<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, 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
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(Exact name of registrant as specified in its charter)
Delaware 75-1622836
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4055 Valley View Lane, #1000
Dallas, Texas 75244
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(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 -- 21,207,994 shares as of November 30, 2000.
<PAGE>
CARREKER CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
at October 31, 2000 and January 31, 2000 3
Condensed Consolidated Statements of Operations
for the three and nine months ended October 31, 2000
and 1999 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended October 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 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARREKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 31, January 31,
ASSETS 2000 2000
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 24,821 $ 25,973
Short term investments 16,087 13,563
Accounts receivable, net 38,284 30,843
Prepaid expenses and other current assets 2,200 733
Deferred income taxes 1,984 831
--------------- ---------------
Total current assets 83,376 71,943
Property and equipment, net of accumulated depreciation 5,923 4,197
Software costs capitalized, net of accumulated amortization 9,230 6,349
Other assets 352 334
--------------- ---------------
Total assets $ 98,881 $ 82,823
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,847 $ 2,089
Accrued compensation and benefits 2,817 2,030
Other accrued expenses 3,704 2,583
Note payable 1,154 --
Income taxes payable 2,422 2,310
Deferred revenue 7,770 6,401
--------------- ---------------
Total current liabilities 19,714 15,413
Deferred income taxes 1,398 2,004
--------------- ---------------
Total liabilities 21,112 17,417
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000 shares
authorized, none issued ---- ----
Common Stock, $.01 par value, 100,000 shares authorized,
19,173 and 18,540 shares issued, respectively
192 185
Additional paid-in capital 48,152 44,564
Deferred compensation (65) (183)
Retained earnings 29,490 20,846
Less treasury stock, at cost:
1 common shares, as of January 31, 2000 -- (6)
--------------- ---------------
Total stockholders' equity 77,769 65,406
--------------- ---------------
Total liabilities and stockholders' equity $ 98,881 $ 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 Nine Months Ended
October 31, October 31,
--------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Consulting fees $17,620 $15,072 $52,496 $36,436
Software license fees 5,712 2,692 11,725 8,546
Software maintenance fees 2,970 1,677 7,965 4,943
Software implementation fees 2,455 1,391 7,262 4,066
Hardware and other fees -- 34 32 230
----------- ----------- ------------ ------------
Total revenues 28,757 20,866 79,480 54,221
COSTS OF REVENUES:
Consulting fees 9,658 8,044 28,144 19,477
Software license fees 1,594 394 3,984 1,241
Software maintenance fees 800 689 2,133 2,025
Software implementation fees 1,583 542 4,039 1,996
Hardware and other fees 8 23 25 183
----------- ----------- ------------ ------------
Total cost of revenues 13,643 9,692 38,325 24,922
----------- ----------- ------------ ------------
GROSS PROFIT 15,114 11,174 41,155 29,299
OPERATING COSTS AND EXPENSES:
Selling, general and administrative 7,816 6,907 24,235 17,839
Research and development 1,625 1,313 4,054 3,987
----------- ----------- ------------ ------------
Total operating costs and expenses 9,441 8,220 28,289 21,826
Income from operations 5,673 2,954 12,866 7,473
Other income 330 223 1,076 780
----------- ----------- ------------ ------------
Income before provision for income taxes 6,003 3,177 13,942 8,253
Provision for income taxes 2,281 1,144 5,298 2,971
----------- ----------- ------------ ------------
Net income $3,722 $2,033 $ 8,644 $ 5,282
=========== =========== ============ ============
Basic earnings per share $ 0.20 $ 0.11 $ 0.46 $ 0.29
=========== =========== ============ ============
Diluted earnings per share $ 0.19 $ 0.11 $ 0.44 $ 0.28
=========== =========== ============ ============
Shares used in computing basic earnings per share 18,825 18,499 18,624 18,448
Shares used in computing diluted earnings per share 20,036 18,963 19,640 18,961
</TABLE>
See accompanying notes.
