EXHIBIT 99.03
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HNC Software Inc.
In our opinion, the accompanying consolidated balance sheet of HNC
Software Inc. and the related consolidated statements of operations, of cash
flows and of changes in stockholders' equity and comprehensive income present
fairly, in all material respects, the financial position of HNC Software Inc.
and its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 24, 2001, except as
to Note 15, to which the date is
March 6, 2001, and Note 12, to
which the date is
February 13, 2002
1
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------------
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents ................................................ $ 69,271 $ 136,340
Marketable securities available for sale-debt ............................ 44,779 22,368
Marketable securities available for sale-equity .......................... 250 6,810
Trade accounts receivable, net ........................................... 43,856 64,189
Deferred income taxes .................................................... 15,045 20,384
Other current assets ..................................................... 8,402 11,144
--------- ---------
Total current assets ............................................. 181,603 261,235
Marketable securities available for sale-debt .............................. 48,453 68,563
Equity investments ......................................................... 14,719 14,219
Property and equipment, net ................................................ 20,826 22,219
Goodwill, net .............................................................. 96,810 17,280
Intangible assets, net ..................................................... 47,522 11,788
Deferred income taxes ...................................................... 33,844 18,085
Other assets ............................................................... 3,964 3,032
--------- ---------
$ 447,741 $ 416,421
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................. $ 38,675 $ 30,049
Deferred revenue ......................................................... 9,876 15,274
--------- ---------
Total current liabilities ........................................ 48,551 45,323
Non-current liabilities .................................................... 259 4,111
Convertible Subordinated Notes ............................................. 16,357 100,000
--------- ---------
Total liabilities ................................................ 65,167 149,434
--------- ---------
Commitments and contingencies (Notes 8 and 14)
Minority interest in consolidated subsidiaries ............................. -- 17,414
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value -- 4,000 shares authorized:
no shares issued or outstanding ....................................... -- --
Common stock, $0.001 par value -- 120,000 shares authorized:
32,286 and 25,704 shares issued and outstanding, respectively ......... 32 26
Common stock in treasury, at cost -- 49 and 882 shares, respectively .... (3,251) (19,613)
Paid-in capital .......................................................... 499,705 275,955
Retained earnings (accumulated deficit) .................................. (104,209) 12,209
Notes receivable from stockholders ....................................... (9,049) --
Unearned stock-based compensation ........................................ (577) (20,511)
Accumulated other comprehensive income (loss) ............................ (77) 1,507
--------- ---------
Total stockholders' equity ....................................... 382,574 249,573
--------- ---------
$ 447,741 $ 416,421
========= =========
See accompanying notes to consolidated financial statements.
2
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
--------- --------- ---------
Revenues:
License and maintenance ................................................. $ 166,063 $ 155,948 $ 139,294
Services and other ...................................................... 88,821 60,941 39,314
--------- --------- ---------
Total revenues .................................................. 254,884 216,889 178,608
--------- --------- ---------
Operating expenses:
License and maintenance (including stock-based
compensation and Retek spin-off expense
totaling $8,744 and $280 in 2000 and 1999, respectively) ............. 60,469 41,552 33,473
Services and other (including stock-based compensation
and Retek spin-off expense totaling $9,151 and $354 in 2000
and 1999, respectively) ............................................... 72,913 41,271 28,656
Research and development (including stock-based compensation
and Retek spin-off expense totaling $9,937 and $1,121 in 2000 and
1999, respectively) ................................................... 75,490 50,176 32,669
Sales and marketing (including stock-based compensation and
Retek spin-off expense totaling $23,509 and $441 in 2000 and
1999, respectively) ................................................... 89,925 46,259 34,515
General and administrative (including stock-based compensation
and Retek spin-off expense totaling $18,514 and $9,789 in 2000
and 1999, respectively) ............................................... 53,321 33,777 18,977
Transaction-related amortization and costs .............................. 43,734 9,158 3,202
In-process research and development ..................................... 7,601 1,480 6,090
Other (Note 1) .......................................................... 1,172 -- --
--------- --------- ---------
Total operating expenses ........................................ 404,625 223,673 157,582
Operating income (loss) ................................................... (149,741) (6,784) 21,026
Interest income ........................................................... 12,924 6,299 6,799
Interest expense .......................................................... (4,231) (5,747) (4,460)
Expense related to debt conversion ........................................ (12,676) -- --
Other expense, net ........................................................ (3,378) (226) (29)
Minority interest in losses (income) of consolidated subsidiaries ......... 7,582 722 (126)
--------- --------- ---------
Income (loss) before income tax provision (benefit) ............. (149,520) (5,736) 23,210
Income tax provision (benefit) ............................................ (33,102) 536 12,758
--------- --------- ---------
Net income (loss) ............................................... $(116,418) $ (6,272) $ 10,452
========= ========= =========
Earnings per share:
Basic net income (loss) per share ....................................... $ (4.08) $ (0.25) $ 0.41
========= ========= =========
Diluted net income (loss) per share ..................................... $ (4.08) $ (0.25) $ 0.39
========= ========= =========
Shares used in computing basic net income (loss) per share ................ 28,529 24,969 25,362
========= ========= =========
Shares used in computing diluted net income (loss) per share .............. 28,529 24,969 26,650
========= ========= =========
See accompanying notes to consolidated financial statements.
3
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $(116,418) $ (6,272) $ 10,452
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Provision for doubtful accounts ................................. 6,505 5,112 3,172
Depreciation and amortization ................................... 53,045 17,583 10,827
Acquired in-process research and development .................... 7,601 1,480 6,090
Loss (gain) on asset impairments and dispositions ............... 1,172 222 (56)
Write-down of marketable security ............................... 2,750 -- --
Non-cash stock-based compensation expense ....................... 15,896 11,985 2,387
Deferred income tax (benefit) expense ........................... (35,384) (4,625) 4,039
Minority interest in (losses) income of consolidated subsidiaries (7,582) (722) 126
Changes in assets and liabilities:
Trade accounts receivable ..................................... (40,458) (35,606) (26,111)
Deferred income taxes ......................................... (291) 4,645 6,864
Other assets .................................................. (8,753) (4,635) (2,312)
Accounts payable and accrued liabilities ...................... 15,954 9,750 4,361
Deferred revenue .............................................. 39,562 5,670 1,024
--------- --------- ---------
Net cash provided by (used in) operating activities ........ (66,401) 4,587 20,863
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of marketable securities .................... (18,332) 7,856 (74,120)
Cash paid for equity investments .................................. (4,750) (17,225) --
Issuance of employee loans ........................................ (1,500) (200) --
Acquisitions of property and equipment ............................ (25,366) (16,093) (8,086)
Cash paid in business acquisitions, net of cash acquired .......... (22,773) (5,098) (8,883)
--------- --------- ---------
Net cash used in investing activities ...................... (72,721) (30,760) (91,089)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of HNC common stock ................... 88,298 50,107 10,536
Net proceeds from issuances of Retek common stock ................. 5,635 84,897 --
Repurchase of HNC common stock for treasury ....................... (18,616) (50,383) --
Spin-off of Retek subsidiary ...................................... (30,463) -- --
Proceeds from sales of receivables ................................ 32,585 23,711 --
Proceeds from repayments of stockholder notes ..................... 3,047 --
Net proceeds from issuance of Convertible Subordinated Notes ...... -- -- 96,913
Repayments of notes payable to stockholders ....................... -- -- (770)
Repayment of debt and capital lease obligations ................... (7,367) (78) (160)
--------- --------- ---------
Net cash provided by financing activities .................. 73,119 108,254 106,519
--------- --------- ---------
Effect of exchange rate changes on cash ............................. (1,066) (8) (94)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................ (67,069) 82,073 36,199
Cash and cash equivalents at beginning of the period ................ 136,340 54,267 18,068
--------- --------- ---------
Cash and cash equivalents at end of the period ...................... $ 69,271 $ 136,340 $ 54,267
========= ========= =========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
COMMON STOCK TREASURY STOCK EARNINGS
------------------------ ------------------------ PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
--------- --------- --------- --------- --------- ------------
BALANCE AT DECEMBER 31, 1997 ..... 24,538 $ 25 -- $ -- $ 95,919 $ 8,029
Common stock options exercised ... 748 1 8,602
Common stock issued under Employee
Stock Purchase Plan ............ 68 1,933
Tax benefit from stock option
transactions ................... 7,569
Compensation related to vested
options in Aptex buy-back ...... 3,346
Unearned stock-based compensation
expense ........................
Common stock issued for
acquisition of PCS ............. 143 5,088
Common stock issued for
acquisition of FTI ............. 397 14,725
Unrealized gain on marketable
securities, net of tax .........
Foreign currency translation
adjustment, net of tax .........
Net income ....................... 10,452
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1998 ..... 25,894 $ 26 -- $ -- $ 137,182 18,481
--------- --------- --------- --------- --------- ---------
Purchase of HNC stock for treasury (2,266) (2) 2,266 (50,381)
Common stock options exercised ... 1,916 2 (1,384) 30,768 16,418
Common stock issued under Employee
Stock Purchase Plan ............ 115 2,808
Tax benefit from stock option
transactions ................... 16,993
Unearned stock-based compensation
expense ........................ 21,462
Non-cash stock-based compensation
expense ........................ 10,077
Effect of Retek's initial public
offering ....................... 69,539
Common stock issued for PCS
earn-out ....................... 45 1,476
Unrealized gain on marketable
securities, net of tax .........
Foreign currency translation
adjustment, net of tax .........
Net loss ......................... (6,272)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1999 ..... 25,704 $ 26 882 $ (19,613) $ 275,955 $ 12,209
--------- --------- --------- --------- --------- ---------
Common stock options exercised ... 3,324 3 (1,026) 32,637 64,340
Purchase of HNC common stock for
treasury ....................... (250) -- 250 (18,616)
Release of FTI escrow shares into
treasury ....................... (49) 49 (1,808)
Common stock issued under Employee
Stock Purchase Plan ............ 106 (106) 4,149 (974)
Effect of common stock issued
under Retek Employee Stock
Purchase Plan .................. 3,635
Tax benefit from stock option
transactions ................... 36,392
Stock-based compensation expense . 9,217
Retek initial public offering
costs .......................... (243)
Spin-off of Retek subsidiary ..... (121,571)
Common stock issued in business
Acquisitions ................... 1,529 1 133,200
Effect of Retek common stock
issued in business acquisition . 5,432
Effect of Retek common stock
issued in business alliance .... 8,010
Common stock issued upon
conversion of Subordinated
Notes .......................... 1,872 2 82,319
Common stock issued for
PCS earn-out ................... 50 3,993
Interest accrued on stockholder
notes ..........................
