-----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, GQFDHMJgBXeHTEHTsI647J9f6fEGu60avpuV+QL4OJPmSXCNH1ItX7xlQvdYkF33 emBFT7DkSnEy6ureYE6eXA== 0001047469-98-020915.txt : 19980519 0001047469-98-020915.hdr.sgml : 19980519 ACCESSION NUMBER: 0001047469-98-020915 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19980518 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARREKER ANTINORI INC CENTRAL INDEX KEY: 0001057709 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 751622836 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-48399 FILM NUMBER: 98626813 BUSINESS ADDRESS: STREET 1: 14001 N DALLAS PKWY STREET 2: STE 1100 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9724581981 MAIL ADDRESS: STREET 1: 14001 N DALLAS PKWY STREET 2: STE 1100 CITY: DALLAS STATE: TX ZIP: 75240 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998 REGISTRATION NO. 333-48399 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- CARREKER-ANTINORI, INC. (Exact name of registrant as specified in its charter) DELAWARE 7379 75-1622836 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.)
14001 N. DALLAS PARKWAY, SUITE 1100 DALLAS, TEXAS 75240 (972) 458-1981 (Address, including zip code, telephone number, including area code, of registrant's principal executive office) JOHN D. CARREKER, JR. CARREKER-ANTINORI, INC. 14001 N. DALLAS PARKWAY, SUITE 1100 DALLAS, TEXAS 75240 (972) 458-1981 (Name, address, including zip code, telephone number, including area code, of agent for service) -------------------------- COPIES TO: MAURICE E. PURNELL, JR. S. MICHAEL DUNN, P.C. JOHN B. MCKNIGHT Brobeck, Phleger & Harrison LLP Locke Purnell Rain Harrell 301 Congress Avenue, Suite 1200 (A Professional Corporation) Austin, Texas 78701 2200 Ross Avenue, Suite 2200 (512) 477-5495 Dallas, Texas 75201 (214) 740-8000 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- 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, 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 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(d) under the Securities Act, check the following box and list the Securities Act registration statement 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED MAY 18, 1998 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. [LOGO] 5,100,000 SHARES COMMON STOCK Of the 5,100,000 shares of Common Stock offered hereby, 3,650,000 shares are being sold by Carreker-Antinori, Inc. (the "Company" or "Carreker-Antinori") and 1,450,000 shares are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "CANI," subject to official notice of issuance. ------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS Per Share.......... $ $ $ $ Total (3).......... $ $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses payable by the Company estimated at $1,100,000. (3) The Company and a Selling Stockholder have granted an option to the Underwriters, exercisable within 30 days of the date hereof, to purchase up to 765,000 additional shares of Common Stock, solely to cover over- allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." ------------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California on or about , 1998. BANCAMERICA ROBERTSON STEPHENS HAMBRECHT & QUIST LEHMAN BROTHERS The date of this Prospectus is , 1998 INSIDE FRONT COVER: Graphic displaying three bubbles labeled "Consulting Services," "Software Applications," and "Industry Expertise." Each of these three bubbles points to a larger bubble labeled "Value-Added Banking Solutions." From this larger bubble are three arrows labeled "Increase Revenues," "Reduce Costs," and "Enhance Delivery of Customer Services." These arrows point to a large bubble labelled "Maximize Bank Values." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." GATEFOLD GRAPHICS: Graphic in middle of page stating "Carreker-Antinori -- Move Money with Greater Intelligence-TM-" (the "Carreker-Antinori Logo"). The graphic includes the statement "Value Added Banking Solutions" and bullet points stating "Industry-Specific Consulting Expertise," "Advanced Technology," "Integrated Approach," "Reduced Customer Risk" and "Broad Array of Services & Technology." Graphic in upper left part of page with the heading "Yield Management--Helping banks increase their revenues" and bullet points stating "Revenue Enhancement," "Liquidity Management," and "Cash Management." Also included in the graphic are images of financial tables, checks, U.S. currency and a personal computer. Graphic at the bottom left of the page with a heading "Payment Electronification--Enabling banks to capture the benefits from the conversion of paper checks to electronic items." Also included in the graphic are images of paper checks, the initials "ECP," U.S. currency and a facade of a columned, institutional building. Graphic at top right of the page with a heading "Payment Systems--Helping banks to reduce check-processing and other costs" and bullet points stating "Consolidation and Best Practices," "Float Management" and "Risk Management." Also included in the graphic are images of paper checks, currency, map of U.S., facades of institutional buildings and a statue of woman holding scales. Graphic at lower right of the page with a heading "Enabling Technologies--Converting leading-edge technologies and ideas into practical banking solutions," and bullet points stating "Electronic Commerce," "Year 2000," "Image systems" and "Integration Services." Also included in the graphic are images of people working on personal computers, personal computer screen displays and typographical characters, number strings and "www.bank.com." NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................................................................................... 4 Risk Factors..................................................................................................... 6 Use of Proceeds.................................................................................................. 16 Dividend Policy.................................................................................................. 16 Capitalization................................................................................................... 17 Dilution......................................................................................................... 18 Selected Consolidated Financial Data............................................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 20 Business......................................................................................................... 29 Management....................................................................................................... 43 Certain Transactions............................................................................................. 53 Principal and Selling Stockholders............................................................................... 55 Description of Capital Stock..................................................................................... 57 Shares Eligible for Future Sale.................................................................................. 59 Underwriting..................................................................................................... 61 Legal Matters.................................................................................................... 63 Experts.......................................................................................................... 63 Additional Information........................................................................................... 63 Index to Consolidated Financial Statements....................................................................... F-1
------------------------ The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements examined by an independent accounting firm and quarterly reports for the first three quarters of each fiscal year containing interim, unaudited financial information. CheckLINK-Registered Trademark-, ATM CashFORECASTER-TM-, Branch Item Truncation-TM-, CashFORECASTER-TM-, CashTRACKER-TM-, CNOTEs-TM-, DepositMANAGER-TM-, Float Analysis System-TM-, Float Pricing System-TM-, Innovasion-TM-, On-Us Fraud-TM-, ReserveLINK-TM-, ReserveLINK PLUS-TM-, SmartNOTEs-TM-, Synapse-TM-, The Analysis Advantage-TM-, TNOTEs-TM- and Transit Fraud-TM- are trademarks, trade names and service marks of the Company and are denoted herein using italics. This Prospectus also includes trademarks, trade names and service marks of companies other than the Company, which are the property of their respective owners. The terms "Company" and "Carreker-Antinori" when used in this Prospectus refer to Carreker-Antinori, Inc. and, unless the context requires otherwise, its predecessors and subsidiaries. Concurrently with the offering, the Company will change its state of incorporation from Texas to Delaware. See "Certain Transactions--The Reincorporation." The Company's principal executive office is located at 14001 N. Dallas Parkway, Suite 1100, Dallas, Texas 75240, and its telephone number at that office is (972) 458-1981. The Company's World Wide Web home page is located at http:\\www.carreker.com. Information contained in the Company's Web site does not constitute, and shall not be deemed to constitute, part of this Prospectus. 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS REFLECTS THE RECENT COMPLETION OF THE REINCORPORATION OF THE COMPANY AS A DELAWARE CORPORATION (THE "REINCORPORATION") AND CERTAIN OTHER MATTERS (SEE "CERTAIN TRANSACTIONS"), AND ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS. THE COMPANY Carreker-Antinori is a leading provider of integrated consulting and software solutions that enable banks to increase their revenues, reduce their costs and enhance their delivery of customer services. The Company's offerings include yield management, payment systems, payment electronification and enabling technologies solutions. Carreker-Antinori's solutions assist banks in re-engineering their operational systems and implementing new software applications to increase earning assets, develop new revenue sources, improve operating efficiencies and reduce check fraud losses. The Company believes that its 20 years of experience in the banking industry, combined with its advanced technological expertise, positions it to effectively address and anticipate the challenges and opportunities faced by banks in today's increasingly competitive environment. The Company's customers include approximately two-thirds of the largest 100 bank holding companies in the United States, including Fleet Financial Group, Inc., NationsBank Corporation, Norwest Corporation and SunTrust Banks, Inc. The banking industry is one of the nation's largest industries, with aggregate annual revenues of nearly $250 billion. In recent years, the industry has undergone significant change, and today's banking environment is characterized by intense competition, continuing consolidation, changing regulations and rapid technological innovation. In addition to increased competition within the banking industry, banks are encountering significant competition from insurance companies, brokerage houses and other financial institutions, all of which are expanding to provide services that were once within the exclusive domain of banks. While banks historically have focused on reducing their operating expenses to remain competitive, they are today increasingly focusing on developing new sources of revenue growth, automating operations to increase efficiencies and outsourcing commodity-like banking functions to sustain market value growth. To this end, banks are expending significant resources, both internally and through outsourcing arrangements. Information technology expenditures by the industry in 1997 on paper-based payment systems and financial and risk management systems alone are estimated to have been approximately $1.0 billion and $2.3 billion, respectively, of which approximately 59% and 51% were paid to third parties. The Company's offerings include yield management, payment systems, payment electronification and enabling technologies solutions. The Company's yield management solutions are designed to quickly increase a bank's revenues through improved operational workflows, pricing structures and liquidity and cash management. The Company's payment systems and payment electronification solutions are designed to reduce check-processing costs through procedural and technological improvements and reduced check fraud and other risks of loss. Carreker-Antinori's enabling technologies convert leading-edge technologies and ideas into practical banking solutions. The Company's solutions are differentiated by virtue of Carreker-Antinori's industry-specific consulting expertise, advanced technology and broad array of integrated, value-added solutions. The Company's objective is to be the leading provider of yield management, payment systems, payment electronification and enabling technologies solutions that enhance the competitiveness of banks. Carreker-Antinori plans to accomplish this objective by: (i) advancing its position as a leading industry innovator; (ii) pursuing strategic alliances and acquisitions; (iii) leveraging its market position to expand its customer base; and (iv) building long-term customer relationships. The Company believes that it derives a significant competitive advantage by providing leadership to the banking industry through its association with two high-profile interbank organizations: the Electronic Check Clearing House Organization ("ECCHO"), which is focused on developing the rules and standards for transitioning the check payment system from paper to electronic formats, and Payment Solutions Network, Inc. ("PSN"), which provides database and information-based products and services critical to the realization of the benefits associated with the electronification of the check payment system. The Company's role in these interbank organizations enables it to be an infrastructure development partner to the banking industry, enhancing the Company's ability to provide value-added benefits to banks today and uniquely positioning it to take advantage of the electronification of payment systems in the future. In addition, the Company has recently partnered with UPS Worldwide Logistics, National Processing Company, Fiserv, Inc. and Brink's Incorporated to form INFITEQ, LLC ("INFITEQ"), a single-source provider of specialized outsourcing services to the banking industry for transaction processing, information management, electronic commerce and image technology. 4 THE OFFERING Common Stock offered by the Company...................... 3,650,000 shares Common Stock offered by the Selling Stockholders......... 1,450,000 shares Common Stock to be outstanding after the Offering (1).... 16,427,433 shares Use of Proceeds.......................................... The Company intends to use the net proceeds for working capital and other general corporate purposes, as well as possible strategic alliances and acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol................... CANI
SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
YEAR ENDED JANUARY 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Total revenues..................................................... $ 9,606 $ 13,084 $ 18,549 $ 29,072 $ 40,501 Income (loss) from operations...................................... (1,284) 593 2,723 2,884 5,009 Net income (loss) (2).............................................. (922) 697 1,862 1,376 3,055 Basic earnings (loss) per share (3)................................ (.08) .06 .16 .13 .27 Diluted earnings per share (3)..................................... -- .06 .15 .12 .23 Shares used in computing basic earnings per share (3).............. 11,547 11,548 11,543 10,914 11,477 Shares used in computing diluted earnings per share (3)............ -- 11,878 12,092 11,878 13,244
JANUARY 31, 1998 -------------------------- ACTUAL AS ADJUSTED (4) --------- --------------- BALANCE SHEET DATA: Cash and cash equivalents.................................................................. $ 1,975 $ 38,215 Working capital............................................................................ 7,434 43,674 Total assets............................................................................... 20,319 56,559 Long-term debt, net of current portion..................................................... -- -- Total stockholders' equity................................................................. 8,624 46,864
- ------------------------------ (1) Assumes the issuance of 77,000 shares of Common Stock concurrently with the offering upon the exercise by a Selling Stockholder of options under the Company's Long Term Incentive Plan (the "Long Term Incentive Plan") to purchase shares of Common Stock, as well as the issuance of 1,152,174 shares upon the exercise of options outstanding under the Long Term Incentive Plan that terminate if unexercised contemporaneously with the offering. BancAmerica Robertson Stephens has established a loan program to facilitate the exercise of such options. See "Principal and Selling Stockholders" and "Underwriting." Excludes: (i) 4,186,126 shares of Common Stock reserved for issuance under the Long Term Incentive Plan of which options to purchase 2,927,926 shares are outstanding at a weighted average exercise price of $5.35 per share; (ii) 100,000 shares of Common Stock reserved for issuance under the Company's Director Stock Option Plan (the "Director Plan"), none of which are outstanding; and (iii) 221,052 options issued to the Company's non-employee directors at a weighted average exercise price of $0.58 per share. See "Management--Long Term Incentive Plan" and "--Director Stock Option Plan." (2) Prior to the Company's acquisition of Antinori Software, Inc., a Georgia corporation ("ASI"), on January 31, 1997, ASI had elected to be treated as an S corporation for federal and state income tax purposes. The provision for income tax included as a component of net income for the fiscal years prior to fiscal 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 ASI had been subject to taxation as a C corporation. (3) See Notes 2 and 10 of Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted net earnings per share. (4) Adjusted to give effect to the sale of 3,650,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share (the mid-point of the range set forth on the cover of this Prospectus), after deducting the estimated underwriting discounts and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." ------------------------------ THE COMPANY'S FISCAL YEAR ENDS 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, THE FISCAL YEAR ENDED JANUARY 31, 1998 IS REFERRED TO HEREIN AS "FISCAL 1997." 5 RISK FACTORS THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. THE FACTORS SET FORTH BELOW, ALONG WITH THE OTHER INFORMATION CONTAINED HEREIN, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. FURTHER, THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, GOALS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS APPLY TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. PROSPECTIVE INVESTORS IN THE SHARES OF COMMON STOCK OFFERED HEREBY ARE CAUTIONED THAT, WHILE THE FORWARD-LOOKING STATEMENTS REFLECT THE COMPANY'S GOOD FAITH BELIEFS, THEY ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. SOME OF THE FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. DEPENDENCE ON BANKING INDUSTRY The Company derives substantially all of its revenues from solutions provided to banks and other participants in the banking industry. Accordingly, the Company's future success significantly depends upon the continued demand for its solutions within this industry. The Company believes that an important factor in its growth has been the substantial change in the banking industry, as manifested by continuing consolidation, regulatory change, technological innovation and other trends. If this environment of change were to slow, the Company could experience reduced demand for its solutions. In addition, the banking industry is sensitive to changes in economic conditions and is highly susceptible to unforeseen events, such as political instability, recession, inflation or other adverse occurrences that may result in a significant decline in the utilization of bank services. 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 the Company's business, financial condition and results of operations. See "Business--Industry Background." FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced in the past, and expects 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, and costs incurred, under value-pricing contracts, the degree of customer acceptance of new solutions, the introduction of new or enhanced solutions by the Company or its competitors, budget concerns of customers, competitive conditions in the industry, seasonal factors, bank purchasing cycles, timing of consolidation decisions by banks, the extent of their international expansion and general economic conditions. See "--Customer Project Risks." In addition, the volume and timing of contract signings during a quarter are difficult to forecast, particularly in light of the Company's historical tendency to have a disproportionately large portion of contract signings in the final weeks of a quarter. Due to the foregoing factors, many of which are beyond the Company's control, quarterly revenues and operating results are difficult to forecast. It is possible that the Company's 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 the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Selected Quarterly Results of Operations." LIMITED OPERATING HISTORY AS A COMBINED COMPANY In January 1997, the Company acquired ASI. Accordingly, the Company has only a limited operating history as a combined company upon which an evaluation of the Company and its prospects can be based, and is subject to the risks generally inherent in the establishment and growth of a new business enterprise. The Company is still in the process of integrating ASI's business, management information systems, 6 software products and other operations with the Company's operations. There can be no assurance that the Company will be able to integrate successfully ASI's operations or institute integrated Company-wide systems and procedures to manage successfully the combined enterprise on a profitable basis. The inability of the Company to integrate successfully ASI's operations could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, because the Company's consolidated financial results of operations reflect only one fiscal year of actual integration of the operations of the Company and ASI, these results of operations should not be relied upon as any indication of future performance. See "Certain Transactions--Merger with Antinori Software, Inc." CUSTOMER CONCENTRATION The Company's five largest customers accounted for approximately 49%, 38% and 46% of total revenues during fiscal 1995, 1996 and 1997, respectively. While the Company's significant customers have changed from period to period, Norwest Corporation has consistently ranked as one of the Company's top customers, and accounted for approximately 16%, 16% and 14% of total revenues in fiscal 1995, 1996 and 1997, respectively. The Company's largest customer in fiscal 1997 was Fleet Financial Group, Inc., which accounted for approximately 15% of total revenues in that period. Further, inasmuch as approximately 74% and 85% of the Company's total revenues in fiscal 1997 were derived from companies who were customers of the Company in fiscal 1995 and fiscal 1996, respectively, the Company is dependent to a significant degree on its ability to maintain its existing relationships with these customers. There can be no assurance that the Company will be successful in maintaining its existing customer relationships or in securing additional major customers, and there can be no assurance that the Company can retain or increase the volume of business that it does 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 the Company to retain one or more of its large customers, maintain or increase the volume of business done for such customers or establish profitable relationships with additional customers would have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER PROJECT RISKS The Company prices its solutions on a time-and-materials, fixed-price and value-pricing basis. In connection with fixed-price projects, the Company occasionally incurs expenses in excess of its projected costs, and, as a result, achieves lower margins than expected or may incur losses with respect to projects. In connection with value-priced projects, the Company is paid based on an agreed percentage of either projected or actual increased revenues or decreased costs derived by the bank over a period of up to twelve months following the implementation of the Company's solution. The Company typically must first commit time and resources to develop such projections before a bank will commit to purchase the Company's solutions, and therefore assumes 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 the Company's solutions or the solutions do not produce the projected results, in which case the Company may not be able to collect any or all of the fees provided for in the customer's contract. The nature of the Company's fixed-price and value-pricing arrangements can result in decreased operating margins or losses and could materially and adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview," "Business--The Carreker-Antinori Solution--Reduced Customer Risk" and "--Strategy--Increase Use of High-Margin Pricing Arrangements." ABILITY TO MANAGE GROWTH The Company has experienced significant growth in recent years, and anticipates that additional expansion may be required in order to address potential market opportunities. Any expansion of the 7 Company's business would place further demands on the Company's management, operational capacity and financial resources. The Company anticipates that it will need to recruit large numbers of qualified personnel in all areas of its operations, including management, sales, marketing, delivery and software development. There can be no assurance that the Company will be effective in attracting and retaining additional qualified personnel, expanding its operational capacity or otherwise managing growth. In addition, there can be no assurance that the Company's systems, procedures or controls will be adequate to support any expansion of the Company's operations. The Company is currently in the process of updating its management information system (the "MIS system"), which could require the Company to provide additional training to existing personnel or hire additional personnel. If the Company cannot implement the new MIS system in a timely manner, the Company's ability to manage growth effectively or generate timely quarterly reports could be materially and adversely affected. The failure to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Strategy--Pursue Strategic Alliances and Acquisitions." MARKET ACCEPTANCE OF THE COMPANY'S SOLUTIONS The Company's success depends upon continued demand for its solutions. Market acceptance of the Company's existing and future solutions depends on several factors including: (i) the ease with which such solutions can be implemented and used; (ii) the performance and reliability of such solutions; (iii) the degree to which customers achieve expected revenue gains, cost savings and performance enhancements; and (iv) the extent to which the Company's customers and prospective customers are able to implement alternative approaches to meet their business development and cost-saving needs. Some of the foregoing factors are beyond the Company's control. There can be no assurance that the Company's customers will realize the intended benefits of the Company's solutions or that the Company's solutions will achieve continued or increased market acceptance. Any significant or ongoing failure to achieve such benefits or to maintain or increase market acceptance would restrict substantially the future growth of the Company and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Products and Services." ABSENCE OF LONG-TERM AGREEMENTS The Company typically provides services to customers on a project-by-project basis without long-term agreements. When a customer defers, modifies or cancels a project, the Company must be able to rapidly redeploy its personnel to other projects in order to minimize the underutilization of its personnel and the resulting adverse impact on operating results. In addition, the Company's 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 termination, significant reduction or modification of its business relationships with any of its significant customers or with a number of smaller customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--Sales and Marketing." POTENTIAL FOR SOFTWARE AND/OR SOLUTIONS DEFECTS The Company's solutions at times in the past have been, and in the future may be, incompatible with the operating environments of its customers or inappropriate to address their needs, resulting in additional costs being incurred by the Company in rendering services to its customers. Further, like other software products, the Company's software occasionally has contained undetected errors, or "bugs," which become apparent through use of the software. Because the Company's 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 Company personnel and funds to cure errors, 8 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 the Company's 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 the Company's business, financial condition and results of operations. It is also possible that errors or defects in the Company's solutions could give rise to liability claims against the Company. See "Business--Technology." COMPETITION The Company competes with third-party providers of services and software products to the banking industry, including firms providing consulting services, such as Andersen Consulting, Electronic Data Systems Corporation and KMPG Peat Marwick LLP, and software companies, such as Earnings Performance Group, Inc., Pegasystems Inc., Sterling Software, Inc. and Transoft International, Inc. Many of these competitors have significantly greater financial, technical, marketing and other resources than the Company. The Company's 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 can the Company. Also, several of the Company's current and potential competitors have greater name recognition and larger customer bases that such competitors could leverage to increase market share at the Company's expense. The Company expects 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 the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully against current or future competitors, and the failure to do so would have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business--Competition." In addition to competing with a variety of third parties, the Company experiences competition from its 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. As a result, the Company must continuously educate existing and prospective customers about the advantages of purchasing its solutions. There can be no assurance that these customers or other potential customers will perceive sufficient value in the Company's solutions to justify investing in them. In addition, customers or potential customers could enter into strategic relationships with one or more of the Company's competitors to develop, market and sell competing services or products. USE OF INDEPENDENT CONTRACTORS The Company often provides solutions through independent contractors. As the Company does not treat these individuals as its employees, it does not pay federal or state employment taxes or withhold federal or state employment or income taxes from compensation paid to such persons. The Company also does not consider these persons to qualify as eligible for coverage or benefits provided under its employee benefit plans or include these persons when evaluating the compliance of its employee benefit plans with the requirements of the Internal Revenue Code. Additionally, the Company does not treat such persons as employees for purposes of worker's compensation, labor and employment, or other legal purposes. From time to time, the Company may face legal challenges to the appropriateness of the characterization of such persons 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 such a determination raises the risk that from time to time an individual that the Company has characterized as an independent contractor will be reclassified as an employee for these or other legal purposes. In the event persons engaged by the Company as independent contractors are determined to be employees by the 9 Internal Revenue Service (the "IRS") or any applicable taxing authority, the Company would be required to pay applicable federal and state employment taxes and withhold income taxes with respect to such persons and could become liable for amounts required to be paid or withheld in prior periods and for costs, penalties and interest thereon. In addition, the Company could be required to include such persons in its 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, the Company could be subject to other liabilities sought by governmental authorities or private persons. At April 30, 1998, 53 consultants were engaged by the Company as independent contractors. Any challenge by the IRS, state authorities or private litigants resulting in a determination that such persons are employees would have a material adverse effect on the Company's business, financial condition and results of operations. In October 1997, a bill was introduced in the United States House of Representatives that would amend the Internal Revenue Code to establish more stringent requirements for the engagement of independent contractors. The Company is unable to assess the likelihood that this bill or similar legislation will be enacted. Further, the Company's ability to retain independent contractors could in the future deteriorate, due in part to the lower commitment level that such contractors have to the Company. See "Business--Independent Contractors." DEPENDENCE ON KEY PERSONNEL The Company's future success depends, in significant part, upon the continued services of John D. Carreker, Jr., its 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 the Company's other executive officers or key employees could have a material adverse effect on the Company's business, financial condition and results of operations, and there can be no assurance that the Company will be able to retain its executive officers or key personnel. The Company does not maintain key-man life insurance covering any of its executive officers or other key personnel. See "Management." ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL The Company's future success depends upon its continuing ability to attract and retain highly qualified banking, technical and managerial personnel. Competition for such personnel is intense, and the Company at times has experienced difficulties in attracting the desired number of such individuals. Further, the Company's employees frequently have left the Company to work in-house with the Company's customers. There can be no assurance that the Company will be able to attract or retain a sufficient number of highly qualified employees or independent contractors in the future. If the Company is unable to attract personnel in key positions, the Company's business, financial condition and results of operations could be materially and adversely affected. IMPACT OF TECHNOLOGICAL ADVANCES The Company's future success will depend, in part, upon its ability to enhance its existing solutions, develop and introduce new solutions that address the increasingly sophisticated and varied needs of its current and prospective customers, develop leading technology and respond to technological advances and emerging industry standards on a timely and cost-effective basis. There can be no assurance that future advances in technology will be beneficial to, or compatible with, the Company's business or that the Company will be able to incorporate such advances into its business. In addition, keeping abreast of technological advances in the Company's business may require substantial expenditures and lead time. There can be no assurance that the Company will be successful in using new technologies, adapting its solutions to emerging industry standards or developing, introducing and marketing solution enhancements or new solutions, or that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of these solutions. If the Company incurs increased costs or is unable, for technical or other reasons, to develop and introduce new solutions or enhancements 10 of existing solutions in a timely manner in response to changing market conditions or customer requirements, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Business--Solutions Development." DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT The Company's success significantly depends upon its proprietary technology and information. The Company relies upon a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect its proprietary technology and information. The Company generally has relied on common law rights to protect the use of its name, technology and brands. The Company has a number of issued patents and one registered trademark. There can be no assurance that the steps taken by the Company to protect its services and products are adequate to prevent misappropriation of its technology or that the Company's competitors independently will not develop technologies that are substantially equivalent or superior to the Company's technology. Further, it is very difficult to police unauthorized use of the Company's software due to the nature of software. Any such misappropriation of the Company's proprietary technology or information or the development of competitive technologies could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the laws of certain countries in which the Company's software is distributed do not protect the Company's 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 the Company licenses its software protect trademarks solely on the basis of the first to register. The Company currently does not possess any trademark registrations in foreign jurisdictions, although it does have copyright protection of its software under the provisions of various international conventions. Accordingly, intellectual property protection of its 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 the Company's proprietary technology or information. The Company could incur substantial costs in protecting and enforcing its intellectual property rights. Although presently there are no pending or threatened intellectual property claims against the Company, third parties may, in the future, assert patent, trademark, copyright and other intellectual property right claims to technologies which are incorporated into the Company's solutions. In such event, the Company may be required to incur significant costs in reaching a resolution to the asserted claims. There can be no assurance that such a resolution would not require that the Company pay damages or obtain a license to the third party's intellectual property rights in order to continue licensing the Company's software as currently offered or, if such a third-party license is required, that it would be available on terms acceptable to the Company. Certain technology used in the Company's current software and software in development includes technology licensed from third parties. These licenses generally require the Company 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 the Company's ability to implement solutions or in delays in the introduction of the Company's new or enhanced solutions while it searches for similar technology from alternative sources, if any, which would prove costly. Any need to implement alternative technology could prove to be very expensive for the Company and any delay in solution implementation could result in a material adverse effect on the business, financial condition and results of operations of the Company. It may also be necessary or desirable in the future to obtain additional licenses for use of third-party products in the Company's solutions and there can be no assurance that the Company will be able to do so on commercially reasonable terms, if at all. See "Business--Proprietary Rights." 11 YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies, including those used by Carreker-Antinori, may need to be upgraded to comply with such "Year 2000" requirements. In addition, if banks dedicate a significant portion of their information budgets to the resolution of Year 2000 issues, their ability to purchase the Company's solutions may be adversely affected, which could have a material adverse effect on the Company's business, financial condition and results of operations. Although most of the software currently offered by the Company is either designed to be Year 2000 compliant or has been upgraded to be Year 2000 compliant, the Company still offers some software which has imbedded software developed by a third party that may not be Year 2000 compliant. The Company is in the process of correcting this situation for a number of its customers. There can be no assurance that the Company's Year 2000 compliant software or related upgrades contain all necessary date code changes or that such software or upgrades will interface with its customers' other software programs. Further, liability claims could arise out of the Company's delivery of solutions that address Year 2000 issues to the extent that such solutions do not effectively address such issues, and the failure of such solutions to effectively address Year 2000 issues could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, although the Company believes that each of the software programs used in its MIS system and other internal programs is Year 2000 compliant, there can be no assurance that such software will be Year 2000 compliant, and any failure to be so compliant may require additional expenditures by the Company to rectify the noncompliance. POTENTIAL LIABILITY CLAIMS As a result of the Company's provision of solutions that address critical functions of bank operations, the Company is exposed to possible liability claims from banks and their customers. Although the Company has not experienced any material liability claims to date, there can be no assurance that the Company will not become subject to such claims in the future. A liability claim against the Company could have a material adverse effect on its business, financial condition and results of operations. RISKS ASSOCIATED WITH POTENTIAL STRATEGIC ALLIANCES OR ACQUISITIONS Except as described immediately below, the Company has no current agreements or negotiations underway with respect to any potential strategic alliances or acquisitions. The Company does, however, regularly evaluate such opportunities and may enter into strategic alliances or make acquisitions of other companies or technologies in the future. Risks inherent in alliances include, among others: (i) substantial investment of the Company's resources in the alliance; (ii) inability to realize the intended benefits of an alliance; (iii) increased reliance on third parties; (iv) increased payment of third-party licensing fees or royalties for the incorporation of third-party technology into the Company's solutions; and (v) inadvertent transfer of the Company's proprietary technology to strategic "partners." Acquisitions involve numerous risks, including difficulties in assimilating acquired operations and products, diversion of management's attention from other business concerns, amortization of acquired intangible assets and potential loss of key employees of acquired companies. There can be no assurance that the Company will be successful in identifying and entering into strategic alliances, if at all, and any inability to do so could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the Company will be able to integrate successfully any operations, personnel or services that might be acquired in the future, and a failure by the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-- Strategy." The Company is currently providing management services to ECCHO and PSN, which enables it to be an infrastructure development partner to the banking industry. These relationships, and the Company's 12 participation in INFITEQ, are forms of strategic alliances. In order to support the formation and growth of PSN, the Company invested time and technological resources in PSN (for which it received an equity interest that was later sold for a gain) and has loaned to PSN an aggregate of $582,000 ($500,000 of which has been reserved due to the Company's belief that collection is doubtful). The Company has also invested time and technological resources in the formation and growth of ECCHO and INFITEQ, although it has not invested any funds directly in those entities. In addition, the Company has experienced, and may continue to experience, delays in collections of management fees from these respective strategic alliances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business--Strategic Banking Initiatives" and Note 8 of Notes to Consolidated Financial Statements. GOVERNMENT REGULATION The Company's primary customers are banks. Although the solutions currently offered by the Company have not been subject to any material, specific government regulation, the banking industry is regulated heavily, and the Company expects that such regulation will affect the relative demand for the Company's 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 the Company to modify its current or future solutions. The adoption of laws or regulations affecting the Company's or its customers' business could reduce the Company's growth rate or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Government Regulation." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Company recently has begun to provide solutions to banks outside the United States, and a key component of the Company's growth strategy is to broaden its international operations. The Company's international operations are subject to risks inherent in the conduct of international business, including unexpected changes in regulatory requirements, exchange rates, export license requirements, tariffs and other economic barriers to free trade, political and economic instability, limited intellectual property protection, difficulties in collecting payments and potentially adverse tax and labor consequences. Certain of the Company's international sales are denominated in local currencies, and the impact of future exchange rate fluctuations on the Company's 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 the Company's business, financial condition and results of operations. See "Business--Strategy." MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS The Company has designated only limited specific use for the net proceeds to the Company from the sale of Common Stock in the offering. The Company expects to use the net proceeds for working capital and other general corporate purposes, as well as possible strategic alliances and acquisitions. Consequently, the Board of Directors and management of the Company will have broad discretion in allocating a significant portion of the net proceeds to the Company from the offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds." BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS The current stockholders of the Company will benefit from the offering in that (a) a public market will be created for shares of the Company's Common Stock, (b) a substantial portion of the proceeds to be received by the Selling Stockholders from the sale of their shares in the offering will constitute gain and (c) the current stockholders will have substantial unrealized gain with respect to shares of the Company's Common Stock owned by them following the offering. The aggregate acquisition cost to the Selling 13 Stockholders with respect to the shares to be sold by them in the offering is approximately $293,726, and they will therefore realize an aggregate gain of approximately $14.5 million with respect to the shares sold by them in the offering; in addition, the current stockholders of the Company will have unrealized gains on shares of the Company's Common Stock beneficially held by them following the offering of approximately $113.0 million (in each case assuming an initial public offering price of $11.00 per share and after taking into account estimated underwriting discounts). See "Principal and Selling Stockholders." CONTROL BY OFFICERS AND DIRECTORS Upon completion of the offering, the Company's executive officers and directors will beneficially own, in the aggregate, 62.9% of the Company's outstanding Common Stock (62.5% if the Underwriters' over-allotment option is exercised). Accordingly, these persons, if acting together, will have substantial control over matters requiring approval by the stockholders of the Company, including the election of directors. See "--Anti-Takeover Matters," "Management" and "Principal and Selling Stockholders." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have an aggregate of 16,427,433 shares of Common Stock outstanding. Of these shares, all of the shares sold in the offering will be freely transferable without restriction or limitation under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares purchased by "affiliates" of the Company, as such term is defined in Rule 144 under the Securities Act. The remaining 11,327,433 shares constitute "restricted securities" within the meaning of Rule 144. Of these "restricted securities," 9,836,570 shares have been held for the required one-year period and will be freely tradeable upon completion of the offering, subject to the 180-day lock-up period described below. With respect to the remaining 1,490,863 "restricted securities," the Company intends to file a registration statement on Form S-8 after the offering providing for the resale of approximately 1,152,174 shares of Common Stock, with the balance of such shares remaining subject to the requisite Rule 144 one-year holding period and other limitations (provided, that the sale of all such shares will in any event be subject to the 180-day lock up period described below). In addition, the holders of 8,443,448 shares have certain rights to have shares registered in the future under the Securities Act pursuant to the terms of agreements between such holders and the Company. The Company, its executive officers, directors and principal and other stockholders who will hold, collectively, 11,268,913 shares of Common Stock after the offering, have agreed not to offer or sell any shares of Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens, except that the Company may issue shares of Common Stock in connection with acquisitions and pursuant to the exercise of stock options described in this Prospectus. On the date of this Prospectus, the Company had outstanding options to purchase 3,148,978 shares of Common Stock, of which 1,075,752 shares may be eligible for resale beginning 90 days following the date of this Prospectus. The Company intends to register all of the shares of Common Stock reserved for issuance pursuant to the Long Term Incentive Plan and the Director Plan under the Securities Act for public resale. Sales of substantial amounts of shares of Common Stock in the public market after the offering, or the perception that such sales could occur, may adversely affect the market price of the Common Stock. See "Shares Eligible for Future Sale." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the offering will incur immediate and substantial dilution in the amount of $8.08 per share, at an assumed initial public offering price of $11.00 per share. To the extent that outstanding options to purchase the Common Stock are exercised, there will be further dilution. See "Dilution." 14 ANTI-TAKEOVER MATTERS The Company's Certificate of Incorporation (the "Certificate") and Bylaws ("Bylaws") contain provisions that may have the effect of delaying, deterring or preventing a potential takeover of the Company that stockholders purchasing shares in the offering 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 directors of the Company 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. Section 203 of the Delaware General Corporation Law, which is applicable to the Company, contains provisions that restrict certain business combinations with interested stockholders, which may have the effect of inhibiting a non-negotiated merger or other business combination involving the Company. See "Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions." ABSENCE OF A PRIOR PUBLIC MARKET Prior to the offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price of the Common Stock will be determined through negotiations among the Company, the Selling Stockholders and the Underwriters and may not be indicative of the market price for the Common Stock after the offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. POTENTIAL VOLATILITY OF STOCK PRICE The market price for the Common Stock following the offering will be affected by a number of factors, including the announcement of new products, product enhancements or services by the Company or its competitors, quarterly variations in the Company's results of operations or results of operations of the Company's competitors, changes in earnings estimates or recommendations by securities analysts, developments in the Company's industry and in the banking industry, general market and economic conditions and other factors, including factors unrelated to the operating performance of the Company or its competitors. In addition, stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations which have often been unrelated to the operating performance of such companies. Such factors and fluctuations may adversely affect the market price of the Company's Common Stock. 15 USE OF PROCEEDS The net proceeds to the Company from its sale of 3,650,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share are estimated to be $36.2 million ($36.9 million if the Underwriters' over-allotment option is exercised in full), after deducting the estimated underwriting discounts and estimated offering expenses payable by the Company. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. The principal purposes of the offering are to increase the Company's equity capital, to create a public market for the Common Stock, to facilitate the future access by the Company to public equity markets, to provide liquidity for certain of the Company's existing stockholders and to provide increased visibility of the Company in a marketplace where many of its competitors are publicly-held companies. The Company intends to use the proceeds of the offering for working capital and other general corporate purposes, including expenses related to the recruitment and retention of additional personnel associated with the Company's anticipated growth. The Company may also use a portion of the net proceeds for possible strategic alliances and acquisitions of businesses, products and technologies that are complementary to those of the Company. Pending such uses, the Company plans to invest the net proceeds in short-term, interest-bearing, investment-grade securities. The Company continues to evaluate potential strategic alliances and acquisitions, and to identify and have preliminary discussions with potential strategic alliance and/or acquisition candidates, although there are, as of the date of this Prospectus, no agreements, arrangements or understandings between the Company and any party relating thereto. DIVIDEND POLICY The Company has not paid a cash dividend on shares of its Common Stock since its incorporation (although prior to its acquisition by the Company, ASI did make cash dividend payments principally to enable its shareholders to pay income taxes arising out of ASI's status as an S corporation). The Company currently intends to retain its earnings in the future to support operations and finance its growth and, therefore, does not intend to pay cash dividends on the Common Stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of the Board of Directors and subject to certain limitations under the Delaware General Corporation Law and will depend upon factors such as the Company's earnings levels, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. The Company is prohibited from paying cash dividends under the terms of its current line of credit agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of January 31, 1998: (i) on an actual basis and (ii) as adjusted to give effect to the sale by the Company of 3,650,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom as set forth in "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JANUARY 31, 1998 -------------------- AS ACTUAL ADJUSTED --------- --------- (In thousands) Common Stock subject to put (1)................................................... $ 2,000 $ -- Stockholders' equity: Preferred Stock, $.01 par value, 2,000,000 shares authorized; no shares outstanding................................................................... -- -- Common Stock, $.01 par value, 100,000,000 shares authorized; 12,007,611 shares issued, actual; 15,657,611 shares issued, as adjusted (2)..................... 120 157 Additional paid-in capital...................................................... 2,078 40,281 Retained earnings............................................................... 7,690 7,690 Treasury Stock, at cost: 367,044 shares, actual and as adjusted................. (510) (510) Deferred compensation (3)....................................................... (754) (754) --------- --------- Total stockholders' equity.................................................. 8,624 46,864 --------- --------- Total capitalization...................................................... $ 10,624 $ 46,864 --------- --------- --------- ---------
- ------------------------ (1) Relates to shares of Common Stock redeemable at the option of Science Applications International Corporation ("SAIC"). SAIC's right to require the Company to repurchase its shares of Common Stock terminates upon the consummation of the offering. See "Certain Transactions--Sale of Shares to SAIC" and Note 6 of Notes to Consolidated Financial Statements. (2) Does not give effect to the contemplated issuance of 77,000 shares of Common Stock to a Selling Stockholder upon the exercise of options under the Long Term Incentive Plan, and the issuance of 1,152,174 shares of Common Stock anticipated to be issued upon the exercise of certain other options under the Long Term Incentive Plan concurrently with the offering. See "Principal and Selling Stockholders" and "Underwriting." Also, excludes: (i) 4,186,126 shares of Common Stock reserved for issuance under the Company's Long Term Incentive Plan, of which options to purchase 2,927,926 shares of Common Stock are outstanding at a weighted average exercise price of $5.35 per share; (ii) 100,000 shares of Common Stock reserved for issuance under the Company's Director Plan, none of which are outstanding; and (iii) 221,052 options issued to the Company's non-employee directors at a weighted average exercise of price of $0.58 per share. See "Management--Long Term Incentive Plan" and "--Director Stock Option Plan." (3) Relates to shares of restricted stock granted to certain employees under the Long Term Incentive Plan. See Note 7 of Notes to Consolidated Financial Statements. 17 DILUTION The net tangible book value of the Company as of January 31, 1998 was $6.4 million, or $0.55 per share of Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of 3,650,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $11.00 per share) and after deduction of the estimated underwriting discounts and estimated offering expenses payable by the Company and the application of the estimated net proceeds therefrom, the adjusted net tangible book value of the Company as of January 31, 1998 would have been approximately $44.6 million or $2.92 per share. This represents an immediate increase in net tangible book value of $2.37 per share to existing stockholders and an immediate dilution of $8.08 per share to new investors purchasing shares of Common Stock in the offering. The following table illustrates this dilution: Assumed initial public offering price per share..................... $ 11.00 Net tangible book value per share at January 31, 1998............. $ 0.55 Increase per share attributable to new investors.................. 2.37 --------- Pro forma net tangible book value per share after offering.......... 2.92 --------- Dilution per share to new investors................................. $ 8.08 --------- ---------
The following table summarizes the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing stockholders and by the investors purchasing shares of Common Stock offered hereby, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company:
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- -------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ----------- ------------- ----------- ------------- Existing stockholders (1)....................... 12,777,433 77.8% $ 6,263,838 13.5% $ 0.49 New investors (1)............................... 3,650,000 22.2 40,150,000 86.5 11.00 ------------ ----- ------------- ----- Total......................................... 16,427,433 100.0% $ 46,413,838 100.0% ------------ ----- ------------- ----- ------------ ----- ------------- -----
- ------------------------ (1) Sales by the Selling Stockholders in the offering will reduce the number of shares held by existing stockholders to 11,327,433 shares, or 69.0% of the total shares of Common Stock outstanding after the offering, and will increase the number of shares held by new investors to 5,100,000 shares, or 31.0% of the total shares of Common Stock outstanding after the offering. If the Underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to 5,865,000 shares, or 35.7% of the total shares of Common Stock outstanding after the offering. See "Principal and Selling Stockholders." The foregoing computations assume no exercise of outstanding stock options, other than the assumed exercise of 77,000 options by a Selling Stockholder contemporaneously with the offering and the assumed exercise of 1,152,174 options that will otherwise terminate if unexercised contemporaneously with the completion of the offering. See "Principal and Selling Stockholders" and "Underwriting." Options to purchase 2,927,926 shares of Common Stock are outstanding under the Company's Long Term Incentive Plan at a weighted average exercise price of $5.35 per share and options to purchase 221,052 shares of Common Stock are outstanding at a weighted average exercise price of $0.58 per share and are held by the Company's non-employee directors. To the extent these options are exercised, there will be further dilution to new investors in the offering. See "Management--Long Term Incentive Plan" and "--Director Stock Option Plan." 18 SELECTED CONSOLIDATED FINANCIAL DATA The following consolidated statements of operations data for each of the three years in the period ended January 31, 1998 and the consolidated balance sheet data as of January 31, 1997 and 1998 have been derived from the consolidated financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The consolidated balance sheet data as of January 31, 1996 has been derived from the Company's consolidated financial statements which have also been audited by Ernst & Young LLP, independent auditors. The consolidated financial data as of and for the years ended January 31, 1994 and 1995 are derived from the unaudited consolidated financial statements of the Company. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
YEAR ENDED JANUARY 31, ------------------------------- 1994 1995 1996 --------- --------- --------- (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues: Consulting and management service fees................................................... $ 4,996 $ 6,090 $ 9,635 Software license fees.................................................................... 2,159 2,793 3,660 Software maintenance and implementation fees............................................. 1,927 3,192 4,184 Hardware sales........................................................................... 524 1,009 1,070 --------- --------- --------- Total revenues......................................................................... 9,606 13,084 18,549 --------- --------- --------- Cost of revenues: Consulting and management service fees................................................... 3,042 3,828 5,303 Software license fees.................................................................... 829 803 700 Software maintenance and implementation fees............................................. 1,349 2,030 2,408 Hardware sales........................................................................... 497 784 753 --------- --------- --------- Total cost of revenues................................................................. 5,717 7,445 9,164 --------- --------- --------- Gross profit............................................................................... 3,889 5,639 9,385 --------- --------- --------- Operating costs and expenses: Selling, general and administrative...................................................... 4,563 4,370 5,702 Research and development................................................................. 610 676 906 Merger related costs..................................................................... -- -- 54 --------- --------- --------- Total operating costs and expenses..................................................... 5,173 5,046 6,662 --------- --------- --------- Income (loss) from operations.............................................................. (1,284) 593 2,723 Other income (expense)..................................................................... (47) 568 304 --------- --------- --------- Income (loss) before provision for income taxes............................................ (1,331) 1,161 3,027 Provision for income taxes (1)............................................................. (409) 464 1,165 --------- --------- --------- Net income (loss).......................................................................... $ (922) $ 697 $ 1,862 --------- --------- --------- --------- --------- --------- Basic earnings (loss) per share (2)........................................................ (.08) .06 .16 Diluted earnings per share (2)............................................................. -- .06 .15 Shares used in computing basic earnings per share (2)...................................... 11,547 11,548 11,543 Shares used in computing diluted earnings per share (2).................................... -- 11,878 12,092 1997 1998 --------- --------- STATEMENT OF OPERATIONS DATA: Revenues: Consulting and management service fees................................................... $ 14,407 $ 21,314 Software license fees.................................................................... 6,398 10,200 Software maintenance and implementation fees............................................. 5,799 7,429 Hardware sales........................................................................... 2,468 1,558 --------- --------- Total revenues......................................................................... 29,072 40,501 --------- --------- Cost of revenues: Consulting and management service fees................................................... 8,794 12,394 Software license fees.................................................................... 1,307 1,412 Software maintenance and implementation fees............................................. 3,108 5,369 Hardware sales........................................................................... 1,746 1,340 --------- --------- Total cost of revenues................................................................. 14,955 20,515 --------- --------- Gross profit............................................................................... 14,117 19,986 --------- --------- Operating costs and expenses: Selling, general and administrative...................................................... 8,649 11,529 Research and development................................................................. 1,161 3,448 Merger related costs..................................................................... 1,423 -- --------- --------- Total operating costs and expenses..................................................... 11,233 14,977 --------- --------- Income (loss) from operations.............................................................. 2,884 5,009 Other income (expense)..................................................................... (386) 99 --------- --------- Income (loss) before provision for income taxes............................................ 2,498 5,108 Provision for income taxes (1)............................................................. 1,122 2,053 --------- --------- Net income (loss).......................................................................... $ 1,376 $ 3,055 --------- --------- --------- --------- Basic earnings (loss) per share (2)........................................................ .13 .27 Diluted earnings per share (2)............................................................. .12 .23 Shares used in computing basic earnings per share (2)...................................... 10,914 11,477 Shares used in computing diluted earnings per share (2).................................... 11,878 13,244
JANUARY 31, ------------------------------- 1994 1995 1996 --------- --------- --------- BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 461 $ 1,220 $ 3,072 Working capital.......................................................................... 1,071 2,813 4,324 Total assets............................................................................. 6,208 8,747 10,892 Common Stock subject to put (3).......................................................... -- -- -- Long-term debt, net of current portion................................................... 163 63 -- Total stockholders' equity............................................................... 2,723 3,665 5,443 1997 1998 --------- --------- BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 3,443 $ 1,975 Working capital.......................................................................... 5,682 7,434 Total assets............................................................................. 16,900 20,319 Common Stock subject to put (3).......................................................... 2,000 2,000 Long-term debt, net of current portion................................................... -- -- Total stockholders' equity............................................................... 5,342 8,624
- ------------------------ (1) Prior to the Company's acquisition of ASI on January 31, 1997, ASI had elected to be treated as an S corporation for federal and state income tax purposes. The provision for income tax included as a component of net income for the fiscal years prior to fiscal 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 ASI had been subject to taxation as a C corporation. (2) See Notes 2 and 10 of Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted net earnings per share. (3) Relates to Common Stock redeemable at the option of SAIC. SAIC's right to require the Company to repurchase its Common Stock terminates upon completion of the offering. See "Certain Transactions--Sale of Shares to SAIC" and Note 6 of Notes to Consolidated Financial Statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Carreker-Antinori is a leading provider of integrated consulting and software solutions that enable banks to increase their revenues, reduce their costs and enhance their delivery of customer services. The Company was founded in 1978 to provide consulting services to banks, and subsequently integrated software products into its banking solutions. With its acquisition of Antinori Software, Inc., a Georgia corporation ("ASI"), the Company was able to significantly enhance its portfolio of software products. The acquisition of ASI was accounted for as a pooling of interests and, accordingly, the Company's Consolidated Financial Statements and Notes thereto, as well as all other financial and statistical data presented in this Prospectus, have been restated to include ASI's financial position and results of operations for all periods prior to and including the period ended January 31, 1997. The Company derives its revenues from consulting and management service fees, software license fees, software maintenance and implementation fees and hardware sales. While many customer contracts provide for both the performance of consulting services and the license of related software, some customer contracts require only the performance of consulting services or only a software license (and, at the election of the customer, related implementation services and/or annual software maintenance services). The Company enters into these contracts with its customers on a project-by-project basis. The Company also derives management service fees from the performance of comprehensive management services for ECCHO, PSN and INFITEQ. A substantial majority of the Company's revenues are generated from contracts with bank holding companies with assets over $50 billion ("Tier I Banks") and bank holding companies and independent banks with assets of between $5 billion and $50 billion ("Tier II Banks"). The Company seeks to establish long-term relationships with its customers that will lead to on-going projects utilizing the Company's solutions. The Company is typically retained to perform one or more discrete projects for a customer, and uses these opportunities to extend its solutions into additional areas of the customer's operations. To this end, approximately 74% and 85% of the Company's total revenues in fiscal 1997 were derived from companies who were customers of the Company in fiscal 1995 and fiscal 1996, respectively. See "Business--Customers and Markets." CONSULTING AND MANAGEMENT SERVICE FEES. The Company employs three primary pricing methods in connection with its delivery of consulting and management services. First, the Company may price its 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 such a case, fees and related amounts are generally payable on a monthly basis, and revenue is recognized as the services are performed. Second, consulting and management services may be delivered on a fixed-price basis. In this case, payments are made to the Company on a monthly basis or pursuant to an agreed upon payment schedule, and revenue is recognized on a percentage-of-completion basis. Any anticipated losses on a fixed-price contract are recognized when estimable. Third, the Company may deliver consulting and management services pursuant to a value-pricing contract with the customer. In this case, the Company is paid, on an agreed upon basis with the customer, either a specified percentage of (i) the projected increased revenues or decreased costs that are expected to be derived by the customer over a period of up to twelve months following implementation of the Company's solution or (ii) the actual increased revenues and/or decreased 20 costs experienced by the customer over a period of up to twelve months following implementation of the Company's solution, subject in either case to a ceiling, if any is agreed to, on the total amount of payments to be made to the Company. Such contracts typically provide for the Company to receive from 10% to 30% of the projected or actual increased revenues or decreased costs, with payments to be made to the Company pursuant to an agreed upon schedule ranging from one to twelve months in length. Revenues generated from rendering consulting and management services in connection with value-priced contracts based upon projected results are recognized only upon completion of all services and agreement upon the actual fee to be paid (even though billings for such services may be delayed by mutual agreement for periods generally not to exceed six months). When fees are to be paid based on a percentage of actual revenues or savings, the Company recognizes revenue only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer. The Company typically must first commit time and resources to develop projections associated with value-pricing contracts before a bank will commit to purchase the Company's solutions, and therefore assumes the risk of making these commitments with no assurance that the bank will purchase the solutions. The Company expects that value-pricing contracts will account for an increasing percentage of its 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, the Company's results of operations will likely fluctuate significantly from period to period. See "--Selected Quarterly Results of Operations." Regardless of the pricing method employed by the Company in a given contract, the Company is reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of its customers, which expenses are netted against reimbursements for financial statement reporting purposes. SOFTWARE LICENSE FEES. In the event that a software license is granted together with consulting and management services or on a stand-alone basis, software license fees are payable to the Company in one or more installments, as provided in the customer's contract. Software license fees are recognized upon delivery, provided that: (i) the Company has no significant remaining obligations under the contract; (ii) the fees are collectible; and (iii) the fees for other components of the solution can be separately identified. Software licenses continue for an indefinite period and there is no provision for any renewal fees. The Company also enters into value-pricing contracts in connection with its grant of software licenses, in which case payments are made and revenue is recognized in a fashion similar to that for such contracts in the consulting and management services context. Although substantially all of the Company's current software licenses provide for a set license fee, whether pursuant to a fixed-price or value-pricing contract, some of the Company's payment electronification licenses instead provide for per-transaction license fees (in which case fees are recognized and due on a monthly basis). The Company expects to increase its practice of charging license fees on a per-transaction basis in the future as part of its strategy to increase recurring revenues and smooth its period-to-period revenues. See "Business--Strategy--Increase Use of High-Margin Pricing Arrangements." SOFTWARE MAINTENANCE AND IMPLEMENTATION FEES. In connection with the Company's sale of a software license, a customer may elect to purchase software implementation services or software maintenance services, including software enhancements, patches and other software support services. Most of the customers that purchase software licenses from the Company also purchase both software implementation services and software maintenance services (the latter of which typically are renewed annually). The Company prices its implementation services on a time-and-materials or on a fixed-price basis, and the related revenues are recognized on a basis consistent with that applied to consulting and management services. The Company charges an annual maintenance fee typically ranging from 15% to 20% of the initial software license fee, which generally is payable to the Company at the beginning of the maintenance period and is recognized ratably over the term of the related contract. HARDWARE SALES. The Company's computer hardware sales are made in tandem with the delivery of related services or software, and are sold on the basis of the Company's cost plus a specified percentage. Revenues are recognized upon shipment of the hardware to the customer. The Company sells hardware at the request of its customers, but does not consider hardware sales to be a meaningful part of its business. 21 In accordance with generally accepted accounting principles, the Company capitalizes 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. Capitalized software development costs are amortized on the basis of each product's projected revenue or on a straight-line basis over the remaining economic life of the product (generally three to five years). At January 31, 1998, the Company's capitalized software development costs, net of accumulated amortization, were $2.3 million, which will be amortized over the next 12 to 20 quarterly periods. See Note 2 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS The following discussion of the Company's results of operations for the fiscal years ended January 31, 1996, 1997 and 1998 is based upon data derived from the statements of operations contained in the Company's audited Consolidated Financial Statements appearing elsewhere in this Prospectus. The following table sets forth this data as a percentage of total revenues.
YEAR ENDED JANUARY 31, ------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Revenues: Consulting and management service fees.......................................... 51.9% 49.6% 52.6% Software license fees........................................................... 19.7 22.0 25.2 Software maintenance and implementation fees.................................... 22.6 19.9 18.4 Hardware sales.................................................................. 5.8 8.5 3.8 ----- ----- ----- Total revenues................................................................ 100.0 100.0 100.0 ----- ----- ----- Cost of revenues: Consulting and management service fees.......................................... 28.5 30.2 30.6 Software license fees........................................................... 3.8 4.5 3.5 Software maintenance and implementation fees.................................... 13.0 10.7 13.3 Hardware sales.................................................................. 4.1 6.0 3.3 ----- ----- ----- Total cost of revenues........................................................ 49.4 51.4 50.7 ----- ----- ----- Gross profit...................................................................... 50.6 48.6 49.3 ----- ----- ----- Operating costs and expenses: Selling, general and administrative............................................. 30.7 29.8 28.4 Research and development........................................................ 4.9 4.0 8.5 Merger related costs............................................................ 0.3 4.9 -- ----- ----- ----- Total operating costs and expenses............................................ 35.9 38.7 36.9 ----- ----- ----- Income from operations............................................................ 14.7 9.9 12.4 Other income (expense)............................................................ 1.6 (1.3) 0.2 ----- ----- ----- Income before provision for income taxes.......................................... 16.3 8.6 12.6 Provision for income taxes........................................................ 6.3 3.9 5.1 ----- ----- ----- Net income........................................................................ 10.0% 4.7% 7.5% ----- ----- ----- ----- ----- -----
YEAR ENDED JANUARY 31, 1997 (FISCAL 1996) COMPARED TO YEAR ENDED JANUARY 31, 1998 (FISCAL 1997) REVENUES. The Company's total revenues increased by 39.2% from $29.1 million in fiscal 1996 to $40.5 million in fiscal 1997. The increase was primarily attributable to growth in revenues from consulting and management services and software licenses. Revenues from consulting and management services increased by 47.9% from $14.4 million in fiscal 1996 to $21.3 million in fiscal 1997. This increase reflected 22 both continued demand for the Company's services, as well as increased demand for the Company's higher-priced services. Software license revenues increased 59.4% from $6.4 million in fiscal 1996 to $10.2 million in fiscal 1997. Software license revenue growth stemmed primarily from increased sales in fiscal 1997 over fiscal 1996 of the Company's RESERVELINK product, certain risk management products and certain consolidation and best practices products of $1.5 million, $650,000 and $1.0 million, respectively. Total RESERVELINK license fees accounted for 28.1% and 32.7% of software license revenue in fiscal 1996 and fiscal 1997, respectively. Software maintenance and implementation revenues increased by 27.6% from $5.8 million in fiscal 1996 to $7.4 million in fiscal 1997. This increase in software maintenance and implementation revenues was primarily generated by increased software product sales, which resulted in increased implementation services and the increased provision of maintenance services to new customers. Increased RESERVELINK product sales alone accounted for increased software implementation fees of $860,000 and increased software maintenance fees of $340,000 in fiscal 1997. Hardware sales decreased 36.0% from $2.5 million in fiscal 1996 to $1.6 million in fiscal 1997. This decrease was primarily due to reduced requests by customers for bundled hardware and license deliveries. 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 by 36.7% from $15.0 million in fiscal 1996 to $20.5 million in fiscal 1997. This increase resulted primarily from an increase in the cost of revenues in consulting and management services and software maintenance and implementation. Cost of revenues for consulting and management services increased by 40.9% from $8.8 million in fiscal 1996 to $12.4 million in fiscal 1997, which was a result primarily of increases in personnel and, to a lesser extent, services related to INFITEQ. Cost of revenues of software licenses increased by 7.7% from $1.3 million in fiscal 1996 to $1.4 million in fiscal 1997. Cost of revenues of software maintenance and implementation increased by 74.2% from $3.1 million in fiscal 1996 to $5.4 million in fiscal 1997, which was primarily due to increases in personnel costs associated with the Company's growth. Cost of revenues for hardware sales decreased 23.5% from $1.7 million in fiscal 1996 to $1.3 million in fiscal 1997 due to reduced hardware sales levels, but increased as a percentage of hardware sales from 70.7% in fiscal 1996 to 86.0% in fiscal 1997 due to pricing pressures. Total cost of revenues as a percentage of total revenues decreased from 51.4% in fiscal 1996 to 50.7% in fiscal 1997. While cost of revenues decreased as a percentage of total revenues, certain elements of cost increased. These costs increased due, in part, to delays in the development of certain software applications. In addition, the Company incurred increased costs as a result of higher levels of professional and technical staff necessary to support anticipated future growth. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses generally consist of personnel costs associated with selling, marketing, general management and software management, as well as fees for professional services and other related costs. Selling, general and administrative expenses increased by 33.7% from $8.6 million in fiscal 1996 to $11.5 million in fiscal 1997. The increase in these expenses reflected the addition of management and marketing staff during late fiscal 1996 and fiscal 1997 associated with the Company's growth. As a percentage of revenues, selling, general and administrative expenses decreased from 29.8% in fiscal 1996 to 28.4% in fiscal 1997. RESEARCH AND DEVELOPMENT. Research and development expenses generally consist of personnel and related costs of developing solutions. Research and development expenses increased by 183.3% from $1.2 million in fiscal 1996 to $3.4 million in fiscal 1997. Research and development expenses as a percentage of revenues increased from 4.0% in fiscal 1996 to 8.5% in fiscal 1997. Growth in research and development expenses resulted largely from an increase in the number of development efforts during fiscal 1997. Furthermore, in addition to planned research and development efforts during fiscal 1997, the Company incurred approximately $580,000 to redevelop certain components of one of its software applications. As a consequence of this undertaking, as well as other software development projects, research and development expenses in the third and fourth quarters of fiscal 1997 were higher than historical levels. 23 MERGER RELATED COSTS. Merger related costs consisted of one-time compensation expense of $589,000 attributable to the accelerated vesting during fiscal 1996 of an option granted to an executive of ASI during fiscal 1995, as well as one-time transaction costs of $834,000 related to the acquisition of ASI by the Company. OTHER INCOME (EXPENSE), NET. Other income (expense) increased from ($386,000) in fiscal 1996 to $99,000 in fiscal 1997. Other income (expense) consists of interest income (net) and non-recurring income (expense) relating to PSN. During fiscal 1996, the Company recorded a reserve of $500,000 to reflect the potential uncollectibility of a loan made to PSN. PROVISION FOR INCOME TAXES. Income tax provision increased from $1.1 million in fiscal 1996 to $2.1 million in fiscal 1997, reflecting an effective tax rate of 44.9% for fiscal 1996 compared with 40.2% for fiscal 1997. Fiscal 1996 included a pro forma tax on earnings of ASI, as ASI was not subject to tax as an S corporation (see Note 5 of Notes to Consolidated Financial Statements). The effective tax rate in fiscal 1996 was larger compared to fiscal 1997 primarily due to the merger with ASI. The Company incurred $450,000 of nondeductible merger costs which increased the fiscal 1996 effective tax rate. Without the impact of merger related costs, the fiscal 1996 effective tax rate would have been 38%. YEAR ENDED JANUARY 31, 1996 (FISCAL 1995) COMPARED TO YEAR ENDED JANUARY 31, 1997 (FISCAL 1996) REVENUES. The Company's total revenues increased by 57.3% from $18.5 million in fiscal 1995 to $29.1 million in fiscal 1996. The increase was the result of growth in each of the Company's business lines. Revenues from consulting and management services increased by 50.0% from $9.6 million in fiscal 1995 to $14.4 million in fiscal 1996 as a result of an increase in engagements, as well as an increase in demand for the Company's higher-priced services. Software license revenues increased 73.0% from $3.7 million in fiscal 1995 to $6.4 million in fiscal 1996. Growth in software license revenues primarily resulted from the successful rollout of the RESERVELINK product, which accounted for approximately $2.2 million of the growth. Software maintenance and implementation revenues increased by 38.1% from $4.2 million in fiscal 1995 to $5.8 million in fiscal 1996. Software maintenance and implementation revenues increased by over $1.6 million, approximately $580,000 of which was due to increased RESERVELINK sales. Hardware sales increased 127.3% from $1.1 million in fiscal 1995 to $2.5 million in fiscal 1996. Increased requests by customers for bundled hardware and license deliveries generated the increase. COST OF REVENUES. Total cost of revenues increased by 63.0% from $9.2 million in fiscal 1995 to $15.0 million in fiscal 1996. This increase resulted primarily from an increase in the cost of revenues related to consulting and management services and software licenses. Cost of revenues in consulting and management services increased by 66.0% from $5.3 million in fiscal 1995 to $8.8 million in fiscal 1996, which primarily resulted from increases in personnel. Cost of revenues of software licenses increased by 85.7% from $700,000 in fiscal 1995 to $1.3 million in fiscal 1996, which was caused primarily by increases in royalty costs of approximately $500,000 driven by growth in software license sales. Cost of revenues of software maintenance and implementation increased by 29.2% from $2.4 million in fiscal 1995 to $3.1 million in fiscal 1996. This increase was attributable predominantly to increased personnel. Cost of revenues for hardware sales increased 125.8% from $753,000 in fiscal 1995 to $1.7 million in fiscal 1996. This increase resulted from increased hardware sales during fiscal 1996. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 50.9% from $5.7 million in fiscal 1995 to $8.6 million in fiscal 1996. This increase resulted from increases in management, marketing and sales staff, combined with larger bonus payments and fees for professional services. Selling, general and administrative expenses as a percentage of revenues decreased from 30.7% in fiscal 1995 to 29.8% in fiscal 1996. 24 RESEARCH AND DEVELOPMENT. Research and development expenses increased 32.5% from $906,000 in fiscal 1995 to $1.2 million in fiscal 1996. This increase reflected the Company's continued efforts to develop additional software applications and enhancements to certain of its existing applications. OTHER INCOME (EXPENSE), NET. Other income (expense) decreased 227.0% from $304,000 in fiscal 1995 to ($386,000) in fiscal 1996. Interest income (net) increased 111.1% from $54,000 during fiscal 1995 to $114,000 during fiscal 1996. The Company recognized investment income of $250,000 in fiscal 1995 and investment expense of $500,000 in fiscal 1996. Investment income during fiscal 1995 represented cash collected from PSN resulting from the sale of the Company's interest in PSN during fiscal 1995. The investment expense during fiscal 1996 represents the establishment of an allowance for the potential that amounts loaned to PSN during fiscal 1996 may not be collectible. PROVISION FOR INCOME TAXES. Income tax provision decreased from $1.2 million in fiscal 1995 to $1.1 million in fiscal 1996, reflecting an effective tax rate of 38.5% for fiscal 1995 compared with 44.9% for fiscal 1996. Both fiscal years included a pro forma tax on the earnings of ASI, as ASI was not subject to tax as an S corporation (see Note 5 of Notes to Consolidated Financial Statements). The increase in the effective tax rate from fiscal 1995 to fiscal 1996 primarily resulted from the impact that nondeductible merger costs had on the fiscal 1996 provision. 25 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly data for each of the Company's last eight quarters ended January 31, 1998. Such data also are expressed as a percentage of the Company's total revenues for the periods indicated. The data have been derived from the Company's unaudited consolidated financial statements that, in management's opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as any indication of future performance. See "Risk Factors--Fluctuations in Quarterly Operating Results."
