-----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, Vk1xZstCkk2V8T0kOr9nX2EpM2xmmfeoGApw4gTFtfm6qIIP3v9j/Ef8JlHGdF+S O1cefq3I95eb9u+O2HA1Sw== /in/edgar/work/0000912057-00-046652/0000912057-00-046652.txt : 20001102 0000912057-00-046652.hdr.sgml : 20001102 ACCESSION NUMBER: 0000912057-00-046652 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20001031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARREKER CORP CENTRAL INDEX KEY: 0001057709 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 751622836 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-47160 FILM NUMBER: 750430 BUSINESS ADDRESS: STREET 1: 4055 VALLEY VIEW LANE STREET 2: STE 1000 CITY: DALLAS STATE: TX ZIP: 75244 BUSINESS PHONE: 9724581981 MAIL ADDRESS: STREET 1: 4055 VALLEY VIEW LANE STREET 2: STE 1000 CITY: DALLAS STATE: TX ZIP: 75244 FORMER COMPANY: FORMER CONFORMED NAME: CARREKER ANTINORI INC DATE OF NAME CHANGE: 19980313 S-3/A 1 a2027381zs-3a.txt S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 2000 REGISTRATION NO. 333-47160 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- CARREKER CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-1622836 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
4055 VALLEY VIEW LANE, SUITE 1000 DALLAS, TEXAS 75244 (972) 458-1981 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) JOHN D. CARREKER, JR. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 4055 VALLEY VIEW LANE, SUITE 1000 DALLAS, TEXAS 75244 (972) 458-1981 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: JOHN B. MCKNIGHT M. HILL JEFFRIES WHIT ROBERTS Alston & Bird LLP Locke Liddell & Sapp LLP One Atlantic Center 2200 Ross Avenue, Suite 2200 1201 West Peachtree Street Dallas, Texas 75201 Atlanta, Georgia 30309 (214) 740-8000 (404) 881-7000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER 31, 2000 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] 4,000,000 SHARES COMMON STOCK Carreker Corporation is offering 2,000,000 shares of its common stock, and the selling stockholders are selling an additional 2,000,000 shares. Carreker Corporation's common stock is traded on the Nasdaq National Market under the symbol "CANI." The last reported sale price of the common stock on the Nasdaq National Market on October 25, 2000 was $17.75 per share. ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------
PER SHARE TOTAL ----------- ----------- Public Offering Price....................................... $ $ Underwriting Discount....................................... $ $ Proceeds to Carreker........................................ $ $ Proceeds to the Selling Stockholders........................ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 600,000 shares of common stock to cover over-allotments. ------------------------ ROBERTSON STEPHENS CHASE H&Q U.S. BANCORP PIPER JAFFRAY THE DATE OF THIS PROSPECTUS IS , 2000 [LOGO] YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS, "CARREKER CORPORATION," "CARREKER," "WE," "OUR" AND "US" REFER TO CARREKER CORPORATION, A DELAWARE CORPORATION, AND ITS SUBSIDIARIES. ------------------------ TABLE OF CONTENTS
PAGE -------- Summary..................................................... 4 Risk Factors................................................ 7 Forward Looking Statements.................................. 19 Use of Proceeds............................................. 20 Price Range of Common Stock................................. 21 Dividend Policy............................................. 21 Capitalization.............................................. 22 Selected Consolidated Financial Data........................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 38 Management.................................................. 49 Principal and Selling Stockholders.......................... 52 Underwriting................................................ 54 Legal Matters............................................... 56 Experts..................................................... 56 Where You Can Find More Information......................... 57
------------------------ 3 SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE INFORMATION THAT WE HAVE INCORPORATED BY REFERENCE IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION. UNLESS INDICATED OTHERWISE, WE HAVE ASSUMED IN THIS PROSPECTUS THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION. CARREKER CORPORATION 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. Our e-finance solutions use leading-edge technologies to create practical applications for banks and their customers. We believe that our 22 years of experience in the banking industry, combined with our professional staff and our advanced technological expertise, allows us to provide customized solutions for banks and other financial institutions. Our offerings fall into four groups: - REVENUE ENHANCEMENT--increases banks' revenues through market segmentation and improved customer pricing structures; - PAYMENTSOLUTIONS--assists banks in transitioning from paper to electronic-based payment systems and minimizing payment processing expenses; - ENTERPRISE SOLUTIONS--integrates systems, combines operations and improves workflows and internal operational processes; and - CASHSOLUTIONS--optimizes inventory management of a bank's cash-on-hand, including management of how much cash is needed, when it is needed and where it is needed. 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. OUR INDUSTRY 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. Today's banking environment is characterized by continuing consolidation, changing regulations, evolving technologies and the emergence of the Internet. In order to compete effectively in this dynamic environment, banks often must identify effective and innovative solutions to address their unique requirements and redesign, and in some cases completely replace, their operational systems. International Data Corporation estimates that banks spent approximately $4.8 billion on information services outsourcing in 1999 and by 2004 are estimated to spend approximately twice that amount. Nevertheless, traditional third party solutions are limited, as some only offer analysis and consultation regarding a bank's operations, while others only provide specific software applications, resulting in a piecemeal approach to solutions development. Consequently and in many cases, banks are forced to use multiple providers, which often results in higher costs, more complex implementation and delayed realization of benefits. Therefore, banks are in need of a solution provider specializing in the banking industry that provides integrated consulting services and technological applications. 4 OUR SOLUTION Our solutions combine consulting services and technological applications that have the following key characteristics: - integrated and consultative approach that enables us to utilize 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; - comprehensive delivery model that enables us to distribute our solutions in a variety of ways to meet our clients' needs and to deliver products and services to a wider range of clients; - latest technological developments that produce software applications which can be expanded with minimal effort, are functional and are able to interface with a bank's current or legacy systems; - compelling business proposition that reduces our clients' investment risk by increasing revenues or reducing costs in a relatively short period of time. In addition, in appropriate circumstances, we value-price our solutions, whereby we receive a percentage of the amount of additional revenues or reduced costs achieved by the customer; and - broad array of services and technology that enables us to provide a bank with an expert solution targeting a narrow area of a bank's operations or addressing a broad range of a bank's operational requirements. OUR 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: - expanding 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, by partnering with service providers or resellers, and by pursuing international customers, particularly banks elsewhere in North America, Europe and Australia; - cross-marketing our products and services to our existing customers to increase revenues through methods that typically do not involve the time and customer acquisition costs associated with developing new relationships; - increasing our use of value-pricing for solutions in appropriate circumstances and expanding our practice of structuring license fees for software-based solutions to generate a recurring revenue stream; - continuing to pursue strategic alliances and acquisitions with selected partners whose solutions and expertise, when combined with ours, would provide value-added benefits to banks and their customers or would enable us to expand our line of e-finance solutions, grow our customer base or pursue new business opportunities; and - enhancing brand awareness to expand our customer base and attract new strategic alliances, acquisition candidates and talented consultants, managers and employees. OUR ADDRESS Our principal executive offices are located at 4055 Valley View Lane, Suite 1000, Dallas, Texas 75244, and our telephone number at that address is (972) 458-1981. Our website is located at WWW.CARREKER.COM. Information contained on our website is not part of this prospectus. 5 THE OFFERING The following information is based on the number of our shares of common stock outstanding as of October 16, 2000. See "Capitalization" for additional information regarding our outstanding shares of common stock and options to purchase shares of common stock and other related matters. Common stock offered by Carreker............................ 2,000,000 shares Common stock offered by the selling stockholders............ 2,000,000 shares Common stock to be outstanding after this offering.......... 21,119,220 shares Use of proceeds............................................. For working capital, general corporate purposes and possible future acquisitions Nasdaq National Market symbol............................... CANI
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes the consolidated financial data for our business. The consolidated balance sheet data has been adjusted to reflect our sale of 2,000,000 shares of common stock in this offering at an assumed public offering price of $17.75 per share and the application of the estimated net proceeds. See "Use of Proceeds" and "Capitalization."
SIX MONTHS ENDED FISCAL YEAR ENDED JANUARY 31, JULY 31, ---------------------------------------------------- --------------------- 1996 1997 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- -------- ---------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues..................... $19,896 $30,535 $42,781 $55,017 $75,820 $33,356 $ 50,722 Income from operations............. 2,709 2,849 4,953 7,150 11,234 4,519 7,193 Net income......................... $ 1,859 $ 1,360 $ 3,005 $ 5,172 $ 7,894 $ 3,249 $ 4,922 ======= ======= ======= ======= ======= ======= ======== Basic earnings per share........... $ 0.15 $ 0.11 $ 0.24 $ 0.32 $ 0.43 $ 0.18 $ 0.27 ======= ======= ======= ======= ======= ======= ======== Diluted earnings per share......... $ 0.14 $ 0.10 $ 0.21 $ 0.30 $ 0.42 $ 0.17 $ 0.25 ======= ======= ======= ======= ======= ======= ======== Shares used in computing basic earnings per share............... 12,783 12,154 12,717 16,224 18,456 18,423 18,524 Shares used in computing diluted earnings per share............... 13,332 13,118 14,484 17,504 18,980 18,961 19,442
AS OF JULY 31, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........................................ $33,856 $ 66,700 Working capital.......................................................................... 59,004 91,848 Total assets............................................................................. 92,473 125,317 Total stockholders' equity............................................................... 71,252 104,096
6 RISK FACTORS BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK. OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT. IN ADDITION, YOU SHOULD KEEP IN MIND THAT THE RISKS DESCRIBED BELOW ARE NOT THE ONLY RISKS THAT WE FACE. THE RISKS DESCRIBED BELOW ARE THE RISKS THAT WE CURRENTLY BELIEVE ARE MATERIAL RISKS OF AN INVESTMENT IN OUR COMMON STOCK. HOWEVER, ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US, OR RISKS THAT WE CURRENTLY BELIEVE ARE NOT MATERIAL, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. 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, AND 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 44%, 35% and 58% of total revenues during the fiscal years ended January 31, 1998, 1999 and 2000, respectively, and for approximately 61% of total revenues during the six months ended July 31, 2000. Wells Fargo & Company and Firstar Bank, N.A. accounted for approximately 24% and 13% of total revenues, respectively, during the year ended January 31, 2000, and Firstar Bank, N.A. and Barclays PLC accounted for approximately 35% and 10% of total revenues, respectively, during the six months ended July 31, 2000. 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. 7 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; - 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 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. 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. 8 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 CANCELATION 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 cancelation of a customer project, or any disruption of our business relationships with any of our significant customers or with a number of smaller customers could have a material adverse effect on our business, financial condition and results of operations. WE HAVE RECENTLY REFOCUSED OUR SOLUTIONS TO FOCUS ON E-FINANCE OPPORTUNITIES, AND ANY INABILITY TO GAIN MARKET ACCEPTANCE OF THESE SOLUTIONS COULD HAVE A NEGATIVE IMPACT ON OUR FUTURE GROWTH AND FINANCIAL RESULTS. We have recently refocused our solutions to concentrate on e-finance opportunities. We have dedicated significant resources to this effort and cannot be certain whether this refocusing of our solutions will achieve market acceptance. Market acceptance of our existing and future solutions depends on several factors, including: - the ease with which those solutions can be implemented and used; - the performance and reliability of those solutions; - the degree to which customers achieve expected revenue gains, cost savings and performance enhancements; and - the extent to which our customers and prospective customers are able to implement alternative approaches to meet their business development and cost-saving needs. Some of these factors are beyond our control. There can be no assurance that our customers will realize the intended benefits of our solutions or that any of our solutions will be accepted in the market. Any significant or ongoing failure to achieve these benefits or to maintain or increase market acceptance would restrict substantially our future growth and 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 9 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 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 10 - 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 WILL SUBJECT US TO NEW RISKS ASSOCIATED WITH AN INCREASED DEPENDENCE ON THIRD-PARTY PROVIDERS AND THE INTERNET. Our move toward an ASP software hosting model will give rise to numerous risks that we have not previously faced, particularly risks related to our heightened dependence on third party providers and the Internet. The success of our ASP software hosting model will partially depend on the performance of the third party application service provider with whom we have contracted to provide software hosting services. In addition, we will also be 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 initiative 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. WE ARE SEEKING TO SELL SOFTWARE LICENSES THAT ARE PRICED BASED ON A USAGE LICENSE FEE RATHER THAN A LUMP SUM LICENSE FEE, WHICH COULD ADVERSELY AFFECT OUR REVENUES AND FINANCIAL RESULTS. Historically, when selling software licenses to customers, we have charged a lump sum software license fee. With our increasing emphasis on selling software licenses based on an ASP software hosting model, however, we will be seeking to increase our usage license fees. This could have an adverse effect on our overall software license fees as we work to implement this new pricing model. There can be no assurance that our revenues derived from usage license fees will offset our loss of lump sum license fees. 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. 11 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." 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; - inability to obtain sufficient financing on acceptable terms to fund acquisitions; - 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; 12 - 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 on 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 recently completed several small acquisitions, and if we were to complete larger or more complex transactions, then the above risks would be heightened. 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 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 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. For example, we are currently involved in a lawsuit against Knowledge Based Systems, Inc., or KBSI, in connection with a software development contract. We allege that KBSI has breached the contract and seek injunctive relief to enforce the contract and to prevent KBSI from using or disclosing our confidential information and trade secrets. KBSI alleges, 13 among other things, that we have breached the contract and seeks ownership of the CashForecaster products and unspecified actual and exemplary monetary damages. See "Business--Legal Proceedings." 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 NEW 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 will require 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. The implementation of our ASP software hosting model may require 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 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 14 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 "Business--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; - 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 15 - 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 calendar year 1999, we used 31 independent contractors. 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. 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. 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. 16 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 reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent significant changes in our board of directors and management. RISKS RELATED TO THIS OFFERING A FEW PEOPLE CONTROL A LARGE PORTION OF OUR STOCK AND MAY VOTE THEIR SHARES IN WAYS CONTRARY TO YOUR INTERESTS. Immediately after this offering, our executive officers and directors will beneficially own 4,907,311 shares, or approximately 23.2%, of our common stock. These shares include shares beneficially owned by John D. Carreker, Jr., our Chairman and Chief Executive Officer, which will total approximately 16.0% of our outstanding common stock after this offering. As a result of their stock ownership, our executive officers and directors can exercise control over our company and have the power to influence the election of a majority of the directors, the appointment of management and the approval of actions requiring a vote of our stockholders. Their interests may conflict with your interest as a stockholder, and they could use their power to delay or prevent a change in control, even if a majority of the other stockholders desired a change. 17 OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO SPEND THE PROCEEDS OF THIS OFFERING AND MAY SPEND THE PROCEEDS IN WAYS WITH WHICH YOU DO NOT AGREE. We estimate that the net proceeds from the sale of the 2,000,000 shares of common stock offered by us will be approximately $32.8 million based on the last per share sales price of our common stock on October 25, 2000, after deducting estimated underwriting discounts and estimated offering expenses. We intend to use the net proceeds for working capital and general corporate purposes, and may also use a portion of the net proceeds for acquisitions of complementary businesses, products or technologies. We have not determined specific uses for a large portion of the net proceeds from this offering. Consequently, our board of directors and management may apply much of the net proceeds of this offering to uses that you may not consider desirable. The failure of management to apply these funds effectively could have an adverse effect on our business, financial condition and operating results. For more information on how we intend to use the proceeds from this offering, see "Use of Proceeds." THE NUMBER OF SHARES OF OUR STOCK ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Based on the number of shares of our common stock outstanding on October 16, 2000, we will have outstanding 21,119,220 shares of common stock immediately following the completion of this offering. Except for approximately 4,475,319 shares to be held by our affiliates immediately after the completion of this offering, as defined in Rule 144 under the Securities Act of 1933, all of our outstanding shares of common stock will be freely tradable without restriction or registration under the Securities Act. As of October 16, 2000, we had outstanding options entitling their holders to acquire an aggregate of 3,454,700 shares of our common stock, of which options covering 1,103,960 shares were exercisable. An aggregate of 966,858 shares of our common stock are reserved for issuance upon the exercise of options that may be granted in the future under our stock option plans. 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 selling stockholders or otherwise, or due to the perception that these sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. Subject to specified exceptions, our executive officers and directors and the selling stockholders have agreed not to sell shares of our common stock held by them for a period of 90 days following the effective date of the registration statement of which this prospectus forms a part. See "Underwriting." 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. 18 FORWARD LOOKING STATEMENTS We have made forward looking statements in this prospectus. These statements are subject to risks and uncertainties, and we cannot guarantee you that they will prove to be correct. Forward looking statements include assumptions as to how we may perform in the future. When we use words like "believe," "expect," "anticipate," "predict," "potential," "seek," "continue," "will," "may," "could," "intend," "plan," "estimate," "goal," "strive" and similar expressions, we are making forward looking statements. Forward looking statements in this prospectus include statements regarding the following: - our business strategies and goals; - our future sources of revenues and potential for future growth and profitability; - development and enhancement of our technologies and solutions; - trends in the banking industry and the markets in which we compete; - our future acquisition of businesses, products or technologies, if any; and - other statements which are not of historical fact made throughout this prospectus, including in the "Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" sections. We believe that the expectations reflected in our forward looking statements are reasonable, but we cannot guarantee that we will actually achieve these expectations. Projections or estimates of our future performance are necessarily subject to a high degree of uncertainty and may vary materially from actual results. In evaluating forward looking statements, you should carefully consider various factors, including the risks outlined under "Risk Factors" beginning on page 7 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 25, as well as our consolidated financial statements that are incorporated by reference in this prospectus. You should also consider the cautionary statements contained in the reports that we have filed with the Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward looking statements. 19 USE OF PROCEEDS We expect to receive approximately $32.8 million from our sale of 2,000,000 shares of common stock, based upon an assumed public offering price of $17.75 per share after deducting underwriting discounts and estimated offering expenses. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See "Principal and Selling Stockholders." We expect to use all of the net proceeds we receive in this offering for working capital and general corporate purposes. We may, however, use a portion of the net proceeds for acquisitions of complementary businesses, products or technologies. However, we currently have no commitments or agreements for any acquisitions, and we cannot guarantee that we will complete any acquisitions in the future. Pending these uses, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. The amount of funds that we actually use for specific purposes will depend on many factors, including revisions to our business plan, material changes in our revenues or expenses, and other factors. Accordingly, our management will have significant discretion over the use and investment of the net proceeds that we receive in the offering. See "Risk Factors--Our management will have broad discretion to spend the proceeds of this offering and may spend the proceeds in ways with which you do not agree." 20 PRICE RANGE OF COMMON STOCK 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. The following table sets forth for the fiscal quarters indicated the high and low closing sale prices per share of our common stock as reported on the Nasdaq National Market.
