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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended July 31, 2003.

o
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
(State or other jurisdiction of
incorporation or organization)		   75-1622836
(IRS Employer Identification No.)

4055 Valley View Lane, #1000
Dallas, Texas
(Address of principal executive office)
 
 
 75244
(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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common Stock, $.01 par value—23,792,505 shares as of August 29, 2003.


CARREKER CORPORATION


Index

 
  
  
   PAGE
PART 1:   FINANCIAL INFORMATION    

 
Item 1.
Financial Statements (unaudited)
 
3

 
 
Condensed Consolidated Balance Sheets at July 31, 2003 and January 31, 2003
 
3

 
 
Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2003 and 2002
 
4

 
 
Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended July 31, 2003
 
5

 
 
Condensed Consolidated Statements of Cash Flows for the three and six months ended July 31, 2003 and 2002
 
6

 
 
Notes to Condensed Consolidated Unaudited Financial Statements
 
7

 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
26

 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
45

 
Item 4.
Controls and Procedures
 
46

PART II:
 
OTHER INFORMATION
 
 

 
Item 1.
Legal Proceedings
 
47

 
Item 2.
Changes in Securities and Use of Proceeds
 
47

 
Item 3.
Defaults Upon Senior Securities
 
47

 
Item 4.
Submission of Matters to a Vote of Security Holders
 
47

 
Item 5.
Other Information
 
47

 
Item 6.
Exhibits and Reports on Form 8-K
 
47

SIGNATURES
 
48

EXHIBITS
 
 

2


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

CARREKER CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts)

 
   July 31,
2003
   January 31,
2003
  
ASSETS  
Current assets              
  Cash and cash equivalents   $ 27,460   $ 26,986  
  Accounts receivable, net of allowance of $1,629 and $1,761 at July 31, 2003 and January 31, 2003, respectively     17,065     22,759  
  Prepaid software royalties     364     763  
  Prepaid expenses and other current assets     2,561     3,073  
   
 
 
Total current assets     47,450     53,581  
Property and equipment, net of accumulated depreciation of $16,048 and $14,704 at July 31, 2003 and January 31, 2003, respectively     7,839     8,975  
Capitalized software costs, net of accumulated amortization of $10,571 and $10,025 at July 31, 2003 and January 31, 2003, respectively     1,464     2,010  
Acquired developed technology, net of accumulated amortization of $8,927 and $6,867 at July 31, 2003 and January 31, 2003, respectively     15,273     17,333  
Goodwill, net of accumulated amortization of $3,405 at July 31, 2003 and January 31, 2003     21,193     21,193  
Customer relationships, net of accumulated amortization of $3,033 and $2,333 at July 31, 2003 and January 31, 2003, respectively     5,367     6,067  
Deferred loan costs, net of accumulated amortization of $892 and $676 at July 31, 2003 and January 31, 2003, respectively     816     576  
Other assets     420     373  
   
 
 
Total assets   $ 99,822   $ 110,108  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY  

Current liabilities
 
 
 
 
 
 
 
  Accounts payable   $ 509   $ 725  
  Accrued compensation and benefits     7,412     7,603  
  Other accrued expenses     4,422     6,030  
  Income tax payable     100     —  
  Deferred revenue     22,614     17,600  
  Accrued merger and restructuring costs     2,668     3,735  
   
 
 
Total current liabilities     37,725     35,693  
Long-term debt     12,500     25,000  
Deferred revenue     —     817  
   
 
 
Total liabilities     50,225     61,510  
   
 
 
Contingencies              

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; 23,792 and 23,574 shares issued at July 31, 2003 and January 31, 2003, respectively     238     236  
  Additional paid-in capital     104,784     105,263  
  Accumulated deficit     (55,422 )   (56,386 )
  Less treasury stock, at cost: 1 and 27 common shares at July 31, 2003 and January 31, 2003, respectively     (3 )   (515 )
   
 
 
Total stockholders' equity     49,597     48,598  
   
 
 
Total liabilities and stockholders' equity   $ 99,822   $ 110,108  
   
 
 

See accompanying notes.

