-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OnT+QnScbx4z3uFoZkcIjQcN2lfpwFpkugzwGt8WngghxQD+97Yg6dc4qvd2SPrC Y+IYDTsq9zxdQL+i4VIagQ== 0001047469-99-035738.txt : 19990915 0001047469-99-035738.hdr.sgml : 19990915 ACCESSION NUMBER: 0001047469-99-035738 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARREKER ANTINORI INC CENTRAL INDEX KEY: 0001057709 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 751622836 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24201 FILM NUMBER: 99711510 BUSINESS ADDRESS: STREET 1: 14001 N DALLAS PKWY STREET 2: STE 1100 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9724581981 MAIL ADDRESS: STREET 1: 14001 N DALLAS PKWY STREET 2: STE 1100 CITY: DALLAS STATE: TX ZIP: 75240 10-Q 1 FORM 10-Q United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended July 31, 1999. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ______________________ to _________________________. Commission file number ___0-24201________________ Carreker-Antinori, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-1622836 - --------------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4055 Valley View Lane, #1000 Dallas, Texas 75244 - ------------------------------------- ----------------------------- (Address of principal executive office) (Zip Code) (972) 458-1981 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value --- 18,561,886 shares as of August 31, 1999. CARREKER-ANTINORI, INC. INDEX
PART I FINANCIAL INFORMATION PAGE ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets at July 31, 1999 and January 31, 1999 3 Condensed Consolidated Statements of Operations for the three and six months ended July 31, 1999 and July 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 1999 and July 31, 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARREKER-ANTINORI, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
July 31, January 31, ASSETS 1999 1999 (Unaudited) --------------- --------------- CURRENT ASSETS: Cash and cash equivalents $ 17,994 $ 20,701 Short term investments 8,677 12,849 Accounts receivable, net 34,667 27,604 Prepaid expenses and other assets 1,125 681 Deferred income taxes 736 736 --------------- --------------- Total current assets 63,199 62,571 Furniture, equipment, and leasehold improvements, net 3,948 2,673 Software costs capitalized, net 4,414 3,279 Other assets 344 213 --------------- --------------- Total assets $ 71,905 $ 68,736 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,238 $ 2,045 Accrued compensation and benefits 610 700 Other accrued expenses 805 961 Income taxes payable 2,328 1,400 Deferred revenue 4,982 5,348 --------------- --------------- Total current liabilities 9,963 10,454 Deferred income taxes 1,201 1,151 --------------- --------------- Total liabilities 11,164 11,605 --------------- --------------- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 2,000 shares authorized, none issued ---- ---- Common Stock, $.01 par value, 100,000 shares authorized, 18,563 and 18,354 shares issued, at July 31 and January 31, 1999, respectively 186 184 Additional paid-in capital 44,770 44,563 Less treasury stock, at cost: 1 shares, as of July 31, 1999 (4) ---- Deferred compensation (412) (568) Retained earnings 16,201 12,952 --------------- --------------- Total stockholders' equity 60,741 57,131 --------------- --------------- Total liabilities and stockholders' equity $ 71,905 $ 68,736 =============== ===============
See accompanying notes. 3 CARREKER-ANTINORI, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended July 31, July 31, --------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ------------- REVENUES: Consulting and management service fees $13,039 $ 6,589 $21,363 $ 11,603 Software license fees 2,762 4,061 5,855 7,518 Software maintenance fees 1,764 1,285 3,266 2,428 Software implementation fees 1,232 2,136 2,675 3,125 Hardware and other fees 75 227 197 558 ----------- ----------- ----------- ------------- Total revenues 18,872 14,298 33,356 25,232 COSTS OF REVENUES: Consulting and management service fees 6,162 3,905 11,433 7,549 Software license fees 380 247 848 503 Software maintenance fees 671 568 1,335 1,067 Software implementation fees 808 1,205 1,454 1,842 Hardware and other fees 60 186 161 418 ----------- ----------- ----------- ------------- Total cost of revenues 8,081 6,111 15,231 11,379 ----------- ----------- ----------- ------------- GROSS PROFIT 10,791 8,187 18,125 13,853 ----------- ----------- ----------- ------------- OPERATING COSTS AND EXPENSES: Selling, general and administrative 6,114 4,424 10,932 8,278 Research and development 1,356 1,243 2,674 2,438 ----------- ----------- ----------- ------------- Total operating costs and expenses 7,470 5,667 13,606 10,716 Income from operations 3,321 2,520 4,519 3,137 Other income 316 205 557 223 ----------- ----------- ----------- ------------- Income before provision for income taxes 3,637 2,725 5,076 3,360 Provision for income taxes 1,351 1,011 1,827 1,263 ----------- ----------- ----------- ------------- Net income $2,286 $ 1,714 $ 3,249 $ 2,097 =========== =========== =========== ============= Basic earnings per share $ 0.12 $ 0.10 $ 0.18 $ 0.14 =========== =========== =========== ============= Diluted earnings per share $ 0.12 $ 0.10 $ 0.17 $ 0.13 =========== =========== =========== ============= Shares used in computing basic earnings per share 18,477 16,523 18,423 14,629 Shares used in computing diluted earnings per share 19,078 17,736 18,961 16,239
