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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24201
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CARREKER-ANTINORI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1622836
(State or other jurisdiction of (I.R.S. Employer Identification
No.)
incorporation or organization) 75240
14001 N. DALLAS PARKWAY, SUITE 1100 (Zip Code)
DALLAS, TEXAS 75240
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 458-1981
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value on March 25, 1999 of the voting and non-voting
common equity held by non-affiliates of the registrant was $61,307,162.
Number of shares of registrant's Common Stock, par value $0.01 per share,
outstanding as of March 25, 1999: 18,409,161.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant's definitive Proxy Statement for the
1999 Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
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PART I
ITEM 1. BUSINESS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" OR
"CARREKER-ANTINORI" WHEN USED IN THIS FORM 10-K ("REPORT") AND IN THE ANNUAL
REPORT TO THE STOCKHOLDERS REFERS TO CARREKER-ANTINORI, INC., A DELAWARE
CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES AND PREDECESSORS. THIS REPORT AND
THE ANNUAL REPORT TO STOCKHOLDERS CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED THEREIN, THE WORDS
"EXPECTS," "PLANS," "BELIEVES," "ANTICIPATING," "ESTIMATES," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN
OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS,
INCLUDING WITHOUT LIMITATION THOSE SET FORTH UNDER "--RISK FACTORS" BELOW.
THE COMPANY
Carreker-Antinori, Inc. 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
are delivered through three divisions, each consisting of several groups. 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 170 banks, including 70 of the largest 100 banks in the United
States.
INDUSTRY BACKGROUND
The banking industry is one of the nation's largest industries, with
aggregate annual revenues of nearly $250 billion. In recent years, the industry
has undergone significant change. 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 increasingly focused 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.
INDUSTRY DRIVERS
Management of the Company has identified the following trends as drivers of
demand for its products and services. Management believes that these drivers
will continue through 1999.
1. CONSOLIDATION: As banks continue to grow by acquisition, they will
require improved operational processes and technological applications
that increase efficiencies in order to enhance their profitability,
recapture acquisition premiums paid, and strengthen their competitive
position within the industry.
2. REGULATORY CHANGE: The banking industry is today 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. 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.
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3. EVOLVING TECHNOLOGIES: 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.
4. INDUSTRY CHANGES: 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. Internal solutions usually require additional resources and
related fixed costs, and traditional third-party solutions usually come
from multiple providers, and therefore carry increased costs, more
complex implementation and delayed realization of benefits. Consequently,
banks are in need of a third party, familiar with the banking industry,
to provide integrated consulting services and technological applications.
THE CARREKER-ANTINORI SOLUTIONS
The Company's solutions combine consulting services and software
applications that are tailored to the unique requirements of the banking
industry. In delivering its solutions, the Company: (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. The Company'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. This enables the Company to develop the most advanced consulting
services and technological applications for the banking industry.
ADVANCED TECHNOLOGY. The Company 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 inter-bank
organizations enables the Company to stay at the forefront of technological
innovations in the industry.
INTEGRATED APPROACH. The Company 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.
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 are the broadest in the banking industry, enabling it 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.
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STRATEGY
The mission of the Company is to improve shareholder value for its customers
by providing solutions that increase bank revenues, reduce bank costs, and
improve banks' delivery of their services. To accomplish that goal, the
Company's two-fold objective is to be the leading provider of TOTAL SOLUTIONS
(coupling consulting and technology) to the banking industry and to continue
serving in a leadership role in the transition of the check payment system from
paper to electronic formats. Key elements of the Company's strategy include the
following:
ADVANCE POSITION AS INDUSTRY INNOVATOR. The Company 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 the Electronic Check Clearing House Organization ("ECCHO") and other
strategic banking initiatives, 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 furthered this strategy through
its January 1999 acquisition of Genisys Operation, Inc. ("Genisys"). 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.
The Company has partnered with several service providers or resellers, including
ALLTEL, Bisys-Document Solutions, and Fiserv to establish alternate marketing
and distribution channels of certain of its solutions through those companies to
Tier III Banks. 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.
BUILD LONG-TERM RELATIONSHIPS. The Company intends to continue leveraging
its long-term relationships to cross-sell additional solutions, which typically
produce higher gross profit margins as the Company does not incur many of the
start-up costs associated with the development of new relationships.
INCREASE USE OF VALUE-PRICING AND RECURRING REVENUE ARRANGEMENTS. The
Company 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 appopriate 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.
PRODUCTS AND SERVICES
The Company offers a wide range of consulting services and state-of-the-art,
proprietary technology applications designed to address the unique requirements
of the banking industry. The Company's solutions are sold individually, or
complementary solutions may be sold together (similarly, software
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products may be sold individually or as part of a product suite). The following
table summarizes the divisions through which the Company's offerings are
delivered. Each division consists of several groups.
<TABLE>
<CAPTION>
DIVISIONS & GROUPS SOLUTIONS DESCRIPTION
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REVENUE ENHANCEMENT...................... INCREASES CUSTOMER REVENUES
Liquidity Management................... Reduces the amount of non-earning assets that a bank maintains in
reserve accounts or in cash-on-hand
Yield Management....................... Improves operational work-flows, processes and pricing structures
employed by a bank
PAYMENT SYSTEMS.......................... DECREASES CUSTOMER COSTS WHILE IMPROVING BACK OFFICE SERVICE
Best Practices......................... Delivery of total solutions for customer information management
Consolidations......................... Delivery of consulting services to help customers reduce costs, improve
operating efficiencies and increase economies-of-scale through
operations consolidations of operations
Float Management....................... Enhances bank float management through improved check collection,
workflow, float allocation, and pricing
Genisys................................ Focuses on information management by utilizing the Company's
proprietary barcode track and trace technology, coupled with utilizing
the Internet as an information delivery vehicle
Payment Electronification.............. Facilitates the electronification of paper checks, while reducing costs
and risks associated with the check payment process
Risk Management........................ Reduces risk of loss from the check payment process as a result of
operational failures, check fraud and litigation
EMERGING SOLUTIONS....................... DEVELOPMENT OF NEW BUSINESS OPPORTUNITIES OR DELIVERY OF MANAGEMENT
SERVICES
ECCHO Management Services.............. Focuses on management of the ECCHO organization
Enabling Technologies.................. Focuses on developing proof of concept for new business opportunities
with the criteria that once a solution is developed, it can be offered
across the Company's key customer base
Enterprise IT Services................. Offers customized, enterprise-wide conversion, consolidation and
integration consulting solutions in areas beyond payments systems,
including subject matter and project management services, Year 2000
services and IT outsourcing services
</TABLE>
REVENUE ENHANCEMENT: This division is comprised of two groups with
solutions focusing primarily on IMPROVING REVENUES in the shortest time possible
for its customers. These solutions help customers achieve large dollar,
income-generating opportunities. This may be achieved through the implementation
of yield management consulting techniques to change the bank's procedures,
policies or product pricing. It may also be achieved through the implementation
of liquidity management software, combined with consulting expertise to improve
processes and procedures.
LIQUIDITY MANAGEMENT: This group helps customers improve the management of
certain non-earning assets (e.g., cash inventories and reserve levels required
by the Federal Reserve) through the application of technologies and process
re-engineering services. The Liquidity Management solutions are designed to
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assist banks in improving earnings by minimizing the amount of non-earning
assets maintained in Federal Reserve accounts and physical cash inventories
within branch, ATM, and vault facilities. By enabling banks to better manage
cash and reserve levels, the Company's subject matter experts facilitate the
deployment of funds to more productive uses. The Company's RESERVELINK and
ANALYSIS ADVANTAGE systems are currently offered in both mainframe and PC-based
configurations. The CASHTRACKER, CASH FORECASTER and ATM CASH FORECASTER systems
operate on Windows NT Server/Workstation utilizing Microsoft SQL Server
technology. These products are available in single-user and multi-user
configurations.
YIELD MANAGEMENT: This group helps customers identify opportunities that
significantly increase revenues. Projects are designed to improve performance
through the systematic testing of existing bank policies and procedures. The
group covers a full range of bank functional areas, including deposit
operations, item processing, loan processing, float management, account
analysis, retail and commercial product management, exception processing and
finance and accounting.
PAYMENT SYSTEMS: This division is comprised of six groups with solutions
focusing primarily on REDUCING COSTS for the Company's customers. The Company's
integrated approach uses consulting, analytical techniques and software
developed through cooperative efforts with major U.S. banks to help its
customers achieve cost and customer service improvements in their operations.
BEST PRACTICES: This group helps its customers reduce costs, increase
efficiency, improve quality, and reduce transaction risk in item processing,
deposit support, and cash management operations. These services are delivered
through stand-alone operations process reviews, and best practices reengineering
projects surrounding the implementation of new systems packages that may include
the Company's INNOVASION, and RESEARCH AND ADJUSTMENTS software. The INNOVASION
product is comprised of modules designed to improve the efficiency and quality
of a bank's photo retrieval operations. It consists primarily of client/server
modules, but also is supported by mainframe data collection programs. The client
server components are built upon OS\2 operating system base. Several components
have been converted to a Windows NT operating system and certain others are in
the process of being converted to function under a Windows NT operating system.
The RESEARCH AND ADJUSTMENTS product suite improves the efficiency and quality
of a bank's adjustments department. It currently is supported on both OS\2 and
Windows NT operating systems.
CONSOLIDATIONS: This group helps customers reduce costs, improve operating
efficiencies and increase economies-of-scale through consolidation services.
These services may include project management, bank operations process
management and bank operations financial management. The Company's approach to
bank consolidation focuses on functions, operations and systems. These services
are delivered through detailed consolidation implementation projects,
acquisition planning projects, and single bank charter merger projects.
FLOAT MANAGEMENT: This group helps customers increase revenue, reduce
costs, and improve operating efficiencies in the float management and workflow
transportation areas. These services are delivered through check clearing
reviews, workflow and transportation analysis, float allocation methodologies,
consolidation impact review and technical support/installation surrounding the
implementation of the Company's FLOAT PRICING, FLOAT ANALYSIS, and DEPOSIT
MANAGER software.
GENISYS: This group helps its customers reduce costs and increase
productivity through the use of products that focus on tracking, traceability,
accountability, and measurement, coupled with utilization of the Internet as an
information delivery vehicle. Genisys products are used in many bank operations
areas, which include check, ATM, cash, loan and corporate mail operations. The
products are based on Windows NT technology with a mixture of other technologies
such as Internet browsers, SQL databases, and report writers. Major products
include: RECEIVE SENTRY, SUPERQUERY, LUMEN, PRODUCTION SENTRY, and OMNITRAC.
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PAYMENT ELECTRONIFICATION: This group helps customers and their corporate
customers in developing and implementing migration plans and technology in the
transition from a paper based payments system to an electronic environment,
while maximizing their benefits during the transition. Consulting and management
solutions offered include operations migration, business impact assessment,
product delivery opportunity and design, organization management and technology
implementation. Technology solutions include: BRANCH ITEM TRUNCATION (BIT),
CHECKLINK, CORPORATE ELECTRONIC RETURN ITEM NOTIFICATIONS (CNOTES), TRAC2ECP and
TRAC2FRAUD.
RISK MANAGEMENT: This group helps customers reduce operating costs and
their risks of loss caused by operations credit risk, litigation, and check and
deposit fraud. These services are delivered through risk reduction programs that
may include reengineering projects surrounding the implementation of the
Company's ON-US FRAUD PROTECTION SYSTEM, DEPOSIT FRAUD DETECTION SYSTEM,
TRAC2FRAUD, FRAUDTRACK and SMARTNOTES software.
EMERGING SOLUTIONS: This division is comprised of three groups that focus
on emerging business opportunities or the management of cooperative banking
ventures.
ECCHO MANAGEMENT SERVICES: By agreement with ECCHO, Carreker-Antinori
employees are retained as paid "staff" members to provide administrative and
management services. ECCHO has no other paid staff outside of the Company's
staff. ECCHO is governed by its own board of directors that is comprised of
representatives from each organizations' various bank owners. Through this
relationship, the Company supports a major banking industry initiative to
electronify paper payments and to reduce check fraud in the United States,
through electronic check presentment (ECP), positioning Carreker-Antinori as an
industry leader in this area.
ENABLING TECHNOLOGIES: This group helps customers with emerging business
needs to develop potential new solutions (for both the customer and the
Company). The group develops potential solutions to address those needs,
oftentimes building solutions from the ground up. A solution may then be offered
through one of the Company's various divisions when it is deemed ready to
"roll-out" for sale and delivery to the Company's customer base.
ENTERPRISE IT SERVICES: This group helps customers reduce costs though
improved management and processes, reduced project timelines and leveraged
models to favorably impact a bank's future projects. Specific areas of expertise
include consulting, project management, and IT outsourcing services for bank
conversions, consolidations, integrations, and Year 2000 projects.
CUSTOMERS AND MARKETS
A majority of the Company's revenues are generated from contracts with Tier
I Banks (banks with assets over $50 billion) and Tier II Banks (banks with
assets of between $5 billion and $50 billion). The Company's customers include
89% of Tier I Banks, and approximately 37% of Tier II banks. For the year ended
January 31, 1999, revenues from the Company's five largest customers accounted
for approximately 35% of the Company's total revenues, with Wells Fargo & Co.
(including the former Norwest organization) representing approximately 11% of
total company revenues, primarily in the revenue enhancement and payments
systems business segments. See "--Risk Factors--Customer Concentration." The
Company also targets Tier III banks (banks with assets of between $550 million
and $5 billion). The Company believes that the Tier III 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 the Company seeks to provide those
specific solutions that most effectively address a customer's needs.
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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. The Company has 15 Account Relationship Managers ("ARMs")
who are responsible for managing the Company's day-to-day relationships with its
customers. Nine are responsible for Tier I and Tier II bank relationships, four
are responsible for some Tier II and the majority of the Company's Tier III bank
sales, and two are responsible for UK and European bank relationships. Their
responsibilities include identifying customers' needs and assisting the
Company's group 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 technical sales support staff 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 exclusively for its customers by the Company
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 Payment Solutions
Network, Inc. ("PSN"), each of which is playing an instrumental role in the
electronification of paper checks and in reducing losses from fraud associated
with the paper check payment process. From time to time, the Company also
participates in other strategic banking initiatives.
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 $4.8
million, $3.6 million and $1.3 million for research and development in the years
ended January 31, 1999, 1998 and 1997, respectively. Further, some of the
Company's key product introductions have resulted from the adaptation of
products developed by customers to a wider market. In exchange for either a
one-time payment and/or on-going royalties, the Company is often able to obtain
the right to develop, enhance and market such products.
The Company believes its leadership role in and interaction with the banking
industry through ECCHO and PSN uniquely positions it to identify and develop
interbank solutions that have bilateral or multilateral banking industry
applications. The Company believes its management of these organizations
provides further opportunities to recognize and respond to the changing needs of
the banking industry.
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TECHNOLOGY
The Company designs its software products to incorporate the latest
developments in open systems architecture and protocols to provide maximum
scalability 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 and application interfaces so that the
Company's software products are constructed from reusable components which are
linked together in a tool-set fashion.
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
situations, with third-party preferred developers that can offer technology
expertise.
COMPETITION
The Company competes with third-party providers of services and software
products to the banking industry that include consulting firms and software
companies. Competitive firms providing consulting services include Andersen
Consulting, Electronic Data Systems Corporation and KPMG Peat Marwick LLP.
Software companies include Earnings Performance Group, Inc., Pegasystems Inc.,
Sterling Software, Inc., HNC 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 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."
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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
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--Government
Regulations."
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 has a
number of issued patents and registered trademarks 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. The Company is not aware that any third-party software being re-sold
by the Company is infringing upon proprietary rights of other third-parties. See
"--Risk Factors--Dependence on Proprietary Technology; Risk of Infringement."
EMPLOYEES
The Company had 270 employees as of January 31, 1999, with 89 persons
providing consulting services, 72 persons in the technical group, 65 persons
performing sales and marketing, customer relations and business development
functions and 44 persons performing corporate, finance and administrative
functions. The Company has no unionized employees and the Company believes that
its employee relations are good.
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 January 31, 1999, the Company used 12 independent contractors to provide
consulting services, most of who work from their homes or from
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customers' offices. 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 January 31, 1999, the Company had 36 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."
RISK FACTORS
THIS REPORT AND THE ANNUAL REPORT TO STOCKHOLDERS CONTAIN CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A
NUMBER OF FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH BELOW AND
ELSEWHERE IN THIS REPORT. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT,
THE FOLLOWING FACTORS, WHICH MAY AFFECT THE COMPANY'S CURRENT POSITION AND
FUTURE PROSPECTS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND
AN INVESTMENT IN THE COMMON STOCK OF THE COMPANY.
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 domestic or foreign 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, 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, customer budget
cycles and priorities, 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 Consolidated Quarterly Results of Operations."
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CUSTOMER CONCENTRATION
The Company's five largest customers accounted for approximately 35%, 44%
and 36% of total revenues during the years ended January 31, 1999, 1998 and
1997, respectively. While the Company's significant customers have changed from
period to period, Wells Fargo & Company (including the former Norwest
Corporation) has consistently ranked as one of the Company's top customers, and
accounted for approximately 11%, 13% and 15% of total revenues during the years
ended January 31, 1999, 1998 and 1997 respectively. The Company's largest
customer during the year ended January 31, 1998 was Fleet Financial Group, Inc.,
which accounted for approximately 14% of total revenues in that period. Further,
inasmuch as approximately 87% and 85% of the Company's total revenues in the
year ended January 31, 1999 were derived from companies who were customers of
the Company in the years ended January 31, 1998 and 1997, 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-priced basis. In connection with fixed-price projects, the Company
occasionally incurs costs in excess of its projections 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 solutions. 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-priced and value-priced 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, Inc.
Solution--Reduced Customer Risk" and "--Strategy--Increase Use of Value-Pricing
and Recurring Revenue 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 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. As a result of acquisitions and continued growth, the
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needs of the Company's management information systems (MIS) is expected to
expand and/or change, which could result in the implementation of new or
modified MIS systems and/or procedures. This may necessitate additional training
to existing personnel or the hiring of additional personnel. If the Company
cannot implement the new, or modified, 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 re-deploy its personnel to other
projects in order to minimize the under-utilization 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, 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,
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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 that include consulting firms and software
companies. Competitive firms providing consulting services include Andersen
Consulting, Electronic Data Systems Corporation and KMPG Peat Marwick LLP.
Software companies include Earnings Performance Group, Inc., Pegasystems Inc.,
Sterling Software, Inc., HNC 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 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
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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 January
31, 1999, 12 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.
From time to time new legislation may be proposed to establish more stringent
requirements for the engagement of independent contractors. The Company is
unable to assess the likelihood that any such 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.
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 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."
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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 has a number of issued
patents and registered trademarks. 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."
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 technology budgets to the resolution of Year 2000 issues, their
ability to
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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. The Company is in the process of evaluating its
information technology ("IT") and non-IT systems to determine their year 2000
compliance, but has not yet completed its evaluation. Although all 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
is not certified for Year 2000 compliance. Internal tests have disclosed no Year
2000 problems with this application. The Company is in the process of addressing
this situation with the third party to resolve the issue. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
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, INITIATIVES OR ACQUISITIONS
The Company regularly evaluates opportunities and may enter into strategic
alliances and/or initiatives, or make acquisitions of other companies or
technologies in the future. Risks inherent in alliances or initiatives include,
among others: (i) substantial investment of the Company's resources in the
alliance or initiative; (ii) inability to realize the intended benefits of an
alliance or initiative; (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 are forms of strategic alliances. In order to
support the formation and growth of PSN, the Company invested time and
technological resources in PSN and has loans to PSN aggregating $531,000
($500,000 of which has been
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reserved due to the Company's belief that collection is doubtful). In addition,
the Company has experienced, and may continue to experience, delays in
collections of fees from strategic alliances. See "--Business--Strategic Banking
Initiatives" and Note 7 of Notes to Consolidated Financial Statements.
GOVERNMENT REGULATIONS
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 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."
CONTROL BY OFFICERS AND DIRECTORS
As of March 25, 1999, the Company's executive officers and directors
beneficially owned, in the aggregate, 49% of the Company's outstanding Common
Stock. Accordingly, these persons, if acting together, have substantial control
over matters requiring approval by the stockholders of the Company, including
the election of directors. See "--Anti-Takeover Matters."
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 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.
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STOCK MARKET VOLATILITY
There has been significant volatility in the market price of the Company's
Common Stock, as well as in the market price of securities of many companies in
the technology and emerging growth sectors. Factors such as announcements 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, may have a significant impact on the market price of the
Common Stock.
ITEM 2. PROPERTIES.
The Company's principal executive office is a leased facility with
approximately 36,000 square feet of space in Dallas, Texas. The lease agreement
for this space expires on May 31, 1999. Commencing on June 1, 1999, the Company
has entered into a new lease agreement with Granite Tower Ltd., for the
relocation of its principal executive offices to Granite Tower at The Centre,
4055 Valley View Lane, Suite 900 and 1000, Dallas, Texas 75244, consisting of
approximately 48,000 square feet of total rentable space. The new lease
agreement expires May 31, 2010. The Company also leases approximately 21,000
square feet in Atlanta, Georgia pursuant to a lease agreement which expires in
August 2002, approximately 21,500 square feet in Kansas City, pursuant to a
lease agreement which expires February 2001, and approximately 1,800 square feet
in Swindon, England, pursuant to the lease which expires July 1999. The Company
is currently negotiating for approximately 2,000 square feet in the Boston area.
The Company believes that its facilities are well maintained and in good
operating condition and are adequate for its present and anticipated levels of
operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's shareholders during the
quarterly period ended January 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "CANI" since May 20 1998, the date of the initial public offering. At
January 31, 1999, there were approximately 1478 record holders of the Company's
Common Stock, although the Company believes that the number of beneficial owners
of its Common Stock is substantially greater. The table below sets forth for the
fiscal quarters indicated the high and low sale prices for the Common Stock, as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Year Ended January 31, 1999 HIGH LOW
--------- ---------
<S> <C> <C>
Fourth quarter............................................. $ 7.38 $ 3.88
Third quarter.............................................. 9.75 4.00
Second quarter (From May 20, 1998)......................... 11.25 8.38
</TABLE>
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, Antinori
Software, Inc. ("ASI") did make cash dividend payments principally to enable its
shareholders to pay income taxes arising out of ASI's status as an S
19
<PAGE>
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 earning levels, capital
requirements, financial condition and other factors deemed relevant by the Board
of Directors.
On January 29, 1999, the Company acquired Genisys Operation, Inc.
("Genisys"), a Texas corporation, pursuant to a merger transaction that also
included the shareholders of Genisys, Kevin J. Taylor, Ronald W. Kreykes, Thomas
R. Flannery, Robert A. Walsh and Patrick M. Rogal-Davis (the "Genisys
Acquisition"). In connection with the Genisys Acquisition, the Company issued a
total of 1.24 million shares of Common Stock to the shareholders of Genisys
listed above in reliance on the exemption from registration under Section 4(2)
of the Securities Act of 1933. The issuance of the shares of Common Stock did
not involve a public offering. The Company has agreed to use its reasonable best
efforts to register with the Securities and Exchange Commission the shares of
the Company's common stock issued in the Genisys Acquisition within six (6)
months of the effectiveness of the transaction.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated statements of operations data for each of the
three years in the period ended January 31, 1999 and the consolidated balance
sheet data as of January 31, 1999 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 Report.
The consolidated balance sheet data as of January 31, 1997 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, 1996 and 1995 is derived from the unaudited
consolidated financial statements of the Company. The selected financial data
set forth below should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Consulting and management service fees....... $ 26,328 $ 21,314 $ 14,407 $ 9,635 $ 6,090
Software license fees........................ 16,327 11,223 6,957 4,316 3,247
Software maintenance fees.................... 5,031 4,274 3,185 2,385 1,490
Software implementation fees................. 6,557 4,094 3,249 2,219 1,933
Hardware and other fees...................... 774 1,876 2,737 1,341 1,050
--------- --------- --------- --------- ---------
Total revenues............................. 55,017 42,781 30,535 19,896 13,810
--------- --------- --------- --------- ---------
Cost of revenues:
Consulting and management service fees....... 16,150 12,394 8,794 5,303 3,828
Software license fees........................ 1,216 1,412 1,307 700 803
Software maintenance fees.................... 2,387 1,923 1,780 1,279 954
Software implementation fees................. 3,862 4,156 1,808 1,572 1,244
Hardware and other fees...................... 560 1,556 1,960 965 808
--------- --------- --------- --------- ---------
Total cost of revenues..................... 24,175 21,441 15,649 9,819 7,637
--------- --------- --------- --------- ---------
Gross profit................................... 30,842 21,340 14,886 10,077 6,173
--------- --------- --------- --------- ---------
Operating costs and expenses:
Selling, general and administrative.......... 18,444 12,777 9,296 6,251 4,608
Research and development..................... 4,763 3,610 1,318 1,063 745
Merger related costs......................... 485 -- 1,423 54 --
--------- --------- --------- --------- ---------
Total operating costs and expenses......... 23,692 16,387 12,037 7,368 5,353
--------- --------- --------- --------- ---------
Income from operations......................... 7,150 4,953 2,849 2,709 820
Other income (expense)......................... 925 79 (375) 313 571
--------- --------- --------- --------- ---------
Income before provision for income taxes....... 8,075 5,032 2,474 3,022 1,391
Provision for income taxes(1).................. 2,903 2,027 1,114 1,163 542
--------- --------- --------- --------- ---------
Net income..................................... $ 5,172 $ 3,005 $ 1,360 $ 1,859 $ 849
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Basic earnings per share(2).................... $ .32 $ .24 $ .11 $ .15 $ .07
Diluted earnings per share(2).................. $ .30 $ .21 $ .10 $ .14 $ .07
Shares used in computing
basic earnings per share(2).................. 16,224 12,717 12,154 12,783 12,788
Shares used in computing
diluted earnings per share(2)................ 17,504 14,484 13,118 13,332 13,118
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 20,701 $ 2,485 $ 3,895 $ 3,281 $ 1,295
Working capital.............................. 52,117 7,529 5,882 4,455 2,947
Total assets................................. 736 21,486 17,569 11,298 9,114
Common stock subject to put(3)............... -- 2,000 2,000 -- --
Long-term debt, net of current portion....... -- -- -- -- 63
Total stockholders' equity................... 57,131 8,803 5,572 5,600 3,825
</TABLE>
- ------------------------
(1) Prior to the Company's acquisition of Antinori Software, Inc. ("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 9 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 Science Applications
International Corporation ("SAIC"). SAIC's right to require the Company to
repurchase its Common Stock terminated upon completion of the Company's
initial public offering. See Note 5 of Notes to Consolidated Financial
Statements.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. 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
REPORT. 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 REPORT.
OVERVIEW
The Company is a leading provider of integrated consulting and software
solutions that enable banks to increase their revenues, reduce their costs and
enhance their delivery of customer services. The Company was founded in 1978 to
provide consulting services to banks, and subsequently integrated software
products into its banking solutions. With its acquisition of Antinori Software,
Inc., a Georgia corporation ("ASI") on January 31, 1997, the Company was able to
significantly enhance its portfolio of software products. Additionally the
Company acquired Genisys Operations, Inc. ("Genisys") on January 29, 1999 which
provides incremental added-value to the Company's product offerings. The
acquisitions of ASI and Genisys were each accounted for as a pooling of
interests and accordingly, the Company's Consolidated Financial Statements and
Notes thereto, as well as all other financial and statistical data presented in
this Annual Report on Form 10-K, have been restated to include the financial
position and results of operations for ASI and Genisys for all periods prior to
and including the period ended January 31, 1999.
The Company derives its revenues from consulting and management service
fees, software license fees, software maintenance fees, software implementation
fees and hardware and other sales. While many customer contracts provide for
both the performance of consulting services and the license of related software,
some customer contracts require only the performance of consulting services or
only a software license (and, at the election of the customer, related
implementation services and/or annual software maintenance services). The
Company enters into these contracts with its customers on a project-by-project
basis. The Company also derives management service fees from the performance of
certain management services.
A substantial majority of the Company's revenues are generated from
contracts with banks with assets over $50 billion ("Tier I Banks") and banks
with assets of between $5 billion and $50 billion ("Tier II Banks"). The Company
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 87% and 85% of the Company's total
revenues during the year ended January 31, 1999 were derived from companies who
were customers of the Company during the year ended January 31, 1998 and 1997,
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
23
<PAGE>
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 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 not to exceed twelve 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 revenues for periods
subsequent to January 31, 1998, are recognized in accordance with the American
Institute of Certified Public Accountants' Statement of Position (SOP) 97-2,
"Software Revenue Recognition." Under SOP 97-2, software license revenues are
recognized upon execution of a contract and delivery of software, provided that
the license fee is fixed and determinable, no significant production,
modification or customization of the software is required, and collection is
considered probably by management. For periods prior to January 31, 1998,
software license revenues were recognized in accordance with SOP 91-1, "Software
Revenue Recognition." Under SOP 91-1, software license revenues were recognized
upon execution of a contract and shipment of the software and after any customer
cancellation right had expired, provided that no significant vendor obligations
remained outstanding, amounts were due within one year, and collection was
considered probable by management. The application of SOP 97-2 did not have a
material impact on the Company's consolidated financial statements for the year
ended January 31, 1999. 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 Value Pricing and Recurring
Revenue Arrangements."
SOFTWARE MAINTENANCE FEES. In connection with the Company's sale of a
software license, a customer may elect to purchase software maintenance
services. Most of the customers that purchase software licenses from the Company
also purchase software maintenance services, which typically are renewed
24
<PAGE>
annually. The Company charges an annual maintenance fee, typically a percent 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.
SOFTWARE IMPLEMENTATION FEES. In connection with the Company's sale of a
software license, a customer may elect to purchase software implementation
services, including software enhancements, patches and other software support
services. Most of the customers that purchase software licenses from the Company
also purchase software implementation services. The Company prices its
implementation services on a time-and-materials or on a fixed-price basis, and
the related revenues are recognized as services are performed.
HARDWARE AND OTHER SALES. The Company's computer hardware and supplies
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.
Effective with the year ended January 31, 1999 the Company adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information (Statement 131)." The Company has three reportable segments: revenue
enhancement, payment systems and emerging solutions. See Note 10 of Notes to
Consolidated Financial Statements.
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 years). At January 31, 1999, the Company's capitalized software
development costs, net of accumulated amortization, were $3.3 million, which
will be amortized over the next 12 quarterly periods. See Note 2 of Notes to
Consolidated Financial Statements.
25
<PAGE>
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations for the
fiscal years ended January 31, 1999, 1998 and 1997 is based upon data derived
from the statements of operations contained in the Company's audited
Consolidated Financial Statements appearing elsewhere in this Report. The
following table sets forth this data as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Consulting and management service fees................................................. 47.9% 49.8% 47.2%
Software license fees.................................................................. 29.7 26.2 22.8
Software maintenance fees.............................................................. 9.1 10.0 10.4
Software implementation fees........................................................... 11.9 9.6 10.6
Hardware and other fees................................................................ 1.4 4.4 9.0
--------- --------- ---------
Total revenues....................................................................... 100.0 100.0 100.0
--------- --------- ---------
Cost of revenues:
Consulting and management service fees................................................. 29.4 29.0 28.8
Software license fees.................................................................. 2.2 3.3 4.3
Software maintenance fees.............................................................. 4.3 4.5 5.8
Software implementation fees........................................................... 7.0 9.7 5.9
Hardware and other fees................................................................ 1.0 3.6 6.4
--------- --------- ---------
Total cost of revenues............................................................... 43.9 50.1 51.2
--------- --------- ---------
Gross profit............................................................................. 56.1 49.9 48.8
--------- --------- ---------
Operating costs and expenses:
Selling, general and administrative.................................................... 33.5 29.9 30.5
Research and development............................................................... 8.7 8.4 4.3
Merger related costs................................................................... 0.9 -- 4.7
--------- --------- ---------
Total operating costs and expenses................................................... 43.1 38.3 39.5
--------- --------- ---------
Income from operations................................................................... 13.0 11.6 9.3
Other income (expense)................................................................... 1.7 0.2 (1.2)
--------- --------- ---------
Income before provision for income taxes................................................. 14.7 11.8 8.1
Provision for income taxes............................................................... 5.3 4.8 3.6
--------- --------- ---------
Net income............................................................................... 9.4% 7.0% 4.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED JANUARY 31, 1999 (FISCAL 1998) COMPARED TO YEAR ENDED JANUARY 31,
1998 (FISCAL 1997)
REVENUES. The Company's total revenues increased by 28.6% to $55.0 million
in fiscal 1998 from $42.8 million in fiscal 1997. The increase was primarily
attributable to growth in revenues from consulting and management services,
software licenses and software implementation. Revenues from consulting and
management services increased by 23.5% to $26.3 million in fiscal 1998 from
$21.3 million in fiscal 1997. This increase reflected both continued demand for
the Company's services, as well as increased use of value-pricing for services.