Repayment of stockholder
notes ..........................
Unrealized loss on marketable
securities, net of tax .........
Foreign currency translation
adjustment, net of tax .........
Net loss ......................... (116,418)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2000 ..... 32,286 $ 32 49 $ (3,251) $ 499,705 $(104,209)
========= ========= ========= ========= ========= =========
STOCKHOLDER UNEARNED OTHER TOTAL
NOTES STOCK-BASED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
RECEIVABLE COMPENSATION INCOME (LOSS) EQUITY INCOME (LOSS)
----------- ------------ ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 ..... $ -- $ -- $ (113) $ 103,860 $ 17,457
Common stock options exercised ... 8,603
Common stock issued under Employee
Stock Purchase Plan ............ 1,933
Tax benefit from stock option
transactions ................... 7,569
Compensation related to vested
options in Aptex buy-back ...... 3,346
Unearned stock-based compensation
expense ........................ (2,508) (2,508)
Common stock issued for
acquisition of PCS ............. 5,088
Common stock issued for
acquisition of FTI ............. 14,725
Unrealized gain on marketable
securities, net of tax ......... 47 47 47
Foreign currency translation
adjustment, net of tax ......... (94) (94) (94)
Net income ....................... 10,452 10,452
--------- --------- --------- ---------- =========
BALANCE AT DECEMBER 31, 1998 ..... $ -- $ (2,508) $ (160) $ 153,021 $ 10,405
--------- --------- --------- ---------- =========
Purchase of HNC stock for treasury (50,383)
Common stock options exercised ... 47,188
Common stock issued under Employee
Stock Purchase Plan ............ 2,808
Tax benefit from stock option
transactions ................... 16,993
Unearned stock-based compensation
expense ........................ (19,911) 1,551
Non-cash stock-based compensation
expense ........................ 1,908 11,985
Effect of Retek's initial public
offering ....................... 69,539
Common stock issued for PCS
earn-out ....................... 1,476
Unrealized gain on marketable
securities, net of tax ......... 2,084 2,084 2,084
Foreign currency translation
adjustment, net of tax ......... (417) (417) (417)
Net loss ......................... (6,272) (6,272)
--------- --------- --------- ---------- =========
BALANCE AT DECEMBER 31, 1999 ..... $ -- $ (20,511) $ 1,507 $ 249,573 $ (4,605)
--------- --------- --------- ---------- =========
Common stock options exercised ... (11,857) 85,123
Purchase of HNC common stock for
treasury ....................... (18,616)
Release of FTI escrow shares into
treasury ....................... (1,808)
Common stock issued under Employee
Stock Purchase Plan ............ 3,175
Effect of common stock issued
under Retek Employee Stock
Purchase Plan .................. 3,635
Tax benefit from stock option
transactions ................... 36,392
Stock-based compensation expense . 6,679 15,896
Retek initial public offering
costs .......................... (243)
Spin-off of Retek subsidiary ..... 13,255 1,594 (106,722)
Common stock issued in business
Acquisitions ................... 133,201
Effect of Retek common stock
issued in business acquisition . 5,432
Effect of Retek common stock
issued in business alliance .... 8,010
Common stock issued upon
conversion of Subordinated
Notes .......................... 82,321
Common stock issued for
PCS earn-out ................... 3,993
Interest accrued on stockholder
notes .......................... (239) (239)
Repayment of stockholder
notes .......................... 3,047 3,047
Unrealized loss on marketable
securities, net of tax ......... (2,112) (2,112) (2,112)
Foreign currency translation
adjustment, net of tax ......... (1,066) (1,066) (1,066)
Net loss ......................... (116,418) (116,418)
--------- --------- --------- ---------- =========
BALANCE AT DECEMBER 31, 2000 ..... $ (9,049) $ (577) $ (77) $ 382,574 $(119,596)
========= ========= ========= ========== =========
5
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- HNC SOFTWARE INC. AND OUR SIGNIFICANT ACCOUNTING POLICIES
HNC Software Inc.
We develop, market, and support innovative predictive software solutions
for leading service industries. These intelligent decision management solutions
employ proprietary neural-network predictive decision engines, profiles,
traditional statistical modeling, business models, expert rules and/or context
vector technology to convert existing data and business experiences into
meaningful recommendations and actions. We currently serve the financial
services, insurance, telecommunications and e-business markets.
Principles of Consolidation and Basis of Presentation
Our consolidated financial statements include our assets, liabilities,
and results of operations, as well as those of our wholly-owned subsidiaries and
Retek Inc. ("Retek"), which was a majority-owned subsidiary prior to its
spin-off in September 2000. The ownership of other interest holders in Retek was
reflected as minority interest. All significant inter-company balances and
transactions have been eliminated.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Revenue Recognition
Software revenue is recognized upon meeting all of the following
criteria: execution of a written license agreement, contract or purchase order;
delivery of software and/or authorization keys; the license fee is fixed and
determinable; and collectibility of the proceeds is assessed as being probable.
For multiple-element agreements, total fees are allocated to each element based
on vendor-specific objective evidence of fair value or using the residual method
when applicable. Allocated fees are recognized separately for each element when
it is delivered, providing other criteria referenced above are met.
Vendor-specific objective evidence is generally based on the price charged when
an element is sold separately, or if not yet sold separately, is established by
authorized management. For perpetual license and maintenance arrangements,
vendor-specific objective evidence for maintenance services is determined based
on contractual renewal rates for those services. For term license and
maintenance arrangements, vendor-specific objective evidence for maintenance
services is also determined based on contractual renewal rates for
6
those services, and license and maintenance fees are unbundled only if the
maintenance term and renewal rates are considered to be substantive.
Revenue from perpetual and short-term periodic licenses of our software
is generally recognized upon delivery. Transactional-based license fees under
software license arrangements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license fees.
Software maintenance fees are recognized as revenue ratably over the
maintenance periods.
Revenue from software installation and implementation and from contract
services is generally recognized as the services are performed using the
percentage of completion method based on costs incurred to date compared to
total estimated costs at completion. Contract losses are recorded as a charge to
operations in the period any losses are first identified. Unbilled accounts
receivable are stated at estimated realizable value.
Transactional-based fees under network service or internally hosted
software arrangements are recognized as revenue based on system usage or when
fees based on system usage exceed monthly minimum license fees. Installation or
setup fees associated with network service and internally hosted software
agreements are recognized ratably over the longer of the customer contract
period or estimated life of the customer relationship.
Amounts received under contracts in advance of performance are recorded
as deferred revenue and are generally recognized within one year from receipt.
Statement of Operations Data
Within our statement of operations, components of operating expenditures
in 2000 and 1999 include stock-based compensation expense and non-recurring
expenses related to our spin-off of Retek that have been classified as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
------- -------
STOCK-BASED COMPENSATION EXPENSE:
License and maintenance ................... $ 2,658 $ 280
Services and other ........................ 2,548 354
Research and development .................. 4,167 1,121
Sales and marketing ....................... 10,629 441
General and administrative ................ 1,668 9,789
------- -------
$21,670 $11,985
======= =======
EXPENSE RELATED TO SPIN-OFF OF RETEK:
License and maintenance ................... $ 6,086
Services and other ........................ 6,603
Research and development .................. 5,770
Sales and marketing ....................... 12,880
General and administrative ................ 16,846
-------
$48,185
=======
7
Cash and Cash Equivalents
Cash and cash equivalents include amounts on deposit with financial
institutions and investments in money market accounts and commercial paper
purchased with maturities of three months or less from the date of purchase. The
carrying amounts of cash and cash equivalents approximate fair value because of
the short-term maturities of these financial instruments.
Marketable Securities
Management determines the appropriate classification of our investments
in marketable debt and equity securities at the time of purchase, and
re-evaluates this designation at each balance sheet date. We have classified all
of our marketable securities as "available for sale" and carry them at fair
value with unrealized gains or losses related to these securities included in
other comprehensive income (loss). Realized gains and losses on the sale of
investments available for sale are determined using the specific identification
method. Losses resulting from other than temporary declines in fair value are
charged to operations.
Equity Investments
Our investments in equity securities of companies over which we do not
have significant influence, are accounted for under the cost method. We use the
equity method to account for our investments in entities over which we have a
voting interest of 20% to 50%, or over which we otherwise have the ability to
exercise significant influence. Under the equity method, the investment is
originally recorded at cost and adjusted to recognize our share of net earnings
or losses of the investee, limited to the extent of our investment in, advances
to, and financial guarantees for the investee. At December 31, 2000, all of our
equity investments in other entities were accounted for under the cost method.
Sales of Receivables
From time to time, we enter into agreements to sell an undivided
interest in specifically identified trade accounts receivable. We sell these
trade accounts receivable to a financial institution for a fee, based
principally upon defined short-term market rates. Once sold, these receivables
are not included in our trade accounts receivable balance on our consolidated
balance sheet. During 2000 and 1999, we sold $32,585 and $23,711 of receivables,
respectively. We did not sell any receivables during 1998. Fees that we paid
related to receivables sold totaled $430 and $364 during 2000 and 1999,
respectively, and are included in interest expense in our consolidated statement
of operations.
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Major renewals and improvements are capitalized,
while repair and maintenance costs are expensed as incurred. Depreciation and
amortization charges are calculated using the straight-line method over the
estimated useful lives of the assets ranging from three to seven years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the
8
remaining term of the related lease. Depreciation and amortization expense
related to property and equipment totaled $11,753, $8,215, and $6,102 during
2000, 1999, and 1998, respectively. The cost and accumulated depreciation for
property and equipment sold, retired or otherwise disposed of are relieved from
the accounts, and resulting gains or losses are recorded in operations.
Intangible Assets
Intangible assets include goodwill, acquired software development costs,
customer base, assembled work force, covenants not to compete, and trademarks.
These assets resulted from our acquisitions accounted for under the purchase
method of accounting (see Note 3). Amortization expense related to intangible
assets totaled $42,372, $8,560, and $3,203 during 2000, 1999, and 1998,
respectively. We amortize these assets using the straight-line method over their
estimated useful lives as follows:
ESTIMATED
USEFUL LIFE
------------
Goodwill................................................ 3 to 5 years
Software development costs.............................. 3 to 5 years
Customer base........................................... 3 to 5 years
Assembled work force.................................... 3 to 5 years
Covenants not to compete................................ 2 to 3 years
Trademarks.............................................. 5 years
We continually review the events and circumstances related to the financial
performance and economic environment of the Company for factors that would
provide evidence of the impairment of enterprise-level goodwill. If such factors
exist, suggesting impairment, we use the market value method to determine the
extent of the impairment.
