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UNITED STATES
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 DECEMBER 31, 2000
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 0-26146
HNC SOFTWARE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0248788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5935 CORNERSTONE COURT WEST, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 546-8877
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
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 of the common stock held by non-affiliates of the
Registrant, based on the closing price as reported on the Nasdaq Stock Market at
March 9, 2001 was approximately $747.9 million. The number of shares of the
Registrant's Common Stock outstanding at March 9, 2001 was 34,583,630 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference
in Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE NO.
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PART I
ITEM 1. BUSINESS............................................................. 2
ITEM 2. PROPERTIES........................................................... 23
ITEM 3. LEGAL PROCEEDINGS.................................................... 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 24
EXECUTIVE OFFICERS................................................... 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................. 26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................. 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.................................................. 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ................................................ 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 28
ITEM 11. EXECUTIVE COMPENSATION............................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 28
HNC SOFTWARE INC. TRADEMARKS
The following are our registered trademarks: AC-Web(R), AC-Manager(R)
Admin-Connect(R), CompCompare(R), EC-Web(R), Employer-Connect(R), MIRA(R),
ProfitMax(R), ProviderCompare(R), Provider-Connect(R), SC-Manager(R), SC-Web(R),
State-Connect(R) and Trans-Connect(R). The following are also our trademarks:
4SCORE(TM), 4WARN(TM), ATACS(TM), AutoAdvisor(TM), Capstone(TM), CardAlert(TM),
CompAdvisor(TM), Eagle(TM), eCMDirector(TM), eFalcon(TM), Falcon(TM),
FraudTec(TM), Home & Away Prepaid Billing(TM), Mindwave Proaction(TM), Mindwave
Reaction(TM), ProfitVision(TM) RoamEx(TM), Spyder(TM), VeriComp Claimant(TM),
VeriComp Employer(TM) and VeriComp Subro(TM). All other trademarks or trade
names in this report are the property of their respective owners.
Our World Wide Web site is located at both hnc.com and hncs.com, and investor
information can be requested by calling our Stockholder Information Line at
1-800-396-8052. Information on our Web site is not part of this Report.
We were founded in 1986 under the laws of California, and were reincorporated in
June 1995 under the laws of Delaware. Our principal executive offices are
located at 5935 Cornerstone Court West, San Diego, California 92121-3728, and
our telephone number is (858) 546-8877.
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PART I
CAUTION REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions we have made. Words such as "anticipates,"
"expects," "plans," "intends," "may," "will," "should," "believes," "estimates"
or similar expressions identify forward-looking statements. These statements
include, among other things, statements concerning our anticipated growth
strategies, anticipated trends in our business and the markets that we serve,
our expectations of our future performance and the market acceptance of our
products, our plans for expanding our business, our plans for product
functionality and features and the status of evolving technologies. In addition,
the section entitled "Risk Factors" in Item 1, "Business," consists primarily of
forward-looking statements. Forward-looking statements are only predictions
based upon our current expectations about future events. We cannot guarantee
future results, performance or achievements or that predictions or current
expectations will be accurate.
Forward-looking statements are subject to risks, uncertainties and assumptions
that are difficult to predict. Therefore, our actual results could differ
materially and adversely from those expressed in any forward-looking statements
as a result of various factors. The section entitled "Risk Factors" in Item 1,
"Business" discusses some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks. Investors are cautioned not to place undue reliance on
these forward-looking statements that speak only as of the date of this report.
We undertake no obligation to revise or update any forward-looking statements
for any reason.
ITEM 1. BUSINESS
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OVERVIEW
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We provide customer insight through Intelligent Response, Decision Management
and Customer Analytics software that enables companies in the financial,
insurance, telecommunications and e-commerce industries to acquire, manage and
retain customers. Our technology helps businesses make the right decisions about
their customers in real time. It can improve a business' speed and accuracy in
differentiating between customer value and risk; determining what customers want
without invading their privacy; delivering personalized service and managing
customers more profitably; and developing customer loyalty.
INDUSTRY BACKGROUND
Today's competitive business environment has forced many companies to increase
business efficiencies while improving their flexibility and responsiveness to
changing market conditions. In particular, the widespread adoption of the
Internet has changed the way many businesses operate. Consequently, companies
continue to make significant investments in technology solutions designed to
manage and analyze information, develop initiatives to boost customer loyalty
and develop lasting customer relationships with profitable customers. Building
lasting relationships with profitable customers requires insight into customer
profitability and the elements driving it, and the ability to optimize
interaction with the customer to improve profitability and maximize the lifetime
value of the customer relationship.
Relationships with customers increasingly depend on electronic interactions.
Businesses must invest more resources to acquire, manage and retain customers.
At the same time, customers have a variety of purchasing options and are only a
click away from the competition. While businesses are experiencing increasing
customer acquisition costs, customers are experiencing decreasing switching
costs. As a result, there is an accelerated demand for the ability to analyze
information concerning customer transaction patterns to enable companies to
respond appropriately to customer needs and predict customer activity. In
addition, there is an expanding recognition that tools, applications and
services can help organizations better understand and retain their customers,
and build relationships over the Internet.
PLATFORM INTRODUCTION
HNC's Customer Insight platform of predictive software products incorporates
Intelligent Response, Decision Management, Risk Analytics and Opportunity
Analytics software solutions. Our decision engines capitalize on information to
provide answers in real time so businesses can more effectively acquire, manage
or retain customers. Because the substantial majority of electronically stored
information is unstructured, there is a real need for a natural language
free-text analysis solution to optimize the use of stored data. HNC's platform
provides this solution.
The platform also utilizes neural networks to help predict which transactions
are likely to result in negative activities such as fraud and payment
delinquency, or positive activities including cross-sell and up-sell. In
addition, the platform's decision support tools enable HNC's customers to
analyze information to take advantage of opportunities while minimizing risks.
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The combination of HNC's core technologies -- decision engines, free text
analysis, neural networks and decision support tools -- results in a customer
profile engine that helps businesses attain customer insight. Specific
capabilities of HNC's platform include:
- - INTELLIGENT RESPONSE
Intelligent Response enables companies to search across different data
repositories and understand the meaning of content in text, images, SKUs or
symbols, and deliver information to devices such as PCs and wireless
(including PDAs) devices. It also proactively makes recommendations based
upon profiles and patterns, and learns to index and retrieve only the most
accurate, relevant information.
- - DECISION MANAGEMENT
Decision Management enables companies to make instant, automated decisions
regarding customer applications, including the ability to identify and
determine customer creditworthiness. This allows companies to simultaneously
reduce costs and increase the speed of the customer acquisition process. In
addition, it allows companies to process large quantities of applications
and claims in real time through multiple acquisition and delivery channels.
- - CUSTOMER ANALYTICS -- RISK MANAGEMENT
Risk Analytics enable companies to analyze the risks associated with
acquiring, managing and retaining customers by analyzing patterns in
customer transactions. Risks can include fraud, churn and bad debt.
- - CUSTOMER ANALYTICS -- OPPORTUNITY MANAGEMENT
Opportunity Analytics enables companies to analyze the opportunities
associated with acquiring, managing and retaining customers by analyzing
patterns in customer transactions. Opportunities can include maximizing
customer profitability by providing cross-sell and up-sell activities and
focusing marketing efforts on more profitable customers.
MARKETS/DOMAIN EXPERTISE
HNC customers comprise leading Fortune 1000 and Global 2000 organizations in the
financial, insurance, telecommunications and e-commerce industries. Within the
financial services industry, HNC's customers include leading corporations on six
continents, including nine out of the top 10 U.S. credit card issuers and 16 of
the 25 largest credit card issuers worldwide. More than 100 insurance companies
and state insurance funds -- including nine out of the 10 largest carriers --
are HNC customers. HNC's has more than 50 wireless and wireline customers
worldwide. In addition, more than 30 customers in industries including computer,
hotel, media and retail, are currently using HNC's products to conduct
e-commerce.
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STRATEGY
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- - ENHANCE AND EXPAND SOLUTION PLATFORM
We intend to continue to commit capital and enhance our Customer Insight
solution platform through internal development and through acquisitions. For
example, our customer analytic solutions for fraud detection have been
expanded from a single credit card fraud detection solution in 1992 to
checking, debit card and online credit card fraud detection in the financial
services sector; extended to workers compensation, Medicare and Medicaid
fraud detection in the insurance sector; and billing, subscription and
network fraud in the telecommunications sector. We are also expanding our
Intelligent Response and Decision Management solutions within and across
these industries. For example, in 2000 we extended our Decision Management
solutions originally developed for the financial services sector into the
telecommunications and insurance underwriting sectors.
- - CONTINUE TO PENETRATE NEW VERTICAL MARKETS
We intend to continue to expand into and explore new market segments within
existing sectors through product extensions and/or acquisitions. For
example, in the financial services sector we extended our solutions into the
brokerage market in fiscal 2000 and introduced new e-commerce solutions to
support business-to-business exchanges. We also entered into the wireless
and m-commerce telecommunications market with solutions for fraud detection,
churn reduction and Decision Management.
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- - EXPAND GLOBAL PRESENCE
In 2000 we started an initiative to drive global expansion by adding several
senior level executives with global experience in sales and marketing in
Europe, the Middle East and Africa (the EMEA), as well as the Asian-Pacific
and Latin American regions. We significantly increased the number of sales,
support and development personnel in these regions and we intend to continue
to allocate increased resources to support accelerated global expansion. We
are leveraging new and existing partnerships to drive growth such as EDS,
which has led to contracts in both the EMEA and the Asian-Pacific region. We
also intend to expand in global markets through acquisitions, such as
Systems/Link that provided direct inroads in the Latin American
telecommunications market.
- - DEEPEN PRESENCE IN CORE MARKETS THROUGH MULTIPLE DELIVERY MODELS
In 2000 we delivered many of our solutions through a self-hosted and an
application service provider, or ASP, channel to our customers for the first
time, and we intend to continue to expand this channel of delivery. An ASP
provides a contractual service that deploys, hosts, manages and rents access
to software applications from a centrally managed facility, giving customers
access to new application environments without up-front investments in
licenses, servers and people. ASP's also offer mid-sized companies the full
benefits of leading enterprise applications while minimizing the challenges,
expense and risk associated with the implementation and ongoing maintenance
of traditional software products. HNC benefits from offering its solutions
through this delivery channel by expanding its market opportunity into
mid-tier markets and deriving additional recurring revenue through a per
user/per transaction model with reduced sales and implementation cycles.
- - STRENGTHEN AND DEVELOP STRATEGIC PARTNERSHIPS
We are increasing our focus on strengthening and developing additional
relationships with channel distribution partners including value added
resellers, or VARs, original equipment manufacturer distributors, or OEMs,
strategic business partners, hardware platform partners, and consulting and
implementation partners. The benefits we expect to receive from these
partnerships include leveraging partner customer bases, sharing in
co-operative marketing programs, and delivering unique, industry leading
solutions. For example, we are developing a medical claim processing
clearing house via the Web through our partnership with Web MD. In addition,
the strategic partnerships we have developed in the merchant fraud market
with Equifax, Thomson Financial and Digital Island have helped us win
contracts with companies like Sears and Paymentech.
- - CROSS-SELL CUSTOMER INSIGHT SOLUTIONS WITHIN EXISTING CUSTOMER BASE
HNC is increasingly leveraging its existing customer relationships to
capitalize on opportunities to sell additional solutions. We are more
closely integrating and cross-training our product development, account
support and sales teams to increase collaboration on joint opportunities.
For example, existing credit card fraud detection customers are also
acquiring our Decision Management solutions. Also, the Decision Management
solutions originally developed for the financial services industry are now
successfully sold to our telecommunications and insurance customer base.
- - GROW THROUGH ACQUISITIONS
In 2000 we made several acquisitions to facilitate growth into new markets
and to deliver product extensions into existing markets. We continue to
evaluate acquisitions that offer us the opportunity to enter new vertical
markets or provide large market opportunity. We evaluate companies as
acquisition targets that: have products or technologies that complement
existing HNC solutions and/or can be enhanced by HNC's technologies; bring
an experienced management team and domain expertise; deliver strong revenue
and earnings growth; and leverage combined sales, marketing and distribution
channels. In 2000, for example, we extended our Customer Analytics solutions
in the financial services sector through our acquisitions of CardAlert and
CASA, by growing our presence in the marketing optimization arena. We
strengthened our Decision Management solutions in the telecommunications
sector through our acquisitions of Onyx Technologies and Systems/Link, by
gaining a foothold in the wireless telecommunications market and an ASP
delivery channel. We also garnered an EDI and network connectivity backbone
in the insurance sector through our acquisition of Celerity Technologies,
which allows us to facilitate claims processing over the Internet.
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MARKETS AND PRODUCTS
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Our Customer Insight product family includes Intelligent Response, Decision
Management and Customer Analytics software that enables companies in the
financial, insurance, telecommunications and e-commerce industries to acquire,
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manage and retain customers. In 2000, we successfully acquired and integrated a
number of acquisitions including Onyx Technologies, Systems/Link, CASA, Celerity
Technologies and CardAlert Services, and as a result have expanded our product
footprint, market penetration and ASP delivery channels.
We intend to continue to expand our solution platform through internal product
development initiatives as well as through strategic acquisitions that deliver
product extensions for existing as well as new markets. Through the expansion of
our solutions we expect to be able to penetrate new markets and gain greater
market share of existing niche markets.
INTELLIGENT RESPONSE
HNC's Intelligent Response products include:
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PRODUCT PRODUCT DESCRIPTION
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MINDWAVE REACTION MINDWAVE REACTION uses text characterization, analysis
and Intelligent Response technology to automatically
categorize text, e-mail and Web inquiries;
automatically respond to e-mail and Web self-help
inquiries; and accurately search electronic content to
find relevant answers across multiple knowledge bases.
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MINDWAVE PROACTION MINDWAVE PROACTION adds proactive and predictive
capabilities to Mindwave Reaction, so companies can
provide key audiences with data they need. Proaction
observes and tracks online transaction patterns;
provides accurate analysis that translates to precise
sales and marketing targeting methods; profiles and
groups users into specific categories; and proactively
suggests relevant information or products based on user
profiles.
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OFFER TARGETING Designed for high-volume online retailers, OFFER
TARGETING delivers one-on-one personalization
technology. Using neural network technology, Offer
Targeting analyzes an individual shopper's interests
and transaction patterns to determine other
complementary products he or she may be interested in.
Using analyzed interests coupled with previous
transaction patterns, Offer Targeting can up-sell,
cross-sell, provide insights about groups of customers
and predict future purchasing transaction patterns.
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FORM-FILL FORM-FILL is a service provided to digital "wallet"
vendors and merchants. Currently, most online merchants
require customers to fill out information forms as a
precondition to a sale. Our patented context vector
technology equips the Form-Fill service to read any
Web-form and complete it, using free-form text analysis
and processing. Applying our adaptive learning
technology, Form-Fill learns with each interaction and
applies that knowledge to future transactions so that
the more a customer uses Form-Fill service (via a
digital wallet), the more powerful this tool becomes.
The eHNC Form-Fill service automatically tracks
merchant-specific information, including reward codes,
affinity programs, and site-specific user names and
passwords. The Form-Fill service does not require any
action on the part of the merchant, and therefore can
be used for almost all e-commerce transactions.
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DECISION MANAGEMENT
HNC's Decision Management products include:
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PRODUCT PRODUCT DESCRIPTION
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COMPADVISOR COMPADVISOR reviews and reprices medical bills for
workers' compensation. It uses a powerful decision
engine to automate the bill review process and route as
many as two-thirds of processed medical bills without
manual intervention. CompAdvisor includes powerful
electronic data interchange, or EDI, technology to
reduce manual entry of data.
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AUTOADVISOR AUTOADVISOR is an integrated medical repricing software
solution with a managed care component for the auto
medical claims industry that automates the process of
bill review with the same technology and quality
results as CompAdvisor. AutoAdvisor addresses the need
to reduce the $13-18 billion the auto insurance
industry loses annually due to unnecessary medical
claims.
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CAPSTONE CAPSTONE DECISION MANAGER is an intelligent new account
DECISION MANAGER decisioning system that can be implemented within any
lending environment. The system is ideally suited for
helping large organizations automate complex lending
decision processes in individual business areas or
across the enterprise.
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CAPSTONE DECISION CAPSTONE DECISION MANAGER FOR INSURANCE CLAIMS is an
MANAGER FOR intelligent decisioning system that interfaces with
INSURANCE CLAIMS large enterprise systems to automate complex insurance
claims transactions.
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CAPSTONE DECISION CAPSTONE DECISION MANAGER FOR MEDICAL BILLS is an
MANAGER FOR MEDICAL intelligent decisioning system that can be the hub of a
BILLS medical bill processing platform for insurance payors.
By automating the processing of a significant
percentage of medical bills, routing medical bills to
other programs like CompAdvisor or VeriComp and routing
bills for professional human review, Capstone for
Medical can greatly enhance the performance of
legacy systems.
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APPLICATION DECISION APPLICATION DECISION MANAGEMENT automates the new
MANAGEMENT account process and enables telecommunications
(4SCORE) carriers to process more applications per month, reduce
headcount and assign customers the most appropriate
service.
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AC-WEB AC-WEB for the insurance industry incorporates
AC-Manager functionality with the addition of allowing
access to the server via a browser-based user
interface. This eliminates the need for installations
at each customer workstation.
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EC-WEB EC-WEB EC-Web is a Web browser-based package that
allows corporate risk managers and human resources
departments to electronically send and receive business
documents in the national standard format, ANSI ASC
X12. It is designed to electronically connect risk
management and human resources departments with any
claims administrator that can send and receive
documents electronically.
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ADMIN-CONNECT ADMIN-CONNECT was created specifically for claims
administrators, enabling them to send and receive
injury reports using business-to-business e-commerce.
This allows third party administrators and insurance
carriers to send and receive business documents
electronically in the ASC X12 format. AC-MANAGER
incorporates Admin-Connect functionality along with
additional network administration features.
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HOME & AWAY PREPAID BILLING & USAGE MONITORING (HOME & AWAY PREPAID
PREPAID BILLING BILLING) provides wireless carriers with a solution to
offer prepaid wireless telecommunications service or to
perform usage monitoring.
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COMPCOMPARE COMPCOMPARE is a benchmarking database that allows
users to generate detailed comparative analyses between
their claims data and insurance industry data. It
features online access to HNC Insurance Solutions'
workers' compensation database. The product is marketed
by NCCI (the National Council on Compensation
Insurance, Inc.) through a joint marketing agreement
with HNC.
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EMPLOYER-CONNECT EMPLOYER-CONNECT is a Microsoft Windows-based PC
package designed to send and receive injury reports in
the ASC X12 format. It is designed to electronically
connect risk management and human resource departments
with an agency or organization that can send and
receive documents electronically. EC-MANAGER
incorporates Employer-Connect functionality and
additional network administration features.
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PROVIDERCOMPARE PROVIDERCOMPARE is a physician profiling system that
compares one physician to a peer group of physicians
for similar claim populations, identifies providers
with significantly higher costs, and uses provider
report cards and treatment pattern analysis to educate
providers to improve financial outcomes. The product is
marketed by NCCI (the National Council on Compensation
Insurance, Inc.) through a joint marketing agreement
with HNC.
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PROVIDER-CONNECT PROVIDER-CONNECT is a Microsoft Windows-based PC
package designed to send and receive injury reports in
the ASC X12 format. It is designed to electronically
connect healthcare providers with insurance carriers
that can send and receive documents electronically.
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ROAMEX ROAMING DATA EXCHANGE NETWORK (ROAMEX) provides
wireless telecommunications carriers with near real
time records of roaming call data that occur outside a
carrier's home network. Carriers use this data to
detect fraud beyond their home network.
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SC-MANAGER SC-MANAGER for the insurance industry incorporates the
functionality of State-Connect (see below) and includes
additional business-to-business e-commerce project
management tools/applications.
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SC-WEB SC-WEB incorporates State-Connect functionality (see
below) along with a Web-enabled front end to allow
workers' compensation injury reports to be entered via
the Internet.
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STATE-CONNECT STATE-CONNECT is a Microsoft Windows-based application,
which unlike traditional translators, specifically
meets the business-to-business e-commerce requirements
for state workers' compensation agencies. It is a
user-friendly software application that requires
minimum staffing and training.
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TRANS-CONNECT TRANS-CONNECT is a software package that allows claims
and risk management software developers to integrate
e-commerce solutions into their legacy applications for
employers, claims administrators and state
jurisdictions.
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CUSTOMER ANALYTICS -- RISK MANAGEMENT
HNC's Risk Analytics products include:
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PRODUCT PRODUCT DESCRIPTION
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MIRA MIRA (Micro Insurance Reserve Analysis) is an
easy-to-use, integrated information system for
estimating workers' compensation claim loss reserves.
MIRA is installed at more than 50 insurance companies,
state funds and third-party administrators.
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VERICOMP VERICOMP CLAIMANT is an insurance-claimant fraud
CLAIMANT detection system that utilizes our advanced neural
network predictive technology to identify claims that
fit historical patterns of fraud and abuse. VeriComp
Claimant saves time and money through early and
accurate detection of fraudulent claims.
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VERICOMP VERICOMP EMPLOYER is a predictive software solution
EMPLOYER created specifically to detect workers' compensation
premium fraud and abuse. This powerful tool enables
auditors and other review staff to identify suspicious
policies and prioritize premium audit efforts.
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VERICOMP SUBRO VERICOMP SUBRO is a new predictive software system that
can help insurance carriers recover significant losses
by automatically identifying and notifying claims
adjusters of claims that should actually be paid by
another party.
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ECMDIRECTOR eCMDIRECTOR is a financial services predictive software
solution that reduces cost by more accurately
identifying claims that would benefit most from case
management and by automating claim management
decisions.
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SPYDER SPYDER is a predictive software solution designed to
combat healthcare fraud and abuse in group healthcare,
Medicaid and Medicare. Using HNC's advanced neural
network predictive technology, Spyder is also available
in a new real time version as well as a version
specifically developed to detect dental fraud and
abuse.
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FALCON FALCON is the leader in real time fraud detection and
prevention for credit card issuers. Falcon's neural
networks examine transaction, cardholder, and merchant
data to detect a wide range of credit card fraud
quickly and accurately.
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FALCON DEBIT FALCON DEBIT is a financial services software product
that examines transaction, cardholder, and merchant
data to detect debit card fraud.
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FALCON CHEQUE FALCON CHEQUE runs in a bank's check processing center
and uses neural networks, expert rules, and HNC's
proprietary transaction pattern profiling technology to
detect many types of checking account fraud.
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EAGLE EAGLE is a merchant risk management system designed to
protect merchants from emerging fraud trends, manage
risk and profitability, and increase operational
efficiency.
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4WARN APPLICATION FRAUD MANAGEMENT (4WARN) is a
telecommunications market solution that confirms
identity authenticity during the customer acquisition
process, to detect individuals who attempt identity
deception.
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CARDALERT NETWORK CARDALERT NETWORK provides early detection and
common-purchase-point analysis of payment card fraud on
shared Automated Teller Machine (ATM) and point-of-sale
systems. Through daily transaction data downloads
provided by participating networks, CardAlert can
identify and link fraudulent transactions, identify
compromised cards, and notify affected financial
institutions to prevent further losses.
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PROFITMAX SUBSCRIPTION FRAUD MANAGEMENT (PROFITMAX) helps
financial services companies reduce write-offs and
losses associated with fraudulent applications for
service by persons who have no intention to pay. The
solution utilizes HNC's profiling engine and advanced
predictive models to quickly and accurately detect
subscription fraud. HNC's decision rules engine is used
to counteract predicted fraudulent activity.
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ATACS AND FRAUDTEC TECHNICAL FRAUD MANAGEMENT (ATACS AND FRAUDTEC) enables
telecommunications carriers to reduce bad debt expenses
related to fraudulent use of their network. These
solutions incorporate profile modeling to detect
suspected fraudulent activity and include a case
manager to monitor and take action on potential
instigators of fraud. ATACS uses neural network models
to automatically prioritize cases and prompt
investigations of transactions with the highest
probability of being fraudulent.
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ATACS ONLINE ATACS ONLINE (Advanced Telecommunications Abuse Control
System) delivers profiling, neural network modeling and
case management through an easy to use browser-based
interface in an ASP environment. Telecommunications
providers of every size can significantly reduce losses
associated with fraud through the use of this tool
formerly available only to the largest carriers.
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eFALCON eFALCON is a real time Internet payment fraud detection
and risk management service for online merchants and
their service providers. Delivered through an ASP
delivery channel, the system also provides strategy
management and customer service tools to help merchants
save legitimate transactions that appear risky, as well
as set policies for accepting and rejecting
transactions.
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CUSTOMER ANALYTICS -- OPPORTUNITY MANAGEMENT
HNC's Opportunity Analytics products include:
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PRODUCT PRODUCT DESCRIPTION
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PROFITMAX PROFITMAX PROFITABILITY provides transaction-based,
PROFITABILITY real time authorization and action decisions that
enhance the profitability of credit card portfolios.
Using neural networks and HNC's cardholder transaction
pattern profiling technology, ProfitMax Profitability
analyzes each cardholder account and predicts future
profitability.
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PROFITMAX MARGIN PROFITMAX MARGIN MANAGER predicts margin risk for
MANAGER equity, investment-grade debt and mutual fund
securities at the portfolio, account, and security
levels. The solution utilizes analytical models to
formulate an assessment of margin account risk. Armed
with the insight these predictions provide, brokerages
can make more intelligent risk management decisions.
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PROFITMAX CHURN CHURN RISK MANAGEMENT (PROFITMAX) helps
RISK MANAGEMENT telecommunications carriers increase revenues by
improving customer retention. Churn risk is predicted
using HNC's profiling engine and advanced predictive
models. Churn prevention treatments are formulated and
executed using HNC's decision rules engines.
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PROFITVISION PROFITVISION is a comprehensive, enterprise-wide
solution that analyzes the profitability of customer
relationships, products, and business units for
financial services companies. It incorporates an
interface to core accounting systems and increases the
accuracy of profitability measurement through
matched-maturity funds transfer pricing and
sophisticated cost-allocation methods, such as
activity-based costing.
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MARKETING MARKETING OPTIMIZATION is an intelligent cross-sell
OPTIMIZATION optimization solution that selects the most profitable
promotion offer that a financial institution might
present to a customer.
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- --------------------------------------------------------------------------------
SALES & MARKETING
- --------------------------------------------------------------------------------
We sell and market our software and services globally through our direct sales
organization and strategic partners, including distribution, hardware platform
and service and consulting partners. Through these direct and indirect sales
channels, we are focusing on three key initiatives to accelerate sales:
- Develop and expand strategic partnerships on a global scale;
- Commit sales and marketing resources internationally to accelerate
global expansion; and
- Leverage our existing customer base and cross-sell solutions within
this base.
The national sales staff is based at our corporate headquarters in San Diego, as
well as in our other United States field offices in California, Colorado,
Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New
Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Texas and
Virginia. Internationally, we have field sales offices in the United Kingdom,
The Netherlands, Japan and Singapore. To support our sales force, we conduct
comprehensive marketing programs, which include demand generation, public
relations, advertising, seminars, trade shows and ongoing customer communication
programs. Our sales staff is generally product-based and is assigned a
geographic territory.
- - SERVICE BUREAUS
We have licensed First Data Resources, Inc., or First Data, Electronic Data
Services, Total Systems and Equifax to act as service bureaus, providing an
alternate channel of distribution for end-users of our Falcon product. We
have also licensed First Data as a service bureau for our ProfitMax product.
We generally assist our service bureau partners in the sales effort, often
employing our direct sales force in the process. These service bureaus pay
us monthly usage fees based on the volume of transactions processed.
We also have an outsourced bill review service bureau servicing the
insurance industry. The service bureau provides both turnkey bill review
services, as well as the capability to handle overflow needs of customers
through our locations in California, Missouri and Texas.
- - ASP (APPLICATION SERVICE PROVIDER)
We provide Internet credit-card fraud detection to e-commerce merchants
through an ASP delivery channel.
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In the telecommunications market we provide a suite of fraud detection
solutions and Decision Management solutions through the ASP channel and in
the insurance industry our EDI/Network Connectivity group offers ASP
versions of several injury reporting products including AC-Web, EC-Web and
SC-Web.