See accompanying notes. 4 CARREKER-ANTINORI, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended July 31, ------------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net Income $ 3,249 $ 2,097 Adjustments to reconcile net income to net cash used in operating activities: Amortization of capitalized software 583 221 Depreciation 1,026 617 Amortization of deferred compensation 156 126 Deferred income taxes 50 216 Changes in assets and liabilities: Accounts receivable (7,064) (5,549) Prepaid expenses and other (574) (139) Accounts payable and accrued expenses (1,052) (1,300) Taxes payable 928 939 Deferred revenue (366) (620) ------------ ------------ Net cash used in operating activities (3,064) (3,392) INVESTING ACTIVITIES: Purchase of short-term investments ---- (24) Sale of short-term investments 4,172 ---- Purchase of furniture, equipment and leasehold improvements (2,301) (1,185) Software costs capitalized (1,719) (781) ------------ ------------ Net cash provided by (used in) investing activities 152 (1,990) FINANCING ACTIVITIES: Purchase of treasury stock (4) (8) Proceeds from sale of stock ---- 35,838 Proceeds from stock options exercised 209 3,069 ------------ ------------ Net cash provided by financing activities 205 38,899 Net increase (decrease) in cash and cash equivalents (2,707) 33,517 Cash and cash equivalents at beginning of period 20,701 2,485 ------------ ------------ Cash and cash equivalents at end of period $17,994 $36,002 ============ ============ Supplemental cash flow information: Cash paid for interest $ ---- $ 26 ============ ============ Cash paid for income taxes $ 809 $ 105 ============ ============
See accompanying notes. 5 CARREKER-ANTINORI, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PART I 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations promulgated by the Securities and Exchange Commission. These statements should be read in conjunction with the audited financial statements and notes thereto for the years ended January 31, 1999, 1998, and 1997 included in the Company's Form 10-K for the fiscal year ended January 31, 1999 on file with the Commission. The results of operations for the interim periods shown herein are not necessarily indicative of the results to be expected for any future interim period or for the entire year. 2. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less from the original purchase date to be cash equivalents. At July 31, 1999, cash equivalents consisted principally of highly liquid debt securities of corporations and municipalities. 3. 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 the management's expectation that they will not be held for greater than one year. Short-term investments consist primarily of tax exempt municipal bonds. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. All debt securities have been determined by management to be available for sale. Available for sale securities are stated at amortized cost, at January 31 and July 31, 1999, respectively, which approximates fair value. Fair value of debt securities is determined based upon current market value price quotes by security. As of July 31, 1999 all short-term investments mature from one to two years. 4. EARNINGS PER SHARE Basic earnings per share is computed by using the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding during each period, and common equivalent shares consisting of stock options (using the treasury stock method). 6 The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended July 31, 1999 and 1998 (in thousands, except per share amounts):
Three Months Ended Six Months Ended July 31, July 31, 1999 1998 1999 1998 ---------- ---------- --------- --------- Basic earnings per share: Net income $ 2,286 $ 1,714 $3,249 $ 2,097 Weighted average shares outstanding 18,477 16,523 18,423 14,629 Basic earnings per share $ 0.12 $ 0.10 $ 0.18 $ 0.14 ---------- ---------- --------- --------- Diluted earnings per share: Net income $ 2,286 $ 1,714 $3,249 $ 2,097 Weighted average shares outstanding 18,477 16,523 18,423 14,629 Assumed conversion of employee stock options 601 1,213 538 1,610 ---------- ---------- --------- --------- Shares used in diluted earnings per share calculation 19,078 17,736 18,961 16,239 ========== ========== ========= ========= Diluted earnings per share $ 0.12 $ 0.10 $ 0.17 $ 0.13 ========== ========== ========= =========
5. MANAGEMENT SERVICES For the three and six months ended July 31, 1999 and 1998, the Company recognized revenue for management services provided to related parties in the following amounts (in thousands):
Three Months Ended Six Months Ended July 31, July 31, ---------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ----------- ------------ ------------- Infiteq, LLC $ 30 $ 343 $ 51 $ 849 Payment Solutions Network, Inc. 180 415 359 788 Electronic Check Clearing House Organization 238 250 505 529
The Company had net receivables from related parties at July 31 in the following amounts (in thousands): 1999 1998 ---- ---- Infiteq, LLC $ 79 $ 157 Payment Solutions Network, Inc. 330 443 Electronic Check Clearing House Organization 91 466
7 6. SEGMENTS Effective with the year ended January 31, 1999, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information (Statement 131)." The Company has three reportable segments: Revenue Enhancement, Payment Systems, and Emerging Solutions. The segments are unique due to the focus of the products and services being offered. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, not including gains and losses on the Company's investment portfolio. Revenue Enhancement consists primarily of yield management consulting, and liquidity management consulting and software. Payment Systems consists primarily of consolidation consulting, best practices consulting and software, risk management consulting and software, float management consulting and software, payment electronification consulting and software, and track and trace software. Emerging Solutions consists primarily of enterprise information technology consulting, and management services, ECCHO management services, and enabling technology consulting. Due to the solution approach to delivering products and services from multiple business segments, contracts are broken down by segment with few transactions between reportable segments. Included in corporate and unallocated are costs related to selling and marketing, unallocated corporate overhead expense, general software management, and incentive bonuses. Business segment results include costs for research and development as well as product royalty expense. Receivables, property and equipment and other assets are not included in the measures reviewed by the Company's chief operating decision-maker. Therefore, all Company assets have been included in the corporate and unallocated category in the following reportable segment disclosure. Segment information for the three month periods ended July 31, 1999 and 1998 is as follows (in thousands):
