiService Revenue Enhancement
eXceptions eCashInventory Enterprise Solutions
eRM Transportation Strategic Services
eTrac eCash Pro
eInform
eTransactions
Float Management
Recon Solutions
</TABLE>
The PAYMENTSOLUTIONS group addresses the needs of a critical function
of banks, the processing of payments made by one party to another. This
includes the identification and mitigation of fraudulent payments,
handling irregular items such as checks returned unpaid (exceptions),
maintaining a record of past transactions (archiving), responding to
related customer inquiries (research) and correcting any errors that
are discovered (adjustments). Our PAYMENTSOLUTIONS segment approaches
these key functions in the context of improving operational efficiency
and a gradual transition from the paper-based payment systems to
electronics.
10
<PAGE>
FRAUDLINK offers a comprehensive, automated approach to
solving the growing problem of fraudulent financial transactions, with
solutions specifically designed to protect banks against bad checks
drawn on them for payment, fraudulent items deposited with them for
credit, and check kiting.
PRODUCTS & SERVICES OFFERED: FRAUDLINK ONUS, FRAUDLINK DEPOSIT,
FRAUDLINK KITE, FRAUDLINK
POSITIVEPAY, FRAUDLINK TRACKER,
FRAUDLINK PC, FRAUDLINK HOLD
EXCEPTIONS is designed to reduce the number of exceptions that
banks experience, while using technology to transform traditionally
labor-intensive bank operations into efficient elements of the total
e-payment transaction chain. It features a unique combination of
automated check research, photo retrieval and adjustment solutions,
together with a flexible workflow engine.
PRODUCTS & SERVICES OFFERED: CHECKFLOW 1ST EDITION
ERM provides powerful tools for customer relationship
management in an e-finance environment. This wide-ranging electronic
relationship management infrastructure is a web-enabled decision
support system that incorporates exception management, risk management,
treasury services and document image archival and retrieval.
PRODUCTS & SERVICES OFFERED: ERM EXCEPTIONSMANAGEMENT, ERM RISK
MANAGEMENT, ERM TREASURY
SERVICES, ERM IMAGE REQUESTOR
ETRAC is an automated track and trace system designed to
monitor items from the time they enter a bank's processing stream to
final disposition. Among other benefits, this enables a bank to improve
labor productivity by channeling resources to where they are most
needed, i.e., potential workflow bottlenecks. Items tracked range from
checks, cash and microfilm records to internal bank mail.
PRODUCTS & SERVICES OFFERED: RECEIVE SENTRY, RECORDS
EINFORM focuses on performance measurement using the
historical data generated by eTrac. End-users can use this historical
data for the purposes of generating key performance indicators, item
processing volume data, productivity statistics, and quality control
benchmarks.
PRODUCTS & SERVICES OFFERED: EILUMEN, EIPERFORM, EISTATS,
EIMICR, EIQUALITY, EIMETRICS
ETRANSACTIONS enables the transition away from paper-based
payment systems to electronics by automating key elements of the
processing stream, as well as improving a bank's yield from float
management. The aim is to reduce and eventually eliminate the movement
of paper payment instruments through the system, automate error-prone
payment processing functions, consolidate payment information and
provide a measure of fraud prevention.
Products & Services Offered: CHECKLINK, CHECKLINK PC, DEPOSIT
MANAGER, BRANCH TRUNCATION
MANAGEMENT, CNOTES
FLOAT MANAGEMENT impacts funding requirements and overall
profitability by properly managing a bank's float through float
analysis, pricing and a comprehensive consulting practice. It analyzes
float-related issues to improve profitability, reporting, workflow and
check-clearing operations. It provides critical activity summaries,
aids in creating multiple availability and pricing schedules as well as
pinpointing the cost/profitability of any transaction or relationship.
SERVICES OFFERED: ANALYSIS, PRICING, CONSULTING
RECON SOLUTIONS addresses the crucial daily activity of
balancing and reconciling financial transactions. It redefines
reconciliation processes through technology and process improvements.
In addition to recommendations that improve automation, control and
risk management practices, we employ a highly configurable matching
engine, Bankrec-TM- Corporate, to provide significant gains in
efficiency and control.