- - INTERNATIONAL AND EXPORT ACTIVITY
International operations and export sales represented 19.3% of our total
revenues in 2000, 23.2% in 1999, and 23.1% in 1998. International sales
result primarily from Falcon product sales, in addition to sales of Retek's
products during the first nine months of 2000, fiscal 1999 and fiscal 1998.
We intend to continue expansion of our operations outside the United States,
and to enter additional international markets, which will require
significant management attention and financial resources. We have committed
and continue to commit significant time and development resources to
customizing our products for selected international markets, and to
developing international sales and support channels. Our efforts to develop
products, databases, and models for targeted international markets or to
develop additional international sales and support channels may not be
successful.
International sales have additional inherent risks, including longer payment
cycles, unexpected changes in regulatory requirements, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, the burdens of complying with a variety of foreign laws, greater
difficulty or delay in accounts receivable collection, potentially adverse
tax consequences and political and economic instability. Our international
sales are currently primarily denominated in United States dollars, and a
small portion is denominated in other currencies, primarily those of Western
Europe and Canada. An increase in the value of the United States dollar
relative to foreign currencies could make our products more expensive, and
therefore potentially less competitive, in foreign markets. In the future,
to the extent our international sales are denominated in local currencies,
foreign currency translations may contribute to significant fluctuations in
our business, financial condition and results of operations. The imposition
of exchange or price controls or other restrictions on foreign currencies
could also harm our business.
- - SALES CYCLE RISKS
Due in part to the mission-critical nature of our applications, potential
customers perceive high risk in connection with adoption of our products. As
a result, customers have been cautious in making decisions to acquire our
products. In addition, because the purchase of our products typically
involves a significant commitment of capital, and may involve shifts by the
customer to a new software and/or hardware platform, delays in completing
sales can arise while customers complete their internal procedures to
approve large capital expenditures and test and accept new technologies that
effect key operations. For these and other reasons, the sales cycle
associated with the purchase of our products is typically lengthy,
unpredictable and holds a number of significant risks over which we have
little or no control, including customers' budgetary constraints and
internal acceptance reviews. The sales cycle associated with the licensing
of our products can typically range from 60 days to 18 months. As a result
of the length of the sales cycle and the typical size of customers' orders,
our ability to forecast the timing and amount of specific sales is limited.
- - COMPETITION
The market for customer insight solutions is intensely competitive and is
constantly changing. Competitors, many of which have substantially greater
financial resources than we do, vary in size and in the scope of the
products and services they offer. We encounter competition from a number of
sources, including:
- Other application software companies, including enterprise software
vendors;
- Management information systems departments of customers and
potential customers, including financial institutions, insurance
companies, telecommunications carriers and retailers;
- Third party professional services organizations, including
consulting divisions of public accounting firms;'
- Internet companies;
- Hardware suppliers that bundle or develop complementary software;
- Network and telecommunications switch manufacturers, and service
providers that seek to enhance their value-added services;
- Neural-network tool suppliers; and
- Managed care organizations.
In the Intelligent Response market, we have experienced competition from the
following companies: Autonomy, Ask Jeeves, Brightware, BroadVision, eGain
Communications, E.piphany, Inc., Kana Communications, Net Perceptions,
Verity and others.
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In the Decision Management market, we have experienced competition from the
following companies: AMS, BCG, Broadvision, Compaq, Corsair, Corporate
Systems, Corvel, eStellarNet, Experian, Fair Isaac, Ingenix, Lightbridge,
Lucent, Medata, Mitchell International, NTC and others.
In the Customer Analytics market, we have experienced competition from the
following companies: Alta Analytics, Carreker-Antinori, Compaq, Computer
Associates, Computer Sciences Corporation, Ectel, Equinox, Fair Isaac, GTE
TSI, IBM Global Business Intelligence Solutions, InfoGlide, ITC,
Lightbridge, Lucent, Magnify Holdings Corp, Marketswitch, Nestor, SAS
Institute, VIPS, Xchange and others.
- - PRICING IN THE MARKETPLACE
We believe that most of our products are competitively priced when compared
to our competitors' products. The market for our products is highly
competitive, and we expect that we will face increasing pricing pressures
from our customers, current competitors and new market entrants. In
particular, increased competition could reduce or eliminate premiums and
cause further price reductions. In addition, competition could negatively
impact our ability to obtain new long-term contracts and renewals of
existing long-term contracts on favorable terms. Any reduction in the price
of our products could negatively impact our business, financial condition
and results of operations.
- - COMPETITIVE FACTORS
We believe that the principal competitive factors affecting our markets
include technical performance (for example, accuracy in detecting credit
card fraud or evaluating workers' compensation claims), access to unique
proprietary databases, availability in ASP format and product attributes
like adaptability, scalability, interoperability, functionality,
ease-of-use, product reputation, quality, performance, price, customer
service and support, the effectiveness of sales and marketing efforts and
our reputation. Although we believe that our products currently compete
favorably with respect to these factors, we may not be able to maintain our
competitive position against current and potential competitors, especially
competitors with significantly greater financial, marketing, service,
technical support and other resources.
Some of our current competitors, and many of our potential competitors, have
significantly greater financial, technical, marketing and other resources
than we do, as well as broader integrated product lines. As a result, they
may be able to respond more quickly to new or emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than we can. They may also
possess marketing advantages due to their ability to market integrated
suites of related products that are vital to the customer's computing
infrastructure. This would enable them to sell products that compete with
ours, even where their products may be inferior or more expensive. In
addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of our
prospective customers. It is possible that new competitors or alliances
among competitors may emerge and rapidly gain significant market share.
Also, we rely upon our customers to provide data, expertise and other
support for the ongoing updating of our models. Our customers, most of which
have significantly greater financial and marketing resources than we do, may
compete with us in the future or otherwise discontinue their relationships
with us, or cease to provide us with critical data or support of our
business, all of which could significantly harm our business.
- --------------------------------------------------------------------------------
CUSTOMER SERVICE & SUPPORT
- --------------------------------------------------------------------------------
A high level of continuing maintenance, service and support is critical to
maintaining the performance of our predictive software solutions. Service and
support are also essential to our objective of developing long-term
relationships with, and obtaining recurring revenues from, our customers. Our
service and support activities are related to system installation, performance
validation and ongoing consultation on the optimal use of our products.
- - MODEL AND RULE UPDATES
Most of our product license agreements obligate us to provide periodic data,
model and/or rule updates to maintain system performance. Our technical
personnel generally assist the customer with installation of updates. We
make commitments to update models and rules at varying intervals, according
to both periodically scheduled updates (for example quarterly and annually)
as well as unscheduled updates, provided the customer has met its
commitments to provide data to us. The choice of data source and data
updates are important to customers because data are the
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fundamental building blocks used to create accurate predictive models. We
provide various models built on industry-specific or customer-specific data
to meet individual application requirements. Customers and data suppliers
provide us with historical transaction data for turnkey models, trend
analyses and product updates. This combination of proprietary turnkey
customized and user-developed models allows us to offer products that solve
a broad range of predictive application problems.
- - EDUCATION
We offer comprehensive education and training programs to our customers. We
provide on-site training services associated with many of our products. Fees
for education and training services are generally included in the pricing of
usage-priced products, but may be charged separately in other cases.
- - CONSULTING
Our consultants are available to work with our customers' user application
groups and information systems organizations. Customers that buy consulting
services are usually planning large implementations or want to optimize the
performance of our products in their operating environments. Fees for
consulting are generally included in the pricing of usage-priced products,
but may be charged separately in other cases.
- --------------------------------------------------------------------------------
TECHNOLOGY
- --------------------------------------------------------------------------------
At the heart of our predictive software solutions lie two critical functions.
The first of these is the ability to predict which individuals are most likely
to exhibit certain critical business transaction patterns. Examples of these
transaction patterns include fraud, payment delinquency, and responsiveness to
cross-sell/up-sell efforts. The second critical function is the ability to
select an appropriate action to either encourage (in the case of a cross-sell)
or discourage (in the case for delinquency) an individual's predicted
transaction patterns.
Our key technologies are designed to perform one or both of these critical
functions. Our technologies include neural-network models, intelligent decision
engines, profiles, traditional statistical models, business models, expert rules
and context vectors.
In addition to current technologies, we strive to develop new and innovative
technologies that enable new or expanded predictive software capabilities. Some
of our longer-term research projects are partially funded through contracts with
the U.S. Government or members of the U.S. Intelligence Community.
- - NEURAL-NETWORK TECHNOLOGY
The term "neural network" refers to a family of nonlinear, statistical
modeling techniques, which were derived from the work of scientists engaged
in understanding biological intelligence. While we are far from having a
complete understanding of biological intelligence, the techniques proposed
by these scientists have proven to be very useful in solving difficult,
complex business and engineering problems. We have adopted many of these
techniques in our predictive software solutions.
We use neural-network techniques to build models of complex transaction
patterns such as consumer credit card fraud. These models are created
through a process called "training." Training involves exposing a large data
set of examples of the transaction patterns to a neural network algorithm.
Often hundreds of thousands to millions of examples are provided. The neural
network processes this data to identify patterns in the data that are
predictive of the transaction patterns being modeled. Once training is
complete, the neural network uses these learned patterns to predict the
probability that a new individual will exhibit the modeled transaction
patterns. We have developed proprietary high-speed and parallel-processor
boards to accelerate training and execution of our neural-network software.
Although other statistical methods can be used, our neural-network
technology distinguishes itself in its ability to build highly accurate
models more rapidly than possible with other methods. This provides us with
a significant competitive advantage in developing and deploying products.
Further, our experience with neural-network technology has led to the
development of proprietary methodologies for applying that technology to
real time, transaction-based business problems.
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- - PROFILING TECHNOLOGY
Many of our products operate on transactional data, such as credit card
purchase transactions, or other types of data that change over time, such as
worker's compensations claims. In their raw form, these data are very
difficult to use in model building for several reasons. First, a single
transaction contains very little information about the transaction patterns
of the individual that generated the transaction. Second, truncations change
rapidly over time. Finally, this type of data can often be incomplete.
To overcome these data problems, we have developed a set of proprietary
techniques that transform raw transactional data into a format that is
suitable for model building. We refer to this set of techniques as our
profiling technology. As the name suggests, our profiling technology
accumulates data across multiple transactions to create profiles of
transaction patterns. Although these profiles are unintelligible to a human,
they provide our neural-network models with the information needed to
predict complex transaction patterns.
- - RULE-BASED TECHNOLOGY
Predicting transaction patterns is only half the battle in determining how
to best manage or interact with a customer. The other half involves
optimizing the response or action, given the transaction patterns that have
been identified and the corresponding predicted outcome. To provide this
response optimization, many of our products combine specially trained
neural-network models with rule-based techniques.
Rules provide an effective method of capturing and applying such
well-defined information as marketing strategies, corporate policies, and
standard operating procedures. We have developed rule engines that operate
efficiently in a real time, transaction-oriented system. We believe that our
combination of these rule engines with neural-network models represents a
significant technological advantage over more traditional approaches to
decision automation.
- - CONTEXT VECTOR TECHNOLOGY.
Much of the information produced and used by the business world is in the
form of text documents. Extracting this information and using it in
predictive solutions has been very difficult with traditional analysis
methods. This problem has been amplified by the huge increase in Internet
usage, which generates an enormous amount of textual data. Our proprietary
context vector technology solves many of the problems encountered in using
textual data in predictive software solutions.
Context vectors provide a means to encode textual information in a form that
can be easily processed by computers. The basic idea is to associate a
context vector with an object based on its textual description. For example,
an online user can be described by the Web pages that he or she reads. An
email can be characterized by the text contained within it and a product can
be identified by a textual description. Using our proprietary training
algorithms, context vectors are assigned to objects in such a way that
vectors for related objects will be closer together than vectors for
unrelated objects. Thus, the problem of associating similar objects based
upon a textual description is solved, by finding vectors that are closest to
each other.
Many text-processing problems can be solved using context vector technology.
For example, traditional query and retrieval consists of finding documents
that include the content that is related and responsive to the query. Other
examples include: matching a Web user with a banner ad, associating an
e-mail with an automatic response, or recommending products that may appeal
to an online buyer. When combined with our other technologies, such as
neural networks and rule-based systems, we believe that context vectors can
improve the performance of existing applications.
- - RISKS OF ENTERING NEW MARKETS
Our success depends upon our ability to enter new markets by successfully
developing new products for those markets on a timely and cost-effective
basis. In order to develop new products, we often require proprietary
customer data for decision model development and system installation. As a
result, completion of new products (particularly new products for new
markets we are entering) may be delayed until we can extract sufficient
amounts of statistically relevant data to develop the models. During this
development process, we rely on our potential customers in the new market to
provide us with relevant data and to help train our personnel in the use and
meaning of the data in the specific industry. These relationships also
assist us in establishing a presence and credibility in the new market.
These potential customers, most of which have significantly greater
financial and marketing resources than we do, may compete with us in the
future or otherwise discontinue their relationships with or support of us,
either during
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development of our products or later on. If we fail to obtain adequate
third-party support for new product development, our ability to enter new
markets could be impaired, and consequently our business, financial
condition and results of operations could be negatively impacted.
- - RESEARCH & DEVELOPMENT
Our research and development expenses were $75.5 million in 2000, $50.2
million in 1999, and $32.7 million in 1998. We believe that our future
success depends on our ability to continually maintain and improve our core
technologies, enhance our existing products, and develop new products and
technologies that meet an expanding range of markets and customer
requirements. We intend to expand our existing product offerings and to
introduce new predictive software solutions. In the development of new
products and enhancements to existing products, we use our own development
tools extensively. We have traditionally relied primarily on the internal
development of our products. Based on timing and cost considerations,
however, we have acquired, and in the future may consider acquiring,
technology or products from third parties. For example, we acquired
technology and products in connection with our acquisitions of PCS, FTI and
ATACS in 1998, WebTrak in 1999, and CASA, AIM, Onyx Technologies, Celerity
Technologies, HighTouch, CardAlert and Systems/Link in 2000. The expense
associated with acquired technology and products is separately stated on our
financial statements as acquired in-process research and development and is
not included in our research and development expenses above. Visionary
research has long been a key component of HNC's business plan. We
continually monitor research developments internal and external to HNC. We
sponsor research programs to develop the ideas that we believe have the most
potential. In some cases, external funding (i.e., Government grants) is used
to develop initial concepts. One example of this is our Cortronics program.
Originally funded by the Defense Advanced Research Projects Agency, or
DARPA, the program is now fully supported by HNC. The Cortronics project is
a long-term research project focused on developing and applying computer
models of regions of the cerebral cortex to recognize and associate patterns
in text, speech and vision. The objective of this work is to develop
intelligent computing systems that are much more capable of interacting with
and reasoning about their environments than current systems.
- - GOVERNMENT RESEARCH We strategically plan and execute our long-term research
projects. In addition to funds allocated for research, we receive research
contracts from a variety of sources, including the United States Government.
Our Government and commercial contract customers have included DARPA, the
United States Air Force, the Office of Naval Research, and several
organizations within the U.S. Intelligence Community. We believe that these
contracts augment our ability to maintain existing technologies and
investigate new technologies that may or may not be used in our products.
The United States Government typically retains intellectual property rights
and licenses in the technologies we develop, directly or indirectly, under
government sponsored research contracts and in some cases can terminate our
rights to these technologies if we fail to commercialize them on a timely
basis. Historically, these research contracts have not resulted in the
development of products contributing to near-term revenue.
- - QUALITY CONTROL
We perform all quality assurance and develop documentation internally. We
intend to continue to support industry standard operating environments,
client-server architectures and network protocols. Our specialists in neural
network model development, software engineering, user interface design,
product documentation and quality improvement are responsible for
maintaining and enhancing the performance, quality and usability of all of
our predictive software solutions. Our marketing group is responsible for
authoring and updating all user documentation and other publications.
- - TECHNOLOGY RISKS
The market for our predictive software solutions is characterized by rapidly
changing technologies, including improvements in computer hardware, network
operating systems, programming tools, programming languages, operating
systems and database technology. Our success will depend upon our ability to
continue to develop and maintain competitive technologies, enhance our
current products and develop, in a timely and cost-effective manner, new
products that meet changing market conditions, including evolving customer
needs, new competitive product offerings, emerging industry standards and
changing technology, such as the growth of Internet-based applications. We
may not be able to develop and market product enhancements or new products
that respond to changing technologies on a timely basis, or at all. We have
previously experienced significant delays in the development and
introduction of new products and product enhancements, primarily due to
difficulties with model development, which has in the past required multiple
iterations, as well as difficulties with acquiring needed data and adapting
to particular
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operating environments. The length of these delays has varied depending upon
the size and scope of the project and the nature of the problems
encountered.
- - INTELLECTUAL PROPERTY & OTHER PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trademark and trade secret
laws and confidentiality procedures to protect our proprietary rights. We
currently own 15 issued United States patents and have 24 United States
patent applications pending. We have applied for international patent
protection utilizing the Patent Cooperation Treaty. We have pending and
granted patents in the following countries: Australia, Canada, France,
Germany, Italy, Japan, the Netherlands, and the United Kingdom.
Our United States patents expire at dates that range from December 2008 to
October 2017. Patents may never issue on our pending patent applications or
on any future applications we submit. In addition, the patents we currently
hold may not be upheld as valid and may not prevent the development of
competitive products. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford
only limited protection.
As part of our confidentiality procedures, we generally enter into invention
assignment and proprietary information agreements with our employees and
independent contractors and nondisclosure agreements with our distributors,
corporate partners and licensees, and limit access to and distribution of
our software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to
obtain and use our products or technology without authorization, or to
develop similar technology independently. In addition, to ensure that
customers will not be negatively impacted by an interruption in our
business, we often place the source code for our products into escrow, which
may increase the likelihood of misappropriation or other misuse of our
intellectual property. Moreover, effective protection of intellectual
property rights may be unavailable or limited in foreign countries in which
we have done and/or may do business.
We have developed technologies for research projects conducted under
agreements with various United States Government agencies or their
subcontractors. Although we have acquired commercial rights to these
technologies, the United States Government typically retains ownership of
intellectual property rights and licenses in the technologies we develop
under these contracts, and in some cases can terminate our rights to these
technologies if we fail to commercialize them on a timely basis. In
addition, under United States Government contracts, the results of our
research may be made public by the government, which could limit our
competitive advantage with respect to future products based on funded
research.
In the past, we have received communications from third parties asserting
that our trademarks infringe upon other parties' trademarks, or that data we
use is copyrighted by an independent third party, none of which resulted in
litigation or material losses to us. In addition, we have been involved in
patent litigation. As the number of software products increases and the
functionality of these products further overlaps, we believe that software
developers' risk of infringement claims will increase. Given our ongoing
efforts to develop and market new technologies and products, we may receive
claims from other third parties asserting that our products infringe upon
their intellectual property rights. Licenses to disputed third-party
technology or intellectual property rights might not be available on
reasonable commercial terms, if at all. Furthermore, we may initiate claims
or litigation against third parties for infringement of our proprietary
rights or to establish the validity of our proprietary rights. Litigation
could result in significant expense to us, and divert the efforts of our
technical and management personnel, whether or not it is resolved in our
favor. As a result of an adverse ruling in any litigation, we might be
required to pay substantial damages, discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain and pay for licenses to infringing technology. In
addition, a court might invalidate our patents, trademarks or other
proprietary rights. In the event of a successful claim against us, and our
failure to develop or license a substitute technology, our business,
financial condition and results of operations would be harmed.
- --------------------------------------------------------------------------------
EMPLOYEES
- --------------------------------------------------------------------------------
As of December 31, 2000, we had 1,121 employees, including 438 in product
development and support, 216 in customer service, 123 in sales and marketing,
162 in service bureau and 182 in finance, administration and management
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information systems. Most of our employees are located in the United States.
None of our employees are represented by a labor union. We have experienced no
work stoppages and believe that our employee relationships are generally good.
Our success depends to a significant degree upon the continued service of our
senior management and other key research, development, sales and marketing
personnel. Only a small number of our employees have employment agreements, and
these agreements may not result in the retention of these employees. In the
past, we have experienced difficulty in recruiting a sufficient number of
qualified technical and sales employees. In addition, competitors may attempt to
recruit, and be successful in recruiting, our key employees. We may not be
successful in attracting, assimilating, and retaining personnel.
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS MIGHT LEAD TO REDUCED PRICES
FOR OUR STOCK. Our revenues and operating results have varied significantly in
the past and in some quarters we have experienced net losses. We expect
fluctuations in our operating results to continue for the foreseeable future. As
a result, we believe that you should not rely on period-to-period comparisons of
our financial results as an indication of our future performance. It is possible
that in some future periods our operating results may fall below the
expectations of market analysts and investors. In this event the market price of
our common stock would likely fall. Factors that are likely to cause our
revenues and operating results to fluctuate include the following:
- changes in the volume of our sales;
- a decrease in recurring revenues or the loss of key customers;
- the timing or deferral, or the reduction or cancellation, of
customer orders or purchases;
- the timing of our new product announcements and introductions in
comparison to our competitors;
- delays in the release of final commercial versions of our products;
- changes in the mix of our distribution channels;
- the amount and timing of our operating expenses;
- our ability to fulfill our obligations under
percentage-of-completion contracts;
- our success in completing pilot installations within contracted fee
budgets;
- competitive conditions in the industries we serve;
- economic conditions in our targeted markets;
- domestic and international economic conditions;
- changes in prevailing technologies;
- expenses and charges related to our acquisition of other businesses;
- increased operating expenses related to the development of new
products, including products for the Internet;
- our ability to recognize revenues in accordance with generally
accepted accounting principles in the quarter in which we expect to
recognize those revenues.
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THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES IT DIFFICULT FOR US TO DETERMINE
WHEN SALES WILL OCCUR, AND WE MAY NOT BE ABLE TO COMPENSATE FOR UNANTICIPATED
REVENUE SHORTFALLS. We cannot predict the timing of the recognition of our
revenues accurately because of the length of our sales cycles. As a result, if
sales forecasted from specific customers are not realized, we may be unable to
compensate for the resulting revenue shortfall and our operating results would
be harmed. The sales cycle to license our products can typically range from 60
days to 18 months. Customers are often cautious in making decisions to acquire
our products, because purchasing our products typically involves a significant
commitment of capital, and may involve shifts by the customer to a new software
and/or hardware platform or changes in the customers operational procedures.
Delays in completing sales can arise while customers complete their internal
procedures to approve large capital expenditures and test and accept our
applications. We may incur substantial sales and marketing expenses and expend
significant management effort while potential customers are evaluating our
products and before they place an order with us. Consequently, if orders for our
products are not received as anticipated, our operating results could be harmed.
THE CHALLENGES ASSOCIATED WITH EFFECTIVELY INTEGRATING ACQUIRED BUSINESSES COULD
PREVENT US FROM REALIZING THE INTENDED BENEFITS OF THESE ACQUISITIONS. During
2000, we completed the acquisition of seven businesses (one of which was
divested in connection with the spin-off of our former subsidiary Retek).
Integrating and organizing the remaining six acquired businesses creates
challenges for our operational, financial and management information systems and
can pose difficulties in maintaining our corporate culture. If we do not
adequately address issues presented by growth through acquisitions, we may not
fully realize the intended benefits, including any financial benefits, of these
acquisitions and may incur increased costs and expenses.
WE EXPECT TO CONTINUE TO MAKE STRATEGIC ACQUISITIONS, WHICH COULD PUT A STRAIN
ON OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS AND ADVERSELY AFFECT OUR
FINANCIAL RESULTS. We believe that our future growth may depend, in part, upon
our ability to successfully complete future acquisitions of businesses and
technologies. Integrating newly acquired organizations and technologies into our
business could put a strain on our resources and be expensive and time
consuming. In addition, we may not succeed in integrating acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. Further,
our acquisition strategy and future acquisitions could result in any of the
following risks:
- increased competition for acquisition opportunities could inhibit
our growth and our ability to complete suitable acquisitions, and
could also increase the price we would have to pay to complete
acquisitions, which might result in dilution to the equity interests
of our stockholders;
- if we are unable to complete acquisitions successfully, we might not
be able to successfully develop and market products for new
industries or for markets with which we may not be familiar;
- we might not be able to coordinate the diverse operating structures,
policies and practices of companies we acquire or to successfully
integrate the employees of the acquired companies into our
organization and culture, which could impair employee morale and
productivity;
- despite due diligence reviews, acquired businesses may bring with
them unanticipated liabilities, risks or operating costs that could
harm our results of operations or business or require unbudgeted
expenses;
- if we fail to retain the services of key employees of acquired
companies for significant time periods after the acquisition of
their companies, we may experience difficulty in managing the
acquired company's business and not realize the anticipated benefits
of the acquisition;
- the accounting treatment of acquisitions can result in significant
acquisition-related accounting charges and expenses that can reduce
our reported results of operations both at the time of the
acquisition and in future periods; and
- additional acquisitions may require us to issue shares of our stock
and stock options to owners of the acquired businesses, resulting in
dilution to our stockholders.
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IF WE FAIL TO EFFECTIVELY RESPOND TO CHANGES IN OUR BUSINESS THEN OUR CORPORATE
ORGANIZATION WILL BE DISRUPTED AND WE WILL BE DIVERTED FROM OUR BUSINESS PLAN.
In recent years, we have experienced changes in our operations that have placed
significant demands on our administrative, operational and financial resources.
These demands, which are expected to continue to challenge our management and
operations, include the following:
- growth and diversification of our customer base;
- expansion of our product functionality and the number of products we
market and support;
- expansion of our product lines into new markets, industries and
technology mediums;
- increase in the number of our employees; and
- geographic dispersion of our operations and personnel.
These changes require us to manage an increasing number of relationships with
customers and other third parties, as well as a larger workforce. In addition,
we will need to adapt our operational and financial control systems, if
necessary, to respond to changes in the size and diversification of our
business. If we fail to manage changes effectively, our employee-related costs
and employee turnover could increase and we could face disruptions that
compromise our ability to execute on our business plan.
IF OUR SOFTWARE PRODUCTS DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR
BUSINESS REPUTATION AND FINANCIAL PERFORMANCE WOULD SUFFER. The rate at which
businesses have adopted our products has varied significantly by market and by
product within each market, and we expect to continue to experience variations
to the degree to which our products are accepted in our target markets in the
future. In particular, the acceptance of our products may be limited by factors
such as:
- the failure of prospective customers to perceive value in predictive
software solutions;
- the reluctance of our prospective customers to replace their
existing solutions with our products; and
- the emergence of new technologies that could cause our products to
be less competitive or obsolete.
In addition, because the market for customer insight solutions is still in a
relatively early stage of development, we cannot accurately assess the size of
the market, and we have limited insight into trends that may emerge and affect
our business. For example, we may have difficulty in predicting customer needs
and new technologies, developing products that could address those needs and
technologies, and establishing a distribution strategy for these products. We
may also have difficulties in predicting the competitive environment that will
develop.
IF WE FAIL TO KEEP UP WITH RAPIDLY CHANGING TECHNOLOGIES, OUR PRODUCTS COULD
BECOME LESS COMPETITIVE OR OBSOLETE. In our markets, technology changes rapidly,
and there are continuous improvements in computer hardware, network operating
systems, programming tools, programming languages, operating systems, database
technology and the use of the Internet. If we fail to enhance our current
products and develop new products in response to changes in technology or
industry standards, our products could rapidly become less competitive or
obsolete. For example, the rapid growth of the Internet environment creates new
opportunities, risks and uncertainties for businesses, such as ours, which
develop software solutions that must also be designed to operate in Internet,
intranet and other online environments. Our future success will depend, in part,
upon our ability to:
- internally develop new and competitive technologies;
- use leading third-party technologies effectively;
- continue to develop our technical expertise;
- anticipate and effectively respond to changing customer needs;
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- time new product introductions in a way that minimizes the impact of
customers delaying purchases of existing products in anticipation of
new product releases; and
- Influence and respond to emerging industry standards and other
technological changes.
DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS OR PRODUCT ENHANCEMENTS COULD HARM OUR
OPERATING RESULTS AND OUR COMPETITIVE POSITION. The development of new,
technologically advanced products is a complex and uncertain process that
requires innovation, highly skilled personnel and accurate anticipation of
technological and market trends. We have previously experienced significant
delays in the development and introduction of new products and product
enhancements, primarily due to difficulties with model development, which has in
the past required multiple iterations, as well as difficulties with acquiring
data and adapting to particular operating environments. The length of these
delays has varied depending upon the size and scope of the project and the
nature of the problems encountered. If we are unable to meet the introduction
schedules for our new products or product enhancements, customers may switch
their allegiance to competitive products or refuse to purchase our solutions,
which would harm our competitive position and our operating results.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM OUR COMPADVISOR AND FALCON
PRODUCTS, AND OUR REVENUE WILL DECLINE IF THE MARKET DOES NOT CONTINUE TO ACCEPT
THESE PRODUCTS. Our CompAdvisor and Falcon products in the aggregate accounted
for 40.3% of our total revenues in 2000. CompAdvisor accounted for 23.5% of
total revenues in 2000 and Falcon accounted for 16.8% of total revenues in 2000.
We expect these products will continue to account for a substantial portion of
our total revenues for the foreseeable future. Our revenue will decline if the
market does not continue to accept these products. Factors that might affect the
market acceptance of CompAdvisor include the following:
- simplification of state workers' compensation fee schedules;
- changes in the overall payment system or regulatory structure for
workers' compensation claims;
- technological change;
- our inability to obtain or use state fee schedule or claims data;
- saturation of market demand;
- loss of key customers; and
- industry consolidation.
Demand for, or use of, Falcon, could decline as a result of factors that reduce
the effectiveness of Falcon's fraud detection capabilities. For example,
patterns of credit card fraud might change in a manner that the Falcon product
line would not detect. In addition, other methods of credit card fraud
prevention such as smart cards may reduce customers' need for the Falcon product
line. Because many Falcon customers are banks and related financial
institutions, sales of our Falcon products are subject to changes in the
financial services industry such as fluctuations in interest rates and the
general economic health of financial services companies, which affect their
capital expenditure budgets. In addition, the financial services industry tends
to be cyclical, which may result in variations in demand for our Falcon
products. There is a continuing trend toward consolidation in the financial
services industry, which has reduced our customer base and may lead to lost or
delayed sales and reduced demand for our Falcon products. Industry consolidation
also could affect our base of recurring revenues derived from contracts in which
we are paid on a per-transaction basis, when consolidated customers combine
their operations under one contract with us which, in some cases, could result
in lower payments to us than those previously paid by our customers separately.
WE DEPEND ON DATA TO UPDATE OUR STATISTICAL MODELS, AND FAILURE TO TIMELY OBTAIN
THIS DATA COULD HARM THE PERFORMANCE OF OUR PRODUCTS. The development,
installation and support of our credit card fraud control and profitability
management, loan underwriting and insurance products require periodic updates of
our statistical models. To develop
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these updates, we must develop or obtain a reliable source of sufficient amounts
of current and statistically relevant data to analyze transactions and update
our models. In most cases, these data must be periodically updated and refreshed
to enable our predictive products to continue to work effectively in a changing
environment. We do not own or control much of the data that we require, most of
which are collected privately and maintained in proprietary databases.
Generally, our customers agree to provide us the data we require to analyze
transactions, report results and build new predictive models. If we fail to
maintain good relationships with these customers, we could lose access to
required data and our products might become less effective. In addition, our
CompAdvisor product uses data from state workers' compensation fee schedules
adopted by state regulatory agencies. Third parties have previously asserted
copyright interests in this data. These assertions, if successful, could prevent
us from using the data. We may not be able to continue to obtain adequate
amounts of statistically relevant data on time, in the required formats or on
reasonable terms and conditions, whether from customers or commercial suppliers.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR
RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS FOR OUR
PRODUCTS, FEWER CUSTOMER ORDERS AND LOSS OF MARKET SHARE. The market for
predictive software solutions is intensely competitive and is constantly
changing. Some of our competitors or potential competitors have substantially
greater financial, technical and marketing resources than we do. These
competitors may be able to respond more rapidly than we can to new or emerging
technologies or changes in customer requirements. They may also devote greater
resources to the development, promotion and sale of their products than we do.
In addition, they may have the ability to sell products competitive to ours at
lower prices as part of integrated suites of several related products that are
vital to the customer's computing infrastructure. This may cause customers to
purchase products of our competitors that directly compete with our products in
order to acquire other products of the competitor.
Our competitors vary in size and in the scope of the products and services they
offer. We encounter competition from a number of sources, including:
- other application software companies, including enterprise software
vendors;
- management information systems departments of customers and
potential customers, including financial institutions, insurance
companies, telecommunications carriers and retailers;
- third-party professional services organizations, including
consulting divisions of public accounting firms;
- Internet companies;
- hardware suppliers that bundle or develop complementary software;
- network and telecommunications switch manufacturers, and service
providers that seek to enhance their value-added services;
- neural-network tool suppliers; and
- managed care organizations.
We expect to experience additional competition from other established and
emerging companies, as well as from other technologies. For example, our Falcon
and eFalcon products compete against other methods of preventing credit card
fraud, such as credit card activation programs, credit cards that contain the
cardholder's photograph, smart cards and other card authorization techniques.
Increased competition, whether from other products or new technologies, could
result in price reductions, fewer customer orders, loss of customers, reduced
gross margins and loss of market share, any of which could negatively impact our
business. We expect to face increasing pricing pressures from our current
competitors and new market entrants. Price reductions could negatively impact
our margins and results of operations. Price competition could also harm our
ability to obtain new long-term contracts and renewals of existing long-term
contracts on favorable terms.
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Furthermore, a number of our current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of our
prospective customers. As a result, new competitors or alliances among
competitors may emerge and rapidly gain significant market share. We may not be
able to compete effectively against current and potential competitors,
especially those with significantly greater resources and market leverage.
IF WE LOSE KEY PERSONNEL, WE MIGHT NOT BE ABLE TO MANAGE OUR BUSINESS
SUCCESSFULLY. Our future success depends to a significant degree upon the
continued service of members of our senior management and other key research,
development, sales and marketing personnel. We generally do not have employment
agreements with our employees, and the few employment agreements we do have with
a small number of our employees may not result in the retention of these
employees. As a result, we could experience the untimely loss of a member of the
management team on little or no advance notice. We could also lose the services
of a key employee of a business we acquire before we have had adequate time to
familiarize ourselves with the operating details of that business and obtain a
suitably experienced replacement. Our future performance will also depend, in
part, upon the ability of our officers to work together effectively. Our
management personnel may not be successful in carrying out their duties or
running our company. Any dissent among members of management could impair our
ability to make strategic decisions quickly in a rapidly changing market.
IF WE DO NOT RECRUIT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO EXECUTE OUR
BUSINESS PLAN WOULD BE COMPROMISED. Our future success depends upon our ability
to attract, retain and motivate highly skilled employees. Competition for
employees in our industry is intense. We have historically experienced
difficulty in recruiting a sufficient number of qualified sales and technical
employees. In addition, competitors and other businesses may be successful in
attempts to recruit our key employees, particularly if they can offer more
attractive stock options or other equity compensation packages. Many of our
technical employees possess unique skills and are not easily replaceable, and
loss of technical personnel could harm our product development efforts. We
expect to continue to experience difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES. International operations and export
sales represented 19.3% of our total revenues in 2000. We intend to continue to
expand our operations outside the United States and to enter additional
international markets, which will require significant management attention and
financial resources. For more mature products, like Falcon, we may need to
increase our international sales in order to continue to expand our customer
base. We have committed and continue to commit significant time and development
resources to customizing and adapting our products for selected international
markets, and to developing international sales and support channels. These
international marketing efforts require us to incur increased sales, marketing,
development and support expenses. If our efforts do not generate additional
international sales on a timely basis, our margins and earnings would be harmed.
To the extent that our revenues from international operations represent an
increasing portion of our total revenues, we will be subject to increased
exposure to international risks. As a result, our future results could be
affected by a variety of factors, including:
- changes in foreign currency exchange rates;
- changes in the political or economic conditions of a country or
region, particularly in emerging markets;
- trade protection measures, such as tariffs, EEU software directives
and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- potentially reduced protection for intellectual property rights;
- difficulty in managing widespread sales operations; and
- slower payment cycles from international customers.
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IF OUR PRODUCTS DO NOT COMPLY WITH GOVERNMENT REGULATIONS THAT APPLY TO US OR TO
OUR CUSTOMERS, WE COULD BE EXPOSED TO LIABILITY OR OUR PRODUCTS COULD BECOME
OBSOLETE. Many of our customers must comply with a number of government
regulations and other industry standards, and as a result, many of our key
products must also be compliant. For example, our financial services products
are affected by the Fair Credit Reporting Act, by Regulation B under the Equal
Credit Opportunity Act, by regulations governing the extension of credit to
consumers and by Regulation E under the Electronic Fund Transfers Act, as well
as non-governmental VISA and MasterCard electronic payment standards. Fannie Mae
and Freddie Mac regulations, among others, for conforming loans, affect our
mortgage services products. Insurance-related regulations may in the future
apply to our insurance products. If our products fail to comply with existing or
future regulations and standards, our customers or we could be subject to legal
action by regulatory authorities or by third parties, including actions seeking
civil or criminal penalties, injunctions against our use of data or preventing
use of our products or civil damages. In addition, we may also be liable to our
customers for failure of our products to comply with regulatory requirements. If
state-mandated workers' compensation laws or regulations or state workers'
compensation fee schedules are simplified, these changes would diminish the need
for, and the benefit provided by, CompAdvisor. In many states, including
California, there have been periodic legislative efforts to reform workers'
compensation laws in order to reduce the cost of workers' compensation insurance
and to curb abuses of the workers' compensation system. Changes in workers
compensation laws or regulations could adversely affect our insurance products
by making them obsolete, or by requiring extensive changes in these products to
reflect new workers' compensation rules. To the extent that we sell new products
targeted to markets that include regulated industries and businesses, our
products will need to comply with these additional regulations.
IF WE FAIL TO PROTECT AND PRESERVE OUR INTELLECTUAL PROPERTY WE COULD LOSE AN
IMPORTANT COMPETITIVE ADVANTAGE. Our success and ability to compete
substantially depend upon our internally developed proprietary technologies,
which we protect through a combination of patent, copyright, trademark and trade
secret laws and confidentiality procedures. We also seek to protect our
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Despite the measures we
take to protect our intellectual property, it may be possible for a third party
to copy or otherwise to obtain and use our products or technology without
authorization, or to develop similar technology independently. In addition,
patents may not be issued with respect to our pending or future patent
applications, and our patents may not be upheld as valid or may not prevent the
development of competitive products. To ensure that customers will not be harmed
by an interruption in our business, we often place software source code for our
products into escrow, which may increase the likelihood of misappropriation or
other misuse of our intellectual property. Any disclosure, loss, invalidity of,
or failure to protect, our intellectual property could negatively impact our
competitive position, and ultimately, our business. We have developed
technologies under research projects conducted under agreements with various
United States Government agencies or subcontractors. Although we have acquired
commercial rights to these technologies, the United States Government typically
retains ownership of intellectual property rights and licenses in the
technologies developed by us under these contracts, and in some cases can
terminate our rights in these technologies if we fail to commercialize them on a
timely basis. Under our contracts with the United States Government, the results
of our research may be made public by the government, which could limit our
competitive advantage with respect to future products based on our research.
WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF
INTELLECTUAL PROPERTY RIGHTS. In the past, we have received communications from
third parties asserting that our trademarks infringe upon their trademarks, or
that data we use is copyrighted by them, none of which has resulted in
litigation or material losses. We have also been involved in patent litigation.
Given our ongoing efforts to develop and market new technologies and products,
we may from time to time be served with other claims from third parties
asserting that our products or technologies infringe their intellectual property
rights. Any litigation to determine the validity of these claims, including
claims arising through our contractual indemnification of our customers and
other business partners against infringement, regardless of their merit or
resolution, would likely be costly and time consuming and divert the efforts and
attention of our management and technical personnel. We cannot be certain we
would prevail in this litigation given the complex technical issues and inherent
uncertainties in intellectual property litigation. If this litigation resulted
in an adverse ruling, we could be required to:
- pay substantial damages;
- cease the use or sale of infringing products;
- expend significant resources to develop non-infringing technology;
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- discontinue the use of certain technology; or
- obtain a license under the intellectual property rights of the third
party claiming infringement, which license may not be available on
reasonable terms, or at all. A license, if obtained, might require
that we pay substantial royalties or license fees that would reduce
our margins.
OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE
MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE AND
RESULT IN LIABILITY TO US. Products as sophisticated as ours are likely to
contain errors or failures when first introduced or as new versions are
released. To the extent that we develop new products that operate in new
environments, such as the Internet, the possibility for program errors and
failures may increase due to factors including the use of new technologies or
the need for more rapid product development that is characteristic of the
Internet market. In the future, we may experience delays in releasing new
products or product enhancements as problems are corrected. Errors or defects in
our products that are significant, or are perceived to be significant, could
result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources and increased service and support costs
and warranty claims. In addition, because our products are used in
business-critical applications, any product errors or failures may give rise to
substantial product liability claims.
OUR COMMON STOCK PRICE FLUCTUATES AND HAS BEEN VOLATILE. The market price of our
common stock has been, and will likely continue to be, subject to wide
fluctuations. Many factors could cause the price of our common stock to rise and
fall, including:
- variations in our quarterly results;
- announcements of new products by us or our competitors
- acquisitions of businesses or products by us or our competitors;
- recruitment or departure of key personnel;
- the gain or loss of significant orders;
- the gain or loss of significant customers;
- changes in the estimates of our operating performance or changes in
recommendations by any securities analysts that follow our stock;
and
- market conditions in our industry, the industries of our customers
and the economy as a whole.
In addition, stocks of technology companies have experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of these companies. Public announcements by companies in
our industry about, among other things, their performance, accounting practices
or legal problems could cause the market price of our common stock to decline
regardless of our actual operating performance.
In the past, securities class action litigation has often been brought against a
company following a period of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources.
OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD
DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BENEFIT OUR
STOCKHOLDERS. Under our certificate of incorporation, our board of directors is
authorized to issue up to 4,000,000 shares of preferred stock without any
further vote or action by our stockholders. The rights of the holders of our
common stock will be subject to the rights of the holders of any preferred stock
that we may issue in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. We have no
current plans to issue shares of preferred stock. In addition, Section
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203 of the Delaware General Corporation Law restricts business combinations with
any "interested stockholder" as defined by the statute. The statute could make
it more difficult for a third party to acquire us, even if an acquisition would
benefit our stockholders.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support, and research and
development facilities are located in approximately 171,000 square feet of
office space in San Diego, California. We also lease an aggregate of
approximately 274,000 square feet of additional office space in the following
locations:
- Costa Mesa, California; - Irvine, California; - Los Gatos, California;
- San Mateo, California; - Denver, Colorado; - Monroe, Connecticut;
- Miami, Florida; - Atlanta, Georgia; - Chicago, Illinois;
- Rockville, Maryland; - Plymouth, Massachusetts; - St. Louis, Missouri;
- Charlotte, North Carolina; - Cranbury, New Jersey; - Morristown, New Jersey;
- Ramsey, New Jersey; - Los Alamos, New Mexico; - Melville, New York;
- Cincinnati, Ohio; - King of Prussia, Pennsylvania; - Dallas, Texas;
- Plano, Texas; and - Arlington, Virginia.
In addition, we maintain several field offices in foreign countries. We believe
that our current and anticipated facilities are adequate to meet our needs for
the foreseeable future. We believe that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
In November 1998, Nestor filed a complaint against us in the United States
District Court for the District of Rhode Island (C.A. No. 98 569). In the
complaint, Nestor alleged antitrust violations and unfair competition in
connection with our marketing of our Falcon credit card fraud detection product.
The complaint also alleged that we infringed United States patents held by
Nestor. Nestor sought to recover unspecified compensatory damages, treble
damages and punitive damages and to obtain injunctive relief arising from these
claims. The complaint also sought a declaratory judgment that a United States
patent we hold relating to technology used in our Falcon products is invalid and
unenforceable. We counterclaimed for patent infringement. In January 2000,
Nestor dropped its claim of patent infringement against us. In January 2001, the
Court granted our motion to dismiss our counterclaim that Nestor infringes our
patent, and Nestor's claims that our patent is invalid or unenforceable. After
that motion was granted, the case settled and Nestor 's remaining claims for
antitrust and unfair competition were dismissed.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS
Pursuant to General Instruction G (3), the information regarding our executive
officers required by Item 401(b) of Regulation S-K, is listed below in Part I of
this filing.
The following table sets forth the names, offices, and ages of each of our
executive officers, as of March 9, 2001:
NAME AGE POSITION
- ---- --- --------
John Mutch............... 44 President and Chief Executive Officer (Principal Executive Officer)
Kenneth J. Saunders...... 39 Chief Financial Officer and Secretary (Principal Financial Officer)
Russell C. Clark......... 32 Vice President, Corporate Finance and Assistant Secretary (Principal Accounting Officer)
Bruce E. Hansen.......... 41 President, HNC Financial Solutions
Sean Downs............... 40 President, HNC Insurance Solutions
J. Anthony Patterson..... 44 President, HNC Telecommunications Solutions
Set forth below are the principal positions held by each of the executive
officers named above as of March 9, 2001:
John Mutch was appointed president and chief executive officer during December
1999. Mutch joined us in July 1997, where he served initially as vice president,
Marketing, until September 1998, and later as president of HNC Insurance
Solutions from September 1998 to December 1999 and as our president and chief
operating officer from October 1999 to December 1999. He was a founder of
MVenture Holdings, Inc., a private equity fund that invests in start-up
technology companies, and served as a general partner from June 1994 to July
1997. From December 1986 to June 1997, Mutch held a variety of executive
marketing positions with Microsoft Corporation, including Director of
Organization Marketing. He holds a bachelor's of science degree in applied
economics from Cornell University and a master's degree in business
administration from the University of Chicago.
Kenneth J. Saunders was appointed chief financial officer during December 1999,
and secretary in January 2000. Saunders joined us in January 1997, where he
initially served as treasurer until June 1998, as corporate controller from June
1998 to January 1999, and then as vice president, corporate finance and
corporate controller from January 1999 to December 1999. From January 1992 to
December 1996, Saunders was employed with Risk Data Corporation, where he served
most recently as chief financial officer. In August 1996, we acquired Risk Data
Corporation. From January 1991 to January 1992, he was vice president of finance
and administration for A-Mark Financial Corporation. Saunders was with Arthur
Andersen from 1984 to 1987. He holds a bachelor's of accountancy from Widener
University and is a Certified Public Accountant.
Russell C. Clark joined us as vice president, corporate finance during January
2000. From August 1990 to January 2000, Clark held various positions with
PricewaterhouseCoopers LLP's Technology Industry Group, most recently as senior
manager in the audit and business advisory services group. He holds a bachelor's
degree in business administration with an emphasis in accounting from the
University of Iowa, and is a Certified Public Accountant.
Bruce E. Hansen joined us as president, HNC Financial Solutions during the first
quarter of 2000. He served as president and chief executive officer of CASA, a
privately held advanced analytical solutions company that specializes in
one-to-one marketing and strategic risk management solutions, until we completed
our acquisition of CASA during March 2000. He served as vice president,
marketing and business development at Summit Medical Systems from June 1997 to
April 1998, as senior vice president and general manager, medical division at
MEDE America Corporation from March 1996 to June 1997 and as vice president,
marketing at National Electronics Corporation from April 1995 to March 1996.
Hansen also served as vice president, corporate development at The Chase
Manhattan Bank from April 1994 to April 1995. He received a bachelor's of
science degree in economics from Harvard University, and a master's degree in
business administration, finance from the University of Chicago.
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Sean Downs was appointed president, HNC Insurance Solutions during June 2000.
Downs joined us in April 1998, where he initially served within our HNC
Insurance Solutions segment as president, Workers Compensation until September
1998, as senior vice president, Predictive Software Solutions from September
1998 until August 1999, and then as senior vice president, Strategic Development
from September 1999 until May 2000. From February 1990 to March 1998, Downs was
employed with Risk Data Corporation, where he served most recently as senior
vice president, Sales and Marketing. In August 1996, HNC Software Inc. acquired
Risk Data Corporation. From July 1984 to February 1990, Downs held various
senior management positions with Republic Health Corporation and Assured Health
Care Inc. He holds a bachelor's of science degree in business administration,
finance from San Diego State University.
J. Anthony Patterson became president, HNC Telecommunications Solutions in
August 1999. Patterson was chief executive officer of Muze Inc., a
business-to-business Internet content affiliate of the privately held Metromedia
Company, from September 1996 to March 1998. He served as vice president and
general manager of the Entertainment Group of Trade Service Corporation, an
international company that provided services in data and information
acquisition, management, publishing, and distribution, from March 1995 to
September 1996. Patterson co-founded Summit Associates, Inc., a bank consulting
and software development firm, where he also served as chief operating officer
and executive vice president from January 1992 to March 1995. He also held
senior management and marketing positions with the Bank of America Corporation
from May 1988 to January 1992. Patterson received a bachelor's of science degree
and a master's degree in business administration, management from Pepperdine
University.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market for our Common Stock is the Nasdaq National Stock Market,
where it is traded under the symbol "HNCS." The following table sets forth for
the periods indicated the high and low sales prices of our Common Stock,
presenting both the historical and adjusted prices for our Common Stock. The
adjusted prices shown below of our Common Stock (as reported by Nasdaq) give
retroactive effect to the spin-off of our former subsidiary, Retek Inc., as if
it had occurred on January 1, 1999.
HISTORICAL ADJUSTED
------------------- ------------------
HIGH LOW HIGH* LOW*
-------- ------- ------- --------
2000:
First Quarter............ $122.500 $72.063 $24.893 $14.644
Second Quarter........... 77.125 38.000 15.672 7.722
Third Quarter............ 81.813 42.000 16.625 8.535
Fourth Quarter........... 29.688 12.375 29.688 12.375
1999:
First Quarter............ $37.500 $23.000 $7.620 $4.674
Second Quarter........... 35.875 15.500 6.909 3.150
Third Quarter............ 41.125 30.125 8.433 6.122
Fourth Quarter........... 106.875 35.000 21.489 7.315
- ------------------
* These prices are reported by Nasdaq and give retroactive effect to the
spin-off of our former Retek subsidiary, by adjusting the historical prices
of our common stock by the Retek distribution ratio (See Note 2 of the
Notes to Consolidated Financial Statements included in this Report on page
F-28 for further discussion of the Retek spin-off).
As of March 9, 2000, there were approximately 259 holders of record of the
Common Stock.
We have never declared or paid any cash dividends on our capital stock. However,
On September 29, 2000, HNC distributed 40,000,000 shares of the common stock of
Retek, Inc., a publicly held company, as a dividend to HNC's stockholders of
record as of September 15, 2000. The dividend distribution ratio would in some
cases have resulted in the distribution of a fractional Retek share to certain
HNC stockholders. To eliminate fractional Retek shares, as an incidental part of
the Retek dividend, HNC paid stockholders cash in lieu of fractional Retek
shares they would otherwise have received, in an amount representing the fair
value of the eliminated fractional share. We currently anticipate that we will
retain all future earnings for use in our business and do not anticipate paying
any cash dividends in the foreseeable future. Our bank credit agreement
prohibits us from declaring or paying any cash dividends without the bank's
consent.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data for the five years ended December 31,
2000, is included in this Report on page F-2.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Our information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is included in this Report on
pages F-3 through F-17.
26
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices.
INTEREST RATE RISK
The fair value of our investments available for sale at December 31, 2000 was
$93.5 million. The objectives of our investment policy are the safety and
preservation of invested funds, and liquidity of investments that is sufficient
to meet cash flow requirements. Our policy is to place our cash, cash
equivalents, and investments available for sale with high credit quality
financial institutions, commercial companies, and government agencies in order
to limit the amount of credit exposure. Except for certain strategic equity
investments, it is also our policy to maintain concentration limits and to
invest only in allowable securities as determined by our management. Our
investment policy also provides that our investment portfolio must not have an
average portfolio maturity of beyond one year and that we must maintain
liquidity positions. Investments are prohibited in industries and speculative
activities. Investments must be denominated in U.S. dollars.
FOREIGN CURRENCY EXCHANGE RATE RISK
We mitigate our foreign currency risks principally by contracting primarily in
U.S. dollars and maintaining only nominal foreign currency cash balances.
Working funds necessary to facilitate the short term operations of our
subsidiaries are kept in the local currencies in which they do business, with
excess funds transferred to our offices in the United States for investment. For
the year ended December 31, 2000, approximately 4.8% of our sales were
denominated in currencies other than our functional currency, which is the U.S.
dollar. These foreign currencies are primarily those of Western Europe and
Canada.
EQUITY PRICE RISK
We have several equity investments we entered into for strategic business
purposes, and therefore are exposed to direct equity price risk. We mitigate
this risk by monitoring the financial performance of our investments. However,
many of our equity investments are in the common stock of privately held,
non-public companies and thus we may be unable to sell or achieve liquidity in
those investments prior to an adverse change in their values. In addition, the
current funding environment for high technology companies may expose our
investments in such companies to increased risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and footnotes and the report of
independent auditors thereon are included in this report on pages F-18 through
F-42. Supplementary Financial Data are presented in Note 16 of the Notes to
Consolidated Financial Statements included in this report on page F-42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 is incorporated by reference to the
information under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Compliance" in our Proxy Statement for our May 2001 annual
meeting. Information about our executive officers is included under the caption
"Executive Officers" after Item 4 included in this Report on page 24.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 is incorporated by reference to the
information under the captions "Director Compensation", "Executive
Compensation", and "Compensation Committee Interlocks and Insider Participation"
in our Proxy Statement for our May 2001 annual meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 12 is incorporated by reference to the
information under the caption "Principal Stockholders" in our Proxy Statement
for our May 2001 annual meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 is incorporated by reference to the
information under the caption "Related Party Transactions" in our Proxy
Statement for our May 2001 annual meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
The list of consolidated financial statements and schedules, are presented
in the accompanying Index to Selected Consolidated Financial Data, the
Consolidated Financial Statements and Supplementary Data included in this
Report on page F-1. These consolidated financial statements and schedules
are filed as part of this Report.
All financial statement schedules are omitted because the required
information is not applicable, or because the information required is
included in the consolidated financial statements and the related notes.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index included in this
Report on page F-43 are filed or incorporated by reference as part of this
Report and the Exhibit Index is incorporated by reference.
(b) During the quarter ended December 31, 2000, the Registrant filed Reports on
Form 8-K as follows:
Report on Form 8-K filed October 6, 2000, dated September 29, 2000,
reporting under Item 5 the completion of the separation of Retek, Inc.
Report on Form 8-K filed October 13, 2000, dated September 29, 2000,
reporting under Items 2 and 7 the completion of the separation of Retek,
Inc.
Amendment filed November 21, 2000 to Report on Form 8-K filed September 22,
2000, reporting financial statements under Item 7.
28
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2001 HNC SOFTWARE INC.
By: /s/ KENNETH J. SAUNDERS
---------------------------------------------
Kenneth J. Saunders
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
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 Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN MUTCH President and Chief Executive Officer, March 29, 2001
- ------------------------------------ Director and Chairman of the Board
John Mutch (Principal Executive Officer)
/s/ KENNETH J. SAUNDERS Chief Financial Officer and Secretary March 29, 2001
- ------------------------------------ (Principal Financial Officer)
Kenneth J. Saunders
/s/ RUSSELL C. CLARK Vice President, Corporate Finance and March 29, 2001
- ------------------------------------ Assistant Secretary
Russell C. Clark (Principal Accounting Officer)
/s/ EDWARD K. CHANDLER Director March 29, 2001
- ------------------------------------
Edward K. Chandler
/s/ THOMAS F. FARB Director March 29, 2001
- ------------------------------------
Thomas F. Farb
/s/ CHARLES H. GAYLORD, JR. Director March 29, 2001
- ------------------------------------
Charles H. Gaylord, Jr.
/s/ ALEX W. HART Director March 29, 2001
- ------------------------------------
Alex W. Hart
/s/ DAVID Y. CHEN Director March 29, 2001
- ------------------------------------
David Y. Chen
29
31
HNC SOFTWARE INC.