Software Development Costs
Development costs of software to be licensed or sold that are incurred
from the time technological feasibility is established until the product is
available for general release to customers are capitalized and reported at the
lower of cost or net realizable value. Through December 31, 2000, no significant
development costs were incurred after technological feasibility was reached.
Internal-Use Software
Costs incurred to develop internal-use software during the application
development stage are also capitalized and reported at the lower of cost or net
realizable value. Application development stage costs generally include costs
associated with internal-use software configuration, coding, installation and
testing. Costs of significant upgrades and enhancements that result in
additional functionality are also capitalized whereas costs incurred for
maintenance and minor upgrades and enhancements are expensed as incurred.
9
Long-lived Assets
We assess potential impairments to our long-lived and intangible assets
when there is evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. An impairment loss is
recognized when the undiscounted cash flows expected to be generated by an asset
(or group of assets) is less than its carrying amount. Any required impairment
loss would be measured as the amount by which the asset's carrying value exceeds
its fair value, and would be recorded as a reduction in the carrying value of
the related asset and a charge to operations.
During 2000, we recorded an impairment charge of $1,172 related to the
abandonment of a lease and associated property and equipment. The impairment
charge consisted of the write-off of the remaining net book value of abandoned
property and equipment that was deemed to have insignificant remaining value at
the time of disposal, as well as charges associated with future facility lease
cash obligations, net of estimated sublease income as determined through
consultation with an independent lease broker. Estimated lease brokerage fees
were also included in this charge. No impairment charges were recorded in 1999
or 1998.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year, prior to the recognition of benefits from stock
option deductions. A deferred income tax asset or liability is computed for the
expected future impact of differences between the financial reporting and tax
bases of assets and liabilities as well as the expected future tax benefit to be
derived from tax loss and tax credit carry-forwards. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount "more
likely than not" to be realized in future tax returns. Tax rate changes and tax
credit reinstatements are reflected in income during the period the changes are
enacted.
Stock-Based Compensation
We measure compensation expense for our employee stock-based
compensation awards using the intrinsic value method, and provide pro forma
disclosures of net income (loss) and net income (loss) per common share as if a
fair value method had been applied. Therefore, compensation cost for employee
stock awards is measured as the excess, if any, of the fair value of our common
stock at the grant date over the amount an employee must pay to acquire the
stock. Compensation expense is amortized over the related service periods using
the accelerated methodology prescribed by Financial Accounting Standards Board
Interpretation No. 28. Compensation expense for awards that are forfeited is
reversed against compensation expense in the period of forfeiture.
Stock-based awards issued to non-employees are accounted for using a
fair value method and are marked to fair value at each period end until the
earlier of the date at which a performance commitment has been obtained or the
awards are fully vested. Fair value of stock-based awards is determined using
the Black-Scholes option pricing model with weighted average assumptions for
dividend yield, risk-free interest rate, expected volatility, and contractual
life.
10
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed as net income
(loss) divided by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per common share is computed as net
income (loss) divided by the weighted average number of common shares and
dilutive potential common shares outstanding during the period, using the
treasury stock method. The computation for basic and diluted net income (loss)
per share is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
NET INCOME (LOSS) USED:
Net income (loss) used in computing basic and diluted net
income (loss) per common share ..................................... $(116,418) $ (6,272) $ 10,452
========= ========= =========
SHARES USED:
Weighted average common shares outstanding used in computing
basic net income per common share ................................. 28,529 24,969 25,362
Weighted average options to purchase common stock as
determined by application of the treasury stock method .............. -- -- 1,227
Additional common shares issued for PCS acquisition earn-out ........ -- -- 23
Employee Stock Purchase Plan common stock equivalents ............... -- -- 38
--------- --------- ---------
Shares used in computing diluted net income per common share ........ 28,529 24,969 26,650
========= ========= =========
The conversion of our 4.75% Convertible Subordinated Notes (see Note 9)
outstanding during 2000, 1999 and 1998, into 3,512, 2,230 and 1,834 common
shares, respectively, were not included in the computation of diluted net income
(loss) per common share, as their effect in such periods would be anti-dilutive.
For 2000 and 1999, weighted average options to purchase 2,064 and 6,491
shares of common stock, respectively, and Employee Stock Purchase Plan common
stock equivalents of 196 and 56 shares of common stock, respectively, were not
included in the computation of diluted net loss per common share as their effect
in these periods would be anti-dilutive.
Foreign Currency Translation
The financial statements of our international operations have been
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation gains and losses are excluded from results of
operations and recorded as a separate component of other comprehensive income
(loss). Gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than our entity's local currency)
are recorded in operations.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in our equity (net assets)
during each period from transactions and other events and circumstances from
non-owner sources. It includes net income
11
(loss), foreign currency translation adjustments and unrealized gains and
losses, net of tax, on our investments in marketable securities.
Concentration of Risk
Our financial instruments that potentially expose us to concentrations
of risk consist primarily of cash and cash equivalents, marketable securities
and accounts receivable, which are generally not collateralized. Our policy is
to place our cash, cash equivalents, and marketable securities with high credit
quality financial institutions, commercial companies and government agencies in
order to limit the amount of credit exposure. We enter into software license and
installation agreements and commercial development contracts primarily with
large customers in the services industries (financial, insurance and
telecommunications). We do not require collateral from our customers, but our
credit extension and collection policies include analyzing the financial
condition of potential customers, establishing credit limits, monitoring
payments, and aggressively pursuing delinquent accounts. We maintain allowances
for potential credit losses.
Segment Reporting
Our operating segments are presented consistently with the way that our
management organizes and evaluates financial information for making internal
operating decisions and assessing performance. Certain prior year segment
information has been reclassified to conform to the current year presentation.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising
and promotion costs totaled $8,006, $3,651 and $1,791 in 2000, 1999 and 1998,
respectively, and are included in sales and marketing expense in our
consolidated statement of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" which deferred the adoption
requirement until the first quarter of 2001. We adopted this new accounting
standard effective January 1, 2001. The adoption of FAS 133 in the first quarter
of 2001 is not expected to have a significant impact on our consolidated
financial position, results of operations or disclosures.
In September 2000, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 140"),
which replaces Statement of Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
12
Liabilities." FAS 140 revises the standards for accounting and disclosures for
securitizations and other transfers of financial assets and collateral. The
primary provisions of this statement are effective for us in the second quarter
of 2001. We have not yet determined the impact, if any, that this statement will
have on our consolidated financial position or results of operations.
NOTE 2 -- INITIAL PUBLIC OFFERING AND SPIN-OFF OF RETEK INC.
On September 10, 1999, Retek filed a registration statement with the
Securities and Exchange Commission relating to an initial public offering of
Retek's common stock. The offering was consummated in November 1999. In the
offering, Retek sold 6,325 shares of its common stock. Prior to the offering, we
transferred to Retek all of the shares of our wholly owned subsidiary, Retek
Information Systems, Inc.
On August 7, 2000, HNC's board of directors declared a dividend of all
of the shares of Retek common stock held by HNC, or 40,000 shares, to complete
the spin-off of our Retek subsidiary. We received a private letter ruling from
the Internal Revenue Service that HNC's dividend of its shares of Retek common
stock would be tax-free to HNC and our stockholders for U.S. federal income tax
purposes. This dividend was paid on September 29, 2000 to all HNC stockholders
of record as of September 15, 2000 using a distribution ratio of approximately
1.243 shares of Retek common stock for each share of HNC common stock held. Cash
was paid in lieu of fractional shares. The shares of Retek common stock that we
distributed in the Retek spin-off constituted all the Retek shares owned by HNC
and represented approximately 83.9% of Retek's outstanding shares as of the
September 29, 2000 distribution date. As a result of our distribution of our
Retek common shares, Retek is no longer affiliated with HNC. In connection with
this spin-off, we eliminated net assets totaling $121,213 from our consolidated
balance sheet, including cash and cash equivalents of $30,463. Additionally, we
eliminated the minority interest associated with Retek of $14,491 and net equity
totaling $106,722.
In connection with the spin-off of our Retek subsidiary, we accelerated
the vesting of 25 percent of the outstanding HNC stock options that would have
been unvested as of the September 15, 2000 record date in order to afford our
option holders the opportunity to participate in receipt of the dividend.
Additionally, we offered option holders the opportunity to exercise a portion of
their vested options prior to the record date through the issuance of secured,
full recourse promissory notes payable to HNC (the "Stockholder Notes"). The
Stockholder Notes bear interest at the rate of 10.0% per annum, and are
collateralized by the underlying shares of stock. Loans totaling $11,857 were
originally extended to option holders. At December 31, 2000, stockholder notes
receivable totaled $9,049, net of repayments, and have been recorded as a
reduction to stockholders' equity. In connection with the Retek dividend, we
also adjusted the exercise price of all HNC stock options that were outstanding
immediately following payment of the dividend. The adjusted stock option
exercise prices were calculated by multiplying the pre-dividend option exercise
price by the price of HNC common stock immediately after payment of the
dividend, and dividing that product by the price of HNC common stock immediately
before payment of the dividend. The vesting acceleration of HNC stock options
and the adjustment to HNC stock option exercise prices that were greater than
the closing price of HNC common stock on September 29, 2000 resulted in
stock-based compensation charges (see Note 13).
13
Because the adjustment to the exercise price of HNC options described
above was less than the change in value of unvested HNC stock options resulting
from the Retek distribution, we paid cash bonuses to employees and directors who
held unvested stock options as of the record date, and recorded a related charge
to operations in the amount of $40,427. These bonuses were paid out in October
2000 and January 2001.
NOTE 3 -- ACQUISITIONS
In September 2000, we acquired all of the outstanding stock and other
securities of Systems/Link Corporation ("Systems/Link") in exchange for the
issuance of 634 shares of our common stock, including 40 underlying shares
associated with stock options we exchanged, and $5,512 in cash. We placed 142 of
the shares issued and $1,275 of the cash portion of the purchase price into
escrow, to secure indemnification obligations of the former Systems/Link
stockholders. Systems/Link is a software developer that creates data management
solutions for large telecommunications companies, providing applications for
real-time data collection, call detail record exchange, fraud control and
prepaid services to carriers. We applied the purchase method of accounting for
the acquisition of Systems/Link, which resulted in a purchase price of $42,549.
The excess of this amount over the net liabilities assumed was $56,416, of which
$55,686 was allocated to intangible assets, including goodwill, and $730 was
allocated to in-process research and development.