SERVICES OFFERED: BANKREC
11
<PAGE>
The CASHSOLUTIONS group optimizes inventory management of a bank's
cash-on-hand, how much, when and where it is needed. Web-based software
solutions dramatically reduce the amount of cash banks need to hold in
reserve accounts and as cash-on-hand, while ensuring a high level of
customer service through timely replenishment of cash in ATMs.
EISERVICE advances ATM monitoring and management through the
use of Internet connectivity to provide electronic notification of cash
and/or servicing needs. Scalable to the largest ATM networks, it
forecasts cash and servicing needs, dispatches vendors for cash
replenishment and maintenance services, records completed work and
reconciles vendor invoices, all via an electronic communication
infrastructure.
PRODUCTS & SERVICES OFFERED: EIMANAGER, EIGATEWAY, EIFORECASTER
ECASHINVENTORY reduces the amount of non-earning assets
required in reserve accounts and as cash-on-hand to meet operating
needs. Using both technology and process reengineering, it provides
management tools for forecasting, tracking and optimizing a bank's
inventory of currency. This comprehensive group of solutions frees
underutilized money for more productive uses.
PRODUCTS & SERVICES OFFERED: CASHFORECASTER, CASHTRACKER, RESERVE
LINK, RESERVE LINKPLUS
TRANSPORTATION focuses on reducing armored car transportation
costs incurred by banks in moving cash between locations and
replenishing ATMs. It optimizes armored car utilization based on ATM
locations and usage, route structures and delivery frequency, as well
as ATM deposit processing requirements.
PRODUCTS & SERVICES OFFERED: OPTIMIZER, CONSULTING
ECASHPRO helps meet the budgetary challenges of centralized
currency processing with a blend of reengineering consulting and
technology. Proprietary software reduces transaction cost of
centralized currency and ATM deposit processing, provides cash
reductions of 20-35% throughout the vault network, establishes a
standardized inventory measurement process and reduces branch and vault
FTE as well as improving Internet-based customer reporting.
SERVICES OFFERED: EVAULT MASTER II, EDEPOSIT MASTER,
EVAULT FORECASTER
The BUSINESS SOLUTIONS group offers a range of consulting services that
enable banks to improve their day-to-day operations and conceive,
implement and fund their e-finance initiatives.
.
REVENUE ENHANCEMENT consulting enables a bank to improve
workflows, internal operational processes and customer pricing
structures. Opportunities to improve performance are identified through
a systematic evaluation of existing policies and procedures in a range
of functional areas.
SERVICES OFFERED: REVENUE ENHANCEMENT
ENTERPRISE SOLUTIONS provides conversion, consolidation and
integration consulting on a bank-wide basis. These services are
particularly in demand in the context of continuing acquisition and
merger activity in the banking industry, and the pressure on banks to
define and implement their e-finance strategies.
SERVICES OFFERED: EFINANCIALSERVICEPRODUCTMANAGEMENT,
EFINANCIASERVICEIT,
EFINANCIALSERVICEFINANCIAL,
EFINANCIALSERVICEINTEGRATION
STRATEGIC SERVICES are offered to banks to assist them in
developing and implementing a comprehensive e-finance strategy. The
scope of work includes defining objectives, detailing a migration path
and time frame and recommending a complete array of enabling
technologies.
SERVICES OFFERED: ESTRATEGICMODELING,
ESTRATEGICFINANCECONSULTING,
ESTRATEGICINTEGRATEDSALES
12
<PAGE>
PRICING METHODS AND REVENUE RECOGNITION: We employ varying
pricing methods for each of our four primary 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, we are 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 generally over a period of up to twelve months
following implementation of our solution, or the actual increased
revenues and/or decreased costs experienced by the customer generally
over a period of up to twelve months following implementation of our
solution, subject in either case to a ceiling, if any is agreed to, on
the total amount of payments to be made to us. Revenues generated in
connection with value-priced contracts based upon projected results are
recognized only upon completion of all services and evidenced by a
signed agreement upon the actual fee to be paid (even though billings
for such services may be delayed by mutual agreement for periods not to
exceed twelve months). When fees are to be paid based on a percentage
of actual revenues or savings, revenues are recognized only upon the
completion of all services and as the amounts of actual revenues or
savings are confirmed to us 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 our cost plus a specified percentage, and related revenues are
recognized upon shipment of the hardware.
