10-K 1 a2076434z10-k.txt 10-K405 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2002 OR / / 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 (I.R.S. Employer Identification No.) incorporation or organization) 4055 VALLEY VIEW LANE DALLAS, TEXAS 75244 75244 (Address of principal executive offices) (Zip Code)
(972) 458-1981 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $0.01 per share (Title of class) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value on April 5, 2002 of the voting and non-voting common equity held by non-affiliates of the registrant was $174,064,535. Number of shares of registrant's Common Stock, par value $0.01 per share, outstanding as of April 5, 2002: 23,234,742. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CARREKER CORPORATION INDEX
PAGE -------- PART 1: ITEM 1. BUSINESS.................................................... 3 ITEM 2. PROPERTIES.................................................. 25 ITEM 3. LEGAL PROCEEDINGS........................................... 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 25 PART II: ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 26 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 72 PART III: ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY............. 72 ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS.................... 74 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 77 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 79 PART IV: ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................... 81
2 PART I ITEM 1. BUSINESS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "WE," "US," "OUR," "COMPANY," "CARREKER," OR "CARREKER CORPORATION" WHEN USED IN THIS FORM 10-K ("REPORT") AND IN THE ANNUAL REPORT TO THE STOCKHOLDERS REFERS TO CARREKER CORPORATION, A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES AND PREDECESSORS. THIS REPORT CONTAINS SOME FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED THEREIN IN THIS REPORT, THE WORDS "EXPECTS," "PLANS," "BELIEVES," "ANTICIPATING," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS AND THE TIMING OF SOME EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING WITHOUT LIMITATION THOSE SET FORTH UNDER "--RISK FACTORS" BELOW. OUR BUSINESS FOCUS We are a leading provider of integrated consulting and software solutions that enable banks to increase their revenues, reduce their costs and enhance their delivery of customer services. Our offerings, uniquely tailored to the needs of the banking industry, fall into three groups: - REVENUE ENHANCEMENT--increases banks' revenues through market segmentation and improved customer pricing structures; - GLOBAL TECHNOLOGY--assists banks in transitioning from paper to electronic-based payment systems and minimizing payment processing expenses, and optimizing inventory management of a bank's cash-on-hand, including management of how much and where cash will be needed; and - ENTERPRISE SOLUTIONS--integrates systems, combines operations and improves workflows and internal operational processes. We have over 20 years of experience in the banking industry. This experience, combined with our professional staff and managers, many of whom are former bankers and experts in complex bank operations, and our advanced technological expertise, positions us to address effectively the challenges and anticipate opportunities that banks face in today's increasingly competitive environment. Our customer list includes over 200 financial institutions in the United States, Canada, the United Kingdom, Ireland and Australia, including 70 of the largest 100 banks in the United States. INDUSTRY BACKGROUND The banking industry is one of the nation's largest industries, with aggregate assets of approximately $7.2 trillion as of June 2000, according to the Federal Deposit Insurance Corporation. While banks historically have focused on reducing their operating expenses to remain competitive, they are increasingly focused on developing new sources of revenue growth that capitalize on their core competencies, automating operations to increase efficiencies and outsourcing some banking functions to sustain market value growth. To this end, banks are expending significant resources both internally and on solutions purchased from external vendors, including outsourcing arrangements. Key industry trends driving our market opportunity include: CONSOLIDATION. The banking industry continues to experience substantial consolidation. As banks grow by acquisition, they require the integration of operational processes and technological applications that serve to increase revenues from a larger customer base, achieve efficiencies of scale associated with increased operating size and enhance customer service through a nationwide presence and consequent broader geographic reach. REGULATORY CHANGE. The banking industry is characterized by continuing regulatory changes. Regulations in certain areas have been relaxed while regulations in other areas have become more 3 restrictive. Revisions to regulations also have permitted interstate banking, which allows bank holding companies to own banks in multiple states under a single charter and, consequently, to capture the operating and structural efficiencies that such expanded operations make possible. In addition, deregulation in certain sectors of the banking industry has led to increased competition for banks from insurance companies, brokerage houses and other financial institutions in areas of business which were previously the exclusive domain of banks. These changes have presented banks with both challenges and opportunities to improve their operations and achieve competitive advantages. EVOLVING TECHNOLOGIES. Rapid technological innovation has increased customers' expectations and, as a result, has created new means for banks to gain competitive advantages. Increasingly, customers are requiring that their banks provide a broader scope of banking services quickly and easily through automated teller machines, or ATMs, by telephone or over the Internet. Additionally, technological development has provided banks with the potential for numerous operational enhancements. For instance, technology currently allows for the electronic storage of images of documents, including checks, as well as the ability to recall and use that data quickly and simultaneously at multiple locations. Technology also currently enables banks to minimize their non-earning assets by reducing their reserve requirements. Furthermore, technological developments are fueling industry-wide advancements, such as the conversion from a paper to an electronic-based check clearing process. The electronic processing and clearing of checks has been gaining increasing acceptance as an efficient and viable solution for eliminating the time-consuming and expensive movement of paper. EMERGENCE OF THE INTERNET. The Internet increasingly is being used as a medium for financial transactions and services, including bill payment and presentment processing, cash management, payroll and other services for commercial customers. One area of particular interest to banks is the impact that the rapid growth of business to business, or B2B, e-commerce is having on their customers. As the trend towards B2B e-commerce accelerates, we believe that banks, as trusted intermediaries, are well-positioned to electronically process, transmit, record, archive, provide customer service and mitigate the risks associated with their customers' B2B transactions. In order to compete effectively in this dynamic environment, banks often must identify effective and innovative solutions to address their unique requirements and re-design, and in some cases completely replace, their operational systems. Effective development and implementation of these solutions is technically challenging, time-consuming and expensive, and banks often are faced with a choice between building internal, custom solutions or purchasing third party offerings. The development of internal solutions necessarily involves either re-deploying already stretched resources or acquiring new resources that increase fixed costs, which typically results in isolated, departmental solutions. In addition, traditional third party solutions typically are not designed to the banking industry's unique requirements and are often inflexible, requiring banks to conform their work processes to available systems. The situation is exacerbated by the fact that effective solutions cannot be developed in isolation, given the increasingly interdependent nature of bank-to-bank operations. Traditional third party solutions are also limited as some offer analysis and consultation regarding a bank's operations, while others only provide specific software applications, resulting in a piecemeal approach to solutions development. By using multiple providers, banks face increased costs, more complex implementation and delayed realization of benefits. As a result, banks are in need of a solution provider, specializing in the banking industry, to provide integrated consulting services and technological applications. THE CARREKER SOLUTION Our products and services are designed to address the unique requirements of the banking industry. These solutions combine consulting services and technological applications to enable banks to 4 identify and implement e-finance solutions, increase revenues, reduce costs and enhance delivery of customer services. The key characteristics of our solutions include: INTEGRATED AND CONSULTATIVE APPROACH. We combine our consulting expertise and proprietary technology to serve as a single-source provider of fully-integrated solutions that address the critical needs of banks. This approach sets us apart from providers of partial solutions that require banks to seek costly additional expertise or implementation services to attain a complete solution. By offering integrated solutions, we achieve more rapid identification and implementation of solutions than would a piecemeal approach. COMPREHENSIVE DELIVERY MODEL. We are able to deliver our solutions in a variety of ways to meet our clients' needs. These delivery methods include traditional software licensing and associated consulting, third party web-hosting and licensing software for use by multiple banks in a shared operating environment. Our ability to deliver products and services in a variety of methods allows us to provide solutions to a wider range of clients. ADVANCED TECHNOLOGY. We incorporate the latest technological developments, including web-enabled systems and protocols, to produce software applications that can be expanded with minimal effort, are functional and are able to interface with a bank's current or legacy systems. In addition, our current and past participation in inter-bank organizations, such as the Electronic Check Clearinghouse Organization, enables us to stay at the forefront of technological innovations in the industry. COMPELLING BUSINESS PROPOSITION FOR CLIENTS. Our solutions reduce investment risk for our clients by increasing revenues or reducing costs in a relatively short period of time. In addition, in appropriate circumstances, we value-price certain of our solutions, whereby we receive a percentage of the amount of additional revenues or reduced costs achieved by the customer. These arrangements allow banks to fund their investments in our solutions with the benefits derived from their implementation. BROAD ARRAY OF SERVICES AND TECHNOLOGY. We believe that our offerings are the broadest in the banking industry, enabling us to provide a bank with an expert solution targeted to a narrow area of a bank's operations or to address a broad range of a bank's operational requirements. We believe that offering a wide variety of solutions, from revenue enhancement to cost reduction to improved delivery of customer services, enhances the value we offer to our customers. In addition, our solutions embrace critical aspects of e-finance, including mitigation of fraud, electronic processing of paper-based payments, archiving of historical transactions and research and adjustments relating to each of these functions. Our complementary groups of products and services, when offered together, are able to deliver comprehensive solutions to banks. We believe we are ideally positioned to assist banks in the transformation of their financial transaction processing expertise into profitable revenue opportunities with their commercial customers. STRATEGY Our objective is to advance our position as a leading provider of integrated consulting and software solutions to banks. Key elements of our strategy include: EXPAND CUSTOMER BASE. We seek to increase our customer base by building on our strong relationships with larger banks to market our solutions to their peers, selected smaller banks and other financial institutions. We also have partnered with several service providers or resellers, including Fiserv, Inc. and Metavante Corporation, to establish alternate marketing and distribution channels of certain of our solutions through those companies to smaller banks. Additionally, we strive to capitalize on our position as a leading provider of e-finance solutions to the banking industry in the United States to continue to pursue international customers, particularly banks elsewhere in North America, Europe, 5 South Africa and Australia. When regulatory change or technological breakthroughs create a significant economic opportunity, the quality and breadth of our customer base allows us to rapidly penetrate the industry with valuable solutions. CROSS-MARKET OUR PRODUCTS AND SERVICES TO OUR EXISTING CUSTOMER BASE. Once customers contract for one or more of our products or services, we strive to develop and expand our relationships by cross-marketing other products and services to those customers. Over the course of these relationships, we are able to increase revenues from our existing customer base with minimal additional sales expense by providing multiple products and services. These relationships typically do not involve the time and customer acquisition costs associated with the development of new relationships. USE OF VALUE-PRICING AND RECURRING REVENUE ARRANGEMENTS. We intend to continue to share in the value that our solutions create for customers by expanding the use of pricing methods and negotiated arrangements to generate high-margin and recurring revenues. We plan to continue to use value-pricing for solutions in appropriate circumstances where increased revenues or reduced costs resulting from such solutions can be readily projected and measured. In addition, we intend to expand our practice of structuring license fees for software-based solutions according to the usage of the software, which is intended to transform a one-time license fee into a recurring revenue stream. PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. We strive to form alliances with selected partners whose solutions and expertise, when combined with ours, provide incremental, value-added benefits to banks and their customers. In addition to such alliances, we also seek to make selective acquisitions of complementary businesses that would enable us to expand our line of products and services, grow our customer base or pursue new business opportunities. ENHANCE BRAND AWARENESS. We plan to continue to build our brand awareness and reputation to expand our customer base and attract new strategic alliances, acquisition candidates and talented consultants, managers and employees. We promote the Carreker brand through our web site, direct mail, "user" conferences conducted exclusively for our customers, participation in industry conferences and trade shows, publication of "white papers" related to specific aspects of our services, customer newsletters and informational listings in trade journals. 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 three complementary groups. These groups, Revenue Enhancement, Global Technology Solutions and Enterprise Solutions, we believe offer products and services that, when combined, deliver optimal benefits. During the second quarter of fiscal 2001, the Company combined the Cash Solutions group with the Payment Solutions group, along with the acquisition of Check Solutions Company, a New York general partnership ("Check Solutions"), to form the Global Technology Solutions group reflecting the common thread of technology between these activities. The Check Solutions suite of products are also included within the Global Technology Solutions group. 6 REVENUE ENHANCEMENT. Revenue Enhancement consulting services enable banks to improve workflows, internal operational processes and customer pricing structures. SOLUTION DESCRIPTION PRODUCTS OFFERED Revenue Enhancement Provides consulting services Revenue Enhancement Consulting that assess the existing and Methodology 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. EnAct EnAct is a customer relationship EnAct Methodology, Consulting management software and and Technology methodology. EnAct enables companies to focus their resources on customers who represent the highest potential value, and then drive customer interactions consistently across every customer channel, to increase profitability of its customer base.
GLOBAL TECHNOLOGY SOLUTIONS. Global Technology Solutions 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). Global Technology Solutions approaches these key functions in the context of improving operational efficiency and a gradual transition from paper to electronic-based payment systems. Another specific area that Global Technology Solutions specializes in is optimizing 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 7 ensuring a high level of customer service through timely replenishment of cash in ATMs. Specific solutions within this group include: SOLUTION DESCRIPTION PRODUCTS OFFERED Fraud Mitigation Provides effective fraud detection FraudLink On-us, FraudLink Deposit, and management software featuring FraudLink Kite, FraudLink automated approaches to solving the PositivePay, FraudLink eTracker, growing problem of fraudulent FraudLink PC financial transactions, including bad checks drawn on banks for payment, fraudulent items deposited with banks for credit and check kiting. Back Office Brings new efficiencies to back Adjustments/Express, Exceptions/ office operations through the use Express, Input/Express, Inbound of state-of-the-art image and Returns/Express, Image Bulk-File workflow technologies. and Fine Sort Remittance Provides both a host-based and NeXGen Remittance client/ server based platform for processing Retail and Wholesale, remittance transactions. Check Capture Offers an extensive array of Image Processor 2, Conventional enhancement products that add Capture, CPCS Enhancements, XP/ flexibility and usability to IBM's Productivity Tools, Platform Check Processing Control System Emulation (CPCS) and the 3890/XP series of reader/sorters. Image Capture Products and services related to ALS, Image Statements, Net Deliver/ check image capture, storage, Reject Repair, RECO, Image POD, delivery and their related Image Delivery, Image Enhancements applications. Archive Management Comprehensive array of check image Check Image Archive AIX, Check archive management products which Image Archive MVS, Check Image may be tailored to a bank's unique Archive Load requirements based on their operational environments and volumes. Global Tracking Offers an automated track and trace Receive Sentry system designed 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. eMetrics Focuses on performance-measurement eiLumen, eiPerform, eiStats, by using historical data to eiMicr, eiQuality generate key performance indicators, item processing volume data, productivity statistics and quality control benchmarks.
8 SOLUTION DESCRIPTION PRODUCTS OFFERED Electronic Check Presentment Enables banks to transition away CheckLink, CheckLink PC, Deposit from paper-based payment systems to Manager, Branch Truncation electronic by automating key 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 Float Analysis System, Float overall profitability by properly Pricing System, Consulting managing a bank's float through float analysis, pricing and a comprehensive consulting practice 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. ATM Solutions Advances ATM monitoring and eiManager, eiGateway 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. Cash Solutions Reduces the amount of non-earning iCom, Reserve Link, Reserve assets required in reserve accounts LinkPlus 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 group of solutions frees underutilized money for more productive uses. Logistics Reduces armored car transportation Consulting Services 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.
9 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: SOLUTION DESCRIPTION PRODUCTS OFFERED Enterprise Solutions Offers customized, bank-wide Project Management, eSolutions, conversions, consolidation and Integration, Process integration consulting solutions Optimization, Line of Business in areas beyond payments Consulting systems, including consulting and project management services and IT consulting for various projects. Expense reduction processes are optimization strategies to help banks reduce operation expenses across the enterprises. Strategic Services Assists customers in planning e-Vision Consulting, Strategy and implementing a total Consulting, Shared Services e-finance and payment strategy. Consulting
CUSTOMERS A majority of our revenues are generated from contracts with banks maintaining assets in excess of $5.0 billion. We currently provide services or products to 20 of the 20 largest banks in the United States as measured by total assets by Sheshunoff Information Services. Our five largest customers accounted for approximately 30%, 49% and 58% of total revenues during the fiscal years ended January 31, 2002, 2001 and 2000, respectively. Wells Fargo & Company and U.S. BANK, N.A. accounted for approximately 9% and 7% of total revenues, respectively, during the year ended January 31, 2002, and U.S. BANK, N.A. accounted for approximately 27% of total revenues during the year ended January 31, 2001. SOLUTIONS DEVELOPMENT Our solutions development activities focus on identifying specific bank needs, which includes prototyping promising applications, test marketing new products, developing sales strategies and coordinating distribution and on-going maintenance for each of our solutions. In certain instances, we have contracted with third party software development companies to develop our solutions. We frequently receive customer requests for new services and/or software. We strive to develop solutions in response to these requests and historically have been able to partner with our customers and share some or all of the development costs. In addition to customer-funded solutions development, we have invested significant amounts in solutions development, including expenditures of $8.7 million, $6.1 million and $4.8 million for research and development in the years ended January 31, 2002, 2001 and 2000, respectively. Further, some of our key product introductions have resulted from the adaptation of products developed for customers to a wider market. In exchange for either a one-time payment and/or on-going royalties, we are often able to obtain the right to develop, enhance and market these modified products. 10 Additionally, we believe our leadership role in the banking industry through our relationship with the Electronic Check Clearing House Organization positions us to identify and develop interbank solutions that have bilateral or multilateral banking industry implications and to anticipate, recognize and respond to the changing needs of the banking industry. TECHNOLOGY Our historical software products incorporate open systems architecture and protocols to provide maximum scalability and functionality and to interface with a bank's current and legacy systems. Our core proprietary technologies, for both our client/server software products and mainframe software products, are primarily directed at using a standard set of components, drivers and application interfaces so that our software products are constructed from reusable components which are linked together in a tool-set fashion. With respect to many of our newer products, we have adopted an Internet-based development methodology that operates on NT or Unix platforms. These products support many of the industry-standard Web browsers, such as Microsoft Internet Explorer and AOL Netscape, and databases, such as Oracle 8i or SQL. These products can be delivered as an ASP or as standard packaged product. We continue to enhance our second-generation computer systems, which are primarily IBM mainframe-based or client server applications, and to use common computer tools to integrate the data from these computer programs into our new products. SALES AND MARKETING We have developed strong relationships with many senior bank executives as a result of our delivery of effective solutions to many of the largest banks in the United States for over 20 years. As of January 31, 2002, we had 22 Account Relationship Managers, who are responsible for managing our day-to-day relationships with our customers. 17 are responsible for domestic bank relationships, and 5 are responsible for the International bank relationships. Our Account Relationship Managers' responsibilities include identifying customers' needs and assisting our group managers in presenting their solutions and concluding sales. Our Account Relationship Managers work closely with our executive officers, who serve as Executive Relationship Managers to our customers. We also employ technical sales support staff, who are familiar with our technology and who participate in opportunities to sell technology-based solutions. We derive a significant portion of our business through customer referrals. In addition, we market our services through a variety of media, including: - our web site; - direct mail; - user conferences conducted exclusively for our customers; - participation in industry conferences and trade shows; - publication of "white papers" related to specific aspects of our services; - customer newsletters; and - informational listings in trade journals. As of January 31, 2002, we employed a marketing staff of 13 individuals, including graphics designers, writers, administrative coordinators and a Web master. 11 COMPETITION We compete with third-party providers of services and software products to the banking industry, which include consulting firms and software companies. Many of these competitors have significantly greater financial, technical, marketing and other resources than we do. However, we believe that our market position with respect to these competitors is enhanced by virtue of our unique ability to deliver fully integrated consulting services and software solutions focused on enabling banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. We believe that we compete based on a number of factors, including: - quality of solutions; - scope of solutions provided; - industry expertise; - access to decision makers within banks; - ease and speed of solutions implementation; and - price. In addition to competing with a variety of third parties, we experience competition from our customers and potential customers when they develop, implement and maintain their own services and applications. In addition, customers or potential customers could enter into strategic relationships with one or more of our competitors to develop, market and sell competing services or products. As a result, we must continually demonstrate to existing and prospective customers the advantages of purchasing our services and products. GOVERNMENT REGULATION Our primary customers are banks. Although the services we currently offer have not been subject to any material industry-specific government regulation, the banking industry is heavily regulated. Our products and services must allow banking customers to comply with all applicable regulations, and as a result, we must understand the intricacies and application of many government regulations. The regulations most applicable to our provision of solutions to banks include requirements establishing minimum reserve requirements, governing funds availability and the collection and return of checks, and establishing rights, liabilities and responsibilities of parties in electronic funds transfers. For example, our Revenue Enhancement and related consulting services assist banks with minimizing their reserves while complying with federal reserve requirements. In addition, the expedited availability and check return requirements imposed by funds availability regulations have increased fraud opportunities dramatically, and our Global Technology Solutions products and services address this concern while complying with such regulations. While we are not directly subject to federal or state regulations specifically applicable to financial institutions, such as banks, thrifts and credit unions, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and various state regulatory authorities typically assert the right to observe the operations of companies to which certain functions of financial institutions (such as data processing) are outsourced. These regulators may from time to time also claim the right to observe the operations of companies like us that provide software to financial institutions. In addition, financial institutions with whom we do business may from time to time require, by contract or otherwise, that evaluations of our internal controls be performed by independent auditors or by the financial institutions themselves. 12 PROPRIETARY RIGHTS We rely upon a combination of patent, copyright, trademark and trade secret laws, including the use of confidentiality agreements with employees, independent contractors and third parties and physical security devices to protect our proprietary technology and information. We have a number of issued patents and registered trademarks and have filed applications for additional patents and trademarks in the United States. We vigorously defend our proprietary rights. We enter into invention assignment and confidentiality agreements with our employees and independent contractors and confidentiality agreements with certain customers. We also limit access to the source codes for our software and other proprietary information. We believe that due to the rapid pace of innovation within the software industry, factors such as the technological and creative expertise of our personnel, the quality of our solutions, the quality of our technical support and training services and the frequency of release of technology enhancements are more important to establishing and maintaining a technology leadership position than the various legal protections available for our technology. We are not aware that we are infringing any proprietary rights of third parties. We rely upon certain software that we license from third parties, including software that is integrated with our internally developed software and used in our solutions to perform key functions. We are not aware that any third-party software being re-sold by us is infringing upon proprietary rights of other third-parties. EMPLOYEES As of January 31, 2002, we had 685 employees. Of these employees, 115 provided consulting services, 443 worked in the technical group, 35 performed sales and marketing, customer relations and business development functions and 92 persons performed corporate, finance and administrative functions. We have no unionized employees, and we believe that our employee relations are good. INDEPENDENT CONTRACTORS We provide consulting and technical services and develop software in part through the use of independent contractors who are not our employees. During fiscal year 2001, we used approximately 38 independent contractors to provide consulting and technical services, most of whom worked from their homes or from customers' offices. Many of these contractors are former bank executives, and we believe that their experience in the banking industry enables them to provide industry-specific solutions to our customers. 13 RISK FACTORS THIS REPORT AND THE ANNUAL REPORT TO STOCKHOLDERS CONTAIN SOME FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF SOME EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH BELOW AND ELSEWHERE IN THIS REPORT. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING FACTORS, WHICH MAY AFFECT OUR CURRENT POSITION AND FUTURE PROSPECTS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING US AND AN INVESTMENT IN OUR COMMON STOCK. RISKS RELATED TO OUR BUSINESS AND INDUSTRY OUR PERFORMANCE DEPENDS ON THE BANKING INDUSTRY, AND ANY CHANGE IN THE BANKING INDUSTRY'S DEMAND FOR OUR SOLUTIONS COULD REDUCE OUR REVENUES AND HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. We derive substantially all of our revenues from solutions provided to banks and other participants in the banking industry. Accordingly, our future success significantly depends upon this industry's continued demand for our solutions. We believe that an important factor in our growth has been substantial changes in the banking industry in recent years, as manifested by continuing consolidation, regulatory change, technological innovation, the emergence of the Internet and other trends. If this environment of change were to slow, we could experience reduced demand for our solutions. In addition, the banking industry is sensitive to changes in economic conditions and is highly susceptible to unforeseen events, such as domestic or foreign political instability, recession, inflation or other adverse occurrences that may result in a significant decline in the utilization of bank services. Furthermore, due to concerns regarding data security and other factors, banks have been and may in the future be hesitant to adopt electronic solutions, which can adversely affect the demand for our solutions. Any event that results in decreased consumer or corporate use of bank services, or increased pressures on banks towards the in-house development and implementation of revenue enhancement or cost reduction measures, could have a material adverse effect on our business, financial condition and results of operations. A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR BUSINESS, THE LOSS OF ANY ONE OF THEM COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND FINANCIAL CONDITION. Our five largest customers accounted for approximately 30%, 49% and 58% of total revenues during the fiscal years ended January 31, 2002, 2001 and 2000, respectively. Wells Fargo & Company and U.S. BANK, N.A. accounted for approximately 9% and 7% of total revenues, respectively, during the year ended January 31, 2002, and U.S. BANK, N.A. accounted for approximately 27% of total revenues during the year ended January 31, 2001. Our significant customers have changed from period to period. However, a significant portion of our current revenues is derived from customers who were major customers in prior years, and we are therefore dependent to a significant degree on our ability to maintain our existing relationships with these customers. There can be no assurance that we will be successful in maintaining our existing customer relationships or in securing additional customers, and there can be no assurance that we can retain or increase the volume of business that we do with such customers. In particular, continuing consolidation within the banking industry may result in the loss of one or more significant customers. Any failure by us to retain one or more of our large customers, maintain or increase the volume of business done for such customers or establish profitable relationships with additional customers could have a material adverse effect on our business, financial condition and results of operations. 