Software license revenues increased 45.5% to $16.3 million in fiscal 1998 from
$11.2 million in fiscal 1997. Software license revenue growth stemmed primarily
from increased sales in fiscal 1998 over fiscal 1997 of the Company's risk
management products of $4.4 million. Total risk management product license fees
accounted for 41.5% and 20.8% of software license revenue in fiscal 1998 and
fiscal 1997, respectively. Software maintenance revenue increased 17.7% to $5.0
million in fiscal 1998 from $4.3 million in fiscal 1997. Software maintenance
growth resulted from growth in licenses sold as
26
<PAGE>
well as rate increases under existing contracts. Software implementation
revenues increased by 60.1% to $6.6 million in fiscal 1998 from $4.1 million in
fiscal 1997. This increase in software implementation revenues was primarily
generated by increased software product sales, which resulted in increased
implementation. Increased risk management and cash management products accounted
for increased software implementation fees in fiscal 1998 of $1.2 million and
increased software maintenance fees of $762,000, respectively. Hardware sales
decreased 58.7% to $774,000 in fiscal 1998 from $1.9 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 generally consists of personnel costs,
amortization of capitalized software development costs, third-party royalties
and cost of hardware delivered. Total cost of revenues increased by 12.8% to
$24.2 million in fiscal 1998 from $21.4 million in fiscal 1997. This increase
resulted primarily from an increase in the cost of revenues in consulting and
management services and software maintenance. Cost of revenues for consulting
and management services increased by 30.3% to $16.2 million in fiscal 1998 from
$12.4 million in fiscal 1997, which was a result primarily of increases in
personnel. Cost of revenues for software licenses decreased by 13.9% to $1.2
million in fiscal 1998 from $1.4 million in fiscal 1997. Decreases in cost of
license fees resulted from a decrease in sales of products subject to royalty
payments. Cost of revenues of software maintenance increased by 24.1% to $2.4
million in fiscal 1998 from $1.9 million in fiscal 1997, which was primarily due
to increases in personnel costs associated with growth of the customer service
function. Cost of revenues for software implementation decreased 7.1% to $3.9
million in fiscal 1998 from $4.2 million in fiscal 1997. Improvements in the
implementation process and adjustments to staffing requirements facilitated
slightly lower staffing levels to accomplish implementations sold. Cost of
revenues for hardware sales decreased 64.0% to $560,000 in fiscal 1998 from $1.6
million in fiscal 1997 due to reduced hardware sales levels. Total cost of
revenues as a percentage of total revenues decreased to 43.9% in fiscal 1998
from 50.1% in fiscal 1997, as a result of increases in sales of value-priced
consulting and software licenses which have lower associated costs.
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 44.4% to $18.4 million in fiscal 1998 from
$12.8 million in fiscal 1997. The increase in these expenses reflected the
addition of software management and marketing staff during fiscal 1998
associated with the Company's growth, as well as additional costs associated
with operation as a public company. As a percentage of revenues, selling,
general and administrative expenses increased to 33.5% in fiscal 1998 from 29.9%
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 31.9% to $4.8 million in fiscal 1998 from $3.6
million in fiscal 1997. Research and development expenses as a percentage of
revenues increased to 8.7% in fiscal 1998 from 8.4% in fiscal 1997. Growth in
research and development expenses resulted largely from an increase in the
number of development efforts during fiscal 1998.
MERGER RELATED COSTS. Merger related costs consisted of one-time
transaction costs of $485,000 related to the acquisition of Genisys by the
Company.
OTHER INCOME. Other income increased to $925,000 in fiscal 1998 from
$79,000 in fiscal 1997. Other income increased as a result of interest earned on
funds raised from the Company's initial public offering on May 20, 1998.
PROVISION FOR INCOME TAXES. Income tax provision increased to $2.9 million
in fiscal 1998 from $2.0 million in fiscal 1997, reflecting an effective tax
rate of 36.0% for fiscal 1998 compared with 40.0% for fiscal 1997. The effective
tax rate in fiscal 1998 was reduced compared to fiscal 1997 primarily due to the
tax-exempt status of certain interest income earned during fiscal 1998.
27
<PAGE>
YEAR ENDED JANUARY 31, 1998 (FISCAL 1997) COMPARED TO YEAR ENDED JANUARY 31,
1997 (FISCAL 1996)
REVENUES. The Company's total revenues increased by 40.1% to $42.8 million
in fiscal 1997 from $30.5 million in fiscal 1996. 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% to $21.3 million in fiscal 1997 from $14.4 million in fiscal 1996. This
increase reflected both continued demand for the Company's services, as well as
increased demand for the Company's higher-priced services. Software license
revenues increased 61.3% to $11.2 million in fiscal 1997 from $7.0 million in
fiscal 1996. 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 29.7% and 25.8% of software license
revenue in fiscal 1997 and fiscal 1996, respectively. Software maintenance
revenues increased by 34.2% to $4.3 million in fiscal 1997 from $3.2 million in
fiscal 1996. Software implementation revenue increased 26.0% to $4.1 million in
fiscal 1997 from $3.2 million in fiscal 1996. 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 31.5% to $1.9 million in fiscal 1997 from $2.7
million in fiscal 1996. This decrease was primarily due to reduced requests by
customers for bundled hardware and license deliveries.
COST OF REVENUES. Cost of revenues generally consists of personnel costs,
amortization of capitalized software development costs, third-party royalties
and cost of hardware delivered. Total cost of revenues increased by 37.0% to
$21.4 million in fiscal 1997 from $15.6 million in fiscal 1996. This increase
resulted primarily from an increase in the cost of revenues in consulting and
management services and software implementation services. Cost of revenues for
consulting and management services increased by 40.9% to $12.4 million in fiscal
1997 from $8.8 million in fiscal 1996, 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 8.0% to $1.4 million in fiscal 1997
from $1.3 million in fiscal 1996. Cost of revenues of software maintenance
increased by 8.0% to $1.9 million in fiscal 1997 from $1.8 million in fiscal
1996. Cost of revenues of implementation increased 129.9% to $4.2 million in
fiscal 1997 from $1.8 million in fiscal 1996. Growth in software implementation
costs resulted from increased personnel costs associated with the Company's
growth. Cost of revenues for hardware sales decreased 20.6% to $1.6 million in
fiscal 1997 from $2.0 million in fiscal 1996 due to reduced hardware sales
levels, but increased as a percentage of hardware sales to 82.9% in fiscal 1997
from 71.6% in fiscal 1996 due to pricing pressures. Total cost of revenues as a
percentage of total revenues decreased to 50.1% in fiscal 1997 from 51.2% in
fiscal 1996. 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 37.4% to $12.8 million in fiscal 1997 from
$9.3 million in fiscal 1996. The increase in these expenses reflected the
addition of management and marketing staff during fiscal 1997 and late fiscal
1996 associated with the Company's growth. As a percentage of revenues, selling,
general and administrative expenses decreased to 29.9% in fiscal 1997 from 30.4%
in fiscal 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses generally
consist of personnel and related costs of developing solutions. Research and
development expenses increased by 173.9% to
28
<PAGE>
$3.6 million in fiscal 1997 from $1.3 million in fiscal 1996. Research and
development expenses as a percentage of revenues increased to 8.4% in fiscal
1997 from 4.3% in fiscal 1996. 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.
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 to $79,000 in
fiscal 1997 from ($375,000) in fiscal 1996. Other income (expense) consists of
interest income (net) and non-recurring (expense) relating to PSN. During fiscal
1996, the Company recorded a reserve of $500,000 to reflect the potential
un-collectibility of a loan made to PSN.
PROVISION FOR INCOME TAXES. Income tax provision increased to $2.0 million
in fiscal 1997 from $1.1 million in fiscal 1996, reflecting an effective tax
rate of 40.3% for fiscal 1997 compared with 45.0% for fiscal 1996. Fiscal 1996
included a pro forma tax on earnings of ASI, as ASI was not subject to tax as an
S corporation (see Note 4 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 38.1%.
29
<PAGE>
SELECTED CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly data for each of
the Company's last eight quarters ended January 31, 1999. The data has 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 Report. 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 "--Business--Risk Factors--Fluctuations in Quarterly Operating
Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
JAN 31, OCT 31, JUL 31, APR 31, JAN 31, OCT 31,
1999 1998 1998 1998 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Consulting and management service fees........ $ 7,452 $ 7,273 $ 6,589 $ 5,014 $ 4,674 $ 5,724
Software license fees......................... 4,991 3,818 4,061 3,457 5,100 3,262
Software maintenance fees..................... 1,377 1,226 1,285 1,143 1,197 1,080
Software implementation fees.................. 1,360 2,072 2,136 989 792 1,025
Hardware and other fees....................... 56 160 227 331 79 424
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............................. 15,236 14,549 14,298 10,934 11,842 11,515
Costs of revenues:
Consulting and management service fees........ 4,390 4,211 3,905 3,644 3,203 3,298
Software license fees......................... 410 303 247 256 363 564
Software maintenance fees..................... 701 619 568 499 486 542
Software implementation fees.................. 890 1,130 1,205 637 1,080 1,255
Hardware and other fees....................... 32 110 186 232 65 326
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues...................... 6,423 6,373 6,111 5,268 5,197 5,985
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................................... 8,813 8,176 8,187 5,666 6,645 5,530
----------- ----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative........... 5,182 4,984 4,424 3,854 3,988 3,086
Research and development...................... 1,363 962 1,243 1,195 1,391 1,076
Merger related costs.......................... 485 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating cost and expenses........... 7,030 5,946 5,667 5,049 5,379 4,162
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.......................... 1,783 2,230 2,520 617 1,266 1,368
Other income (expense).......................... 336 366 205 18 29 (25)
----------- ----------- ----------- ----------- ----------- -----------
Income before provision for income taxes........ 2,119 2,596 2,725 635 1,295 1,343
Provision for income taxes...................... 714 926 1,011 252 532 540
----------- ----------- ----------- ----------- ----------- -----------
Net income...................................... $ 1,405 $ 1,670 $ 1,714 $ 383 $ 763 $ 803
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share........................ $ 0.08 $ 0.09 $ 0.10 $ 0.03 $ 0.06 $ 0.06
Diluted earnings per share...................... $ 0.07 $ 0.09 $ 0.10 $ 0.03 $ 0.05 $ 0.05
<CAPTION>
JUL 31, APR 31,
1997 1997
----------- -----------
<S> <C> <C>
Revenues:
Consulting and management service fees........ $ 6,777 $ 4,139
Software license fees......................... 1,324 1,537
Software maintenance fees..................... 1,042 955
Software implementation fees.................. 1,231 1,046
Hardware and other fees....................... 959 414
----------- -----------
Total revenues.............................. 11,333 8,091
Costs of revenues:
Consulting and management service fees........ 3,116 2,777
Software license fees......................... 258 227
Software maintenance fees..................... 502 393
Software implementation fees.................. 1,023 798
Hardware and other fees....................... 854 311
----------- -----------
Total cost of revenues...................... 5,753 4,506
----------- -----------
Gross profit.................................... 5,580 3,585
----------- -----------
Operating costs and expenses:
Selling, general and administrative........... 3,000 2,703
Research and development...................... 534 609
Merger related costs.......................... -- --
----------- -----------
Total operating cost and expenses........... 3,534 3,312
----------- -----------
Income from operations.......................... 2,046 273
Other income (expense).......................... 20 55
----------- -----------
Income before provision for income taxes........ 2,066 328
Provision for income taxes...................... 828 127
----------- -----------
Net income...................................... $ 1,238 $ 201
----------- -----------
----------- -----------
Basic earnings per share........................ $ 0.10 $ 0.02
Diluted earnings per share...................... $ 0.09 $ 0.01
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company increased operating cash by $2.5 million
over amounts generated during fiscal 1997 through net income, amortization of
capitalized software and depreciation and amortization of property and
equipment. Due to negotiated payment terms associated with some sales, accounts
receivable increased, using $15.1 million of cash resulting in a deficit of $6.1
in cash provided by operations. During fiscal 1997, the Company funded its
activities through cash provided by operations of $1.8 million. At January 31,
1999 and 1998, the Company had working capital of $52.1 million and $7.5
million, respectively.
30
<PAGE>
Cash used in investing activities during fiscal 1998 was $16.6 million, and
was primarily related to purchases of short term investments of $12.8 million,
purchases of property and equipment of $2.3 million, and development of
capitalized software of $1.5 million. Cash used in investing activities during
fiscal 1997 was $3.5 million, and was primarily related to purchases of property
and equipment, and purchases and development of software.
Cash generated through financing activities for fiscal 1998 of $40.9 million
resulted primarily from proceeds derived from the Company's initial public
offering completed on May 20, 1998 for $35.8 million after deducting costs of
the offering, and $5.0 million (including $1.4 million of related tax benefits)
resulting from the exercise of stock options. Cash generated through financing
activities for fiscal 1997 resulted primarily from the exercise of stock options
for $159,000 and the sale of treasury stock for $72,000.
The Company no longer maintains a revolving credit facility in light of its
substantial liquid working capital.
The Company's future liquidity and capital requirements will depend upon
numerous factors. The Company believes its current cash and cash equivalents and
short term investment balances and cash generated from operations will be
sufficient to meet the Company's operating and capital requirement through at
least January 2000. However, there can be no assurance that the Company will not
require additional financing within this time frame. The Company's forecast of
the period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risk and
uncertainties, and actual results could vary. The failure of the Company to
raise capital when needed could have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000
STATE OF READINESS
The Company has performed a company-wide evaluation to assess the ability of
its products and its information technology ("IT") and non-IT systems to
properly function and execute transactions in the Year 2000. The Company's Year
2000 Project is divided into three major sections: (a) Infrastructure, which
includes internal management information systems, computers, servers, networks
to support the business and any non-IT systems used in the operation of the
business; (b) Third Party Suppliers, which includes those suppliers that provide
the Company with software applications that are used in concert with the
Company's products and service suppliers, such as Internet service providers and
computer testing resources; and (c) Company Products and Services, which
includes those products and services that generate revenue for the Company. The
Project has been divided into six phases: (1) Awareness and Communication; (2)
Inventory; (3) Assessment; (4) Renovation; (5) Testing; and (6) Rollout. As
discussed below, the Company has substantially completed the first two phases of
the Year 2000 Project for its Infrastructure, Third Party Suppliers and Customer
Products and Services. All phases of the Project are expected to be completed by
the third quarter of 1999.
INFRASTRUCTURE
The Company has completed the inventory and assessment phases of its IT and
non-IT systems and is substantially complete with the renovation and testing
phases for these systems. The Renovation, Testing and Rollout phases of the
Project are expected to be completed by September 1999. The Company has
distributed a letter to each of its vendors that supply systems or software for
its IT and non-IT systems to determine the vendors' Year 2000 status. A majority
of the recipients have responded to the letter, and most of the respondents have
given assurances that their products and services are able to function in the
context of the Year 2000 Problem. The Company is assessing these responses and
will continue to communicate with vendors that are material to the Company's
operations to gain satisfactory assurances. If
31
<PAGE>
such assurances are not obtained, the Company will seek alternatives, including
contracting with other vendors.
THIRD PARTY SUPPLIERS
The Company has taken an inventory of the applications from third party
suppliers that are used in conjunction with the Company's products. The Company
has contacted significant third-party suppliers in an effort to assess the state
of their Year 2000 readiness. The Company has received information, or tested
all of the applications from third-party suppliers used in the its products.
Only one supplier has not been willing to certify the Year 2000 compliance of
its application, although internal tests have disclosed no Year 2000 problems
with this application. Because its bank customers require certifications
regarding Year 2000 compliance, the Company is communicating with this supplier
to determine a solution to this certification issue and at the same time is
formulating a contingency plan in the event the Company is unable to resolve
this issue.
COMPANY PRODUCTS AND SERVICES
All of the Company's software products have been tested and confirmed as
compliant. The Company has a Web site to identify each product and its compliant
release number and status. The Company also has transmitted letters to its
customers notifying them of their current Year 2000 readiness status and
outlining the steps, if any, needed for the customer to receive Year 2000
compliant software. As a result of the stringent requirements placed on the
Company's bank customers by the Office of Comptroller and Currency (the "OCC")
and the Federal Financial Industry Examiners Council (the "FFIEC"), these
customers are requiring documented evidence of Year 2000 Compliance of the
Company's products. The Company currently is establishing a process to archive
the results of its compliance tests and to document this test information in a
format suitable for external distribution.
COSTS
Through and including fiscal 1998 the Company has spent approximately
$610,000 relating to labor costs for its Year 2000 Project. The Company has
incurred no material replacement costs for non-compliant systems because it did
not accelerate its replacement of any systems as a result of the Year 2000
issue. The Company currently estimates that its costs through fiscal year 1999
relating to the Year 2000 Project will be less than $850,000, the majority of
which will be spent on the documentation process required by the Company's bank
customers. Other costs, including replacement of non-compliant hardware and
other equipment, are expected to be less than $200,000. Funds for the Year 2000
Project are expected to be paid for out of operations.
RISKS
If the Company does not successfully complete its Year 2000 Project, it
could have a material adverse effect on the Company's ability to market, sell
and implement its software products and consulting services, which could have a
material adverse effect on its financial condition and results of operations.
The Company's customer base is primarily in the banking industry. Because
members of this industry are heavily regulated and audited for their Year 2000
compliance efforts, the Company does not consider the possibility of Year 2000
noncompliance by banks to be reasonably likely. The OCC has published guidance
criteria that all banks be complete with Year 2000 renovation and unit testing
by December 1998, thus allowing the entire year of 1999 for system testing.
However, the operations and financial condition of banks is significantly
dependent on the results of operations and financial condition of the their
customers. If customers of banks experience a material adverse effect as a
result of Year 2000 issues, banks, and consequently the Company, could be
adversely affected. There can be no assurance that third parties will be Year
2000 compliant in a timely manner. The Company is anticipating that many of its
bank customers will not move any new systems into production during the last
half of 1999. During this period, only current
32
<PAGE>
system bug fixes and Year 2000 compliant releases will be sent into the bank's
production environment. Banks will continue to contract for new business
solutions, especially those that result in new bank revenues. During this
period, banks also will continue to initiate efforts that precede the
implementation of a new business software solution. The Company is currently
assessing the impact this will have on the Company's operations.
CONTINGENCY PLAN
A contingency planning process is underway and is anticipated to be complete
by September 30, 1999 in preparation for Year 2000 related events.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued Statement of Position No. 98-9
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 98-9"), which amends certain provisions of Statement of
Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"). SOP 98-9 will be
effective for all transactions entered into by the Company subsequent to January
31, 2000. The Company is currently reviewing the impact of applying SOP 98-9.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATES. The Company invests its cash in a variety of financial
instruments, primarily tax-advantaged variable rate and fixed rate obligations
of state and local municipalities, and educational entities and agencies. These
investments are denominated in U.S. dollars.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash
equivalents and short-term investments are treated as available-for-sale under
SFAS 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The Company's
investment securities are held for purposes other than trading. While certain of
the investment securities had maturities in excess of one year, the Company
intends to liquidate such securities if necessary within one year. The
weighted-average interest rate on investment securities at January 31, 1999 was
5.0%. Amortized cost of short term investments held at January 31, 1999 was
$12.8 million which approximates fair value.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CARREKER-ANTINORI, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... 35
Consolidated Balance Sheets as of January 31, 1999 and 1998............................ 36
Consolidated Statements of Operations for the years ended January 31, 1999, 1998 and
1997................................................................................. 37
Consolidated Statements of Stockholders' Equity for the years ended January 31, 1999,
1998 and 1997........................................................................ 38
Consolidated Statements of Cash Flows for the years ended January 31, 1999, 1998 and
1997................................................................................. 39
Notes to Consolidated Financial Statements............................................. 40
</TABLE>
34
<PAGE>
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, 1999 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, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1999, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
April 12, 1999
35
<PAGE>
CARREKER-ANTINORI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................................. $ 20,701 $ 2,485
Short term investments.................................................................... 12,849 50
Accounts receivable, net of allowance of $569 and $468 at January 31, 1999 and 1998,
respectively............................................................................ 26,618 11,907
Receivable from Electronic Check Clearing House Organization.............................. 343 566
Receivable from Payment Solutions Network, Inc., net of allowance of $565 and $100 at
January 31, 1999 and 1998, respectively................................................. 545 797
Receivable from Infiteq, LLC. net of allowance of $138 at January 31, 1999................ 98 --
Income taxes receivable................................................................... -- 199
Prepaid expenses and other assets......................................................... 681 680
Deferred income taxes..................................................................... 736 546
--------- ---------
Total current assets.................................................................. 62,571 17,230
Furniture, equipment, and leasehold improvements, net of accumulated depreciation of $2,894
and $1,617 at January 31, 1999 and 1998, respectively..................................... 2,673 1,664
Software costs capitalized, net of accumulated amortization of $3,753 and $3,300 at January
31, 1999 and 1998, respectively........................................................... 3,279 2,263
Deferred income taxes....................................................................... 178 --
Other assets................................................................................ 35 329
--------- ---------
Total assets.......................................................................... $ 68,736 $ 21,486
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 2,045 $ 2,043
Accrued compensation and benefits......................................................... 700 1,879
Other accrued expenses.................................................................... 961 899
Income taxes payable...................................................................... 1,400 --
Deferred revenue.......................................................................... 5,348 4,880
--------- ---------
Total current liabilities............................................................. 10,454 9,701
Deferred income taxes....................................................................... 1,151 982
Commitments (Note 8)........................................................................
Common stock subject to put................................................................. -- 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; 18,354 and 13,247 shares issued at January 31, 1999 and 1998,
respectively.......................................................................... 184 132
Additional paid-in capital................................................................ 44,563 2,155
Retained earnings......................................................................... 12,952 7,780
Less treasury stock, at cost:
367 common shares as of January 31, 1998 -- (510)
Deferred compensation..................................................................... (568) (754)
--------- ---------
Total stockholders' equity............................................................ 57,131 8,803
--------- ---------
Total liabilities and stockholders' equity............................................ $ 68,736 $ 21,486
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
36
<PAGE>
CARREKER-ANTINORI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Consulting and management service fees......................................... $ 26,328 $ 21,314 $ 14,407
Software license fees.......................................................... 16,327 11,223 6,957
Software maintenance........................................................... 5,031 4,274 3,185
Software implementation fees................................................... 6,557 4,094 3,249
Hardware sales and other fees.................................................. 774 1,876 2,737
--------- --------- ---------
Total revenues............................................................... 55,017 42,781 30,535
--------- --------- ---------
Costs of revenues:
Consulting and management service fees......................................... 16,150 12,394 8,794
Software license fees.......................................................... 1,216 1,412 1,307
Software maintenance........................................................... 2,387 1,923 1,780
Software implementation fees................................................... 3,862 4,156 1,808
Hardware sales and other fees.................................................. 560 1,556 1,960
--------- --------- ---------
Total cost of revenues....................................................... 24,175 21,441 15,649
--------- --------- ---------
Gross profit..................................................................... 30,842 21,340 14,886
--------- --------- ---------
Operating costs and expenses:
Selling, general, and administrative........................................... 18,444 12,777 9,296
Research and development....................................................... 4,763 3,610 1,318
Merger related costs........................................................... 485 -- 1,423
--------- --------- ---------
Total operating costs and expenses........................................... 23,692 16,387 12,037
--------- --------- ---------
Income from operations........................................................... 7,150 4,953 2,849
Other income (expense):
Interest income, net........................................................... 925 79 125
Other income (expense)......................................................... -- -- (500)
--------- --------- ---------
Total other income (expense)................................................. 925 79 (375)
--------- --------- ---------
Income before provision for income taxes......................................... 8,075 5,032 2,474
Provision for income taxes (Note 4).............................................. 2,903 2,027 1,114
--------- --------- ---------
Net income....................................................................... $ 5,172 $ 3,005 $ 1,360
--------- --------- ---------
--------- --------- ---------
Basic earnings per share......................................................... $ .32 $ .24 $ .11
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share....................................................... $ .30 $ .21 $ .10
--------- --------- ---------
--------- --------- ---------
Shares used in computing basic earnings per share................................ 16,224 12,717 12,154
--------- --------- ---------
--------- --------- ---------
Shares used in computing diluted earnings per share.............................. 17,504 14,484 13,118
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
37
<PAGE>
CARREKER-ANTINORI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TREASURY
COMMON STOCK ADDITIONAL STOCK
---------------------- PAID-IN RETAINED DEFERRED -----------
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES
--------- ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996.................... 12,762 $ 128 $ 1,802 $ 4,266 $ (589) 6
Compensation earned under employee stock option
plan......................................... -- -- -- -- 589 --
Purchase of treasury stock..................... -- -- -- -- -- 1,431
Sale of treasury stock......................... -- -- 1,378 -- -- (1,050)
Sale of stock.................................. 224 2 86 -- -- --
Common shares subject to put (Note 5).......... -- -- (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..................................... -- -- -- 1,360 -- --
Pro forma tax adjustment (Note 4).............. -- -- -- 103 -- --
--------- ----- ----------- ----------- ----- -----------
Balance at January 31, 1997.................... 13,010 130 1,205 4,775 -- 387
Restricted stock grant......................... 85 1 753 -- (754) --
Sale of treasury stock......................... -- -- 39 -- -- (23)
Purchase of treasury stock..................... -- -- -- -- -- 3
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..................................... -- -- -- 3,005 -- --
--------- ----- ----------- ----------- ----- -----------
Balance at January 31, 1998.................... 13,247 132 2,155 7,780 (754) 367
Adjustment of shares issued to Antinori
Software shareholders........................ (141) (1) 1 -- -- --
Common shares subject to put (Note 5).......... -- -- 2,000 -- -- --
Director option grant.......................... -- -- 100 -- (100) --
Sale of stock.................................. 3,650 37 35,800 -- -- --
Compensation earned under employee/ director
stock option plans........................... -- -- -- -- 286 --
Purchase of treasury stock..................... -- -- -- -- -- 11
Tax benefit from stock option exercise......... -- -- 1,407 -- -- --
Issuance of shares of common stock upon
exercise of stock options.................... 1,598 16 3,100 -- -- (378)
Net income..................................... -- -- -- 5,172 -- --
--------- ----- ----------- ----------- ----- -----------
Balance at January 31, 1999.................... 18,354 $ 184 $ 44,563 $ 12,952 $ (568) --
--------- ----- ----------- ----------- ----- -----------
--------- ----- ----------- ----------- ----- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
AMOUNT EQUITY
--------- -------------
<S> <C> <C>
Balance at January 31, 1996.................... $ (7) $ 5,600
Compensation earned under employee stock option
plan......................................... -- 589
Purchase of treasury stock..................... (2,004) (2,004)
Sale of treasury stock......................... 1,472 2,850
Sale of stock.................................. -- 88
Common shares subject to put (Note 5).......... -- (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..................................... -- 1,360
Pro forma tax adjustment (Note 4).............. -- 103
--------- -------------
Balance at January 31, 1997.................... (539) 5,571
Restricted stock grant......................... -- --
Sale of treasury stock......................... 33 72
Purchase of treasury stock..................... (4) (4)
Adjustment of shares issued to Antinori
Software shareholders........................ -- --
Issuance of shares of common stock upon
exercise of stock options.................... -- 159
Net income..................................... -- 3,005
--------- -------------
Balance at January 31, 1998.................... (510) 8,803
Adjustment of shares issued to Antinori
Software shareholders........................ -- --
Common shares subject to put (Note 5).......... -- 2,000
Director option grant.......................... -- --
Sale of stock.................................. -- 35,837
Compensation earned under employee/ director
stock option plans........................... -- 286
Purchase of treasury stock..................... (15) (15)
Tax benefit from stock option exercise......... -- 1,407
Issuance of shares of common stock upon
exercise of stock options.................... 525 3,641
Net income..................................... -- 5,172
--------- -------------
Balance at January 31, 1999.................... $ -- $ 57,131
--------- -------------
--------- -------------
</TABLE>
See accompanying notes.
38
<PAGE>
CARREKER-ANTINORI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income.............................................................. $ 5,172 $ 3,005 $ 1,360
Pro forma tax adjustment (Note 4)....................................... -- -- 103
--------- --------- ---------
5,172 3,005 1,463
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of capitalized software.................................... 453 745 606
Depreciation and amortization of property and equipment................. 1,277 639 350
Loss on Payment Solutions Network, Inc. investment...................... -- -- 500
Compensation earned under employee stock option plan.................... 286 -- 589
Deferred income taxes................................................... (199) 651 (635)
Provision for doubtful accounts......................................... 708 832 514
Changes in operating assets and liabilities
Accounts receivable................................................... (15,073) (4,108) (4,461)
Prepaid expenses, deposits, and other assets.......................... 324 32 (539)
Accounts payable and accrued expenses................................. (1,115) 825 1,909
Income taxes payable/receivable....................................... 1,599 (54) (424)
Deferred revenue...................................................... 468 (752) 2,720
--------- --------- ---------
Net cash (used in) provided by operating activities....................... (6,100) 1,815 2,592
Investing activities:
Investment in Payment Solution Network, Inc............................. -- -- (500)
Purchases of short term investments..................................... (12,799) (50) --
Purchases of property and equipment..................................... (2,286) (1,383) (687)
Computer software costs capitalized..................................... (1,469) (2,019) (710)
--------- --------- ---------
Net cash used in investing activities..................................... (16,554) (3,452) (1,897)
Financing Activities
Purchase of treasure stock.............................................. (15) (4) (2,004)
Sales of treasury stock................................................. -- 72 2,850
Proceeds from stock options exercised................................... 3,641 159 15
Tax benefit from stock option exercise.................................. 1,407 -- --
Distribution to stockholders............................................ -- -- (1,030)
Proceeds from sale of stock............................................. 35,837 -- 88
--------- --------- ---------
Net cash provided by (used in) financing activities....................... 40,870 227 (81)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...................... 18,216 (1,410) 614
Cash and cash equivalents at beginning of year............................ 2,485 3,895 3,281
--------- --------- ---------
Cash and cash equivalents at end of year.................................. $ 20,701 $ 2,485 $ 3,895
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest.................................................. $ 45 $ 26 $ 4
--------- --------- ---------
--------- --------- ---------
Cash paid for income taxes.............................................. $ 126 $ 1,611 $ 1,885
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes
39
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Carreker-Antinori, Inc. ("the Company") is a leading provider of revenue
enhancement, payment systems, and emerging 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 yield management, liquidity management, consolidations,
best practices, risk management, float management, payment electronification,
track and trace, and enterprise information technology. As described in Note 7,
the Company also provides consulting and administrative services to certain
organizations.
On January 29, 1999 Genisys Operation, Inc. ("Genisys"), a Texas
Corporation, was merged with the Company in a transaction accounted for as a
pooling of interests (Note 3). The accompanying consolidated financial
statements of the Company include the accounts of Genisys.