For the three month period ended July 31, 1999 ------------------------------------------------------------------------- Revenue Payment Emerging Corporate Enhancement Systems Solutions & Unallocated Total ------------ ----------- ----------- -------------- --------- Revenues Consulting and management service fees $ 7,017 $ 3,361 $ 2,661 $ ---- $ 13,039 Software license fees ................ 612 2,150 ---- ---- 2,762 Software maintenance fees ............ 374 1,390 ---- ---- 1,764 Software implementation fees ......... 195 1,037 ---- ---- 1,232 Hardware and other fees .............. ---- 75 ---- ---- 75 -------- -------- -------- -------- -------- Total revenues .................... $ 8,198 $ 8,013 $ 2,661 $ ---- $ 18,872 ======== ======== ======== ======== ======== Income (loss) from operations $ 5,165 $ 2,363 $ 649 $ (4,856) $ 3,321 Assets .................................. ---- ------ ---- $ 71,905 $ 71,905 Depreciation and Amortization ............................ $ 130 $ 328 $ 14 $ 340 $ 812 Capital expenditures .................... $ ---- $ ---- $ ---- $ 1,119 $ 1,119
8
For the three month period ended July 31, 1998 ------------------------------------------------------------------ Revenue Payment Emerging Corporate Enhancement Systems Solutions & Unallocated Total ------------------------------------------------------------------ Revenues Consulting and management service fees $ 3,453 $ 1,999 $ 1,137 $ ---- $ 6,589 Software license fees ................. 1,171 2,890 ---- ---- 4,061 Software maintenance fees ............. 209 1,076 ---- ---- 1,285 Software implementation fees .......... 722 1,414 ---- ---- 2,136 Hardware and other fees ............... ---- 227 ---- ---- 227 -------- -------- -------- -------- -------- Total revenues ..................... $ 5,555 $ 7,606 $ 1,137 $ ---- $ 14,298 ======== ======== ======== ======== ======== Income (loss) from operations $ 3,522 $ 2,111 $ 250 $ (3,363) $ 2,520 Assets ................................... $ --- $ ---- $ ---- $ 61,569 $ 61,569 Depreciation and Amortization ............................. $ 19 $ 159 $ 8 $ 230 $ 416 Capital expenditures ..................... $ ---- $ ---- $ ---- $ 911 $ 911
Segment information for the six month periods ended July 31, 1999 and 1998 is as follows (in thousands):
For the six month period ended July 31, 1999 ------------------------------------------------------------------------ Revenue Payment Emerging Corporate Enhancement Systems Solutions & Unallocated Total ------------------------------------------------------------------------ Revenues Consulting and management service fees $ 10,855 $ 6,257 $ 4,251 $ ---- $ 21,363 Software license fees ................. 1,850 4,005 ---- ---- 5,855 Software maintenance fees ............. 713 2,553 ---- ---- 3,266 Software implementation fees .......... 423 2,252 ---- ---- 2,675 Hardware and other fees ............... 197 ---- ---- 197 -------- --------- --------- -------- --------- Total revenues ..................... $ 13,841 $ 15,264 $ 4,251 $ ---- $ 33,356 ======== ========= ========= ======== ========= Income (loss) from operations $ 8,152 $ 4,583 $ 567 $ (8,783) $ 4,519 Assets ................................... $ --- $ ---- $ ---- $ 71,905 $ 71,905 Depreciation and Amortization ............................. $ 252 $ 676 $ 25 $ 656 $ 1,609 Capital expenditures ..................... $ --- $ ---- $ ---- $ 2,301 $ 2,301
9
For the six month period ended July 31, 1998 -------------------------------------------------------------------------------- Revenue Payment Emerging Corporate Enhancement Systems Solutions & Unallocated Total -------------------------------------------------------------------------------- Revenues Consulting and management service fees $ 4,369 $ 4,622 $ 2,612 ---- $11,603 Software license fees ................. 2,110 5,408 ---- ---- 7,518 Software maintenance fees ............. 384 2,044 ---- ---- 2,428 Software implementation fees .......... 1,106 2,019 ---- ---- 3,125 Hardware and other fees ............... -- 558 ---- ---- 558 -------- ------- ------- -------- -------- Total revenues ..................... $ 7,969 $14,651 $ 2,612 ---- $25,232 ======== ======= ======= ======== ======== Income (loss) from operations $ 4,243 $ 4,806 $ 951 $(6,863) $ 3,137 Assets ................................... $ ---- $ ---- $ ---- $61,569 $61,569 Depreciation and Amortization ............................. $ 37 $ 382 $ 15 $ 410 $ 844 Capital expenditures ..................... $ -- $ -- $ -- $ 1,185 $ 1,185
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading provider of integrated consulting and software solutions that enable banks to increase their revenues, reduce their costs and enhance their delivery of customer services. The Company was founded in 1978 to provide consulting services to banks, and subsequently integrated software products into its banking solutions. With its acquisition of Antinori Software, Inc., a Georgia corporation ("ASI") on January 31, 1997, the Company was able to significantly enhance its portfolio of software products. Additionally, the Company acquired Genisys Operations, Inc. ("Genisys") on January 29, 1999 which provides incremental added-value to the Company's product offerings. The acquisitions of ASI and Genisys were each accounted for as a pooling-of-interests, and accordingly, the Company's Condensed Consolidated Financial Statements and notes thereto, as well as all other financial and statistical data presented in this Form 10-Q, have been restated to include the financial position and results of operations for ASI and Genisys for all periods presented. MARKETS: A substantial majority of the Company's revenues are generated from contracts with banks with assets over $50 billion ("Tier I Banks") and banks with assets of between $5 billion and $50 billion ("Tier II Banks"). The Company also targets smaller bank holding companies and independent banks with assets of between $550 million and $5 billion. SOURCE OF REVENUES: The