14 OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION In June 2001, we completed a revolving credit facility and borrowed on the line to facilitate the purchase of Check Solutions Company. Our indebtedness could have important consequences for our business. For example, it could: - Increase our vulnerability to general adverse economic and industry conditions; - Limit our ability to obtain additional financing; - Require the dedication of a substantial portion of our cash flows from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of capital to fund our growth strategy, working capital, capital expenditures, acquisitions and other general corporate purposes; and - Limit our flexibility in planning for, or reacting to, changes in our business and the industry. Further, effective October 2001 we amended the terms of the revolving credit facility to reflect the impact of a decline in our recent operating results. The amended terms included adjustments to certain financial covenants and also a temporary increase in the interest rates applicable to the indebtedness outstanding under the credit facility. While we believe that we will meet the amended financial covenant targets, there can be no assurance that we will be able to do so and, if we are not able to meet these targets, what actions our lenders might take. MANY FACTORS, SOME BEYOND OUR CONTROL, COULD CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD RESULT IN A LOWER MARKET PRICE FOR OUR COMMON STOCK. We have experienced in the past, and expect to experience in the future, significant fluctuations in quarterly operating results. Such fluctuations may be caused by many factors, including but not limited to: - the extent and timing of revenues recognized, particularly in light of our historical tendency to have a disproportionately large portion of our contract signings near the end of each quarter; - increases in costs beyond anticipated levels, especially in the context of costs incurred under value-pricing contracts or fluctuations in software royalty expense due to a change in future product mix; - the degree of customer acceptance of new solutions; - the introduction of new or enhanced solutions by us or our competitors; - our mix of revenues derived from consulting and management service fees on the one hand, and software-related fees on the other; - customer budget cycles and priorities and purchasing cycles; - competitive conditions in the industry; - seasonal factors; - timing of consolidation decisions by customers; - the extent of customers' international expansion; and - general economic conditions. Due to the foregoing factors, many of which are beyond our control, our quarterly revenues and operating results are difficult to forecast. It is possible that our future quarterly results of operations 15 from time to time will not meet the expectations of securities analysts or investors, which could have a material adverse effect on the market price of our common stock. THE NUMBER OF SHARES OF OUR STOCK ELIGIBLE FOR SALE MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. We are planning to file a registration statement on Form S-3 immediately following the filing of this annual report seeking to register the resale of 1,282,214 shares that we recently sold privately to a group of investors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." We are not certain whether these investors intend to sell the shares of our common stock that they purchased, but when the registration statement is declared effective, and for so long as it remains effective, these investors will be free to resell their shares. In addition, except for approximately 3,300,000 shares of our common stock held by our affiliates as of April 5, 2002, as defined in Rule 144 under the Securities Act of 1933, all of our remaining outstanding shares of common stock are freely tradable without restriction or registration under the Securities Act. As of April 5, 2002, we also had outstanding options entitling their holders to acquire an aggregate of 5,121,072 shares of our common stock, of which options covering 1,609,089 shares were exercisable. The shares issued upon the exercise of these options may be resold immediately. The market price of our common stock could drop due to sales of a large number of shares of our common stock by our new investors or any other stockholders, or due to the perception that these sales could occur. OUR USE OF FIXED-PRICE AND VALUE-PRICED ARRANGEMENTS FOR CUSTOMER PROJECTS COULD REDUCE OUR REVENUES AND NET INCOME, WHICH COULD RESULT IN DECREASED OPERATING MARGINS OR LOSSES. We primarily price our solutions on a time-and-materials, fixed-price or value-priced basis. In connection with fixed-price projects, we occasionally incur costs in excess of our projections and as a result achieve lower margins than expected or may incur losses with respect to projects. In connection with value-priced projects, we are paid based on an agreed percentage of either projected or actual increased revenues or decreased costs derived by the bank generally over a period of up to twelve months following the implementation of our solutions. We typically must first commit time and resources to develop such projections before a bank will commit to purchase our solutions and therefore assume the risk of making these commitments and incurring related expenses with no assurance that the bank will purchase the solutions. In addition, from time to time, a customer will not achieve projected revenues or savings because it belatedly decides not to implement our solutions or the solutions do not produce the projected results, in which case we may not be able to collect any or all of the fees provided for in the customer's contract. The nature of our fixed-priced and value-priced arrangements can result in decreased operating margins or losses and could materially and adversely affect our business, financial condition and results of operations. WE DO NOT TYPICALLY ENTER INTO LONG-TERM AGREEMENTS WITH OUR CUSTOMERS, WHICH MAKES IT MORE DIFFICULT TO PLAN AND EFFICIENTLY ALLOCATE OUR RESOURCES, AND ANY DEFERRAL, MODIFICATION OR CANCELLATION OF A CUSTOMER PROJECT CAN ADVERSELY AFFECT OUR OPERATING RESULTS. We typically provide services to customers on a project-by-project basis without long-term agreements. When a customer defers, modifies or cancels a project, we must be able to rapidly re-deploy our personnel to other projects in order to minimize the under-utilization of our personnel and the resulting adverse impact on operating results. In addition, our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of projects in progress. As a result, any delay, modification or cancellation of a customer project, or any disruption of our business relationships with any of our significant customers or with a 16 number of smaller customers could have a material adverse effect on our business, financial condition and results of operations. WE HAVE EXPERIENCED RAPID GROWTH IN OUR BUSINESS, AND THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO MAINTAIN THIS GROWTH RATE. IF WE ARE ABLE TO MAINTAIN IT, OUR OPERATIONAL AND FINANCIAL RESOURCES COULD BE STRAINED, WHICH COULD CAUSE US TO LOSE CUSTOMERS, PREVENT US FROM OBTAINING NEW CUSTOMERS AND INCREASE OUR OPERATING EXPENSES. We have experienced significant growth in recent years, but there can be no assurance that we will be able to maintain this growth rate. If we are not successful in maintaining this growth rate, our business could be negatively affected. To be successful in maintaining our growth rate, we anticipate that additional expansion may be required in order to address potential market opportunities. Any further growth would place further demands on our management, operational capacity and financial resources. We anticipate that we will need to recruit large numbers of qualified personnel in all areas of our operations, including management, sales, marketing, delivery and software development. There can be no assurance that we will be effective in attracting and retaining additional qualified personnel, expanding our operational capacity or otherwise managing growth. In addition, there can be no assurance that our systems, procedures or controls will be adequate to support any expansion of our operations. As a result of acquisitions and continued growth, the needs of our management information systems are expected to expand and change, which could result in the implementation of new or modified management information systems and procedures. This may necessitate additional training of existing personnel or the hiring of additional personnel. If we cannot implement the new, or modified, management information systems in a timely manner, our ability to manage growth effectively or generate timely operating and financial reports could be materially and adversely affected. The failure to manage growth effectively could have a material adverse effect on our business, financial condition and results of operations. OUR FUTURE SUCCESS SIGNIFICANTLY DEPENDS ON THE EXPERIENCE OF OUR KEY PERSONNEL, AND THE LOSS OF ANY ONE OF THEM COULD IMPAIR OUR ABILITY TO DO BUSINESS. Our future success depends, in significant part, upon the continued services of John D. Carreker, Jr., our Chairman of the Board and Chief Executive Officer, as well as other executive officers and key personnel. The loss of services of Mr. Carreker or one or more of our other executive officers or key employees could have a material adverse effect on our business, financial condition and results of operations, and there can be no assurance that we will be able to retain our executive officers or key personnel. We do not maintain key-man life insurance covering any of our executive officers or other key personnel. OUR SOFTWARE AND SOLUTIONS MAY CONTAIN DEFECTS OR ERRORS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND SUBJECT US TO LIABILITY CLAIMS. Our solutions at times in the past have been, and in the future may be, incompatible with the operating environments of our customers or inappropriate to address their needs, resulting in additional costs being incurred by us in rendering services to our customers. Further, like other software products, our software occasionally has contained undetected errors, or "bugs," which become apparent through use of the software. Because our new or enhanced software initially is installed at a limited number of sites and operated by a limited number of users, such errors and/or incompatibilities may not be detected for a number of months after delivery of the software. The foregoing errors in the past have resulted in the deployment of our personnel and funds to cure errors, occasionally resulting in cost overruns and delays in solutions development and enhancement. Moreover, solutions with substantial errors could be rejected by or result in damages to customers, which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance 17 that errors or defects will not be discovered in the future, potentially causing delays in solution implementation or requiring design modifications that could adversely affect our business, financial condition and results of operations. It is also possible that errors or defects in our solutions could give rise to liability claims against us. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW TECHNOLOGIES AND SERVICES TO MEET THE CHANGING NEEDS OF OUR CURRENT AND FUTURE CUSTOMERS, AND OUR INABILITY TO INTRODUCE NEW SOLUTIONS COULD NEGATIVELY IMPACT OUR ABILITY TO DO BUSINESS AND MAINTAIN OUR FINANCIAL CONDITION. We regularly undertake new projects and initiatives in order to meet the changing needs of our customers. In so doing, we invest substantial resources with no assurance of their ultimate success. We believe our future success will depend, in part, upon our ability to: - enhance our existing solutions; - design and introduce new solutions that address the increasingly sophisticated and varied needs of our current and prospective customers; - develop leading technology; and - respond to technological advances and emerging industry standards on a timely and cost-effective basis. There can be no assurance that future advances in technology will be beneficial to, or compatible with, our business or that we will be able to incorporate such advances into our business. In addition, keeping abreast of technological advances in our business may require substantial expenditures and lead-time. There can be no assurance that we will be successful in using new technologies, adapting our solutions to emerging industry standards or developing, introducing and marketing solution enhancements or new solutions, or that we will not experience difficulties that could delay or prevent the successful development, introduction or marketing of these solutions. If we incur increased costs or are unable, for technical or other reasons, to develop and introduce new solutions or enhancements of existing solutions in a timely manner in response to changing market conditions or customer requirements, our business, financial condition and results of operations could be materially and adversely affected. OUR FOCUS ON PROVIDING AN APPLICATION SERVICE PROVIDER, OR ASP, SOFTWARE HOSTING MODEL SUBJECTS US TO RISKS ASSOCIATED WITH AN INCREASED DEPENDENCE ON THIRD-PARTY PROVIDERS AND THE INTERNET. Our ASP software hosting model gives rise to numerous risks, particularly risks related to our heightened dependence on third party providers and the Internet. The success of our ASP software hosting model partially depends on the performance of the third party application service provider with whom we have contracted to provide software hosting services. In addition, we are also dependent on the Internet as a reliable network backbone capable of supporting our customers' use of our software. There can be no assurance that our solutions that rely on Internet access will be protected against disruptions, delays or losses due to technical difficulties, natural causes or security breaches. These problems may adversely affect the success of our ASP software hosting model and could negatively impact our operating results. We may also be subject to any governmental adoption of regulations that charge Internet access fees or impose taxes on subscriptions. Currently, there are few laws or regulations that specifically regulate the Internet; however, such laws and regulations, if adopted, may increase our operating expenses. 18 THERE IS INTENSE COMPETITION IN OUR INDUSTRY FOR QUALIFIED BANKING PROFESSIONALS AND TECHNICAL AND MANAGERIAL PERSONNEL, AND OUR FAILURE TO ATTRACT AND RETAIN THESE PEOPLE COULD AFFECT OUR ABILITY TO RESPOND TO BANKING AND TECHNOLOGICAL CHANGE AND TO INCREASE OUR REVENUES. Our future success depends upon our continuing ability to attract and retain highly qualified banking, technical and managerial personnel. Competition for such personnel is intense, and we at times have experienced difficulties in attracting the desired number of such individuals. Further, our employees have left us to work in-house with our customers and with our competitors. There can be no assurance that we will be able to attract or retain a sufficient number of highly qualified employees or independent contractors in the future. If we are unable to attract personnel in key positions, our business, financial condition and results of operations could be materially and adversely affected. WE FACE INCREASED COMPETITION THAT COULD RESULT IN PRICE REDUCTIONS, FEWER CUSTOMER ORDERS AND LOSS OF MARKET SHARE, ANY OF WHICH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS. We compete with third-party providers of services and software products to the banking industry that include consulting firms and software companies. Many of our competitors have significantly greater financial, technical, marketing and other resources than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can. Also, several of our current and potential competitors have greater name recognition and larger customer bases that such competitors could leverage to increase market share at our expense. We expect to face increased competition as other established and emerging companies enter the banking services market. Increased competition could result in price reductions, fewer customer orders and loss of market share, any of which could materially and adversely affect our business, financial condition and results of operations. There can be no assurance that we will be able to compete successfully against current or future competitors, and the failure to do so would have a material adverse effect upon our business, financial condition and results of operations. In addition to competing with a variety of third parties, we experience competition from our customers and potential customers. From time to time, these potential customers develop, implement and maintain their own services and applications for revenue enhancements, cost reductions and/or enhanced customer services, rather than purchasing services and related products from third parties. There can be no assurance that these customers or other potential customers will perceive sufficient value in our solutions to justify investing in them. In addition, customers or potential customers could enter into strategic relationships with one or more of our competitors to develop, market and sell competing services or products. WE MAY BE UNABLE TO FULLY BENEFIT FROM OUR STRATEGIC ALLIANCES AND ACQUISITIONS, WHICH COULD NEGATIVELY AFFECT OUR BUSINESS AND HINDER OUR ABILITY TO REALIZE EXPECTED BENEFITS. We regularly evaluate opportunities and may enter into strategic alliances, or make acquisitions of other businesses, products or technologies. Risks inherent in alliances may include, among others: - substantial investment of our resources in the alliance; - inability to realize the intended benefits of an alliance; - increased reliance on third parties; - increased payment of third-party licensing fees or royalties for the incorporation of third-party technology into our solutions; and - inadvertent transfer of our proprietary technology to strategic "partners." 19 Acquisitions involve numerous risks, including: - difficulties in identifying suitable acquisition candidates; - competition for acquisitions with other companies, many of which have substantially greater resources than we do; - failure to close after expending time and resources; - inability to obtain sufficient financing on acceptable terms to fund acquisitions; - requirement that the acquisition may be funded through additional debt obligations which therefore would increase interest expense; - volatility of stock price due to one-time charges to earnings; - difficulties in assimilating acquired operations and products into our business; - maintaining uniform standards, controls, procedures and policies; - potential loss of customers and strategic partners of acquired companies; - potential loss of key employees of acquired companies; - diversion of management's attention from other business concerns; - amortization of acquired intangible assets; and - failure of acquired businesses, products or technologies to perform as expected or to achieve expected levels of revenues, profitability or productivity. There can be no assurance that we will be successful in identifying and entering into strategic alliances or making acquisitions, if at all, and any inability to do so could have a material adverse effect on our business, financial condition and results of operations. We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and our common stock. If the consideration for an acquisition transaction is paid in common stock, this could further dilute existing stockholders. Any impairment or amortization of a significant amount of goodwill or other assets resulting from an acquisition transaction could materially impair our operating results and financial condition. OUR INABILITY TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY OR TO PREVENT ITS UNAUTHORIZED USE COULD DIVERT OUR FINANCIAL RESOURCES AND CAUSE SIGNIFICANT EXPENDITURES, WHICH COULD MATERIALLY HARM OUR BUSINESS. Our success significantly depends upon our proprietary technology and information. We rely upon a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary technology and information. We have a number of issued patents and registered trademarks. There can be no assurance that the steps we have taken to protect our services and products are adequate to prevent misappropriation of our technology or that our competitors independently will not develop technologies that are substantially equivalent or superior to our technology. Furthermore, it is very difficult to police unauthorized use of our software due to the nature of software. Any such misappropriation of our proprietary technology or information or the development of competitive technologies could have a material adverse effect on our business, financial condition and results of operations. In addition, the laws of some countries in which our software is distributed do not protect our intellectual property rights to the same extent as the laws of the United States. For example, the laws of a number of foreign jurisdictions in which we license our software protect trademarks solely on the 20 basis of the first to register. We currently do not possess any trademark registrations in foreign jurisdictions, although we do have copyright protection of our software under the provisions of various international conventions. Accordingly, intellectual property protection of our services and products may be ineffective in many foreign countries. In summary, there can be no assurance that the protection provided by the laws of the United States or such foreign jurisdictions will be sufficient to protect our proprietary technology or information. INFRINGEMENT CLAIMS BY THIRD PARTIES CAN SUBJECT US TO SUBSTANTIAL LIABILITY AND EXPENSES AND CAN IMPAIR OUR ABILITY TO SELL OUR SOLUTIONS. We may need to litigate claims against third parties to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. We may be required to incur significant costs in reaching a resolution to the asserted claims, or any other claims that may be asserted against us. There can be no assurance that the resolution of a claim would not require us to pay damages or obtain a license to the third party's intellectual property rights in order to continue licensing our software as currently offered or, if such a third-party license is required, that it would be available on terms acceptable to us. The resolution of claims may also divert our management resources. If we cannot adequately protect our proprietary rights, it could have a material adverse effect on our business, operating results and financial condition. WE DEPEND ON THIRD PARTIES FOR TECHNOLOGY LICENSES, AND IF WE CANNOT OBTAIN SATISFACTORY LICENSES OUR BUSINESS COULD SUFFER. Some technology used in our current software and software in development includes technology licensed from third parties. These licenses generally require us to pay royalties and to fulfill confidentiality obligations. The termination of any such licenses, or the failure of the third party licensors to adequately maintain or update their products, could result in delays in our ability to implement solutions or in delays in the introduction of our new or enhanced solutions while we search for similar technology from alternative sources, if any, which could prove costly. Any need to implement alternative technology could prove to be very expensive for us, and any delay in solution implementation could result in a material adverse effect on the business, financial condition and results of our operations. It may also be necessary or desirable in the future to obtain additional licenses for use of third-party products in our solutions, and there can be no assurance that we will be able to do so on commercially reasonable terms, if at all. WE MAY FACE LIABILITY CLAIMS RELATED TO THE USE OF OUR SOLUTIONS, INCLUDING THOSE WHICH ARISE OUT OF THE USE OF OUR ASP SOFTWARE HOSTING MODEL, AND THE DEFENSE OF THESE CLAIMS COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION. As a result of our provision of solutions that address critical functions of bank operations, we are exposed to possible liability claims from banks and their customers. Although we have not experienced any material liability claims to date, there can be no assurance that we will not become subject to such claims in the future. A liability claim against us could have a material adverse effect on our business, financial condition and results of operations. Our ASP software hosting model requires the storage and transmission of sensitive business information of our customers electronically over the Internet. The difficulty of securely storing confidential information electronically has been a significant issue in conducting electronic commerce and in carrying out banking operations over the Internet. Our ASP software hosting model requires us to spend significant capital and other resources to protect against the threat of security breaches or computer viruses, or to alleviate problems caused by breaches or viruses. To the extent that our activities or the activities of our customers require the storage and transmission of confidential 21 information, such as banking records or credit information, security breaches and viruses could expose us to claims, litigation or other possible liabilities. Our inability to prevent security breaches or computer viruses could also cause our customers to lose confidence in our solutions and terminate their relationships with us. WE ARE SUBJECT TO CLAIMS AND LEGAL PROCEEDINGS FROM TIME TO TIME THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON US. We are subject to third party claims and are named as a defendant in legal proceedings from time to time. We may be damaged as a result of an asserted claim, and we may be required to incur substantial costs in reaching a resolution of a claim. Any such claim may also divert our management resources. A significant judgment against us in connection with any legal proceedings could have a material adverse effect on our business, financial condition and results of operations. Although we do not believe that the costs 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. See "Legal Proceedings." OUR STOCK PRICE HAS FLUCTUATED SIGNIFICANTLY AND, IN THE EVENT OF A DOWNTURN IN OUR STOCK PRICE, WE COULD FACE SECURITIES CLASS ACTION LITIGATION. There has been significant volatility in the market price of our common stock, as well as in the market price of securities of many companies in the technology and emerging growth sectors. Factors which may have a significant impact on the market price of our common stock include the following: - quarterly variations in our results of operations or results of operations of our competitors; - changes in earnings estimates or recommendations by securities analysts; - developments in our industry and in the banking industry; - general market and economic conditions; and - other factors, including factors unrelated to our operating performance or that of our competitors. We believe that factors such as quarterly fluctuations in financial results or announcements by us, our competitors, banks and other bank industry participants could cause the market price of our common stock to fluctuate substantially. In addition, the stock market may experience extreme price and volume fluctuations that often are unrelated to the operating performance of specific companies. Market fluctuations or perceptions regarding the banking industry and general economic or political conditions may adversely affect the market price of the common stock. In the past, following declines in the market price of a company's securities, securities class-action litigation often has been instituted against that company. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations. WE FACE RISKS IN CONNECTION WITH THE EXPANSION OF OUR INTERNATIONAL OPERATIONS, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We provide solutions to banks outside the United States, and a key component of our growth strategy is to broaden our international operations. Our international operations are subject to risks inherent in the conduct of international business, including: - unexpected changes in regulatory requirements; - fluctuations in exchange rates and devaluations of foreign currencies; 22 - export license requirements; - tariffs and other economic barriers to free trade; - restrictions on the export of critical technology; - difficulties in staffing international projects; - political and economic instability; - limited intellectual property protection; - longer accounts receivable cycles and difficulties in collecting payments; and - potentially adverse tax and labor consequences. Some of our international sales are denominated in local currencies, and the impact of future exchange rate fluctuations on our financial condition and results of operations cannot be accurately predicted. There can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse effect on revenue from international sales and thus our business, financial condition and results of operations. OUR USE OF INDEPENDENT CONTRACTORS EXPOSES US TO LEGAL AND TAX RISKS WHICH, IF DETERMINED AGAINST US, COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. We often provide solutions through independent contractors. As we do not treat these individuals as our employees, we do not pay federal or state employment taxes or withhold federal or state employment or income taxes from compensation paid to such persons. We also do not consider these persons eligible for coverage or benefits provided under our employee benefit plans or include these persons when evaluating the compliance of our employee benefit plans with the requirements of the Internal Revenue Code. Additionally, we do not treat such persons as employees for purposes of worker's compensation, labor and employment, or other legal purposes. From time to time, we may face legal challenges to the appropriateness of the characterization of these individuals as independent contractors from governmental agencies, the independent contractors themselves or some other person or entity. The determination of such a legal challenge generally will be determined on a case-by-case basis in view of the particular facts of each case. The fact specific nature of this determination raises the risk that from time to time an individual that we have characterized as an independent contractor will be reclassified as an employee for these or other legal purposes. In the event persons engaged by us as independent contractors are determined to be employees by the Internal Revenue Service or any applicable taxing authority, we would be required to pay applicable federal and state employment taxes and withhold income taxes with respect to these individuals and could become liable for amounts required to be paid or withheld in prior periods and for costs, penalties and interest thereon. In addition, we could be required to include these individuals in our employee benefit plans on a retroactive, as well as a current, basis. Furthermore, depending on the party that makes the legal challenge and the remedy sought, we could be subject to other liabilities sought by governmental authorities or private persons. During the fiscal years 2001 and 2000, we used approximately 38 and 75 independent contractors, respectively. Any challenge by the IRS, state authorities or private litigants resulting in a determination that these individuals are employees could have a material adverse effect on our business, financial condition and results of operations. From time to time new legislation may be proposed to establish more stringent requirements for the engagement of independent contractors. We are unable to assess the likelihood that any such legislation will be enacted. Further, our ability to retain independent contractors could in the future deteriorate, due in part to the lower commitment level that these contractors have to us. 23 GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD FORCE US TO CHANGE OUR OPERATIONS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO MAINTAIN OUR CURRENT BUSINESS. Our primary customers are banks. Although the solutions that we currently offer have not been subject to any material, specific government regulation, the banking industry is regulated heavily, and we expect that such regulation will affect the relative demand for our solutions. While we are not directly subject to federal or state regulations specifically applicable to financial institutions, such as banks, thrifts and credit unions, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and various state regulatory authorities typically assert the right to observe the operations of companies to which certain functions of financial institutions (such as data processing) are outsourced. These regulators may from time to time also claim the right to observe the operations of companies like us that provide software to financial institutions. In addition, financial institutions with whom we do business may from time to time require, by contract or otherwise, that evaluations of our internal controls be performed by independent auditors or by the financial institutions themselves. There can be no assurance that federal, state or foreign governmental authorities will not adopt new regulations, and any adoption of new regulations could require us to modify our current or future solutions. The adoption of laws or regulations affecting us or our customers' businesses could reduce our growth rate or could otherwise have a material adverse effect on our business, financial condition and results of operations. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD PREVENT OR DELAY POTENTIAL ACQUISITION BIDS, INCLUDING BIDS WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS. Our certificate of incorporation and bylaws contain provisions that may have the effect of delaying, deterring or preventing a potential takeover that our stockholders may consider to be in their best interests. The certificate and bylaws provide for a classified board of directors serving staggered terms of three years, prevent stockholders from calling a special meeting of stockholders and prohibit stockholder action by written consent. The certificate also authorizes only the board of directors to fill vacancies, including newly-created directorships, and states that our directors may be removed only for cause and only by the affirmative vote of holders of at least two-thirds of the outstanding shares of the voting stock, voting together as a single class. In addition, our board of directors may issue up to 2,000,000 shares of preferred stock in one or more series and can fix the rights, preferences, privileges and restrictions thereof without any further vote or action by our stockholders. The issuance of shares of preferred stock may prevent or delay a change of control transaction. In addition, Section 203 of the Delaware General Corporation Law, which is applicable to us, restricts certain business combinations with interested stockholders even if such a combination would be beneficial to stockholders. These provisions may inhibit a non-negotiated merger or other business combination. The anti-takeover provisions of the Delaware General Corporation Law prevent us from engaging in a "business combination" with any "interested stockholder" for three years following the date that the stockholder became an interested stockholder. For purposes of Delaware law, a "business combination" includes a merger or consolidation involving us and the interested stockholder and the sale of more than 10% of our assets. In general, Delaware law defines an "interested stockholder" as any entity or person beneficially owning more than 15% of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Under Delaware law, a Delaware corporation may opt out of the anti-takeover provisions. We do not intend to opt out of these anti-takeover provisions. The foregoing provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also discourage others from making tender offers for our shares. As a result, these provisions may prevent the market price of our common stock from 24 reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent significant changes in our board of directors and management. THE ADOPTION OF THE FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS AS OF FEBRUARY 1, 2002 COULD ADVERSELY AFFECT OUR FUTURE RESULTS OF OPERATIONS AND FINANCIAL POSITION. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. As of January 31, 2001, we had goodwill and intangible assets valued at $77.5 million. We will apply the new rules on accounting for goodwill and other intangible assets beginning with the first quarter of 2002. Also during 2002, we will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 1, 2002 to determine if a transition impairment charge should be recognized under SFAS 142. We will thereafter annually test for impairment. There can be no assurance that such tests will not result in a determination that these assets have been impaired. If at any time it is determined that an impairment has occurred, we will be required to reflect the impaired value as a charge resulting in a reduction in earnings in the quarter such impairment is identified and a corresponding reduction in the net asset value of the Company. WE CANNOT PREDICT EVERY EVENT AND CIRCUMSTANCE WHICH MAY IMPACT OUR BUSINESS AND, THEREFORE, THE RISKS AND UNCERTAINTIES DISCUSSED ABOVE MAY NOT BE THE ONLY ONES YOU SHOULD CONSIDER. The risks and uncertainties discussed above are in addition to those that apply to most businesses generally. In addition, as we continue to grow our business, we may encounter other risks of which we are not aware at this time. These additional risks may cause serious damage to our business in the future, the impact of which we cannot estimate at this time. ITEM 2. PROPERTIES. Our principal executive office is a leased facility with approximately 72,443 square feet of space in Dallas, Texas. The lease agreement for this space expires on May 31, 2010. We also lease approximately 19,000 square feet in Atlanta, Georgia pursuant to a lease agreement which expires on March 1, 2003, approximately 3,638 square feet in Toronto, Canada, pursuant to a lease agreement which expires February 28, 2006, approximately 4,100 square feet in London, England, pursuant to a lease agreement which expires September 29, 2006, approximately 45,757 square feet in Memphis, Tennessee pursuant to a lease agreement which expires August 31, 2005 and approximately 40,307 square feet in Charlotte, North Carolina pursuant to a lease agreement which expires December 31, 2008. We believe that our facilities are well maintained and in good operating condition and are adequate for our present and anticipated levels of operations ITEM 3. LEGAL PROCEEDINGS. 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 to our financial condition or results of operation, there can be no assurance in this regard. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of our stockholders during the quarterly period ended January 31, 2002. 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Common Stock has traded on the NASDAQ National Market under the symbol "CANI" since May 20, 1998, the date of our initial public offering. At January 31, 2002, there were approximately 204 record holders of our Common Stock, although we believe that the number of beneficial owners of our Common Stock is substantially greater. The table below sets forth for the fiscal quarters indicated the high and low sale prices for the Common Stock, as reported by the NASDAQ National Market.