Revenues of $5,934,000 to a major customer accounted for 11% of total
revenues in the year ended January 31, 1999. Revenues of $11,956,000 to two
major customers accounted for 28% of total revenues in the year ended January
31, 1998. Revenues of $4,669,000 to a major customer accounted for 15% of total
revenues in the year ended January 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES
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.
SHORT TERM INVESTMENTS
The Company considers investments with maturities of greater than three
months when purchased to be short term investments based on the freely tradable
nature of the investments, and management's expectation that they will not be
held for greater than one year. Short term investments consist primarily of tax
exempt municipal bonds. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. All debt securities have been determined by management
to be available for sale. Available for sale securities are stated at amortized
cost, which approximates fair value. Fair value of debt securities is determined
based upon current market value price quotes by security. As of January 31,
1999, approximately $4,124,000 of short-term investments mature in less than one
year, and $8,725,000 mature from one to two years.
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
40
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES (CONTINUED)
no collateral. The Company maintains an allowance for losses based upon the
expected collectibility of all accounts receivable. Write-offs of receivables
during the three years ended January 31, 1999, 1998 and 1997 were $64,000,
$368,000 and $546,000, 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 $10,134,000, and
$4,202,000 of unbilled receivables at January 31, 1999 and 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, generally from three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the terms of the related
leases or the respective useful lives of the assets. The components of property
and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Furniture................................................. $ 2,321 $ 1,596
Equipment................................................. 2,921 1,546
Leasehold Improvements.................................... 325 139
Less: Accumulated Depreciation............................ (2,894) (1,617)
--------- ---------
$ 2,673 $ 1,664
--------- ---------
--------- ---------
</TABLE>
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 years). The Company recorded
amortization relating to software development costs capitalized of $453,000,
$745,000, and $606,000 in the years ended January 31, 1999, 1998 and 1997,
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
41
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES (CONTINUED)
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
billings for such services may be delayed by mutual agreement for periods
generally not to exceed twelve months.
Software license revenues for periods subsequent to January 31, 1998, are
recognized in accordance with the American Institute of Certified Public
Accountants' Statement of Position (SOP) 97-2, "Software Revenue Recognition."
Under SOP 97-2, software license revenues are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required, and collection is considered probable by management. For
periods prior to January 31, 1998, software license revenues were recognized in
accordance with SOP 91-1, "Software Revenue Recognition." Under SOP 91-1,
software license revenues were recognized upon execution of a contract and
shipment of the software and after any customer cancellation right had expired,
provided that no significant vendor obligations remained outstanding, amounts
were due within one year, and collection was considered probable by management.
The application of SOP 97-2 did not have a material impact on the Company's
consolidated financial statements for the year ended January 31, 1999.
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 sales of the software. Approximately $746,000,
$816,000 and $724,000 of royalty expense was recorded under these agreements in
the years ended January 31, 1999, 1998 and 1997, respectively.
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
42
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES (CONTINUED)
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 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).
COMPREHENSIVE INCOME
In 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE INCOME.
Statement 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements, and was effective for the Company beginning February 1,
1998. For all periods presented, the Company had no components of comprehensive
income other than net income.
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.
SEGMENT REPORTING
Effective February 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (Statement
131). Statement 131 superseded FASB Statement No. 14, FINANCIAL REPORTING FOR
SEGMENTS OF A BUSINESS ENTERPRISE. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
Statement 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of Statement
131 did not affect results of operations or financial position, but did affect
the disclosure of segment information (Note 10).
3. BUSINESS COMBINATIONS
On January 31, 1997, the Company acquired all the outstanding common shares
of Antinori Software, Inc, ("ASI") from the shareholders of ASI in exchange for
3,962,528 shares of the Company's 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 the
financial position and results of operations of
43
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS (CONTINUED)
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, 1999, all settlement 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 ASI merger. These charges consisted of
investment banking, legal, accounting and other fees. Included in these charges
are fees of $200,000 which were paid to a director of the Company for consulting
services performed in connection with the ASI merger.
On January 29, 1999, the Company acquired all the outstanding common shares
of Genisys from the shareholders of Genisys in exchange for 1,240,000 shares of
the Company's Common Stock. The transaction was accounted for as a pooling of
interests, and accordingly, the accompanying consolidated financial statements
have been restated to include the financial position and results of operations
of Genisys for all periods presented. Revenues and net income (loss) of the
Company and Genisys are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Carreker-Antinori, Inc......................... $ 52,361 $ 40,501 $ 29,072
Genisys Group, Inc............................. 2,656 2,280 1,463
--------- --------- ---------
$ 55,017 $ 42,781 $ 30,535
--------- --------- ---------
--------- --------- ---------
Net income (loss):
Carreker-Antinori, Inc......................... $ 5,108 $ 3,055 $ 1,376
Genisys Group, Inc............................. 64 (50) (16)
--------- --------- ---------
$ 5,172 $ 3,005 $ 1,360
--------- --------- ---------
--------- --------- ---------
</TABLE>
During the year ended January 31, 1999, the Company recorded charges of
$485,000 in connection with the Genisys merger. These charges consisted of
legal, accounting and other fees.
44
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROVISIONS FOR INCOME TAXES
Prior to the ASI merger, 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 year ended
January 31, 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 $103,000 in the year ended January 31, 1997.
The Company's provision for income taxes, including pro forma amounts for
the year ended January 31, 1997, consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current........................................... $ 2,802 $ 1,237 $ 1,511
Deferred.......................................... (188) 615 (518)
--------- --------- ---------
2,614 1,852 993
--------- --------- ---------
--------- --------- ---------
State:
Current........................................... 300 139 167
Deferred.......................................... (11) 36 (46)
--------- --------- ---------
289 175 121
--------- --------- ---------
$ 2,903 $ 2,027 $ 1,114
--------- --------- ---------
--------- --------- ---------
</TABLE>
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):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense at statutory rate................ $ 2,744 $ 1,712 $ 841
State income taxes, net of U.S. federal benefit..... 195 92 76
Tax exempt interest income.......................... (273) -- --
Nondeductible expenses.............................. 172 67 197
Other, net.......................................... 65 156 --
--------- --------- ---------
Provision for income taxes.......................... $ 2,903 $ 2,027 $ 1,114
--------- --------- ---------
--------- --------- ---------
</TABLE>
45
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROVISIONS FOR INCOME TAXES (CONTINUED)
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):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY
31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustment................................. $ 136 $ 181
Depreciation of furniture and equipment.................... 178 (21)
Accruals not currently deductible.......................... 152 63
Merger costs not currently deductible...................... -- 72
Allowance for doubtful accounts............................ 418 164
Other.................................................... 30 87
--------- ---------
Total deferred tax assets.................................... 914 546
Deferred tax liabilities:
Amortization of capitalized software....................... 1,151 965
Other...................................................... -- 17
--------- ---------
Total deferred tax liabilities............................... 1,151 982
--------- ---------
Net deferred tax liabilities................................. $ (237) $ (436)
--------- ---------
--------- ---------
</TABLE>
5. 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 required, 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 Company classified the common stock subject to
the put outside of stockholders' equity on the consolidated balance sheet at
January 31, 1998. The put option terminated upon the Company's initial public
offering on May 20, 1998.
6. BENEFIT PLANS
STOCK OPTION PLANS
Effective October 7, 1994, the Company adopted the 1994 Long Term Incentive
Plan (the Long Term Incentive Plan) under which officers and employees may be
granted awards in the form of incentive stock options, non-qualified stock
options and restricted shares. The exercise price per share for the Common Stock
issued pursuant to incentive stock options under the Long Term Incentive Plan
shall be no less than 100% of the fair market value on the date the option is
granted. The exercise price per share for non-qualified stock options under the
Long Term Incentive Plan may be determined by the Compensation
46
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
Committee of the Company's Board of Directors (the Committee), but may not be
less than the par value of the shares. Options granted under the Long Term
Incentive Plan become exercisable and vest as determined by the Committee. To
date, options granted under the Long Term Incentive Plan fully vest within four
years from the date of grant. The term of each option granted under the Long
Term Incentive Plan shall be as the Committee determines, but in no event shall
any option have a term of longer than ten years from the date of grant. Options
may be granted pursuant to the Long Term Incentive Plan up to October 7, 2004,
unless the Board of Directors terminates the Long Term Incentive Plan prior to
such date.
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, 1999 and
1998, there was deferred compensation related to the restricted shares totaling
$502,698 and $754,000, respectively. 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 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. During the year ended January 31, 1999, options to
purchase 17,790 shares of common stock were granted to Directors. The exercise
price was set at 50% of the fair market value on the grant date. As a result,
the Company recorded deferred compensation of $100,026 to be expensed ratably
over a one year vesting period. At January 31, 1999, there was deferred
compensation related to such Director options of $65,020.
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 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 Company's merger with ASI effective January 31, 1997. Therefore, all
remaining deferred compensation recorded relating to this stock option grant was
expensed in the fourth quarter of 1997.
47
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
Stock option transactions under all plans for the years ended January 31,
1999, 1998 and 1997, are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year... 4,230 $ 3.96 2,983 $ 1.45 1,942 $ 0.82
Granted.................................. 1,378 6.91 1,932 6.96 1,119 2.51
Exercised................................ (1,975) 1.87 (350) 0.45 (24) 0.61
Forfeited................................ (60) 8.21 (335) 2.57 (54) 1.11
----------- ----- -----
Options outstanding at end of year......... 3,573 6.19 4,230 3.96 2,983 1.45
----------- ----- -----
----------- ----- -----
Options exercisable at end of year......... 1,221 1,557 1,272
Weighted average grant-date fair value of
options granted during the year.......... $ 5.26 $ 1.58 $ 0.48
----- ----- -----
----- ----- -----
</TABLE>
Information related to options outstanding at January 31, 1999, is
summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE JANUARY 31, CONTRACTUAL EXERCISE JANUARY 31, EXERCISE
PRICE 1999 LIFE PRICE 1999 PRICE
- --------------------- --------------- ------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $ 4.88.... 955 5.4 $ 1.94 883 $ 1.80
$5.81 to $ 7.20.... 1,275 9.7 6.15 60 7.14
$8.90 to $11.00.... 1,343 8.9 9.24 278 9.07
----- -----
3,573 8.2 $ 6.19 1,221 $ 3.72
----- -----
----- -----
</TABLE>
As of January 31, 1999, the Company has reserved for issuance under the Long
Term Incentive Plan 3,801,364 shares of Common Stock, of which 84,700 shares of
restricted stock have been issued, 3,389,604 shares are subject to currently
outstanding options to employees, 165,789 shares are subject to currently
outstanding options to directors, and 161,271 shares are reserved for future
awards. As of January 31, 1999, the Company has reserved for issuance under the
Director Plan 100,000 shares of Common Stock, of which 17,790 shares are subject
to currently outstanding options, and 82,210 shares are reserved for future
awards.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee and director stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS 123
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, no compensation expense is
recorded when the exercise price of the Company's employee stock options equals
the fair value of the underlying stock on the date of grant. Compensation equal
to the intrinsic value of employee stock options is recorded when the exercise
price of the stock options is less than the fair value of the underlying stock
on the date of grant. Any resulting compensation is amortized to expense over
the option's vesting period. During the years ended January 31, 1999 and 1997,
total compensation expense recorded relating to employee stock options was
$286,359 and
48
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
$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 and director
stock options under the fair value method of SFAS 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model assuming volatility of 1.045 in 1999, no volatility for 1998 and 1997, and
the following assumptions for 1999, 1998 and 1997, respectively:
weighted-average risk free interest rate of 5.3%, 5.95% and 6.22%, no dividends,
and weighted average expected life of 4.51, 4.45 and 3.49 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee and director stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information (in thousands, except per share amounts) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income................................................................. $ 3,710 $ 2,592 $ 1,208
--------- --------- ---------
--------- --------- ---------
Basic pro forma earnings per share................................................... $ .23 $ .20 $ .10
--------- --------- ---------
--------- --------- ---------
Diluted pro forma earnings per share................................................. $ .21 $ .20 $ .09
--------- --------- ---------
--------- --------- ---------
</TABLE>
The pro forma disclosures only include the effect of options granted
subsequent to January 31, 1995. Accordingly, the pro forma information does not
reflect the pro forma effect of all previous stock option grants of the Company,
and thus is not indicative of future amounts until SFAS 123 is applied to all
outstanding stock options.
PROFIT SHARING PLAN
The Company has adopted a profit sharing plan pursuant to Section 401(k) of
the Internal Revenue Code (the Code) whereby participants may contribute a
percentage of compensation not in excess of the maximum allowed under the Code.
The plan provides for a matching contribution by the Company. Effective January
1, 1998, employees of ASI became eligible to participate in the Company plan.
Employer matching contributions amounted to $616,183, $421,000 and $304,000, in
1999, 1998 and 1997, respectively. The Company may make additional contributions
at the discretion of the Board of Directors. No discretionary contribution was
made during 1999, 1998, or 1997. 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 $260,000 and $187,000 under the ASI plan for the
years ended January 31, 1998 and 1997, respectively.
49
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
Through January 31, 1999, employees of Genisys 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 and additional contributions are discretionary
and amounted to $105,488, $1,800 and $42,000, under the Genisys plan for the
years ended January 31, 1999, 1998 and 1997, 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 $513,000, $1,554,000 and $2,241,000 in 1999, 1998 and 1997,
respectively.
7. MANAGEMENT SERVICES
An employee of 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
$1,040,000, $994,000 and $866,000 for the years ended January 31, 1999, 1998 and
1997, respectively. Receivables from ECCHO were $343,000, $566,000 and $477,000
at January 31, 1999, 1998 and 1997, 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 and included in other
income. The scheduled 1999, 1998 and 1997 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 $31,000 and $64,000 as of January 31, 1999 and 1998,
respectively. 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, 1999, 1998
and 1997, the Company recorded management service fees related to the PSN
Agreement of $1,216,000, $1,378,000 and $1,344,000, respectively. Net
receivables from PSN for management services (excluding the note receivable
discussed above) were, $545,000, $797,000 and $257,000 at January 31, 1999, 1998
and 1997, respectively. Subsequent to January 31, 1999, the Company received
payments from PSN for management services in the amount of $175,000.
50
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. MANAGEMENT SERVICES (CONTINUED)
The Company owns an equity interest (for which the Company has no book
basis) and an employee of the Company 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. The
Company provided consulting and management services to INFITEQ, for which the
Company recorded revenues of $1,093,000 for the year ended January 31, 1999.
Receivables from INFITEQ were $98,000 at January 31, 1999.
The Company has not provided guarantees of debt or other obligations, has
not agreed to fund any losses, and is not otherwise contingently liable with
respect to ECCHO, PSN or INFITEQ.
8. 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. Subsequent to January 31, 1999 the Company
entered into a lease commitment for a term of 11 years for its corporate
headquarters in Dallas, Texas. Rental commitments for this lease are reflected
in the lease commitments schedule below. Rental expense under operating leases
for 1999, 1998 and 1997 was approximately $1,038,000, $620,000 and $546,000,
respectively. Future minimum base rents under terms of non-cancelable operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
Year ending January 31:
2000................................................ $ 1,120
2001................................................ 1,442
2002................................................ 1,608
2003................................................ 1,361
2004 and thereafter................................. 8,000
</TABLE>
51
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Net income..................................................................... $ 5,172 $ 3,005 $ 1,360
Weighted average shares outstanding............................................ 16,224 12,717 12,154
--------- --------- ---------
--------- --------- ---------
Basic earnings per share....................................................... $ 0.32 $ 0.24 $ 0.11
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share:
Net income..................................................................... $ 5,172 $ 3,005 $ 1,360
Weighted average shares outstanding............................................ 16,224 12,717 12,154
Assumed conversion of employee stock options................................... 1,280 1,767 964
--------- --------- ---------
Shares used in diluted earnings per share calculation.......................... 17,504 14,484 13,118
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share..................................................... $ 0.30 $ 0.21 $ 0.10
--------- --------- ---------
--------- --------- ---------
</TABLE>
For the year ended January 31, 1999 approximately 846,000 weighted average
options have been excluded from the calculation of year to date diluted earnings
per share due to their antidilutive effect.
10. SEGMENTS
Effective with the year ended January 31, 1999, the Company adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION (STATEMENT 131). Segment disclosures required by Statement 131 have
been reported for the year ended January 31, 1999. Segment information for the
years ended January 31, 1998 and 1997 has not been prepared and disclosed as it
is impractical to do so due to the merger with ASI which occurred in 1997 and
organizational changes which occurred in the Company's business effective
February 1, 1998 which impact segment reporting under Statement 131.
The Company has three reportable segments: revenue enhancement, payment
systems, and emerging solutions. The segments are unique due to the focus of the
products and services being offered. The Company evaluates performance and
allocates resources based on profit or loss from operations before income taxes,
not including gains and losses on the Company's investment portfolio. The
accounting policies of the reportable segments are the same as those described
in Note 2, Summary of Significant Accounting Policies.
Revenue enhancement consists primarily of yield management consulting, and
liquidity management consulting and software. Payment systems consists primarily
of consolidation consulting, best practices consulting and software, risk
management consulting and software, float management consulting and software,
payment electronification consulting and software, and track and trace software.
Emerging solutions consists primarily of enterprise information technology
consulting, and management services, ECCHO management services, and enabling
technology consulting.
Due to the solution approach to delivering products and services from
multiple business segments, contracts are broken down by segment with few
transactions between reportable segments.
52
<PAGE>
CARREKER-ANTINORI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENTS (CONTINUED)
Included in corporate and unallocated are costs related to selling and
marketing, unallocated corporate overhead expense, general software management,
and incentive bonuses. Business segment results include costs for research and
development as well as product royalty expense. Receivables, property and
equipment and other assets are not included in the measures reviewed by the
Company's chief operating decision-maker. Therefore, all Company assets have
been included in the corporate and unallocated category in the following
reportable segment disclosure. Segment information for the year ended January
31, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
REVENUE PAYMENT EMERGING CORPORATE
ENHANCEMENT SYSTEMS SOLUTIONS & UNALLOCATED TOTAL
------------ --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Consulting and management service fees.......... $ 11,734 $ 9,537 $ 5,057 -- $ 26,328
Software license fees........................... 3,977 12,350 -- -- 16,327
Software maintenance fees....................... 884 4,147 -- -- 5,031
Software implementation fees.................... 1,655 4,902 -- -- 6,557
Hardware and other fees......................... -- 774 -- -- 774
------------ --------- ----------- ------------- ---------
Total revenues................................ $ 18,250 $ 31,710 $ 5,057 -- $ 55,017
------------ --------- ----------- ------------- ---------
------------ --------- ----------- ------------- ---------
Operating income (loss)........................... $ 10,272 $ 11,355 $ 1,391 $ (15,868) $ 7,150
Assets............................................ $ -- $ -- $ -- $ 8,736 $ 68,736
Depreciation and Amortization..................... $ 121 $ 779 $ 34 $ 796 $ 730
Capital expenditures.............................. $ -- $ -- $ -- $ 2,286 $ 2,286
</TABLE>
11. SELECTED CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly data for the
eight quarters ended January 31, 1999. The data has 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 Report.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
JAN 31, OCT 31, JUL 31, APR 31, JAN 31, OCT 31, JUL 31 APR 31,
1999 1998 1998 1998 1998 1997 1997 1997
--------- --------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................ $ 15,236 $ 14,549 $ 14,298 $ 10,934 $ 11,842 $ 11,515 $ 11,333 $ 8,091
Gross profit.................. 8,813 8,176 8,187 5,666 6,645 5,530 5,580 3,585
Income from operations........ 1,783 2,230 2,520 617 1,266 1,368 2,046 273
Net income.................... 1,405 1,670 1,714 383 763 803 1,238 201
Basic earnings per share...... $ .08 $ .09 $ .10 $ .03 $ .06 $ .06 $ .10 $ .02
Diluted earnings per share.... $ .07 $ .09 $ .10 $ .03 $ .05 $ .05 $ .09 $ .01
</TABLE>
Net income for the three months ended January 31, 1999 includes one time
merger related costs of $485,000 resulting from the merger with Genisys.
53
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors" and
"Executive Officers of the Company" of the Company's definitive Proxy Statement
for the Company's 1999 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation and
Other Matters" of the Company's definitive Proxy Statement for the Company's
1999 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Outstanding Capital Stock and
Stock Ownership of Directors, Certain Executive Officers and Principal
Stockholders" of the Company's definitive Proxy Statement for the Company's 1999
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" and
"Executive Compensation and Other Matters--Compensation of Directors" by
reference of the Company's definitive Proxy Statement for the Company's 1999
Annual Meeting of Stockholders is incorporated herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are filed as part of this report:
Report of Ernst & Young, LLP, Independent Auditors
Consolidated Balance Sheets as of January 31, 1999 and
1998
Consolidated Statements of Operations for the years ended
Janaury 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended January 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
January 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Financial Statement Schedules for which provision is made
in the applicable accounting regulation of the Securities
and Exchange Commission have been excluded, as they are
not required under the related instructions or information
required has been included in the Company's Consolidated
Financial Statements.
3. The following documents are filed or incorporated by reference as
exhibits to this report:
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger between Carreker-Antinori, Inc., a Texas corporation, and
Carreker-Antinori, Inc., a Delaware corporation (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
2.2 Agreement and Plan of Merger, dated January 29, 1999, by and among Carreker-Antinori, Inc., GO
Acquisition Corp., Genisys Operation, Inc., and Kevin J. Taylor, Ronald W. Kreykes, Thomas R.
Flannery, Robert A. Walsh, and Patrick M. Rogal-Davis (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed February 12, 1999).
2.3 List of Schedules and Attachments omitted from Exhibit 2.2, Agreement and Plan of Merger (incorporated
by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed February 12, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (Registration No. 333-48399)).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
4.2 Amended and Restated Certificate of Incorporation and Bylaws of the Company ((incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
+10.1 Employment Agreement dated January 31, 1997 between the Company and John D. Carreker, Jr. (incorporated
by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.2 Employment Agreement dated January 31, 1997 between the Company and Ronald R. Antinori (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.3 Employment Agreement dated March 19, 1998 between the Company and Terry L. Gage (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.4 Employment Agreement dated March 12, 1998 between the Company and Wyn P. Lewis (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.5 Employment Agreement dated March 10, 1998 between the Company and Richard L. Linting (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.6 Employment Agreement dated March 13, 1998 between the Company and Royce D. Brown (incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.7 Amended and Restated Carreker-Antinori 1994 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
+10.8 Carreker-Antinori Director Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Registration No. 333-48399)).
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
+10.9 Carreker-Antinori Profit Sharing Incentive Plan (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
10.10 Intentionally omitted.
10.11 Management Services Agreement dated November 18, 1993 between the Company and Payment Systems Network,
Inc. (as amended) (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement
on Form S-1 (Registration No. 333-48399)).
10.12 Management Services Agreement dated January 15, 1998 between the Company and INFITEQ, LLC (incorporated
by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.13 Strategic Alliance Agreement dated October 1996 between the Company and Science Applications
International Corporation (incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
+10.14 Indemnification Agreement between the Company and John D. Carreker, Jr. (together with a schedule)
(incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1
(Registration No. 333-48399)).
10.15 Settlement Agreement dated January 29, 1998, between the Company and Ronald R. Antinori (incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.16 Settlement Agreement dated January 29, 1998, between the Company and Susan Antinori (incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.17 Settlement Agreement dated January 29, 1998, between the Company and Lawrence D. Duckworth (incorporated
by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.18 Settlement Agreement dated January 29, 1998, between the Company and Michael Israel (incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.19 Loan and Security Agreement between Compass Bank and the Company dated September 1997 (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.20 Stock Purchase Agreement by and among the Company and Science Applications International Corporation,
dated October 10, 1996 (incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
10.21 Stock Purchase Agreement by and between Crow Family Partnership, L.P. and the Company, dated January 10,
1997 (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1
(Registration No. 333-48399)).
10.22 Form of the Company's independent contractor agreement (incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
10.23 Agreement and Plan of Merger between the Company and CAG Newco, Inc. and Antinori Software, Inc. dated
as of January 29, 1997 (incorporated by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.24 Promissory Note dated September 1, 1997, between the Company and John S. Davis (incorporated by
reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.25 Form of Underwriting Agreement by and among the Company, the Selling Stockholders named therein and the
Underwriters (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-48399).
*10.26 Office Lease between Granite Tower, Ltd. and the Company dated as of March 31, 1999.
21.1 Subsidiaries of the Company.
(a) Genisys Operation, Inc.
(b) Antinori Software, Inc.
(c) Carreker-Antinori, Ltd.
*23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on first signature page).
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Management contract or compensatory plan or arrangement. The Company will
furnish a copy of any exhibit listed above to any shareholder without charge
upon written request to Mr. James L. Dow, II, 14001 N. Dallas Parkway, Suite
1100, Dallas, Texas 75240.
* Filed herewith.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
(c) The Index to Exhibits filed or incorporated by reference pursuant to
Item 601 of Regulation S-K and the Exhibits being filed with this Report
are included following the signature pages to this Form 10-K
(d) Not applicable.
57
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Carreker-Antinori, Inc., a
Delaware corporation, and the undersigned directors and officers of
Carreker-Antinori, Inc., hereby constitutes and appoints John D. Carreker, Jr.
and Terry L. Gage, or any one of them, its or his true and lawful
attorney-in-fact and agent, for it or him and in its or his name, place and
stead, in any and all capacities, with full power to act alone, to sign any and
all amendments to this Report, and to file each such amendment to the Report,
with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as it or he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CARREKER-ANTINORI, INC.
By: /s/ JOHN D. CARREKER, JR.
-----------------------------------------
John D. Carreker, Jr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: April 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in the capacities indicated on April 28, 1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board and
/s/ JOHN D. CARREKER, JR. Chief Executive Officer
- ------------------------------ (Principal Executive
John D. Carreker, Jr. Officer)
/s/ RICHARD L. LINTING
- ------------------------------ President, Chief Operating
Richard L. Linting Officer and Director
Executive Vice President
/s/ TERRY L. GAGE and Chief Financial
- ------------------------------ Officer (Principle
Terry L. Gage Financial and Accounting
Officer)
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ RONALD R. ANTINORI
- ------------------------------ Vice Chairman of the Board
Ronald R. Antinori
/s/ JAMES D. CARREKER
- ------------------------------ Director
James D. Carreker
/s/ JAMES L. FISCHER
- ------------------------------ Director
James L. Fischer
/s/ DONALD L. HOUSE
- ------------------------------ Director
Donald L. House
/s/ RICHARD R. LEE, JR.
- ------------------------------ Director
Richard R. Lee, Jr.
/s/ LARRY J. PECK
- ------------------------------ Director
Larry J. Peck
/s/ DAVID K. SIAS
- ------------------------------ Director
David K. Sias
</TABLE>
59
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger between Carreker-Antinori, Inc., a Texas corporation, and
Carreker-Antinori, Inc., a Delaware corporation (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
2.2 Agreement and Plan of Merger, dated January 29, 1999, by and among Carreker-Antinori, Inc., GO
Acquisition Corp., Genisys Operation, Inc., and Kevin J. Taylor, Ronald W. Kreykes, Thomas R.
Flannery, Robert A. Walsh, and Patrick M. Rogal-Davis (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed February 12, 1999).
2.3 List of Schedules and Attachments omitted from Exhibit 2.2, Agreement and Plan of Merger (incorporated
by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed February 12, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (Registration No. 333-48399)).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
4.2 Amended and Restated Certificate of Incorporation and Bylaws of the Company ((incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
+10.1 Employment Agreement dated January 31, 1997 between the Company and John D. Carreker, Jr. (incorporated
by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.2 Employment Agreement dated January 31, 1997 between the Company and Ronald R. Antinori (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.3 Employment Agreement dated March 19, 1998 between the Company and Terry L. Gage (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.4 Employment Agreement dated March 12, 1998 between the Company and Wyn P. Lewis (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.5 Employment Agreement dated March 10, 1998 between the Company and Richard L. Linting (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.6 Employment Agreement dated March 13, 1998 between the Company and Royce D. Brown (incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
+10.7 Amended and Restated Carreker-Antinori 1994 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
+10.8 Carreker-Antinori Director Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Registration No. 333-48399)).
+10.9 Carreker-Antinori Profit Sharing Incentive Plan (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
10.10 Intentionally omitted.
10.11 Management Services Agreement dated November 18, 1993 between the Company and Payment Systems Network,
Inc. (as amended) (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement
on Form S-1 (Registration No. 333-48399)).
10.12 Management Services Agreement dated January 15, 1998 between the Company and INFITEQ, LLC (incorporated
by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.13 Strategic Alliance Agreement dated October 1996 between the Company and Science Applications
International Corporation (incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
+10.14 Indemnification Agreement between the Company and John D. Carreker, Jr. (together with a schedule)
(incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1
(Registration No. 333-48399)).
10.15 Settlement Agreement dated January 29, 1998, between the Company and Ronald R. Antinori (incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.16 Settlement Agreement dated January 29, 1998, between the Company and Susan Antinori (incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.17 Settlement Agreement dated January 29, 1998, between the Company and Lawrence D. Duckworth (incorporated
by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.18 Settlement Agreement dated January 29, 1998, between the Company and Michael Israel (incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.19 Loan and Security Agreement between Compass Bank and the Company dated September 1997 (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.20 Stock Purchase Agreement by and among the Company and Science Applications International Corporation,
dated October 10, 1996 (incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
10.21 Stock Purchase Agreement by and between Crow Family Partnership, L.P. and the Company, dated January 10,
1997 (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1
(Registration No. 333-48399)).
10.22 Form of the Company's independent contractor agreement (incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form S-1 (Registration No. 333-48399)).
10.23 Agreement and Plan of Merger between the Company and CAG Newco, Inc. and Antinori Software, Inc. dated
as of January 29, 1997 (incorporated by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48399)).
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.24 Promissory Note dated September 1, 1997, between the Company and John S. Davis (incorporated by
reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (Registration No.
333-48399)).
10.25 Form of Underwriting Agreement by and among the Company, the Selling Stockholders named therein and the
Underwriters (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-48399).
*10.26 Office Lease between Granite Tower, Ltd. and the Company dated as of March 31, 1999.
21.1 Subsidiaries of the Company.
(a) Genisys Operation, Inc.
(b) Antinori Software, Inc.
(c) Carreker-Antinori, Ltd.
*23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on first signature page).
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Management contract or compensatory plan or arrangement. The Company will
furnish a copy of any exhibit listed above to any shareholder without charge
upon written request to Jim Dow, Corporate Counsel, 14001 N. Dallas Parkway,
Suite 1100, Dallas, Texas 75240.
* Filed herewith.
62
<PAGE>
GRANITE TOWER AT THE CENTRE
OFFICE LEASE
BETWEEN
GRANITE TOWER, LTD.
Landlord,
And
CARREKER-ANTINORI, INC.