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 our financial position and liquidity, results of
operations, prospects for future growth, and other matters are
forward-looking statements. Although we believe 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 our 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 Form 10-K for the fiscal year ended January 31, 2000, on file
with the Commission. Such risks include, without limitation, the risks
associated with our dependence on the banking industry, fluctuations in
quarterly operating results, customer concentration, customer project
risks, our ability to manage growth, market acceptance of our
solutions, the absence of long-term agreements with customers, the
potential for software and/or solutions defects, competition within the
markets in which we compete our use of independent contractors, our
dependence on key personnel, our ability to attract and retain
qualified personnel, the impact of technological advances on our
business, our 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 Form 10-K) and elsewhere in this report.
13
<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 Six Months Ended
July 31, July 31,
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Consulting and management service fees 75.9 % 69.2 % 68.8 % 64.0 %
Software license fees 6.4 14.6 11.9 17.6
Software maintenance fees 9.5 9.3 9.8 9.8
Software implementation fees 8.1 6.5 9.5 8.0
Hardware and other fees .1 .4 -- .6
------------- ------------ ------------- ------------
Total revenues 100.0 100.0 100.0 100.0
Costs of revenues:
Consulting and management service fees 34.6 32.7 36.5 34.3
Software license fees 4.3 2.0 4.7 2.5
Software maintenance fees 2.8 3.6 2.6 4.0
Software implementation fees 4.3 4.3 4.8 4.4
Hardware and other fees .1 .3 .1 .5
------------- ------------ ------------- ------------
Total cost of revenues 46.1 42.9 48.7 45.7
------------- ------------ ------------- ------------
Gross Profit 53.9 57.1 51.3 54.3
------------- ------------ ------------- ------------
Operating costs and expenses:
Selling general and administrative 30.8 32.4 32.3 32.7
Research and development 5.0 7.2 4.8 8.0
------------- ------------ ------------- ------------
Total operating costs and expenses 35.8 39.6 37.1 40.7
Income from operations 18.1 17.6 14.2 13.6
Other income (expense) 1.3 1.7 1.5 1.7
------------- ------------ ------------- ------------
Income before provisions for income taxes 19.4 19.3 15.7 15.3
Provision from income taxes 7.4 7.2 6.0 5.5
------------- ------------ ------------- ------------
Net income 12.0 % 12.1 % 9.7 % 9.8 %
============= ============ ============= ============
</TABLE>
14
<PAGE>
REVENUES
REVENUES: Our total revenues increased 51.9% to $28.7 million
for the quarter ended July 31, 2000 from $18.9 million for the quarter
ended July 31, 1999. The Company's total revenues increased 51.8% to
$50.7 million for the six months ended July 31, 2000 from $33.4 million
for the six months ended July 31, 1999.
CONSULTING AND MANAGEMENT SERVICE FEES: Revenues from
consulting and management service fees increased 67.7% to $21.8 million
for the quarter ended July 31, 2000 from $13.0 million for the quarter
ended July 31, 1999. Revenues from consulting and management service
fees increased 63.1% to $34.9 million for the six months ended July 31,
2000 from $21.4 million for the six months ended July 31, 1999.
Consulting and management service fees have grown primarily as a result
of continued demand for eFinancial Services as well as value priced
Revenue Enhancement consulting. We have expanded the use of value
priced engagements due to their improved margins as well as their
favorable reception from customers. Revenue Enhancement engagements
increased to $14.8 million for the quarter ended July 31, 2000 from
$6.2 million for the quarter ended July 31, 1999 and $20.5 million for
the six months ended July 31, 2000 from $9.3 million for the six months
ended July 31, 1999. Revenues related to value priced opportunities
tend to fluctuate period-to-period and are likely to fluctuate in
future periods.