HIGH LOW -------- -------- QUARTERLY PERIOD ENDING January 31, 2002.......................................... $ 7.20 $ 3.37 October 31, 2001.......................................... 19.75 3.30 July 31, 2001............................................. 26.15 9.80 April 30, 2001............................................ 31.44 13.00 January 31, 2001.......................................... 39.50 18.25 October 31, 2000.......................................... 20.19 10.19 July 31, 2000............................................. 12.06 9.00 April 30, 2000............................................ 14.00 8.38
We have not paid a cash dividend on shares of our common stock since our incorporation. We currently intend to retain our earnings in the future to support operations and finance our growth and, therefore, do not intend to pay cash dividends on the common stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of the board of directors and subject to some limitations under the Delaware General Corporation Law. However, our revolving credit agreement, which is described in Note 4 of our Notes to Consolidated Financial Statements, currently prohibits the payment of any cash dividends. On April 5, 2002, we sold 1,282,214 shares to a group of institutional investors in a private transaction exempt from registration under The Securities Act of 1933 pursuant to Section 4(2) thereof. In connection with this transaction, we are planning to file a registration statement on Form S-3 following the filing of this annual report seeking to register the resale of such shares. The approximately $9.3 million of net proceeds that were received were used to satisfy an existing obligation with respect to the Check Solutions acquisition as described in Notes 12 and 13 of our Notes to Consolidated Financial Statements, with the remainder being used for working capital. 26 ITEM 6. SELECTED FINANCIAL DATA. SELECTED CONSOLIDATED FINANCIAL DATA The following consolidated statements of operations data for each of the three years in the period ended January 31, 2002 and the consolidated balance sheet data as of January 31, 2002 and 2001 have been derived from our audited consolidated financial statements which are included elsewhere in this Report. The consolidated balance sheet data as of January 31, 2000, 1999, and 1998, and the consolidated statement of operations data for the years ended January 31, 1999 and 1998, have been derived from our audited consolidated financial statements not included in this Report. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report.
YEAR ENDED JANUARY 31, ---------------------------------------------------- 2002(1) 2001 2000 1999 1998 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Consulting fees............................ $ 42,842 $ 71,715 $49,725 $26,328 $21,314 Software license fees...................... 40,291 18,030 13,994 17,101 13,099 Software maintenance fees.................. 29,347 11,223 6,985 5,031 4,274 Software implementation fees............... 19,210 9,298 5,116 6,557 4,094 -------- -------- ------- ------- ------- Total revenues........................... 131,690 110,266 75,820 55,017 42,781 Cost of revenues: Consulting fees............................ 34,957 38,185 27,574 16,150 12,394 Software license fees...................... 6,877 5,529 1,974 1,776 2,968 Write-off of capitalized software costs and prepaid software royalties(2)............ 14,908 -- -- -- -- Software maintenance fees.................. 7,294 2,897 2,511 2,387 1,923 Software implementation fees............... 15,949 5,653 2,381 3,862 4,156 -------- -------- ------- ------- ------- Total cost of revenues................... 79,985 52,264 34,440 24,175 21,441 -------- -------- ------- ------- ------- Gross profit............................... 51,705 58,002 41,380 30,842 21,340 -------- -------- ------- ------- ------- Operating costs and expenses: Selling, general and administrative........ 53,581 31,743 25,333 18,444 12,777 Research and development................... 8,665 6,055 4,813 4,763 3,610 Amortization of goodwill and intangible assets..................................... 4,575 -- -- -- -- Merger and restructuring costs(2).......... 23,592 -- -- 485 -- -------- -------- ------- ------- ------- Total operating costs and expenses....... 90,413 37,798 30,146 23,692 16,387 -------- -------- ------- ------- ------- Income (loss) from operations.............. (38,708) 20,204 11,234 7,150 4,953 Other income (expense)....................... (796) 1,722 1,100 925 79 -------- -------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes............................... (39,504) 21,926 12,334 8,075 5,032 Provision (benefit) for income taxes(3)...... (3,899) 8,332 4,440 2,903 2,027 -------- -------- ------- ------- ------- Net income (loss)............................ $(35,605) $ 13,594 $ 7,894 $ 5,172 $ 3,005 ======== ======== ======= ======= ======= Basic earnings (loss) per share(4)........... $ (1.63) $ 0.70 $ 0.43 $ 0.32 $ 0.24 ======== ======== ======= ======= ======= Diluted earnings (loss) per share(4)......... $ (1.63) $ 0.67 $ 0.42 $ 0.30 $ 0.21 ======== ======== ======= ======= ======= Shares used in computing basic earnings per share(4)................................... 21,853 19,305 18,456 16,224 12,717 ======== ======== ======= ======= ======= Shares used in computing diluted earnings per share(4)................................... 21,853 20,429 18,980 17,504 14,484 ======== ======== ======= ======= =======
27
JANUARY 31, ---------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................................ $ 25,674 $ 78,505 $39,536 $20,701 $ 2,485 Working capital............................ 23,734 111,755 56,530 52,117 7,529 Total assets............................... 208,491 148,074 82,823 68,736 21,486 Long-term debt............................. 44,000 -- -- -- -- Total stockholders' equity................. 92,219 125,058 65,406 57,131 8,803
------------------------ (1) On June 6, 2001, we completed the acquisition of Check Solutions Company, a New York general partnership ("Check Solutions"). The operating results of Check Solutions are included in our results of operations from the date of acquisition. See Note 3 of our Notes to Consolidated Financial Statements for information concerning our acquisition of Check Solutions. (2) See Note 11 of our Notes to Consolidated Financial Statements for information concerning the Merger, Restructuring and Write-off of Capitalized Software Costs and Prepaid Software Royalties for the year ended January 31, 2002. (3) See Note 5 of our Notes to Consolidated Financial Statements for information concerning the provision (benefit) for income taxes for the year ended January 31, 2002. (4) See Notes 2 and 8 of our Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted earnings per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS," ELSEWHERE IN THIS REPORT OR IN THE INFORMATION INCORPORATED BY REFERENCE IN THIS REPORT. YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA" INCLUDED IN THIS REPORT, AS WELL AS OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT. OUR FISCAL YEAR ENDS ON JANUARY 31. REFERENCES CONTAINED IN THIS REPORT TO A GIVEN FISCAL YEAR REFER TO THE TWELVE-MONTH PERIOD ENDED JANUARY 31 OF THE SUCCEEDING YEAR. FOR EXAMPLE, OUR FISCAL YEAR ENDED JANUARY 31, 2002 IS REFERRED TO IN THIS REPORT AS "FISCAL 2001." 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 Check Solutions in June 2001, we were able to significantly enhance our portfolio of software products. The acquisition of Check Solutions was accounted for as a purchase. We separate our business operations into three reportable business segments: Revenue Enhancement, Global Technology Solutions and Enterprise Solutions. See Note 10 of our Notes to Consolidated Financial Statements. 28 We derive our revenues from consulting fees, software license fees, software maintenance fees, and software implementation fees. 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 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. RESULTS OF OPERATIONS The following discussion of our results of operations for the fiscal years ended January 31, 2002, 2001 and 2000 is based upon data derived from the statements of operations contained in our audited Consolidated Financial Statements appearing elsewhere in this Report. The following table sets forth this data as a percentage of total revenues.
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Revenues: Consulting fees...................................... 32.5% 65.0% 65.6% Software license fees................................ 30.6 16.4 18.5 Software maintenance fees............................ 22.3 10.2 9.2 Software implementation fees......................... 14.6 8.4 6.7 ----- ----- ----- Total revenues..................................... 100.0 100.0 100.0 ----- ----- ----- Cost of revenues: Consulting fees...................................... 26.5 34.6 36.4 Software license fees................................ 5.2 5.0 2.6 Write-off capitalized software costs and prepaid software royalties................................... 11.3 -- -- Software maintenance fees............................ 5.6 2.7 3.3 Software implementation fees......................... 12.1 5.1 3.1 ----- ----- ----- Total cost of revenues............................. 60.7 47.4 45.4 ----- ----- ----- Gross profit........................................... 39.3 52.6 54.6 Operating costs and expenses: Selling, general and administrative.................. 40.7 28.8 33.4 Research and development............................. 6.6 5.5 6.4 Amortization of goodwill and intangible assets....... 3.5 -- -- Merger and restructuring costs....................... 17.9 -- -- ----- ----- ----- Total operating costs and expenses................. 68.7 34.3 39.8 ----- ----- ----- Income (loss) from operations.......................... (29.4) 18.3 14.8 Other income (expense)................................. (0.6) 1.6 1.5 ----- ----- ----- Income (loss) before provision (benefit) for income taxes................................................ (30.0) 19.9 16.3 Provision (benefit) for income taxes................... (3.0) 7.6 5.9 ----- ----- ----- Net income (loss)...................................... (27.0)% 12.3% 10.4% ===== ===== =====
29 YEAR ENDED JANUARY 31, 2002 (FISCAL 2001) COMPARED TO YEAR ENDED JANUARY 31, 2001 (FISCAL 2000) REVENUES. Our total revenues increased by $21.4 million or 19% to $131.7 million in fiscal 2001 from $110.3 million in fiscal 2000. After adjusting for the $50.2 million of revenue attributable to the acquisition of Check Solutions on June 6, 2001, underlying revenue decreased 26% for fiscal 2001. The decrease primarily resulted from a decline in Consulting Fees in both the Revenue Enhancement and Enterprise Solutions business segments. CONSULTING FEES: Revenues from consulting fees decreased by $28.9 million or 40% to $42.8 million for fiscal 2001 from $71.7 million for fiscal 2000. Consulting fees have decreased primarily due to a decrease within the Revenue Enhancement and Enterprise Solutions business segments. The Check Solutions acquisition had no impact on consulting fees. Revenue Enhancement revenues decreased by $14.0 million or 35% to $26.0 million for fiscal 2001 from $40.0 million in fiscal 2000. Due to the lower number of engagements and general economic conditions, we experienced lower revenues from Revenue Enhancement's value-priced engagements. In an effort to mitigate these factors and to allow customers to more closely match expected benefits from our Revenue Enhancement services, we began in the quarter ended October 31, 2001 to offer payment terms which extend beyond 12 months. Enterprise Solutions consulting fees decreased $10.0 million or 36% to $17.7 million for fiscal 2001 from $27.7 million for fiscal 2000. During the fiscal year, economic conditions caused banks to delay the timing of IT spending decisions, increasing pricing pressures on these engagements, and slowed mergers or consolidations which also drive revenue for the Enterprise Solutions segment, resulting in lower overall consulting fees. SOFTWARE LICENSE FEES: Revenues from software license fees increased $22.3 million or 123% to $40.3 million from $18.0 million for fiscal 2000. After adjusting for the software license fees attributable to the Check Solutions acquisition of $24.5 million for fiscal 2001, our underlying software license fees decreased 12% as compared to fiscal 2000. The underlying decrease in software license fees in fiscal 2001 is due principally to the decision to discontinue our CheckFlow product line during the quarter ended July 31, 2001 in light of products available through the acquisition of Check Solutions. This decrease was partially offset by software license growth in FraudLink Solutions. SOFTWARE MAINTENANCE FEES: Revenues from software maintenance fees increased $18.1 million or 162% to $29.3 million for fiscal 2001 from $11.2 million for fiscal 2000. After adjusting for software maintenance fees attributable to the Check Solutions acquisition of $15.8 million for fiscal 2001, our underlying software maintenance fees increased 21% for fiscal 2001 as compared to fiscal 2000. Our underlying software maintenance fees have increased as a result of increased software license revenue derived principally from our FraudLink Solutions during fiscal 2001, resulting in an increased number of customers and products under maintenance contracts. Maintenance contracts are also normally subject to annual rate increases, usually between 5% and 10%, which are expected to continue in the future. SOFTWARE IMPLEMENTATION FEES: Revenues from software implementation fees increased $9.9 million or 106% to $19.2 million for fiscal 2001 from $9.3 million for fiscal 2000. After adjusting for software implementation fees attributable to the Check Solutions acquisition of $9.9 million, our underlying software implementation fees were flat for fiscal 2001 as compared to fiscal 2000. The lack of growth of software implementation fees is due to our product mix. The majority of the software license growth is in the FraudLink Solutions, which generally require less complicated and therefore smaller implementation engagements. COST OF REVENUES: Our total cost of revenues have increased $27.7 million or 53% to $80.0 million for fiscal 2001 from $52.3 million for fiscal 2000. After adjusting for costs of revenues attributable to the Check Solutions acquisition of $12.9 million for fiscal 2001 and write-off of capitalized software costs and prepaid software royalties of $14.9 million for fiscal 2001, our underlying cost of revenues in fiscal 2001 were flat as compared to fiscal 2000. The increased costs as a percentage of revenues in 30 fiscal 2001 as compared to fiscal 2000 is a result of higher personnel costs during periods where corresponding revenues have been flat or declining. COST OF CONSULTING: Cost of consulting decreased $3.2 million or 8% to $35.0 million for fiscal 2001 from $38.2 million for fiscal 2000. Cost of consulting as a percentage of consulting fees increased to 82% for fiscal 2001 from 53% for fiscal 2000. There has been no impact on these costs attributable to the Check Solutions acquisition. Cost of consulting as a percentage of corresponding revenue has increased due to reductions in revenue levels over comparable periods. The decrease in the cost of consulting is due to reduced personnel through merger and restructuring efforts, contract labor and travel costs. COST OF SOFTWARE LICENSES: Cost of software licenses increased $1.4 million or 24% to $6.9 million for fiscal 2001 from $5.5 million for fiscal 2000. Costs of software licenses increased principally due to the addition of $3.6 million of costs from Check Solutions, offset by underlying decreases in software royalties and software amortization from our existing products. Cost of software licenses as a percentage of license fees decreased to 17% in fiscal 2001 from 31% in fiscal 2000. The decrease in cost of software licenses as a percentage of license fees was driven principally by increases in license fee revenue including revenues resulting from the acquisition of Check Solutions. In connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which we acquired software technology used in products sold to its customers, we are required to pay royalties on sales of certain software products, including four Back Office products and the Branch Truncation Management product. Under these arrangements, we accrue royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20% to 30%. Approximately $2,465,000 and $1,914,000 of royalty expense was recorded under these agreements in the years ended January 31, 2002 and 2001, respectively. Royalty expense is included as a component of the cost of software license in the accompanying consolidated statements of operations. Depending on our future product mix, our margins from software license fees may be negatively impacted by increased software royalty expense. WRITE-OFF OF CAPITALIZED SOFTWARE COSTS AND PREPAID SOFTWARE ROYALTIES: During the second quarter of fiscal 2001, in connection with the Company's periodic impairment review of its portfolio of software products, the Vault software acquired in the X-Port business combination in May 2000 was deemed to be impaired. Based on our calculation of the expected cash flows of the product, a $2.8 million non-cash charge was recorded. The charge resulted from the loss of two key transactions and the projected changes in the approach to selling and delivering the software and related services under a time or usage model. Effective March 31, 2001, we entered into an alliance with Exchange Applications, Inc. ("Xchange"). As part of this alliance we became the exclusive provider of their EnAct customer relationship software and methodology to the banking industry. Under the agreement, we became obligated for guaranteed royalty payments of $12.5 million. Based on our periodic evaluation of the future cash flows associated with this product, a liability for the remaining $2.5 million obligation was accrued at October 31, 2001, and the carrying value of the prepaid software royalties, at that time, of $9.6 million was reduced to zero. This analysis resulted in a charge of $12.1 million to "cost of revenue" during the quarter ended October 31, 2001. During December 2001, we negotiated with Xchange and received a commitment for $960,000 as a partial offset to expenses to be incurred to enhance and support the EnAct software for the existing customer base. Through January 31, 2002, we reflected $480,000 of this reimbursement as a reduction in our cost of revenue. COST OF SOFTWARE MAINTENANCE: Cost of software maintenance increased $4.4 million or 152% to $7.3 million for fiscal 2001 from $2.9 million for fiscal 2000. Costs of software maintenance as a percentage of software maintenance fees decreased to 25% for fiscal 2001 from 26% for fiscal 2000. 31 Costs of software maintenance increased principally due to the addition of $2.5 million of costs from Check Solutions and an underlying increase in personnel costs due to job reassignments attributable to fewer research and development efforts undertaken in fiscal 2001, but decreased as a percentage of maintenance fees due to increased revenue levels. COST OF SOFTWARE IMPLEMENTATION: Cost of software implementation increased $10.2 million or 182% to $15.9 million for fiscal 2001 from $5.7 million for fiscal 2000. Cost of software implementation as a percentage of implementation fees increased to 83% for fiscal 2001 from 61% for fiscal 2000. The acquisition of Check Solutions increased the costs of software implementation by $6.8 million for fiscal 2001. The underlying cost of implementations increased primarily due to increased non-billable time and travel, which was due to delays in implementation efforts and integration during the third quarter caused by litigation with Pegasystems, Inc. during that quarter. OPERATING COSTS AND EXPENSES: SELLING GENERAL AND ADMINISTRATIVE: Selling general and administrative expenses increased $21.9 million or 69% to $53.6 million for fiscal 2001 from $31.7 million for fiscal 2000. Selling, general and administrative expenses as a percent of revenue increased to 41% for fiscal 2001 from 29% for fiscal 2000. 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 acquisition of Check Solutions increased selling, general and administrative expenses by $13.4 million during fiscal 2001 reflecting the additional costs associated with the Check Solutions' operations. Underlying selling, general and administrative expenses increased by 27% for fiscal 2001 as compared to fiscal 2000. The increase in these underlying expenses reflect increased personnel costs, contract labor, travel, office costs and infrastructure costs related to the implementation of the PeopleSoft ERP system and growth in management staff to support projected revenues. RESEARCH AND DEVELOPMENT: Research and development expenses increased $2.6 million or 43% to $8.7 million for the fiscal 2001 from $6.1 million for fiscal 2000. Research and development expenses were principally generated by Check Solutions, which accounted for $6.0 million of these expenses during fiscal 2001. These expenses related primarily to our development of the Adjustments Express Back Office product, which was generally available in the fourth quarter of fiscal 2001. The increase from Check Solutions was offset by a decrease in underlying research and development activity, through reduced personnel costs from employee reductions or job reassignment. AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS: Amortization of intangibles was $4.6 million for fiscal 2001. The amortization results from the periodic recognition of amortization expense of goodwill and intangible assets acquired in the Check Solutions acquisition. Goodwill and other indefinite lived intangibles will cease to be amortized effective February 2002, when we adopt Statement of Financial Accounting Standards ("SFAS") No. 141 and No. 142. See further discussion in Note 2 to our Consolidated Financial Statements regarding the adoption of SFAS No. 141 and No. 142. MERGER AND RESTRUCTURING COSTS: In connection with the acquisition of Check Solutions during the quarter ended July 31, 2001, we recorded $15.6 million in merger-related costs (consisting of $11.3 million attributable to cost of revenues, $2.3 million attributable to research and development, and $2.0 million attributable to selling, general and administrative costs). In connection with the various legal and administrative actions surrounding the dispute with Pegasystems, Inc. during the quarter ended October 31, 2001, we recorded an additional $4.2 million of settlement and legal costs and classified them in merger and restructuring costs in the consolidated statement of operations. The payment of these costs will be completed during the year ended January 31, 2003. 32 During the fourth quarter of fiscal 2001, we implemented an additional reduction in its workforce to adjust staffing levels to a level sufficient to support projected business activities. Primarily as a result of the reductions, approximately 95 employees were terminated and a charge of $3.8 million relating primarily to severance costs was recorded during the quarter. These costs are summarized below (in thousands):