3


CARREKER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)

 
   Three Months Ended
July 31,
   Six Months Ended
July 31,
  
 
   2003
   2002
   2003
   2002
  
Revenues:                          
  Consulting fees   $ 8,202   $ 12,946   $ 14,953   $ 22,541  
  Software license fees     8,351     12,058     14,929     26,100  
  Software maintenance fees     14,284     11,090     22,994     21,757  
  Software implementation fees     4,508     5,695     9,402     12,892  
  Out-of-pocket expense reimbursements     816     1,670     2,139     3,858  
   
 
 
 
 
    Total revenues     36,161     43,459     64,417     87,148  

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Consulting fees     5,288     7,119     10,257     13,973  
  Software license fees     1,905     2,068     3,626     3,761  
  Software maintenance fees     3,070     2,475     6,186     5,244  
  Software implementation fees     5,027     4,691     9,850     9,829  
  Out-of-pocket expenses     1,038     1,939     2,291     4,276  
   
 
 
 
 
    Total cost of revenues     16,328     18,292     32,210     37,083  
   
 
 
 
 
Gross profit     19,833     25,167     32,207     50,065  

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Selling, general and administrative     12,695     12,558     24,780     25,404  
  Research and development     1,716     3,175     3,522     6,161  
  Amortization of intangible assets     350     350     700     700  
  Restructuring and other charges     778     —     1,462     —  
   
 
 
 
 
    Total operating costs and expenses     15,539     16,083     30,464     32,265  
   
 
 
 
 
Income from operations     4,294     9,084     1,743     17,800  

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest income     73     125     154     193  
  Interest expense     (339 )   (696 )   (757 )   (1,481 )
  Other income (expense)     36     (49 )   50     38  
   
 
 
 
 
    Total other income (expense)     (230 )   (620 )   (553 )   (1,250 )
   
 
 
 
 
Income before provision (benefit) for income taxes     4,064     8,464     1,190     16,550  
Provision (benefit) for income taxes     133     547     226     (1,058 )
   
 
 
 
 
Net income   $ 3,931   $ 7,917   $ 964   $ 17,608  
   
 
 
 
 
Basic earnings per share   $ 0.17   $ 0.34   $ 0.04   $ 0.77  
   
 
 
 
 
Diluted earnings per share   $ 0.17   $ 0.33   $ 0.04   $ 0.75  
   
 
 
 
 
Shares used in computing basic earnings per share     23,547     23,397     23,547     22,850  
   
 
 
 
 
Shares used in computing diluted earnings per share     23,723     24,005     23,631     23,351  
   
 
 
 
 

See accompanying notes.

4


CARREKER CORPORATION
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)

 
   Common Stock
    
    
   Treasury Stock
    
  
 
   Additional
Paid-In
Capital
   Accumulated
Deficit
   Total
Stockholders'
Equity
  
 
   Shares
   Amount
   Shares
   Amount
  
Balance at January 31, 2003   23,574   $ 236   $ 105,263   $ (56,386 ) 27   $ (515 ) $ 48,598  

Net loss
 
—
 
 
—
 
 
—
 
 
(2,967
)
—
 
 
—
 
 
(2,967
)
   
 
 
 
 
 
 
 
  Balance at April 30, 2003   23,574   $ 236   $ 105,263   $ (59,353 ) 27   $ (515 ) $ 45,631  
   
 
 
 
 
 
 
 

Reissuance of treasury stock as restricted stock
 
—
 
 
—
 
 
(512
)
 
—
 
(26
)
 
512
 
 
—
 
Compensation expense related to issuance of restricted stock   218     2     33     —   —     —     35  
Net income   —     —     —     3,931   —     —     3,931  
   
 
 
 
 
 
 
 
  Balance at July 31, 2003   23,792   $ 238   $ 104,784   $ (55,422 ) 1   $ (3 ) $ 49,597  
   
 
 
 
 
 
 
 

See accompanying notes.