HIGH LOW -------- -------- FISCAL YEAR ENDED JANUARY 31, 1999 Second Quarter (beginning May 20, 1998)................... $11.56 $ 8.25 Third Quarter............................................. $ 9.75 $ 4.13 Fourth Quarter............................................ $ 7.00 $ 4.25 FISCAL YEAR ENDED JANUARY 31, 2000 First Quarter............................................. $ 7.81 $ 4.00 Second Quarter............................................ $ 9.50 $ 5.88 Third Quarter............................................. $ 8.25 $ 5.19 Fourth Quarter............................................ $ 9.56 $ 6.25 FISCAL YEAR ENDING JANUARY 31, 2001 First Quarter............................................. $13.63 $ 8.38 Second Quarter............................................ $12.06 $ 9.00 Third Quarter (through October 25, 2000).................. $20.19 $10.19
On October 25, 2000, the last reported sale price of our common stock on the Nasdaq National Market was $17.75 per share. As of October 16, 2000, there were approximately 94 record holders of our common stock, although we believe that the number of beneficial owners of our common stock is substantially greater. DIVIDEND POLICY We have never declared or paid any cash dividends on shares of our common stock. We intend to retain any future earnings for future growth and do not anticipate paying any cash dividends in the foreseeable future. Any future determination as to the payment of dividends will be at the discretion of our board of directors. 21 CAPITALIZATION The following table sets forth our cash position and capitalization as of July 31, 2000: - on an actual basis; and - on an as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of 2,000,000 shares of common stock offered by us at an assumed public offering price of $17.75 per share and the application of the net proceeds in the manner described in "Use of Proceeds." Please read the information in the table below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and related notes that are incorporated by reference in this prospectus, and the other information included or incorporated by reference in this prospectus.
AS OF JULY 31, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Cash, cash equivalents and short-term investments........... $ 33,856 $ 66,700 ======== ======== Stockholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued and outstanding............ -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 18,656,798 shares outstanding (actual); 20,656,798 shares outstanding (as adjusted)............. $ 186 $ 206 Additional paid-in capital.................................. 45,404 78,228 Deferred compensation....................................... (106) (106) Retained earnings........................................... 25,768 25,768 -------- -------- Total stockholders' equity................................ 71,252 104,096 -------- -------- Total capitalization.................................... $ 71,252 $104,096 ======== ========
The number of shares of common stock reflected as outstanding in the table above includes 61,600 shares of restricted common stock subject to future vesting and issued pursuant to our 1994 Long Term Incentive Plan, but does not reflect shares that may be issued upon the exercise of options to purchase shares of our common stock. If and when we issue these shares, the percentage of the common stock that you own may be diluted. The following is a summary of additional shares of common stock that may be issued pursuant to the exercise of options, whether these options are currently outstanding or may be granted in the future: - 4,321,558 shares of our common stock reserved for issuance under our 1994 Long Term Incentive Plan. Under this plan, options to purchase 3,412,999 shares of our common stock were outstanding at October 16, 2000 with a weighted average exercise price of $8.41 per share; and - 100,000 shares of our common stock reserved for issuance under our Director Stock Option Plan. Under this plan, options to purchase 41,701 shares of our common stock were outstanding at October 16, 2000 at a weighted average exercise price of $4.11 per share. 22 SELECTED CONSOLIDATED FINANCIAL DATA We derived the following selected consolidated financial data as of and for each of the four fiscal years ended January 31, 1997, 1998, 1999 and 2000 from our consolidated financial statements that have been audited by Ernst & Young LLP, independent auditors. We derived the selected consolidated financial data as of and for the year ended January 31, 1996 from our unaudited consolidated financial statements. We derived the selected consolidated financial data as of July 31, 2000 and for the six months ended July 31, 1999 and 2000 from our unaudited interim consolidated financial statements which, in the opinion of our management, include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the information set forth in the consolidated financial statements. The results of operations for the six months ended July 31, 2000 are not necessarily indicative of the results for the full fiscal year. Please read the selected consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus, as well as our consolidated financial statements and the related notes incorporated by reference in this prospectus.
SIX MONTHS FISCAL YEAR ENDED JANUARY 31, ENDED JULY 31, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Consulting and management service fees........ $ 9,635 $14,407 $21,314 $26,328 $49,725 $21,363 $34,876 Software license fees......................... 4,316 6,957 11,223 16,327 13,727 5,855 6,013 Software maintenance fees..................... 2,385 3,185 4,274 5,031 6,985 3,266 4,995 Software implementation fees.................. 2,219 3,249 4,094 6,557 5,116 2,675 4,806 Hardware and other fees....................... 1,341 2,737 1,876 774 267 197 32 ------- ------- ------- ------- ------- ------- ------- Total revenues.............................. 19,896 30,535 42,781 55,017 75,820 33,356 50,722 ------- ------- ------- ------- ------- ------- ------- Cost of revenues: Consulting and management service fees........ 5,303 8,794 12,394 16,150 27,574 11,433 18,485 Software license fees......................... 700 1,307 1,412 1,216 1,766 848 2,376 Software maintenance fees..................... 1,279 1,780 1,923 2,387 2,511 1,335 1,333 Software implementation fees.................. 1,572 1,808 4,156 3,862 2,381 1,454 2,456 Hardware and other fees....................... 965 1,960 1,556 560 208 161 31 ------- ------- ------- ------- ------- ------- ------- Total cost of revenues...................... 9,819 15,649 21,441 24,175 34,440 15,231 24,681 ------- ------- ------- ------- ------- ------- ------- Gross profit.................................... 10,077 14,886 21,340 30,842 41,380 18,125 26,041 ------- ------- ------- ------- ------- ------- ------- Operating costs and expenses: Selling, general and administrative........... 6,251 9,296 12,777 18,444 25,333 10,932 16,419 Research and development...................... 1,063 1,318 3,610 4,763 4,813 2,674 2,429 Merger related costs.......................... 54 1,423 -- 485 -- -- -- ------- ------- ------- ------- ------- ------- ------- Total operating costs and expenses.......... 7,368 12,037 16,387 23,692 30,146 13,606 18,848 ------- ------- ------- ------- ------- ------- ------- Income from operations.......................... 2,709 2,849 4,953 7,150 11,234 4,519 7,193 Other income (expense).......................... 313 (375) 79 925 1,100 557 746 ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes........ 3,022 2,474 5,032 8,075 12,334 5,076 7,939 Provision for income taxes (1).................. 1,163 1,114 2,027 2,903 4,440 1,827 3,017 ------- ------- ------- ------- ------- ------- ------- Net income...................................... $ 1,859 $ 1,360 $ 3,005 $ 5,172 $ 7,894 $ 3,249 $ 4,922 ======= ======= ======= ======= ======= ======= ======= Basic earnings per share........................ $ 0.15 $ 0.11 $ 0.24 $ 0.32 $ 0.43 $ 0.18 $ 0.27 ======= ======= ======= ======= ======= ======= ======= Diluted earnings per share...................... $ 0.14 $ 0.10 $ 0.21 $ 0.30 $ 0.42 $ 0.17 $ 0.25 ======= ======= ======= ======= ======= ======= ======= Shares used in computing basic earnings per share......................................... 12,783 12,154 12,717 16,224 18,456 18,423 18,524 Shares used in computing diluted earnings per share......................................... 13,332 13,118 14,484 17,504 18,980 18,961 19,442
23
AS OF JANUARY 31, ---------------------------------------------------- AS OF JULY 31, 1996 1997 1998 1999 2000 2000 -------- -------- -------- -------- -------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments... $ 3,281 $ 3,895 $ 2,535 $33,550 $39,536 $33,856 Working capital..................................... 4,455 5,882 7,529 52,117 56,530 59,004 Total assets........................................ 11,298 17,569 21,486 68,736 82,823 92,473 Total stockholders' equity.......................... 5,600 5,572 8,803 57,131 65,406 71,252
- ------------------------------ (1) Prior to our acquisition of Antinori Software, Inc. on January 31, 1997, Antinori Software had elected to be treated as an S corporation for federal and state income tax purposes. The provision for income taxes for the fiscal years ended January 31, 1996 and 1997 reflects a pro forma tax provision which includes estimated federal and state income taxes (by applying statutory income tax rates) that would have been incurred if Antinori Software had been subject to taxation as a C corporation. 24 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 PROSPECTUS OR IN THE INFORMATION INCORPORATED BY REFERENCE IN THIS PROSPECTUS. YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA" INCLUDED IN THIS PROSPECTUS, AS WELL AS OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCORPORATED BY REFERENCE IN THIS PROSPECTUS. OUR FISCAL YEAR ENDS ON JANUARY 31. REFERENCES CONTAINED IN THIS PROSPECTUS 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, 2000 IS REFERRED TO IN THIS PROSPECTUS AS "FISCAL 1999." OVERVIEW We are a leading provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. We were founded in 1978 to provide consulting services to banks, and we subsequently integrated software products into our banking solutions. With our acquisition of Antinori Software, Inc. in 1997, we were able to significantly enhance our portfolio of software products. Additionally, we acquired Genisys Operations, Inc. in January 1999, Automated Integrated Solutions, Inc. in February 2000 and X-Port Software, Inc. in May 2000, each of which provided incremental added value to our product offerings. We accounted for the acquisitions of Antinori and Genisys as a pooling of interests, and accordingly we have restated our consolidated financial statements and the related notes, as well as all other consolidated financial and statistical data presented in this prospectus, to include the financial position and results of operations of Antinori Software, Inc. and Genisys for all periods prior to and including the period ended July 31, 2000. The acquisitions of Automated Integrated Solutions and X-Port Software were accounted for as purchases. We derive our revenues from consulting and management service fees, software license fees, software maintenance fees, software implementation fees and hardware and other sales. While many customer contracts provide for both the performance of consulting services and the license of related software, some customer contracts require only the performance of consulting services or only a software license (and, at the election of the customer, related implementation services and/or annual software maintenance services). We enter into these contracts with our customers on a project-by-project basis. We seek to establish long-term relationships with our customers that will lead to on-going projects utilizing our solutions. We are typically retained to perform one or more discrete projects for 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 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. CONSULTING AND MANAGEMENT SERVICE FEES. We employ three primary pricing methods in connection with our delivery of consulting and management services. First, we may price our delivery of consulting and management services on the basis of time and materials, in which case the customer is charged agreed daily rates for services performed and out-of-pocket expenses. In this case, we are generally paid fees and related amounts on a monthly basis, and we recognize revenues as the services are performed. Second, we may deliver consulting and management services on a fixed-price basis. In this case, we are paid on a monthly basis or pursuant to an agreed upon payment schedule, and we recognize revenues paid on a percentage-of-completion basis. We recognize any anticipated losses on a fixed-price contract when estimable. Third, we may deliver consulting and management services 25 pursuant to a value-pricing contract with the customer. In this case, we are paid, on an agreed upon basis with the customer, either a specified percentage of (1) the projected increased revenues and/or decreased costs that are expected to be derived by the customer generally over a period of up to twelve months following implementation of our solution or (2) the actual increased revenues and/or decreased costs experienced by the customer generally over a period of up to twelve months following implementation of our solution, subject in either case to a maximum, if any is agreed to, on the total amount of payments to be made to us. These contracts typically provide for us to receive from 7% to 30% of the projected or actual increased revenues and/or decreased costs, with payments to be made to us pursuant to an agreed upon schedule ranging from one to twelve months in length. We recognize revenues generated from consulting and management services in connection with value-priced contracts based upon projected results only upon completion of all services and agreement upon the actual fee to be paid (even though billings for these services may be delayed by mutual agreement for periods not to exceed twelve months). When fees are to be paid based on a percentage of actual revenues and/or savings, we recognize revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer. We typically must first commit time and resources to develop projections associated with value-pricing contracts before a bank will commit to purchase our solutions, and we therefore assume the risk of making these commitments with no assurance that the bank will purchase the solutions. We expect that value-pricing contracts will account for an increasing percentage of our revenues in the future. In addition, as a consequence of the shift toward the use of more value-pricing contracts and due to the revenue recognition policy associated with those contracts, our results of operations will likely fluctuate significantly from period to period. Regardless of the pricing method employed by us in a given contract, we are typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of our customers, which expenses are netted against reimbursements for consolidated financial statement reporting purposes. SOFTWARE LICENSE FEES. In the event that a software license is sold either together with consulting and management services or on a stand-alone basis, we are usually paid software license fees in one or more installments, as provided in the customer's contract. We recognize software license revenues for periods subsequent to January 31, 1998 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. For periods prior to January 31, 1998, we recognized software license revenues in accordance with SOP 91-1, "Software Revenue Recognition." Under SOP 91-1, we recognized software license revenues upon execution of a contract and shipment of the software and after any customer cancellation right had expired, provided that no significant vendor obligations remained outstanding, amounts were due within one year and collection was considered probable by management. Software licenses that are priced in this fashion continue for an indefinite period, and there is no provision for any renewal fees. Although substantially all of our current software licenses provide for a fixed price license fee, some of our payment electronification licenses instead provide for usage fees, in which case fees are recognized and due on a monthly basis. Software licenses that include a usage license fee have a fixed term. We expect to increase this practice of charging license fees on a usage basis in the future as part of our strategy to increase recurring revenues and smooth our period-to-period revenues. 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 26 annual maintenance fee generally is paid to us at the beginning of the maintenance period, and we recognize these revenues ratably over the term of the related contract. SOFTWARE IMPLEMENTATION FEES. In connection with our sale of a software license, a customer may elect to purchase software implementation services, including software enhancements, patches and other software support services. Most of the customers that purchase software licenses from us also purchase software implementation services. We price our implementation services on a time-and-materials or on a fixed-price basis, and we recognize the related revenues as services are performed. HARDWARE AND OTHER SALES. We sell our computer hardware and supplies in tandem with the delivery of related services or software and on the basis of our cost plus a specified percentage. We recognize revenues upon shipment of the hardware to the customer. We sell hardware at the request of our customers but do not consider hardware sales to be a meaningful part of our business. In accordance with generally accepted accounting principles, we capitalize software development costs incurred in developing a product once technological feasibility of the product has been determined. These capitalized software development costs also include amounts paid for software that is purchased and that has reached technological feasibility. We amortize capitalized software development costs on the basis of each product's projected revenues or on a straight-line basis over the remaining economic life of the product, which is generally three to four years. At July 31, 2000, our capitalized software development costs, net of accumulated amortization, were $10.3 million, which we will amortize over the next 15 quarterly periods. BUSINESS SEGMENTS The tables below show revenues and income (loss) from operations for the periods indicated for our four reportable business segments: Revenue Enhancement, PaymentSolutions, Enterprise Solutions and CashSolutions. Our customer projects are sold on a solution basis, so it is necessary to break them down by segment and allocate accordingly. Included in "Corporate Unallocated" are costs related to selling and marketing, unallocated corporate overhead expense and general software management. Business segment results include costs for research and development as well as product royalty expense.
SIX MONTHS ENDED JULY 31, 1999 ------------------------------------------------------------------------------------ REVENUE ENTERPRISE CORPORATE ENHANCEMENT PAYMENTSOLUTIONS SOLUTIONS CASHSOLUTIONS UNALLOCATED TOTAL ----------- ---------------- ---------- ------------- ----------- -------- (IN THOUSANDS) Revenues: Consulting and management service fees.................. $9,251 $ 2,889 $7,619 $1,604 $ -- $21,363 Software license fees... -- 4,005 -- 1,850 -- 5,855 Software maintenance fees.................. -- 2,553 -- 713 -- 3,266 Software implementation fees.................. -- 2,252 -- 423 -- 2,675 Hardware and other fees.................. -- 197 -- -- -- 197 ------ ------- ------ ------ ------- ------- Total revenues........ $9,251 $11,896 $7,619 $4,590 $ -- $33,356 ====== ======= ====== ====== ======= ======= Income (loss) from operations.............. $6,655 $ 337 $2,383 $1,275 $(6,131) $ 4,519 ====== ======= ====== ====== ======= =======
27
SIX MONTHS ENDED JULY 31, 2000 ------------------------------------------------------------------------------------ REVENUE ENTERPRISE CORPORATE ENHANCEMENT PAYMENTSOLUTIONS SOLUTIONS CASHSOLUTIONS UNALLOCATED TOTAL ----------- ---------------- ---------- ------------- ----------- -------- (IN THOUSANDS) Revenues: Consulting and management service fees.................. $20,484 $ 2,327 $11,992 $ 73 $ -- $34,876 Software license fees... -- 4,590 -- 1,423 -- 6,013 Software maintenance fees.................. -- 3,756 -- 1,239 -- 4,995 Software implementation fees.................. -- 3,173 -- 1,633 -- 4,806 Hardware and other fees.................. -- 32 -- -- -- 32 ------- ------- ------- ------ ------- ------- Total revenues........ $20,484 $13,878 $11,992 $4,368 $ -- $50,722 ======= ======= ======= ====== ======= ======= Income (loss) from operations.............. $14,800 $(2,283) $ 3,871 $ 23 $(9,218) $ 7,193 ======= ======= ======= ====== ======= =======
FISCAL YEAR ENDED JANUARY 31, 1999 ------------------------------------------------------------------------------------ REVENUE ENTERPRISE CORPORATE ENHANCEMENT PAYMENTSOLUTIONS SOLUTIONS CASHSOLUTIONS UNALLOCATED TOTAL ----------- ---------------- ---------- ------------- ----------- -------- (IN THOUSANDS) Revenues: Consulting and management service fees.................. $10,422 $ 3,634 $10,961 $1,311 $ -- $26,328 Software license fees... -- 12,350 -- 3,977 -- 16,327 Software maintenance fees.................. -- 4,147 -- 884 -- 5,031 Software implementation fees.................. -- 4,901 -- 1,656 -- 6,557 Hardware and other fees.................. -- 774 -- -- -- 774 ------- ------- ------- ------ -------- ------- Total revenues........ $10,422 $25,806 $10,961 $7,828 $ -- $55,017 ======= ======= ======= ====== ======== ======= Income (loss) from operations.............. $ 7,171 $ 3,826 $ 3,513 $3,101 $(10,461) $ 7,150 ======= ======= ======= ====== ======== ======= FISCAL YEAR ENDED JANUARY 31, 2000 ------------------------------------------------------------------------------------ REVENUE ENTERPRISE CORPORATE ENHANCEMENT PAYMENTSOLUTIONS SOLUTIONS CASHSOLUTIONS UNALLOCATED TOTAL ----------- ---------------- ---------- ------------- ----------- -------- (IN THOUSANDS) Revenues: Consulting and management service fees.................. $19,849 $ 6,017 $20,558 $3,301 $ -- $49,725 Software license fees... -- 10,567 -- 3,160 -- 13,727 Software maintenance fees.................. -- 5,458 -- 1,527 -- 6,985 Software implementation fees.................. -- 4,274 -- 842 -- 5,116 Hardware and other fees.................. -- 267 -- -- -- 267 ------- ------- ------- ------ -------- ------- Total revenues........ $19,849 $26,583 $20,558 $8,830 $ -- $75,820 ======= ======= ======= ====== ======== ======= Income (loss) from operations.............. $13,219 $ 1,181 $ 7,904 $3,504 $(14,574) $11,234 ======= ======= ======= ====== ======== =======
Comparable business segment information for the fiscal year ended January 31, 1998 is unavailable. 28 RESULTS OF OPERATIONS The following table sets forth the percentage of total revenues represented by certain line items in our consolidated statements of operations for the periods indicated.