MERGER AND RESTRUCTURING COSTS ------------- Workforce reductions........................................ $ 1,925 Charges relating to CheckFlow Suite......................... 10,833 In-process research and development costs................... 2,300 Facility closures........................................... 240 Other....................................................... 298 ------- Quarterly period ended July 31, 2001...................... 15,596 ------- Pegasystems, Inc. settlement and legal costs................ 4,239 ------- Quarterly period ended October 31, 2001................... 4,239 ------- Workforce reductions........................................ 3,483 Facility closures........................................... 200 Charges relating to CheckFlow Suite......................... 74 ------- Quarterly period ended January 31, 2002................... 3,757 ------- Total recorded in the year ended January 31, 2002........... $23,592 =======
Included in merger and restructuring costs was $5.5 million of cash termination benefits associated with the separation of approximately 145 employees. Most of the affected employees left their positions during the quarter ended January 31, 2002. We developed the CheckFlow Suite with Pegasystems, Inc. ("Pega") under a Product Development, Distribution and Sublicensing Agreement effective May 5, 1999 (the "Agreement"). Pega filed suit to restrain us from developing, marketing, licensing, advertising, leasing or selling any products, including certain Back Office products acquired during the Check Solutions business combination, that allegedly compete with products jointly developed under the Agreement. On October 1, 2001 the Delaware Chancery Court granted Pega's motion for preliminary injunction. On November 5, 2001, all matters relating to various legal and administrative actions surrounding this dispute were settled. Under this Settlement Agreement, we agreed to pay settlement and legal costs totaling $5.4 million (of which $1.1 million was accrued at July 31, 2001), which includes royalties on prior period sales of the four Back Office products. Consistent with the prior Agreement, we will continue to pay Pega royalties based on future sales of the four Back Office products through October 31, 2006. Charges related to the CheckFlow Suite included a write-off of capitalized software costs, a write-off of accounts receivable net of deferred revenue, settlements and estimated implementation costs for existing CheckFlow customers, write-off of prepaid royalties previously paid to Pega, and payments under existing work orders and other product wind-down costs. The implementations provide for estimated time and labor along with out-of-pockets costs as of January 31, 2002. If actual costs differ from our estimates, revisions to our estimated liability would be necessary. In connection with the Check Solutions acquisition, a $2.3 million in-process research and development charge was recorded reflecting the estimated fair value of acquired research and development projects at Check Solutions, which had not yet reached technological feasibility. The facility closure charge includes $440,000 for office space, which will no longer be utilized. 33 The activity related to the merger and restructuring costs reserve balance during the year ended January 31, 2002 is as follows (in thousands):
CHARGES RELATING WORKFORCE TO CHECKFLOW FACILITY REDUCTIONS SUITE CLOSURES OTHER TOTAL ---------- ---------------- -------- -------- -------- Reserve balance at the beginning of the year..................................... $ -- $ -- $ -- $ -- $ -- Merger costs, excluding in-process research and development costs.................... 1,925 10,833 240 298 13,296 Cash paid.................................. (305) (317) -- -- (622) Non-cash charges against reserve........... -- (5,181) -- (298) (5,479) Other...................................... -- 150 -- -- 150 ------ ------- ---- ----- ------- July 31, 2001 reserve balance.............. 1,620 5,485 240 -- 7,345 Merger-related costs, Pegasystems, Inc. settlement............................... -- 4,239 -- -- 4,239 Cash paid.................................. (601) (643) (41) -- (1,285) ------ ------- ---- ----- ------- October 31, 2001 reserve balance........... 1,019 9,081 199 -- 10,299 Restructuring costs........................ 3,483 74 200 -- 3,757 Cash paid.................................. (960) (1,814) (32) -- (2,806) ------ ------- ---- ----- ------- January 31, 2002 reserve balance........... $3,542 $ 7,341 $367 $ -- $11,250 ====== ======= ==== ===== =======
INTEREST INCOME: Interest income decreased $0.4 million or 19% to $1.6 million for fiscal 2001 from $2.0 million for fiscal 2000. Interest income initially increased during fiscal 2001 due to the addition of $32.0 million of net proceeds related to our public offering of 2,000,000 shares of common stock, at a price of $17.00 per share, in November 2000. As these proceeds as well as approximately $33.7 million of additional cash, were used to fund the Check Solutions acquisition during the second quarter, we expect interest income to significantly decrease in the future. INTEREST EXPENSE: Interest expense is primarily the result of the borrowings during the second quarter under the three year revolving credit agreement with a group of banks. PROVISION (BENEFIT) FOR INCOME TAXES: The provision (benefit) 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 lowered to 9.9% for fiscal 2001 due to losses we incurred which were not benefited. For us to realize the benefit of our net operating loss carryforward and other deferred tax assets recorded as of January 31, 2002, we must generate future taxable income. Due to significant losses incurred in fiscal 2001, we concluded that the "more likely than not" criteria required for recognition of deferred tax assets under SFAS No. 109, ACCOUNTING FOR INCOME TAXES was not met at January 31, 2002. Thus, a $9.4 million valuation allowance was recorded in fiscal 2001 to fully reserve the net deferred tax assets which resulted in the unbenefitted losses. For fiscal 2000, our effective income tax rate was 38%. On March 7, 2002, the federal tax law changed to allow net operating losses for taxable years ending in 2001 and 2002 to be carried back an additional three years. Consistent with the requirements of SFAS No. 109, the impact of this change in tax law and related five year carryback was not used in the determination of the Company's tax provision and related deferred tax valuation allowance for the year ended January 31, 2002. Any impact from this change in tax law, including any reduction in the valuation allowance as a result of the expanded carryback period will first be reflected in our tax provision for the quarterly period ended April 30, 2002. At January 31, 2002, we had available net operating loss carryforwards of approximately $14.5 million, which expire in 2022. 34 YEAR ENDED JANUARY 31, 2001 (FISCAL 2000) COMPARED TO YEAR ENDED JANUARY 31, 2000 (FISCAL 1999) REVENUES. Our total revenues increased by 45.4% to $110.3 million in fiscal 2000 from $75.8 million in fiscal 1999. The increase was primarily attributable to growth in revenues from consulting fees. Revenues from consulting fees increased by 44.2% to $71.7 million in fiscal 2000 from $49.7 million in fiscal 1999. Consulting fees have increased primarily as a result of continued demand for value-priced Revenue Enhancement Services and Enterprise Solutions. Revenue Enhancement revenues increased 101.6% to $40.0 million in fiscal 2000 from $19.8 million in fiscal 1999. Enterprise Solutions increased 34.9% to $27.7 million in fiscal 2000 from $20.6 million in fiscal 1999. Value-priced engagements have a favorable reception from customers in the United States and in our foreign markets. Revenues related to value-priced opportunities tend to fluctuate period to period and are likely to fluctuate in future periods. Software license fees increased 28.8% to $18.0 million in fiscal 2000 from $14.0 million in fiscal 1999. This increase was precipitated by increased demand for our FraudLink and Back Office solutions. The FraudLink solution has been particularly successful in both Australia and the United Kingdom. Software maintenance fees increased 60.7% to $11.2 million in fiscal 2000 from $7.0 million in fiscal 1999. Increases in software maintenance fees have been driven by increased software license revenue along with annual rate increases. Additionally, increases in software maintenance fees have been driven by the acquisition of new software products that were already subject to annual maintenance contracts. Software implementation fees increased 81.7% to $9.3 million in fiscal 2000 from $5.1 million in fiscal 1999. The increase in software implementation fees have been driven by increased software licensing activity resulting in the growth in the number of customers requiring these services. COST OF REVENUES. Cost of revenues generally consists of personnel costs, amortization of capitalized software development costs, and third-party royalties. Total cost of revenues increased by 51.8% to $52.3 million in fiscal 2000 from $34.4 million in fiscal 1999. This increase resulted primarily from an increase in the cost of revenue for consulting fees, software license fees and software implementation fees. Cost of revenues for consulting fees increased by 38.5% to $38.2 million in fiscal 2000 from $27.6 million in fiscal 1999. The increase was primarily the result of increases in personnel and personnel related costs to support the growth of the Revenue Enhancement and Enterprise Solutions practices. Cost of revenues for software licenses increased 180.1% to $5.5 million in fiscal 2000 from $2.0 million in fiscal 1999. The increase was primarily due to increased amortization of capitalized software costs along with increased software royalties expense. Cost of revenues for software implementation increased 137.4% to $5.7 million in fiscal 2000 from $2.4 million in fiscal 1999. The increase was primarily due to an increase in personnel cost associated with implementation, training and customer support related to these engagements. Total cost of revenues as a percentage of total revenues increased to 47.4% in fiscal 2000 from 45.4% in fiscal 1999, primarily as a result of increased amortization of capitalized software costs and third-party royalty expense along with increased personnel costs associated with software implementations. OPERATING COSTS AND EXPENSES: SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses generally consist of personnel costs associated with selling, marketing, general management and software management, as well as fees for professional services and other related costs. Selling, general and administrative expenses increased by 25.3% to $31.7 million in fiscal 2000 from $25.3 million in fiscal 1999. The increase in these expenses primarily reflected the addition of sales, management and administrative staff during fiscal 2000 associated with our growth. As a percentage of revenues, selling, general and administrative expenses decreased to 28.8% in fiscal 2000 from 33.4% in fiscal 1999. RESEARCH AND DEVELOPMENT. Research and development expenses generally consist of personnel and related costs of developing solutions. In certain instances we have contracted with a third-party to develop our solutions. Research and development expenses increased to $6.1 million in fiscal 2000 35 compared to $4.8 million in fiscal 1999. Research and development expenses as a percentage of revenues decreased to 5.5% in fiscal 2000 from 6.4% in fiscal 1999. Research and development expenses as a percentage of non-consulting revenue decreased to 15.7% in fiscal 2000 from 18.4% in fiscal 1999. OTHER INCOME. Other income increased to $1.7 million in fiscal 2000 from $1.1 million in fiscal 1999. Other income increased as a result of higher earnings on cash and cash equivalents, and short-term investments. PROVISION FOR INCOME TAXES. The provision for income taxes increased to $8.3 million in fiscal 2000 from $4.4 million in fiscal 1999, reflecting an effective tax rate of 38% and 36% for fiscal 2000 and fiscal 1999, respectively. Increases in the estimated annual effective rate resulted from increased state taxes and also increased non-deductibility of certain expenses. 36 SELECTED CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth unaudited quarterly data for each of our last eight quarters ended January 31, 2002. The data has been derived from our unaudited consolidated financial statements that, in management's opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of this information when read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report. We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as any indication of future performance.
THREE MONTHS ENDED ------------------------------------------------------------------------------------- JAN 31, OCT 31, JULY 31, APR 30, JAN 31, OCT 31, JULY 31, APR 30, 2002(1) 2001(1) 2001(1) 2001 2001 2000 2000 2000 -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: REVENUES: Consulting fees......................... $10,276 $ 7,066 $ 10,655 $14,845 $19,219 $17,620 $21,766 $13,110 Software license fees................... 15,830 7,169 12,057 5,235 6,273 5,712 1,872 4,173 Software maintenance fees............... 10,456 9,257 6,437 3,197 3,258 2,970 2,713 2,282 Software implementation fees............ 6,188 6,192 4,703 2,127 2,037 2,455 2,311 2,495 ------- -------- -------- ------- ------- ------- ------- ------- Total revenues........................ 42,750 29,684 33,852 25,404 30,787 28,757 28,662 22,060 COST OF REVENUES: Consulting fees......................... 7,072 8,312 9,558 10,015 10,042 9,658 9,912 8,573 Software license fees................... 1,920 2,004 1,788 1,165 1,520 1,602 1,264 1,143 Write-off of capitalized software costs and prepaid software royalties(2)..... -- 12,089 2,819 -- -- -- -- Software maintenance fees............... 2,169 2,041 1,784 1,300 764 800 798 535 Software implementation fees............ 5,663 5,056 3,506 1,724 1,614 1,583 1,239 1,217 ------- -------- -------- ------- ------- ------- ------- ------- Total cost of revenues................ 16,824 29,502 19,455 14,204 13,940 13,643 13,213 11,468 ------- -------- -------- ------- ------- ------- ------- ------- Gross profit.............................. 25,926 182 14,397 11,200 16,847 15,114 15,449 10,592 ------- -------- -------- ------- ------- ------- ------- ------- OPERATING COSTS AND EXPENSES: Selling, general and administrative..... 15,924 14,629 14,091 8,937 7,508 7,816 8,821 7,598 Research and development................ 2,548 3,241 2,009 867 2,001 1,625 1,445 984 Amortization of goodwill and intangible assets.................................. 1,724 1,709 1,142 -- -- -- -- -- Merger and restructuring costs(2)....... 3,757 4,239 15,596 -- -- -- -- -- ------- -------- -------- ------- ------- ------- ------- ------- Total operating costs and expenses.... 23,953 23,818 32,838 9,804 9,509 9,441 10,266 8,582 ------- -------- -------- ------- ------- ------- ------- ------- Income (loss) from operations............. 1,973 (23,636) (18,441) 1,396 7,338 5,673 5,183 2,010 Other income (expense).................... (782) (664) (36) 686 646 330 374 372 ------- -------- -------- ------- ------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes........................ 1,191 (24,300) (18,477) 2,082 7,984 6,003 5,557 2,382 Provision (benefit) for income taxes(3)... 67 2,100 (6,836) 770 3,034 2,281 2,112 905 ------- -------- -------- ------- ------- ------- ------- ------- Net income (loss)......................... $ 1,124 $(26,400) $(11,641) $ 1,312 $ 4,950 $ 3,722 $ 3,445 $ 1,477 ======= ======== ======== ======= ======= ======= ======= ======= Basic earnings (loss) per share(4)........ $ 0.05 $ (1.21) $ (0.53) $ 0.06 $ 0.23 $ 0.20 $ 0.19 $ 0.08 ======= ======== ======== ======= ======= ======= ======= ======= Diluted earnings (loss) per share(4)...... $ 0.05 $ (1.21) $ (0.53) $ 0.06 $ 0.22 $ 0.19 $ 0.18 $ 0.08 ======= ======== ======== ======= ======= ======= ======= ======= Shares used in computing basic earnings per share(4)............................ 21,896 21,890 21,863 21,764 21,345 18,825 18,549 18,499 ======= ======== ======== ======= ======= ======= ======= ======= Shares used in computing diluted earnings per share(4)............................ 21,982 21,890 21,863 22,732 22,795 20,036 19,417 19,467 ======= ======== ======== ======= ======= ======= ======= =======
------------------------------ (1) On June 6, 2001, we completed the acquisition of Check Solutions Company, a New York general partnership ("Check Solutions"). The operating results of Check Solutions are included in our results of operations from the date of acquisition. See Note 3 of our Notes to Consolidated Financial Statements for information concerning our acquisition of Check Solutions. (2) See Note 11 of our Notes to Consolidated Financial Statements for information concerning the Merger, Restructuring and Write-off of Capitalized Software Costs and Prepaid Software Royalties for the year ended January 31, 2002. (3) See Note 5 of our Notes to Consolidated Financial Statements for information concerning the provision (benefit) for income taxes for the year ended January 31, 2002. (4) See Note 2 and 8 of our Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted earnings per share. 37 Our quarterly results may vary significantly depending primarily on factors, such as: - the extent and timing of revenues recognized, particularly in light of our historical tendency to have a disproportionately large portion of our contract signings near the end of each quarter; - increases in costs beyond anticipated levels, especially in the context of costs incurred under value-pricing contracts; - the degree of customer acceptance of new solutions; - the introduction of new or enhanced solutions by us or our competitors; - our mix of revenues derived from consulting and management service fees on the one hand, and software-related fees on the other; - customer budget cycles and priorities and purchasing cycles; - competitive conditions in the industry; - seasonal factors; - timing of consolidation decisions by customers; - the extent of customers' international expansion; and - general economic conditions. Because of the above factors, along with such non-recurring items such as merger and restructuring costs and write-off of capitalized software costs and prepaid software royalties, the results of any particular quarter may not be indicative of the results for the full year. There can be no assurance that we will continue to experience growth in revenues and earnings. LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our operations and cash expenditures primarily with cash generated from operating activities. At January 31, 2002, we had a working capital of $23.7 million compared to $111.8 million at January 31, 2001. We had $25.7 million in cash and cash equivalents at January 31, 2002, a decrease of $37.4 million from $63.1 million in cash and cash equivalents at January 31, 2001. At January 31, 2002, we had $44.0 million of long-term debt. Based on our cash forecasts, we expect to use cash from an equity offering discussed below and cash from operating activities to fund our operations in fiscal 2002. Cash used in operating activities was $7.9 million in fiscal 2001 compared to cash provided by operating activities of $11.2 million in fiscal 2000 and $14.1 million in fiscal 1999. Operating cash flows decreased in fiscal 2001 primarily due to our net loss for fiscal 2001, increases in accounts receivable, prepayments of software royalties and decreases in deferred revenues. 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 38 expenses to the revenue portion of the computation. Reimbursed expenses are travel and out of pocket expenses, which are not considered revenue but are included in outstanding receivables.