In September 2000, we acquired all of the outstanding stock and other
securities of CardAlert Services, Inc. ("CardAlert") in exchange for the
issuance of 208 shares of our common stock. We placed 42 of the shares issued
into escrow to secure indemnification obligations of the former CardAlert
stockholders. CardAlert provides ATM and debit card risk management services to
domestic financial institutions and debit card networks. We applied the purchase
method of accounting for the acquisition of CardAlert, which resulted in a
purchase price of $12,608. The excess of this amount over the net liabilities
assumed was $12,976, of which $12,555 was allocated to intangible assets,
including goodwill, and $421 was allocated to in-process research and
development.
In May 2000, Retek acquired all of the outstanding stock and other
securities of HighTouch Technologies, Inc. ("HighTouch") in exchange for the
issuance of 389 shares of Retek's common stock and $18,000 in cash. HighTouch is
a provider of customized software and services relating to customer relationship
management. Retek applied the purchase method of accounting for the acquisition
of HighTouch, which resulted in a purchase price of $26,308. The excess of this
amount over the net liabilities assumed was $30,558, of which $26,558 was
allocated to intangible assets, including goodwill, and $4,000 was allocated to
in-process research and development.
In April 2000, we acquired all of the outstanding stock and other
securities of Celerity Technologies, Inc. ("Celerity") in exchange for the
issuance of 220 shares of our common stock and $2,400 in cash. We placed 33 of
the shares issued into escrow to secure indemnification obligations of the
former Celerity shareholders. Celerity develops and markets electronic data
interchange solutions for the workers' compensation industry. We applied the
purchase method of accounting for the acquisition of Celerity, which resulted in
a purchase price of $18,591. The excess of this amount over the net liabilities
assumed was $20,769, of which $19,719 was
14
allocated to intangible assets, including goodwill and $1,050 was allocated to
in-process research and development.
In March 2000, we acquired all of the outstanding stock and other
securities of Onyx Technologies, Inc. ("Onyx") in exchange for the issuance of
382 shares of our common stock, including 30 underlying shares associated with
stock options we exchanged, and $1,500 in cash. We placed 105 of the shares
issued and $450 of the cash portion of the purchase price into escrow to secure
indemnification obligations of the former Onyx shareholders. During September
2000 and March 2001, we released from escrow without claim a total of 70 shares
of our common stock and $300 in cash. The remaining 35 shares and $150 in cash
are scheduled to be released from escrow in September 2001 and March 2002. Onyx
is a provider of online data access and customer acquisition analysis for
telecommunications, financial and retail service companies. We applied the
purchase method of accounting for the acquisition of Onyx, which resulted in a
purchase price of $49,555, of which $3,500 represented our initial 1999
investment in Onyx. The excess of this amount over the net liabilities assumed
of $51,163 was allocated to intangible assets, including goodwill.
In March 2000, we acquired all of the outstanding stock and other
securities of the Center for Adaptive Systems Applications, Inc. ("CASA") in
exchange for the issuance of 226 shares of our common stock, including 80
underlying shares associated with stock options we exchanged. CASA is an
advanced analytics solutions company that develops and markets account
optimization and precision marketing solutions. We placed 38 of the shares
issued into escrow to secure indemnification obligations of the former CASA
stockholders. We applied the purchase method of accounting for the acquisition
of CASA, which resulted in a purchase price of $23,756. The excess of this
amount over the net liabilities assumed was $27,260, of which $25,860 was
allocated to intangible assets, including goodwill, and $1,400 was allocated to
in-process research and development.
In March 2000, we acquired all of the outstanding stock and other
securities of Adaptive Systems Applications, Inc. ("AIM") in exchange for 9
shares of our common stock, including 0.4 underlying shares associated with
stock options we exchanged. AIM provides marketing process automation, campaign
execution software, and client-to-vendor data management to direct marketers of
enhancement services. We applied the purchase method of accounting for the
acquisition of AIM, which resulted in a purchase price of $1,656, of which $750
represents our initial 1999 investment in AIM. The excess of this amount over
the net liabilities assumed of $1,785 was allocated to intangible assets,
including goodwill.
In October 1999, Retek acquired WebTrak Limited ("WebTrak") for a cash
payment of $5,333 and the issuance of a $2,667 convertible note, which was
subsequently converted into shares of Retek common stock. WebTrak is a United
Kingdom company that develops, markets and sells business-to-business products
that enable users to publish and share a critical path on the Internet, and
allow Web-based collaboration to improve the new product design and development
process. The application of the purchase method of accounting for the
acquisition resulted in an excess of cost over net liabilities assumed of
$8,131, of which $6,651 was allocated to intangible assets, including goodwill,
and $1,480 was allocated to in-process research and development.
15
In March 1998, we acquired Practical Control Systems Technologies, Inc.
("PCS"; renamed Retek Logistics, Inc.) in exchange for 143 shares of our common
stock, 14 shares of which were placed into escrow to secure indemnification
obligations of the former PCS stockholders, plus the contingent right, subject
to the achievement of certain financial objectives during 1998 and 1999, to
receive additional shares of our common stock. During 1999, the escrow shares
were released without claim. Additionally, we issued 45 shares in 1999 and 50
shares in 2000, related to the PCS' achievement of financial objectives during
1998 and 1999, respectively. PCS is a supplier of fully integrated distribution
center management software products that address the distribution needs of the
retail, wholesale and manufacturing industries. The application of the purchase
method of accounting for the acquisition resulted in an excess of cost over net
liabilities assumed of $9,530, of which $7,780 was allocated to intangible
assets, including initial goodwill and additional goodwill recorded as a result
of the contingent shares issued, and $1,750 was allocated to in-process research
and development.
In April 1998, we acquired Financial Technology Inc. ("FTI"; renamed HNC
Financial Solutions, Inc.) in exchange for the issuance of 397 shares of our
common stock, 97 of which were placed in escrow to secure indemnification
obligations of the former FTI stockholders, and a cash payment of $1,500. FTI
develops and markets profitability measurement and decision-support software
products and related support services to banks and other similar financial
institutions. The application of the purchase method of accounting for the
acquisition resulted in an excess of cost over net liabilities assumed of
$19,186, of which $16,186 was allocated to intangible assets, including
goodwill, and $3,000 was allocated to in-process research and development. In
May 2000, we entered into a settlement agreement with the former FTI
stockholders pertaining to the release and distribution of the 97 shares of our
common stock that were placed into escrow to secure potential indemnification
obligations. In accordance with this settlement agreement, one-half of the
escrow shares were released to us and placed into treasury while the remaining
escrow shares were released to the former FTI shareholders, representing a full
and complete release of the former FTI shareholders' contractual indemnification
obligations to us.
In June 1998, we acquired the Advanced Telecommunications Abuse Control
System ("ATACS") product line in exchange for $4,750 in cash. ATACS is a
fraud-management software solution for wire-line, wireless and Internet
telecommunication service providers. The application of the purchase method of
accounting for the acquisition resulted in an excess of cost over net
liabilities assumed of $4,932, of which $3,592 was allocated to intangible
assets, including goodwill, and $1,340 was allocated to in-process research and
development.
During the fourth quarter of 1998, we acquired the outstanding minority
shares of Aptex Software Inc. ("Aptex"). Pursuant to the merger and related
transactions, we acquired the outstanding stock held by Aptex employees for
$5,321 in cash, and exchanged all outstanding Aptex stock options into options
to purchase 380 shares of our common stock. As a result of this merger, we
incurred a one-time charge to operations of $2,459 and recorded unearned
stock-based compensation of $2,508. The application of the purchase method of
accounting to this transaction resulted in an excess of cost over net assets
acquired, of which $3,788 was allocated to intangible assets, including
goodwill.
16
In-process research and development recorded in connection with the
above-mentioned purchase transactions represents the present value of the
estimated after-tax cash flows expected to be generated by purchased
technologies which, as of the acquisition dates, had not yet reached
technological feasibility. The cash flow projections for revenues were based on
estimates of relevant market sizes and growth factors, expected industry trends,
the anticipated nature and timing of new product introductions, product sales
cycles and the estimated life of each product's underlying technology. Estimated
operating expenses and income taxes were deducted from estimated revenue
projections to arrive at estimated after-tax cash flows. Projected operating
expenses include costs of revenues, marketing and selling expenses, general and
administrative expenses, and research and development, including estimated costs
to maintain the products once they have been introduced into the market and are
generating revenue. We made our assessment of whether acquired technologies in
these acquisitions were complete or under development in accordance with the
guidelines prescribed by Statement of Financial Accounting Standards No. 86,
Statement of Financial Accounting Standards No. 2, and Financial Accounting
Standards Board Interpretation No. 4.
The following table summarizes in the aggregate, for all purchase
acquisitions during 2000, 1999 and 1998, the goodwill and identified intangible
assets recorded:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
GOODWILL .................................... $131,499 $ 61 $ 21,770
-------- -------- --------
INTANGIBLE ASSETS:
Acquired software development costs ....... 40,834 4,940 6,604
Customer base ............................. 9,938 180 1,197
Assembled Workforce ....................... 6,633 240 866
Other ..................................... 4,422 1,230 909
-------- -------- --------
61,827 6,590 9,576
-------- -------- --------
TOTAL ....................................... $193,326 $ 6,651 $ 31,346
======== ======== ========
The unaudited pro forma results of operations below present the impact
on our results of operations as if the Systems/Link, CardAlert, HighTouch,
Celerity, Onyx, CASA and AIM acquisitions had occurred on January 1, 1999, and
as if the WebTrak, PCS, FTI and Aptex acquisitions had occurred on January 1,
1998, instead of on their respective acquisition dates:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- ------------------------- ------------------------
PROFORMA PRO FORMA PRO FORMA
HISTORICAL COMBINED HISTORICAL COMBINED HISTORICAL COMBINED
---------- ---------- ---------- --------- ---------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Total revenues .......... $ 254,884 $ 270,192 $ 216,889 $ 239,690 $ 178,608 $ 181,048
Total net income
(loss) ................ (116,418) (121,344) (6,272) (6,868) 10,452 8,577
Basic net income
(loss) per share ..... $ (4.08) $ (4.03) $ (0.25) $ (0.26) $ 0.41 $ 0.34
Diluted net income
(loss) per share ...... $ (4.08) $ (4.03) $ (0.25) $ (0.26) $ 0.39 $ 0.32
17
NOTE 4 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Trade accounts receivable, net:
Billed ...................................................... $ 41,860 $ 56,738
Unbilled .................................................... 5,593 13,890
-------- --------
47,453 70,628
Less allowance for doubtful accounts and sales returns ........ (3,597) (6,439)
-------- --------
$ 43,856 $ 64,189
======== ========
Unbilled accounts receivable represent revenue recorded in excess of
amounts billable pursuant to contract provisions and generally become billable
at contractually specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be realized within one year. During 2000, 1999, and
1998, we reserved $6,505, $5,112, and $3,172, wrote off $3,661, $1,049, and
$3,917 and recovered $104, $0, and $79 of our allowance for doubtful accounts
and sales returns. Additionally, in connection with the spin-off of Retek on
September 29, 2000, we removed Retek's allowance for doubtful accounts and sales
returns of $5,787 from our consolidated balance sheet.