Tenant
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Article 1 General Provisions. . . . . . . . . . . . . . . . . . . . . .1
1.01. Introduction Provisions and Definitions . . . . . . . . . . .1
Article 2 Premises. . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.01. Premises. . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.02. Improvements by Landlord. . . . . . . . . . . . . . . . . . .2
2.03. Condition . . . . . . . . . . . . . . . . . . . . . . . . . .2
Article 3 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.01. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.02. Commencement. . . . . . . . . . . . . . . . . . . . . . . . .3
3.03. Late Possession . . . . . . . . . . . . . . . . . . . . . . .3
3.04. Early Possession . . . . . . . . . . . . . . . . . . . . . .3
3.05. Acceptance of Premises. . . . . . . . . . . . . . . . . . . .3
Article 4 Rental. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
4.01. Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . .3
4.02. Payment of Rent . . . . . . . . . . . . . . . . . . . . . . .3
4.03. Security Deposit . . . . . . . . . . . . . . . . . . . . . .4
Article 5 Operating Expense . . . . . . . . . . . . . . . . . . . . . .4
5.01. Operating Expense Reimbursement . . . . . . . . . . . . . .4
5.02A. Operating Expenses. . . . . . . . . . . . . . . . . . . . . .5
5.02B. Tenant's Electricity Charge . . . . . . . . . . . . . . . . .5
5.03. Proration and Adjustment of Operating Expenses. . . . . . . .6
Article 6 Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
6.01. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Article 7 Landlord's Services . . . . . . . . . . . . . . . . . . . . .6
7.01. Landlord's Services . . . . . . . . . . . . . . . . . . . . .6
7.02. Additional Services . . . . . . . . . . . . . . . . . . . . .7
7.03. Interruption of Services. . . . . . . . . . . . . . . . . . .7
7.04. Keys and Locks. . . . . . . . . . . . . . . . . . . . . . . .8
7.05. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Article 8 Alterations and Repairs . . . . . . . . . . . . . . . . . . .8
8.01. Alterations . . . . . . . . . . . . . . . . . . . . . . . . .8
8.02. Removal of Trade Fixtures and Personal Property . . . . . . .9
8.03. Repairs by Landlord . . . . . . . . . . . . . . . . . . . . .9
8.04. Repairs by Tenant . . . . . . . . . . . . . . . . . . . . . .9
Article 9 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .9
9.01. Landlord's Insurance. . . . . . . . . . . . . . . . . . . . .9
9.02. Tenant's Insurance. . . . . . . . . . . . . . . . . . . . . 10
9.03. Waiver of Subrogation . . . . . . . . . . . . . . . . . . . 11
9.04. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 10 Casualty. . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.01. Casualty. . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.02. End of Term Casualty. . . . . . . . . . . . . . . . . . . . 12
Article 11 Condemnation. . . . . . . . . . . . . . . . . . . . . . . . 12
11.01. Condemnation. . . . . . . . . . . . . . . . . . . . . . . . 12
11.02. Condemnation Award. . . . . . . . . . . . . . . . . . . . . 12
Article 12 Access. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12.01. Access. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Article 13 Subordinations and Attornment . . . . . . . . . . . . . . . 12
13.01. Subordination . . . . . . . . . . . . . . . . . . . . . . . 12
13.02. Attornment. . . . . . . . . . . . . . . . . . . . . . . . . 12
13.03. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . 13
Article 14 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . 13
14.01. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . 13
14.02. Consent . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.03. Transfer by Landlord. . . . . . . . . . . . . . . . . . . . 13
ii
<PAGE>
Article 15 Default . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15.01. Default by Tenant . . . . . . . . . . . . . . . . . . . . . 14
15.02. Rights Upon Default by Tenant . . . . . . . . . . . . . . . 14
15.03. Expense of Repossession . . . . . . . . . . . . . . . . . . 16
15.04. Cumulative Remedies: Waiver or Release. . . . . . . . . . . 16
15.05. Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . 16
15.06. Financial Statements. . . . . . . . . . . . . . . . . . . . 16
15.07. Landlord's Contractual Security Interest. . . . . . . . . . 16
15.08. Use and Storage of Personal Property. . . . . . . . . . . . 16
15.09. Default by Landlord . . . . . . . . . . . . . . . . . . . . 16
Article 16 Environmental . . . . . . . . . . . . . . . . . . . . . . . 17
16.01. Hazardous Waste . . . . . . . . . . . . . . . . . . . . . . 17
Article 17 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 17
17.01. Substitute Premises . . . . . . . . . . . . . . . . . . . . 17
17.02. Estoppel Letters. . . . . . . . . . . . . . . . . . . . . . 17
17.03. Holdover. . . . . . . . . . . . . . . . . . . . . . . . . . 17
17.04. Surrender . . . . . . . . . . . . . . . . . . . . . . . . . 17
17.05. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
17.06. Rules and Regulations . . . . . . . . . . . . . . . . . . . 18
17.07. Landlord's Liability. . . . . . . . . . . . . . . . . . . . 18
17.08. Texas DTPA Waiver . . . . . . . . . . . . . . . . . . . . . 18
17.09 Americans with Disabilities Act . . . . . . . . . . . . . . 18
17.10. Inability to Perform. . . . . . . . . . . . . . . . . . . . 18
17.11. Tenant Authorization. . . . . . . . . . . . . . . . . . . . 18
17.12. Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17.13. Memorandum of Lease . . . . . . . . . . . . . . . . . . . . 19
17.14. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17.15. Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . 19
17.16. Joint and Several Liability . . . . . . . . . . . . . . . . 19
17.17. Acceptance by Landlord. . . . . . . . . . . . . . . . . . . 19
17.18. Time of Essence . . . . . . . . . . . . . . . . . . . . . . 19
17.19. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 19
17.20. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 19
17.21. Severability. . . . . . . . . . . . . . . . . . . . . . . . 19
17.22. Successors. . . . . . . . . . . . . . . . . . . . . . . . . 21
17.23. Captions. . . . . . . . . . . . . . . . . . . . . . . . . . 20
17.24. Number and Gender . . . . . . . . . . . . . . . . . . . . . 20
17.25. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 20
17.26. Rights Reserved to Landlord . . . . . . . . . . . . . . . . 20
17.27. Visible Areas Clause. . . . . . . . . . . . . . . . . . . . 21
17.28. No Presumption Against Drafter. . . . . . . . . . . . . . . 21
17.29 Examination of Lease. . . . . . . . . . . . . . . . . . . . 21
17.30 Defined Terms and Marginal Headings . . . . . . . . . . . . 21
17.31 No Representations. . . . . . . . . . . . . . . . . . . . . 21
17.32 No Light, Air or View Easement. . . . . . . . . . . . . . . 21
17.33 Survival of Indemnities . . . . . . . . . . . . . . . . . . 21
EXHIBITS
Exhibit "A" - Floor Plan. . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit "B" - Legal Description . . . . . . . . . . . . . . . . . . . . 24
Exhibit "C" - Rules and Regulations . . . . . . . . . . . . . . . . . . 25
Exhibit "D" - Work Letter . . . . . . . . . . . . . . . . . . . . . . . 28
Exhibit "D-1" - Building Shell Improvements . . . . . . . . . . . . . . 32
Exhibit "E" - Acceptance of Premises Memorandum . . . . . . . . . . . . 33
Exhibit "F" - Parking Garage. . . . . . . . . . . . . . . . . . . . . . 34
Exhibit "G" - Operating Expense Exclusions. . . . . . . . . . . . . . . 35
Exhibit "H" - Use By Tenant . . . . . . . . . . . . . . . . . . . . . . 36
Exhibit "I" - Cleaning Specifications . . . . . . . . . . . . . . . . . 37
Exhibit "J" - Commission Agreement. . . . . . . . . . . . . . . . . . . 40
Exhibit "K" - Signage Location. . . . . . . . . . . . . . . . . . . . . 43
Rider 1 - Renewal Option. . . . . . . . . . . . . . . . . . . . . . . . 44
Rider 2 - Cap on Certain Operating Expenses . . . . . . . . . . . . . . 45
Rider 3- Signage. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Rider 4 - Right of First Refusal and Expansion Option . . . . . . . . . 47
Schedule A - Right of First Refusal Space . . . . . . . . . . . . . . . 49
</TABLE>
iii
<PAGE>
LEASE
THIS LEASE ("Lease") is entered into as of the _________________________
day of _____________________________________ , 1999, by and between GRANITE
TOWER, LTD. ("Landlord"), and CARREKER-ANTINORI, INC. ("Tenant").
W I T N E S S E T H:
ARTICLE 1
=========
1.01. INTRODUCTORY PROVISIONS AND DEFINITIONS. The Lease provisions and
definitions set forth in this Section 1.01 in summary form are solely to
facilitate convenient reference by the parties. If there is any conflict
between this Section and any other provisions of this Lease, the latter shall
control.
(a) Addresses for notices
due under this Lease
(See Article 17)
Landlord's Name
and Address: Granite Tower, Ltd.
----------------------------------------
4099 McEwen Road, Suite 370
----------------------------------------
Dallas, Texas 75244
----------------------------------------
Fax: (972) 386-6811
----------------------------------------
Attn: Property Manager
----------------------------------------
Prior To Commencement Date:
Tenant's Name and Carreker-Antinori, Inc.
Address: ----------------------------------------
4055 Valley View Lane, Suite 900 & 1000
----------------------------------------
Dallas, Texas 75244
----------------------------------------
Fax: (972) 701-0758
----------------------------------------
Attn: Jim Dow
With Notices To:
Carreker-Antinori, Inc.
----------------------------------------
4055 Valley View Lane, Suite 900 & 1000
----------------------------------------
Dallas, Texas 75244
----------------------------------------
Attn:
----------------------------------------
(b) Building: Granite Tower at The Centre
----------------------------------------
4055 Valley View Lane
----------------------------------------
Dallas, Texas 75244
----------------------------------------
containing approximately 240,153 square
feet of total rentable area. Rentable
area shall be measured in accordance with
1996 BOMA National Standards ANSI Z265.
(c) Premises: Approximately 47,720 square feet of
rentable area on the NINTH AND TENTH floors
of the Building, designated as Suite No. 900
& 1000 RESPECTIVELY (See Exhibit "A")
Surface Parking Garage Parking
(d) Parking: 31 Unreserved spaces 149 Unreserved spaces @ $ 0.00
@ $ 0.00 per month each per month each
11 Reserved spaces @ $ 0.00
per month each (See Exhibit "F")
Landlord agrees to substitute the thirty-one (31) surface
parking spaces with thirty-one (31) garage parking spaces on
a month to month basis. If, in Landlord's opinion, it
becomes necessary, Landlord may, with thirty (30) days prior
written notice to Tenant, take back the thirty-one (31)
substitute garage parking spaces and replace with thirty-one
(31) surface parking spaces.
1
<PAGE>
(e) Permitted Use: General Office Use and the permitted
ancillary uses described on Exhibit "H"
attached hereto (per Article 6 herein)
(f) Primary Term: ELEVEN (11) years and ZERO (0) months
----------- --------
(See Article 3)
(g) Commencement Date: June 1, 1999 (See Article 3)
------------
(h) Expiration Date: May 31, 2010 (See Article 3)
------------
(i) Tenant's Pro Rata
Share: 19.87% (See Article 5)
------
(j) Base Rent:
<TABLE>
Rate per Square Base Base
Rental Foot of Annual Monthly
Period Rentable Area Rent Rent
------ ------------- ---- ----
<S> <C> <C> <C>
June 1, 1999 - May 31, 2000 $12.00 $ 572,640.00 $47,720.00
June 1, 2000 - May 31, 2004 $22.00 $1,049,840.04 $87,486.67
June 1, 2004 - May 31, 2010 $23.00 $1,097,559.96 $91,463.33
</TABLE>
(k) Base Operating
Expense: Operating Expenses per square foot of
rentable area for the calendar year 2000
(excluding electricity). (See Article 5.)
(l) Security Deposit: N/A (See Article 4)
(m) Guarantor: N/A (See "Rider No. " )
(n) Tenant's Broker: The Amend Group (such broker is
---------------
represented by
John Amend and Greg Biggs )
-------------------------
(o) Address for Payment of Base Rent:
(See Article 4) Granite Tower, Ltd.
--------------------------------
P.O. Box 911597
--------------------------------
Dallas, Texas 75391-1597
--------------------------------
ARTICLE 2
= = = = = = = = ==
2.01. PREMISES. In consideration of the obligation of Tenant to pay Rent
as herein provided and in consideration of the other terms, covenants and
conditions hereof, Landlord hereby does lease, let and demise unto Tenant, and
Tenant hereby does lease and rent from Landlord, upon and subject to the
provisions of this Lease, rentable area which is hereby stipulated and for all
purposes hereof agreed to be as stated in 1.01(c) above and as reflected on the
floor plan(s) attached hereto as Exhibit "A" and incorporated herein for all
purposes (such space so leased to Tenant is herein called the "Premises")
located in the Building as set forth in Article 1.01(b) and situated on the
tract of "Land" herein so called in Exhibit "B" attached hereto and
incorporated herein for all purposes (the Building, the Land, and the parking
area and garage being hereinafter collectively referred to as the "Project"), TO
HAVE AND TO HOLD said Premises for the Term, subject to the provisions of this
Lease.
2.02. IMPROVEMENTS BY LANDLORD. Landlord shall deliver the Premises to
Tenant in "Shell Condition" (as such term is defined in Exhibit "D" attached
hereto. All installations now or hereafter placed on the Premises in excess of
Building Standard items as determined by Landlord and as set forth in Exhibit
"D" shall be for Tenant's account and at Tenant's cost (and Tenant shall pay ad
valorem taxes and increased insurance thereon), which costs shall be payable by
Tenant to Landlord as additional rent hereunder promptly upon being invoiced
therefor, and failure by Tenant to pay same in full within fifteen (15) days
shall constitute an event of default by Tenant hereunder giving rise to all
remedies available to Landlord under this Lease and at law for non-payment of
rent.
2.03. CONDITION OF PREMISES. Tenant has inspected the Premises and the
common areas of the Building and
2
<PAGE>
the parking facilities, is familiar with their condition and accepts same in
their present "AS IS" condition. Tenant acknowledges that Landlord is not
obligated to do any further construction or make any additional improvements,
except as provided in Section 2.02 and Exhibit "D" hereof. The taking of
possession of the Premises by Tenant shall be deemed to conclusively establish
that the Premises have been accepted and are in good and satisfactory condition,
except for minor "punch list" items agreed to in writing by Landlord and Tenant,
which Tenant will promptly remedy. Tenant hereby waives any and all warranties,
express or implied, as to the Premises, including, without limitation, the
implied warranty of suitability of the Premises for Tenant's intended use.
ARTICLE 3
= = = = = = = = = =
3.01. TERM. Subject to the other provisions hereof, this Lease shall be
and continue in full force and effect for the Primary Term as set forth in
Section 1.01(f) and commencing on the Commencement Date set forth in Section
1.01(g) and expiring on the Expiration Date set forth in Section 1.01(h). Such
term, as it may be extended or modified only by written agreement of the parties
or pursuant to an express provision of this Lease, is herein called the " Term".
3.02. COMMENCEMENT. The Commencement Date shall be June 1, 1999
3.03. LATE POSSESSION. No delay in the completion of the Premises
resulting from delay or failure on the part of Tenant, Tenant's agents, or
contractors in furnishing information, work or other matters required in Exhibit
"D" shall delay the Commencement Date, the Expiration Date or the commencement
of installments of Rent.
3.04. EARLY POSSESSION. If prior June 1, 1999, Tenant shall occupy all or
any part of the Premises, and commence operation of business, such occupancy
shall be subject to all of the provisions of this Lease, and the Term and the
payment of all Rent shall commence, with respect to all or such part of the
Premises as are so occupied by Tenant, on the date of such entry, and the total
amount of all Rent due hereunder shall be increased accordingly, provided that
no such early entry shall operate to change the Expiration Date provided for
herein.
3.05. ACCEPTANCE OF PREMISES MEMORANDUM. Upon Substantial Completion (as
defined in Exhibit "D") of Tenant's Improvements, Landlord and Tenant shall
execute the Acceptance of Premises Memorandum, a form of which is attached
hereto as Exhibit "E" and incorporated herein for all purposes. If Tenant
occupies the Premises without executing an Acceptance of Premises Memorandum,
Tenant shall be deemed to have accepted the Premises for all purposes and
Substantial Completion shall be deemed to have occurred on the earlier to occur
of (i) actual occupancy or (ii) the Commencement Date.
ARTICLE 4
=========
4.01. BASE RENT. Tenant, in consideration for this Lease and the leasing
of the Premises for the Term, agrees to pay to Landlord as Base Rent in such
amounts as set forth in Section 1.01(j) (subject to adjustments as provided for
herein). Base Rent is payable in advance, and without demand, on the first day
of each calendar month during the Term. If the Commencement Date is other than
the first day of a month, Tenant shall be required to pay only a pro rata
portion of the monthly installment of Base Rent for such partial month.
4.02. PAYMENT OF RENT. As used in this Lease, "Rent" shall mean the Base
Rent, the Operating Expense reimbursements pursuant to Section 5.01, Tenant's
Electricity Charge pursuant to Section 5.02B, the Parking Rent pursuant to
Section 17.14 hereof, and all other monetary obligations provided for in this
Lease to be paid by Tenant, all of which shall constitute rental in
consideration for this Lease and the leasing of the Premises. Without invoice or
other notice from Landlord, Tenant shall send Base Rent and other sums due
hereunder in legal tender of the United States of America to Landlord at the
address set forth in Section 1.01(o) or to such other person or at such other
address as Landlord may from time to time designate in writing. The Rent shall
be paid without notice, demand, abatement, deduction, or offset except as may be
expressly set forth in this Lease. Upon execution of this Lease, Tenant shall
pay to Landlord an amount equal to one months rent as described in
Section1.01(l) and any such amount shall be applied to this first month's Rent
due hereunder.
Landlord shall, at its option, have the right to collect from Tenant, five
cents ($.05) for each dollar ($1.00) of each installment of Rent which is not
received within five (5) business days of its due date after Landlord's written
notice to Tenant for any reason whatsoever and Tenant agrees to pay such amount
immediately on demand as liquidated damages to cover the additional costs of
collecting and processing such late payments. Tenant acknowledges that the late
payment by Tenant to Landlord of Rent due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and such late charges represent a fair and
reasonable estimate of the cost that Landlord will incur by reason of the late
payment by Tenant. If such failure to pay Rent continues beyond a five (5) day
period, any and all due and unpaid Rent shall bear interest at the lesser of (i)
eighteen percent (18%) per annum, or (ii) the maximum non-usurious rate allowed
by applicable law (the "Default Interest Rate"), from the date such Rent
became due until the date such Rent is received by Landlord. Such interest
shall be immediately due and payable as additional Rent hereunder. The
collection of such late charge and/or such interest by Landlord shall be in
addition to and cumulative of any and all other remedies available to
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Landlord.
It is the intention of Landlord and Tenant to conform to all applicable
laws concerning the contracting for, charging and receiving of interest. In the
event that any payments of interest required under this Lease are ever found to
exceed any applicable limits, Landlord shall credit the amount of any such
excess paid by Tenant against any amount owing under this Lease or if all
amounts owing under this Lease have been paid, Landlord shall refund to Tenant
the amount of such excess paid by Tenant. Landlord and Tenant agree that
Landlord shall not be subject to any applicable penalties in connection with any
such excess interest, it being agreed that any such excess interest contracted
for, charged or received pursuant to this Lease shall be deemed a result of a
bona fide error and a mistake. The obligation of Tenant to pay Rent is an
independent covenant, and no act or circumstance, whether constituting a breach
of covenant by Landlord or not, shall release or modify Tenant's obligation to
pay Rent.
4.03. SECURITY DEPOSIT. Not required.
ARTICLE 5
=========
5.01. OPERATING EXPENSE REIMBURSEMENT. The Base Rent payable under
Section 4.01 of this Lease includes an annual allocation for operating expenses
equal to the Operating Expense (defined in Section 5.02A hereof) per square foot
of rentable area of the Premises for calendar year set forth in Section1.01(k)
(the "Base Operating Expense"). In the event that Tenant's Pro Rata share of
Operating Expenses (defined in Section 5.02A hereof) of the Building during any
calendar year of the Term shall exceed the Base Operating Expense, Tenant shall
pay to Landlord its proportionate share of the increase in such Operating
Expenses over the Base Operating Expense. On or before the first day of each
calendar year during the Term (or as soon thereafter as is reasonably possible),
Landlord shall provide to Tenant the Estimated Operating Expense Increase for
the upcoming year. In addition to the Base Rent, Tenant shall pay in advance on
the first day of each calendar month during the Term, installments equal to
1/12th of Tenant's Pro Rata Share (as set forth in Section 1.01 (i) of the
Estimated Operating Expense Increase, except that the first such monthly
installment is due upon the Commencement Date.
As soon as possible after the end of each calendar year during the Term,
Landlord shall furnish to Tenant a statement of the Actual Operating Expense
Increase (hereinafter defined) for the immediately preceding calendar year,
which statement shall specify the various types of Operating Expenses and set
forth Landlord's calculations of Tenant's Pro Rata Share of the Actual Operating
Expense Increase. If Tenant's Pro Rata Share of the Estimated Operating Expense
Increase paid to Landlord during the previous calendar year exceeds Tenant's Pro
Rata Share of the Actual Operating Expense Increase, then Landlord shall, at
Tenant's option, either refund the difference to Tenant at the time Landlord
furnishes the statement of the Actual Operating Expense Increase or credit the
amount overpaid by Tenant to Tenant's Pro Rata Share of the Estimated Operating
Expense Increase for the next calendar year. If Tenant's Pro Rata Share of
Estimated Operating Expense Increase paid to Landlord during the previous
calendar year is less than Tenant's Pro Rata Share of the Actual Operating
Expense Increase, then Tenant shall pay to Landlord the amount of such
underpayment. Unless Tenant takes written exception to any item within thirty
(30) days after the furnishing of an annual statement, such statement shall be
considered final and accepted by Tenant. Any amount due Landlord as shown on any
such statement shall be paid by Tenant within thirty (30) days after it is
furnished to Tenant.
The "Estimated Operating Expense Increase" shall equal Landlord's estimate
of Tenant's Pro Rata share of Operating Expenses for the applicable calendar
year, less the Base Operating Expense. Landlord's statement of the Estimated
Operating Expense Increase shall control for the year specified in such
statement and for each succeeding year during the Term until Landlord provides a
new statement of the Estimated Operating Expense Increase. The "Actual
Operating Expense Increase" shall equal Tenant's Pro Rata share of the actual
Operating Expenses for the applicable calendar year, less the Base Operating
Expense. If Operating Expenses change during a calendar year or if the number
of square feet of rentable area in the Premises changes, Landlord may revise the
estimated Additional Rent during such year by giving Tenant written notice to
that effect and thereafter Tenant shall pay to Landlord, in each of the
remaining months of such year, an amount commensurate with the change in the
estimated Additional Rent divided by the number of months remaining in such
year.
Tenant shall have the right to perform an annual audit at Tenant's expense
on Landlord's books and records to the extent necessary to verify Landlord's
calculation of the Base Operating Expense and/or the Actual Operating Expense
Increase for the prior calendar year, provided that such audit shall be
conducted by an unrelated, third party Certified Public Accountant and further
provided that the auditor's report reflecting the results of such audit shall be
promptly delivered to Landlord. Any such audit shall be conducted, if at all,
(i) within ninety (90) days after the receipt of the annual statement of the
Base Operating Expense or the Actual Operating Expense Increase (as applicable)
from Landlord, (ii) during Landlord's normal business hours, (iii) at the place
in Dallas, Texas where Landlord maintains it records and (iv) only after
Landlord has received thirty (30) days prior written notice. If the audit
report reflects an overcharge in the Actual Operating Expense Increase of more
than four percent (4%) in the aggregate for such audited calendar year, then
Landlord shall reimburse Tenant for all reasonable costs incurred by Tenant due
to such audit. If the audit report reflects that the Actual Operating Expense
Increase was overcharged or undercharged in the audited calendar year, Tenant
shall, within twenty (20) days after receipt of such report, pay to Landlord the
amount of any underpayment or, if applicable, Landlord shall pay to Tenant the
amount of any overpayment.
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5.02A. OPERATING EXPENSES. The term "Operating Expenses" shall mean and
include all those amounts, expenses, and costs of whatsoever nature (other than
electricity) that Landlord incurs, pays or becomes obligated to pay because of
or in connection with the ownership, operation, management, repair, or
maintenance of the Project and Landlord's personal property used in connection
therewith. Operating Expenses shall be determined on an accrual basis in
accordance with generally accepted accounting principles consistently applied
and shall include, without limitation, the following:
(a) Wages, salaries, fees, related taxes, insurance, benefits, and
reimbursable expenses of all personnel engaged in operating, repairing, and
maintaining the Project and providing traffic control about the Project;
provided, however, that if during the Term such personnel are also working on
other projects being operated by Landlord, their wages, salaries, fees and
related expenses shall be allocated by Landlord in good faith among all of such
projects and only that portion of such expenses allocable to the Project shall
be included as an "Operating Expense."
(b) Cost of all labor, supplies, tools, equipment and materials used in
operating, repairing, and maintaining the Project.
(c) Cost of all utilities (except for electricity) for the Project,
including, without limitation, water, gas and fuel oil.
(d) Cost of all maintenance, security, window cleaning, elevator
maintenance, landscaping, repair, janitorial, and other similar service
agreements for the Project and the equipment and other personal property of
Landlord therein and thereon used in connection with the operation, management,
repair or maintenance of the Project.
(e) Cost of all insurance relating to the Project and its occupancy or
operations, including but not limited to (i) the cost of casualty and liability
insurance applicable to the Project or Landlord's personal property used in
connection with the operation of the Project, (ii) the cost of business
interruption insurance in such amounts as will reimburse Landlord for all losses
of earnings and other income attributable to the ownership and operation of the
Project, and (iii) the cost of insurance against such perils and occurrences as
are commonly insured against by prudent landlords.
(f) All taxes, assessments, and governmental charges and fees of whatsoever
nature, whether now existing or subsequently created, attributable to the
Project or its occupancy or operation, excluding only franchise and income taxes
of Landlord (but not excluding such taxes if imposed in the future wholly or
partially in lieu of present real estate, ad valorem, or similar taxes), and
including all such taxes whether assessed to or paid by Landlord or third
parties, but excluding such taxes to the extent, if any, that Tenant, any other
tenant of the Project, or any other party specifically reimburses Landlord
therefor (other than through the payment of Operating Expense reimbursements).
Tenant hereby agrees not to protest any valuation of the Property pursuant to
Section 41.413 of the Texas Property Tax Code, unless Tenant notifies Landlord
in writing of Tenant's intent to so protest and Landlord fails to protest the
valuation within fifteen (15) days after receipt of Tenant's written notice.
Furthermore, Tenant hereby releases Landlord of its obligations to provide
Tenant a copy of any notice of the reappraisal of the Property pursuant to
Section 41.413 of the Texas Property Tax Code.
(g) Costs of repairs to and maintenance of the Project undertaken by
Landlord in its sole discretion on or of the Project, excluding any such costs
as are paid by the proceeds of insurance, by Tenant, or by other third parties,
and excluding any alterations of space occupied by other tenants of the
Building.
(h) A reasonable management fee for management services rendered in
connection with the Project which shall not exceed four percent (4%) of the
gross revenues received by Landlord from the operation of the Project.
(i) The cost of capital investment items which are installed primarily to
reduce Operating Expenses for the benefit of all of the Project's tenants (but
not in excess of Landlord's good faith estimate of the aggregate cost savings to
be realized as a result of such capital investment items) and the cost of
capital investment items that are required under any law, statute or regulation
that is issued or enacted after the Commencement Date). To the best of
Landlord's knowledge, there are no capital investment items that are anticipated
in the Base Operating Expense. All such costs, including interest costs, shall
be amortized over the reasonable life of the capital investment items, with the
reasonable life and amortization schedule being determined by Landlord according
to generally accepted accounting principles, but in no event to extend beyond
the reasonable life of the Building.
(j) Landlord's central accounting costs, and legal, appraisal (if such
appraisal is related to efforts to reduce Operating Expenses), and other such
third party fees relating to the operation of the Project.
(k) The fair market rental value of Landlord's and the property manager's
offices, if any, in the Building.
Nothing contained in this Section 5.02A shall be construed as requiring
Landlord to provide any services which are not specifically set forth in this
Lease as obligations of Landlord.
The term "Operating Expenses" shall not include the items listed on Exhibit
"G" attached hereto.
5.02 B. TENANT'S ELECTRICITY CHARGE. Tenant covenants and agrees to pay
to Landlord as additional Rent without any setoff or deduction whatsoever
Tenant's Pro Rata Share as set forth in Section 1.01(i) of all electricity
consumed in the use, occupancy, and operation of the Building, the parking
garage associated with the Building and the exterior perimeter lights for the
remainder of the Building and Project (hereinafter called "Tenant's Electricity
Charge"). Landlord shall bill Tenant for Tenant's Electricity Charge throughout
the term of this Lease and Tenant shall pay same within fifteen (15)
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days after receipt of each such bill. Landlord shall bill Tenant for
Tenant's Electricity Charge for the last month or portion thereof of the term
of this Lease as soon as practicable after the termination of this Lease and
Tenant shall pay same within five (5) days after receipt of such bill; the
Tenant's obligation to pay such billing shall survive the termination of the
Lease. All payments for Tenant's Electricity Charge are to be predicated
upon separate and specific bills by Landlord and are not to be included as
part of the Base Rent payment required to be paid pursuant to Section 1.01(j)
hereof. To the extent feasible, Landlord shall make a good faith effort to
coordinate the timing of the billing of Tenant's Electricity Charge such that
Tenant can pay Tenant's Electricity Charge concurrently with the monthly
installments of Base Rent.
Notwithstanding anything to the contrary hereinbefore contained, Landlord
may at any time during the term hereof, elect to install meters measuring
electricity used in the Building and/or the Premises at Landlord's expense
(except as provided in Section 7.02(h) hereof), which may also include meters
measuring electricity used for heating and cooling the Building and/or the
Premises and in such cases, Tenant's Pro Rata Share of such costs shall then be
based on actual use as measured by such meters but with any areas sharing a
meter being prorated on the basis that the area of the Premises bears to the
area covered by the meters.
Electrical power which is separately metered or is otherwise separately
assessable to tenants of the area served by such facilities and the cost of
normal and after-hours air conditioning supplied to tenants of the area so
served shall be excluded in computing Tenant's Pro Rata Share of such costs as
aforesaid.
5.03. PRORATION AND ADJUSTMENT OF OPERATING EXPENSES. If this Lease
commences on other than the first day of a calendar year, or if this Lease
expires on other than the last day of a calendar year, then the Operating
Expenses for all of such calendar year shall be prorated according to the
portion of the Term that occurs during such calendar year. If at any time the
Building is not fully occupied or Landlord is not supplying all services to all
portions of the Building during an entire calendar year, then, Base Operating
Expenses, Operating Expenses, the Actual Operating Expense Increase and the
Estimated Operating Expense Increase shall be adjusted as though the Building
had been ninety-five percent (95%) occupied and Landlord were supplying all
services to such portions of the Building during the entire calendar year.
ARTICLE 6
=========
6.01. USE. Tenant shall use and occupy the Premises only for the
Permitted Use set forth in Section 1.01(e) hereof, and for no other purposes.
Tenant shall not use or permit the Premises or any portion thereof to be used
for any purpose other than the Permitted Use or for any unlawful purpose or in
any unlawful manner, and shall comply with all federal, state, and local
governmental laws, ordinances, orders, rules and regulations applicable to the
Premises, the Project, and the occupancy thereof and Tenant shall give prompt
written notice to Landlord of any notification to Tenant of any claimed
violation thereof. Tenant shall not do or permit anything to be done in or
about the Premises, nor bring or keep anything therein which will in any way
increase the existing rate of or affect any fire or other insurance upon the
Project or any of its contents, or cause cancellation of any insurance policy
covering the Project or any part thereof or any of its contents. In the event
that, by reason of any acts of Tenant or its conduct of business, there shall be
any increase in the rate of insurance on the Building or its contents, Tenant
hereby agrees to pay such increase. Tenant covenants that at all times during
the Term of this Lease, Tenant will not allow occupancy of the Premises to
exceed a ratio of four persons for every one thousand square feet of the
Premises without Landlord's consent. Tenant shall not do or permit anything to
be done in or about the Premises and/or Project which will in any way obstruct
or interfere with the rights of other tenants or occupants of the Project or
injure or annoy them. Tenant shall not permit any nuisance in, on or about the
Premises. Tenant shall not commit or suffer to be committed any waste in or
upon the Premises. Without limitation of the foregoing, Tenant shall not,
without Landlord's prior written consent, use, store, install, spill, remove,
release or dispose of, within or about the Premises or any other portion of the
Project, any asbestos-containing materials or any sold, liquid or gaseous
material now or hereafter considered toxic or hazardous under the provisions of
42 U.S.C. 9601, et seq., or any other applicable environmental law which may
now or hereafter be in effect. If Landlord does give written consent to Tenant
pursuant to the foregoing sentence, Tenant shall comply with all applicable
laws, rules and regulations pertaining to and governing such use by Tenant, and
shall remain liable for the costs of any clean up or removal required to be
performed with respect to such asbestos-containing, toxic or hazardous
materials.
