-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NqJ/yzmvH+aUzJixCmMpNNYxaNWJzeC5adNgJY7+YZUGTGZDCGHVkP7A7oKRiI5H b5oUEnxFucFMPKbUs9AnZQ== 0000936392-01-000032.txt : 20010409 0000936392-01-000032.hdr.sgml : 20010409 ACCESSION NUMBER: 0000936392-01-000032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HNC SOFTWARE INC/DE CENTRAL INDEX KEY: 0000945093 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330248788 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26146 FILM NUMBER: 1588414 BUSINESS ADDRESS: STREET 1: 5935 CORNERSTONE CT W CITY: SAN DIEGO STATE: CA ZIP: 92121-3728 BUSINESS PHONE: 8585468877 MAIL ADDRESS: STREET 1: 5935 CORNERSTONE CT WEST CITY: SAN DIEGO STATE: CA ZIP: 92121-3728 10-K 1 a70938e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31,2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. COMMISSION FILE NUMBER 0-26146 HNC SOFTWARE INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0248788 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 5935 CORNERSTONE COURT WEST, SAN DIEGO, CA 92121 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 546-8877 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock held by non-affiliates of the Registrant, based on the closing price as reported on the Nasdaq Stock Market at March 9, 2001 was approximately $747.9 million. The number of shares of the Registrant's Common Stock outstanding at March 9, 2001 was 34,583,630 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement to be used in connection with the Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
PAGE NO. -------- PART I ITEM 1. BUSINESS............................................................. 2 ITEM 2. PROPERTIES........................................................... 23 ITEM 3. LEGAL PROCEEDINGS.................................................... 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 24 EXECUTIVE OFFICERS................................................... 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................................. 26 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................................................. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ................................................ 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 28 ITEM 11. EXECUTIVE COMPENSATION............................................... 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 28
HNC SOFTWARE INC. TRADEMARKS The following are our registered trademarks: AC-Web(R), AC-Manager(R) Admin-Connect(R), CompCompare(R), EC-Web(R), Employer-Connect(R), MIRA(R), ProfitMax(R), ProviderCompare(R), Provider-Connect(R), SC-Manager(R), SC-Web(R), State-Connect(R) and Trans-Connect(R). The following are also our trademarks: 4SCORE(TM), 4WARN(TM), ATACS(TM), AutoAdvisor(TM), Capstone(TM), CardAlert(TM), CompAdvisor(TM), Eagle(TM), eCMDirector(TM), eFalcon(TM), Falcon(TM), FraudTec(TM), Home & Away Prepaid Billing(TM), Mindwave Proaction(TM), Mindwave Reaction(TM), ProfitVision(TM) RoamEx(TM), Spyder(TM), VeriComp Claimant(TM), VeriComp Employer(TM) and VeriComp Subro(TM). All other trademarks or trade names in this report are the property of their respective owners. Our World Wide Web site is located at both hnc.com and hncs.com, and investor information can be requested by calling our Stockholder Information Line at 1-800-396-8052. Information on our Web site is not part of this Report. We were founded in 1986 under the laws of California, and were reincorporated in June 1995 under the laws of Delaware. Our principal executive offices are located at 5935 Cornerstone Court West, San Diego, California 92121-3728, and our telephone number is (858) 546-8877. 1 3 PART I CAUTION REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains forward-looking statements based on our current expectations, estimates and projections about our industry, management's beliefs and certain assumptions we have made. Words such as "anticipates," "expects," "plans," "intends," "may," "will," "should," "believes," "estimates" or similar expressions identify forward-looking statements. These statements include, among other things, statements concerning our anticipated growth strategies, anticipated trends in our business and the markets that we serve, our expectations of our future performance and the market acceptance of our products, our plans for expanding our business, our plans for product functionality and features and the status of evolving technologies. In addition, the section entitled "Risk Factors" in Item 1, "Business," consists primarily of forward-looking statements. Forward-looking statements are only predictions based upon our current expectations about future events. We cannot guarantee future results, performance or achievements or that predictions or current expectations will be accurate. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in Item 1, "Business" discusses some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks. Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements for any reason. ITEM 1. BUSINESS - -------------------------------------------------------------------------------- OVERVIEW - -------------------------------------------------------------------------------- We provide customer insight through Intelligent Response, Decision Management and Customer Analytics software that enables companies in the financial, insurance, telecommunications and e-commerce industries to acquire, manage and retain customers. Our technology helps businesses make the right decisions about their customers in real time. It can improve a business' speed and accuracy in differentiating between customer value and risk; determining what customers want without invading their privacy; delivering personalized service and managing customers more profitably; and developing customer loyalty. INDUSTRY BACKGROUND Today's competitive business environment has forced many companies to increase business efficiencies while improving their flexibility and responsiveness to changing market conditions. In particular, the widespread adoption of the Internet has changed the way many businesses operate. Consequently, companies continue to make significant investments in technology solutions designed to manage and analyze information, develop initiatives to boost customer loyalty and develop lasting customer relationships with profitable customers. Building lasting relationships with profitable customers requires insight into customer profitability and the elements driving it, and the ability to optimize interaction with the customer to improve profitability and maximize the lifetime value of the customer relationship. Relationships with customers increasingly depend on electronic interactions. Businesses must invest more resources to acquire, manage and retain customers. At the same time, customers have a variety of purchasing options and are only a click away from the competition. While businesses are experiencing increasing customer acquisition costs, customers are experiencing decreasing switching costs. As a result, there is an accelerated demand for the ability to analyze information concerning customer transaction patterns to enable companies to respond appropriately to customer needs and predict customer activity. In addition, there is an expanding recognition that tools, applications and services can help organizations better understand and retain their customers, and build relationships over the Internet. PLATFORM INTRODUCTION HNC's Customer Insight platform of predictive software products incorporates Intelligent Response, Decision Management, Risk Analytics and Opportunity Analytics software solutions. Our decision engines capitalize on information to provide answers in real time so businesses can more effectively acquire, manage or retain customers. Because the substantial majority of electronically stored information is unstructured, there is a real need for a natural language free-text analysis solution to optimize the use of stored data. HNC's platform provides this solution. The platform also utilizes neural networks to help predict which transactions are likely to result in negative activities such as fraud and payment delinquency, or positive activities including cross-sell and up-sell. In addition, the platform's decision support tools enable HNC's customers to analyze information to take advantage of opportunities while minimizing risks. 2 4 The combination of HNC's core technologies -- decision engines, free text analysis, neural networks and decision support tools -- results in a customer profile engine that helps businesses attain customer insight. Specific capabilities of HNC's platform include: - - INTELLIGENT RESPONSE Intelligent Response enables companies to search across different data repositories and understand the meaning of content in text, images, SKUs or symbols, and deliver information to devices such as PCs and wireless (including PDAs) devices. It also proactively makes recommendations based upon profiles and patterns, and learns to index and retrieve only the most accurate, relevant information. - - DECISION MANAGEMENT Decision Management enables companies to make instant, automated decisions regarding customer applications, including the ability to identify and determine customer creditworthiness. This allows companies to simultaneously reduce costs and increase the speed of the customer acquisition process. In addition, it allows companies to process large quantities of applications and claims in real time through multiple acquisition and delivery channels. - - CUSTOMER ANALYTICS -- RISK MANAGEMENT Risk Analytics enable companies to analyze the risks associated with acquiring, managing and retaining customers by analyzing patterns in customer transactions. Risks can include fraud, churn and bad debt. - - CUSTOMER ANALYTICS -- OPPORTUNITY MANAGEMENT Opportunity Analytics enables companies to analyze the opportunities associated with acquiring, managing and retaining customers by analyzing patterns in customer transactions. Opportunities can include maximizing customer profitability by providing cross-sell and up-sell activities and focusing marketing efforts on more profitable customers. MARKETS/DOMAIN EXPERTISE HNC customers comprise leading Fortune 1000 and Global 2000 organizations in the financial, insurance, telecommunications and e-commerce industries. Within the financial services industry, HNC's customers include leading corporations on six continents, including nine out of the top 10 U.S. credit card issuers and 16 of the 25 largest credit card issuers worldwide. More than 100 insurance companies and state insurance funds -- including nine out of the 10 largest carriers -- are HNC customers. HNC's has more than 50 wireless and wireline customers worldwide. In addition, more than 30 customers in industries including computer, hotel, media and retail, are currently using HNC's products to conduct e-commerce. - -------------------------------------------------------------------------------- STRATEGY - -------------------------------------------------------------------------------- - - ENHANCE AND EXPAND SOLUTION PLATFORM We intend to continue to commit capital and enhance our Customer Insight solution platform through internal development and through acquisitions. For example, our customer analytic solutions for fraud detection have been expanded from a single credit card fraud detection solution in 1992 to checking, debit card and online credit card fraud detection in the financial services sector; extended to workers compensation, Medicare and Medicaid fraud detection in the insurance sector; and billing, subscription and network fraud in the telecommunications sector. We are also expanding our Intelligent Response and Decision Management solutions within and across these industries. For example, in 2000 we extended our Decision Management solutions originally developed for the financial services sector into the telecommunications and insurance underwriting sectors. - - CONTINUE TO PENETRATE NEW VERTICAL MARKETS We intend to continue to expand into and explore new market segments within existing sectors through product extensions and/or acquisitions. For example, in the financial services sector we extended our solutions into the brokerage market in fiscal 2000 and introduced new e-commerce solutions to support business-to-business exchanges. We also entered into the wireless and m-commerce telecommunications market with solutions for fraud detection, churn reduction and Decision Management. 3 5 - - EXPAND GLOBAL PRESENCE In 2000 we started an initiative to drive global expansion by adding several senior level executives with global experience in sales and marketing in Europe, the Middle East and Africa (the EMEA), as well as the Asian-Pacific and Latin American regions. We significantly increased the number of sales, support and development personnel in these regions and we intend to continue to allocate increased resources to support accelerated global expansion. We are leveraging new and existing partnerships to drive growth such as EDS, which has led to contracts in both the EMEA and the Asian-Pacific region. We also intend to expand in global markets through acquisitions, such as Systems/Link that provided direct inroads in the Latin American telecommunications market. - - DEEPEN PRESENCE IN CORE MARKETS THROUGH MULTIPLE DELIVERY MODELS In 2000 we delivered many of our solutions through a self-hosted and an application service provider, or ASP, channel to our customers for the first time, and we intend to continue to expand this channel of delivery. An ASP provides a contractual service that deploys, hosts, manages and rents access to software applications from a centrally managed facility, giving customers access to new application environments without up-front investments in licenses, servers and people. ASP's also offer mid-sized companies the full benefits of leading enterprise applications while minimizing the challenges, expense and risk associated with the implementation and ongoing maintenance of traditional software products. HNC benefits from offering its solutions through this delivery channel by expanding its market opportunity into mid-tier markets and deriving additional recurring revenue through a per user/per transaction model with reduced sales and implementation cycles. - - STRENGTHEN AND DEVELOP STRATEGIC PARTNERSHIPS We are increasing our focus on strengthening and developing additional relationships with channel distribution partners including value added resellers, or VARs, original equipment manufacturer distributors, or OEMs, strategic business partners, hardware platform partners, and consulting and implementation partners. The benefits we expect to receive from these partnerships include leveraging partner customer bases, sharing in co-operative marketing programs, and delivering unique, industry leading solutions. For example, we are developing a medical claim processing clearing house via the Web through our partnership with Web MD. In addition, the strategic partnerships we have developed in the merchant fraud market with Equifax, Thomson Financial and Digital Island have helped us win contracts with companies like Sears and Paymentech. - - CROSS-SELL CUSTOMER INSIGHT SOLUTIONS WITHIN EXISTING CUSTOMER BASE HNC is increasingly leveraging its existing customer relationships to capitalize on opportunities to sell additional solutions. We are more closely integrating and cross-training our product development, account support and sales teams to increase collaboration on joint opportunities. For example, existing credit card fraud detection customers are also acquiring our Decision Management solutions. Also, the Decision Management solutions originally developed for the financial services industry are now successfully sold to our telecommunications and insurance customer base. - - GROW THROUGH ACQUISITIONS In 2000 we made several acquisitions to facilitate growth into new markets and to deliver product extensions into existing markets. We continue to evaluate acquisitions that offer us the opportunity to enter new vertical markets or provide large market opportunity. We evaluate companies as acquisition targets that: have products or technologies that complement existing HNC solutions and/or can be enhanced by HNC's technologies; bring an experienced management team and domain expertise; deliver strong revenue and earnings growth; and leverage combined sales, marketing and distribution channels. In 2000, for example, we extended our Customer Analytics solutions in the financial services sector through our acquisitions of CardAlert and CASA, by growing our presence in the marketing optimization arena. We strengthened our Decision Management solutions in the telecommunications sector through our acquisitions of Onyx Technologies and Systems/Link, by gaining a foothold in the wireless telecommunications market and an ASP delivery channel. We also garnered an EDI and network connectivity backbone in the insurance sector through our acquisition of Celerity Technologies, which allows us to facilitate claims processing over the Internet. - -------------------------------------------------------------------------------- MARKETS AND PRODUCTS - -------------------------------------------------------------------------------- Our Customer Insight product family includes Intelligent Response, Decision Management and Customer Analytics software that enables companies in the financial, insurance, telecommunications and e-commerce industries to acquire, 4 6 manage and retain customers. In 2000, we successfully acquired and integrated a number of acquisitions including Onyx Technologies, Systems/Link, CASA, Celerity Technologies and CardAlert Services, and as a result have expanded our product footprint, market penetration and ASP delivery channels. We intend to continue to expand our solution platform through internal product development initiatives as well as through strategic acquisitions that deliver product extensions for existing as well as new markets. Through the expansion of our solutions we expect to be able to penetrate new markets and gain greater market share of existing niche markets. INTELLIGENT RESPONSE HNC's Intelligent Response products include: ---------------------------------------------------------------------------- PRODUCT PRODUCT DESCRIPTION ---------------------------------------------------------------------------- MINDWAVE REACTION MINDWAVE REACTION uses text characterization, analysis and Intelligent Response technology to automatically categorize text, e-mail and Web inquiries; automatically respond to e-mail and Web self-help inquiries; and accurately search electronic content to find relevant answers across multiple knowledge bases. ---------------------------------------------------------------------------- MINDWAVE PROACTION MINDWAVE PROACTION adds proactive and predictive capabilities to Mindwave Reaction, so companies can provide key audiences with data they need. Proaction observes and tracks online transaction patterns; provides accurate analysis that translates to precise sales and marketing targeting methods; profiles and groups users into specific categories; and proactively suggests relevant information or products based on user profiles. ---------------------------------------------------------------------------- OFFER TARGETING Designed for high-volume online retailers, OFFER TARGETING delivers one-on-one personalization technology. Using neural network technology, Offer Targeting analyzes an individual shopper's interests and transaction patterns to determine other complementary products he or she may be interested in. Using analyzed interests coupled with previous transaction patterns, Offer Targeting can up-sell, cross-sell, provide insights about groups of customers and predict future purchasing transaction patterns. ---------------------------------------------------------------------------- FORM-FILL FORM-FILL is a service provided to digital "wallet" vendors and merchants. Currently, most online merchants require customers to fill out information forms as a precondition to a sale. Our patented context vector technology equips the Form-Fill service to read any Web-form and complete it, using free-form text analysis and processing. Applying our adaptive learning technology, Form-Fill learns with each interaction and applies that knowledge to future transactions so that the more a customer uses Form-Fill service (via a digital wallet), the more powerful this tool becomes. The eHNC Form-Fill service automatically tracks merchant-specific information, including reward codes, affinity programs, and site-specific user names and passwords. The Form-Fill service does not require any action on the part of the merchant, and therefore can be used for almost all e-commerce transactions. ---------------------------------------------------------------------------- DECISION MANAGEMENT HNC's Decision Management products include: ---------------------------------------------------------------------------- PRODUCT PRODUCT DESCRIPTION ---------------------------------------------------------------------------- COMPADVISOR COMPADVISOR reviews and reprices medical bills for workers' compensation. It uses a powerful decision engine to automate the bill review process and route as many as two-thirds of processed medical bills without manual intervention. CompAdvisor includes powerful electronic data interchange, or EDI, technology to reduce manual entry of data. ---------------------------------------------------------------------------- AUTOADVISOR AUTOADVISOR is an integrated medical repricing software solution with a managed care component for the auto medical claims industry that automates the process of bill review with the same technology and quality results as CompAdvisor. AutoAdvisor addresses the need to reduce the $13-18 billion the auto insurance industry loses annually due to unnecessary medical claims. ---------------------------------------------------------------------------- CAPSTONE CAPSTONE DECISION MANAGER is an intelligent new account DECISION MANAGER decisioning system that can be implemented within any lending environment. The system is ideally suited for helping large organizations automate complex lending decision processes in individual business areas or across the enterprise. ---------------------------------------------------------------------------- CAPSTONE DECISION CAPSTONE DECISION MANAGER FOR INSURANCE CLAIMS is an MANAGER FOR intelligent decisioning system that interfaces with INSURANCE CLAIMS large enterprise systems to automate complex insurance claims transactions. ---------------------------------------------------------------------------- CAPSTONE DECISION CAPSTONE DECISION MANAGER FOR MEDICAL BILLS is an MANAGER FOR MEDICAL intelligent decisioning system that can be the hub of a BILLS medical bill processing platform for insurance payors. By automating the processing of a significant percentage of medical bills, routing medical bills to other programs like CompAdvisor or VeriComp and routing bills for professional human review, Capstone for Medical can greatly enhance the performance of legacy systems. ---------------------------------------------------------------------------- 5 7 ---------------------------------------------------------------------------- APPLICATION DECISION APPLICATION DECISION MANAGEMENT automates the new MANAGEMENT account process and enables telecommunications (4SCORE) carriers to process more applications per month, reduce headcount and assign customers the most appropriate service. ---------------------------------------------------------------------------- AC-WEB AC-WEB for the insurance industry incorporates AC-Manager functionality with the addition of allowing access to the server via a browser-based user interface. This eliminates the need for installations at each customer workstation. ---------------------------------------------------------------------------- EC-WEB EC-WEB EC-Web is a Web browser-based package that allows corporate risk managers and human resources departments to electronically send and receive business documents in the national standard format, ANSI ASC X12. It is designed to electronically connect risk management and human resources departments with any claims administrator that can send and receive documents electronically. ---------------------------------------------------------------------------- ADMIN-CONNECT ADMIN-CONNECT was created specifically for claims administrators, enabling them to send and receive injury reports using business-to-business e-commerce. This allows third party administrators and insurance carriers to send and receive business documents electronically in the ASC X12 format. AC-MANAGER incorporates Admin-Connect functionality along with additional network administration features. ---------------------------------------------------------------------------- HOME & AWAY PREPAID BILLING & USAGE MONITORING (HOME & AWAY PREPAID PREPAID BILLING BILLING) provides wireless carriers with a solution to offer prepaid wireless telecommunications service or to perform usage monitoring. ---------------------------------------------------------------------------- COMPCOMPARE COMPCOMPARE is a benchmarking database that allows users to generate detailed comparative analyses between their claims data and insurance industry data. It features online access to HNC Insurance Solutions' workers' compensation database. The product is marketed by NCCI (the National Council on Compensation Insurance, Inc.) through a joint marketing agreement with HNC. ---------------------------------------------------------------------------- EMPLOYER-CONNECT EMPLOYER-CONNECT is a Microsoft Windows-based PC package designed to send and receive injury reports in the ASC X12 format. It is designed to electronically connect risk management and human resource departments with an agency or organization that can send and receive documents electronically. EC-MANAGER incorporates Employer-Connect functionality and additional network administration features. ---------------------------------------------------------------------------- PROVIDERCOMPARE PROVIDERCOMPARE is a physician profiling system that compares one physician to a peer group of physicians for similar claim populations, identifies providers with significantly higher costs, and uses provider report cards and treatment pattern analysis to educate providers to improve financial outcomes. The product is marketed by NCCI (the National Council on Compensation Insurance, Inc.) through a joint marketing agreement with HNC. ---------------------------------------------------------------------------- PROVIDER-CONNECT PROVIDER-CONNECT is a Microsoft Windows-based PC package designed to send and receive injury reports in the ASC X12 format. It is designed to electronically connect healthcare providers with insurance carriers that can send and receive documents electronically. ---------------------------------------------------------------------------- ROAMEX ROAMING DATA EXCHANGE NETWORK (ROAMEX) provides wireless telecommunications carriers with near real time records of roaming call data that occur outside a carrier's home network. Carriers use this data to detect fraud beyond their home network. ---------------------------------------------------------------------------- SC-MANAGER SC-MANAGER for the insurance industry incorporates the functionality of State-Connect (see below) and includes additional business-to-business e-commerce project management tools/applications. ---------------------------------------------------------------------------- SC-WEB SC-WEB incorporates State-Connect functionality (see below) along with a Web-enabled front end to allow workers' compensation injury reports to be entered via the Internet. ---------------------------------------------------------------------------- STATE-CONNECT STATE-CONNECT is a Microsoft Windows-based application, which unlike traditional translators, specifically meets the business-to-business e-commerce requirements for state workers' compensation agencies. It is a user-friendly software application that requires minimum staffing and training. ---------------------------------------------------------------------------- TRANS-CONNECT