DECEMBER 31,
-------------------------
2000 1999
--------- ---------
Property and equipment, net:
Computer equipment and software .................... $ 34,389 $ 28,320
Furniture and fixtures ............................. 8,312 11,397
Leasehold improvements ............................. 4,897 3,585
--------- ---------
47,598 43,302
Less accumulated depreciation and amortization ....... (26,772) (21,083)
--------- ---------
$ 20,826 $ 22,219
========= =========
Goodwill, net:
Goodwill ........................................... 126,053 22,740
Less accumulated amortization ...................... (29,243) (5,460)
--------- ---------
$ 96,810 $ 17,280
========= =========
Intangible assets, net:
Acquired software development costs ................ 41,538 14,532
Customer base ...................................... 9,935 1,377
Assembled work force ............................... 6,779 1,106
Other .............................................. 4,266 2,234
--------- ---------
62,518 19,249
Less accumulated amortization ...................... (14,996) (7,461)
--------- ---------
$ 47,522 $ 11,788
========= =========
Accounts payable and accrued liabilities:
Accounts payable ..................................... $ 5,712 $ 9,867
Accrued payroll and related benefits ................. 16,539 12,572
Accrued interest payable ............................. 260 1,583
Accrued external costs related to spin-off ........... 6,913 --
Income taxes payable ................................. 2,662 45
Other ................................................ 6,589 5,982
--------- ---------
$ 38,675 $ 30,049
========= =========
The carrying amounts of accrued liabilities approximate fair value
because of the short-term maturities of these financial instruments.
18
NOTE 5 -- MARKETABLE SECURITIES
At December 31, 2000 and 1999, the amortized cost and estimated fair
value of marketable securities available for sale were as follows:
DECEMBER 31, 2000
-----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
U.S. government and
federal agencies ............... $59,841 $ 13 $ -- $59,854
U.S. corporate debt .............. 30,765 111 -- 30,876
U.S. corporate equity ............ 250 -- -- 250
Foreign corporate debt ........... 2,500 2 -- 2,502
------- ------- ------- -------
$93,356 $ 126 -- $93,482
======= ======= ======= =======
DECEMBER 31, 1999
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
U.S. government and
federal agencies ............... $ 62,233 $ -- $ (54) $ 62,179
U.S. corporate debt .............. 22,415 -- (109) 22,306
U.S. corporate equity ............ 3,000 3,810 -- 6,810
Foreign corporate debt ........... 6,484 -- (38) 6,446
-------- -------- -------- --------
$ 94,132 $ 3,810 $ (201) $ 97,741
======== ======== ======== ========
During the fourth quarter of 2000, we assessed the impairment in value
of our $3,000 investment in Network Commerce Inc. (See Note 6) to be other than
temporary and, accordingly, we wrote this investment down to $250 as of December
31, 2000, representing the aggregate fair value of our investment in this entity
based on the closing market price of this publicly traded security on December
31, 2000. As a result of this write-down, we recorded a loss of $2,750 that is
included in other expense, net in our statement of operations. As of December
31, 1999, we had recorded an unrealized gain of $3,810 related to our investment
in this entity. No significant gains or losses were realized on our investments
during 1999 or 1998.
At December 31, 2000 and 1999, all foreign corporate debt investments
were denominated in U.S. dollars.
NOTE 6 -- EQUITY INVESTMENTS
In July 2000, we became a limited partner in Azure Capital Partners
Venture Fund, a venture capital investment management fund, through an initial
investment of $2,250. We have committed to invest an additional $2,750 into this
fund during 2001. Our commitment to this fund will not exceed 2% of total fund
ownership. This investment is being accounted for using the cost method.
In July 2000, we invested $1,000 to purchase an approximate 4% interest
in Burning Glass Technologies, LLC, a privately held developer of statistical
and predictive technologies for use in the employment marketplace. This
investment is being accounted for using the cost method.
19
In March 2000, we invested $1,500 to maintain our approximate 6%
ownership interest in Open Solutions Inc. ("OSI"). In April 1999, we had
previously invested $6,000 to purchase an approximate 6% interest in OSI. OSI is
a developer of client/server core data processing solutions for community banks
and credit unions. This investment is being accounted for using the cost method.
In October 1999, we invested $3,500 to purchase an approximate 13%
interest in Onyx Technologies, Inc. ("Onyx"), a provider of online data access
and customer acquisition analysis for telecommunications, financial and retail
service companies. In March 2000, we acquired Onyx (see Note 3).
In June 1999, we invested $3,000 to purchase an approximate 1% interest
in Network Commerce Inc. ("Network Commerce"; formerly ShopNow.com Inc.), an
e-commerce company that helps customers and merchants buy and sell merchandise
online. In September 1999, Network Commerce became a public company. As a
result, we reclassified our investment in Network Commerce in our consolidated
balance sheet to a short-term available for sale investment classification (see
Note 5).
In July 1999, we invested $2,000 to purchase an approximate 16% interest
in KeyLime Software Inc., a privately held software company specializing in the
development of certain data mining technologies. This investment is accounted
for using the cost method.
In March 1999, we invested $2,000 to purchase an approximate 3% interest
in Qpass Inc., a Web-wide transaction and customer service network enabling
commerce in digital goods and services. This investment is accounted for using
the cost method.
In March 1999, we invested $750 to purchase an approximate 16% interest
in AIM Solutions, Inc. ("AIM"), a company that provides marketing process
automation, campaign execution software, and client-to-vendor data management to
direct marketers of enhancement services. In March 2000, we acquired AIM (see
Note 3).
NOTE 7 -- CREDIT AGREEMENT
We have a Credit Agreement with a bank that provides for a $15,000
revolving line of credit through July 11, 2001. During 2000 and 1999, we had no
amounts outstanding under this revolving line of credit. The agreement contains
covenants that restrict our ability to pay cash dividends and make loans,
advances or investments without the bank's consent. As of December 31, 2000, we
were in compliance with all covenants under this agreement. Borrowings under
this agreement bear interest at LIBOR plus 0.5%, which is payable monthly. The
applicable interest rate was 7.06% at December 31, 2000.
20
NOTE 8 -- OPERATING LEASES
At December 31, 2000, we are obligated through 2007 under non-cancelable
operating leases for our facilities and equipment as follows:
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
2001 .................... $ 7,546 $ (283) $ 7,263
2002 .................... 7,052 -- 7,052
2003 .................... 5,007 -- 5,007
2004 .................... 2,377 -- 2,377
2005 .................... 1,832 -- 1,832
After 2005 .............. 622 -- 622
-------- -------- --------
$ 24,436 $ (283) $ 24,153
======== ======== ========
Our corporate headquarters lease provides for scheduled rent increases
and an option to extend the lease for five years with changes to the terms of
the lease agreement and a refurbishment allowance. Rent expense under operating
leases totaled $9,075, $6,172 and $3,689 during 2000, 1999, and 1998,
respectively, net of sublease income of $555, $1,286, and $1,029, respectively.
NOTE 9 -- CONVERTIBLE SUBORDINATED NOTES
In March 1998, we completed an offering of $100,000 of 4.75% Convertible
Subordinated Notes (the "Notes"), due on March 1, 2003, which we fully and
unconditionally guaranteed. The Notes were originally convertible into our
common stock at any time prior to the close of business on the maturity date at
a conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). We also had the right to
redeem the Notes, in whole or in part, on or after March 6, 2001, at redemption
prices (plus accrued interest), as follows: a premium of 101.9 after one year,
100.95 after two years, and at par as of the third year. This offering resulted
in net proceeds to us of $97,000 after the payment of underwriters' commissions
but before the deduction of offering expenses. Debt issuance costs were recorded
at cost and are being amortized using the straight-line method, which
approximates the effective interest-method, over the life of the Notes.
During 2000, $83,643 of the Notes were converted into HNC common stock
at a conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). In connection with these
note conversions, we issued 1,872 shares of our common stock. Additionally, we
paid $12,676 million in conversion premiums to the converting note holders,
which we recorded as a debt conversion charge. As of December 31, 2000, $16,357
of the Notes remained outstanding. In connection with the spin-off of our Retek
subsidiary, the indenture governing the Notes required an adjustment to the
conversion price of the remaining outstanding Notes. This conversion price was
based upon a formula that calculated an adjusted conversion rate using the
relative per common share values of HNC and Retek as of the date of the
spin-off. As a result of this adjustment, the remaining Notes became convertible
into our common stock at a conversion rate of 100.20 shares per $1,000 principal
amount of the Notes
21
(equivalent to a conversion price of $9.98 per share). As discussed in Note 15,
the remaining outstanding Notes were converted into our common stock in March
2001.
The fair value of the Notes at December 31, 2000 was estimated to be
$48,657, calculated based upon the fair value of the underlying shares of HNC
common stock that the Notes were convertible into as of this date based upon the
revised conversion rate.
Cash amounts paid for interest related to the Notes totaled $4,750,
$4,750, and $2,335 during 2000, 1999, and 1998, respectively.
NOTE 10 -- TREASURY, COMMON AND PREFERRED STOCK
During 2000, we repurchased 250 shares of our outstanding common stock
for treasury at a cost of $18,616. During 1999, we repurchased 2,266 shares of
our outstanding common stock for treasury at a cost of $50,383.
During March 1998, we completed a secondary public offering of 2,100
shares of common stock (of which 2,080 shares were sold by selling stockholders
and 20 shares were sold by us) at a price to the public of $34.50 per share,
which resulted in net proceeds of $655 after the payment of underwriters'
commissions but before the deduction of offering expenses.
Our Board of Directors is authorized to issue up to 4,000 shares of
preferred stock and to determine the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of common stockholders will be
superceded by the rights of any preferred stock holders, if preferred stock is
issued in the future.