QUARTER ENDED DSO DSO INCLUDING EXPENSE REIMBURSEMENTS ------------- -------- ------------------------------------ January 31, 2002....................... 124 118 October 31, 2001....................... 164 151 July 31, 2001.......................... 147 137 April 30, 2001......................... 169 151 January 31, 2001....................... 131 119
Cash used in investing activities during fiscal 2001 was $72.5 million, and was primarily related to the acquisition of Check Solutions Company. Cash used in investing activities during fiscal 2000 was $11.1 million, and was primarily related to the purchase of two companies, Automated Integrated Solutions, Inc. and X-Port Software, Inc., along with purchases of property and equipment. Cash used in investing activities was $8.5 million in fiscal 1999, and was related to purchases of property and equipment and capitalization of computer software costs. Financing activities provided cash of $43.0 million in fiscal 2001 and $37.0 million in fiscal 2000 compared to cash used in financing activities of $0.3 million in fiscal 1999. Cash provided by financing activities in fiscal 2001 resulted primarily from $45 million drawn on our revolving credit agreement entered into to assist in funding the Check Solutions acquisition. The cash provided by financing activities in fiscal 2000 related to our public offering of 2,000,000 shares of common stock on November 3, 2000 which raised $31.5 million after deducting the costs of the offering. On June 6, 2001, we entered into a three-year revolving credit agreement with a group of banks in an amount not to exceed $60.0 million. At January 31, 2002, we had borrowed $44.0 million to fund the acquisition of Check Solutions. All outstanding borrowings are due on June 5, 2004. Borrowings under the credit agreement bear interest equal to either the greater of prime or federal funds rate plus a margin ranging from 0.00% to 0.75% depending on our ratio of funded debt to Earnings Before Interest, Taxes Depreciation and Amortization ("EBITDA"); or London Interbank Offered Rate ("LIBOR") plus a margin equal to 1.50% to 2.25% depending on our ratio of funded debt to EBITDA. Interest payments are due quarterly. We are required to pay a commitment fee equal to 0.25% to 0.50% depending on our ratio of funded debt to EBITDA on the unused amount of the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants including financial covenants requiring the maintenance of specified interest coverage, ratio of EBITDA to funded debt, and ratio of accounts receivable, cash and short-term investments to funded debt. Additionally, the payment of dividends is precluded subject to the approval of the banks. Effective October 31, 2001, we entered into an amendment to the credit agreement to reflect the impact of the decline in recent operating results. Under the amendment, margin rates were increased on prime or federal funds based loans to 2.00%, and on LIBOR based loans to 3.50%. Effective August 1, 2002, margins will decrease to a range of 0.50% to 1.25% on prime or federal funds based loans, and to a range of 2.00% to 2.75% on LIBOR based loans. Substantially all of our assets collateralize this revolving credit agreement. Also under the amendment, certain covenants were adjusted to levels we expect to achieve. As of January 31, 2002, we are in compliance with the covenants of the revolving credit agreement, as amended. While there can be no assurance, we believe we will continue to meet these covenants during the year ended January 31, 2003. Any instances of non-compliance would negatively impact our liquidity. Our ability to make additional borrowings under this revolving credit agreement is limited by a formula based on our outstanding accounts receivable. Additionally, if our accounts receivable decreases below certain levels as defined in the revolving credit agreement, mandatory prepayments of 39 the debt may be required. At January 31, 2002, $3.8 million of additional borrowing capacity was available to us under the formula. At January 31, 2002, we had material commitments for our operating leases, as described in Note 7 in our Notes to Consolidated Financial Statements, including commitments of approximately $4.2 million in fiscal 2002. We have no material commitments for our capital expenditures. In fiscal 2002, we expect capital expenditures to be similar or slightly less than levels experienced in fiscal 2001. We may in the future pursue acquisitions of businesses, products or technologies that could complement or expand our business and product offerings. Any material acquisition or joint venture could result in a decrease in our working capital depending on the amount, timing and nature of the consideration to be paid. On April 5, 2002, we sold 1,282,214 shares to a group of investors in a private transaction. In connection with this transaction, we intend to file a registration statement on Form S-3, following the filing of this annual report on Form 10-K for the year ended January 31, 2002, seeking to register the resale of such shares. We utilized the approximately $9.3 million of net proceeds that were received from the sale to satisfy existing obligations due to certain former employees of Check Solutions, with the remainder being used for working capital. Such amounts were paid on April 5, 2002. See Note 13 in our Notes to Consolidated Financial Statements. We believe that current cash balances and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities during fiscal 2002. However, if current sources are not sufficient to meet our needs, we may seek additional equity or debt financing. There can be no assurance that additional financing would be available on acceptable terms, if at all. 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. The failure to secure additional financing when needed could have a material adverse effect on our business, financial condition and results of operations. The following summarizes our contractual obligations at January 31, 2002 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
PAYMENTS DUE BY PERIOD ----------------------------------------------------- TOTAL 1 YEAR OR LESS YEARS 2-3 AFTER 3 YEARS -------- -------------- --------- ------------- Revolving credit agreement(1)..................... $44,000 $ -- $44,000 $ -- Operating leases.................................. 25,209 4,225 7,629 13,355 Accrued merger and restructuring costs............ 11,250 11,250 -- -- ------- ------- ------- ------- $80,459 $15,475 $51,629 $13,355 ======= ======= ======= =======
------------------------ (1) Borrowings under the revolving credit agreement are subject to repayment based on our outstanding accounts receivable levels, as defined in the revolving credit agreement. See Note 4 to our Notes to Consolidated Financial Statements. ACCOUNTING POLICIES In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use certain estimates and assumptions that affect the reported amounts and related disclosures and our estimates may vary from actual results. We consider the following four accounting policies as the most important to the portrayal of our financial condition and those that require the most subjective judgment. Although we believe that our estimates and 40 assumptions are reasonable, actual results may differ, and such differences could be significant to our financial results. REVENUE RECOGNITION 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 upon daily rates for services performed and out-of-pocket expenses. In this case, we are 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 believe that this method is appropriate because of our ability to determine performance milestones and determine dependable estimates of our costs applicable to each phase of a contract. Since financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to revisions as the contract progresses. Anticipated losses on fixed-priced contracts are recognized when estimable. Third, we may deliver consulting services pursuant to a value-priced 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 a percentage 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). In an effort to allow customers to more closely match expected benefits from our services with payments to us, during the third quarter of fiscal 2001, we began to offer payment terms which extend beyond 12 months. When we enter into an agreement which has a significant component of the total amount payable under the agreement due beyond 12 months and it is determined payments are not fixed and determinable at the date the agreement was entered into, revenue under the arrangement will be recognized as payments become due and payable. Under this approach, upon contract signing, a completed backlog of revenue is established which is incrementally recognized as revenue over future quarters as amounts become due and payable under the agreement. When fees are to be paid based on a percentage of actual revenues and/or savings to our customers, 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 continue to account for a large percentage of our revenues in the future. As a consequence of the use of 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. Expenses are netted against reimbursements for consolidated financial statement reporting purposes, for fiscal 2001, 2000 and 1999. Beginning February 1, 2002, we will begin to characterize reimbursements received for 41 out-of-pocket expenses incurred as revenue in the statement of operations in accordance with a recent FASB announcement. See "Recently Issued Accounting Standards". 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 but not to exceed twelve months. 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. Although substantially all of our current software licenses provide for a fixed price license fee, some licenses instead provide for the customer to pay a monthly license fee based on actual use of the software product. The level of license fees earned by us under these arrangements will vary based on the actual amount of use by the customer. Revenue under these arrangements is recognized on a monthly basis. In connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which we acquired software technology used in products sold to its customers, we are required to pay royalties on sales of certain software products, including four Back Office products and Branch Truncation Management product. Under these arrangements, we accrue royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20%-30%. Royalty expense is included as a component of the cost of software licenses in the accompanying consolidated statement of operations. 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 as these services are not essential to the functionality of the associated software. Revenues for agreements that include one or more elements to be delivered at a future date are recognized based on the relative fair value of those elements determined using vendor-specific objective evidence. If fair values have not been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values have been determined. Our contracts do not include right of return clauses. As a result, we have experienced few returns or cancellations for our products, and accordingly we do not record a provision for returns. ALLOWANCE FOR DOUBTFUL ACCOUNTS A large proportion of our revenues and receivables are attributable to our customers in the banking industry. Our trade accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers. Because our accounts receivable are typically unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors, including a 42 particular customer's ability to pay as well as the age of receivables. To evaluate a specific customer's ability to pay, we analyze financial statements, payment history, and various information or disclosures by the customer or other publicly available information. In cases where the evidence suggests a customer may not be able to satisfy its obligation to us or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of our products and services, we set up a specific reserve in an amount we determine appropriate for the perceived risk. Most of our contracts include multiple payment milestones, some of which occur in advance of revenue recognition, which mitigates our risk both in terms of collectibility and adjustments to recorded revenue. SOFTWARE COSTS CAPITALIZED, GOODWILL AND OTHER INTANGIBLE ASSETS Software costs capitalized include developed technology acquired in acquisitions and costs incurred by us in developing our products which qualify for capitalization. We capitalize our development costs of software, other than internal use software, in accordance with Statement of Financial Accounting Standards No. 86, "ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED" ("SFAS 86"). Our policy is to capitalize software development costs incurred in developing a product once technological feasibility of the product has been established. Software development costs capitalized also include amounts paid for purchased software on products that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detailed program design, technological feasibility is determined only after completion of a working model which has been beta tested. All software development costs capitalized are amortized using an amount determined as the greater of: (i) the ratio that current gross revenues for a capitalized software project bears to the total of current and future projected gross revenues for that project or (ii) the straight-line method over the remaining economic life of the product (generally three to six years). Through January 31, 2002, goodwill and other intangible assets were amortized using the straight-line method over lives of six to fifteen years. Effective February 1, 2002, goodwill will no longer be amortized. See "Recently Issued Accounting Standards" below. The goodwill will be assessed on an annual basis for impairment at the reporting unit level by applying a fair value based test. We periodically evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of other long-lived assets warrant revision or that the remaining balance may not be recoverable. When factors indicate that other long-lived assets should be evaluated for possible impairment, we use an estimate of undiscounted future net cash flows over the remaining life of the asset to determine if impairment has occurred. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent from other asset groups. An impairment in the carrying value of an asset is assessed when the undiscounted, expected future operating cash flows derived from the asset are less than its carrying value. Management believes that assumptions used to determine cash flows are reasonable, but actual future cash flows may differ from those estimated. If we determine an asset has been impaired, the impairment is recorded based on the estimated fair value of the impaired asset. MERGER AND RESTRUCTURING During fiscal year 2001, we recorded significant reserves in connection with our acquisition of Check Solutions and subsequent operational restructurings. These reserves contain significant estimates pertaining to work force reductions, and the settlement of contractual obligations resulting from our actions. Although we do not anticipate significant changes, the actual costs may differ from these estimates. 43 RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with Statement No. 142. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement No. 142 is expected to result in an increase in net income of $5.5 million ($0.25 per share using the dilutive number of shares at January 31, 2002) per year. During 2002, we will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 1, 2002 and have not yet determined what the effect of these will be on the earnings and financial position of the Company. In October 2001, the FASB issued SFAS No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144, which replaces SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transaction reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. We do not anticipate that a charge, if any, related to the adoption of SFAS No. 144 in fiscal 2002 will be significant. In November 2001, the FASB issued a Staff Announcement Topic D-103 covering the "INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR OUT OF POCKET EXPENSES INCURRED" ("Announcement"). The Announcement requires companies to characterize reimbursements received for out of pocket expenses incurred as revenue in the statement of operations. We netted reimbursements received for out of pocket expenses against the related expenses in the accompanying consolidated statements of operations. The Announcement is to be applied in financial reporting periods beginning after December 15, 2001 and comparative financial statements for prior periods are to be reclassified to comply with the guidance in this announcement. We will adopt the Announcement beginning in the first quarter of fiscal 2002. The Announcement is not expected to have a significant impact on gross margin and will have no effect on net income, but will increase consulting fees and software implementation fees and related costs of revenues. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK We invest our cash in a variety of financial instruments. These investments are denominated in U.S. dollars and maintained with nationally recognized financial institutions, and mutual fund companies. 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. All investments were liquidated as of January 31, 2002. The weighted- 44 average interest rate on investment securities at January 31, 2001 was 4.5%. Amortized cost of short-term investments held at January 31, 2001 was $15.4 million, which approximates fair value. We currently have $44.0 million outstanding under our revolving credit agreement at January 31, 2002. As described in Note 4 of our Notes to Consolidated Financial Statements, the interest rate is variable. At January 31, 2002, the interest rate on $35.0 million of the debt is 5.44% and the interest rate on $9.0 million of the debt is 5.25%. FOREIGN CURRENCY RISK Less than 5% of our accounts receivable balance at January 31, 2002 and 2001 was denominated in a foreign currency. Our exposure to adverse movements to foreign exchange rates is not significant. Therefore, we do not currently hedge our foreign currency exposure. Historically, foreign currency gains and losses have not had a significant impact on our results of operations or financial position. We will continue to evaluate the need to adopt a hedge strategy in the future and may implement a formal strategy if the volume of our business transacted in foreign currencies increases. 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CARREKER CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........... 47 Consolidated Balance Sheets as of January 31, 2002 and 2001...................................................... 48 Consolidated Statements of Operations for the years ended January 31, 2002, 2001 and 2000........................... 49 Consolidated Statements of Stockholders' Equity for the years ended January 31, 2002, 2001 and 2000............... 50 Consolidated Statements of Cash Flows for the years ended January 31, 2002, 2001 and 2000........................... 51 Notes to Consolidated Financial Statements.................. 52
46 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Carreker Corporation We have audited the accompanying consolidated balance sheets of Carreker Corporation (the Company), as of January 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carreker Corporation at January 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Dallas, Texas March 7, 2002 (except for Note 13, as to which the date is April 5, 2002) 47 CARREKER CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 31, ------------------- 2002 2001 -------- -------- ASSETS Current assets Cash and cash equivalents................................. $ 25,674 $ 63,098 Short-term investments.................................... -- 15,407 Accounts receivable, net of allowance of $2,367 and $580 at January 31, 2002 and 2001, respectively.............. 58,792 44,746 Federal income tax receivable............................. 4,823 5,372 Prepaid software royalties................................ 368 635 Prepaid expenses and other current assets................. 3,281 1,919 Deferred income taxes..................................... 816 678 -------- -------- Total current assets........................................ 93,754 131,855 Property and equipment, net of accumulated depreciation of $10,682 and $7,305 at January 31, 2002 and 2001, respectively.............................................. 10,384 5,888 Software costs, net of accumulated amortization of $10,023 and $8,711 at January 31, 2002 and 2001, respectively..... 25,708 10,222 Goodwill, net of accumulated amortization of $3,019 at January 31, 2002.......................................... 65,018 -- Intangible assets, net of accumulated amortization of $1,555 at January 31, 2002....................................... 12,445 -- Deferred loan costs......................................... 1,008 -- Deferred income taxes....................................... -- 29 Other assets................................................ 174 80 -------- -------- Total assets................................................ $208,491 $148,074 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 4,281 $ 3,521 Accrued compensation and benefits......................... 19,775 1,925 Other accrued expenses.................................... 6,218 3,902 Note payable.............................................. -- 880 Income taxes payable...................................... -- 862 Deferred revenue.......................................... 28,496 9,010 Accrued merger and restructuring costs.................... 11,250 -- -------- -------- Total current liabilities................................... 70,020 20,100 Long-term debt.............................................. 44,000 -- Deferred income taxes....................................... 816 2,916 Deferred revenue............................................ 1,436 -- -------- -------- Total liabilities........................................... 116,272 23,016 -------- -------- Stockholders' equity Preferred stock, $.01 par value: 2,000 shares authorized; no shares issued or outstanding......................... -- -- Common stock, $.01 par value: 100,000 shares authorized; 21,924 and 21,738 shares issued at January 31, 2002 and 2001, respectively...................................... 219 217 Additional paid-in capital................................ 93,680 90,873 Retained earnings (deficit)............................... (1,165) 34,440 Less treasury stock, at cost: 27 and 18 common shares as of January 31, 2002 and 2001, respectively.............. (515) (472) -------- -------- Total stockholders' equity.................................. 92,219 125,058 -------- -------- Total liabilities and stockholders' equity.................. $208,491 $148,074 ======== ========
See accompanying notes. 48 CARREKER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- REVENUES: Consulting fees........................................... $ 42,842 $ 71,715 $49,725 Software license fees..................................... 40,291 18,030 13,994 Software maintenance fees................................. 29,347 11,223 6,985 Software implementation fees.............................. 19,210 9,298 5,116 -------- -------- ------- Total revenues.......................................... 131,690 110,266 75,820 COST OF REVENUES: Consulting fees........................................... 34,957 38,185 27,574 Software license fees..................................... 6,877 5,529 1,974 Write-off of capitalized software costs and prepaid software royalties...................................... 14,908 -- -- Software maintenance fees................................. 7,294 2,897 2,511 Software implementation fees.............................. 15,949 5,653 2,381 -------- -------- ------- Total cost of revenues.................................. 79,985 52,264 34,440 -------- -------- ------- Gross profit................................................ 51,705 58,002 41,380 OPERATING COSTS AND EXPENSES: Selling, general and administrative....................... 53,581 31,743 25,333 Research and development.................................. 8,665 6,055 4,813 Amortization of goodwill and intangible assets............ 4,575 -- -- Merger and restructuring costs............................ 23,592 -- -- -------- -------- ------- Total operating costs and expenses...................... 90,413 37,798 30,146 -------- -------- ------- Income (loss) from operations............................... (38,708) 20,204 11,234 OTHER INCOME (EXPENSE): Interest income, net...................................... 1,580 1,959 1,164 Interest (expense), net................................... (2,265) (64) (14) Other expense............................................. (111) (173) (50) -------- -------- ------- Total other income (expense)............................ (796) 1,722 1,100 Income (loss) before provision (benefit) for income taxes... (39,504) 21,926 12,334 Provision (benefit) for income taxes........................ (3,899) 8,332 4,440 -------- -------- ------- Net income (loss)........................................... $(35,605) $ 13,594 $ 7,894 ======== ======== ======= Basic earnings (loss) per share............................. $ (1.63) $ 0.70 $ 0.43 ======== ======== ======= Diluted earnings (loss) per share........................... $ (1.63) $ 0.67 $ 0.42 ======== ======== ======= Shares used in computing basic earnings (loss) per share.... 21,853 19,305 18,456 Shares used in computing diluted earnings (loss) per share..................................................... 21,853 20,429 18,980
See accompanying notes. 49 CARREKER CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK TOTAL ------------------- PAID-IN DEFERRED EARNINGS ------------------- STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) SHARES AMOUNT EQUITY -------- -------- ---------- ------------- --------- -------- -------- ------------- Balance at January 31, 1999....................... 18,354 $184 $44,563 $(568) $ 12,952 -- $ -- $ 57,131 Director option grant........ -- -- 28 (28) -- -- -- -- Termination of restricted stock grant................ (23) -- (80) 80 -- -- -- -- Compensation earned under employee/ director stock option plans............... -- -- -- 333 -- -- -- 333 Purchases of treasury stock...................... -- -- -- -- -- 89 (574) (574) Issuance of shares of common stock upon exercises of stock options.............. 208 1 (322) -- -- (88) 568 247 Tax benefit from exercises of stock options.............. -- -- 375 -- -- -- -- 375 Net income................... -- -- -- -- 7,894 -- -- 7,894 ------ ---- ------- ----- -------- --- ----- -------- Balance at January 31, 2000....................... 18,539 185 44,564 (183) 20,846 1 (6) 65,406 Director option grant........ -- -- 78 (78) -- -- -- -- Sale of stock................ 2,000 20 31,436 -- -- -- -- 31,456 Compensation earned under employee/ director stock option plans............... -- -- -- 261 -- -- -- 261 Purchases of treasury stock...................... -- -- -- -- -- 18 (472) (472) Issuance of shares of common stock upon exercises of stock options.................... 1,199 12 6,612 -- -- (1) 6 6,630 Tax benefit from exercises of stock options.............. -- -- 8,183 -- -- -- -- 8,183 Net income................... -- -- -- -- 13,594 -- -- 13,594 ------ ---- ------- ----- -------- --- ----- -------- Balance at January 31, 2001....................... 21,738 217 90,873 -- 34,440 18 (472) 125,058 Director option grant........ -- -- 56 (56) -- -- -- -- Compensation earned under employee/ director stock option plans............... -- -- 68 56 -- -- -- 124 Purchases of treasury stock...................... -- -- -- -- -- 9 (43) (43) Issuance of shares of common stock upon exercises of stock options.................... 186 2 1,161 -- -- -- -- 1,163 Tax benefit from exercises of stock options.............. -- -- 1,522 -- -- -- -- 1,522 Net loss..................... -- -- -- -- (35,605) -- -- (35,605) ------ ---- ------- ----- -------- --- ----- -------- Balance at January 31, 2002....................... 21,924 $219 $93,680 $ -- $ (1,165) 27 $(515) $ 92,219 ====== ==== ======= ===== ======== === ===== ========
See accompanying notes. 50 CARREKER CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- OPERATING ACTIVITIES: Net income (loss)......................................... $(35,605) $ 13,594 $ 7,894 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization of property and equipment.............................................. 3,801 2,591 1,997 Amortization of software costs.......................... 5,846 3,822 1,189 Amortization of goodwill and intangible assets.......... 4,575 -- -- Compensation earned under employee/director stock option plan................................................... 124 261 333 Tax benefit from exercises of stock options............. 1,522 8,183 375 Deferred income taxes................................... (2,209) (258) 757 Non-cash portion of merger and restructuring costs...... 19,027 -- -- Write-off of capitalized software costs and prepaid software royalties..................................... 14,908 -- -- Provision for doubtful accounts......................... 1,797 986 587 Amortization of software royalties...................... 473 -- -- Amortization of deferred loan costs..................... 244 -- -- Loss on sale of assets.................................. 11 24 -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable................................... (6,031) (14,889) (3,826) Prepaid expenses and other assets..................... (478) (1,133) (172) Prepayment of software royalties...................... (12,900) -- -- Accounts payable and accrued expenses................. 1,222 2,285 2,996 Income taxes payable/receivable....................... (313) (6,820) 910 Deferred revenue...................................... (3,872) 2,571 1,053 -------- -------- -------- Net cash (used in) provided by operating activities......... (7,858) 11,217 14,093 INVESTING ACTIVITIES: Purchases of short-term investments....................... -- (36,540) (6,016) Sales and maturities of short-term investments............ 15,407 34,696 5,302 Acquisition, net of cash acquired......................... (78,051) (5,268) -- Purchases of property and equipment....................... (5,967) (3,095) (3,521) Computer software costs capitalized....................... (3,964) (928) (4,259) Proceeds from disposition of assets....................... 22 -- -- -------- -------- -------- Net cash used in investing activities....................... (72,553) (11,135) (8,494) FINANCING ACTIVITIES: Purchases of treasury stock............................... (43) (466) (574) Proceeds from issuance of long-term debt.................. 45,000 -- -- Payments on long-term debt................................ (1,000) -- -- Payment of deferred loan costs............................ (1,253) -- -- Proceeds from exercises of stock options.................. 1,163 6,624 247 Proceeds from sale of stock............................... -- 31,456 -- Payments on notes payable................................. (880) (571) -- -------- -------- -------- Net cash provided by (used in) financing activities......... 42,987 37,043 (327) -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (37,424) 37,125 5,272 Cash and cash equivalents at beginning of year.............. 63,098 25,973 20,701 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 25,674 $ 63,098 $ 25,973 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid for interest.................................... $ 1,618 $ 64 $ 14 ======== ======== ======== Cash paid (received) for income taxes, net................ $ (2,980) $ 7,198 $ 2,357 ======== ======== ========