TRANS-CONNECT is a software package that allows claims and risk management software developers to integrate e-commerce solutions into their legacy applications for employers, claims administrators and state jurisdictions. ---------------------------------------------------------------------------- 6 8 CUSTOMER ANALYTICS -- RISK MANAGEMENT HNC's Risk Analytics products include: ---------------------------------------------------------------------------- PRODUCT PRODUCT DESCRIPTION ---------------------------------------------------------------------------- MIRA MIRA (Micro Insurance Reserve Analysis) is an easy-to-use, integrated information system for estimating workers' compensation claim loss reserves. MIRA is installed at more than 50 insurance companies, state funds and third-party administrators. ---------------------------------------------------------------------------- VERICOMP VERICOMP CLAIMANT is an insurance-claimant fraud CLAIMANT detection system that utilizes our advanced neural network predictive technology to identify claims that fit historical patterns of fraud and abuse. VeriComp Claimant saves time and money through early and accurate detection of fraudulent claims. ---------------------------------------------------------------------------- VERICOMP VERICOMP EMPLOYER is a predictive software solution EMPLOYER created specifically to detect workers' compensation premium fraud and abuse. This powerful tool enables auditors and other review staff to identify suspicious policies and prioritize premium audit efforts. ---------------------------------------------------------------------------- VERICOMP SUBRO VERICOMP SUBRO is a new predictive software system that can help insurance carriers recover significant losses by automatically identifying and notifying claims adjusters of claims that should actually be paid by another party. ---------------------------------------------------------------------------- ECMDIRECTOR eCMDIRECTOR is a financial services predictive software solution that reduces cost by more accurately identifying claims that would benefit most from case management and by automating claim management decisions. ---------------------------------------------------------------------------- SPYDER SPYDER is a predictive software solution designed to combat healthcare fraud and abuse in group healthcare, Medicaid and Medicare. Using HNC's advanced neural network predictive technology, Spyder is also available in a new real time version as well as a version specifically developed to detect dental fraud and abuse. ---------------------------------------------------------------------------- FALCON FALCON is the leader in real time fraud detection and prevention for credit card issuers. Falcon's neural networks examine transaction, cardholder, and merchant data to detect a wide range of credit card fraud quickly and accurately. ---------------------------------------------------------------------------- FALCON DEBIT FALCON DEBIT is a financial services software product that examines transaction, cardholder, and merchant data to detect debit card fraud. ---------------------------------------------------------------------------- FALCON CHEQUE FALCON CHEQUE runs in a bank's check processing center and uses neural networks, expert rules, and HNC's proprietary transaction pattern profiling technology to detect many types of checking account fraud. ---------------------------------------------------------------------------- EAGLE EAGLE is a merchant risk management system designed to protect merchants from emerging fraud trends, manage risk and profitability, and increase operational efficiency. ---------------------------------------------------------------------------- 4WARN APPLICATION FRAUD MANAGEMENT (4WARN) is a telecommunications market solution that confirms identity authenticity during the customer acquisition process, to detect individuals who attempt identity deception. ---------------------------------------------------------------------------- CARDALERT NETWORK CARDALERT NETWORK provides early detection and common-purchase-point analysis of payment card fraud on shared Automated Teller Machine (ATM) and point-of-sale systems. Through daily transaction data downloads provided by participating networks, CardAlert can identify and link fraudulent transactions, identify compromised cards, and notify affected financial institutions to prevent further losses. ---------------------------------------------------------------------------- PROFITMAX SUBSCRIPTION FRAUD MANAGEMENT (PROFITMAX) helps financial services companies reduce write-offs and losses associated with fraudulent applications for service by persons who have no intention to pay. The solution utilizes HNC's profiling engine and advanced predictive models to quickly and accurately detect subscription fraud. HNC's decision rules engine is used to counteract predicted fraudulent activity. ---------------------------------------------------------------------------- ATACS AND FRAUDTEC TECHNICAL FRAUD MANAGEMENT (ATACS AND FRAUDTEC) enables telecommunications carriers to reduce bad debt expenses related to fraudulent use of their network. These solutions incorporate profile modeling to detect suspected fraudulent activity and include a case manager to monitor and take action on potential instigators of fraud. ATACS uses neural network models to automatically prioritize cases and prompt investigations of transactions with the highest probability of being fraudulent. ---------------------------------------------------------------------------- ATACS ONLINE ATACS ONLINE (Advanced Telecommunications Abuse Control System) delivers profiling, neural network modeling and case management through an easy to use browser-based interface in an ASP environment. Telecommunications providers of every size can significantly reduce losses associated with fraud through the use of this tool formerly available only to the largest carriers. ---------------------------------------------------------------------------- eFALCON eFALCON is a real time Internet payment fraud detection and risk management service for online merchants and their service providers. Delivered through an ASP delivery channel, the system also provides strategy management and customer service tools to help merchants save legitimate transactions that appear risky, as well as set policies for accepting and rejecting transactions. ---------------------------------------------------------------------------- 7 9 CUSTOMER ANALYTICS -- OPPORTUNITY MANAGEMENT HNC's Opportunity Analytics products include: ---------------------------------------------------------------------------- PRODUCT PRODUCT DESCRIPTION ---------------------------------------------------------------------------- PROFITMAX PROFITMAX PROFITABILITY provides transaction-based, PROFITABILITY real time authorization and action decisions that enhance the profitability of credit card portfolios. Using neural networks and HNC's cardholder transaction pattern profiling technology, ProfitMax Profitability analyzes each cardholder account and predicts future profitability. ---------------------------------------------------------------------------- PROFITMAX MARGIN PROFITMAX MARGIN MANAGER predicts margin risk for MANAGER equity, investment-grade debt and mutual fund securities at the portfolio, account, and security levels. The solution utilizes analytical models to formulate an assessment of margin account risk. Armed with the insight these predictions provide, brokerages can make more intelligent risk management decisions. ---------------------------------------------------------------------------- PROFITMAX CHURN CHURN RISK MANAGEMENT (PROFITMAX) helps RISK MANAGEMENT telecommunications carriers increase revenues by improving customer retention. Churn risk is predicted using HNC's profiling engine and advanced predictive models. Churn prevention treatments are formulated and executed using HNC's decision rules engines. ---------------------------------------------------------------------------- PROFITVISION PROFITVISION is a comprehensive, enterprise-wide solution that analyzes the profitability of customer relationships, products, and business units for financial services companies. It incorporates an interface to core accounting systems and increases the accuracy of profitability measurement through matched-maturity funds transfer pricing and sophisticated cost-allocation methods, such as activity-based costing. ---------------------------------------------------------------------------- MARKETING MARKETING OPTIMIZATION is an intelligent cross-sell OPTIMIZATION optimization solution that selects the most profitable promotion offer that a financial institution might present to a customer. ---------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SALES & MARKETING - -------------------------------------------------------------------------------- We sell and market our software and services globally through our direct sales organization and strategic partners, including distribution, hardware platform and service and consulting partners. Through these direct and indirect sales channels, we are focusing on three key initiatives to accelerate sales: - Develop and expand strategic partnerships on a global scale; - Commit sales and marketing resources internationally to accelerate global expansion; and - Leverage our existing customer base and cross-sell solutions within this base. The national sales staff is based at our corporate headquarters in San Diego, as well as in our other United States field offices in California, Colorado, Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Texas and Virginia. Internationally, we have field sales offices in the United Kingdom, The Netherlands, Japan and Singapore. To support our sales force, we conduct comprehensive marketing programs, which include demand generation, public relations, advertising, seminars, trade shows and ongoing customer communication programs. Our sales staff is generally product-based and is assigned a geographic territory. - - SERVICE BUREAUS We have licensed First Data Resources, Inc., or First Data, Electronic Data Services, Total Systems and Equifax to act as service bureaus, providing an alternate channel of distribution for end-users of our Falcon product. We have also licensed First Data as a service bureau for our ProfitMax product. We generally assist our service bureau partners in the sales effort, often employing our direct sales force in the process. These service bureaus pay us monthly usage fees based on the volume of transactions processed. We also have an outsourced bill review service bureau servicing the insurance industry. The service bureau provides both turnkey bill review services, as well as the capability to handle overflow needs of customers through our locations in California, Missouri and Texas. - - ASP (APPLICATION SERVICE PROVIDER) We provide Internet credit-card fraud detection to e-commerce merchants through an ASP delivery channel. 8 10 In the telecommunications market we provide a suite of fraud detection solutions and Decision Management solutions through the ASP channel and in the insurance industry our EDI/Network Connectivity group offers ASP versions of several injury reporting products including AC-Web, EC-Web and SC-Web. - - INTERNATIONAL AND EXPORT ACTIVITY International operations and export sales represented 19.3% of our total revenues in 2000, 23.2% in 1999, and 23.1% in 1998. International sales result primarily from Falcon product sales, in addition to sales of Retek's products during the first nine months of 2000, fiscal 1999 and fiscal 1998. We intend to continue expansion of our operations outside the United States, and to enter additional international markets, which will require significant management attention and financial resources. We have committed and continue to commit significant time and development resources to customizing our products for selected international markets, and to developing international sales and support channels. Our efforts to develop products, databases, and models for targeted international markets or to develop additional international sales and support channels may not be successful. International sales have additional inherent risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, difficulties in staffing and managing foreign operations, the burdens of complying with a variety of foreign laws, greater difficulty or delay in accounts receivable collection, potentially adverse tax consequences and political and economic instability. Our international sales are currently primarily denominated in United States dollars, and a small portion is denominated in other currencies, primarily those of Western Europe and Canada. An increase in the value of the United States dollar relative to foreign currencies could make our products more expensive, and therefore potentially less competitive, in foreign markets. In the future, to the extent our international sales are denominated in local currencies, foreign currency translations may contribute to significant fluctuations in our business, financial condition and results of operations. The imposition of exchange or price controls or other restrictions on foreign currencies could also harm our business. - - SALES CYCLE RISKS Due in part to the mission-critical nature of our applications, potential customers perceive high risk in connection with adoption of our products. As a result, customers have been cautious in making decisions to acquire our products. In addition, because the purchase of our products typically involves a significant commitment of capital, and may involve shifts by the customer to a new software and/or hardware platform, delays in completing sales can arise while customers complete their internal procedures to approve large capital expenditures and test and accept new technologies that effect key operations. For these and other reasons, the sales cycle associated with the purchase of our products is typically lengthy, unpredictable and holds a number of significant risks over which we have little or no control, including customers' budgetary constraints and internal acceptance reviews. The sales cycle associated with the licensing of our products can typically range from 60 days to 18 months. As a result of the length of the sales cycle and the typical size of customers' orders, our ability to forecast the timing and amount of specific sales is limited. - - COMPETITION The market for customer insight solutions is intensely competitive and is constantly changing. Competitors, many of which have substantially greater financial resources than we do, vary in size and in the scope of the products and services they offer. We encounter competition from a number of sources, including: - Other application software companies, including enterprise software vendors; - Management information systems departments of customers and potential customers, including financial institutions, insurance companies, telecommunications carriers and retailers; - Third party professional services organizations, including consulting divisions of public accounting firms;' - Internet companies; - Hardware suppliers that bundle or develop complementary software; - Network and telecommunications switch manufacturers, and service providers that seek to enhance their value-added services; - Neural-network tool suppliers; and - Managed care organizations. In the Intelligent Response market, we have experienced competition from the following companies: Autonomy, Ask Jeeves, Brightware, BroadVision, eGain Communications, E.piphany, Inc., Kana Communications, Net Perceptions, Verity and others. 9 11 In the Decision Management market, we have experienced competition from the following companies: AMS, BCG, Broadvision, Compaq, Corsair, Corporate Systems, Corvel, eStellarNet, Experian, Fair Isaac, Ingenix, Lightbridge, Lucent, Medata, Mitchell International, NTC and others. In the Customer Analytics market, we have experienced competition from the following companies: Alta Analytics, Carreker-Antinori, Compaq, Computer Associates, Computer Sciences Corporation, Ectel, Equinox, Fair Isaac, GTE TSI, IBM Global Business Intelligence Solutions, InfoGlide, ITC, Lightbridge, Lucent, Magnify Holdings Corp, Marketswitch, Nestor, SAS Institute, VIPS, Xchange and others. - - PRICING IN THE MARKETPLACE We believe that most of our products are competitively priced when compared to our competitors' products. The market for our products is highly competitive, and we expect that we will face increasing pricing pressures from our customers, current competitors and new market entrants. In particular, increased competition could reduce or eliminate premiums and cause further price reductions. In addition, competition could negatively impact our ability to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms. Any reduction in the price of our products could negatively impact our business, financial condition and results of operations. - - COMPETITIVE FACTORS We believe that the principal competitive factors affecting our markets include technical performance (for example, accuracy in detecting credit card fraud or evaluating workers' compensation claims), access to unique proprietary databases, availability in ASP format and product attributes like adaptability, scalability, interoperability, functionality, ease-of-use, product reputation, quality, performance, price, customer service and support, the effectiveness of sales and marketing efforts and our reputation. Although we believe that our products currently compete favorably with respect to these factors, we may not be able to maintain our competitive position against current and potential competitors, especially competitors with significantly greater financial, marketing, service, technical support and other resources. Some of our current competitors, and many of our potential competitors, have significantly greater financial, technical, marketing and other resources than we do, as well as broader integrated product lines. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can. They may also possess marketing advantages due to their ability to market integrated suites of related products that are vital to the customer's computing infrastructure. This would enable them to sell products that compete with ours, even where their products may be inferior or more expensive. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances among competitors may emerge and rapidly gain significant market share. Also, we rely upon our customers to provide data, expertise and other support for the ongoing updating of our models. Our customers, most of which have significantly greater financial and marketing resources than we do, may compete with us in the future or otherwise discontinue their relationships with us, or cease to provide us with critical data or support of our business, all of which could significantly harm our business. - -------------------------------------------------------------------------------- CUSTOMER SERVICE & SUPPORT - -------------------------------------------------------------------------------- A high level of continuing maintenance, service and support is critical to maintaining the performance of our predictive software solutions. Service and support are also essential to our objective of developing long-term relationships with, and obtaining recurring revenues from, our customers. Our service and support activities are related to system installation, performance validation and ongoing consultation on the optimal use of our products. - - MODEL AND RULE UPDATES Most of our product license agreements obligate us to provide periodic data, model and/or rule updates to maintain system performance. Our technical personnel generally assist the customer with installation of updates. We make commitments to update models and rules at varying intervals, according to both periodically scheduled updates (for example quarterly and annually) as well as unscheduled updates, provided the customer has met its commitments to provide data to us. The choice of data source and data updates are important to customers because data are the 10 12 fundamental building blocks used to create accurate predictive models. We provide various models built on industry-specific or customer-specific data to meet individual application requirements. Customers and data suppliers provide us with historical transaction data for turnkey models, trend analyses and product updates. This combination of proprietary turnkey customized and user-developed models allows us to offer products that solve a broad range of predictive application problems. - - EDUCATION We offer comprehensive education and training programs to our customers. We provide on-site training services associated with many of our products. Fees for education and training services are generally included in the pricing of usage-priced products, but may be charged separately in other cases. - - CONSULTING Our consultants are available to work with our customers' user application groups and information systems organizations. Customers that buy consulting services are usually planning large implementations or want to optimize the performance of our products in their operating environments. Fees for consulting are generally included in the pricing of usage-priced products, but may be charged separately in other cases. - -------------------------------------------------------------------------------- TECHNOLOGY - -------------------------------------------------------------------------------- At the heart of our predictive software solutions lie two critical functions. The first of these is the ability to predict which individuals are most likely to exhibit certain critical business transaction patterns. Examples of these transaction patterns include fraud, payment delinquency, and responsiveness to cross-sell/up-sell efforts. The second critical function is the ability to select an appropriate action to either encourage (in the case of a cross-sell) or discourage (in the case for delinquency) an individual's predicted transaction patterns. Our key technologies are designed to perform one or both of these critical functions. Our technologies include neural-network models, intelligent decision engines, profiles, traditional statistical models, business models, expert rules and context vectors. In addition to current technologies, we strive to develop new and innovative technologies that enable new or expanded predictive software capabilities. Some of our longer-term research projects are partially funded through contracts with the U.S. Government or members of the U.S. Intelligence Community. - - NEURAL-NETWORK TECHNOLOGY The term "neural network" refers to a family of nonlinear, statistical modeling techniques, which were derived from the work of scientists engaged in understanding biological intelligence. While we are far from having a complete understanding of biological intelligence, the techniques proposed by these scientists have proven to be very useful in solving difficult, complex business and engineering problems. We have adopted many of these techniques in our predictive software solutions. We use neural-network techniques to build models of complex transaction patterns such as consumer credit card fraud. These models are created through a process called "training." Training involves exposing a large data set of examples of the transaction patterns to a neural network algorithm. Often hundreds of thousands to millions of examples are provided. The neural network processes this data to identify patterns in the data that are predictive of the transaction patterns being modeled. Once training is complete, the neural network uses these learned patterns to predict the probability that a new individual will exhibit the modeled transaction patterns. We have developed proprietary high-speed and parallel-processor boards to accelerate training and execution of our neural-network software. Although other statistical methods can be used, our neural-network technology distinguishes itself in its ability to build highly accurate models more rapidly than possible with other methods. This provides us with a significant competitive advantage in developing and deploying products. Further, our experience with neural-network technology has led to the development of proprietary methodologies for applying that technology to real time, transaction-based business problems. 