NOTE 11 -- INCOME TAXES
The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
CURRENT:
Federal ............... $ -- $ 3,869 $ 6,659
State ................. -- 1,042 1,549
Foreign ............... 2,282 250 511
DEFERRED:
Federal ............... (33,899) (3,958) 3,218
State ................. (1,485) (694) 715
Foreign ............... 27 106
-------- -------- --------
$(33,102) $ 536 $ 12,758
======== ======== ========
Income before income tax provision (benefit) was taxed under the
following jurisdictions:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
--------- --------- ---------
Domestic ................ $(154,945) $ (6,521) $ 21,388
Foreign ................. 5,425 785 1,822
--------- --------- ---------
$(149,520) $ (5,736) $ 23,210
========= ========= =========
22
A reconciliation of the income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate to income before
income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Amounts computed at statutory federal rate ....... $(52,332) $ (2,008) $ 8,123
State income taxes, net of federal benefit ....... (965) 226 1,472
Non-deductible debt conversion expense ........... 4,437 -- --
Non-deductible spin-off expense .................. 4,820 -- --
Tax credit carry-forwards generated .............. (1,005) (642) (949)
Non-deductible stock redemption compensation
expense .......................................... -- 543 835
Non-deductible acquired technology and
amortization ..................................... 12,110 1,947 2,895
Minority interest in Retek ....................... (2,654) (253) --
Stock based compensation ......................... 1,910 407 --
Other, net ....................................... 577 316 382
-------- -------- --------
Income tax provision (benefit) ................... $(33,102) $ 536 $ 12,758
======== ======== ========
During 2000, 1999 and 1998, we realized certain tax benefits related to
stock option transactions in the amounts of $36,392, $16,993 and $7,569,
respectively. The tax benefits from these stock option tax deductions were
credited directly to paid-in capital.
Deferred tax assets (liabilities) are summarized as follows:
DECEMBER 31,
----------------------
2000 1999
-------- --------
Taxable pooling basis difference ........................... $-- $ 14,955
Net operating loss carry-forwards .......................... 54,953 11,257
Tax credit carry-forwards .................................. 5,713 6,251
Allowance for doubtful accounts ............................ 1,431 2,506
Deferred tax liabilities related to purchase accounting ... (18,159) --
Stock based compensation ................................... 741 4,106
Other ...................................................... 4,210 (606)
-------- --------
48,889 38,469
Deferred tax asset valuation allowance ..................... -- --
-------- --------
Net deferred tax assets .......................... $ 48,889 $ 38,469
======== ========
No valuation allowance has been recorded against our net deferred tax
assets as we believe it to be more likely than not that our tax assets will be
realized.
At December 31, 2000, we had federal and state net operating loss
carry-forwards totaling $143,187 and $84,189, respectively. The federal net
operating loss carry-forwards include $4,772 that expires in 2011, $24,618 that
expires in 2019 and $113,797 that expires in 2020. The state net operating loss
carry-forwards expire from 2002 through 2010.
23
At December 31, 2000, we also had $2,391 of federal research and
development credit carry-forwards that expire from 2001 to 2020, $1,643 of state
research and development credit carry-forwards that have no expiration dates,
$1,525 of foreign tax credit carry-forwards that expire from 2000 to 2005, and
federal and state alternative minimum tax credits of $150 and $4, respectively,
that have no expiration dates. These net operating loss and research and
development credit carry-forwards are subject to annual limitations and also are
limited to utilization solely by the segment that generated them. Should a
substantial change in our ownership occur, as defined by the Tax Reform Act of
1986, there will be additional annual limitations on our utilization of net
operating loss and research and development credit carry-forwards.
We paid $484, $6,312 and $1,151 of income taxes during 2000, 1999 and
1998, respectively.
NOTE 12 -- SEGMENT INFORMATION
In April 2001, we announced and began to implement a reorganization that
involved realigning our internal organization from a vertical market orientation
to a horizontal product platform. As a result, our reportable segments were
changed to reflect the new method in which management primarily organizes and
evaluates internal financial information to make operating decisions and assess
performance, based upon the product suites of our Critical Action Technology
Platform (formerly our Customer Insight platform). The following segment
information for the years ended December 31, 2000 and 1999 has been revised to
conform to our current segment presentation. Segment information for the year
ended December 31, 1998 has not been presented as it is impracticable to conform
that year's segment information to the current segment presentation. Segment
information on a vertical market orientation is also presented for comparative
purposes.
Our Critical Action Technology Platform consists of our Efficiency, Risk
and Opportunity Suites. Our Efficiency Suite enables companies to make instant,
automated decisions regarding customer applications for loans, credit or
services, 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. Our Risk Suite enables
companies to analyze the risks associated with acquiring, managing and retaining
customers by analyzing patterns in customer transactions, and includes analysis
of fraud, churn and bad debt. Our Opportunity Suite enables companies to analyze
the opportunities associated with acquiring, managing and retaining customers by
analyzing patterns in customer transactions. The Opportunity Suite can maximize
customer profitability by providing cross-sell and up-sell activities and
focusing marketing efforts on more profitable customers. Additionally, as
presented herein, our "Other" segment category includes our Advanced Technology
Solutions group, which primarily conducts research and development for the
United States government and other internally funded projects, as well as other
miscellaneous products. Retek, which we spun-off to stockholders effective
September 29, 2000, is also presented separately below.
24
The accounting policies of our operating segments are the same as those
described in Note 1. We evaluate the performance of our segments and allocate
resources to them based on segment revenue and segment contribution margin. The
Company does not have any inter-segment sales. Under our new internal
organization and reporting structure, we do not allocate or report our assets by
operating segment. Accordingly, segment asset information is not presented.
Segment revenues and segment contribution margins for the years ended
December 31, 2000 and 1999 are as follows:
YEARS ENDED
DECEMBER 31,
------------------------
2000 1999
--------- ---------
EFFICIENCY SUITE
Total revenues ................................... 102,953 72,187
Direct segment operating expenses (1) ............ (64,842) (50,623)
--------- ---------
Segment contribution margin ...................... $ 38,111 $ 21,564
========= =========
RISK SUITE
Total revenues ................................... 68,426 55,773
Direct segment operating expenses (1) ............ (18,251) (15,047)
--------- ---------
Segment contribution margin ...................... $ 50,175 $ 40,726
========= =========
OPPORTUNITY SUITE
Total revenues ................................... 14,682 9,987
Direct segment operating expenses (1) ............ (12,062) (5,745)
--------- ---------
Segment contribution margin ...................... $ 2,620 $ 4,242
========= =========
OTHER
Total revenues ................................... 8,908 9,783
Direct segment operating expenses (1) ............ (7,671) (6,791)
--------- ---------
Segment contribution margin ...................... $ 1,237 $ 2,992
========= =========
TOTAL SEGMENT CONTRIBUTION MARGIN ................ $ 92,143 $ 69,524
========= =========
Reconciliation to operating loss:
Total segment contribution margin ................ $ 92,143 $ 69,524
Indirect operating expenses (2) .................. (82,677) (51,367)
Retek operating loss, excluding non-cash
and non-recurring charges included below (3) .... (36,845) (2,318)
Stock-based compensation expense ................. (21,670) (11,985)
Transaction-related amortization and costs ....... (43,734) (9,158)
In-process research and development .............. (7,601) (1,480)
Expense related to spin-off of Retek ............. (48,185) --
Other operating expenses ......................... (1,172) --
--------- ---------
Total operating loss ............................. $(149,741) $ (6,784)
Interest income .................................. 12,924 6,299
Interest expense ................................. (4,231) (5,747)
Expense related to debt conversion ............... (12,676) --
Other expense, net ............................... (3,378) (226)
Minority interest in losses of consolidated
Subsidiaries .................................... 7,582 722
--------- ---------
Loss before income taxes ......................... $(149,520) $ (5,736)
========= =========
- --------------------------------------------------------------------------------
(1) Direct segment operating expenses include direct costs such as direct
labor costs related to product research and development, sales, and
marketing activities, direct support and installation costs, and other
product-specific costs of sales. Direct costs reflect only direct
controllable expenses associated with each segment's line of business.
25
(2) Indirect operating expenses consist of costs not directly attributable
to a segment, such as general and administrative expenses, corporate
marketing expenses, depreciation and amortization, facilities expenses,
information technology overhead costs, and other indirect, non-product
specific costs.
(3) Includes Retek revenues of $59,915 and $69,159 for the years ended
December 31, 2000 and 1999, respectively. Reported segment revenues and
Retek revenues represent the Company's total revenues as displayed in
the Company's consolidated statement of operations.
During 2000, 1999 and 1998, one product line in the Risk Suite segment
accounted for 16.8%, 15.4% and 14.5% of our total revenues, respectively. During
those same periods, revenues from one product in the Efficiency Suite segment
accounted for 23.5%, 20.9% and 21.5% of our total revenues, respectively. During
1999 and 1998, one Retek product accounted for 10.1% and 13.2% of our total
revenues, respectively.
Revenue and long-lived assets by geographical area are summarized as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Revenue by geographical area:
United States ...................... $205,361 $166,505 $137,332
Foreign ............................ 49,523 50,384 41,276
-------- -------- --------
Total revenue ............... $254,884 $216,889 $178,608
======== ======== ========
DECEMBER 31,
---------------------
2000 1999
-------- --------
Long-lived assets by geographical area:
United States ................................ $168,963 $ 54,174
Foreign ...................................... 159 145
-------- --------
Total long-lived assets ............... $169,122 $ 54,319
======== ========
Our foreign revenues are from export sales and international operations.
Export sales include sales from the United States to foreign countries.
International operations include sales by foreign operations. Revenues from
international operations and export sales, primarily to Western Europe, Japan
and Canada, represented 19.3%, 23.2% and 23.1% of total revenues in 2000, 1999
and 1998, respectively. Export sales totaled $42,540, $37,713 and $27,840 in
2000, 1999 and 1998, respectively.
PRIOR YEAR SEGMENT PRESENTATION
Prior to April 2001, our reportable segments were based upon our method
of internal reporting to management, who viewed our business for these periods
by vertical market. Excluding Retek, our primary operating segments included HNC
Financial Solutions ("HNC FS"), HNC Insurance Solutions ("HNC IS") and HNC
Telecommunications Solutions ("HNC TS").
HNC FS provided transaction-based, real-time fraud detection,
authorization and action decisions for applications such as credit card charge
authorization and the loan approval decision
26
process. Our HNC FS segment also included the activities associated with our
former eHNC division, the activities of which we reintegrated into FS in July
2000. HNC IS provided users with the ability to reduce fraud losses and
streamline operations in the containment of the medical costs of workers'
compensation and automobile accident insurance claims, workers' compensation
loss reserving, workers' compensation fraud, managed care effectiveness and
provider effectiveness. HNC TS provided our telecommunications carrier customers
with the ability to reduce fraud losses and determine customer profitability.