4
<PAGE>
CARREKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 8,644 $ 5,282
Adjustments to reconcile net income to net
cash used in operating activities:
Amortization of capitalized software 2,771 875
Depreciation and amortization of property and equipment 1,857 1,693
Amortization of deferred compensation 196 236
Deferred income taxes (1,777) 837
Provision for doubtful accounts 1,176 133
Loss on sale of assets 9 --
Changes in assets and liabilities:
Accounts receivable (8,617) (12,699)
Prepaid expenses and other (854) (575)
Accounts payable and accrued expenses 1,301 180
Taxes payable 112 1,237
Deferred revenue 1,331 144
------------ ------------
Net cash provided by (used in) operating activities 6,149 (2,657)
INVESTING ACTIVITIES:
Purchase of short-term investments (23,244) --
Sales and maturities of short-term investments 20,720 4,172
Acquisition of AIS and XPORT, net of cash acquired (5,268) --
Purchase of property and equipment and leasehold improvements (2,381) (2,919)
Computer software costs capitalized (358) (2,566)
------------ ------------
Net cash used in investing activities (10,531) (1,313)
FINANCING ACTIVITIES:
Purchase of treasury stock -- (574)
Proceeds from stock options exercised 3,523 248
Repayment of note payable (293) --
------------ ------------
Net cash provided by (used in) financing activities 3,230 (326)
Net decrease in cash and cash equivalents (1,152) (4,296)
Cash and cash equivalents at beginning of period 25,973 20,701
------------ ------------
Cash and cash equivalents at end of period $24,821 $16,405
============ ============
Supplemental cash flow information:
Cash paid for interest $ 30 $ ----
============ ============
Cash paid for income taxes $ 7,016 $ 886
============ ============
Non-cash financing activities:
Internal use software financed through issuance of note payable $ 1,451 --
============ ============
</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 October 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 October 31, 2000, substantially 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 nine months ended October
31, 2000 and 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 3,722 $ 2,033 $ 8,644 $ 5,282
========== ========== ========== ==========
Weighted average shares outstanding 18,825 18,499 18,624 18,448
========== ========== ========== ==========
Basic earnings per share $ 0.20 $ 0.11 $ 0.46 $ 0.29
========== ========== ========== ==========
Diluted earnings per share:
Net income $ 3,722 $ 2,033 $ 8,644 $ 5,282
========== ========== ========== ==========
Weighted average shares outstanding 18,825 18,499 18,624 18,448
Assumed conversion of employee
stock options 1,211 464 1,016 513
---------- ---------- ---------- ----------
Shares used in diluted earnings per share
calculation 20,036 18,963 19,640 18,961
========== ========== ========== ==========
Diluted earnings per share $ 0.19 $ 0.11 $ 0.44 $ 0.28
========== ========== ========== ==========
</TABLE>
7
<PAGE>
6. BUSINESS SEGMENTS
The tables below show revenues and income (loss) from operations
for the periods indicated for our four reportable business segments:
Revenue Enhancement, PaymentSolutions, Enterprise Solutions and
CashSolutions. Our customer projects are sold on a solution basis, so
it is necessary to break them down by segment and allocate accordingly.
Included in "Corporate Unallocated" are costs related to selling and
marketing, unallocated corporate overhead expense and general software
management. Business segment results include costs for research and
development as well as product royalty expense.
<TABLE>
<CAPTION>
Three months ended October 31, 2000
------------------------------------------------------------------------------------------
Revenue Enterprise Corporate
Enhancement PaymentSolutions Solutions CashSolutions Unallocated Total
------------------ ---------------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Consulting fees.......................... $ 9,556 $ 645 $ 7,392 $ 27 $ -- $ 17,620
Software license fees.................... -- 4,636 -- 1,076 -- 5,712
Software maintenance fees................ -- 2,270 -- 700 -- 2,970
Software implementation fees............. -- 1,819 -- 636 -- 2,455
Hardware and other fees.................. -- -- -- -- -- --
-------------- ---------------- ------------ -------------- ----------- ----------
Total revenues........................ $ 9,556 $ 9,370 $ 7,392 $ 2,439 $ -- $ 28,757
============== ================ ============ ============== =========== ==========
Income (loss) from operations.............. $ 6,593 $ 1,305 $ 2,649 $ (317) $ (4,557) $ 5,673
============= ================ ============ ============== ============ ==========
<CAPTION>
Three months ended October 31, 1999
------------------------------------------------------------------------------------------
Revenue Enterprise Corporate
Enhancement PaymentSolutions Solutions CashSolutions Unallocated Total
------------------ ---------------- ------------ -------------- ----------- ----------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Consulting fees.......................... $ 6,365 $ 1,529 $ 6,137 $ 1,041 $ -- $ 15,072
Software license fees.................... -- 1,899 -- 793 -- 2,692
Software maintenance fees................ -- 1,295 -- 382 -- 1,677
Software implementation fees............. -- 1,084 -- 307 -- 1,391
Hardware and other fees.................. -- 34 -- -- -- 34
-------------- ---------------- ------------ -------------- ----------- ----------
Total revenues........................ $ 6,365 $ 5,841 $ 6,137 $ 2,523 $ -- $ 20,866
============== ================ ============ ============== =========== ==========
Income (loss) from operations.............. $ 4,428 $ (733) $ 2,526 $ 803 $ (4,070) $ 2,954
============= ================ ============ ============== ============ ==========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Nine months ended October 31, 2000
------------------------------------------------------------------------------------------
Revenue Enterprise Corporate
Enhancement PaymentSolutions Solutions CashSolutions Unallocated Total