SIX MONTHS ENDED FISCAL YEAR ENDED JANUARY 31, JULY 31, ------------------------------------ ---------------------- 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- Revenues: Consulting and management service fees........ 49.8% 47.9% 65.6% 64.0% 68.8% Software license fees......................... 26.2 29.7 18.1 17.6 11.9 Software maintenance fees..................... 10.0 9.1 9.2 9.8 9.8 Software implementation fees.................. 9.6 11.9 6.7 8.0 9.5 Hardware and other fees....................... 4.4 1.4 0.4 0.6 -- ----- ----- ----- ----- ----- Total revenues.............................. 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of revenues: Consulting and management service fees........ 29.0 29.4 36.4 34.3 36.5 Software license fees......................... 3.3 2.2 2.3 2.5 4.7 Software maintenance fees..................... 4.5 4.3 3.3 4.0 2.6 Software implementation fees.................. 9.7 7.0 3.1 4.4 4.8 Hardware and other fees....................... 3.6 1.0 0.3 0.5 0.1 ----- ----- ----- ----- ----- Total cost of revenues...................... 50.1 43.9 45.4 45.7 48.7 ----- ----- ----- ----- ----- Gross profit.................................... 49.9 56.1 54.6 54.3 51.3 ----- ----- ----- ----- ----- Operating costs and expenses: Selling, general and administrative........... 29.9 33.5 33.4 32.7 32.3 Research and development...................... 8.4 8.7 6.4 8.0 4.8 Merger related costs.......................... -- 0.9 -- -- -- ----- ----- ----- ----- ----- Total operating costs and expenses.......... 38.3 43.1 39.8 40.7 37.1 ----- ----- ----- ----- ----- Income from operations.......................... 11.6 13.0 14.8 13.6 14.2 Other income.................................... 0.2 1.7 1.5 1.7 1.5 ----- ----- ----- ----- ----- Income before provision for income taxes........ 11.8 14.7 16.3 15.3 15.7 Provision for income taxes...................... 4.8 5.3 5.9 5.5 6.0 ----- ----- ----- ----- ----- Net income...................................... 7.0% 9.4% 10.4% 9.8% 9.7% ===== ===== ===== ===== =====
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED JULY 31, 2000 REVENUES. Total revenues increased 52.1% from $33.4 million for the six months ended July 31, 1999 to $50.7 million for the six months ended July 31, 2000. Revenues from consulting and management service fees increased 63.3% from $21.4 million for the six months ended July 31, 1999 to $34.9 million for the six months ended July 31, 2000. Consulting and management service fees grew primarily as a result of continued demand for our Enterprise Solutions consulting practice as well as our value-priced Revenue Enhancement consulting practice. Enterprise Solutions revenues increased from $7.6 million for the six months ended July 31, 1999 to $12.0 million for the six months ended July 31, 2000. Revenue Enhancement revenues increased from $9.3 million for the six months ended July 31, 1999 to $20.5 million for the six months ended July 31, 2000. The increase in consulting and management service fees also resulted from expanded use of value-priced engagements due to their improved margins as well as their favorable reception from customers. Revenues related to value-priced opportunities tend to fluctuate from period-to-period and are likely to fluctuate in future periods. 29 Revenues from software license fees increased 2.7% from $5.9 million for the six months ended July 31, 1999 to $6.0 million for the six months ended July 31, 2000. Softness in software license fee growth for the first six months was due to a carryover effect of anticipated Year 2000 problems, where customers delayed new software decisions until their Year 2000 issues were fully addressed. We also experienced delays in sales of new licenses of our CheckFlow product as a result of a longer than anticipated sales process. Additionally, we are now licensing some of our software products families, such as eRM, eCashInventory and eiService, on a usage fee basis rather than the traditional one-time perpetual license fee. Revenues from software maintenance fees increased 52.9% from $3.3 million for the six months ended July 31, 1999 to $5.0 million for the six months ended July 31, 2000. Increases in software maintenance fees were driven by software sales during the six months ended January 31, 2000, resulting from the growth in the number of customers and products under maintenance contracts. Additionally, increases in software maintenance fees were driven by the acquisition of new products mainly within the PaymentSolutions group that were already subject to maintenance contracts and by annual rate increases. Revenues from software implementation fees increased 79.7% from $2.7 million for the six months ended July 31, 1999 to $4.8 million for the six months ended July 31, 2000. Increases in software implementation fees were driven by sales of software licenses experienced during the six months ended January 31, 2000, resulting in an increase in the number of customers requiring implementation services. Revenues from hardware sales were $197,000 for the six months ended July 31, 1999 compared to $32,000 for the six months ended July 31, 2000. We sell hardware at the request of our customers, but do not consider hardware sales to be a meaningful part of our business. COST OF REVENUES. Cost of revenues consists generally of personnel costs, amortization of capitalized software development costs, third party royalties and cost of hardware delivered. Total cost of revenues increased $9.5 million, or 62.0%, from $15.2 million for the six months ended July 31, 1999 to $24.7 million for the six months ended July 31, 2000. This increase resulted primarily from an increase in the cost of revenues for consulting and management services of $7.1 million and an increase in cost of revenues for software license fees of $1.5 million. Cost of consulting and management services consists primarily of personnel costs associated with time and material contracts and value-priced efforts. Cost of consulting and management services increased 61.7% from $11.4 million for the six months ended July 31, 1999 to $18.5 million for the six months ended July 31, 2000. The increase in the cost of consulting and management services was due primarily to increased personnel costs. Cost of consulting and management services as a percentage of consulting and management services fees decreased from 53.5% for the six months ended July 31, 1999 to 53.0% for the six months ended July 31, 2000. The reduction in the cost of consulting and management services as a percentage of consulting and management services fees reflected continued growth in value priced engagements. Cost of software licenses includes amortization costs relating to capitalized software, as well as royalty costs associated with sales of PaymentSolutions and CashSolutions software products. Cost of software licenses increased 180.2% from $848,000 for the six months ended July 31, 1999 to $2.4 million for the six months ended July 31, 2000. Cost of software licenses as a percentage of software license fees increased from 14.5% for the six months ended July 31, 1999 to 39.5% for the six months ended July 31, 2000. The increase in cost of software licenses as a percentage of software license fees was due to an increase in royalties paid of $420,000, resulting from changes in the mix of products sold during the period and increases in amortization of capitalized software costs of $1.1 million related to certain software products purchased or reaching general release status during the six months ended July 31, 2000. 30 Cost of software maintenance consists primarily of personnel costs associated with providing customer support for software products sold and contracted services. Cost of software maintenance remained unchanged at $1.3 million for the six-month periods ended July 31, 1999 and 2000. Cost of software maintenance as a percentage of related fees decreased from 40.9% for the six months ended July 31, 1999 to 26.7% for the six months ended July 31, 2000 due to operational efficiencies. Cost of software implementation consists primarily of personnel costs associated with implementation, training, and providing customer support for software products sold. Cost of software implementation increased 68.9% from $1.5 million for the six months ended July 31, 1999 to $2.5 million for the six months ended July 31, 2000. Increases in costs associated with software implementation reflect increased personnel costs to support increased revenues. Cost of software implementation as a percentage of related fees decreased from 54.4% for the six months ended July 31, 1999 to 51.1% for the six months ended July 31, 2000 due to operational efficiencies. Cost of hardware decreased 80.7% from $161,000 for the six months ended July 31, 1999 to $31,000 for the six months ended July 31, 2000, reflecting reductions in the amount of hardware sold during the six months period. SELLING, GENERAL AND ADMINISTRATIVE. 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. Selling general and administrative expenses increased 50.2% from $10.9 million for the six months ended July 31, 1999 to $16.4 million for the six months ended July 31, 2000. The increase in these expenses reflected additional management, marketing, and administrative staff compared to the prior periods to support our expanding operations. Additionally, an increase in the provision for doubtful accounts was necessary to mitigate accounts receivable exposure both from related parties and our bank customer base. Selling, general and administrative expenses as a percentage of total revenues decreased from 32.8% for the six months ended July 31, 1999 to 32.4% for the six months ended July 31, 2000. RESEARCH AND DEVELOPMENT. Research and development expenses generally consist of personnel and related costs of developing solutions. Research and development expenses decreased 9.2% from $2.7 million for the six months ended July 31, 1999 to $2.4 million for the six months ended July 31, 2000 due to a lower rate of research and development spending during the six months ended July 31, 2000. Research and development expenses as a percentage of total revenues decreased from 8.0% for the six months ended July 31, 1999 to 4.8% for the six months ended July 31, 2000 due to our reduction of these expenses while increasing revenues. OTHER INCOME. Other income consists primarily of interest income on tax-exempt, short-term investments. Other income increased 33.9% from $557,000 for the six months ended July 31, 1999 to $746,000 for the six months ended July 31, 2000. The increase in other income was primarily due to interest earned on higher balances of cash, cash equivalents and short-term investments on hand during the six months ended July 31, 2000. PROVISION FOR INCOME TAXES. The provision for income taxes is based on the estimated annual effective tax rate and includes federal, state and foreign income taxes. Our effective income tax rate was 36.0% for the six months ended July 31, 1999 compared to 38.0% for the six months ended July 31, 2000. The increase in the estimated annual effective rate resulted from a reduction in tax-exempt income as a percentage of total taxable income. YEAR ENDED JANUARY 31, 1999 (FISCAL 1998) COMPARED TO YEAR ENDED JANUARY 31, 2000 (FISCAL 1999) REVENUES. Total revenues increased by 37.8% from $55.0 million in fiscal 1998 to $75.8 million in fiscal 1999. The increase was primarily attributable to growth in revenues from consulting and management services. Revenues from consulting and management services increased by 88.9% from $26.3 million in fiscal 1998 to $49.7 million in fiscal 1999. This increase reflected the startup of our 31 Enterprise Solutions practice and continued growth of our value-priced Revenue Enhancement practice, which generated $9.6 million and $9.4 million, respectively, of the $23.4 million increase in revenues from consulting and maintenance services. Software license revenues decreased 15.9% from $16.3 million in fiscal 1998 to $13.7 million in fiscal 1999. Decreases in software license revenues were precipitated by customer decisions to delay software purchases due to concerns over Year 2000 problems and delayed purchase decisions due to our announced roll out plan for our new research and adjustment product. Software maintenance revenues increased 38.8% from $5.0 million in fiscal 1998 to $7.0 million in fiscal 1999. Software maintenance growth resulted from growth in licenses sold in the prior fiscal year, rate increases under existing contracts and renewals of previously terminated agreements due to Year 2000 and other concerns by clients. Software implementation revenues decreased by 22.0% from $6.6 million in fiscal 1998 to $5.1 million in fiscal 1999. Decreases in software implementation revenue resulted from the decreases in license sales. Hardware sales decreased 65.5% from $774,000 in fiscal 1998 to $267,000 in fiscal 1999. This decrease was primarily due to reduced requests by customers for bundled hardware and license deliveries. COST OF REVENUES. Total cost of revenues increased by 42.5% from $24.2 million in fiscal 1998 to $34.4 million in fiscal 1999. Cost of revenues as a percentage of total revenues increased from 43.9% in fiscal 1998 to 45.4% in fiscal 1999, as a result of increases in staff to facilitate growth in consulting efforts and increases in software amortization costs. This increase resulted primarily from an increase in the cost of revenues in consulting and management services and software maintenance. Cost of revenues for consulting and management services increased by 70.7% from $16.2 million in fiscal 1998 to $27.6 million in fiscal 1999, which was a result primarily of increases in personnel to support the growth of the Enterprise Solutions practice. Cost of revenues for consulting and management service fees as a percentage of revenues from consulting and management consulting fees declined from 61.3% in fiscal 1998 to 55.5% in fiscal 1999 due to improved margins on consulting efforts and larger value-priced engagements. Cost of revenues for software licenses increased by 45.2% from $1.2 million in fiscal 1998 to $1.8 million in fiscal 1999. Increases in cost of license fees resulted from an increase of 162.5% in amortization costs from $453,000 in fiscal 1998 to $1.2 million in fiscal 1999, generated from previously capitalized software. Cost of revenues for software maintenance increased by 5.2% from $2.4 million in fiscal 1998 to $2.5 million in fiscal 1999. Cost of revenues for software implementation decreased 38.3% from $3.9 million in fiscal 1998 to $2.4 million in fiscal 1999. Decreases in implementation costs resulted principally from lower staffing levels to accomplish fewer implementations sold. Cost of revenues for hardware sales decreased 62.9% from $560,000 in fiscal 1998 to $208,000 in fiscal 1999 due to reduced hardware sales levels. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by 37.4% from $18.4 million in fiscal 1998 to $25.3 million in fiscal 1999. The increase in these expenses primarily reflected the addition of sales and management staff during fiscal 1999 associated with our growth. As a percentage of revenues, selling, general and administrative expenses decreased slightly from 33.5% in fiscal 1998 to 33.4% in fiscal 1999. 32 RESEARCH AND DEVELOPMENT. Research and development expenses remained constant at $4.8 million in fiscal 1998 and in fiscal 1999. Research and development expenses as a percentage of revenues decreased from 8.7% in fiscal 1998 to 6.4% in fiscal 1999. OTHER INCOME. Other income increased from $925,000 in fiscal 1998 to $1.1 million in fiscal 1999 as a result of earnings on cash, cash equivalents and short-term investments. PROVISION FOR INCOME TAXES. Income tax provision increased from $2.9 million in fiscal 1998 to $4.4 million in fiscal 1999, reflecting an effective tax rate of 36.0% for both fiscal 1998 and fiscal 1999. YEAR ENDED JANUARY 31, 1998 (FISCAL 1997) COMPARED TO YEAR ENDED JANUARY 31, 1999 (FISCAL 1998) REVENUES. Total revenues increased by 28.6% from $42.8 million in fiscal 1997 to $55.0 million in fiscal 1998. The increase was primarily attributable to growth in revenues from consulting and management services, software licenses and software implementation. Revenues from consulting and management services increased by 23.5% from $21.3 million in fiscal 1997 to $26.3 million in fiscal 1998. This increase reflected both continued demand for our services as well as increased use of value-pricing for services. Software license revenues increased 45.5% from $11.2 million in fiscal 1997 to $16.3 million in fiscal 1998. Software license revenue growth was due primarily to increased sales of our risk management products in fiscal 1998. Software maintenance revenues increased 17.7% from $4.3 million in fiscal 1997 to $5.0 million in fiscal 1998. Software maintenance revenue growth resulted from growth in licenses sold as well as rate increases under existing contracts. Software implementation revenues increased by 60.2% from $4.1 million in fiscal 1997 to $6.6 million in fiscal 1998. This increase in software implementation revenues was primarily generated by increased sales of risk management and cash management products, which resulted in increased implementation. Hardware sales decreased 58.7% from $1.9 million in fiscal 1997 to $774,000 in fiscal 1998. This decrease was primarily due to reduced requests by customers for bundled hardware and license deliveries. COST OF REVENUES. Total cost of revenues increased by 12.8% from $21.4 million in fiscal 1997 to $24.2 million in fiscal 1998. This increase resulted primarily from an increase in the cost of revenues in consulting and management services and software maintenance. Total cost of revenues as a percentage of total revenues decreased from 50.1% in fiscal 1997 to 43.9% in fiscal 1998 as a result of increases in sales of value-priced consulting and software licenses which have lower associated costs. Cost of revenues for consulting and management services increased by 30.3% from $12.4 million in fiscal 1997 to $16.2 million in fiscal 1998, which was a result primarily of increases in personnel. Cost of revenues for software licenses decreased by 13.9% from $1.4 million in fiscal 1997 to $1.2 million in fiscal 1998. The decrease in cost of license fees resulted from a decrease in sales of products subject to royalty payments. Cost of revenues for software maintenance increased by 24.1% from $1.9 million in fiscal 1997 to $2.4 million in fiscal 1998, which was primarily due to increases in personnel costs associated with growth of the customer service function. Cost of revenues for software implementation decreased 7.1% from $4.2 million in fiscal 1997 to $3.9 million in fiscal 1998. Improvements in the implementation process and adjustments to staffing requirements facilitated slightly lower staffing levels to accomplish implementations sold. 33 Cost of revenues for hardware sales decreased 64.0% from $1.6 million in fiscal 1997 to $560,000 in fiscal 1998 due to reduced hardware sales levels. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by 44.4% from $12.8 million in fiscal 1997 to $18.4 million in fiscal 1998. The increase in these expenses reflected the addition of software management and marketing staff during fiscal 1998 associated with our growth, as well as additional costs associated with operation as a public company. As a percentage of revenues, selling, general and administrative expenses increased from 29.9% in fiscal 1997 to 33.5% in fiscal 1998. RESEARCH AND DEVELOPMENT. Research and development expenses increased by 31.9% from $3.6 million in fiscal 1997 to $4.8 million in fiscal 1998. Growth in research and development expenses resulted largely from an increase in the number of development efforts during fiscal 1998. Research and development expenses as a percentage of revenues increased from 8.4% in fiscal 1997 to 8.7% in fiscal 1998. MERGER RELATED COSTS. Merger related costs consisted of one-time transaction costs of $485,000 related to the acquisition of Genisys. OTHER INCOME. Other income increased from $79,000 in fiscal 1997 to $925,000 in fiscal 1998. Other income increased as a result of interest earned on funds raised in our initial public offering on May 20, 1998. PROVISION FOR INCOME TAXES. Income tax provision increased from $2.0 million in fiscal 1997 to $2.9 million in fiscal 1998, reflecting an effective tax rate of 40.3% for fiscal 1997 compared with 36.0% for fiscal 1998. The effective tax rate in fiscal 1998 was lower than in fiscal 1997 primarily due to the tax-exempt status of some interest income earned during fiscal 1998. 34 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited consolidated statement of operations data for each of our last eight quarters ended July 31, 2000. We derived this data from our unaudited interim 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 our consolidated financial statements and the related notes incorporated by reference in this prospectus. 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 our future performance.