Company derives its revenues from consulting and management service fees, software license fees, software implementation fees and hardware and other sales. While many customer contracts provide for both the performance of consulting services and the license of related software, some customer contracts require only the performance of consulting services or only a software license (and, at the election of the customer, related implementation services and/or annual software maintenance services). The company enters into these contracts with its customers on a project-by-project basis. The Company also derives management service fees from the performance of certain management services on behalf of Payment Solutions Network, Inc. (PSN), Electronic Check Clearing House Organization (ECCHO) and Infiteq, LLC. 10 PRODUCTS AND SERVICES: The Company offers a wide range of consulting services and state-of-the-art, proprietary technology applications designed to address the unique requirements of the banking industry. The Company's solutions are sold individually, or complementary solutions may be sold together (similarly, software products may be sold individually or as part of a product suite). The following table summarizes the divisions through which the Company's offerings are delivered. Each division consists of several groups.
DIVISIONS & GROUPS SOLUTIONS DESCRIPTION --------------------------------- ------------------------------------------ REVENUE ENHANCEMENT INCREASES CUSTOMER REVENUES Liquidity Management Reduces the amount of non-earning assets that a bank maintains in reserve accounts or in cash-on-hand Yield Management Improves operational work-flows, processes and pricing structures employed by a bank PAYMENT SYSTEMS DECREASES CUSTOMER SERVICE COSTS WHILE IMPROVING BACK OFFICE SERVICE Best Practices Delivery of total solutions for customer information management Consolidations Delivery of consulting services to help customers reduce costs, improve operating efficiencies and increase economies-of-scale through operations consolidations of operations Float Management Enhances bank float management through improved check collection, workflow, float allocation, and pricing Genisys Focuses on information management by utilizing the Company's proprietary barcode track and trace technology, coupled with utilizing the Internet as an information delivery vehicle Payment Electronification Facilitates the electronification of paper checks, while reducing costs and risks associated with the check payment process Risk Management Reduces risk of loss from the check payment process as a result of operational failures, check fraud and litigation EMERGING SOLUTIONS DEVELOPMENT OF NEW BUSINESS OPPORTUNITIES OR DELIVERY OF MANAGEMENT SERVICES ECCHO Management Services Focuses on management of the ECCHO organization Enabling Technologies Focuses on developing proof of concept for new business opportunities with the criteria that once a solution is developed, it can be offered across the Company's key customer base Enterprise IT Services Offers customized, enterprise-wide conversion, consolidation and integration consulting solutions in areas beyond payments systems, including subject matter and project management services, Year 2000 services and IT outsourcing services
PRICING METHODS AND REVENUE RECOGNITION: The Company employs varying pricing methods for each of its four sources of revenue, resulting in a number of different revenue recognition practices. Consulting and management services are priced on (i) a time and materials basis (revenue is recognized as the services are performed), (ii) a fixed-price basis (revenue is recognized on a percentage-of-completion basis) and (iii) on a value-priced basis. In the case of value-priced contracts, the Company is paid, on an agreed upon basis with the customer, either a specified percentage of the projected 11 increased revenues or decreased costs that are expected to be derived by the customer over a period of up to twelve months following implementation of the Company's solution, or the actual increased revenues and/or decreased costs experienced by the customer over a period of up to twelve months following implementation of the Company's solution, subject in either case to a ceiling, if any is agreed to, on the total amount of payments to be made to the Company. Revenues generated in connection with value-priced contracts based upon projected results are recognized only upon completion of all services and agreement upon the actual fee to be paid (even though billings for such services may be delayed by mutual agreement for periods generally not to exceed twelve months). When fees are to be paid based on a percentage of actual revenues or savings, revenues are recognized only upon the completion of all services and as the amounts of actual revenues or savings are confirmed to the Company by the customer. Software license fees are priced on a fixed-price basis (with revenue recognized upon delivery, subject to certain conditions), on a value-priced basis (with revenue recognized in a fashion similar to that for consulting and management service fees) and in some cases on a per-transaction basis (with the related revenue being recognized and due on a monthly basis). Software maintenance and implementation fees are priced on a time and materials basis or on a fixed-price basis, and the related revenues are recognized on the basis consistent with that applied to consulting and management service fees. Finally, hardware sales are priced on the basis of the Company's cost plus a specified percentage, and related revenues are recognized upon shipment of the hardware. All statements other than statements of historical fact contained in this report, including statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" concerning the Company's financial position and liquidity, results of operations, prospects for future growth, and other matters are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in, or contemplated by, such forward-looking statements include the risks described under "Risk Factors" in the Company's Form 10-K for the fiscal year