ARTICLE 7
=========
7.01. LANDLORD'S SERVICES. Provided Tenant is not in default hereunder
and subject to the availability of necessary service from the appropriate public
utility or other entity responsible for providing such service, Landlord shall,
at Landlord's expense, except as provided to the contrary in this Lease, furnish
to Tenant in the occupied portion of the Premises the following services:
(a) Air-conditioning and central heat at such temperatures and in such
amounts as are reasonably considered to be standard for the Building, during
normal business hours for the Building as set forth in the Rules and Regulations
attached as Exhibit "C" attached hereto and incorporated herein for all
purposes.
(b) Janitorial cleaning services in the Premises and public and exterior
portions of the Building for all days, except
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Saturdays, Sundays and holidays; provided, however, if Tenant's floor
covering or other improvements is other than Building Standard, Tenant shall
pay the additional cleaning cost attributable thereto as additional Rent upon
presentation of a statement therefor by Landlord. The janitorial services
provided by Landlord shall be substantially in accordance with the
specifications attached hereto as Exhibit "I".
(c) Hot and cold water at those points of supply provided for general use
of other tenants in the Building.
(d) Normal and customary routine maintenance for all public, structural,
and exterior portions of the Project according to Landlord's reasonable
standards.
(e) Electric lighting service for all public portions of the Project in the
manner and to the extent reasonably deemed by Landlord to be standard for
comparable buildings in the market area.
(f) Automatic passenger elevator service for access to and egress from the
Premises. Freight elevator service, in common with other tenants, shall be
provided during reasonable business hours and at such other times as prescribed
by Landlord, exclusive of Saturdays, Sundays, and holidays. Landlord may reduce
the number of elevators operating outside of business hours.
(g) All Building Standard fluorescent bulb replacement in the Premises and
in all common and public areas, toilet and restroom areas and stairwells, and
the electrical power required for Building Standard fluorescent fixtures;
provided, however, bulb replacement required for lights in the Premises which
are above Building Standard shall be paid for by Tenant in a manner determined
by Landlord, in Landlord's reasonable discretion.
(h) Electrical facilities to furnish sufficient power for typewriters,
calculating machines, personal computers and other machines of similar low
electrical consumption such that the total electrical power usage shall not
exceed four (4) watts per square foot of rentable area; but not including
electricity required for electronic data processing equipment, special lighting
in excess of Building Standard, and any other item of electrical equipment, the
electrical power equipment of which (singly) is more than 0.5 kilowatts per hour
at rated capacity or requires a voltage other than 110/120 volts single phase;
and provided that Landlord shall not be obligated to provide dedicated circuits
or electrical power in excess of Building Standard and provided that if the
installation of said electrical equipment requires additional air conditioning
capacity above that provided by the Building Standard system, then the
additional air conditioning installation and operating costs will be the
obligation of Tenant. Landlord, at its option, may cause a water meter,
electric current meter or such similar device to be installed on the Premises so
as to measure the amount of water and electric current consumed by Tenant. The
cost of any such meters and of the installation, maintenance and repair thereof
shall be paid for by Tenant and Tenant agrees to pay Landlord, promptly upon
demand by Landlord, for all such excess water and electric expense incurred.
If a separate meter is not installed or Landlord is prevented from installing a
separate meter by operation of law or other cause beyond Landlord's control,
such excess costs for such water and electric current will be established by
an estimate made by the utility company, electrical engineer, or an independent
consultant, which estimate shall be binding on Tenant.
(i) Security guard service for the Project from 7:00 p.m. until 7:00 a.m.
seven (7) days per week; such guard shall be provided by a third party security
firm as Landlord may from time to time reasonably determine to be providing
security services for comparable buildings in the market area. NOTWITHSTANDING
ANYTHING HEREIN TO THE CONTRARY, TENANT EXPRESSLY ACKNOWLEDGES AND AGREES THAT
LANDLORD IS NOT WARRANTING THE EFFICIENCY OF ANY SUCH SECURITY PERSONNEL,
SERVICE, PROCEDURES OR EQUIPMENT AND THAT TENANT IS NOT RELYING AND SHALL NOT
HEREAFTER RELY ON ANY SUCH PERSONNEL, SERVICE, PROCEDURES OR EQUIPMENT.
LANDLORD SHALL NOT BE RESPONSIBLE OR LIABLE IN ANY MANNER FOR FAILURE OF ANY
SUCH SECURITY PERSONNEL, SERVICES, PROCEDURES OR EQUIPMENT TO PREVENT, CONTROL,
OR APPREHEND ANYONE SUSPECTED OF CAUSING PERSONAL INJURY OR DAMAGE IN, ON OR
AROUND THE PROJECT.
Notwithstanding anything hereinabove to the contrary, Landlord reserves
the right from time to time to make reasonable modifications to the above
standards for utilities and services that are provided to all tenants in the
Building.
7.02. ADDITIONAL SERVICES. Landlord may impose a reasonable charge for
any utilities and services, (including without limitation, janitorial,
maintenance, security, air conditioning, electrical current and water), provided
by Landlord by reason of any use of the services at any time other than the
hours as set forth in the Rules and Regulations attached hereto as Exhibit "C"
or beyond the levels or quantities that Landlord agrees herein to furnish or
because of special electrical, cooling or ventilating needs created by Tenant's
hybrid telephone equipment, computers or other equipment; provided, however,
that Tenant's excessive use or consumption of heating, air conditioning and/or
electrical services in violation of Section 7.01 above, without Landlord's prior
written consent, shall constitute a Default under this Lease. Upon request of
Tenant to be given to the Property Manager of the Project before 5:00 p.m. of
the business day preceding the day of requested extra usage, Landlord shall make
available, at Tenant's expense, after hours heat or air conditioning. The hourly
rate for the use of after hours heat or air conditioning (HVAC) shall be the
actual cost of the utilities to Landlord of providing such service plus an
equipment depreciation charge as reasonably determined by Landlord's third party
engineers (such determination to be substantiated to the reasonable satisfaction
of Tenant). For purposes of this Lease, the hourly rate for 1999 for such after
hours HVAC is $12.58 PER FLOOR.
7.03. INTERRUPTION OF SERVICES. Notwithstanding anything herein to the
contrary, the obligations of the Landlord to provide the services and utilities
provided above shall be subject to governmental regulation (e.g., rationing,
temperature, control, etc.) and any such regulation which requires Landlord to
provide or not provide such services or utilities other than as herein provided,
shall not constitute a default hereunder, but rather compliance with such
regulation shall be
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deemed to be compliance by Landlord hereunder. Any failure or defect in
Landlord's hereinabove described services shall not be construed as an
eviction of Tenant, nor entitle Tenant to any reduction, abatement, offset,
or refund of Rent or to any damages from Landlord and in no event shall
Landlord be liable for damage to persons or property (including, without
limitation, business interruption) or be in default hereunder as a result of
any such uncontrollable event or results or effects thereof. Landlord shall
not be in breach or default under this Lease, provided Landlord uses
reasonable diligence to restore any such failure or defect promptly after
Landlord receives written notice thereof. Notwithstanding the foregoing, in
the event of the failure to furnish, any stoppage of or other interruption in
the furnishing of the services or utilities described in Section 7.01, which
continues for five (5) consecutive business days after receipt by Landlord of
written notice thereof from Tenant, and such failure, stoppage or
interruption is not caused by force majeure (defined in Section 17.10
hereof), a casualty covered by Section 10.01 hereof, a failure on the part of
a public utility, or by any act or omission of Tenant, its agents, employees
or contractors, Tenant shall be entitled, as its sole and exclusive remedy,
to an abatement of Base Rent and Actual Operating Expense Increases in
proportion to the area of the Premises that is rendered untenantable by such
failure, stoppage or interruption, with such abatement to begin on the sixth
(6th) business day after the receipt by Landlord of written notice of such
occurrence and continuing until such failure, stoppage or interruption has
been cured.
7.04. KEYS AND LOCKS. Landlord shall furnish to Tenant two (2) keys for
each corridor door entering the Premises. Additional keys will be furnished at
a charge by Landlord on an order signed by Tenant or Tenant's authorized
representative. All such keys shall remain the property of Landlord. Tenant
shall be permitted to install additional locks and or other security devices in
the Premises and on the ninth (9th) and tenth (10th) floor Building stairwell
doors provided Landlord is provided with a set of duplicate keys or a master
key. Upon termination of this Lease, Tenant shall surrender to Landlord all
keys to the Premises, and give to Landlord an explanation of the combination of
all locks for safes, safe cabinets and vault doors, if any, in the Premises.
7.05. SIGNS. Landlord shall, at Landlord's cost, provide and install all
letters and numerals on entrance doors in or at the Premises. All such letters
and numerals are to be Building Standard graphics, and no other letters,
numbers, or signage shall be used or permitted on the Premises without the
prior written consent of Landlord. Tenant shall not place signs on the Premises
which are visible from outside the Premises, without Landlord's prior written
consent. Tenant shall not place or permit to be placed or maintained on any
exterior door, wall or window of the Premises any sign, awning, canopy,
advertising matter or similar item of any kind, and will not place or maintain
any decoration, lettering or advertising matter on the glass of any window or
door of the Premises without first obtaining Landlord's prior written approval
in each instance. Tenant shall maintain any such sign, awning, canopy,
decoration, lettering, advertising matter or similar item as may be approved by
Landlord, in good condition and repair at all times.
ARTICLE 8
=========
8.01. ALTERATIONS. Except for non-structural additions or alterations
which do not cost more than $50,000.00 in the aggregate, Tenant shall not make
or allow to be made any alterations, installations, additions, or improvements
in or to the Premises or install any equipment or machinery (other than standard
office equipment and unattached personal property), without Landlord's prior
written consent (which shall not be unreasonably withheld or delayed). Should
Tenant desire to perform any alterations, Tenant shall submit plans and
specifications for same to Landlord for Landlord's written approval before
beginning such work. Upon receipt by Tenant of the written approval of Landlord
of such plans and specifications, and upon payment by Tenant to Landlord of the
reasonable fees (not to exceed $500.00) incurred by Landlord to have such plans
and specifications reviewed, Tenant may proceed to make such approved
alterations so long as they are in compliance with such approved plans and
specifications and are performed by a contractor approved by Landlord. Any and
all such alterations, physical additions or improvements, including those
improvements made at the Tenant's expense or under any agreement with the Tenant
whereby the Tenant is given an allowance or rent reduction in exchange for
Tenant's agreement to install or allow to be installed lease improvements, such
as by way of example, but not limitation, wall coverings, floor coverings or
carpet, paneling, doors, cabinets, appliances (such as built-in refrigerators
and dishwashers) and hardware, shall become the property of Landlord at the
expiration or termination of this Lease or the termination of Tenant's right to
possession of the Premises and shall in no event be removed by Tenant; provided,
however, that Landlord may require Tenant, at Tenant's cost, to remove any or
all of such items upon the expiration or termination of this Lease or the
termination of Tenant's right to possession of the Premises and, at Tenant's
expense, repair any damage caused by such removal. All installations shall be at
Tenant's sole cost and expense. Without in any way limiting Landlord's consent
rights, Landlord shall not be required to give its consent until (a) Landlord
approves the contractor or person making such and approves such contractor's
insurance coverage to be provided in connection with the work, (b) Landlord
approves final and complete plans and specifications for the work and (c) the
appropriate governmental agency, if any, has approved the plans and
specifications for such work. All work performed by Tenant or its contractor
relating to the installations shall conform to applicable governmental laws,
rules and regulations, including, without limitation, the Disability Acts. Upon
completion of the installations, Tenant shall deliver to Landlord "as built"
plans. If Landlord performs such installations, Tenant shall pay Landlord, as
additional Rent, the cost thereof plus fifteen percent (15%) as reimbursement
for Landlord's overhead. Each payment shall be made to Landlord within twenty
(20) days after receipt of an invoice from Landlord.
All work performed by Tenant with respect to the Premises shall (a) be
performed so as not to alter the exterior appearance of the Building, (b) be
performed so as not to adversely affect the structure or safety of the Building,
(c) comply with all building, safety, fire, and other codes and governmental and
insurance requirements, (d) be performed so as not to result in any usage in
excess of Building Standard quantities of water, electricity, gas, heating,
ventilating, or air-conditioning (either during or after such work) unless prior
written arrangements reasonably satisfactory to Landlord are made with respect
8
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thereto, (e) be completed promptly and in a good and workmanlike manner and in a
quality equivalent to Building Standard, (f) be performed at Tenant's expense
and at such times and in such manner as Landlord may designate from time to time
to insure minimum disruption to other tenants in the Building, and (g) be
performed in such a manner that no valid mechanic's, materialman's, or other
similar liens be attached to Tenant's leasehold estate and in no event shall
Tenant permit, or be authorized to permit, any such liens (valid or alleged) or
other claims to be asserted against Landlord or Landlord's rights, estates, and
interests with respect to the Project or this Lease. Landlord will have the
right, but not the obligation, to inspect periodically the work in the Premises.
If any mechanic's lien is filed against the Premises or the Project or any
portion thereof, Tenant shall cause same to be discharged within thirty (30)
days after the lien is filed by paying or bonding over said lien. If Tenant
fails to comply with the foregoing sentence, Landlord shall (without limitation
of its other rights or remedies) have the right, but not the obligation, to
discharge said lien and Tenant shall immediately reimburse Landlord for any sum
of money expended by Landlord in connection with obtaining such discharge
(together with an additional fifteen percent (15%) thereof to cover Landlord's
administrative costs), which amount shall be deemed to be Rent hereunder for all
purposes. Landlord may require (prior to commencement of construction), at
Tenant's sole cost and expense, a lien and completion bond in an amount equal to
the estimated cost of any improvements, additions or alterations in the Premises
which have been approved by Landlord.
Any approval by Landlord (or Landlord's architect and/or engineers) of any
of Tenant's contractors or Tenant's drawings, plans or specifications which are
prepared in connection with any construction of improvements (including without
limitation, Tenant's Improvements) in the Premises shall not in any way be
construed as or constitute a representation or warranty of Landlord as to the
abilities of the contractor or the adequacy or sufficiency of such drawings,
plans or specifications or the improvements to which they relate, for any use,
purpose or condition.
8.02. REMOVAL OF TRADE FIXTURES AND PERSONAL PROPERTY. Tenant agrees to
remove all of its trade fixtures, personal property and, if so required by
Landlord prior to installation, certain other (or all) additions, installations,
and/or improvements on or before the date of expiration or termination of the
Term, and shall promptly reimburse Landlord for the cost of repairing all damage
done to the Premises or the Project by such removal and the cost of restoring
the Premises to its original condition, reasonable wear and tear excepted, after
such removal. If Tenant fails to deliver the Premises in the condition
aforesaid, then Landlord may restore the Premises to such a condition at
Tenant's expense including an overhead charge of fifteen percent (15%). All
property required to be removed pursuant to this Section not removed within the
time period required hereunder shall thereupon be conclusively presumed to have
been abandoned by Tenant and Landlord may, at its option, take over possession
of such property and either (a) declare the same to be the property of Landlord
by written notice to Tenant at the address provided herein or (b) at the
reasonable sole cost and expense of Tenant, remove and store and/or dispose of
the same or any part thereof in any manner that Landlord shall choose without
incurring liability to Tenant or any other person.
8.03. REPAIRS BY LANDLORD. Landlord shall repair and maintain the
structural portions of the Project, including the exterior windows of the
Building (both interior and exterior faces), the balcony outside the tenth
(10th) floor, basic plumbing, the building standard sprinkler system, air
conditioning, heating and electrical systems installed or furnished by Landlord,
and all areas of the Project for the common non-exclusive use of all tenants in
the Project, unless such maintenance and repairs are caused in part or in whole
by the act, neglect, or omission of any duty by the Tenant, its agents,
servants, employees or invitees, or unless such maintenance or repairs are
otherwise herein provided to be made by Tenant. Landlord shall not be liable
for any failure to make such repairs or to perform any maintenance unless such
failure shall persist for an unreasonable time after written notice of the need
of such repairs or maintenance is given to Landlord by Tenant. Landlord shall
not be liable for any damages, compensation or claim for loss of the use of the
whole or any part of the Premises or Tenant's personal property, or any
inconvenience, loss of business, or annoyance arising from any such repair
and/or maintenance performed by Landlord hereunder, except for damage resulting
from Landlord's gross negligence or willful misconduct. Landlord reserves the
right to make such repairs, changes, alterations, additions, or improvements in
or to any portion of the Project and the fixtures and equipment thereof as it
may deem necessary or desirable.
8.04. REPAIRS BY TENANT. Tenant shall, at Tenant's sole cost and
expense, keep the Premises and any appliances in good condition and repair.
Tenant shall, upon the expiration or earlier termination of this Lease,
surrender the Premises to the Landlord in good condition, ordinary wear and tear
excepted. Any injury or damage to the Premises or Project, or the appurtenances
or fixtures thereof, caused by or resulting from the act, omission or neglect of
Tenant or Tenant's employees, servants, agents, invitees, assignees, or
subtenants shall be repaired or replaced by Tenant, or at Landlord's option by
Landlord at the expense of Tenant. If Tenant fails to maintain the Premises or
fails to repair or replace any damage to the Premises or Project resulting from
the act, omission or neglect of Tenant, its employees, servants, agents,
invitees, assignees or subtenants, Landlord may, but shall not be obligated to
cause such maintenance, repair or replacement to be done, as Landlord deems
necessary, and Tenant shall immediately pay to Landlord all costs related
thereto, plus a charge for overhead of fifteen percent (15%) of such cost.
ARTICLE 9
=========
9.01. LANDLORD'S INSURANCE . Landlord covenants and agrees that from and
after the date of delivery of the Premises from Landlord to Tenant, Landlord
will carry and maintain the insurance set forth in Section 9.01(a) and (b) of
this article.
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(a) Commercial general liability insurance covering the Building and all
common areas of the Project, but excluding the Premises, insuring against claims
for personal or bodily injury or death or property damage occurring upon, in or
about the Building or common areas of the Project to afford protection to the
limit of not less than $2,000,000.00 combined single limit in respect to injury
or death to any number of persons and property damage arising out of any one (1)
occurrence. This insurance coverage shall extend to any liability of Landlord
arising out of the indemnities provided for in this Lease.
(b) Landlord shall at all times during the Term hereof maintain in effect
a policy or policies of "special form" or "all risks" insurance covering the
Building (excluding property required to be insured by Tenant) in such amounts
as Landlord may from time to time determine, providing protection against perils
included within the standard Texas form of "special form" or "all risks"
insurance coverage, with no exclusions thereunder with respect to sprinkler
damage, vandalism and malicious mischief and with any such deductibles as
Landlord may from time to time determine.
Any insurance provided for in Subsections 9.01(a) and (b) above may be
effected by self-insurance or by a policy or policies of blanket insurance
covering additional items or locations or assureds, provided that the
requirements of Sections 9.01(a) and (b) are otherwise satisfied. Tenant shall
have no rights in any policy or policies maintained by Landlord.
9.02. TENANT'S INSURANCE. Tenant covenants and agrees that from and
after the date of delivery of the Premises from Landlord to Tenant, Tenant will
carry and maintain, at its sole cost and expense, the insurance set forth in
paragraphs (a), (b), (c) and (d) of this subsection. No policy shall be
cancellable or subject to reduction of coverage except after thirty (30) days'
prior written notice to Landlord.
(a) The broadest available form of commercial general liability insurance
covering the Premises and Tenant's use thereof against claims for personal or
bodily injury or death or property damage occurring upon, in or about the
Premises (including, to the extent available and applicable, contractual
indemnity and liability coverage), such insurance to insure both Tenant and its
employees and to afford protection to the limit of not less than $1,000,000.00,
combined single limit, in respect to injury or death to any number of persons
and all property damage arising out of any one (1) occurrence, with no
deductible or self-insured retention in excess of an amount acceptable to
Landlord. The foregoing commercial general liability insurance will include,
without limitation, the following required endorsements, to wit: (i) if such
policy contains a general aggregate limit, an "Aggregate Limits of Insurance Per
Location" or equivalent form as may be applicable from time to time or at any
time during the Term of this Lease and acceptable to Landlord; (ii) Landlord
Parties (as defined hereinbelow) will be included as "additional insureds" using
an additional insured endorsement form as may be applicable from time to time or
at any time during the Term of this Lease and acceptable to Landlord, without
modification (and under the commercial umbrella, if any); and (iii) a waiver of
subrogation in favor of the Landlord Parties using such form as may be
applicable from time to time or at any time during the Term of this Lease and
acceptable to Landlord (and under the commercial umbrella, if any). For
purposes hereof, the term "Landlord Parties" (herein so called) shall mean,
collectively, Landlord, Landlord's property manager, and Landlord's mortgagee,
if any, and the respective shareholders, members, partners, affiliates,
subsidiaries, directors, officers, employees, agents or contractors of any such
persons or entities. All such commercial general liability policies maintained
by Tenant pursuant hereto shall be written as and endorsed to be primary
policies, not contributing with and not supplemental to any coverage that
Landlord and/or any Landlord's mortgagee may carry (with any policies of
Landlord or Landlord's mortgagee being excess, secondary and non-contributing).
If the rentable area of the Premises is more than 30,000 square feet, then, in
addition to and not in lieu of the above stated coverage, Tenant shall carry
umbrella or so called excess coverage in an amount not less than $1,000,000.00
over Tenant's base coverage amount. This insurance coverage shall, to the extent
available and applicable, extend to any liability of Tenant arising out of the
indemnities provided for in this Lease.
(b) The broadest available "special form" or "all risks" insurance
coverage (including coverage against fire, wind, tornado, vandalism, malicious
mischief, water damage and sprinkler leakage) covering all fixtures, equipment
and personalty located in the Premises, in an amount not less than one hundred
percent (100%) of the full replacement cost thereof, with no exclusions
permitted thereunder with respect to vandalism, malicious mischief or sprinkler
leakage and with an endorsement thereto showing, among others, Landlord as
"insured as its interest may appear" and with an ordinance or law coverage
endorsement, and with a waiver of subrogation endorsement in favor of the
Landlord Parties (as defined hereinabove). The property insurance may, with the
consent of the Landlord, provide for a reasonable deductible.
(c) Workers' compensation insurance insuring against and satisfying
Tenant's obligations and liabilities under the workers' compensation laws of the
State of Texas, with a waiver of subrogation endorsement in favor of the
Landlord Parties.
(d) Employer's liability insurance in an amount not less than
$1,000,000.00.
All such insurance will be issued and underwritten by companies reasonably
acceptable to Landlord, duly licensed in the State of Texas, and will contain
endorsements that (a) such insurance may not lapse with respect to Landlord or
Property Manager or be canceled or amended with respect to Landlord or Property
Manager without the insurance company giving Landlord and Property Manager at
least thirty (30) days' prior written notice of such cancellation or amendment,
(b) Tenant will be solely responsible for payment of premiums, (c) in the event
of payment of any loss covered by such policy, Landlord or Landlord's designees
will be paid first by the insurance company for Landlord's loss and (d) Tenant's
insurance is primary in the event of overlapping coverage which may be carried
by Landlord.
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Tenant shall deliver to Landlord duplicate originals of all policies of
insurance required by this Section or duly executed originals of the
certificates of such insurance (in form and content acceptable to Landlord)
evidencing in-force coverage, within ten (10) days prior to the commencement of
construction of Tenant's Improvements. Further, Tenant shall deliver to Landlord
renewals thereof at least thirty (30) days prior to the expiration of the
respective policy terms.
In no event shall Landlord be responsible for loss or damage with respect
to Tenant's personal property unless caused by Landlord's gross negligence.
9.03. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives any
rights it may have against the other (including, but not limited to, a direct
action for damages) on account of any loss or damage occasioned to Landlord or
Tenant, as the case may be (whether or not such loss or damage is caused by the
fault, negligence or other tortious conduct, acts or omissions of Landlord or
Tenant or their respective officers, directors, employees, agents or invitees),
to their respective property, the Premises, its contents or to any other portion
of the Building or the Property arising from any risk covered by the current
Texas State Board of Insurance promulgated form of "special form" or "all risks"
insurance coverage required to be carried by Landlord and Tenant, respectively,
under Sections 9.01(b) and 9.02(b) above. If a party waiving rights under this
Section is carrying a fire and extended coverage insurance policy in the
promulgated form used in the State of Texas and an amendment to such promulgated
form is passed, such amendment shall be deemed not a part of such promulgated
form until it applies to the policy being carried by the waiving party. Without
in any way limiting the foregoing waivers and to the extent permitted by
applicable law, the parties hereto each, on behalf of their respective insurance
companies insuring the property of either Landlord or Tenant against any such
loss, waive any right of subrogation that Landlord or Tenant or their respective
insurers may have against the other party or their respective officers,
directors, employees, agents or invitees and all rights of their respective
insurance companies based upon an assignment from its insured. Each party to
this Lease agrees immediately to give to each such insurance company written
notification of the terms of the mutual waivers contained in this Section and to
have said insurance policies properly endorsed, if necessary, to prevent the
invalidation of said insurance coverage by reason of said waivers. The foregoing
waiver shall be effective whether or not the parties maintain the required
insurance.
9.04. INDEMNITY. Tenant will indemnify and hold Landlord and Landlord's
respective officers, directors, employees and agents (including, but not limited
to Landlord's property manager) harmless from all claims, demands, actions,
damages, loss, liabilities, judgments, costs and expenses, including without
limitation, attorney's fees and court costs (each a "Claim" and collectively the
"Claims") which (i) are suffered by, recovered from or asserted against
Landlord, (ii) are not paid by insurance carried by Tenant or Landlord (without
in any way affecting the requirements of or Landlord's rights under Sections
9.01 and 9.02 above and (iii) arise from or in connection with (a) the use or
occupancy of the Premises and/or any accident, injury or damage occurring in or
at the Premises or (b) any breach by Tenant of any representation or covenant in
this Lease; provided, however, such indemnification of Landlord by Tenant shall
not include any Claim waived by Landlord under Section 9.03 above, any Claim to
the extent caused by the gross negligence or willful misconduct of Landlord or
any Claim relating to hazardous or toxic materials except to the extent such
Claim arises out of a breach by Tenant of any of the provisions of Section 16.01
of this Lease.
Landlord will indemnify and hold Tenant and its officers, directors,
employees and agents harmless from all Claims which are suffered by, recovered
from or asserted against Tenant and which are not paid by proceeds of insurance
carried by Landlord or Tenant and which arise from or in connection with (i) the
use of the common areas of the Project and/or any accident, injury or damage
occurring in or on the Common Areas solely as a result of Landlord's gross
negligence or (ii) any breach by Landlord of any representation or covenant in
this Lease; provided, however, such indemnification of Tenant by Landlord shall
not include any Claim waived by Tenant under Section 9.03 above, any Claim to
the extent caused by the negligence or willful misconduct of Tenant or any Claim
relating to hazardous or toxic materials except to the extent such Claim arises
out of a breach by Landlord of any of the provisions of Section 16.01 of this
Lease.
ARTICLE 10
==========
10.01. CASUALTY. If the Premises or Project, or any portion of either,
shall be damaged by fire or other casualty covered by the insurance carried by
Landlord hereunder, and the cost of repairing such damage shall not be greater
than ten percent (10%) of the then full replacement cost thereof, then, subject
to the following provisions of this Article, Landlord shall repair the Premises
and/or Project.
If the Premises or Project shall be damaged (a) by fire or other casualty
not covered by insurance carried by Landlord hereunder, (b) by fire or other
casualty covered by insurance carried by Landlord hereunder and Landlord's
mortgagee requires that such insurance proceeds be used to retire the mortgage
debt, or (c) to an extent greater than ten percent (10%) of the then full
replacement cost thereof, then Landlord shall have the option to either (i)
repair or reconstruct the same to substantially the same condition as
immediately prior to such fire or other casualty, or (ii) terminate this Lease
by so notifying Tenant within one hundred twenty (120) days after the date of
such fire or other casualty, such termination to be effective as of the date of
such notice.
The Rent required to be paid hereunder shall be abated in proportion to
the portions of the Premises, if any, which are rendered untenantable by fire or
other casualty hereunder until repairs of the Premises are completed, or if the
Premises are not repaired, until the termination date hereunder. Other than
such Rent abatement, no damages, compensation or claim shall be payable by
Landlord for loss of the use of the whole or any part of the Premises,
Tenant's personal property, or any
11
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inconvenience, loss of business, or annoyance arising from any such repair
and reconstruction. If any portion of Rent is abated under this Article 10,
Landlord shall have the option to extend the expiration date of this Lease
for a period equal to the length of the abated period.
If the damage results from default or negligence of Tenant, its agents,
employees, licensees or invitees, then Tenant shall not be entitled to any
abatement or reduction of any Rent or other sums due hereunder and, if the cost
to repair such damage is not fully covered by Landlord's insurance, such damage
shall be repaired by Tenant, or at Landlord's option by Landlord at Tenant's
expense (to the extent Landlord is not reimbursed by insurance). If this Lease
is terminated as provided in (c)(ii) above, all Rent shall be apportioned and
paid up to the termination date. Landlord shall not be required to repair or
replace any furniture, furnishings or other personal property which Tenant may
be entitled to remove from the Premises or any property constructed and
installed by or for Tenant in the Premises.
10.02. END OF TERM CASUALTY. Notwithstanding anything to the contrary in
this Article 10, Landlord shall not have any obligation whatsoever to repair,
reconstruct or restore the Premises or the Project when the damage resulting
from any casualty covered under this Article 10 occurs during the last eighteen
(18) months of the Term or any extension thereof.
ARTICLE 11
==========
11.01. CONDEMNATION. If all or substantially all of the Premises shall be
taken by virtue of eminent domain or for any public or quasi-public use or
purpose, this Lease and the estate hereby granted shall terminate on the date
the condemning authority takes possession. If only a part of the Premises is so
taken, or if a portion of the Project not including the Premises is taken, this
Lease and the estate hereby granted shall, at the election of Landlord, either
(i) terminate on the date the condemning authority takes possession by
Landlord's giving notice thereof to Tenant within thirty (30) days after the
date of such taking of possession, or (ii) continue in full force and effect as
to that part of the Premises not so taken and the Base Rent shall be reduced
(from and after the date of such taking of possession) in the proportion that
the number of square feet of the Premises so taken, if any, bears to the total
number of square feet contained in the Premises.
11.02. CONDEMNATION AWARD. Landlord shall be entitled to the whole of
any and all awards which may be paid or made in connection with any such taking.
As long as it does not diminish the amount of Landlord's award hereunder, Tenant
shall have the right to assert a claim for and recover from the condemning
authority, but not from Landlord, such compensation as may be awarded on account
of Tenant's moving and relocation expenses and depreciation to and loss of
Tenant's movable personal property.
ARTICLE 12
==========
12.01. ACCESS. Without being deemed guilty of an eviction of Tenant and
without abatement of Rent, Landlord or its authorized agents shall have the
right to enter the Premises, upon reasonable notice, to inspect the Premises, to
show the Premises to prospective lenders, purchasers or tenants and to fulfill
Landlord's obligations or exercise its rights under this Lease; provided,
however, Landlord will show the Premises to prospective tenants only during the
last nine (9) months of the term of this Lease. Tenant hereby waives any claim
for damages for any injury or inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises and any other
loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at
all times have and retain a key with which to unlock the doors to and within the
Premises, excluding Tenant's vaults and safes. Landlord shall have the right to
use any and all means which Landlord may deem proper to enter the Premises in an
emergency without liability therefor.