THREE MONTHS ENDED --------------------------------------------------------------------------------------------- OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, 1998 1999 1999 1999 1999 2000 2000 2000 --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Consulting and management service fees............. $ 7,273 $ 7,452 $ 8,324 $13,039 $15,072 $13,290 $13,110 $21,766 Software license fees...... 3,818 4,991 3,093 2,762 2,692 5,180 4,173 1,840 Software maintenance fees..................... 1,226 1,377 1,502 1,764 1,677 2,042 2,282 2,713 Software implementation fees..................... 2,072 1,360 1,443 1,232 1,391 1,050 2,495 2,311 Hardware and other fees.... 160 56 122 75 34 36 -- 32 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues........... 14,549 15,236 14,484 18,872 20,866 21,598 22,060 28,662 Cost of revenues: Consulting and management service fees............. 4,211 4,390 5,271 6,162 8,044 8,097 8,573 9,912 Software license fees...... 303 410 468 380 394 524 1,137 1,239 Software maintenance fees..................... 619 701 664 671 689 487 535 798 Software implementation fees..................... 1,130 890 646 808 542 385 1,217 1,239 Hardware and other fees.... 110 32 101 60 23 24 6 25 ------- ------- ------- ------- ------- ------- ------- ------- Total cost of revenues... 6,373 6,423 7,150 8,081 9,692 9,517 11,468 13,213 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit................. 8,176 8,813 7,334 10,791 11,174 12,081 10,592 15,449 ------- ------- ------- ------- ------- ------- ------- ------- Operating costs and expenses: Selling, general and administrative........... 4,984 5,182 4,818 6,114 6,907 7,494 7,598 8,821 Research and development... 962 1,363 1,318 1,356 1,313 826 984 1,445 Merger related costs....... -- 485 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total operating cost and expenses............... 5,946 7,030 6,136 7,470 8,220 8,320 8,582 10,266 ------- ------- ------- ------- ------- ------- ------- ------- Income from operations..... 2,230 1,783 1,198 3,321 2,954 3,761 2,010 5,183 Other income............... 366 336 241 316 223 320 372 374 ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes............. 2,596 2,119 1,439 3,637 3,177 4,081 2,382 5,557 Provision for income taxes.................... 926 714 476 1,351 1,144 1,469 905 2,112 ------- ------- ------- ------- ------- ------- ------- ------- Net income................. $ 1,670 $ 1,405 $ 963 $ 2,286 $ 2,033 $ 2,612 $ 1,477 $ 3,445 ======= ======= ======= ======= ======= ======= ======= ======= Basic earnings per share... $ 0.09 $ 0.08 $ 0.05 $ 0.12 $ 0.11 $ 0.14 $ 0.08 $ 0.19 ======= ======= ======= ======= ======= ======= ======= ======= Diluted earnings per share.................... $ 0.09 $ 0.07 $ 0.05 $ 0.12 $ 0.11 $ 0.14 $ 0.08 $ 0.18 ======= ======= ======= ======= ======= ======= ======= =======
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; 35 - 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, 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. We have funded our operations and cash expenditures primarily with cash generated from operating activities. As of July 31, 2000, we had no long-term debt. The changes in net cash provided by operating activities generally reflect the changes in earnings plus the effect of changes in working capital. Changes in working capital, especially accounts receivable, accounts payable and accrued expenses, are generally the result of timing differences between collection of fees billed and payment of operating expenses. As of January 31, 1999, we had $56.5 million of working capital, including $39.5 million of cash, cash equivalents and short-term investments, as compared to $59.0 million of working capital, including $33.9 million in cash, cash equivalents and short-term investments, as of July 31, 2000. Operating activities consumed $3.1 million in cash for the six months ended July 31, 1999, as compared to providing $885,000 of available cash for the six months ended July 31, 2000. Cash generated from operating activities during the six-month period ended July 31, 2000 was largely due to growth in net income of $1.7 million, increase of non-cash expenses of $2.8 million, and growth in accounts payable of $2.7 million, offset by an increase in accounts receivable of $1.9 million. Average days' sales outstanding, or DSO, fluctuate for a variety of reasons, including the timing of billings specified by contractual agreement and receivables for expense reimbursements, which results in our experiencing higher average DSO than would otherwise be the case. The following table presents, for the fiscal quarters indicated, (1) our average DSO and (2) our average DSO, including reimbursements for travel and out of pocket expenses, which are not considered revenues but are included in outstanding receivables:
DSO INCLUDING EXPENSE QUARTER ENDED DSO REIMBURSEMENTS ------------- --- -------------- July 31, 1999 169 155 October 31, 1999 177 160 January 31, 2000 131 119 April 30, 2000 142 128 July 31, 2000 123 112
Cash provided by investing activities was $152,000 for the six months ended July 31, 1999, as compared to cash used in investing activities of $5.8 million during the six months ended July 31, 2000. Cash used in investing activities during the six-month period ended July 31, 2000 was used for the purchase of $1.7 million of property and equipment and the acquisitions of Automated Integrated Systems and X-Port Software at a total cost of $5.3 million, offset by sales of $1.6 million of short-term investments. Cash provided by financing activities for the six months ended July 31, 1999 and July 31, 2000 was $205,000 and $793,000, respectively, each of which amounts primarily resulted from the exercise of stock options. 36 We do not maintain a revolving credit facility in light of our current liquidity position. Our future liquidity and capital requirements will depend upon numerous factors. We believe that the net proceeds from this offering, together with current available cash, cash equivalents and short-term investment balances and cash generated from operations, will be sufficient to meet our operating and capital requirements through at least the next twelve months. However, there can be no assurance that we will not require additional financing within this time frame. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risk and uncertainties, and actual results could vary. See "Risk Factors." Our failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting For Derivative Instruments And Hedging Activities." SFAS 133, as amended, is effective for us beginning February 1, 2001. We do not currently utilize derivative financial instruments. Therefore, we do not expect that the adoption of SFAS 133 will have a material impact on our results of operation or financial position. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued Statement of Position No. 98-9, "Modification of Sop 97-2, Software Revenue Recognition, With Respect To Certain Transactions," which amends certain provisions of Statement of Position No. 97-2, "Software Revenue Recognition." SOP 98-9 requires the use of the residual method when vendor specific objective evidence of fair value does not exist for one or more delivered elements in an arrangement but there is vendor specific objective evidence of the fair values of all undelivered elements in a multiple element arrangement. SOP 98-9 was effective for us on February 1, 2000 but did not materially impact our operating results for the six months ended July 31, 2000. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the staff of the SEC on applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue Recognition in Financial Statements." SAB 101B delays the implementation of SAB 101 until the quarter ending January 31, 2001. Based on our initial evaluation, we do not expect the application of SAB 101, as amended, to have a material impact on our financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest our cash in a variety of financial instruments, primarily tax advantaged variable rate and fixed rate obligations of state and local municipalities and educational entities and agencies. These investments are denominated in U.S. dollars. We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 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. We hold our investment securities for purposes other than trading. The weighted-average interest rate on our investment securities at July 31, 2000 was 4.9%. Amortized costs of short-term investments held at July 31, 2000 was $12.0 million, which approximated fair value. 37 BUSINESS 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. Our offerings, uniquely tailored to the needs of the banking industry, fall into four groups: - REVENUE ENHANCEMENT--increases banks' revenues through market segmentation and improved customer pricing structures; - PAYMENTSOLUTIONS--assists banks in transitioning from paper to electronic-based payment systems and minimizing payment processing expenses; - ENTERPRISE SOLUTIONS--integrates systems, combines operations and improves workflows and internal operational processes; and - CASHSOLUTIONS--optimizes inventory management of a bank's cash-on-hand, including management of how much cash is needed, when it is needed and where it is needed. We have 22 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. According to International Data Corporation, banks spent approximately $4.8 billion on information services outsourcing in 1999 and by 2004 are estimated to spend approximately twice that amount. Key industry trends driving our market opportunity include: CONSOLIDATION. The banking industry continues to experience substantial consolidation. According to the Federal Deposit Insurance Corporation, in 1999 the number of banks with assets of $3.0 billion or more increased. 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 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. 38 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. International Data Corporation has estimated that the amount of B2B purchases worldwide will reach $2.2 trillion by 2004. 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. OUR 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 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. 39 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 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. INCREASE 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 40 negotiated arrangements to generate high-margin and recurring revenues. We plan to increase the use of 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 e-finance solutions, 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 four complementary groups. These groups, Revenue Enhancement, PaymentSolutions, Enterprise Solutions and CashSolutions, we believe offer products and services that, when combined, deliver optimal benefits. REVENUE ENHANCEMENT. Revenue Enhancement consulting services enable banks to improve workflows, internal operational processes and customer pricing structures. Our Revenue Enhancement group offers consulting services that assess the existing policies and procedures of banks to increase their revenue streams and reduce interest and operating expenses. These assessments generally focus on a variety of a bank's operations, including deposits, treasury management, commercial lending, credit cards, automobile finance, mortgage and other consumer lending operations. Revenue Enhancement engagements typically take four to seven months to complete and we believe are relatively non-intrusive to the client. 41 PAYMENTSOLUTIONS. PaymentSolutions addresses the needs of a critical function of banks, the processing of payments made by one party to another. This includes presentment of checks in paper and electronic form, determination of the availability of funds, identification and mitigation of fraudulent payments, handling irregular items such as checks returned unpaid (exceptions), maintaining a record of past transactions (archiving), responding to related customer inquiries (research) and correcting any errors that are discovered (adjustments). PaymentSolutions approaches these key functions in the context of improving operational efficiency and a gradual transition from paper to electronic-based payment systems. Specific solutions within this group include:
- ----------------------------------------------------------------------------------------- SOLUTION DESCRIPTION PRODUCTS OFFERED FraudLink Provides a comprehensive, FRAUDLINK ON-US, FRAUDLINK automated approach to solving the DEPOSIT, FRAUDLINK KITE, FRAUDLINK growing problem of fraudulent POSITIVEPAY, FRAUDLINK ETRACKER, financial transactions, including FRAUDLINK PC, FRAUDLINK HOLD bad checks drawn on banks for payment, fraudulent items deposited with banks for credit and check kiting. eXceptions Reduces the number of exceptions CHECKFLOW 1ST EDITION, INNOVASION, that banks experience, while using RESEARCH AND ADJUSTMENTS technology to transform traditionally labor-intensive bank operations into efficient elements of the total e-payment transaction chain. It features a unique combination of an automated check research, photo referral and adjustment solutions, together with a flexible workflow engine. eRM Provides tools for customer ERM EXCEPTIONS MANAGEMENT, ERM relationship management in an RISK MANAGEMENT, ERM TREASURY e-finance environment through a SERVICES, ERM IMAGE REQUESTOR web-enabled decision support system that incorporates exception management, risk management, treasury services and document image archival and retrieval. eTrac Offers an automated track and RECEIVE SENTRY, RECORDS trace 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.
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- ----------------------------------------------------------------------------------------- SOLUTION DESCRIPTION PRODUCTS OFFERED eInform Focuses on performance-measurement EILUMEN, EIPERFORM, EISTATS, SUPER by using the historical data QUERY, EIMICR, EIQUALITY generated by eTrac through which end-users can analyze historical data to generate key performance indicators, item processing volume data, productivity statistics and quality control benchmarks. eTransactions Enables banks to transition away CHECKLINK, CHECKLINK PC, DEPOSIT from paper-based payment systems MANAGER, BRANCH TRUNCATION to 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 Focuses on funding requirements FLOAT ANALYSIS SYSTEM, FLOAT Management and overall profitability by PRICING SYSTEM, CONSULTING properly 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. Recon Solutions Improves efficiency and control BANKREC over the daily activity of balancing and reconciling financial transactions. It redefines reconciliation processes through technology and process improvements. In addition to recommendations that improve automation, control and risk management practices, we employ an automated reconciliation software, Bankrec-TM-Corporate, to provide significant gains in efficiency and control.
43 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 Offers customized, bank-wide PROJECT MANAGEMENT, ESOLUTIONS, Solutions conversions, consolidation and INTEGRATION, PROCESS OPTIMIZATION, integration consulting solutions LINE OF BUSINESS CONSULTING in areas beyond payments systems, including consulting and project management services and IT consulting for various projects. Strategic Assists customers in planning and BVIP, CUSTOMER EXPERIENCE Services implementing a total e-finance and CONSULTING, STRATEGY CONSULTING payment strategy.
CASHSOLUTIONS. CashSolutions optimizes the inventory management of a bank's cash-on-hand, including managing how much is needed, when it is needed and where it is needed. We believe our solutions reduce the amount of cash banks need to hold in reserve accounts and as cash-on-hand, while ensuring a high level of customer service through timely replenishment of cash in ATMs. Specific solutions within this group include:
- ----------------------------------------------------------------------------------------- SOLUTION DESCRIPTION PRODUCTS OFFERED eiService Advances ATM monitoring and EIMANAGER, EIGATEWAY, EIFORECASTER 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. eCashInventory Reduces the amount of non-earning CASH FORECASTER, CASH TRACKER, assets required in reserve RESERVE LINK, RESERVE LINKPLUS accounts and as cash-on-hand to meet operating needs. Using both technology and process reengineering, it provides management tools for forecasting, tracking and optimizing a bank's inventory of currency. This group of solutions frees underutilized money for more productive uses.
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- ----------------------------------------------------------------------------------------- SOLUTION DESCRIPTION PRODUCTS OFFERED Transportation Reduces armored car transportation OPTIMIZER, 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. eCashPro Reduces transaction cost of EVAULTMASTER II, EDEPOSITMASTER, centralized currency and ATM EVAULTFORECASTER depositing processing, typically provides significant cash reductions throughout the vault network, establishes a standardized inventory measurement process and allows a reduction in the number of branch and vault employees, as well as improves Internet-based customer reporting.
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 19 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 44%, 35% and 58% of total revenues during the fiscal years ended January 31, 1998, 1999 and 2000, respectively, and for approximately 61% of total revenues during the six months ended July 31, 2000. Wells Fargo & Company and Firstar Bank, N.A. accounted for approximately 24% and 13% of total revenues, respectively, during the year ended January 31, 2000, and Firstar Bank, N.A. and Barclays PLC accounted for approximately 35% and 10% of total revenues, respectively, during the six months ended July 31, 2000. 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. 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 recoup some or all of our development costs from the customer making the request. In addition to customer-funded solutions development, we have invested significant amounts in solutions development, including expenditures of $3.6 million, $4.8 million and $4.8 million for research and development in the years ended January 31, 1998, 1999 and 2000, respectively. Further, some of our key product introductions have resulted from the adaptation of products developed by 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. 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 45 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 July 31, 2000, we had 19 Account Relationship Managers, who are responsible for managing our day-to-day relationships with our customers. Seventeen are responsible for domestic bank relationships, and two are responsible for the United Kingdom and European 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 by our speaking engagements; - 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 July 31, 2000, we employed a marketing staff of eight individuals, including graphics designers, writers, administrative coordinators and a Web master. 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 46 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 CashSolutions 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 PaymentSolutions products and services address this concern while complying with such regulations. 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. 47 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. We are involved in a dispute relating to one of our software products. See "Legal Proceedings." EMPLOYEES As of July 31, 2000, we had 429 employees. Of these employees, 205 provided consulting services, 95 worked in the technical group, 54 performed sales and marketing, customer relations and business development functions and 75 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 calendar year 1999, we used 31 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. PROPERTIES Our principal executive office is a leased facility with approximately 72,400 square feet of space in Dallas, Texas. The lease agreement for this space expires on May 31, 2010. We also lease approximately 20,600 square feet in Atlanta, Georgia pursuant to a lease agreement which expires on March 1, 2003, approximately 3,300 square feet in Kansas City, Missouri, pursuant to a lease agreement which expires February 28, 2002, approximately 5,300 square feet in Bedford, Texas pursuant to a lease agreement which expires September 30, 2002 and approximately 3,100 square feet in Reading, England, pursuant to a lease agreement which expires September 4, 2004. We believe that our facilities are well maintained and in good operating condition and are adequate for our present and anticipated levels of operations. LEGAL PROCEEDINGS We began to develop with Knowledge Based Systems, Inc., or KBSI, our CashForecaster suite of products in 1996 pursuant to a development contract. KBSI provided the algorithm-based components for these products. This contract is the subject of a lawsuit filed in September 2000 and pending in the United States District Court for the Northern District of Texas. We allege that KBSI has breached the contract and seek injunctive relief to enforce the contract and to prevent KBSI from using or disclosing our confidential information and trade secrets. KBSI alleges, among other things, that we have breached the contract and seeks ownership of the CashForecaster products and unspecified actual and exemplary monetary damages. Certain contractual disputes relating to this contract are also the subject of a pending arbitration proceeding. This lawsuit and the related arbitration are not expected to have a material adverse effect on our business, financial position or results of operations. We are subject from time to time to certain claims and legal proceedings arising in the ordinary course of our business. Although we do not believe that the cost or liability that may result from the resolution of currently pending claims or legal proceedings against us will be material, there can be no assurance in this regard. 48 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information regarding our current executive officers and directors. The term of Class I directors expires in 2002; the Class II term expires in 2003; and the Class III term expires in 2001.