THREE MONTHS ENDED --------------------------------------------------------------- APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, 1996 1996 1996 1997 1997 ----------- ----------- ----------- ----------- ----------- (In thousands, except per share data) Revenues: Consulting and management service fees................. $ 2,315 $ 3,628 $ 4,390 $ 4,074 $ 4,139 Software license fees.................................. 877 1,004 2,765 1,752 1,261 Software maintenance and implementation fees........... 1,160 1,120 1,773 1,746 1,793 Hardware sales......................................... 787 385 568 728 321 ----------- ----------- ----------- ----------- ----------- Total revenues....................................... 5,139 6,137 9,496 8,300 7,514 ----------- ----------- ----------- ----------- ----------- Costs of revenues: Consulting and management service fees................. 1,607 2,175 2,464 2,548 2,777 Software license fees.................................. 214 422 416 255 227 Software maintenance and implementation fees........... 551 541 919 1,097 1,051 Hardware sales......................................... 420 239 435 652 249 ----------- ----------- ----------- ----------- ----------- Total cost of revenues............................... 2,792 3,377 4,234 4,552 4,304 ----------- ----------- ----------- ----------- ----------- Gross profit............................................. 2,347 2,760 5,262 3,748 3,210 ----------- ----------- ----------- ----------- ----------- Operating costs and expenses: Selling, general and administrative.................... 1,718 1,806 2,613 2,512 2,442 Research and development............................... 255 313 380 213 573 Merger related costs................................... 80 80 80 1,183 -- ----------- ----------- ----------- ----------- ----------- Total operating cost and expenses.................... 2,053 2,199 3,073 3,908 3,015 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations............................ 294 561 2,189 (160) 195 Other income (expense)................................... 36 12 6 (440) 49 ----------- ----------- ----------- ----------- ----------- Income before provision for income taxes................. 330 573 2,195 (600) 244 Provision for income taxes............................... 122 212 813 (25) 98 ----------- ----------- ----------- ----------- ----------- Net income (loss)........................................ $ 208 $ 361 $ 1,382 $ (575) $ 146 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic earnings (loss) per share.......................... $ .02 $ .03 $ .13 $ (.05) $ .01 Diluted earnings (loss) per share........................ $ .02 $ .03 $ .12 $ (.05) $ .01 AS A PERCENTAGE OF TOTAL REVENUES --------------------------------------------------------------- Revenues: Consulting and management service fees................. 45.0% 59.1% 46.2% 49.1% 55.0% Software license fees.................................. 17.1 16.4 29.1 21.1 16.8 Software maintenance and implementation fees........... 22.6 18.2 18.7 21.0 23.9 Hardware sales......................................... 15.3 6.3 6.0 8.8 4.3 ----------- ----------- ----------- ----------- ----------- Total revenues....................................... 100.0 100.0 100.0 100.0 100.0 ----------- ----------- ----------- ----------- ----------- Cost of revenues: Consulting and management service fees................. 31.3 35.4 25.9 30.6 37.0 Software license fees.................................. 4.2 6.9 4.4 3.1 3.0 Software maintenance and implementation fees........... 10.7 8.8 9.7 13.2 14.0 Hardware sales......................................... 8.1 3.9 4.6 7.9 3.3 ----------- ----------- ----------- ----------- ----------- Total cost of revenues............................... 54.3 55.0 44.6 54.8 57.3 ----------- ----------- ----------- ----------- ----------- Gross profit............................................. 45.7 45.0 55.4 45.2 42.7 ----------- ----------- ----------- ----------- ----------- Operating cost and expenses: Selling, general and administrative.................... 33.4 29.4 27.4 30.3 32.5 Research and development............................... 5.0 5.1 4.0 2.5 7.6 Merger related costs................................... 1.6 1.3 0.8 14.3 -- ----------- ----------- ----------- ----------- ----------- Total operating cost and expenses.................... 40.0 35.8 32.2 47.1 40.1 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations............................ 5.7 9.2 23.2 (1.9) 2.6 Other income (expense)................................... 0.7 0.2 0.1 (5.3) 0.7 ----------- ----------- ----------- ----------- ----------- Income before provision for income taxes................. 6.4 9.4 23.3 (7.2) 3.3 Provision for income taxes............................... 2.4 3.5 8.6 (0.3) 1.3 ----------- ----------- ----------- ----------- ----------- Net income (loss)........................................ 4.0% 5.9% 14.7% (6.9)% 2.0% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- JULY 31, OCT. 31, JAN. 31, 1997 1997 1998 ----------- ----------- ----------- Revenues: Consulting and management service fees................. $ 6,777 $ 5,724 $ 4,674 Software license fees.................................. 1,163 2,979 4,797 Software maintenance and implementation fees........... 2,034 1,856 1,746 Hardware sales......................................... 906 289 42 ----------- ----------- ----------- Total revenues....................................... 10,880 10,848 11,259 ----------- ----------- ----------- Costs of revenues: Consulting and management service fees................. 3,116 3,298 3,203 Software license fees.................................. 258 564 363 Software maintenance and implementation fees........... 1,371 1,602 1,345 Hardware sales......................................... 810 250 31 ----------- ----------- ----------- Total cost of revenues............................... 5,555 5,714 4,942 ----------- ----------- ----------- Gross profit............................................. 5,325 5,134 6,317 ----------- ----------- ----------- Operating costs and expenses: Selling, general and administrative.................... 2,809 2,761 3,517 Research and development............................... 497 1,035 1,343 Merger related costs................................... -- -- -- ----------- ----------- ----------- Total operating cost and expenses.................... 3,306 3,796 4,860 ----------- ----------- ----------- Income (loss) from operations............................ 2,019 1,338 1,457 Other income (expense)................................... 13 14 23 ----------- ----------- ----------- Income before provision for income taxes................. 2,032 1,352 1,480 Provision for income taxes............................... 817 543 595 ----------- ----------- ----------- Net income (loss)........................................ $ 1,215 $ 809 $ 885 ----------- ----------- ----------- ----------- ----------- ----------- Basic earnings (loss) per share.......................... $ .11 $ .07 $ .08 Diluted earnings (loss) per share........................ $ .09 $ .06 $ .06 Revenues: Consulting and management service fees................. 62.3% 52.8% 41.5% Software license fees.................................. 10.7 27.4 42.6 Software maintenance and implementation fees........... 18.7 17.1 15.5 Hardware sales......................................... 8.3 2.7 0.4 ----------- ----------- ----------- Total revenues....................................... 100.0 100.0 100.0 ----------- ----------- ----------- Cost of revenues: Consulting and management service fees................. 28.6 30.4 28.5 Software license fees.................................. 2.4 5.2 3.2 Software maintenance and implementation fees........... 12.7 14.8 11.9 Hardware sales......................................... 7.4 2.3 0.3 ----------- ----------- ----------- Total cost of revenues............................... 51.1 52.7 43.9 ----------- ----------- ----------- Gross profit............................................. 48.9 47.3 56.1 ----------- ----------- ----------- Operating cost and expenses: Selling, general and administrative.................... 25.8 25.5 31.2 Research and development............................... 4.6 9.5 11.9 Merger related costs................................... -- -- -- ----------- ----------- ----------- Total operating cost and expenses.................... 30.4 35.0 43.1 ----------- ----------- ----------- Income (loss) from operations............................ 18.5 12.3 13.0 Other income (expense)................................... 0.1 0.1 0.2 ----------- ----------- ----------- Income before provision for income taxes................. 18.6 12.4 13.2 Provision for income taxes............................... 7.5 5.0 5.3 ----------- ----------- ----------- Net income (loss)........................................ 11.1% 7.4% 7.9% ----------- ----------- ----------- ----------- ----------- -----------
26 In the quarter ended October 31, 1996, total revenues increased $3.4 million over the prior quarter due to a substantial delivery of software during the period combined with corresponding implementation services. As a result, net income for the quarter increased by $1.0 million. During the following quarter, revenues returned to more normal levels, while net income declined to a loss of $575,000 due primarily to one-time merger related costs. In the quarter ended July 31, 1997, consulting and management service fees increased $2.6 million over the prior quarter due to the completion and closing of two large projects. From time to time, the Company has experienced, and will likely experience in the future, fluctuations in revenues due to the timing of revenue recognition. See "--Overview" and "Risk Factors--Fluctuations in Quarterly Operating Results." In the quarters ended October 31, 1997 and January 31, 1998, research and development costs increased due to growth in personnel in order to accelerate the delivery of solutions to meet contract commitments. Research and development staffing levels continued to increase through the quarter ended January 31, 1998 to meet internal schedules for the completion of multiple development efforts. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1996 and 1997, the Company funded its activities through cash provided by operations. Cash provided by operating activities during fiscal 1996 and 1997 was $2.4 million and $1.6 million, respectively. At January 31, 1997 and 1998, the Company had working capital of $5.7 million and $7.4 million, respectively. Cash used in investing activities during fiscal 1996 was $1.9 million, and was primarily related to working capital loans made to PSN, purchases of property and equipment and development of capitalized software. Cash used in investing activities during fiscal 1997 was $3.3 million, and was primarily related to purchases of property and equipment, purchases of software and development of software. The Company established a reserve of $500,000 in fiscal 1996 to address the potential uncollectibility of working capital loans made to PSN. In addition, the Company has experienced in the past, and may experience in the future, delays in collecting trade receivables due to it from PSN. Cash generated through financing activities for fiscal 1996 resulted primarily from the sale of treasury stock to the Crow Family Partnership, L.P. for $834,050. Additionally, during fiscal 1996 ASI made distributions to its shareholders totaling $1.0 million for the payment of their personal income taxes resulting from ASI's status as an S corporation. Cash generated through financing activities for fiscal 1997 resulted primarily from the exercise of stock options for $159,000 and the net sale of treasury stock for $68,000. The Company has a $3.0 million revolving credit facility (the "Facility"). As of January 31, 1998, the Company had no amounts outstanding under the Facility (although $2,250,000 was outstanding at May 15, 1998). Principal amounts outstanding under the Facility bear interest at national prime (8.5% at January 31, 1998). Availability under the Facility is calculated based on 70% of qualified accounts receivable. All indebtedness under the Facility matures on July 1, 1998. The Company has pledged its inventory, accounts receivables and certain intangible rights to secure indebtedness under the Facility. Under the Facility, the Company is subject to certain covenants regarding its operations and corporate actions, such as restrictions relating to creation of liens, borrowing of funds, changes in control, liquidation and dividends. The Company believes that the net proceeds from the offering, existing cash resources and cash flows from operations will be sufficient to fund the Company's operations for at least the next twelve months. See "Use of Proceeds" for more information regarding possible future capital requirements. The Company has taken actions to address the nature and extent of the work required to make its products and systems Year 2000 compliant. The Company believes that its products are Year 2000 27 compliant, with the possible exception of certain software developed by a third-party and imbedded in one of the Company's products (the Company will continue its efforts with respect to Year 2000 compliance for this embedded software). The Company's Year 2000 compliance activities are being performed as part of the Company's normal development activity. The Company is evaluating the software employed in its internal operations and does not believe it will incur any significant Year 2000 costs associated with its internal systems. As a consequence, Year 2000 compliance costs are not expected to result in any material incremental costs to the Company. See "Risk Factors--Year 2000 Compliance." RECENTLY ISSUED ACCOUNTING STANDARDS The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"), which supersedes Statement of Position No. 91-1. The new SOP 97-2 will be effective for all transactions entered into by the Company in fiscal 1998. SOP 97-2 requires, among other things, that revenue should be recognized when there is persuasive evidence of an existing arrangement, delivery has occurred, the fees charged are fixed or determinable and collectibility is probable. Additionally, SOP 97-2 provides that for those arrangements which consist of multiple elements such as services, software, software upgrades, enhancements and post-contract support, the fees charged must be allocated to each element of the arrangement based upon vendor-specific objective evidence of fair value, which is to be determined based upon the price charged when the element is sold separately or the price for the element established by management with relevant authority. The Company currently is continuing to evaluate the impact that SOP 97-2 will have on license revenue transactions entered into subsequent to January 31, 1998. Based on the Company's reading and interpretation of SOP 97-2, the Company believes that SOP 97-2 will not have a material impact on future operating results. However, detailed implementation guidelines for this standard have not been issued. Once issued, such detailed implementation guidelines could result in changes in the Company's current revenue recognition practices, and such changes could be material to the Company's revenues and earnings. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FASB 131"), which supersedes existing accounting standards related to disclosure of operating segment information beginning in fiscal 1998. Although the Company currently operates in only one industry segment, the Company is in the process of evaluating the impact this new standard will have on the Company's financial statement disclosures in fiscal 1998. The adoption of FASB 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows and any effect will be limited to the presentation of its Consolidated Financial Statements. 28 BUSINESS THE COMPANY Carreker-Antinori is a leading provider of integrated consulting and software solutions that enable banks to increase their revenues, reduce their costs and enhance their delivery of customer services. The Company's offerings include yield management, payment systems, payment electronification and enabling technologies solutions. Carreker-Antinori's solutions assist banks in re-engineering their operational systems and implementing new software applications to increase earning assets, develop new revenue sources, improve operating efficiencies and reduce check fraud losses. The Company believes that its 20 years of experience in the banking industry, combined with its advanced technological expertise, positions it to effectively address and anticipate the challenges and opportunities faced by banks in today's increasingly competitive environment. The Company's customers include approximately two-thirds of the largest 100 bank holding companies in the United States, including Fleet Financial Group, Inc., NationsBank Corporation, Norwest Corporation and SunTrust Banks, Inc. The Company's offerings include yield management, payment systems, payment electronification and enabling technologies solutions. The Company's yield management solutions are designed to quickly increase a bank's revenues through improved operational workflows, pricing structures and liquidity and cash management. The Company's payment systems and payment electronification solutions are designed to reduce check-processing costs through procedural and technological improvements and reduced check fraud and other risks of loss. Carreker-Antinori's enabling technologies convert leading-edge technologies and ideas into practical banking solutions. INDUSTRY BACKGROUND The banking industry is one of the nation's largest industries, with aggregate annual revenues of nearly $250 billion. In recent years, the industry has undergone significant change, and today's banking environment is characterized by intense competition, continuing consolidation, changing regulations and rapid technological innovation. In addition to increased competition within the banking industry, banks are encountering significant competition from insurance companies, brokerage houses and other financial institutions, all of which are expanding to provide services that were once within the exclusive domain of banks. While banks historically have focused on reducing their operating expenses to remain competitive, they are today increasingly focusing on developing new sources of revenue growth, automating operations to increase efficiencies and outsourcing commodity-like banking functions to sustain market value growth. To this end, banks are expending significant resources, both internally and through outsourcing arrangements. Information technology expenditures by the industry in 1997 on paper-based payment systems and financial and risk management systems alone are estimated to have been approximately $1.0 billion and $2.3 billion, respectively, of which approximately 59% and 51% were paid to third parties. CONSOLIDATION Over the past several years, the banking industry has experienced substantial consolidation as banks have sought to gain a competitive advantage by acquiring other banks. This consolidation is driven by a continuing effort to increase revenues through 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. This trend has resulted in a decrease in the number of banks, but an increase in the number of banks with assets of $5 billion or more. As they grow by acquisition, these banks require improved operational processes and technological applications that increase efficiencies in order to recapture acquisition premiums paid. In the face of this consolidation trend, banks are under considerable pressure to maximize their public market valuations to enhance the attractiveness of their acquisition currency, provide a credible defense to unsolicited offers and increase returns to shareholders. 29 REGULATORY CHANGE Currently, the banking industry is characterized by continuing regulatory changes. Regulations in certain areas, such as interstate banking operations, have been relaxed while regulations in other areas, such as payment systems, have become more restrictive. These changes have presented banks with both challenges and opportunities to improve their operations and achieve competitive advantages. For instance, over the past several years changes in regulations have required banks to provide their depositors with accelerated credit on deposited checks, which has increased the risk of bank loss if the deposited checks are returned unpaid after the depositor has withdrawn the funds. A 1995 study estimated that banks absorbed $850 million of losses due to check fraud. Banks have responded by implementing expedited check processing, presentment and return item processing systems not only to reduce such losses, but also to gain added revenue and generate further efficiencies. 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. TECHNOLOGICAL INNOVATION Rapid technological innovation is creating new means for participants in the banking industry to gain competitive advantages, and this development has increased customers' expectations. Increasingly, customers are requiring that their banks provide a broader scope of banking services quickly and easily through automated teller machines ("ATMs"), by telephone or over the Internet. The banking industry has witnessed an exponential growth in distributed banking, including Internet banking, with more than 2,000 banks having launched Web sites and more than 16% of United States households estimated to be banking via the Internet by the year 2000. 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 and instruments, including checks, and the ability to recall the data quickly and to utilize the data at multiple locations simultaneously. Technology also currently enables banks to optimize their earning assets by reducing their reserve requirements. Furthermore, technological developments are fueling industry-wide advancements, such as the electronification of the check payment process. According to industry sources, in 1996, over 60 billion paper checks were used, of which electronic check payment presentment ("ECP") accounted for approximately 3%. However, electronification of the check payment system has been gaining increasing acceptance as an efficient and viable solution for eliminating the time-consuming and expensive paper shuffle. INDUSTRY CHALLENGES 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, while typically resulting in isolated, departmental solutions. Traditional third-party solutions often have their own shortcomings. Some third-party providers 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. By using multiple providers, banks face increased costs, more complex implementation and delayed realization of benefits. 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. Consequently, banks are in need of a third party, familiar with the banking industry, to provide integrated consulting services and technological applications. 30 THE CARREKER-ANTINORI SOLUTION Designed to address the unique requirements of the banking industry, Carreker-Antinori's solutions enable banks to increase revenues, reduce costs and enhance delivery of customer services. These solutions combine consulting services and technological applications in such areas as liquidity management, payment processing, deposit taking, fraud prevention, customer service and cash management services. In delivering its solutions, Carreker-Antinori: (i) gathers and analyzes information about a customer's operations, markets and external environments; (ii) identifies opportunities for revenue enhancement, cost minimization and other efficiency generating solutions; (iii) develops and proposes tailored solutions, which typically include one or more of the Company's software applications; (iv) designs a business case to justify investment in the solutions; (v) builds project consensus among senior management; and (vi) provides implementation and maintenance services. Carreker-Antinori's solutions are differentiated by the following characteristics: INDUSTRY-SPECIFIC CONSULTING EXPERTISE. The Company's consultants, managers and employees, many of whom are former bankers, include experts in complex bank operations. Carreker-Antinori provides services to approximately two-thirds of the largest 100 bank holding companies. The Company believes that its expertise and its in-depth experience have allowed it to develop the most advanced consulting services and technological applications for the banking industry. ADVANCED TECHNOLOGY. Carreker-Antinori incorporates the latest technological developments in client/server systems and protocols to produce software applications that are scaleable, functional and able to interface with a bank's legacy systems. In addition, the Company's participation in various interbank organizations enables the Company to stay at the forefront of technological innovations in the industry. INTEGRATED APPROACH. Carreker-Antinori combines its consulting expertise and proprietary technology to serve as a single-source provider of fully-integrated, end-to-end solutions that address the critical needs of banks. This approach sets the Company 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, the Company achieves more rapid identification and implementation of solutions than would a piecemeal approach. REDUCED CUSTOMER RISK. The Company's solutions reduce investment risk by increasing revenues or reducing costs in a relatively short period of time. In addition, in appropriate circumstances, the Company value-prices certain of its solutions, whereby it receives a percentage of the amount of additional revenues or reduced costs achieved by the customer. These arrangements allow banks to fund their investments in the Company's solutions with the benefits derived from their implementation. BROAD ARRAY OF SERVICES AND TECHNOLOGY. The Company believes that its offerings of yield management, payment systems and related bank operations solutions are the broadest in the banking industry. By offering a broad set of complementary solutions, the Company is able 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. The Company believes that by offering a wide variety of solutions, it enhances the value that is offered to its customers. 31 STRATEGY The Company's objective is to be the leading provider of yield management, payment systems, payment electronification and enabling technologies solutions to the banking industry, and to continue to serve in a leadership role in transitioning the check payment system from paper to electronic formats. Key elements of the Company's strategy include the following: ADVANCE POSITION AS INDUSTRY INNOVATOR. Carreker-Antinori intends to maintain its consulting and technology leadership position in the banking industry by anticipating and responding to evolving industry needs and creating consulting services and technological applications that address these needs. Through its industry contacts and customer interaction, the Company plans to identify new methods for converting leading-edge technologies and ideas into practical banking solutions. The Company's leadership position is enhanced by the role it plays in ECCHO and PSN, which enables it to be an infrastructure development partner to the banking industry as it transitions the check payment system from paper to electronic formats. PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. The Company seeks to form alliances with large service providers or acquire smaller companies whose solutions, when combined with those of the Company, provide incremental value-added benefits to banks. The Company has implemented this strategy through its acquisition of ASI, its strategic alliance with Visa and IBM Global Services in forming PSN and its recent alliance with UPS Worldwide Logistics, National Processing Company, Fiserv, Inc. and Brink's Incorporated relating to INFITEQ. The Company believes that strategic alliances and acquisitions will further enable the Company to combine its own solutions with those of complementary businesses, provide it with strong opportunities to expand its line of banking solutions, increase its customer base and pursue new growth platforms. LEVERAGE MARKET POSITION TO EXPAND CUSTOMER BASE. The Company seeks to increase its customer base by leveraging its strong relationships with Tier I and Tier II Banks to market its solutions to other Tier II Banks and selected smaller banks and other financial institutions. The Company also intends to leverage its existing technological applications by marketing them to smaller banks that do not require significant customization or implementation services. Additionally, the Company plans to leverage its position of being a leading provider of integrated consulting and software solutions to the banking industry in the United States market to pursue international customers, particularly banks elsewhere in North America and in Europe. To this end, the Company recently has provided solutions internationally to Barclays Bank and National Westminster Bank, as well as to four of the largest Canadian banks through several service companies owned by these banks. Furthermore, as non-bank financial institutions aggressively continue to expand their markets to include related financial services, the Company is identifying new opportunities to market its solutions to these institutions. BUILD LONG-TERM RELATIONSHIPS. By focusing on long-term customer relationships where the Company can identify and offer a continual stream of value-added solutions, the Company intends to increase its repeat business with existing customers. Through its long-term customer relationships, the Company plans to continue focusing on the generation of significant year-to-year revenues, which typically produce higher gross profit margins as the Company is able to deliver value-added solutions to existing customers without incurring many of the start-up costs associated with the development of new relationships. INCREASE USE OF HIGH-MARGIN PRICING ARRANGEMENTS. Carreker-Antinori will continue to share in the value that its solutions create for customers by expanding the use of pricing methods and negotiated arrangements to generate recurring and high-margin revenues. The Company will seek 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 or measured. In addition, the Company intends to expand its practice of structuring license fees for software-based solutions according to the number of transactions processed with the solutions, which will increase its recurring revenues and smooth period-to-period revenues. 32 PRODUCTS AND SERVICES The Company offers a wide range of consulting services and state-of-the-art, proprietary technology applications designed to address the unique requirements of the banking industry. The Company's services and technology applications fall into five categories: Yield Management, Payment Systems, Payment Electronification, Enabling Technologies and Management Services, with most of these categories consisting of a number of practices. The Company's solutions are sold individually, or complementary solutions may be sold together (similarly, software products may be sold individually or as part of a product suite). The following table summarizes the Company's solutions, together with each of their respective practices:
SOLUTIONS DESCRIPTION - ------------------------------- --------------------------------------------------------------------------------- YIELD MANAGEMENT REVENUE ENHANCEMENT Improves operational workflows and processes and pricing structures employed by a bank. LIQUIDITY MANAGEMENT Reduces the amount of non-earning assets that a bank maintains in reserve accounts or in cash on hand. The solutions incorporate reserve management and cash management software, including RESERVELINK, RESERVELINK PLUS, THE ANALYSIS ADVANTAGE, CASHFORECASTER and CASHTRACKER. CASH MANAGEMENT Improves efficiency and effectiveness of a bank's cash management business lines and related practices. PAYMENT SYSTEMS CONSOLIDATION AND BEST Consolidates check processing operations, streamlines payment process flows and PRACTICES enables potential reductions of full-time personnel. The solutions incorporate software applications, including INNOVASION and SYNAPSE, that enable a bank to obtain customer or internally requested information electronically. FLOAT MANAGEMENT Enhances bank float management through improved check collection, workflow and float allocation and pricing. The solutions incorporate software applications, including DEPOSITMANAGER, BRANCH ITEM TRUNCATION, FLOAT PRICING SYSTEM and FLOAT ANALYSIS SYSTEM, that simplify the processing of certain customer deposits, facilitate float processing and enable a bank to increase its competitiveness by extending teller window hours. RISK MANAGEMENT Reduces risk of loss from the check payment process as a result of operational failures, check fraud and litigation. The solutions incorporate software applications, including ON-US FRAUD and TRANSIT FRAUD, that identify potentially fraudulent checks. PAYMENT ELECTRONIFICATION Facilitates the capture of the benefits from the electronification of the check payment process. The solutions incorporate software applications, including SMARTNOTES, TNOTES and CNOTES, that reduce the risk of loss at a number of points in the check payment process. ENABLING TECHNOLOGIES ELECTRONIC COMMERCE Develops and implements a bank's electronic commerce strategy. YEAR 2000 Assesses a bank's ability to process data during the transition from the year 1999 to the year 2000 without functional or data abnormality. IMAGE SYSTEMS Applies check imaging technologies to improve the efficiency of a bank's "back-office" customer service operations. INTEGRATION SERVICES Aligns work processes, information needs, business infrastructure and long-term strategic goals with operational practices and technology applications. MANAGEMENT SERVICES Provides management services to ECCHO, PSN and INFITEQ.
33 YIELD MANAGEMENT The Company's Yield Management solutions utilize Carreker-Antinori's in-depth banking expertise and history of innovation to produce increased revenues for banks in a compressed time frame through improved operational workflows, pricing structures and liquidity and cash management. The Yield Management solutions generally consist of three practices: revenue enhancement, liquidity management and cash management. REVENUE ENHANCEMENT The revenue enhancement practice identifies opportunities to increase a bank's revenues quickly and recommends operational practices to capitalize on these opportunities. In this practice, the Company analyzes a bank's records and interviews bank representatives to obtain information regarding a bank's retail and commercial business, markets, products, pricing policies, workflow practices and operating procedures. This analysis typically focuses on several functional areas, including check, loan, deposit and trust operations, deposit and loan product management, finance and accounting. With this information, the Company is able to recommend changes in fee structures, operational processes and other procedures to increase a bank's revenues. LIQUIDITY MANAGEMENT The liquidity management practice enables a bank to increase its revenues by minimizing the amount of non-earning assets that, under applicable regulations, the bank is obligated to maintain as a reserve against deposit balances. Banks typically satisfy their reserve requirement by maintaining interest-free balances at the Federal Reserve Bank and as cash in vaults, branches and ATMs. By minimizing the level of reserves the bank is required to maintain, the liquidity management practice enables the bank to re-deploy funds maintained in interest free balances at the Federal Reserve Bank to more productive uses. Additionally, this practice assists banks in identifying cash-on-hand that is surplus to normal operating requirements and reserve requirements so that such surplus may be re-deployed in earning assets. The Company's RESERVELINK and RESERVELINK PLUS applications minimize a bank's required reserves by automatically sweeping daily balances in consumer and commercial accounts from transaction accounts, which are subject to a 10% reserve requirement, to non-transaction accounts, which have no reserve requirement. THE ANALYSIS ADVANTAGE application allows a bank, if it so desires, to share the benefits from reduced reserves with its commercial customers. In addition, the Company's CASHFORECASTER, ATM CASHFORECASTER and CASHTRACKER software applications are designed to identify surplus cash in a bank's branches and ATMs, which information can then be used to reduce a bank's cash inventory. CASH MANAGEMENT The cash management practice enhances the revenues that certain large banks derive from providing their institutional customers with cash management services, such as check clearing, lockbox and money transfer services. In this practice, the Company reviews the profitability, quality of delivery and overall business strategy of a bank's cash management lines of business and benchmarks the bank's performance against other industry participants. Following such a review, the Company proposes and implements specific adjustments relating to business strategies, market segmentation, product offerings and pricing policies to improve the financial performance of the bank's cash management business line. PAYMENT SYSTEMS The Payment Systems solutions assist banks in reducing check-processing costs through procedural and technological improvements that support internal growth and acquisitions, standardize transactional processing and reduce risk of loss. The Company's Payment Systems solutions enable banks to manage their check processing operations to function more efficiently and effectively at reduced costs without compromising customer service. The Payment Systems solutions generally consist of three practices: consolidation and best practices, float management and risk management. 34 CONSOLIDATION AND BEST PRACTICES The consolidation and best practices practice reduces bank operating costs in the area of check processing by consolidating check-processing centers, streamlining check-process flows and reducing personnel to achieve economies of scale, better management control, more standardized operations and improved customer service. This practice also uses industry benchmarks to assure that a bank's check-processing operations are utilizing the industry's most advanced procedures. The consolidation and best practices practice has been used in a variety of contexts that require streamlined check-processing operations, including reconfiguring multi-state operations into a single operation, collapsing multi-state banking charters into a single state charter, and re-engineering "back-office" operations through the application of technology. The consolidation and best practices practice offers technology applications that focus on different areas of check processing, including customer service and research and adjustments. The Company's technology applications that focus on customer service, INNOVASION and SYNAPSE, enable a bank to obtain electronically information needed internally by the bank or for customer requests that require a copy of a check or other documentation, such as a statement of account. Technology applications focused on adjustments and research allow banks to respond to inquiries about checks that are stored in the bank's archives. FLOAT MANAGEMENT The Company's float management practice focuses on a bank's check-processing procedures and increases a bank's investable funds by optimizing bank float profitability through improved check collection, efficient check-processing workflow and float allocation and pricing. As a result of the implementation of float management practices, a bank can reduce the float and related costs that the bank incurs, increase the float allocated to the bank's customers, decrease the bank's non-earning assets, improve the bank's check-processing workflow, increase the bank's profitability and improve the bank's management reporting. The float management practice consists generally of conducting float audits and performing reviews and analyses of check-processing workflow, float management organization, structure and reporting, check clearing and market segmentation. The float management practice offers software applications that focus on different approaches to optimizing a bank's float. The Company's technology applications, such as FLOAT PRICING SYSTEM and FLOAT ANALYSIS SYSTEM, assist banks in taking maximum advantage of float by selectively pricing the availability of funds for deposited checks, measuring float profitability by customer and generating detailed check clearing end-point data. The Company also offers technology applications, such as BRANCH ITEM TRUNCATION and DEPOSIT MANAGER, that simplify the processing of customer deposits containing five items or less and enable banks to become more competitive by extending teller window hours while still meeting "back-office" processing deadlines. RISK MANAGEMENT The risk management practice assists banks in identifying and reducing the risk of loss from the check payment process as a result of operational failures, check fraud and litigation. The Company provides risk management reviews and training and offers implementation and support of its risk management technology applications. The Company also offers "expert opinion" services for litigation support. The Company's risk management technology applications consist of an application for deposited checks drawn by the bank's customer and an application for deposited checks drawn on other banks. The application for checks drawn by the bank's customer, ON-US FRAUD, detects potential fraud both at the teller station and in the bank's "back-office" using a set of bank-defined detection rules, such as duplicate check numbers, out-of-range check numbers, out-of-range amount and inconsistent account activity. The technology application for checks drawn on other banks and deposited with the customer bank, TRANSIT FRAUD, detects deposit fraud by evaluating each deposited item and account against a series of bank-defined detection rules to identify those items that have a high probability of being fraudulent. This technology application also lists "suspects" in a report so that bank personnel can exercise their judgment on whether to allow a depositor to withdraw funds against the deposited item or account. 