ended January 31, 1999, on file with the Commission. Such risks include, without limitation, the risks associated with the Company's dependence on the banking industry, fluctuations in quarterly operating results, customer concentration, customer project risks, the Company's ability to manage growth, market acceptance of the Company's solutions, the absence of long-term agreements with customers, the potential for software and/or solutions defects, competition within the markets in which the Company competes, the Company's use of independent contractors, the Company's dependence on key personnel, the Company's ability to attract and retain qualified personnel, the impact of technological advances on the Company's business, the Company's dependence on proprietary technology and the risks associated with infringement, Year 2000 issues, the potential for liability claims, the risks associated with potential strategic alliances or acquisitions, government regulation and the risks associated with international operations. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in this paragraph, in "Risk Factors" (as set forth in the aforementioned Form 10-K) and elsewhere in this report. 12 RESULTS OF OPERATIONS The following table sets forth for the periods indicated, the percentages that selected items in the unaudited condensed consolidated statements of operations bear to total revenues. The period to period comparisons of financial results are not necessarily indicative of future results.
Three Months Ended Six Months Ended July 31, July 31, ------------------------- ---------------------- 1999 1998 1999 1998 ------------ --------- -------- ---------- Revenues: Consulting and management service fees 69.2% 46.1% 64.0% 46.0% Software license fees 14.6 28.4 17.6 29.8 Software maintenance fees 9.3 9.0 9.8 9.6 Software implementation fees 6.5 14.9 8.0 12.4 Hardware and other fees .4 1.6 .6 2.2 ------------ ---------- ---------- ---------- Total revenues 100.0 100.0 100.0 100.0 Costs of revenues: Consulting and management service fees 32.7 27.3 34.3 29.9 Software license fees 2.0 1.7 2.5 2.0 Software maintenance fees 3.6 4.0 4.0 4.2 Software implementation fees 4.3 8.4 4.4 7.3 Hardware and other fees .3 1.3 .5 1.7 ------------ ---------- ---------- ---------- Total cost of revenues 42.9 42.7 45.7 45.1 ------------ ---------- ---------- ---------- Gross profit 57.1 57.3 54.3 54.9 ------------ ---------- ---------- ---------- Operating costs and expenses: Selling general and administrative 32.4 30.9 32.7 32.8 Research and development 7.2 8.7 8.0 9.7 ------------ ---------- ---------- ---------- Total operating costs and expenses 39.6 39.6 40.7 42.5 Income from operations 17.5 17.7 13.6 12.4 Other income (expense) 1.7 1.4 1.7 .9 ------------ ---------- ---------- ---------- Income before provisions for income taxes 19.2 19.1 15.3 13.3 Provision from income taxes 7.2 7.1 5.5 5.0 ------------ ---------- ---------- ---------- Net income 12.0% 12.0% 9.8% 8.3% ============ ========== ========== =========
REVENUES REVENUES: The Company's total revenues increased 32.0% to $18.9 million for the quarter ended July 31, 1999 from $14.3 million for the quarter ended July 31, 1998. The Company's total revenues increased 32.2% to $33.4 million for the six months ended July 31, 1999 from $25.2 million for the six months ended July 31, 1998. CONSULTING AND MANAGEMENT SERVICE FEES: Revenues from consulting and management service fees increased 97.9% to $13.0 million for the quarter ended July 31, 1999 from $6.6 million for the quarter ended July 31, 1998. Revenues from consulting and management service fees increased 84.1% to $21.4 million for the six months ended July 31, 1999 from $11.6 million for the six months ended July 31, 1998. Consulting and management service fees have grown as a result of continued demand for time and material services as well as value priced revenue enhancement consulting. The Company has expanded the use of value priced engagements due to their improved margins as well as their favorable reception from customers. Revenues related to value priced opportunities tend to fluctuate period-to-period and are likely to fluctuate in future periods 13 SOFTWARE LICENSE FEES: Revenues from software license fees decreased 32.0% to $2.8 million for the quarter ended July 31, 1999 from $4.1 million for the quarter ended July 31, 1998. Revenues from software license fees decreased 22.1% to $5.9 million for the six months ended July 31, 1999 from $7.5 million for the six months ended July 31, 1998. Software license fees continued at reduced levels over the prior year periods as many of the Company's bank customers have limited moving new systems into production as they continue to commit resources to Year 2000 renovation and testing. Certain product offerings requiring limited client resources continue to experience significant demand while other, more intrusive product offerings have experienced reduced demand in light of the Year 2000 commitments of the Company's bank customers. To date, sales of software licenses have principally been derived from direct sales to customers. SOFTWARE MAINTENANCE FEES: Revenues from software maintenance fees increased 37.3% to $1.8 million for the quarter ended July 31, 1999 from $1.3 million for the quarter ended July 31, 1998. Revenues from software maintenance fees increased 34.5% to $3.3 million for the six months ended July 31, 1999 from $2.4 million for the six months ended July 31, 1998. Increases in software maintenance fees have been driven by continued growth in the installed customer base resulting in growth in the number of customers under maintenance contracts. SOFTWARE IMPLEMENTATION FEES: Revenues from software implementation fees decreased 42.3% to $1.2 million for the quarter ended July 31, 1999 from $2.1 million for the quarter ended July 31, 1998. Revenues from software implementation fees decreased 14.4% to $2.7 million for the six months ended July 31, 1999 from $3.1 million for the six months ended July 31, 1998. Decreases in software implementation fees have been driven by reduced sales levels of software licenses, resulting in a