ARTICLE 13
==========
13.01. SUBORDINATION. Provided that Tenant shall have been provided with
a Non-Disturbance Agreement in a form reasonably acceptable to Tenant by the
applicable Underlying Party (hereafter defined), this Lease is and shall be
subject and subordinate to any and all ground or similar leases affecting the
Project, all mortgages which may now or hereafter encumber or affect the Project
and to all renewals, modifications, consolidations, replacements and extensions
of any such leases and/or mortgages; provided, however, that at the option of
any Underlying Party (hereinafter defined), this Lease shall be superior to the
lease or mortgage of such Underlying Party. The provisions of this Section
13.01 shall be self-operative and shall require no further consent or agreement
requested by any such landlord or mortgagee in connection with this Section
13.01. Tenant shall, however, execute promptly any appropriate certificate or
instrument evidencing same that Landlord may request. Tenant hereby irrevocably
appoints Landlord as Tenant's attorney-in-fact to execute the same. As used in
this Lease, the term "Underlying Party" shall mean the holder of the Landlord's
interest under any ground or similar lease and/or the mortgagee or purchaser at
foreclosure with respect to any mortgage. Tenant agrees that any Underlying
Party may unilaterally subordinate its mortgage or lease to this Lease at any
time by filing a notice of such subordination in the Official Public Records of
Real Property of the County where the Building is located.
13.02. ATTORNMENT. In the event of the termination of any ground or
similar lease affecting the Project or the enforcement by the trustee or the
beneficiary under any mortgage or deed of trust of remedies provided by law or
by such
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mortgage or deed of trust, Tenant will, upon request of any person or party
succeeding to the interest of Landlord as the result of such termination or
enforcement, automatically become the Tenant of such successor in interest
without change in the terms or other provisions of this Lease; provided,
however, that such successor in interest shall not be bound by (a) any
payment of Rent for more than one (1) month in advance, or (b) any amendment
or modification of this Lease made without the written consent of such
trustee or such beneficiary or such successor in interest. Upon request by
any such successor in interest, Tenant shall execute and deliver within ten
(10) days of receipt an instrument or instruments confirming the attornment
provided for herein. The failure by Tenant to execute such instrument(s)
shall be deemed an event of Default hereunder.
13.03. QUIET ENJOYMENT. Tenant, upon paying the Rent and keeping and
performing all of the conditions and covenants herein contained, shall and may
peaceably and quietly enjoy the Premises for the Term, subject to all applicable
laws and ordinances, applicable insurance requirements and regulations, and the
provisions of this Lease.
ARTICLE 14
==========
14.01. ASSIGNMENT. Tenant shall not assign or in any manner transfer this
Lease or any estate or interest herein, or sublet the Premises or any part
thereof, or grant any license, concession or other right of occupancy of any
portion of the Premises without the prior written consent of Landlord. If such
proposed sublease or assignment would cover more than one (1) full floor of the
Building, then Landlord shall have the option, upon receipt of Tenant's notice
to Landlord of its intent to sublet or assign, to cancel this Lease with
respect to the portion of the Premises which is the subject of such proposed
assignment or sublease as of the date which is fifteen (15) days following the
receipt by Landlord of Tenant's intent to sublet or assign. The option of
Landlord to cancel this Lease, as provided for above, shall be exercised, if at
all, within fifteen (15) days following Landlord's receipt of such written
notice, by delivering to Tenant written notice of Landlord's intention to
exercise the option to so cancel this Lease. Thereafter, if Landlord elects
not to cancel and Tenant desires to enter into an assignment of this Lease or a
sublease of the Premises or any portion thereof, Tenant shall give written
notice to Landlord of its desire to do so, which notice shall contain (i) the
name of the proposed assignee or subtenant, (ii) the nature of the proposed
assignee's or subtenant's business to be carried on in the Premises, (iii) the
terms and provisions of the proposed assignment or sublease, and (iv) resumes,
business plans, references, financial information, and other information as
Landlord may reasonably request concerning the proposed assignee or subtenant.
Landlord shall give Tenant notice of either its consent or its denial of consent
to the proposed assignment or sublease within the same fifteen (15) day period.
Landlord shall be deemed to have reasonably withheld its consent to any sublease
or assignment if the refusal is based on (i) Landlord's determination (in its
sole discretion) that such subtenant or assignee is not of the character or
quality of a tenant to whom Landlord would generally lease space of the
Building, (ii) the fact that such sublease or assignment is not in form and of
substance reasonably satisfactory to Landlord, (iii) such sublease or assignment
conflicts in any manner with this Lease, including, but not limited to, the
Permitted Use, (iv) the proposed subtenant or assignee is a governmental entity
or a medical office, (v) the proposed subtenant's or assignee's business is
prohibited by any non-compete clause then affecting the Building, (vi) the
character of the business to be conducted within the Premises by the proposed
subtenant or assignee is likely to substantially increase the costs of providing
Building services, or the burden on parking, existing janitorial services or
elevators in the Building, (vii) the sublease or assignment would cause Landlord
to breach any recorded covenants or contractural obligations to which the
Project or Landlord is subject, or (viii) such subtenant or assignee shall not
meet the creditworthiness standards applied by Landlord generally in the
selection of tenants for the Building (but taking into consideration the fact
that Tenant remains liable under this Lease).
In the event, however, that such written consent of Landlord is granted, if
the rent due and payable by a sublessee under any such permitted sublease (or a
combination of the rent payable under such sublease plus any bonus or other
consideration therefor or incident thereto) exceeds the hereinabove provided
Rent payable under this Lease or if with respect to a permitted assignment,
permitted license or other transfer by Tenant permitted by Landlord, the
consideration payable to Tenant by the assignee, licensee or other transferee
exceeds the Rent payable under this Lease, then Tenant shall be bound and
obligated to pay Landlord fifty percent (50%) of all such excess rental and
other excess consideration within ten (10) days following receipt thereof by
Tenant from such sublessee, assignee, licensee or other transferee, as the case
might be. Tenant shall, despite any permitted assignment or sublease, remain
directly and primarily liable for the performance of all of the covenants,
duties, and obligations of Tenant hereunder and Landlord shall be permitted to
enforce the provisions of this Lease against Tenant or any assignee or sublessee
without demand upon or proceeding in any way against any other person.
14.02. CONSENT. Consent by Landlord to a particular assignment or
sublease shall not be deemed a consent to any other or subsequent transaction.
If this Lease is assigned or if the Premises or any portion thereof are
subleased without the permission of Landlord, then Landlord may nevertheless
collect rent from the assignee or sublessee and apply the net amount collected
to the Rent payable hereunder, but no such transaction or collection of rent or
application thereof by Landlord shall be deemed a waiver of any provision hereof
or a release of Tenant from the performance by Tenant of its obligations
hereunder.
14.03. TRANSFER BY LANDLORD. In the event of the transfer and assignment
by Landlord of its interest in this Lease and in the Project to a person
expressly assuming Landlord's obligations under this Lease, Landlord shall
thereby be released from any further obligations thereafter accuring hereunder,
and Tenant agrees to look solely to such successor in interest of the Landlord
for performance of such obligations. Any security given by Tenant to secure
performance of Tenant's obligations hereunder may be assigned and transferred by
Landlord to such successor in interest, and Landlord shall thereby
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be discharged of any further obligation relating thereto.
ARTICLE 15
==========
15.01. DEFAULT BY TENANT. Each of the following shall constitute a
"Default" by Tenant:
(a) With respect to the first two payments of Rent not made by Tenant when
due in any twelve (12) month period, the failure by Tenant to make such payment
to Landlord within five (5) days after Landlord gives Tenant written notice
specifying that the payment was not made when due. With respect to any other
payment of Rent, the failure by Tenant to make such payment of Rent to Landlord
when due, no notice of any such failure being required; or
(b) Tenant shall fail to fulfill or perform, in whole or in part, any of
its obligations under this Lease (other than the payment of Rent) and such
failure or non-performance shall continue for a period of thirty (30) days after
written notice thereof has been given by Landlord to Tenant; provided that if
such failure by its nature cannot be cured within such thirty (30) day period,
Tenant shall not be in default hereunder so long as Tenant commences curative
action within such thirty (30) day period, diligently and continuously pursues
the curative action and fully cures the failure within ninety (90) days after
Landlord gives such written notice to Tenant; or
(c) The entry of a decree or order by a court having jurisdiction adjudging
Tenant or any guarantor to be bankrupt or insolvent or approving as properly
filed a petition seeking reorganization of Tenant or such guarantor under the
National Bankruptcy Act, or any other similar applicable Federal or State law,
or a decree or order of a court having jurisdiction for the appointment of a
receiver or liquidator or a trustee or assignee in bankruptcy or insolvency of
Tenant or such guarantor or its property or for the winding up or liquidation of
its affairs; or Tenant or any guarantor shall institute proceedings to be
adjudicated a voluntary bankruptcy or shall consent to the filing of any
bankruptcy, reorganization, receivership or other proceeding against Tenant or
such guarantor, or any such proceedings shall be instituted against Tenant or
any guarantor and the same shall not be vacated within ninety (90) days after
the same are commenced; or
(d) Tenant shall make an assignment for the benefit of Tenant's creditors
or admit in writing Tenant's inability to pay the debts of Tenant generally as
they may become due; or
(e) Intentionally deleted.
(f) Intentionally deleted.
(g) Intentionally deleted.
(h) Intentionally deleted.
(i) Tenant shall fail to vacate the Premises upon the expiration or
termination of this Lease; or
(j) If Tenant is a corporation or limited partnership, Tenant fails to
maintain its right to do business in the State of Texas or fails to pay any
applicable annual franchise taxes as and when same become finally due and
payable; or
(k) If Tenant is a corporation or partnership, Tenant dissolves or
liquidates.
15.02. RIGHTS UPON DEFAULT BY TENANT.
(a) This Lease and the Term and estate hereby granted and the demise hereby
made are subject to the limitation that if and whenever there shall occur any
event of Default, as enumerated above, Landlord may, at Landlord's option,
without any notice or demand whatsoever (any such notice and demand being
expressly waived by Tenant) and without judicial process, in addition to any
other remedy or right given hereunder or by law or equity do any one or more of
the following:
(1) Terminate this Lease by written notice to Tenant, in which event Tenant
shall immediately surrender possession of the Premises to Landlord;
(2) Terminate Tenant's right to possession of the Premises under this Lease
without terminating the Lease itself, by written notice to Tenant, in which
event Tenant shall immediately surrender possession of the Premises to
Landlord;
(3) Enter upon and take possession of the Premises and expel or remove
Tenant and any other occupant therefrom, with or without having terminated
this Lease;
(4) Alter locks and other security devices at the Premises so that Tenant
will not have access to the Premises with or without having terminated this
Lease or Tenant's right to possession under the Lease;
(5) Apply all or any portion of the Security Deposit to cure such event of
Default;
(6) Any right of Tenant through contract, statute or otherwise to receive
notice of Landlord's intent to exercise any of
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Landlord's remedies hereunder is hereby waived by Tenant. Any right of
Tenant through contract, statute, or otherwise to cure any Default
before Landlord may exercise any of its remedies hereunder is hereby
waived by Tenant.
(7) In the event of any Default described in subsection (b) of Section
15.01, Landlord shall have the right to enter upon the Premises by force if
necessary without being liable for prosecution or any claim for damages
therefor, and do whatever Tenant is obligated to do under the terms of this
Lease; and Tenant agrees to reimburse Landlord on demand for any
reasonable expenses which Landlord may incur in thus effecting compliance
with Tenant's obligations under this Lease, and Tenant further agrees that
Landlord shall not be liable for any damages resulting to Tenant from such
action.
(b) It is hereby expressly stipulated by Landlord and Tenant that any of
the above listed actions including, without limitation, termination of this
Lease, termination of Tenant's right to possession, and re-entry by Landlord,
will not affect the obligations of Tenant for the unexpired Term of this Lease,
including the obligations to pay unaccrued monthly Rent and other charges
provided in this Lease for the remaining portion of the Term of the Lease. The
following provisions shall override and control any conflicting provisions of
Section 93.002 of the Texas Property Code. If an event of Default occurs,
Landlord is entitled and is hereby authorized, without any notice to Tenant
whatsoever, to enter upon the Premises by use of a master key, a duplicate key,
or other peaceable means, and to change, alter, and/or modify the door locks on
all entry doors of the Premises, thereby permanently excluding Tenant, and its
officers, principals, agents, employees, and representatives therefrom. In the
event that Landlord has either terminated Tenant's right to possession of the
Premises pursuant to the foregoing provisions of this Lease, or has terminated
the Lease by reason of Tenant's default, Landlord shall not thereafter be
obligated to provide Tenant with a key to the Premises at any time; provided,
however, that in any such instance, during Landlord's normal business hours and
at the convenience of Landlord, and upon the written request of Tenant
accompanied by such written waivers and releases as the Landlord may require,
Landlord will escort Tenant or its authorized personnel to the Premises to
retrieve any personal belongings or other property of Tenant not subject to the
Landlord's lien or security interest described in Section 15.07 below. If
Landlord elects to exclude Tenant from the Premises without permanently
repossessing the Premises or terminating the Lease pursuant to the foregoing
provisions of this Lease, then Landlord (at any time prior to actual permanent
repossession or termination) shall not be obligated to provide Tenant a key to
re-enter the Premises until such time as all delinquent Rent and other amounts
due under this Lease have been paid in full (and all other defaults, if any,
have been completely cured to Landlord's satisfaction), and Landlord has been
given Tenant's recent financial statements and other such assurance reasonably
satisfactory to Landlord evidencing Tenant's ability to satisfy its remaining
obligations under this Lease. During any such temporary period of exclusion,
Landlord will, during Landlord's regular business hours and at Landlord's
convenience, upon written request by Tenant accompanied by such waivers and
releases as the Landlord may require, escort Tenant or its authorized personnel
to the Premises to retrieve personal belongings of Tenant or its employees, and
such other property of Tenant as is not subject to the Landlord's lien and
security interest described in Section 15.07, below. This remedy of Landlord
shall be in addition to, and not in lieu of, any of its other remedies set forth
in this Lease, or otherwise available to Landlord at law or in equity.
(c) Exercise by Landlord of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender of the
Premises by Tenant, whether by agreement or by operation of law, it being
understood that such surrender can be effected only by the written agreement of
Landlord. No such alteration of locks or other security devices and no removal
or other exercise of dominion by Landlord over the property of Tenant or others
at the Premises shall be deemed unauthorized or constitute a conversion, Tenant
hereby consenting, after any event of Default, to the aforesaid exercise of
dominion over Tenant's property within the Premises. All claims for damages by
reason of such re-entry and/or repossession and/or alteration of locks or other
security devices are hereby waived, as are all claims for damages by reason of
any distress warrant, forcible detainer proceedings, sequestration proceedings
or other legal process.
Tenant agrees that any re-entry by Landlord may be pursuant to a judgment
obtained in forcible detainer proceedings or other legal proceedings or without
the necessity for any legal proceedings, as Landlord may elect, and Landlord
shall not be liable in trespass or otherwise.
(d) In the event Landlord elects to terminate this Lease by reason of an
event of Default, then notwithstanding such termination, the Tenant shall be
liable for and shall pay to the Landlord, at the address specified in Section
1.01(a) above, the sum of all Rent accrued to the date of such termination,
plus, as damages, the cost of recovering, reletting and remodeling the
Premises, and an amount equal to the total of the Rent provided in this Lease
for the remaining portion of the Term of the Lease (had such Term not been
terminated by Landlord prior to the Expiration Date stated in Section 3.01),
less the reasonable rental value of the Premises for such period, (the
undersigned parties here stipulating that such reasonable rental value shall in
no event be deemed to exceed 40% of the then present value of the Rent for such
period); such amount to be discounted to present value at the rate of six
percent (6%) per annum.
In the event Landlord elects to terminate this Lease by reason of an event
of Default, in lieu of exercising the right of Landlord under the preceding
paragraph, Landlord may instead hold Tenant liable for all Rent accrued to the
date of such termination, plus such Rent as would otherwise have been required
to be paid by Tenant to Landlord during the period following termination of the
Term measured from the date of such termination by Landlord until the Expiration
Date stated in Section 3.01 (had Landlord not elected to terminate the Lease on
account of such event of Default) diminished by any net sums thereafter received
by Landlord through reletting the Premises during said period (after deducting
expenses incurred by Landlord as provided in Section 15.03 hereof). Actions to
collect amounts due by Tenant as provided for in this paragraph may be brought
from time to time by Landlord during the aforesaid period, on one or more
occasions, without the necessity of Landlord's waiting until expiration of such
period; and in no event shall Tenant be entitled to any excess of rent obtained
by reletting over and above the Rent provided for in this Lease. If Landlord
elects to exercise the remedy prescribed in this
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paragraph, this election shall in no way prejudice Landlord's right at any
time hereafter to cancel said election in favor of the remedy prescribed in
the preceding paragraph.
(e) In the event that Landlord elects to repossess the Premises without
terminating the Lease, then Tenant shall be liable for and shall pay to Landlord
at the address specified in Section 1.01(a) above, all Rent accrued to the date
of such repossession, plus Rent required to be paid by Tenant to Landlord during
the remainder of the Term until the Expiration Date of the Term as stated in
Section 3.01, diminished by any net sums thereafter received by Landlord through
reletting the Premises during said period (after deducting expenses incurred by
Landlord as provided in Section 15.03). Actions to collect amounts due by
Tenant as provided in this paragraph may be brought from time to time by
Landlord during the aforesaid period, on one or more occasions, without the
necessity of Landlord's waiting until expiration of the Term and in no event
shall Tenant be entitled to any excess of any rent obtained by reletting over
and above the Rent provided for in this Lease.
(f) In the event of termination of the Lease or repossession of the
Premises for an event of Default, Landlord shall not have any obligation to
relet or attempt to relet the Premises, or any portion thereof, or to collect
rental after reletting; and in the event of reletting Landlord may relet the
whole or any portion of the Premises for any period, to any tenant and for any
use and purpose.
(g) In the event of a Default in the payment of Rent, Tenant shall in
addition to all other sums owed to Landlord, pay to Landlord an amount equal to
the dollar amount of all "concessions" provided to Tenant in connection with
this Lease, including, but not limited to, rental concessions, above standard
tenant improvements, relocation allowances, cash payments and the like. The
foregoing shall not, however, act to limit in any manner the damages or remedies
to which Landlord may be entitled under this Lease or by law, but shall act only
as a reimbursement of such concessions as may have been provided to Tenant as an
incentive to enter into this Lease.
15.03. EXPENSE OF REPOSSESSION. It is further agreed that, in addition to
payments required pursuant to Section 15.02 above, Tenant shall compensate
Landlord for all reasonable expenses incurred by Landlord in repossession
(including among other reasonable expenses, the total amount of any increase in
insurance premiums caused by the vacancy of the Premises), all expenses incurred
by Landlord in reletting (including among other expenses, repairs, remodeling,
replacements, advertisements and brokerage fees), and all losses incurred by
Landlord as a direct or indirect result of Tenant's default.
15.04. CUMULATIVE REMEDIES; WAIVER OR RELEASE. Landlord may restrain or
enjoin any breach or threatened breach of any covenant, duty or obligation of
Tenant herein contained without the necessity of proving the inadequacy of any
legal remedy or irreparable harm. The remedies of Landlord hereunder shall be
deemed cumulative and not exclusive of each other. No action, omission or
commission by Landlord, including specifically, the failure to exercise any
right, remedy or recourse, shall be deemed a waiver or release of the same. A
waiver or release shall exist and be effective only as set forth in a written
document executed by Landlord, and then only to the extent recited therein. A
waiver or release with reference to any one event shall not be construed as
continuing as to, or as a bar to, or as a waiver or a release of, any right,
remedy or recourse as to any other or subsequent event.
15.05. ATTORNEYS' FEES. In the event of any legal action or proceeding
brought by either party against the other arising out of this Lease, the
prevailing party in such action shall be entitled to recover from the non-
prevailing party therein reasonable attorneys' fees and costs incurred in such
action (including, without limitation, all costs of appeal) and such amount
shall be included in any judgment rendered in such proceeding.
15.06. FINANCIAL STATEMENTS. Tenant warrants and represents that (i) all
financial statements, operating statements or other financial data at any time
given to Landlord by or on behalf of Tenant and any guarantor are, or will be,
as of their respective dates, true and correct in all material respects and do
not (or will not) omit any material liability, direct or contingent; and (ii)
there have been no material changes between the respective dates thereof and the
date of this Lease in any such financial statements, operating statements or
other financial data given to Landlord prior to the date hereof by or on behalf
of Tenant or any guarantor. A breach of any of the foregoing warranties or
representations shall, at the election of Landlord, be deemed a Default
hereunder.
15.07. LANDLORD'S CONTRACTUAL SECURITY INTEREST. Intentionally deleted.
15.08. USE AND STORAGE OF PERSONAL PROPERTY. Intentionally deleted.
15.09. DEFAULT BY LANDLORD. Landlord shall be in default under this Lease
if Landlord fails to perform any of its obligations hereunder and said failure
continues for a period of thirty (30) days after Tenant delivers written notice
thereof to Landlord (to each of the addresses required by this Section) and each
mortgagee who has a lien against any portion of the Property and whose name and
address has been provided to Tenant, provided that if such failure cannot
reasonably be cured within said thirty (30) day period, Landlord shall not be in
default hereunder if the curative action is commenced within said thirty (30)
day period and is thereafter diligently pursued until cured. Any notice of a
failure to perform by Landlord shall be sent to Landlord at the addresses and to
the attention of the parties set forth in Section 1.01(a). Any notice of a
failure to perform by Landlord not sent to Landlord at all addresses and/or to
the attention of all parties required under this Section and to each mortgagee
who is entitled to notice or not sent in compliance with Section 17.05 below
shall be of no force or effect.
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ARTICLE 16
==========
16.01. HAZARDOUS WASTE. Tenant hereby represents and warrants to Landlord
the following:
(a) No toxic or hazardous substances or wastes, pollutants or contaminants
(including, without limitation, asbestos, urea formaldehyde, the group of
organic compounds known as polychlorinated biphenyls, petroleum products
including gasoline, fuel oil, crude oil and various constituents of such
products, radon, and any hazardous substance as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 USC
9601-9657, as amended ("CERCLA") (collectively, "Environmental Pollutants") will
be generated, treated, stored, released or disposed of, or otherwise placed,
deposited in or located on the Premises or Project by Tenant or any of the
employees, officers, contractors, agents, guests or invitees, and no activity
shall be undertaken on the Premises or Project that would cause or contribute to
(i) the Premises to become a generation, treatment, storage or disposal facility
within the meaning of, or otherwise bring the Premises within the ambit of the
Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 USC 6901 et. seq.,
or any similar state law or local ordinance, (ii) a release or threatened
release of toxic or hazardous wastes or substances, pollutants or contaminants,
from the Premises or Project within the meaning of, or otherwise result in
liability in connection with the Premises within the ambit of CERCLA, or any
similar state law or local ordinance, or (iii) the discharge of pollutants or
effluents into any water source or system, the dredging or filling of any
waters, or the discharge into the air of any emissions, that would require a
permit under the Federal Water Pollution Control Act, 33 USC 1251 et. seq., or
the Clean Air Act, 42 USC 7401 et. seq. or any similar state law or local
ordinance.
(b) Tenant agrees to indemnify and hold Landlord harmless from and against
and to reimburse Landlord with respect to, any and all claims, demands, causes
of action, loss, damage, liabilities, costs and expenses (including reasonable
attorneys' fees and court costs) of any and every kind or character, known or
unknown, fixed or contingent, asserted against or incurred by Landlord at any
time and from time to time by reason of or arising out of the breach of any
representation or warranty contained in Section 16.01(a) above. Landlord shall
have the right at Tenant's expense to periodically inspect, take samples for
testing and otherwise investigate the Premises for the presence of hazardous or
toxic materials.
(c) Landlord agrees to hold and indemnify Tenant harmless from and against
any and all claims, demands, causes of action, loss, damage, liabilities, costs
and expenses (including reasonable attorneys' fees and court costs) of any kind
or character, known or unknown, fixed or contingent, asserted against or
incurred by Tenant as a result of any Environmental Pollutants being generated,
treated, stored, released or disposed of, or otherwise placed, deposited in or
located on the Premises or Project by Landlord or any of its employees,
officers, contractors, agents, guests or invitees.
(d) All representations and warranties contained in this Article 16 shall
survive the expiration or termination of this Lease.
ARTICLE 17
==========
17.01. SUBSTITUTE PREMISES. Intentionally deleted.
17.02. ESTOPPEL LETTERS. Tenant agrees, periodically, to execute and
acknowledge, within twenty (20) business days after Landlord's request, a
certificate stating whether this Lease is in full force and effect, whether any
amendments or modifications exist, whether there are any defaults hereunder, and
any such other related information as may be requested. Any such certificate may
be relied upon by any ground lessor, prospective purchaser, secured party,
mortgagee or any beneficiary under any mortgage, deed of trust on the Building
or the Land or any part thereof or interest of Landlord therein.
17.03. HOLDOVER. If Tenant shall remain in possession of the Premises
after the expiration or earlier termination of this Lease, Tenant will be deemed
to be a tenant at sufferance and shall be subject to immediate eviction and
removal and shall pay for each month or partial month of holdover period as rent
an amount equal to one hundred fifty percent (150%) of the prevailing then
actual Base Rent for the Premises on the date of such expiration or termination.
The remaining in possession by Tenant or the acceptance by Landlord of the
payment of said rent shall not be construed as an extension or renewal of this
Lease unless extended by Landlord pursuant to the preceding sentence. The
rental payable to Landlord under this Section shall not be deemed to be in lieu
of any damages or other remedy to which Landlord may be entitled by virtue of
Tenant's holding over. Tenant shall pay to Landlord all damages sustained by
Landlord as a result of Tenant's holding over and shall additionally indemnify
Landlord against all claims for damages by any other tenant to whom Landlord may
have leased all or any part of the Premises effective upon the termination of
this Lease.
17.04. SURRENDER. Upon the expiration or earlier termination of the Lease
or upon the exercise by Landlord of its right to re-enter the Premises without
termination of this Lease, Tenant shall peacefully quit and surrender the
Premises in good order and condition, excepting ordinary wear and tear, but
subject to Sections 8.01 and 8.02 hereof.
17.05. NOTICE. Any notice or communication required or permitted in this
Lease shall be given in writing, sent by (i) personal delivery, (ii) expedited
delivery service with proof of delivery, (iii) United States registered or
certified mail, return receipt requested or (iv) prepaid telegram (provided that
such telegram is confirmed by expedited delivery service or by mail
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in the manner previously described), addressed as provided in Section 1.01(a)
or to such other address or to the attention of such other person as shall be
designated from time to time in writing by the applicable party and sent in
accordance herewith. Notice also may be given by telex or fax, provided each
such transmission is confirmed (and such confirmation is supported by
documented evidence) as received and further provided a telex or fax number,
as the case may be, is set forth in Section 1.01(a). Any such notice or
communication shall be deemed to have been delivered, whether actually
received or not, when deposited in the US Mail, postage paid, certified or
return receipt requested at the address and in the manner provided herein, or
any such notice or communication shall have been deemed to have been given
as of the date so delivered and actually received at the address and in the
manner provided herein in the case of personal delivery, telegram, telex or
fax.
17.06. RULES AND REGULATIONS. Tenant, as well as any assignee or
sublessee approved by Landlord, will comply with the Rules and Regulations of
the Project adopted by Landlord, which are set forth in Exhibit "C" attached
hereto and made a part hereof for all purposes. Landlord shall have the right
to change such Rules and Regulations or to amend them in any reasonable manner
for the safety, care and cleanliness of the Project, and the Premises, and for
preservation of good order therein, all of which changes and amendments will be
sent by Landlord to Tenant in writing and shall be thereafter binding upon,
carried out and observed by Tenant. Tenant shall further be responsible for the
compliance with such Rules and Regulations by the employees, servants, agents
and invitees of Tenant.
17.07. LANDLORD'S LIABILITY. Tenant is granted no contractual right of
termination by this Lease. If Tenant shall recover a money judgment against
Landlord, such judgment shall be satisfied only out of the right, title and
interest of Landlord in the Property as the same may then be encumbered and
Landlord shall not be liable for any deficiency, it being agreed that Landlord
shall never be personally liable for any such judgment. If Landlord is found to
be in default hereunder by reason of its failure to give a consent that it is
required to give hereunder, Tenant's sole remedy will be an action for specific
performance or injunction. The foregoing sentence shall in no event be construed
as mandatorily requiring Landlord to give consents under this Lease. In no event
shall Landlord be liable to Tenant for consequential or special damages by
reason of a failure to perform (or a default) by Landlord hereunder or
otherwise. In no event shall Tenant have the right to levy execution against any
property of Landlord other than its interest in the Property as hereinbefore
expressly provided.
Notwithstanding the foregoing, unless caused by Landlord's gross negligence
or willful misconduct, Landlord shall not be liable to Tenant for any claims,
actions, demands, costs, expenses, damage or liability of any kind (i) arising
out of the use, occupancy or enjoyment of the Premises by Tenant or any person
therein or holding under Tenant or by or through the acts or omissions of any of
their respective employees, officers, agents, invitees or contractors, (ii)
caused by or arising out of fire, explosion, falling sheetrock, gas,
electricity, water, rain, snow or dampness, or leaks in any part of the
Premises, (iii) caused by or arising out of damage to the roof, pipes,
appliances or plumbing works or any damage to or malfunction of heating,
ventilation or air conditioning equipment or (iv) caused by tenants or any
persons either in the Premises or elsewhere in the Building (other than Common
Areas) or by occupants of property adjacent to the Building or Common Areas or
by the public or by the construction of any private, public or quasi-public
work. In no event shall Landlord be liable to Tenant for any loss of or damage
to property of Tenant or of others located in the Premises or the Building by
reason of theft or burglary.
17.08. WAIVER OF CONSUMER RIGHTS. Tenant hereby waives its rights under
the Texas Deceptive Trade Practices - Consumer Protection Act, Section 17.41 ET.
SEQ. of the Texas Business and Commerce Code, a law that gives consumers special
rights and protections. After consultation with an attorney/legal counsel of
its own selection, Tenant voluntarily consents to this waiver. Tenant covenants
and warrants that such attorney/legal counsel was not directly or indirectly
identified, suggested or selected by Landlord or agent of Landlord.
17.09. AMERICANS WITH DISABILITIES ACT AND TEXAS ARCHITECTURAL BARRIERS
ACT. Tenant agrees to cause the Premises to comply with all requirements of the
Americans with Disabilities Act (Public Law (July 26, 1990)) and the Texas
Architectural Barriers Act (Article 9102, Tex. Rev. Civ. St. (1991)) and any
other similar federal, state or local laws applicable to the Premises (herein,
collectively, the "Disability Acts"). Tenant acknowledges that it will be
wholly responsible for any accommodations or alterations which need to be made
to the Premises to accommodate disabled employees, customers and invitees of
Tenant. No provision in this Lease should be construed in any manner as
permitting, consenting to or authorizing Tenant to violate requirements under
any of the Disability Acts and any provision of the Lease which could arguably
be construed as authorizing a violation of any of the Disability Acts shall be
interpreted in a manner which permits compliance with such Disability Acts and
is hereby amended to permit such compliance. Landlord shall be responsible for
causing all other areas of the Project (exclusive of the Premises and premises
occupied by other tenants of the Building) to comply with the Disability Acts.