11 13 - - PROFILING TECHNOLOGY Many of our products operate on transactional data, such as credit card purchase transactions, or other types of data that change over time, such as worker's compensations claims. In their raw form, these data are very difficult to use in model building for several reasons. First, a single transaction contains very little information about the transaction patterns of the individual that generated the transaction. Second, truncations change rapidly over time. Finally, this type of data can often be incomplete. To overcome these data problems, we have developed a set of proprietary techniques that transform raw transactional data into a format that is suitable for model building. We refer to this set of techniques as our profiling technology. As the name suggests, our profiling technology accumulates data across multiple transactions to create profiles of transaction patterns. Although these profiles are unintelligible to a human, they provide our neural-network models with the information needed to predict complex transaction patterns. - - RULE-BASED TECHNOLOGY Predicting transaction patterns is only half the battle in determining how to best manage or interact with a customer. The other half involves optimizing the response or action, given the transaction patterns that have been identified and the corresponding predicted outcome. To provide this response optimization, many of our products combine specially trained neural-network models with rule-based techniques. Rules provide an effective method of capturing and applying such well-defined information as marketing strategies, corporate policies, and standard operating procedures. We have developed rule engines that operate efficiently in a real time, transaction-oriented system. We believe that our combination of these rule engines with neural-network models represents a significant technological advantage over more traditional approaches to decision automation. - - CONTEXT VECTOR TECHNOLOGY. Much of the information produced and used by the business world is in the form of text documents. Extracting this information and using it in predictive solutions has been very difficult with traditional analysis methods. This problem has been amplified by the huge increase in Internet usage, which generates an enormous amount of textual data. Our proprietary context vector technology solves many of the problems encountered in using textual data in predictive software solutions. Context vectors provide a means to encode textual information in a form that can be easily processed by computers. The basic idea is to associate a context vector with an object based on its textual description. For example, an online user can be described by the Web pages that he or she reads. An email can be characterized by the text contained within it and a product can be identified by a textual description. Using our proprietary training algorithms, context vectors are assigned to objects in such a way that vectors for related objects will be closer together than vectors for unrelated objects. Thus, the problem of associating similar objects based upon a textual description is solved, by finding vectors that are closest to each other. Many text-processing problems can be solved using context vector technology. For example, traditional query and retrieval consists of finding documents that include the content that is related and responsive to the query. Other examples include: matching a Web user with a banner ad, associating an e-mail with an automatic response, or recommending products that may appeal to an online buyer. When combined with our other technologies, such as neural networks and rule-based systems, we believe that context vectors can improve the performance of existing applications. - - RISKS OF ENTERING NEW MARKETS Our success depends upon our ability to enter new markets by successfully developing new products for those markets on a timely and cost-effective basis. In order to develop new products, we often require proprietary customer data for decision model development and system installation. As a result, completion of new products (particularly new products for new markets we are entering) may be delayed until we can extract sufficient amounts of statistically relevant data to develop the models. During this development process, we rely on our potential customers in the new market to provide us with relevant data and to help train our personnel in the use and meaning of the data in the specific industry. These relationships also assist us in establishing a presence and credibility in the new market. These potential customers, most of which have significantly greater financial and marketing resources than we do, may compete with us in the future or otherwise discontinue their relationships with or support of us, either during 12 14 development of our products or later on. If we fail to obtain adequate third-party support for new product development, our ability to enter new markets could be impaired, and consequently our business, financial condition and results of operations could be negatively impacted. - - RESEARCH & DEVELOPMENT Our research and development expenses were $75.5 million in 2000, $50.2 million in 1999, and $32.7 million in 1998. We believe that our future success depends on our ability to continually maintain and improve our core technologies, enhance our existing products, and develop new products and technologies that meet an expanding range of markets and customer requirements. We intend to expand our existing product offerings and to introduce new predictive software solutions. In the development of new products and enhancements to existing products, we use our own development tools extensively. We have traditionally relied primarily on the internal development of our products. Based on timing and cost considerations, however, we have acquired, and in the future may consider acquiring, technology or products from third parties. For example, we acquired technology and products in connection with our acquisitions of PCS, FTI and ATACS in 1998, WebTrak in 1999, and CASA, AIM, Onyx Technologies, Celerity Technologies, HighTouch, CardAlert and Systems/Link in 2000. The expense associated with acquired technology and products is separately stated on our financial statements as acquired in-process research and development and is not included in our research and development expenses above. Visionary research has long been a key component of HNC's business plan. We continually monitor research developments internal and external to HNC. We sponsor research programs to develop the ideas that we believe have the most potential. In some cases, external funding (i.e., Government grants) is used to develop initial concepts. One example of this is our Cortronics program. Originally funded by the Defense Advanced Research Projects Agency, or DARPA, the program is now fully supported by HNC. The Cortronics project is a long-term research project focused on developing and applying computer models of regions of the cerebral cortex to recognize and associate patterns in text, speech and vision. The objective of this work is to develop intelligent computing systems that are much more capable of interacting with and reasoning about their environments than current systems. - - GOVERNMENT RESEARCH We strategically plan and execute our long-term research projects. In addition to funds allocated for research, we receive research contracts from a variety of sources, including the United States Government. Our Government and commercial contract customers have included DARPA, the United States Air Force, the Office of Naval Research, and several organizations within the U.S. Intelligence Community. We believe that these contracts augment our ability to maintain existing technologies and investigate new technologies that may or may not be used in our products. The United States Government typically retains intellectual property rights and licenses in the technologies we develop, directly or indirectly, under government sponsored research contracts and in some cases can terminate our rights to these technologies if we fail to commercialize them on a timely basis. Historically, these research contracts have not resulted in the development of products contributing to near-term revenue. - - QUALITY CONTROL We perform all quality assurance and develop documentation internally. We intend to continue to support industry standard operating environments, client-server architectures and network protocols. Our specialists in neural network model development, software engineering, user interface design, product documentation and quality improvement are responsible for maintaining and enhancing the performance, quality and usability of all of our predictive software solutions. Our marketing group is responsible for authoring and updating all user documentation and other publications. - - TECHNOLOGY RISKS The market for our predictive software solutions is characterized by rapidly changing technologies, including improvements in computer hardware, network operating systems, programming tools, programming languages, operating systems and database technology. Our success will depend upon our ability to continue to develop and maintain competitive technologies, enhance our current products and develop, in a timely and cost-effective manner, new products that meet changing market conditions, including evolving customer needs, new competitive product offerings, emerging industry standards and changing technology, such as the growth of Internet-based applications. We may not be able to develop and market product enhancements or new products that respond to changing technologies on a timely basis, or at all. We have previously experienced significant delays in the development and introduction of new products and product enhancements, primarily due to difficulties with model development, which has in the past required multiple iterations, as well as difficulties with acquiring needed data and adapting to particular 13 15 operating environments. The length of these delays has varied depending upon the size and scope of the project and the nature of the problems encountered. - - INTELLECTUAL PROPERTY & OTHER PROPRIETARY RIGHTS We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary rights. We currently own 15 issued United States patents and have 24 United States patent applications pending. We have applied for international patent protection utilizing the Patent Cooperation Treaty. We have pending and granted patents in the following countries: Australia, Canada, France, Germany, Italy, Japan, the Netherlands, and the United Kingdom. Our United States patents expire at dates that range from December 2008 to October 2017. Patents may never issue on our pending patent applications or on any future applications we submit. In addition, the patents we currently hold may not be upheld as valid and may not prevent the development of competitive products. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. As part of our confidentiality procedures, we generally enter into invention assignment and proprietary information agreements with our employees and independent contractors and nondisclosure agreements with our distributors, corporate partners and licensees, and limit access to and distribution of our software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise to obtain and use our products or technology without authorization, or to develop similar technology independently. In addition, to ensure that customers will not be negatively impacted by an interruption in our business, we often place the source code for our products into escrow, which may increase the likelihood of misappropriation or other misuse of our intellectual property. Moreover, effective protection of intellectual property rights may be unavailable or limited in foreign countries in which we have done and/or may do business. We have developed technologies for research projects conducted under agreements with various United States Government agencies or their subcontractors. Although we have acquired commercial rights to these technologies, the United States Government typically retains ownership of intellectual property rights and licenses in the technologies we develop under these contracts, and in some cases can terminate our rights to these technologies if we fail to commercialize them on a timely basis. In addition, under United States Government contracts, the results of our research may be made public by the government, which could limit our competitive advantage with respect to future products based on funded research. In the past, we have received communications from third parties asserting that our trademarks infringe upon other parties' trademarks, or that data we use is copyrighted by an independent third party, none of which resulted in litigation or material losses to us. In addition, we have been involved in patent litigation. As the number of software products increases and the functionality of these products further overlaps, we believe that software developers' risk of infringement claims will increase. Given our ongoing efforts to develop and market new technologies and products, we may receive claims from other third parties asserting that our products infringe upon their intellectual property rights. Licenses to disputed third-party technology or intellectual property rights might not be available on reasonable commercial terms, if at all. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not it is resolved in our favor. As a result of an adverse ruling in any litigation, we might be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain and pay for licenses to infringing technology. In addition, a court might invalidate our patents, trademarks or other proprietary rights. In the event of a successful claim against us, and our failure to develop or license a substitute technology, our business, financial condition and results of operations would be harmed. - -------------------------------------------------------------------------------- EMPLOYEES - -------------------------------------------------------------------------------- As of December 31, 2000, we had 1,121 employees, including 438 in product development and support, 216 in customer service, 123 in sales and marketing, 162 in service bureau and 182 in finance, administration and management 14 16 information systems. Most of our employees are located in the United States. None of our employees are represented by a labor union. We have experienced no work stoppages and believe that our employee relationships are generally good. Our success depends to a significant degree upon the continued service of our senior management and other key research, development, sales and marketing personnel. Only a small number of our employees have employment agreements, and these agreements may not result in the retention of these employees. In the past, we have experienced difficulty in recruiting a sufficient number of qualified technical and sales employees. In addition, competitors may attempt to recruit, and be successful in recruiting, our key employees. We may not be successful in attracting, assimilating, and retaining personnel. - -------------------------------------------------------------------------------- RISK FACTORS - -------------------------------------------------------------------------------- FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS MIGHT LEAD TO REDUCED PRICES FOR OUR STOCK. Our revenues and operating results have varied significantly in the past and in some quarters we have experienced net losses. We expect fluctuations in our operating results to continue for the foreseeable future. As a result, we believe that you should not rely on period-to-period comparisons of our financial results as an indication of our future performance. It is possible that in some future periods our operating results may fall below the expectations of market analysts and investors. In this event the market price of our common stock would likely fall. Factors that are likely to cause our revenues and operating results to fluctuate include the following: - changes in the volume of our sales; - a decrease in recurring revenues or the loss of key customers; - the timing or deferral, or the reduction or cancellation, of customer orders or purchases; - the timing of our new product announcements and introductions in comparison to our competitors; - delays in the release of final commercial versions of our products; - changes in the mix of our distribution channels; - the amount and timing of our operating expenses; - our ability to fulfill our obligations under percentage-of-completion contracts; - our success in completing pilot installations within contracted fee budgets; - competitive conditions in the industries we serve; - economic conditions in our targeted markets; - domestic and international economic conditions; - changes in prevailing technologies; - expenses and charges related to our acquisition of other businesses; - increased operating expenses related to the development of new products, including products for the Internet; - our ability to recognize revenues in accordance with generally accepted accounting principles in the quarter in which we expect to recognize those revenues. 15 17 THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES IT DIFFICULT FOR US TO DETERMINE WHEN SALES WILL OCCUR, AND WE MAY NOT BE ABLE TO COMPENSATE FOR UNANTICIPATED REVENUE SHORTFALLS. We cannot predict the timing of the recognition of our revenues accurately because of the length of our sales cycles. As a result, if sales forecasted from specific customers are not realized, we may be unable to compensate for the resulting revenue shortfall and our operating results would be harmed. The sales cycle to license our products can typically range from 60 days to 18 months. Customers are often cautious in making decisions to acquire our products, because purchasing our products typically involves a significant commitment of capital, and may involve shifts by the customer to a new software and/or hardware platform or changes in the customers operational procedures. Delays in completing sales can arise while customers complete their internal procedures to approve large capital expenditures and test and accept our applications. We may incur substantial sales and marketing expenses and expend significant management effort while potential customers are evaluating our products and before they place an order with us. Consequently, if orders for our products are not received as anticipated, our operating results could be harmed. THE CHALLENGES ASSOCIATED WITH EFFECTIVELY INTEGRATING ACQUIRED BUSINESSES COULD PREVENT US FROM REALIZING THE INTENDED BENEFITS OF THESE ACQUISITIONS. During 2000, we completed the acquisition of seven businesses (one of which was divested in connection with the spin-off of our former subsidiary Retek). Integrating and organizing the remaining six acquired businesses creates challenges for our operational, financial and management information systems and can pose difficulties in maintaining our corporate culture. If we do not adequately address issues presented by growth through acquisitions, we may not fully realize the intended benefits, including any financial benefits, of these acquisitions and may incur increased costs and expenses. WE EXPECT TO CONTINUE TO MAKE STRATEGIC ACQUISITIONS, WHICH COULD PUT A STRAIN ON OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS AND ADVERSELY AFFECT OUR FINANCIAL RESULTS. We believe that our future growth may depend, in part, upon our ability to successfully complete future acquisitions of businesses and technologies. Integrating newly acquired organizations and technologies into our business could put a strain on our resources and be expensive and time consuming. In addition, we may not succeed in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. Further, our acquisition strategy and future acquisitions could result in any of the following risks: - increased competition for acquisition opportunities could inhibit our growth and our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions, which might result in dilution to the equity interests of our stockholders; - if we are unable to complete acquisitions successfully, we might not be able to successfully develop and market products for new industries or for markets with which we may not be familiar; - we might not be able to coordinate the diverse operating structures, policies and practices of companies we acquire or to successfully integrate the employees of the acquired companies into our organization and culture, which could impair employee morale and productivity; - despite due diligence reviews, acquired businesses may bring with them unanticipated liabilities, risks or operating costs that could harm our results of operations or business or require unbudgeted expenses; - if we fail to retain the services of key employees of acquired companies for significant time periods after the acquisition of their companies, we may experience difficulty in managing the acquired company's business and not realize the anticipated benefits of the acquisition; - the accounting treatment of acquisitions can result in significant acquisition-related accounting charges and expenses that can reduce our reported results of operations both at the time of the acquisition and in future periods; and - additional acquisitions may require us to issue shares of our stock and stock options to owners of the acquired businesses, resulting in dilution to our stockholders. 16 18 IF WE FAIL TO EFFECTIVELY RESPOND TO CHANGES IN OUR BUSINESS THEN OUR CORPORATE ORGANIZATION WILL BE DISRUPTED AND WE WILL BE DIVERTED FROM OUR BUSINESS PLAN. In recent years, we have experienced changes in our operations that have placed significant demands on our administrative, operational and financial resources. These demands, which are expected to continue to challenge our management and operations, include the following: - growth and diversification of our customer base; - expansion of our product functionality and the number of products we market and support; - expansion of our product lines into new markets, industries and technology mediums; - increase in the number of our employees; and - geographic dispersion of our operations and personnel. These changes require us to manage an increasing number of relationships with customers and other third parties, as well as a larger workforce. In addition, we will need to adapt our operational and financial control systems, if necessary, to respond to changes in the size and diversification of our business. If we fail to manage changes effectively, our employee-related costs and employee turnover could increase and we could face disruptions that compromise our ability to execute on our business plan. IF OUR SOFTWARE PRODUCTS DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS REPUTATION AND FINANCIAL PERFORMANCE WOULD SUFFER. The rate at which businesses have adopted our products has varied significantly by market and by product within each market, and we expect to continue to experience variations to the degree to which our products are accepted in our target markets in the future. In particular, the acceptance of our products may be limited by factors such as: - the failure of prospective customers to perceive value in predictive software solutions; - the reluctance of our prospective customers to replace their existing solutions with our products; and - the emergence of new technologies that could cause our products to be less competitive or obsolete. In addition, because the market for customer insight solutions is still in a relatively early stage of development, we cannot accurately assess the size of the market, and we have limited insight into trends that may emerge and affect our business. For example, we may have difficulty in predicting customer needs and new technologies, developing products that could address those needs and technologies, and establishing a distribution strategy for these products. We may also have difficulties in predicting the competitive environment that will develop. IF WE FAIL TO KEEP UP WITH RAPIDLY CHANGING TECHNOLOGIES, OUR PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE. In our markets, technology changes rapidly, and there are continuous improvements in computer hardware, network operating systems, programming tools, programming languages, operating systems, database technology and the use of the Internet. If we fail to enhance our current products and develop new products in response to changes in technology or industry standards, our products could rapidly become less competitive or obsolete. For example, the rapid growth of the Internet environment creates new opportunities, risks and uncertainties for businesses, such as ours, which develop software solutions that must also be designed to operate in Internet, intranet and other online environments. Our future success will depend, in part, upon our ability to: - internally develop new and competitive technologies; - use leading third-party technologies effectively; - continue to develop our technical expertise; - anticipate and effectively respond to changing customer needs; 17 19 - time new product introductions in a way that minimizes the impact of customers delaying purchases of existing products in anticipation of new product releases; and - Influence and respond to emerging industry standards and other technological changes. DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS OR PRODUCT ENHANCEMENTS COULD HARM OUR OPERATING RESULTS AND OUR COMPETITIVE POSITION. The development of new, technologically advanced products is a complex and uncertain process that requires innovation, highly skilled personnel and accurate anticipation of technological and market trends. We have previously experienced significant delays in the development and introduction of new products and product enhancements, primarily due to difficulties with model development, which has in the past required multiple iterations, as well as difficulties with acquiring data and adapting to particular operating environments. The length of these delays has varied depending upon the size and scope of the project and the nature of the problems encountered. If we are unable to meet the introduction schedules for our new products or product enhancements, customers may switch their allegiance to competitive products or refuse to purchase our solutions, which would harm our competitive position and our operating results. WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM OUR COMPADVISOR AND FALCON PRODUCTS, AND OUR REVENUE WILL DECLINE IF THE MARKET DOES NOT CONTINUE TO ACCEPT THESE PRODUCTS. Our CompAdvisor and Falcon products in the aggregate accounted for 40.3% of our total revenues in 2000. CompAdvisor accounted for 23.5% of total revenues in 2000 and Falcon accounted for 16.8% of total revenues in 2000. We expect these products will continue to account for a substantial portion of our total revenues for the foreseeable future. Our revenue will decline if the market does not continue to accept these products. Factors that might affect the market acceptance of CompAdvisor include the following: - simplification of state workers' compensation fee schedules; - changes in the overall payment system or regulatory structure for workers' compensation claims; - technological change; - our inability to obtain or use state fee schedule or claims data; - saturation of market demand; - loss of key customers; and - industry consolidation. Demand for, or use of, Falcon, could decline as a result of factors that reduce the effectiveness of Falcon's fraud detection capabilities. For example, patterns of credit card fraud might change in a manner that the Falcon product line would not detect. In addition, other methods of credit card fraud prevention such as smart cards may reduce customers' need for the Falcon product line. Because many Falcon customers are banks and related financial institutions, sales of our Falcon products are subject to changes in the financial services industry such as fluctuations in interest rates and the general economic health of financial services companies, which affect their capital expenditure budgets. In addition, the financial services industry tends to be cyclical, which may result in variations in demand for our Falcon products. There is a continuing trend toward consolidation in the financial services industry, which has reduced our customer base and may lead to lost or delayed sales and reduced demand for our Falcon products. Industry consolidation also could affect our base of recurring revenues derived from contracts in which we are paid on a per-transaction basis, when consolidated customers combine their operations under one contract with us which, in some cases, could result in lower payments to us than those previously paid by our customers separately. WE DEPEND ON DATA TO UPDATE OUR STATISTICAL MODELS, AND FAILURE TO TIMELY OBTAIN THIS DATA COULD HARM THE PERFORMANCE OF OUR PRODUCTS. The development, installation and support of our credit card fraud control and profitability management, loan underwriting and insurance products require periodic updates of our statistical models. To develop 18 20 these updates, we must develop or obtain a reliable source of sufficient amounts of current and statistically relevant data to analyze transactions and update our models. In most cases, these data must be periodically updated and refreshed to enable our predictive products to continue to work effectively in a changing environment. We do not own or control much of the data that we require, most of which are collected privately and maintained in proprietary databases. Generally, our customers agree to provide us the data we require to analyze transactions, report results and build new predictive models. If we fail to maintain good relationships with these customers, we could lose access to required data and our products might become less effective. In addition, our CompAdvisor product uses data from state workers' compensation fee schedules adopted by state regulatory agencies. Third parties have previously asserted copyright interests in this data. These assertions, if successful, could prevent us from using the data. We may not be able to continue to obtain adequate amounts of statistically relevant data on time, in the required formats or on reasonable terms and conditions, whether from customers or commercial suppliers. IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS FOR OUR PRODUCTS, FEWER CUSTOMER ORDERS AND LOSS OF MARKET SHARE. The market for predictive software solutions is intensely competitive and is constantly changing. Some of our competitors or potential competitors have substantially greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. In addition, they may have the ability to sell products competitive to ours at lower prices as part of integrated suites of several related products that are vital to the customer's computing infrastructure. This may cause customers to purchase products of our competitors that directly compete with our products in order to acquire other products of the competitor. Our competitors vary in size and in the scope of the products and services they offer. We encounter competition from a number of sources, including: - other application software companies, including enterprise software vendors; - management information systems departments of customers and potential customers, including financial institutions, insurance companies, telecommunications carriers and retailers; - third-party professional services organizations, including consulting divisions of public accounting firms; - Internet companies; - hardware suppliers that bundle or develop complementary software; - network and telecommunications switch manufacturers, and service providers that seek to enhance their value-added services; - neural-network tool suppliers; and - managed care organizations. We expect to experience additional competition from other established and emerging companies, as well as from other technologies. For example, our Falcon and eFalcon products compete against other methods of preventing credit card fraud, such as credit card activation programs, credit cards that contain the cardholder's photograph, smart cards and other card authorization techniques. Increased competition, whether from other products or new technologies, could result in price reductions, fewer customer orders, loss of customers, reduced gross margins and loss of market share, any of which could negatively impact our business. We expect to face increasing pricing pressures from our current competitors and new market entrants. Price reductions could negatively impact our margins and results of operations. Price competition could also harm our ability to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms. 19 21 Furthermore, a number of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. As a result, new competitors or alliances among competitors may emerge and rapidly gain significant market share. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. IF WE LOSE KEY PERSONNEL, WE MIGHT NOT BE ABLE TO MANAGE OUR BUSINESS SUCCESSFULLY. Our future success depends to a significant degree upon the continued service of members of our senior management and other key research, development, sales and marketing personnel. We generally do not have employment agreements with our employees, and the few employment agreements we do have with a small number of our employees may not result in the retention of these employees. As a result, we could experience the untimely loss of a member of the management team on little or no advance notice. We could also lose the services of a key employee of a business we acquire before we have had adequate time to familiarize ourselves with the operating details of that business and obtain a suitably experienced replacement. Our future performance will also depend, in part, upon the ability of our officers to work together effectively. Our management personnel may not be successful in carrying out their duties or running our company. Any dissent among members of management could impair our ability to make strategic decisions quickly in a rapidly changing market. IF WE DO NOT RECRUIT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO EXECUTE OUR BUSINESS PLAN WOULD BE COMPROMISED. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. Competition for employees in our industry is intense. We have historically experienced difficulty in recruiting a sufficient number of qualified sales and technical employees. In addition, competitors and other businesses may be successful in attempts to recruit our key employees, particularly if they can offer more attractive stock options or other equity compensation packages. Many of our technical employees possess unique skills and are not easily replaceable, and loss of technical personnel could harm our product development efforts. We expect to continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES. International operations and export sales represented 19.3% of our total revenues in 2000. We intend to continue to expand our operations outside the United States and to enter additional international markets, which will require significant management attention and financial resources. For more mature products, like Falcon, we may need to increase our international sales in order to continue to expand our customer base. We have committed and continue to commit significant time and development resources to customizing and adapting our products for selected international markets, and to developing international sales and support channels. These international marketing efforts require us to incur increased sales, marketing, development and support expenses. If our efforts do not generate additional international sales on a timely basis, our margins and earnings would be harmed. To the extent that our revenues from international operations represent an increasing portion of our total revenues, we will be subject to increased exposure to international risks. As a result, our future results could be affected by a variety of factors, including: - changes in foreign currency exchange rates; - changes in the political or economic conditions of a country or region, particularly in emerging markets; - trade protection measures, such as tariffs, EEU software directives and import or export licensing requirements; - potentially negative consequences from changes in tax laws; - potentially reduced protection for intellectual property rights; - difficulty in managing widespread sales operations; and - slower payment cycles from international customers. 20 22 IF OUR PRODUCTS DO NOT COMPLY WITH GOVERNMENT REGULATIONS THAT APPLY TO US OR TO OUR CUSTOMERS, WE COULD BE EXPOSED TO LIABILITY OR OUR PRODUCTS COULD BECOME OBSOLETE. Many of our customers must comply with a number of government regulations and other industry standards, and as a result, many of our key products must also be compliant. For example, our financial services products are affected by the Fair Credit Reporting Act, by Regulation B under the Equal Credit Opportunity Act, by regulations governing the extension of credit to consumers and by Regulation E under the Electronic Fund Transfers Act, as well as non-governmental VISA and MasterCard electronic payment standards. Fannie Mae and Freddie Mac regulations, among others, for conforming loans, affect our mortgage services products. Insurance-related regulations may in the future apply to our insurance products. If our products fail to comply with existing or future regulations and standards, our customers or we could be subject to legal action by regulatory authorities or by third parties, including actions seeking civil or criminal penalties, injunctions against our use of data or preventing use of our products or civil damages. In addition, we may also be liable to our customers for failure of our products to comply with regulatory requirements. If state-mandated workers' compensation laws or regulations or state workers' compensation fee schedules are simplified, these changes would diminish the need for, and the benefit provided by, CompAdvisor. In many states, including California, there have been periodic legislative efforts to reform workers' compensation laws in order to reduce the cost of workers' compensation insurance and to curb abuses of the workers' compensation system. Changes in workers compensation laws or regulations could adversely affect our insurance products by making them obsolete, or by requiring extensive changes in these products to reflect new workers' compensation rules. To the extent that we sell new products targeted to markets that include regulated industries and businesses, our products will need to comply with these additional regulations. IF WE FAIL TO PROTECT AND PRESERVE OUR INTELLECTUAL PROPERTY WE COULD LOSE AN IMPORTANT COMPETITIVE ADVANTAGE. Our success and ability to compete substantially depend upon our internally developed proprietary technologies, which we protect through a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite the measures we take to protect our intellectual property, it may be possible for a third party to copy or otherwise to obtain and use our products or technology without authorization, or to develop similar technology independently. In addition, patents may not be issued with respect to our pending or future patent applications, and our patents may not be upheld as valid or may not prevent the development of competitive products. To ensure that customers will not be harmed by an interruption in our business, we often place software source code for our products into escrow, which may increase the likelihood of misappropriation or other misuse of our intellectual property. Any disclosure, loss, invalidity of, or failure to protect, our intellectual property could negatively impact our competitive position, and ultimately, our business. We have developed technologies under research projects conducted under agreements with various United States Government agencies or subcontractors. Although we have acquired commercial rights to these technologies, the United States Government typically retains ownership of intellectual property rights and licenses in the technologies developed by us under these contracts, and in some cases can terminate our rights in these technologies if we fail to commercialize them on a timely basis. Under our contracts with the United States Government, the results of our research may be made public by the government, which could limit our competitive advantage with respect to future products based on our research. WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF INTELLECTUAL PROPERTY RIGHTS. In the past, we have received communications from third parties asserting that our trademarks infringe upon their trademarks, or that data we use is copyrighted by them, none of which has resulted in litigation or material losses. We have also been involved in patent litigation. Given our ongoing efforts to develop and market new technologies and products, we may from time to time be served with other claims from third parties asserting that our products or technologies infringe their intellectual property rights. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our customers and other business partners against infringement, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. We cannot be certain we would prevail in this litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If this litigation resulted in an adverse ruling, we could be required to: - pay substantial damages; - cease the use or sale of infringing products; - expend significant resources to develop non-infringing technology; 21 23 - discontinue the use of certain technology; or - obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available on reasonable terms, or at all. A license, if obtained, might require that we pay substantial royalties or license fees that would reduce our margins. OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE AND RESULT IN LIABILITY TO US. Products as sophisticated as ours are likely to contain errors or failures when first introduced or as new versions are released. To the extent that we develop new products that operate in new environments, such as the Internet, the possibility for program errors and failures may increase due to factors including the use of new technologies or the need for more rapid product development that is characteristic of the Internet market. In the future, we may experience delays in releasing new products or product enhancements as problems are corrected. Errors or defects in our products that are significant, or are perceived to be significant, could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased service and support costs and warranty claims. In addition, because our products are used in business-critical applications, any product errors or failures may give rise to substantial product liability claims. OUR COMMON STOCK PRICE FLUCTUATES AND HAS BEEN VOLATILE. The market price of our common stock has been, and will likely continue to be, subject to wide fluctuations. Many factors could cause the price of our common stock to rise and fall, including: - variations in our quarterly results; - announcements of new products by us or our competitors - acquisitions of businesses or products by us or our competitors; - recruitment or departure of key personnel; - the gain or loss of significant orders; - the gain or loss of significant customers; - changes in the estimates of our operating performance or changes in recommendations by any securities analysts that follow our stock; and - market conditions in our industry, the industries of our customers and the economy as a whole. In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. Public announcements by companies in our industry about, among other things, their performance, accounting practices or legal problems could cause the market price of our common stock to decline regardless of our actual operating performance. In the past, securities class action litigation has often been brought against a company following a period of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BENEFIT OUR STOCKHOLDERS. Under our certificate of incorporation, our board of directors is authorized to issue up to 4,000,000 shares of preferred stock without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no current plans to issue shares of preferred stock. In addition, Section 22 24 203 of the Delaware General Corporation Law restricts business combinations with any "interested stockholder" as defined by the statute. The statute could make it more difficult for a third party to acquire us, even if an acquisition would benefit our stockholders. ITEM 2. PROPERTIES Our principal administrative, sales, marketing, support, and research and development facilities are located in approximately 171,000 square feet of office space in San Diego, California. We also lease an aggregate of approximately 274,000 square feet of additional office space in the following locations: - Costa Mesa, California; - Irvine, California; - Los Gatos, California; - San Mateo, California; - Denver, Colorado; - Monroe, Connecticut; - Miami, Florida; - Atlanta, Georgia; - Chicago, Illinois; - Rockville, Maryland; - Plymouth, Massachusetts; - St. Louis, Missouri; - Charlotte, North Carolina; - Cranbury, New Jersey; - Morristown, New Jersey; - Ramsey, New Jersey; - Los Alamos, New Mexico; - Melville, New York; - Cincinnati, Ohio; - King of Prussia, Pennsylvania; - Dallas, Texas; - Plano, Texas; and - Arlington, Virginia.
In addition, we maintain several field offices in foreign countries. We believe that our current and anticipated facilities are adequate to meet our needs for the foreseeable future. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS In November 1998, Nestor filed a complaint against us in the United States District Court for the District of Rhode Island (C.A. No. 98 569). In the complaint, Nestor alleged antitrust violations and unfair competition in connection with our marketing of our Falcon credit card fraud detection product. The complaint also alleged that we infringed United States patents held by Nestor. Nestor sought to recover unspecified compensatory damages, treble damages and punitive damages and to obtain injunctive relief arising from these claims. The complaint also sought a declaratory judgment that a United States patent we hold relating to technology used in our Falcon products is invalid and unenforceable. We counterclaimed for patent infringement. In January 2000, Nestor dropped its claim of patent infringement against us. In January 2001, the Court granted our motion to dismiss our counterclaim that Nestor infringes our patent, and Nestor's claims that our patent is invalid or unenforceable. After that motion was granted, the case settled and Nestor 's remaining claims for antitrust and unfair competition were dismissed. 23 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS Pursuant to General Instruction G (3), the information regarding our executive officers required by Item 401(b) of Regulation S-K, is listed below in Part I of this filing. The following table sets forth the names, offices, and ages of each of our executive officers, as of March 9, 2001:
NAME AGE POSITION - ---- --- -------- John Mutch............... 44 President and Chief Executive Officer (Principal Executive Officer) Kenneth J. Saunders...... 39 Chief Financial Officer and Secretary (Principal Financial Officer) Russell C. Clark......... 32 Vice President, Corporate Finance and Assistant Secretary (Principal Accounting Officer) Bruce E. Hansen.......... 41 President, HNC Financial Solutions Sean Downs............... 40 President, HNC Insurance Solutions J. Anthony Patterson..... 44 President, HNC Telecommunications Solutions
Set forth below are the principal positions held by each of the executive officers named above as of March 9, 2001: John Mutch was appointed president and chief executive officer during December 1999. Mutch joined us in July 1997, where he served initially as vice president, Marketing, until September 1998, and later as president of HNC Insurance Solutions from September 1998 to December 1999 and as our president and chief operating officer from October 1999 to December 1999. He was a founder of MVenture Holdings, Inc., a private equity fund that invests in start-up technology companies, and served as a general partner from June 1994 to July 1997. From December 1986 to June 1997, Mutch held a variety of executive marketing positions with Microsoft Corporation, including Director of Organization Marketing. He holds a bachelor's of science degree in applied economics from Cornell University and a master's degree in business administration from the University of Chicago. Kenneth J. Saunders was appointed chief financial officer during December 1999, and secretary in January 2000. Saunders joined us in January 1997, where he initially served as treasurer until June 1998, as corporate controller from June 1998 to January 1999, and then as vice president, corporate finance and corporate controller from January 1999 to December 1999. From January 1992 to December 1996, Saunders was employed with Risk Data Corporation, where he served most recently as chief financial officer. In August 1996, we acquired Risk Data Corporation. From January 1991 to January 1992, he was vice president of finance and administration for A-Mark Financial Corporation. Saunders was with Arthur Andersen from 1984 to 1987. He holds a bachelor's of accountancy from Widener University and is a Certified Public Accountant. Russell C. Clark joined us as vice president, corporate finance during January 2000. From August 1990 to January 2000, Clark held various positions with PricewaterhouseCoopers LLP's Technology Industry Group, most recently as senior manager in the audit and business advisory services group. He holds a bachelor's degree in business administration with an emphasis in accounting from the University of Iowa, and is a Certified Public Accountant. Bruce E. Hansen joined us as president, HNC Financial Solutions during the first quarter of 2000. He served as president and chief executive officer of CASA, a privately held advanced analytical solutions company that specializes in one-to-one marketing and strategic risk management solutions, until we completed our acquisition of CASA during March 2000. He served as vice president, marketing and business development at Summit Medical Systems from June 1997 to April 1998, as senior vice president and general manager, medical division at MEDE America Corporation from March 1996 to June 1997 and as vice president, marketing at National Electronics Corporation from April 1995 to March 1996. Hansen also served as vice president, corporate development at The Chase Manhattan Bank from April 1994 to April 1995. He received a bachelor's of science degree in economics from Harvard University, and a master's degree in business administration, finance from the University of Chicago. 24 26 Sean Downs was appointed president, HNC Insurance Solutions during June 2000. Downs joined us in April 1998, where he initially served within our HNC Insurance Solutions segment as president, Workers Compensation until September 1998, as senior vice president, Predictive Software Solutions from September 1998 until August 1999, and then as senior vice president, Strategic Development from September 1999 until May 2000. From February 1990 to March 1998, Downs was employed with Risk Data Corporation, where he served most recently as senior vice president, Sales and Marketing. In August 1996, HNC Software Inc. acquired Risk Data Corporation. From July 1984 to February 1990, Downs held various senior management positions with Republic Health Corporation and Assured Health Care Inc. He holds a bachelor's of science degree in business administration, finance from San Diego State University. J. Anthony Patterson became president, HNC Telecommunications Solutions in August 1999. Patterson was chief executive officer of Muze Inc., a business-to-business Internet content affiliate of the privately held Metromedia Company, from September 1996 to March 1998. He served as vice president and general manager of the Entertainment Group of Trade Service Corporation, an international company that provided services in data and information acquisition, management, publishing, and distribution, from March 1995 to September 1996. Patterson co-founded Summit Associates, Inc., a bank consulting and software development firm, where he also served as chief operating officer and executive vice president from January 1992 to March 1995. He also held senior management and marketing positions with the Bank of America Corporation from May 1988 to January 1992. Patterson received a bachelor's of science degree and a master's degree in business administration, management from Pepperdine University. 25 27 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market for our Common Stock is the Nasdaq National Stock Market, where it is traded under the symbol "HNCS." The following table sets forth for the periods indicated the high and low sales prices of our Common Stock, presenting both the historical and adjusted prices for our Common Stock. The adjusted prices shown below of our Common Stock (as reported by Nasdaq) give retroactive effect to the spin-off of our former subsidiary, Retek Inc., as if it had occurred on January 1, 1999.
HISTORICAL ADJUSTED ------------------- ------------------ HIGH LOW HIGH* LOW* -------- ------- ------- -------- 2000: First Quarter............ $122.500 $72.063 $24.893 $14.644 Second Quarter........... 77.125 38.000 15.672 7.722 Third Quarter............ 81.813 42.000 16.625 8.535 Fourth Quarter........... 29.688 12.375 29.688 12.375 1999: First Quarter............ $37.500 $23.000 $7.620 $4.674 Second Quarter........... 35.875 15.500 6.909 3.150 Third Quarter............ 41.125 30.125 8.433 6.122 Fourth Quarter........... 106.875 35.000 21.489 7.315
- ------------------ * These prices are reported by Nasdaq and give retroactive effect to the spin-off of our former Retek subsidiary, by adjusting the historical prices of our common stock by the Retek distribution ratio (See Note 2 of the Notes to Consolidated Financial Statements included in this Report on page F-28 for further discussion of the Retek spin-off). As of March 9, 2000, there were approximately 259 holders of record of the Common Stock. We have never declared or paid any cash dividends on our capital stock. However, On September 29, 2000, HNC distributed 40,000,000 shares of the common stock of Retek, Inc., a publicly held company, as a dividend to HNC's stockholders of record as of September 15, 2000. The dividend distribution ratio would in some cases have resulted in the distribution of a fractional Retek share to certain HNC stockholders. To eliminate fractional Retek shares, as an incidental part of the Retek dividend, HNC paid stockholders cash in lieu of fractional Retek shares they would otherwise have received, in an amount representing the fair value of the eliminated fractional share. We currently anticipate that we will retain all future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Our bank credit agreement prohibits us from declaring or paying any cash dividends without the bank's consent. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Our selected consolidated financial data for the five years ended December 31, 2000, is included in this Report on page F-2. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Our information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is included in this Report on pages F-3 through F-17. 26 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices. INTEREST RATE RISK The fair value of our investments available for sale at December 31, 2000 was $93.5 million. The objectives of our investment policy are the safety and preservation of invested funds, and liquidity of investments that is sufficient to meet cash flow requirements. Our policy is to place our cash, cash equivalents, and investments available for sale with high credit quality financial institutions, commercial companies, and government agencies in order to limit the amount of credit exposure. Except for certain strategic equity investments, it is also our policy to maintain concentration limits and to invest only in allowable securities as determined by our management. Our investment policy also provides that our investment portfolio must not have an average portfolio maturity of beyond one year and that we must maintain liquidity positions. Investments are prohibited in industries and speculative activities. Investments must be denominated in U.S. dollars. FOREIGN CURRENCY EXCHANGE RATE RISK We mitigate our foreign currency risks principally by contracting primarily in U.S. dollars and maintaining only nominal foreign currency cash balances. Working funds necessary to facilitate the short term operations of our subsidiaries are kept in the local currencies in which they do business, with excess funds transferred to our offices in the United States for investment. For the year ended December 31, 2000, approximately 4.8% of our sales were denominated in currencies other than our functional currency, which is the U.S. dollar. These foreign currencies are primarily those of Western Europe and Canada. EQUITY PRICE RISK We have several equity investments we entered into for strategic business purposes, and therefore are exposed to direct equity price risk. We mitigate this risk by monitoring the financial performance of our investments. However, many of our equity investments are in the common stock of privately held, non-public companies and thus we may be unable to sell or achieve liquidity in those investments prior to an adverse change in their values. In addition, the current funding environment for high technology companies may expose our investments in such companies to increased risks. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and footnotes and the report of independent auditors thereon are included in this report on pages F-18 through F-42. Supplementary Financial Data are presented in Note 16 of the Notes to Consolidated Financial Statements included in this report on page F-42. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under Item 10 is incorporated by reference to the information under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Compliance" in our Proxy Statement for our May 2001 annual meeting. Information about our executive officers is included under the caption "Executive Officers" after Item 4 included in this Report on page 24. ITEM 11. EXECUTIVE COMPENSATION The information required under Item 11 is incorporated by reference to the information under the captions "Director Compensation", "Executive Compensation", and "Compensation Committee Interlocks and Insider Participation" in our Proxy Statement for our May 2001 annual meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under Item 12 is incorporated by reference to the information under the caption "Principal Stockholders" in our Proxy Statement for our May 2001 annual meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under Item 13 is incorporated by reference to the information under the caption "Related Party Transactions" in our Proxy Statement for our May 2001 annual meeting. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1)-(2) Financial Statements and Schedules: The list of consolidated financial statements and schedules, are presented in the accompanying Index to Selected Consolidated Financial Data, the Consolidated Financial Statements and Supplementary Data included in this Report on page F-1. These consolidated financial statements and schedules are filed as part of this Report. All financial statement schedules are omitted because the required information is not applicable, or because the information required is included in the consolidated financial statements and the related notes. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index included in this Report on page F-43 are filed or incorporated by reference as part of this Report and the Exhibit Index is incorporated by reference. (b) During the quarter ended December 31, 2000, the Registrant filed Reports on Form 8-K as follows: Report on Form 8-K filed October 6, 2000, dated September 29, 2000, reporting under Item 5 the completion of the separation of Retek, Inc. Report on Form 8-K filed October 13, 2000, dated September 29, 2000, reporting under Items 2 and 7 the completion of the separation of Retek, Inc. Amendment filed November 21, 2000 to Report on Form 8-K filed September 22, 2000, reporting financial statements under Item 7. 28 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 29, 2001 HNC SOFTWARE INC. By: /s/ KENNETH J. SAUNDERS --------------------------------------------- Kenneth J. Saunders Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN MUTCH President and Chief Executive Officer, March 29, 2001 - ------------------------------------ Director and Chairman of the Board John Mutch (Principal Executive Officer) /s/ KENNETH J. SAUNDERS Chief Financial Officer and Secretary March 29, 2001 - ------------------------------------ (Principal Financial Officer) Kenneth J. Saunders /s/ RUSSELL C. CLARK Vice President, Corporate Finance and March 29, 2001 - ------------------------------------ Assistant Secretary Russell C. Clark (Principal Accounting Officer) /s/ EDWARD K. CHANDLER Director March 29, 2001 - ------------------------------------ Edward K. Chandler /s/ THOMAS F. FARB Director March 29, 2001 - ------------------------------------ Thomas F. Farb /s/ CHARLES H. GAYLORD, JR. Director March 29, 2001 - ------------------------------------ Charles H. Gaylord, Jr. /s/ ALEX W. HART Director March 29, 2001 - ------------------------------------ Alex W. Hart /s/ DAVID Y. CHEN Director March 29, 2001 - ------------------------------------ David Y. Chen