35 PAYMENT ELECTRONIFICATION The Company's Payment Electronification solutions enable banks to capture the benefits from the conversion of paper checks to electronic items. These benefits, estimated by ECCHO to be between $2 billion and $3 billion for the banking industry as a whole, arise in the near term from the earlier electronic presentment and collection of checks deposited at one bank and drawn on another, the reduced risk of loss from earlier electronic identification of checks that have been or are likely to be returned unpaid, new sources of fee revenue from a bank's institutional customers who stand to benefit from additional services made possible by the electronification of checks, and in the longer term, from the reduced costs associated with the truncation of paper checks at the bank of first deposit. The Company's Payment Electronification solutions incorporate a number of technology applications, such as CHECKLINK, that allow banks to electronically present checks drawn on other banks and receiving banks to post these checks to their books from the electronic transmission in advance of receipt of the paper item, which increases the receiving bank's investable funds as customers replenish the balances in their accounts earlier than they otherwise would. Additionally, the Company offers a suite of technology applications, such as SMARTNOTES, TNOTES and CNOTES, that reduce the risk of loss from returned checks and fraudulent checks by enabling early electronic communication with respect to these items between banks, between banks and their customers, and between banks and third parties that furnish such information to the retailing industry. ENABLING TECHNOLOGIES The Enabling Technologies solutions provide services and products that assist in the deployment of advanced technologies, while enabling the rapid realization of benefits from these technologies, such as higher revenues, reduced costs and heightened customer service. The current Enabling Technologies solutions consist generally of four practices: electronic commerce, Year 2000, image systems and integration services. ELECTRONIC COMMERCE The electronic commerce practice provides electronic commerce solutions to banks that lack current on-line transactional capabilities. The Company's electronic commerce solutions are designed to enable banks to attract and retain larger numbers of customers, expand their geographic reach and create a lower cost transaction processing platform. In the electronic commerce practice, the Company assists in the development and execution of the bank's electronic commerce strategy, the design of the electronic commerce transaction processing platform and the procurement of appropriate technologies. YEAR 2000 The Company's Year 2000 practice assists banks in determining whether their systems will be able to manage and manipulate data in the context of the transition of the dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such dates. In this practice, the Company tests a bank's computer-dependent systems and infrastructure to assure that they are able to make the transfer to the year 2000 both independently and in concert with other interrelated systems. The Company also partners with third parties that provide additional resources to address the Year 2000 problem. By combining the Company's expertise with the resources of these partners, Carreker-Antinori is able to provide banks with a comprehensive solution to their Year 2000 problems. IMAGE SYSTEMS The image system deployment practice assists banks in increasing "back-office" productivity through the use of image technologies. In many of a bank's areas of operation, the use of an electronically stored image that can be recalled quickly from a database and used in several places simultaneously greatly streamlines a bank's operational processes. In its image system deployment practice, the Company capitalizes on its industry leadership and technological expertise to identify potential changes that image system deployment can make to a bank's current workflow. 36 INTEGRATION SERVICES The integration services practice assists banks in aligning their technology and systems with their work processes, information needs, business infrastructure and long-term strategic goals. In the integration services practice, the Company provides banks with business process modeling, as well as process simulation that incorporates the solutions proposed by the Company. The Company also combines prototype client/server systems with mainframe legacy systems and assists with architecture design and systems development. Additionally, the Company implements operational processes and assists in training bank personnel to realize the benefits of the Company's proposals. MANAGEMENT SERVICES The Company provides management services to three banking organizations: ECCHO, PSN and INFITEQ. The Company provides all of ECCHO's and PSN's non-legal management services, which include administration, research and development, industry representation and public relations. For INFITEQ, the Company is responsible for customer service, quality assurance, recruiting additional service providers, billing, marketing, sales, integrating products and technology and acting as the organization's general manager (subject to the supervision, direction and approval of the board of managers of INFITEQ). See "--Strategic Banking Initiatives." CUSTOMERS AND MARKETS A substantial majority of the Company's revenues are generated from contracts with Tier I Banks (bank holding companies with assets over $50 billion) and Tier II Banks (bank holding companies and independent banks with assets of between $5 billion and $50 billion). The Company's customers include 95% of Tier I Banks, including Fleet Financial Group, Inc., NationsBank Corporation, Norwest Corporation and SunTrust Banks, Inc. In fiscal 1997, Fleet Financial Group, Inc. and Norwest Corporation accounted for approximately 15% and 14% of the Company's revenues, respectively. See "Risk Factors-- Customer Concentration." The Company's customers include approximately 60% of Tier II Banks, including Comerica Incorporated, Firstar Corporation, Huntington Bancshares and Summit Service Corporation. The Company also targets smaller bank holding companies and independent banks with assets of between $550 million and $5 billion. Smaller bank customers include California Federal Savings Bank, Mechanics Bank and U.S. Trust Company. The Company believes that the smaller bank market affords it an opportunity for growth. See "--Strategy--Leverage Market Position to Expand Customer Base" and "Risk Factors--Dependence on Banking Industry." The Company enters into numerous types of engagements with customers. The needs of each customer are unique, and Carreker-Antinori seeks to provide those specific solutions that most effectively address a customer's needs. A model engagement is set forth below. MODEL ENGAGEMENT In a model engagement, the Company would conduct its due diligence review of a bank's operations within a short time span of six-to-eight weeks to identify opportunities that would enhance the bank's revenues and reduce the bank's expenses. Upon identification of these opportunities and agreement by the bank, Carreker-Antinori would implement certain of its yield management solutions (revenue enhancement and liquidity management), and certain of its payment systems solutions (float management and risk management), to rapidly generate enhanced revenues and cost reductions for the bank. These solutions often incorporate technology applications, such as RESERVELINK, FLOAT PRICING SYSTEM, FLOAT ANALYSIS SYSTEM, ON-US FRAUD and TRANSIT FRAUD, and are designed to enable the bank to recover its investment in a shorter time frame than would be the case with competing alternatives. Upon the bank realizing the near-term benefits of the solutions that previously were implemented, the Company would work with the bank to install additional solutions that may require a longer period of time 37 to implement. These solutions include services from the liquidity management practice and consolidation and best practices practice, as well as implementation of software applications, such as RESERVELINK PLUS, CASHTRACKER, CASHFORECASTER, INNOVASION and SYNAPSE, to improve the bank's "back-office" operations. As the bank realizes further revenue enhancements, cost reductions and customer service improvements from these solutions, the Company would work with the bank to provide additional services and technology applications that further improve the operational efficiency of the bank and generate new sources of revenue. These solutions would include consulting services and technology applications from the payment electronification practice and from certain of its enabling technologies practices (electronic commerce, Year 2000, image systems and integration services). SALES AND MARKETING The Company has developed strong relationships with many senior bank executives as a result of its delivery of effective solutions to Tier I and Tier II Banks for 20 years. In addition, Carreker-Antinori's leadership position within the industry enables it to develop relationships with senior banking executives of its prospective customers. The Company has found that an important element of its success has been its ability to maintain relationships with banking executives as they are elevated to senior positions in a consolidating banking industry. The Company believes that the strength of its customer relationships contributes significantly to sales and marketing efforts. The Company has seven Account Relationship Managers ("ARMs") who are responsible for managing the Company's day-to-day relationships with its customers. Their responsibilities include identifying customers' needs and assisting the Company's practice managers in presenting their solutions and concluding sales. The Company's ARMs work closely with the Company's executive officers who serve as Executive Relationship Managers ("ERMs") to the Company's customers. The Company also employs Software Account Managers ("SAMs") who are familiar with the Company's technology and who participate in opportunities to sell technology-based solutions. The Company derives a significant portion of its business through customer referrals and repeat business. In addition, the Company markets its services through a variety of media, including: the Company's Web site, direct mail, "user" conferences conducted by Carreker-Antinori exclusively for its customers, speaking engagements, participation in industry conferences and trade shows, publication of "white papers" related to specific aspects of the Company's services, customer newsletters, and informational listings in trade journals. The Company employs a marketing staff of seven persons, including graphics designers, writers, administrative coordinators and a Web master. STRATEGIC BANKING INITIATIVES The Company provides management services to ECCHO and PSN, each of which is playing an instrumental role in the electronification of the check payment process. In addition, the Company is a co-founder of INFITEQ, which provides outsourcing services to the banking industry. ECCHO ECCHO, Electronic Check Clearing House Organization, is a not-for-profit rules and standards organization whose bank members hold approximately 80% of the deposits held by the top 100 banks in the United States. This organization is committed to promoting the transition of payment systems from paper to electronic formats. ECCHO intends to accomplish these goals by aligning the relationships among various participants in the banking industry to promote the rapid acceptance and implementation of electronic check applications. PSN PSN, Payment Systems Network, Inc., is a corporation owned by VISA USA and 19 bank holding companies representing more than 180 banks in all 50 states, which collectively hold over 40% of bank 38 deposits in the United States. VISA USA and a subsidiary of International Business Machines (IBM) are strategic suppliers to PSN. PSN strives to support the initiatives of ECCHO by creating products that will generate new revenue streams and reduce fraud losses and processing expenses for banks and provide incentives to banks to take incremental steps towards the utilization of electronic check processing. PSN's products incorporate a number of applications developed by the Company, such as SMARTNOTES, TNOTES and CNOTES. See "--Products and Services--Payment Electronification." INFITEQ INFITEQ, a joint venture among the Company, UPS Worldwide Logistics, National Processing Company, Fiserv, Inc. and Brink's Incorporated, is a single-source provider of specialized outsourcing services to the banking industry for transaction processing, information management, electronic commerce and image technology. INFITEQ integrates leading providers of specific services into a broad cafeteria of service offerings, which allows banks to economically expand the number of services offered to customers by outsourcing these additional services. INFITEQ offers to banks the expertise of UPS Worldwide Logistics in package delivery and ground/air logistics, National Processing Company in the retail lockbox business and image-enabled remote capture, Fiserv, Inc. in its compute/capture centers and its deposit processing system, and the Company in payment systems, cash management, system integration, data warehousing, Year 2000 solutions and electronic commerce. INFITEQ markets its broad array of services as a complement to the services that the bank performs itself. SOLUTIONS DEVELOPMENT The Company seeks to maintain its position as a leading innovator in the banking industry by converting leading-edge technologies and ideas into practical banking solutions. The Company's relationships with its customers provide it with opportunities to identify additional bank needs. The Company's solutions development activities focus on prototyping promising applications, test marketing new products, developing sales strategies and coordinating distribution and on-going maintenance for each of the Company's solutions. The Company frequently receives customer requests for new services and/or software, develops solutions in response to these requests and historically has been able to recoup some or all of its development costs from these customers. In addition to customer-funded solutions development, the Company has invested significant amounts in solutions development, including expenditures of $906,000, $1.2 million and $3.4 million for software development in fiscal 1995, 1996 and 1997, respectively. Further, some of the Company's key product introductions have resulted from the adaptation for a wider market of customized solutions that were originally developed by customers for their internal use. In exchange for either a one-time payment and/or on-going royalties, the Company is often able to obtain the right to develop, enhance and market such products. The Company believes that its leadership role in and interaction with the banking industry through ECCHO, PSN and INFITEQ uniquely position it to identify and develop interbank solutions that have bilateral or multilateral banking industry applications. The Company believes that its management of these organizations provides further opportunities to recognize and respond to the changing needs of the banking industry. TECHNOLOGY The Company designs its software products to incorporate the latest developments in open systems architecture and protocols to provide maximum scaleability and functionality and to interface with a bank's legacy systems. The Company's core proprietary technologies, for both its client/server software products and mainframe software products, are primarily directed at using a standard set of components, drivers 39 and application interfaces so that the Company's software products are constructed from reusable components which are linked together in a tool-set fashion. Most of the Company's client/server software products are based upon the Company's proprietary SYNAPSE architecture. The SYNAPSE architecture is a component framework that provides reusable building blocks or object-oriented components for developing multi-tiered, highly distributed software applications. The SYNAPSE architecture is intended to provide a straightforward framework for defining and implementing the core, or low level, components used in constructing software products. The current core components of the SYNAPSE architecture include DAS persistent object, trace/audit component and viewer, messaging infrastructure, network management functionality, work flow engine, folder manager, distribution manager, DAS client and data archive server. The Company has adopted the IBM System Application Architecture for developing its interactive screen designs for its mainframe products and for interactions with other systems, such as client/server products. The Company's mainframe software products have been evolving toward a standard set of core processing components, drivers and exit points and are more fully leveraging published standard application programming interfaces. As a result, the Company can employ reusable components to create new utility modules and link them together in a tool-set fashion, much like objects in object-oriented programming. The Company has a number of software products that either fall within the client/server or the batch-oriented file sharing categories. Many of the newer software products are developed to operate with an OS/2 and/or Windows NT operating system. Most of the Company's mainframe software products are written in COBOL. The Company has several software products that operate on two or more of these operating systems. For example, the Company's INNOVASION software application operates with the OS/2 operating system, while the Company's DAS software application, a substantially similar product programmed in C++, operates with the Windows NT operating system. The Company develops its technology both internally and, in certain strategically beneficial situations, with third-party preferred developers that can offer an expertise within a core competency. For example, currently Carreker-Antinori is working on features of its CASHFORECASTER software application with a third party that has a core competency in developing advanced forecasting engines based on synthetic algorithms, including neural net technology and annealing techniques. COMPETITION The Company competes with third-party providers of services and software products to the banking industry, including firms providing consulting services, such as Andersen Consulting, Electronic Data Systems Corporation and KPMG Peat Marwick LLP, and software companies, such as Earnings Performance Group, Inc., Pegasystems Inc., Sterling Software, Inc. and Transoft International, Inc. Many of these competitors have significantly greater financial, technical, marketing and other resources than the Company; however, the Company believes that its market position with respect to these competitors is enhanced by virtue of its unique ability to deliver fully integrated consulting services and software solutions focused on enabling banks to increase their revenues, reduce their costs and enhance their delivery of customer services. The Company believes that it competes based on a number of factors, including: (i) scope of solutions provided; (ii) industry expertise; (iii) access to decision makers within banks; (iv) ease and speed of solutions implementation; (v) quality of solutions; and (vi) price. While many of the Company's competitors are better equipped to compete with the Company in certain of these areas, the Company believes that it is uniquely qualified to compete effectively in all of these areas. In addition to competing with a variety of third parties, the Company experiences competition from its customers and potential customers. From time to time, such customers develop, implement and maintain their own services and applications for revenue enhancement, cost reductions or enhanced customer service, rather than purchasing services and related software products from third parties. As a result, the 40 Company must continually educate existing and prospective customers about the advantages of purchasing its services and products. In addition, customers or potential customers could enter into strategic relationships with one or more of the Company's competitors to develop, market and sell competing services or products. See "Risk Factors--Competition." GOVERNMENT REGULATION The Company's primary customers are banks. Although the services currently offered by the Company have not been subject to any material industry-specific government regulation, the banking industry is heavily regulated. The Company's services and products must allow banking customers to comply with all applicable regulations, and, as a result, the Company must understand the intricacies and application of many government regulations. The regulations most applicable to the Company's 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, the Company's RESERVELINK and RESERVELINK PLUS software 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 the Company's risk management and float management services address this concern while complying with such regulations. See "Risk Factors--Governmental Regulation." PROPRIETARY RIGHTS The Company relies 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 its proprietary technology and information. The Company primarily has relied on common law rights to protect the use of its name, technology and brands. The Company has a number of issued patents and one registered trademark and has filed applications for additional patents and trademarks in the United States. The Company vigorously defends its proprietary rights. The Company presently enters into invention assignment and confidentiality agreements with its employees and independent contractors and confidentiality agreements with certain customers. The Company also limits access to the source codes for its software and other proprietary information. Further, the Company's software will not operate with computers which have not been synchronized with the Company's equipment. The Company believes that due to the rapid pace of innovation within the software industry, factors such as the technological and creative expertise of its personnel, the quality of its solutions, the quality of its 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 the Company's technology. The Company is not aware that it is infringing any proprietary rights of third parties. The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in its solutions to perform key functions. See "Risk Factors--Dependence on Proprietary Technology; Risk of Infringement." EMPLOYEES The Company had 215 employees as of April 30, 1998, with 75 persons providing consulting services, 75 persons in the technical group, 24 persons performing sales and marketing, customer relations and business development functions and 41 persons performing corporate, finance and administrative functions. The Company has no unionized employees. The Company believes that its employee relations are good. 41 INDEPENDENT CONTRACTORS The Company provides consulting services and develops software in part through the use of independent contractors who are not employees of the Company. As of April 30, 1998, the Company used 25 independent contractors to provide consulting services, 23 of whom work from their homes using self-owned equipment. Many of these contractors are former bank executives, and the Company believes that their experience in the banking industry uniquely enables them to provide consulting services to the Company's customers. In addition, as of April 30, 1998, the Company had 28 independent contractors who assisted in the development of technology. These technology contractors spend a majority of their time performing software development in the Company's offices; however, from time to time these contractors travel with Company personnel and work directly with the Company's customers. See "Risk Factors--Use of Independent Contractors." FACILITIES The Company's principal executive office is a leased facility with approximately 32,000 square feet of space in Dallas, Texas. The lease agreement for this space expires in May 1999. The Company also leases approximately 21,000 square feet in Atlanta, Georgia pursuant to a lease agreement which expires in August 2002. The Company believes that its existing facilities are well maintained and in good operating condition and are adequate for its present and anticipated levels of operations. LEGAL PROCEEDINGS The Company is not a party to any material legal proceeding. 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the executive officers and directors of the Company as of April 30, 1998:
NAME AGE POSITION - ------------------------------------------- --- --------------------------------------------------------------- John D. Carreker, Jr....................... 55 Chairman of the Board and Chief Executive Officer Ronald R. Antinori......................... 55 Vice Chairman of the Board and Chief Technology Officer Richard L. Linting......................... 52 President, Chief Operating Officer and Director Royce D. Brown............................. 49 Executive Vice President and Managing Director of Payment Systems John S. Davis, Jr.......................... 40 Executive Vice President and Managing Director of Technology Richard C. Ercole.......................... 55 Executive Vice President, Sales, Marketing and Management Services H. Douglas Eubanks......................... 41 Executive Vice President and Managing Director of Enabling Technologies Terry L. Gage.............................. 40 Executive Vice President, Treasurer and Chief Financial Officer Wyn P. Lewis............................... 48 Executive Vice President and Managing Director of Yield Management James D. Carreker (1)...................... 50 Director James L. Fischer (2)....................... 70 Director Donald L. House (1)........................ 56 Director Richard R. Lee, Jr. (2).................... 51 Director Larry J. Peck (1).......................... 50 Director David K. Sias (1).......................... 60 Director
- ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. JOHN D. CARREKER, JR. has served as Chairman of the Board and Chief Executive Officer of the Company since the Company's formation in 1978, and served as the Company's President from 1978 until July 1997, at which time Richard L. Linting became President of the Company. John D. Carreker, Jr. and James D. Carreker are brothers. RONALD R. ANTINORI has served as Chief Technology Officer of the Company since the Company's merger with ASI in January 1997. Mr. Antinori has served as Vice Chairman of the Board of the Company since January 1997. Prior to the Company's merger with ASI, Mr. Antinori served as Chairman of the Board of ASI since its formation in 1988 and Chief Executive Officer of ASI from 1988 through December 1995. See "Certain Transactions--Merger with Antinori Software, Inc." for further information regarding the Company's merger with ASI. RICHARD L. LINTING has served as President and Chief Operating Officer of the Company since August 1997, and served as President of the Consulting Group from December 1996 to August 1997. He has served as a director of the Company since December 1996. From February 1996 to October 1996, 43 Mr. Linting served as Executive Vice President of Manufacturers' Services Ltd., a manufacturer of computers and telecommunications equipment for the computer industry. From February 1995 to February 1996, he served as President of Linting Brown Limited, a consulting firm. From 1993 to February 1995, Mr. Linting served as Vice President, Integrations Services (1993-1994) and Vice President, Americas (1994-1995) for Digital Consulting, a professional services division of Digital Equipment Corporation, a computer manufacturer. Prior to 1993, Mr. Linting served for 23 years in various positions with Andersen Consulting, including Managing Director, Partner and member of the Worldwide Operations Committee. ROYCE D. BROWN has served as Executive Vice President and Managing Director of the Company's Payment Systems Group since February 1996. From March 1994 to January 1996, Mr. Brown served as Vice President and Managing Director of the Company's Software Group. From March 1993 to March 1994, Mr. Brown served as Vice President and Managing Director of the Company's PSN Group. In addition, Mr. Brown served in various other capacities with the Company from November 1978 to March 1993. JOHN S. DAVIS, JR. has served as Executive Vice President and Managing Director of Technology of the Company since April 1997. From February 1996 to April 1997, Mr. Davis served as Senior Vice President and Managing Director of the Company's Software Group. From February 1993 to January 1996, Mr. Davis served as Director of Sales and Marketing for the Company's Software Group. From July 1992 to February 1993, Mr. Davis served as a Regional Sales Manager for the Company. RICHARD C. ERCOLE has served as Executive Vice President, Sales, Marketing and Management Services of the Company since October 1997. From October 1992 to October 1997, Mr. Ercole served as President of Huntington Treasury Management, a division of Huntington National Bank. H. DOUGLAS EUBANKS has served as Executive Vice President and Managing Director of Enabling Technologies of the Company since July 1995. From January 1992 to July 1995, Mr. Eubanks served as Vice President of Systems Integration of Cap Gemini America, a systems integration firm. TERRY L. GAGE has served as Senior Vice President, Treasurer and Chief Financial Officer of the Company since October 1995 and has served as Executive Vice President since April 1997. From October 1986 to April 1995, Mr. Gage served as Treasurer and Chief Financial Officer of FAAC Incorporated, a company specializing in technology engineering and consulting services. WYN P. LEWIS has served as Executive Vice President and Managing Director of Yield Management of the Company since March 1996. From March 1993 to March 1996, Mr. Lewis served as Vice President and Managing Director for Yield Management. From September 1990 to March 1993, Mr. Lewis served as the Company's West Coast Regional Practice Manager. JAMES D. CARREKER has served as a director of the Company since 1984. Since January 1998, Mr. Carreker has served as Chairman of the Board of Directors and Chief Executive Officer of Wyndham International, Inc., a hotel management and leasing company that is affiliated with Patriot American Hospitality, Inc. ("Patriot"), a hotel real estate investment trust for which Mr. Carreker is a director. Mr. Carreker served as President and Chief Executive Officer of Wyndham Hotel Corporation ("Wyndham"), a national hotel company, from May 1988, 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 Trammell Crow Company. John D. Carreker, Jr. and James D. Carreker are brothers. JAMES L. FISCHER has served as a director of the Company since 1984. Mr. Fischer retired in 1984 from Texas Instruments, Inc. ("TI"), an electronics manufacturer, where he served in a variety of positions over 29 years. At the time of his retirement, Mr. Fischer served as Executive Vice President and Principal Financial Officer of TI. Mr. Fischer also serves as a director of DSC Communications Corporation, a global provider of advanced telecommunications products. 44 DONALD L. HOUSE has served as a director of the Company since March 30, 1998. From January 1993 until December 1997, Mr. House served as Chairman of the Board of Directors of SQL Financials International, Inc., a developer of financial and human resource application software; Mr. House continues to serve as a director of SQL Financials International, Inc. From September 1991 until December 1992, Mr. House served as President of Prentice Hall Professional Software, a subsidiary of Simon & Schuster, Inc. From 1968 through 1987, he served in a number of senior executive positions with Management Science America, Inc., a provider of mainframe application software. Mr. House is a director of Melita International Corporation, a developer of call center management software, where he serves as chairman of its audit committee and a member of its compensation committee, and is a director of XcelleNet, Inc., a provider of systems management software for remote applications, where he serves as chairman of its audit and nominating committees. Mr. House also serves as a member of the Boards of Directors of BT Squared Technologies, Intellimedia Commerce, Inc., Systems Techniques, Inc., and Telinet Technologies, LLC, all of which are privately-held companies. RICHARD R. LEE, JR. has served as a director of the Company since 1984. Mr. Lee has served as President of Lee Financial Corporation, a financial advisory firm, since 1975. LARRY J. PECK has served as a director of the Company since October 1996. Mr. Peck has served as Sector Vice President and Manager, Technology Solutions Sector, of SAIC, a diversified technology research and development services company, since January 1994. From January 1990 to January 1994, Mr. Peck served as Group Senior Vice President and Manager, Informations Technology Group, of SAIC. DAVID K. SIAS has served as a director of the Company since October 1993 and has served as a consultant to the Company since November 1993. Mr. Sias also serves as a consultant to other companies. Mr. Sias retired in 1993 from Bankers Trust Company, where he served in a variety of positions over 30 years. See "Certain Transactions--Consulting Services." The Company's Certificate of Incorporation and Bylaws provide for a classified Board of Directors. Messrs. John D. Carreker, Jr., House and Peck are appointed to Class I and will serve until the annual meeting of stockholders to be held in 1999; Messrs. Antinori, Fischer and Lee are appointed to Class II and will serve until the annual meeting of stockholders to be held in 2000; and Messrs. James D. Carreker, Linting and Sias are appointed to Class III and will serve until the annual meeting of stockholders to be held in 2001. At each annual meeting of stockholders beginning with the 1999 annual meeting, the successors to directors whose terms then expire will be elected to serve from the time of their election and qualification until the third annual meeting following election and until their successors have been duly elected and qualified, or until their earlier resignation or removal. The officers of the Company are appointed by and serve at the discretion of the Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has a Compensation Committee, which consists of Messrs. Fischer and Lee, and an Audit Committee, which consists of Messrs. James D. Carreker, House, Peck and Sias. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for the Company's officers and employees and administers the Company's Long Term Incentive Plan. Mr. Fischer serves as Chairman of the Compensation Committee. 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 the Company's internal control functions. Mr. Sias serves as Chairman of the Audit Committee. DIRECTORS' COMPENSATION Prior to the offering, James D. Carreker, James L. Fischer and Richard R. Lee, Jr. each received an annual retainer of $5,000 and a fee of $1,250 per meeting attended. The Company paid a fee of $43,887 to Lee Financial Corporation, a company owned by Mr. Lee, in fiscal 1997 for investment management 45 services and corporate advice rendered by Mr. Lee in his capacity as trustee of the Company's employee stock ownership plan (the "ESOP"). Larry J. Peck has served on the Board of Directors as the representative of SAIC pursuant to a Shareholders Agreement among the Company, John D. Carreker, Jr. and SAIC (see "Certain Transactions--Sale of Shares to SAIC"), and has not received a director's fee. David K. Sias has received a monthly consulting fee of $4,167, which includes fees for service as a director. Directors have been reimbursed for travel and other out-of-pocket expenses in attending meetings of the Board of Directors. Employee directors have not received compensation for their services as directors. Following the offering, the non-employee directors of the Company will receive an annual retainer of $5,000, a fee of $1,250 per meeting attended and a fee of $625 per committee meeting attended; provided, that the Company and each of Messrs. Sias and House expect to enter into new arrangements that will provide for compensation to be paid to following the offering that reflects both their services as directors of and consultants to the Company. Employee directors will not receive compensation for their services as directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Fischer and Lee. Neither of these individuals was at any time during fiscal 1997, or any other time, an officer or employee of the Company. No member of the Compensation Committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. EXECUTIVE COMPENSATION The following table sets forth the compensation earned by the Company's Chief Executive Officer and the five other most highly compensated executive officers (collectively, the "Named Executive Officers") whose salary and bonus for the fiscal year ended January 31, 1998 ("1997 Annual Compensation") were in excess of $100,000 for services rendered in all capacities to the Company for that year: SUMMARY COMPENSATION TABLE
LONG-TERM AWARDS ANNUAL COMPENSATION ------------------------ ------------------------------------------ SECURITIES NAME AND OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER PRINCIPAL POSITION SALARY BONUS COMPENSATION (1)(2) STOCK OPTIONS COMPENSATION (3) - ------------------------------------ ---------- --------- ------------------- ----------- ----------- ---------------- John D. Carreker, Jr. .............. $ 475,248 -- -- -- -- $ 9,125 Chairman of the Board and Chief Executive Officer Ronald R. Antinori ................. 350,008 -- -- -- -- 16,000 Vice Chairman of the Board and Chief Technology Officer Richard L. Linting ................. 350,016 -- $ 49,345 205,650 495,757 10,521 President, Chief Operating Officer and Director Wyn P. Lewis ....................... 300,000 -- -- 342,750 582,952 8,875 Executive Vice President and Managing Director of Yield Management Royce D. Brown ..................... 218,750 -- -- -- 120,890 9,125 Executive Vice President and Managing Director of Payment Systems Group
46
LONG-TERM AWARDS ANNUAL COMPENSATION ------------------------ ------------------------------------------ SECURITIES NAME AND OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER PRINCIPAL POSITION SALARY BONUS COMPENSATION (1)(2) STOCK OPTIONS COMPENSATION (3) - ------------------------------------ ---------- --------- ------------------- ----------- ----------- ---------------- John S. Davis, Jr. ................. 215,000 $ 44,158 -- -- 185,570 9,125 Executive Vice President and Managing Director of Technology
- ------------------------------ (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the compensation described in this table does not include medical, group life insurance or other benefits received by each Named Executive Officer that were available generally to all salaried employees of the Company, and certain perquisites and other personal benefits received by a Named Executive Officer that did not exceed the lesser of $50,000 or 10% of such officer's salary and bonus as disclosed in the table. (2) Consists of relocation, rent and local expenses for Mr. Linting. (3) Includes Company contributions to the Long Term Incentive Plan on behalf of Messrs. Carreker, Linting, Lewis and Davis; and includes profit sharing paid to Mr. Antinori under an ASI employee benefit plan. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options made during the fiscal year ended January 31, 1998 to each of the Named Executive Officers:
INDIVIDUAL GRANTS (1) --------------------------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF AT ASSUMED ANNUAL RATES OF SECURITIES STOCK PRICE APPRECIATION UNDERLYING % OF TOTAL OPTIONS FOR OPTION TERM (3) OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION -------------------------- NAME GRANTED (2) IN FISCAL YEAR PER SHARE DATE 5% 10% - --------------------------- ----------- -------------------- --------------- ----------- ------------ ------------ Richard L. Linting (4)..... 154,000 8.0% $ 3.67 8/1/07 $ 2,109,522 $ 3,572,962 33,757 1.7 8.90 1/31/08 297,849 642,727 Wyn P. Lewis (5)........... 6,930 * 3.45 3/31/07 94,040 155,046 75,522 3.9 8.90 1/31/08 666,354 1,437,923 Royce D. Brown (5)......... 5,390 * 3.45 3/31/07 73,142 120,591 77,000 4.0 8.90 1/31/08 679,354 1,466,064 John S. Davis, Jr. (5)..... 770 * 3.45 3/31/07 10,449 17,227 52,614 2.7 8.90 1/31/08 141,829 1,001,759
- ------------------------------ * Less than 1%. (1) Messrs. Carreker and Antinori did not receive grants of options during fiscal 1997. (2) The options shown were granted under the Long Term Incentive Plan. (3) The potential realizable values for such options shown in the table are based on an estimated initial public offering price of the Company's Common Stock of $11.00 per share (the midpoint of the price range set forth on the cover page of this Prospectus) and a subsequent appreciation of such price at assumed rates of 5% and 10%, compounded annually from April 24, 1998 to their expiration date. These assumed rates of appreciation do not represent the Company's estimate or projection of the appreciation of Common Stock of the Company. The Company valued options that expire prior to January 2008 based upon the per share valuation of Common Stock under the Company's ESOP. The Company valued options that expire in January 2008 using the per share valuations of comparable public companies, and then applied a discount to reflect the Company's privately-held status at the time of grant. (4) The 154,000 options granted to Mr. Linting vest one-third per year on August 1, 1997, 1998 and 1999, and the 33,757 options granted vest one-quarter per year on January 31, 1999, 2000, 2001 and 2002. (5) The 6,930 options granted to Mr. Lewis, the 5,390 options granted to Mr. Brown and the 770 options granted to Mr. Davis vest on March 31, 2000. The 75,522 options granted to Mr. Lewis, the 77,000 options granted to Mr. Brown and the 52,614 options granted to Mr. Davis vest one-quarter per year on January 31, 1999, 2000, 2001 and 2002. 47 AGGREGATE FISCAL YEAR-END OPTION VALUES The following table sets forth, for each of the Named Executive Officers, information concerning the number and value of securities underlying unexercised options held on January 31, 1998. No options were exercised by such persons during fiscal 1997, although Messrs. Lewis, Brown and Davis will exercise 122,430 and 5,390 and 44,406 options, respectively, concurrently with the offering. See "Certain Transactions--Stock Option Loan Program" and "Principal and Selling Stockholders."