------------------ ---------------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Consulting fees.......................... $ 30,040 $ 2,973 $ 19,383 $ 100 $ -- $ 52,496
Software license fees.................... -- 9,226 -- 2,499 -- 11,725
Software maintenance fees................ -- 6,025 -- 1,940 -- 7,965
Software implementation fees............. -- 4,992 -- 2,270 -- 7,262
Hardware and other fees.................. -- 32 -- -- -- 32
-------------- ---------------- ------------ -------------- ----------- ----------
Total revenues........................ $ 30,040 $ 23,248 $ 19,383 $ 6,809 $ -- $ 79,480
============== ================ ============ ============== =========== ==========
Income (loss) from operations.............. $ 21,393 $ (977) $ 6,519 $ (293) $(13,776) $ 12,866
============== ================ ============ ============== ============ ==========
<CAPTION>
Nine months ended October 31, 1999
------------------------------------------------------------------------------------------
Revenue Enterprise Corporate
Enhancement PaymentSolutions Solutions CashSolutions Unallocated Total
------------------ ---------------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Consulting fees.......................... $ 15,617 $ 4,418 $ 13,756 $ 2,645 $ -- $ 36,436
Software license fees.................... -- 5,903 -- 2,643 -- 8,546
Software maintenance fees................ -- 3,848 -- 1,095 -- 4,943
Software implementation fees............. -- 3,336 -- 730 -- 4,066
Hardware and other fees.................. -- 230 -- -- -- 230
-------------- ---------------- ------------ -------------- ----------- ----------
Total revenues........................ $ 15,617 $ 17,735 $ 13,756 $ 7,113 $ -- $ 54,221
============== ================ ============ ============== =========== ==========
Income (loss) from operations.............. $ 11,083 $ (396) $ 4,909 $ 2,078 $(10,201) $ 7,473
============= ================ ============ ============== ============ ==========
</TABLE>
Revenues of $10,589,000 from three major customers accounted for
36.8% of total revenues in the three months ended October 31, 2000.
Revenues of $11,766,000 from three major customers accounted for 56.4%
of total revenues in the three months ended October 31, 1999. Revenues
of $41,644,000 from our five largest customers accounted for 52.4% of
total revenues for the nine months ended October 31, 2000. Revenues of
$33,567,000 from our five largest customers accounted for 61.9% of
total revenues for the nine months ended October 31, 1999.
7. 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 which 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
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8. SUBSEQUENT EVENT
On November 3, 2000, the Securities and Exchange Commission
declared effective a Registration Statement on Form S-3 relating to our
public offering of 2,000,000 shares of common stock, at a price of
$17.00 per share. In connection with this offering, existing
stockholders sold an additional 3,175,000 shares. The $32,011,000 of
net proceeds that we received will be used for working capital, general
corporate purposes and possible future acquisitions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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/A for the fiscal year ended January 31, 2000, on
file with the Commission. Such risks include, without limitation, the
risks associated with changes in the banking industry's demand for our
solutions, significant customer concentration and the potential loss of
a significant customer, variations in operating results, reduction in
revenues due to pricing arrangements, the infrequent use of long-term
contracts with customers, the focus of our solutions on e-finance
opportunities and the chance that they will not be accepted in the
marketplace, risks associated with rapid growth in our business, the
inability to attract and retain key personnel, existence of defects or
errors in our software, ability to develop new technologies and
services, ability to meet the changing needs of customers, dependence
on third-party Internet providers and the Internet, intense
competition, risks associated with strategic alliances and
acquisitions, inability to protect our proprietary rights, infringement
and other claims and related expenses, reliance on third-party
licenses, volatility in our stock price, exposure to risks associated
with international operations, reliance on independent contractors,
governmental regulation and legal uncertainties and anti-takeover
provisions in our charter documents and under applicable law. 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/A) and elsewhere
in this report.
OVERVIEW
We are a leading provider of integrated consulting and
software solutions that enable banks to identify and implement
e-finance solutions, 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 we subsequently integrated
software products into our banking solutions. With our acquisition of
Antinori Software, Inc. in 1997, we were able to significantly enhance
our portfolio of software products. Additionally, we acquired Genisys
Operations, Inc. in January 1999, Automated Integrated Solutions, Inc.
in February 2000 and X-Port Software, Inc. in May 2000, each of which
provided incremental added value to our product offerings. We accounted
for the acquisitions of Antinori and Genisys as a pooling of interests.
The acquisitions of Automated Integrated Solutions and X-Port Software
were accounted for as purchases.
We derive our revenues from consulting and management service
fees, software license fees, software maintenance fees, software
implementation fees 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.
We seek to establish long-term relationships with our
customers that will lead to on-going projects utilizing our solutions.
We are typically retained to perform one or more discrete projects for
10
<PAGE>
a customer, and we use these opportunities to extend our solutions into
additional areas of the customer's operations. To this end, a
significant portion of our current revenues is derived from customers
who were customers in prior years, and we are therefore dependent to a
significant degree on our ability to maintain our existing
relationships with these customers.