SOFTWARE LICENSE FEES: Revenues from software license fees
decreased 35.7% to $1.8 million for the quarter ended July 31, 2000
from $2.8 million for the quarter ended July 31, 1999. Revenues from
software license fees increased 1.7% to $6.0 million for the six months
ended July 31, 2000 from $5.9 million for the six months ended July 31,
1999. Softness in software license fee growth for the first six months
is due to a carryover affect of Y2K, where customers delayed new
software decisions until their internal issues were fully addressed. We
also experienced delays in new licenses of our CheckFlow product.
Additionally, the migration of new and existing software products such
as eRM, eCashInventory and eiService are being licensed on an ASP
("Application Service Provider") model which will provide for recurring
revenue over an extended timeframe versus the traditional one-time
perpetual license fee.
SOFTWARE MAINTENANCE FEES: Revenues from software maintenance
fees increased 50% to $2.7 million for the quarter ended July 31, 2000
from $1.8 million for the quarter ended July 31, 1999. Revenues from
software maintenance fees increased 51.5% to $5.0 million for the six
months ended July 31, 2000 from $3.3 million for the six months ended
July 31, 1999. Increases in software maintenance has been driven by
increased software sales during the three months ended January 31, 2000
resulting in the growth of the number of customers and products under
maintenance contracts. Additionally, increases in software maintenance
fees have been driven by the acquisition of new products mainly within
the PaymentSolutions group with an existing install base.
SOFTWARE IMPLEMENTATION FEES: Revenues from software
implementation fees increased 91.7% to $2.3 million for the quarter
ended July 31, 2000 from $1.2 million for the quarter ended July 31,
1999. Revenues from software implementation fees increased 77.8% to
$4.8 million for the six months ended July 31, 2000 from $2.7 million
for the six months ended July 31, 1999. Increases in software
implementation fees have been driven by the increased sales level of
software licenses experienced during the three months ended January 31,
2000, resulting in a growth in the number of customers requiring
implementation services.
HARDWARE SALES: Revenues from hardware were $32,000 for the
quarter ended July 31, 2000 compared to revenues of $75,000 for the
quarter ended July 31, 1999. Revenues from hardware were $32,000 for
the six months ended July 31, 2000 compared to $197,000 for the six
months ended July 31, 1999. The Company sells hardware at the request
of its customers, but does not consider hardware sales to be a
meaningful part of its business.
15
<PAGE>
COST OF REVENUES
COST OF CONSULTING AND MANAGEMENT SERVICES: Cost of consulting
and management services increased 59.7% to $9.9 million for the quarter
ended July 31, 2000 from $6.2 million for the quarter ended July 31,
1999. Cost of consulting and management services increased 62.3% to
$18.5 million for the six months ended July 31, 2000 from $11.4 million
for the six months ended July 31, 1999. Cost of consulting and
management services as a percentage of consulting and management
service fees decreased to 45.5% for the three months ended July 31,
2000 from 47.3% for the three months ended July 31, 1999. Cost of
consulting and management services as a percentage of consulting and
management service fees decreased to 53.0% for the six months ended
July 31, 2000 from 53.5% for the six months ended July 31, 1999.
Increases in the cost of consulting and management services were due
primarily to increased costs associated with related personnel cost.
Reductions in the cost of consulting and management services as a
percentage of consulting and management services fees reflects
continued growth in value price engagements. 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 increased
215.8% to $1.2 million for the quarter ended July 31, 2000 from
$380,000 for the quarter ended July 31, 1999. Cost of software licenses
increased 183.0% to $2.4 million for the six months ended July 31, 2000
from $848,000 for the six months ended July 31, 1999. Cost of software
licenses as a percentage of software license fees increased to 67.3%
for the three months ended July 31, 2000 from 13.8% for the three
months ended July 31, 1999. Cost of the software licenses as a
percentage of software license fees increased to 39.5% for the six
months ended July 31, 2000 from 14.5% for the six months ended July 31,
1999. Costs of software licenses includes amortization costs relating
to capitalized software, as well as royalty costs associated with sales
of ePaymentSolutions and eCashSolutions software products. Increases in
cost of software licenses as a percentage of software license fees
reflect a decrease in software license fees. Additionally, an increase
in royalties paid of $220,000 resulting from changes in the mix of
products sold during the period. Finally, increases in amortization of
capitalized software costs of $640,000 relative to certain software
products purchased or reaching general release status during the three
months ended July 31, 2000.