29 31 HNC SOFTWARE INC. INDEX TO SELECTED CONSOLIDATED FINANCIAL DATA, THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DESCRIPTION PAGE - -------------------------------------------------------------------------------------------------- -------- Selected Consolidated Financial Data.............................................................. F-2 Management's Discussion and Analysis of Results of Operations and Financial Condition............. F-3 Report of Independent Accountants................................................................. F-18 Consolidated Financial Statements: Consolidated Balance Sheet as of December 31, 2000 and 1999.................................. F-19 Consolidated Statement of Operations for the years ended December 31, 2000, 1999 and 1998.... F-20 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998.... F-21 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2000, 1999 and 1998......................... F-22 Notes to Consolidated Financial Statements................................................... F-23
F-1 32 HNC SOFTWARE INC. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000, come from our audited Consolidated Financial Statements included later in this Report. The selected consolidated financial data as of December 31, 1998, 1997 and 1996, and for the years ended December 31, 1997 and 1996, are derived from our audited financial statements that are not included in this Report. During September 2000, we completed the spin-off of our former Retek subsidiary. Subsequent to the spin-off, Retek's results of operations and financial condition were not included in our results of operations and financial condition, and consequently the comparability of the data presented below is impacted. The selected consolidated financial data gives retroactive effect to the acquisitions of Risk Data, Retek and CompReview for all periods presented, as we accounted for these acquisitions as poolings of interests. For a complete understanding of the following you should read this selected consolidated financial data in conjunction with "Management's Discussion and Analysis Results of Operations and Financial Condition" and the Consolidated Financial Statements and related notes included in this Report on pages F-3 through F-17.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues ......................................... $254,884 $216,889 $178,608 $113,735 $ 71,439 Operating income (loss) ................................ (149,741) (6,784) 21,026 23,040 9,659 Net income (loss) ...................................... (116,418) (6,272) 10,452 17,565 11,893 Basic net income (loss) per share ...................... (4.08) (0.25) 0.41 0.72 0.50 Diluted net income (loss) per share .................... (4.08) (0.25) 0.39 0.68 0.47 Pro forma net income(1) ................................ 15,417 9,731 Pro forma basic net income per share(1) ................ 0.64 0.41 Pro forma diluted net income per share(1) .............. 0.60 0.38 Shares used in computing basic net income (loss) per share and basic pro forma net income per share ............................................ 28,529 24,969 25,362 24,275 23,552 Shares used in computing diluted net income (loss) per share and diluted pro forma net income per share ............................................ 28,529 24,969 26,650 25,681 25,363
DECEMBER 31, --------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities available for sale ............................. $ 162,753 $ 234,081 $ 153,340 $ 42,946 $ 34,849 Total assets ...................................... 447,741 416,421 283,914 119,877 98,293 Long-term obligations, less current portion ....... 16,616 104,111 101,039 239 683 Total stockholders' equity ........................ 382,574 249,573 153,021 103,860 84,970
- ---------- (1) Pro forma net income and net income per share reflect a provision for taxes on the income of CompReview, which prior to our acquisition was a subchapter S corporation, as if CompReview had been liable for corporate income taxes as a C corporation for all periods presented. F-2 33 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Statements in the following section contain forward-looking information about our anticipated future operating expenses, our expectations for our international operations, our future capital needs and about the assumptions and projections underlying our in-process research and development expense. Forward-looking statements are subject to risks and uncertainties. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in Item 1, "Business" discusses some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks. Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements for any reason. OVERVIEW In November 1999, our former subsidiary Retek, Inc. ("Retek") completed the initial public offering of approximately 6.3 million shares of its common stock. Prior to the offering, we transferred to Retek all of the shares of our wholly owned subsidiary, Retek Information Systems, Inc. On August 7, 2000, HNC's board of directors declared a dividend of all of the shares of Retek common stock held by HNC, or approximately 40.0 million shares, to complete the spin-off of our Retek subsidiary. We received a private letter ruling from the Internal Revenue Service that HNC's dividend of its shares of Retek common stock would be tax-free to HNC and our stockholders for U.S. federal income tax purposes. This dividend was paid on September 29, 2000 to all HNC stockholders of record as of September 15, 2000 using a distribution ratio of approximately 1.243 shares of Retek common stock for each share of HNC common stock held. Cash was paid in lieu of fractional shares. The shares of Retek common stock that were distributed by HNC in the Retek spin-off constituted all the Retek shares owned by HNC and represented approximately 83.9% of Retek's outstanding shares as of the September 29, 2000 distribution date. As a result of our distribution of our Retek common shares, Retek is no longer affiliated with HNC. In this section, we refer to HNC Software, Inc., excluding Retek, as "Core HNC." Excluding Retek, our primary business segments during 2000 were HNC Financial Solutions ("FS"), HNC Insurance Solutions ("IS") and HNC Telecommunications Solutions ("TS"). Each of our segments sells products incorporating our Intelligent Response, Decision Management, Risk Analytics and Opportunity Analytics software solutions. Financial Solutions FS provides a suite of products that addresses the customer-lifecycle management needs of banks and other financial institutions. FS provides transaction-based, real-time fraud detection, authorization and action decisions for applications such as credit card charge authorization and the loan approval decision process. Insurance Solutions IS develops software solutions for the insurance industry that are designed to add value to its customers' businesses through cost reduction and improved management of risks. Customers in this segment include insurance carriers, third-party administrators, managed care organizations, preferred provider organizations, insurance industry trade groups, brokers, and other service organizations. Our current product offerings are targeted to the workers' compensation and automobile segments of the property and casualty insurance market, as well as the group health segment of the insurance market. Telecommunications Solutions TS provides solutions designed to help telecommunications carriers acquire more customers, enhance relationships with existing customers and retain customers for longer periods. Our current products include solutions to reduce fraud losses and determine customer profitability. Our revenues and operating results have varied significantly in the past and in some quarters we have experienced net losses. We expect fluctuations in our operating results to continue for the foreseeable future. As a result, we believe that investors should not rely on period-to-period comparisons of our financial results as an indication of our future performance. Because our expense levels are based in part on our expectations regarding future revenues and in the short term are fixed to a large extent, we may be unable to adjust our spending in time to compensate for any unexpected revenue shortfall. We may not be able to maintain profitability on a quarterly or annual basis in the future. In addition, in the past we have acquired several companies and may continue to do so in the future. During 2000, we completed the F-3 34 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) spin-off of our former Retek subsidiary. Such transactions typically affect the comparability of our historical financial results. Acquisitions also typically generate significant continuing charges that decrease our net income, often for many fiscal periods. It is possible that in some future quarter our operating results will be below the expectations of public market analysts and investors. In that event, the price of our common stock would likely be harmed. RESULTS OF OPERATIONS REVENUES - -------------------------------------------------------------------------------- Our revenues are comprised of license and maintenance revenues and services and other revenues. Total revenues for 2000 increased by $38.0 million, or 17.5%, over 1999. Total revenues for 1999 increased by $38.3 million, or 21.4%, over 1998. Our revenues during 2000, 1999 and 1998 are summarized as follows, and include Retek's revenues through the September 29, 2000 spin-off date:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ---------- ---------- ---------- (in thousands) CORE HNC: License and maintenance revenues ........ $ 130,834 $ 109,983 $ 94,905 Services and other revenues ............. 64,135 37,747 27,034 ---------- ---------- ---------- 194,969 147,730 121,939 ---------- ---------- ---------- RETEK: License and maintenance revenues ........ 35,229 45,965 44,389 Services and other revenues ............. 24,686 23,194 12,280 ---------- ---------- ---------- 59,915 69,159 56,669 ---------- ---------- ---------- TOTAL CONSOLIDATED REVENUES ................. $ 254,884 $ 216,889 $ 178,608 ========== ========== ==========
LICENSE AND MAINTENANCE REVENUES We recognize license and maintenance revenues in several different ways, depending on the terms on which the software and maintenance are provided. Revenue from perpetual and short-term periodic licenses of our software is generally recognized upon delivery. Transactional-based fees under software license arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees. Software maintenance fees are recognized as revenue ratably over the maintenance periods. Transactional-based fees under network service or internal hosted software arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees. Amounts received under contracts in advance of delivery or performance are recorded as deferred revenue and are generally recognized within one year from receipt. The following table presents our license and maintenance revenues by segment for 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ---------- ---------- ---------- (in thousands) LICENSE AND MAINTENANCE REVENUES: FS ................................. $ 66,207 $ 52,489 $ 48,144 IS ................................. 49,804 52,418 43,765 TS and other ....................... 14,822 5,076 2,996 ---------- ---------- ---------- Core HNC ..................... 130,834 109,983 94,905 Retek .............................. 35,229 45,965 44,389 ---------- ---------- ---------- $ 166,063 $ 155,948 $ 139,294 ========== ========== ==========
License and maintenance revenues in 2000 increased by $10.1 million, or 6.5%, compared with 1999. This increase consisted of a $20.9 million, or 19.0% increase within Core HNC, offset by a $10.7 million, or 23.4% decline at Retek. The increase at Core HNC was primarily attributable to a $13.7 million, or 26.1% increase at our FS segment and a $9.7 F-4 35 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) million, or 192.0% increase at our combined TS and other segments, offset by a $2.6 million, or 5.0% decline at our IS segment. The increase at our FS segment was attributable primarily to increases in sales of our Falcon and ProfitMax products, along with increased revenues resulting from acquisitions. The increase at our combined TS and other segments is attributable primarily to growth in the TS license and maintenance business through acquisitions, resulting in increased revenues derived primarily through the sale of our 4SCORE and RoamEX products. The decrease at our IS segment resulted primarily from the sale of fewer risk analytic product perpetual licenses as compared to 1999. License and maintenance revenues in 1999 increased by $16.7 million, or 12.0%, compared to 1998. This increase consisted of a $15.1 million, or 15.9% increase within Core HNC and a $1.6 million, or 3.6% increase at Retek. The increase at Core HNC was attributable primarily to a $4.3 million, or 9.0% increase at our FS segment and a $8.7 million, or 19.8% increase at our IS segment and a $2.1 million, or 69.4% increase at our combined TS and other segments. The increase at our FS segment was attributable primarily to increases in sales of our Falcon and ProfitMax products as a result of an increase in the customer base. The increase at our IS segment was primarily the result of increased license and maintenance revenues associated with our CompAdvisor product, resulting from an increase in the customer base coupled with growth from existing customers, and an increase in the number of MIRA licenses sold. The increase at our combined TS and other segments is attributable primarily to growth in the TS license and maintenance business through increased sales of our ATACS product line, which we acquired in June 1998. SERVICES AND OTHER REVENUES Services and other revenues are comprised of installation and implementation revenues, remote hosted service operation revenues and revenues which are derived from consulting contracts, new product development contracts with commercial customers and, to a lesser extent, research and development contracts with the United States Government. Revenue from software installation and implementation and from contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year from receipt. Contract losses are recorded as a charge to operations in the period any losses are first identified. Installation or setup fees associated with network service and internally hosted software agreements are recognized ratably over the longer of the customer contract period or estimated life of the customer relationship. Remote hosted service fees derived from the review and repricing of customers' medical bills are recognized as revenue when the processing services are performed. The following table presents our services and other revenues by segment for 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ---------- ---------- ---------- (in thousands) SERVICE AND OTHER REVENUES: FS ............................ $ 29,480 $ 21,152 $ 15,100 IS ............................ 31,578 14,372 8,375 TS and other .................. 3,077 2,223 3,559 ---------- ---------- ---------- Core HNC ................ 64,135 37,747 27,034 Retek ......................... 24,686 23,194 12,280 ---------- ---------- ---------- $ 88,821 $ 60,941 $ 39,314 ========== ========== ==========
Services and other revenues in 2000 increased $27.9 million, or 45.7%, compared to 1999. This increase consisted of a $26.5 million, or 70.2% increase at Core HNC and a $1.4 million, or 6.4% increase at Retek. The increase at Core HNC was attributable primarily to a $8.4 million, or 39.8% increase at our FS segment and a $17.2 million, or 119.7% increase at our IS segment. The increase at our FS segment was attributable primarily to an increase in Capstone implementation revenues, along with increased revenues resulting from acquisitions. The increase at our IS segment was attributable primarily to overall growth in our hosted services customer base, including the commencement of full-scale hosted service operations for a primary customer. Services and other revenues in 1999 increased $21.6 million, or 55.0%, compared to 1998. This increase consisted of a $10.7 million, or 39.6% increase at Core HNC and a $10.9 million, or 88.9% increase at Retek. The increase at Core HNC F-5 36 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) was primarily driven by a $6.1 million, or 40.1% increase at our FS segment and a $6.0 million, or 71.6% increase at our IS segment. The increase at our FS segment was principally the result of an increase in Capstone product implementations and, to a lesser extent, installations of Falcon products. These increases were partially offset by a decrease in installations related to our ProfitMax suite of products as a result of the completion of a large project during 1999. The increase at our IS segment was attributable to a combination of increased installation, consulting and remote hosted service bureau revenues relating to our CompAdvisor product, resulting from the aggregate growth of our customer base within this segment, including the addition of two sizable customers, offset by the loss of a significant service bureau customer as a result of industry consolidation. REVENUES FROM NON-U.S. REGIONS International operations and export sales represented 19.3%, 23.2% and 23.1% of our total revenues in 2000, 1999 and 1998, respectively. During 2000, 1999 and 1998, approximately 4.8%, 5.2% and 6.8% of our sales were denominated in currencies other than our functional currency, which is the U.S. dollar. These foreign currencies are primarily those of Western Europe and Canada. During 2000, approximately 33.4% of our international sales were derived from Retek. In 1999 and 1998, the majority of our international sales were derived from Retek. We believe that international sales represent a significant opportunity for revenue growth and anticipate that our international sales may increase as a percentage of our total revenue in the future. However, there can be no assurance that our efforts to develop products, databases, and models for targeted international markets or in developing additional international sales and support channels will be successful. GROSS MARGIN - -------------------------------------------------------------------------------- LICENSE AND MAINTENANCE GROSS MARGIN. License and maintenance costs primarily represent our expenses for personnel engaged in customer support, travel to customer sites and documentation materials. Our license and maintenance gross margin was $105.6 million in 2000, $114.4 million in 1999 and $105.8 million in 1998. The following table summarizes our license and maintenance gross margins by operating segment:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- --------------------- (in thousands) LICENSE AND MAINTENANCE GROSS MARGINS Segment gross margins: FS .................................... $ 57,218 86.4% $ 43,185 82.3% $ 39,641 82.3% IS .................................... 25,379 51.0% 27,998 53.4% 24,246 55.4% TS and other .......................... 11,571 78.1% 3,886 76.6% 2,295 76.6% -------- ------- -------- ------- -------- ------- Core HNC .......................... 94,168 72.0% 75,069 68.3% 66,182 69.7% Retek ................................. 20,170 57.3% 39,607 86.2% 39,639 89.3% -------- ------- -------- ------- -------- ------- 114,338 68.9% 114,676 73.5% 105,821 76.0% Amounts not allocated to segments: Stock-based compensation expense ...... (2,658) (1.6%) (280) (0.1%) -- -- Expenses related to Retek spin-off .... (6,086) (3.7%) -- -- -- -- -------- ------- -------- ------- -------- ------- HNC Consolidated ................... $105,594 63.6% $114,396 73.4% $105,821 76.0% ======== ======= ======== ======= ======== =======
Our license and maintenance gross margin percentage in 2000 decreased by 9.8% compared to 1999. Of this decrease, 4.6% was attributable to margin declines within our combined Core HNC and Retek operating segments and 5.2% of this decline was attributable to our recognition in 2000 of increased stock-based compensation charges and non-recurring expenditures relating to our Retek spin-off. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled "Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek" appearing later in this Report. In 2000, the 4.6% license and maintenance gross margin percentage decline within our operating segments was attributable to a 3.7% increase at Core HNC, offset by a 28.9% decline at Retek. The improvement in Core HNC's license F-6 37 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) and maintenance gross margin percentage was attributable to a 4.1% increase at our FS segment and a 1.5% improvement at our combined TS and other segments, offset by a 2.4% decline at our IS segment. The margin increase at our FS segment was attributable primarily to improved margins resulting from one-time, non-recurring license fees related to Falcon product sales, as well as increased revenues associated with higher margin e-commerce products. The margin increase within our combined TS and other segments was attributable primarily to the increase of higher margin TS product sales during 2000, primarily resulting from growth in the TS license and maintenance business through acquisitions. The margin decline at our IS segment was attributable primarily to the sale of fewer higher margin perpetual licenses related to risk analytic products in 2000 versus 1999. Our license and maintenance gross margin percentage in 1999 decreased by 2.6% compared to 1998. This decline was attributable primarily to a 1.4% decline at Core HNC and a 3.1% decline at Retek. Core HNC's license and maintenance margin decrease was attributable primarily to a 2.0% margin decline at our IS segment, while the margins at our FS segment and our combined TS and other segments remained relatively flat year over year. The decline at our IS segment was attributable primarily to a decline in decision management product margins, primarily related to increased costs related to Preferred Provider Organization bill repricing expenses, including network access fees, as a result of increasingly competitive market conditions. SERVICES AND OTHER GROSS MARGIN. Services and other expenses consist of personnel and other expenses associated with providing installation and implementation services and performing development, consulting, and research development contracts, and the costs associated with hosted service operations. Our services and other gross margin was $15.9 million in 2000, $19.7 million in 1999 and $10.7 million in 1998. The following table summarizes our services and other gross margins by operating segment:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------- ------------------------- (in thousands) SERVICES AND OTHER GROSS MARGINS Segment gross margins: FS..................................... $6,739 22.9% $7,139 33.8% $4,655 30.8% IS..................................... 12,061 38.2% 5,680 39.5% 2,362 28.2% TS and other........................... 922 30.0% 637 28.7% 812 22.8% ---------- ---------- ---------- ---------- ----------- ---------- Core HNC........................... 19,722 30.8% 13,456 35.6% 7,883 29.2% Retek.................................. 5,337 21.6% 6,568 28.3% 2,775 22.6% ---------- ---------- ---------- ---------- ----------- ---------- 25,059 28.2% 20,024 32.9% 10,658 27.1% Amounts not allocated to segments: Stock-based compensation expense....... (2,548) (2.9)% (354) (0.6)% -- -- Expenses related to Retek spin-off..... (6,603) (7.4)% -- -- -- -- ---------- ---------- ---------- ---------- ----------- ---------- HNC Consolidated.................... $15,908 17.9% $19,670 32.3% $10,658 27.1% ========== ========== ========== ========== =========== ==========