CONSULTING FEES. We employ three primary pricing methods in
connection with our delivery of consulting services. First, we may
price our delivery of consulting services on the basis of time and
materials, in which case the customer is charged agreed daily rates
for services performed and out-of-pocket expenses. In this case, we
are generally paid fees and related amounts on a monthly basis, and we
recognize revenues as the services are performed. Second, we may
deliver consulting services on a fixed-price basis. In this case, we
are paid on a monthly basis or pursuant to an agreed upon payment
schedule, and we recognize revenues paid on a percentage-of-completion
basis. We recognize any anticipated losses on a fixed-price contract
when estimable. Third, we may deliver consulting services pursuant to a
value-pricing contract with the customer. In this case, we are paid,
on an agreed upon basis with the customer, either a specified
percentage of (1) the projected increased revenues and/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 (2) 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 maximum, if any is agreed to, on the total amount of
payments to be made to us. These contracts typically provide for us to
receive from 7% to 30% of the projected or actual increased revenues
and/or decreased costs, with payments to be made to us pursuant to an
agreed upon schedule ranging from one to twelve months in length. We
recognize revenues generated from consulting services in connection
with value-priced contracts based upon projected results only upon
completion of all services and agreement upon the actual fee to be
paid (even though billings for these 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 and/or savings,
we recognize revenues only upon completion of all services and as the
amounts of actual revenues or savings are confirmed by the customer.
We typically must first commit time and resources to develop
projections associated with value-pricing contracts before a bank will
commit to purchase our solutions, and we therefore assume the risk of
making these commitments with no assurance that the bank will purchase
the solutions. We expect that value-pricing contracts will account for
an increasing percentage of our revenues in the future. In addition, as
a consequence of the shift toward the use of more value-pricing
contracts and due to the revenue recognition policy associated with
those contracts, our results of operations will likely fluctuate
significantly from period to period.
Regardless of the pricing method employed by us in a given
contract, we are typically reimbursed on a monthly basis for
out-of-pocket expenses incurred on behalf of our customers, which
expenses are netted against reimbursements for consolidated financial
statement reporting purposes.
SOFTWARE LICENSE FEES. In the event that a software license is
sold either together with consulting services or on a stand-alone
basis, we are usually paid software license fees in one or more
installments, as provided in the customer's contract. We recognize
software license revenues in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2, "Software
Revenue Recognition." Under SOP 97-2, we recognize software license
revenues upon execution of a contract and delivery of software,
provided that the license fee is fixed and determinable, no significant
production, modification or customization of the software is required,
and collection is considered probable by management. Software licenses
that are priced in this fashion continue for an indefinite period, and
there is no provision for any renewal fees.
Although substantially all of our current software licenses
provide for a fixed price license fee, some of our payment
electronification licenses instead provide for usage fees, in which
case fees are recognized and due on a monthly basis. Software licenses
that include a usage license fee have a fixed term. We expect to
increase this practice of charging license fees on a usage basis in the
future as part of our strategy to increase recurring revenues and
smooth our period-to-period revenues.
11
<PAGE>
SOFTWARE MAINTENANCE FEES. In connection with our sale of a
software license, a customer may elect to purchase software maintenance
services. Most of the customers that purchase software licenses from us
also purchase software maintenance services, which typically are
renewed annually. We charge an annual maintenance fee, which is
typically a percentage of the initial software license fee. The annual
maintenance fee generally is paid to us at the beginning of the
maintenance period, and we recognize these revenues ratably over the
term of the related contract.
SOFTWARE IMPLEMENTATION FEES. In connection with our sale of a
software license, a customer may elect to purchase software
implementation services, including software enhancements, patches and
other software support services. Most of the customers that purchase
software licenses from us also purchase software implementation
services. We price our implementation services on a time-and-materials
or on a fixed-price basis, and we recognize the related revenues as
services are performed.
HARDWARE AND OTHER SALES. We sell our computer hardware and
supplies in tandem with the delivery of related services or software
and on the basis of our cost plus a specified percentage. We recognize
revenues upon shipment of the hardware to the customer. We sell
hardware at the request of our customers but do not consider hardware
sales to be a meaningful part of our business.
In accordance with generally accepted accounting principles,
we capitalize software development costs incurred in developing a
product once technological feasibility of the product has been
determined. These capitalized software development costs also include
amounts paid for software that is purchased and that has reached
technological feasibility. We amortize capitalized software development
costs on the basis of each product's projected revenues or on a
straight-line basis over the remaining economic life of the product,
which is generally three to four years. At October 31, 2000, our
capitalized software development costs, net of accumulated
amortization, were $9.2 million, which we will amortize over the next
14 quarterly periods.