NAME AGE CLASS POSITION - ---- -------- -------- -------- John D. Carreker, Jr................ 58 I Chairman of the Board, Chief Executive Officer and Director Royce D. Brown...................... 52 -- Vice Chairman of the Office of the President, Executive Vice President and Managing Director John S. Davis, Jr................... 42 -- Executive Vice President and Managing Director Terry L. Gage....................... 43 -- Executive Vice President, Treasurer, Chief Financial Officer and Assistant Secretary Michael D. Hansen................... 48 -- Executive Vice President and Managing Director Richard J. Jerrier.................. 57 -- Executive Vice President and Managing Director Wyn P. Lewis........................ 51 III Vice Chairman of the Office of the President, Executive Vice President and Managing Director Robert M. Olson, Jr................. 45 -- Executive Vice President and Managing Director James D. Carreker................... 53 III Director James L. Fischer.................... 72 II Director Donald L. House..................... 59 I Director Richard R. Lee, Jr.................. 53 II Director Larry J. Peck....................... 53 I Director David K. Sias....................... 62 III 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. ROYCE D. BROWN was appointed Vice Chairman of the Office of the President in September 1999 and has served as Executive Vice President and Managing Director since February 1996. From March 1994 to January 1996, Mr. Brown served as Vice President and Managing Director. JOHN S. DAVIS, JR. has served as Executive Vice President and Managing Director since April 1997. From February 1996 to April 1997, Mr. Davis served as Senior Vice President and Managing Director. From February 1993 to January 1996, Mr. Davis served as Director of Sales and Marketing. From July 1992 to February 1993, Mr. Davis served as a regional sales manager. 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, 49 Mr. Gage served as Treasurer and Chief Financial Officer of FAAC Incorporated, a company specializing in technology engineering and consulting services. MICHAEL D. HANSEN has served as Executive Vice President and Managing Director since October 2000. 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. RICHARD J. JERRIER has served as Executive Vice President and Managing Director since January 1999. From 1993 until December 1998, Mr. Jerrier served as the Senior Vice President and Director of New Business for Atlantic Data Services, a professional services firm that provides project management leadership to the financial services industry. WYN P. LEWIS has served as our director since March 2000, was appointed Vice Chairman of the Office of the President in September 1999 and has served as Executive Vice President and Managing Director since March 1996. From March 1993 to March 1996, Mr. Lewis served as our Vice President and Managing Director. ROBERT M. OLSON, JR. has served as Executive Vice President and Managing Director since September 1998. From July 1994 until July 1998, Mr. Olson served as Executive Vice President, Operations & Technology for Magna Group, Inc., a financial services institution. JAMES D. CARREKER has served as our director 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. He continues to serve as a director of Wyndham International, Inc. From January 1998 to March 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 and into Patriot in January 1998. Mr. Carreker also served as Chief Executive Officer of Trammell Crow Company, a national real estate company, from August 1994 to December 1995 and currently serves as a director of Crow Family Holdings. John D. Carreker, Jr. and James D. Carreker are brothers. JAMES L. FISCHER has served as our director since 1984. Mr. Fischer retired in 1984 from Texas Instrument Incorporated, 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 Texas Instruments. DONALD L. HOUSE has served as our director since March 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 financial, human resource and electronic commerce application software. Mr. House continues to serve as a director of Clarus Corporation. Mr. House is a director of Eshare Technologies, Inc., formerly known as Melita International Corporation, a provider of automated customer relationship management systems, where he serves as chairman of its audit committee and a member of its compensation committee. He is now chairman of Ockham Technologies, Inc., a provider of sales management software, and he is on the board of several other private technology companies. RICHARD R. LEE, JR. has served as our director since 1984. Mr. Lee has served as President of Lee Financial Corporation, a financial advisory firm, since 1975. 50 LARRY J. PECK has served as our director since October 1996. Mr. Peck has served since 1994 as Senior Vice President and Manager, Technology Solutions Sector, of Science Applications International Corporation, or SAIC, a diversified technology research and development services company. An affiliate of SAIC is a selling stockholder in this offering. DAVID K. SIAS has served as our director since October 1993 and has served as a consultant to us since November 1993. Mr. Sias also serves as a consultant to other companies. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors has an audit committee and a compensation committee. The members of the audit committee are Messrs. Fischer, House and Peck. The audit committee makes recommendations to the board of directors regarding the selection of independent auditors, reviews the results and scope of audits and other accounting-related services and reviews and evaluates our internal control functions. The members of the compensation committee are Messrs. Fischer and Lee. The compensation committee makes recommendations to the board of directors concerning salaries and incentive compensation for our officers and employees and administers our 1994 Long Term Incentive Plan. 51 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth as of October 16, 2000, certain information regarding the beneficial ownership of our outstanding common stock, both before this offering and immediately following this offering by: - each person known by us to own beneficially more than five percent of our outstanding common stock; - each of our directors and each of our most highly compensated executive officers; - each selling stockholder; and - all of our directors and executive officers as a group. As of October 16, 2000, the number of shares of our common stock outstanding was 19,119,220. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. These rules generally require inclusion of any securities over which the stockholders have voting or investment power. In accordance with the rules of the Securities and Exchange Commission, shares of our common stock subject to options that are presently exercisable or exercisable within 60 days of October 16, 2000 are deemed outstanding and beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage of any other person. These options are separately set forth below in the column titled "Options." Unless otherwise noted, the address for the stockholders named in the table is 4055 Valley View Lane, Suite 1000, Dallas, Texas 75244.
SHARES BENEFICIALLY OWNED PRIOR SHARES BENEFICIALLY OWNED TO THE OFFERING NUMBER OF AFTER THE OFFERING -------------------------------- SHARES ------------------------------- NAME NUMBER OPTIONS PERCENT BEING OFFERED NUMBER OPTIONS PERCENT - ------------------------ --------- --------- -------- ------------- --------- -------- -------- John D. Carreker, Jr. (1)(3)................ 4,395,271 -- 23.0% 1,018,000 3,377,271 -- 16.0% Ronald R. Antinori (2)................... 2,669,646 -- 14.0 618,500 2,051,146 -- 9.7 Wyn P. Lewis (3)(4)..... 233,224 37,760 1.4 54,000 179,224 37,760 1.0 Royce D. Brown (3)...... 299,178 77,000 2.0 69,000 230,178 77,000 1.5 Richard J. Jerrier...... -- 40,625 * -- -- 40,625 * David K. Sias (5)....... 248,173 7,700 1.3 -- 248,173 7,700 1.2 James L. Fischer (6).... 136,486 11,529 * 20,000 116,486 11,529 * James D. Carreker (7)... 118,550 18,251 * -- 118,550 18,251 * Richard R. Lee, Jr. (8)................... 121,550 18,251 * -- 121,550 18,251 * Larry J. Peck (9) (11).............. -- 10,719 * -- -- 10,719 * Donald L. House (10).... -- 38,161 * -- -- 38,161 * SAIC Venture Capital Corporation (11)...... 702,967 -- 3.7 220,500 482,467 -- 2.3 Directors and executive officers as a group (14 persons)(3)....... 5,636,319 431,992 31.0% 4,475,319 431,992 23.2%
- ------------------------ *Less than 1% of the outstanding common stock. (1) Includes 465,079 shares held in a family limited partnership. (2) Includes 402,111 shares held by Susan Antinori, the wife of Mr. Antinori, as to which Mr. Antinori disclaims beneficial ownership. The address for Mr. Antinori is 238 15th Street, No. 12, Atlanta, Georgia 30309. 52 (3) Includes 68,837, 17,239, 42,956 and 146,499 shares of common stock held in our employee stock ownership plan for the benefit of Messrs. Carreker, Lewis and Brown, respectively, and all directors and executive officers as a group. (4) Includes 38,500 shares of restricted stock issued under our 1994 Long Term Incentive Plan. (5) Includes 6,000 shares held by Patricia L. Sias, the wife of Mr. Sias, as to which Mr. Sias disclaims beneficial ownership. The address for Mr. Sias is 1930 Jelinda Drive, Santa Barbara, California 93108. (6) Includes 2,000 shares held by Elizabeth Fischer, the wife of Mr. Fischer, as to which Mr. Fischer disclaims beneficial ownership. The address for Mr. Fischer is 7170 Kendallwood, Dallas, Texas 75240. (7) Includes 6,576 shares held by children of Mr. Carreker, as to which Mr. Carreker disclaims beneficial ownership. The address for Mr. Carreker is 1950 Stemmons Freeway, Suite 6001, Dallas, Texas 75207. (8) 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. The address for Mr. Lee is 12201 Merritt Drive, Suite 530, Dallas, Texas 75251. (9) The address for Mr. Peck is 10260 Campus Point Drive, San Diego, California 92121. (10) The address for Mr. House is 2480 Spalding Drive, Atlanta, Georgia 30350. (11) The address for SAIC Venture Capital Corporation is 3993 Howard Hughes Parkway, Suite 570, Las Vegas, Nevada 89109. SAIC Venture Capital Corporation is an affiliate of Science Applications International Corporation of which Mr. Peck is an officer. In the event that the underwriters elect to exercise the over-allotment option, the selling stockholders will sell up to the following number of additional shares: John D. Carreker, Jr............................... 210,000 Ronald R. Antirori................................. 130,000 Wyn P. Lewis....................................... 46,000 Royce D. Brown..................................... 31,000 SAIC Venture Capital Corporation................... 183,000 ------- 600,000 =======
53 UNDERWRITING The underwriters named below, acting through their representatives, Robertson Stephens, Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc. have severally agreed with us and the selling stockholders, subject to the terms and conditions of the underwriting agreement, to purchase from us and the selling stockholders the number of shares of common stock set forth below opposite their respective names. The underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER OF UNDERWRITER SHARES - ------------------------------------------------------------ --------- Robertson Stephens, Inc. and Robertson Stephens International, Ltd. ...................................... Chase Securities Inc. and Chase Manhattan International Limited................................................... U.S. Bancorp Piper Jaffray Inc.............................. --------- Total................................................... 4,000,000 =========
The underwriters' representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to selected dealers at that price less a concession of not in excess of $ per share, of which $0.10 may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the underwriters' representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. OVER-ALLOTMENT OPTION The selling stockholders have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 600,000 additional shares of common stock at the public offering price less the underwriting discount set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares as the number of shares to be purchased by it as shown in the above table represents as a percentage of the 4,000,000 shares offered by this prospectus. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the 4,000,000 shares offered by this prospectus are being sold. Each of the selling stockholders will be obligated, under this over-allotment option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. 54 The following table summarizes the compensation to be paid to the underwriters by us and the selling stockholders:
TOTAL --------------------- WITHOUT WITH PER OVER- OVER- SHARE ALLOTMENT ALLOTMENT -------- --------- --------- Underwriting discounts payable by us........................ $ $ $ Underwriting discounts payable by the selling stockholders.............................................. $ $ $
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts referred to above, will be approximately $579,000. INDEMNITY The underwriting agreement contains covenants of indemnity among the underwriters, us and the selling stockholders against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. LOCK-UP AGREEMENTS Each of our executive officers and directors and each of the selling stockholders have agreed, during the period of 90 days after the effective date of the registration statement of which this prospectus forms a part, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any share of common stock, or any securities convertible into or exchangeable for share of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of Robertson Stephens, Inc. However, Robertson Stephens, Inc. may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters' representatives and any of our stockholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of Robertson Stephens, Inc., subject to specified exceptions, (a) consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock-up period, or (b) offer, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than (w) our sale of shares in this offering, (x) the issuance of our common stock upon the exercise of outstanding options or warrants, (y) the issuance of options under existing stock option and incentive plans, subject to certain limitations, and (z) the issuance of our common stock or securities convertible into, or exchangeable or exercisable for shares of our common stock in connection with acquisitions, subject to specified limitations. SYNDICATE SHORT SALES The representatives have advised us that, on behalf of the underwriters, they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a "covered" short position to the 55 extent that it does not exceed the 600,000 shares subject to the underwriters' over-allotment option and will be deemed a "naked" short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchased shares in the offering. The underwriters may reduce or close out their covered short position either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which shares are available for purchase through the over-allotment option. Any "naked" short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market. STABILIZATION The representatives have advised us that, pursuant to Regulation M under the Securities Exchange Act of 1934, they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "penalty bid" is an arrangement permitting the representatives to claim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by that underwriter or syndicate member is purchased by the representatives in the open market pursuant to a stabilizing bid or to cover all or part of a syndicate short position. The representatives have advised us that stabilizing bids and open market purchases may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. REGULATION M/PASSIVE MARKET MAKING In connection with this offering, certain underwriters and selling group members, if any, who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, during the business day prior to the pricing of this offering, before the commencement of offers or sales of the common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. LEGAL MATTERS Locke Liddell & Sapp LLP, Dallas, Texas, will pass upon the validity of the common stock offered under this prospectus. Maurice E. Purnell, a partner of Locke Liddell & Sapp LLP, is the secretary of Carreker. Alston & Bird LLP, Atlanta, Georgia, will pass upon certain legal matters relating to the offering on behalf of the underwriters. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2000, as set forth in their report, which is incorporated by reference in this prospectus and elsewhere in the registration statement. Our consolidated financial statements are incorporated by reference in reliance on Ernst & Young LLP's report given on their authority as experts in accounting and auditing. 56 WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934, and therefore we file annual, quarterly and current reports, proxy statements and other information with the Commission. You may read and copy any of the reports, proxy statements and other information that we file at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Reports, proxy and information statements and other information about us may also be inspected at the National Association of Securities Dealers, Inc. at NASD Regulation, Inc., Corporate Financing Department, 9509 Key West Ave., 5th Floor, Rockville, MD 20850. We have filed with the Commission a registration statement on Form S-3 under the Securities Act of 1933, as amended, with respect to the shares of common stock offered in this prospectus. This prospectus is part of that registration statement and, as permitted by the Commission's rules, does not contain all of the information set forth in the registration statement. For further information about us and our common stock, we refer you to the documents that have been filed as exhibits to the registration statement, and statements relating to those documents are qualified in all respects by this reference. You can review and copy the registration statement and its exhibits from the Commission at the address listed above or from its Internet site. The Commission allows us to "incorporate by reference" into this prospectus information we file with the Commission in other documents. This means that we can disclose important information by referring you to other documents that we file with the Commission. We incorporate by reference the documents listed below and future filings we will make with the Commission under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until the offering of these shares is terminated: - our annual report on Form 10-K for the fiscal year ended January 31, 2000, as amended by our annual report on Form 10-K/A filed October 3, 2000; - our quarterly report on Form 10-Q for the quarter ended April 30, 2000; - our quarterly report on Form 10-Q for the quarter ended July 31, 2000; and - the description of our capital stock contained in our registration statement on Form 8-A filed with the Commission on May 5, 1998. The information incorporated by reference is deemed to constitute a part of this prospectus, except that any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed modified, superseded or replaced for purposes of this prospectus to the extent that a statement contained in this prospectus or in any subsequently filed document that also is or is deemed to be incorporated by reference in this prospectus modifies, supersedes or replaces such statement. Any statement so modified, superseded or replaced shall not be deemed, except as so modified, superseded or replaced, to constitute a part of this prospectus. You may request a copy of any information that we incorporate by reference into the registration statement or this prospectus, at no cost, by writing or telephoning us. Please send your request to: Carreker Corporation 4055 Valley View Lane, Suite 1000 Dallas, Texas 75244 Attention: Terry L. Gage Telephone number (972) 458-1981 57 WE BELIEVE OUR MARKET OPPORTUNITIES ARE DRIVEN BY FAVORABLE INDUSTRY DYNAMICS. Icon representing a bank in middle of page surrounded by four triangles containing the following phrases "Consolidation," "Regulatory Change," "Evolving Technology" and "Emergence of Internet." [LOGO] [LOGO] PART II ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table indicates the estimated expenses to be incurred by us in connection with the offering described in the Registration Statement:
Securities and Exchange Commission filing fee............... $ 22,466 NASD filing fee............................................. 9,010 Nasdaq National Market additional listing fee............... 17,500 Blue Sky fees and expenses.................................. 5,000 Printing and engraving fees................................. 150,000 Accountants' fees and expenses.............................. 100,000 Legal fees and expenses..................................... 200,000 Miscellaneous............................................... 75,024 -------- Total................................................... $579,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides, in effect, that any person made a party to any action by reason of the fact that he is or was our director, officer, employee or agent may and, in certain cases, must be indemnified by us against, in the case of a non-derivative action, judgments, fines, amounts paid in settlement and reasonable expenses (including attorney's fees) incurred by him as a result of such action, and in the case of a derivative action, against expense (including attorney's fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interests. This indemnification does not apply, in a derivative action, to matters as to which it adjudged that the director, officer, employee or agent is liable to us, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for expense and, in a non-derivative action, to any criminal proceeding in which such person had reasonable cause to believe his conduct was unlawful. Article Eight of our amended and restated certificate of incorporation provides that, to the fullest extent permitted by Delaware law, none of our directors shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Article Eight of our amended and restated certificate of incorporation also provides that we may indemnify to the fullest extent permitted by Delaware law any and all of our directors and officers, or former directors and officers, or any person who may have served at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. In addition, Section 7.07 of our amended and restated bylaws provides for similar indemnification of officers and directors within the limits of Delaware law. Reference is made to the underwriting agreement filed as Exhibit 1.1 to this registration statement, pursuant to which the underwriters have agreed to indemnify our officers and directors against certain liabilities under the Securities Act of 1933, as amended, or Securities Act. We have entered into indemnification agreements with each of our executive officers and directors. Pursuant to such agreements, we have, to the extent permitted by applicable law, indemnified these persons against all expenses, judgments, fines and penalties incurred in connection with the defense or settlement of any actions brought against them by reason of the fact that they were our directors or assumed certain responsibilities at our direction. We have also purchased directors and officers liability insurance in order to limit our exposure to liability for indemnification of directors and officers. II-1 ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement by and among Carreker Corporation and the Underwriters. 2.1 Agreement and Plan of Merger between Carreker-Antinori, Inc., a Texas corporation, and Carreker-Antinori, Inc., a Delaware corporation (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 2.2 Agreement and Plan of Merger, dated January 29, 1999, by and among Carreker-Antinori, Inc., GO Acquisition Corp., Genisys Operation, Inc., and Kevin J. Taylor, Ronald W. Kreykes, Thomas R. Flannery, Robert A. Walsh, and Patrick M. Rogal-Davis (incorporated by reference to Exhibit 2.1 to Carreker Corporation's Current Report on Form 8-K filed February 12, 1999). 2.3 List of Schedules and Attachments omitted from Exhibit 2.2, Agreement and Plan of Merger (incorporated by reference to Exhibit 2.2 to Carreker Corporation's Current Report on Form 8-K filed February 12, 1999). 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Carreker Corporation's Registration Statement on Form S-1 (Registration No. 333-48399)). 4.2 Amended and Restated Certificate of Incorporation and Bylaws of Carreker Corporation (incorporated by reference to Exhibit 4.2 to Carreker Corporation's Registration Statement on Form S-1 (Registration No. 333-48399). 5.1+ Opinion of Locke Liddell & Sapp LLP. 10.1* Employment Agreement dated October 6, 2000, between Carreker Corporation and Michael D. Hansen. 23.1* Consent of Ernst & Young LLP, Independent Auditors. 23.2+ Consent of Locke Liddell & Sapp LLP (included in Exhibit 5.1). 24.1+ Power of Attorney (included on first signature page of initial filing).
- ------------------------ * Filed herewith + Previously filed ITEM 17. UNDERTAKINGS. We hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, as amended, each filing of our annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. We hereby undertake to provide the representatives of the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons pursuant to the Delaware General Corporation Law, our certificate of incorporation and our bylaws, the Underwriting Agreement, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the II-2 successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. We hereby undertake that: (1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on this 31st day of October, 2000. CARREKER CORPORATION By: /s/ JOHN D. CARREKER, JR. ----------------------------------------- John D. Carreker, Jr. CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN D. CARREKER, JR. Chief Executive Officer and October 31, 2000 ------------------------------------------- Director (Principal John D. Carreker, Jr. Executive Officer) /s/ TERRY L. GAGE Chief Financial Officer, October 31, 2000 ------------------------------------------- Executive Vice President Terry L. Gage and Treasurer (Principal Financial and Accounting Officer) * Executive Vice President, October 31, 2000 ------------------------------------------- Managing Director and Wyn P. Lewis Director * Director October 31, 2000 ------------------------------------------- James D. Carreker * Director October 31, 2000 ------------------------------------------- James L. Fischer * Director October 31, 2000 ------------------------------------------- Donald L. House * Director October 31, 2000 ------------------------------------------- Richard R. Lee, Jr.