HNC TS is presented below along with activities associated with our Advanced
Technology Solutions group, which primarily conducted research and development
for the United States government, as well as corporate activity. Retek, which we
spun-off to stockholders effective September 29, 2000, is also presented
separately below.
The accounting policies of our operating segments are the same as those
described in Note 1. We evaluated the performance of our segments and allocated
resources to them based on operating income. Inter-segment sales were accounted
for at fair value as if the sales were to third parties.
Each segment represented a strategic business unit that offered unique
products and services to their functional markets. The table below presents
segment data for certain statement of operations and balance sheet line items as
of and for the years ended December 31, 2000, 1999 and 1998.
Segment revenues are summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Segment revenue:
HNC FS .............................. $ 95,668 $ 73,641 $ 63,244
HNC IS .............................. 81,382 66,790 52,140
HNC TS and other .................... 17,919 7,299 6,555
-------- -------- --------
HNC, excluding Retek ............. 194,969 147,730 121,939
Retek .............................. 59,915 69,159 56,669
-------- -------- --------
Total consolidated revenue ...... $254,884 $216,889 $178,608
======== ======== ========
During 2000, 1999 and 1998, one product line in the HNC FS segment
accounted for 16.8%, 15.4% and 14.5% of our total revenues, respectively. During
those same periods, revenues from one product in the HNC IS segment accounted
for 23.5%, 20.9% and 21.5% of our total revenues, respectively. During 1999 and
1998, one product in the Retek segment accounted for 10.1% and 13.2% of our
total revenues, respectively.
Segment operating income (loss), excluding all non-cash and
non-recurring charges that we do not allocate between segments, is summarized as
follows:
27
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Segment operating income (loss):
HNC FS .............................. $ 603 $ 9,935 $ 10,936
HNC IS .............................. 10,572 13,390 7,651
HNC TS and other .................... (1,709) (5,168) 700
-------- -------- --------
HNC, excluding Retek ............. 9,466 18,157 19,287
Retek ............................... (36,845) (2,318) 11,031
-------- -------- --------
Total operating income (loss) .... $(27,379) $ 15,839 $ 30,318
======== ======== ========
A reconciliation of the operating income (loss) reported by each of our
segments to our consolidated operating income (loss) is set forth below:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Segment operating income (loss) .................. $ (27,379) $ 15,839 $ 30,318
Stock-based compensation ......................... (21,670) (11,985) --
Transaction-related costs and amortization ....... (43,734) (9,158) (3,202)
Expense related to spin-off of Retek ............. (48,185) -- --
Acquired in-process research and development ..... (7,601) (1,480) (6,090)
Other ............................................ (1,172) -- --
--------- --------- ---------
Consolidated operating income (loss) .......... (149,741) (6,784) 21,026
Interest income .................................. 12,924 6,299 6,799
Interest expense ................................. (4,231) (5,747) (4,460)
Expense related to debt conversion ............... (12,676) -- --
Other expense, net ............................... (3,378) (226) (29)
Minority interest in losses (income) of
consolidated
Subsidiaries .................................. 7,582 722 (126)
--------- --------- ---------
Income (loss) before income tax provision ........ $(149,520) $ (5,736) $ 23,210
========= ========= =========
Segment depreciation expense, included in operating income, is
summarized as follows:
28
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------- ------- -------
Segment depreciation expense:
HNC FS ........................................ $ 4,533 $ 2,971 $ 2,921
HNC IS ........................................ 2,510 2,134 1,564
HNC TS and other .............................. 1,122 801 355
------- ------- -------
HNC, excluding Retek ....................... 8,165 5,906 4,840
Retek ......................................... 3,588 2,309 1,262
------- ------- -------
Total segment depreciation expense ......... $11,753 $ 8,215 $ 6,102
======= ======= =======
Segment assets are summarized as follows:
DECEMBER 31,
------------------------
2000 1999
--------- ---------
Total segment assets:
HNC FS ........................................ $ 96,553 $ 49,492
HNC IS ........................................ 60,106 40,491
HNC TS and other .............................. 67,003 5,872
--------- ---------
HNC, excluding Retek ....................... 223,662 95,855
Retek ......................................... -- 129,099
--------- ---------
Total segment assets ....................... 223,662 224,954
Corporate .................................... 295,762 291,098
Eliminations ................................. (71,683) (99,631)
--------- ---------
Total consolidated assets ................. $ 447,741 $ 416,421
========= =========
Corporate assets are primarily comprised of cash and cash equivalents,
marketable securities, deferred tax assets and inter-company receivables.
Eliminations primarily relate to inter-company balances and investments in
subsidiaries.
Segment capital expenditures are summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------- ------- -------
Segment capital expenditures:
HNC FS .............................. $ 7,053 $ 4,455 $ 2,909
HNC IS .............................. 2,252 4,336 1,831
HNC TS and other .................... 3,991 1,565 407
------- ------- -------
HNC, excluding Retek ............. 13,296 10,356 5,147
Retek ............................... 12,070 5,737 2,939
------- ------- -------
Total capital expenditures ....... $25,366 $16,093 $ 8,086
======= ======= =======
NOTE 13 -- STOCK COMPENSATION PLANS
We apply Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for our stock-based compensation. Had compensation
cost for our stock-based compensation awards been determined based on the fair
value at the grant dates of awards, consistent with the method of Financial
Accounting Standards Board Statement No. 123, our net
29
income (loss) and basic and diluted pro forma net income (loss) per common share
would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- --------- ---------
Net income (loss):
As reported ............................. $(116,418) $ (6,272) $ 10,452
Pro forma ............................... $(230,171) $(43,583) $(21,678)
Basic net income (loss) per common share:
As reported ............................. $ (4.08) $ (0.25) $ 0.41
Pro forma ............................... $ (8.07) $ (1.75) $ (0.84)
Diluted net income (loss) per common share:
As reported ............................. $ (4.08) $ (0.25) $ 0.39
Pro forma ............................... $ (8.07) $ (1.75) $ (0.85)
HNC Software Inc. Sponsored Plans
We administer several employee benefit plans, both active and inactive.
Our active plans include our 1995 Equity Incentive Plan, our 1995 Directors
Stock Option Plan, our 1995 Employee Stock Purchase Plan, and our 1998 Stock
Option Plan. Our inactive plans include our original 1987 Stock Option Plan and
various plans that we acquired in conjunction with our acquisitions. Our
inactive plans also include the eHNC 1999 Equity Incentive and Executive Equity
Incentive Plans. As a result of a short-form merger of eHNC into HNC in July
2000, all outstanding options under eHNC plans were assumed. These assumed plans
were amended to convert their respective options into HNC options as of the
respective acquisition or merger dates. While subsequent to the assumption of
these plans the acquired employees participated in our own stock option plans
and are subject to our plans' terms and conditions, options issued prior to the
acquisition or merger dates are subject to their respective plan terms and
conditions. Our inactive plans are not discussed herein. For purposes of the
discussion regarding our active plans below, "fair market value" means the
closing price of our common stock on the Nasdaq National Market on the grant
date.
Our 1995 Directors Stock Option Plan ("Directors Plan"), as amended,
provides for the issuance of up to 600 nonqualified stock options to our outside
directors. Under the provisions of the Directors Plan, nonqualified options to
purchase 25 shares of our common stock are granted to outside directors upon
their respective dates of becoming members of the Board of Directors, and
nonqualified options to purchase ten shares of our stock will be granted on each
anniversary date. Options under the Directors Plan are to be granted at the fair
market value of the stock at the grant date and vest at specific times over a
four-year period. As of December 31, 2000, 255 shares remained available for
future grant under this plan.
Our 1995 Equity Incentive Plan ("Incentive Plan") as amended, provides
for the issuance of up to 9,100 shares of our common stock in the form of
nonqualified or incentive stock options, restricted stock or stock bonuses.
Nonqualified stock options and restricted stock may be awarded at a price not
less than 85% of the fair market value of the stock at the date of the award.
Incentive stock options must be awarded at a price not less than 100% of the
fair market value of the stock at the date of the award. Options granted under
the Incentive Plan may have a
30
term of up to ten years. We have the discretion to provide for restrictions, and
the lapse of restrictions, in respect of restricted stock awards. Options
typically vest at the rate of 25% of the total grant per year over a four-year
period; however, we may, at our discretion, implement a different vesting
schedule with respect to any new stock option grant. At December 31, 2000, 1,172
shares remained available for future grant under this plan.
Our 1998 Stock Option Plan ("1998 Plan"), as amended, provides for the
issuance of up to 2,980 shares of our common stock in the form of nonqualified
stock options to our employees, officers, consultants and independent advisors.
Options granted under the 1998 Plan may have a term of up to ten years and
typically vest at the rate of 25% of the total grant per year over a four-year
period; however, we may, at our discretion, implement a different vesting
schedule with respect to any new stock option grant. At December 31, 2000, 1,148
shares remained available for future grant under this plan.
Our 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"), as
amended, provides for the issuance of a maximum of 850 shares of common stock.
Each purchase period, eligible employees may designate between 2% and 10% of
their cash compensation, up to legally permitted amounts, to be deducted from
their compensation for the purchase of common stock under the Stock Purchase
Plan. The purchase price of the shares under the Stock Purchase Plan is equal to
85% of the lesser of the fair market value per share on the first day of the
twelve-month offering period or the last day of each six-month purchase period.
During 2000, 1999 and 1998, 106, 115 and 68 shares of our common stock were
issued under the Stock Purchase Plan at an average price of $29.55, $24.46 and
$28.34 per share, respectively. As of December 31, 2000, 416 shares were
reserved for future issuance under the Stock Purchase Plan.
31
Option transactions under HNC's plans during the three years ending
December 31, 2000 are summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding at December 31, 1997 ................. 4,591 $23.92
Options granted/exchanged ...................... 3,333 34.59
Options exercised .............................. (732) 12.12
Options canceled ............................... (718) 32.04
------ ------
Outstanding at December 31, 1998 ................. 6,474 29.84
Options granted ................................ 3,845 33.67
Options exercised .............................. (1,916) 24.68
Options canceled ............................... (2,368) 32.11
------ ------
Outstanding at December 31, 1999 ................. 6,035 33.03
Options granted/exchanged ...................... 3,747 69.84
Options exercised .............................. (3,227) 29.76
Options canceled ............................... (1,249) 47.57
------ ------
Outstanding at September 29, 2000 (a) ............ 5,306 57.60
Options granted ................................ 1,559 17.46
Options exercised .............................. (98) 12.44
Options canceled ............................... (848) 10.92
------ ------
Outstanding at December 31, 2000 ................. 5,919 12.88
====== ======
(a) On September 29, 2000, in connection with the spin-off of Retek, we
adjusted the exercise price of all outstanding stock options in
accordance with the distribution ratio discussed in Note 2. The
weighted average exercise price of options outstanding at September 29,
2000 after consummation of the spin-off was $11.21.