COST OF SOFTWARE MAINTENANCE: Cost of software maintenance
increased 18.9% to $798,000 for the quarter ended July 31, 2000 from
$671,000 for the quarter ended July 31, 1999. Cost of software
maintenance remained unchanged at $1.3 million for the six month
periods ended July 31, 2000 and 1999, respectively. Cost of software
maintenance consists primarily of personnel costs associated with
providing customer support for software products sold and royalty
costs. Increases in costs associated with software maintenance reflect
an increase of royalty costs of $100,000 during the three months ended
July 31, 2000.
COST OF SOFTWARE IMPLEMENTATION: Cost of software
implementation increased 48.5% to $1.2 million for the quarter ended
July 31, 2000 from $808,000 for the quarter ended July 31, 1999. Cost
of software implementation increased 66.7% to $2.5 million for the six
months ended July 31, 2000 from $1.5 million for the six months ended
July 31, 1999. Cost of software implementation as a percentage of
related fees decreased to 53.6% for the quarter ended July 31, 2000
from 65.6% for the quarter ended July 31, 1999. Cost of software
implementation as a percentage of related fees decreased to 51.1% for
the six months ended July 31, 2000 from 54.4% for the six months ended
July 31, 1999. Cost of software implementation consists primarily of
personnel costs associated with implementation, training, and providing
customer support for software products sold. Increases in costs
associated with software implementation reflect increased personnel
costs to support increased revenue.
COST OF HARDWARE: Cost of hardware decreased to $25,000 for
the quarter ended July 31, 2000 from $60,000 for the quarter ended July
31, 1999. Cost of hardware decreased 80.7% to $31,000 for the six
months ended July 31, 2000 from $161,000 for the six months ended July
31, 1999. Decreases for the quarter and six months ended July 31, 2000
is reflective of reductions in the amount of hardware sold during the
quarter and six months period.
16
<PAGE>
OPERATING COSTS AND EXPENSES
SELLING GENERAL AND ADMINISTRATIVE: Selling general and
administrative expenses increased 44.3% to $8.8 million for the quarter
ended July 31, 2000 from $6.1 million for the quarter ended July 31,
1999. Selling general and administrative expenses increased 50.5% to
$16.4 million for the six months ended July 31, 2000 from $10.9 million
for the six months ended July 31, 1999. Selling, general and
administrative expenses generally consist of personnel costs associated
with selling, marketing, general management, software management
provision for doubtful accounts 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 our expanding
operations as well as costs associated with the acquisition of AIS and
Xport. Additionally an increase in the provision for doubtful accounts
was necessary to mitigate accounts receivable exposure from both
related parties and our banking customer base.
RESEARCH AND DEVELOPMENT: Research and development expenses
were unchanged at $1.4 million for the quarters ended July 31, 2000 and
1999, respectively. Research and development expenses decreased 11.1%
to $2.4 million for the six months ended July 31, 2000 from $2.7
million for the six months ended July 31, 1999. The decrease reflects a
lower rate of research and development spending particularly in the
three months ended April 30, 2000.
OTHER INCOME: Other income increased 18.4% to $374,000 for the
quarter ended July 31, 2000 from $316,000 for the quarter ended July
31, 1999. Other income increased 33.9% to $746,000 for the six months
ended July 31, 2000 from $557,000 for the six months ended July 31,
1999. 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 on hand during the
current quarter.
PROVISION FOR INCOME TAXES: The provision for income taxes is
based on the estimated annual effective tax rate, and includes federal
state and foreign income taxes. Our effective income tax rate was 38.0%
for the three months ended July 31, 2000 compared to 37.1% for the
three months ended July 31, 1999. Our effective income tax rate was
38.0% for the six months ended July 31, 2000 compared to 36.0% for the
six months ended July 31, 1999. Increases in the estimated annual
effective rate resulted from reductions in tax-exempt income as a
percent of total taxable income.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2000, we had $59.0 million of working capital,
including $21.9 million in cash and cash equivalents, as compared to
$56.5 million of working capital as of January 31, 2000, including
$26.0 million of cash and cash equivalents. Operating activities
provided $885,000 of available cash for the six months ended July 31,
2000 as compared to consuming $3.1 million for the six months ended
July 31, 1999, largely through growth in net income of $1.7 million,
increase of non-cash expenses of $2.8 million, growth in accounts
payable of $2.7 million, and offset by increase in accounts receivable
of $1.9 million.