reduction in the number of customers requiring implementation services. HARDWARE AND OTHER FEES: Revenues from hardware sales decreased 67.2% to $74,000 for the quarter ended July 31, 1999 from $227,000 for the quarter ended July 31, 1998. Revenues from hardware sales decreased 64.7% to $197,000 for the six months ended July 31, 1999 from $558,000 for the six months ended July 31, 1998. The Company sells hardware at the request of its customers, but does not consider hardware sales to be a meaningful part of its business. COST OF REVENUES COST OF CONSULTING AND MANAGEMENT SERVICES: Cost of consulting and management services increased 57.8% to $6.2 million for the quarter ended July 31, 1999 from $3.9 million for the quarter ended July 31, 1998. Cost of consulting and management services increased 51.5% to $11.4 million for the six months ended July 31, 1999 from $7.5 million for the six months ended July 31, 1998. Cost of consulting and management services as a percentage of consulting and management service fees decreased to 47.3% for the three months ended July 31, 1999 from 59.3% for the three months ended July 31, 1998. Cost of consulting and management services as a percentage of consulting and management service fees decreased to 53.5% for the six months ended July 31, 1999 from 65.1% for the six months ended July 31, 1998. Cost of consulting and management services as a percentage of consulting and management services fees reflects continued growth in value priced engagements and a declining reliance on time and material contracts. Cost of consulting and management services consists primarily of personnel costs associated with time and material contracts and value priced efforts. COST OF SOFTWARE LICENSES: Cost of software licenses increased 53.9% to $380,000 for the quarter ended July 31, 1999 from $247,000 for the quarter ended July 31, 1998. Cost of software licenses increased 68.5% to $848,000 for the six months ended July 31, 1999 from $503,000 for the six months ended July 31, 1998. Cost of software licenses as a percentage of software license fees increased to 13.8% for the three months ended July 31, 1999 from 6.1% for the three months ended July 31, 1998. Cost of the software licenses as a percentage of software license fees increased to 14.5% for the six months ended July 31, 1999 from 6.7% for the six months ended July 31, 1998. Costs of software licenses includes amortization costs relating to capitalized software, as well as royalty costs associated with sales of liquidity management and consolidation software products. Increases in cost of software licenses as a percentage of software license fees reflect an increase in software amortization cost. 14 COST OF SOFTWARE MAINTENANCE: Cost of software maintenance increased 18.2% to $671,000 for the quarter ended July 31, 1999 from $568,000 for the quarter ended July 31, 1998. Cost of software maintenance increased 25.2% to $1.3 million for the six months ended July 31, 1999 from $1.1 million for the six months ended July 31, 1998. Cost of software maintenance consists primarily of personnel costs associated with providing customer support for software products sold. Increases in costs associated with software maintenance reflect staffing increases to support increased customer support and maintenance revenue. COST OF SOFTWARE IMPLEMENTATION: Cost of software implementation decreased 32.9% to $800,000 for the quarter ended July 31, 1999 from $1.2 million for the quarter ended July 31, 1998. Cost of software implementation decreased 21.0% to $1.5 million for the six months ended July 31, 1999 from $1.8 million for the six months ended July 31, 1998. Cost of software implementation consists primarily of personnel costs associated with implementation, training, and providing customer support for software products sold. Decreases in costs associated with software implementation reflect reductions in staffing required to support delivery of these services. COST OF HARDWARE AND OTHER FEES: Cost of hardware decreased 67.9% to $60,000 for the quarter ended July 31, 1999 from $186,000 for the quarter ended July 31, 1998. Cost of hardware decreased 61.6% to $161,000 for the six months ended July 31, 1999 from $418,000 for the six months ended July 31, 1998. Decreases for the quarter and six months ended reflect reductions in the amount of hardware sold during the respective periods over the prior year periods. OPERATING COSTS AND EXPENSES SELLING GENERAL AND ADMINISTRATIVE: Selling, general and administrative expenses 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 38.2% to $6.1 million for the quarter ended July 31, 1999 from $4.4 million for the quarter ended July 31, 1998. Selling general and administrative expenses increased 32.1% to $10.9 million for the six months ended July 31, 1999 from $8.3 million for the six months ended July 31, 1998. The increase in these expenses reflected growth in additional management, marketing, and administrative staff over the prior periods to support the Company's expanding operations. RESEARCH AND DEVELOPMENT: Research and development expenses increased 9.1% to $1.4 million for the quarter ended July 31, 1999 from $1.2 million for the quarter ended July 31, 1998. Research and development expenses increased 9.7% to $2.7 million for the six months ended July 31, 1999 from $2.4 million for the six months ended July 31, 1998. Increases in research and development expense reflect a higher level of software development activity. OTHER INCOME: Other income increased 54.0% to $316,000 for the quarter ended July 31, 1999 from $205,000 for the quarter ended July 31, 1998. Other income increased 149.4% to $557,000 for the six months ended July 31, 1999 from $223,000 for the six months ended July 31, 1998. Other income consists primarily of interest income on tax exempt short-term investments partially offset by interest expense on the Company's debt. The increases in the dollar amount of other income were primarily due to interest earned on higher balances of cash, cash equivalents and short-term investments resulting from net proceeds of the initial public offering of the Company's common stock which was completed in May 1998. PROVISION FOR INCOME TAXES: The provision for income taxes is based on the estimated annual effective tax rate, and includes federal and state income taxes. The Company's effective income tax rate was 37.1% and 36.0% for the three and six months ended July 31, 1999. 