See accompanying notes 51 CARREKER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Carreker Corporation ("the Company") is a leading provider of consulting and software solutions to the banking industry. The Company's solutions include comprehensive service offerings coupled with a broad array of state-of-the-art, proprietary software products, which have been designed to address the unique requirements of the banking industry. These solutions are designed to improve the competitiveness of a bank's financial performance and operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. As discussed below, the Company makes significant estimates and assumptions in the areas of accounts receivable and revenue recognition. Although the Company believes that the estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to the Company's financial results. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of demand deposit accounts and shares in a demand money market account comprised of domestic and foreign commercial paper, certificates of deposit and U.S. government obligations which are maintained with nationally recognized financial institutions. SHORT-TERM INVESTMENTS The Company considers 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 reevaluates their 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. The fair value of debt securities is determined based upon current market value price quotes by security. As of January 31, 2002, all short-term investments have been liquidated. ACCOUNTS RECEIVABLE A significant portion of the Company's business consists of providing consulting services and licensing software to major domestic banks, which gives rise to a concentration of credit risk in receivables. The Company performs on-going credit evaluations of its customers' financial condition and generally requires no collateral. Because the Company's accounts receivable are typically 52 unsecured, the Company periodically evaluates the collectibility of its accounts based on a combination of factors, including a particular customer's ability to pay as well as the age of receivables. To evaluate a specific customer's ability to pay, the Company analyzes financial statements, payment history, and various information or disclosures by the customer or other publicly available information. In cases where the evidence suggests a customer may not be able to satisfy its obligation to the Company or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of the Company's products and services, the Company sets up a specific reserve in an amount we determine appropriate for the perceived risk. Most of the Company's contracts include multiple payment milestones, some of which occur in advance of revenue recognition, which mitigates the risk both in terms of collectibility and adjustments to recorded revenue. Write-offs of receivables during the three years ended January 31, 2002, 2001 and 2000 were $1,010,000, $1,763,000 and $502,000, respectively. Accounts receivable include unbilled amounts that represent receivables for work performed for which billings upon mutual agreement have not been presented to the customers. These receivables are generally billed and collected within one year of completion of the service. Accounts receivable include $20,958,000 and $24,055,000 of unbilled receivables at January 31, 2002 and 2001, respectively. The fair value of accounts receivable approximates the carrying amount of accounts receivable. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the terms of the related leases or the respective useful lives of the assets. The components of property and equipment are as follows (in thousands):
JANUARY 31, ------------------- 2002 2001 -------- -------- Furniture.................................................. $ 5,035 $4,304 Equipment and software..................................... 15,038 8,204 Leasehold improvements..................................... 993 685 ------- ------ Total cost............................................... 21,066 13,193 Less accumulated depreciation and amortization............. (10,682) (7,305) ------- ------ Net property and equipment............................... $10,384 $5,888 ======= ======
The Company accounts for the costs of computer software developed or obtained for internal use in accordance with Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE". The Company capitalizes costs of consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included in "Equipment and Software". Costs incurred during preliminary project and post-implementation stages are charged to expense. INTANGIBLE ASSETS AND GOODWILL Intangible assets, which consist of developed technology and software products, customer relations and assembled workforce, have been recorded as the result of business acquisitions (See Note 3) and are being amortized on the straight-line basis over six years. Developed technology and software products acquired are classified as a component of capitalized software costs in the accompanying consolidated balance sheets. 53 Goodwill is the result of differences, if any, between the aggregate consideration paid for the acquisition and the fair value of the net tangible and intangible assets acquired. Goodwill is amortized on a straight-line basis over an estimated life of 15 years. Beginning in the first quarter of the year ended January 31, 2003, goodwill will no longer be amortized, but will be subject to an annual impairment test. See "Recently Issued Accounting Standards" below. DEFERRED LOAN COSTS Deferred loan costs consist of loan closing costs and other administrative expenses associated with the Revolving Credit Agreement. The costs are being amortized to interest expense over the 36 month life of the credit agreement. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets, including goodwill and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to projected future undiscounted cash flows expected to be generated by the asset or business center. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets. The assessment of recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. See "Recently Issued Accounting Standards" below. SOFTWARE COSTS CAPITALIZED Software costs capitalized include developed technology acquired in acquisitions and costs incurred by the Company in developing its products which qualify for capitalization. The Company capitalizes the development costs of software, other than internal use software, in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). The Company's policy is to capitalize software development costs incurred in developing a product once technological feasibility of the product has been established. Software development costs capitalized also include amounts paid for purchased software on products that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detail program design, technological feasibility is determined only after completion of a working model which has been beta tested. All software development costs capitalized are amortized using an amount determined as the greater of: (i) the ratio that current gross revenues for a capitalized software project bears to the total of current and future gross revenues for that project or (ii) the straight-line method over the remaining economic life of the product (generally three to six years). The Company capitalized, excluding software acquired through business combinations, $3,964,000, $928,000 and $4,259,000, and recorded amortization relating to software development costs capitalized of $3,099,000, $3,822,000, and $1,189,000 in the years ended January 31, 2002, 2001 and 2000, respectively. REVENUE RECOGNITION Effective February 1, 2000, the Company adopted Statement of Position ("SOP") 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION WITH RESPECT TO CERTAIN TRANSACTIONS, which did not require a significant change to the Company's revenue recognition policies. In December 1999, the Securities and Exchange Commission ("SEC"), issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which was adopted retroactive to February 1, 2000. The adoption of SAB 101 did not materially affect the Company's revenue recognition policies. 54 CONSULTING FEES. The Company employs three primary pricing methods in connection with the delivery of consulting services. First, the Company may price our delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed upon daily rates for services performed and out-of-pocket expenses. In this case, the Company is generally paid fees and related amounts on a monthly basis, and the Company recognizes revenues as the services are performed. Second, the Company may deliver consulting services on a fixed-price basis. In this case, the Company is paid on a monthly basis or pursuant to an agreed upon payment schedule, and the Company recognizes revenues paid on a percentage-of-completion basis. The Company believes that this method is appropriate because of our ability to determine performance milestones and determine dependable estimates of our costs applicable to each phase of a contract. Since financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to revisions as the contract progresses. Anticipated losses on fixed-price contracts are recognized when estimable. Third, the Company may deliver consulting services pursuant to a value-priced 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 the 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 the 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 the Company to receive a percentage 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. The Company recognizes 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). In an effort to allow customers to more closely match expected benefits from our services with payments to the Company, during the third quarter of fiscal 2001, the Company began to offer payment terms which extend beyond 12 months. When we enter into an agreement which has a significant component of the total amount payable under the agreement due beyond 12 months and it is determined payments are not fixed and determinable at the date the agreement was entered into, revenue under the arrangement will be recognized as payments become due and payable. Under this approach, upon contract signing, a completed backlog of revenue is established which is incrementally recognized as revenue over future quarters as amounts become due and payable under the agreement. When fees are to be paid based on a percentage of actual revenues and/or savings to our customers, the Company recognizes revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer. The Company 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 the Company therefore assumes the risk of making these commitments with no assurance that the bank will purchase the solutions. The Company expects that value-pricing contracts will continue to account for a large percentage of our revenues in the future. As a consequence of the use of value-pricing contracts and due to the revenue recognition policy associated with those contracts, the Company's results of operations will likely fluctuate significantly from period to period. Regardless of the pricing method employed by the Company in a given contract, the Company is typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of our customers. Expenses are netted against reimbursements for consolidated financial statement reporting purposes. Beginning February 1, 2002, the Company will begin to characterize reimbursements received for out-of-pocket expenses incurred as revenue in the consolidated statement of operations in accordance with a recent FASB announcement, See Recently Issued Accounting Standards. 55 SOFTWARE LICENSE FEES. In the event that a software license is sold either together with consulting services or on a stand-alone basis, the Company is usually paid software license fees in one or more installments, as provided in the customer's contract but not to exceed twelve months. The Company recognizes 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, the Company recognizes 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. Although substantially all of the Company's current software licenses provide for a fixed price license fee, some licenses instead provide for the customer to pay a monthly license fee based on actual use of the software product. The level of license fees earned by the Company under these arrangements will vary based on the actual amount of use by the customer. Revenue under these arrangements is recognized on a monthly basis as earned. SOFTWARE MAINTENANCE FEES. In connection with the sale of a software license, a customer may elect to purchase software maintenance services. Most of the customers that purchase software licenses from the Company also purchase software maintenance services, which typically are renewed annually. The Company charges an annual maintenance fee, which is typically a percentage of the initial software license fee. The annual maintenance fee generally is paid to the Company at the beginning of the maintenance period, and the Company recognizes these revenues ratably over the term of the related contract. SOFTWARE IMPLEMENTATION FEES. In connection with the 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 the Company also purchase software implementation services. The Company prices our implementation services on a time-and-materials or on a fixed-price basis, and the Company recognizes the related revenues as services are performed. Revenues for agreements that include one or more elements to be delivered at a future date are recognized based on the relative fair value of those elements determined using vendor-specific objective evidence. If fair values have not been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values have been determined. The Company's contracts typically do not include right of return clauses. As a result, the Company has experienced few returns or cancellations for its products, and accordingly the Company does not record a provision for returns. ROYALTIES In connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which the Company acquired software technology used in products sold to its customers, the Company is required to pay royalties on sales of certain software products, including four Back Office products and the Branch Truncation Management product. Under these arrangements, the Company accrues royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20% to 30%. Approximately $2,465,000, $1,914,000 and $577,000 of royalty expense was recorded under these agreements in the years ended January 31, 2002, 2001 and 2000, respectively. Royalty expense is included as a component of the cost of software licenses in the accompanying consolidated statements of operations. 56 DEFERRED REVENUE Deferred revenue represents amounts billed to customers under terms specified in consulting, software licensing, and maintenance contracts for which completion of contractual terms or delivery of the software has not occurred. Long-term deferred revenue represents amounts received for maintenance to be provided beginning in periods on or after February 1, 2003. RESEARCH AND PRODUCT DEVELOPMENT COSTS Research and product development costs, which are not subject to capitalization under Statement of Financial Accounting Standards (SFAS) 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed," are expensed as incurred and relate mainly to the development of new products, new applications, new features or enhancements for existing products or applications and sustaining maintenance activities. EARNINGS PER SHARE Basic earnings per share is computed 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). STOCK-BASED COMPENSATION The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion No. 25"). In March 2000, the Financial Accounting Standards Board Statement ("FASB") issued Interpretation No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION (AN INTERPRETATION OF APB OPINION NO. 25)," ("FIN 44"), which became effective July 1, 2000. The adoption of the provisions of FIN 44 did not have a material impact on the Company's consolidated financial position or results of operations. As required under Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company provides pro forma disclosure of net income and earnings per share. See Note 6. RISKS AND UNCERTAINTIES The Company's future results of operations and financial condition could be impacted by the following factors, among others: dependence on the banking industry, customer concentration, indebtedness, fluctuations in operating results, eligibility of shares for sale in the market, use of fixed-price or value-priced arrangements, lack of long-term agreements, ability to gain market acceptance, ability to manage growth, dependence on key personnel, product liability, rapid technological change and dependence on new products, dependence on third-party providers and the Internet, ability to attract and retain qualified personnel, competition, potential strategic alliances and acquisitions, proprietary rights, claims and legal proceedings, international operations, use of independent contractors, changing government and tax regulations, anti-takeover provisions in our charter and impairment of goodwill or intangible assets. Negative trends in the Company's operating results could result in noncompliance of financial covenants related to its revolving credit agreement, which could impair the Company's liquidity. See description of the Company's revolving credit agreement and related financial covenants in Note 4. 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, was effective for us 57 beginning February 1, 2001. We do not currently utilize derivative financial instruments. Therefore, the adoption of SFAS 133 did not have any impact on our results of operation or financial position. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $5.5 million ($0.25 per share using the dilutive number of shares at January 31, 2002) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 1, 2002 to determine if a transition impairment charge should be recognized under SFAS 142 and has not yet determined what the effect of this change, if any, will be on the earnings and financial position of the Company. In October 2001, the FASB issued SFAS No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144, which replaces SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transaction reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. We do not anticipate that a charge, if any, related to the adoption of SFAS No. 144 in fiscal 2002 will be significant. In November 2001, the FASB issued an announcement on the topic of "INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR OUT OF POCKET EXPENSES INCURRED" (the "Announcement"). The Announcement requires companies to characterize reimbursements received for out of pocket expenses incurred as revenue in the statement of operations. The Company has netted reimbursements received for out of pocket expenses against the related expenses in the accompanying consolidated statements of operations. The Announcement is to be applied in financial reporting periods beginning after December 15, 2001 and comparative financial statements for prior periods are to be reclassified to comply with the guidance in this announcement. The Company will adopt the Announcement beginning in the first quarter of fiscal 2002. The Announcement is not expected to have a significant impact on gross margin and will have no effect on net income, but will increase consulting fees and software implementation fees and related cost of revenues. 3. BUSINESS COMBINATIONS On February 10, 2000, the Company 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, the Company 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 which was to be amortized over a four year period. However, during the three months ended July 31, 2001, the Company recorded a non-cash charge of $2.8 million representing the write-off of the remaining net book value of the capitalized software. See Note 11. In connection with the acquisition of X-Port, the Company entered into a separate agreement with the former owner of X-Port for consulting and development services through 2003. The payments for 58 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 other criteria are met. In January 2002, the Company terminated this agreement with the former owner of X-Port. The resulting charge of $1.1 million is included in merger and restructuring costs in the accompanying consolidated statement of operations. On June 6, 2001, the Company completed the acquisition of Check Solutions Company, a New York general partnership ("Check Solutions") for $110.2 million in cash, plus an additional $2.0 million of direct acquisition costs. Check Solutions is a check and image processing software and installation business that services the payment-processing sector of the financial industry. The operating results of Check Solutions are reported in the Business Segment and Revenue Concentration footnote in the Global Technology Solutions segment. The Company funded the acquisition through $65.2 million of its cash, and funded the remaining $45.0 million from proceeds under the revolving credit agreement as described in Note 4. The acquisition was accounted for by the purchase method of accounting, and accordingly, the statements of operations include the results of Check Solutions beginning June 6, 2001. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Company's management, based on information currently available and on current assumptions as to future operations. The Company has obtained an independent appraisal of the fair values of the identified intangible assets, which are being amortized on a straight-line basis. A summary of the assets acquired and liabilities assumed in the acquisition follows (In thousands): Net assets of Check Solutions............................... $ 3,663 Current technology and software products (estimated life of 5-6 years)................................................ 24,200 Customer relationships (estimated life of 6 years).......... 8,400 Assembled workforce (estimated life of 6 years)............. 5,600 Goodwill (estimated life of 15 years)....................... 68,037 In-process research and development......................... 2,300 -------- Total purchase price...................................... $112,200 ========
In connection with the acquisition of Check Solutions, a portion of the purchase price was allocated to acquired in-process research and development ("IPR&D"). The $2.3 million attributed to IPR&D was expensed on the date of the acquisition as the IPR&D projects had not reached technological feasibility nor had any alternative future use. The following unaudited pro forma financial information for the year ended January 31, 2002 and 2001, assumes the Check Solutions acquisition occurred at the beginning of the respective periods (In thousands, except per share data).
YEAR ENDED JANUARY 31, ----------------------- 2002 2001 ---------- ---------- Revenue................................................. $146,415 $150,364 Net loss................................................ (39,914) 1,405 Basic loss per share.................................... (1.83) 0.07 Diluted loss per share.................................. (1.83) 0.07
The unaudited pro-forma financial information for the year ended January 31, 2001 combines the Company's historical statement of operations for the year ended January 31, 2001 with Check Solutions' historical statement of operations for the year ended December 31, 2000. The unaudited pro-forma financial information for the year ended January 31, 2002 combines the Company's 59 statement of operations for the year ended January 31, 2002, which includes Check Solutions since the acquisition date of June 6, 2001 with Check Solutions historical statement of operations for the four months ended May 31, 2001. The pro-forma information reflects adjustments for amortization of software costs, goodwill and other intangible assets, additional interest expense and amortization of deferred loan costs related to the new credit agreement, a reduction in interest income, and the income tax impact of these adjustments. The unaudited pro forma financial information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations that may occur in the future or what would have occurred had the acquisition of Check Solutions been affected on the dates indicated. 4. REVOLVING CREDIT AGREEMENT On June 6, 2001, the Company entered into a three-year revolving credit agreement with a group of banks in an amount not to exceed $60.0 million. All outstanding borrowings are due on June 5, 2004. Borrowings under the credit agreement bear interest equal to either the greater of prime or federal funds rate plus a margin ranging from 0.00% to 0.75% depending on the Company's ratio of funded debt to EBITDA; or LIBOR plus a margin equal to 1.50% to 2.25% depending on the Company's ratio of funded debt to EBITDA. Interest payments are due quarterly. The Company is required to pay a commitment fee equal to 0.25% to 0.50% depending on the Company's ratio of funded debt to EBITDA on the unused amount of the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants including financial covenants requiring the maintenance of specified interest coverage, ratio of EBITDA to funded debt, and ratio of accounts receivable, cash and short-term investments to funded debt. Additionally, the payment of dividends is precluded subject to the approval of the banks. Effective October 31, 2001, the Company entered into an amendment to the credit agreement to reflect the impact of the decline in recent operating results. Under the amendment, margin rates were increased on prime or federal funds based loans to 2.00%, and on LIBOR based loans to 3.50%. Effective August 1, 2002, margins will decrease to a range of 0.50% to 1.25% on prime or federal funds based loans, and to a range of 2.00% to 2.75% on LIBOR based loans. Substantially all of the Company's assets collateralize the revolving credit agreement. Also under the amendment, certain covenants were eliminated for the period ended October 31, 2001, and future covenants were adjusted to levels the Company expects to achieve. As of January 31, 2002, the Company is in compliance with the covenants of the revolving credit agreement, as amended. The Company's ability to make additional borrowings under this revolving credit agreement is limited by a formula based on the Company's outstanding accounts receivable. Additionally, if the Company's accounts receivable balance decreases below certain levels as defined in the revolving credit agreement, mandatory prepayments of the debt may be required. At January 31, 2002, $3.8 million of additional borrowing capacity was available to the Company. At January 31, 2002, the Company has $44.0 million outstanding under the agreement in connection with the acquisition of Check Solutions. At January 31, 2002, the interest rate on $35.0 million of the debt is 5.44% and the interest rate on $9.0 million of the debt is 5.25%. As the interest on the debt is variable, the carrying value approximates the fair value. Interest expense on the Revolving Credit Agreement was $1,878,000 million for the year ended January 31, 2002. 60 5. PROVISION (BENEFIT) FOR INCOME TAXES The Company's provision (benefit) for income taxes consists of the following (in thousands):
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Federal: Current.......................................... $(1,690) $7,744 $3,278 Deferred......................................... (2,209) (294) 714 ------- ------ ------ (3,899) 7,450 3,992 State: Current.......................................... -- 899 404 Deferred......................................... -- (17) 44 ------- ------ ------ -- 882 448 ------- ------ ------ $(3,899) $8,332 $4,440 ======= ====== ======
The provisions (benefit) for income taxes differ from the amounts computed by applying the statutory United States federal income tax rate to income before provision, (benefit) for income taxes as follows (in thousands):
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Income tax expense at statutory rate.............. $(13,432) $7,674 $4,193 State income taxes, net of U.S. federal benefit... -- 567 399 Tax exempt interest income........................ (230) (306) (307) Nondeductible expenses............................ 211 371 28 Increase in valuation reserve..................... 9,412 -- -- Other, net........................................ 140 26 127 -------- ------ ------ Provision (benefit) for income taxes.............. $ (3,899) $8,332 $4,440 ======== ====== ======
61 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred tax assets and liabilities are as follows (in thousands):
JANUARY 31, ------------------- 2002 2001 -------- -------- Deferred tax assets: Accruals not currently deductible........................ $1,250 $ 469 Allowance for doubtful accounts.......................... 852 209 Accrued merger and restructuring costs................... 2,628 -- Net operating loss....................................... 5,212 -- Tax credits.............................................. 286 -- Less valuation allowance................................. (9,412) -- ------ ------- Total deferred tax assets.................................. 816 678 Deferred tax liabilities: Depreciation of property and equipment................... 62 146 Capitalized software costs............................... 754 2,741 ------ ------- Total deferred tax liabilities............................. 816 2,887 ------ ------- Net deferred tax liabilities............................... $ -- $(2,209) ====== =======