INDEX TO SELECTED CONSOLIDATED FINANCIAL DATA,
THE CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
DESCRIPTION PAGE
- -------------------------------------------------------------------------------------------------- --------
Selected Consolidated Financial Data.............................................................. F-2
Management's Discussion and Analysis of Results of Operations and Financial Condition............. F-3
Report of Independent Accountants................................................................. F-18
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 2000 and 1999.................................. F-19
Consolidated Statement of Operations for the years ended December 31, 2000, 1999 and 1998.... F-20
Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998.... F-21
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income (Loss) for the years ended December 31, 2000, 1999 and 1998......................... F-22
Notes to Consolidated Financial Statements................................................... F-23
F-1
32
HNC SOFTWARE INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 2000 and 1999, and
for each of the years in the three-year period ended December 31, 2000, come
from our audited Consolidated Financial Statements included later in this
Report. The selected consolidated financial data as of December 31, 1998, 1997
and 1996, and for the years ended December 31, 1997 and 1996, are derived from
our audited financial statements that are not included in this Report. During
September 2000, we completed the spin-off of our former Retek subsidiary.
Subsequent to the spin-off, Retek's results of operations and financial
condition were not included in our results of operations and financial
condition, and consequently the comparability of the data presented below is
impacted. The selected consolidated financial data gives retroactive effect to
the acquisitions of Risk Data, Retek and CompReview for all periods presented,
as we accounted for these acquisitions as poolings of interests. For a complete
understanding of the following you should read this selected consolidated
financial data in conjunction with "Management's Discussion and Analysis Results
of Operations and Financial Condition" and the Consolidated Financial Statements
and related notes included in this Report on pages F-3 through F-17.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues ......................................... $254,884 $216,889 $178,608 $113,735 $ 71,439
Operating income (loss) ................................ (149,741) (6,784) 21,026 23,040 9,659
Net income (loss) ...................................... (116,418) (6,272) 10,452 17,565 11,893
Basic net income (loss) per share ...................... (4.08) (0.25) 0.41 0.72 0.50
Diluted net income (loss) per share .................... (4.08) (0.25) 0.39 0.68 0.47
Pro forma net income(1) ................................ 15,417 9,731
Pro forma basic net income per share(1) ................ 0.64 0.41
Pro forma diluted net income per share(1) .............. 0.60 0.38
Shares used in computing basic net income (loss)
per share and basic pro forma net income
per share ............................................ 28,529 24,969 25,362 24,275 23,552
Shares used in computing diluted net income (loss)
per share and diluted pro forma net income
per share ............................................ 28,529 24,969 26,650 25,681 25,363
DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities
available for sale ............................. $ 162,753 $ 234,081 $ 153,340 $ 42,946 $ 34,849
Total assets ...................................... 447,741 416,421 283,914 119,877 98,293
Long-term obligations, less current portion ....... 16,616 104,111 101,039 239 683
Total stockholders' equity ........................ 382,574 249,573 153,021 103,860 84,970
- ----------
(1) Pro forma net income and net income per share reflect a provision for taxes
on the income of CompReview, which prior to our acquisition was a
subchapter S corporation, as if CompReview had been liable for corporate
income taxes as a C corporation for all periods presented.
F-2
33
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Statements in the following section contain forward-looking information about
our anticipated future operating expenses, our expectations for our
international operations, our future capital needs and about the assumptions and
projections underlying our in-process research and development expense.
Forward-looking statements are subject to risks and uncertainties. Therefore,
our actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors. The section
entitled "Risk Factors" in Item 1, "Business" discusses some of the important
risk factors that may affect our business, results of operations and financial
condition. You should carefully consider those risks. Investors are cautioned
not to place undue reliance on these forward-looking statements that speak only
as of the date of this report. We undertake no obligation to revise or update
any forward-looking statements for any reason.
OVERVIEW
In November 1999, our former subsidiary Retek, Inc. ("Retek") completed the
initial public offering of approximately 6.3 million shares of its common stock.
Prior to the offering, we transferred to Retek all of the shares of our wholly
owned subsidiary, Retek Information Systems, Inc. On August 7, 2000, HNC's board
of directors declared a dividend of all of the shares of Retek common stock held
by HNC, or approximately 40.0 million shares, to complete the spin-off of our
Retek subsidiary. We received a private letter ruling from the Internal Revenue
Service that HNC's dividend of its shares of Retek common stock would be
tax-free to HNC and our stockholders for U.S. federal income tax purposes. This
dividend was paid on September 29, 2000 to all HNC stockholders of record as of
September 15, 2000 using a distribution ratio of approximately 1.243 shares of
Retek common stock for each share of HNC common stock held. Cash was paid in
lieu of fractional shares. The shares of Retek common stock that were
distributed by HNC in the Retek spin-off constituted all the Retek shares owned
by HNC and represented approximately 83.9% of Retek's outstanding shares as of
the September 29, 2000 distribution date. As a result of our distribution of our
Retek common shares, Retek is no longer affiliated with HNC. In this section, we
refer to HNC Software, Inc., excluding Retek, as "Core HNC."
Excluding Retek, our primary business segments during 2000 were HNC Financial
Solutions ("FS"), HNC Insurance Solutions ("IS") and HNC Telecommunications
Solutions ("TS"). Each of our segments sells products incorporating our
Intelligent Response, Decision Management, Risk Analytics and Opportunity
Analytics software solutions.
Financial Solutions
FS provides a suite of products that addresses the customer-lifecycle management
needs of banks and other financial institutions. FS provides transaction-based,
real-time fraud detection, authorization and action decisions for applications
such as credit card charge authorization and the loan approval decision process.
Insurance Solutions
IS develops software solutions for the insurance industry that are designed to
add value to its customers' businesses through cost reduction and improved
management of risks. Customers in this segment include insurance carriers,
third-party administrators, managed care organizations, preferred provider
organizations, insurance industry trade groups, brokers, and other service
organizations. Our current product offerings are targeted to the workers'
compensation and automobile segments of the property and casualty insurance
market, as well as the group health segment of the insurance market.
Telecommunications Solutions
TS provides solutions designed to help telecommunications carriers acquire more
customers, enhance relationships with existing customers and retain customers
for longer periods. Our current products include solutions to reduce fraud
losses and determine customer profitability.
Our revenues and operating results have varied significantly in the past and in
some quarters we have experienced net losses. We expect fluctuations in our
operating results to continue for the foreseeable future. As a result, we
believe that investors should not rely on period-to-period comparisons of our
financial results as an indication of our future performance. Because our
expense levels are based in part on our expectations regarding future revenues
and in the short term are fixed to a large extent, we may be unable to adjust
our spending in time to compensate for any unexpected revenue shortfall. We may
not be able to maintain profitability on a quarterly or annual basis in the
future. In addition, in the past we have acquired several companies and may
continue to do so in the future. During 2000, we completed the
F-3
34
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
spin-off of our former Retek subsidiary. Such transactions typically affect the
comparability of our historical financial results. Acquisitions also typically
generate significant continuing charges that decrease our net income, often for
many fiscal periods. It is possible that in some future quarter our operating
results will be below the expectations of public market analysts and investors.
In that event, the price of our common stock would likely be harmed.
RESULTS OF OPERATIONS
REVENUES
- --------------------------------------------------------------------------------
Our revenues are comprised of license and maintenance revenues and services and
other revenues. Total revenues for 2000 increased by $38.0 million, or 17.5%,
over 1999. Total revenues for 1999 increased by $38.3 million, or 21.4%, over
1998. Our revenues during 2000, 1999 and 1998 are summarized as follows, and
include Retek's revenues through the September 29, 2000 spin-off date:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands)
CORE HNC:
License and maintenance revenues ........ $ 130,834 $ 109,983 $ 94,905
Services and other revenues ............. 64,135 37,747 27,034
---------- ---------- ----------
194,969 147,730 121,939
---------- ---------- ----------
RETEK:
License and maintenance revenues ........ 35,229 45,965 44,389
Services and other revenues ............. 24,686 23,194 12,280
---------- ---------- ----------
59,915 69,159 56,669
---------- ---------- ----------
TOTAL CONSOLIDATED REVENUES ................. $ 254,884 $ 216,889 $ 178,608
========== ========== ==========
LICENSE AND MAINTENANCE REVENUES
We recognize license and maintenance revenues in several different ways,
depending on the terms on which the software and maintenance are provided.
Revenue from perpetual and short-term periodic licenses of our software is
generally recognized upon delivery. Transactional-based fees under software
license arrangements are recognized as revenue based on system usage or when
fees based on system usage exceed monthly minimum license fees. Software
maintenance fees are recognized as revenue ratably over the maintenance periods.
Transactional-based fees under network service or internal hosted software
arrangements are recognized as revenue based on system usage or when fees based
on system usage exceed monthly minimum license fees. Amounts received under
contracts in advance of delivery or performance are recorded as deferred revenue
and are generally recognized within one year from receipt.
The following table presents our license and maintenance revenues by segment for
2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands)
LICENSE AND MAINTENANCE REVENUES:
FS ................................. $ 66,207 $ 52,489 $ 48,144
IS ................................. 49,804 52,418 43,765
TS and other ....................... 14,822 5,076 2,996
---------- ---------- ----------
Core HNC ..................... 130,834 109,983 94,905
Retek .............................. 35,229 45,965 44,389
---------- ---------- ----------
$ 166,063 $ 155,948 $ 139,294
========== ========== ==========
License and maintenance revenues in 2000 increased by $10.1 million, or 6.5%,
compared with 1999. This increase consisted of a $20.9 million, or 19.0%
increase within Core HNC, offset by a $10.7 million, or 23.4% decline at Retek.
The increase at Core HNC was primarily attributable to a $13.7 million, or 26.1%
increase at our FS segment and a $9.7
F-4
35
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
million, or 192.0% increase at our combined TS and other segments, offset by a
$2.6 million, or 5.0% decline at our IS segment. The increase at our FS segment
was attributable primarily to increases in sales of our Falcon and ProfitMax
products, along with increased revenues resulting from acquisitions. The
increase at our combined TS and other segments is attributable primarily to
growth in the TS license and maintenance business through acquisitions,
resulting in increased revenues derived primarily through the sale of our 4SCORE
and RoamEX products. The decrease at our IS segment resulted primarily from the
sale of fewer risk analytic product perpetual licenses as compared to 1999.
License and maintenance revenues in 1999 increased by $16.7 million, or 12.0%,
compared to 1998. This increase consisted of a $15.1 million, or 15.9% increase
within Core HNC and a $1.6 million, or 3.6% increase at Retek. The increase at
Core HNC was attributable primarily to a $4.3 million, or 9.0% increase at our
FS segment and a $8.7 million, or 19.8% increase at our IS segment and a $2.1
million, or 69.4% increase at our combined TS and other segments. The increase
at our FS segment was attributable primarily to increases in sales of our Falcon
and ProfitMax products as a result of an increase in the customer base. The
increase at our IS segment was primarily the result of increased license and
maintenance revenues associated with our CompAdvisor product, resulting from an
increase in the customer base coupled with growth from existing customers, and
an increase in the number of MIRA licenses sold. The increase at our combined TS
and other segments is attributable primarily to growth in the TS license and
maintenance business through increased sales of our ATACS product line, which we
acquired in June 1998.
SERVICES AND OTHER REVENUES
Services and other revenues are comprised of installation and implementation
revenues, remote hosted service operation revenues and revenues which are
derived from consulting contracts, new product development contracts with
commercial customers and, to a lesser extent, research and development contracts
with the United States Government. Revenue from software installation and
implementation and from contract services is generally recognized as the
services are performed using the percentage of completion method based on costs
incurred to date compared to total estimated costs at completion. Amounts
received under contracts in advance of performance are recorded as deferred
revenue and are generally recognized within one year from receipt. Contract
losses are recorded as a charge to operations in the period any losses are first
identified. Installation or setup fees associated with network service and
internally hosted software agreements are recognized ratably over the longer of
the customer contract period or estimated life of the customer relationship.
Remote hosted service fees derived from the review and repricing of customers'
medical bills are recognized as revenue when the processing services are
performed.
The following table presents our services and other revenues by segment for
2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands)
SERVICE AND OTHER REVENUES:
FS ............................ $ 29,480 $ 21,152 $ 15,100
IS ............................ 31,578 14,372 8,375
TS and other .................. 3,077 2,223 3,559
---------- ---------- ----------
Core HNC ................ 64,135 37,747 27,034
Retek ......................... 24,686 23,194 12,280
---------- ---------- ----------
$ 88,821 $ 60,941 $ 39,314
========== ========== ==========
Services and other revenues in 2000 increased $27.9 million, or 45.7%, compared
to 1999. This increase consisted of a $26.5 million, or 70.2% increase at Core
HNC and a $1.4 million, or 6.4% increase at Retek. The increase at Core HNC was
attributable primarily to a $8.4 million, or 39.8% increase at our FS segment
and a $17.2 million, or 119.7% increase at our IS segment. The increase at our
FS segment was attributable primarily to an increase in Capstone implementation
revenues, along with increased revenues resulting from acquisitions. The
increase at our IS segment was attributable primarily to overall growth in our
hosted services customer base, including the commencement of full-scale hosted
service operations for a primary customer.
Services and other revenues in 1999 increased $21.6 million, or 55.0%, compared
to 1998. This increase consisted of a $10.7 million, or 39.6% increase at Core
HNC and a $10.9 million, or 88.9% increase at Retek. The increase at Core HNC
F-5
36
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
was primarily driven by a $6.1 million, or 40.1% increase at our FS segment and
a $6.0 million, or 71.6% increase at our IS segment. The increase at our FS
segment was principally the result of an increase in Capstone product
implementations and, to a lesser extent, installations of Falcon products. These
increases were partially offset by a decrease in installations related to our
ProfitMax suite of products as a result of the completion of a large project
during 1999. The increase at our IS segment was attributable to a combination of
increased installation, consulting and remote hosted service bureau revenues
relating to our CompAdvisor product, resulting from the aggregate growth of our
customer base within this segment, including the addition of two sizable
customers, offset by the loss of a significant service bureau customer as a
result of industry consolidation.
REVENUES FROM NON-U.S. REGIONS
International operations and export sales represented 19.3%, 23.2% and 23.1% of
our total revenues in 2000, 1999 and 1998, respectively. During 2000, 1999 and
1998, approximately 4.8%, 5.2% and 6.8% of our sales were denominated in
currencies other than our functional currency, which is the U.S. dollar. These
foreign currencies are primarily those of Western Europe and Canada. During
2000, approximately 33.4% of our international sales were derived from Retek. In
1999 and 1998, the majority of our international sales were derived from Retek.
We believe that international sales represent a significant opportunity for
revenue growth and anticipate that our international sales may increase as a
percentage of our total revenue in the future. However, there can be no
assurance that our efforts to develop products, databases, and models for
targeted international markets or in developing additional international sales
and support channels will be successful.
GROSS MARGIN
- --------------------------------------------------------------------------------
LICENSE AND MAINTENANCE GROSS MARGIN.
License and maintenance costs primarily represent our expenses for personnel
engaged in customer support, travel to customer sites and documentation
materials. Our license and maintenance gross margin was $105.6 million in 2000,
$114.4 million in 1999 and $105.8 million in 1998. The following table
summarizes our license and maintenance gross margins by operating segment:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ---------------------
(in thousands)
LICENSE AND MAINTENANCE GROSS MARGINS
Segment gross margins:
FS .................................... $ 57,218 86.4% $ 43,185 82.3% $ 39,641 82.3%
IS .................................... 25,379 51.0% 27,998 53.4% 24,246 55.4%
TS and other .......................... 11,571 78.1% 3,886 76.6% 2,295 76.6%
-------- ------- -------- ------- -------- -------
Core HNC .......................... 94,168 72.0% 75,069 68.3% 66,182 69.7%
Retek ................................. 20,170 57.3% 39,607 86.2% 39,639 89.3%
-------- ------- -------- ------- -------- -------
114,338 68.9% 114,676 73.5% 105,821 76.0%
Amounts not allocated to segments:
Stock-based compensation expense ...... (2,658) (1.6%) (280) (0.1%) -- --
Expenses related to Retek spin-off .... (6,086) (3.7%) -- -- -- --
-------- ------- -------- ------- -------- -------
HNC Consolidated ................... $105,594 63.6% $114,396 73.4% $105,821 76.0%
======== ======= ======== ======= ======== =======
Our license and maintenance gross margin percentage in 2000 decreased by 9.8%
compared to 1999. Of this decrease, 4.6% was attributable to margin declines
within our combined Core HNC and Retek operating segments and 5.2% of this
decline was attributable to our recognition in 2000 of increased stock-based
compensation charges and non-recurring expenditures relating to our Retek
spin-off. For a further discussion regarding stock-based compensation charges
and expenditures relating to our Retek spin-off, refer to the sections entitled
"Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek"
appearing later in this Report.
In 2000, the 4.6% license and maintenance gross margin percentage decline within
our operating segments was attributable to a 3.7% increase at Core HNC, offset
by a 28.9% decline at Retek. The improvement in Core HNC's license
F-6
37
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
and maintenance gross margin percentage was attributable to a 4.1% increase at
our FS segment and a 1.5% improvement at our combined TS and other segments,
offset by a 2.4% decline at our IS segment. The margin increase at our FS
segment was attributable primarily to improved margins resulting from one-time,
non-recurring license fees related to Falcon product sales, as well as increased
revenues associated with higher margin e-commerce products. The margin increase
within our combined TS and other segments was attributable primarily to the
increase of higher margin TS product sales during 2000, primarily resulting from
growth in the TS license and maintenance business through acquisitions. The
margin decline at our IS segment was attributable primarily to the sale of fewer
higher margin perpetual licenses related to risk analytic products in 2000
versus 1999.
Our license and maintenance gross margin percentage in 1999 decreased by 2.6%
compared to 1998. This decline was attributable primarily to a 1.4% decline at
Core HNC and a 3.1% decline at Retek. Core HNC's license and maintenance margin
decrease was attributable primarily to a 2.0% margin decline at our IS segment,
while the margins at our FS segment and our combined TS and other segments
remained relatively flat year over year. The decline at our IS segment was
attributable primarily to a decline in decision management product margins,
primarily related to increased costs related to Preferred Provider Organization
bill repricing expenses, including network access fees, as a result of
increasingly competitive market conditions.
SERVICES AND OTHER GROSS MARGIN.
Services and other expenses consist of personnel and other expenses associated
with providing installation and implementation services and performing
development, consulting, and research development contracts, and the costs
associated with hosted service operations. Our services and other gross margin
was $15.9 million in 2000, $19.7 million in 1999 and $10.7 million in 1998. The
following table summarizes our services and other gross margins by operating
segment:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- -------------------------
(in thousands)
SERVICES AND OTHER GROSS MARGINS
Segment gross margins:
FS..................................... $6,739 22.9% $7,139 33.8% $4,655 30.8%
IS..................................... 12,061 38.2% 5,680 39.5% 2,362 28.2%
TS and other........................... 922 30.0% 637 28.7% 812 22.8%
---------- ---------- ---------- ---------- ----------- ----------
Core HNC........................... 19,722 30.8% 13,456 35.6% 7,883 29.2%
Retek.................................. 5,337 21.6% 6,568 28.3% 2,775 22.6%
---------- ---------- ---------- ---------- ----------- ----------
25,059 28.2% 20,024 32.9% 10,658 27.1%
Amounts not allocated to segments:
Stock-based compensation expense....... (2,548) (2.9)% (354) (0.6)% -- --
Expenses related to Retek spin-off..... (6,603) (7.4)% -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
HNC Consolidated.................... $15,908 17.9% $19,670 32.3% $10,658 27.1%
========== ========== ========== ========== =========== ==========
Our services and other gross margin percentage in 2000 decreased by 14.4%
compared to 1999. Of this decrease, 4.7% was attributable to margin declines
within our combined Core HNC and Retek operating segments and 9.7% of this
decline was attributable to our recognition in 2000 of increased stock-based
compensation charges and non-recurring expenditures relating to our Retek
spin-off. For a further discussion regarding stock-based compensation charges
and expenditures relating to our Retek spin-off, refer to the sections entitled
"Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek"
appearing later in this Report.
In 2000, the 4.7% services and other gross margin percentage decline within our
operating segments was attributable to a 4.8% decline at Core HNC and a 6.7%
decline at Retek. The decline within Core HNC was primarily attributable to a
10.9% decline at our FS segment and a 1.3% decline at our IS segment. The margin
decline at our FS segment is attributable primarily to the increased use of
third party consultants, who have a higher average cost than internal resources,
in connection with Capstone product implementations during the year. The margin
decline at our IS segment is attributable primarily to lower margins associated
with contract development work performed during the year, offset by improved
efficiencies and resultant margin increases associated with the growth in our
hosted service customer base.
F-7
38
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Our services and other gross margin percentage in 1999 increased by 5.2%
compared to 1998. The increase was comprised primarily of a 6.4% increase at
Core HNC and a 5.7% increase at Retek. The increase within HNC was primarily
attributable to a 3.0% increase at our FS segment and an 11.3% increase at our
IS Segment. The margin increase at our FS segment is attributable primarily to
an increase in the number of Capstone and Falcon product implementations,
yielding relatively higher margins than other services. The margin increase at
our IS segment was attributable primarily to the result of improved efficiencies
and resultant margin increases associated with the growth in our hosted service
customer base.
RESEARCH AND DEVELOPMENT EXPENSE
- --------------------------------------------------------------------------------
Research and development expenses consist primarily of salaries and other
personnel-related expenses, subcontracted development services, depreciation for
development equipment and supplies. Research and development expense totaled
$75.5 million in 2000, $50.2 million in 1999 and $32.7 million in 1998.
Research and development expense in 2000 increased by $25.3 million, or 50.5%,
compared to 1999. Of this increase, $16.5 million, or 32.9%, was attributable to
increased expenditures within our combined Core HNC and Retek operating
segments, and $8.8 million, or 17.6%, was attributable to our recognition in
2000 of increased stock-based compensation charges as well as non-recurring
expenditures relating to our Retek spin-off. Research and development expenses
in 1999 increased by $17.5 million, or 53.6%, compared to 1998. Of this
increase, $16.4 million, or 50.2%, was attributable to increased expenditures
within our combined Core HNC and Retek operating segments and $1.1 million, or
3.4%, was attributable to the recording of stock-based compensation charges in
1999. For a further discussion regarding stock-based compensation charges and
expenditures relating to our Retek spin-off, which we do not allocate to our
operating segments, refer to the sections entitled "Stock-Based Compensation
Expense" and "Expenses Related to Spin-Off of Retek" appearing later in this
Report.
Within our operating segments, the 2000 increase consisted of a $12.9 million,
or 48.8% increase within Core HNC and an increase of $3.6 million, or 15.9%
related to Retek. The 2000 increase at Core HNC is attributable to a $9.6
million increase at our FS segment, a $2.4 million increase at our combined TS
and other segments and a $0.9 million increase at our IS segment. The 1999
increase consisted of a $6.6 million, or 33.3% increase at Core HNC and a $9.8
million, or 76.2% increase related to Retek. The 1999 increase at Core HNC is
attributable primarily to a $5.8 million increase at our FS segment and a $0.6
million increase at our IS segment. The absolute dollar increases at Core HNC in
2000 and 1999 were attributable primarily to increases in staffing and related
costs to support new product development activities.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of software development costs from the time technological
feasibility is established until the product is available for general release to
customers. Based on our product development process, technological feasibility
is not established until completion of a working model. Costs we incur between
completion of the working model and the point at which a product is ready for
general release have been insignificant. As a result, no significant software
development costs were capitalized through December 31, 2000. We anticipate that
research and development expenses will increase in dollar amount and could
increase as a percentage of total revenues for the foreseeable future.
SALES AND MARKETING EXPENSE
- --------------------------------------------------------------------------------
Sales and marketing expenses consist primarily of salaries and benefits,
commissions, travel, entertainment and promotional expenses. Sales and marketing
expenses totaled $89.9 million in 2000, $46.3 million in 1999 and $34.5 million
in 1998.
Sales and marketing expense in 2000 increased by $43.6 million, or 94.4%,
compared to 1999. Of this increase, $20.5 million, or 44.5%, was attributable to
increased expenditures within our combined Core HNC and Retek operating
segments, and $23.1 million, or 49.9%, was attributable to our recognition in
2000 of increased stock-based compensation charges as well as non-recurring
expenditures relating to our Retek spin-off. Sales and marketing expenses in
1999 increased by $11.8 million, or 34.0%, compared to 1998. Of this increase,
$11.3 million, or 32.7%, was attributable to increased expenditures within our
combined Core HNC and Retek operating segments and $0.4 million, or 1.3%, was
attributable to the recording of stock-based compensation charges in 1999. For a
further discussion regarding stock-
F-8
39
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
based compensation charges and expenditures relating to our Retek spin-off,
which we do not allocate to our operating segments, refer to the sections
entitled "Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of
Retek" appearing later in this Report.
Within our operating segments, the 2000 increase consisted of a $12.0 million,
or 45.8% increase at Core HNC and a $8.6 million, or 43.9% increase related to
Retek. The 2000 increase at Core HNC is attributable to a $6.9 million increase
at our FS segment, a $3.3 million increase at our IS segment and a $1.8 million
increase at our combined TS and other segments. Sales and marketing expenses in
1999 increased by $11.3 million, or 32.7%, compared to 1998. The 1999 increase
consisted of a 5.7 million, or 27.7% increase at Core HNC and a $5.6 million, or
40.1% increase related to Retek. The 1999 increase at Core HNC is attributable
to a $2.5 million increase at our FS segment, a $2.6 million increase at our
combined TS and other segments, and a $0.5 million increase at our IS segment.
The absolute dollar increases at Core HNC in 2000 and 1999 were attributable
primarily to increases in staffing related to the expansion of our direct sales
and marketing staff, including that resulting from acquisitions. Also
contributing to the increases were additional expenses for trade shows,
advertising, corporate marketing programs and other expenses to support recently
acquired businesses.
We expect sales and marketing expenses to continue to increase in absolute
dollars for the foreseeable future. These expenses could also increase as a
percentage of total revenues as we continue to develop a direct sales force in
the EMEA (Europe, the Middle East and Africa), the Asian-Pacific and Latin
American regions, as well as other international markets, expand our domestic
sales and marketing organization and increase the breadth of our product lines.
GENERAL AND ADMINISTRATIVE EXPENSE
- --------------------------------------------------------------------------------
General and administrative expenses consist primarily of personnel costs for
finance, contract administration, human resources and general management, as
well as insurance and professional services expenses. General and administrative
expenses totaled $53.3 million in 2000, 33.8 million in 1999 and $19.0 million
in 1998.
General and administrative expense in 2000 increased by $19.5 million, or 57.9%,
compared to 1999. Of this increase, $10.8 million, or 32.0%, was attributable to
increased expenditures within our combined Core HNC and Retek operating
segments, and $8.7 million, or 25.9%, was attributable to the net effect of our
recognition of non-recurring expenditures relating to our Retek spin-off, offset
by a decline in stock-based compensation charges in 2000 as compared to 1999.
General and administrative expenses in 1999 increased by $14.8 million, or
78.0%, compared to 1998. Of this increase, $5.0 million, or 26.4%, was
attributable to increased expenditures within our combined Core HNC and Retek
operating segments and $9.8 million, or 51.6%, was attributable to the recording
of stock-based compensation charges in 1999. For a further discussion regarding
stock-based compensation charges and expenditures relating to our Retek
spin-off, which we do not allocate to our operating segments, refer to the
sections entitled "Stock-Based Compensation Expense" and "Expenses Related to
Spin-Off of Retek" appearing later in this Report.
Within our operating segments, the 2000 increase consisted of a $9.1 million, or
51.6% increase at Core HNC and a $1.7 million, or 26.6% increase related to
Retek. The 2000 increase at Core HNC is attributable to a $5.6 million increase
at our FS segment, a $2.4 million increase at our IS segment and a $1.1 million
increase at our combined TS and other segments. General and administrative
expenses in 1999 increased by $5.0 million, or 26.4%, compared to 1998. The 1999
increase consisted of a $3.3 million, or 23.1% increase at Core HNC and a $1.7
million, or 36.8% increase related to Retek. The 1999 increase at Core HNC is
attributable primarily to a $2.1 million increase at our FS segment and a $1.0
million increase at our combined TS and other segments. The absolute dollar
increases at Core HNC in 2000 and 1999 are attributable primarily to additional
staffing and related expenses to support a higher volume of business, resulting
in part from our acquisitions. Contributing also to the 1999 increase within our
FS segment were additional legal costs incurred in our defense related to the
Nestor litigation.