Our services and other gross margin percentage in 2000 decreased by 14.4% compared to 1999. Of this decrease, 4.7% was attributable to margin declines within our combined Core HNC and Retek operating segments and 9.7% of this decline was attributable to our recognition in 2000 of increased stock-based compensation charges and non-recurring expenditures relating to our Retek spin-off. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled "Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek" appearing later in this Report. In 2000, the 4.7% services and other gross margin percentage decline within our operating segments was attributable to a 4.8% decline at Core HNC and a 6.7% decline at Retek. The decline within Core HNC was primarily attributable to a 10.9% decline at our FS segment and a 1.3% decline at our IS segment. The margin decline at our FS segment is attributable primarily to the increased use of third party consultants, who have a higher average cost than internal resources, in connection with Capstone product implementations during the year. The margin decline at our IS segment is attributable primarily to lower margins associated with contract development work performed during the year, offset by improved efficiencies and resultant margin increases associated with the growth in our hosted service customer base. F-7 38 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) Our services and other gross margin percentage in 1999 increased by 5.2% compared to 1998. The increase was comprised primarily of a 6.4% increase at Core HNC and a 5.7% increase at Retek. The increase within HNC was primarily attributable to a 3.0% increase at our FS segment and an 11.3% increase at our IS Segment. The margin increase at our FS segment is attributable primarily to an increase in the number of Capstone and Falcon product implementations, yielding relatively higher margins than other services. The margin increase at our IS segment was attributable primarily to the result of improved efficiencies and resultant margin increases associated with the growth in our hosted service customer base. RESEARCH AND DEVELOPMENT EXPENSE - -------------------------------------------------------------------------------- Research and development expenses consist primarily of salaries and other personnel-related expenses, subcontracted development services, depreciation for development equipment and supplies. Research and development expense totaled $75.5 million in 2000, $50.2 million in 1999 and $32.7 million in 1998. Research and development expense in 2000 increased by $25.3 million, or 50.5%, compared to 1999. Of this increase, $16.5 million, or 32.9%, was attributable to increased expenditures within our combined Core HNC and Retek operating segments, and $8.8 million, or 17.6%, was attributable to our recognition in 2000 of increased stock-based compensation charges as well as non-recurring expenditures relating to our Retek spin-off. Research and development expenses in 1999 increased by $17.5 million, or 53.6%, compared to 1998. Of this increase, $16.4 million, or 50.2%, was attributable to increased expenditures within our combined Core HNC and Retek operating segments and $1.1 million, or 3.4%, was attributable to the recording of stock-based compensation charges in 1999. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, which we do not allocate to our operating segments, refer to the sections entitled "Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek" appearing later in this Report. Within our operating segments, the 2000 increase consisted of a $12.9 million, or 48.8% increase within Core HNC and an increase of $3.6 million, or 15.9% related to Retek. The 2000 increase at Core HNC is attributable to a $9.6 million increase at our FS segment, a $2.4 million increase at our combined TS and other segments and a $0.9 million increase at our IS segment. The 1999 increase consisted of a $6.6 million, or 33.3% increase at Core HNC and a $9.8 million, or 76.2% increase related to Retek. The 1999 increase at Core HNC is attributable primarily to a $5.8 million increase at our FS segment and a $0.6 million increase at our IS segment. The absolute dollar increases at Core HNC in 2000 and 1999 were attributable primarily to increases in staffing and related costs to support new product development activities. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires capitalization of software development costs from the time technological feasibility is established until the product is available for general release to customers. Based on our product development process, technological feasibility is not established until completion of a working model. Costs we incur between completion of the working model and the point at which a product is ready for general release have been insignificant. As a result, no significant software development costs were capitalized through December 31, 2000. We anticipate that research and development expenses will increase in dollar amount and could increase as a percentage of total revenues for the foreseeable future. SALES AND MARKETING EXPENSE - -------------------------------------------------------------------------------- Sales and marketing expenses consist primarily of salaries and benefits, commissions, travel, entertainment and promotional expenses. Sales and marketing expenses totaled $89.9 million in 2000, $46.3 million in 1999 and $34.5 million in 1998. Sales and marketing expense in 2000 increased by $43.6 million, or 94.4%, compared to 1999. Of this increase, $20.5 million, or 44.5%, was attributable to increased expenditures within our combined Core HNC and Retek operating segments, and $23.1 million, or 49.9%, was attributable to our recognition in 2000 of increased stock-based compensation charges as well as non-recurring expenditures relating to our Retek spin-off. Sales and marketing expenses in 1999 increased by $11.8 million, or 34.0%, compared to 1998. Of this increase, $11.3 million, or 32.7%, was attributable to increased expenditures within our combined Core HNC and Retek operating segments and $0.4 million, or 1.3%, was attributable to the recording of stock-based compensation charges in 1999. For a further discussion regarding stock- F-8 39 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) based compensation charges and expenditures relating to our Retek spin-off, which we do not allocate to our operating segments, refer to the sections entitled "Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek" appearing later in this Report. Within our operating segments, the 2000 increase consisted of a $12.0 million, or 45.8% increase at Core HNC and a $8.6 million, or 43.9% increase related to Retek. The 2000 increase at Core HNC is attributable to a $6.9 million increase at our FS segment, a $3.3 million increase at our IS segment and a $1.8 million increase at our combined TS and other segments. Sales and marketing expenses in 1999 increased by $11.3 million, or 32.7%, compared to 1998. The 1999 increase consisted of a 5.7 million, or 27.7% increase at Core HNC and a $5.6 million, or 40.1% increase related to Retek. The 1999 increase at Core HNC is attributable to a $2.5 million increase at our FS segment, a $2.6 million increase at our combined TS and other segments, and a $0.5 million increase at our IS segment. The absolute dollar increases at Core HNC in 2000 and 1999 were attributable primarily to increases in staffing related to the expansion of our direct sales and marketing staff, including that resulting from acquisitions. Also contributing to the increases were additional expenses for trade shows, advertising, corporate marketing programs and other expenses to support recently acquired businesses. We expect sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future. These expenses could also increase as a percentage of total revenues as we continue to develop a direct sales force in the EMEA (Europe, the Middle East and Africa), the Asian-Pacific and Latin American regions, as well as other international markets, expand our domestic sales and marketing organization and increase the breadth of our product lines. GENERAL AND ADMINISTRATIVE EXPENSE - -------------------------------------------------------------------------------- General and administrative expenses consist primarily of personnel costs for finance, contract administration, human resources and general management, as well as insurance and professional services expenses. General and administrative expenses totaled $53.3 million in 2000, 33.8 million in 1999 and $19.0 million in 1998. General and administrative expense in 2000 increased by $19.5 million, or 57.9%, compared to 1999. Of this increase, $10.8 million, or 32.0%, was attributable to increased expenditures within our combined Core HNC and Retek operating segments, and $8.7 million, or 25.9%, was attributable to the net effect of our recognition of non-recurring expenditures relating to our Retek spin-off, offset by a decline in stock-based compensation charges in 2000 as compared to 1999. General and administrative expenses in 1999 increased by $14.8 million, or 78.0%, compared to 1998. Of this increase, $5.0 million, or 26.4%, was attributable to increased expenditures within our combined Core HNC and Retek operating segments and $9.8 million, or 51.6%, was attributable to the recording of stock-based compensation charges in 1999. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, which we do not allocate to our operating segments, refer to the sections entitled "Stock-Based Compensation Expense" and "Expenses Related to Spin-Off of Retek" appearing later in this Report. Within our operating segments, the 2000 increase consisted of a $9.1 million, or 51.6% increase at Core HNC and a $1.7 million, or 26.6% increase related to Retek. The 2000 increase at Core HNC is attributable to a $5.6 million increase at our FS segment, a $2.4 million increase at our IS segment and a $1.1 million increase at our combined TS and other segments. General and administrative expenses in 1999 increased by $5.0 million, or 26.4%, compared to 1998. The 1999 increase consisted of a $3.3 million, or 23.1% increase at Core HNC and a $1.7 million, or 36.8% increase related to Retek. The 1999 increase at Core HNC is attributable primarily to a $2.1 million increase at our FS segment and a $1.0 million increase at our combined TS and other segments. The absolute dollar increases at Core HNC in 2000 and 1999 are attributable primarily to additional staffing and related expenses to support a higher volume of business, resulting in part from our acquisitions. Contributing also to the 1999 increase within our FS segment were additional legal costs incurred in our defense related to the Nestor litigation. TRANSACTION-RELATED AMORTIZATION AND COSTS - -------------------------------------------------------------------------------- Transaction-related amortization and costs primarily include acquisition-related amortization during 2000, 1999 and 1998. Additional costs include $0.8 million related to the write-off of deferred offering costs during 2000 and $0.6 million related to the write-off of deferred merger costs during 1999. Transaction- related amortization and costs increased from $3.2 million in 1998 to 9.2 million in 1999 and to $43.7 million in 2000. These year-over-year increases are primarily attributable to incremental intangible asset amortization charges as a result of our business acquisitions during 1998, 1999 and 2000. The F-9 40 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) average amortization period and useful life for these intangible assets is approximately 3.5 years. For further information regarding our acquisitions, refer to Note 3 of the Notes to the Consolidated Financial Statements. IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE - -------------------------------------------------------------------------------- 2000 ACQUISITIONS In-process research and development expense was $7.6 million in 2000, related to one-time write-offs in connection with the acquisitions of CASA ($1.4 million), Celerity ($1.1 million), HighTouch ($4.0 million), Systems/Link ($0.7 million) and CardAlert ($0.4 million). The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. CASA, acquired in the first quarter of 2000, is an advanced analytic solutions company that provides account optimization and precision marketing solutions. Prior to 2000, CASA primarily sold its Adaptive Dynamic Marketing solutions to businesses to improve revenue and customer retention. At the time of acquisition, CASA had a number of new technologies under development related to account management algorithms and pricing algorithms, which in-process research and development projects were estimated at the time of acquisition to achieve technological feasibility in 2000. Celerity Technologies, acquired in the second quarter of 2000, is involved in developing and marketing electronic data interchange ("EDI") solutions for the workers' compensation industry. The company is a developer and provider of translation software, desktop software, and value-added network services in support of the claims handling process. Prior to our acquisition, Celerity Technologies primarily sold its software and network services to insurance carriers, third party administrators, managed care organizations, employers, and medical providers to facilitate the workers compensation claims handling process. At the time of acquisition, Celerity Technologies had a number of new technologies under development related to Web-enabling and EDI network technologies, which in-process research and development projects were estimated at the time of acquisition to achieve technological feasibility in 2000. HighTouch, acquired in the second quarter of 2000 by Retek, is a provider of customized software and services relating to customer relationship management ("CRM"). Prior to our acquisition, HighTouch primarily sold customized software and services to a variety of customers in the retail industry. At the time of acquisition, HighTouch had technology under development relating to the creation of a fully integrated standardized off-the-shelf CRM product, which in-process research and development project was estimated at the time of acquisition to achieve technological feasibility in 2000. Systems/Link, acquired in the third quarter of 2000, is a software developer that creates data management solutions for large telecommunications companies. The company provides applications for real-time data collection, call detail record exchange, fraud control and prepaid services for carriers. At the time of acquisition, Systems/Link had a new technology under development related to a F-10 41 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) real-time roamer record exchange system for enhanced fraud control capabilities, which in-process research and development project was estimated at the time of acquisition to achieve technological feasibility in 2001. CardAlert, acquired in the third quarter of 2000, provides ATM and debit card risk management services to domestic financial institutions and debit card networks. The company's Accelerated Detection technology analyzes daily ATM transactions for fraudulent activity. Prior to its acquisition, CardAlert primarily provided fraud detection services to large domestic debit card networks. At the time of acquisition, CardAlert had a new technology under development related to fraud detection for signature-based credit card activity, which in-process research and development project was estimated at the time of acquisition to achieve technological feasibility in the third quarter of 2001. We used an independent appraisal firm to assist us with our valuations of the fair market values of the purchased assets in connection with these acquisitions. Fair market value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. The in-process research and development projects were valued through the use of a discounted cash flow analysis, taking into account projected future cash flows associated with these projects once they achieve technological feasibility, their stage of completion as of the acquisition date, and the expected return requirements (i.e. discount rates) for determining present values of the projected cash flows. Stages of completion were estimated by considering time, cost, and complexity of tasks completed prior to the acquisition as a percentage of total time, cost and effort required for the total project up to achieving technological feasibility. With respect to the projected financial information provided to our appraiser pertaining to these acquisitions: CASA prepared a detailed set of projections forecasting revenue from the new algorithms as well as gross profit and operating profit margins; Celerity and HNC prepared a detailed set of projections forecasting revenue from the Web-enabling and EDI technology as well as gross profit and operating profit margins; Retek prepared a detailed set of projections forecasting revenue from the HighTouch CRM technology as well as gross profit and operating profit margins; Systems/Link and HNC prepared a detailed set of projections forecasting revenue from the real-time roamer record exchange technology as well as gross profit and operating profit margins; and CardAlert and HNC prepared a detailed set of projections forecasting revenue from the credit card fraud detection technology as well as gross profit and operating profit margins. These projections were made based on an assessment of customer needs and the expected pricing and cost structure. With respect to the discount rates used in the valuation approach, incomplete technology represents a mix of near and mid-term prospects for the acquired businesses and imparts a level of uncertainty as to their prospects. A reasonable expectation of return on the incomplete technology would be higher than that of completed technology due to these inherent risks. As a result, the earnings associated with incomplete technology were discounted based upon the following methodologies: The Capital Asset Pricing Model was used to determine the cost of equity. It combines a risk free rate of return with an equity risk premium multiplied by a factor, referred to as Beta, which is based on the performance of common stock prices of similar publicly traded companies. Employing these data for CASA, Celerity, HighTouch, Systems/Link and CardAlert, the discount rates attributable to the businesses were 22.0%, 19.3%, 21.2%, 21.0% and 21.0%, respectively, which were used for valuing completed technology. Since incomplete technology would require a higher return than completed technology, the valuation reports prepared by our appraiser utilized discount rates of 27.0%, 24.3%, 26.2%, 31.0% and 31.0% for CASA, Celerity, HighTouch, Systems/Link and CardAlert, respectively, to present value cash flows (in excess of a return on other assets of the business) attributable to in-process research and development projects. The in-process research and development for the CASA, Celerity, HighTouch, Systems/Link and CardAlert projects have reached completion or continue to F-11 42 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) progress, in all material respects, consistently with our original assumptions that were provided to the independent appraiser and used to value the in-process research and development. 1999 ACQUISITION In-process research and development expenses was $1.5 million in 1999, related to a one-time write-off in connection with Retek's acquisition of WebTrak in the fourth quarter of 1999. At the time of acquisition, certain WebTrak products were under development. The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. Retek used an independent appraisal firm to assist in the valuation of the fair market values of the purchased assets of WebTrak. Fair market value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. Retek provided assumptions by product line of revenue, cost of goods sold and operating expense to the appraiser to assist in the valuation. The in-process research and development projects were valued through the use of a discounted cash flow analysis, taking into account projected future cash flows associated with these projects once they achieve technological feasibility, their stage of completion as of the acquisition date, and the expected return requirements (i.e. discount rates) for determining present values of the projected cash flows. Stages of completion were estimated by considering time, cost, and complexity of tasks completed prior to the acquisition as a percentage of total time, cost and effort required for the total project up to achieving technological feasibility. Earnings associated with WebTrak's incomplete technology were discounted at a rate of 26.4% 1998 ACQUISITIONS In-process research and development expense was $6.1 million in 1998, related to one-time write-offs in connection with the acquisitions of PCS ($1.8 million), FTI ($3.0 million), and the ATACS product line ($1.3 million). The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. PCS, acquired in the first quarter of 1998, was a supplier of fully integrated distribution center management software products that address the distribution needs of the retail, wholesale and manufacturing industries. At the time of acquisition, PCS had a number of new technologies under development, including primarily two software product versions that were being designed to assist warehouse operations and of which were estimated to achieve technological feasibility in 1999. FTI, acquired in the second quarter of 1998, developed and marketed profitability measurement and decision-support software products and related support services to banks and other similar financial institutions. At the time of acquisition, FTI had various new products under development relating to profitability measurement and other decision support systems, that were estimated to achieve technological feasibility at various dates in 1998 and 1999. F-12 43 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The ATACS product line, acquired in the second quarter of 1998, was a fraud management software solution for the wireline, wireless and Internet telecommunication service provider industries. At the time of acquisition, ATACS Version 4.2, which included new features and interface technologies, was under development and was estimated to reach technological feasibility in the third quarter of 1998. Although Version 4.2 had as its foundation certain technology from completed versions, management believed that Version 4.2 development efforts were of a significance level to be considered new research and development efforts. We used an independent appraisal firm to assist us with our valuations of the fair market values of the purchased assets in connection with these acquisitions. Fair market value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. The in-process research and development projects were valued through the use of a discounted cash flow analysis, taking into account projected future cash flows associated with these projects once they achieve technological feasibility, their stage of completion as of the acquisition date, and the expected return requirements (i.e. discount rates) for determining present values of the projected cash flows. Stages of completion were estimated by considering time, cost, and complexity of tasks completed prior to the acquisition as a percentage of total time, cost and effort required for the total project up to achieving technological feasibility. With respect to the projected financial information provided to our appraiser pertaining to these acquisitions, we prepared detailed sets of projections forecasting revenues from the in-process technologies as well as gross profit and operating profit margins. These projections were made based on an assessment of customer needs and the expected pricing and cost structure. With respect to the discount rates used in the valuation approach, incomplete technology represents a mix of near and mid-term prospects for the acquired businesses/product lines and imparts a level of uncertainty as to their prospects. A reasonable expectation of return on the incomplete technology would be higher than that of completed technology due to these inherent risks. As a result, the earnings associated with incomplete technology were discounted based upon the following methodologies: The Capital Asset Pricing Model was used to determine the cost of equity for the PCS and ATACS product line acquisitions. It combines a risk free rate of return with an equity risk premium multiplied by a factor, referred to as Beta, which is based on the performance of common stock prices of similar publicly traded companies. The Weighted Average Cost of Capital was used to determine the discount rate for FTI. Employing these data for PCS, FTI and the ATACS product line, the discount rates attributable to the businesses/product line were 30.0%, 17.0% and 17.5%, respectively, which were used for valuing completed technology. Since incomplete technology would require a higher return than completed technology, the valuation reports prepared by our appraiser utilized rates of 40.0%, 27.0% and 22.5% for PCS, FTI and the ATACS product line, respectively, to present value cash flows (in excess of a return on other assets of the business) attributable to in-process research and development projects. OTHER OPERATING EXPENSES - -------------------------------------------------------------------------------- During 2000, we recorded an impairment charge of $1.2 million related to the abandonment of a lease and associated property and equipment. No impairment charges were recorded in 1999 or 1998. F-13 44 INTEREST INCOME - -------------------------------------------------------------------------------- Interest income totaled $12.9 million in 2000, $6.3 million in 1999 and $6.8 million in 1998. The increase in interest income in 2000 compared to 1999 is attributable primarily to increased interest earned as a result of higher average cash and investment balances during 2000 whereas the decrease in interest income in 1999 from 1998 is attributable primarily to lower average cash and investment balances during 1999 as compared to 1998. INTEREST EXPENSE - -------------------------------------------------------------------------------- Interest expense totaled $4.2 million in 2000, $5.7 million in 1999 and $4.5 million in 1998. The majority of our interest expense during each of these years relates to our Convertible Subordinated Notes (the "Notes"). The decline in interest expense in 2000 compared to 1999 is attributable primarily to the conversion of $83.6 million of the Notes into our common stock during the third quarter of 2000, whereas the outstanding convertible note balance during all of 1999 was $100.0 million. The increase in interest expense in 1999 compared to 1998 is attributable primarily to a full year of interest recorded on the Notes during 1999 and a partial year in 1998, as the Notes were issued in March 1998. EXPENSE RELATED TO DEBT CONVERSION - -------------------------------------------------------------------------------- In connection with the conversion of $83.6 million in Notes during 2000, we incurred and paid $12.7 million in conversion premiums to the note holders, which we recorded as a debt conversion expense. OTHER EXPENSE, NET - -------------------------------------------------------------------------------- Other expense, net totaled $3.4 million in 2000, $0.2 million in 1999 and $0.1 million in 1998. The increase in 2000 compared to 1999 and 1998 is attributable primarily to a $2.8 million charge related to the write-down of our investment in Network Commerce in 2000. See Note 5 of the Notes to the Consolidated Financial Statements. MINORITY INTEREST IN LOSSES (INCOME) OF CONSOLIDATED SUBSIDIARIES - -------------------------------------------------------------------------------- Minority interest in losses (income) of consolidated subsidiaries totaled $7.6 million in 2000, $0.7 million in 1999 and $(0.1) million in 1998, and represents other stockholders' share of the losses (income) of our consolidated subsidiaries, including that relating to Retek in 2000 and 1999. INCOME TAXES - -------------------------------------------------------------------------------- The provision (benefit) for income taxes was $(33.1) million in 2000, $0.5 million in 1999 and $12.8 million in 1998. The differences between the provision (benefit) for income taxes recorded and that computed by applying taxes at statutory rates during 2000, 1999 and 1998 are attributable primarily to the effect of non-deductible expenses, offset by the effect of Retek's loss attributable to minority interest stockholders and the generation of tax credit carryforwards during each of these three years. Significant non-deductible expenses in 2000 include the effect of one-time write-offs of in-process research and development related to acquisitions, stock-based compensation expense, acquisition related amortization, Retek spin-off costs, and debt conversion expense. Significant non-deductible expenses in 1999 include the effect of a one-time write-off of in-process research and development related to an acquisition, stock-based compensation expense, acquisition related amortization and stock redemption charges. Significant non-deductible expenses in 1998 include the effect of one-time write-offs of in-process research and development related to acquisitions, acquisition related amortization and stock redemption charges. See Note 12 of the Notes to the Consolidated Financial Statements. F-14 45 STOCK-BASED COMPENSATION EXPENSE - -------------------------------------------------------------------------------- Within our statement of operations, stock-based compensation charges have been classified as follows in 2000 and 1999:
YEAR ENDED DECEMBER 31, 2000 1999 ---------- ---------- (in thousands) License and maintenance $ 2,658 $ 280 Services and other 2,548 354 Research and development 4,167 1121 Sales and marketing 10,629 441 General and administrative 1,668 9,789 ---------- ---------- $ 21,670 $ 11,985 ========== ==========