II-4
SIGNATURE TITLE DATE --------- ----- ---- Director October 31, 2000 ------------------------------------------- Larry J. Peck * Director October 31, 2000 ------------------------------------------- David K. Sias
*By: /s/ JOHN D. CARREKER, JR. -------------------------------------- John D. Carreker, Jr. ATTORNEY-IN-FACT
II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement by and among Carreker Corporation and the Underwriters. 2.1 Agreement and Plan of Merger between Carreker-Antinori, Inc., a Texas corporation, and Carreker-Antinori, Inc., a Delaware corporation (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)). 2.2 Agreement and Plan of Merger, dated January 29, 1999, by and among Carreker-Antinori, Inc., GO Acquisition Corp., Genisys Operation, Inc., and Kevin J. Taylor, Ronald W. Kreykes, Thomas R. Flannery, Robert A. Walsh, and Patrick M. Rogal-Davis (incorporated by reference to Exhibit 2.1 to Carreker Corporation's Current Report on Form 8-K filed February 12, 1999). 2.3 List of Schedules and Attachments omitted from Exhibit 2.2, Agreement and Plan of Merger (incorporated by reference to Exhibit 2.2 to Carreker Corporation's Current Report on Form 8-K filed February 12, 1999). 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Carreker Corporation's Registration Statement on Form S-1 (Registration No. 333-48399)). 4.2 Amended and Restated Certificate of Incorporation and Bylaws of Carreker Corporation (incorporated by reference to Exhibit 4.2 to Carreker Corporation's Registration Statement on Form S-1 (Registration No. 333-48399). 5.1+ Opinion of Locke Liddell & Sapp LLP. 10.1* Employment Agreement dated October 6, 2000, between Michael D. Hansen and Carreker Corporation. 23.1* Consent of Ernst & Young LLP, Independent Auditors. 23.2+ Consent of Locke Liddell & Sapp LLP (included in Exhibit 5.1). 24.1+ Power of Attorney (included on first signature page).
- ------------------------ * Filed herewith + Previously filed EX-1.1 2 a2027381zex-1_1.txt EXHIBIT 1.1 UNDERWRITING AGREEMENT October __, 2000 Robertson Stephens, Inc. Chase Securities Inc. U.S. Bancorp Piper Jaffray Inc. As Representatives of the several Underwriters c/o Robertson Stephens, Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: INTRODUCTORY. Carreker Corporation, a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in SCHEDULE A (the "Underwriters") an aggregate of 2,000,000 shares (the "Company Shares") of its Common Stock, par value $.01 per share (the "Common Stock"); and John D. Carreker, Jr. (the "Principal Selling Stockholder") and Ronald R. Antinori, Royce D. Brown, Wyn P. Lewis, James L. Fischer and SAIC Venture Capital Corporation (the "Other Selling Stockholders," collectively with the Principal Selling Stockholder, the "Selling Stockholders") severally propose to sell to the Underwriters an aggregate of 2,000,000 shares of Common Stock (the "Selling Stockholder Shares"). The 2,000,000 Company Shares and the 2,000,000 Selling Stockholder Shares are collectively called the "Firm Shares." In addition, the Selling Stockholders have severally granted to the Underwriters an option to purchase up to an additional 600,000 shares of Common Stock (the "Option Shares"), as provided in Section 2, each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in SCHEDULE B. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares." Robertson Stephens, Inc. ("Robertson Stephens"), Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc. have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (File No. 333-47160), which contains a form of prospectus, subject to completion, to be used in connection with the public offering and sale of the Shares. Each such prospectus, subject to completion, used in connection with such public offering is called a "preliminary prospectus." Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including all documents incorporated or deemed to be incorporated by reference therein and any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act or the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (collectively, the "Exchange Act"), is called the "Registration Statement." Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement," and, from and after the date and time of filing of the Rule 462(b) Registration Statement, the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) under the Securities Act, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) under the Securities Act); provided, however, that if in reliance on Rule 434 under the Securities Act and with the consent of Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Securities Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) under the Securities Act) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) under the Securities Act). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) under the Securities Act), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 under the Securities Act and with the consent Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Securities Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included," "provided" or "stated" in the Registration Statement or the Prospectus (and all other references or like import) shall be deemed to mean and include all such financial statements and schedules and other information which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the Exchange Act which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be. The Company and each of the Selling Stockholders hereby confirms their respective agreements with the Underwriters as follows: 2 SECTION 1. REPRESENTATIONS AND WARRANTIES. A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SELLING STOCKHOLDER. The Company and the Principal Selling Stockholder, to the best of his knowledge, hereby represent, warrant and agree with each Underwriter as follows: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect, and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company or the Principal Selling Stockholder, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), the text thereof (excluding any tables and pictures, which are fairly and accurately described in all material respects) was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times up to and on the First Closing Date (as defined below) and on any Second Closing Date (as defined below), complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each preliminary prospectus, as of its date, and the Prospectus, as amended or supplemented, as of its date and at all subsequent times up to and on the First Closing Date and on any Second Closing Date, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or any preliminary prospectus or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has delivered to the Representatives three complete conformed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof. The Company has delivered conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and on the Closing Date will have delivered the Prospectus, as amended or supplemented, all in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. 3 (c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus, the Registration Statement or other materials permitted by the Securities Act. (d) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE COMPANY. The Company Shares have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE SELLING STOCKHOLDERS. The Selling Stockholder Shares, when issued, were validly issued, fully paid and nonassessable. (g) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been satisfied under this Agreement or have been duly waived. (h) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (i) INDEPENDENT ACCOUNTANTS. Ernst & Young LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act and the Exchange Act. 4 (j) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus, together with the related schedules and notes, present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules and the notes thereto have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Summary--Summary Consolidated Financial Data", "Selected Consolidated Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (k) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its subsidiaries maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (l) SUBSIDIARIES OF THE COMPANY. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2000. (m) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS SUBSIDIARIES. Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction in which it is organized with full corporate or limited liability company power and authority to own its properties and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification except where the failure to be so qualified would not have a Material Adverse Effect. (n) CAPITALIZATION OF THE SUBSIDIARIES. All the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances. (o) NO PROHIBITION ON SUBSIDIARIES FROM PAYING DIVIDENDS OR MAKING OTHER DISTRIBUTIONS. No subsidiary of the Company is currently prohibited, directly or indirectly, from 5 paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus. (p) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Stock (including the Shares) conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock (excluding the Company Shares) have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the shares of outstanding Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus and the financial statements of the Company, and related notes thereto, included in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (q) STOCK EXCHANGE LISTING. The Company's Common Stock is registered pursuant to Section 12(g) of the Exchange Act, and the Shares are listed, or have been approved for listing upon notice of issuance, on the Nasdaq National Market. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Shares from the Nasdaq National Market, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. (the "NASD") is contemplating terminating such registration or listing. (r) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the NASD and (iii) by the federal and provincial laws of Canada. (s) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AGREEMENTS. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the 6 Company or any of its subsidiaries is a party or bound or to which their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its subsidiaries or any of their properties, except with respect to (ii) and (iii) such breaches, violations or impositions that would not individually or in the aggregate have a Material Adverse Effect or could materially affect the Company's ability to consummate the transactions contemplated hereby. (t) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any subsidiary is in violation of or default under (i) any provision of its charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a Material Adverse Change except as otherwise disclosed in the Prospectus. (u) NO ACTIONS, SUITS OR PROCEEDINGS. Except as otherwise disclosed in the Prospectus, no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a material adverse effect on the Company's ability to perform its obligations under this Agreement or to consummate any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. (v) ALL NECESSARY PERMITS, ETC. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (w) TITLE TO PROPERTIES. The Company and each of its subsidiaries has good and valid title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A)(j) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. 7 (x) TAX LAW COMPLIANCE. The Company and its consolidated subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A)(j) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its consolidated subsidiaries has not been finally determined. The Company has no knowledge of any tax deficiency that has been or might be asserted or threatened against the Company that could result in a Material Adverse Change. (y) INTELLECTUAL PROPERTY RIGHTS. Except as disclosed in the Prospectus each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a Material Adverse Change; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights the loss of which by the Company would result in a Material Adverse Effect; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Effect. There is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights that is not otherwise disclosed in the Prospectus. The Company and its subsidiaries do not in the conduct of their business as now or proposed to be conducted as described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its subsidiaries, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (z) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or other similar fees or charges under federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the Company Shares. (aa) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (bb) INSURANCE. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such 8 deductibles and covering such risks as are generally deemed adequate and customary for their businesses, including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, and acts of vandalism, general liability and Directors and Officers liability. The Company has no reason to believe that it or any of its subsidiaries will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (cc) LABOR MATTERS. To the best of Company's and Principal Selling Stockholder's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent that might be expected to result in a Material Adverse Change. (dd) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (ee) LOCK-UP AGREEMENTS. Each officer and director of the company, each Selling Stockholder and each beneficial owner known to the Company to hold five or more percent of the outstanding issued share capital of the Company has signed an agreement substantially in the form attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all stockholders of record of the Company and the number and type of securities held by each such securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. The Company hereby agrees that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson Stephens. (ff) RELATED PARTY TRANSACTIONS. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus that have not been described as required. (gg) EXCHANGE ACT COMPLIANCE. The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act, and when read together with the other information in the Prospectus, at the time the Registration Statement and any amendments thereto become effective and at the First Closing Date and the Second Closing Date, as the case may be, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (hh) REPORTS FILED. The Company has filed all reports required to be filed pursuant to the Securities Act and the Exchange Act. 9 (ii) CONDITIONS FOR USE OF FORM S-3. The Company has satisfied the conditions for the use of Form S-3, as set forth in the general instructions thereto, with respect to the Registration Statement.: (jj) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. During the past five (5) years, neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (kk) ENVIRONMENTAL LAWS. The Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, except where the failure to comply would not result in a Material Adverse Change. The Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus. The Company is not currently aware that it will be required to make future material capital expenditures to comply with Environmental Laws. No property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, ET SEQ.), or otherwise designated as a contaminated site under applicable state or locaL law. (ll) ERISA COMPLIANCE. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. 10 Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each Selling Stockholder represents, warrants and covenants, severally and not jointly, to each Underwriter as follows: (a) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the (i) Custody Agreement signed by such Selling Stockholder and the Company, as custodian (the "Custodian"), relating to the deposit of the Selling Stockholder Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of Attorney appointing certain individuals named therein as such Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. Each Selling Stockholder agrees that the Selling Stockholder Shares to be sold by such Selling Stockholder on deposit with the Custodian are subject to the interests of the Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Custody Agreement, by any act of the Selling Stockholder, by operation of law, by death or incapacity of such Selling Stockholder or by the occurrence of any other event. To the maximum extent permitted by applicable law, if such Selling Stockholder should die or become incapacitated, or in any other event should occur, before the delivery of the Selling Stockholder Shares to be sold by such Selling Stockholder hereunder, the documents evidencing the Selling Stockholder Shares to be sold by such Selling Stockholder then on deposit with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian shall have received notice thereof. (c) TITLE TO SHARES TO BE SOLD. Such Selling Stockholder is the lawful owner of the Selling Stockholder Shares to be sold by such Selling Stockholder hereunder and upon sale and delivery of, and payment for, such Selling Stockholder Shares, as provided herein, such Selling Stockholder will convey good and valid title to such Selling Stockholder Shares, free and clear of 11 all liens, encumbrances, equities and claims whatsoever (except any that might have been created by or through any Underwriter). (d) ALL AUTHORIZATIONS OBTAINED. Such Selling Stockholder has, and on the First Closing Date and the Second Closing Date (as defined below) will have the legal right and power, and all authorizations and approvals required by law and under its charter or by-laws or other organizational documents, as applicable, to enter into this Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Selling Stockholder Shares which may be sold by such Selling Stockholder pursuant to this Agreement and to comply with its other obligations hereunder and thereunder. (e) NO FURTHER CONSENTS, AUTHORIZATION OR APPROVALS. No consent, approval, authorization or order of any court or governmental agency or body is required for (i) the execution and delivery by such Selling Stockholder of this Agreement or such Selling Stockholder's Custody Agreement and Power of Attorney or (ii) the consummation by such Selling Stockholder of the transactions contemplated herein, except such as may be required or have been obtained under the Securities Act and the rules and regulations of the NASD and such as may be required under the federal and provincial securities laws of Canada or the blue sky laws or any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters and such other approvals as have been obtained. (f) NON-CONTRAVENTION. Neither the sale of the Selling Stockholder Shares being sold by such Selling Stockholder nor the consummation of any other of the transactions herein contemplated by such Selling Stockholder or the fulfillment of the terms hereof by such Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any terms of any indenture or other agreement or instrument to which such Selling Stockholder is a party or bound, any law, judgment, order or decree applicable to such Selling Stockholder or any court or regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. (g) NO REGISTRATION OR OTHER SIMILAR RIGHTS. The Selling Stockholder Shares to be offered and sold by such Selling Stockholder under this Agreement is in full satisfaction of the registration rights of such Selling Stockholder to participate in the offering contemplated by the Registration Statement; or, in the alternative, such Selling Stockholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement. (h) NO PREEMPTIVE, CO-SALE OR OTHER RIGHTS. Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, right, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. 12 (i) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS. All information furnished by or on behalf of such Selling Stockholder in writing expressly for use in the Registration Statement and Prospectus is, and on the First Closing Date and the Second Closing Date (as defined below) will be, true, correct, and complete in all material respects, and does not, and on the First Closing Date and the Second Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information, in light of the circumstances in which such statement is made, not misleading. Such Selling Stockholder confirms as accurate the number of shares of Common Stock beneficially owned by such Selling Stockholder set forth opposite such Selling Stockholder's name in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Shares). (j) NO PRICE STABILIZATION OR MANIPULATION. Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (k) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or other similar fees or charges under federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the sale by such Selling Stockholder of the Shares being sold by such Selling Stockholder, except such as may be required or have been obtained under the Securities Act and the rules and regulations of the NASD and such as may be required under the federal and provincial securities laws of Canada or the blue sky laws or any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters and such other approvals as have been obtained. (l) DISTRIBUTION OF OFFERING MATERIALS BY THE SELLING STOCKHOLDERS. Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Stock. (m) CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES. (i) In addition to the other representations and warranties set forth in this Section 1B, Ronald R. Antinori further represents and warrants that (A) to the best of his knowledge, the representations and warranties of the Company contained in Section 1A hereof are true and correct, (B) he is familiar with the Registration Statement and the Prospectus and (C) he is not prompted to sell the Shares to be sold by such Selling Stockholder by any information concerning the Company which is not set forth in the Registration Statement and the Prospectus PROVIDED, HOWEVER, that the foregoing representations, warranties and covenants shall not apply to the extent, but only to the extent, they arise out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Selling Stockholders by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (ii) In addition to the other representations and warranties set forth in this Section 1B, each of Royce D. Brown, Wyn P. Lewis, James L. Fischer, and SAIC Venture Capital 13 Corporation, severally and not jointly, further represents and warrants that such Selling Stockholder is familiar with the Registration Statement and such Selling Stockholder is not aware that (A) any preliminary prospectus, as of its date, included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; or at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased by the Underwriters from such Selling Stockholder, the Registration Statement, or any amendments or supplements thereto, has included or will include any untrue statement of a material fact or omission of, or will omit to state, a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, or any amendments or supplements thereto, has included or will include any untrue statement of a material fact or omission of, or omit to state, a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (B) such Selling Stockholder is not prompted to sell the Shares to be sold by such Selling Stockholder by any information concerning the Company which is not set forth in the Registration Statement and the Prospectus PROVIDED, HOWEVER, that the foregoing representations, warranties and covenants shall not apply to the extent, but only to the extent, they arise out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Selling Stockholders by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). For the purposes of this Section 1B(m)(ii), the awareness of SAIC shall be limited to the awareness of [_____________]. Any certificate signed by or on behalf of any Selling Stockholder and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) THE FIRM SHARES. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, (i) the Company agrees to issue and sell to the several Underwriters an aggregate of 2,000,000 Firm Shares and (ii) the Selling Stockholders agree, severally and not jointly, to sell to the several Underwriters an aggregate of 2,000,000 Firm Shares, each Selling Stockholder selling the number of Firm Shares set forth opposite such Selling Stockholder's name on SCHEDULE B. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company and the Selling Stockholders the respective number of Firm Shares set forth opposite their names on SCHEDULE A. The purchase price per Firm Share to be paid by the several Underwriters to the Company and the Selling Stockholders shall be $[___] per share. (b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Selling Stockholders and the Representatives at 8:00 a.m. Dallas time, at the Dallas offices of Locke Liddell & Sapp 14 LLP (or at such other place as may be agreed upon among the Representatives and the Company), (i) if this Agreement is executed and delivered before 1:30 p.m., San Francisco time, on the third (3rd) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 p.m., San Francisco time, on the fourth (4th) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later than seven (7) full business days following the first day that Firm Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 2(g) and 3A(e) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. (c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Selling Stockholders, severally and not jointly, hereby grant an option to the several Underwriters to purchase up to an aggregate of 600,000 Option Shares from the Selling Stockholders at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised in whole or in part at any time or from time to time upon notice by the Representatives to the Selling Stockholders (with a copy to the Company), which notice may be given at any time within 30 days from the date of this Agreement. Each time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date," shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, (i) each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on SCHEDULE A opposite the name of such Underwriter bears to the total number of Firm Shares and (ii) each Selling Stockholder agrees, severally and not jointly, to sell the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be sold as the number of Option Shares set forth in SCHEDULE B opposite the name of such Selling Stockholder. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Selling Stockholders (with a copy to the Company). (d) PUBLIC OFFERING OF THE SHARES. The Representatives hereby advises the Company and the Selling Stockholders that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. 