TRANSACTION-RELATED AMORTIZATION AND COSTS
- --------------------------------------------------------------------------------
Transaction-related amortization and costs primarily include acquisition-related
amortization during 2000, 1999 and 1998. Additional costs include $0.8 million
related to the write-off of deferred offering costs during 2000 and $0.6 million
related to the write-off of deferred merger costs during 1999. Transaction-
related amortization and costs increased from $3.2 million in 1998 to 9.2
million in 1999 and to $43.7 million in 2000. These year-over-year increases are
primarily attributable to incremental intangible asset amortization charges as a
result of our business acquisitions during 1998, 1999 and 2000. The
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40
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
average amortization period and useful life for these intangible assets is
approximately 3.5 years. For further information regarding our acquisitions,
refer to Note 3 of the Notes to the Consolidated Financial Statements.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE
- --------------------------------------------------------------------------------
2000 ACQUISITIONS
In-process research and development expense was $7.6 million in 2000, related to
one-time write-offs in connection with the acquisitions of CASA ($1.4 million),
Celerity ($1.1 million), HighTouch ($4.0 million), Systems/Link ($0.7 million)
and CardAlert ($0.4 million). The classification of the technology as complete
or under development was made in accordance with the guidelines of Statement of
Financial Accounting Standards No. 86, Statement of Financial Accounting
Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4.
CASA, acquired in the first quarter of 2000, is an advanced analytic solutions
company that provides account optimization and precision marketing solutions.
Prior to 2000, CASA primarily sold its Adaptive Dynamic Marketing solutions to
businesses to improve revenue and customer retention. At the time of
acquisition, CASA had a number of new technologies under development related to
account management algorithms and pricing algorithms, which in-process research
and development projects were estimated at the time of acquisition to achieve
technological feasibility in 2000.
Celerity Technologies, acquired in the second quarter of 2000, is involved in
developing and marketing electronic data interchange ("EDI") solutions for the
workers' compensation industry. The company is a developer and provider of
translation software, desktop software, and value-added network services in
support of the claims handling process. Prior to our acquisition, Celerity
Technologies primarily sold its software and network services to insurance
carriers, third party administrators, managed care organizations, employers, and
medical providers to facilitate the workers compensation claims handling
process. At the time of acquisition, Celerity Technologies had a number of new
technologies under development related to Web-enabling and EDI network
technologies, which in-process research and development projects were estimated
at the time of acquisition to achieve technological feasibility in 2000.
HighTouch, acquired in the second quarter of 2000 by Retek, is a provider of
customized software and services relating to customer relationship management
("CRM"). Prior to our acquisition, HighTouch primarily sold customized software
and services to a variety of customers in the retail industry. At the time of
acquisition, HighTouch had technology under development relating to the creation
of a fully integrated standardized off-the-shelf CRM product, which in-process
research and development project was estimated at the time of acquisition to
achieve technological feasibility in 2000.
Systems/Link, acquired in the third quarter of 2000, is a software developer
that creates data management solutions for large telecommunications companies.
The company provides applications for real-time data collection, call detail
record exchange, fraud control and prepaid services for carriers. At the time of
acquisition, Systems/Link had a new technology under development related to a
F-10
41
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
real-time roamer record exchange system for enhanced fraud control capabilities,
which in-process research and development project was estimated at the time of
acquisition to achieve technological feasibility in 2001.
CardAlert, acquired in the third quarter of 2000, provides ATM and debit card
risk management services to domestic financial institutions and debit card
networks. The company's Accelerated Detection technology analyzes daily ATM
transactions for fraudulent activity. Prior to its acquisition, CardAlert
primarily provided fraud detection services to large domestic debit card
networks. At the time of acquisition, CardAlert had a new technology under
development related to fraud detection for signature-based credit card activity,
which in-process research and development project was estimated at the time of
acquisition to achieve technological feasibility in the third quarter of 2001.
We used an independent appraisal firm to assist us with our valuations of the
fair market values of the purchased assets in connection with these
acquisitions. Fair market value is defined as the estimated amount at which an
asset might be expected to be exchanged between a willing buyer and willing
seller assuming the buyer continues to use the assets in its current operations.
The in-process research and development projects were valued through the use of
a discounted cash flow analysis, taking into account projected future cash flows
associated with these projects once they achieve technological feasibility,
their stage of completion as of the acquisition date, and the expected return
requirements (i.e. discount rates) for determining present values of the
projected cash flows. Stages of completion were estimated by considering time,
cost, and complexity of tasks completed prior to the acquisition as a percentage
of total time, cost and effort required for the total project up to achieving
technological feasibility.
With respect to the projected financial information provided to our appraiser
pertaining to these acquisitions: CASA prepared a detailed set of projections
forecasting revenue from the new algorithms as well as gross profit and
operating profit margins; Celerity and HNC prepared a detailed set of
projections forecasting revenue from the Web-enabling and EDI technology as well
as gross profit and operating profit margins; Retek prepared a detailed set of
projections forecasting revenue from the HighTouch CRM technology as well as
gross profit and operating profit margins; Systems/Link and HNC prepared a
detailed set of projections forecasting revenue from the real-time roamer record
exchange technology as well as gross profit and operating profit margins; and
CardAlert and HNC prepared a detailed set of projections forecasting revenue
from the credit card fraud detection technology as well as gross profit and
operating profit margins. These projections were made based on an assessment of
customer needs and the expected pricing and cost structure.
With respect to the discount rates used in the valuation approach, incomplete
technology represents a mix of near and mid-term prospects for the acquired
businesses and imparts a level of uncertainty as to their prospects. A
reasonable expectation of return on the incomplete technology would be higher
than that of completed technology due to these inherent risks. As a result, the
earnings associated with incomplete technology were discounted based upon the
following methodologies: The Capital Asset Pricing Model was used to determine
the cost of equity. It combines a risk free rate of return with an equity risk
premium multiplied by a factor, referred to as Beta, which is based on the
performance of common stock prices of similar publicly traded companies.
Employing these data for CASA, Celerity, HighTouch, Systems/Link and CardAlert,
the discount rates attributable to the businesses were 22.0%, 19.3%, 21.2%,
21.0% and 21.0%, respectively, which were used for valuing completed technology.
Since incomplete technology would require a higher return than completed
technology, the valuation reports prepared by our appraiser utilized discount
rates of 27.0%, 24.3%, 26.2%, 31.0% and 31.0% for CASA, Celerity, HighTouch,
Systems/Link and CardAlert, respectively, to present value cash flows (in excess
of a return on other assets of the business) attributable to in-process research
and development projects.
The in-process research and development for the CASA, Celerity, HighTouch,
Systems/Link and CardAlert projects have reached completion or continue to
F-11
42
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
progress, in all material respects, consistently with our original assumptions
that were provided to the independent appraiser and used to value the in-process
research and development.
1999 ACQUISITION
In-process research and development expenses was $1.5 million in 1999, related
to a one-time write-off in connection with Retek's acquisition of WebTrak in the
fourth quarter of 1999. At the time of acquisition, certain WebTrak products
were under development. The classification of the technology as complete or
under development was made in accordance with the guidelines of Statement of
Financial Accounting Standards No. 86, Statement of Financial Accounting
Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4.
Retek used an independent appraisal firm to assist in the valuation of the fair
market values of the purchased assets of WebTrak. Fair market value is defined
as the estimated amount at which an asset might be expected to be exchanged
between a willing buyer and willing seller assuming the buyer continues to use
the assets in its current operations. Retek provided assumptions by product line
of revenue, cost of goods sold and operating expense to the appraiser to assist
in the valuation. The in-process research and development projects were valued
through the use of a discounted cash flow analysis, taking into account
projected future cash flows associated with these projects once they achieve
technological feasibility, their stage of completion as of the acquisition date,
and the expected return requirements (i.e. discount rates) for determining
present values of the projected cash flows. Stages of completion were estimated
by considering time, cost, and complexity of tasks completed prior to the
acquisition as a percentage of total time, cost and effort required for the
total project up to achieving technological feasibility. Earnings associated
with WebTrak's incomplete technology were discounted at a rate of 26.4%
1998 ACQUISITIONS
In-process research and development expense was $6.1 million in 1998, related to
one-time write-offs in connection with the acquisitions of PCS ($1.8 million),
FTI ($3.0 million), and the ATACS product line ($1.3 million). The
classification of the technology as complete or under development was made in
accordance with the guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards No. 2 and Financial
Accounting Standards Board Interpretation No. 4.
PCS, acquired in the first quarter of 1998, was a supplier of fully integrated
distribution center management software products that address the distribution
needs of the retail, wholesale and manufacturing industries. At the time of
acquisition, PCS had a number of new technologies under development, including
primarily two software product versions that were being designed to assist
warehouse operations and of which were estimated to achieve technological
feasibility in 1999.
FTI, acquired in the second quarter of 1998, developed and marketed
profitability measurement and decision-support software products and related
support services to banks and other similar financial institutions. At the time
of acquisition, FTI had various new products under development relating to
profitability measurement and other decision support systems, that were
estimated to achieve technological feasibility at various dates in 1998 and
1999.
F-12
43
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The ATACS product line, acquired in the second quarter of 1998, was a fraud
management software solution for the wireline, wireless and Internet
telecommunication service provider industries. At the time of acquisition, ATACS
Version 4.2, which included new features and interface technologies, was under
development and was estimated to reach technological feasibility in the third
quarter of 1998. Although Version 4.2 had as its foundation certain technology
from completed versions, management believed that Version 4.2 development
efforts were of a significance level to be considered new research and
development efforts.
We used an independent appraisal firm to assist us with our valuations of the
fair market values of the purchased assets in connection with these
acquisitions. Fair market value is defined as the estimated amount at which an
asset might be expected to be exchanged between a willing buyer and willing
seller assuming the buyer continues to use the assets in its current operations.
The in-process research and development projects were valued through the use of
a discounted cash flow analysis, taking into account projected future cash flows
associated with these projects once they achieve technological feasibility,
their stage of completion as of the acquisition date, and the expected return
requirements (i.e. discount rates) for determining present values of the
projected cash flows. Stages of completion were estimated by considering time,
cost, and complexity of tasks completed prior to the acquisition as a percentage
of total time, cost and effort required for the total project up to achieving
technological feasibility.
With respect to the projected financial information provided to our appraiser
pertaining to these acquisitions, we prepared detailed sets of projections
forecasting revenues from the in-process technologies as well as gross profit
and operating profit margins. These projections were made based on an assessment
of customer needs and the expected pricing and cost structure.
With respect to the discount rates used in the valuation approach, incomplete
technology represents a mix of near and mid-term prospects for the acquired
businesses/product lines and imparts a level of uncertainty as to their
prospects. A reasonable expectation of return on the incomplete technology would
be higher than that of completed technology due to these inherent risks. As a
result, the earnings associated with incomplete technology were discounted based
upon the following methodologies: The Capital Asset Pricing Model was used to
determine the cost of equity for the PCS and ATACS product line acquisitions. It
combines a risk free rate of return with an equity risk premium multiplied by a
factor, referred to as Beta, which is based on the performance of common stock
prices of similar publicly traded companies. The Weighted Average Cost of
Capital was used to determine the discount rate for FTI. Employing these data
for PCS, FTI and the ATACS product line, the discount rates attributable to the
businesses/product line were 30.0%, 17.0% and 17.5%, respectively, which were
used for valuing completed technology. Since incomplete technology would require
a higher return than completed technology, the valuation reports prepared by our
appraiser utilized rates of 40.0%, 27.0% and 22.5% for PCS, FTI and the ATACS
product line, respectively, to present value cash flows (in excess of a return
on other assets of the business) attributable to in-process research and
development projects.
OTHER OPERATING EXPENSES
- --------------------------------------------------------------------------------
During 2000, we recorded an impairment charge of $1.2 million related to the
abandonment of a lease and associated property and equipment. No impairment
charges were recorded in 1999 or 1998.
F-13
44
INTEREST INCOME
- --------------------------------------------------------------------------------
Interest income totaled $12.9 million in 2000, $6.3 million in 1999 and $6.8
million in 1998. The increase in interest income in 2000 compared to 1999 is
attributable primarily to increased interest earned as a result of higher
average cash and investment balances during 2000 whereas the decrease in
interest income in 1999 from 1998 is attributable primarily to lower average
cash and investment balances during 1999 as compared to 1998.
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Interest expense totaled $4.2 million in 2000, $5.7 million in 1999 and $4.5
million in 1998. The majority of our interest expense during each of these years
relates to our Convertible Subordinated Notes (the "Notes"). The decline in
interest expense in 2000 compared to 1999 is attributable primarily to the
conversion of $83.6 million of the Notes into our common stock during the third
quarter of 2000, whereas the outstanding convertible note balance during all of
1999 was $100.0 million. The increase in interest expense in 1999 compared to
1998 is attributable primarily to a full year of interest recorded on the Notes
during 1999 and a partial year in 1998, as the Notes were issued in March 1998.
EXPENSE RELATED TO DEBT CONVERSION
- --------------------------------------------------------------------------------
In connection with the conversion of $83.6 million in Notes during 2000, we
incurred and paid $12.7 million in conversion premiums to the note holders,
which we recorded as a debt conversion expense.
OTHER EXPENSE, NET
- --------------------------------------------------------------------------------
Other expense, net totaled $3.4 million in 2000, $0.2 million in 1999 and $0.1
million in 1998. The increase in 2000 compared to 1999 and 1998 is attributable
primarily to a $2.8 million charge related to the write-down of our investment
in Network Commerce in 2000. See Note 5 of the Notes to the Consolidated
Financial Statements.
MINORITY INTEREST IN LOSSES (INCOME) OF CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------------------------------------
Minority interest in losses (income) of consolidated subsidiaries totaled $7.6
million in 2000, $0.7 million in 1999 and $(0.1) million in 1998, and represents
other stockholders' share of the losses (income) of our consolidated
subsidiaries, including that relating to Retek in 2000 and 1999.
INCOME TAXES
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes was $(33.1) million in 2000, $0.5
million in 1999 and $12.8 million in 1998. The differences between the provision
(benefit) for income taxes recorded and that computed by applying taxes at
statutory rates during 2000, 1999 and 1998 are attributable primarily to the
effect of non-deductible expenses, offset by the effect of Retek's loss
attributable to minority interest stockholders and the generation of tax credit
carryforwards during each of these three years. Significant non-deductible
expenses in 2000 include the effect of one-time write-offs of in-process
research and development related to acquisitions, stock-based compensation
expense, acquisition related amortization, Retek spin-off costs, and debt
conversion expense. Significant non-deductible expenses in 1999 include the
effect of a one-time write-off of in-process research and development related to
an acquisition, stock-based compensation expense, acquisition related
amortization and stock redemption charges. Significant non-deductible expenses
in 1998 include the effect of one-time write-offs of in-process research and
development related to acquisitions, acquisition related amortization and stock
redemption charges. See Note 12 of the Notes to the Consolidated Financial
Statements.
F-14
45
STOCK-BASED COMPENSATION EXPENSE
- --------------------------------------------------------------------------------
Within our statement of operations, stock-based compensation charges have been
classified as follows in 2000 and 1999:
YEAR ENDED DECEMBER 31,
2000 1999
---------- ----------
(in thousands)
License and maintenance $ 2,658 $ 280
Services and other 2,548 354
Research and development 4,167 1121
Sales and marketing 10,629 441
General and administrative 1,668 9,789
---------- ----------
$ 21,670 $ 11,985
========== ==========
During 2000, we recorded net stock-based compensation expense totaling $21.7
million, consisting of $13.8 million in stock-based compensation charges
attributable to our Retek spin-off, which are discussed separately below, and
$7.9 million in additional net compensation expense. This additional net
compensation expense relates primarily to the amortization of unearned
stock-based compensation of $8.8 million (of which $8.3 million related to
Retek) and also includes additional net compensation income of $0.9 million,
primarily related to the reversal of compensation expense recorded in 1999 on
variable awards, as a result of a decline in the fair values of these awards
during 2000.
During 1999, Retek granted stock options to employees and directors to purchase
Retek common stock at an exercise price of $10.00 per share when the deemed fair
market value of Retek's common stock was $13.00 per share. As a result, Retek
recorded unearned stock-based compensation totaling $21.9 million representing
the aggregate intrinsic value of the options on the date of grant. Additionally,
during 2000, Retek recorded additional unearned stock-based compensation
totaling $1.8 million related to an employee option grant having an exercise
price below the fair value of Retek's common stock on the date of grant.
Amortization of Retek's unearned stock-based compensation totaled $1.9 million
during 1999 and $8.3 million during the period from January 1, 2000 through the
Retek spin-off date of September 29, 2000. Retek's unearned stock-based
compensation balance of $13.3 million at September 29, 2000, net of forfeiture
reductions, was removed from our consolidated equity accounts in connection with
the Retek spin-off.
During 1999, in addition to Retek's amortization of unearned stock-based
compensation as described above, we recorded stock-based compensation expense
totaling $10.1 million. This compensation expense relates primarily to stock
awards granted to former employees and non-employee consultants, of which $8.0
million was calculated at intrinsic value while the remainder related to
variable awards measured at fair value. The intrinsic value charge consisted
primarily of a one-time charge of $6.1 million related to a key employee
severance agreement executed in the fourth quarter of 1999.
The fair values of HNC's variable awards during 2000 and 1999 were estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0.0% for both years; risk-free interest rate of
5.02% and 5.23% in 2000 and 1999, respectively; volatility of 100% for both
years; and expected lives from four months to one year according to the vesting
date and subsequent exercise period of each option grant, and our stock prices
on the various grant dates as well as on December 31, 2000 and 1999.
In August 2000, we accelerated the vesting of 25 percent of the outstanding
stock options that would have been unvested as of the September 15, 2000 record
date to afford our option holders the opportunity to participate in receipt of
the Retek share dividend. As a result of this award modification, we recorded a
non-cash stock-based compensation charge of $6.7 million during the third
quarter of 2000 in accordance with Financial Accounting Standards Board
Interpretation No. 44, or FIN 44. Additionally, as a result of the proportionate
option repricing in connection with the Retek spin-off, certain options failed
to qualify for fixed accounting treatment under FIN 44. As a result, we recorded
a one-time charge to operations of $7.1 million related to the modification and
cash repurchase of options in connection with the Retek spin-off.
F-15
46
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
EXPENSES RELATED TO SPIN-OFF OF RETEK
- --------------------------------------------------------------------------------
During 2000, we incurred $48.2 million in non-recurring expenses associated with
our spin-off of Retek, excluding stock-based compensation charges totaling $13.8
million that are discussed above. Within our statement of operations, these
expenses have been classified as follows in 2000:
YEAR ENDED
DECEMBER 31, 2000
-----------------
(in thousands)
License and maintenance $6,086
Services and other 6,603
Research and development 5,770
Sales and marketing 12,880
General and administrative 16,846
-------
$48,185
=======
These expenses consisted primarily of a $40.4 million charge related to the
accrual of cash bonuses payable to employees and directors who held unvested
stock options as of the record date for the Retek dividend, along with
investment banking, legal, accounting and other non-recurring costs related to
the Retek spin-off.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Net cash used in operating activities totaled $66.4 million in 2000, compared to
net cash provided by operating activities of $4.6 million in 1999. Cash used in
operations during 2000 reflects our net loss of $116.4 million, reduced by
non-cash aspects of our net loss totaling $50.0 million. Significant
non-recurring operational cash outflows during 2000 included $12.7 million in
debt conversion expense as well as $40.1 million in cash payments related to
bonuses paid and options repurchased in connection with the Retek spinoff.
Net cash used in investing activities totaled $72.7 million in 2000, compared to
net cash used in investing activities of $30.8 million in 1999. Cash used in
investing activities during 2000 included $18.3 million in net purchases of
marketable securities, $25.4 million expended for the purchase of property and
equipment, $22.8 million paid in connection with our business acquisitions, net
of cash acquired, and $6.3 million paid out in connection with equity
investments and employee loans made.
Net cash provided by financing activities totaled $74.6 million in 2000,
compared to net cash provided by financing activities of $108.3 million in 1999.
Cash provided by financing activities during 2000 includes $98.5 million in
proceeds resulting from stock option exercises and employee stock purchase plan
contributions under both HNC and Retek plans, including the repayment of
stockholder notes. It also includes $32.6 million in proceeds from the sale of
trade receivables, offset by $18.6 million in cash expended to repurchase HNC
common stock for treasury and $7.4 million used to repay debt and capital lease
obligations, and a $30.5 million reduction of Retek's cash and cash equivalent
balance as of the September 29, 2000 spin-off date.
As of December 31, 2000, we had $162.8 million in cash, cash equivalents and
investment securities. We believe that these balances, including interest to be
earned thereon, and borrowings available under our credit facility will be
sufficient to fund our working and other capital requirements, including
potential investments in other companies and other assets to support the
strategic growth of our business, over the next twelve months. In the event
additional needs for cash arise, we may raise additional funds from a
combination of sources including the potential issuance of debt or equity
securities in public markets. Additional financing might not be available on
terms favorable to us, or at all, particularly in light of the recent decline in
the capital markets. If adequate funds were not available or were not available
on acceptable terms, our ability to take advantage of unanticipated
opportunities or respond to competitive pressures could be limited.
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and
F-16
47
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
liabilities and measured at fair value. In July 1999, the FASB issued Statement
of Accounting Standards No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
which deferred the adoption requirement until the first quarter of 2001. We
adopted this new accounting standard effective January 1, 2001. The adoption of
FAS 133 in the first quarter of 2001 is not expected to have a significant
impact on our consolidated financial position, results of operations or
disclosures.
In September 2000, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS 140"), which replaces
Statement of Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS 140
revises the standards for accounting and disclosures for securitizations and
other transfers of financial assets and collateral. The primary provisions of
this statement are effective for us in the second quarter of 2001. We have not
yet determined the impact, if any, that this statement will have on our
consolidated financial position or results of operations.
F-17
48
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HNC Software Inc.
In our opinion, the accompanying consolidated balance sheet of HNC Software Inc.
and the related consolidated statements of operations, of cash flows and of
changes in stockholders' equity and comprehensive income present fairly, in all
material respects, the financial position of HNC Software Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 24, 2001, except as
to Note 15, to which the date is
March 6, 2001
F-18
49
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
ASSETS
DECEMBER 31,
---------------------------
2000 1999
---------- ----------
Current assets:
Cash and cash equivalents ............................................. $ 69,271 $ 136,340
Marketable securities available for sale-debt ......................... 44,779 22,368
Marketable securities available for sale-equity ....................... 250 6,810
Trade accounts receivable, net ........................................ 43,856 64,189
Deferred income taxes ................................................. 15,045 20,384
Other current assets .................................................. 8,402 11,144
---------- ----------
Total current assets .......................................... 181,603 261,235
Marketable securities available for sale-debt ........................... 48,453 68,563
Equity investments ...................................................... 14,719 14,219
Property and equipment, net ............................................. 20,826 22,219
Goodwill, net ........................................................... 96,810 17,280
Intangible assets, net .................................................. 47,522 11,788
Deferred income taxes ................................................... 33,844 18,085
Other assets ............................................................ 3,964 3,032
---------- ----------
$ 447,741 $ 416,421
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .............................. $ 38,675 $ 30,049
Deferred revenue ...................................................... 9,876 15,274
---------- ----------
Total current liabilities ..................................... 48,551 45,323
Non-current liabilities ................................................. 259 4,111
Convertible Subordinated Notes .......................................... 16,357 100,000
---------- ----------
Total liabilities ............................................. 65,167 149,434
---------- ----------
Commitments and contingencies (Notes 8 and 14)
Minority interest in consolidated subsidiaries .......................... - 17,414
---------- ----------
Stockholders' equity:
Preferred stock, $0.001 par value -- 4,000 shares authorized:
no shares issued or outstanding .................................... - -
Common stock, $0.001 par value -- 120,000 shares authorized:
32,286 and 25,704 shares issued and outstanding, respectively ...... 32 26
Common stock in treasury, at cost -- 49 and 882 shares, respectively.. (3,251) (19,613)
Paid-in capital ....................................................... 499,705 275,955
Retained earnings (accumulated deficit) ............................... (104,209) 12,209
Notes receivable from stockholders .................................... (9,049) -
Unearned stock-based compensation ..................................... (577) (20,511)
Accumulated other comprehensive income (loss) ......................... (77) 1,507
---------- ----------
Total stockholders' equity .................................... 382,574 249,573
---------- ----------
$ 447,741 $ 416,421
========== ==========
See accompanying notes to consolidated financial statements.
F-19
50
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues:
License and maintenance ....................................................... $ 166,063 $ 155,948 $ 139,294
Services and other ............................................................ 88,821 60,941 39,314
---------- ---------- ----------
Total revenues ........................................................ 254,884 216,889 178,608
---------- ---------- ----------
Operating expenses:
License and maintenance (including stock-based
compensation and Retek spin-off expense totaling $8,744
and $280 in 2000 and 1999, respectively) ................................... 60,469 41,552 33,473
Services and other (including stock-based compensation and Retek spin-off
expense totaling $9,151 and $354 in 2000 and 1999, respectively) ............ 72,913 41,271 28,656
Research and development (including stock-based compensation and Retek spin-off
expense totaling $9,937 and $1,121 in 2000 and 1999, respectively) .......... 75,490 50,176 32,669
Sales and marketing (including stock-based compensation and Retek spin-off
expense totaling $23,509 and $441 in 2000 and 1999, respectively) ........... 89,925 46,259 34,515
General and administrative (including stock-based compensation and Retek
spin-off expense totaling $18,514 and $9,789 in 2000 and 1999,
respectively) ............................................................... 53,321 33,777 18,977
Transaction-related amortization and costs .................................... 43,734 9,158 3,202
In-process research and development ........................................... 7,601 1,480 6,090
Other (Note 1) ................................................................ 1,172 -- --
---------- ---------- ----------
Total operating expenses .............................................. 404,625 223,673 157,582
Operating income (loss) ......................................................... (149,741) (6,784) 21,026
Interest income ................................................................. 12,924 6,299 6,799
Interest expense ................................................................ (4,231) (5,747) (4,460)
Expense related to debt conversion .............................................. (12,676) -- --
Other expense, net .............................................................. (3,378) (226) (29)
Minority interest in losses (income) of consolidated subsidiaries ............... 7,582 722 (126)
---------- ---------- ----------
Income (loss) before income tax provision (benefit) ................... (149,520) (5,736) 23,210
Income tax provision (benefit) .................................................. (33,102) 536 12,758
---------- ---------- ----------
Net income (loss) ..................................................... $ (116,418) $ (6,272) $ 10,452
========== ========== ==========
Earnings per share:
Basic net income (loss) per share ............................................. $ (4.08) $ (0.25) $ 0.41
========== ========== ==========
Diluted net income (loss) per share ........................................... $ (4.08) $ (0.25) $ 0.39
========== ========== ==========
Shares used in computing basic net income (loss) per share ...................... 28,529 24,969 25,362
========== ========== ==========
Shares used in computing diluted net income (loss) per share .................... 28,529 24,969 26,650
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-20
51
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................. $ (116,418) $ (6,272) $ 10,452
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for doubtful accounts ............................................. 6,505 5,112 3,172
Depreciation and amortization ............................................... 53,045 17,583 10,827
Acquired in-process research and development ................................ 7,601 1,480 6,090
Loss (gain) on asset impairments and dispositions ........................... 1,172 222 (56)
Write-down of marketable security ........................................... 2,750 -- --
Non-cash stock-based compensation expense ................................... 15,896 11,985 2,387
Deferred income tax (benefit) expense ....................................... (35,384) (4,625) 4,039
Minority interest in (losses) income of consolidated subsidiaries ........... (7,582) (722) 126
Changes in assets and liabilities:
Trade accounts receivable ................................................. (40,458) (35,606) (26,111)
Deferred income taxes ..................................................... (291) 4,645 6,864
Other assets .............................................................. (8,753) (4,635) (2,312)
Accounts payable and accrued liabilities .................................. 15,954 9,750 4,361
Deferred revenue .......................................................... 39,562 5,670 1,024
---------- ---------- ----------
Net cash provided by (used in) operating activities .................... (66,401) 4,587 20,863
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of marketable securities ................................ (18,332) 7,856 (74,120)
Cash paid for equity investments .............................................. (4,750) (17,225) --
Issuance of employee loans .................................................... (1,500) (200) --
Acquisitions of property and equipment ........................................ (25,366) (16,093) (8,086)
Cash paid in business acquisitions, net of cash acquired ...................... (22,773) (5,098) (8,883)
---------- ---------- ----------
Net cash used in investing activities .................................. (72,721) (30,760) (91,089)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of HNC common stock ............................... 88,298 50,107 10,536
Net proceeds from issuances of Retek common stock ............................. 5,635 84,897 --
Repurchase of HNC common stock for treasury ................................... (18,616) (50,383) --
Spin-off of Retek subsidiary .................................................. (30,463) -- --
Proceeds from sales of receivables ............................................ 32,585 23,711 --
Proceeds from repayments of stockholder notes ................................. 3,047 --
Net proceeds from issuance of Convertible Subordinated Notes .................. -- -- 96,913
Repayments of notes payable to stockholders ................................... -- -- (770)
Repayment of debt and capital lease obligations ............................... (7,367) (78) (160)
---------- ---------- ----------
Net cash provided by financing activities .............................. 73,119 108,254 106,519
---------- ---------- ----------
Effect of exchange rate changes on cash ......................................... (1,066) (8) (94)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ............................ (67,069) 82,073 36,199
Cash and cash equivalents at beginning of the period ............................ 136,340 54,267 18,068
---------- ---------- ----------
Cash and cash equivalents at end of the period .................................. $ 69,271 $ 136,340 $ 54,267
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-21
52
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)
Common Stock Treasury Stock
--------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 ...... 24,538 $ 25 -- $-- $ 95,919
Common stock options exercised .... 748 1 8,602
Common stock issued under
Employee Stock Purchase Plan .... 68 1,933
Tax benefit from stock option
transactions .................... 7,569
Compensation related to vested
options in Aptex buy-back ....... 3,346
Unearned stock-based compensation
expense .........................
