EXHIBIT 99.01
HNC'S BUSINESS AS OF DECEMBER 31, 2000
This exhibit contains forward-looking statements 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.
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, including, but not limited to, the risks
discussed under the heading "Risk Factors."
You should carefully consider these 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
We provide customer insight through Efficiency, Risk, Opportunity and
Intelligent Response software suites that enable 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 incorporates Efficiency, Risk, Opportunity
and Intelligent Response 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.
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:
- EFFICIENCY SUITE. The HNC Efficiency Suite 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.
- RISK SUITE. The HNC Risk Suite enables 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.
- OPPORTUNITY SUITE. The HNC Opportunity Suite 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.
2
- INTELLIGENT RESPONSE SUITE -- The HNC Intelligent Response Suite 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.
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 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.
STRATEGY
- - 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 Risk 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 Efficiency solutions within and across
these industries. For example, in 2000 we extended our Efficiency 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 Efficiency management.
- - 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
3
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 Efficiency
solutions. Also, the Efficiency 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 Risk solutions in the financial services sector through our acquisition
of CardAlert and our Opportunity solutions through our acquisition of CASA,
by growing our presence in the marketing optimization arena. We strengthened
our Efficiency 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
4
insurance sector through our acquisition of Celerity Technologies, which
allows us to facilitate claims processing over the Internet.
MARKETS AND PRODUCTS
Our Customer Insight product family includes Efficiency, Risk, Opportunity
and Intelligent Response software suites that enable companies in the financial,
insurance, telecommunications and e-commerce industries to acquire, 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.
EFFICIENCY
The HNC Efficiency Suite includes the following products:
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
CAPSTONE CAPSTONE DECISION MANAGER is an intelligent new account decisioning system that can be
DECISION MANAGER 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.
- ------------------------------------------------------------------------------------------------------------------
CAPSTONE DECISION CAPSTONE DECISION MANAGER FOR INSURANCE CLAIMS is an intelligent decisioning system that
MANAGER FOR interfaces with large enterprise systems to automate complex insurance claims transactions.
INSURANCE CLAIMS
- ------------------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
CAPSTONE DECISION CAPSTONE DECISION MANAGER FOR MEDICAL BILLS is an intelligent decisioning system that can be
MANAGER FOR MEDICAL the hub of a medical bill processing platform for insurance payors. By automating the
BILLS 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.
- ------------------------------------------------------------------------------------------------------------------
APPLICATION DECISION APPLICATION DECISION MANAGEMENT automates the new account process and enables
MANAGEMENT telecommunications carriers to process more applications per month, reduce headcount and
(4SCORE) assign customers the most appropriate service.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
HOME & AWAY PREPAID BILLING & USAGE MONITORING (HOME & AWAY PREPAID BILLING) provides wireless carriers
PREPAID BILLING with a solution to offer prepaid wireless telecommunications service or to perform usage
monitoring.
- ------------------------------------------------------------------------------------------------------------------
6
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
7
RISK
The HNC Risk Suite includes the following products:
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
VERICOMP VERICOMP CLAIMANT is an insurance-claimant fraud detection system that utilizes our advanced
CLAIMANT 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.
- ------------------------------------------------------------------------------------------------------------------
VERICOMP VERICOMP EMPLOYER is a predictive software solution created specifically to detect workers'
EMPLOYER compensation premium fraud and abuse. This powerful tool enables auditors and other review
staff to identify suspicious policies and prioritize premium audit efforts.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
FALCON DEBIT FALCON DEBIT is a financial services software product that examines transaction, cardholder,
and merchant data to detect debit card fraud.
- ------------------------------------------------------------------------------------------------------------------
8
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
EAGLE EAGLE is a merchant risk management system designed to protect merchants from emerging fraud
trends, manage risk and profitability, and increase operational efficiency.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
9
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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's workers' compensation database. The product is marketed by NCCI (the National Council
on Compensation Insurance, Inc.) through a joint marketing agreement with HNC.
- ------------------------------------------------------------------------------------------------------------------
PROVIDER-COMPARE PROVIDER-COMPARE 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 through a joint marketing
agreement with HNC.
- ------------------------------------------------------------------------------------------------------------------
OPPORTUNITY
The HNC Opportunity Suite includes the following products:
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROFITMAX PROFITMAX PROFITABILITY provides transaction-based, real time authorization and action
PROFITABILITY 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.
- ------------------------------------------------------------------------------------------------------------------
10
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROFITMAX MARGIN PROFITMAX MARGIN MANAGER predicts margin risk for equity, investment-grade debt and mutual
MANAGER 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.
- ------------------------------------------------------------------------------------------------------------------
PROFITMAX CHURN CHURN RISK MANAGEMENT (PROFITMAX) helps telecommunications carriers increase revenues by
RISK MANAGEMENT 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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
MARKETING MARKETING OPTIMIZATION is an intelligent cross-sell optimization solution that selects the
OPTIMIZATION most profitable promotion offer that a financial institution might present to a customer.
- ------------------------------------------------------------------------------------------------------------------
INTELLIGENT RESPONSE
HNC's Intelligent Response products include:
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
11
- ------------------------------------------------------------------------------------------------------------------
PRODUCT PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
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.
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
12
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.
In the telecommunications market we provide a suite of fraud detection
solutions and Efficiency 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.
13
- - 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.
- - 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
14
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
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.
15
- - 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
16
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.
- - 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.
17
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 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
18
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 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
19
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
20
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
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;
21
- 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.
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
22
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.
23
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.
24
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;
- 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:
25
- 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 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'
26
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
27
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.
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.
28
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.
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
29
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
30
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;
- 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;
31
- 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 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.
32