PRODUCTS AND SERVICES: We offer a wide range of innovative
solutions that enable banks to identify and implement e-finance
solutions, increase their revenues, reduce their costs and enhance
their delivery of customer services. By combining our consulting
services with our proprietary technology applications, we help banks
improve their current operations and provide access to the benefits of
the Internet economy. Our offerings, uniquely tailored to the needs of
the banking industry, fall into four complementary groups. These
groups, Revenue Enhancement, PaymentSolutions, Enterprise Solutions and
CashSolutions, we believe offer products and services that, when
combined, deliver optimal benefits.
REVENUE ENHANCEMENT. Revenue Enhancement consulting services
enable banks to improve workflows, internal operational processes and
customer pricing structures. Our Revenue Enhancement group offers
consulting services that assess the existing policies and procedures of
banks to increase their revenue streams and reduce interest and
operating expenses. These assessments generally focus on a variety of a
bank's operations, including deposits, treasury management, commercial
lending, credit cards, automobile finance, mortgage and other consumer
lending operations. Revenue Enhancement engagements typically take four
to seven months to complete and we believe are relatively non-intrusive
to the client.
12
<PAGE>
PAYMENTSOLUTIONS. PaymentSolutions addresses the needs of a
critical function of banks, the processing of payments made by one
party to another. This includes presentment of checks in paper and
electronic form, determination of the availability of funds,
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). PaymentSolutions approaches these key
functions in the context of improving operational efficiency and a
gradual transition from paper to electronic-based payment systems.
Specific solutions within this group include:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SOLUTION DESCRIPTION PRODUCTS OFFERED
<S> <C> <C>
FraudLink Provides a comprehensive, automated approach to FraudLink On-us, FraudLink Deposit, FraudLink Kite,
solving the growing problem of fraudulent financial FraudLink PositivePay, FraudLink eTracker,
transactions, including bad checks drawn on banks FraudLink PC, FraudLink Hold
for payment, fraudulent items deposited with banks
for credit and check kiting.
eXceptions Reduces the number of exceptions that banks CheckFlow 1st Edition, Innovasion, Research and
experience, while using technology to transform Adjustments
traditionally labor-intensive bank operations into
efficient elements of the total e-payment
transaction chain. It features a unique combination
of an automated check research, photo referral and
adjustment solutions, together with a flexible
workflow engine.
eRM Provides tools for customer relationship management eRM Exceptions Management, eRM Risk Management, eRM
in an e-finance environment through a web-enabled Treasury Services, eRM Image Requestor
decision support system that incorporates exception
management, risk management, treasury services and
document image archival and retrieval.
eTrac Offers an automated track and trace system designed Receive Sentry, Records
to monitor items from the time they enter a bank's
processing stream to final disposition, which
enables a bank to improve labor productivity by
channeling resources to the place they are most
needed.
eInform Focuses on performance-measurement by using the eiLumen, eiPerform, eiStats, Super Query, eiMicr,
historical data generated by eTrac through which eiQuality
end-users can analyze historical data to generate
key performance indicators, item processing volume
data, productivity statistics and quality control
benchmarks.
eTransactions Enables banks to transition away from paper-based CheckLink, CheckLink PC, Deposit Manager, Branch
payment systems to electronic by automating key Truncation Management, Cnotes
elements of the processing stream as well as
improving a bank's yield from float management. The
aim of this product and service 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.
Float Management Focuses on funding requirements and overall FLOAT ANALYSIS SYSTEM, FLOAT PRICING SYSTEM,
profitability by properly managing a bank's float CONSULTING
through float analysis, pricing and a comprehensive
consulting practice to improve profitability,
13
<PAGE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SOLUTION DESCRIPTION PRODUCTS OFFERED
<S> <C> <C>
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.
Recon Solutions Improves efficiency and control over the daily Bankrec
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 an automated reconciliation software,
Bankrec-TM-Corporate, to provide significant gains
in efficiency and control.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ENTERPRISE SOLUTIONS. Enterprise Solutions provides
conversion, consolidation and integration consulting services and
products on a bank-wide basis. These services and products are
particularly in demand in the context of continuing consolidation
activity in the banking industry and the pressure by customers on banks
to define and implement their e-finance strategies. Key elements of
this group include:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SOLUTION DESCRIPTION PRODUCTS OFFERED
<S> <C> <C>
Enterprise Solutions Offers customized, bank-wide conversions, Project Management, eSolutions, Integration,
consolidation and integration consulting solutions Process Optimization, Line of Business Consulting
in areas beyond payments systems, including
consulting and project management services and IT
consulting for various projects.