Common stock issued for
acquisition of PCS .............. 143 5,088
Common stock issued for
acquisition of FTI .............. 397 14,725
Unrealized gain on marketable
securities, net of tax ..........
Foreign currency translation
adjustment, net of tax ..........
Net income ........................
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 ...... 25,894 $ 26 -- $-- $137,182
-------- -------- -------- -------- --------
Purchase of HNC stock for
treasury ........................ (2,266) (2) 2,266 (50,381)
Common stock options exercised .... 1,916 2 (1,384) 30,768 16,418
Common stock issued under
Employee Stock Purchase Plan .... 115 2,808
Tax benefit from stock option
transactions .................... 16,993
Unearned stock-based
compensation expense ............ 21,462
Non-cash stock-based compensation
expense ......................... 10,077
Effect of Retek's initial
public offering ................. 69,539
Common stock issued for
PCS earn-out .................... 45 1,476
Unrealized gain on marketable
securities, net of tax ..........
Foreign currency translation
adjustment, net of tax ..........
Net loss ..........................
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999 ...... 25,704 $ 26 882 $(19,613) $275,955
-------- -------- -------- -------- --------
Common stock options exercised .... 3,324 3 (1,026) 32,637 64,340
Purchase of HNC common stock for
Treasury ........................ (250) -- 250 (18,616)
Release of FTI escrow shares into
treasury ........................ (49) 49 (1,808)
Common stock issued under Employee
Stock Purchase Plan ............. 106 (106) 4,149 (974)
Effect of common stock issued
under Retek Employee Stock
Purchase Plan ................... 3,635
Tax benefit from stock option
transactions .................... 36,392
Stock-based compensation expense .. 9,217
Retek initial public offering
costs ........................... (243)
Spin-off of Retek subsidiary ...... (121,571)
Common stock issued in business ...
Acquisitions .................... 1,529 1 133,200
Effect of Retek common stock
issued in business acquisition .. 5,432
Effect of Retek common stock
issued in business alliance ..... 8,010
Common stock issued upon
conversion of Subordinated
Notes ........................... 1,872 2 82,319
Common stock issued for
PCS earn-out .................... 50 3,993
Interest accrued on
stockholder notes ...............
Repayment of stockholder notes ....
Unrealized loss on marketable
securities, net of tax ..........
Foreign currency translation
adjustment, net of tax ..........
Net loss ..........................
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000 ...... 32,286 $ 32 49 $ (3,251) $499,705
======== ======== ======== ======== ========
Retained Accumulated
Earnings Stockholder Unearned Other Total
(Accumulated Notes Stock-based Comprehensive Stockholders' Comprehensive
Deficit) Receivable Compensation Income (Loss) Equity Income (Loss)
------------ ----------- ------------ ------------- ------------ -------------
BALANCE AT DECEMBER 31, 1997 ...... $ 8,029 $-- $-- $ (113) $103,860 $ 17,457
========
Common stock options exercised .... 8,603
Common stock issued under
Employee Stock Purchase Plan .... 1,933
Tax benefit from stock option
transactions .................... 7,569
Compensation related to vested
options in Aptex buy-back ....... 3,346
Unearned stock-based compensation
expense ......................... (2,508) (2,508)
Common stock issued for
acquisition of PCS .............. 5,088
Common stock issued for
acquisition of FTI .............. 14,725
Unrealized gain on marketable
securities, net of tax .......... 47 47 47
Foreign currency translation
adjustment, net of tax .......... (94) (94) (94)
Net income ........................ 10,452 10,452 10,452
-------- -------- -------- -------- -------- ========
BALANCE AT DECEMBER 31, 1998 ...... 18,481 $-- $ (2,508) $ (160) $153,021 $ 10,405
-------- -------- -------- -------- -------- ========
Purchase of HNC stock for
treasury ........................ (50,383)
Common stock options exercised .... 47,188
Common stock issued under
Employee Stock Purchase Plan .... 2,808
Tax benefit from stock option
transactions .................... 16,993
Unearned stock-based
compensation expense ............ (19,911) 1,551
Non-cash stock-based
compensation expense ............ 1,908 11,985
Effect of Retek's initial
public offering ................. 69,539
Common stock issued for
PCS earn-out .................... 1,476
Unrealized gain on marketable
securities, net of tax .......... 2,084 2,084 2,084
Foreign currency translation
adjustment, net of tax .......... (417) (417) (417)
Net loss .......................... (6,272) (6,272) (6,272)
-------- -------- -------- -------- -------- ========
BALANCE AT DECEMBER 31, 1999 ...... $ 12,209 $-- $(20,511) $ 1,507 $249,573 $ (4,605)
-------- -------- -------- -------- --------- ========
Common stock options exercised .... (11,857) 85,123
Purchase of HNC common stock for
Treasury ........................ (18,616)
Release of FTI escrow shares
into treasury ................... (1,808)
Common stock issued under
Employee Stock Purchase Plan .... 3,175
Effect of common stock issued
under Retek Employee Stock
Purchase Plan ................... 3,635
Tax benefit from stock option
transactions .................... 36,392
Stock-based compensation expense .. 6,679 15,896
Retek initial public offering
costs ........................... (243)
Spin-off of Retek subsidiary ...... 13,255 1,594 (106,722)
Common stock issued in business
Acquisitions .................... 133,201
Effect of Retek common stock
issued in business acquisition .. 5,432
Effect of Retek common stock
issued in business alliance ..... 8,010
Common stock issued upon conversion
of Subordinated Notes ........... 82,321
Common stock issued for
PCS earn-out .................... 3,993
Interest accrued on
stockholder notes ............... (239) (239)
Repayment of stockholder notes .... 3,047 3,047
Unrealized loss on marketable
securities, net of tax .......... (2,112) (2,112) (2,112)
Foreign currency translation
adjustment, net of tax .......... (1,066) (1,066) (1,066)
Net loss .......................... (116,418) (116,418) (116,418)
--------- -------- -------- -------- --------- =========
BALANCE AT DECEMBER 31, 2000 ...... $(104,209) $ (9,049) $ (577) $ (77) $ 382,574 $(119,596)
========= ======== ======== ======== ========= ==========
F-22
53
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--HNC SOFTWARE INC. AND OUR SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
HNC Software Inc.
We develop, market, and support innovative predictive software solutions for
leading service industries. These intelligent decision management solutions
employ proprietary neural-network predictive decision engines, profiles,
traditional statistical modeling, business models, expert rules and/or context
vector technology to convert existing data and business experiences into
meaningful recommendations and actions. We currently serve the financial
services, insurance, telecommunications and e-business markets.
Principles of Consolidation and Basis of Presentation
Our consolidated financial statements include our assets, liabilities, and
results of operations, as well as those of our wholly-owned subsidiaries and
Retek Inc. ("Retek"), which was a majority-owned subsidiary prior to its
spin-off in September 2000. The ownership of other interest holders in Retek was
reflected as minority interest. All significant inter-company balances and
transactions have been eliminated.
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Revenue Recognition
Software revenue is recognized upon meeting all of the following criteria:
execution of a written license agreement, contract or purchase order; delivery
of software and/or authorization keys; the license fee is fixed and
determinable; and collectibility of the proceeds is assessed as being probable.
For multiple-element agreements, total fees are allocated to each element based
on vendor-specific objective evidence of fair value or using the residual method
when applicable. Allocated fees are recognized separately for each element when
it is delivered, providing other criteria referenced above are met.
Vendor-specific objective evidence is based on the price charged when an element
is sold separately, or if not yet sold separately, is established by authorized
management.
Revenue from perpetual and short-term periodic licenses of our software is
generally recognized upon delivery. Transactional-based license fees under
software license arrangements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license fees.
Software maintenance fees are recognized as revenue ratably over the maintenance
periods.
Revenue from software installation and implementation and from contract services
is generally recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to total estimated
costs at completion. Contract losses are recorded as a charge to operations in
the period any losses are first identified. Unbilled accounts receivable are
stated at estimated realizable value.
Transactional-based fees under network service or internally hosted software
arrangements are recognized as revenue based on system usage or when fees based
on system usage exceed monthly minimum license fees. Installation or setup fees
associated with network service and internally hosted software agreements are
recognized ratably over the longer of the customer contract period or estimated
life of the customer relationship.
Amounts received under contracts in advance of performance are recorded as
deferred revenue and are generally recognized within one year from receipt.
F-23
54
Statement of Operations Data
Within our statement of operations, components of operating expenditures in 2000
and 1999 include stock-based compensation expense and non-recurring expenses
related to our spin-off of Retek that have been classified as follows:
YEAR ENDED DECEMBER 31,
------- -------
2000 1999
------- -------
STOCK-BASED COMPENSATION EXPENSE:
License and maintenance $ 2,658 $ 280
Services and other 2,548 354
Research and development 4,167 1,121
Sales and marketing 10,629 441
General and administrative 1,668 9,789
------- -------
$21,670 $11,985
======= =======
EXPENSE RELATED TO SPIN-OFF OF RETEK:
License and maintenance $ 6,086
Services and other 6,603
Research and development 5,770
Sales and marketing 12,880
General and administrative 16,846
-------
$48,185
=======
Cash and Cash Equivalents
Cash and cash equivalents include amounts on deposit with financial institutions
and investments in money market accounts and commercial paper purchased with
maturities of three months or less from the date of purchase. The carrying
amounts of cash and cash equivalents approximate fair value because of the
short-term maturities of these financial instruments.
Marketable Securities
Management determines the appropriate classification of our investments in
marketable debt and equity securities at the time of purchase, and re-evaluates
this designation at each balance sheet date. We have classified all of our
marketable securities as "available for sale" and carry them at fair value with
unrealized gains or losses related to these securities included in other
comprehensive income (loss). Realized gains and losses on the sale of
investments available for sale are determined using the specific identification
method. Losses resulting from other than temporary declines in fair value are
charged to operations.
Equity Investments
Our investments in equity securities of companies over which we do not have
significant influence, are accounted for under the cost method. We use the
equity method to account for our investments in entities over which we have a
voting interest of 20% to 50%, or over which we otherwise have the ability to
exercise significant influence. Under the equity method, the investment is
originally recorded at cost and adjusted to recognize our share of net earnings
or losses of the investee, limited to the extent of our investment in, advances
to, and financial guarantees for the investee. At December 31, 2000, all of our
equity investments in other entities were accounted for under the cost method.
Sales of Receivables
From time to time, we enter into agreements to sell an undivided interest in
specifically identified trade accounts receivable. We sell these trade accounts
receivable to a financial institution for a fee, based principally upon defined
short-term market rates. Once sold, these receivables are not included in our
trade accounts receivable balance on our consolidated balance sheet. During 2000
and 1999, we sold $32,585 and $23,711 of receivables, respectively. We did not
F-24
55
sell any receivables during 1998. Fees that we paid related to receivables sold
totaled $430 and $364 during 2000 and 1999, respectively, and are included in
interest expense in our consolidated statement of operations.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and
amortization. Major renewals and improvements are capitalized, while repair and
maintenance costs are expensed as incurred. Depreciation and amortization
charges are calculated using the straight-line method over the estimated useful
lives of the assets ranging from three to seven years. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the remaining
term of the related lease. Depreciation and amortization expense related to
property and equipment totaled $11,753, $8,215, and $6,102 during 2000, 1999,
and 1998, respectively. The cost and accumulated depreciation for property and
equipment sold, retired or otherwise disposed of are relieved from the accounts,
and resulting gains or losses are recorded in operations.
Intangible Assets
Intangible assets include goodwill, acquired software development costs,
customer base, assembled work force, covenants not to compete, and trademarks.
These assets resulted from our acquisitions accounted for under the purchase
method of accounting (see Note 3). Amortization expense related to intangible
assets totaled $42,372, $8,560, and $3,203 during 2000, 1999, and 1998,
respectively. We amortize these assets using the straight-line method over their
estimated useful lives as follows:
Estimated
Useful Life
------------
Goodwill 3 to 5 years
Software development costs 3 to 5 years
Customer base 3 to 5 years
Assembled work force 3 to 5 years
Covenants not to compete 2 to 3 years
Trademarks 5 years
Software Development Costs
Development costs of software to be licensed or sold that are incurred from the
time technological feasibility is established until the product is available for
general release to customers are capitalized and reported at the lower of cost
or net realizable value. Through December 31, 2000, no significant development
costs were incurred after technological feasibility was reached.
Internal-Use Software
Costs incurred to develop internal-use software during the application
development stage are also capitalized and reported at the lower of cost or net
realizable value. Application development stage costs generally include costs
associated with internal-use software configuration, coding, installation and
testing. Costs of significant upgrades and enhancements that result in
additional functionality are also capitalized whereas costs incurred for
maintenance and minor upgrades and enhancements are expensed as incurred.
Long-lived Assets
We assess potential impairments to our long-lived and intangible assets when
there is evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. An impairment loss is
recognized when the undiscounted cash flows expected to be generated by an asset
(or group of assets) is less than its carrying amount. Any required impairment
loss would be measured as the amount by which the asset's carrying value exceeds
its fair value, and would be recorded as a reduction in the carrying value of
the related asset and a charge to operations. During 2000, we recorded an
impairment charge of $1,172 related to the abandonment of a lease and associated
property and equipment. No impairment charges were recorded in 1999 or 1998.
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56
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable
for the current year, prior to the recognition of benefits from stock option
deductions. A deferred income tax asset or liability is computed for the
expected future impact of differences between the financial reporting and tax
bases of assets and liabilities as well as the expected future tax benefit to be
derived from tax loss and tax credit carry-forwards. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount "more
likely than not" to be realized in future tax returns. Tax rate changes and tax
credit reinstatements are reflected in income during the period the changes are
enacted.
Stock-Based Compensation
We measure compensation expense for our employee stock-based compensation awards
using the intrinsic value method, and provide pro forma disclosures of net
income (loss) and net income (loss) per common share as if a fair value method
had been applied. Therefore, compensation cost for employee stock awards is
measured as the excess, if any, of the fair value of our common stock at the
grant date over the amount an employee must pay to acquire the stock.
Compensation expense is amortized over the related service periods using the
accelerated methodology prescribed by Financial Accounting Standards Board
Interpretation No. 28. Compensation expense for awards that are forfeited is
reversed against compensation expense in the period of forfeiture.
Stock-based awards issued to non-employees are accounted for using a fair value
method and are marked to fair value at each period end until the earlier of the
date at which a performance commitment has been obtained or the awards are fully
vested. Fair value of stock-based awards is determined using the Black-Scholes
option pricing model with weighted average assumptions for dividend yield,
risk-free interest rate, expected volatility, and contractual life.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed as net income (loss)
divided by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share is computed as net income
(loss) divided by the weighted average number of common shares and dilutive
potential common shares outstanding during the period, using the treasury stock
method. The computation for basic and diluted net income (loss) per share is as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
NET INCOME (LOSS) USED:
Net income (loss) used in computing basic and
diluted net income (loss) per common share $(116,418) $ (6,272) $ 10,452
========= ========= =========
SHARES USED:
Weighted average common shares outstanding
used in computing basic net income per common share 28,529 24,969 25,362
Weighted average options to purchase common stock
as determined by application of the treasury stock method -- -- 1,227
Additional common shares issued for PCS acquisition earn-out -- -- 23
Employee Stock Purchase Plan common stock equivalents -- -- 38
--------- --------- ---------
Shares used in computing diluted net income
per common share 28,529 24,969 26,650
========= ========= =========
The conversion of our 4.75% Convertible Subordinated Notes (see Note 9)
outstanding during 2000, 1999 and 1998, into 3,512, 2,230 and 1,834 common
shares, respectively, were not included in the computation of diluted net income
(loss) per common share, as their effect in such periods would be anti-dilutive.
For 2000 and 1999, weighted average options to purchase 2,064 and 6,491 shares
of common stock, respectively, and Employee Stock Purchase Plan common stock
equivalents of 196 and 56 shares of common stock, respectively, were not
included in the computation of diluted net loss per common share as their effect
in these periods would be anti-dilutive.
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Foreign Currency Translation
The financial statements of our international operations have been translated
into U.S. dollars using period-end exchange rates for assets and liabilities and
average exchange rates during the period for revenues and expenses. Cumulative
translation gains and losses are excluded from results of operations and
recorded as a separate component of other comprehensive income (loss). Gains and
losses resulting from foreign currency transactions (transactions denominated in
a currency other than our entity's local currency) are recorded in operations.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in our equity (net assets) during each
period from transactions and other events and circumstances from non-owner
sources. It includes net income (loss), foreign currency translation adjustments
and unrealized gains and losses, net of tax, on our investments in marketable
securities.
Concentration of Risk
Our financial instruments that potentially expose us to concentrations of risk
consist primarily of cash and cash equivalents, marketable securities and
accounts receivable, which are generally not collateralized. Our policy is to
place our cash, cash equivalents, and marketable securities with high credit
quality financial institutions, commercial companies and government agencies in
order to limit the amount of credit exposure. We enter into software license and
installation agreements and commercial development contracts primarily with
large customers in the services industries (financial, insurance and
telecommunications). We do not require collateral from our customers, but our
credit extension and collection policies include analyzing the financial
condition of potential customers, establishing credit limits, monitoring
payments, and aggressively pursuing delinquent accounts. We maintain allowances
for potential credit losses.
Segment Reporting
Our operating segments are presented consistently with the way that our
management organizes and evaluates financial information for making internal
operating decisions and assessing performance. Certain prior year segment
information has been reclassified to conform to the current year presentation.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs totaled $8,006, $3,651 and $1,791 in 2000, 1999 and 1998,
respectively, and are included in sales and marketing expense in our
consolidated statement of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" which deferred the adoption
requirement until the first quarter of 2001. We adopted this new accounting
standard effective January 1, 2001. The adoption of FAS 133 in the first quarter
of 2001 is not expected to have a significant impact on our consolidated
financial position, results of operations or disclosures.
In September 2000, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS 140"), which replaces
Statement of Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS 140
revises the standards for accounting and disclosures for securitizations and
other transfers of financial assets and collateral. The primary provisions of
this statement are effective for us in the second quarter of 2001. We have not
yet determined the impact, if any, that this statement will have on our
consolidated financial position or results of operations.
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58
NOTE 2--INITIAL PUBLIC OFFERING AND SPIN-OFF OF RETEK INC.
On September 10, 1999, Retek filed a registration statement with the Securities
and Exchange Commission relating to an initial public offering of Retek's common
stock. The offering was consummated in November 1999. In the offering, Retek
sold 6,325 shares of its common stock. Prior to the offering, we transferred to
Retek all of the shares of our wholly owned subsidiary, Retek Information
Systems, Inc.
On August 7, 2000, HNC's board of directors declared a dividend of all of the
shares of Retek common stock held by HNC, or 40,000 shares, to complete the
spin-off of our Retek subsidiary. We received a private letter ruling from the
Internal Revenue Service that HNC's dividend of its shares of Retek common stock
would be tax-free to HNC and our stockholders for U.S. federal income tax
purposes. This dividend was paid on September 29, 2000 to all HNC stockholders
of record as of September 15, 2000 using a distribution ratio of approximately
1.243 shares of Retek common stock for each share of HNC common stock held. Cash
was paid in lieu of fractional shares. The shares of Retek common stock that we
distributed in the Retek spin-off constituted all the Retek shares owned by HNC
and represented approximately 83.9% of Retek's outstanding shares as of the
September 29, 2000 distribution date. As a result of our distribution of our
Retek common shares, Retek is no longer affiliated with HNC. In connection with
this spin-off, we eliminated net assets totaling $121,213 from our consolidated
balance sheet, including cash and cash equivalents of $30,463. Additionally, we
eliminated the minority interest associated with Retek of $14,491 and net equity
totaling $106,722.
In connection with the spin-off of our Retek subsidiary, we accelerated the
vesting of 25 percent of the outstanding HNC stock options that would have been
unvested as of the September 15, 2000 record date in order to afford our option
holders the opportunity to participate in receipt of the dividend. Additionally,
we offered option holders the opportunity to exercise a portion of their vested
options prior to the record date through the issuance of secured, full recourse
promissory notes payable to HNC (the "Stockholder Notes"). The Stockholder Notes
bear interest at the rate of 10.0% per annum, and are collateralized by the
underlying shares of stock. Loans totaling $11,857 were originally extended to
option holders. At December 31, 2000, stockholder notes receivable totaled
$9,049, net of repayments, and have been recorded as a reduction to
stockholders' equity. In connection with the Retek dividend, we also adjusted
the exercise price of all HNC stock options that were outstanding immediately
following payment of the dividend. The adjusted stock option exercise prices
were calculated by multiplying the pre-dividend option exercise price by the
price of HNC common stock immediately after payment of the dividend, and
dividing that product by the price of HNC common stock immediately before
payment of the dividend. The vesting acceleration of HNC stock options and the
adjustment to HNC stock option exercise prices that were greater than the
closing price of HNC common stock on September 29, 2000 resulted in stock-based
compensation charges (see Note 13).
Because the adjustment to the exercise price of HNC options described above was
less than the change in value of unvested HNC stock options resulting from the
Retek distribution, we paid cash bonuses to employees and directors who held
unvested stock options as of the record date, and recorded a related charge to
operations in the amount of $40,427. These bonuses were paid out in October 2000
and January 2001.
NOTE 3--ACQUISITIONS
In September 2000, we acquired all of the outstanding stock and other securities
of Systems/Link Corporation ("Systems/Link") in exchange for the issuance of 634
shares of our common stock, including 40 underlying shares associated with stock
options we exchanged, and $5,512 in cash. We placed 142 of the shares issued and
$1,275 of the cash portion of the purchase price into escrow, to secure
indemnification obligations of the former Systems/Link stockholders.
Systems/Link is a software developer that creates data management solutions for
large telecommunications companies, providing applications for real-time data
collection, call detail record exchange, fraud control and prepaid services to
carriers. We applied the purchase method of accounting for the acquisition of
Systems/Link, which resulted in a purchase price of $42,549. The excess of this
amount over the net liabilities assumed was $56,416, of which $55,686 was
allocated to intangible assets, including goodwill, and $730 was allocated to
in-process research and development.
In September 2000, we acquired all of the outstanding stock and other securities
of CardAlert Services, Inc. ("CardAlert") in exchange for the issuance of 208
shares of our common stock. We placed 42 of the shares issued into escrow to
secure indemnification obligations of the former CardAlert stockholders.
CardAlert provides ATM and debit card risk management services to domestic
financial institutions and debit card networks. We applied the purchase method
of accounting for the acquisition of CardAlert, which resulted in a purchase
price of $12,608. The excess of this amount over
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59
the net liabilities assumed was $12,976, of which $12,555 was allocated to
intangible assets, including goodwill, and $421 was allocated to in-process
research and development.
In May 2000, Retek acquired all of the outstanding stock and other securities of
HighTouch Technologies, Inc. ("HighTouch") in exchange for the issuance of 389
shares of Retek's common stock and $18,000 in cash. HighTouch is a provider of
customized software and services relating to customer relationship management.
Retek applied the purchase method of accounting for the acquisition of
HighTouch, which resulted in a purchase price of $26,308. The excess of this
amount over the net liabilities assumed was $30,558, of which $26,558 was
allocated to intangible assets, including goodwill, and $4,000 was allocated to
in-process research and development.
In April 2000, we acquired all of the outstanding stock and other securities of
Celerity Technologies, Inc. ("Celerity") in exchange for the issuance of 220
shares of our common stock and $2,400 in cash. We placed 33 of the shares issued
into escrow to secure indemnification obligations of the former Celerity
shareholders. Celerity develops and markets electronic data interchange
solutions for the workers' compensation industry. We applied the purchase method
of accounting for the acquisition of Celerity, which resulted in a purchase
price of $18,591. The excess of this amount over the net liabilities assumed was
$20,769, of which $19,719 was allocated to intangible assets, including goodwill
and $1,050 was allocated to in-process research and development.
In March 2000, we acquired all of the outstanding stock and other securities of
Onyx Technologies, Inc. ("Onyx") in exchange for the issuance of 382 shares of
our common stock, including 30 underlying shares associated with stock options
we exchanged, and $1,500 in cash. We placed 105 of the shares issued and $450 of
the cash portion of the purchase price into escrow to secure indemnification
obligations of the former Onyx shareholders. During September 2000 and March
2001, we released from escrow without claim a total of 70 shares of our common
stock and $300 in cash. The remaining 35 shares and $150 in cash are scheduled
to be released from escrow in September 2001 and March 2002. Onyx is a provider
of online data access and customer acquisition analysis for telecommunications,
financial and retail service companies. We applied the purchase method of
accounting for the acquisition of Onyx, which resulted in a purchase price of
$49,555, of which $3,500 represented our initial 1999 investment in Onyx. The
excess of this amount over the net liabilities assumed of $51,163 was allocated
to intangible assets, including goodwill.
In March 2000, we acquired all of the outstanding stock and other securities of
the Center for Adaptive Systems Applications, Inc. ("CASA") in exchange for the
issuance of 226 shares of our common stock, including 80 underlying shares
associated with stock options we exchanged. CASA is an advanced analytics
solutions company that develops and markets account optimization and precision
marketing solutions. We placed 38 of the shares issued into escrow to secure
indemnification obligations of the former CASA stockholders. We applied the
purchase method of accounting for the acquisition of CASA, which resulted in a
purchase price of $23,756. The excess of this amount over the net liabilities
assumed was $27,260, of which $25,860 was allocated to intangible assets,
including goodwill, and $1,400 was allocated to in-process research and
development.
In March 2000, we acquired all of the outstanding stock and other securities of
Adaptive Systems Applications, Inc. ("AIM") in exchange for 9 shares of our
common stock, including 0.4 underlying shares associated with stock options we
exchanged. AIM provides marketing process automation, campaign execution
software, and client-to-vendor data management to direct marketers of
enhancement services. We applied the purchase method of accounting for the
acquisition of AIM, which resulted in a purchase price of $1,656, of which $750
represents our initial 1999 investment in AIM. The excess of this amount over
the net liabilities assumed of $1,785 was allocated to intangible assets,
including goodwill.