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT JANUARY 31, 1998 JANUARY 31, 1998 (1) -------------------------- --------------------------- NAME (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------------- ----------- ------------- ------------ ------------- Richard L. Linting............................. 256,672 239,085 $ 1,566,763 $ 1,186,237 Wyn P. Lewis................................... 462,000 120,952 3,721,800 283,982 Royce D. Brown................................. 38,500 82,390 309,925 29,375 John S. Davis, Jr.............................. 88,550 97,020 713,345 309,626
- ------------------------ (1) Based on the fair market value of the Company's Common Stock at fiscal year end (January 31, 1998) of $8.90 per share, as determined by the Company's Board of Directors, less the exercise price payable for such shares. (2) Messrs. Carreker and Antinori hold no options. LONG TERM INCENTIVE PLAN SCOPE. The Company has a 1994 Long Term Incentive Plan which was originally adopted in 1994, and was recently amended and restated (as amended and restated, the "Long Term Incentive Plan"). The Long Term Incentive Plan is designed to attract and retain qualified and competent employees, non-employee directors and consultants, and to provide additional equity-based incentives to employees, non-employee directors and consultants of the Company. Awards under the Long Term Incentive Plan may be granted in the form of incentive stock options, non-qualified options and restricted shares, as determined by the Board of Directors at the time of grant and subject to the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The Board of Directors may delegate any or all of its discretion under the Long Term Incentive Plan to the Compensation Committee. Although the Long Term Incentive Plan itself is of indefinite duration, no awards of incentive stock options may be made under the Long Term Incentive Plan after October 6, 2004. SHARES RESERVED UNDER THE LONG TERM INCENTIVE PLAN. The Company has reserved for issuance under the Long Term Incentive Plan 5,500,000 shares of Common Stock, of which 1,229,174 shares previously have been issued pursuant to options that have been exercised, 2,927,926 shares are subject to currently outstanding options, 84,700 shares of restricted stock have been issued and 1,258,200 shares of Common Stock are reserved for future awards. If an award made under the Long Term Incentive Plan expires, terminates or is forfeited, cancelled or settled in cash, without issuance of shares of Common Stock covered by the award, those shares will be available for future awards under the Long Term Incentive Plan. Commencing on February 1, 1999, and for each year thereafter, the number of shares of Common Stock available for awards under the Long Term Incentive Plan will be increased by a number of shares equal to 2% of the number of shares of Common Stock outstanding as of the effective date of the amended and restated Long Term Incentive Plan. ELIGIBILITY. Persons eligible to participate in the Long Term Incentive Plan include all employees of the Company or any subsidiary of the Company, all non-employee directors and all consultants for the Company. Awards of incentive stock options under the Long Term Incentive Plan may be made only to employees of the Company or any subsidiary. 48 ADMINISTRATION. The Long Term Incentive Plan is administered by the Board of Directors, unless the Board of Directors delegates its authority to the Compensation Committee. The Board of Directors has the authority to grant options and restricted shares under the Long Term Incentive Plan and to determine the vesting schedule and the exercise price of the options, and the restrictions and terms thereof. The Board of Directors also has full power and authority to construe, interpret and administer the Long Term Incentive Plan. OPTION EXERCISE PRICE. The exercise price per share for the Common Stock issued pursuant to incentive stock options under the Long Term Incentive Plan may not be less than 100% of the fair market value on the date the option is granted. The exercise price per share for non-qualified stock options under the Long Term Incentive Plan may be determined by the Board or Committee, but may not be less than the par value of the shares. ADJUSTMENTS, TERMINATIONS AND AMENDMENT. In the event of any change in the Company's capitalization, including any stock split, reverse stock split, stock dividend, spinoff, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, appropriate adjustments will be made to the number of shares available under the Long Term Incentive Plan as well as the price per share and/or number of shares covered by any outstanding option or restricted stock award. The Long Term Incentive Plan may be suspended, terminated, altered or amended in any way by the Board of Directors, provided that stockholder approval of any plan amendment will be required to the extent necessary and desirable to comply with applicable provisions of the Securities Exchange Act of 1934 (the "Exchange Act"), the Code or other legal requirements. No suspension, termination, alteration or amendment of the Long Term Incentive Plan may alter or impair any option or restricted stock award previously made under the Long Term Incentive Plan. BUSINESS COMBINATIONS. Unless provision is otherwise made in an award, or by the terms of the agreement with respect to a business combination, in the event of a change in control of the Company (as defined), then, with respect to each option or restricted share outstanding immediately prior to the consummation of such transaction and without the necessity of any action by the Compensation Committee, all outstanding stock options and restricted stock shall terminate or be forfeited, provided that the holders of any options may exercise such awards to the extent then vested immediately prior to any such event. DIRECTOR STOCK OPTION PLAN The Company's Board of Directors recently approved the Carreker-Antinori, Inc. Director Stock Option Plan (the "Director Plan"). The purpose of the Director Plan is to encourage ownership in the Company by outside directors whose continued services as directors and consultants are considered essential to the Company's further progress, thereby providing them with an additional incentive to continue as directors of the Company. The Director Plan will terminate on January 31, 2013. PRINCIPAL FEATURES OF THE DIRECTOR PLAN. The Director Plan provides that eligible directors of the Company may elect to receive options to purchase Common Stock in lieu of all or a portion of their annual director's retainer and various attendance fees and any consulting fees for consulting services rendered to the Company (the "Fees"). Only directors of the Company who are not employees of the Company are eligible to participate in the Director Plan. Options will be granted automatically on the first trading day in any fiscal quarter (the "Grant Date") to any eligible director who, prior to the Grant Date, files with the committee administering the Director Plan an election to receive a stock option in lieu of 25%, 50%, 75% or all of his Fees to be earned in the period from the Grant Date to the end of the fiscal year. The per share option price (the "Option Price") under the Director Plan is equal to 50% of the fair market value of the Common Stock (the "Market 49 Value") on the Grant Date. "Market Value" is the fair market value of the Common Stock at the close of business on the relevant Grant Date, as reported on the Nasdaq National Market. Elections will be deemed made for each succeeding fiscal year, and options will be automatically granted on the first trading day in each succeeding fiscal year, unless the director notifies the Company of the cancellation of the election prior to the first day of the fiscal year. The number of option shares granted to an eligible director will be determined by a formula which provides that each director will receive an option equal to the nearest number of whole shares equivalent to the Deferred Retainer and Fees divided by the Option Price. "Deferred Retainer and Fees" are the amounts the director would have been entitled to receive (i) for serving as a director and attending all regularly scheduled meetings of the Board of Directors and its Committees and (ii) for serving as a consultant, during the remainder of the fiscal year following the Grant Date but for the election described above. As an example, assuming a Market Value of the Common Stock equal to the assumed initial public offering price of $11.00 per share, if a director elected to participate in the Director Plan at a 100% level for fiscal year 1999, he would have received an option for 1,818 shares. This amount is calculated by dividing (i) the director's deferred retainer ($5,000) plus anticipated attendance fees of $5,000 (assuming no committee meeting attendance fees) by (ii) 50% of $11.00, the applicable Market Value for the Common Stock. Generally, no option may be exercised prior to the first anniversary of the date the option was granted. However, an option will become fully exercisable upon the retirement of the director because of age, disability or death. In addition, upon a merger or other business combination involving the Company, an option will become fully exercisable unless the Company is the surviving corporation in such merger or business combination or provision is made for the continuance and assumption of the option. No option may be exercised after the expiration of 15 years from the date the option was granted. If the optionee ceases to be a director or consultant before an option granted under the Director Plan becomes exercisable, is absent from a regularly scheduled meeting, or fails to earn a consulting fee, the option shall terminate as to a pro rata portion of the shares subject to the option, based upon the Fees actually earned. Unless limited by the option agreement pursuant to which an option is granted, the option price may be paid upon exercise of an option by delivery of shares of Common Stock, cash or a combination of cash and Common Stock. The shares so delivered will be valued as of the exercise date. Options granted under the Director Plan are transferable by the director by will or the laws of descent and distribution and to members of the director's immediate family. After a director's death, the option is exercisable by the director's designee or, in the absence of a designation, the director's legal representative. SHARES RESERVED UNDER THE DIRECTOR PLAN. A total of 100,000 shares of Common Stock may be issued pursuant to the Director Plan. The Company plans to register the shares under the Securities Act. Upon the exercise of an option, the Company may issue authorized but unissued shares or reissue shares previously repurchased by or on behalf of the Company. ADMINISTRATION. The Director Plan is administered by the Company's Compensation Committee. ADJUSTMENTS, TERMINATIONS AND AMENDMENT. The Compensation Committee has the power to modify, extend or renew outstanding options and authorize the grant of new options in substitution therefor, provided that any such action may not have the effect of altering or impairing any rights or obligations of any option previously granted without the consent of the optionee. STOCK OPTIONS PREVIOUSLY AWARDED TO NON-EMPLOYEE DIRECTORS. Prior to its adoption of the Director Plan, the Company granted options to certain of its current and former non-employee directors. Messrs. James D. Carreker, Fischer and Lee, as well as two former directors, each hold 55,263 options, all of which are fully vested. In addition, Messrs. James L. Carreker, Fischer, Lee, Peck and Sias each hold 50 7,700 options, all of which are fully vested but not exercisable until March 12, 1999. Mr. Donald L. House holds 30,000 options that vest quarterly over a three year period beginning on May 1, 1998. PROFIT SHARING PLAN The Company maintains a Profit Sharing Incentive Plan (the "Profit Sharing Plan") administered by the Compensation Committee in which substantially all employees of the Company are eligible to participate. Under the terms of the Profit Sharing Plan, each year the Compensation Committee reviews the Company's actual financial performance in the preceding year compared to certain financial performance objectives established at the outset of such year. If the Company exceeded these financial objectives, then a bonus pool is established, and is allocated among the various operating and corporate divisions of the Company based upon the Compensation Committee's assessment of the gross contribution made by each division to the Company's overall performance. Awards are allocated among specific employees within each division on the basis of the employee's individual performance and contribution to the overall goals of his or her division and of the Company. The Compensation Committee seeks input from Company management in making awards. Awards under the Profit Sharing Plan are made in the form of cash bonuses and stock-based compensation pursuant to the Company's Long Term Incentive Plan, with at least 50% of awards granted to senior management consisting of stock-based compensation. An employee may at his or her election substitute any cash award for an equivalent stock-based compensation award. Messrs. John D. Carreker, Jr. and Antinori removed themselves from consideration for awards under the Profit Sharing Plan in fiscal 1997, but all other executive officers received awards in that year. EMPLOYMENT AGREEMENTS JOHN D. CARREKER, JR. The Company is a party to an employment agreement with Mr. Carreker with a term extending through January 31, 1999. The agreement may be renewed by Mr. Carreker for an additional one-year term upon six months' prior written notice to the Company. The agreement provides that Mr. Carreker will receive a base annual salary of not less than $450,000 and will be eligible to receive bonuses as determined by the Board of Directors in its sole discretion. The agreement may be terminated at any time by the Board of Directors, with or without cause, and may be terminated during the first two years of the agreement by Mr. Carreker if the Company is in material breach of the agreement. Upon termination of the agreement by Mr. Carreker due to a breach on the part of the Company or by the Company without cause, Mr. Carreker will be entitled to receive, on the Company's regular payroll dates and less required withholdings, his salary at the current rate for the remaining term of the agreement. RONALD R. ANTINORI. The Company is a party to an employment agreement with Mr. Antinori with a term extending through January 31, 1999. The agreement provides that Mr. Antinori will receive a base annual salary during the first year of not less than $350,000. Mr. Antinori will be entitled to a salary increase in the second year of the agreement: (i) if the Board of Directors, in its sole discretion, so determines or (ii) if Mr. Carreker receives a salary increase in the second year of his contract, Mr. Antinori will be entitled to receive the same salary increase on a dollar-for-dollar basis. Mr. Antinori will not receive a bonus for the fiscal year ending January 31, 1998 unless Mr. Carreker receives a bonus for such fiscal year, in which event their bonuses for such fiscal year shall be in the same proportion as are their salaries for such year. If and to the extent the Board of Directors establishes a bonus pool for the fiscal year ending January 31, 1999, then Mr. Antinori will be entitled to participate in the same, with the amount of his bonus to be determined based upon the bonus paid to Mr. Carreker in respect of such fiscal year. In such event, Messrs. Antinori and Carreker's bonuses shall be in the same proportion as are their salaries. In determining any bonus for Mr. Antinori, credit will be given to the Company contributions to his profit-sharing account, if any. The agreement may be terminated at any time by the Board of Directors, with or without cause, and may be terminated by Mr. Antinori if the Company is in material breach of the agreement. Upon termination by Mr. Antinori due to a breach on the part of the Company or by the 51 Company without cause, Mr. Antinori will be entitled to receive, on the Company's regular payroll dates and less required withholdings, his salary at the current rate for the remaining term of the agreement. OTHER EXECUTIVES. The Company is a party to employment agreements with Messrs. Linting, Brown, Lewis and Gage. The agreement with Mr. Linting has a term extending through December 1999 and the agreements with Messrs. Brown, Lewis and Gage have a term extending through March 2001. Under the agreements, Messrs. Linting, Brown, Lewis and Gage will receive an annual base salary of not less than $350,000, $240,000, $300,000 and $180,000, respectively, and each is entitled to a bonus of seventy percent of his annual base salary on terms no less favorable than those applicable to other high-level officers of the Company in each year of the applicable agreement if the Board of Directors, in its sole discretion, so determines. The agreement with Mr. Linting also provides for the Company to reimburse him in the aggregate amount of up to $48,000 per year for rent and other living expenses. The agreements may be terminated at any time by the Company, with or without cause, and may be terminated by the executive if the Company is in material breach of the applicable agreement. The agreement with Mr. Gage allows him to terminate the agreement if (i) Mr. John D. Carreker, Jr. no longer serves as Chairman or Chief Executive Officer, or (ii) there is a substantial diminution in his duties or responsibilities during two months prior to, or six months after, the consummation of certain transactions involving a change in control of the Company. Upon termination by the executive due to a breach on the part of the Company or by the Company without cause, the executive will be entitled to receive, on the Company's regular payroll dates and less required withholdings, his salary at the current rate for the remaining term of the agreement. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS As permitted by the Delaware General Corporation Law, the Company's Certificate of Incorporation provides that no director of the Company will be personally liable to the Company or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for: (i) any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of the law; (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions; or (iv) any transaction from which the director derived an improper personal benefit. The Company's Certificate of Incorporation and Bylaws provide for the Company's indemnification of its officers and directors to the fullest extent permitted by the Delaware General Corporation Law. The Company is also a party to an indemnification agreement with each of its directors. In addition, the Company intends to maintain directors' and officers' liability insurance. There is no pending litigation or proceeding involving a director, officer or employee of the Company for which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. 52 CERTAIN TRANSACTIONS THE REINCORPORATION Effective May 14, 1998, the Company changed its state of incorporation from Texas to Delaware (the "Reincorporation"). The Reincorporation was effected by merging Carreker-Antinori, Inc., a Texas corporation ("C-A Texas"), into a newly organized, wholly-owned, Delaware subsidiary that is the surviving corporation (the "Company"). The Plan and Agreement of Merger relating to the Reincorporation resulted in: (i) the conversion of each outstanding share of common stock of C-A Texas into 7.70 shares of Common Stock of the Company; (ii) the conversion of all options and rights to acquire shares of common stock of C-A Texas under its various benefit plans into options and rights to acquire shares of Common Stock of the Company on a basis consistent with the Common Stock conversion ratio; and (iii) the substitution of the charter and bylaws of the Company for those of C-A Texas. The Reincorporation did not result in any material change in the business, assets or financial position of C-A Texas, or in the persons who constitute its Board of Directors or management. MERGER WITH ANTINORI SOFTWARE, INC. On January 31, 1997, a wholly-owned subsidiary of the Company merged with and into ASI, with the result that ASI became a wholly-owned subsidiary of the Company (the "Merger"). Pursuant to the Merger, the shareholders of ASI received 3,962,528 shares of Common Stock. Of this amount, Ronald R. Antinori, Vice Chairman of the Board and Chief Technology Officer of the Company, received 3,526,654 shares of Common Stock and Susan Antinori, his wife, received 396,250 shares of Common Stock of the Company. Following resolution of certain issues relating to the Merger, Mr. Antinori returned 317,032 shares of Common Stock to the Company for cancellation. In addition, Ms. Antinori returned 19,789 shares and another former shareholder of ASI returned 1,979 shares. The return of these shares was intended to effectuate a post-merger adjustment to reflect the relative values of the Company and ASI at the time of the Merger. In connection with the Merger, Messrs. Carreker and Antinori and the Company entered into a Shareholders Agreement which granted certain registration rights to Messrs. Carreker and Antinori and certain former ASI shareholders. See "Description of Capital Stock--Registration Rights." Also, Messrs. Carreker and Antinori entered into certain Employment Agreements with the Company. See "Management--Employment Agreements." CONSULTING SERVICES David K. Sias, a director of the Company, provided special consulting services to the Company in connection with the Merger. In addition to a monthly consulting fee of $4,167, the Board of Directors of the Company authorized the payment of a special fee of $200,000 to Mr. Sias to compensate him for his time and efforts spent on behalf of the Company in connection with the Merger. The Company paid consulting fees to Mr. Sias in the aggregate amounts of $71,682, $64,310 and $36,178 in fiscal 1997, 1996 and 1995, respectively. The Company and Mr. Sias expect to enter into a new arrangement that will provide for compensation to be paid to Mr. Sias following the offering that reflects both his services as a director of and consultant to the Company. SALE OF SHARES TO SAIC On October 10, 1996, Science Applications International Corporation ("SAIC") acquired 774,967 shares of the Company's Common Stock for $2.0 million and entered into a Shareholder Agreement with the Company and John D. Carreker, Jr. Pursuant to the Shareholder Agreement, SAIC was entitled to one representative on the Board of Directors of the Company. Larry J. Peck, Sector Vice President and Manager, Technology Solutions Sector, of SAIC was elected to the Board of Directors. In addition, SAIC was granted an option to require the Company to repurchase its shares of Common Stock pursuant to the Shareholder Agreement. The Shareholder Agreement terminates upon completion of the offering. The 53 Company and SAIC also entered into a three-year, non-exclusive Strategic Alliance Agreement providing for joint efforts to offer services, products and technology to customers. SALE OF SHARES TO CROW FAMILY PARTNERSHIP, L.P. On January 10, 1997, the Crow Family Partnership, L.P. ("Crow") acquired 269,500 shares of the Company's Common Stock for $834,050. In connection with such purchase, Crow was granted certain registration rights with respect to shares of Common Stock held by it. See "Description of Capital Stock-- Registration Rights." James D. Carreker, a director of the Company, serves as a director of Crow Family, Inc., the general partner of Crow. PROVISION OF MANAGEMENT SERVICES AND OTHER TRANSACTIONS INVOLVING ECCHO, PSN AND INFITEQ The Company provides management services to three organizations, ECCHO, PSN and INFITEQ (See "Business--Strategic Banking Initiatives"). David Walker, Senior Vice President of the Company, serves as Executive Director of ECCHO. For the fiscal years ended January 31, 1998, 1997 and 1996, the Company recognized revenues from ECCHO for its management services in the amount of approximately $994,000, $866,000 and $696,000, respectively. John D. Carreker, Jr., Chairman of the Board and Chief Executive Officer of the Company, serves as a director of PSN. In the fiscal years ended January 31, 1998, 1997 and 1996, the Company recognized revenues from PSN for its management services in the amounts of $1.4 million, $1.3 million and $1.3 million, respectively. John D. Carreker, Jr. serves as Chairman of the Board of INFITEQ, and John D. Carreker, III, Senior Vice President of the Company and the son of John D. Carreker, Jr., serves as Executive Director of INFITEQ. Under a ten-year agreement entered into on January 1998 with three other service providers in INFITEQ, the Company will receive a monthly fee of $45,000 plus expenses for an initial period, and thereafter, a fee calculated on a percentage of the charges from the service providers to the banks, as well as certain other amounts. See "Management's Discussion of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company loaned PSN $500,000 in fiscal 1996, which amount has been reserved due to the Company's belief that collection is doubtful. The Company loaned PSN an additional $66,000 in fiscal 1996, which loan is currently being repaid in accordance with its terms. EMPLOYEE RELOCATION LOAN In connection with the relocation of John S. Davis, Jr. to serve in the Company's office in Atlanta, the Company agreed to advance Mr. Davis $90,000 without interest to allow him to recoup a portion of his equity in his Dallas residence so that he would be able to purchase a home in Atlanta. In addition, pending the sale of Mr. Davis' Dallas residence, the Company has agreed to make all principal and interest payments on the mortgage applicable to that residence. Amounts of principal and interest paid on such mortgage totaled approximately $15,200 for fiscal 1997. Upon the sale of Mr. Davis' Dallas residence, the Company will be entitled to receive the amount of the loan and of principal payments made by it to the extent amounts are available after receipt by Mr. Davis of his equity remaining in the Dallas residence and repayment of the mortgage. Mr. Davis is entitled to any amounts remaining after the repayment of the loan from the Company and the reimbursement of principal payments from the Company. FUTURE TRANSACTIONS The Company intends to adopt a policy providing that all transactions between the Company and related parties will be subject to approval by a majority of all disinterested directors and must be on terms no less favorable than those that could otherwise be obtained from unrelated third parties. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock and as adjusted to reflect the sale of shares of Common Stock in the offering, by: (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock; (ii) each of the Company's directors; (iii) each of the Named Executive Officers; (iv) all directors and executive officers of the Company as a group; and (v) each Selling Stockholder. The share information set forth below assumes the full exercise of all options that are eligible to participate in the loan program established by BancAmerica Robertson Stephens. See "Underwriting." Unless otherwise noted, the address for each of the following persons is: c/o Carreker-Antinori, Inc., 14001 N. Dallas Parkway, Suite 1100, Dallas, Texas 75240.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING NUMBER OF OFFERING ------------------------- SHARES ------------------------- NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT - -------------------------------------------------- ------------ ----------- ------------- ------------ ----------- John D. Carreker, Jr. (1)(2)...................... 5,116,203 40.0% 738,525 4,377,678 26.6% Ronald R. Antinori (3)............................ 3,381,686 26.5 488,275 2,893,411 17.6 SAIC (4).......................................... 774,967 6.1 72,000 702,967 4.3 Wyn P. Lewis (2)(5)............................... 586,563 4.5 77,000 509,563 3.0 Richard L. Linting (6)............................ 279,772 2.1 -- 279,772 1.7 Royce D. Brown (2)(7)............................. 387,787 3.0 46,200 341,587 2.1 David K. Sias (8)................................. 242,173 1.9 -- 242,173 1.5 John S. Davis, Jr. (2)(9)......................... 144,429 1.1 -- 144,429 * James L. Fischer (10)............................. 132,486 1.0 -- 132,486 * James D. Carreker (11)............................ 387,772 3.0 -- 387,772 2.4 Richard R. Lee, Jr. (12).......................... 713,189 5.6 -- 713,189 4.3 Larry J. Peck (13)................................ 774,967 6.1 -- 702,967 4.3 Donald L. House (14).............................. 2,500 * -- 2,500 * Lawrence D. Duckworth (15)........................ 188,227 1.5 28,000 160,227 1.0 Directors and executive officers as a group (15 persons)(2)(16).................................. 12,366,066 89.2 % 1,350,000 11,016,066 62.9 %
- ------------------------ * Less than 1% (1) Includes 189,281 shares held in family trusts for which Mr. Carreker is the trustee; 252,375 shares held in a family limited partnership for which Mr. Carreker is the general partner; and 189,281 shares held in family trusts for which Connie B. Carreker, the wife of Mr. Carreker, is the trustee (as to which shares Mr. Carreker disclaims beneficial ownership). (2) Includes 68,746, 17,148, 42,866, 11,473 and 594,917 shares of Common Stock held in the Employee Stock Option Plan ("ESOP") for the benefit of Messrs. Carreker, Lewis, Brown and Davis, respectively, and all directors and executive officers as a group. (3) Includes 403,411 shares held by Susan Antinori, the wife of Mr. Antinori, as to which Mr. Antinori disclaims beneficial ownership. The address for Mr. Antinori is c/o the Company, 1201 Peachtree Street, Suite 450, Atlanta, Georgia 30361. (4) SAIC has granted an option to the Underwriters to purchase up to 702,967 shares, solely to cover over-allotments, if any. See "Underwriting." The address for SAIC is 10260 Campus Point Drive, San Diego, California 92121. (5) Includes 77,000 shares that will be issued to Mr. Lewis upon his exercise of options contemporaneously with the offering, 385,000 shares held under exercisable options and 38,500 shares of restricted stock issued under the Long Term Incentive Plan. 55 (6) Includes 256,672 shares held under currently exercisable options and 23,100 shares of restricted stock issued under the Long Term Incentive Plan. (7) Includes 38,500 shares held under currently exercisable options. (8) The address for Mr. Sias is 468 Meadowbrook Drive, Santa Barbara, California 93108. (9) Includes 88,550 shares held under currently exercisable options. (10) Includes 55,263 shares held under currently exercisable options. The address for James L. Fischer is 7170 Kendallwood, Dallas, Texas 75240. (11) Includes 55,263 shares held under currently exercisable options and 6,576 shares held by children of Mr. Carreker, as to which Mr. Carreker disclaims beneficial ownership. Also includes 269,500 shares held by Crow Family Holdings, L.P. for which Mr. Carreker serves as a director of the general partner. Mr. Carreker disclaims beneficial ownership of all shares held by Crow Family Holdings, L.P. The address for Mr. Carreker is 1950 Stemmons Freeway, Suite 6001, Dallas, Texas 75207. (12) Includes 55,263 shares held under currently exercisable options and 594,917 shares held in the ESOP for which Mr. Lee has full voting rights as trustee of the ESOP. Mr. Lee disclaims beneficial ownership of all shares held in the ESOP. The address for Mr. Lee is 12201 Merritt Drive, Suite 530, Dallas, Texas 75251. (13) Shares beneficially owned prior to offering includes 774,967 shares held by SAIC, as to which Mr. Peck disclaims beneficial ownership. The address for Mr. Peck is c/o SAIC, 10260 Campus Point Drive, San Diego, California 92121. (14) Includes 2,500 shares held under currently exercisable options. The address for Mr. House is 2480 Spalding Drive, Atlanta, Georgia 30350. (15) The address for Mr. Duckworth is 15 Old Stratton Chase, Atlanta, Georgia 30328. (16) Includes shares held by SAIC and Crow Family Holdings, L.P. Mr. Peck disclaims beneficial ownership of all shares held by SAIC, and Mr. James D. Carreker disclaims beneficial ownership of all shares held by Crow Family Holdings, L.P. 56 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 100,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), and 2,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), issuable in series. There will be 12,777,433 shares of Common Stock outstanding immediately prior to consummation of the offering, held of record by 80 stockholders. No shares of Preferred Stock are outstanding. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of directors, and as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences that may be applicable to any then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive, conversion or other rights to subscribe for additional securities of the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of the offering will be, validly issued, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by the stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, without any further vote or action by stockholders. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS DELAWARE ANTI-TAKEOVER STATUTE. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. Subject to certain exceptions, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the Board of Directors, the business combination is approved in a prescribed manner or certain other conditions are satisfied. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. CERTIFICATE OF INCORPORATION. The Company's Certificate of Incorporation (the "Certificate") provides: (i) for the authorization of the Board of Directors to issue, without further action by the stockholders, up to 2,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof; (ii) that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing; (iii) that special meetings of stockholders of the Company may be called only by the Chairman of the Board, the Chief Executive Officer or a majority 57 of the members of the Board of Directors; (iv) for a classified Board of Directors; (v) that vacancies on the Board of Directors, including newly created directorships, can be filled only by a majority of the directors then in office, and (vi) that directors of the Company may be removed only for cause and only by the affirmative vote of holders of at least two-thirds of the outstanding shares of voting stock, voting together as a single class. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions are designed to reduce the vulnerability of the Company to an unsolicited proposal for a takeover of the Company that does not contemplate the acquisition of all of its outstanding shares, or an unsolicited proposal for the restructuring or sale of all or part of the Company. Such provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions may also have the effect of preventing changes in the management of the Company. See "Risk Factors--Anti-Takeover Matters." LIMITATIONS ON DIRECTOR LIABILITY The Certificate provides that, to the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, directors of the Company will not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. REGISTRATION RIGHTS Pursuant to an agreement among the Company, Ronald R. Antinori, Susan Antinori (Mr. Antinori's wife), Michael Israel, Lawrence D. Duckworth and John D. Carreker, Jr. (the "Shareholders"), the Shareholders are entitled to certain rights with respect to the registration of shares of Common Stock under the Securities Act. If the Company proposes to register any shares of Common Stock under the Securities Act for its own account for cash, the Shareholders are entitled to notice of such registration and entitled, subject to certain limitations, to include shares of their Common Stock therein. The registration rights of each of the Shareholders continue until such time as the Shareholder can sell shares of Common Stock pursuant to Rule 144(k) under the Securities Act. Additionally, at any time from and after one year after the completion of the offering, the Shareholders holding not less than 50%, on a fully-diluted basis, of the capital stock of the Company are entitled to certain demand registration rights pursuant to which they may require the Company to file a registration statement under the Securities Act; provided, however, that the amount of shares to be offered for sale in the demand registration must have a fair market value of $10 million or more. The Company is not obligated to effect more than four demand registrations. The Company is required to use its best efforts to effect such registrations. Generally, the Company is required to bear all registration and selling expenses incurred in connection with any such registrations. The rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registrations. John D. Carreker, Jr., Ronald R. Antinori and Lawrence D. Duckworth are participating as Selling Stockholders in the offering pursuant to the above described agreement. The Company will bear all registration and selling expenses incurred in connection with the offering (other than underwriting discounts and commissions attributable to their shares) and has agreed to indemnify such Selling Stockholders for certain liabilities arising in connection with the offering. Pursuant to an agreement between the Company and Crow, Crow also has certain registration rights. If any other stockholder of the Company exercises contractual registration rights, Crow is entitled to notice of such registration and is entitled, subject to certain limitations, to include shares of its Common Stock therein. Generally, the Company is required to bear all registration and selling expenses incurred in connection with such registrations. The rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registrations. The Crow registration rights terminate at such time as its shares may be sold under Rule 144 of the Securities Act. 58 TRADING MARKET, TRANSFER AGENT AND REGISTRAR The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol CANI, subject to official notice of issuance. The Transfer Agent and Registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have an aggregate of 16,427,433 shares of Common Stock outstanding. Of these shares, all of the shares sold in the offering will be freely transferable without restriction or limitation under the Securities Act, except for any shares purchased by "affiliates" or persons deemed to be acting as "underwriters" (as such terms are defined under the Securities Act) of the Company. The remaining 11,327,433 shares constitute "restricted shares" within the meaning of Rule 144, and the resale of such shares is restricted for one year from the date they were acquired. Of these "restricted securities," 9,836,570 shares have been held for the required one-year period and will be freely tradeable upon completion of the offering, subject to the 180-day lock-up period described below. With respect to the remaining 1,490,863 "restricted securities," the Company intends to file a registration statement on Form S-8 after the offering providing for the resale of approximately 1,152,174 shares of Common Stock, with the balance of such shares remaining subject to the requisite Rule 144 one-year holding period and other limitations (provided, that the sale of all such shares will in any event be subject to the 180-day lock-up period described below). In addition, the holders of 8,443,448 shares have certain rights to have shares registered in the future under the Securities Act pursuant to the terms of agreements between such holders and the Company. See "Description of Capital Stock--Registration Rights." In general, under Rule 144, as currently in effect, a person (or persons whose shares are required to be aggregated) who has beneficially owned, for at least one year, shares of Common Stock that have not been registered under the Securities Act or that were acquired from an "affiliate" of the Company is entitled to sell within any three-month period the number of shares of Common Stock which does not exceed the greater of one percent of the number of then outstanding shares or the average weekly reported trading volume during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain notice and manner of sale requirements and to the availability of current public information about the Company and must be made in unsolicited brokers' transactions or to a market maker. A person (or persons whose shares are aggregated) who is not an "affiliate" of the Company under the Securities Act during the three months preceding a sale and who has beneficially owned such shares for at least two years is entitled to sell such shares under Rule 144 without regard to the volume, notice, information and manner of sale provisions of such rule. Rule 144 does not require the same person to have held the securities for the applicable periods. The Company, its executive officers, directors and principal and other stockholders, who will hold, collectively, 11,268,913 shares of Common Stock after the offering, have agreed not to offer or sell any shares of Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens, except that the Company may issue shares of Common Stock in connection with acquisitions and pursuant to the exercise of stock options described in this Prospectus. The resale provisions of Rule 701 under the Securities Act may be relied upon by option holders of the Company's Common Stock for the resale of shares issued upon the exercise of approximately 1,075,752 outstanding options and 55,263 outstanding shares held by certain employees, directors, officers, consultants or advisors pursuant to a written compensatory benefit plan or contract relating to the compensation of such persons. Securities issued in reliance on Rule 701 are "restricted" shares and, beginning 90 days after the date of this Prospectus, may be resold by non-affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with the one-year holding period, in each case subject to the lock-up agreements discussed above. 59 After the offering, the Company intends to file a registration statement on Form S-8 to register all of the shares of Common Stock reserved for issuance pursuant to the Long Term Incentive Plan and the Director Plan. Accordingly, shares issued upon exercise of such options will be freely tradeable by holders who are not affiliates of the Company and, subject to the volume and other limitations of Rule 144, by holders who are affiliates of the Company. Prior to the offering, there has been no market for the Common Stock. No predictions can be made of the effect, if any, that market sales of shares of Common Stock or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of Common Stock could adversely affect the prevailing market price of the Common Stock, as well as impair the ability of the Company to raise capital through the issuance of additional equity securities. See "Risk Factors--Shares Eligible for Future Sale." 60 UNDERWRITING The Underwriters named below, acting through their representatives, BancAmerica Robertson Stephens, Hambrecht & Quist LLC and Lehman Brothers Inc. (the "Representatives"), have severally agreed with the Company and the Selling Stockholders, subject to the terms and conditions of the Underwriting Agreement, to purchase the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER OF UNDERWRITER SHARES - ------------------------------------------------------------------------------------------- ---------- BancAmerica Robertson Stephens............................................................. Hambrecht & Quist LLC...................................................................... Lehman Brothers Inc........................................................................ ---------- Total.................................................................................... 5,100,000 ---------- ----------
The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company and a Selling Stockholder have granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 62,033 and 702,967 additional shares of Common Stock, respectively (an aggregate of 765,000 shares of Common Stock), at the initial public offering price per share set forth on the cover page of this Prospectus. In the event the Underwriters exercise their right to purchase less than all of the shares of Common Stock covered by the option, then the Underwriters will first purchase the shares held by the Selling Stockholder and will thereafter purchase shares issued by the Company. To the extent that the Underwriters exercise the option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the total number of shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the shares offered hereby are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Pursuant to the terms of lock-up agreements, the holders of 11,268,913 shares of the Company's Common Stock have agreed, for a period of up to 180 days after the date of this Prospectus, that, subject to certain exceptions, they will not contract to sell or otherwise dispose of any shares of Common Stock, any options or warrants to purchase shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock, currently owned by such holders, without the prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson Stephens may, in its sole discretion, and at 61 any time without notice, release all or any portion of the securities subject to lock-up agreements. All of the shares of Common Stock subject to lock-up agreements will be eligible for sale in the public market upon the expiration of the lock-up agreements, subject to Rule 144. In addition, the Company has agreed that until 180 days after the date of this Prospectus, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, subject to certain exceptions, 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, or exercisable or exchangeable for shares of Common Stock, other than the Company's sale of shares in the offering, the issuance of shares of Common Stock upon the exercise of outstanding options and the grant of options to purchase shares of Common Stock under existing employee stock option or stock purchase plans. See "Shares Eligible For Future Sale." The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to the offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations among the Company, the Selling Stockholders and the Representatives. Among the factors to be considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the 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 the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. A substantial number of the Company's employees hold options to purchase shares of Common Stock that terminate if unexercised contemporaneously with the offering. BancAmerica Robertson Stephens is offering a margin loan program (the "Loan Program") to these employees to loan to them the purchase price required to exercise their options, plus additional amounts up to a specified loan-to-value ratio. The interest rate applicable to the loans made to enable the employees to exercise their options is 5.3% per annum, and the interest rate applicable to any additional amounts loaned will be 8.0% per annum. All principal and interest is due and payable upon maturity (two years from the date of the initial loans). The shares of Common Stock received by an option holder upon exercise of his or her options will be pledged to secure the margin loans. It is expected that BancAmerica Robertson Stephens will loan up to approximately $3.0 million to employees of the Company under the Loan Program in order to enable them to exercise their options. Certain employees of the Company have made alternative arrangements that enable them to exercise the options held by them that would otherwise terminate if unexercised contemporaneously with the offering. For purposes of determining the number of shares of Common Stock currently outstanding, this Prospectus assumes that options covering 1,152,174 shares of Common Stock that 62 terminate if unexercised contemporaneously with the offering will be exercised and the related shares of Common Stock will be issued. After the offering, the Company intends to file a registration statement on Form S-8 that would provide for registration for resale of all shares issued pursuant to options that would terminate if unexercised contemporaneously with the offering. See "Shares Eligible for Future Sale." LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon for the Company by Locke Purnell Rain Harrell (A Professional Corporation), Dallas, Texas. Maurice E. Purnell, Jr., a shareholder of Locke Purnell Rain Harrell (A Professional Corporation), is the Secretary of the Company. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas. EXPERTS The Consolidated Financial Statements of Carreker-Antinori, Inc. as of January 31, 1998 and 1997 and for each of the three years in the period ended January 31, 1998 included in this Prospectus and the Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the shares offered by this Prospectus, reference is made to the Registration Statement, including the exhibits and schedules filed thereto. Statements contained in this Prospectus as to the contents of any agreement, contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C. and copies of all or any part thereof may be obtained upon payment of certain fees prescribed by the Commission from the Public Reference Section of the Commission at the Commission's principal office, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Commission's Regional Offices in New York, located at 7 World Trade Center, Suite 1300, New York, New York 10048, or in Chicago, located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's World Wide Web site is http://www.sec.gov. 63 CARREKER-ANTINORI, INC. INDEX TO FINANCIAL STATEMENTS
PAGE Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2 Consolidated Balance Sheets as of January 31, 1997 and 1998................................................ F-3 Consolidated Statements of Operations for the years ended January 31, 1996, 1997 and 1998.................. F-4 Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996, 1997 and 1998........ F-5 Consolidated Statements of Cash Flows for the years ended January 31, 1996, 1997 and 1998.................. F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Carreker-Antinori, Inc. We have audited the accompanying consolidated balance sheets of Carreker-Antinori, Inc. (the Company), as of January 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carreker-Antinori, Inc., at January 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas March 18, 1998, except for Notes 1 and 11 as to which the date is May 14, 1998 F-2 CARREKER-ANTINORI, INC. CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
JANUARY 31, -------------------- 1997 1998 --------- --------- Current assets: Cash and cash equivalents.................................................................. $ 3,443 $ 1,975 Accounts receivable, net of allowance of $134 and $356 at January 31, 1997 and 1998, respectively............................................................................. 9,075 11,392 Receivable from Electronic Check Clearing House Organization............................... 477 566 Receivable from Payment Solutions Network, Inc., net of allowance of $100 at January 31, 1998..................................................................................... 257 797 Inventory.................................................................................. 216 26 Income tax receivable...................................................................... 192 199 Prepaid expenses........................................................................... 719 646 Deferred income taxes...................................................................... 538 546 --------- --------- Total current assets......................................................................... 14,917 16,147 Furniture, equipment, and leasehold improvements, net of accumulated depreciation of $835 and $1,489 at January 31, 1997 and 1998, respectively.......................................... 891 1,580 Software costs capitalized, net of accumulated amortization of $2,571 and $3,300 at January 31, 1997 and 1998, respectively............................................................ 989 2,263 Other assets................................................................................. 103 329 --------- --------- Total assets................................................................................. $ 16,900 $ 20,319 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................... $ 1,030 $ 2,036 Accrued compensation and benefits.......................................................... 1,846 1,652 Other accrued expenses..................................................................... 1,042 849 Deferred income taxes...................................................................... -- -- Deferred revenue........................................................................... 5,317 4,176 --------- --------- Total current liabilities.................................................................... 9,235 8,713 Deferred income taxes........................................................................ 323 982 Commitments (Note 9) Common stock subject to put.................................................................. 2,000 2,000 Stockholders' equity: Preferred Stock, $.01 par value: 2,000 shares authorized; no shares issued and outstanding.............................................................................. -- -- Common Stock, $.01 par value: 100,000 shares authorized; 11,770 and 12,007 shares issued at January 31, 1997 and 1998, respectively............................................................................. 118 120 Additional paid-in capital................................................................. 1,128 2,078 Retained earnings.......................................................................... 4,635 7,690 Less treasury stock, at cost: 387 and 367 common shares as of January 31, 1997 and 1998, respectively.................... (539) (510) Deferred compensation...................................................................... -- (754) --------- --------- Total stockholders' equity................................................................... 5,342 8,624 --------- --------- Total liabilities and stockholders' equity................................................... $ 16,900 $ 20,319 --------- --------- --------- ---------