15 (e) PAYMENT FOR THE SHARES. (i) Payment for the Company Shares shall be made at the First Closing Date by wire transfer of immediately available funds to the order of the Company. Payment for the Selling Stockholder Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Custodian. (ii) It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. Robertson Stephens, individually and not as one of the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (iii) Each Selling Stockholder hereby agrees that (A) it will pay all income tax, capital gains tax, stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Selling Stockholder Shares, or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder and (B) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to pay such amounts for the account of such Selling Stockholder in accordance with the Custody Agreement. (f) DELIVERY OF THE SHARES. The Company and the Selling Stockholders shall deliver, or cause to be delivered, at the First Closing Date, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Selling Stockholders shall also deliver, or cause to be delivered, at the First Closing Date or the Second Closing Date, as the case may be, a credit representing the Option Shares to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00 noon on the second business day following the date the Firm Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. 16 SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its reasonable best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus, containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall promptly file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) SECURITIES ACT COMPLIANCE. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission and shall deliver a copy of (or summary of, if such comments were delivered orally) to the Representatives promptly upon their receipt, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its reasonable best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and, if issued, to obtain as soon as possible the withdrawal thereof. (c) BLUE SKY COMPLIANCE. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) other than the United States federal laws as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT MATTERS. The Company will comply with the Securities Act and the Exchange Act so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by 17 an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus, as so amended or supplemented, will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the reasonable opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto (including any documents incorporated or deemed incorporated by reference therein) as the Representatives may request. (f) INSURANCE. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby and (ii) cause Robertson Stephens to be added to such policy such that up to $500,000 of its expenses pursuant to section 7(a) shall be paid directly by such insurer and (iii) shall cause Robertson Stephens to be added as an additional insured to such policy in respect of the offering contemplated hereby. (g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which, in the Representatives' reasonable opinion, the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from the Representatives advising the Company to the effect set forth above, forthwith prepare, consult with the Representatives concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to the Representatives, responding to or commenting on such rumor, publication or event. (h) USE OF PROCEEDS. The Company shall apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) TRANSFER AGENT. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Shares. (j) EARNINGS STATEMENT. As soon as practicable but in any event no later than the 45th day following the end of the first fiscal quarter occurring after the first anniversary of the effective date of the Registration Statement, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) 18 covering the twelve-month period beginning after the date of the Registration Statement that satisfies the provisions of Section 11(a) of the Securities Act. (k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company will not offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other shares of Common Stock or any securities convertible into, or exchangeable for, Common Stock; provided, however, that the Company may (i) issue and sell shares of Common Stock pursuant to any director or employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus and described in the Prospectus so long as none of those shares may be transferred and the Company shall enter stop transfer instructions with its transfer agent and registrar against the transfer of any such shares of Common Stock and (ii) the Company may issue shares of Common Stock issuable upon the conversion of securities or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus. These restrictions terminate the earlier of (A) the date that is 90 days after the Registration Statement is declared effective by the Commission or (B) the date on which the Company receives written notice from Robertson Stephens that the offering has been postponed, delayed or cancelled. (m) FUTURE REPORTS TO THE REPRESENTATIVEs. During the period of five years hereafter the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the Nasdaq National Market or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder further covenants and agrees with each Underwriter: (a) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. Such Selling Stockholder will abide by the terms and conditions of the lock-up agreements substantially in the form of Exhibit A hereto, during the Lock-Up Period. (b) DELIVERY OF FORMS W-8 AND W-9. To deliver to the Representatives prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Stockholder is a non-United States person) or Form W-9 (if the Selling Stockholder is a United States person). 19 (c) NOTIFICATION OF UNTRUE STATEMENTS, ETC. If, at any time prior to the date on which the distribution of the Shares as contemplated herein and in the Prospectus has been completed, as determined by the Representatives, such Selling Stockholder has knowledge of the occurrence of any event as a result of which the Prospectus or the Registration Statement, in each case as then amended or supplemented, would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, such Selling Stockholder will promptly notify the Company and the Representatives. SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Firm Shares as provided herein on the First Closing Date and, with respect to the Option Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Selling Stockholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION FROM THE NASD. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, any Selling Stockholder or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel; and the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issuance, sale and delivery of the Shares, shall have been reasonably satisfactory to counsel for the Underwriters, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) NO MATERIAL ADVERSE CHANGE. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change which, in the Representatives' sole judgment, is material and adverse and that makes it, in the Representatives' sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. 20 (d) OPINION OF COUNSEL FOR THE COMPANY. (i) The Representatives shall have received on the First Closing Date and the Second Closing Date, as the case may be, an opinion of Locke Liddell & Sapp LLP, counsel for the Company, in form reasonably satisfactory to the Representatives, dated the First Closing Date or the Second Closing Date, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. (ii) Counsel rendering the opinion REQUIRED IN SUBSECTION (I) ABOVE may rely as to questions of law not involving the laws of the United States or the States of Delaware and Texas upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to the Representatives and to Underwriters' Counsel. (e) OPINION OF COUNSEL FOR THE UNDERWRITERS. The Representatives shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Alston & Bird LLP, in form and substance reasonably satisfactory to the Representatives. The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) ACCOUNTANTS' COMFORT LETTER. The Representatives shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the Exchange Act and the applicable published rules and regulations of the Commission thereunder, as the case may be, and based upon the procedures described in such letter delivered to the Representatives concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four (4) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in the Representatives' sole judgment, is material and adverse and that makes it, in the Representatives' sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from the Representatives shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (A) represent, to 21 the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the Exchange Act, as the case may be, (B) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company and related consolidated statements of operations, stockholders' equity, and cash flows for the periods that are included in the Registration Statement (C) state that Ernst & Young LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as described in SAS 71 on the financial statements for each of the quarters for which financial information is provided in the Registration Statement (the "Quarter Financial Statements"), (D) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented and (E) address other matters agreed upon by Ernst & Young LLP and the Representatives. In addition, the Representatives shall have received from Ernst & Young LLP a letter addressed to the Company and made available to the Representatives for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of January 31, 2000, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) OFFICERS' CERTIFICATE. The Representatives shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and the Representatives shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto contained all material information required to be included therein by the Securities Act, and in all material respects conformed to the requirements of the Securities Act, the Registration Statement, and any amendments or supplements thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not 22 misleading; the Prospectus, and any amendments or supplements thereto did not and does not include any untrue statement of a material fact or omit to state or material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (A) any Material Adverse Change, (B) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (C) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (D) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (E) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (F) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a Material Adverse Effect. (h) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The Company shall have obtained and delivered to the Representatives an agreement substantially in the form of EXHIBIT A attached hereto from each officer and director of the Company, each Selling Stockholder and each beneficial owner of five or more percent of the outstanding issued share capital of the Company. (i) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. The Representatives shall have received on the First Closing Date and the Second Closing Date, as the case may be, an opinion of counsel for each of the Selling Stockholders substantially in the form of EXHIBIT B hereto. In rendering such opinion, such counsel may rely as to questions of law not involving the laws of the United States or States of Delaware and Texas upon opinions of local counsel and as to questions of fact upon representations or certificates of the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of governmental officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy of any material misstatement or inaccuracy in any such opinion, representation or certificate so relied upon shall be delivered to the Representatives of the Underwriters, and to Underwriters' Counsel. (j) SELLING STOCKHOLDERS' CERTIFICATE. On each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives shall receive a written certificate executed by the Attorney-in-Fact of each Selling Stockholder, dated as of such Closing Date, to the effect that: 23 (i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on such Closing Date; or (ii) Such Selling Stockholder has not complied in any material respect with any obligation or failed to satisfy in any material respect any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to such Closing Date. (k) SELLING STOCKHOLDERS' DOCUMENTS. At least three business days prior to the date hereof, the Company and the Selling Stockholders shall have furnished for review by the Representatives copies of the Powers of Attorney and Custody Agreements executed by each of the Selling Stockholders and such further information, certificates and documents as the Representatives may reasonably request. (l) STOCK EXCHANGE LISTING. The Shares shall have been listed or approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (m) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall have complied with the provisions of Sections 2(g) and 3A(e) hereof with respect to the furnishing of Prospectuses. (n) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company and the Selling Stockholders at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. SECTION 5. PAYMENT OF EXPENSES. The Company and the Selling Stockholders, jointly and severally, agree to pay in such proportions as they may agree upon among themselves all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution 24 of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD review and approval of the Underwriters' participation in the offering and distribution of the Shares, (viii) the fees and expenses associated with including the Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the travel and accommodation of the Company's employees on the "roadshow", and (x) all other fees, costs and expenses referred to in Item 14 of Part II of the Registration Statement. Except as provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. The Selling Stockholders further agree with each Underwriter to pay (directly or by reimbursement) all fees and expenses incident to the performance of their obligations under this Agreement which are not otherwise specifically provided for herein, including but not limited to (i) fees and expenses of counsel and other advisors for such Selling Stockholders, (ii) fees and expenses of the Custodian and (iii) expenses, underwriting discounts and commissions and taxes incident to the sale and delivery of the Selling Stockholder Shares (which amounts, if any, may be deducted by the Custodian under the provisions of Section 2 of this Agreement). This Section 5 shall not affect or modify any separate, valid agreement relating to the allocation of payment of expenses between the Company, on the one hand, and the Selling Stockholders, on the other hand. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 8, Section 9 or Section 15, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel and accommodation expenses, postage, facsimile and telephone charges. 25 SECTION 7. INDEMNIFICATION AND CONTRIBUTION. (a) INDEMNIFICATION OF THE UNDERWRITERS. (i) The Company agrees to: (A) indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act, against any loss, claim, damage or liability, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage or liability (or actions in respect thereof as contemplated below) arises out of or is based: (1) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (2) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (3) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (4) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (5) upon any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials provided by the Company or based upon written information furnished by or on behalf of the Company, including, without limitation, slides, videos, films or tape recordings, used in connection with the marketing of the Shares or (6) upon any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (1), (2), (3), (4) or (5) above, 26 provided that the Company shall not be liable under this clause (6) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and (B) reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by Robertson Stephens) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; PROVIDED, HOWEVER, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company and the Principal Selling Stockholder may otherwise have. (ii) Each of the Selling Stockholders, severally and not jointly, agrees to: (A) indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage or liability, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage or liability (or actions in respect thereof as contemplated below) arises out of or is based: (1) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to 27 Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (2) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (3) in whole or in part upon any inaccuracy in the representations and warranties of such Selling Stockholder contained herein; or (4) in whole or in part upon any failure of such Selling Stockholder to perform its or his obligations hereunder; and (B) reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by Robertson Stephens) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; PROVIDED, HOWEVER, that in the case of subparagraphs (1) and (2) of this Section 7(a)(ii) the obligations under this Section 7(a)(ii) shall apply to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Stockholder directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof; and PROVIDED, FURTHER, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Other Selling Stockholders may otherwise have. (b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS, OFFICERS AND SELLING STOCKHOLDERS. (A) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholders and each person, if any, who 28 controls the Company or any Selling Stockholder within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage or liability, as incurred, to which the Company, or any such director, officer, Selling Stockholder or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage or liability (or actions in respect thereof as contemplated below) arises out of or is based: (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of such Underwriter contained herein; and (B) reimburse the Company, or any such director, officer, Selling Stockholder or controlling person for any and all expenses (including the fees and disbursements of counsel) as such expenses are reasonably incurred by the Company, or any such director, officer, Selling Stockholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that in the case of subparagraphs (i) and (ii) of this Section 7(b)(A) the obligations under this Section 7(b) shall apply to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter directly or through such Underwriter's representatives, specifically for use in the preparation thereof. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) INFORMATION PROVIDED BY THE UNDERWRITERS. The Company, each of the Selling Stockholders, and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Securities Act or the Exchange Act, hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or 29 supplement thereto) are the statements set forth in the table in the first paragraph, the second paragraph and in the paragraphs entitled "Stabilization" and "Regulation M/Passive Market Making" under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. (d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof. The omission, delay or failure to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise under the indemnity agreement contained in this Section 7 to the extent it is not prejudiced as a proximate result of such omission, delay or failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (Robertson Stephens in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party; provided, that in no event shall the indemnifying party be liable to such indemnified party for any legal fees or expenses in excess of reasonable legal fees and expenses. (e) SETTLEMENTS. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, 30 claim, damage, liability or expense by reason of such settlement or judgment in accordance with this Section 7. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (A) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (B) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) CONTRIBUTION. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by such party on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the such party on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each Selling Stockholder and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or 31 contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than forty-five (45) days of invoice to the indemnifying party. (h) SURVIVAL. The indemnity and contribution agreements contained in this Section 7 and the representation and warranties set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, any Selling Stockholder or any person controlling the Company or any Selling Stockholder, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) ACKNOWLEDGEMENTS OF PARTIES. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. (j) Notwithstanding the foregoing provisions of this Section 7, with respect to any claims for indemnification or contribution by any of the Underwriters that are asserted or made against both the Company under this Section 7 and any Selling Stockholders under this Section 7, the Underwriters agree to first exhaust their remedies against the Company before proceeding (only as to the enforcement of remedies available to them and not as to the initiation of any action) against such Selling Stockholders. Notwithstanding the foregoing provisions of this Section 7, the liability of each Selling Stockholder under the representations, warranties and agreements contained herein and under the indemnity and contribution agreements contained in the provisions of this Section 7 shall be limited to an amount equal to the public offering price of the Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters minus the amount of the underwriting discount paid thereon to the Underwriters by such Selling Stockholder. The Company and such Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of shares of Common Stock which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Shares set forth opposite their respective names on SCHEDULE A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may 32 be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 5, Section 6 and Section 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 9. TERMINATION OF THIS AGREEMENT. This Agreement may be terminated by the Representatives by notice given to the Company and the Selling Stockholders if (a) at any time after the execution and delivery of this Agreement and prior to the First Closing Date (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, Inc. or trading in securities generally on either the Nasdaq National Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the Nasdaq Stock Market, Inc.; (ii) a general banking moratorium shall have been declared by any of federal, New York, Delaware, Texas or California governmental authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the reasonable judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Shares in the manner and on the terms contemplated in the Prospectus; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 9 shall be without liability on the part of (x) the Company or the Selling Stockholders to any Underwriter, except that the Company and the Selling Stockholders shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (y) any Underwriter to the Company or any Selling Stockholders or any person controlling the Company or any Selling Stockholders, or (z) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. 33 SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company or any person controlling the Company, of its officers, of the Selling Stockholders or any person controlling any Selling Stockholder and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, or the Selling Stockholders, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. SECTION 11. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: ROBERTSON STEPHENS, INC. 555 California Street San Francisco, California 94104 Facsimile: (415) 676-2675 Attention: General Counsel With a copy (which shall not constitute notice) to: ALSTON & BIRD LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Facsimile: (404) 881-4777 Attention: M. Hill Jeffries If to the Company: CARREKER CORPORATION 14001 North Dallas Parkway Suite 100 Dallas, Texas 75240 Facsimile: [___] Attention: [___] If to the Selling Stockholders: CARREKER CORPORATION, as Custodian 14001 North Dallas Parkway Suite 100 Dallas, Texas 75240 Facsimile: [___] Attention: [___] 34 Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 8 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 14. GOVERNING LAW PROVISIONS. (a) GOVERNING LAW. This agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed in such state. (b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the personal jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. SECTION 15. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Shares to be sold and delivered by such Selling Stockholders at the First Closing Date pursuant to this Agreement, then the Underwriters may at their option, by written 35 notice from the Representatives to the Company and the Selling Stockholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 5, 6, and 7 hereof, the Company or the Selling Stockholders, or (ii) purchase the shares which the Company and other Selling Stockholders have agreed to sell and deliver in accordance with the terms hereof. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Shares to be sold and delivered by such Selling Stockholders pursuant to this Agreement at the First Closing Date or the Second Closing Date, then the Underwriters shall have the right, by written notice from the Representatives to the Company and the Selling Stockholders, to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. SECTION 16. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Custodian the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. 36 Very truly yours, CARREKER CORPORATION By: ------------------------------------------ Name: ----------------------------------- Title: ----------------------------------- SELLING STOCKHOLDERS By: ------------------------------------------ Attorney-in-fact for the Selling Stockholders named in Schedule B hereto By: ------------------------------------------ 37 The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. ROBERTSON STEPHENS, INC. CHASE SECURITIES INC. U.S. BANCORP PIPER JAFFRAY INC. On their behalf and on behalf of each of the several underwriters named in SCHEDULE A hereto. BY ROBERTSON STEPHENS, INC. By: ------------------------------------ Mitch Whiteford 38 SCHEDULE A
NUMBER OF FIRM SHARES UNDERWRITERS TO BE PURCHASED - ----------------------------------------------------------------------------------- ROBERTSON STEPHENS, INC...................................... [___] CHASE SECURITIES INC......................................... [___] U.S. BANCORP PIPER JAFFRAY INC............................... [___] Total............................................... 4,000,000
S-A SCHEDULE B
MAXIMUM NUMBER OF OPTION NUMBER OF FIRM SHARES TO SHARES SELLING STOCKHOLDER BE SOLD TO BE SOLD - ------------------------------------------------------------------------------------------------------ John D. Carreker, Jr. [address] Attention: [___]........................................ 1,018,000 210,000 Ronald R. Antinori [address] Attention: [___]........................................ 618,500 130,000 SAIC Venture Capital Corporation [address] Attention: [___]........................................ 220,500 183,000 Royce D. Brown [address] Attention: [___]........................................ 69,000 31,000 Wyn P. Lewis [address] Attention: [___]........................................ 54,000 46,000 James L. Fischer [address] Attention: [___]........................................ 20,000 0 Total:......................................... 2,000,000 600,000 =========== ===========