At January 31, 2002, the Company had available to it net operating loss carryforwards of approximately $14.5 million, which expire in 2022. The Company has established a valuation allowance to reserve its net deferred tax assets at January 31, 2002 because the more likely than not criteria for future realization of the Company's net deferred tax assets specified in SFAS No. 109, ACCOUNTING FOR INCOME TAXES, were not met. 6. BENEFIT PLANS STOCK OPTION PLANS Effective October 7, 1994, the Company adopted the 1994 Long Term Incentive Plan (the Long Term Incentive Plan) under which officers and employees may be granted awards in the form of incentive stock options, non-qualified stock options and restricted shares. The exercise price per share for the common stock issued pursuant to incentive stock options under the Long Term Incentive Plan shall be no less than 100% of the fair market value on the date the option is granted. The exercise price per share for non-qualified stock options under the Long Term Incentive Plan may be determined by the Compensation Committee of the Company's Board of Directors (the Committee), but may not be less than the par value of the shares. Options granted under the Long Term Incentive Plan become exercisable and vest as determined by the Committee. To date, options granted under the Long Term Incentive Plan fully vest within four years from the date of grant. The term of each option granted under the Long Term Incentive Plan shall be as the Committee determines, but in no event shall any option have a term of longer than ten years from the date of grant. Options may be granted pursuant to the Long Term Incentive Plan indefinitely, unless the Board of Directors terminates the Long Term Incentive Plan. On January 31, 1998, the Committee issued 84,700 shares of restricted stock with a fair market value of $8.90 per share to certain key employees under the Company's Long Term Incentive Plan. Holders of restricted stock retain all rights of a stockholder, except the shares cannot be sold until they vest. Upon employee termination, all unvested shares are forfeited to the Company. On December 15, 1999, 23,100 shares were forfeited due to an employee termination. The remaining restricted shares 62 vested in full on January 31, 2001. At January 31, 2000, there was deferred compensation related to the restricted shares totaling $183,000. The deferred compensation was charged to expense ratably over the vesting period. The Company has a Director Stock Option Plan (the Director Plan) under which non-employee members of the Company's Board of Directors may be granted options to purchase shares of the Company's Common Stock. Effective July 19, 2001, options granted under the Director Plan are granted at fair market value as of the grant date, vest at the rate of 25% per calendar quarter, and expire if not exercised ten years from the date of grant or at an earlier date as determined by the Committee and specified in the applicable stock option agreement. Prior to July 19, 2001, options granted under the Director Plan were granted at 50% of the fair market value on the grant date, became exercisable one year from the date of the grant or in one or more installments and expired fifteen years from the date of grant or at an earlier date as determined by the Committee and specified in the applicable stock option agreement. During the years ended January 31, 2002, 2001 and 2000, options to purchase 31,792 shares, 15,557 shares and 9,168 shares, respectively, of common stock were granted to Directors. Due to options issued prior to July 19, 2001 being issued at less than fair market value on the grant date, the Company recorded deferred compensation at the dates of grant during the years ended January 31, 2002, 2001 and 2000 of $56,246, $77,500 and $27,500, respectively, to be expensed ratably over the vesting period. At January 31, 2002, there was no remaining deferred compensation related to Director options. Stock option transactions under all plans for the years ended January 31, 2002, 2001 and 2000, are as follows (in thousands, except per share amounts):
2002 2001 2000 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------- -------- -------- -------- -------- -------- Options outstanding at beginning of year...... 2,864 $ 9.14 3,042 $ 6.47 3,573 $6.19 Granted..................................... 1,914 12.17 1,152 12.50 194 6.47 Exercised................................... (185) 6.27 (1,200) 5.53 (297) .84 Forfeited................................... (230) 11.15 (130) 9.71 (428) 8.02 ------ ------ ----- Options outstanding at end of year............ 4,363 10.49 2,864 9.14 3,042 6.47 ====== ====== ===== Options exercisable at end of year............ 1,640 932 1,573 Weighted average grant-date fair value of options granted during the year............. $10.21 $ 8.64 $4.55 ====== ====== =====
Information related to options outstanding at January 31, 2002, is summarized below (in thousands, except per share amounts):
OPTIONS WEIGHTED OPTIONS OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED JANUARY 31, REMAINING AVERAGE JANUARY 31, AVERAGE RANGE OF EXERCISE PRICE 2002 CONTRACTUAL LIFE EXERCISE PRICE 2002 EXERCISE PRICE ---------------------------- -------------- ---------------- -------------- -------------- -------------- $0.85 to $7.44 833 6.87 $ 5.39 567 $ 5.11 $8.08 to $9.32 1,587 7.87 8.66 732 8.96 $10.13 to $14.90 1,620 8.86 13.39 269 11.68 $16.13 to $26.19 323 8.86 18.06 72 18.02 ----- ----- 4,363 1,640 ----- -----
As of January 31, 2002, the Company has reserved for issuance under the Long Term Incentive Plan 5,692,367 shares of common stock, of which 4,294,758 shares are subject to currently outstanding 63 options to employees, and 1,397,609 shares are reserved for future awards. As of January 31, 2002, the Company has reserved for issuance under the Director Plan 195,314 shares of Common Stock, of which 68,113 shares are subject to currently outstanding options, and 127,201 shares are reserved for future awards. The Company has elected to follow APB 25 and related interpretations in accounting for its employee and director stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recorded when the exercise price of the Company's employee stock options equals the fair value of the underlying stock on the date of grant. Compensation equal to the intrinsic value of employee stock options is recorded when the exercise price of the stock options is less than the fair value of the underlying stock on the date of grant. Any resulting compensation is amortized to expense over the option's vesting period. During the years ended January 31, 2002, 2001 and 2000, total compensation expense recorded relating to employee and director stock options was approximately $56,000, $260,000 and $332,000, respectively. Information regarding pro forma net income is required by SFAS 123, and has been determined as if the Company had accounted for its employee and director stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model assuming volatility of 1.260 in 2002, .846 in 2001 and .862 in 2000, and the following assumptions for 2002, 2001 and 2000, respectively: weighted-average risk free interest rate of 4.6%, 6.2% and 5.6%, no dividends, and a weighted average expected life of 4.5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee and director stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (in thousands, except per share amounts):
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Pro forma net income (loss)................................. $(39,481) $10,970 $6,051 ======== ======= ====== Basic pro forma earnings (loss) per share................... $ (1.81) $ 0.57 $ 0.33 ======== ======= ====== Diluted pro forma earnings (loss) per share................. $ (1.81) $ 0.54 $ 0.32 ======== ======= ======
The pro forma disclosures only include the effect of options granted subsequent to January 31, 1995. Accordingly, the pro forma information does not reflect the pro forma effect of all previous stock option grants of the Company, and thus is not indicative of future amounts until SFAS 123 is applied to all outstanding stock options. PROFIT SHARING PLAN The Company has adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the Code) whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. The plan provides for a matching contribution by the Company. Employer matching contributions amounted to $1,662,000, $1,268,000 and $792,000 for the 64 fiscal years ended January 31, 2002, 2001 and 2000, respectively. The Company may make additional contributions at the discretion of the Board of Directors. No discretionary contribution was made during 2002, 2001, or 2000. BONUS PLAN The Company pays discretionary bonuses to key employees based primarily on Company profitability and the extent to which individuals meet agreed-upon objectives for the year. The Company recorded bonus expense of approximately $3,238,000, $2,938,000 and $2,132,000 for the fiscal year ended January 31, 2002, 2001 and 2000, respectively. 7. LEASE COMMITMENTS The Company leases office facilities and certain equipment under operating leases for various periods. Leases that expire are generally expected to be renewed or replaced by other leases. Rental expense under operating leases for the fiscal years ended January 31, 2002, 2001 and 2000 was approximately $4,374,000, $2,664,000 and $1,826,000, respectively. Future minimum base rents under terms of non-cancelable operating leases are as follows (in thousands): Year ending January 31: 2003........................................................ $ 4,225 2004........................................................ 3,837 2005........................................................ 3,792 2006........................................................ 3,481 2007 and thereafter......................................... 9,874 ------- Total....................................................... $25,209 =======
8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
YEAR ENDED JANUARY 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Basic earnings (loss) per share: Net income (loss).................................. $(35,605) $13,594 $7,894 ======== ======= ====== Weighted average shares outstanding................ 21,853 19,305 18,456 ======== ======= ====== Basic earnings (loss) per share.................... $ (1.63) $ 0.70 $ 0.43 ======== ======= ====== Diluted earnings (loss) per share: Net income (loss).................................. $(35,605) $13,594 $7,894 ======== ======= ====== Weighted average shares outstanding................ 21,853 19,305 18,456 Assumed conversion of employee stock options....... -- 1,124 524 -------- ------- ------ Shares used in diluted earnings per share calculation...................................... 21,853 20,429 18,980 ======== ======= ====== Diluted earnings (loss) per share.................. $ (1.63) $ 0.67 $ 0.42 ======== ======= ======
Options totaling 4,236,056, 4,000 and 1,328,585 in fiscal years ending January 31, 2002, 2001 and 2000 respectively, have been excluded from the diluted earnings per share computation, as the options were anti-dilutive. 65 9. CONTINGENCIES The Company is periodically involved in various legal actions and claims which arise in the normal course of business. In the opinion of management, the final disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. 10. SEGMENTS The tables below show revenues and income (loss) from operations for the periods indicated for our three reportable business segments: Revenue Enhancement, Global Technology Solutions and Enterprise Solutions. Our customer projects are sold on a solution basis, so it is necessary to break them down by segment and allocate accordingly. During the year ended January 31, 2002, the Company updated the composition of its reportable business segments to combine the Cash Solutions and Payment Solutions business segments with Check Solutions to form the Global Technology Solutions business segment. Segment information from all prior periods have been reclassified to conform with the current presentation. 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, the amortization of goodwill and intangible assets, the write-off of capitalized software costs and merger-related costs (in thousands):
YEAR ENDED JANUARY 31, 2002 -------------------------------------------------------------- GLOBAL REVENUE TECHNOLOGY ENTERPRISE CORPORATE ENHANCEMENT SOLUTIONS SOLUTIONS UNALLOCATED TOTAL ----------- ---------- ---------- ----------- -------- Revenues: Consulting fees...................... $23,904 $ 1,265 $17,673 $ -- $ 42,842 Software license fees................ 880 39,411 -- -- 40,291 Software maintenance fees............ -- 29,347 -- -- 29,347 Software implementation fees......... 1,198 17,991 21 -- 19,210 Intercompany revenue................. -- (126) 126 -- -- ------- -------- ------- -------- -------- Total revenues..................... $25,982 $ 87,888 $17,820 $ -- $131,690 ======= ======== ======= ======== ======== Income (loss) from operations before amortization of goodwill and intangible assets and unusual charges.............................. $ 7,808 $ 19,640 $ 1,797 $(24,878) $ 4,367 Amortization of goodwill and intangible assets.................. -- 4,575 -- -- 4,575 Write-off of capitalized software costs and prepaid software royalties.......................... 12,089 2,819 -- -- 14,908 Merger and restructuring costs....... -- 23,592 -- -- 23,592 ------- -------- ------- -------- -------- Income (loss) from operations.......... $(4,281) $(11,346) $ 1,797 $(24,878) $(38,708) ======= ======== ======= ======== ========
66
YEAR ENDED JANUARY 31, 2001 -------------------------------------------------------------- GLOBAL REVENUE TECHNOLOGY ENTERPRISE CORPORATE ENHANCEMENT SOLUTIONS SOLUTIONS UNALLOCATED TOTAL ----------- ---------- ---------- ----------- -------- Revenues: Consulting fees...................... $40,008 $ 3,968 $27,739 $ -- $ 71,715 Software license fees................ -- 18,030 -- -- 18,030 Software maintenance fees............ -- 11,223 -- -- 11,223 Software implementation fees......... -- 9,298 -- -- 9,298 ------- ------- ------- -------- -------- Total revenues..................... $40,008 $42,519 $27,739 $ -- $110,266 ======= ======= ======= ======== ======== Income (loss) from operations before amortization of goodwill and intangible assets and unusual charges.............................. $28,999 $ 110 $ 9,535 $(18,440) $ 20,204 Amortization of goodwill and intangible assets.................. -- -- -- -- -- Write-off of capitalized software costs and prepaid software royalties.......................... -- -- -- -- -- Merger and restructuring costs....... -- -- -- -- -- ------- ------- ------- -------- -------- Income (loss) from operations.......... $28,999 $ 110 $ 9,535 $(18,440) $ 20,204 ======= ======= ======= ======== ========
YEAR ENDED JANUARY 31, 2000 -------------------------------------------------------------- GLOBAL REVENUE TECHNOLOGY ENTERPRISE CORPORATE ENHANCEMENT SOLUTIONS SOLUTIONS UNALLOCATED TOTAL ----------- ---------- ---------- ----------- -------- Revenues: Consulting fees....................... $19,849 $ 9,318 $20,558 $ -- $49,725 Software license fees................. -- 13,994 -- -- 13,994 Software maintenance fees............. -- 6,985 -- -- 6,985 Software implementation fees.......... -- 5,116 -- -- 5,116 ------- ------- ------- -------- ------- Total revenues...................... $19,849 $35,413 $20,558 $ -- $75,820 ======= ======= ======= ======== ======= Income (loss) from operations before amortization of goodwill and intangible assets and unusual charges............................... $13,219 $ 4,685 $ 7,904 $(14,574) $11,234 Amortization of goodwill and intangible assets................... -- -- -- -- -- Write-off of capitalized software costs and prepaid software royalties........................... -- -- -- -- -- Merger and restructuring costs........ -- -- -- -- -- ------- ------- ------- -------- ------- Income (loss) from operations........... $13,219 $ 4,685 $ 7,904 $(14,574) $11,234 ======= ======= ======= ======== =======
Revenues derived from a single major customer accounted for approximately 9%, 27% and 24% of total revenue in the fiscal years ended January 31, 2002, 2001 and 2000, respectively. Revenue derived from our five largest customers accounted for approximately 30%, 49% and 58% of total revenue in the fiscal years ended January 31, 2002, 2001 and 2000, respectively. 67 The Company markets its solutions in several foreign countries. Revenues for fiscal years ended January 31, 2002, 2001 and 2000 attributed to countries based on the location of the customers was as follows (in thousands):
2002 2001 2000 --------------------- --------------------- --------------------- PERCENT OF PERCENT OF PERCENT OF TOTAL TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES -------- ---------- -------- ---------- -------- ---------- United States............................. $104,930 79.7% $ 94,503 85.7% $73,171 96.5% United Kingdom............................ 10,869 8.3 8,282 7.5 1,462 1.9 Australia................................. 4,177 3.2 4,097 3.7 33 -- Canada.................................... 8,889 6.7 3,217 2.9 1,114 1.5 Other..................................... 2,825 2.1 167 .2 40 0.1 -------- ----- -------- ----- ------- ----- Total revenues.......................... $131,690 100.0% $110,266 100.0% $75,820 100.0% ======== ===== ======== ===== ======= =====
11. MERGER, RESTRUCTURING AND WRITE-OFF OF CAPITALIZED SOFTWARE COSTS AND PREPAID SOFTWARE ROYALTIES In connection with the acquisition of Check Solutions during the quarter ended July 31, 2001, the Company recorded $15.6 million in merger-related costs (consisting of $11.3 million attributable to cost of revenues, $2.3 million attributable to research and development, and $2.0 million attributable to selling, general and administrative costs). In connection with the various legal and administrative actions surrounding a dispute with Pegasystems, Inc. during the quarter ended October 31, 2001, the Company recorded an additional $4.2 million of settlement and legal costs and classified them in merger and restructuring costs in the accompanying statement of operations. The payment of these costs will be completed during the year ending January 31, 2003. During the fourth quarter of fiscal 2001, the Company implemented a reduction in the workforce to adjust staffing levels to a level sufficient to support projected business activities. Primarily, as a result of the reductions, approximately 95 employees were terminated and a charge of $3.8 million related primarily to severance costs was recorded during the quarter. 68 These costs are summarized below (in thousands):
WRITE-OFF OF CAPITALIZED MERGER AND SOFTWARE COSTS AND RESTRUCTURING PREPAID SOFTWARE COSTS ROYALTIES ------------- ------------------ Workforce reductions............................ $ 1,925 $ -- Charges relating to CheckFlow Suite............. 10,833 -- In-process research and development costs....... 2,300 -- Facility closures............................... 240 -- Other........................................... 298 -- Capitalized X-Port Vault product costs.......... -- 2,819 ------- ------- Quarterly period ended July 31, 2001.......... 15,596 2,819 ------- ------- Pegasystems, Inc. settlement and legal costs.... 4,239 -- Write-off of prepaid software royalties with Exchange Applications, Inc.................... -- 12,089 ------- ------- Quarterly period ended October 31, 2001....... 4,239 12,089 ------- ------- Workforce reductions............................ 3,483 -- Facility closures............................... 200 -- Charges relating to CheckFlow Suite............. 74 -- ------- ------- Quarterly period ended January 31, 2002....... 3,757 -- ------- ------- Total recorded in the year ended January 31, 2002.......................................... $23,592 $14,908 ======= =======
Included in merger and restructuring costs was $5.5 million of cash termination benefits associated with the separation of approximately 145 employees. Most of the affected employees left their positions during the quarter ended January 31, 2002. The Company developed the CheckFlow Suite with Pegasystems, Inc. ("Pega") under a Product Development, Distribution and Sublicensing Agreement effective May 5, 1999 (the "Agreement"). Pega filed suit to restrain the Company from developing, marketing, licensing, advertising, leasing or selling any products, including certain Back Office products acquired during the Check Solutions business combination, that allegedly compete with products jointly developed under the Agreement. On October 1, 2001 the Delaware Chancery Court granted Pega's motion for preliminary injunction. On November 5, 2001, all matters relating to various legal and administrative actions surrounding this dispute were settled. Under this Settlement Agreement, the Company agreed to pay settlement and legal costs totaling $5.4 million (of which $1.1 million was accrued at July 31, 2001), which includes royalties on prior period sales of the four Back Office products. Consistent with the prior Agreement, the Company will continue to pay Pega royalties based on future sales of the four Back Office products through October 31, 2006. Charges related to the CheckFlow Suite included a write-off of capitalized software costs, a write-off of accounts receivable net of deferred revenue, settlements and estimated implementation costs for existing CheckFlow customers, write-off of prepaid royalties previously paid to Pega, and payments under existing work orders and other product wind-down costs. The implementations provide for estimated time and labor along with out-of-pocket costs as of January 31, 2002. If actual costs differ from our estimates, revisions to our estimated liability would be necessary. In connection with the Check Solutions acquisition, a $2.3 million in-process research and development charge was recorded reflecting the estimated fair value of acquired research and development projects at Check Solutions, which have not yet reached technological feasibility. 69 The facility closure charge includes $440,000 for office space, which will no longer be utilized. The activity related to the merger and restructuring costs reserve balance during the year ended January 31, 2002 is as follows (in thousands):
CHARGES RELATING WORKFORCE TO CHECKFLOW FACILITY REDUCTIONS SUITE CLOSURES OTHER TOTAL ---------- ---------------- -------- -------- -------- Reserve balance at the beginning of the year $ -- $ -- $ -- $ -- $ -- Merger costs, excluding in-process research and development costs.......... 1,925 10,833 240 298 13,296 Cash paid................................. (305) (317) -- -- (622) Non-cash charges against reserve.......... -- (5,181) -- (298) (5,479) Other..................................... -- 150 -- -- 150 ------ ------- ---- ----- ------- July 31, 2001 reserve balance............. 1,620 5,485 240 -- 7,345 Merger-related costs, Pegasystems, Inc. settlement.............................. -- 4,239 -- -- 4,239 Cash paid................................. (601) (643) (41) -- (1,285) ------ ------- ---- ----- ------- October 31, 2001 reserve balance.......... 1,019 9,081 199 -- 10,299 Restructuring costs....................... 3,483 74 200 -- 3,757 Cash paid................................. (960) (1,814) (32) -- (2,806) ------ ------- ---- ----- ------- January 31, 2002 reserve balance.......... $3,542 $ 7,341 $367 $ -- $11,250 ====== ======= ==== ===== =======
During the quarterly period ended July 31, 2001, in connection with the Company's periodic impairment review of its portfolio of software products, the Vault software acquired in the X-Port business combination in May 2000 was deemed to be impaired. Based on the Company's calculation of the expected cash flows of the product, a $2.8 million non-cash charge was recorded. The charge resulted from the loss of two key transactions and the projected changes in the approach to selling and delivering the software and related services under a time or usage model. Effective March 31, 2001, the Company entered into an alliance with Exchange Applications, Inc. ("Xchange"). As part of this alliance the Company became the exclusive provider of the EnAct customer relationship software and methodology to the banking industry. Under the EnAct agreement, the Company became obligated for guaranteed royalty payments of $12.5 million. Based on the Company's periodic evaluation of the future cash flows associated with this product, a liability for the remaining $2.5 million obligation was accrued at October 31, 2001, and the carrying value of the prepaid software royalties, at that time, of $9.6 million was reduced to zero. This analysis resulted in a charge of $12.1 million to "cost of revenue" during the quarter ended October 31, 2001. During December 2001, the Company negotiated with Exchange and received a commitment for $960,000 as a partial offset to expenses incurred to enhance and support the EnAct software for the existing customer base. Through January 31, 2002, the Company reflected $480,000 of this reimbursement as a reduction in cost of revenue. 12. RELATED PARTY TRANSACTIONS In March 2001, the Company loaned $500,000 to an officer of the Company pursuant to a Limited Recourse Promissory Note ("Note"). The principal is due in full on March 30, 2004. In January 2002, the Note was adjusted to its estimated fair value of $125,000 resulting in a charge to earnings of $375,000. 70 In connection with the completion of the Check Solutions acquisition, the Company assumed a $10.0 million obligation to certain employees of Check Solutions, including a current officer of the Company. At January 31, 2002, approximately $6.7 million of this obligation was outstanding. 13. SUBSEQUENT EVENT On April 5, 2002, the Company sold 1,282,214 shares to a group of institutional investors in a private transaction. In connection with this transaction, the Company intends to file a registration statement on Form S-3 following the filing of its annual report on Form 10-K for the year ended January 31, 2002 seeking to register the resale of such shares. On April 5, 2002, the Company utilized the approximately $9.3 million of net proceeds that were received from the sale to satisfy obligations due to certain former employees of Check Solutions described in Note 12 above, with the remainder being used for working capital. 71 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY. The following table sets forth information regarding our current executive officers and directors.
NAME AGE POSITION ---- -------- -------- John D. Carreker, Jr. 59 Chairman of the Board, Chief Executive Officer and Director Michael D. Hansen 49 President, Chief Operating Officer and Director Terry L. Gage 44 Executive Vice President, Treasurer, Chief Financial Officer and Assistant Secretary Robert M. Olson, Jr. 46 Executive Vice President and Managing Director Joseph M. Rowell 50 President, Global Technology Solutions Blake A. Williams 40 Executive Vice President and Managing Director Tod V. Mongan 52 Senior Vice President, General Counsel and Secretary James D. Carreker 54 Director James R. Erwin 58 Director Donald L. House 60 Director James L. Fischer 74 Director Richard R. Lee, Jr. 55 Director David K. Sias 64 Director Ronald G. Steinhart 61 Director
JOHN D. CARREKER, JR. has served as our Chairman of the Board of Directors and Chief Executive Officer since our formation in 1978. John D. Carreker, Jr. and James D. Carreker are brothers. MICHAEL D. HANSEN has served as a director of the Company since December 2001. Mr. Hansen has served as President and Chief Operating Officer of the Company since December 2001. From October 2000 to December 2001 Mr. Hansen served as Executive Vice President and Managing Director of the Company. From 1998 to September 2000, Mr. Hansen served as the Head of Commercial Services and Executive Vice President and the Managing Director of Commercial Banking of Bank One Corporation. From 1995 to 1998, Mr. Hansen served as the President of Operations Services of Bank One Corporation. His term as director expires in 2003. TERRY L. GAGE has served as Executive Vice President, Treasurer and Chief Financial Officer since October 1995 and was elected Assistant Secretary in April 1997. From October 1986 to April 1995, Mr. Gage served as Treasurer and Chief Financial Officer of FAAC Incorporated, a company specializing in technology engineering and consulting services. ROBERT M. OLSON, JR. has served as Executive Vice President and Managing Director since July 1998. From July 1994 until July 1998, Mr. Olson served as Executive Vice President, Operations & Technology for Magna Group, Inc., a financial services institution. JOSEPH M. ROWELL has served as President, Global Technology Solutions since February 2002. From June 2001 to January 2002, Mr. Rowell served as President of Carreker Check Solutions LLC, a wholly owned subsidiary of the Company. For the five years prior to this time Mr. Rowell served as President of Check Solutions Company, a software and services company serving financial institutions. BLAKE A. WILLIAMS has served as Executive Vice President and Managing Director of Revenue Enhancement since July 2001. For two years prior to that time, Mr. Williams was the SVP and 72 Managing Director of Revenue Enhancement. Mr. Williams has been with the Company for eleven years in various management and consulting roles. TOD V. MONGAN has served as Senior Vice President, and Secretary since December 2001. Mr. Mongan has served as General Counsel to the Company since February 2001. For the five years prior to that time Mr. Mongan served as Senior Vice President, General Counsel, Secretary and Chief Administrative Officer for BancTec, Inc., a worldwide systems integration, manufacturing and services company. JAMES D. CARREKER has served as a director of the Company since 1984. Mr. Carreker served as Chairman of the Board of Directors of Wyndham International, Inc., a hotel management and leasing company from March 1999 to October 2000. Mr. Carreker served as Chief Executive Officer of Wyndham International, and from January 1998 to June 1999 Mr. Carreker also served as a director of Patriot American Hospitality, Inc. Patriot was a hotel real estate investment trust until it became a wholly-owned subsidiary of Wyndham International in June 1999. Mr. Carreker served as President and Chief Executive Officer of Wyndham Hotel Corporation, a national hotel company from May 1996, and as a director of Wyndham from February 1996, until the merger of Wyndham with Patriot in January 1998. Mr. Carreker also served as President and Chief Executive Officer of Trammell Crow Company, a national real estate company as well as President of Burdines Department Stores, located in Florida. He currently serves as a director of Crow Holdings, Outrigger Hotels & Resorts, Pier 1 Imports and WinsLoew Furniture, Inc. John D. Carreker, Jr. and James D. Carreker are brothers. His term expires in 2004. JAMES R. ERWIN has served as a director of the Company since May 2001. Mr. Erwin is currently Managing Director and Partner of Erwin Graves & Associates, L.P., a management consulting company. Mr. Erwin served as Vice Chairman-Texas and Senior Client Executive-Southwest of Bank of America, N.A. from October 1998 to May 2000, was Vice Chairman for Texas and Corporate Finance Executive-West for NationsBank Corp from January 1994 to October 1998, and was Executive Vice President, Manager of Operations and Technology for NationsBank Corp. from October 1991 to January 1994. Mr. Erwin has served as a director of Trammell Crow Company, a diversified real estate service company, since December 1997. In May 2001 Mr. Erwin was elected to the Board of Texas Capital Bancshares, Inc. His term expires in 2002. DONALD L. HOUSE has served as a director of the Company since March 30, 1998. From January 1993 until December 1997, Mr. House served as Chairman of the Board of Directors of SQL Financials International, Inc. (now known as Clarus Corporation), a developer of electronic commerce application software; Mr. House continues to serve as a director of Clarus Corporation, where he is a member of its audit committee. Mr. House is Chairman of Ockham Technologies, Inc., a provider of sales management software, and he is on the board of several other private technology companies. His term expires in 2002. JAMES L. FISCHER has served as a director of the Company since 1984. Mr. Fischer retired in 1984 from Texas Instruments Incorporated ("TI"), an electronics manufacturer, where he served in a variety of positions over 29 years. At the time of his retirement, Mr. Fischer served as Executive Vice President and Principal Financial Officer of TI. His term expires in 2003. RICHARD R. LEE, JR.has served as a director of the Company since 1984. Mr. Lee has served as President of Lee Financial Corporation, a financial advisory firm, since 1975. His term expires in 2003. DAVID K. SIAS has served as a director of the Company since October 1993 and served as a consultant to the Company from November of that year until July 2001. Mr. Sias has been a partner of eVentures International, LLL, a venture capital group that specializes in start-up firms in the software arena, since 1999. From 1997 until 1999, Mr. Sias was a director and advisor to ADS Associates, a privately held software company. Prior to that time Mr. Sias was with Bankers Trust Company, New 73 York for over thirty years where he led several of the bank's major businesses to include it's International Division as well as its Global Operating and Information Systems. His term expires in 2004. RONALD G. STEINHART has served as a director of the Company since April 2001. Mr. Steinhart served as Chairman and Chief Executive Officer, Commercial Banking Group of Bank One Corporation from December 1996 until his retirement in January 2000. From January 1995 to December 1996, Mr. Steinhart was Chairman and Chief Executive Officer of Bank One Texas, N.A. Mr. Steinhart joined Bank One in connection with the merger of Team Bank, which he founded in 1988. Mr. Steinhart serves on the Board of Managers of Compass Variable Accounts, as a Director of United Auto Group, Inc., and as a Trustee of Prentiss Properties Trust and MFS/Sun Life Series Trust. His term expires in 2004. ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS. The following information sets forth certain compensation provided to the Company's five most highly compensated executive officers of the Company (collectively, the "Named Executive Officers") for each of the last three fiscal years: SUMMARY COMPENSATION TABLE (FISCAL YEAR ENDED JANUARY 31, 2002)