5


CARREKER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 
   Three Months Ended
July 31,
   Six Months Ended
July 31,
  
 
   2003
   2002
   2003
   2002
  
Operating Activities:                          
 
Net income
 
$
3,931
 
$
7,917
 
$
964
 
$
17,608
 
  Adjustments to reconcile net income to net cash provided by operating activities:                          
    Depreciation and amortization of property and equipment     832     1,133     1,706     2,341  
    Amortization of capitalized software costs and acquired developed technology     1,270     1,512     2,606     2,878  
    Amortization of customer relationships     350     350     700     700  
    Provision for doubtful accounts     25     376     (27 )   516  
    Amortization of deferred loan costs     108     108     216     216  
    Compensation earned under restricted stock plan     35     —     35     —  
    Changes in operating assets and liabilities:                          
      Accounts receivable     (1,001 )   875     5,721     1,436  
      Prepaid expenses and other assets     1,005     536     864     558  
      Accounts payable and accrued expenses     (1,380 )   (3,691 )   (3,082 )   (20,466 )
      Income taxes payable/receivable     100     129     100     (1,714 )
      Deferred revenue     (3,487 )   2,214     4,197     3,580  
   
 
 
 
 
Net cash provided by operating activities     1,788     11,459     14,000     7,653  
Investing Activities:                          
  Purchases of property and equipment     (259 )   (782 )   (570 )   (1,798 )
  Computer software costs capitalized     —     —     —     (103 )
   
 
 
 
 
Net cash used in investing activities     (259 )   (782 )   (570 )   (1,901 )
Financing Activities:                          
  Purchases of treasury stock     —     4     —     —  
  Payments on long-term debt     (2,500 )   (6,500 )   (12,500 )   (9,000 )
  Payment of deferred loan costs     (456 )   —     (456 )   —  
  Proceeds from exercises of stock options     —     1,587     —     2,241  
  Proceeds from sale of common stock     —     —     —     9,323  
   
 
 
 
 
Net cash provided by (used in) financing activities     (2,956 )   (4,909 )   (12,956 )   2,564  
   
 
 
 
 
Net increase (decrease) in cash and cash equivalents     (1,427 )   5,768     474     8,316  
Cash and cash equivalents at beginning of period     28,887     28,222     26,986     25,674  
   
 
 
 
 
Cash and cash equivalents at end of period   $ 27,460   $ 33,990   $ 27,460   $ 33,990  
   
 
 
 
 

Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Cash paid for interest   $ 322   $ 611   $ 669   $ 1,229  
   
 
 
 
 
  Cash paid for income taxes, net   $ 36   $ 418   $ 130   $ 656  
   
 
 
 
 

See accompanying notes.

6


Carreker Corporation
Notes to Condensed Consolidated Unaudited Financial Statements
For the Three and Six Months Ended July 31, 2003 and 2002

1.     Description of Business

        Carreker Corporation ("the Company," "Carreker," "our," "we") provides payments-related software and consulting solutions to financial institutions and financial service providers. These solutions help the Company's customers improve operational efficiency in how payments are processed; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; and evolve toward next-generation payment practices and technologies.

2.     Summary of Significant Accounting Procedures

        The condensed consolidated unaudited financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

        Certain accounts payable and other accrued expenses amounts at January 31, 2003 have been reclassified to conform to the current presentation.

        The accompanying condensed consolidated unaudited financial statements and notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim financial reporting. The results of operations, for the three and six months ended July 31, 2003, are not necessarily indicative of full-year results.

        These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair representation of financial results for the interim periods presented.

        We restated our audited financial statements for the years ended January 31, 2002, 2001, 2000 and 1999, and our unaudited financial statements for each of the quarters in the year ended January 31, 2002 and for the quarters ended April 30, 2002 and July 31, 2002. Refer to the Company's Form 10-K for the year ended January 31, 2003 for details of the restatement as well as the impact of the restatement on the years and quarters previously reported.

        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, impairment of intangibles, 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.

        The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents primarily consist of demand deposit accounts and shares in a demand money market account comprised of domestic and foreign

7

commercial paper, certificates of deposit and U.S. government obligations that are maintained with nationally recognized financial institutions.

        Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of temporary cash investments and accounts receivable. The Company places temporary cash investments with financial institutions and limits its exposure with any one financial institution.

        A significant portion of the Company's business consists of providing consulting services and licensing software to major domestic and international 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 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 reserve in an amount determined 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.

        The fair value of accounts receivable approximates the carrying amount of accounts receivable.

        Accounts receivable, net of allowances, consist of the following (in thousands):

 
   July 31,
2003
   January 31,
2003
  
Gross accounts receivable   $ 51,035   $ 74,918  
Less amounts in deferred revenue     (32,341 )   (50,398 )
Less allowance for doubtful accounts     (1,629 )   (1,761 )
   
 
 
Net accounts receivable   $ 17,065   $ 22,759  
   
 
 

        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

8