EX-10.1 3 a2027381zex-10_1.txt EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered into as of the 6th day of October, 2000, between Carreker Corporation, a Delaware corporation (the "COMPANY"), and Michael D. Hansen ("MR. HANSEN"). RECITALS Mr. Hansen agreed to accept employment with the Company pursuant to a letter agreement between Mr. Hansen and the Company dated September 21, 2000. This Agreement sets forth in definitive form the terms of Mr. Hansen's employment by the Company. As such, this Agreement supersedes the letter agreement in its entirety. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements of the parties contained herein, the Company and Mr. Hansen hereby agree as follows: 1. EMPLOYMENT. The Company will employ Mr. Hansen and Mr. Hansen accepts employment with the Company for a period of three (3) years beginning October 6, 2000 (the "INITIAL PERIOD"). This Agreement shall automatically renew for successive one (1) year terms ("Renewal Periods") unless either party notifies the other six (6) months in advance of the expiration of the Initial or any Renewal Period. Mr. Hansen's employment may continue after the Initial or any Renewal Period but he will then be deemed an employee at will under Texas law. The obligations of the Company and Mr. Hansen set forth in that certain "Noncompetition, Property Rights and Trade Secrets Agreement" and in that certain "Confidentiality Agreement" (each as defined in Section 8) (referring to noncompetition, intellectual property rights and confidentiality, respectively) and in Section 9 (referring to termination) will survive termination of Mr. Hansen's employment, regardless of reason, as provided in such agreements. 2. BUSINESS TRAVEL. Mr. Hansen acknowledges and agrees that the primary location of his employment will be in Dallas, Texas or its environs, that he will spend substantial time in Dallas, Texas and other locations where the Company transacts (or proposes to transact) business and undertake such other business travel as is reasonably required in the discharge of his duties set forth below and for the successful operation of the Company. 3. DUTIES. Mr. Hansen will be employed initially as Executive Vice President and Managing Director, reporting directly to J.D. Carreker, Jr., Chairman and Chief Executive Officer. Mr. Hansen shall be responsible for formulating and implementing e-commerce strategy; conducting the role of an Executive Relationship Manager for a selected set of accounts/relationships; representing the Company in identified community efforts/activities; participating in the leadership and direction of the Company; and participating as a member of the Policy Committee and Administration. Mr. Hansen shall have such authority as Mr. Carreker or the Policy Committee reasonably determine is necessary to perform his duties. EMPLOYMENT AGREEMENT - Page 1 Mr. Hansen agrees that, to the best of his ability and experience, he will at all times conscientiously perform such duties and obligations as may be assigned to him, consistent with his position, by the Company's Chief Executive Officer or the Company's Policy Committee. 4. FULL-TIME EMPLOYMENT. Mr. Hansen's employment will be on a full-time basis, in accordance with standard employee policies of the Company, including the rules of any employee handbook and all other rules and policies the Company might announce from time to time. In addition to such restrictions as are set forth in the Noncompetition, Property Rights and Trade Secrets Agreement referenced herein, Mr. Hansen will not engage in any other business or render any commercial or professional services, directly or indirectly, to any other person or organization, whether for compensation or otherwise, provided that Mr. Hansen may (a) provide incidental assistance to family members on matters of family business; or (b) engage in charitable activities on behalf of civic, educational or other nonprofit organizations; (c) serve with or without compensation on advisory boards of directors; and (d) serve with or without compensation on non-competitor boards of directors; provided in each case that such activities do not conflict with or interfere with Mr. Hansen's normal full-time and first priority obligations to the Company, and provided further that with respect to service on boards of directors of any type, Mr. Hansen shall obtain prior written consent of the Chairman of the Company, which consent shall not be unreasonably withheld or delayed. Mr. Hansen may make personal investments in non-publicly traded corporations, partnerships or other entities that, to the knowledge of the Company, are not at the time of such investment engaged in any business activities competitive with the Company. Notwithstanding anything to the contrary contained in this Agreement, Mr. Hansen may make personal investments in publicly traded corporations regardless of the business they are engaged in, provided that Mr. Hansen does not at any time own in excess of two percent (2%) of the issued and outstanding stock of any such corporation. 5. SALARY; POTENTIAL INCENTIVE COMPENSATION; STOCK OPTIONS. (a) SALARY AND POTENTIAL INCENTIVE COMPENSATION. Mr. Hansen's annual base salary for the Initial or any Renewal Period will be $340,000 unless and until increased as set forth below. All base salary will be payable on the Company's regular payroll dates, less required withholdings. At least annually, Mr. Hansen's annual base salary shall be reviewed by the Chairman and Chief Executive Officer and may, in his sole discretion, be increased from time to time during the Initial or any Renewal Period in light of merit, cost of living changes, and base compensation levels for similar executive positions in the Company's industry. (b) COMPANY BONUS PLAN. The Company bonus plan operates on a February 1 through January 31 time frame and will provide Mr. Hansen the opportunity to earn a bonus when the Company meets certain profitability goals. The bonus for Mr. Hansen for the period from October 6, 2000 through January 31, 2001 shall equal 70% of base salary prorated for a 4 month period representing that portion of the 2000 fiscal year during which he was employed, provided Mr. Hansen was actually employed during such period. Such bonus shall be paid concurrently with the Company's payment of bonuses to other Company executives but no EMPLOYMENT AGREEMENT - Page 2 later than June 15, 2001. The target bonus for Mr. Hansen's position for subsequent periods is set at 70% of base salary. The Chairman and Chief Executive Officer will determine the actual amount received. It is possible to receive more than the target percentage based on the Company exceeding the Incentive Plan and at the discretion of the Chairman and Chief Executive Officer. Mr. Hansen acknowledges that the Company's Board of Directors has complete and sole discretion (exercisable in good faith) to establish and revise any and all of the Company's bonus plans and payout levels; provided, however, that no such action may retroactively alter or limit the amount of any incentive compensation actually and previously earned by Mr. Hansen. (c) STOCK OPTIONS. A recommendation will be presented to the Compensation Committee of the Board of Directors for Mr. Hansen to receive a non-qualified stock option of 110,000 shares of common stock. The recommended vesting will be a three (3) year schedule, 33.3% vesting for each year of continuous service and employment. The per share option price will be determined as market value (closing price) on the day of grant. Every effort will be made to coincide the date of grant with Mr. Hansen's first day of work. If Mr. Hansen should receive stock options on a vesting schedule, all unvested options shall vest immediately upon the occurrence of any of the following: a Change of Control (as defined below), the termination by the Company of Mr. Hansen's employment without cause, Mr. Hansen's resignation pursuant to Section 9(b) of this Agreement, Mr. Hansen's permanent disability, or Mr. Hansen's death. Each such option shall be issued under and pursuant to the Company's Amended and Restated 1994 Long-Term Incentive Plan, with terms and conditions as provided therein except as expressly provided herein. Mr. Hansen will also be eligible to receive such other options that the Company's Board of Directors shall, in its sole discretion, hereafter determine to grant to him. For purposes of this Agreement, a Change of Control shall have occurred if, as the result of a completed tender offer, merger, consolidation, sale of assets, acquisition of shares or contested election, or any combination of the foregoing transactions, (a) any person (other than J.D. Carreker, his heirs, Crow Family Partnership, L.P., or affiliates of any of them) shall become the owner, beneficially or of record, of more than fifty percent (50%) of the aggregate voting power of the Company, or (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election to such board or whose nomination for election by the shareholders of the Company was approved by the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease to constitute a majority of the Board of Directors of the Company, or (c) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; PROVIDED, HOWEVER, that a merger or consolidation in which the Company is the surviving entity (other than as a wholly owned EMPLOYMENT AGREEMENT - Page 3 subsidiary of another entity) and in which the Board of the Company after giving effect to the merger or consolidation is comprised of a majority of members who are either (i) directors of the Company immediately preceding the merger or consolidation, or (ii) appointed to the Board of the Company by the Company (or its Board) as an integral part of such merger or consolidation, shall not constitute a Change in Control of the Company; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a dividend in kind or spin-off type transaction, directly or indirectly, of such assets to the stockholders of the Company. 6. BENEFITS. Mr. Hansen will also be entitled to insurance, vacation and other employee benefits commensurate with his position (and reasonably consistent with the benefits afforded other executive officers of the Company) in accordance with the Company's standard employee policies in effect from time to time. Mr. Hansen acknowledges receipt of a summary of the Company's standard employee benefits policies in effect as of the date of this Agreement. 7. REIMBURSEMENT OF SPECIAL EXPENSES AND NORMAL BUSINESS EXPENSES. The Company agrees to reimburse Mr. Hansen's out-of-pocket expenses for initiation fees, special assessments and monthly dues to a mutually agreed upon country club for entertainment and networking. The Company will, but in accordance with the Company's policies in effect from time to time, reimburse Mr. Hansen for all other out-of-pocket reasonable business expenses incurred by Mr. Hansen in connection with the performance of his duties under this Agreement, upon submission of the required documentation required pursuant to the Company's standard policies and record-keeping procedures. 8. INTELLECTUAL PROPERTY. Simultaneously with the execution of this Agreement and as a condition of his employment, Mr. Hansen agrees to execute and deliver (if he has not done so already) that certain Noncompetition, Property Rights and Trade Secrets Agreement between him and the Company, a copy of which is attached to this Agreement as Attachment A, and that certain Confidentiality Agreement between him and the Company, a copy of which is attached to this Agreement as Attachment B. 9. TERMINATION. (a) THE COMPANY. Notwithstanding Section 1, the Company may terminate Mr. Hansen's employment at any time during the Initial or any Renewal Period with or without Cause (as defined below), provided that the Company shall provide Mr. Hansen thirty (30) days written notice for termination without Cause. The Company shall not be required to provide notice for a termination with Cause. EMPLOYMENT AGREEMENT - Page 4 (b) BY MR. HANSEN. During the Initial or any Renewal Period, Mr. Hansen may terminate his employment upon thirty (30) days written notice to the Company if he has "Good Reason" (as defined herein) or if the Company is in material breach of this Agreement; provided, however, that such material breach shall permit such termination only if the Company shall have been provided at least 30 days' prior notice and opportunity to cure such material breach. A failure by the Company to pay to Mr. Hansen any undisputed amounts due under this Agreement in accordance with the terms hereof shall be deemed a material breach. Any such termination for Good Reason or material breach shall be deemed a termination by the Company of Mr. Hansen's employment under Section 9(b) without cause, for which Mr. Hansen shall have the remedy set forth in Section 9(c). As used herein, "Good Reason" means the occurrence, without Mr. Hansen's prior consent, of any of the following: (i) the assignment to Mr. Hansen of any duties inconsistent in any material respect with an EVP or higher position; or (ii) the Company's or any subsidiary's requiring Mr. Hansen to perform services at any location outside the Dallas, Texas metropolitan area, other than reasonable business travel contemplated by Section 2 hereof. (c) REMEDY. Upon termination of Mr. Hansen's employment during the Initial or any Renewal Period without Cause pursuant to Section 9(a) or pursuant to Section 9(b) only (at which time he shall cease to be an employee of the Company for all purposes), the Company will (i) pay to Mr. Hansen on the Company's regular payroll dates and less required withholdings, the base salary at the rate paid to Mr. Hansen immediately prior to such termination, for the remainder of the Initial Period or for 12 months, whichever is longer; (ii) pay to Mr. Hansen annual bonuses for the remainder of the Initial Period or 12 months, whichever is longer, at such time as the Company pays bonuses, equal to the bonus to which he would have been entitled under Section 5(b) had (x) he not been terminated and (y) the Company's profitability through the fiscal quarter ended immediately prior to the effective date of termination continued at the same rate throughout the applicable bonus period; and (iii) provide Mr. Hansen with the opportunity to purchase major medical health and dental insurance reasonably comparable to employee benefits then provided to the Company's senior officers in accordance with the Consolidated Omnibus Benefit Reconciliation Act of 1985 ("COBRA"). Further, to the extent Mr. Hansen would otherwise be entitled to a bonus under Section 5(b), the Company will pay Mr. Hansen a prorated bonus, for that portion of the relevant fiscal year during which he worked, at such time as the Company pays bonuses, or portions thereof, to other senior executives of the Company. The Company's obligation to reimburse Mr. Hansen's monthly country club dues and related fees and business expenses (to the extent incurred following the effective date of his termination) as provided in Section 7 shall not survive termination. If the Company terminates Mr. Hansen's employment with Cause, none of the foregoing post-termination payments or benefits, or any other post-termination or severance payments or benefits, shall be made or provided to Mr. Hansen. EMPLOYMENT AGREEMENT - Page 5 For purposes of this Agreement, the term "Cause" shall mean conduct involving one or more of the following as determined by the Company in its reasonable discretion: (i) the substantial, material and continuing failure of Mr. Hansen, after reasonable notice thereof, to render services to the Company or any subsidiary in accordance with the terms or requirements of this Agreement other than as a result of disability; (ii) disloyalty, gross negligence, willful misconduct, dishonesty or breach of fiduciary duty to the Company or any subsidiary; (iiiiv) the commission of an act of embezzlement or fraud; (iv) deliberate disregard of the rules or policies of the Company that results in direct or indirect material loss, damage or injury to the Company or any subsidiary; (vi) breach of the Company's policies concerning harassment, discrimination, and offensive or disruptive behavior; (vii) the unauthorized and intentional disclosure of any trade secret or confidential information of the Company or any subsidiary; (viii) the commission of an act that constitutes unfair competition with the Company or any subsidiary or which induces any customer or supplier to terminate a contract with the Company or any subsidiary, or that otherwise results in direct or indirect material loss, damage or injury to the Company or any subsidiary; (viiix) habitual drunkenness or an addiction to drugs; or (viiix) commission of a crime of moral turpitude. The Company's obligation to make payments (and provide COBRA benefits), if any, pursuant to this Section 9(c) is in lieu of any damages and any other payment or other benefits that the Company might otherwise be obligated to pay Mr. Hansen as a result of the termination of Mr. Hansen's employment with the Company (including for claims of employment discrimination, wrongful termination or breach of this Section 9). The Company and Mr. Hansen agree that, in view of the nature of the issues likely to arise in the event of such termination, it would be impracticable or extremely difficult to fix the actual damages resulting from such termination and proving actual damages, causation and foreseeability in the case of such termination would be costly, inconvenient and difficult. In requiring the Company to make the payments (and provide the COBRA benefits) as set forth herein, it is the intent of the parties to provide, as of the date of this Agreement, for a liquidated amount of damages to be paid by the Company to Mr. Hansen. Such liquidated amount shall be deemed full and adequate damages for such termination and is not intended by either party to be a penalty. (d) UPON DEATH. Except as otherwise provided for in this Agreement, if Mr. Hansen dies during the term of this Agreement, then the Company will pay his estate an amount equal to all earned and unpaid salary, prorated bonuses (if any) for that portion of the year of his death during which he worked, other bonuses (if any) accrued and payable, and accrued benefits, all as of the date of his death. (e) SURVIVAL. Mr. Hansen's and the Company's obligations under Sections 8, 9 and 10(h) of this Agreement and, to the extent that any allowable expenses have not been reimbursed as of the effective date of such termination, under Section 7 of this Agreement, will survive the termination of Mr. Hansen's employment with the Company. 10. MISCELLANEOUS. EMPLOYMENT AGREEMENT - Page 6 (a) NOTICES. Any and all notices permitted or required to be given under this Agreement must be in writing. Notices will be deemed given (i) when personally received or when sent by facsimile transmission (to the receiving party's facsimile number), (ii) on the first business day after having been sent by commercial overnight courier with written verification of receipt, or (iii) on the third business day after having been sent by registered or certified mail from a location on the United States mainland, return receipt requested, postage prepaid, whichever occurs first, at the address set forth below or at any new address, notice of which will have been given in accordance with this Section 10(a): (i) If to the Company: Carreker Corporation 4055 Valley View Lane, Suite 1000 Dallas, Texas 75244 Attention: Chief Executive Officer Phone: (972) 458-1981 Fax: (972) 661-5158 (ii) If to Mr. Hansen: Mr. Michael D. Hansen 4430 Belclaire Avenue Dallas, Texas 75205 Phone: (214) 213-7466 (b) AMENDMENTS. This Agreement, including the Attachments hereto, contains the entire agreement and supersedes and replaces all prior agreements between the Company and Mr. Hansen concerning Mr. Hansen's employment and employment benefits (including, without limitation, the letter agreement referenced in the recitals to this Agreement). This Agreement may not be changed or modified in whole or in part except by a writing signed by the party against whom enforcement of the change or modifications is sought. (c) SUCCESSORS AND ASSIGNS. This Agreement will not be assignable by either Mr. Hansen or the Company, except that the rights and obligations of the Company under this Agreement may be assigned to a corporation which succeeds the Company as the result of a merger or other corporate reorganization and which continues the business of the Company, or a subsidiary of the Company, provided that the Company guarantees the performance by such assignee of the Company's obligations hereunder. (d) GOVERNING LAW. The laws of the State of Texas (without regard to its choice of law principles that might apply the law of another jurisdiction) will govern the validity of this Agreement, the construction of its terms, the interpretation and enforcement of the rights and duties of the parties, and any other issues that might arise with respect to hereto. (e) NO WAIVER. The failure of any party to enforce any of the provisions of this Agreement will not be construed to be a waiver of the right of such party thereafter to enforce such provisions. The waiver by any party of the right to enforce any of the provisions of this EMPLOYMENT AGREEMENT - Page 7 Agreement on any occasion will not be construed to be a waiver of the right of such party to enforce such provisions on any other occasion. (f) SEVERABILITY. Mr. Hansen and the Company recognize that the limitations contained in this Agreement are reasonably and properly required for the adequate protection of the interests of the Company. If for any reason a court of competent jurisdiction or an arbitrator in a binding arbitration proceeding finds any provision of this Agreement, or the application thereof, to be unenforceable, then the remaining provisions of this Agreement will be interpreted so as best to reasonably effect the intent of the parties. The parties further agree that the court or arbitrator shall replace any such invalid or unenforceable provisions with valid and enforceable provisions designed to achieve, to the extent possible, the business purposes and intent of such unenforceable provisions. (g) COUNTERPARTS. This Agreement may be executed in counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, bear the signatures of both parties reflected hereon as signatories. (h) DISPUTE RESOLUTION. (i) ARBITRATION OF DISPUTES. Any dispute under this Agreement shall be resolved by arbitration in Dallas, Texas and, except as herein specifically stated, in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA Rules") then in effect, except that depositions and documentary discovery shall be freely permitted. However, in all events, these arbitration provisions shall govern over any conflicting rules that may now or hereafter be contained in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction over the subject matter thereof. The arbitrator shall have the authority to grant any equitable and legal remedies that would be available in any judicial proceeding instituted to resolve such dispute, and may, in his or her discretion, award attorneys' fees, expenses and costs. (ii) COMPENSATION OF ARBITRATOR. Any such arbitration will be conducted before a single arbitrator who will be compensated for his or her services at a rate to be determined by the parties or by the American Arbitration Association, but based upon reasonable hourly or daily consulting rates for the arbitrator if the parties are not able to agree upon his or her rate of compensation. (iii) SELECTION OF ARBITRATOR. The American Arbitration Association will have the authority to select an arbitrator from a list of arbitrators who are lawyers familiar with Texas contract law; provided, however, that such lawyers cannot work for a firm then performing services for either party, that each party will have the opportunity to make such reasonable objection to any of the arbitrators listed as such party may wish and that the American Arbitration Association will select the arbitrator from the list of arbitrators as to whom neither EMPLOYMENT AGREEMENT - Page 8 party makes any such objection. If the foregoing procedure is not followed, then each party will choose one person from the list of arbitrators provided by the American Arbitration Association (provided that such person does not have a conflict of interest), and the two persons so selected will select from the list provided by the American Arbitration Association the person who will act as the arbitrator. (iv) PAYMENT OF COSTS. The Company and Mr. Hansen will each pay 50% of the initial compensation to be paid to the arbitrator in any such arbitration and 50% of the costs of transcripts and other normal and regular expenses of the arbitration proceedings. (v) BURDEN OF PROOF. For any dispute submitted to arbitration, the burden of proof will be as it would be if the claim were litigated in a Texas judicial proceeding. (vi) AWARD. Upon the conclusion of any arbitration proceedings hereunder, the arbitrator will render findings of fact and conclusions of law and a written opinion setting forth the basis and reasons for any decision reached and will deliver such documents to each party to this Agreement along with a signed copy of the award. (vii) TERMS OF ARBITRATION. The arbitrator chosen in accordance with these provisions will not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the provisions of this Agreement. (viii) NATURE OF REMEDY. Except as specifically otherwise provided below, arbitration will be the sole and exclusive remedy of the parties for any dispute arising out of this Agreement. (ix) EQUITABLE REMEDY. Notwithstanding the provisions of this Section 10(h) and the arbitration provided for herein, actions initiated or maintained by the parties for injunctive or similar equitable relief are not subject to arbitration, and may be brought by the parties in any court that has jurisdiction, and, should the party bringing any such action prevail, all costs and expenses (including legal fees) shall be borne by the party against whom such action was brought. (i) CONSTRUCTION. This Agreement is a result of arms length negotiation between the parties during which each has been represented by counsel of its choice. Its terms shall not be construed for or against either party. EMPLOYMENT AGREEMENT - Page 9 IN WITNESS WHEREOF, the parties have executed this Employment Agreement to be effective as of the date first set forth above. CARREKER CORPORATION EMPLOYEE By: /s/ John D. Carreker, Jr. /s/ Michael D. Hansen ------------------------- --------------------- John D. Carreker, Jr. Michael D. Hansen Chairman of the Board and Chief Executive Officer EMPLOYMENT AGREEMENT - Page 10 EX-23.1 4 a2027381zex-23_1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated March 7, 2000, in Pre-Effective Amendment No. 1 to the Registration Statement (Form S-3 No. 333-47160) and related Prospectus of Carreker Corporation (formerly Carreker-Antinori, Inc.) for the Registration of 4,000,000 shares of its common stock. /s/ Ernst & Young LLP Dallas, Texas October 26, 2000 -----END PRIVACY-ENHANCED MESSAGE-----