17.10. INABILITY TO PERFORM. If, by reason of inability reasonably to
obtain and utilize labor, materials, equipment, or supplies, or by reason of
circumstances directly or indirectly the result of any state of war or national
or local emergency, or by reason of any laws, rules, orders, regulations,
action, non-action, or requirements of any governmental authority now or
hereafter in force, or by reason of strikes or riots, or by reason of accidents
in, damage to, or the making of repairs, replacements, or improvements to the
Project or the Premises, or any of the equipment of either, or by the reason of
any other cause beyond the reasonable control of Landlord ("force majeure"),
Landlord shall be unable to perform or shall be delayed in the performance of
any obligation hereunder, then this Lease and the obligation of Tenant to pay
the Base Rent or additional items of Rent and to perform and comply with all of
the other covenants and agreements hereunder shall in no manner be affected or
impaired, and such nonperformance or delay in performance by Landlord shall not
give rise to any claim against Landlord for damages or constitute a total or
partial eviction, constructive or otherwise. Landlord shall exercise due
diligence in undertaking to remedy such inability to perform or delay in
performance with all reasonable dispatch, but shall
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not be required to adjust a labor dispute against its will.
17.11. TENANT AUTHORIZATION. If Tenant signs as a corporation, each of
the persons executing this Lease on behalf of Tenant represents and warrants
that Tenant is a duly organized and existing corporation, that Tenant has and is
qualified to do business in Texas, that the corporation has full right and
authority to enter into this Lease, and that all persons signing on behalf of
the corporation were authorized to do so by appropriate corporate actions. If
Tenant is a general partnership, limited partnership, trust, or other legal
entity, each individual executing this Lease on behalf of said entity represents
and warrants that he or she is duly authorized to execute this Lease on behalf
of such entity and in accordance with such entity's governing instruments, and
that this Lease is binding upon such entity. Upon the Landlord's request,
Tenant shall furnish Landlord with proper proof of due authorization for
Tenant's execution of this Lease as Landlord shall require.
17.12. BROKER. Tenant warrants that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Lease,
excepting only the broker named in of Section 1.01 (n) ("Broker") and that it
knows of no other real estate brokers or agents who are or might be entitled to
a commission in connection with this Lease. Furthermore, Tenant warrants and
agrees that Tenant shall deal with no real estate broker other than Broker in
connection with any renewal of this lease or expansion of the Premises.
Accordingly, Tenant agrees to indemnify and hold harmless Landlord from and
against any liability or claim, whether meritorious or not, arising with respect
to brokers and/or agents other than Broker, either in connection with the
initial term of this Lease or with respect to any renewal of this lease or
expansion of the Premises. Landlord has agreed to pay the fees of Broker (but
only Broker) named in Section 1.01(n) to the extent that Landlord has agreed to
do so pursuant to a written agreement with such Broker, a copy of which is
attached hereto as Exhibit "J".
17.13. MEMORANDUM OF LEASE. Without the prior written consent of Landlord
(which may be granted or withheld in Landlord's sole discretion), Tenant shall
not record this Lease or a memorandum or other instrument with respect to this
Lease.
17.14. PARKING. "Exhibit "F" attached hereto, sets forth the agreements
between Landlord and Tenant relating to the parking garage. The parking areas
for the garage and for surface parking shall be designated for automobile
parking on a first come, first serve non-exclusive basis for all Property
tenants (including Tenant) and their respective employees, customers, invitees
and visitors. Parking and delivery areas for all vehicles shall be in accordance
with parking regulations established from time to time by Landlord, with which
Tenant agrees to conform. Tenant shall only permit parking of automobiles by its
employees, customers and agents in appropriate designated parking areas. Tenant
covenants that at all times during the term of this Lease Tenant shall not use
in excess of four (4) garage and surface parking spaces for each one thousand
(1,000) square feet in the Premises for Tenant's employees, visitors and
invitees.
17.15. OTHER TAXES. Tenant shall be liable for all taxes levied or
assessed against personal property, furniture or fixtures placed by Tenant on
the Premises. If such taxes for which Tenant is liable are levied or assessed
against Landlord or Landlord's property and if Landlord elects to pay the same,
or if the assessed value of the Project is increased by the inclusion of
personal property, furniture or fixtures, placed by Tenant on the Premises, and
Landlord elects to pay the taxes based on such increase, Tenant shall pay to
Landlord upon demand, that part of such taxes for which Tenant is primarily
liable hereunder, together with interest thereon until paid at the Default
Interest Rate set forth in Section 4.02 hereof. Tenant shall be liable for any
and all sales, use or other taxes levied in connection with the Premises and
Tenant's parking.
17.16. JOINT AND SEVERAL LIABILITY. If there is more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. If there
is a guarantor of the obligations hereunder imposed upon Tenant, there shall be
a joint and several obligation of Tenant and such guarantor, and Landlord shall
not be required to first proceed against Tenant before proceeding against such
guarantor, nor shall any such guarantor be released from its guaranty for any
reason whatsoever.
17.17. ACCEPTANCE BY LANDLORD. The acceptance by Landlord as evidenced by
the execution of this Lease by its duly authorized representative is subject to
the condition precedent of obtaining written approval of the terms and
provisions of this Lease by any financial institution possessing the right to
approve the form and content of each lease at the Building. In the event
Landlord is unable to obtain the required written approval from any financial
institution, this Lease shall become null and void ab initio and shall have no
further legal force and effect.
17.18. TIME OF ESSENCE. Time is of the essence of this Lease and all of
its provisions in which performance is a factor.
17.19. ENTIRE AGREEMENT. This Lease, including the Exhibits attached
hereto (which Exhibits are hereby incorporated herein and shall constitute a
portion hereof), contains the entire agreement between Landlord and Tenant with
respect to the subject matter hereof.
17.20. AMENDMENT. Any agreement hereafter made between Landlord and
Tenant shall be ineffective to modify, release or otherwise affect this Lease,
in whole or in part, unless such agreement is in writing and signed by the
party to be bound thereby.
17.21. SEVERABILITY. If any term or provision of this Lease shall, to any
extent, be held invalid or unenforceable by a final judgment of a court of
competent jurisdiction, the remainder of this Lease shall not be affected
thereby.
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17.22. SUCCESSORS. Subject to the limitations and conditions set forth
elsewhere herein, this Lease shall bind and inure to the benefit of the
respective heirs, legal representatives, successors, and assigns of the parties
hereto. All rights, powers, privileges, immunities, and duties of Landlord
under this Lease, including, but not limited to, any notices required or
permitted to be delivered by Landlord to Tenant hereunder, may, at Landlord's
option, be exercised or performed by Landlord's agent or attorney.
17.23. CAPTIONS. The captions in this Lease are inserted only as a matter
of convenience and for reference only and they in no way define, limit, or
describe the scope of this Lease or the intent of any provisions hereof.
17.24. NUMBER AND GENDER. All genders used in this Lease shall include
the other genders, the singular shall include the plural, and the plural shall
include the singular, whenever and as often as may be appropriate.
17.25. GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of Texas.
17.26. RIGHTS RESERVED TO LANDLORD. Landlord, in addition to all other
rights which it may possess, hereby expressly reserves the following rights
exercisable from time to time without notice and without liability to Tenant for
damage or injury to property, person or business and without effecting an
eviction or disturbance of Tenant's use or possession or giving rise to any
claim for setoff or abatement of Rent or affecting any of Tenant's obligations
under this Lease:
(a) To change the name or street address of the Building (in which event
Landlord shall reimburse Tenant for reasonable costs of replacing stationery and
business cards).
(b) Subject to Rider 3, to install and maintain signs on the exterior and
interior of the Building, except in the Premises.
(c) To prescribe the location and style of the suite number and
identification sign or lettering for the Premises occupied by Tenant.
(d) To retain at all times, and to use in appropriate instances, pass keys
to the leased Premises occupied by Tenant.
(e) To grant to anyone the right to conduct any commercially reasonable
business or render any service in the Building, whether or not it is the same as
or similar to the use expressly permitted to Tenant by Section 1.01(e) hereof.
(f) To exhibit the leased Premises during the last nine (9) months of the
Term at reasonable hours, and upon reasonable notice to Tenant, and to decorate,
remodel, repair, alter or otherwise prepare the Premises for reoccupancy at any
time after Tenant vacates or abandons the Leased Premises.
(g) To have access for Landlord to any mail chutes according to the rules
of the United States Postal Service.
(h) To require all persons entering or leaving the Building during such
hours as Landlord may from time to time reasonably determine to identify
themselves to watchmen (by registration or otherwise), and to establish their
right to enter or leave in accordance with the provisions of the applicable
Building Rules and Regulations. Landlord shall not be liable in damages for any
error with respect to admission to or eviction or exclusion from the Building of
any person. In case of fire, invasion, insurrection, mob, riot, civil disorder,
public excitement, hazardous condition or other commotion, or the threat
thereof, Landlord reserves the right to limit or prevent access to the Building
during the continuance of the same, shut down elevator service, activate
elevator emergency controls, or otherwise take such action or preventive
measures deemed necessary by Landlord for the safety of tenants or other
occupants of the Building or the protection of the Building and the property in
the Building. Tenant agrees to fully cooperate in any reasonable safety program
developed by Landlord.
(i) To control and prevent access to common areas and other non-general
public areas pursuant to the provisions of the applicable Building Rules and
Regulations.
(j) Provided that reasonable access to the Premises shall be maintained
and the business of Tenant shall not be unreasonably interfered with or
disrupted unreasonably, Landlord reserves the right to relocate, enlarge, reduce
or change lobbies, exits or entrances in or to the Building and to decorate and
to make, at Landlord's own expense (except to the extent same constitutes
Operating Expenses), repairs, alterations, additions and improvements,
structural or otherwise, in or to the Building or any part thereof, and any
adjacent building, land, street or alley, including for the purpose of
connection with or entrance into or use of the Building in conjunction with any
adjoining or adjacent building or buildings, now existing or hereafter
constructed, and may for such purposes erect scaffolding and other structures
reasonably required by the character of the work to be performed, and during
such operations may enter upon the Premises and take into and upon or through
any part of the Building, including the Premises, all materials that may be
required to make such repairs, alterations, improvements or additions, and in
that connection Landlord may temporarily close public entry ways, other public
spaces, stairways or corridors and interrupt or temporarily suspend any services
or facilities agreed to be furnished by Landlord, all without the same
constituting an eviction of Tenant in whole or in part and without abatement of
Rent by reason of loss or interruption of the business of Tenant or otherwise
and without in any manner rendering Landlord liable for damages or relieving
Tenant from the performance of any of Tenant's obligations under this Lease.
Landlord may at its option make any repairs, alterations, improvements and
additions in and about the Building and the Premises during ordinary business
hours and if Tenant desires to have such work done during other than business
hours and Landlord consents to such change,
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Tenant shall pay all overtime and additional expenses resulting therefrom.
(k) To designate and approve, prior to installation, all types of window
shades, blinds, drapes, awnings, and similar equipment, and to control all
internal lighting that may be visible from the exterior of the Building.
(l) Intentionally deleted.
17.27 VISIBLE AREAS CLAUSE. Tenant agrees to keep any visible portion
of the Premises (the "Visible Area") in a neat, clean and attractive condition
at all times. Tenant shall cause the walls in the Visible Area to be painted or
covered with wall coverings, and the interior of the Visible Area shall be
tastefully furnished, as determined by Landlord in its sole and absolute
discretion. All paint, wall coverings, signs, artwork, floor materials, floor
coverings, furniture and other articles in the Visible Area and the arrangement,
style, color and appearance thereof, and any changes thereto shall be approved
in advance of installation by Landlord, in its sole and absolute discretion.
Landlord reserves the right to require Tenant to correct any non-conformity with
the provisions of this paragraph and Tenant agrees that any failure to comply
with the provisions of this paragraph shall constitute a major event of Default
under the Lease entitling Landlord to exercise any of its remedies pursuant to
the other provisions of this Lease, at law or in equity.
17.28 NO PRESUMPTION AGAINST DRAFTER. Landlord and Tenant
understand, agree and acknowledge that: (i) this Lease has been freely
negotiated by both parties; and (ii) that in any controversy, dispute, or
contest over the meaning, interpretation, validity, or enforceability of this
Lease or any of its terms or conditions, there shall be no inference,
presumption or conclusion drawn whatsoever against either party by virtue of
that party having drafted this Lease or any portion thereof.
17.29 EXAMINATION OF LEASE. Submission by Landlord of this instrument
to Tenant for examination or signature does not constitute a reservation of or
option for lease. This Lease will be effective as a lease or otherwise only upon
execution by and delivery to both Landlord and Tenant.
17.30 DEFINED TERMS AND MARGINAL HEADINGS. The words "Landlord" and
"Tenant" as used herein shall include the plural as well as singular. If more
than one person is named as Tenant, the obligations of such persons are joint
and several. The headings and titles to the articles, sections and subsections
of this Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part of this Lease.
17.31 NO REPRESENTATIONS. LANDLORD AND LANDLORD'S AGENTS HAVE MADE NO
WARRANTIES, REPRESENTATIONS OR PROMISES (EXPRESS OR IMPLIED) WITH RESPECT TO THE
PREMISES, THE BUILDING OR ANY OTHER PART OF THE PROPERTY (INCLUDING, WITHOUT
LIMITATION, THE CONDITION, USE OR SUITABILITY OF THE PREMISES, THE BUILDING OR
THE PROPERTY), EXCEPT AS HEREIN EXPRESSLY SET FORTH AND NO RIGHTS, EASEMENTS OR
LICENSES ARE ACQUIRED BY TENANT BY IMPLICATION OR OTHERWISE EXCEPT AS EXPRESSLY
SET FORTH IN THE PROVISIONS OF THIS LEASE.
17.32 NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off
of light, air or view by any structure which may be erected on the Project or
lands adjacent to the Project shall in no way affect this Lease or impose any
liability on Landlord (even if Landlord is the adjacent land owner).
17.33 SURVIVAL OF INDEMNITIES. Each indemnity agreement and hold
harmless agreement contained herein shall survive the expiration or termination
of this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease
as of the day and year first above written.
LANDLORD: Granite Tower, Ltd. TENANT: Carreker-Antinori, Inc.
By: Granite Properties, Inc.
Its: General Partner
By: By:
--------------------------- -----------------------------
Name: Jim Kirchhoff Name:
--------------------------- -----------------------------
Title: Director of Marketing Title:
--------------------------- -----------------------------
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EXHIBIT "A"
FLOOR PLAN
PAGE 1 OF 2
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EXHIBIT "A"
FLOOR PLAN
Page 2 of 2
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EXHIBIT "B"
LEGAL DESCRIPTION
Lot 1-R, Block A Granite Tower at the Centre, City of Farmers Branch, County of
Dallas, State of Texas.
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EXHIBIT "C"
RULES AND REGULATIONS
1. The sidewalks, walks, plaza entries, corridors, concourses, ramps,
staircases, escalators and elevators of the Project shall not be obstructed or
used by Tenant, or the employees, agents, servants, visitors or licenses of
Tenant for any purpose other than ingress and egress to and from the Premises.
No bicycle or motorcycle shall be brought into the Building or kept on the
Premises without the prior written consent of Landlord.
2. No freight, furniture or bulky matter of any description will be
received into the Project or carried into the elevators except in such a manner,
during such hours and using such elevators and passageways as may be approved by
Landlord, and then only upon having been scheduled in advance. Any hand trucks,
carryalls, or similar equipment used for the delivery or receipt of merchandise
or equipment shall be equipped with rubber tires, side guards and such other
safeguards as Landlord shall require.
3. Landlord shall have the right to prescribe the weight, position and
manner of installation of safes or other heavy equipment which shall, if
considered necessary by Landlord, be installed in a manner which shall insure
satisfactory weight distribution. All damage done to the Project by reason of a
safe or any other article of Tenant's office equipment being on the Premises
shall be repaired at the expense of Tenant. The time, routing and manner of
moving safes or other heavy equipment shall be subject to prior approval by
Landlord.
4. Only persons authorized by Landlord will be permitted to furnish
newspapers, ice, drinking water, towels, barbering, shoe shining, janitorial
services, floor polishing and other similar services and concessions to Tenant,
and only at hours and under regulations fixed by Landlord.
5. Tenant, or the employees, agents, servants, visitors or licensees of
Tenant, shall not at any time leave, place or discard any rubbish, paper,
articles or objects of any kind whatsoever outside the doors of the Premises or
in the corridors, stairways or passageways of the Project.
6. Landlord shall have the right to prohibit any advertising by Tenant
which, in Landlord's opinion, tends to impair the reputation of the Project or
its desirability for offices and, upon written notice from Landlord, Tenant will
refrain from or discontinue such advertising.
7. Tenant shall not place, or cause or allow to be placed, any sign,
placard, picture, advertisement, notice or lettering whatsoever, in, about or on
the exterior of the Premises, Building or Project except in and at such places
as may be designated by Landlord and consented to by Landlord in writing. Any
such sign, placard, advertisement, picture, notice or lettering so placed may be
removed by Landlord without notice to and at the expense of Tenant. All
lettering and graphics on corridor doors shall conform to the Building Standard
prescribed by Landlord. No trademark shall be displayed in any event.
8. Canvassing, soliciting or peddling in the Building and/or Project is
prohibited, and Tenant shall cooperate to prevent same.
9. Landlord shall have the right to exclude any person from the Project
other than during customary business hours as set forth in the Lease, and any
person in the Project will be subject to identification by employees and agents
of Landlord. All persons in or entering the Project shall be required to comply
with the security policies of the Project. If Tenant desires any additional
security service for the Premises, Tenant shall have the right (with the advance
written consent of Landlord) to obtain such additional service at Tenant's sole
cost and expense. Tenant shall keep doors to unattended areas locked and shall
otherwise exercise reasonable precautions to protect property from theft, loss
or damage. Landlord shall not be responsible for the theft, loss or damage of
any property or for any error with regard to the exclusion from or admission to
the Project of any person. In case of invasion, mob, riot or public excitement,
Landlord reserves the right to prevent access to the Project during the
continuance of same by closing the doors or taking other measures for the safety
of the tenants and protection of the Project and property or persons therein.
10. Only workmen employed, designated or approved by Landlord may be
employed for repairs, installations, alterations, painting, material moving and
other similar work that may be done in or on the Premises. Tenant will refer
all contractors, contractor's representatives and installation technicians
rendering any service on or to the Premises for Tenant to Landlord for
Landlord's approval and supervision before performance of any contractual
service. This provision shall apply to all work performed in the Building
including installation of telephones, telegraph equipment, electrical devices
and attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings equipment or any other physical portion of the
Building.
11. Tenant shall not do any cooking except on the tenth (10th) floor,
provided however, such use shall be separately vented to outside air (other than
warming in a microwave oven) or conduct any restaurant, luncheonette, automat or
cafeteria for the sale or service of food or beverages to its employees or to
others, or permit the delivery of any food or beverage to the Premises, except
by such persons delivering the same as shall be approved by Landlord and only
under regulations fixed by Landlord. Tenant may, however, operate a coffee bar
by and for its employees.
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12. Tenant shall not bring or permit to be brought or kept in or on the
Premises or Project any inflammable, combustible, corrosive, caustic, poisonous,
or explosive substance, or cause or permit any odors to permeate in or emanate
from the Premises, or permit or suffer the Premises to be occupied or used in a
manner offensive or objectionable to Landlord or other occupants of the Project
by reason of light, radiation, magnetism, noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business in the Project.
13. Tenant shall not mark, paint, drill into (with the exception of
installing white boards), or in any way deface any part of the Project or the
Premises. No boring, driving of nails or screws, cutting or stringing of wires
shall be permitted, except with the prior written consent of Landlord, and as
Landlord may direct. Tenant shall not install any resilient tile or similar
floor covering in the Premises except with the prior approval of Landlord. The
use of cement or other similar adhesive material is expressly prohibited.
14. Landlord shall furnish two keys for each lock on exterior doors to the
Premises and shall, on Tenant's request and at Tenant's expense, provide
additional duplicate keys. Tenant shall not make duplicate keys. All keys
shall be returned to Landlord upon the termination of this Lease, and Tenant
shall give to Landlord explanations of the combinations of all safes, vaults and
combination locks remaining with the Premises. Landlord may at all times keep a
pass key to the Premises. All entrance doors to the Premises shall be left
closed at all times and left locked when the Premises are not in use. Landlord
agrees to furnish to Tenant, at Landlord's expense, one hundred eighty five
(185) CardKeys for access to the Building during such times as the Building is
not open to the public. Upon written request from Tenant, or other parties
authorized by Tenant, Landlord will furnish additional CardKeys to Tenant at
Tenant's expense. Should any CardKeys be lost or stolen, Tenant will
immediately notify Landlord and Landlord will issue replacement CardKeys with a
different computer code number. Such replacement CardKeys will be at Tenant's
expense.
15. Tenant shall give immediate notice to Landlord in case of theft,
unauthorized solicitation or accident in the Premises or in the Project or of
defects therein or in any fixtures or equipment, or of any known emergency in
the Project.
16. Tenant shall not use the Premises or permit the Premises to be used
for photographic, multilith or multigraph reproductions, except in connection
with its own business and not as a service for others without Landlord's prior
permission.
17. Tenant shall not use or permit any portion of the Premises to be used
as an office for a public stenographer or typist, offset printing, the sale of
liquor or tobacco, a barber or manicure shop, an employment bureau, a labor
union office, a doctor's or dentist's office, a dance or music studio, any type
of school, or for any use other than those specifically granted in this Lease.
18. Tenant shall not advertise for laborers giving the Premises as an
address, nor pay such laborers at a location in the Premises.
19. The requirements of Tenant will be attended to only upon application
of Landlord in the Building or at such other address as may be designated by
Landlord in the Lease. Employees of Landlord shall not perform any work or do
anything outside of their regular duties, unless under special instructions from
the office of Landlord.
20. Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Business machines and mechanical and electrical
equipment belonging to Tenant which cause noise, vibration, electrical or
magnetic interference, or any other nuisance that may be transmitted to the
structure or other portions of the Project or to the Premises to such a degree
as to be objectionable to Landlord or which interfere with the use or enjoyment
by other tenants of their premises or the public portions of the Project shall
be placed and maintained by Tenant, at Tenant's expense, in settings of cork,
rubber, spring type, or other vibration eliminators sufficient to eliminate
noise or vibration.
21. No awning, draperies, shutters or other interior or exterior window
coverings that are visible from the exterior of the Building or from the
exterior of the Premises within the Building may be installed by Tenant.
22. Tenant shall not place, install or operate within the Premises or any
other part of the Project any engine, stove, or machinery, or conduct mechanical
operations therein, without the written consent of Landlord.
23. No portion of the Premises or any part of the Project shall at any
time be used or occupied as sleeping or lodging quarters.
24. Tenant shall at all times keep the Premises neat and orderly.
25. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein and the expense
of any breakage, stoppage or damage resulting from the violation of this rule
shall be borne by the tenant who or whose employees or invitees shall have
caused it.
26. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
the Rules
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and Regulations of the Project.
27. Normal business hours shall be deemed to be 7:00 a.m. through
7:00 p.m. on weekdays and 8:00 a.m. through 1:00 p.m. on Saturdays,
exclusive of holidays. Holidays shall, for purposes of this Lease, be deemed to
be New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and any other holidays commonly observed by landlords of
comparable buildings in the market area of the Project.
28. Landlord reserves the right, without the approval of Tenant, to
rescind, add to and amend any rules or regulations, to add new rules and
regulations, and to waive any rules or regulations with respect to any tenant or
tenants.
29. Tenant shall use no other method of heating or cooling than that
supplied by Landlord.
30. Tenant shall comply with all local and federal codes and ordinances.
31. Tenant and its agents, employees and invitees shall observe and comply
with the driving and parking signs and markers on the Project grounds and
surrounding areas.
32. No animals or birds shall be brought to or kept in or about the
Project.
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EXHIBIT "D"
WORK LETTER
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29
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EXHIBIT D-1
BUILDING SHELL IMPROVEMENTS
Landlord shall, at Landlord's expense, furnish and install the following
building standard improvements in accordance with all applicable governmental
laws and regulations as follows:
1. Building standard ceiling grid (2 x 4).
2. Building standard parabolic light fixtures (up to one fixture per 80 usable
square feet).
3. Building standard ceiling tile.
4. Building standard horizontal mini blinds on all perimeter windows.
5. Building standard sprinkler system. Tenant to pay for height adjustment
and relocation/additions if required by code.
6. Building standard air conditioning main ducts up to and including variable
air volume (VAV) and fan-powered mixing boxes. Tenant to pay for all
ducts and devices downstream from main boxes (i.e. flexible ducts,
diffusers, return-air grills, etc.).
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EXHIBIT "E"
FORM OF
ACCEPTANCE OF PREMISES MEMORANDUM
This Acceptance of Premises Memorandum is being executed pursuant to that
certain Lease Agreement (the "Lease') dated the __________________ day of
_______________________________, 1999 between GRANITE TOWER, LTD.
("Landlord") and CARREKER-ANTINORI, INC. ("Tenant"), pursuant to which Landlord
leased to Tenant and Tenant leased from Landlord certain space in the office
building located at 4055 VALLEY VIEW LANE in DALLAS, Texas (the "Building").
Landlord and Tenant hereby agree that:
1. Landlord has fully completed all construction work required of Landlord
under the terms of the Lease and the Work Letter attached thereto.
2. The Premises are tenantable, Landlord has no further obligation for
construction and Tenant acknowledges that the Building, the Premises and
Tenant's Improvements are satisfactory in all respects, and are suitable
for the Permitted Use.
3. The Commencement Date of the Lease is the ________________________ day of
________________________________________, 1999. If the date set forth in
Section 1.01(g)of the Lease is different than the date set forth in the
preceding sentence, then Section 1.01(g) of the Lease is hereby amended
to be the Commencement Date set forth in the preceding sentence.
4. The Expiration Date of the Lease is the ____________________________ day of
_______________________________________________ 2010. If the date set forth
in Section 1.01(h) of the Lease is different than the date set forth in
the preceding sentence, then Section 1.01(h) of the Lease is hereby
amended to be the Expiration Date set forth in the preceding sentence.
5. Tenant acknowledges receipt of the current Rules and Regulations for the
Building.
6. Tenant represents to Landlord that Tenant has obtained a Certificate of
Occupancy covering the Premises.
7. All capitalized terms not defined herein shall have the meaning assigned to
them in the Lease.
Agreed and Executed this __________________ day of ____________________, 1999.
LANDLORD
Granite Tower, Ltd.
By: Granite Properties, Inc.
Its: General Partner
By:
-------------------------
Name: James Kirchhoff
Title: Director of Marketing
TENANT
Carreker-Antinori, Inc.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
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EXHIBIT "F"
PARKING GARAGE
1. In accordance with Section 1.01(d) of this Lease, Tenant shall not be
obligated to pay any parking charges under this Lease. Tenant shall indemnify
and hold harmless Landlord from and against all claims, losses, liabilities,
damages, costs and expenses (including, but not limited to, attorneys' fees and
court costs) arising or alleged to arise out of Tenant's use of any such parking
spaces. Tenant shall have no further rights to (a) any parking permit not taken
at the beginning of the original Term or (b) any parking permit taken at the
beginning of the original Term and thereafter released by Tenant or terminated
by Landlord for failure to comply with the other terms and conditions for the
leasing of such parking permit imposed by Landlord. Upon the termination of
this Lease, Tenant's rights to the parking permits then being leased to Tenant
hereunder shall terminate.
2. Tenant agrees to comply with all reasonable rules and regulations
now or hereafter established by Landlord relating to the use of the garage by
contract parking patrons. A condition of any parking shall be compliance by the
parking patron with garage rules and regulations, including any sticker or other
identification system established by Landlord. The following rules and
regulations are in effect until notice is given to Tenant of any change.
Landlord reserves the right to modify the following rules and regulations and/or
adopt such other reasonable and nondiscriminatory rules and regulations for the
garage as Landlord deems necessary for the operation of the garage. Landlord
may refuse to permit any person who violates the rules to park in the garage,
and any violation of the rules shall subject the car to removal.
RULES AND REGULATIONS
1. Cars must be parked entirely within the stall lines painted on the
floor.
2. All directional signs and arrows must be observed.
3. The speed limit shall be 5 miles per hour.
4. Parking is prohibited:
(a) in areas not striped for parking
(b) in aisles
(c) where "No Parking" signs are posted
(d) in cross hatched areas
(e) in such other areas as may be designated by Landlord or
Landlord's agent(s).
(f) in Visitor, Delivery, Handicapped or other specially designated
parking areas
5. Parking stickers or any other device or form of identification
supplied by Landlord shall remain the property of the Landlord and shall not be
transferable. There will be a replacement charge payable by Tenant equal to the
amount posted from time to time by Landlord for loss of any magnetic parking
card or parking sticker.
6. Garage managers or attendants are not authorized to make or allow any
exceptions to these Rules and Regulations.
7. Every parker is required to park and lock his own car. All
responsibility for damage to cars or persons is assumed by the parker.
8. No intermediate or full-size cars shall be parked in parking spaces
limited to compact cars.
9. All motorcycles/motorized bicycles are to be parked in the designated
motorcycle area, and will be removed from the property if not in the designated
area.
Persistent failure on the part of Tenant or Tenant's designated parkers to
observe the rules and regulations above shall give Landlord the right to
terminate Tenant's right to use the parking areas. No such termination shall
create any liability on Landlord or be deemed to interfere with Tenant's right
to quiet possession of the Premises.
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EXHIBIT "G"
OPERATING EXPENSE EXCLUSIONS
Notwithstanding any contrary provision in subsection 5.02A, "Operating Expenses"
shall not include any of the following:
(i) Costs for which Landlord actually receives reimbursement by insurance,
condemnation awards, warranties or otherwise.
(ii) Expenses incurred in leasing or procuring new tenants, including
advertising expenses or leasing commissions paid to agents of Landlord
or other brokers.
(iii) Costs (other than Permitted Capital Pass Through Costs) of renovating or
constructing space for Tenant or other tenants or renovating space
vacated by Tenant or other tenants.
(iv) Income, capital stock, estate, inheritance, franchise or other taxes
payable by Landlord unless the same shall have been levied as a
substitute for or supplement of real property taxes.
(v) Depreciation of the Building or Landlord's personal property at the
Building.
(vi) Interest on debt or amortization payments on any mortgage or deed of
trust, rental under any prime lease or similar rental under any other
superior lease or sublease.
(vii) Any wages, salaries or other compensation paid to any employee not
employed for or on behalf of the Building. To the extent wages, salaries
or other compensation are billed to the Building for any employee not
employed by Landlord full time on behalf of the Building, Landlord shall
reasonably prorate such employees time and bill to the Building only
such time as the employee reasonably devotes to the Building or Building
operations.
(viii) Dividends paid by Landlord.
(ix) Costs (other than Permitted Capital Pass Through Costs) of alterations
and capital improvements which could not be expenses under generally
accepted accounting principles.
(x) The costs incurred to remove or otherwise abate asbestos or asbestos
containing materials from the Building.
(xi) That portion of any payment made to an affiliate of Landlord that is in
excess of the amount which would have been paid in the absence of such
relationship.
(xii) the costs for repairs or maintenance that are reimbursed by others,
including, without limitation, reimbursement made on warranty claims.
(xiii) Repair and/or replacement costs to Building equipment arising from Year
2000 equipment failure.
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EXHIBIT "H"
USE BY TENANT
The Premises are to be used and occupied by Lessee solely for general office
purposes and for the following ancillary purposes or uses.
(i) cafeterias, kitchens, pantries and dining rooms for the preparation and
serving of food and beverages to employees and guests of Lessee;
(ii) vending machines and snack bars for the sale of food, confections, non-
alcoholic beverages, newspapers and other convenience items to employees
of lessee:
(iii) business machines, equipment for printing, producing and reproducing
forms, circulars and other materials used in connection with the conduct
of Lessee's business, and equipment for the production of such
blueprints, photostats and other material as Lessee may require for the
transaction of its business, but not for sale to others;
(iv) libraries for employees of Lessee;
(v) computer and other electronic data processing equipment;
(vi) conference rooms;
(vii) training rooms for employees and clients of Lessee;
(viii) facilities for storage of equipment and supplies in connection with the
foregoing;
(ix) safe and vault area;
(x) audio-visual and closed circuit television facilities located entirely
within the interior of the Premises; and
(xi) radio and other electronic communication facilities located entirely
within the interior of the Premises.