See accompanying notes. F-3 CARREKER-ANTINORI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED JANUARY 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Revenues: Consulting and management service fees......................................... $ 9,635 $ 14,407 $ 21,314 Software license fees.......................................................... 3,660 6,398 10,200 Software maintenance and implementation fees................................... 4,184 5,799 7,429 Hardware sales................................................................. 1,070 2,468 1,558 --------- --------- --------- Total revenues............................................................... 18,549 29,072 40,501 --------- --------- --------- Costs of revenues: Consulting and management service fees......................................... 5,303 8,794 12,394 Software license fees.......................................................... 700 1,307 1,412 Software maintenance and implementation fees................................... 2,408 3,108 5,369 Hardware sales................................................................. 753 1,746 1,340 --------- --------- --------- Total cost of revenues....................................................... 9,164 14,955 20,515 --------- --------- --------- Gross profit..................................................................... 9,385 14,117 19,986 --------- --------- --------- Operating costs and expenses: Selling, general, and administrative........................................... 5,702 8,649 11,529 Research and development....................................................... 906 1,161 3,448 Merger related costs........................................................... 54 1,423 -- --------- --------- --------- Total operating costs and expenses........................................... 6,662 11,233 14,977 Income from operations........................................................... 2,723 2,884 5,009 Other income (expense): Interest income, net........................................................... 54 114 99 Other income (expense)......................................................... 250 (500) -- --------- --------- --------- 304 (386) 99 --------- --------- --------- Income before provision for income taxes......................................... 3,027 2,498 5,108 Provision for income taxes (Note 5).............................................. 1,165 1,122 2,053 --------- --------- --------- Net income....................................................................... $ 1,862 $ 1,376 $ 3,055 --------- --------- --------- --------- --------- --------- Basic earnings per share......................................................... $ .16 $ .13 $ .27 --------- --------- --------- --------- --------- --------- Diluted earnings per share....................................................... $ .15 $ .12 $ .23 --------- --------- --------- --------- --------- --------- Shares used in computing basic earnings per share................................ 11,543 10,914 11,477 --------- --------- --------- --------- --------- --------- Shares used in computing diluted earnings per share.............................. 12,092 11,878 13,244 --------- --------- --------- --------- --------- ---------
See accompanying notes. F-4 CARREKER-ANTINORI, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
COMMON STOCK ADDITIONAL TREASURY STOCK ------------------------ PAID-IN RETAINED DEFERRED ---------------------- SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES AMOUNT ----------- ----------- ----------- ----------- --------------- --------- ----------- Balance at January 31, 1995............ 11,746 $ 118 $ 1,811 $ 1,901 $ (163) 2 $ (2) Compensation earned under employee stock ownership plan................. -- -- -- -- 163 -- -- Issuance of stock options.............. -- -- -- 643 (643) -- -- Compensation earned under employee stock option plan.................... -- -- -- -- 54 Purchase of treasury stock............. -- -- -- -- -- 4 (5) Distributions to Antinori Software shareholders......................... (445) Net income............................. -- -- -- 1,862 -- -- -- Pro forma tax adjustment (Note 5)...... -- -- -- 149 -- -- -- ----------- ----- ----------- ----------- ----- --------- ----------- Balance at January 31, 1996............ 11,746 118 1,811 4,110 (589) 6 (7) Compensation earned under employee stock option plan.................... -- -- -- -- 589 -- -- Purchase of treasury stock............. -- -- -- -- -- 1,431 (2,004) Sale of treasury stock................. -- -- 1,378 -- -- (1,050) 1,472 Common shares subject to put (Note 6)................................... -- -- (2,000) -- -- -- -- Issuance of shares of common stock upon exercise of stock options............ 24 -- 15 -- -- -- -- Distributions to Antinori Software shareholders......................... -- -- -- (1,030) -- -- -- Merger with Antinori Software.......... -- -- (76) 76 -- -- -- Net income............................. -- -- -- 1,376 -- -- -- Pro forma tax adjustment (Note 5)...... -- -- -- 103 -- -- -- ----------- ----- ----------- ----------- ----- --------- ----------- Balance at January 31, 1997............ 11,770 118 1,128 4,635 -- 387 (539) Restricted stock grant................. 85 1 753 -- (754) -- -- Sale of treasury stock................. -- -- 39 -- -- (23) 33 Purchase of treasury stock............. -- -- -- -- -- 3 (4) Adjustment of shares issued to Antinori Software shareholders................ (198) (2) 2 -- -- -- -- Issuance of shares of common stock upon exercise of stock options............ 350 3 156 -- -- -- -- Net income............................. -- -- 3,055 -- -- -- ----------- ----- ----------- ----------- ----- --------- ----------- Balance at January 31, 1998............ 12,007 $ 120 $ 2078 $ 7,690 $ (754) 367 $ (510) ----------- ----- ----------- ----------- ----- --------- ----------- ----------- ----- ----------- ----------- ----- --------- ----------- TOTAL STOCKHOLDERS' EQUITY ------------- Balance at January 31, 1995............ $ 3,665 Compensation earned under employee stock ownership plan................. 163 Issuance of stock options.............. -- Compensation earned under employee stock option plan.................... 54 Purchase of treasury stock............. (5) Distributions to Antinori Software shareholders......................... (445) Net income............................. 1,862 Pro forma tax adjustment (Note 5)...... 149 ------------- Balance at January 31, 1996............ 5,443 Compensation earned under employee stock option plan.................... 589 Purchase of treasury stock............. (2,004) Sale of treasury stock................. 2,850 Common shares subject to put (Note 6)................................... (2,000) Issuance of shares of common stock upon exercise of stock options............ 15 Distributions to Antinori Software shareholders......................... (1,030) Merger with Antinori Software.......... -- Net income............................. 1,376 Pro forma tax adjustment (Note 5)...... 103 ------------- Balance at January 31, 1997............ 5,342 Restricted stock grant................. -- Sale of treasury stock................. 72 Purchase of treasury stock............. (4) Adjustment of shares issued to Antinori Software shareholders................ -- Issuance of shares of common stock upon exercise of stock options............ 159 Net income............................. 3,055 ------------- Balance at January 31, 1998............ $ 8,624 ------------- -------------
See accompanying notes. F-5 CARREKER-ANTINORI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED JANUARY 31, ------------------------------- 1996 1997 1998 --------- --------- --------- OPERATING ACTIVITIES: Net income....................................................................... $ 1,862 $ 1,376 $ 3,055 Pro forma tax adjustment (Note 5)................................................ 149 103 -- --------- --------- --------- 2,011 1,479 3,055 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of capitalized software........................................... 595 606 745 Depreciation and amortization of property and equipment........................ 201 350 601 (Income) loss on Payment Solutions Network, Inc. investment.................... (250) 500 -- Compensation earned under employee stock option plan........................... 54 589 -- Compensation earned under employee stock ownership plan........................ 163 -- -- Deferred income taxes.......................................................... (293) (635) 651 Provision for doubtful accounts................................................ 164 514 690 Changes in operating assets and liabilities: Accounts receivable.......................................................... (788) (4,443) (3,636) Inventory.................................................................... (91) (6) 190 Prepaid expenses, deposits, and other assets................................. 79 (533) (160) Accounts payable and accrued expenses........................................ 811 1,458 619 Deferred revenue............................................................. 317 2,556 (1,141) --------- --------- --------- Net cash provided by operating activities.......................................... 2,973 2,435 1,614 INVESTING ACTIVITIES: Investment in Payment Solutions Network, Inc..................................... 250 (500) -- Proceeds from note receivable.................................................... 214 -- -- Purchases of property and equipment.............................................. (388) (686) (1,290) Computer software costs capitalized.............................................. (280) (708) (2,019) --------- --------- --------- Net cash used in investing activities.............................................. (204) (1,894) (3,309) FINANCING ACTIVITIES: Purchase of treasury stock....................................................... (5) (2,004) (4) Sales of treasury stock.......................................................... -- 2,849 72 Proceeds from stock options exercised............................................ -- 15 159 Distributions to stockholders.................................................... (445) (1,030) -- Repayment of long-term borrowings................................................ (467) -- -- --------- --------- --------- Net cash (used in) provided by financing activities................................ (917) (170) 227 --------- --------- --------- Net increase (decrease) in cash and cash equivalents............................... 1,852 371 (1,468) Cash and cash equivalents at beginning of year..................................... 1,220 3,072 3,443 --------- --------- --------- Cash and cash equivalents at end of year........................................... $ 3,072 $ 3,443 $ 1,975 --------- --------- --------- --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid for interest........................................................... $ 51 $ 4 $ 26 --------- --------- --------- --------- --------- --------- Cash paid for income taxes....................................................... $ 1,000 $ 1,880 $ 1,607 --------- --------- --------- --------- --------- ---------
See accompanying notes. F-6 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT 1. DESCRIPTION OF BUSINESS The accompanying consolidated financial statements of Carreker-Antinori, Inc. (the Company), include the accounts of The Carreker Group, Inc. (TCG), a Texas corporation, and Antinori Software, Inc. (ASI), a Georgia corporation. On January 31, 1997, ASI was merged with TCG in a transaction accounted for as a pooling of interests (Note 3). The Company is a leading provider of yield management, payment systems, payment electronification and enabling technologies solutions to the banking industry. The Company's solutions include comprehensive service offerings coupled with a broad array of state-of-the-art, proprietary software products which have been designed to address the unique requirements of the banking industry. These solutions improve the competitiveness of a bank's financial performance and operations, including payment processing, deposit processing, customer service and cash management services among others. As described in Note 8, the Company also provides consulting and administrative services to certain organizations. Net revenues of $3,021,000 and $4,669,000 to a major customer accounted for 16% of net revenues in each of the years ended January 31, 1996 and 1997. Net revenues of $11,956,000 to two major customers accounted for 30% of net revenues in the year ended January 31, 1998. In connection with the Company's initial public offering, the Company changed its state of incorporation from Texas to Delaware (the Reincorporation). The Reincorporation was effected by merging Carreker-Antinori, Inc., a Texas corporation (C-A Texas), into a newly organized, wholly-owned, Delaware subsidiary that is the surviving corporation and is referred to herein as the Company. The Plan and Agreement of Merger relating to the Reincorporation resulted in: (i) the conversion of each outstanding share of Class A voting Common Stock and Class B non-voting Common Stock of C-A Texas into 7.7 shares of Common Stock of the Company; (ii) the conversion of all options and rights to acquire shares of Class A and Class B Common Stock of C-A Texas under its various benefit plans into options and rights to acquire shares of Common Stock of the Company on a basis consistent with the Common Stock conversion ratio; and (iii) the substitution of the charter and bylaws of the Company for those of C-A Texas. The financial statements included herein reflect the merger and resulting change in capitalization as all share and per share amounts have been retroactively restated to reflect the merger. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of demand deposit accounts and shares in a demand money market account comprised of domestic and foreign commercial paper, certificates of deposit and U.S. government obligations. ACCOUNTS RECEIVABLE A significant portion of the Company's business consists of providing consulting services and licensing software to major domestic banks, which gives rise to a concentration of credit risk in receivables. The Company performs on-going credit evaluations of its customers' financial condition and generally requires F-7 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) no collateral. The Company maintains an allowance for losses based upon the expected collectibility of all accounts receivable. Writeoffs of receivables during the three years ended January 31, 1996, 1997 and 1998 were $97,000, $546,000 and $368,000, respectively. Accounts receivable include unbilled amounts that represent receivables for work performed for which billings upon mutual agreement have not been presented to the customers. Such receivables are generally billed and collected within one year of completion of the service. Accounts receivable include $2,053,000 and $4,202,000 of unbilled receivables at January 31, 1997 and 1998, respectively. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market and is primarily comprised of computer hardware. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the terms of the related leases or the respective useful lives of the assets. SOFTWARE COSTS CAPITALIZED The Company capitalizes software development costs incurred in developing a product once technological feasibility of the product has been determined. Software development costs capitalized also include amounts paid for purchased software on products that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detail program design, technological feasibility is determined only after completion of a working model which has been beta tested. All software development costs capitalized are amortized using an amount determined as the greater of: (i) the ratio that current gross revenues for a capitalized software project bears to the total of current and future gross revenues for that project or (ii) the straight-line method over the remaining economic life of the product (generally three to five years). The Company recorded amortization relating to software development costs capitalized of $595,000, $606,000 and $745,000 in the years ended January 31, 1996, 1997 and 1998, respectively. REVENUE RECOGNITION Revenue for consulting services performed under fixed-price contracts which are generally in duration in excess of six months is recognized on a percentage-of-completion method. Revenue from these contracts is recognized in the proportion that costs incurred bear to total estimated costs at completion. Anticipated losses on fixed-price contracts are recognized when estimable. Revenue generated from consulting services and under management services contracts is recognized as services are performed. Revenue generated from value-priced consulting services is recognized at the completion of all services and the actual fee to be paid has been agreed to by the customer even though F-8 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) billings for such services may be delayed by mutual agreement for periods generally not to exceed six months. Maintenance contract revenue is recognized ratably over the term of the related contract. Revenue from computer hardware sales is recognized upon shipment. In connection with software license agreements entered into with certain banks and purchase agreements with vendors under which the Company acquired software technology used in products sold to its customers, the Company is required to pay royalties on future sales of the software. Approximately $123,000, $724,000 and $816,000 of royalty expense was recorded under these agreements in the years ended January 31, 1996, 1997 and 1998, respectively. In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2), which supersedes Statement of Position No. 91-1. SOP 97-2 will be effective for all transactions entered into by the Company subsequent to January 31, 1998. The Company is continuing to evaluate the impact that SOP 97-2 will have on license revenue transactions entered into subsequent to January 31, 1998. Based upon the Company's reading and interpretation of SOP 97-2, the Company believes that SOP 97-2 will not have a material impact on future operating results. However, detailed implementation guidelines for this standard have not been issued. Once issued, such detailed implementation guidelines could result in changes in the Company's current revenue recognition practices, and such changes could be material to the Company's revenues and earnings. DEFERRED REVENUE Deferred revenue represents amounts billed to customers under terms specified in consulting, software licensing, and maintenance contracts for which completion of contractual terms or delivery of the software has not occurred. RESEARCH AND PRODUCT DEVELOPMENT COSTS Research and product development costs, which are not subject to Statement of Financial Accounting Standards (SFAS) 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed," are expensed as incurred and relate mainly to the development of new products and the ongoing maintenance of existing products. Research and development expenses incurred by the Company are reported net of funding obtained under research and development arrangements. EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding during each period and common equivalent shares consisting of stock options (using the treasury stock method). INCOME TAXES The Company accounts for income taxes under the liability method whereby deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between tax F-9 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. STOCK-BASED COMPENSATION Compensation expense on stock options issued to employees is measured in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25). USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates. NEW ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FASB 131), which supersedes existing accounting standards related to disclosure of operating segment information. The provisions of FASB 131 are effective for the Company beginning the year ended January 31, 1999. Although the Company currently operates in one industry segment, the Company is evaluating the potential impact of FASB 131 on its reporting requirements. 3. BUSINESS COMBINATION On January 31, 1997, TCG acquired all the outstanding common shares of ASI from the shareholders of ASI in exchange for 3,962,528 shares of TCG common stock. Effective with the merger, the combined entity changed its legal name to Carreker-Antinori, Inc. The transaction was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to include among other things the financial position and results of operations of ASI for all periods presented. On January 29, 1998, the Company and shareholders of ASI entered into a settlement agreement under which the ASI shareholders agreed to return 338,800 shares of Common Stock to the Company. Certain ASI software products were determined to require significantly more development effort than anticipated at the time of the merger. The Company and the ASI shareholders agreed to a settlement based upon the additional development costs incurred by the Company to ready certain of the software products for sale to customers. The settlement in shares was determined based upon the fair value of the Company's Common Stock on the consummation date of the merger. At January 31, 1998, 197,890 shares of Common Stock had been returned to the Company and canceled. During the year ended January 31, 1997, the Company recorded charges of $834,220 in connection with the merger. These charges consisted of investment banking, legal, accounting and other fees. Included in these charges are fees of $200,000 payable to a director of the Company for consulting services performed in connection with the merger. 4. CREDIT ARRANGEMENTS The Company has a revolving credit agreement (the Revolving Credit Agreement) with a bank which extends through July 1, 1998. The maximum amount of borrowings allowed under the Revolving Credit F-10 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 4. CREDIT ARRANGEMENTS (CONTINUED) Agreement is $3.0 million subject to a borrowing base calculated based on 70% of qualified accounts receivable (as defined in the Revolving Credit Agreement). At January 31, 1998, the maximum borrowings allowed under the Revolving Credit Agreement was $3.0 million. The Company had no borrowings outstanding under the Revolving Credit Agreement at January 31, 1998. Borrowings under the Revolving Credit Agreement bear interest at the prime lending rate (8.5% at January 31, 1998) and are collateralized against certain assets of the Company, including accounts and notes receivable, inventory, and intangibles. The Revolving Credit Agreement contains certain financial covenants and restrictions including limitations on capital expenditures, the maintenance of specified levels of tangible net worth and certain financial ratios. The Company may not declare or pay any dividends (unless such dividends are payable in the Company's stock) without obtaining prior written consent from the lender. 5. PROVISION FOR INCOME TAXES Prior to the merger of ASI and TCG, ASI had elected to be treated as an S corporation for federal and state income tax purposes. As such, the taxable income of ASI was reported to and subject to tax to its shareholders. The provision for income taxes reported on the consolidated statement of operations for the years ended January 31, 1996 and 1997, provides approximate federal and state income taxes (by applying statutory income tax rates) that would have been incurred if ASI had been subject to tax as a C corporation. The pro forma adjustment to the tax provision amounted to $149,000 and $103,000 in the years ended January 31, 1996 and 1997, respectively. The Company's provision for income taxes, including pro forma amounts for the years ended January 31, 1996 and 1997, consists of the following (in thousands):
YEAR ENDED JANUARY 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Federal: Current.................................................................. $ 1,436 $ 1,519 $ 1,263 Deferred................................................................. (350) (518) 615 --------- --------- --------- 1,086 1,001 1,878 State: Current.................................................................. 147 167 139 Deferred................................................................. (68) (46) 36 --------- --------- --------- 79 121 175 --------- --------- --------- $ 1,165 $ 1,122 $ 2,053 --------- --------- --------- --------- --------- ---------
F-11 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 5. PROVISION FOR INCOME TAXES (CONTINUED) The provisions for income taxes differ from the amounts computed by applying the statutory United States federal income tax rate to income before provision for income taxes as follows (in thousands):
YEAR ENDED JANUARY 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Income tax expense at statutory rate....................................... $ 1,029 $ 849 $ 1,738 State income taxes, net of U.S. federal benefit............................ 77 76 92 Nondeductible expenses..................................................... 32 197 67 Other, net................................................................. 27 -- 156 --------- --------- --------- Provision for income taxes................................................. $ 1,165 $ 1,122 $ 2,053 --------- --------- --------- --------- --------- ---------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred tax assets and liabilities are as follows (in thousands):
YEAR ENDED JANUARY 31, -------------------- 1997 1998 --------- --------- Deferred tax assets: Cash to accrual adjustment............................................................ $ 241 $ 181 Loss on PSN note not currently deductible............................................. 180 -- Merger costs not currently deductible................................................. 72 72 Allowance for doubtful accounts....................................................... 21 164 Other................................................................................. 59 129 --------- --------- Total deferred tax assets............................................................... 573 546 Deferred tax liabilities: Amortization of capitalized software.................................................. 356 965 Other................................................................................. 2 17 --------- --------- Total deferred tax liabilities.......................................................... 358 982 --------- --------- Net deferred tax assets (liabilities)................................................... $ 215 $ (436) --------- --------- --------- ---------
6. COMMON STOCK In June 1996, the Company repurchased 1,427,249 shares of Common Stock, representing all the shares held by Pacific USA Holdings Corp., for a total cash price of $2,000,000. In October 1996, Science Applications International Corporation (SAIC) purchased 774,967 shares of common stock for a cash purchase price of $2,000,000. In connection with the stock purchase, the Company and SAIC entered into a Shareholders Agreement (the Shareholders Agreement) under which SAIC was granted: (i) the right to participate in any future offerings of common stock by the Company so as to avoid dilution of SAIC's equity interest in the Company and (ii) a put option which requires, if exercised, the Company to purchase any or all shares of common stock owned by SAIC under certain conditions, as defined in the Shareholder Agreement. The Shareholders Agreement terminates upon the F-12 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 6. COMMON STOCK (CONTINUED) closing of a firm underwritten public offering of the Company's common stock which has an aggregate offering price of at least $15,000,000 or a merger between the Company and another corporation or entity that is not affiliated with or controlled by the Company in which the Company is not the surviving corporation in the merger. The Company has classified the common stock subject to the put outside of stockholders' equity on the consolidated balance sheet. The put option will terminate if the Company's initial public offering is consummated (Note 11). 7. BENEFIT PLANS STOCK OPTION PLANS Effective October 7, 1994, the Company adopted the 1994 Long Term Incentive Plan (the Long Term Incentive Plan) under which officers and employees may be granted awards in the form of incentive stock options, non-qualified stock options and restricted shares. The exercise price per share for the Common Stock issued pursuant to incentive stock options under the Long Term Incentive Plan shall be no less than 100% of the fair market value on the date the option is granted. The exercise price per share for non-qualified stock options under the Long Term Incentive Plan may be determined by the Compensation Committee of the Company's Board of Directors (the Committee), but may not be less than the par value of the shares. Options granted under the Long Term Incentive Plan become exercisable and vest as determined by the Committee. To date, options granted under the Long Term Incentive Plan fully vest within two to three years from the date of grant. The term of each option granted under the Long Term Incentive Plan shall be as the Committee determines, but in no event shall any option have a term of longer than ten years from the date of grant. Options may be granted pursuant to the Long Term Incentive Plan up to October 7, 2004, unless the Board of Directors terminates the Long Term Incentive Plan prior to such date. At January 31, 1998, the Company's employees hold options to purchase 1,159,882 shares of Common Stock which immediately vest upon consummation of the Company's initial public offering and are required to be exercised contemporaneously with consummation of such offering (Note 11). On January 31, 1998, the Committee issued 84,700 shares of restricted stock with a fair market value of $8.90 per share to certain key employees under the Company's Long Term Incentive Plan. Holders of restricted stock retain all rights of a stockholder, except the shares cannot be sold until they vest. Upon employee termination, all unvested shares are forfeited to the Company. The restricted shares vest in full on January 31, 2001. At January 31, 1998, there was deferred compensation related to the restricted shares totaling $754,000. The deferred compensation will be charged to expense over the vesting period. The Company has a Director Stock Option Plan (the Director Plan) under which non-employee members of the Company's Board of Directors may be granted options to purchase shares of the Company's Common Stock at prices determined by the Committee. Options granted under the Director Plan expire after ten years from the date of grant or at such earlier date as determined by the Committee and specified in the applicable stock option agreement. Each option granted shall become exercisable immediately or in one or more installments as determined by the Committee and as provided in the applicable stock option agreement. All shares issued and options granted pursuant to the Director Plan are subject to restriction agreements. As part of an employment contract, the President of ASI granted an option to an officer of ASI in December 1995 to purchase 396,257 equivalent shares of the Company's Common Stock at an exercise F-13 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 7. BENEFIT PLANS (CONTINUED) price of $.54 per share from the President of ASI. The exercise price was set at 25% of the fair market value on the grant date. As a result, the Company recorded deferred compensation of $642,633 to be expensed ratably over the vesting period. The option initially vested over a two year period from the date of grant but fully vested in the event of a change in control as defined in the option agreement. The option fully vested as a result of the TCG and ASI merger effective January 31, 1997. Therefore, all remaining deferred compensation recorded relating to this stock option grant was expensed in the fourth quarter of 1997. The fair value of these options as determined by the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), was $.89 per option on the date of grant. Stock option transactions for the years ended January 31, 1996, 1997 and 1998, are as follows (in thousands, except per share amounts):
1996 1997 1998 ------------------------ ------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ----------- ----------- ----------- ----------- ----------- ----------- Options outstanding at beginning of year........... 1,066 $ .64 1,942 $ .82 2,983 $ 1.45 Granted.......................................... 968 1.02 1,119 2.51 2,017 7.04 Exercised........................................ -- -- (24) .61 (350) .45 Canceled......................................... (92) .85 (54) 1.11 (335) 2.57 ----- ----- ----- Options outstanding at end of year................. 1,942 .82 2,983 1.45 4,315 4.06 ----- ----- ----- ----- ----- ----- Options exercisable at end of year................. 627 1,272 1,557 Weighted average grant-date fair value of options granted during the year.......................... $ .28 $ .48 $ 1.61 ----- ----- ----- ----- ----- -----
Information related to options outstanding at January 31, 1998, is summarized below (in thousands, except per share amounts):
WEIGHTED OPTIONS AVERAGE OPTIONS WEIGHTED OUTSTANDING REMAINING WEIGHTED EXERCISABLE AVERAGE AT JANUARY CONTRACTUAL AVERAGE AT JANUARY EXERCISE RANGE OF EXERCISE PRICE 31, 1998 LIFE EXERCISE PRICE 31, 1998 PRICE - -------------------------------------- ------------- --------------- --------------- ------------- ----------- $ .45 to $1.30 1,513 4.4 $ .90 1,115 $ .78 $2.28 to $3.67 1,404 9.1 2.94 442 2.72 $6.88 to $8.90 1,398 10.0 8.60 -- -- ----- ----- 4,315 7.7 4.06 1,557 1.33 ----- ----- ----- -----
As of January 31, 1998, the Company has reserved for issuance under the Long Term Incentive Plan 5,120,500 shares of Common Stock, of which 84,700 shares of restricted stock have been issued, 3,953,665 shares are subject to currently outstanding options and 1,082,135 shares of Common Stock are reserved for future awards. In addition to shares issued under the Long Term Incentive Plan, 276,315 shares of Common Stock are subject to currently outstanding options issued to directors. Subsequent to January 31, 1998, the Company increased the number of shares reserved for issuance under the Long Term Incentive F-14 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 7. BENEFIT PLANS (CONTINUED) Plan to 5,500,000 shares, and reserved an additional 100,000 shares for future issuance under the Director Plan. The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recorded when the exercise price of the Company's employee stock options equals the fair value of the underlying stock on the date of grant. Compensation equal to the intrinsic value of employee stock options is recorded when the exercise price of the stock options is less than the fair value of the underlying stock on the date of grant. Any resulting compensation is amortized to expense over the option's vesting period. During the years ended January 31, 1996 and 1997, total compensation expense recorded relating to employee stock options was $53,552 and $589,081, respectively. No compensation expense relating to employee stock options was recorded during the year ended January 31, 1998. Information regarding pro forma net income is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with no volatility and the following assumptions for 1996, 1997 and 1998, respectively: weighted-average risk free interest rate of 5.92%, 6.22% and 5.95%, no dividends, and weighted average expected life of 5, 3.49 and 4.45 years. The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information (in thousands, except per share amounts) is as follows:
1996 1997 1998 --------- --------- --------- Pro forma net income....................................................... $ 1,799 $ 1,224 $ 2,641 --------- --------- --------- --------- --------- --------- Basic pro forma earnings per share......................................... $ .16 $ .11 $ .23 --------- --------- --------- --------- --------- --------- Diluted pro forma earnings per share....................................... $ .15 $ .10 $ .20 --------- --------- --------- --------- --------- ---------
The pro forma disclosures only include the effect of options granted subsequent to January 31, 1995. Accordingly, the pro forma information does not reflect the pro forma effect of all previous stock option grants of the Company, and thus is not indicative of future amounts until SFAS 123 is applied to all outstanding stock options. F-15 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 7. BENEFIT PLANS (CONTINUED) EMPLOYEE STOCK OWNERSHIP PLAN Effective October 22, 1984, the Company established an Employee Stock Ownership Plan (the ESOP) for the benefit of eligible employees. In February 1992, the Company contributed $650,000 to the ESOP. The ESOP used the proceeds from the contribution to purchase 278,054 shares of the Company's Common Stock from an officer and principal stockholder of the Company. Shares of Common Stock acquired by the ESOP have been allocated to each employee in amounts based on the employee's compensation (all shares have been allocated as of January 31, 1996). Compensation expense related to the ESOP is based upon the shares of Common Stock allocated to participants and amounted to $162,500 in 1996. Unearned ESOP compensation is reported as a reduction to Common Stock in stockholders' equity. PROFIT SHARING PLAN TCG has adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the Code) whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. The plan provides for a matching contribution by TCG. Effective January 1, 1998, employees of ASI became eligible to participate in the TCG plan. Employer matching contributions amounted to $210,000, $304,000 and $421,000 in 1996, 1997 and 1998, respectively. TCG may make additional contributions at the discretion of the Board of Directors. No discretionary contribution was made during 1996, 1997, or 1998. Prior to January 1, 1998, employees of ASI had a separate profit sharing plan pursuant to Section 401(k) of the Code, whereby participants could contribute a percentage of compensation not in excess of the maximum allowed under the Code. Employer matching contributions are discretionary and amounted to $135,000, $187,000 and $260,000 under the ASI plan for the years ended January 31, 1996, 1997 and 1998, respectively. BONUS PLAN The Company pays bonuses to key employees based on Company profitability, the extent to which individuals meet agreed-upon objectives for the year, and executive management's discretion. The Company recorded bonus expense of approximately $1,486,000, $2,179,000 and $1,051,000 in 1996, 1997 and 1998, respectively. 8. MANAGEMENT SERVICES The Company serves as Executive Director of the Electronic Check Clearing House Organization (ECCHO) and provides consulting and administrative services to ECCHO, for which the Company recorded net revenues of $696,000, $866,000 and $994,000 in 1996, 1997 and 1998, respectively. Receivables from ECCHO were $317,000, $477,000 and $566,000 at January 31, 1996, 1997 and 1998, respectively. The Company owns an equity interest in Payment Solutions Network, Inc. (PSN) for which the Company has no book basis. PSN's articles of incorporation require PSN to repurchase the Company's equity interest for $1,250,000 at a rate of $250,000 per year over a five-year period, with the final year's payment contingent upon the amount of operating revenue of PSN in the fifth year. The annual repurchase of these units is subject to PSN maintaining certain cash and net worth levels. The proceeds from the first scheduled repurchase of $250,000 was received by the Company from PSN in January 1996 F-16 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 8. MANAGEMENT SERVICES (CONTINUED) and included in other income. The scheduled 1997 and 1998 repurchase of $250,000 was not received due to cash and net worth levels of PSN falling below the amounts stipulated in its articles of incorporation. Additional payments, if any, to be received by the Company from PSN in subsequent years will be recognized as other income when the realization of such amounts is probable. To assist PSN in maintaining its liquidity, the Company and another stockholder of PSN each advanced PSN a total of $500,000 in two increments in August and December of the fiscal year ended January 31, 1997. The Company believes ultimate collection of these advances is doubtful based upon PSN's historical and forecasted operating results. Therefore, the Company fully reserved the $500,000 receivable and charged $500,000 to other expense in 1997. The Company has an additional long-term note receivable from PSN with a remaining balance of $64,000 as of January 31, 1998. Such note receivable is included in other assets in the consolidated balance sheet. The Company has a management services contract (the PSN Agreement) with PSN to provide consulting, sales, and administrative support to PSN for a five-year term beginning January 31, 1995. During the years ended January 31, 1996, 1997 and 1998, the Company recorded management service fees related to the PSN Agreement of $1,285,000, $1,344,000 and $1,378,000, respectively. Receivables from PSN for management services (excluding the note receivable discussed above) were $342,000, $257,000 and $797,000 at January 31, 1996, 1997 and 1998, respectively. Subsequent to January 31, 1998, the Company received payments from PSN for management services in the amount of $362,000. The Company owns an equity interest (for which the Company has no book basis) and serves as Managing Director of INFITEQ, LLC (INFITEQ), a single-source provider of specialized outsourcing services to the banking industry for transaction processing, information management, electronic commerce and image technology. INFITEQ was incorporated on January 15, 1998. The Company has a Management Services Agreement (the INFITEQ Agreement) with INFITEQ to provide INFITEQ consulting, sales and administrative support through January 2008. The Company also is entitled to receive reimbursement of certain costs it incurred for the benefit of INFITEQ. No management service fees were recognized by the Company under this agreement during the year ended January 31, 1998 and the Company has not recognized any receivables from INFITEQ due to uncertainties surrounding collection of these amounts. INFITEQ has no operating history and is expected to generate operating losses in its start-up phase and therefore, collection of these receivables is considered to be doubtful as of January 31, 1998. Amounts reserved at January 31, 1998 totalled $368,000. The Company has not provided guarantees of debt or other obligations, has not agreed to fund any losses, or is not otherwise contingently liable with respect to ECCHO, PSN or INFITEQ. 9. LEASE COMMITMENTS The Company leases office facilities and certain equipment under operating leases for various periods. Leases that expire are generally expected to be renewed or replaced by other leases. Rental expense under these leases for 1996, 1997 and 1998 was approximately $421,000, $527,000 and $580,000, respectively. Future minimum base rents under terms of noncancelable operating leases (in thousands) are as follows at January 31, 1998: F-17 CARREKER-ANTINORI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 9. LEASE COMMITMENTS (CONTINUED) Year ending January 31: 1999................................................................. $ 832 2000................................................................. 569 2001................................................................. 455 2002 and thereafter.................................................. 940
10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
1996 1997 1998 --------- --------- --------- Basic earnings per share: Net income..................................................................... $ 1,862 $ 1,376 $ 3,055 Weighted average shares outstanding............................................ 11,543 10,914 11,477 Basic earnings per share....................................................... $ .16 $ .13 $ .27 --------- --------- --------- --------- --------- --------- Diluted earnings per share: Net income..................................................................... $ 1,862 $ 1,376 $ 3,055 Weighted average shares outstanding............................................ 11,543 10,914 11,477 Assumed conversion of employee stock options................................... 549 964 1,767 --------- --------- --------- Shares used in diluted earnings per share calculation.......................... 12,092 11,878 13,244 --------- --------- --------- --------- --------- --------- Diluted earnings per share..................................................... $ .15 $ .12 $ .23 --------- --------- --------- --------- --------- ---------
11. SUBSEQUENT EVENT Subsequent to January 31, 1998, the Company's Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission to sell up to 3,650,000 shares of the Company's Common Stock through an initial public offering (the Offering). The Company intends to use the proceeds from the Offering for working capital and other general corporate purposes. The Company may also use a portion of the proceeds for possible strategic alliances and acquisitions of businesses, products and technologies that are complementary to those of the Company. Pending such uses, the Company plans to invest the net proceeds in short-term, interest-bearing, investment grade securities. If the Offering is consummated, the Shareholder Agreement with SAIC will terminate (Note 6). Subsequent to January 31, 1998, the Company's Board of Directors authorized the merger of C-A Texas. The merger was effected through the conversion of each outstanding share of Class A voting Common Stock and Class B non-voting Common Stock of C-A Texas into 7.7 shares of Common Stock of the Company. Additionally, all options and rights to acquire shares of Class A and Class B Common Stock of C-A Texas were converted into rights to acquire shares of the newly formed Delaware subsidiary on a basis consistent with the Common Stock conversion ratio (Note 1). F-18 INSIDE BACK COVER DESCRIPTION: TOP HALF OF PAGE: Graphic of Carreker-Antinori Logo and image representing major banks pointing to stylized logo of ECCHO and description stating "ECCHO, a rule-making body for the electronification of the check payment system." Also included in the graphic are images representing major banks, VISA and IBM and the Carreker-Antinori Logo pointing to a stylized logo of PSN and a description stating "PSN, a provider of database and information services critical to the realization of check electronification benefits." BOTTOM HALF OF PAGE: Below a bubble across the middle of the page labeled "Strategic Banking Initiatives," a graphic of images and logos representing FISERV, NPC, Brinks and UPS all pointing to image and logo stating "INFITEQ -- The Answer," which points to the Carreker-Antinori Logo with a statement at the bottom of the graphic stating "INFITEQ, a single source provider of specialized outsourcing services to the banking industry." OUTSIDE BACK COVER DESCRIPTION: Carreker - Antinori Logo: Carreker Antinori, Move Money with Greater Intelligence-TM- PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table indicates the estimated expenses to be incurred in connection with the offering described in the Registration Statement. The Company is paying certain of the offering expenses of the Selling Stockholders. Securities and Exchange Commission filing fee........................... $ 20,763 NASD filing fee......................................................... 7,538 NASDAQ National Market listing fee...................................... 95,000 Blue Sky fees and expenses.............................................. 5,000 Printing and engraving fees............................................. 217,000 Accountants' fees and expenses.......................................... 270,000 Legal fees and expenses................................................. 390,000 Transfer Agent's fees and expenses...................................... 5,000 Miscellaneous........................................................... 89,699 --------- Total................................................................. $1,100,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in effect, that any person made a party to any action by reason of the fact that he is or was a director, officer, employee or agent of the Company may and, in certain cases, must be indemnified by the Company 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 expenses (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 the best interests of the Company. This indemnification does not apply, in a derivative action, to matters as to which it is adjudged that the director, officer, employee or agent is liable to the Company, 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 expenses, 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 the Company's Certificate of Incorporation provides that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the DGCL. Article Eight of the Company's Certificate of Incorporation also provides that the Company may indemnify to the fullest extent permitted by Delaware law any and all of its directors and officers, or former directors and officers, or any person who may have served at the Company's request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. In addition, Section 7.07 of the Company's Bylaws provides for similar indemnification of officers and directors within the limits of Delaware law. Reference is made to the Underwriting Agreement which is filed as part of Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify officers and directors of the Company against certain liabilities under the Securities Act. The Company has entered into Indemnification Agreements with each director and officer of the Company, a form of which is filed as an Exhibit to this Registration Statement. Pursuant to such agreements, the Company does, to the extent permitted by applicable law, indemnify such directors and officers against all expenses, judgments, fines and penalties incurred in connection with the defense or II-1 settlement of any actions brought against them by reason of the fact that they were directors or officers of the Company or assumed certain responsibilities at the direction of the Company. The Company has purchased directors and officers liability insurance in order to limit its exposure to liability for indemnification of directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information relates to all securities issued or sold by the Company within the past three years and not registered under the Securities Act. Effective May 14, 1998, the Company effected a reincorporation into the State of Delaware pursuant to an agreement and plan of merger by and between the Company and Carreker-Antinori, Inc., a Texas corporation (the "Merger"). The issuance of shares by the Company in connection with the Merger was exempt from registration under the Securities Act pursuant to Section 3(a)(9) thereof. On January 31, 1997 a wholly-owned subsidiary of the Company merged with and into ASI, with the result that ASI became a wholly-owned subsidiary of the Company (the "ASI Merger"). Pursuant to the ASI Merger, the Company issued 3,962,528 shares of Common Stock to the shareholders of ASI. Such sale was completed without registration under the Securities Act in reliance upon an exemption provided by Section 4(2) of the Securities Act, no public offering being involved. On June 20, 1997 the Company issued 23,062 shares of Common Stock to Wyn P. Lewis for $72,300. Such sale was completed without registration under the Securities Act in reliance upon an exemption provided by Section 4(2) of the Securities Act, no public offering being involved. On January 10, 1997 the Company issued 269,500 shares of Common Stock to the Crow Family Partnership, L.P. for $834,050. Such sale was completed without registration under the Securities Act in reliance upon an exemption provided by Section 4(2) of the Securities Act, no public offering being involved. On October 10, 1996 the Company issued 774,967 shares of Common Stock to Science Applications International Corporation for $2,000,000. Such sale was completed without registration under the Securities Act in reliance upon an exemption provided by Section 4(2) of the Securities Act, no public offering being involved. During the three-year period ended January 31, 1998, the Company issued 374,736 shares of Common Stock in connection with the exercise of stock options. Such shares were issued without registration under the Securities Act in reliance upon exemptions provided by Sections 3(b) and 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ---------- ------------------------------------------------------------------------------------------------------ *1.1 Form of Underwriting Agreement by and among the Company, the Selling Stockholders named therein and the Underwriters. *2.1 Agreement and Plan of Merger between Carreker-Antinori, Inc., a Texas corporation, and Carreker-Antinori, Inc., a Delaware corporation. **3.1 Amended and Restated Certificate of Incorporation of the Company. **3.2 Bylaws of the Company. **4.1 Specimen Stock Certificate. **4.2 Amended and Restated Certificate of Incorporation and Bylaws of the Company (see Exhibits 3.1 and 3.2).