The fair value of each option grant under our HNC plans was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for grants during 2000, 1999 and 1998,
respectively: dividend yield of 0.0% for all three years; risk-free interest
rates of 6.21%, 5.47% and 5.14%; expected volatilities of 100%, 100% and 65%;
and expected lives of 4.1, 4.1 and 5.0 years. The weighted average fair value of
options granted under HNC plans during 2000, 1999 and 1998 was $37.61, $23.15
and $22.17, respectively. The fair value of the employees' purchase rights
issued pursuant to the Stock Purchase Plan were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions during 2000, 1999 and 1998, respectively: dividend yield of 0.0% for
all three years; risk-free interest rates of 6.18%, 4.98% and 5.02%; expected
volatilities of 100%, 100% and 65%; and an expected life of 6 months for all
three years. The weighted average fair value of those purchase rights granted in
2000, 1999 and 1998 was $7.29, $16.66 and $16.25, respectively.
32
The following table summarizes information about employee stock options
outstanding at December 31, 2000 under HNC's plans:
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2000 LIFE (IN YEARS) PRICE 2000 PRICE
- -------------------- -------------- --------------- -------- -------------- ---------
$ 0.03 to $6.23 814 7.73 $5.23 126 $5.21
6.24 7.46 733 7.23 6.92 100 6.97
7.47 10.42 758 6.58 8.58 96 8.32
10.43 13.22 618 6.73 11.24 130 10.99
13.23 16.25 1,036 6.85 15.13 109 14.40
16.33 18.10 858 6.22 17.41 195 17.39
18.11 20.25 599 6.43 19.05 94 19.38
20.36 29.69 503 6.60 22.71 50 22.00
----- -----
0.03 29.69 5,919 6.81 12.88 900 12.73
===== =====
Retek Inc. Sponsored Plans
During 1999, Retek adopted the 1999 Equity Incentive Plan, the 1999
Director Stock Option Plan and the Employee Stock Option Exchange Program, under
which options to purchase common stock in our former subsidiary Retek had been
granted. During 1999, Retek also adopted the 1999 Employee Stock Purchase Plan,
which provides for the issuance of Retek's common stock to eligible employee
participants at a purchase price equal to 85% of the lesser of the fair market
value per share on the first day of the two-year offering period and the date of
purchase. As a result of our September 2000 spin-off of Retek, HNC is no longer
affiliated with any Retek stock compensation plans.
During the period from January 1, 2000 through the Retek spin-off date
of September 29, 2000, 464 shares of Retek common stock were issued under
Retek's employee stock purchase plan at an average price of $12.75 per share. No
shares were issued under this plan during 1999. Option activity under Retek's
option plans during 1999 and during the period from January 1, 2000 through the
spin-off date, is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding at December 31, 1998 ................. -- --
Options granted ................................ 7,416 10.38
Options canceled ............................... (5) 10.00
------ -----
Outstanding at December 31, 1999 ................. 7,411 10.38
Options granted ................................ 1,496 27.82
Options canceled ............................... (247) 19.93
------ -----
Outstanding at September 29, 2000 (a) ............ 8,660 13.06
====== =====
(a) As a result of the Retek spin-off, HNC has no further affiliation with
Retek's plans or underlying options, including those outstanding as of
the September 29, 2000 spin-off date.
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The fair value of each option granted under Retek's plans was estimated
on the date of grant using the Black-Scholes option pricing model and the
following weighted average assumptions used for grants during the period from
January 1, 2000 through the September 29, 2000 spin-off date and during 1999,
respectively: dividend yield of 0.0% for both years; risk-free interest rates of
5.12% and 5.47%; expected volatility of 130% and 100%; and expected lives of 4.4
and 4.1 years. The weighted average fair value of options granted under Retek
plans during the period from January 1, 2000 through September 29, 2000, and
during 1999, was $24.49 and $7.62, respectively. The fair value of the
employees' purchase rights issued pursuant to Retek's stock purchase plan in
2000 were estimated using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield of 0.0%; risk-free
interest rate of 5.50%; expected volatility of 130%; and an expected life of 6
months. The weighted average fair value of those purchase rights granted was
$8.33.
Stock-Based Compensation
During 2000, we recorded net stock-based compensation expense totaling
$21,670, consisting of $13,762 in stock-based compensation charges attributable
to our Retek spin-off, which are discussed separately below, and $7,908 in
additional net compensation expense. This additional net compensation expense
relates primarily to the amortization of unearned stock-based compensation of
$8,772 (of which $8,266 related to Retek) and also includes additional net
compensation income of $864, primarily related to the reversal of compensation
expense recorded in 1999 on variable awards, as a result of a decline in the
fair values of these awards during 2000.
During 1999, Retek granted stock options to employees and directors to
purchase Retek common stock at an exercise price of $10.00 per share when the
deemed fair market value of Retek's common stock was $13.00 per share. As a
result, Retek recorded unearned stock-based compensation totaling $21,886
representing the aggregate intrinsic value of the options on the date of grant.
Additionally, during 2000, Retek recorded additional unearned stock-based
compensation totaling $1,750 related to an employee option grant having an
exercise price below the fair value of Retek's common stock on the date of
grant. Amortization of Retek's unearned stock-based compensation totaled $1,908
during 1999 and $8,266 during the period from January 1, 2000 through the Retek
spin-off date of September 29, 2000. Retek's unearned stock-based compensation
balance of $13,255 at September 29, 2000, net of forfeiture reductions, was
removed from our consolidated equity accounts in connection with the Retek
spin-off.
During 1999, in addition to Retek's amortization of unearned stock-based
compensation as described above, we recorded stock-based compensation expense
totaling $10,077. This compensation expense relates primarily to stock awards
granted to former employees and non-employee consultants, of which $7,972 was
calculated at intrinsic value while the remainder related to variable awards
measured at fair value. The intrinsic value charge consisted primarily of a
one-time charge of $6,064 related to a key employee severance agreement executed
in the fourth quarter of 1999.
The fair values of HNC's variable awards during 2000 and 1999 were
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend
34
yield of 0.0% for both years; risk-free interest rate of 5.02% and 5.23% in 2000
and 1999, respectively; volatility of 100% for both years; and expected lives
from four months to one year according to the vesting date and subsequent
exercise period of each option grant, and our stock prices on the various grant
dates as well as on December 31, 2000 and 1999.
In August 2000, we accelerated the vesting of 25 percent of the
outstanding stock options that would have been unvested as of the September 15,
2000 record date to afford our option holders the opportunity to participate in
receipt of the Retek share dividend. As a result of this award modification, we
recorded a non-cash stock-based compensation charge of $6,688 during the third
quarter of 2000 in accordance with Financial Accounting Standards Board
Interpretation No. 44, or FIN 44. Additionally, as a result of the proportionate
option repricing in connection with the Retek spin-off, certain options failed
to qualify for fixed accounting treatment under FIN 44. As a result, we recorded
a one-time charge to operations of $7,074 related to the modification and cash
repurchase of options in connection with the Retek spin-off.
NOTE 14 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary
damages and other relief, are pending. We believe that these claims will not
result in a material negative impact on our results of operations, liquidity or
financial condition. However, the amount of the liability associated with these
claims, if any, cannot be determined with certainty.
We recently settled, without liability, a suit that Nestor Inc. filed
against us in November 1998 in the United States District Court for the District
of Rhode Island. In this suit, Nestor had alleged antitrust violations and
unfair competition claims with respect to our marketing of our Falcon credit
card fraud detection product. Nestor's complaint also alleged that we infringed
United States patents held by Nestor and sought a declaratory judgment that a
United States patent we hold relating to technology used in our Falcon products
is invalid and unenforceable. In January 2000 Nestor dropped its claim of patent
infringement against us and in January 2001 the case settled and Nestor's
remaining claims for antitrust and unfair competition were dismissed.
NOTE 15 -- SUBSEQUENT EVENT
In February 2001, we announced the call for redemption of our
outstanding Convertible Subordinated Notes on March 6, 2001. In March 2001, all
remaining outstanding Notes were converted into 1,639 shares of our common stock
at a conversion ratio of 100.2004 shares per $1,000 principal amount of Notes
held.
35
NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 2000 and 1999 is as
follows:
YEAR ENDED DECEMBER 31, 2000(1)(2)
---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Revenues ......................................... $ 54,564 $ 67,432 $ 77,812 $ 55,076 $ 254,884
Gross Profit ..................................... 26,896 35,349 43,543 33,609 139,397
Operating loss ................................... (20,992) (30,462) (85,363) (12,924) (149,741)
Net loss ......................................... (12,215) (20,145) (78,519) (5,539) (116,418)
Basic net income (loss) per share (a) ............ $ (0.47) $ (0.75) $ (2.71) $ (0.17) $ (4.08)
Diluted net income (loss) per share (a) ......... $ (0.47) $ (0.75) $ (2.71) $ (0.17) $ (4.08)
YEAR ENDED DECEMBER 31, 1999(3)
------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Revenues ......................................... $ 49,189 $ 55,933 $ 58,773 $ 52,994 $ 216,889
Gross Profit ..................................... 29,815 35,484 38,697 30,704 134,700
Operating Income (loss) .......................... 3,685 5,994 7,599 (24,062) (6,784)
Net Income (loss) ................................ 2,124 3,345 3,331 (15,072) (6,272)
Basic net income (loss) per share(4) ............. $ 0.08 $ 0.14 $ 0.14 $ (0.60) $ (0.25)
Diluted net income (loss) per share (4) .......... $ 0.08 $ 0.13 $ 0.13 $ (0.60) $ (0.25)
(1) Results of operations in 2000 include: i) charges of $1.4 million, $5.0
million and $1.2 million related to the write-off of in-process
research and development in the first, second and third quarters,
respectively; ii) $12.7 million in non-recurring debt conversion
expense and $48.2 million in non-recurring Retek spin-off charges in
the third quarter, and iii) a $2.8 million charge relating to the
write-down of our investment in Network Commerce and a $1.2 million
impairment charge related to the abandonment of a lease and associated
property and equipment in the fourth quarter.
(2) Results of operations in 2000 exclude Retek's results of operations in
the fourth quarter, as a result of our spin-off of Retek on September
29, 2000.
(3) Results of operations in 1999 include a charge of $1.5 million related
to the write-off of in-process research and development in the fourth
quarter.
(4) Net income (loss) per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income
(loss) amounts per share do not equal the total for the year.
36