Strategic Services Assists customers in planning and implementing a BVIP, Customer Experience Consulting, Strategy
total e-finance and payment strategy. Consulting
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
CASHSOLUTIONS. CashSolutions optimizes the inventory
management of a bank's cash-on-hand, including managing how much is
needed, when it is needed and where it is needed. We believe our
solutions 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. Specific
solutions within this group include:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SOLUTION DESCRIPTION PRODUCTS OFFERED
<S> <C> <C>
eiService Advances ATM monitoring and management through the eiManager, eiGateway, eiForecaster
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.
eCashInventory Reduces the amount of non-earning assets required Cash Forecaster, Cash Tracker, Reserve Link,
in reserve accounts and as cash-on-hand to meet Reserve LinkPlus
operating needs. Using both technology and process
reengineering, it provides management tools for
forecasting, tracking and optimizing a bank's
inventory of currency. This group of solutions
frees underutilized money for more productive uses.
Transportation Reduces armored car transportation costs incurred Optimizer, Consulting Services
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.
eCashPro Reduces transaction cost of centralized currency eVaultMaster II, eDepositMaster, eVaultForecaster
and ATM depositing processing, typically provides
significant cash reductions throughout the vault
network, establishes a standardized inventory
measurement process and allows a reduction in the
number of branch and vault employees, as well as
improves Internet-based customer reporting.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<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
October 31, October 31,
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Consulting fees 61.3 % 72.2 % 66.1 % 67.2 %
Software license fees 19.9 12.9 14.8 15.8
Software maintenance fees 10.3 8.0 10.0 9.1
Software implementation fees 8.5 6.7 9.1 7.5
Hardware and other fees -- .2 -- .4
------------- ------------ ------------- ------------
Total revenues 100.0 100.0 100.0 100.0
Costs of revenues:
Consulting fees 33.5 38.5 35.4 36.0
Software license fees 5.6 1.9 5.0 2.3
Software maintenance fees 2.8 3.3 2.7 3.7
Software implementation fees 5.5 2.6 5.1 3.7
Hardware and other fees -- .1 -- .3
------------- ------------ ------------- ------------
Total cost of revenues 47.4 46.4 48.2 46.0
------------- ------------ ------------- ------------
Gross profit 52.6 53.6 51.8 54.0
------------- ------------ ------------- ------------
Operating costs and expenses:
Selling general and administrative 27.2 33.1 30.5 32.9
Research and development 5.7 6.3 5.1 7.4
------------- ------------ ------------- ------------
Total operating costs and expenses 32.9 39.4 35.6 40.3
Income from operations 19.7 14.2 16.2 13.7
Other income (expense) 1.1 1.0 1.4 1.5
------------- ------------ ------------- ------------
Income before provision for income taxes 20.8 15.2 17.6 15.2
Provision from income taxes 7.9 5.5 6.7 5.5
------------- ------------ ------------- ------------
Net income 12.9 % 9.7 % 10.9 % 9.7 %
============= ============ ============= ============
</TABLE>
16
<PAGE>
REVENUES
REVENUES: Our total revenues increased 37.8% to $28.8 million
for the quarter ended October 31, 2000 from $20.9 million for the
quarter ended October 31, 1999. The Company's total revenues increased
46.6% to $79.5 million for the nine months ended October 31, 2000 from
$54.2 million for the nine months ended October 31, 1999.
CONSULTING FEES: Revenues from consulting fees increased
16.9% to $17.6 million for the quarter ended October 31, 2000 from
$15.1 million for the quarter ended October 31, 1999. Revenues from
consulting fees increased 44.1% to $52.5 million for the nine months
ended October 31, 2000 from $36.4 million for the nine months ended
October 31, 1999. Consulting fees have grown primarily as a result of
continued demand for Enterprise Solutions as well as value-priced
Revenue Enhancement services. Enterprise Solutions revenues increased
from $13.8 million for the nine months ended October 31, 1999 to
$19.4 million for the nine months ended October 31, 2000. Revenue
Enhancement revenues increased from $15.6 million for the nine months
ended October 31, 1999 to $30.0 million for the nine months ended
October 31, 2000. The increase in consulting fees resulted from
expanded 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.
SOFTWARE LICENSE FEES: Revenues from software license fees
increased 112.2% to $5.7 million for the quarter ended October 31, 2000
from $2.7 million for the quarter ended October 31, 1999. Revenues from
software license fees increased 37.2% to $11.7 million for the nine
months ended October 31, 2000 from $8.5 million for the nine months
ended October 31, 1999. For the first six months of 2000, we
experienced a softness in our software license fee growth due to a
carryover affect of Year 2000, where customers delayed new software
decisions until their Year 2000 issues were fully addressed. In the
three months ended October 31, 2000 this affect decreased, particularly
in our PaymentSolutions business segment. Software license revenues
were generated in the eXceptions and FraudLink products.