Average days' sales outstanding fluctuate for a variety of
reasons, including the timing of billings specified by contractual
agreement, and receivables for expense reimbursements.
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>
July 31, 1999 169 155
October 31, 1999 177 160
January 31, 2000 131 119
April 30, 2000 142 128
July 31, 2000 123 112
</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 six months ended
July 31, 2000, of $5.8 million was used to purchase $1.7 million of
property and equipment and $5.3 million invested in the acquisition of
AIS and X-Port, offset by sales of $1.6 million of short-term
investments.
Cash provided by financing activities for the six months ended
July 31, 2000, was $793,000 and resulted from the exercise of stock
options.
Our future liquidity and capital requirements will depend upon
numerous factors. We believe our current cash and cash equivalents and
short-tern investment balances and cash generated from operations will
be sufficient to meet our operating and capital requirements through at
least the next twelve months. However, there can be no assurance that
we will not require additional financing within this time frame. Our
forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking
statement that involves risk and uncertainties, and actual results
could vary. Our failure to raise capital when needed could have a
material adverse effect on our business, financial condition and
results of operation.
18
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" (SFAS 133). SFAS 133, as amended, is effective for us
beginning February 1, 2001. We do not currently utilize derivative
financial instruments. Therefore, we do not expect that the adoption of
SFAS 133 will have a material impact on our results of operation or
financial position.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has issued Statement of
Position ("SOP") No. 98-9, "MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS" ("SOP 98-9"), which
amends certain provisions of Statement of Position No. 97-2 "SOFTWARE
REVENUE RECOGNITION" ("SOP 97-2"). SOP 98-9 requires the use of the
residual method when vendor specific objective evidence of fair value
does not exist for one or more delivered elements in an arrangement,
but there is vendor specific objective evidence of the fair values of
all undelivered elements in a multiple element arrangement. SOP 98-9
was effective for us on February 1, 2000 and did not materially impact
our operating results for the three and six months ended July 31, 2000.
In December 1999, the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). This bulletin summarizes certain
views of the staff of the Securities and Exchange Commission (the
"Staff") on applying generally accepted accounting principals to
revenue recognition in financial statements. In June 2000, the Staff
issued Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements". SAB 101B delays the
implementation of SAB 101 until the quarter ended January 31, 2001.
Based on our initial evaluation, we do not expect the application of
SAB 101, as amended, to have a material impact on our financial
position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES. We invest our cash in a variety of financial
instruments, primarily tax advantaged variable rate and fixed rate
obligations of state and local municipalities, and educational entities
and agencies. These investments are denominated in U.S. dollars.
We account for our investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of
the cash equivalents and short-term investments are treated as
available-for-sale under SFAS 115.
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a
rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these
factors, our future investment income may fall short of expectations
due to changes in interest rates or we may suffer losses in principal
if forced to sell securities which have seen a decline in market value
due to changes in interest rates. Our investment securities are held
for purposes other than trading. The weighted-average interest rate on
investment securities at July 31, 2000 was 4.9%. Amortized costs of
short-term investments held at July 31, 2000 was $12.0 million, which
approximates fair value.
19
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and Knowledge Based Systems, Inc. ("KBSI") began to jointly
develop the CashForecaster suite of products in 1996. KBSI is our
"Preferred Developer" of Synthetic Algorithm-based components for
CashForecaster. CashForecaster is the only product that we jointly
developed with KBSI. Other programming services were provided by KBSI
on an hourly basis for certain of our other cash inventory management
software products.