In October 1999, Retek acquired WebTrak Limited ("WebTrak") for a cash payment
of $5,333 and the issuance of a $2,667 convertible note, which was subsequently
converted into shares of Retek common stock. WebTrak is a United Kingdom company
that develops, markets and sells business-to-business products that enable users
to publish and share a critical path on the Internet, and allow Web-based
collaboration to improve the new product design and development process. The
application of the purchase method of accounting for the acquisition resulted in
an excess of cost over net liabilities assumed of $8,131, of which $6,651 was
allocated to intangible assets, including goodwill, and $1,480 was allocated to
in-process research and development.
In March 1998, we acquired Practical Control Systems Technologies, Inc. ("PCS";
renamed Retek Logistics, Inc.) in exchange for 143 shares of our common stock,
14 shares of which were placed into escrow to secure indemnification obligations
of the former PCS stockholders, plus the contingent right, subject to the
achievement of certain financial objectives during 1998 and 1999, to receive
additional shares of our common stock. During 1999, the escrow shares were
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released without claim. Additionally, we issued 45 shares in 1999 and 50 shares
in 2000, related to the PCS' achievement of financial objectives during 1998 and
1999, respectively. PCS is a supplier of fully integrated distribution center
management software products that address the distribution needs of the retail,
wholesale and manufacturing industries. The application of the purchase method
of accounting for the acquisition resulted in an excess of cost over net
liabilities assumed of $9,530, of which $7,780 was allocated to intangible
assets, including initial goodwill and additional goodwill recorded as a result
of the contingent shares issued, and $1,750 was allocated to in-process research
and development.
In April 1998, we acquired Financial Technology Inc. ("FTI"; renamed HNC
Financial Solutions, Inc.) in exchange for the issuance of 397 shares of our
common stock, 97 of which were placed in escrow to secure indemnification
obligations of the former FTI stockholders, and a cash payment of $1,500. FTI
develops and markets profitability measurement and decision-support software
products and related support services to banks and other similar financial
institutions. The application of the purchase method of accounting for the
acquisition resulted in an excess of cost over net liabilities assumed of
$19,186, of which $16,186 was allocated to intangible assets, including
goodwill, and $3,000 was allocated to in-process research and development. In
May 2000, we entered into a settlement agreement with the former FTI
stockholders pertaining to the release and distribution of the 97 shares of our
common stock that were placed into escrow to secure potential indemnification
obligations. In accordance with this settlement agreement, one-half of the
escrow shares were released to us and placed into treasury while the remaining
escrow shares were released to the former FTI shareholders, representing a full
and complete release of the former FTI shareholders' contractual indemnification
obligations to us.
In June 1998, we acquired the Advanced Telecommunications Abuse Control System
("ATACS") product line in exchange for $4,750 in cash. ATACS is a
fraud-management software solution for wire-line, wireless and Internet
telecommunication service providers. The application of the purchase method of
accounting for the acquisition resulted in an excess of cost over net
liabilities assumed of $4,932, of which $3,592 was allocated to intangible
assets, including goodwill, and $1,340 was allocated to in-process research and
development.
During the fourth quarter of 1998, we acquired the outstanding minority shares
of Aptex Software Inc. ("Aptex"). Pursuant to the merger and related
transactions, we acquired the outstanding stock held by Aptex employees for
$5,321 in cash, and exchanged all outstanding Aptex stock options into options
to purchase 380 shares of our common stock. As a result of this merger, we
incurred a one-time charge to operations of $2,459 and recorded unearned
stock-based compensation of $2,508. The application of the purchase method of
accounting to this transaction resulted in an excess of cost over net assets
acquired, of which $3,788 was allocated to intangible assets, including
goodwill.
In-process research and development recorded in connection with the
above-mentioned purchase transactions represents the present value of the
estimated after-tax cash flows expected to be generated by purchased
technologies which, as of the acquisition dates, had not yet reached
technological feasibility. The cash flow projections for revenues were based on
estimates of relevant market sizes and growth factors, expected industry trends,
the anticipated nature and timing of new product introductions, product sales
cycles and the estimated life of each product's underlying technology. Estimated
operating expenses and income taxes were deducted from estimated revenue
projections to arrive at estimated after-tax cash flows. Projected operating
expenses include costs of revenues, marketing and selling expenses, general and
administrative expenses, and research and development, including estimated costs
to maintain the products once they have been introduced into the market and are
generating revenue. We made our assessment of whether acquired technologies in
these acquisitions were complete or under development in accordance with the
guidelines prescribed by Statement of Financial Accounting Standards No. 86,
Statement of Financial Accounting Standards No. 2, and Financial Accounting
Standards Board Interpretation No. 4.
The unaudited pro forma results of operations below present the impact on our
results of operations as if the Systems/Link, CardAlert, HighTouch, Celerity,
Onyx, CASA and AIM acquisitions had occurred on January 1, 1999, and as if the
WebTrak, PCS, FTI and Aptex acquisitions had occurred on January 1, 1998,
instead of on their respective acquisition dates:
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YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- -------------------------
PROFORMA PRO FORMA PRO FORMA
HISTORICAL COMBINED HISTORICAL COMBINED HISTORICAL COMBINED
---------- ----------- ---------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Total revenues $ 254,884 $ 270,192 $ 216,889 $ 239,690 $ 178,608 $ 181,048
Total net income (loss) (116,418) (121,344) (6,272) (6,868) 10,452 8,577
Basic net income (loss)
per share $ (4.08) $ (4.03) $ (0.25) $ (0.26) $ 0.41 $ 0.34
Diluted net income (loss)
per share $ (4.08) $ (4.03) $ (0.25) $ (0.26) $ 0.39 $ 0.32
NOTE 4--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Trade accounts receivable, net:
Billed .......................................... $ 41,860 $ 56,738
Unbilled ........................................ 5,593 13,890
-------- --------
47,453 70,628
Less allowance for doubtful
accounts and sales returns ...................... (3,597) (6,439)
-------- --------
$ 43,856 $ 64,189
======== ========
Unbilled accounts receivable represent revenue recorded in excess of amounts
billable pursuant to contract provisions and generally become billable at
contractually specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be realized within one year. During 2000, 1999, and
1998, we reserved $6,505, $5,112, and $3,172, wrote off $3,661, $1,049, and
$3,917 and recovered $104, $0, and $79 of our allowance for doubtful accounts
and sales returns. Additionally, in connection with the spin-off of Retek on
September 29, 2000, we removed Retek's allowance for doubtful accounts and sales
returns of $5,787 from our consolidated balance sheet.
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Property and equipment, net:
Computer equipment and software ................. $ 34,389 $ 28,320
Furniture and fixtures .......................... 8,312 11,397
Leasehold improvements .......................... 4,897 3,585
-------- --------
47,598 43,302
Less accumulated depreciation
and amortization .............................. (26,772) (21,083)
-------- --------
$ 20,826 $ 22,219
======== ========
Goodwill, net:
Goodwill ........................................ 126,053 22,740
Less accumulated amortization ................... (29,243) (5,460)
-------- --------
$ 96,810 $ 17,280
======== ========
Intangible assets, net:
Acquired software development costs ............. 41,538 14,532
Customer base ................................... 9,935 1,377
Assembled work force ............................ 6,779 1,106
Other ........................................... 4,266 2,234
-------- --------
62,518 19,249
Less accumulated amortization ................... (14,996) (7,461)
-------- --------
$ 47,522 $ 11,788
======== ========
Accounts payable and accrued liabilities:
Accounts payable ................................ $ 5,712 $ 9,867
Accrued payroll and related benefits ............ 16,539 12,572
Accrued interest payable ........................ 260 1,583
Accrued external costs related to spin-off ...... 6,913 --
Income taxes payable ............................ 2,662 45
Other ........................................... 6,589 5,982
-------- --------
$ 38,675 $ 30,049
======== ========
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62
The carrying amounts of accrued liabilities approximate fair value because of
the short-term maturities of these financial instruments.
NOTE 5-- MARKETABLE SECURITIES
At December 31, 2000 and 1999, the amortized cost and estimated fair value of
marketable securities available for sale were as follows:
DECEMBER 31, 2000
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
U.S. government and federal agencies ... $59,841 $ 13 $ -- $59,854
U.S. corporate debt .................... 30,765 111 -- 30,876
U.S. corporate equity .................. 250 -- -- 250
Foreign corporate debt ................. 2,500 2 -- 2,502
------- ------- --------- -------
$93,356 $ 126 -- $93,482
======= ======= ========= =======
DECEMBER 31, 1999
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
U.S. government and federal agencies ... $62,233 $ -- $ (54) $62,179
U.S. corporate debt .................... 22,415 -- (109) 22,306
U.S. corporate equity .................. 3,000 3,810 -- 6,810
Foreign corporate debt ................. 6,484 -- (38) 6,446
------- ------- --------- -------
$94,132 $ 3,810 $ (201) $97,741
======= ======= ========= =======
During the fourth quarter of 2000, we assessed the impairment in value of our
$3,000 investment in Network Commerce Inc. (See Note 6) to be other than
temporary and, accordingly, we wrote this investment down to $250 as of December
31, 2000, representing the aggregate fair value of our investment in this entity
based on the closing market price of this publicly traded security on December
31, 2000. As a result of this write-down, we recorded a loss of $2,750 that is
included in other expense, net in our statement of operations. As of December
31, 1999, we had recorded an unrealized gain of $3,810 related to our investment
in this entity. No significant gains or losses were realized on our investments
during 1999 or 1998.
At December 31, 2000 and 1999, all foreign corporate debt investments were
denominated in U.S. dollars.
NOTE 6--EQUITY INVESTMENTS
In July 2000, we became a limited partner in Azure Capital Partners Venture
Fund, a venture capital investment management fund, through an initial
investment of $2,250. We have committed to invest an additional $2,750 into this
fund during 2001. Our commitment to this fund will not exceed 2% of total fund
ownership. This investment is being accounted for using the cost method.
In July 2000, we invested $1,000 to purchase an approximate 4% interest in
Burning Glass Technologies, LLC, a privately held developer of statistical and
predictive technologies for use in the employment marketplace. This investment
is being accounted for using the cost method.
In March 2000, we invested $1,500 to maintain our approximate 6% ownership
interest in Open Solutions Inc. ("OSI"). In April 1999, we had previously
invested $6,000 to purchase an approximate 6% interest in OSI. OSI is a
developer of client/server core data processing solutions for community banks
and credit unions. This investment is being accounted for using the cost method.
In October 1999, we invested $3,500 to purchase an approximate 13% interest in
Onyx Technologies, Inc. ("Onyx"), a provider of online data access and customer
acquisition analysis for telecommunications, financial and retail service
companies. In March 2000, we acquired Onyx (see Note 3).
F-32
63
In June 1999, we invested $3,000 to purchase an approximate 1% interest in
Network Commerce Inc. ("Network Commerce"; formerly ShopNow.com Inc.), an
e-commerce company that helps customers and merchants buy and sell merchandise
online. In September 1999, Network Commerce became a public company. As a
result, we reclassified our investment in Network Commerce in our consolidated
balance sheet to a short-term available for sale investment classification (see
Note 5).
In July 1999, we invested $2,000 to purchase an approximate 16% interest in
KeyLime Software Inc., a privately held software company specializing in the
development of certain data mining technologies. This investment is accounted
for using the cost method.
In March 1999, we invested $2,000 to purchase an approximate 3% interest in
Qpass Inc., a Web-wide transaction and customer service network enabling
commerce in digital goods and services. This investment is accounted for using
the cost method.
In March 1999, we invested $750 to purchase an approximate 16% interest in AIM
Solutions, Inc. ("AIM"), a company that provides marketing process automation,
campaign execution software, and client-to-vendor data management to direct
marketers of enhancement services. In March 2000, we acquired AIM (see Note 3).
NOTE 7--CREDIT AGREEMENT
We have a Credit Agreement with a bank that provides for a $15,000 revolving
line of credit through July 11, 2001. During 2000 and 1999, we had no amounts
outstanding under this revolving line of credit. The agreement contains
covenants that restrict our ability to pay cash dividends and make loans,
advances or investments without the bank's consent. As of December 31, 2000, we
were in compliance with all covenants under this agreement. Borrowings under
this agreement bear interest at LIBOR plus 0.5%, which is payable monthly. The
applicable interest rate was 7.06% at December 31, 2000.
NOTE 8--OPERATING LEASES
At December 31, 2000, we are obligated through 2007 under non-cancelable
operating leases for our facilities and equipment as follows:
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
2001 ............... $ 7,546 $ (283) $ 7,263
2002 ............... 7,052 -- 7,052
2003 ............... 5,007 -- 5,007
2004 ............... 2,377 -- 2,377
2005 ............... 1,832 -- 1,832
After 2005 ......... 622 -- 622
-------- -------- --------
$ 24,436 $ (283) $ 24,153
======== ======== ========
Our corporate headquarters lease provides for scheduled rent increases and an
option to extend the lease for five years with changes to the terms of the lease
agreement and a refurbishment allowance. Rent expense under operating leases
totaled $9,075, $6,172 and $3,689 during 2000, 1999, and 1998, respectively, net
of sublease income of $555, $1,286, and $1,029, respectively.
NOTE 9--CONVERTIBLE SUBORDINATED NOTES
In March 1998, we completed an offering of $100,000 of 4.75% Convertible
Subordinated Notes (the "Notes"), due on March 1, 2003, which we fully and
unconditionally guaranteed. The Notes were originally convertible into our
common stock at any time prior to the close of business on the maturity date at
a conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). We also had the right to
redeem the Notes, in whole or in part, on or after March 6, 2001, at redemption
prices (plus accrued interest), as follows: a premium of 101.9 after one year,
100.95 after two years, and at par as of the third year. This offering resulted
in net proceeds to us
F-33
64
of $97,000 after the payment of underwriters' commissions but before the
deduction of offering expenses. Debt issuance costs were recorded at cost and
are being amortized using the straight-line method, which approximates the
effective interest-method, over the life of the Notes.
During 2000, $83,643 of the Notes were converted into HNC common stock at a
conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). In connection with these
note conversions, we issued 1,872 shares of our common stock. Additionally, we
paid $12,676 million in conversion premiums to the converting note holders,
which we recorded as a debt conversion charge. As of December 31, 2000, $16,357
of the Notes remained outstanding. In connection with the spin-off of our Retek
subsidiary, the indenture governing the Notes required an adjustment to the
conversion price of the remaining outstanding Notes. This conversion price was
based upon a formula that calculated an adjusted conversion rate using the
relative per common share values of HNC and Retek as of the date of the
spin-off. As a result of this adjustment, the remaining Notes became convertible
into our common stock at a conversion rate of 100.20 shares per $1,000 principal
amount of the Notes (equivalent to a conversion price of $9.98 per share). As
discussed in Note 15, the remaining outstanding Notes were converted into our
common stock in March 2001.
The fair value of the Notes at December 31, 2000 was estimated to be $48,657,
calculated based upon the fair value of the underlying shares of HNC common
stock that the Notes were convertible into as of this date based upon the
revised conversion rate.
Cash amounts paid for interest related to the Notes totaled $4,750, $4,750, and
$2,335 during 2000, 1999, and 1998, respectively.
NOTE 10--TREASURY, COMMON AND PREFERRED STOCK
During 2000, we repurchased 250 shares of our outstanding common stock for
treasury at a cost of $18,616. During 1999, we repurchased 2,266 shares of our
outstanding common stock for treasury at a cost of $50,383.
During March 1998, we completed a secondary public offering of 2,100 shares of
common stock (of which 2,080 shares were sold by selling stockholders and 20
shares were sold by us) at a price to the public of $34.50 per share, which
resulted in net proceeds of $655 after the payment of underwriters' commissions
but before the deduction of offering expenses.
Our Board of Directors is authorized to issue up to 4,000 shares of preferred
stock and to determine the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of common stockholders will be superceded by the
rights of any preferred stock holders, if preferred stock is issued in the
future.
NOTE 11--INCOME TAXES
The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
-------- -------- --------
CURRENT:
Federal ................... $ -- $ 3,869 $ 6,659
State ..................... -- 1,042 1,549
Foreign ................... 2,282 250 511
DEFERRED:
Federal ................... (33,899) (3,958) 3,218
State ..................... (1,485) (694) 715
Foreign ................... 27 106
-------- -------- --------
$(33,102) $ 536 $ 12,758
======== ======== ========
F-34
65
Income before income tax provision (benefit) was taxed under the following
jurisdictions:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
--------- --------- ---------
Domestic ......... $(154,945) $ (6,521) $ 21,388
Foreign .......... 5,425 785 1,822
--------- --------- ---------
$(149,520) $ (5,736) $ 23,210
========= ========= =========
A reconciliation of the income tax provision (benefit) to the amount computed by
applying the statutory federal income tax rate to income before income tax
provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
Amounts computed at statutory federal rate ............ $(52,332) $ (2,008) $ 8,123
State income taxes, net of federal benefit ............ (965) 226 1,472
Non-deductible debt conversion expense ................ 4,437 -- --
Non-deductible spin-off expense ....................... 4,820 -- --
Tax credit carry-forwards generated ................... (1,005) (642) (949)
Non-deductible stock redemption compensation
expense ............................................ -- 543 835
Non-deductible acquired technology and
amortization ....................................... 12,110 1,947 2,895
Minority interest in Retek ............................ (2,654) (253) --
Stock based compensation .............................. 1,910 407 --
Other, net ............................................ 577 316 382
-------- -------- --------
Income tax provision (benefit) ........................ $(33,102) $ 536 $ 12,758
======== ======== ========
During 2000, 1999 and 1998, we realized certain tax benefits related to stock
option transactions in the amounts of $36,392, $16,993 and $7,569, respectively.
The tax benefits from these stock option tax deductions were credited directly
to paid-in capital.
Deferred tax assets (liabilities) are summarized as follows:
DECEMBER 31,
------------------------
2000 1999
-------- --------
Taxable pooling basis difference ............ $ -- $ 14,955
Net operating loss carry-forwards ........... 54,953 11,257
Tax credit carry-forwards ................... 5,713 6,251
Allowance for doubtful accounts ............. 1,431 2,506
Deferred tax liabilities related to
purchase accounting ....................... (18,159) --
Stock based compensation .................... 741 4,106
Other ....................................... 4,210 (606)
-------- --------
48,889 38,469
Deferred tax asset valuation allowance ...... -- --
-------- --------
Net deferred tax assets ........... $ 48,889 $ 38,469
======== ========
No valuation allowance has been recorded against our net deferred tax assets as
we believe it to be more likely than not that our tax assets will be realized.
At December 31, 2000, we had federal and state net operating loss carry-forwards
totaling $143,187 and $84,189, respectively. The federal net operating loss
carry-forwards include $4,772 that expires in 2011, $24,618 that expires in 2019
and $113,797 that expires in 2020. The state net operating loss carry-forwards
expire from 2002 through 2010.
F-35
66
At December 31, 2000, we also had $2,391 of federal research and development
credit carry-forwards that expire from 2001 to 2020, $1,643 of state research
and development credit carry-forwards that have no expiration dates, $1,525 of
foreign tax credit carry-forwards that expire from 2000 to 2005, and federal and
state alternative minimum tax credits of $150 and $4, respectively, that have no
expiration dates. These net operating loss and research and development credit
carry-forwards are subject to annual limitations and also are limited to
utilization solely by the segment that generated them. Should a substantial
change in our ownership occur, as defined by the Tax Reform Act of 1986, there
will be additional annual limitations on our utilization of net operating loss
and research and development credit carry-forwards.
We paid $484, $6,312 and $1,151 of income taxes during 2000, 1999 and 1998,
respectively.
NOTE 12--SEGMENT INFORMATION
During 2000, 1999 and 1998, our reportable segments were based upon our method
of internal reporting to management, who viewed our business for these periods
by functional market. During 2000, 1999 and 1998, our operating segments
reflected the way management organized and evaluated internal financial
information to make operating decisions and assess performance. Excluding Retek,
our primary operating segments include HNC Financial Solutions ("HNC FS"), HNC
Insurance Solutions ("HNC IS") and HNC Telecommunications Solutions ("HNC TS").
HNC FS provides transaction-based, real-time fraud detection, authorization and
action decisions for applications such as credit card charge authorization and
the loan approval decision process. Our HNC FS segment also includes the
activities associated with our former eHNC division, the activities of which we
reintegrated into FS in July 2000. HNC IS provides users with the ability to
reduce fraud losses and streamline operations in the containment of the medical
costs of workers' compensation and automobile accident insurance claims,
workers' compensation loss reserving, workers' compensation fraud, managed care
effectiveness and provider effectiveness. HNC TS provides our telecommunications
carrier customers with the ability to reduce fraud losses and determine customer
profitability. HNC TS is presented below along with activities associated with
our Advanced Technology Solutions group, which primarily conducts research and
development for the United States government, as well as corporate activity.
Retek, which we spun-off to stockholders effective September 29, 2000, is also
presented separately below.
The accounting policies of the segments are the same as those described in Note
1. We evaluate the performance of our segments and allocate resources to them
based on operating income. Inter-segment sales are accounted for at fair value
as if the sales were to third parties.
Our operating segments reflect the way our management team organizes and
evaluates internal financial information, in order to make operating decisions
and assess performance. Each segment represents a strategic business unit that
offers unique products and services to their functional markets. The table below
presents segment data for certain statement of operations and balance sheet line
items as of and for the years ended December 31, 2000, 1999 and 1998.
Segment revenues are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Segment revenue:
HNC FS $ 95,668 $ 73,641 $ 63,244
HNC IS 81,382 66,790 52,140
HNC TS and other 17,899 7,299 6,555
-------- -------- --------
HNC, excluding Retek 194,969 147,730 121,939
Retek 59,915 69,159 56,669
-------- -------- --------
Total consolidated revenue $254,884 $216,889 $178,608
======== ======== ========
During 2000, 1999 and 1998, one product line in the HNC FS segment accounted for
16.8%, 15.4% and 14.5% of our total revenues, respectively. During those same
periods, revenues from one product in the HNC IS segment accounted for 23.5%,
20.9% and 21.5% of our total revenues, respectively. During 1999 and 1998, one
product in the Retek segment accounted for 10.1% and 13.2% of our total
revenues, respectively.
Segment operating income (loss), excluding all non-cash and non-recurring
charges that we do not allocate between segments, is summarized as follows:
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YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Segment operating income (loss):
HNC FS $ 603 $ 9,935 $ 10,936
HNC IS 10,572 13,390 7,651
HNC TS and other (1,709) (5,168) 700
-------- -------- --------
HNC, excluding Retek 9,466 18,157 19,287
Retek (36,845) (2,318) 11,031
-------- -------- --------
Total operating income (loss) $(27,379) $ 15,839 $ 30,318
======== ======== ========
A reconciliation of the operating income (loss) reported by each of our segments
to our consolidated operating income (loss) is set forth below:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Segment operating income (loss) $ (27,379) $ 15,839 $ 30,318
Stock-based compensation (21,670) (11,985) --
Transaction-related costs and
amortization (43,734) (9,158) (3,202)
Expense related to spin-off of Retek (48,185) -- --
Acquired in-process research
and development (7,601) (1,480) (6,090)
Other (Note 1) (1,172) -- --
--------- -------- --------
Consolidated operating income (loss) (149,741) (6,784) 21,026
Interest income 12,924 6,299 6,799
Interest expense (4,231) (5,747) (4,460)
Expense related to debt conversion (12,676) -- --
Other expense, net (3,378) (226) (29)
Minority interest in losses (income) of
consolidated Subsidiaries 7,582 722 (126)
--------- -------- --------
Income (loss) before
income tax provision $(149,520) $ (5,736) $ 23,210
========= ======== ========
Segment depreciation expense, included in operating income, is summarized as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Segment depreciation expense:
HNC FS $ 4,533 $ 2,971 $ 2,921
HNC IS 2,510 2,134 1,564
HNC TS and other 1,122 801 355
-------- -------- --------
HNC, excluding Retek 8,165 5,906 4,840
Retek 3,588 2,309 1,262
-------- -------- --------
Total segment depreciation
expense $ 11,753 $ 8,215 $ 6,102
======== ======== ========
Segment assets are summarized as follows:
DECEMBER 31,
--------------------------
2000 1999
--------- ---------
Total segment assets:
HNC FS $ 96,553 $ 49,492
HNC IS 60,106 40,491
HNC TS and other 67,003 5,872
--------- ---------
HNC, excluding Retek 223,662 95,855
Retek -- 129,099
--------- ---------
Total segment assets 223,662 224,954
Corporate 295,762 291,098
Eliminations (71,683) (99,631)
--------- ---------
Total consolidated assets $ 447,741 $ 416,421
========= =========
Corporate assets are primarily comprised of cash and cash equivalents,
marketable securities, deferred tax assets and inter-company receivables.
Eliminations primarily relate to inter-company balances and investments in
subsidiaries.
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68
Segment capital expenditures are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Segment capital expenditures:
HNC FS $ 7,053 $ 4,455 $ 2,909
HNC IS 2,252 4,336 1,831
HNC TS and other 3,991 1,565 407
-------- -------- --------
HNC, excluding Retek 13,296 10,356 5,147
Retek 12,070 5,737 2,939
-------- -------- --------
Total capital expenditures $ 25,366 $ 16,093 $ 8,086
======== ======== ========
Revenue and long-lived assets by geographical area are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Revenue by geographical area:
United States ......................... $205,361 $166,505 $137,332
Foreign ............................... 49,523 50,384 41,276
-------- -------- --------
Total revenue ................. $254,884 $216,889 $178,608
======== ======== ========
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Long-lived assets by geographical area:
United States ............................... $169,963 $ 54,174
Foreign ..................................... 159 145
-------- --------
Total long-lived assets ............. $169,122 $ 54,319
======== ========
Our foreign revenues are from export sales and international operations. Export
sales include sales from the United States to foreign countries. International
operations include sales by foreign operations. Revenues from international
operations and export sales, primarily to Western Europe, Japan and Canada,
represented 19.3%, 23.2% and 23.1% of total revenues in 2000, 1999 and 1998,
respectively. Export sales totaled $42,540, $37,713 and $27,840 in 2000, 1999
and 1998, respectively.
NOTE 13--STOCK COMPENSATION PLANS
We apply Accounting Principles Board Opinion No. 25 and related Interpretations
in accounting for our stock-based compensation. Had compensation cost for our
stock-based compensation awards been determined based on the fair value at the
grant dates of awards, consistent with the method of Financial Accounting
Standards Board Statement No. 123, our net income (loss) and basic and diluted
pro forma net income (loss) per common share would have been reduced to the pro
forma amounts indicated below:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
--------- -------- --------
Net income (loss):
As reported ............................. $(116,418) $ (6,272) $ 10,452
Pro forma ............................... $(230,171) $(43,583) $(21,678)
Basic net income (loss)
per common share:
As reported ............................. $ (4.08) $ (0.25) $ 0.41
Pro forma ............................... $ (8.07) $ (1.75) $ (0.84)
Diluted net income (loss)
per common share:
As reported ............................. $ (4.08) $ (0.25) $ 0.39
Pro forma ............................... $ (8.07) $ (1.75) $ (0.85)
HNC Software Inc. Sponsored Plans
We administer several employee benefit plans, both active and inactive. Our
active plans include our 1995 Equity Incentive Plan, our 1995 Directors Stock
Option Plan, our 1995 Employee Stock Purchase Plan, and our 1998 Stock
F-38
69
Option Plan. Our inactive plans include our original 1987 Stock Option Plan and
various plans that we acquired in conjunction with our acquisitions. Our
inactive plans also include the eHNC 1999 Equity Incentive and Executive Equity
Incentive Plans. As a result of a short-form merger of eHNC into HNC in July
2000, all outstanding options under eHNC plans were assumed. These assumed plans
were amended to convert their respective options into HNC options as of the
respective acquisition or merger dates. While subsequent to the assumption of
these plans the acquired employees participated in our own stock option plans
and are subject to our plans' terms and conditions, options issued prior to the
acquisition or merger dates are subject to their respective plan terms and
conditions. Our inactive plans are not discussed herein. For purposes of the
discussion regarding our active plans below, "fair market value" means the
closing price of our common stock on the Nasdaq National Market on the grant
date.