SOFTWARE MAINTENANCE FEES: Revenues from software maintenance
fees increased 77.1% to $3.0 million for the quarter ended October 31,
2000 from $1.7 million for the quarter ended October 31, 1999. Revenues
from software maintenance fees increased 61.1% to $8.0 million for the
nine months ended October 31, 2000 from $4.9 million for the nine
months ended October 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 that were already
subject to maintenance contracts and by annual rate increases.
SOFTWARE IMPLEMENTATION FEES: Revenues from software
implementation fees increased 76.5% to $2.5 million for the quarter
ended October 31, 2000 from $1.4 million for the quarter ended October
31, 1999. Revenues from software implementation fees increased 78.6% to
$7.3 million for the nine months ended October 31, 2000 from $4.1
million for the nine months ended October 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: There were no revenues from hardware for the
quarter ended October 31, 2000 compared to revenues of $34,000 for the
quarter ended October 31, 1999. Revenues from hardware were $32,000 for
the nine months ended October 31, 2000 compared to $230,000 for the
nine months ended October 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.
17
<PAGE>
COST OF REVENUES
COST OF CONSULTING: Cost of consulting increased 20.1% to
$9.7 million for the quarter ended October 31, 2000 from $8.0 million
for the quarter ended October 31, 1999. Cost of consulting increased
44.5% to $28.1 million for the nine months ended October 31, 2000 from
$19.5 million for the nine months ended October 31, 1999. Cost of
consulting as a percentage of consulting fees increased to 54.8% for
the three months ended October 31, 2000 from 53.4% for the three
months ended October 31, 1999. Cost of consulting as a percentage of
consulting fees increased to 53.6% for the nine months ended
October 31, 2000 from 53.5% for the nine months ended October 31, 1999.
Increases in the cost of consulting were due primarily to increased
costs associated with related personnel cost. Cost of consulting
consists primarily of personnel costs associated with time and material
contracts and value priced efforts.
COST OF SOFTWARE LICENSES: Cost of software licenses increased
304.6% to $1.6 million for the quarter ended October 31, 2000 from
$394,000 for the quarter ended October 31, 1999. Cost of software
licenses increased 221.0% to $4.0 million for the nine months ended
October 31, 2000 from $1.2 million for the nine months ended October
31, 1999. Cost of software licenses as a percentage of software license
fees increased to 27.9% for the three months ended October 31, 2000
from 14.6% for the three months ended October 31, 1999. Cost of the
software licenses as a percentage of software license fees increased to
34.0% for the nine months ended October 31, 2000 from 14.5% for the
nine months ended October 31, 1999. Costs of software licenses includes
amortization costs relating to capitalized software, as well as royalty
costs associated with sales of PaymentSolutions and CashSolutions
software products. Increases in the costs of software licenses is
largely due to an increase of $800,000 of software amortization during
the three months ended October 31, 2000 and a $1.9 million increase for
the nine months ended October 31, 2000. Additionally, software
royalties increased $400,000 in the three months ended October 31, 2000
and $800,000 during the nine months ended October 31, 2000. The
increase in software amortization is a result of certain software
products purchased or reaching general release status during the
period. The increase in software royalties is a result of a change in
the mix of the products sold during the period which required royalty
payments.
COST OF SOFTWARE MAINTENANCE: Cost of software maintenance
increased 16.1% to $800,000 for the quarter ended October 31, 2000 from
$689,000 for the quarter ended October 31, 1999. Cost of software
maintenance increased 5.3% to $2.1 million for the nine months ended
October 31, 2000 from $2.0 million for the nine months ended October
31, 1999. Cost of software maintenance consists primarily of personnel
costs and subcontract services associated with providing customer
support for software products sold. Increases in costs associated with
software maintenance reflect an increase in subcontract service costs
of $67,000 during the three months ended October 31, 2000, and $186,000
during the nine months ended October 31, 2000.
COST OF SOFTWARE IMPLEMENTATION: Cost of software
implementation increased 192.1% to $1.6 million for the quarter ended
October 31, 2000 from $542,000 for the quarter ended October 31, 1999.
Cost of software implementation increased 102.4% to $4.0 million for
the nine months ended October 31, 2000 from $2.0 million for the nine
months ended October 31, 1999. Cost of software implementation as a
percentage of related fees increased to 64.5% for the quarter ended
October 31, 2000 from 39.0% for the quarter ended October 31, 1999.
Cost of software implementation as a percentage of related fees
increased to 55.6% for the nine months ended October 31, 2000 from
49.1% for the nine months ended October 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.
18
<PAGE>
COST OF HARDWARE: Cost of hardware decreased to $8,000 for the
quarter ended October 31, 2000 from $23,000 for the quarter ended
October 31, 1999. Cost of hardware decreased 86.3% to $25,000 for the
nine months ended October 31, 2000 from $183,000 for the nine months
ended October 31, 1999. Decreases for the quarter and nine months ended
October 31, 2000 is reflective of reduced hardware sales levels during
both periods.