LONG-TERM AWARDS ANNUAL COMPENSATION(1) ---------- ------------------------------------- SECURITIES ALL OTHER FISCAL SALARY BONUS OTHER ANNUAL RESTRICTED UNDERLYING COMPENSATION(2) NAME AND PRINCIPAL POSITION(5) YEAR ($) ($) COMPENSATION($) STOCK($) OPTIONS(#) ($) ------------------------------ -------- -------- -------- --------------- ---------- ---------- --------------- John D. Carreker, Jr........ 2001 353,590 -- -- -- 50,000 5,250 Chairman of the Board and 2000 487,752 -- -- -- 50,000 5,004 Chief Executive Officer 1999 487,752 -- -- -- -- 5,000 Michael D. Hansen........... 2001 330,083 -- -- -- 30,000 5,250 President and Chief 2000 107,013 -- -- -- 110,000 -- Operating Officer 1999 -- -- -- -- -- -- Robert M. Olson............. 2001 322,585 -- -- -- 30,000 4,796 Executive Vice President 2000 290,008 50,000 -- -- 40,000 5,004 and Managing Director 1999 260,006 -- -- -- -- 5,000 Joseph M. Rowell............ 2001 208,652 163,333 -- -- 166,000 12,538(3) President, Global 2000 -- -- -- -- -- -- Technology Solutions 1999 -- -- -- -- -- -- Blake A. Williams........... 2001 270,667 89,629 -- -- 30,000 5,250 Executive Vice President 2000 220,000 -- -- -- 25,000 5,004 and Managing Director 1999 220,779 122,755 -- -- -- 5,000
------------------------ (1) Richard J. Jerrier, former Executive Vice President and Managing Director of the Company, resigned his position as of February 28, 2002. In Fiscal Year 2001, Mr. Jerrier earned a salary of $339,794 and had other compensation of $4,944. (2) Includes Company contributions to the Employee 401(K) Savings Plan on behalf of each of the Named Executive Officers. (3) Includes an auto allowance of $5,738 that Mr. Rowell received pursuant to his employment agreement. 74 OPTION GRANTS IN LAST FISCAL YEAR: The following table sets forth, for each of the identified Named Executive Officers, information concerning the number of options granted during the fiscal year ended January 31, 2002.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR NUMBER OF SECURITIES % OF TOTAL OPTION TERM(7)($) UNDERLYING OPTIONS GRANTED EXERCISE PRICE EXPIRATION -------------------- NAME OPTIONS GRANTED(#) IN FISCAL 2001(4)(%) PER SHARE(5)($) DATE (6) 5% 10% ---------------------- -------------------- -------------------- --------------- ---------- -------- --------- John D. Carreker, Jr.(1).............. 50,000 2.6 14.90 6/8/11 468,526 1,187,338 Michael D. Hansen(1)........... 30,000 1.6 14.90 6/8/11 281,116 712,403 Robert M. Olson(3).... 30,000 1.6 14.90 6/8/11 281,116 712,403 Joseph Rowell(2)...... 100,000 5.2 11.25 6/6/11 707,506 1,792,960 Joseph Rowell(2)...... 66,000 3.4 11.25 6/6/11 466,954 1,183,354 Blake A. Williams(1)......... 30,000 1.6 14.90 6/8/11 281,116 712,403
------------------------ (1) The options vest equally in increments over four years beginning June 8, 2001. (2) The options vest equally in increments over four years beginning June 6, 2001. (3) Mr. Olson's option vesting has been accelerated pursuant to the terms of a previous agreement with the Company dated May 21, 1999. (4) Based on a total of 1,913,570 options granted during the fiscal year ended January 31, 2002. During the fiscal year ended January 31, 2002, 228,937 outstanding options were cancelled. (5) The option exercise price for the common stock is based on the fair market value on the date of grant as determined pursuant to the terms of the 1994 Long Term Incentive Plan. (6) Options may terminate before their expiration date upon death, disability or termination of employment of the optionee. (7) In accordance with the rules of the Commission, shown are the gains or "option spreads" that would exist for the respective options granted. These gains are based on the assumed rates of annual compound stock price appreciation of 5% and 10% from the date the option was granted over the full option term. These assumed compound rates of stock price appreciation are mandated by the rules of the Commission and do not represent our estimate or projection of future prices of our common stock. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES: The following table sets forth, for each of the identified Named Executive Officers, information concerning the number of shares received during the fiscal year ended January 31, 2002 upon exercise 75 of options and the aggregate dollar amount received from such exercise, as well as the number and value of securities underlying unexercised options held on January 31, 2002.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT FISCAL THE-MONEY OPTIONS AT SHARES YEAR-END(#) FISCAL YEAR-END($)(2) ACQUIRED ON VALUE REALIZED --------------------------- --------------------------- NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------------- ----------- ------------- ----------- ------------- John D. Carreker, Jr........ -- -- 12,500 87,500 0.00 0.00 Michael D. Hansen........... -- -- 36,666 103,334 0.00 0.00 Robert M. Olson............. -- -- 214,091 0 0.00 0.00 Joseph Rowell............... -- -- 0 166,000 0.00 0.00 Blake A. Williams........... 16,000 157,881 16,450 57,500 0.00 0.00
------------------------ (1) Based on the difference between the option exercise price and the closing sales price of the Company's Common Stock as reported on the Nasdaq National Market on the exercise date. (2) Based on the difference between the option exercise price and the closing sale price of $5.25 of the Company's Common Stock as reported on the Nasdaq National Market on January 31, 2002, the last trading day prior to the closing of the Company's fiscal year ended January 31, 2002, multiplied by the number of shares underlying the options. EXECUTIVE EMPLOYMENT AGREEMENTS The Company is a party to an employment agreement with Mr. Carreker with a term beginning February 1, 1997 extending through January 31, 1999. Pursuant to its terms, the agreement was renewed by Mr. Carreker for additional one-year terms (through January 31, 2003) by giving six months' prior written notice to the Company in 1998, 1999, 2000 and 2001. The agreement provides that Mr. Carreker will receive a base annual salary of not less than $450,000 and will be eligible to receive bonuses as determined by the Board of Directors in its sole discretion. The agreement may be terminated at any time by the Board of Directors, with or without cause. Upon termination of the agreement by Mr. Carreker due to a breach on the part of the Company or by the Company without cause, Mr. Carreker will be entitled to receive, on the Company's regular payroll dates and less required withholdings, his salary at the current rate for the remaining term of the agreement. Mr. Carreker has agreed to reduce his base salary by ten percent (10%) to reflect his participation in the Company's Variable Compensation Plan. The Company is a party to employment agreements with Messrs. Hansen and Rowell. Mr. Hansen's agreement has an initial term extending through October 2003 and Mr. Rowell's agreement has an initial term extending through June 2004. Each of Messrs. Hansen and Rowell's agreements will renew automatically for successive one (1) year terms at the end of the initial period unless either party notifies the other six (6) months in advance of the expiration of the initial or renewal period. Under the agreements each of Messrs. Hansen and Rowell receive an annual base salary of not less than $340,000 and $350,000, respectively (subject to annual review and discretionary increases), and each is entitled to a bonus of up to seventy percent of his annual base salary on terms no less favorable than those applicable to other high-level officers of the Company in each year of the applicable agreement if the Board of Directors, in its sole discretion, so determines. The agreements may be terminated at any time by the Company with or without cause, and may be terminated by the executive if the Company is in material breach of the applicable agreement. Upon termination by the executive due to a breach on the part of the Company or by the Company without cause, the executive will be entitled to receive, on the Company's regular payroll dates and less required withholdings, his salary at the current rate for the remaining term of the agreement (in addition, under certain circumstances, Messrs. Hansen and Rowell would be entitled to receive certain bonus payments). 76 Messrs. Hansen and Rowell have agreed to reduce their base salaries by ten percent (10%) to reflect their participation in the Company's Variable Compensation Plan. DIRECTOR COMPENSATION Employee directors do not receive compensation for their services as directors. Non-employee directors receive an annual retainer of $12,000, payable quarterly, a fee of $2,000 per board meeting attended, a fee of $650 per committee meeting attended, and a fee of $150 for each chairman attending a committee meeting. Under the Company's Director Stock Option Plan, non-employee directors are awarded options to purchase Common Stock on the first day of each board compensation year (August 1), exercisable at the fair market value of the Common Stock on such date. The number of options awarded is determined pursuant to an option pricing formula, so that the fair value of the option award will equal $60,000. COMPENSATION AND OTHER COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Fischer, Erwin and Lee. The Audit Committee consists of Messrs. Fischer, House, Lee and Steinhart. None of these individuals was at any time during the fiscal year ended January 31, 2002, or any other time, an officer or employee of the Company. No member of the Compensation Committee or Audit Committee serves as a member of the board of directors, compensation committee or audit committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors, Compensation Committee or Audit Committee. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. OUTSTANDING CAPITAL STOCK AND STOCK OWNERSHIP OF DIRECTORS, CERTAIN EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS: As of January 31, 2002, the Company had issued and outstanding 21,897,029 shares of Common Stock, par value $.01 per share ("Common Stock"). The following table sets forth information as of January 31, 2002, regarding the beneficial ownership of the Company's Common Stock by each person or group known by management of the Company to own more than five percent of the outstanding shares of Common Stock of the Company, by each of the Company's executive officers named in the Summary Compensation Table below, by each of the Company's directors and by all of its directors and executive officers as a group. 77 The information for the five percent owners is derived solely from Schedules 13D and 13G filed with the Commission. Except as otherwise noted, the address for each owner is 4055 Valley View Lane, Suite 1000, Dallas, Texas, 75244.
SHARES OF COMMON STOCK BENEFICIALLY OWNED AND PERCENTAGE OF OUTSTANDING SHARES AS OF JANUARY 31, 2002 -------------------- NAME NUMBER PERCENT ---- --------- -------- 5% BENEFICIAL OWNERS FMR Corp.(1)................................................ 2,188,400 9.99% 82 Devonshire Street Boston, MA 02109 DIRECTORS AND OFFICERS John D. Carreker, Jr.(2).................................... 2,672,549 12.20% David K. Sias(3)............................................ 250,333 1.14% Robert M. Olson, Jr.(4)..................................... 219,899 * James D. Carreker(5)........................................ 141,431 * Richard R. Lee, Jr.(6)...................................... 143,090 * James L. Fischer(7)......................................... 132,645 * Donald L. House(8).......................................... 54,788 * Michael D. Hansen(9)........................................ 46,586 * Blake A. Williams(10)....................................... 16,450 * James R. Erwin(11).......................................... 11,960 * Ronald G. Steinhart(12)..................................... 4,960 * Joseph M. Rowell............................................ 0 * Directors and executive officers as a group (14 persons)(13).............................................. 3,779,911 16.92%
------------------------ * Less than 1% (1) Various persons have the right to receive or the power to direct the receipt of dividend from, or the proceeds from the sale of, the Common Stock of the Company. The interest of one person, Fidelity Low Priced Stock Fund, an investment company registered under the Investment Company Act of 1940, in the Common Stock of the Company amounted to 2,188,400 shares at December 31, 2001. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the Funds each has sole power to dispose of the 2,188,400 shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson 3d has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees. Members of the Edward C. Johnson 3d family are the predominant owners of Class B shares of common stock of FMR Corp., representing approximately 49% of the voting power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR Corp. 78 (2) Includes 315,079 shares held in a family limited partnership for which Mr. Carreker is the general partner and 12,500 shares that are exercisable by Mr. Carreker within sixty days. (3) Includes 6,000 shares held by Patricia L. Sias, the wife of Mr. Sias, as to which Mr. Sias disclaims beneficial ownership and 9,660 shares that are exercisable by Mr. Sias within sixty days. (4) Includes 214,091 shares that are exercisable by Mr. Olson within sixty days. (5) Includes 6,576 shares held by children of Mr. Carreker and 82,117 shares currently held in trust, as to which Mr. Carreker disclaims beneficial ownership and 14,492 shares that are exercisable by Mr. Carreker within sixty days. (6) Includes 5,000 shares held by Lee Financial Corporation and 11,576 shares currently held in trust, as to which Mr. Lee disclaims beneficial ownership and 16,159 shares that are exercisable by Mr. Lee within sixty days. Of the shares owned by Mr. Lee, 83,000 have been pledged as security for a loan. (7) Includes 2,000 shares held by Elizabeth Fischer, the wife of Mr. Fischer, as to which Mr. Fischer disclaims beneficial ownership and 16,159 shares that are exercisable by Mr. Fischer within sixty days. (8) Includes 54,788 shares that are exercisable by Mr. House within sixty days. (9) Includes 36,666 shares that are exercisable by Mr. Hansen within sixty days. (10) Includes 16,450 shares that are exercisable by Mr. Williams within sixty days. (11) Includes 1,960 shares that are exercisable by Mr. Erwin within sixty days. (12) Includes 1,960 shares that are exercisable by Mr. Steinhart within sixty days. (13) Includes 438,373 shares that are exercisable by the directors and executive officers as a group within sixty days. EQUITY COMPENSATION PLAN INFORMATION (IN THOUSANDS, EXCEPT PER SHARE EXERCISE PRICE AMOUNTS):
NUMBER OF SECURITIES REMAINING AVAILABLE NUMBER OF SECURITIES FOR FUTURE ISSUANCE TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS OUTSTANDING OPTIONS) ------------- ------------------------ ------------------------ ------------------------ Equity compensation plans approved by security holders........................... 1994 Plan 4,295 1994 Plan $ 10.48 1994 Plan 1,398 Director Plan 68 Director Plan 10.71 Director Plan 127 ----- ------- ----- Total 4,363 Total 10.49 Total 1,525 Equity compensation plans not approved by security holders........................... -- -- -- ----- ------- ----- Total -- Total -- Total -- ----- ------- ----- Total....................................................... 4,363 $ 10.49 1,525 ===== ======= =====
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In March 2001 the Company loaned $500,000 to Mr. Robert E. Hall pursuant to a Limited Recourse Promissory Note. Pursuant to the terms of the Note, interest shall accrue annually at a rate of five percent (5%) and all principal and accrued interest is due in full on March 30, 2004. 79 In connection with our acquisition of Check Solutions Company we entered into an Assumption Agreement with Joseph M. Rowell, the President of our wholly-owned subsidiary Carreker Check Solutions LLC, under which we assumed certain obligations of Check Solutions Company to pay Mr. Rowell $5,550,000 pursuant to a Goodwill Purchase Agreement. We agreed to pay this amount in four equal installments of $1,387,500, payable in either cash, fully registered shares of our common stock, or a combination thereof, in our sole discretion. We elected to satisfy our obligation to Mr. Rowell through payment of the full cash amount, $1,387,500 of which we paid during fiscal 2001 and $4,162,500 of which we paid in early fiscal 2002. The Company has adopted a policy providing that all transactions between the Company and related parties will be subject to approval by a majority of all disinterested directors; and must be on terms no less favorable than those that could otherwise be obtained from unrelated third parties. 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. The following financial statements are filed as part of this report: Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets as of January 31, 2002 and 2001 Consolidated Statements of Operations for the years ended January 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the years ended January 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended January 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules Financial Statement Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been excluded, as they are not required under the related instructions or the information required has been included in the Company's Consolidated Financial Statements. 3. The following documents are filed or incorporated by reference as exhibits to this report:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 4.2 Amended and Restated Certificate of Incorporation and Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). +10.1 Employment Agreement dated January 31, 1997 between the Company and John D. Carreker, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). +10.2 Employment Agreement between the Company and Michael Hansen (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Registration Form S-3 (Registration No. 333-47160)). +*10.3 Employment Agreement dated May 22, 2001 between the Company and Joseph M. Rowell. +10.4 Carreker Corporation Third Amended and Restated 1994 Long Term Incentive Plan (incorporated by reference to Appendix B to the Company's Definitive Proxy Statement filed on May 30, 2001). +10.5 Carreker Corporation Director Stock Option Plan (incorporated by reference to Appendix C to the Company's Definitive Proxy Statement filed on May 30, 2001). +10.6 Indemnification Agreement between the Company and John D. Carreker, Jr. (together with a schedule) (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
81
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- *10.7 Goodwill Purchase Agreement dated May 22, 2001 by and among Check Solutions Company, Joseph M. Rowell and Paul Lechtenberg. *10.8 Assumption Agreement dated May 22, 2001 by and among the Company, Joseph M. Rowell and Paul Lechtenberg. *10.9 Termination and License Agreement dated December 27, 2001 by and between the Company and Exchange Applications, Inc. *10.10 Agreement and Release dated November 2, 2001 by and between the Company and Pegasystems, Inc. 10.11 Form of the Company's independent contractor agreement (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 10.12 Office Lease between Granite Tower, Ltd. And the Company dated as of March 31, 1999 (incorporated by reference to Exhibit 10.26 of the Registration Form 10-K for fiscal year ended January 31, 1999). 10.13 Office Lease between Granite Tower, Ltd. And the Company dated August 31, 1999 (incorporated by reference to Exhibit 10.16 of the Registration Form 10-K for fiscal year ended January 31, 2000). 10.14 Credit Agreement, dated June 6, 2001, among the Company as Borrower, J.P. Morgan Chase Bank (formerly known as The Chase Manhattan Bank) as Administrative Agent and Issuing Bank, and Compass Bank as Syndication Agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed June 8, 2001). 10.15 Partnership Interest Purchase Agreement, dated May 22, 2001, among Carreker Corporation, Check Consultants Company of Tennessee, Inc., IPSS Corporation, International Business Machines Corporation and First Tennessee Bank National Association (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed May 29, 2001). 10.16 Second Amendment to Credit Agreement dated October 31, 2001 among Carreker Corporation as Borrower, J.P. Morgan Chase Bank (formerly known as The Chase Manhattan Bank) as Administrative Agent and Issuing Bank, and Compass Bank as Syndication Agent (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed December 14, 2001). 10.17 Limited Recourse Promissory Note executed by Robert E. Hall in favor of the Company, as dated March 31, 2001 (incorporated by reference to Exhibit 10.3 of the Company's Quarterly report on Form 10-Q filed June 12, 2001). 10.18 Loan Agreement between Robert E. Hall and the Company dated March 31, 2001 (incorporated by reference to Exhibit 10.4 of the Company's Quarterly report on Form 10-Q filed June 12, 2001). 21.1 Subsidiaries of the Company. (a) Genisys Operation, Inc. (b) Antinori Software, Inc. (c) Carreker, Ltd. (d) Cash Services Australia Pty, Ltd. (e) Carreker Holdings Australia Pty, Ltd. (f) Carreker Canada, Inc. (g) Carreker Check Solutions LLC *23.1 Consent of Ernst & Young LLP, Independent Auditors.
82
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- *24.1 Power of Attorney (included on first signature page).
-------------------------- + Management contract or compensatory plan or arrangement. The Company will furnish a copy of any exhibit listed above to any shareholder without charge upon written request to Mr. Terry L. Gage, Chief Financial Officer, 4055 Valley View Lane, Suite 1000, Dallas, TX 75244. * Filed herewith. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Report. (c) The Index to Exhibits filed or incorporated by reference pursuant to Item 601 of Regulation S-K and the Exhibits being filed with this Report are included following the signature pages to this Form 10-K (d) Not applicable. 83 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of Carreker Corporation, a Delaware corporation, and the undersigned directors and officers of Carreker Corporation hereby constitutes and appoints John D. Carreker, Jr. and Terry L. Gage, or any one of them, its or his true and lawful attorney-in-fact and agent, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company 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. ----------------------------------------- John D. Carreker, Jr. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Dated: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company in the capacities indicated on April 15, 2002.
TITLE SIGNATURES ----- ---------- /s/ JOHN D. CARREKER, JR. Chairman of the Board and Chief Executive ------------------------------------------- Officer John D. Carreker, Jr. (Principal John D. Carreker, Jr. Executive Officer) /s/ TERRY L. GAGE Executive Vice President and Chief Financial ------------------------------------------- Officer Terry L. Gage (Principal Financial Terry L. Gage and Accounting Officer) /s/ JAMES D. CARREKER ------------------------------------------- Director James D. Carreker /s/ JAMES R. ERWIN ------------------------------------------- Director James R. Erwin
84
TITLE SIGNATURES ----- ---------- /s/ JAMES L. FISCHER ------------------------------------------- Director James L. Fischer /s/ MICHAEL D. HANSEN ------------------------------------------- President and Chief Operating Officer, Michael D. Hansen Director /s/ DONALD L. HOUSE ------------------------------------------- Director Donald L. House /s/ RICHARD R. LEE, JR. ------------------------------------------- Director Richard R. Lee, Jr. /s/ DAVID K. SIAS ------------------------------------------- Director David K. Sias /s/ RONALD G. STEINHART ------------------------------------------- Director Ronald G. Steinhart
85
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 4.2 Amended and Restated Certificate of Incorporation and Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). +10.1 Employment Agreement dated January 31, 1997 between the Company and John D. Carreker, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). +10.2 Employment Agreement between the Company and Michael Hansen (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Registration Form S-3 (Registration No. 333-47160)). +*10.3 Employment Agreement dated May 22, 2001 between the Company and Joseph M. Rowell. +10.4 Carreker Corporation Third Amended and Restated 1994 Long Term Incentive Plan (incorporated by reference to Appendix B to the Company's Definitive Proxy Statement filed on May 30, 2001). +10.5 Carreker Corporation Director Stock Option Plan (incorporated by reference to Appendix C to the Company's Definitive Proxy Statement filed on May 30, 2001). +10.6 Indemnification Agreement between the Company and John D. Carreker, Jr. (together with a schedule) (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). *10.7 Goodwill Purchase Agreement dated May 22, 2001 by and among Check Solutions Company, Joseph M. Rowell and Paul Lechtenberg. *10.8 Assumption Agreement dated May 22, 2001 by and among the Company, Joseph M. Rowell and Paul Lechtenberg. *10.9 Termination and License Agreement dated December 27, 2001 by and between the Company and Exchange Applications, Inc. *10.10 Agreement and Release dated November 2, 2001 by and between the Company and Pegasystems, Inc. 10.11 Form of the Company's independent contractor agreement (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 10.12 Office Lease between Granite Tower, Ltd. And the Company dated as of March 31, 1999 (incorporated by reference to Exhibit 10.26 of the Registration Form 10-K for fiscal year ended January 31, 1999). 10.13 Office Lease between Granite Tower, Ltd. And the Company dated August 31, 1999 (incorporated by reference to Exhibit 10.16 of the Registration Form 10-K for fiscal year ended January 31, 2000). 10.14 Credit Agreement, dated June 6, 2001, among the Company as Borrower, J.P. Morgan Chase Bank (formerly known as The Chase Manhattan Bank) as Administrative Agent and Issuing Bank, and Compass Bank as Syndication Agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed June 8, 2001).
86
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.15 Partnership Interest Purchase Agreement, dated May 22, 2001, among Carreker Corporation, Check Consultants Company of Tennessee, Inc., IPSS Corporation, International Business Machines Corporation and First Tennessee Bank National Association (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed May 29, 2001). 10.16 Second Amendment to Credit Agreement dated October 31, 2001 among Carreker Corporation as Borrower, J.P. Morgan Chase Bank (formerly known as The Chase Manhattan Bank) as Administrative Agent and Issuing Bank, and Compass Bank as Syndication Agent (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed December 14, 2001). 10.17 Limited Recourse Promissory Note executed by Robert E. Hall in favor of the Company, as dated March 31, 2001 (incorporated by reference to Exhibit 10.3 of the Company's Quarterly report on Form 10-Q filed June 12, 2001). 10.18 Loan Agreement between Robert E. Hall and the Company dated March 31, 2001 (incorporated by reference to Exhibit 10.4 of the Company's Quarterly report on Form 10-Q filed June 12, 2001). 21.1 Subsidiaries of the Company. (h) Genisys Operation, Inc. (i) Antinori Software, Inc. (j) Carreker, Ltd. (k) Cash Services Australia Pty, Ltd. (l) Carreker Holdings Australia Pty, Ltd. (m) Carreker Canada, Inc. (n) Carreker Check Solutions LLC *23.1 Consent of Ernst & Young LLP, Independent Auditors. *24.1 Power of Attorney (included on first signature page).
-------------------------- + Management contract or compensatory plan or arrangement. The Company will furnish a copy of any exhibit listed above to any shareholder without charge upon written request to Mr. Terry L. Gage, Chief Financial Officer, 4055 Valley View Lane, Suite 1000, Dallas, TX 75244. * Filed herewith. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Report. (c) The Index to Exhibits filed or incorporated by reference pursuant to Item 601 of Regulation S-K and the Exhibits being filed with this Report are included following the signature pages to this Form 10-K (d) Not applicable. 87 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-63517) pertaining to the Amended and Restated Carreker Corporation 1994 Long Term Incentive Plan and the Carreker Corporation Director Stock Option Plan of our report dated March 7, 2002, (except for Note 13, as to which the date is April 5, 2002) with respect to the consolidated financial statements of Carreker Corporation included in the Annual Report (Form 10-K) for the year ended January 31, 2002 filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG, LLP Dallas, Texas April 11, 2002