Our 1995 Directors Stock Option Plan ("Directors Plan"), as amended, provides
for the issuance of up to 600 nonqualified stock options to our outside
directors. Under the provisions of the Directors Plan, nonqualified options to
purchase 25 shares of our common stock are granted to outside directors upon
their respective dates of becoming members of the Board of Directors, and
nonqualified options to purchase ten shares of our stock will be granted on each
anniversary date. Options under the Directors Plan are to be granted at the fair
market value of the stock at the grant date and vest at specific times over a
four-year period. As of December 31, 2000, 255 shares remained available for
future grant under this plan.
Our 1995 Equity Incentive Plan ("Incentive Plan") as amended, provides for the
issuance of up to 9,100 shares of our common stock in the form of nonqualified
or incentive stock options, restricted stock or stock bonuses. Nonqualified
stock options and restricted stock may be awarded at a price not less than 85%
of the fair market value of the stock at the date of the award. Incentive stock
options must be awarded at a price not less than 100% of the fair market value
of the stock at the date of the award. Options granted under the Incentive Plan
may have a term of up to ten years. We have the discretion to provide for
restrictions, and the lapse of restrictions, in respect of restricted stock
awards. Options typically vest at the rate of 25% of the total grant per year
over a four-year period; however, we may, at our discretion, implement a
different vesting schedule with respect to any new stock option grant. At
December 31, 2000, 1,172 shares remained available for future grant under this
plan.
Our 1998 Stock Option Plan ("1998 Plan"), as amended, provides for the issuance
of up to 2,980 shares of our common stock in the form of nonqualified stock
options to our employees, officers, consultants and independent advisors.
Options granted under the 1998 Plan may have a term of up to ten years and
typically vest at the rate of 25% of the total grant per year over a four-year
period; however, we may, at our discretion, implement a different vesting
schedule with respect to any new stock option grant. At December 31, 2000, 1,148
shares remained available for future grant under this plan.
Our 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"), as amended,
provides for the issuance of a maximum of 850 shares of common stock. Each
purchase period, eligible employees may designate between 2% and 10% of their
cash compensation, up to legally permitted amounts, to be deducted from their
compensation for the purchase of common stock under the Stock Purchase Plan. The
purchase price of the shares under the Stock Purchase Plan is equal to 85% of
the lesser of the fair market value per share on the first day of the
twelve-month offering period or the last day of each six-month purchase period.
During 2000, 1999 and 1998, 106, 115 and 68 shares of our common stock were
issued under the Stock Purchase Plan at an average price of $29.55, $24.46 and
$28.34 per share, respectively. As of December 31, 2000, 416 shares were
reserved for future issuance under the Stock Purchase Plan.
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70
Option transactions under HNC's plans during the three years ending December 31,
2000 are summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
Outstanding at December 31, 1997 ................ 4,591 $ 23.92
Options granted/exchanged ..................... 3,333 34.59
Options exercised ............................. (732) 12.12
Options canceled .............................. (718) 32.04
-------- --------
Outstanding at December 31, 1998 ................ 6,474 29.84
Options granted ............................... 3,845 33.67
Options exercised ............................. (1,916) 24.68
Options canceled .............................. (2,368) 32.11
-------- --------
Outstanding at December 31, 1999 ................ 6,035 33.03
Options granted/exchanged ..................... 3,747 69.84
Options exercised ............................. (3,227) 29.76
Options canceled .............................. (1,249) 47.57
-------- --------
Outstanding at September 29, 2000 (a) ........... 5,306 57.60
Options granted ............................... 1,559 17.46
Options exercised ............................. (98) 12.44
Options canceled .............................. (848) 10.92
-------- --------
Outstanding at December 31, 2000 ................ 5,919 12.88
======== ========
(a) On September 29, 2000, in connection with the spin-off of Retek,
we adjusted the exercise price of all outstanding stock options
in accordance with the distribution ratio discussed in Note 2.
The weighted average exercise price of options outstanding at
September 29, 2000 after consummation of the spin-off was
$11.21.
The fair value of each option grant under our HNC plans was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for grants during 2000, 1999 and 1998,
respectively: dividend yield of 0.0% for all three years; risk-free interest
rates of 6.21%, 5.47% and 5.14%; expected volatilities of 100%, 100% and 65%;
and expected lives of 4.1, 4.1 and 5.0 years. The weighted average fair value of
options granted under HNC plans during 2000, 1999 and 1998 was $37.61, $23.15
and $22.17, respectively. The fair value of the employees' purchase rights
issued pursuant to the Stock Purchase Plan were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions during 2000, 1999 and 1998, respectively: dividend yield of 0.0% for
all three years; risk-free interest rates of 6.18%, 4.98% and 5.02%; expected
volatilities of 100%, 100% and 65%; and an expected life of 6 months for all
three years. The weighted average fair value of those purchase rights granted in
2000, 1999 and 1998 was $7.29, $16.66 and $16.25, respectively.
The following table summarizes information about employee stock options
outstanding at December 31, 2000 under HNC's plans:
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2000 LIFE (IN YEARS) PRICE 2000 PRICE
----------------- -------------- --------------- --------- -------------- ---------
$ 0.03 to $6.23 814 7.73 $5.23 126 $5.21
6.24 7.46 733 7.23 6.92 100 6.97
7.47 10.42 758 6.58 8.58 96 8.32
10.43 13.22 618 6.73 11.24 130 10.99
13.23 16.25 1,036 6.85 15.13 109 14.40
16.33 18.10 858 6.22 17.41 195 17.39
18.11 20.25 599 6.43 19.05 94 19.38
20.36 29.69 503 6.60 22.71 50 22.00
----- ------
0.03 29.69 5,919 6.81 12.88 900 12.73
===== ======
Retek Inc. Sponsored Plans
During 1999, Retek adopted the 1999 Equity Incentive Plan, the 1999 Director
Stock Option Plan and the Employee Stock Option Exchange Program, under which
options to purchase common stock in our former subsidiary Retek had been
granted. During 1999, Retek also adopted the 1999 Employee Stock Purchase Plan,
which provides for the issuance of Retek's common stock to eligible employee
participants at a purchase price equal to 85% of the lesser of the fair market
F-40
71
value per share on the first day of the two-year offering period and the date of
purchase. As a result of our September 2000 spin-off of Retek, HNC is no longer
affiliated with any Retek stock compensation plans.
During the period from January 1, 2000 through the Retek spin-off date of
September 29, 2000, 464 shares of Retek common stock were issued under Retek's
employee stock purchase plan at an average price of $12.75 per share. No shares
were issued under this plan during 1999. Option activity under Retek's option
plans during 1999 and during the period from January 1, 2000 through the
spin-off date, is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
Outstanding at December 31, 1998 ................ -- --
Options granted ............................... 7,416 10.38
Options canceled .............................. (5) 10.00
-------- --------
Outstanding at December 31, 1999 ................ 7,411 10.38
Options granted ............................... 1,496 27.82
Options canceled .............................. (247) 19.93
-------- --------
Outstanding at September 29, 2000 (a) ........... 8,660 13.06
======== ========
(a) As a result of the Retek spin-off, HNC has no further
affiliation with Retek's plans or underlying options, including
those outstanding as of the September 29, 2000 spin-off date.
The fair value of each option granted under Retek's plans was estimated on the
date of grant using the Black-Scholes option pricing model and the following
weighted average assumptions used for grants during the period from January 1,
2000 through the September 29, 2000 spin-off date and during 1999, respectively:
dividend yield of 0.0% for both years; risk-free interest rates of 5.12% and
5.47%; expected volatility of 130% and 100%; and expected lives of 4.4 and 4.1
years. The weighted average fair value of options granted under Retek plans
during the period from January 1, 2000 through September 29, 2000, and during
1999, was $24.49 and $7.62, respectively. The fair value of the employees'
purchase rights issued pursuant to Retek's stock purchase plan in 2000 were
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 0.0%; risk-free interest rate of
5.50%; expected volatility of 130%; and an expected life of 6 months. The
weighted average fair value of those purchase rights granted was $8.33.
Stock-Based Compensation
During 2000, we recorded net stock-based compensation expense totaling $21,670,
consisting of $13,762 in stock-based compensation charges attributable to our
Retek spin-off, which are discussed separately below, and $7,908 in additional
net compensation expense. This additional net compensation expense relates
primarily to the amortization of unearned stock-based compensation of $8,772 (of
which $8,266 related to Retek) and also includes additional net compensation
income of $864, primarily related to the reversal of compensation expense
recorded in 1999 on variable awards, as a result of a decline in the fair values
of these awards during 2000.
During 1999, Retek granted stock options to employees and directors to purchase
Retek common stock at an exercise price of $10.00 per share when the deemed fair
market value of Retek's common stock was $13.00 per share. As a result, Retek
recorded unearned stock-based compensation totaling $21,886 representing the
aggregate intrinsic value of the options on the date of grant. Additionally,
during 2000, Retek recorded additional unearned stock-based compensation
totaling $1,750 related to an employee option grant having an exercise price
below the fair value of Retek's common stock on the date of grant. Amortization
of Retek's unearned stock-based compensation totaled $1,908 during 1999 and
$8,266 during the period from January 1, 2000 through the Retek spin-off date of
September 29, 2000. Retek's unearned stock-based compensation balance of $13,255
at September 29, 2000, net of forfeiture reductions, was removed from our
consolidated equity accounts in connection with the Retek spin-off.
During 1999, in addition to Retek's amortization of unearned stock-based
compensation as described above, we recorded stock-based compensation expense
totaling $10,077. This compensation expense relates primarily to stock awards
granted to former employees and non-employee consultants, of which $7,972 was
calculated at intrinsic value while the remainder related to variable awards
measured at fair value. The intrinsic value charge consisted primarily of a
one-time charge of $6,064 related to a key employee severance agreement executed
in the fourth quarter of 1999.
F-41
72
The fair values of HNC's variable awards during 2000 and 1999 were estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0.0% for both years; risk-free interest rate of
5.02% and 5.23% in 2000 and 1999, respectively; volatility of 100% for both
years; and expected lives from four months to one year according to the vesting
date and subsequent exercise period of each option grant, and our stock prices
on the various grant dates as well as on December 31, 2000 and 1999.
In August 2000, we accelerated the vesting of 25 percent of the outstanding
stock options that would have been unvested as of the September 15, 2000 record
date to afford our option holders the opportunity to participate in receipt of
the Retek share dividend. As a result of this award modification, we recorded a
non-cash stock-based compensation charge of $6,688 during the third quarter of
2000 in accordance with Financial Accounting Standards Board Interpretation No.
44, or FIN 44. Additionally, as a result of the proportionate option repricing
in connection with the Retek spin-off, certain options failed to qualify for
fixed accounting treatment under FIN 44. As a result, we recorded a one-time
charge to operations of $7,074 related to the modification and cash repurchase
of options in connection with the Retek spin-off.
NOTE 14--CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages and
other relief, are pending. We believe that these claims will not result in a
material negative impact on our results of operations, liquidity or financial
condition. However, the amount of the liability associated with these claims, if
any, cannot be determined with certainty.
We recently settled, without liability, a suit that Nestor Inc. filed against us
in November 1998 in the United States District Court for the District of Rhode
Island. In this suit, Nestor had alleged antitrust violations and unfair
competition claims with respect to our marketing of our Falcon credit card fraud
detection product. Nestor's complaint also alleged that we infringed United
States patents held by Nestor and sought a declaratory judgment that a United
States patent we hold relating to technology used in our Falcon products is
invalid and unenforceable. In January 2000 Nestor dropped its claim of patent
infringement against us and in January 2001 the case settled and Nestor's
remaining claims for antitrust and unfair competition were dismissed.
NOTE 15 - SUBSEQUENT EVENT
In February 2001, we announced the call for redemption of our outstanding
Convertible Subordinated Notes on March 6, 2001. In March 2001, all remaining
outstanding Notes were converted into 1,639 shares of our common stock at a
conversion ratio of 100.2004 shares per $1,000 principal amount of Notes held.
NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 2000 and 1999 is as follows:
YEAR ENDED DECEMBER 31, 2000(1)(2)
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Revenues .................................... $ 54,564 $ 67,432 $ 77,812 $ 55,076 $ 254,884
Gross Profit ................................ 26,896 35,349 43,543 33,609 139,397
Operating loss .............................. (20,992) (30,462) (85,363) (12,924) (149,741)
Net loss .................................... (12,215) (20,145) (78,519) (5,539) (116,418)
Basic net income (loss) per share (a) ....... $ (0.47) $ (0.75) $ (2.71) $ (0.17) $ (4.08)
Diluted net income (loss) per share (a) .... $ (0.47) $ (0.75) $ (2.71) $ (0.17) $ (4.08)
YEAR ENDED DECEMBER 31, 1999(3)
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Revenues .................................... $ 49,189 $ 55,933 $ 58,773 $ 52,994 $ 216,889
Gross Profit ................................ 29,815 35,484 38,697 30,704 134,700
Operating Income (loss) ..................... 3,685 5,994 7,599 (24,062) (6,784)
Net Income (loss) ........................... 2,124 3,345 3,331 (15,072) (6,272)
Basic net income (loss) per share (4) ....... $ 0.08 $ 0.14 $ 0.14 $ (0.60) $ (0.25)
Diluted net income (loss) per share (4) ..... $ 0.08 $ 0.13 $ 0.13 $ (0.60) $ (0.25)
(1) Results of operations in 2000 include: i) charges of $1.4 million,
$5.0 million and $1.2 million related to the write-off of
in-process research and development in the first, second and third
quarters, respectively; ii) $12.7 million in non-recurring debt
conversion expense and $48.2 million in non-recurring Retek
spin-off charges in the third quarter, and iii) a $2.8 million
charge relating to the write-down of our investment in Network
Commerce and a $1.2 million impairment charge related to the
abandonment of a lease and associated property and equipment in
the fourth quarter.
(2) Results of operations in 2000 exclude Retek's results of
operations in the fourth quarter, as a result of our spin-off of
Retek on September 29, 2000.
(3) Results of operations in 1999 include a charge of $1.5 million
related to the write-off of in-process research and development in
the fourth quarter.
(4) Net income (loss) per share is computed independently for each of
the quarters presented. Therefore, the sum of the quarterly net
income (loss) amounts per share do not equal the total for the
year.
F-42
73
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.01 Agreement and Plan of Reorganization dated as of April 6,
1998 by and among the Registrant, FW2 Merger Corp. and the
shareholders of Financial Technology, Inc. Pursuant to Item
601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the
Commission upon request. (Incorporated by reference to
Exhibit 2.01 to Registrant's Form 8-K filed April 22, 1998.)
2.02 Plan of Merger dated December 21, 1998 adopted by Registrant
and Aptex Software Inc. (Incorporated by reference to
Exhibit 2.01 to Registrant's Form 8-K filed February 5,
1999).
2.03 Agreement and Plan of Reorganization dated as of March 9,
2000 among the Registrant, ONYX Technologies, Inc. and FW2
Acquisition Corp. Pursuant to Item 601(b)(2) of Regulation
S-K, certain schedules have been omitted but will be
furnished supplementally to the Commission upon request.
(Incorporated by reference to Exhibit 2.01 to Registrant's
Form 8-K filed March 27, 2000.)
2.04 Agreement and Plan of Merger among Retek Inc., HT
Acquisition, Inc., HighTouch Technologies, Inc. and Kipling
Investments Labvan Limited dated as of April 17, 2000.
Pursuant to Item 601(b)(2) of Regulation S-K, certain
schedules have been omitted but will be furnished
supplementally to the Commission upon request. (Incorporated
by reference to Exhibit 2.01 to Registrant's Form 8-K filed
May 25, 2000.)
2.05** Agreement and Plan of Reorganization dated as of September
7, 2000 among Registrant, Systems/Link Corporation and SLC
Merger Corp. Pursuant to Item 601(b)(2) of Regulation S-K,
certain exhibits and schedules have been omitted but will be
furnished supplementally to the Commission upon request.
(Incorporated by reference to Exhibit 2.01 to Registrant's
Form 8-K, as amended, filed September 22, 2000.)
3.01 Registrant's Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on June 13, 1996.
(Incorporated by reference to Exhibit 3(i).04 to
Registrant's Form 10-Q for the quarter ended June 30, 1996.)
3.02 Certificate of Amendment to Registrant's Restated
Certificate of Incorporation filed with the Secretary of
State of Delaware on June 12, 2000. (Incorporated by
reference to Exhibit 4.08 to Registrant's Form S-8
Registration Statement, File No. 333-40344, filed June 28,
2000.)
3.03* Registrant's Bylaws, as amended.
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference to Exhibit 4.01 to Registrant's
Form S-1 Registration Statement, as amended (File No.
33-91932) (the "IPO S-1").)
10.01 Registrant's 1987 Stock Option Plan and related documents.
(Incorporated by reference to Exhibit 10.01 to the IPO
S-1.)(1)
10.02 Registrant's 1995 Equity Incentive Plan, as amended through
March 30, 2000. (Incorporated by reference to Exhibit 4.01
to Registrant's Form S-8 Registration Statement, File No.
333-40344, filed June 28, 2000.)(1)
10.03 Form of 1995 Equity Incentive Plan Stock Option Agreement
and Stock Option Exercise Agreement. (Incorporated by
reference to Exhibit 10.02 to Registrant's Form S-4
Registration Statement, File No. 333-64527, as amended
December 21, 1998.)(1)
10.04 Registrant's 1995 Directors Stock Option Plan, as amended
through April 30, 2000. (Incorporated by reference to
Exhibit 4.05 to Registrant's Form S-8 Registration
Statement, File No. 333-40344, filed June 28, 2000.)(1)
10.05 Form of 1995 Directors Stock Option Plan Option Agreement
and Stock Option Exercise Agreement. (Incorporated by
reference to Exhibit 10.01 to Registrant's Form 10-Q for the
quarter ended June 30, 1999)(1)
10.06 Registrant's 1995 Employee Stock Purchase Plan, as amended
through January 1, 2001. (Incorporated by reference to
Exhibit 4.01 to Registrant's Form S-8 Registration
Statement, File No. 333-55398, filed February 12, 2001.)(1)
10.07 Registrant's 1998 Stock Option Plan, as amended through
September 1, 2000 and related form of option agreement.
(Incorporated by reference to Exhibit 4.05 to Registrant's
Form S-8 Registration Statement, File No. 333-45442, filed
September 8, 2000.)(1)
10.08 Aptex Software Inc. 1996 Equity Incentive Plan assumed by
Registrant. (Incorporated by reference to Exhibit 4.03 to
Registrant's Form S-8 Registration Statement, File No.
333-71923, filed February
F-43
74
EXHIBIT
NUMBER DESCRIPTION
------ -----------
5, 1999.)(1)
10.09 Form of Aptex Software Inc. 1996 Equity Incentive Plan Stock
Option Agreement and Stock Option Exercise Agreement.
(Incorporated by reference to Exhibit 4.04 to Registrant's
Form S-8 Registration Statement, File No. 333-71923, filed
February 5, 1999.)(1)
10.10 Practical Control Systems Technologies, Inc. 1998 Stock
Option Plan assumed by Registrant. (Incorporated by
reference to Exhibit 4.03 to Registrant's Form S-8
Registration Statement, File No. 333-50623, filed April 21,
1998.)(1)
10.11 Form of Practical Control Systems Technologies, Inc. 1998
Stock Option Plan Stock Option Agreement and Stock Option
Exercise Agreement. (Incorporated by reference to Exhibit
4.04 to Registrant's Form S-8 Registration Statement, File
No. 333-50623, filed April 21, 1998.)(1)
10.12 Advanced Information Management Solutions, Inc. Stock Option
Plan assumed by Registrant. (Incorporated by reference to
Exhibit 4.01 to Registrant's Form S-8 Registration
Statement, File No. 333-33952, filed April 4, 2000.)(1)
10.13 Form of Advanced Information Management Solutions, Inc.
Stock Option Agreement. (Incorporated by reference to
Exhibit 4.02 to Registrant's Form S-8 Registration
Statement, File No. 333-33952, filed April 4, 2000.)(1)
10.14 ONYX Technologies, Inc. 1999 Stock Plan assumed by
Registrant. (Incorporated by reference to Exhibit 4.03 to
Registrant's Form S-8 Registration Statement, File No.
333-33952, filed April 4, 2000.)(1)
10.15 Form of ONYX Technologies, Inc. Stock Option Agreement.
(Incorporated by reference to Exhibit 4.04 to Registrant's
Form S-8 Registration Statement, File No. 333-33952, filed
April 4, 2000.)(1)
10.16 The Center for Adaptive Systems Applications, Inc. 1995
Stock Option Plan assumed by Registrant. (Incorporated by
reference to Exhibit 4.05 to Registrant's Form S-8
Registration Statement, File No. 333-33952, filed April 4,
2000.)(1)
10.17 Forms of The Center for Adaptive Systems Applications, Inc.
Stock Option Agreements. (Incorporated by reference to
Exhibit 4.06 to Registrant's Form S-8 Registration
Statement, File No. 333-33952, filed April 4, 2000.)(1)
10.18 eHNC Inc. 1999 Equity Incentive Plan, as amended, assumed by
Registrant. (Incorporated by reference to Exhibit 4.01 to
Registrant's Form S-8 Registration Statement, File No.
333-41388, filed July 13, 2000.)(1)
10.19 Forms of eHNC Inc. Stock Option Agreements and Stock Option
Exercise Agreements under the eHNC Inc. 1999 Equity
Incentive Plan. (Incorporated by reference to Exhibit 4.02
to Registrant's Form S-8 Registration Statement, File No.
333-41388, filed July 13, 2000.)(1)
10.20 eHNC Inc. 1999 Executive Equity Incentive Plan assumed by
Registrant. (Incorporated by reference to Exhibit 4.03 to
Registrant's Form S-8 Registration Statement, File No.
333-41388, filed July 13, 2000.)(1)
10.21 Forms of eHNC Inc. Stock Option Agreements and Stock Option
Exercise Agreements under the eHNC Inc. 1999 Executive
Equity Incentive Plan. (Incorporated by reference to Exhibit
4.04 to Registrant's Form S-8 Registration Statement, File
No. 333-41388, filed July 13, 2000.)(1)
10.22 Systems/Link Corporation 1999 Stock Option Plan assumed by
Registrant and related forms of agreements. (Incorporated by
reference to Exhibit 4.04 to Registrant's Form S-8
Registration Statement, File No. 333-45442, filed September
8, 2000.)(1)
10.23 Separation Agreement dated December 14, 1999 between the
Registrant and Robert L. North. (Incorporated by reference
to Exhibit 10.23 to Registrant's Form 10-K, as amended, for
the year ended December 31, 1999.)(1)
10.24 Separation Agreement dated December 13, 1999 between the
Registrant and Raymond V. Thomas. (Incorporated by reference
to Exhibit 10.24 to Registrant's Form 10-K, as amended, for
the year ended December 31, 1999.)(1)
10.25 Employment Agreement dated October 13, 1999 between the
Registrant and John Mutch. (Incorporated by reference to
Exhibit 10.25 to Registrant's Form 10-K, as amended, for the
year ended December 31, 1999.)(1)
10.26 Employment Agreement dated December 13, 1999 between the
Registrant and John Mutch. (Incorporated by reference to
Exhibit 10.26 to Registrant's Form 10-K, as amended, for the
year ended December 31, 1999.)(1)
F-44
75
EXHIBIT
NUMBER DESCRIPTION
------ -----------
Employment Agreement dated December 13, 1999 between
Registrant and Kenneth J.
10.27 Saunders. (Incorporated by reference to Exhibit 10.27 to
Registrant's Form 10-K, as amended, for the year ended
December 31, 1999.)(1)
10.28 Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers. (Incorporated
by reference to Exhibit 10.08 to the IPO S-1.)(1)
10.29 Loan and Security Agreement by and among Registrant and John
Mutch and Teresa Mutch, dated as of May 31, 2000.
(Incorporated by reference to Exhibit 20.02 to Registrant's
Form 10-Q, as amended, for the quarter ended June 30,
2000.)(1)
10.30 Loan and Security Agreement by and among Registrant and
Bruce Hansen and Jody Hansen, dated as of June 2, 2000.
(Incorporated by reference to Exhibit 20.03 to Registrant's
Form 10-Q, as amended, for the quarter ended June 30,
2000.)(1)
10.31* First Amendment to Loan and Security Agreement by and among
Registrant and Bruce Hansen and Jody Hansen, effective as of
December 1, 2000.(1)
10.32 Employee Option Exercise Assistance documents used under
Registrant's option plans, consisting of forms of Secured
Full Recourse Promissory Note, Stock Pledge Agreement and
related documents. (Incorporated by reference to Exhibit
10.01 to Registrant's Form 10-Q for the quarter ended
September 30, 2000.)(1)
10.33* Amended Employee Option Exercise Assistance documents,
consisting of forms of Secured Full Recourse Promissory
Note, Stock Pledge Agreement and related documents.(1)
10.34 [Intentionally Omitted]
10.35* Strategic Partnership Agreement dated as of October 23,
2000, between Registrant and GeoTrust, Inc., as amended by
Amendment No. 1 dated March 6, 2001.
10.36 Office Building Lease dated as of December 1, 1993, as
amended effective February 1, 1994 and June 1, 1994, between
Registrant and PacCor Partners. (Incorporated by reference
to Exhibit 10.09 to the IPO S-1.)
10.37 Credit Agreement dated as of July 11, 1997, between
Registrant and Wells Fargo Bank, National Association.
(Incorporated by reference to Exhibit 10.02 to Registrant's
Form 10-Q, as amended, for the quarter ended June 30, 1997.)
10.38 Office Building Lease dated as of May 30, 1997, between
Retek Information Systems, Inc. and Midwest Real Estate
Holdings, Inc. (Incorporated by reference to Exhibit 10.01
to Registrant's Form 10-Q, as amended, for the quarter ended
June 30, 1997.)
10.39 Lease Agreement dated as of June 17, 1996, between
Registrant and Williams Properties I, LLC & Williams
Properties II, LLC. (Incorporated by reference to Exhibit
10.12 to Registrant's Form 10-K, as amended, for the year
ended December 31, 1996.)
10.40 Office Building Lease dated June 17, 1993, between
Linsco/Private Ledger Corp. and PacCor Partners and
Assignment of the lease to the Registrant. (Incorporated by
reference to Exhibit 10.17 to Registrant's Annual Report on
Form 10-K, as amended, for the year ended December 31,
1997.)
10.41 First Amendment to Lease Agreement between Williams
Properties I, LLC and Williams Properties II, LLC and the
Registrant dated June 17, 1996, amended October 28, 1997.
(Incorporated by reference to Exhibit 10.16 to Registrant's
Form S- 4 Registration Statement, as amended, File No.
333-64527.)
10.42 Second Amendment to Lease between the Registrant and W9/PC
Real Estate Limited Partnership dated as of April 13, 1998.
(Incorporated by reference to Exhibit 10.17 to Registrant's
Form S-4 Registration Statement, as amended, File No.
333-64527.)
10.43 Industrial Lease dated as of October 2, 1998, between the
Registrant and The Irvine Company. (Incorporated by
reference to Exhibit 99.01 to Registrant's Registration
Statement on Form S-8, File No. 333-71923, filed February 5,
1999.)
10.44 Supplement and Amendment No. 1 dated as of November 30,
1998, between Retek Information Systems, Inc. and Midwest
Real Estate Holdings LLC. (Incorporated by reference to
Exhibit 99.02 to Registrant's Form S-8 Registration
Statement, File No. 333-71923, filed February 5, 1999.)
10.45 Supplement and Amendment No. 2 dated as of December 18,
1998, between Retek Information Systems, Inc. and Midwest
Real Estate Holdings LLC. (Incorporated by reference to
Exhibit 99.03 to Registrant's Form S-8 Registration
Statement, File No. 333-71923, filed February 5, 1999.)
10.46 Multi-Tenant Industrial Lease between LBA VF-1, LLC and
eHNC. (Incorporated by reference to Exhibit 10.01 to
Registrant's Form 10-Q for the quarter ended March 31,
2000.)
21.01* List of Registrant's subsidiaries.
F-45
76
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23.01* Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
- ----------
* Filed herewith.
** Confidential treatment has been granted for portions of this exhibit. These
portions have been omitted from this exhibit and have been filed separately
with the Commission.
(1) Management contract or compensatory plan or arrangement.
F-46