15 LIQUIDITY AND CAPITAL RESOURCES As of July 31, 1999, the Company had $53.2 million of working capital, including $18.0 million in cash, and cash equivalents, as compared to $52.1 million of working capital as of January 31,1999, including $20.7 million of cash and cash equivalents. Operating activities consumed $3.1 million of available cash for the six months ended July 31, 1999 as compared to $3.4 million for the six months ended July 31, 1998, largely through growth in accounts receivable of $7.1 million and through reductions of accounts payable and accrued expenses of $1.1 million. Average days' sales outstanding fluctuate for a variety of reasons, including the timing of billings specified by contractual agreement, and receivables for non-revenue related activities. The following table contains the quarterly days sales outstanding (DSO) with a comparative column which adds reimbursed expenses to the revenue portion of the computation:
DSO Including Expense Quarter Ended DSO Reimbursements* ------------------------------ ------------------------ ----------------------- January 31, 1999 163 151 April 30, 1999 175 158 July 31, 1999 169 155
* Includes reimbursements for travel and out of pocket expenses which are not considered revenue, but are included in outstanding receivables. Cash provided by investing activities during the period ended July 31, 1999, of $152,000 was generated by the sale of short-term investments of $4.2 million, less $2.3 million used to purchase furniture, equipment, and leasehold improvements due to growth in staff, and $1.7 million invested in capitalized software. Cash provided by financing activities for the period ended July 31, 1999, was $205,000 and resulted primarily from the exercise of stock options. The Company no longer maintains a revolving credit facility in light of its substantial liquid working capital. The Company's future liquidity and capital requirements will depend upon numerous factors. The Company believes its current cash and cash equivalents and short-term investment balances and cash generated from operations will be sufficient to meet the Company's operating and capital requirement through at least July 2000. However, there can be no assurance that the Company will not require additional financing within this time frame. The Company's forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement that involves risk and uncertainties, and actual results could vary. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operation. YEAR 2000 STATE OF READINESS The Company has performed a company-wide evaluation to assess the ability of its products and its information technology ("IT") and non-IT systems to properly function and execute transactions in the Year 2000. The Company's Year 2000 Project is divided into three major sections: (a) Infrastructure, which includes internal management information systems, computers, servers, networks to support the business and any non-IT systems used in the operation of the business; (b) Third Party Suppliers, which includes those suppliers that provide the Company with software applications that are used in concert with the Company's products and service suppliers, such as Internet service providers and computer 16 testing resources; and (c) Company Products and Services, which includes those products and services that generate revenue for the Company. The Project has been divided into six phases: (1) Awareness and Communication; (2) Inventory; (3) Assessment; (4) Renovation; (5) Testing; and (6) Rollout. As discussed below, the Company has substantially completed the first four phases of the Year 2000 Project for its Infrastructure, Third Party Suppliers and Customer Products and Services. All phases of the Project are expected to be completed by September 30, 1999. INFRASTRUCTURE The Company has completed the inventory, assessment and renovation phases of its IT and non-IT systems and is substantially complete with the testing phase for these systems. The Testing and Rollout phases of the Project are expected to be completed by September 30, 1999. The Company has distributed a letter to each of its vendors that supply systems or software for its IT and non-IT systems to determine the vendors' Year 2000 status. A majority of the recipients have responded to the letter, and most of the respondents have given assurances that their products and services are able to function in the context of the Year 2000 Problem. The Company is assessing these responses and will continue to communicate with vendors that are material to the Company's operations to gain satisfactory assurances. If such assurances are not obtained, the Company will seek alternatives, including contracting with other vendors. THIRD PARTY SUPPLIERS The Company has taken an inventory of the applications from third party suppliers that are used in conjunction with the Company's products. The Company has contacted significant third-party suppliers in an effort to assess the state of their Year 2000 readiness. The Company has received information, or tested all of the applications from third-party suppliers used in the its products. Only one supplier has not been willing to certify the Year 2000 compliance of its application, although internal tests have disclosed no Year 2000 problems with this application. Because its bank customers require certifications regarding Year 2000 compliance, the Company has communicated with this supplier to determine a solution to this certification issue. The Company has been given access to the source code and has concluded its own remediation and risk evaluation in conjunction with the testing already conducted. COMPANY PRODUCTS AND SERVICES All of the Company's software products have been tested and confirmed as compliant. The Company has a Web site to identify each product and its compliant