OPERATING COSTS AND EXPENSES
SELLING GENERAL AND ADMINISTRATIVE: Selling general and
administrative expenses increased 13.2% to $7.8 million for the quarter
ended October 31, 2000 from $6.9 million for the quarter ended October
31, 1999. Selling general and administrative expenses increased 35.9%
to $24.2 million for the nine months ended October 31, 2000 from $17.8
million for the nine months ended October 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
increased 23.8% to $1.6 million for the quarter ended October 31, 2000
from $1.3 million for the quarter ended October 31, 1999. Research and
development expenses increased 1.7% to $4.1 million for the nine months
ended October 31, 2000 from $4.0 million for the nine months ended
October 31, 1999. The increase reflects a higher rate of research and
development spending particularly in the current quarter.
OTHER INCOME: Other income increased 48.0% to $330,000 for the
quarter ended October 31, 2000 from $223,000 for the quarter ended
October 31, 1999. Other income increased 37.9% to $1.1 million for the
nine months ended October 31, 2000 from $780,000 for the nine months
ended October 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 nine months ended October 31, 2000.
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 October 31, 2000 compared to 36.0% for the
three months ended October 31, 1999. Our effective income tax rate was
38.0% for the nine months ended October 31, 2000 compared to 36.0% for
the nine months ended October 31, 1999. Increases in the estimated
annual effective rate resulted from reductions in tax-exempt income as
a percent of total taxable income.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, we had $63.7 million of working
capital, including $24.8 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 $6.1 million of available cash for the nine months
ended October 31, 2000 as compared to consuming $2.7 million for the
nine months ended October 31, 1999, largely through an increase in net
income of $3.4 million and slower growth in our accounts receivable.
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>
October 31, 1999 177 160
January 31, 2000 131 119
April 30, 2000 142 128
July 31, 2000 123 112
October 31, 2000 120 108
</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, 2000, of $10.5 million was used to purchase $2.4 million of
property and equipment and $5.3 million invested in the acquisition of
AIS and X-Port, and net purchases of $2.5 million of short-term
investments.
Cash provided by financing activities for the nine months
ended October 31, 2000, was $3.2 million and primarily resulted from
the exercise of stock options.
On November 3, 2000, the Securities and Exchange Commission
declared effective a Registration Statement on Form S-3 relating to our
public offering of 2,000,000 shares of common stock, at a price of
$17.00 per share. In connection with this offering, existing
stockholders sold an additional 3,175,000 shares. The $32,011,000 of
net proceeds that we received will be used for working capital, general
corporate purposes and possible future acquisitions.
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 risks 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.
20
<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.
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 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
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"). We
treat all of our cash equivalents and short-term investments 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 October 31, 2000 was 5.1%. Amortized costs of
short-term investments held at October 31, 2000 was $16.1 million,
which approximates fair value.
21
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We began to develop with Knowledge Based Systems, Inc., or KBSI,
our CashForecaster suite of products in 1996 pursuant to a development
contract. KBSI provided the algorithm-based components for these
products. This contract is the subject of a lawsuit filed in September
2000 and pending in the United States District Court for the Northern
District of Texas. We allege that KBSI has breached the contract and
seek injunctive relief to enforce the contract and to prevent KBSI from
using or disclosing our confidential information and trade secrets.
KBSI alleges, among other things, that we have breached the contract
and seeks ownership of the CashForecaster products and unspecified
actual and exemplary monetary damages. Certain contractual disputes
relating to this contract are also the subject of a pending arbitration
proceeding. This lawsuit and the related arbitration are not expected
to have a material adverse effect on our business, financial position
or results of operations.
We are subject from time to time to certain claims and legal
proceedings arising in the ordinary course of our business. Although we
do not believe that the cost or liability that may result from the
resolution of currently pending claims or legal proceedings against us
will be material, there can be no assurance in this regard.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 3, 2000, the Securities and Exchange Commission
declared effective a Registration Statement on Form S-3 relating to our
public offering of 2,000,000 shares of common stock, at a price of
$17.00 per share. In connection with this offering, existing
stockholders sold an additional 3,175,000 shares. The $32,011,000 of
net proceeds that we received will be used for working capital, general
corporate purposes and possible future acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
22
<PAGE>
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
10.1 Employment Agreement between the Company and
Michael Hansen; Incorporated by reference to
Exhibit 10.1 of the Company's Registration
Statement on Form S-3 (Registration No. 333-4716).
(b) Reports on Form 8-K
None
23
<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: December 13, 2000
------------------------------------ ----------------------------
John D. Carreker, Jr.
Chairman of the Board and
Chief Executive Officer
By: /s/ Terry L. Gage Date: December 13, 2000
------------------------------------ ----------------------------
Terry L. Gage
Executive Vice President and
Chief Financial Officer
24