II-2
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ---------- ------------------------------------------------------------------------------------------------------ **5.1 Opinion of Locke Purnell Rain Harrell (A Professional Corporation). **+10.1 Employment Agreement dated January 31, 1997 between the Company and John D. Carreker, Jr. **+10.2 Employment Agreement dated January 31, 1997 between the Company and Ronald R. Antinori. **+10.3 Employment Agreement dated March 19, 1998 between the Company and Terry L. Gage. **+10.4 Employment Agreement dated March 12, 1998 between the Company and Wyn P. Lewis. **+10.5 Employment Agreement dated March 10, 1998 between the Company and Richard L. Linting. **+10.6 Employment Agreement dated March 13, 1998 between the Company and Royce D. Brown. **+10.7 Amended and Restated Carreker-Antinori 1994 Long Term Incentive Plan. **+10.8 Carreker-Antinori Director Stock Option Plan. *+10.9 Carreker-Antinori Profit Sharing Incentive Plan. 10.10 Intentionally omitted. **10.11 Management Services Agreement dated November 18, 1993 between the Company and Payment Systems Network, Inc. (as amended). **10.12 Management Services Agreement dated January 15, 1998 between the Company and INFITEQ, LLC. **10.13 Strategic Alliance Agreement dated October 1996 between the Company and Science Applications International Corporation. **10.14 Indemnification Agreement between the Company and John D. Carreker, Jr. (together with a schedule). **10.15 Settlement Agreement dated January 29, 1998, between the Company and Ronald R. Antinori. **10.16 Settlement Agreement dated January 29, 1998, between the Company and Susan Antinori. **10.17 Settlement Agreement dated January 29, 1998, between the Company and Lawrence D. Duckworth. **10.18 Settlement Agreement dated January 29, 1998, between the Company and Michael Israel. **10.19 Loan and Security Agreement between Compass Bank and the Company dated September 1997. **10.20 Stock Purchase Agreement by and among the Company and Science Applications International Corporation, dated October 10, 1996. **10.21 Stock Purchase Agreement by and between Crow Family Partnership, L.P. and the Company, dated January 10, 1997. **10.22 Form of the Company's independent contractor agreement. **10.23 Agreement and Plan of Merger between the Company and CAG Newco, Inc. and Antinori Software, Inc. dated as of January 29, 1997. **10.24 Promissory Note dated September 1, 1997, between the Company and John S. Davis. 21.1 Subsidiaries of the Company (no significant subsidiaries). *23.1 Consent of Ernst & Young LLP. **23.2 Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in its opinion filed as Exhibit 5.1).
II-3
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ---------- ------------------------------------------------------------------------------------------------------ **24.1 Power of Attorney (included on first signature page). **27.1 Financial Data Schedule.
- ------------------------ * Filed herewith. ** Previously filed. + Management contract or compensatory plan or arrangement. (b) Financial Statement Schedules. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable or the information has been provided in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Company hereby undertakes 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 may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by any director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Act, 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 the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act 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 Act, 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-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 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 15th day of May, 1998. CARREKER-ANTINORI, INC. By: /s/ JOHN D. CARREKER, JR. ----------------------------------------- John D. Carreker, Jr. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman of the Board and /s/ JOHN D. CARREKER, JR. Chief Executive Officer - ------------------------------ (Principal Executive May 15, 1998 John D. Carreker, Jr. Officer) Executive Vice President, * Treasurer and Chief - ------------------------------ Financial Officer May 15, 1998 Terry L. Gage (Principal Financial and Accounting Officer) * Vice Chairman of the Board - ------------------------------ and Chief Technology May 15, 1998 Ronald R. Antinori Officer * - ------------------------------ President, Chief Operating May 15, 1998 Richard L. Linting Officer and Director * - ------------------------------ Director May 15, 1998 James D. Carreker * - ------------------------------ Director May 15, 1998 James L. Fischer II-5 SIGNATURES TITLE DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Director May 15, 1998 Richard R. Lee, Jr. * - ------------------------------ Director May 15, 1998 Larry J. Peck * - ------------------------------ Director May 15, 1998 David K. Sias * - ------------------------------ Director May 15, 1998 Donald House - ------------------------------ *By: /s/ JOHN D. CARREKER, JR. ------------------------- John D. Carreker, Jr. ATTORNEY-IN-FACT II-6 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ---------- ------------------------------------------------------------------------------------------------------ *1.1 Form of Underwriting Agreement by and among the Company, the Selling Stockholders named therein and the Underwriters. *2.1 Form of Agreement and Plan of Merger between Carreker-Antinori, Inc., a Texas corporation, and Carreker-Antinori, Inc., a Delaware corporation. **3.1 Amended and Restated Certificate of Incorporation of the Company. **3.2 Bylaws of the Company. **4.1 Specimen Stock Certificate. **4.2 Amended and Restated Certificate of Incorporation and Bylaws of the Company (see Exhibits 3.1 and 3.2). **5.1 Opinion of Locke Purnell Rain Harrell (A Professional Corporation). **+10.1 Employment Agreement dated January 31, 1997 between the Company and John D. Carreker, Jr. **+10.2 Employment Agreement dated January 31, 1997 between the Company and Ronald R. Antinori. **+10.3 Employment Agreement dated March 19, 1998 between the Company and Terry L. Gage. **+10.4 Employment Agreement dated March 12, 1998 between the Company and Wyn P. Lewis. **+10.5 Employment Agreement dated March 10, 1998 between the Company and Richard L. Linting. **+10.6 Employment Agreement dated March 13, 1998 between the Company and Royce D. Brown. **+10.7 Amended and Restated Carreker-Antinori 1994 Long Term Incentive Plan. **+10.8 Carreker-Antinori Director Stock Option Plan. *+10.9 Carreker-Antinori Profit Sharing Incentive Plan. 10.10 Intentionally omitted. **10.11 Management Services Agreement dated November 18, 1993 between the Company and Payment Systems Network, Inc. (as amended). **10.12 Management Services Agreement dated January 15, 1998 between the Company and INFITEQ, LLC. **10.13 Strategic Alliance Agreement dated October 1996 between the Company and Science Applications International Corporation. **10.14 Indemnification Agreement between the Company and John D. Carreker, Jr. (together with a schedule). **10.15 Settlement Agreement dated January 29, 1998, between the Company and Ronald R. Antinori. **10.16 Settlement Agreement dated January 29, 1998, between the Company and Susan Antinori. **10.17 Settlement Agreement dated January 29, 1998, between the Company and Lawrence D. Duckworth. **10.18 Settlement Agreement dated January 29, 1998, between the Company and Michael Israel. **10.19 Loan and Security Agreement between Compass Bank and the Company dated September 1997. **10.20 Stock Purchase Agreement by and among the Company and Science Applications International Corporation, dated October 10, 1996. **10.21 Stock Purchase Agreement by and between Crow Family Partnership, L.P. and the Company, dated January 10, 1997.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ---------- ------------------------------------------------------------------------------------------------------ **10.22 Form of the Company's independent contractor agreement. **10.23 Agreement and Plan of Merger between the Company and CAG Newco, Inc. and Antinori Software, Inc. dated as of January 29, 1997. **10.24 Promissory Note dated September 1, 1997, between the Company and John S. Davis. 21.1 Subsidiaries of the Company (no significant subsidiaries). *23.1 Consent of Ernst & Young LLP. **23.2 Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in its opinion filed as Exhibit 5.1). **24.1 Power of Attorney (included on first signature page). **27.1 Financial Data Schedule.
- ------------------------ * Filed herewith. ** Previously filed. + Management contract or compensatory plan or arrangement. EX-1.1 2 EXHIBIT 1.1 5,100,000 SHARES(1) CARREKER-ANTINORI, INC. COMMON STOCK UNDERWRITING AGREEMENT May __, 1998 BANCAMERICA ROBERTSON STEPHENS HAMBRECHT & QUIST LLC LEHMAN BROTHERS INC. As Representatives of the several Underwriters c/o BancAmerica Robertson Stephens 555 California Street Suite 2600 San Francisco, California 94104 Ladies and Gentlemen: Carreker-Antinori, Inc., a Delaware corporation (the "Company"), and certain stockholders of the Company named in Schedule B hereto (hereafter called the "Selling Stockholders") address you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirm their respective agreements with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 3,650,000 shares of its authorized and unissued Common Stock, par value $.01 per share, to the several Underwriters. The Selling Stockholders, acting severally and not jointly, propose to sell an aggregate of 1,450,000 shares of the Company's authorized and outstanding Common Stock, par value $.01 per share, to the several Underwriters. The 3,650,000 shares of Common Stock, par value $.01 per share, of the Company to be sold by the Company are hereinafter called the "Company Shares" and the 1,450,000 shares of Common Stock, par value $.01 per share, to be sold by the Selling Stockholders are hereinafter called the "Selling Stockholder Shares." The Company Shares and the Selling Stockholder Shares are hereinafter collectively referred to as the "Firm Shares." The Company and a Selling Stockholder also propose to grant, severally and not jointly, to the Underwriters an option to purchase up to 765,000 additional shares of the Company's Common Stock, par value $.01 per share (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock, par value $.01 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. I. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 333-48399) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements - ---------- (1) Plus an option to purchase up to 765,000 additional shares from the Company and a Selling Stockholder of the Company to cover over-allotments. of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses") and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. The Company meets the requirements for filing a registration statement on Form S-1 under the Act. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated 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) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); PROVIDED, HOWEVER, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of BancAmerica 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 Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) 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) of the Rules and Regulations). 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) of the Rules and Regulations), 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 of the Rules and Regulations and with the consent of BancAmerica 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 2 or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not 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; and 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 (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will 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 misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact 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; PROVIDED, HOWEVER, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) Each of the Company and Antinori Software, Inc., a Georgia corporation (the "Subsidiary"), has been duly incorporated and is validly existing as a corporation in good standing under the laws of the respective state of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company owns all of the outstanding capital stock of the Subsidiary free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; each of the Company and the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; each of the Company and the Subsidiary is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of the business of the Company and the Subsidiary, considered as one enterprise, all of which are valid and in full force and effect; each material contract or other instrument to which the Company or the Subsidiary is a party or by which their respective properties or business is or may be bound or affected has been duly and validly executed by the Company and is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; neither the Company nor the Subsidiary is in violation of its respective charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or their respective properties may be bound; and neither the Company nor the Subsidiary is in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over 3 their respective properties of which it has knowledge. The Company does not own or have any ownership interest in, directly or indirectly, any corporation, association or other entity other than the Subsidiary and INFITEQ, LLC. (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification or contribution hereunder may be limited by applicable law or public policy and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, license agreement, joint venture or other agreement or instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or their respective properties may be bound, (ii) the charter or bylaws of the Company or the Subsidiary, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties is required for the execution and delivery of this Agreement and the consummation by the Company or the Subsidiary of the transactions herein contemplated, except such as may be required under the Act or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, the Subsidiary or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties or otherwise which (i) could foreseeably result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise, or might materially and adversely affect their properties, assets or rights, (ii) could prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company or the Subsidiary of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company (including, as of the Closing Date, the Selling Stockholder Shares) have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Company Shares and the Option Shares to be purchased from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders to which the Company is a party exists with respect to any of the Company Shares or Option Shares to be purchased from the Company hereunder or the issuance and sale thereof other than those that have been 4 satisfied or expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right, or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor the Subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised 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. (g) Ernst & Young LLP, which has examined the consolidated financial statements of the Company, together with the related schedules and notes, as of January 31, 1997 and 1998 and for each of the years in the three (3) years ended January 31, 1998 filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, forming part of the Registration Statement and Prospectus, fairly present the consolidated financial position and the consolidated results of operations of the Company and the Subsidiary at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise, (ii) any transaction that is material to the Company and the Subsidiary, considered as one enterprise, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company and the Subsidiary, considered as one enterprise, incurred by the Company or the Subsidiary, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary that is material to the Company and the Subsidiary, considered as one enterprise, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary (other than dividends or distributions made by the Subsidiary to the Company), or (vi) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary which has been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise. (i) Except as set forth in the Registration Statement and Prospectus, (i) each of the Company and the Subsidiary has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise, 5 (ii) the agreements to which the Company or the Subsidiary is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company and the Subsidiary (as applicable), except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) each of the Company and the Subsidiary has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (j) The Company and the Subsidiary have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or the Subsidiary, except where the failure to file such tax returns or pay such taxes or the existence of such tax deficiency would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise; and all tax liabilities are adequately provided for on the books of the Company and the Subsidiary. (k) Except as described in the Registration Statement and the Prospectus, neither the Company nor the Subsidiary has any employee benefit plans (including, without limitation, profit sharing plans) or deferred compensation arrangements. (l) The Company and the Subsidiary maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company or the Subsidiary against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; neither the Company nor the Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor the Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise. (m) To the best of the Company's knowledge, no labor disturbance by the employees of the Company or the Subsidiary exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, value added resellers, subcontractors, independent software vendors, original equipment manufacturers, authorized dealers or distributors that might be expected to result in a material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the Company's knowledge, no such agreement is imminent. (n) Each of the Company and the Subsidiary owns or possesses adequate rights to use all patents, patent rights, inventions, 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 have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise; 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; and the Company has not received any notice 6 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 on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise. (o) The statements in the Prospectus, under the heading "Certain Transactions," set forth all existing agreements, arrangements, understandings or transactions or proposed agreements, arrangements, understandings or transactions, between or among the Company and the Subsidiary, on the one hand, and any officer, director or stockholder of the Company or the Subsidiary, or with any partner, affiliate or associate of any of the foregoing persons or entities, on the other hand, required to be set forth or described thereunder. (p) The Common Stock has been approved for quotation on The Nasdaq National Market, subject to official notice of issuance. (q) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (r) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (s) Neither the Company nor the Subsidiary has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (t) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be 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. (u) Each officer and director of the Company who owns shares of Common Stock or options to purchase shares of Common Stock that will vest within 180 days of the date of this Agreement, each Selling Stockholder and each other beneficial owner of 10,000 or more shares of Common Stock and/or options to purchase shares of Common Stock that will vest within 180 days of the date of this Agreement has agreed in writing that such person will not, for a period of 180 days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, PROVIDED the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, PROVIDED that the distributees thereof agree in writing to be bound by the terms of this 7 restriction, or (iii) with the prior written consent of BancAmerica Robertson Stephens (which consent has been given with respect to the exercise by any such person of options granted under the Company's stock compensatory and other benefit plans and the pledge of any shares of Common Stock that were purchased pursuant to BancAmerica Robertson Stephens' "Loan Program" described in the Registration Statement or any other loan program approved in writing by BancAmerica Robertson Stephens). The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. Furthermore, each such person has also agreed that, without the prior written consent of BancAmerica Robertson Stephens, such person will not, during the period ending with the conclusion of the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Securities, except pursuant to the Registration Statement to the extent set forth in Schedule B hereto. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers (to the extent that they are stockholders of the Company), directors (to the extent that they are stockholders of the Company) and stockholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that, prior to the conclusion of the Lock-Up Period, 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 BancAmerica Robertson Stephens. (v) Except as set forth in the Registration Statement and Prospectus, (i) 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, (ii) 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, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) 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. Section 9601, ET SEQ.), or otherwise designated as a contaminated site under applicable state or local law. (w) The Company and the Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles 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. (x) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (y) The Company has not incurred any liability for any finder's fees or similar payments in connection with the transactions contemplated herein. 8 (z) The Company's products are designed to be in compliance with all federal, state and local banking laws and regulation and similar laws and regulations of the United States of America and its subdivisions. (aa) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. (ab) The Company has given notice of the filing of the Registration Statement and the offering contemplated thereby as required by the Shareholders Agreements, dated January 29, 1997, by and among the Company and certain of its stockholders. II. Each Selling Stockholder, severally and not jointly, represents and warrants to and agrees with each Underwriter that: (a) Such Selling Stockholder on the Closing Date and on any later date on which Option Shares are purchased will have valid marketable title to the Shares to be sold by such Selling Stockholder under this Agreement, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters will obtain valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest pertaining to such Selling Stockholder or such Selling Stockholder's property, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Stockholder. (b) Such Selling Stockholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Custody Agreement and Power of Attorney (the "Selling Stockholder Agreement") with John D. Carreker, Jr., Richard L. Linting and Terry L. Gage (collectively, the "Attorneys" and individually, an "Attorney"), appointing the Attorneys as attorneys-in-fact for such Selling Stockholder, and with ChaseMellon Shareholder Services, L.L.C., as custodian (the "Custodian"); the Selling Stockholder Agreement of each Selling Stockholder constitutes a valid and binding agreement on the part of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling Stockholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 6(h) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the several Underwriters to such Selling Stockholder as provided in Section 3 hereof, to authorize the delivery of the Selling Stockholder Shares and the Option Shares to be sold by such Selling Stockholder under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Stockholder of the Selling Stockholder Agreement, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the Selling Stockholder Shares and the Option Shares to be sold by such Selling Stockholder under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws or under the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD")) have been obtained and are in full force and effect; such Selling Stockholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this 9 Agreement and such Selling Stockholder Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder under this Agreement. (d) Such Selling Stockholder will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such Selling Stockholder or with respect to which such Selling Stockholder has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, PROVIDED the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such Selling Stockholder, PROVIDED that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancAmerica Robertson Stephens (which consent has been given with respect to the exercise by any such person of options granted under the Company's stock compensatory and other benefit plans and the pledge of any shares of Common Stock that were purchased by such Selling Stockholder pursuant to BancAmerica Robertson Stephens' "Loan Program" described in the Registration Statement or any other loan program approved in writing by BancAmerica Robertson Stephens). The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the Selling Stockholder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such Selling Stockholder also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the securities held by such Selling Stockholder except in compliance with this restriction. Furthermore, such Selling Stockholder also agrees that, without the prior written consent of BancAmerica Robertson Stephens, such Selling Stockholder will not, during the period ending with the conclusion of the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Securities, except pursuant to the Registration Statement to the extent set forth in Schedule B hereto. (e) Certificates in negotiable form for all Shares to be sold by such Selling Stockholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Stockholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder, except for the Selling Stockholder Shares to be sold by Wyn P. Lewis which certificates and stock power will be delivered by Mr. Lewis or on his behalf to the Underwriters at the time of the Closing. (f) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly 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 or contribution hereunder may be limited by applicable law or public policy and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and the performance of this Agreement and the consummation of the transactions herein contemplated will not (i) result in a material breach or violation of any of the terms and provisions of or constitute a default under any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder, or any Shares to be sold by such Selling Stockholder hereunder, may be bound or, (ii) to the best of such Selling Stockholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Stockholder or over the properties of such Selling Stockholder, or (iii) if such Selling Stockholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Stockholder. 10 (g) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be 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. (h) 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 Shares. (i) All information furnished by or on behalf of such Selling Stockholder relating to such Selling Stockholder, in his or its capacity as such, and the Selling Stockholder Shares that is contained in the representations and warranties of such Selling Stockholder in such Selling Stockholder's Selling Stockholder Agreement or set forth in the Registration Statement or the Prospectus is, and 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, was or will be, true, correct and complete in all material respects, and does not, and 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 of such Selling Stockholder are to be purchased, 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 such information not misleading. (j) Such Selling Stockholder (other than Lawrence D. Duckworth) will review the Prospectus and such Selling Stockholder will comply with all agreements and satisfy all conditions on his or its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date, or any later date on which Option Shares of such Selling Stockholder are to be purchased, as the case may be, and will advise one of its Attorneys and BancAmerica Robertson Stephens prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 6(h) would be inaccurate if made as of the Closing Date or such later date on which Option Shares of such Selling Stockholder are to be purchased, as the case may be. (k) 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; such Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of 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, rights, warrants, options or other securities from the Company, other than those referred to in the Registration Statement and the Prospectus. (l) Except as disclosed to the Underwriters in writing, such Selling Stockholder is not directly or indirectly an affiliate of or associate with any member of the NASD. (m) In addition to the other representations and warranties set forth in this Section 2.II, each of John D. Carreker, Jr. and Ronald R. Antinori, severally and not jointly, further represents and warrants that, to the best of their respective knowledge, the representations and warranties of the Company set forth in Section 2.I of this Agreement are true and correct in all material respects. (n) In addition to the other representations and warranties set forth in this Section 2.II, each of Wyn P. Lewis, Royce D. Brown and Science Applications International Corporation ("SAIC"), severally and not jointly, further represents and warrants that such Selling Stockholder is not aware that (i) 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 (ii) at the 11 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, with respect to SAIC, on any later date on which Option Shares are to be purchased by the Underwriters from SAIC, 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; PROVIDED, HOWEVER, that none of the representations and warranties contained in this subparagraph (n) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information furnished to the Company by such Underwriter specifically for use in the preparation thereof. For the purposes of this subparagraph (n), the awareness of SAIC shall be limited to the awareness of Larry J. Peck. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders agree, severally and not jointly, to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, respectively, at a purchase price of $__.__ per share, the respective number of Company Shares as hereinafter set forth and Selling Stockholder Shares set forth opposite the names of the Company and the Selling Stockholders in Schedule B hereto. The obligation of each Underwriter to the Company and to each Selling Stockholder shall be to purchase from the Company or such Selling Stockholder that number of Company Shares or Selling Stockholder Shares, as the case may be, which (as nearly as practicable, as determined by you) is in the same proportion to the number of Company Shares or Selling Stockholder Shares, as the case may be, set forth opposite the name of the Company or such Selling Stockholder in Schedule B hereto as the number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10) is to the total number of Firm Shares to be purchased by all the Underwriters under this Agreement. The certificates in negotiable form for the Selling Stockholder Shares have been placed in custody (for delivery under this Agreement) under the Selling Stockholder Agreements, except for the Selling Stockholder Shares to be sold by Wyn P. Lewis which certificates, together with duly endorsed stock powers, will be delivered by Mr. Lewis or on his behalf to the Underwriters at the time of the Closing. Each Selling Stockholder agrees that the certificates for the Selling Stockholder Shares of such Selling Stockholder are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Stockholder for the custody of the Selling Stockholder Shares, including the Selling Stockholder Agreement, is to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated by the act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event, except as specifically provided herein or in the Selling Stockholder Agreement. If any Selling Stockholder should die or be incapacitated, or if any other such event should occur, before the delivery of the certificates for the Selling Stockholder Shares hereunder, the Selling Stockholder Shares to be sold by such Selling Stockholder shall, except as specifically provided herein or in the Selling Stockholder Agreement, 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 the Custodian shall have received notice of such death or other event. Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in same-day funds or by wire transfer in same-day funds, payable to the order of the Company with regard to the Shares being purchased from the Company, and to the order of the Custodian for the respective accounts of the Selling Stockholders with regard to the Shares being purchased from such Selling Stockholders, at the offices of Locke Purnell Rain Harrell, 2200 Ross Avenue, Suite 2200, Dallas, Texas (or at such other place as may be agreed upon among the Representatives and the Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this 12 Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that 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 10 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 4(d) hereof (through no fault of the Representatives), 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. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $__.__ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under the second, seventh, eighth and ninth paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company and the Selling Stockholders that the statements made therein do 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, in the light of the circumstances under which they were made, not misleading. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of 13 the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact 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; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus, or, prior to the end of the period of time in which a prospectus relating to the Shares is required to be delivered under the Act, which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. 14 (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of three (3) years after the date hereof, the Company will furnish to its stockholders annual reports (including financial statements audited by independent certified public accountants) and will furnish to you and the other several Underwriters hereunder, upon request (i) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (i) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD, and (iii) every material press release and every material news item or article in respect of the Company or its affairs that was delivered to stockholders in their capacity as stockholders of the Company. During such three (3) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and such subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) 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 your 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 you advising the Company to the effect set forth above, forthwith consult with you concerning the substance of and advisability of disseminating a press release or other public statement responding to or commenting on such rumor, publication or event. (j) For a period of twenty-five (25) days following the date the Registration Statement is declared effective by the Commission, the Company will not issue any press release or engage in any other publicity without the Representatives' prior written consent, other than normal customary releases issued in the ordinary course of the Company's business or those releases required by law. (k) During the Lock-up Period, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, effect the Disposition of, directly or indirectly, any Securities other than the sale of the Company Shares and the Option Shares to be sold by the Company hereunder and the Company's issuance of options or Common Stock under the Company's presently authorized 1994 Long Term Incentive Plan, the Company's Director Stock Option Plan or pursuant to certain options granted to non-employee directors of the Company (collectively, the "Option Arrangements"). (n) The Company will conduct its affairs in such a manner to ensure that the Company will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act. 15 5. EXPENSES. (a) The Company and the Selling Stockholders agree with each Underwriter that the Company and the Selling Stockholders will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any; the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company and the Selling Stockholders in connection with the performance of their obligations hereunder. Any additional expenses incurred as a result of the sale of the Shares by the Selling Stockholders will be borne collectively by the Company and the Selling Stockholders or as otherwise may be mutually agreed to by them, but shall not be, in any event, borne by the Underwriters. The provisions of this Section 5(a) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Stockholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Stockholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Stockholders hereunder to the several Underwriters. (b) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company or any Selling Stockholder to perform any agreement on their respective parts to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. Subject to the provisions of Section 8, the Underwriters agree to pay, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the performance of the obligations of the Underwriters under this Agreement that are not payable by the Company or the Selling Stockholders pursuant to Section 5(a) above or the first sentence of this Section 5(b), including, without limitation, the fees and disbursements of counsel for the Underwriters. (c) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters 16 within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (d) In addition to their other obligations under Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof relating to such Selling Stockholder, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of such Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction; PROVIDED, that if such claim, action, investigation or other proceeding is within the purview of Section 8(a) hereof, the Underwriters shall first demand interim reimbursement from the Company pursuant to Section 5(c) hereof, and shall have failed to be so reimbursed in full within forty-five (45) days of such demand, prior to invoking its rights against such Selling Stockholder pursuant to this Section 5(d). To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Selling Stockholders, together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Underwriters within forty-five (45) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (e) In addition to their other obligations under Section 8(c) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(c) hereof, they will reimburse the Company and each Selling Stockholder on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and each such Selling Stockholder for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and each such Selling Stockholder shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company and each such Selling Stockholder within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (f) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(c), 5(d) and 5(e) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(c), 5(d) and 5(e) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(e) hereof. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Stockholders herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: 17 (a) The Registration Statement shall have become effective not later than 2:00 P.M., San Francisco time, on the date following the date of this Agreement, or 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. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, 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) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise, from that set forth in the Registration Statement or Prospectus, which, in your reasonable judgment, is material and adverse and that makes it, in your reasonable judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares that are Company Shares are to be purchased, as the case may be, the following opinion of respective counsel for the Company and the Selling Stockholders, dated the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) To such counsel's knowledge and in reliance upon an examination of an officer's certificate, the Company does not have any subsidiaries that would qualify as a "significant subsidiary" of the Company within the meaning of Regulation S-X of the Act; (iii) The Company has the corporate power and authority to own lease and operate its respective properties and to conduct its business as described in the Prospectus; (iv) The Company is duly qualified to do business as a foreign corporation and is in good standing in the State of Texas, and based solely upon an examination of an officer's certificate (which such firm shall state that it has no reason to believe that it would be not justified in relying upon) and certificates of governmental authorities, the Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. To such counsel's knowledge, the Company does not own or have any ownership interest in, directly or indirectly, any corporation, association or other entity other than the Subsidiary and INFITEQ, LLC; 18 (v) To such counsel's knowledge, all issued and outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable and are owned by the Company; (vi) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, and the issued and outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly and validly issued, are nonassessable and, to such counsel's knowledge, are fully paid; (vii) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (viii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (ix) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except that no opinion need be expressed as to indemnification or contribution provisions and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (x) Based solely upon the provisions of Section 35.51 of the Texas Business and Commerce Code, as amended, the contractual choice by the Company that the Agreement be governed by the laws of the State of California (other than the choice of law or conflicts of laws rules thereof) is enforceable under Texas law against the Company, except to the extent that the Agreement purports to deal with certain issues related to real property, the validity of a marriage or adoption or the marital property, interests created by a will or will contexts (collectively, the "Excepted Issues"), or to the extent an issue is governed by a statute of the United States that provides that it shall be governed by the law of a particular jurisdiction. Such counsel shall state that it is unaware of any provision of the Agreement which deals with the Excepted Issues; (xi) The Registration Statement has been duly authorized and executed by the Company and the filing of such document with the Commission has been duly authorized by the Company; (xii) Based upon the oral advice of the Commission, the Registration Statement has become effective under the Act and, to such counsel's knowledge, 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 Act; (xiii) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, and the notes and schedules thereto, and other financial and statistical information included therein as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; 19 (xiv) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary in all material respects of such matters and conclusions; and the form of certificate evidencing the Common Stock and filed as an exhibit to the Registration Statement complies with Delaware law; (xv) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (xvi) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (xvii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties are bound and which is listed as an exhibit to the Registration Statement or is otherwise identified on a schedule certified by an officer of the Company, or any applicable statute, rule or regulation or, to the best of such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations; (xviii) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, as to which such counsel need not express an opinion; (xix) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; (xx) To such counsel's knowledge, the Company is not presently (a) in material violation of its charter or bylaws or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; (xxi) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such 20 counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights; (xxii) The Shares have been duly approved for inclusion on the Nasdaq National Market, subject to the consummation of the transactions contemplated by this Agreement and to official notice of issuance; (xxiii) The Company is not, and, assuming the application of the net proceeds from the sale of the Shares as described in the Prospectus under the caption "Use of Proceeds," will not become, an "investment company" subject to registration under the 1940 Act; (xxiv) Each Selling Stockholder which is not a natural person has full right, power and authority to enter into and to perform its obligations under the Selling Stockholder Agreement to be executed and delivered by it or him in connection with the transactions contemplated herein; the Selling Stockholder Agreement of each Selling Stockholder that is not a natural person has been duly authorized by such Selling Stockholder; the Selling Stockholder Agreement of each Selling Stockholder has been duly executed and delivered by or on behalf of such Selling Stockholder; and the Selling Stockholder Agreement of each Selling Stockholder constitutes the valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except insofar as indemnification and contribution provisions may be limited by applicable law or equitable principles, and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; (xxv) Each of the Selling Stockholders has full power, authority and to such counsel's knowledge, right to enter into and to perform its obligations under this Agreement and to sell, transfer, assign and deliver the Shares to be sold by such Selling Stockholder hereunder; (xxvi) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of each Selling Stockholder; and (xxvii) Upon the delivery of and payment for the Shares as contemplated in this Agreement, each of the Underwriters will receive valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. In rendering such opinion, such counsel may assume that the Underwriters are without notice of any defect in the title of the Shares being purchased from the Selling Stockholders. In addition, counsel to the Company shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not independently verified the accuracy, fairness or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became 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, the Registration Statement and any amendment or supplement thereto (other than the financial statements and the notes and schedules thereto and other financial and statistical information 21 derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained 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. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the States of Texas and Delaware 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 you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and 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) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, 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 Closing Date or such later date on which Option Shares are to be purchased, 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 the Subsidiary, considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your reasonable judgment, is material and adverse and that makes it, in your reasonable judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of January 31, 1998 and related consolidated statements of operations, stockholders' equity, and cash flows for the twelve (12) months ended January 31, 1998, and (iii) address other matters agreed upon by Ernst & Young LLP and you. In addition, you shall have received from Ernst & Young LLP a letter addressed to the Company and made available to you 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, 1998, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. 22 (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you 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 Closing Date or any later date on which Option Shares are to be purchased, 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 Closing Date or any later date on which Option Shares are to be purchased, 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 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 Act and the Rules and Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement 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 misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact 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, 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 in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise, (b) any transaction that is material to the Company and the Subsidiary, 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 the Subsidiary, considered as one enterprise, incurred by the Company or the Subsidiary, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary that is material to the Company and the Subsidiary, considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary, or (f) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise. (h) You shall be satisfied that, and you shall have received a certificate, dated the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, from the Attorneys for each Selling Stockholder to the effect that, as of the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, they have not been informed that: 23 (i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the Closing Date or on any later date on which Option Shares are to be purchased, as the case may be; 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 the Closing Date or any later date on which Option Shares are to be purchased, as the case may be. (i) The Company shall have obtained and delivered to you an agreement from each officer and director of the Company who owns shares of Common Stock or options to purchase shares of Common Stock that will vest within 180 days of the date of this Agreement, each Selling Stockholder and each other beneficial owner of 10,000 or more shares of Common Stock and/or options to purchase shares of Common Stock that will vest within 180 days of the date of this Agreement in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, PROVIDED the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, PROVIDED that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancAmerica Robertson Stephens (which consent has been given with respect to the exercise by any such person of options granted under the Company's stock compensatory and other benefit plans and the pledge of any shares of Common Stock that were purchased pursuant to BancAmerica Robertson Stephens' "Loan Program" described in the Registration Statement or any other loan program approved in writing by BancAmerica Robertson Stephens). The foregoing restriction shall have been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. Furthermore, such person will have also agreed that, without the prior written consent of BancAmerica Robertson Stephens, such person will not, during the period ending with the conclusion of the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Securities, except pursuant to the Registration Statement to the extent set forth in Schedule B hereto. (j) The Company and the Selling Stockholders shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person)) as to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein, as to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 24 7. OPTION SHARES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholder that is identified in Schedule B hereto, severally and not jointly, hereby grant to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to 62,033 and 702,967 Option Shares, respectively, at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company and such Selling Stockholder. Any exercise of the option granted to the Underwriters pursuant to this Section 7 shall first be applied to the Option Shares offered by the Selling Stockholder, with any Option Shares in excess of 702,967 Option Shares to be sold to the Underwriters by the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in same-day funds or by wire transfer in same-day funds, payable to the order of the Company (to the extent that the Option Shares are sold by the Company) and the Custodian (to the extent that the Option Shares are sold by the Selling Stockholder) for the account of the Selling Stockholder. Such delivery and payment shall take place at the offices of Locke Purnell Rain Harrell, 2200 Ross Avenue, Suite 2200, Dallas, Texas, or at such other place as may be mutually agreed upon among the Representatives, the Selling Stockholder and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company and the Selling Stockholder (directly or indirectly through the Custodian) receive written notice of the exercise of such option, if such notice is received by the Company and the Selling Stockholder (directly or indirectly through the Custodian) less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose funds shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company and the Selling Stockholder herein, to the accuracy of the statements of the Company, the Selling Stockholder and officers of the Company made pursuant to the provisions hereof, to the 25 performance by the Company and the Selling Stockholder of their respective obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company and the Selling Stockholder or the satisfaction of any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material 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, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof; and, PROVIDED, FURTHER, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of a subsequent Preliminary Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person prior to the time that such person purchased such Shares, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company or such Selling Stockholders may otherwise have. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E or the Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Selling Stockholder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not 26 misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) 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 that relates to such Selling Stockholder in his capacity as such, directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Selling Stockholder shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof; PROVIDED, FURTHER, that the indemnity agreement provided in this Section 8(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of a subsequent Preliminary Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person prior to the time that such person purchased such Shares, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof; and PROVIDED, FURTHER, with respect to any claims for indemnification by any of the Underwriters that are asserted or made against both the Company under Section 8(a) and any Selling Stockholders under this Section 8(b), the Underwriters agree to first exhaust their remedies against the Company before proceeding (only as to enforcement of remedies available to them and not as to the initiation of any action) against such Selling Stockholder or Selling Stockholders. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which such Selling Stockholder may otherwise have. Notwithstanding, no Selling Stockholder shall be liable hereunder to the Underwriters for the obligations owed by any other Selling Stockholder to the Underwriters. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company or such Selling Stockholder may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) 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 you, specifically for use in the preparation thereof, and agrees to reimburse the Company and each such Selling Stockholder for any legal or other expenses reasonably incurred by the Company and each such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. 27 The indemnity agreement in this Section 8(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, each Selling Stockholder and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8 unless the indemnifying party is materially prejudiced by such failure to be timely notified. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect 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, that 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 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 the 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 8 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 appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof 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; 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. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; PROVIDED that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding and does not include any statement as to or an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion, subject to Section 8(f) hereof, as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters from the offering of the Shares, it being acknowledged by the parties that the relative benefit of the offering of the Shares to the Underwriters shall reflect, as to each Underwriter (severally and not jointly), such Underwriter's pro rata portion received of the percentage that the underwriting discount bears to 28 the initial public offering price, PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has otherwise required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(e) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter, the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. The provisions set forth in Section 8(d) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 8(e); PROVIDED, HOWEVER, that no additional notice shall be required with respect to any action for which notices has been given under Section 8(d) for the purposes of indemnification. (f) 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 8 shall be limited to an amount equal to the initial 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; and nothing contained herein shall be construed to alter any pre-existing arrangements between the Company and any such Selling Stockholder with respect to their responsibility for liability. (g) 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 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 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 Act. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company, the Selling Stockholders and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or any of their officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date 29 shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company nor any Selling Stockholder shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company, the Selling Stockholders and the other Underwriters for damages, if any, resulting from such default) be liable to the Company or any Selling Stockholder (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., San Francisco time, on the first business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(i), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company or any Selling Stockholder shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary, considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading 30 in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California Street, Suite 2600, San Francisco, California 94104, telecopier number (415) 781-0278, Attention: General Counsel; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to 14001 North Dallas Parkway, Suite 1100, Dallas, Texas 75240, telecopier number (972) 458-2567, Attention: John D. Carreker, Chairman and Chief Executive Officer; if sent to one or more of the Selling Stockholders, such notice shall be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to the respective address for such Selling Stockholder or Selling Stockholders as set forth in their respective Selling Stockholder Agreements. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and the Selling Stockholders and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company and the Selling Stockholders under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company and the Selling Stockholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by BancAmerica Robertson Stephens on behalf of you. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW CONFLICTS OF LAW PRINCIPLES THEREOF. 31 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. [Signature page follows] 32 If the foregoing correctly sets forth the understanding among the Company, the Selling Stockholders and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, CARREKER-ANTINORI, INC. By --------------------------------------------- SELLING STOCKHOLDERS: John D. Carreker, Jr. Ronald R. Antinori Science Applications International Corporation Wyn P. Lewis Royce D. Brown Lawrence D. Duckworth By --------------------------------------------- John D. Carreker, Jr., Attorney-in-Fact Accepted as of the date first above written: BANCAMERICA ROBERTSON STEPHENS HAMBRECHT & QUIST LLC LEHMAN BROTHERS INC. On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By BANCAMERICA ROBERTSON STEPHENS By --------------------------------------------- Authorized Signatory SCHEDULE A Number of Firm Shares To Be Underwriters Purchased - -------------------------------- ------------ BancAmerica Robertson Stephens . . . . . . . . . . . . . . . . . [ ] Hambrecht & Quist LLC . . . . . . . . . . . . . . . . . . . . . . [ ] Lehman Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . [ ] [underwriter] . . . . . . . . . . . . . . . . . . . . . . . . . . [ ] Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,100,000
SCHEDULE B Number of Company Shares To Be Sold ---------- Carreker-Antinori, Inc. . . . . . . . . . . . . . . . . . . . . . 3,650,000(2)
Number of Selling Stockholder Shares Name of Selling Stockholder To Be Sold - ----------------------------------------------------------------------------------- John D. Carreker, Jr. . . . . . . . . . . . . . . . . . . . . . 738,525 Ronald R. Antinori . . . . . . . . . . . . . . . . . . . . . . . 488,275 Science Applications International Corporation . . . . . . . . . 72,000(3) Wyn P. Lewis . . . . . . . . . . . . . . . . . . . . . . . . . . 77,000 Royce D. Brown . . . . . . . . . . . . . . . . . . . . . . . . . 46,200 Lawrence D. Duckworth . . . . . . . . . . . . . . . . . . . . . . 28,000 --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450,000 --------- ---------
- ----------- (2) In addition to the shares shown, Carreker-Antinori, Inc. also will include 62,033 shares of Common Stock for sale to the Underwriters upon exercise of the over-allotment option in accordance with Section 7 of the Underwriting Agreement. (3) In addition to the shares shown, this Selling Stockholder also will include 702,967 shares of Common Stock for sale to the Underwriters upon exercise of the over-allotment option in accordance with Section 7 of the Underwriting Agreement. EX-2.1 3 EXHIBIT 2.1 EXHIBIT 2.1 PLAN AND AGREEMENT OF MERGER THIS PLAN AND AGREEMENT OF MERGER (the "Agreement") dated as of May 12, 1998, pursuant to Article 5.16 of the Texas Business Corporation Act (the "TBCA") and Section 253 of the General Corporation Law of Delaware (the "DGCL") is made and entered into by and between Carreker-Antinori, Inc., a Texas corporation ("C-A Texas"), and Carreker-Antinori, Inc., a Delaware corporation ("C-A Delaware"). W I T N E S S E T H: WHEREAS, C-A Texas is a corporation organized and existing under the laws of the State of Texas, having been incorporated on January 22, 1979; and WHEREAS, C-A Delaware is a wholly-owned subsidiary corporation of C-A Texas, organized and existing under the laws of the State of Delaware, having been incorporated on March 10, 1998; and WHEREAS, the respective Boards of Directors of C-A Texas and C-A Delaware have determined that it is desirable to merge C-A Texas with and into C-A Delaware (hereinafter the "Merger"); NOW, THEREFORE, in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that C-A Texas shall merge with and into C-A Delaware upon the terms and conditions set forth. ARTICLE I MERGER On the effective date of the Merger (the "Effective Date") as provided herein, C-A Texas shall be merged with and into C-A Delaware, the separate existence of C-A Texas shall cease and C-A Delaware (hereinafter sometimes referred to as the "Surviving Corporation") shall continue to exist under the name of C-A Delaware by virtue of, and shall be governed by, the laws of the State of Delaware. The address of the registered office of the Surviving Corporation in the State of Delaware will be Corporation Trust Center, 1209 Orange Street, in the County of New Castle, in the City of Wilmington, Delaware 19801. The name of the registered agent is The Corporation Trust Company. ARTICLE II CERTIFICATE OF INCORPORATION OF SURVIVING CORPORATION The name of the Surviving Corporation shall be "Carreker-Antinori, Inc." The Certificate of Incorporation of the Surviving Corporation as in effect on the date hereof shall be the Certificate of Incorporation of C-A Delaware (the "Delaware Charter") without change unless and until amended in accordance with Article VIII of this Agreement or otherwise amended in accordance with applicable law. ARTICLE III BYLAWS OF THE SURVIVING CORPORATION The Bylaws of the Surviving Corporation as in effect on the date hereof shall be the Bylaws of C-A Delaware (the "Delaware Bylaws") without change unless and until amended in accordance with applicable law. ARTICLE IV EFFECT OF MERGER ON STOCK OF CONSTITUENT CORPORATIONS 4.1 On the Effective Date, (i) each outstanding share of Class A voting Common Stock of C-A Texas, no par value (the "Class A Common Stock"), shall be converted into 7.7 shares of C-A Delaware common stock, par value $.01 per share (the "Delaware Common Stock"), rounded to the nearest whole share; (ii) each outstanding share of Class B non-voting Common Stock of C-A Texas, no par value (the "Class B Common Stock"), shall be converted into 7.7 shares of the Delaware Common Stock, rounded to the nearest whole share (the Class A Common Stock and the Class B Common Stock, collectively referred to hereinafter as the "Texas Common Stock"), other than the shares, if any, for which appraisal rights shall be perfected under Articles 5.12 and 5.13 of the TBCA, (iii) each outstanding share of the Texas Common Stock held by C-A Texas shall be retired and cancelled; and (iv) each outstanding share of the Delaware Common Stock held by C-A Texas shall be retired and cancelled. 4.2 All options and rights to acquire any Texas Common Stock under employee benefit plans and other options plans and under all other outstanding options, warrants or rights outstanding on the Effective Date will automatically be converted into options and rights to purchase shares of Delaware Common Stock on the basis of 7.7 shares of Delaware Common Stock for each share of Texas Common Stock, rounded to the nearest whole share. 4.3 After the Effective Date, certificates representing shares of the Texas Common Stock will represent shares of Delaware Common Stock and upon surrender of the same to the transfer agent for C-A Delaware, the holder thereof shall be entitled to receive in exchange -2- therefor a certificate or certificates representing the number of shares of Delaware Common Stock into which such shares of Texas Common Stock shall have been converted pursuant to Article 4.1 of this Agreement. ARTICLE V CORPORATE EXISTENCE, POWERS AND LIABILITIES OF SURVIVING CORPORATION 5.1 On the Effective Date, the separate existence of C-A Texas shall cease. C-A Texas shall be merged with and into C-A Delaware, the Surviving Corporation, in accordance with the provisions of this Agreement. Thereafter, C-A Delaware shall possess all the rights, privileges, powers and franchises of a public as well as of a private nature, and shall be subject to all the restrictions, disabilities and duties of each of the parties to this Agreement; all singular rights, privileges, powers and franchises of C-A Texas and C-A Delaware, and all property, real, personal and mixed and all debts due to each of them on whatever account, shall be vested in C-A Delaware; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of C-A Delaware, the Surviving Corporation, as they were of the respective constituent entities, and the title to any real estate, whether by deed or otherwise, vested in C-A Texas and C-A Delaware, or either of them, shall not revert or be in any way impaired by reason of the Merger, but all rights of creditors and all liens upon the property of the parties hereto, shall be preserved unimpaired, and all debts, liabilities and duties of C-A Texas, shall thenceforth attach to C-A Delaware, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. 5.2 C-A Texas agrees that it will execute and deliver, or cause to be executed and delivered, all such deeds and other instruments and will take or cause to be taken such further or other action as the Surviving Corporation may deem necessary in order to vest in and confirm to the Surviving Corporation title to and possession of all the property, rights, privileges, immunities, powers, purposes and franchises, and all and every other interest of C-A Texas and otherwise to carry out the intent and purposes of this Agreement. ARTICLE VI OFFICERS AND DIRECTORS OF SURVIVING CORPORATION 6.1 Upon the Effective Date, the officers of C-A Texas shall become the officers of C-A Delaware, and such persons shall hold office in accordance with the Delaware Bylaws until their respective successors shall have been appointed or elected. Upon the Effective Date, the directors of C-A Delaware shall remain the directors of the Surviving Corporation, such persons to hold office in accordance with the Delaware Charter and Delaware Bylaws and until their successors shall have been duly elected and qualified. -3- 6.2 If upon the Effective Date, a vacancy shall exist in the Board of Directors of the Surviving Corporation, such vacancy shall be filled in the manner provided by the Delaware Bylaws. ARTICLE VII DISSENTING SHARES Holders of shares of Texas Common Stock who have complied with all requirements for perfecting their rights of appraisal set forth in Articles 5.12 and 5.13 of the TBCA shall be entitled to their rights under Texas law. ARTICLE VIII APPROVAL BY SHAREHOLDERS, EFFECTIVE DATE, CONDUCT OF BUSINESS PRIOR TO EFFECTIVE DATE 8.1 Soon after the approval of this Agreement by the requisite number of shareholders of C-A Texas, the respective Boards of Directors of C-A Texas and C-A Delaware will cause their duly authorized officers to make and execute Articles of Merger and a Certificate of Ownership and Merger or other applicable certificates or documentation effecting this Agreement and shall cause the same to be filed with the Secretaries of State of Texas and Delaware, respectively, in accordance with the TBCA and the DGCL, the Effective Date shall be the date on which the Merger becomes effective under the TBCA or the date on which the Merger becomes effective under the DGCL, whichever occurs later. 8.2 The Boards of Directors of C-A Texas and C-A Delaware may amend this Agreement and the Delaware Charter at any time prior to the Effective Date, provided that an amendment made subsequent to the approval of the Merger by the shareholders of C-A Texas may not (i) change the type of shares or the number of shares to be received in exchange for or on conversion of the shares of the Texas Common Stock, (ii) alter or change any term of the Delaware Charter, or (iii) change any term of the terms and conditions of this Agreement if such change would adversely affect the holders of the Texas Common Stock. ARTICLE IX TERMINATION OF MERGER This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Date, whether before or after shareholder approval of this Agreement, by the consent of the Boards of Directors of C-A Texas and C-A Delaware. -4- ARTICLE X MISCELLANEOUS In order to facilitate the filing and recording of the Agreement, this Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective Chief Executive Officers and Secretaries, all as of the day and year first above written. CARREKER-ANTINORI, INC., a Texas corporation By: /s/ John D. Carreker, Jr. ---------------------------------------- Chairman of the Board and Chief Executive Officer ATTEST: /s/ Maurice E. Purnell, Jr. - ----------------------------- Secretary CARREKER-ANTINORI, INC., a Delaware corporation By: /s/ John D. Carreker, Jr. ---------------------------------------- Chairman of the Board and Chief Executive Officer ATTEST: /s/ Maurice E. Purnell, Jr. - ----------------------------- Secretary -5- EX-10.9 4 EXHIBIT 10.9 PROFIT SHARING INCENTIVE PLAN OF CARREKER-ANTINORI, INC. 1. NAME OF THE PLAN. The Plan is the PROFIT SHARING INCENTIVE PLAN OF CARREKER-ANTINORI, INC. 2. PURPOSE OF THE PLAN. The Plan is intended to promote the best interests of the shareholders of the Corporation by providing incentives for the employees of the Corporation to remain in the service of the Corporation and to vigorously promote the success of the Corporation. 3. PLAN CONCEPT. The Plan is a performance-driven incentive plan. Awards are earned based on actual results compared to pre-established targets. Participants shall be eligible to receive Incentive Awards based on (i) the Corporation's and business unit's achievement of certain pre-determined corporate and business unit performance target goals, and/or (ii) the Participant's achievement of certain pre-determined individual performance goals. The measurement period for determining whether performance target goals are met is the Corporation's fiscal year ending January 31 (the "Plan Year"). Employees' salaries and bonus opportunities are adjusted each "Salary Year", which is the twelve-month period ending each March 31. In order to participate in the Incentive Award for fiscal year performance, an employee must remain employed on the last day of the Salary Year following the Plan Year end. 4. PARTICIPANTS IN THE PLAN. Any employee who shall have been designated by the Board shall, during such individual's period of employment, be a Plan Participant. Currently, the Board has designated all full-time employees except commissioned sales employees as Plan Participants. If, at any time during a Salary Year, a Participant ceases to be an employee of the Corporation by reason of the fact that he or she is discharged by the Corporation with or without cause, by reason of his or her resignation, retirement, death, disability, or otherwise, then such Participant shall have no right nor claim to any Incentive Award for the Plan Year ending within such Salary Year, and all rights of such Participant pursuant to the Plan shall terminate, lapse and be forfeited at the time the Participant ceases to be an employee of the Corporation. If an individual becomes an employee of the Corporation and a Participant after the commencement of a Plan Year, any Incentive Award to which such Participant becomes entitled shall be reduced by a percentage equal to the percentage of the Plan Year during which such individual was not an employee of the Corporation. A Participant hereunder may not be a plan participant in any other annual cash or stock performance incentive plan maintained by the Corporation, but may be a participant in the Carreker-Antinori, Inc. 1994 Long Term Incentive Plan. 5. PLAN ADMINISTRATION. The Plan shall be administered by the Committee without further reference to or approval by the Board for decisions made in the ordinary course of Plan administration, including the approval of any award or payment pursuant to the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority and discretion to adopt, alter and repeal administrative rules, guidelines and practices governing the operation of the Plan, to decide questions of fact under the Plan, and to interpret and apply the terms and provisions of the Plan and take all other actions necessary or advisable for the administration of the Plan. 5.1 ADMINISTRATIVE ASSISTANCE. The Committee may rely on the employees of the Corporation for such clerical and recordkeeping duties as it, in its sole discretion, shall judge prudent or necessary in connection with its administration of the Plan. 5.2 PROFESSIONAL ASSISTANCE. The Committee may, at the expense of the Corporation, engage such accountants, attorneys and compensation plan consultants as it, in its sole discretion, shall judge prudent or necessary to assist it in connection with its administration of the Plan. 5.3 ACTION OF THE COMMITTEE. To be an act of the Committee, an act must be approved by a majority of Committee members at any Committee meeting, or without a meeting, by unanimous written consent of the Committee members. 6. COMMITTEE DETERMINATIONS. 6.1 CURRENT PLAN YEAR DETERMINATIONS. 6.1.1 As soon as practicable following each Plan Year end, the Committee shall make the following determinations relating to the current Plan Year: - subject to the provisions of Section 8.1 hereof, the amount of each Participant's potential Incentive Award stated as a percentage of the Participant's Base Salary; - the corporate-based performance target goals; - the business unit-based performance target goals; - the individual-based performance goals applicable to each Participant; and - the percentage of each Participant's Incentive Award which is to be paid in cash and the percentage of each Participant's Incentive Award, if any, which is to be paid in the form of an award of stock options of the Corporation. Unless determined otherwise by the Committee, all Participants' Incentive Awards (except for employees who are Executive -2- Vice Presidents or more senior officers of the Corporation) up to 100% of the standard bonus percentage shall be paid in cash. Awards will be set aside for distribution in excess of the 100% standard cash incentive pool in the form of options if the Corporation exceeds performance required to fund 100% of the standard cash incentive pool. Employees who are Executive Vice Presidents or more senior officers of the Corporation shall be eligible for incentive awards paid 50% in cash and 50% in the form of stock options. 6.1.2 With regard to individuals becoming Participants during a Plan Year, management will make determinations with regard to these individuals in accordance with parameters approved by the Committee. 6.2 PRIOR PLAN YEAR DETERMINATIONS. As soon as practicable following the Plan Year end, the Committee shall make the following prior Plan Year determinations relating to the Plan: - whether the performance target goals applicable to the Corporation and each business unit during the prior Plan Year were achieved; - the amount of the Incentive Award for each Participant who is an Executive Vice President or more senior officer of the Corporation based on performance during the prior Plan Year; - the total incentive award pool based on performance during the prior Plan Year; and - the date on which payment of Incentive Awards is to be made. Unless determined otherwise by the Committee, Incentive Awards shall be paid on or about the last day of the Salary Year, to Participants who remain employed at such date. 7. PERFORMANCE TARGET GOALS. 7.1 CORPORATE-BASED PERFORMANCE TARGET GOALS. The Committee shall establish performance target goals, both corporate-wide and for each business unit, based on one or a combination of the following for a Plan Year: gross contribution margin; operating margins; earnings, earnings before taxes; earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation and amortization (EBITDA); sales backlog; earnings per share; operating income; net income; revenue; cash flow; assets; total stockholder return; return on assets employed; return on equity; return on invested capital; economic value added; -3- market value added; or price of the Corporation's common stock. The corporate and business unit performance target goals shall be based on measurable or confirmable, performance-based financial results for the Corporation or a business unit of the Corporation. To the extent reasonably possible, corporate-based performance target goals shall be described in such a manner that achievement thereof can be determined in accordance with the Corporation's audited financial statements and generally accepted accounting principles and reported upon by the Corporation's independent accountants. The Committee shall establish corporate-wide performance target goals which are described by a continuum of results, including a threshold minimum acceptable level of performance below which no Incentive Award pool shall be established, levels of performance at which an Incentive Award pool will be established in an amount equal to specified percentages of the maximum achievable Incentive Awards (such as 10%, 60%, and 100%) and a maximum level of performance above which no additional Incentive Awards shall be paid. The Committee may use a weighted or a straight line interpolation for results falling between the ends of any performance continuum. 7.2 BUSINESS UNIT-BASED PERFORMANCE GOALS. After the Committee has determined the Incentive Award pool for the Plan Year as set forth in Section 7.1, based on the achievement of corporate-wide performance target goals, the Committee shall further assess the contribution made by each business unit for the Plan Year on the basis of (i) the business unit's arithmetic factor, based on its achievement of such business unit's performance target goal for the Plan Year (weighted 50%) and (ii) the business unit's merit factor, based on its achievement of qualitative objectives (such as development of its personnel, degree of value added to the Company's capitalized value, and other criteria established for each business unit) for the Plan Year (weighted 50%). The Incentive Award pool shall then be allocated among the business units and functional units (i.e., the Eligible ARM Employees, the Eligible Senior Management Employees, and the Eligible Administrative Staff Employees), based on relative weighting of the business unit's arithmetic and merit factors and the corporate-wide performance, as applicable. 7.3 INDIVIDUAL-BASED PERFORMANCE GOALS. After the Committee has determined the portion of the Incentive Award pool allocable to each business unit as set forth in Section 7.2, the Committee may review senior management's summary of the individual performance of each Participant. The performance goal for each Participant may be wholly or in part based on qualitative performance as determined by senior management and the Participant's business unit manager. Senior management may establish individual-based performance goals based on one or more of the following: the Participant's annual performance review rating; and/or the Participant accomplishing certain quantitative and qualitative objectives. Each Participant may be awarded his or her potential Incentive Award, in the discretion of the Participant's business unit manager, based upon the participant's achievement of his or her performance goals for the Plan Year and the amount funded in his or her business unit's incentive award pool. The business unit manager may award 0% of a Participant's maximum potential Incentive Award if, for example, such Participant has engaged, during such Plan Year, in conduct -4- harmful to the Corporation or, during such Plan Year, the Participant's annual performance review rating is unacceptable. The Incentive Award pool allocable to each business unit shall be allocated among the Participants in such business unit at the discretion of the business unit manager. A business unit manager's individual Incentive Award shall be determined, after input from senior management, in the discretion of the Committee, with 25% derived from corporate-wide arithmetic factor performance, 25% derived from business unit arithmetic factor performance, and 50% from business unit performance merit factor. 7.4 ADJUSTMENT OF PERFORMANCE GOALS. Except for good cause shown, the Committee may not adjust performance goals for a particular Plan Year after such have been formally determined by resolution of the Committee. However, the Committee may adjust any corporate or business unit goal, and senior management may adjust individual-based performance goals, to account for events which may affect the achievement of corporate-based, business unit-based or individual-based performance target goals. Such events may include, without limitation, the Participant being promoted, being given different job responsibilities, or being directed to accomplish goals other than the previously determined performance target goals; a significant corporate opportunity or emergency requiring the Participant to divert his or her efforts away from the previously determined performance target goals; significant acquisitions or divestitures; special charges or other extraordinary accounting items; destruction of significant corporate assets; and the like. 8. INCENTIVE AWARDS. 8.1 MAXIMUM AND MINIMUM INCENTIVE AWARDS. Senior management, within the parameters approved by the Committee, may establish Incentive Awards of different percentages of Base Salary for different Plan Participants, and may increase or decrease a Participant's Incentive Award and/or Base Salary at any time during the Salary Year. The highest maximum potential Incentive Award that may be established for a Participant is seventy percent (70%) of base salary. The lowest maximum potential Incentive Award that may be established for a Plan Participant is six percent (6%) of base salary. 8.2 INCENTIVE AWARDS PAID IN CASH OR STOCK. Incentive Awards may be paid in cash or in the form of options or restricted stock of the Corporation or in any combination thereof. Payments of Incentive Awards in the form of options shall be in the form of incentive stock options awarded pursuant to Article II of the Carreker-Antinori, Inc. 1994 Long Term Incentive Plan (the "LTIP"). Payments of Incentive Awards in the form of restricted stock of the Corporation shall be in the form of awards of restricted shares pursuant to Article IV of the LTIP. The -5- option in lieu of any Cash Incentive Award under procedures stablished by the Committee. 8.3 NO INTEREST. The Corporation shall not be liable for interest upon any Incentive Award regardless of when paid. 8.4 NO PRE-PAYMENT. Except as otherwise determined by senior management, no payment of any Incentive Award applicable to a particular Plan Year shall be made to any Participant prior to the close of such Plan Year regardless of whether the performance target goals applicable to any Participant have been previously accomplished. 8.5 INDIVIDUAL AGREEMENTS. Notwithstanding any provision of the Plan to the contrary, the Corporation, acting through its senior management, may enter into individual agreements regarding Incentive Awards under the Plan, on a case-by-case basis, with employees. The terms of any such agreements shall prevail over any provisions of the Plan to the contrary. 8.6 WITHHOLDING. Payment of Incentive Awards pursuant to the Plan shall comply with all applicable tax and payroll withholding requirements and the Corporation shall have the right to withhold any cash necessary to satisfy such requirements. 9. MISCELLANEOUS. 9.1 EFFECTIVE DATE. The Plan shall be effective upon its approval by formal resolution of the Board. 9.2 DURATION OF PLAN. The Board may terminate the Plan or any portion thereof at any time. The Plan shall continue in effect until terminated by formal resolution of the Board; however, termination of the Plan after the end of a Plan Year but before payment of any Incentive Awards applicable to such prior Plan Year shall not affect the obligation of the Committee to make the Prior Plan Year Determinations provided for by Section 6.2 nor of the Corporation to pay the Incentive Awards based upon such Prior Plan Year Determinations. 9.3 AMENDMENT OF PLAN. The Board may alter or amend the Plan in whole or in part at any time and from time to time. Unless required by applicable law, rule or regulation, no amendment shall affect adversely any vested or accrued rights of any Participant under the Plan, without such Participant's consent. 9.4 NONTRANSFERABILITY. A Participant's right and interest to Incentive Awards under the Plan may not be assigned or transferred other than through the laws of descent and distribution or by will in the event of death. -6- 9.5 NO CONTRACT OF EMPLOYMENT. Neither the Plan nor participation in the Plan shall be deemed to be a contract of employment between the Corporation and any Participant or to give any Participant any right to be retained in employment. 9.6 NON-CUMULATIVE. Incentive Awards under the Plan shall not be used to determine compensation for purposes of pension, insurance, disability or any other similar benefit calculations. 9.7 GOVERNING LAW. The Plan and the rights of all persons claiming hereunder shall be construed, regulated and administered under the laws of the State of Texas without giving effet to the choice of law principles thereof. 9.8 UNFUNDED STATUS. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments which at any time are not yet made to a Participant pursuant to an Incentive Award, nothing contained in the Plan shall give any such Participant any rights that are greater than those of a general creditor of the Corporation. 10. DEFINITIONS. Whenever used herein, the following terms shall have the following meanings: - BASE SALARY - the base salary paid a Participant by the Corporation for a particular Salary Year excluding all other forms of compensation such as any other benefits, Incentive Awards, commissions, pension contributions, and other cash payments. In the case of individuals who are partial Salary Year Participants, Base Salary shall be the base salary paid during that portion of the Salary Year during which such individual was a Participant. - BOARD - the Board of Directors of the Corporation. - COMMITTEE - the Compensation Committee of the Board. - CORPORATION - Carreker-Antinori, Inc., a Delaware corporation. - ELIGIBLE ARM EMPLOYEES, ELIGIBLE SENIOR MANAGEMENT EMPLOYEES AND ELIGIBLE ADMINISTRATIVE STAFF EMPLOYEES - those account relationship managers, senior managers and administrative staff employees identified by the Committee for whom corporate-wide performance achievement (rather than business-unit performance achievement) is utilized to determine their participation in the Incentive Award pool. -7- - INCENTIVE AWARD - a payment made to a Participant pursuant to the provisions of Section Eight hereof and subject to the provisions of the Plan. - LTIP - the CARREKER-ANTINORI, INC. 1994 LONG TERM INCENTIVE PLAN (AS AMENDED AND RESTATED). - PARTICIPANT - is defined in Section Four above. - PLAN - the PROFIT SHARING INCENTIVE PLAN OF CARREKER-ANTINORI, INC. - PLAN YEAR - the period February 1 to January 31 for each year the Plan is in effect. - RESTRICTED PERIOD - is defined in Article IV of the LTIP. - Salary Year - the period April 1 through March 31 for each year the Plan is in effect. -8- EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated March 18, 1998 (except for Notes 1 and 11, as to which the date is May 14, 1998) in the Registration Statement (Form S-1) and related Prospectus of Carreker-Antinori, Inc. for the registration of 5,100,000 shares of its common stock. ERNST & YOUNG LLP Dallas, Texas May 15, 1998 -----END PRIVACY-ENHANCED MESSAGE-----