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EXHIBIT "I'
CLEANING SPECIFICATIONS
Janitorial services are to be performed nightly Monday through Friday or Sunday
through Thursday, five (5) days per week. Services to be furnished shall
include, but not be limited to: all office areas, including service areas, all
restrooms (private and public), all stairways, all elevators and elevator
lobbies, and all entrance walkways (plaza).
I. GENERAL CLEANING, FIVE DAYS PER WEEK:
A. All carpeting will be vacuumed and spot cleaned.
B. Empty and clean all wastebaskets, sand urns, ash trays, etc.; damp
dust or wet wipe and dry polish as necessary. (Liners will be placed
in receptacles and wastebaskets and replaced as needed.)
C. Remove all trash and wastepaper to designated collection points. Bag
trash and non-bag trash will be placed in designated area.
D. All HORIZONTAL surfaces of desks, other furniture and file cabinets
should be dusted with clean dry cloth as necessary. Personal items,
papers, folders, etc. will NOT be moved in order to avoid misplacement
or breakage. NOTE: Computer keyboards will not be dusted.
E. All chairs will be dusted and replaced around desks and conference
tables.
F. Drinking fountains will be cleaned and disinfected, and all exposed
metal shall be polished and kept free of foreign matter.
G. All interior doors and partition panels will be cleaned to remove
smudge marks and dust.
H. All glass doors, windows around front and rear entrances and glass
panels will be cleaned and polished.
I. Vacuum entrance mats nightly.
J. Wash and polish all restroom mirrors, powder shelves, bright work,
dispensers, etc.
K. Clean and sanitize all restroom fixtures. Toilet, wash basins,
urinals, shower walls, and floors to be kept free of scale and mildew.
Wash and sanitize top and underside of toilet seats and benches.
L. Refill soap, towel, and tissue containers, and holders.
M. Wipe down toilet partitions and counters and walls around wash basins.
N. Mop all restroom and shower room floors.
O. Mop hard surfaced floors.
P. Mop outside main lobby entrances.
Q. Sweep outside loading dock truck area.
R. Dust mop and sweep loading dock and service elevator area.
S. Wipe clean window sills.
T. Empty and sanitize all receptacles and sanitary disposals.
U. Clean building directory and remove fingerprints and smudges.
V. All counter tops of wet bar areas will be wiped down nightly and sinks
will be cleaned if free of dishes.
II. GENERAL CLEANING - WEEKLY
A. Vacuum upholstery in executive areas.
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B. Spray buff hard tile floors.
C. Machine scrub, wash, buff all resilient tile, and concrete floors.
D. Wash down with disinfectant all ceramic tile walls, toilet partitions,
ledges and sills in restrooms.
E. Wash all door glass and sidelights.
F. Paneled walls will be dusted with a clean dry cloth.
G. Loading dock will be hosed down and cleaned of all foreign matter.
H. Sweep and dust service elevator lobbies.
III. GENERAL CLEANING - MONTHLY
A. Dust all cabinets, files, chairs, chair rails, paneling, sills, trim
and baseboards.
B. Dust pictures, frames and picture glass.
C. Dust exterior of lighting fixtures and air conditioning grills.
D. Venetian blinds are to be dusted or vacuumed.
E. Remove high cobwebs from all entry areas.
IV. GENERAL CLEANING - QUARTERLY
A. Dust and spot clean where necessary all vertical surfaces such as
walls, partitions, ventilating louvers, and other surfaces not reached
in nightly or monthly cleaning.
B. High dust (ladder required) all shelves, cabinets and other objects in
tenant offices.
C. Vacuum upholstery and draperies.
V. ELEVATOR CLEANING
A. Elevator carpet will be vacuumed daily, spot cleaned as required, and
shampooed monthly.
B. Exterior doors and trim will be dusted and fingerprint and smudges
removed daily.
C. Thresholds will be cleaned and polished as needed.
D. Fingerprints and smudges will be removed daily from the interior metal
doors and panels.
E. Elevator thresholds will be brushed clean and polished daily.
VI. FLOOR CLEANING
A. Hard Surface (granite included)
1. Tenant areas: Dust mop and mop nightly.
2. Restroom floors: Strip and reseal monthly, keep grout clean at
all times.
3. Scrub and polish door thresholds daily.
D. Carpet Floors
1. Thorough nightly vacuuming.
2. Spot removal as required.
F. Outside Sidewalks
1. Police and sweep as required.
2. Sweep and hose down monthly, per managers instructions.
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VII. WINDOW CLEANING
VIII. SPECIAL RULES AND REGULATIONS
A. No computer should ever be unplugged. If lamps, etc. are unplugged so
outlet may be used for vacuuming, all unplugged items should be re-
plugged and left as originally found.
B. Vending machines, refrigerators, microwave ovens, etc. in tenant
spaces are not to be used by the cleaning crew. No eating is allowed
in tenant space or common areas.
C. Telephones may not be used by cleaning crew, except by cleaning
supervisor, who may use management office or security desk telephones
for business or emergency calls only.
D. No radios or other personal property of tenants may be used by
cleaning crew.
E. Cleaning crew will work behind closed doors when possible. All
exterior suite doors will be closed and locked while cleaning is being
performed.
F. Cleaning crew shall perform all work Monday through Friday or Sunday
through Thursday commencing at 6:00 p.m. and completing no later than
7:00 am.
G. Cleaning crew shall observe the same holidays observed by the
building. Cleaning crew will work on holidays that the building is
open for normal business.
H. Unless the Tenant is in the office, cleaning personnel will turn off
all lights and lock all lockable tenant and common area doors when
cleaning is complete.
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EXHIBIT "J"
REGISTRATION AND STANDARD COMMISSION AGREEMENT
STATE OF TEXAS
COUNTY OF DALLAS
THIS AGREEMENT, entered into by and between GRANITE TOWER, LTD. (herein
referred to as "Landlord"), and THE AMEND GROUP (referred to as "Broker").
WHEREAS, Broker desires to assist Landlord in negotiating and consummating a
lease (the "Lease Agreement") between Landlord and CARREKER-ANTINORI, INC.
(herein after referred to as "Prospect"), to be located at 4055 VALLEY VIEW
LANE, Dallas, Texas (the "Building"); and
WHEREAS, Broker and Landlord hereby and herein desire to agree upon the terms
and conditions upon which Landlord shall pay Broker a commission for such
services; and
WHEREAS, Broker is a Real Estate Broker duly licensed under the Texas Real
Estate License Act.
NOW THEREFORE, Broker and Landlord agree as follows:
1. REGISTRATION
Landlord and Broker agree that Broker has registered Prospect with Landlord by a
written authorization letter from Prospect which has been received by Landlord.
2. COMMISSION
(A) ORIGINAL SPACE. In the event, and only in the event Landlord and
Prospect execute a lease agreement covering space in the Building ( the "Lease
Agreement") while this Agreement is in effect, Landlord agrees to pay Broker a
commission equal to FOUR AND ONE-HALF PERCENT (4.5%) of the "Basic Rent"
(hereinafter defined) payable to Landlord by Prospect under the Lease Agreement
during the primary term thereof (the "Commission").
(B) EXPANSION SPACE. In the event Prospect increases the amount of space
in the Building it leases from Landlord, Landlord agrees to pay Broker a
commission equal to four and one-half percent (4.5%) of the "Basic Rent" paid to
Landlord during the primary term of the Lease Agreement attributable to such
space (the "Expansion Space Commission").
(C) RENEWAL SPACE. In the event Prospect renews or extends the Lease
Agreement beyond the primary term of the Lease Agreement, Landlord agrees to pay
Broker a commission equal to FOUR AND ONE-HALF PERCENT (4.5%) of the "Basic
Rent" paid to Landlord during the renewal term of the Lease Agreement
attributable to such space (the "Renewal Space Commission").
Expansion Space Commissions and Renewal Space Commissions will be paid to
Broker only upon the condition that Prospect agrees in the Lease Agreement that
Tenant will indemnify Landlord from any claims or assertions by any third party
broker that such third party broker is entitled to any commission or other
compensation with respect to any such expansion or renewal. In the event that
Tenant is unwilling to agree to such indemnity provisions in the Lease
Agreement, Landlord shall still be entitled to enter into the Lease Agreement
with Tenant and Broker shall be entitled to an Expansion Space Commission or a
Renewal Space Commission hereunder ONLY IF Tenant has notified Landlord in
writing that Broker is representing Tenant specifically with respect to such
renewal of expansion.
(D) PAYMENT TERMS. The commission shall be payable by Landlord to Broker.
Landlord shall pay such commission or portion thereof to Broker in two (2) equal
installments as follows:
(1) Fifty percent (50%) of the commission shall be payable upon the
receipt and acceptance by Landlord of (i) copy of the Lease which has
been fully executed by Landlord and Tenant.
(2) The balance of the commission shall be due and payable upon (i)
Tenant's occupancy and full acceptance of the premises subject to the
Lease and (ii) Tenant's payment of the entire balance
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of any construction cost then due.
The Expansion Space Commission shall be payable by Landlord to Broker, if at
all, in the same manner described above. The Renewal Space Commission shall be
payable, if at all, upon the commencement of the applicable renewal term.
(D) BASIC RENT. The "Basic Rent" payable under the Lease Agreement shall
be calculated by adding the total amount of "base rent" or "basic rent" (as
described in the Lease Agreement) which is due and payable during the primary
lease term of the Lease, and excluding therefrom (and subtracting therefrom
where appropriate) the following items:
(1) Cash, credits, deferments, or abatements of rent;
(2) Escalations in excess of the original basic rent payable;
(3) An amount equal to the amortization of leasehold improvements in
excess of Building Standard finish;
(4) Cancellation or penalty payments with respect to termination of the
Lease Agreement;
(5) Late payment charges;
(6) Sums designated as "additional rent" under the Lease Agreement;
(7) Reimbursements to Landlord for advances made pursuant to the Lease
Agreement;
(8) Percentage rent (on retail businesses);
(9) Rent or other charges for parking and electricity;
(10) Security deposits (including any amounts necessary to restore any
security deposit after application of same pursuant to the Lease
Agreement);
(11) Rent for services of facilities available to Tenant at locations other
than the Demised Premises covered by the Lease Agreement;
(12) Rent credited to Tenant by reason of Landlord's assumption or takeover
of Prospect's obligations under any other lease and/or Landlord
takeback;
(14) Landlord's assumption of Prospect's obligations and/or costs,
including but not limited to rent escalation, brokerage commissions,
leasehold improvements and all other direct expense and obligations
under any lease or leases covering any space occupied by Prospect in
the Building or other buildings ("Present Space") or requirements by
Landlord to indemnify Prospect as to any obligations respecting such
Present Space;
(15) Additional rentals for special tenant services over and above normal;
and
(16) Rentals payable upon a temporary lease or continuation of a tenancy of
a month-to-month or statutory basis.
3. Intentionally deleted.
4. This Agreement shall continue in effect for one hundred eighty (180) days
after the date hereof and will be extended by Landlord only if Broker shows
reasonable evidence satisfactory to Landlord that Broker is actively pursuing
the execution of a lease between Landlord and Prospect.
5. If any Lease Agreement has a cancellation provision during any given Lease
year and the cancellation penalty does not reimburse Landlord for unamortized
commission on the term of the lease to be canceled, the "Base Rent" upon which
the Commission is calculated shall be equal to the Basic Rent payable on or
before the date of such cancellation. In the event the cancellation option is
not exercised and the cancellation penalty does not reimburse Landlord for
unamortized commission on the term of the lease to be canceled, Landlord shall
make a cash payment to Broker equal to the Commission due on the amount of Basic
Rent payable pursuant to the Lease after the date the cancellation options
expires.
6. Except as otherwise herein provided, all rights and obligations hereunder
shall be binding upon and insure to the benefit of the successors, assigns,
heirs, administrators, and personal representatives of the Landlord and Broker.
7. If, for any reason whatsoever, a Lease is not entered into between Landlord
and Prospect for space in the Building within the time period specified above,
then no commission whatsoever shall be deemed to be due or earned, or shall be
paid to Broker or any other Broker by Landlord, and Landlord is and shall in
such event be relieved from any responsibility or liability for the payment of
any and all commissions, claims, or changes of any kind or character.
8. This Agreement shall be construed under and in accordance with the laws of
the State of Texas. All monetary and other obligations hereunder are
performable in Dallas County, Texas, and venue for any action in connection
herewith shall be in Dallas County, Texas.
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9. No consent or waiver, expressed or implied, by any party hereto of or to
any breech or default by any other party hereunder, shall be deemed or construed
to be a consent or waiver of or to any other breech or default hereunder of the
same or any obligations of such parties. Failure on the part of any party
hereto to complain of any act of the other party or to declare the other party
in default hereunder irrespective of how long such failure continues, shall not
constitute a waiver by such party of its rights hereunder.
10. This Agreement contains the entire agreement of the parties hereto and it
may not be changed or modified orally, but only by a written instrument signed
by a duly authorized officer of the parties hereto.
11. In the event any one or more of the provisions contained in this Agreement
shall, for any reason, be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision hereof and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision has never been contained in this Agreement.
12. All notices, requests and other communications under this Agreement shall
be in writing and shall be delivered in person or sent by Certified Mail, Return
Receipt Requested, addressed as follows:
If to Landlord: Granite Properties, Inc.
4099 McEwen, Suite 370
Dallas, Texas 75244
If to Broker: The Amend Group
8150 North Central Expressway
Suite 1100
Dallas, TX 75206
13. Intentionally deleted..
14. Landlord's liability to Broker for all agreements contained herein shall be
limited to Landlord's interest in the Building.
15. This Agreement is executed in multiple original counterparts, each of which
shall be deemed an original, but together shall constitute one and the same
instrument.
16. Intentionally deleted.
17. In the event of sale or transfer of the Building, Landlord shall remain
liable for all terms and conditions of this agreement unless and until the
purchaser or assign(s) assumes all obligations herein.
EXECUTED THIS THE ________________ DAY OF ______________________ 1999.
BROKER: The Amend Group LANDLORD: Granite Tower, Ltd.
By: Granite Properties, Inc.
By: By:
------------------------- ------------------------------
Name: John T. Amend Name: Jim Kirchhoff
---------------------- ---------------------------
Title: President Title: Director of Marketing
---------------------- ---------------------------
Tax ID Number:
--------------
Broker ID Number:
-----------
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EXHIBIT "K"
SIGNAGE LOCATIONS
43
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RIDER 1
RENEWAL OPTION
1. If, and only if, on the Expiration Date and the date Tenant notifies
Landlord of its intention to renew the term of this Lease (as provided
below), (i) Tenant is not currently in default under this Lease, (ii)
Tenant then occupies at least one (1) full floor of the original Premises
and (iii) this Lease is in full force and effect, then Tenant, but not any
assignee or subtenant of Tenant, shall have and may exercise an option to
renew this Lease for two (2) consecutive additional term of FIVE (5)
years each (hereinafter referred to as a "Renewal Term") upon the same
terms and conditions contained in this Lease with the exceptions that (x)
after the second (2nd) Renewal Term, this Lease shall not be further
available for renewal, and (y) the rental for each Renewal Term shall be
the "Renewal Rental Rate" with respect to such Renewal Term. The Renewal
Rental Rate with respect to each Renewal Term is hereby defined to mean the
then prevailing rents (including, without limitation, those similar to the
Basic Annual Rent and Additional Rent) payable by renewal tenants having a
credit standing substantially similar to that of Tenant, for properties of
equivalent quality, size, utility and location as the Premises, including
any additions thereto, located within the area described below and leased
for a renewal term approximately equal to the Renewal Term. The Renewal
Rental Rate will take into consideration the tenant inducements offered in
the such renewal transactions considered by Landlord in determining the
Renewal Rental Rate.
2. If Tenant desires to renew this Lease, Tenant must notify Landlord in
writing (the "Renewal Notice") of its intention to renew on or before the
date which is at least NINE (9) months but no more than twelve (12) months
prior to the Expiration Date (as same may have been extended). Landlord
shall, within the next sixty (60) days, notify Tenant in writing (the
"Market Rent Notice") of Landlord's determination of the Renewal Rental
Rate with respect to such Renewal Term. If Lessee agrees with the Renewal
Rental Rate quoted by Lessor in the Market Rent Notice, Lessee may accept
such rental rate by delivering written notice thereof to Lessor within
fifteen (15) days after receipt of the Market Rent Notice. If Lessee
disagrees with the rental rate quoted by Lessor in the Market Rent Notice,
or if Lessor fails to deliver the Market Rent Notice within the sixty (60)
day period required above, Lessee may elect, by delivering written notice
thereof (an "Appraisal Notice") to Lessor in the manner provided below, to
have the fair market base rent determined by the appraisal process set
forth in paragraph 3 hereinbelow. The Appraisal Notice must be delivered
by Lessee to Lessor, if at all (a) within fifteen 15 days after Lessee's
receipt of the Market Rent Notice, or (b) if Lessor fails to deliver the
Market Rent Notice within the prescribed time period, within seventy-five
(75) days after the date of the Renewal Notice. If Lessee fails, within
the applicable prescribed time periods, to either (i) accept Lessor's
proposed Renewal Rental Rate, or (ii) deliver the Appraisal Notice, Lessee
shall be deemed to have accepted Lessor's proposed Renewal Rental Rate.
3. If Lessee delivers to Lessor an Appraisal Notice pursuant to Paragraph 2
above, the provisions of this Paragraph 3 shall apply. Within fifteen (15)
days after delivery to Lessor of an Appraisal Notice, each party at its
cost and by giving notice to the other party, shall appoint an MAI-
certified real estate appraiser with at least five (5) years experience
appraising similar commercial properties in Dallas County, Texas to
appraise and set the fair market base rent for the Premises for the
applicable Renewal Term. The appraisal shall be based upon the market rent
for comparable office space in comparable buildings in the LBJ/North Dallas
market, taking into account all relevant factors with respect to the
Renewal Terms, including condition and size of the Premises, length of
term, creditworthiness of Tenant, extent of leasehold improvements, the
basis for payment of taxes, operating expenses, electricity, and other
factors affecting rent in the market. If either party fails to appoint an
appraiser within the allotted time, the single appraiser appointed by the
other party shall be the sole appraiser. If an appraiser is appointed by
each party and the appraisers so appointed are unable to agree upon the
Renewal Rental Rate within thirty (30) days after the appointment of the
second, they shall appoint a third similarly qualified appraiser within ten
(10) days after the expiration of such thirty (30) day period; if they are
unable to agree upon a third appraiser, either party may, upon not less
than five (5) days notice to the other party, apply to the Presiding Judge
of any Dallas County state court for the appointment of a third similarly
qualified appraiser. Each party shall bear its own legal fees in
connection with the appointment of the third appraiser and shall bear one-
half of any other cost of appointment of third appraiser and of such third
appraiser's fee. The third appraiser, however selected, shall be a person
who has not previously acted for either party in any capacity. Within
twenty (20) days after the appointment of the third appraiser, the two fair
market rentals that are nearest to one another in amount shall be added
together, divided by two, and the resulting quotient shall be the Renewal
Rental Rate for the Premises for the applicable Renewal Term, which
determination shall be binding on the parties and shall be enforceable in
any further proceedings relating to this Lease.
4. Notwithstanding anything contained in this Rider 1 to the contrary, if
Tenant fails to deliver written notice indicating whether or not it elects to
extend at least nine (9) months prior to the expiration of the term of this
Lease (as same may have been extended), Tenant shall be deemed to have elected
not to extend this Lease beyond the current term hereof, and Tenant's option to
extend (and any remaining unexercised options to extend) shall be void.
3. Intentionally deleted.
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RIDER 2
CAP ON CERTAIN OPERATING EXPENSES
For the purpose of determining Additional Rent, Operating Expenses (exclusive of
the Non-Capped Operating Expenses, as hereinafter defined) for any calendar year
shall not be increased over the amount of Operating Expenses (exclusive of Non-
Capped Operating Expenses) during the calendar year in which the term of this
Lease commences by more than SEVEN percent (7%) per year. It is
understood and agreed that there shall be no cap on Non-Capped Operating
Expenses, which are hereby defined to mean all Utility Expenses, Real Estate
Taxes and Insurance Premiums.
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RIDER 3
SIGNAGE
Landlord hereby grants Tenant the exclusive right, at Tenant's sole cost and
expense, to display Tenant's name and corporate emblem on the exterior portion
above the tenth floor on the Building facade at two (2) locations shown on
Exhibit "K" to be approved by Landlord which shall not be unreasonably withheld
and shall be deemed to be approved if not withheld in writing within ten (10)
days after Tenant gives Landlord a written request for such consent. Landlord
reserves the right to approve style, type of construction, color size and
location of any such sign. Landlord's approval shall be submitted to Tenant in
writing after receipt by Landlord of Tenant's request accompanied by drawings,
schematics and site location for said signage together with any applicable plans
and specifications for review. Installation shall be subject to: (i) Tenant's
receipt of all necessary governmental permits and approvals, (ii) Landlord's
written consent as provided above and (iii) supervision by Landlord of
installation. Notwithstanding anything to the contrary, Landlord reserves the
right to offer lower spandrel signage to a third party tenant.
Tenant agrees to maintain such signage during the Term of this Lease and remove
any exterior building signage installed by Tenant at Tenant's sole cost and
expense when the Premises are vacated or the Lease Term is terminated or
otherwise, canceled and to restore the exterior of the Building to the original
condition, reasonable wear and tear accepted. Any subletting or assignment
shall terminate, so long as Tenant or an affiliate is in occupancy of at least
one (1) floor, Tenant's signage rights contained herein. Tenant shall have the
rights contained herein only so long as Tenant is not in default of this Lease.
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RIDER 4
TENANT'S RIGHT OF FIRST REFUSAL AND EXPANSION OPTION
A. For purposes of this Rider 4, the area within the Building described on
SCHEDULE A attached to this Rider is hereinafter referred to as the "ROFR
Space". Prior to leasing any of the ROFR Space to a party other than
Tenant, Landlord shall deliver to Tenant a written statement ("Statement")
which shall reflect the basic terms upon which Landlord is then intending
to lease all or a portion of the ROFR Space to a prospective tenant (the
portion of the ROFR Space that is the subject of such Statement is
hereinafter referred to as the "Subject ROFR Space"), such as rent, term,
finish allowances, tenant inducements and the description of the Subject
ROFR Space. Tenant shall have five (5) days after receipt of the Statement
within which to notify Landlord in writing that it desires to lease the
Subject ROFR Space upon the terms and conditions contained in the Statement
provided, however, (I) if Tenant notifies Landlord of its election to lease
the Subject ROFR Space within two (2) years after the Commencement Date,
Tenant shall lease the Subject ROFR Space (which shall thereafter be part
of the Premises) for the number of months remaining for the Primary Term of
this Lease, and upon the same terms and conditions set forth for the
original Premises (including the same Base Rent payable for the original
Premises during the remainder of the Primary Term, except that (i) the
Finish Allowance of $27.50 per square feet payable by Landlord shall be
reduced in direct proportion to the number of months remaining on the
Primary Term as of Landlord's estimated delivery date of the Subject ROFR
Space to Tenant and (ii) Tenant shall be entitled to four (4) parking
spaces for each one thousand (1,000) rentable square feet of such Subject
ROFR Space being added to the Premises, of which seventy-five percent (75%)
shall be located in the Parking Garage and the remainder shall be located
on the surface lot (all such parking spaces shall be at no cost to Tenant
provided, however, Landlord agrees that, on a month-to-month basis, the
foregoing percentage of seventy-five percent (75%) shall be increased to
eighty-four (84%), and provided further that, if in Landlord's reasonable
opinion, it becomes necessary that such additional parking spaces shall be
required to lease the remainder of the Building, Landlord may, upon thirty
(30) days prior written notice to Tenant reduce such percentage to seventy-
five percent (75%); and (II) if Tenant notifies Landlord of its election to
lease the Subject ROFR Space after the second (2nd) anniversary of the
Commencement Date but prior to the sixth (6th) anniversary of the
Commencement Date, Tenant shall lease the Subject ROFR Space upon the same
terms set forth in (I) immediately preceding, except that the rate of Base
Rent, the amount of the Finish Allowance and the other terms and allowances
shall be determined by Landlord in its good faith discretion and shall be
based upon the then current market conditions for comparable office space
in comparable buildings in the LBJ/North Dallas market, taking into account
all relevant factors such as condition and size of the Subject ROFR Space,
length of term, creditworthiness of Tenant, basis for payment of operating
expenses and other relevant factors. Failure by Tenant to notify Landlord
within such five (5) day period shall be deemed an election by Tenant not
to lease the Subject ROFR Space and Landlord shall thereafter have the
right to lease such subject ROFR Space upon substantially the same terms
described in the Statement to a third party. In the event that Landlord
does not enter into a lease with respect to such Subject ROFR Space within
one hundred eighty (180) days after the date of the Statement, Tenant's
rights under this Rider 4 shall automatically be reinstated with respect to
such Subject ROFR Space.
B.1 So long as Landlord has not theretofore leased all of the ROFR Space to
Tenant or to another party, Tenant shall have the option (the "Expansion
Option") to lease all or any portion of the then unleased portion of the
ROFR Space pursuant to the terms of this Lease; provided, however, Tenant
must lease the ROFR Space in sufficient quantity such that any unleased
portions of the ROFR Space shall, in Landlord's reasonable determination,
be in a commercially leasable size and configuration. Tenant must exercise
the Expansion Option, by delivering written notice to Landlord. If Tenant
exercises the Expansion Option within two (2) years after the Commencement
Date, Tenant shall lease the designated portion of the ROFR Space upon the
same terms and conditions set forth in the Lease for the remainder of the
Primary Term (including the same Base Rent payable for the original
Premises during the remainder of the Primary Term), except that (i) the
Finish Allowance of $27.50 per square foot payable by Landlord respect to
such ROFR Space shall be reduced in proportion to the number of months
remaining on the Primary Term as of Landlord's estimate of the date of
delivery of such ROFR Space to Tenant, and (ii) Tenant shall be entitled to
four (4) parking spaces for each one thousand (1,000) rentable square feet
of such ROFR Space being added to the Premises, of which seventy-five
percent (75%) of such spaces shall be located in the Parking Garage and the
remaining twenty-five percent (25%) shall be located on the surface parking
lot provided, however, Landlord agrees that, on a month-to-month basis, the
foregoing percentage of seventy-five percent (75%) shall be increased to
eighty-four (84%), and provided further that, if in Landlord's reasonable
opinion, it becomes necessary that such additional parking spaces shall be
required to lease the remainder of the Building, Landlord may, upon thirty
(30) days prior written notice to Tenant reduce such percentage to seventy-
five percent (75%). All such parking spaces shall be at no cost to Tenant.
B.2 If Tenant exercises the Expansion Option after the second (2nd) anniversary
of the Commencement Date, Tenant shall lease the designated portion of the
ROFR Space on the same terms and conditions as set forth in B.1 of this
Rider 4 for the remainder of the Primary Term, except that the rate of Base
Rent, Tenant Allowance and other terms and allowances shall be determined
by Landlord in its good faith discretion and shall be based upon the then
current market conditions for comparable office space in comparable
buildings in the LBJ/North Dallas market, taking into account all relevant
factors such as condition and size of the designated portion of the ROFR
Space, length of term, creditworthiness of Tenant, basis for payment of
operating expenses and other relevant factors.
47
<PAGE>
C. If at any time during the first two (2) years of the term of this Lease,
Landlord has leased Subject ROFR Space to parties other than Tenant
containing (in the aggregate) more than 12,500 square feet of rentable
area, Landlord shall, to the extent available, designate certain portions
of the Available Space (as hereinafter defined) as replacement ROFR Space,
which such designated Available space shall thereafter be part of the ROFR
Space for purposes of this Rider 4, subject to and upon the following terms
and conditions:
1. As used in this Rider 4, "Available Space" shall mean such leaseable
areas of floors 2 through 6 of the Building, if any, that at the time
are not subject to a lease agreement, option, or other contractual
right or agreement with any party other than Tenant.
2. For each 12,500 square foot increment of Subject ROFR Space (but not
smaller increments thereof) leased to parties other than Tenant
pursuant to Paragraph A of this Rider 4, Landlord shall designate
12,500 square feet of Available Space as replacement ROFR Space;
provided, however, if the then largest continuous block of Available
Space is less than 12,500 square feet of rentable area, Landlord shall
designate such largest contiguous block of Available Space as
replacement ROFR Space (even though less than 12,500 square feet).
3. The terms of this Paragraph C of this Rider 4 shall automatically
terminate as of the second (2nd) anniversary of the Commencement Date.
D. So long as Tenant has theretofore leased in aggregate a minimum of 95,720
square feet in the Building, Tenant shall have the option, which must be
exercised (if at all) by the delivery of written notice to Landlord between
the second (2nd) and third (3rd) anniversaries of the Commencement Date, to
require that Landlord designate, to the extent available, the then largest
contiguous block of Available Space as replacement ROFR Space (but not to
exceed 25,000 square feet). If Tenant timely exercises such option,
Landlord shall notify Tenant of the designation of such replacement ROFR
space within ten (10) days following receipt of Tenant's written notice.
Therefore, such replacement ROFR Space shall be subject to the terms and
conditions of Paragraphs A, B.1, and B.2 of this Rider 4 (any leasing by
Tenant of any such replacement ROFR Space shall therefore occur after the
second anniversary of the Commencement Date and the lease terms applicable
thereto shall be determined accordingly).
E. Notwithstanding any provision or inference in this Rider to the contrary,
Tenant's rights under this Rider 4 shall expire and be of no further force
or effect upon the earlier of (i) the expiration or earlier termination of
the Primary Term of this Lease, or (ii) the occurrence of a Default by
Tenant under this Lease.
F. Any assignment or subletting by Tenant of more than one (1) full floor of
the original Premises, other than to an affiliate of Tenant, or a Default
by Tenant under this Lease, shall terminate Tenant's rights under this
Rider 4.
G. Landlord will use commercially reasonable efforts to present the Available
Space on floors 2-6 of the Building to prospective tenants prior the ROFR
Space; provided, however, Landlord shall have no obligation to lease any
available space in the Building prior to leasing the ROFR Space.
48
<PAGE>
SCHEDULE "A"
RIGHT OF FIRST REFUSAL SPACE
Page 1 of 2
49
<PAGE>
SCHEDULE "A"
RIGHT OF FIRST REFUSAL SPACE
Page 2 of 2
50
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-63517) pertaining to the Amended and Restated Carreker-Antinori,
Inc. 1994 Long Term Incentive Plan and the Carreker-Antinori, Inc. Director
Stock Option Plan of our report dated April 12, 1999, with respect to the
consolidated financial statements of Carreker-Antinori, Inc. included in the
Annual Report (Form 10-K) for the year ended January 31, 1999.
ERNST & YOUNG, LLP
Dallas, Texas
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARREKER
ANTINORI, INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE
MONTHS ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 20,701
<SECURITIES> 12,849
<RECEIVABLES> 28,876
<ALLOWANCES> 1,272
<INVENTORY> 0
<CURRENT-ASSETS> 62,571
<PP&E> 5,567
<DEPRECIATION> 2,894
<TOTAL-ASSETS> 68,736
<CURRENT-LIABILITIES> 10,454
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 56,947
<TOTAL-LIABILITY-AND-EQUITY> 68,736
<SALES> 774
<TOTAL-REVENUES> 55,017
<CGS> 560
<TOTAL-COSTS> 24,175
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 708
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 8,075
<INCOME-TAX> 2,903
<INCOME-CONTINUING> 5,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,172
<EPS-PRIMARY> .32
<EPS-DILUTED> .30
</TABLE>