release number and status. The Company also has transmitted letters to its customers notifying them of their current Year 2000 readiness status and outlining the steps, if any, needed for the customer to receive Year 2000 compliant software. As a result of the stringent requirements placed on the Company's bank customers by the Office of Comptroller and Currency (the "OCC") and the Federal Financial Industry Examiners Council (the "FFIEC"), these customers are requiring documented evidence of Year 2000 Compliance of the Company's products. The Company currently is establishing a process to archive the results of its compliance tests and to document this test information in a format suitable for external distribution. COSTS Through and including the second quarter of fiscal 1999, the Company has spent approximately $805,000 relating to labor costs for its Year 2000 Project. The Company has incurred no material replacement costs for non-compliant systems because it did not accelerate its replacement of any systems as a result of the Year 2000 issue. The Company currently estimates that its costs remaining through January 31, 2000 relating to the Year 2000 Project will be less than $50,000, the majority of which will be spent on the documentation process required by the Company's bank customers. Other costs, including replacement of non-compliant hardware and other equipment, are expected to be less than $200,000. Funds for the Year 2000 Project are expected to be paid for out of operations. 17 RISKS If the Company does not successfully complete its Year 2000 Project, it could have a material adverse effect on the Company's ability to market, sell and implement its software products and consulting services, which could have a material adverse effect on its financial condition and results of operations. The Company's customer base is primarily in the banking industry. Because members of this industry are heavily regulated and audited for their Year 2000 compliance efforts, the Company does not consider the possibility of Year 2000 noncompliance by banks to be reasonably likely. The OCC has published guidance criteria that all banks be complete with Year 2000 renovation and unit testing by December 1998, thus allowing the entire year of 1999 for system testing. However, the operations and financial condition of banks is significantly dependent on the results of operations and financial condition of the their customers. If customers of banks experience a material adverse effect as a result of Year 2000 issues, banks, and consequently the Company, could be adversely affected. There can be no assurance that third parties will be Year 2000 compliant in a timely manner. The Company is anticipating that many of its bank customers will not move any new systems into production during the last half of 1999. During this period, only current system bug fixes and Year 2000 compliant releases will be sent into the bank's production environment. Banks will continue to contract for new business solutions, especially those that result in new bank revenues. During this period, banks also will continue to initiate efforts that precede the implementation of a new business software solution. The Company is currently assessing the impact this will have on the Company's operations. CONTINGENCY PLAN A contingency planning process is underway and is anticipated to be complete by September 30, 1999 in preparation for Year 2000 related events. RECENTLY ISSUED ACCOUNTING STANDARDS The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued Statement of Position No. 98-9 "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"), which amends certain provisions of Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"). The new SOP 98-9 will be effective for all transactions entered into by the Company subsequent to January 31, 2000. The Company is currently reviewing the impact of applying SOP 98-9. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS and HEDGING ACTIVITIES ("SFAS 133"), which is required to be adopted in years beginning after June 15, 2000. Because the Company does not use derivatives, management does not anticipate that the adoption of the new statement will have an effect on earnings or the financial position of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATES. The Company invests its cash in a variety of financial instruments, primarily tax advantaged variable rate and fixed rate obligations of state and local municipalities, and educational entities and agencies. These investments are denominated in U.S. dollars. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and short-term investments are treated as available-for-sale under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The Company's investment securities are held for purposes other than trading. While certain of the investment securities had maturities in excess of one year, the Company intends to liquidate such securities if necessary within one year. The weighted-average interest rate on investment securities at July 31, 1999 was 5.82%. 18 Amortized costs of short-term investments held at July 31, 1999 was $8.7 million, which approximates fair value. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits NUMBER EXHIBIT DESCRIPTION ------- ----------------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARREKER-ANTINORI, INC. By: /s/ John D. Carreker, Jr. Date: September 14, 1999 ----------------------------------------- ----------------------- John D. Carreker, Jr. Chairman of the Board and Chief Executive Officer By: /s/ Terry L. Gage Date: September 14, 1999 ----------------------------------------- ----------------------- Terry L. Gage Executive Vice President and Chief Financial Officer 20 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARREKER-ANTINORI, INC'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIOD ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-31-2000 MAY-01-1999 JUL-31-1999 17,994 8,677 36,071 1,404 0 63,199 7,868 3,920 71,905 9,963 0 0 0 186 60,555 71,905 0 18,872 0 8,081 0 26 0 3,637 1,351 2,286 0 0 0 2,286 .12 .12
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