We and KBSI have a dispute over ownership rights to the jointly
developed products and other products for which KBSI has provided
programming services. We have been attempting to enforce the existing
development contract with KBSI or establish a new contractual
arrangement. Due to a lack of progress on settling our dispute with
KBSI, we filed a lawsuit in the State District Court in Dallas County,
Texas on August 4, 2000 seeking injunctive relief to prevent KBSI from
using or disclosing our confidential information and trade secrets and
to prevent KBSI from failing to perform certain contractual
obligations. In addition to the filing of the lawsuit, we also
initiated arbitration proceedings to arbitrate certain contractual
issues under our contract with KBSI and damages relating to these
issues.
On September 1, 2000 KBSI removed the lawsuit to the United
States District Court for the Northern District of Texas and has since
filed an answer and counterclaim. In its counterclaim KBSI seeks
declaratory relief to the effect that it owns certain cash inventory
management software and source codes, which includes the CashForecaster
suite of products. KBSI also alleges copyright infringement, breach of
contract, fraud and tortious interference with contract for which it
seeks unspecified actual and exemplary monetary damages.
We intend to vigorously pursue our claims and defend KBSI's
counterclaims. This lawsuit and the related arbitration are not
expected to have a material effect on our financial position or results
of operations.
We are pursuing several initiatives to mitigate the risk of the
KBSI relationship. These initiatives include (1) development of new
cash forecasting products on a web-enabled platform, and (2)
replacement of KBSI as the provider of the algorithm-based components
of cash forecasting products.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on June 20, 2000, four
proposals were adopted by our stockholders: (1) the election of three
directors as Class II directors for terms expiring at the Annual
Meeting of Stockholders in 2003 as described in our Proxy Statement for
the Annual Meeting; (2) the ratification of the appointment of Ernst
Young LLP as independent certified public accountants of the Company
for the fiscal year ending January 31, 2001; (3) the approval of an
amendment to our Certificate of Incorporation changing our name to
"Carreker Corporation"; and (4) the approval to amend and restate the
Company's 1994 Long Term Incentive Plan to (a) make an additional
1,000,000 shares of Common Stock available for issuance under the Plan
and (b) change the formula for calculating the annual increase in the
number of shares of Common Stock available under the Plan.
The number of shares cast for and against as well as the number
of abstentions as to each of these matters (other than the election of
directors) are as follows:
<TABLE>
<CAPTION>
Proposal Shares for Shares Against Abstentions
-------- ---------- -------------- -----------
<S> <C> <C> <C>
Ratification of accounts 16,822,369 5,062 5,725
Amendment to Certificate of Incorporation 14,447,786 2,381,595 3,775
Amendment to 1994 Long Term Incentive Plan 11,096,992 2,030,373 336,620
</TABLE>
ITEM 5. OTHER INFORMATION
On February 10,2000 we acquired all of the outstanding stock of
Automated Integrated Solutions, Inc., an Ontario Company ("AIS") for
$2.3 million in cash and additional cash payments to AIS shareholders
of up to $2.0 million based on achievement of specified revenue targets
over three years. The transaction was accounted for as a purchase
transaction with $2.3 million of the purchase price allocated to
Capitalized Software.
On May 29,2000 we acquired all of the outstanding stock of X-Port
Software, Inc., an Ontario Company ("X-Port") for $3.0 million in cash.
The transaction was accounted for as a purchase transaction with
approximately $3.0 million of the purchase price allocated to
Capitalized Software.
In connection with the acquisition of X-Port, we entered into a
separate agreement with the former owner of X-Port for consulting and
development services through 2003. The payments for consulting total
$616,000 over the three year period and the development services fees
total $1.0 million with an additional $400,000 if certain project
milestones are met.
Effective July 17, 2000 Ronald R. Antinori resigned from the
Company's Board of Directors to pursue other opportunities. The vacancy
on the Board created by Mr. Antinori's resignation has not been filled
at the present time.
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
21
<PAGE>
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 CORPORATION
By: /s/ John D. Carreker, Jr. Date: September 14, 2000
------------------------------------------ ------------------------
John D. Carreker, Jr.
Chairman of the Board and
Chief Executive Officer
By: /s/ Terry L. Gage Date: September 14, 2000
------------------------------------------ ------------------------
Terry L. Gage
Executive Vice President and
Chief Financial Officer
22