During 2000, we recorded net stock-based compensation expense totaling $21.7 million, consisting of $13.8 million in stock-based compensation charges attributable to our Retek spin-off, which are discussed separately below, and $7.9 million in additional net compensation expense. This additional net compensation expense relates primarily to the amortization of unearned stock-based compensation of $8.8 million (of which $8.3 million related to Retek) and also includes additional net compensation income of $0.9 million, primarily related to the reversal of compensation expense recorded in 1999 on variable awards, as a result of a decline in the fair values of these awards during 2000. During 1999, Retek granted stock options to employees and directors to purchase Retek common stock at an exercise price of $10.00 per share when the deemed fair market value of Retek's common stock was $13.00 per share. As a result, Retek recorded unearned stock-based compensation totaling $21.9 million representing the aggregate intrinsic value of the options on the date of grant. Additionally, during 2000, Retek recorded additional unearned stock-based compensation totaling $1.8 million related to an employee option grant having an exercise price below the fair value of Retek's common stock on the date of grant. Amortization of Retek's unearned stock-based compensation totaled $1.9 million during 1999 and $8.3 million during the period from January 1, 2000 through the Retek spin-off date of September 29, 2000. Retek's unearned stock-based compensation balance of $13.3 million at September 29, 2000, net of forfeiture reductions, was removed from our consolidated equity accounts in connection with the Retek spin-off. During 1999, in addition to Retek's amortization of unearned stock-based compensation as described above, we recorded stock-based compensation expense totaling $10.1 million. This compensation expense relates primarily to stock awards granted to former employees and non-employee consultants, of which $8.0 million was calculated at intrinsic value while the remainder related to variable awards measured at fair value. The intrinsic value charge consisted primarily of a one-time charge of $6.1 million related to a key employee severance agreement executed in the fourth quarter of 1999. The fair values of HNC's variable awards during 2000 and 1999 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0.0% for both years; risk-free interest rate of 5.02% and 5.23% in 2000 and 1999, respectively; volatility of 100% for both years; and expected lives from four months to one year according to the vesting date and subsequent exercise period of each option grant, and our stock prices on the various grant dates as well as on December 31, 2000 and 1999. In August 2000, we accelerated the vesting of 25 percent of the outstanding stock options that would have been unvested as of the September 15, 2000 record date to afford our option holders the opportunity to participate in receipt of the Retek share dividend. As a result of this award modification, we recorded a non-cash stock-based compensation charge of $6.7 million during the third quarter of 2000 in accordance with Financial Accounting Standards Board Interpretation No. 44, or FIN 44. Additionally, as a result of the proportionate option repricing in connection with the Retek spin-off, certain options failed to qualify for fixed accounting treatment under FIN 44. As a result, we recorded a one-time charge to operations of $7.1 million related to the modification and cash repurchase of options in connection with the Retek spin-off. F-15 46 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) EXPENSES RELATED TO SPIN-OFF OF RETEK - -------------------------------------------------------------------------------- During 2000, we incurred $48.2 million in non-recurring expenses associated with our spin-off of Retek, excluding stock-based compensation charges totaling $13.8 million that are discussed above. Within our statement of operations, these expenses have been classified as follows in 2000:
YEAR ENDED DECEMBER 31, 2000 ----------------- (in thousands) License and maintenance $6,086 Services and other 6,603 Research and development 5,770 Sales and marketing 12,880 General and administrative 16,846 ------- $48,185 =======
These expenses consisted primarily of a $40.4 million charge related to the accrual of cash bonuses payable to employees and directors who held unvested stock options as of the record date for the Retek dividend, along with investment banking, legal, accounting and other non-recurring costs related to the Retek spin-off. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- Net cash used in operating activities totaled $66.4 million in 2000, compared to net cash provided by operating activities of $4.6 million in 1999. Cash used in operations during 2000 reflects our net loss of $116.4 million, reduced by non-cash aspects of our net loss totaling $50.0 million. Significant non-recurring operational cash outflows during 2000 included $12.7 million in debt conversion expense as well as $40.1 million in cash payments related to bonuses paid and options repurchased in connection with the Retek spinoff. Net cash used in investing activities totaled $72.7 million in 2000, compared to net cash used in investing activities of $30.8 million in 1999. Cash used in investing activities during 2000 included $18.3 million in net purchases of marketable securities, $25.4 million expended for the purchase of property and equipment, $22.8 million paid in connection with our business acquisitions, net of cash acquired, and $6.3 million paid out in connection with equity investments and employee loans made. Net cash provided by financing activities totaled $74.6 million in 2000, compared to net cash provided by financing activities of $108.3 million in 1999. Cash provided by financing activities during 2000 includes $98.5 million in proceeds resulting from stock option exercises and employee stock purchase plan contributions under both HNC and Retek plans, including the repayment of stockholder notes. It also includes $32.6 million in proceeds from the sale of trade receivables, offset by $18.6 million in cash expended to repurchase HNC common stock for treasury and $7.4 million used to repay debt and capital lease obligations, and a $30.5 million reduction of Retek's cash and cash equivalent balance as of the September 29, 2000 spin-off date. As of December 31, 2000, we had $162.8 million in cash, cash equivalents and investment securities. We believe that these balances, including interest to be earned thereon, and borrowings available under our credit facility will be sufficient to fund our working and other capital requirements, including potential investments in other companies and other assets to support the strategic growth of our business, over the next twelve months. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including the potential issuance of debt or equity securities in public markets. Additional financing might not be available on terms favorable to us, or at all, particularly in light of the recent decline in the capital markets. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited. NEW ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and F-16 47 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) liabilities and measured at fair value. In July 1999, the FASB issued Statement of Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which deferred the adoption requirement until the first quarter of 2001. We adopted this new accounting standard effective January 1, 2001. The adoption of FAS 133 in the first quarter of 2001 is not expected to have a significant impact on our consolidated financial position, results of operations or disclosures. In September 2000, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 140"), which replaces Statement of Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS 140 revises the standards for accounting and disclosures for securitizations and other transfers of financial assets and collateral. The primary provisions of this statement are effective for us in the second quarter of 2001. We have not yet determined the impact, if any, that this statement will have on our consolidated financial position or results of operations. F-17 48 HNC SOFTWARE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HNC Software Inc. In our opinion, the accompanying consolidated balance sheet of HNC Software Inc. and the related consolidated statements of operations, of cash flows and of changes in stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of HNC Software Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP San Diego, California January 24, 2001, except as to Note 15, to which the date is March 6, 2001 F-18 49 HNC SOFTWARE INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts) ASSETS
DECEMBER 31, --------------------------- 2000 1999 ---------- ---------- Current assets: Cash and cash equivalents ............................................. $ 69,271 $ 136,340 Marketable securities available for sale-debt ......................... 44,779 22,368 Marketable securities available for sale-equity ....................... 250 6,810 Trade accounts receivable, net ........................................ 43,856 64,189 Deferred income taxes ................................................. 15,045 20,384 Other current assets .................................................. 8,402 11,144 ---------- ---------- Total current assets .......................................... 181,603 261,235 Marketable securities available for sale-debt ........................... 48,453 68,563 Equity investments ...................................................... 14,719 14,219 Property and equipment, net ............................................. 20,826 22,219 Goodwill, net ........................................................... 96,810 17,280 Intangible assets, net .................................................. 47,522 11,788 Deferred income taxes ................................................... 33,844 18,085 Other assets ............................................................ 3,964 3,032 ---------- ---------- $ 447,741 $ 416,421 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities .............................. $ 38,675 $ 30,049 Deferred revenue ...................................................... 9,876 15,274 ---------- ---------- Total current liabilities ..................................... 48,551 45,323 Non-current liabilities ................................................. 259 4,111 Convertible Subordinated Notes .......................................... 16,357 100,000 ---------- ---------- Total liabilities ............................................. 65,167 149,434 ---------- ---------- Commitments and contingencies (Notes 8 and 14) Minority interest in consolidated subsidiaries .......................... - 17,414 ---------- ---------- Stockholders' equity: Preferred stock, $0.001 par value -- 4,000 shares authorized: no shares issued or outstanding .................................... - - Common stock, $0.001 par value -- 120,000 shares authorized: 32,286 and 25,704 shares issued and outstanding, respectively ...... 32 26 Common stock in treasury, at cost -- 49 and 882 shares, respectively.. (3,251) (19,613) Paid-in capital ....................................................... 499,705 275,955 Retained earnings (accumulated deficit) ............................... (104,209) 12,209 Notes receivable from stockholders .................................... (9,049) - Unearned stock-based compensation ..................................... (577) (20,511) Accumulated other comprehensive income (loss) ......................... (77) 1,507 ---------- ---------- Total stockholders' equity .................................... 382,574 249,573 ---------- ---------- $ 447,741 $ 416,421 ========== ==========
See accompanying notes to consolidated financial statements. F-19 50 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Revenues: License and maintenance ....................................................... $ 166,063 $ 155,948 $ 139,294 Services and other ............................................................ 88,821 60,941 39,314 ---------- ---------- ---------- Total revenues ........................................................ 254,884 216,889 178,608 ---------- ---------- ---------- Operating expenses: License and maintenance (including stock-based compensation and Retek spin-off expense totaling $8,744 and $280 in 2000 and 1999, respectively) ................................... 60,469 41,552 33,473 Services and other (including stock-based compensation and Retek spin-off expense totaling $9,151 and $354 in 2000 and 1999, respectively) ............ 72,913 41,271 28,656 Research and development (including stock-based compensation and Retek spin-off expense totaling $9,937 and $1,121 in 2000 and 1999, respectively) .......... 75,490 50,176 32,669 Sales and marketing (including stock-based compensation and Retek spin-off expense totaling $23,509 and $441 in 2000 and 1999, respectively) ........... 89,925 46,259 34,515 General and administrative (including stock-based compensation and Retek spin-off expense totaling $18,514 and $9,789 in 2000 and 1999, respectively) ............................................................... 53,321 33,777 18,977 Transaction-related amortization and costs .................................... 43,734 9,158 3,202 In-process research and development ........................................... 7,601 1,480 6,090 Other (Note 1) ................................................................ 1,172 -- -- ---------- ---------- ---------- Total operating expenses .............................................. 404,625 223,673 157,582 Operating income (loss) ......................................................... (149,741) (6,784) 21,026 Interest income ................................................................. 12,924 6,299 6,799 Interest expense ................................................................ (4,231) (5,747) (4,460) Expense related to debt conversion .............................................. (12,676) -- -- Other expense, net .............................................................. (3,378) (226) (29) Minority interest in losses (income) of consolidated subsidiaries ............... 7,582 722 (126) ---------- ---------- ---------- Income (loss) before income tax provision (benefit) ................... (149,520) (5,736) 23,210 Income tax provision (benefit) .................................................. (33,102) 536 12,758 ---------- ---------- ---------- Net income (loss) ..................................................... $ (116,418) $ (6,272) $ 10,452 ========== ========== ========== Earnings per share: Basic net income (loss) per share ............................................. $ (4.08) $ (0.25) $ 0.41 ========== ========== ========== Diluted net income (loss) per share ........................................... $ (4.08) $ (0.25) $ 0.39 ========== ========== ========== Shares used in computing basic net income (loss) per share ...................... 28,529 24,969 25,362 ========== ========== ========== Shares used in computing diluted net income (loss) per share .................... 28,529 24,969 26,650 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-20 51 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................. $ (116,418) $ (6,272) $ 10,452 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts ............................................. 6,505 5,112 3,172 Depreciation and amortization ............................................... 53,045 17,583 10,827 Acquired in-process research and development ................................ 7,601 1,480 6,090 Loss (gain) on asset impairments and dispositions ........................... 1,172 222 (56) Write-down of marketable security ........................................... 2,750 -- -- Non-cash stock-based compensation expense ................................... 15,896 11,985 2,387 Deferred income tax (benefit) expense ....................................... (35,384) (4,625) 4,039 Minority interest in (losses) income of consolidated subsidiaries ........... (7,582) (722) 126 Changes in assets and liabilities: Trade accounts receivable ................................................. (40,458) (35,606) (26,111) Deferred income taxes ..................................................... (291) 4,645 6,864 Other assets .............................................................. (8,753) (4,635) (2,312) Accounts payable and accrued liabilities .................................. 15,954 9,750 4,361 Deferred revenue .......................................................... 39,562 5,670 1,024 ---------- ---------- ---------- Net cash provided by (used in) operating activities .................... (66,401) 4,587 20,863 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of marketable securities ................................ (18,332) 7,856 (74,120) Cash paid for equity investments .............................................. (4,750) (17,225) -- Issuance of employee loans .................................................... (1,500) (200) -- Acquisitions of property and equipment ........................................ (25,366) (16,093) (8,086) Cash paid in business acquisitions, net of cash acquired ...................... (22,773) (5,098) (8,883) ---------- ---------- ---------- Net cash used in investing activities .................................. (72,721) (30,760) (91,089) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of HNC common stock ............................... 88,298 50,107 10,536 Net proceeds from issuances of Retek common stock ............................. 5,635 84,897 -- Repurchase of HNC common stock for treasury ................................... (18,616) (50,383) -- Spin-off of Retek subsidiary .................................................. (30,463) -- -- Proceeds from sales of receivables ............................................ 32,585 23,711 -- Proceeds from repayments of stockholder notes ................................. 3,047 -- Net proceeds from issuance of Convertible Subordinated Notes .................. -- -- 96,913 Repayments of notes payable to stockholders ................................... -- -- (770) Repayment of debt and capital lease obligations ............................... (7,367) (78) (160) ---------- ---------- ---------- Net cash provided by financing activities .............................. 73,119 108,254 106,519 ---------- ---------- ---------- Effect of exchange rate changes on cash ......................................... (1,066) (8) (94) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ............................ (67,069) 82,073 36,199 Cash and cash equivalents at beginning of the period ............................ 136,340 54,267 18,068 ---------- ---------- ---------- Cash and cash equivalents at end of the period .................................. $ 69,271 $ 136,340 $ 54,267 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-21 52 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (in thousands)
Common Stock Treasury Stock --------------------------- --------------------------- Paid-in Shares Amount Shares Amount Capital -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1997 ...... 24,538 $ 25 -- $-- $ 95,919 Common stock options exercised .... 748 1 8,602 Common stock issued under Employee Stock Purchase Plan .... 68 1,933 Tax benefit from stock option transactions .................... 7,569 Compensation related to vested options in Aptex buy-back ....... 3,346 Unearned stock-based compensation expense ......................... Common stock issued for acquisition of PCS .............. 143 5,088 Common stock issued for acquisition of FTI .............. 397 14,725 Unrealized gain on marketable securities, net of tax .......... Foreign currency translation adjustment, net of tax .......... Net income ........................ -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1998 ...... 25,894 $ 26 -- $-- $137,182 -------- -------- -------- -------- -------- Purchase of HNC stock for treasury ........................ (2,266) (2) 2,266 (50,381) Common stock options exercised .... 1,916 2 (1,384) 30,768 16,418 Common stock issued under Employee Stock Purchase Plan .... 115 2,808 Tax benefit from stock option transactions .................... 16,993 Unearned stock-based compensation expense ............ 21,462 Non-cash stock-based compensation expense ......................... 10,077 Effect of Retek's initial public offering ................. 69,539 Common stock issued for PCS earn-out .................... 45 1,476 Unrealized gain on marketable securities, net of tax .......... Foreign currency translation adjustment, net of tax .......... Net loss .......................... -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1999 ...... 25,704 $ 26 882 $(19,613) $275,955 -------- -------- -------- -------- -------- Common stock options exercised .... 3,324 3 (1,026) 32,637 64,340 Purchase of HNC common stock for Treasury ........................ (250) -- 250 (18,616) Release of FTI escrow shares into treasury ........................ (49) 49 (1,808) Common stock issued under Employee Stock Purchase Plan ............. 106 (106) 4,149 (974) Effect of common stock issued under Retek Employee Stock Purchase Plan ................... 3,635 Tax benefit from stock option transactions .................... 36,392 Stock-based compensation expense .. 9,217 Retek initial public offering costs ........................... (243) Spin-off of Retek subsidiary ...... (121,571) Common stock issued in business ... Acquisitions .................... 1,529 1 133,200 Effect of Retek common stock issued in business acquisition .. 5,432 Effect of Retek common stock issued in business alliance ..... 8,010 Common stock issued upon conversion of Subordinated Notes ........................... 1,872 2 82,319 Common stock issued for PCS earn-out .................... 50 3,993 Interest accrued on stockholder notes ............... Repayment of stockholder notes .... Unrealized loss on marketable securities, net of tax .......... Foreign currency translation adjustment, net of tax .......... Net loss .......................... -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2000 ...... 32,286 $ 32 49 $ (3,251) $499,705 ======== ======== ======== ======== ========
Retained Accumulated Earnings Stockholder Unearned Other Total (Accumulated Notes Stock-based Comprehensive Stockholders' Comprehensive Deficit) Receivable Compensation Income (Loss) Equity Income (Loss) ------------ ----------- ------------ ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1997 ...... $ 8,029 $-- $-- $ (113) $103,860 $ 17,457 ======== Common stock options exercised .... 8,603 Common stock issued under Employee Stock Purchase Plan .... 1,933 Tax benefit from stock option transactions .................... 7,569 Compensation related to vested options in Aptex buy-back ....... 3,346 Unearned stock-based compensation expense ......................... (2,508) (2,508) Common stock issued for acquisition of PCS .............. 5,088 Common stock issued for acquisition of FTI .............. 14,725 Unrealized gain on marketable securities, net of tax .......... 47 47 47 Foreign currency translation adjustment, net of tax .......... (94) (94) (94) Net income ........................ 10,452 10,452 10,452 -------- -------- -------- -------- -------- ======== BALANCE AT DECEMBER 31, 1998 ...... 18,481 $-- $ (2,508) $ (160) $153,021 $ 10,405 -------- -------- -------- -------- -------- ======== Purchase of HNC stock for treasury ........................ (50,383) Common stock options exercised .... 47,188 Common stock issued under Employee Stock Purchase Plan .... 2,808 Tax benefit from stock option transactions .................... 16,993 Unearned stock-based compensation expense ............ (19,911) 1,551 Non-cash stock-based compensation expense ............ 1,908 11,985 Effect of Retek's initial public offering ................. 69,539 Common stock issued for PCS earn-out .................... 1,476 Unrealized gain on marketable securities, net of tax .......... 2,084 2,084 2,084 Foreign currency translation adjustment, net of tax .......... (417) (417) (417) Net loss .......................... (6,272) (6,272) (6,272) -------- -------- -------- -------- -------- ======== BALANCE AT DECEMBER 31, 1999 ...... $ 12,209 $-- $(20,511) $ 1,507 $249,573 $ (4,605) -------- -------- -------- -------- --------- ======== Common stock options exercised .... (11,857) 85,123 Purchase of HNC common stock for Treasury ........................ (18,616) Release of FTI escrow shares into treasury ................... (1,808) Common stock issued under Employee Stock Purchase Plan .... 3,175 Effect of common stock issued under Retek Employee Stock Purchase Plan ................... 3,635 Tax benefit from stock option transactions .................... 36,392 Stock-based compensation expense .. 6,679 15,896 Retek initial public offering costs ........................... (243) Spin-off of Retek subsidiary ...... 13,255 1,594 (106,722) Common stock issued in business Acquisitions .................... 133,201 Effect of Retek common stock issued in business acquisition .. 5,432 Effect of Retek common stock issued in business alliance ..... 8,010 Common stock issued upon conversion of Subordinated Notes ........... 82,321 Common stock issued for PCS earn-out .................... 3,993 Interest accrued on stockholder notes ............... (239) (239) Repayment of stockholder notes .... 3,047 3,047 Unrealized loss on marketable securities, net of tax .......... (2,112) (2,112) (2,112) Foreign currency translation adjustment, net of tax .......... (1,066) (1,066) (1,066) Net loss .......................... (116,418) (116,418) (116,418) --------- -------- -------- -------- --------- ========= BALANCE AT DECEMBER 31, 2000 ...... $(104,209) $ (9,049) $ (577) $ (77) $ 382,574 $(119,596) ========= ======== ======== ======== ========= ==========
F-22 53 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1--HNC SOFTWARE INC. AND OUR SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- HNC Software Inc. We develop, market, and support innovative predictive software solutions for leading service industries. These intelligent decision management solutions employ proprietary neural-network predictive decision engines, profiles, traditional statistical modeling, business models, expert rules and/or context vector technology to convert existing data and business experiences into meaningful recommendations and actions. We currently serve the financial services, insurance, telecommunications and e-business markets. Principles of Consolidation and Basis of Presentation Our consolidated financial statements include our assets, liabilities, and results of operations, as well as those of our wholly-owned subsidiaries and Retek Inc. ("Retek"), which was a majority-owned subsidiary prior to its spin-off in September 2000. The ownership of other interest holders in Retek was reflected as minority interest. All significant inter-company balances and transactions have been eliminated. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. Revenue Recognition Software revenue is recognized upon meeting all of the following criteria: execution of a written license agreement, contract or purchase order; delivery of software and/or authorization keys; the license fee is fixed and determinable; and collectibility of the proceeds is assessed as being probable. For multiple-element agreements, total fees are allocated to each element based on vendor-specific objective evidence of fair value or using the residual method when applicable. Allocated fees are recognized separately for each element when it is delivered, providing other criteria referenced above are met. Vendor-specific objective evidence is based on the price charged when an element is sold separately, or if not yet sold separately, is established by authorized management. Revenue from perpetual and short-term periodic licenses of our software is generally recognized upon delivery. Transactional-based license fees under software license arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees. Software maintenance fees are recognized as revenue ratably over the maintenance periods. Revenue from software installation and implementation and from contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Contract losses are recorded as a charge to operations in the period any losses are first identified. Unbilled accounts receivable are stated at estimated realizable value. Transactional-based fees under network service or internally hosted software arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees. Installation or setup fees associated with network service and internally hosted software agreements are recognized ratably over the longer of the customer contract period or estimated life of the customer relationship. Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year from receipt. F-23 54 Statement of Operations Data Within our statement of operations, components of operating expenditures in 2000 and 1999 include stock-based compensation expense and non-recurring expenses related to our spin-off of Retek that have been classified as follows:
YEAR ENDED DECEMBER 31, ------- ------- 2000 1999 ------- ------- STOCK-BASED COMPENSATION EXPENSE: License and maintenance $ 2,658 $ 280 Services and other 2,548 354 Research and development 4,167 1,121 Sales and marketing 10,629 441 General and administrative 1,668 9,789 ------- ------- $21,670 $11,985 ======= ======= EXPENSE RELATED TO SPIN-OFF OF RETEK: License and maintenance $ 6,086 Services and other 6,603 Research and development 5,770 Sales and marketing 12,880 General and administrative 16,846 ------- $48,185 =======
Cash and Cash Equivalents Cash and cash equivalents include amounts on deposit with financial institutions and investments in money market accounts and commercial paper purchased with maturities of three months or less from the date of purchase. The carrying amounts of cash and cash equivalents approximate fair value because of the short-term maturities of these financial instruments. Marketable Securities Management determines the appropriate classification of our investments in marketable debt and equity securities at the time of purchase, and re-evaluates this designation at each balance sheet date. We have classified all of our marketable securities as "available for sale" and carry them at fair value with unrealized gains or losses related to these securities included in other comprehensive income (loss). Realized gains and losses on the sale of investments available for sale are determined using the specific identification method. Losses resulting from other than temporary declines in fair value are charged to operations. Equity Investments Our investments in equity securities of companies over which we do not have significant influence, are accounted for under the cost method. We use the equity method to account for our investments in entities over which we have a voting interest of 20% to 50%, or over which we otherwise have the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize our share of net earnings or losses of the investee, limited to the extent of our investment in, advances to, and financial guarantees for the investee. At December 31, 2000, all of our equity investments in other entities were accounted for under the cost method. Sales of Receivables From time to time, we enter into agreements to sell an undivided interest in specifically identified trade accounts receivable. We sell these trade accounts receivable to a financial institution for a fee, based principally upon defined short-term market rates. Once sold, these receivables are not included in our trade accounts receivable balance on our consolidated balance sheet. During 2000 and 1999, we sold $32,585 and $23,711 of receivables, respectively. We did not F-24 55 sell any receivables during 1998. Fees that we paid related to receivables sold totaled $430 and $364 during 2000 and 1999, respectively, and are included in interest expense in our consolidated statement of operations. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Depreciation and amortization expense related to property and equipment totaled $11,753, $8,215, and $6,102 during 2000, 1999, and 1998, respectively. The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are relieved from the accounts, and resulting gains or losses are recorded in operations. Intangible Assets Intangible assets include goodwill, acquired software development costs, customer base, assembled work force, covenants not to compete, and trademarks. These assets resulted from our acquisitions accounted for under the purchase method of accounting (see Note 3). Amortization expense related to intangible assets totaled $42,372, $8,560, and $3,203 during 2000, 1999, and 1998, respectively. We amortize these assets using the straight-line method over their estimated useful lives as follows:
Estimated Useful Life ------------ Goodwill 3 to 5 years Software development costs 3 to 5 years Customer base 3 to 5 years Assembled work force 3 to 5 years Covenants not to compete 2 to 3 years Trademarks 5 years
Software Development Costs Development costs of software to be licensed or sold that are incurred from the time technological feasibility is established until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through December 31, 2000, no significant development costs were incurred after technological feasibility was reached. Internal-Use Software Costs incurred to develop internal-use software during the application development stage are also capitalized and reported at the lower of cost or net realizable value. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Long-lived Assets We assess potential impairments to our long-lived and intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss would be measured as the amount by which the asset's carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operations. During 2000, we recorded an impairment charge of $1,172 related to the abandonment of a lease and associated property and equipment. No impairment charges were recorded in 1999 or 1998. F-25 56 Income Taxes Current income tax expense is the amount of income taxes expected to be payable for the current year, prior to the recognition of benefits from stock option deductions. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount "more likely than not" to be realized in future tax returns. Tax rate changes and tax credit reinstatements are reflected in income during the period the changes are enacted. Stock-Based Compensation We measure compensation expense for our employee stock-based compensation awards using the intrinsic value method, and provide pro forma disclosures of net income (loss) and net income (loss) per common share as if a fair value method had been applied. Therefore, compensation cost for employee stock awards is measured as the excess, if any, of the fair value of our common stock at the grant date over the amount an employee must pay to acquire the stock. Compensation expense is amortized over the related service periods using the accelerated methodology prescribed by Financial Accounting Standards Board Interpretation No. 28. Compensation expense for awards that are forfeited is reversed against compensation expense in the period of forfeiture. Stock-based awards issued to non-employees are accounted for using a fair value method and are marked to fair value at each period end until the earlier of the date at which a performance commitment has been obtained or the awards are fully vested. Fair value of stock-based awards is determined using the Black-Scholes option pricing model with weighted average assumptions for dividend yield, risk-free interest rate, expected volatility, and contractual life. Net Income (Loss) Per Common Share Basic net income (loss) per common share is computed as net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed as net income (loss) divided by the weighted average number of common shares and dilutive potential common shares outstanding during the period, using the treasury stock method. The computation for basic and diluted net income (loss) per share is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- NET INCOME (LOSS) USED: Net income (loss) used in computing basic and diluted net income (loss) per common share $(116,418) $ (6,272) $ 10,452 ========= ========= ========= SHARES USED: Weighted average common shares outstanding used in computing basic net income per common share 28,529 24,969 25,362 Weighted average options to purchase common stock as determined by application of the treasury stock method -- -- 1,227 Additional common shares issued for PCS acquisition earn-out -- -- 23 Employee Stock Purchase Plan common stock equivalents -- -- 38 --------- --------- --------- Shares used in computing diluted net income per common share 28,529 24,969 26,650 ========= ========= =========
The conversion of our 4.75% Convertible Subordinated Notes (see Note 9) outstanding during 2000, 1999 and 1998, into 3,512, 2,230 and 1,834 common shares, respectively, were not included in the computation of diluted net income (loss) per common share, as their effect in such periods would be anti-dilutive. For 2000 and 1999, weighted average options to purchase 2,064 and 6,491 shares of common stock, respectively, and Employee Stock Purchase Plan common stock equivalents of 196 and 56 shares of common stock, respectively, were not included in the computation of diluted net loss per common share as their effect in these periods would be anti-dilutive. F-26 57 Foreign Currency Translation The financial statements of our international operations have been translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and recorded as a separate component of other comprehensive income (loss). Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than our entity's local currency) are recorded in operations. Comprehensive Income (Loss) Comprehensive income (loss) is the change in our equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. It includes net income (loss), foreign currency translation adjustments and unrealized gains and losses, net of tax, on our investments in marketable securities. Concentration of Risk Our financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable, which are generally not collateralized. Our policy is to place our cash, cash equivalents, and marketable securities with high credit quality financial institutions, commercial companies and government agencies in order to limit the amount of credit exposure. We enter into software license and installation agreements and commercial development contracts primarily with large customers in the services industries (financial, insurance and telecommunications). We do not require collateral from our customers, but our credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. We maintain allowances for potential credit losses. Segment Reporting Our operating segments are presented consistently with the way that our management organizes and evaluates financial information for making internal operating decisions and assessing performance. Certain prior year segment information has been reclassified to conform to the current year presentation. Advertising and Promotion Costs Advertising and promotion costs are expensed as incurred. Advertising and promotion costs totaled $8,006, $3,651 and $1,791 in 2000, 1999 and 1998, respectively, and are included in sales and marketing expense in our consolidated statement of operations. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. In July 1999, the FASB issued Statement of Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133" which deferred the adoption requirement until the first quarter of 2001. We adopted this new accounting standard effective January 1, 2001. The adoption of FAS 133 in the first quarter of 2001 is not expected to have a significant impact on our consolidated financial position, results of operations or disclosures. In September 2000, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 140"), which replaces Statement of Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS 140 revises the standards for accounting and disclosures for securitizations and other transfers of financial assets and collateral. The primary provisions of this statement are effective for us in the second quarter of 2001. We have not yet determined the impact, if any, that this statement will have on our consolidated financial position or results of operations. F-27 58 NOTE 2--INITIAL PUBLIC OFFERING AND SPIN-OFF OF RETEK INC. On September 10, 1999, Retek filed a registration statement with the Securities and Exchange Commission relating to an initial public offering of Retek's common stock. The offering was consummated in November 1999. In the offering, Retek sold 6,325 shares of its common stock. Prior to the offering, we transferred to Retek all of the shares of our wholly owned subsidiary, Retek Information Systems, Inc. On August 7, 2000, HNC's board of directors declared a dividend of all of the shares of Retek common stock held by HNC, or 40,000 shares, to complete the spin-off of our Retek subsidiary. We received a private letter ruling from the Internal Revenue Service that HNC's dividend of its shares of Retek common stock would be tax-free to HNC and our stockholders for U.S. federal income tax purposes. This dividend was paid on September 29, 2000 to all HNC stockholders of record as of September 15, 2000 using a distribution ratio of approximately 1.243 shares of Retek common stock for each share of HNC common stock held. Cash was paid in lieu of fractional shares. The shares of Retek common stock that we distributed in the Retek spin-off constituted all the Retek shares owned by HNC and represented approximately 83.9% of Retek's outstanding shares as of the September 29, 2000 distribution date. As a result of our distribution of our Retek common shares, Retek is no longer affiliated with HNC. In connection with this spin-off, we eliminated net assets totaling $121,213 from our consolidated balance sheet, including cash and cash equivalents of $30,463. Additionally, we eliminated the minority interest associated with Retek of $14,491 and net equity totaling $106,722. In connection with the spin-off of our Retek subsidiary, we accelerated the vesting of 25 percent of the outstanding HNC stock options that would have been unvested as of the September 15, 2000 record date in order to afford our option holders the opportunity to participate in receipt of the dividend. Additionally, we offered option holders the opportunity to exercise a portion of their vested options prior to the record date through the issuance of secured, full recourse promissory notes payable to HNC (the "Stockholder Notes"). The Stockholder Notes bear interest at the rate of 10.0% per annum, and are collateralized by the underlying shares of stock. Loans totaling $11,857 were originally extended to option holders. At December 31, 2000, stockholder notes receivable totaled $9,049, net of repayments, and have been recorded as a reduction to stockholders' equity. In connection with the Retek dividend, we also adjusted the exercise price of all HNC stock options that were outstanding immediately following payment of the dividend. The adjusted stock option exercise prices were calculated by multiplying the pre-dividend option exercise price by the price of HNC common stock immediately after payment of the dividend, and dividing that product by the price of HNC common stock immediately before payment of the dividend. The vesting acceleration of HNC stock options and the adjustment to HNC stock option exercise prices that were greater than the closing price of HNC common stock on September 29, 2000 resulted in stock-based compensation charges (see Note 13). Because the adjustment to the exercise price of HNC options described above was less than the change in value of unvested HNC stock options resulting from the Retek distribution, we paid cash bonuses to employees and directors who held unvested stock options as of the record date, and recorded a related charge to operations in the amount of $40,427. These bonuses were paid out in October 2000 and January 2001. NOTE 3--ACQUISITIONS In September 2000, we acquired all of the outstanding stock and other securities of Systems/Link Corporation ("Systems/Link") in exchange for the issuance of 634 shares of our common stock, including 40 underlying shares associated with stock options we exchanged, and $5,512 in cash. We placed 142 of the shares issued and $1,275 of the cash portion of the purchase price into escrow, to secure indemnification obligations of the former Systems/Link stockholders. Systems/Link is a software developer that creates data management solutions for large telecommunications companies, providing applications for real-time data collection, call detail record exchange, fraud control and prepaid services to carriers. We applied the purchase method of accounting for the acquisition of Systems/Link, which resulted in a purchase price of $42,549. The excess of this amount over the net liabilities assumed was $56,416, of which $55,686 was allocated to intangible assets, including goodwill, and $730 was allocated to in-process research and development. In September 2000, we acquired all of the outstanding stock and other securities of CardAlert Services, Inc. ("CardAlert") in exchange for the issuance of 208 shares of our common stock. We placed 42 of the shares issued into escrow to secure indemnification obligations of the former CardAlert stockholders. CardAlert provides ATM and debit card risk management services to domestic financial institutions and debit card networks. We applied the purchase method of accounting for the acquisition of CardAlert, which resulted in a purchase price of $12,608. The excess of this amount over F-28 59 the net liabilities assumed was $12,976, of which $12,555 was allocated to intangible assets, including goodwill, and $421 was allocated to in-process research and development. In May 2000, Retek acquired all of the outstanding stock and other securities of HighTouch Technologies, Inc. ("HighTouch") in exchange for the issuance of 389 shares of Retek's common stock and $18,000 in cash. HighTouch is a provider of customized software and services relating to customer relationship management. Retek applied the purchase method of accounting for the acquisition of HighTouch, which resulted in a purchase price of $26,308. The excess of this amount over the net liabilities assumed was $30,558, of which $26,558 was allocated to intangible assets, including goodwill, and $4,000 was allocated to in-process research and development. In April 2000, we acquired all of the outstanding stock and other securities of Celerity Technologies, Inc. ("Celerity") in exchange for the issuance of 220 shares of our common stock and $2,400 in cash. We placed 33 of the shares issued into escrow to secure indemnification obligations of the former Celerity shareholders. Celerity develops and markets electronic data interchange solutions for the workers' compensation industry. We applied the purchase method of accounting for the acquisition of Celerity, which resulted in a purchase price of $18,591. The excess of this amount over the net liabilities assumed was $20,769, of which $19,719 was allocated to intangible assets, including goodwill and $1,050 was allocated to in-process research and development. In March 2000, we acquired all of the outstanding stock and other securities of Onyx Technologies, Inc. ("Onyx") in exchange for the issuance of 382 shares of our common stock, including 30 underlying shares associated with stock options we exchanged, and $1,500 in cash. We placed 105 of the shares issued and $450 of the cash portion of the purchase price into escrow to secure indemnification obligations of the former Onyx shareholders. During September 2000 and March 2001, we released from escrow without claim a total of 70 shares of our common stock and $300 in cash. The remaining 35 shares and $150 in cash are scheduled to be released from escrow in September 2001 and March 2002. Onyx is a provider of online data access and customer acquisition analysis for telecommunications, financial and retail service companies. We applied the purchase method of accounting for the acquisition of Onyx, which resulted in a purchase price of $49,555, of which $3,500 represented our initial 1999 investment in Onyx. The excess of this amount over the net liabilities assumed of $51,163 was allocated to intangible assets, including goodwill. In March 2000, we acquired all of the outstanding stock and other securities of the Center for Adaptive Systems Applications, Inc. ("CASA") in exchange for the issuance of 226 shares of our common stock, including 80 underlying shares associated with stock options we exchanged. CASA is an advanced analytics solutions company that develops and markets account optimization and precision marketing solutions. We placed 38 of the shares issued into escrow to secure indemnification obligations of the former CASA stockholders. We applied the purchase method of accounting for the acquisition of CASA, which resulted in a purchase price of $23,756. The excess of this amount over the net liabilities assumed was $27,260, of which $25,860 was allocated to intangible assets, including goodwill, and $1,400 was allocated to in-process research and development. In March 2000, we acquired all of the outstanding stock and other securities of Adaptive Systems Applications, Inc. ("AIM") in exchange for 9 shares of our common stock, including 0.4 underlying shares associated with stock options we exchanged. AIM provides marketing process automation, campaign execution software, and client-to-vendor data management to direct marketers of enhancement services. We applied the purchase method of accounting for the acquisition of AIM, which resulted in a purchase price of $1,656, of which $750 represents our initial 1999 investment in AIM. The excess of this amount over the net liabilities assumed of $1,785 was allocated to intangible assets, including goodwill. In October 1999, Retek acquired WebTrak Limited ("WebTrak") for a cash payment of $5,333 and the issuance of a $2,667 convertible note, which was subsequently converted into shares of Retek common stock. WebTrak is a United Kingdom company that develops, markets and sells business-to-business products that enable users to publish and share a critical path on the Internet, and allow Web-based collaboration to improve the new product design and development process. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net liabilities assumed of $8,131, of which $6,651 was allocated to intangible assets, including goodwill, and $1,480 was allocated to in-process research and development. In March 1998, we acquired Practical Control Systems Technologies, Inc. ("PCS"; renamed Retek Logistics, Inc.) in exchange for 143 shares of our common stock, 14 shares of which were placed into escrow to secure indemnification obligations of the former PCS stockholders, plus the contingent right, subject to the achievement of certain financial objectives during 1998 and 1999, to receive additional shares of our common stock. During 1999, the escrow shares were F-29 60 released without claim. Additionally, we issued 45 shares in 1999 and 50 shares in 2000, related to the PCS' achievement of financial objectives during 1998 and 1999, respectively. PCS is a supplier of fully integrated distribution center management software products that address the distribution needs of the retail, wholesale and manufacturing industries. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net liabilities assumed of $9,530, of which $7,780 was allocated to intangible assets, including initial goodwill and additional goodwill recorded as a result of the contingent shares issued, and $1,750 was allocated to in-process research and development. In April 1998, we acquired Financial Technology Inc. ("FTI"; renamed HNC Financial Solutions, Inc.) in exchange for the issuance of 397 shares of our common stock, 97 of which were placed in escrow to secure indemnification obligations of the former FTI stockholders, and a cash payment of $1,500. FTI develops and markets profitability measurement and decision-support software products and related support services to banks and other similar financial institutions. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net liabilities assumed of $19,186, of which $16,186 was allocated to intangible assets, including goodwill, and $3,000 was allocated to in-process research and development. In May 2000, we entered into a settlement agreement with the former FTI stockholders pertaining to the release and distribution of the 97 shares of our common stock that were placed into escrow to secure potential indemnification obligations. In accordance with this settlement agreement, one-half of the escrow shares were released to us and placed into treasury while the remaining escrow shares were released to the former FTI shareholders, representing a full and complete release of the former FTI shareholders' contractual indemnification obligations to us. In June 1998, we acquired the Advanced Telecommunications Abuse Control System ("ATACS") product line in exchange for $4,750 in cash. ATACS is a fraud-management software solution for wire-line, wireless and Internet telecommunication service providers. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net liabilities assumed of $4,932, of which $3,592 was allocated to intangible assets, including goodwill, and $1,340 was allocated to in-process research and development. During the fourth quarter of 1998, we acquired the outstanding minority shares of Aptex Software Inc. ("Aptex"). Pursuant to the merger and related transactions, we acquired the outstanding stock held by Aptex employees for $5,321 in cash, and exchanged all outstanding Aptex stock options into options to purchase 380 shares of our common stock. As a result of this merger, we incurred a one-time charge to operations of $2,459 and recorded unearned stock-based compensation of $2,508. The application of the purchase method of accounting to this transaction resulted in an excess of cost over net assets acquired, of which $3,788 was allocated to intangible assets, including goodwill. In-process research and development recorded in connection with the above-mentioned purchase transactions represents the present value of the estimated after-tax cash flows expected to be generated by purchased technologies which, as of the acquisition dates, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimates of relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions, product sales cycles and the estimated life of each product's underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. Projected operating expenses include costs of revenues, marketing and selling expenses, general and administrative expenses, and research and development, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue. We made our assessment of whether acquired technologies in these acquisitions were complete or under development in accordance with the guidelines prescribed by Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2, and Financial Accounting Standards Board Interpretation No. 4. The unaudited pro forma results of operations below present the impact on our results of operations as if the Systems/Link, CardAlert, HighTouch, Celerity, Onyx, CASA and AIM acquisitions had occurred on January 1, 1999, and as if the WebTrak, PCS, FTI and Aptex acquisitions had occurred on January 1, 1998, instead of on their respective acquisition dates: F-30 61
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------- -------------------------- ------------------------- PROFORMA PRO FORMA PRO FORMA HISTORICAL COMBINED HISTORICAL COMBINED HISTORICAL COMBINED ---------- ----------- ---------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Total revenues $ 254,884 $ 270,192 $ 216,889 $ 239,690 $ 178,608 $ 181,048 Total net income (loss) (116,418) (121,344) (6,272) (6,868) 10,452 8,577 Basic net income (loss) per share $ (4.08) $ (4.03) $ (0.25) $ (0.26) $ 0.41 $ 0.34 Diluted net income (loss) per share $ (4.08) $ (4.03) $ (0.25) $ (0.26) $ 0.39 $ 0.32
NOTE 4--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31, ----------------------- 2000 1999 -------- -------- Trade accounts receivable, net: Billed .......................................... $ 41,860 $ 56,738 Unbilled ........................................ 5,593 13,890 -------- -------- 47,453 70,628 Less allowance for doubtful accounts and sales returns ...................... (3,597) (6,439) -------- -------- $ 43,856 $ 64,189 ======== ========
Unbilled accounts receivable represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be realized within one year. During 2000, 1999, and 1998, we reserved $6,505, $5,112, and $3,172, wrote off $3,661, $1,049, and $3,917 and recovered $104, $0, and $79 of our allowance for doubtful accounts and sales returns. Additionally, in connection with the spin-off of Retek on September 29, 2000, we removed Retek's allowance for doubtful accounts and sales returns of $5,787 from our consolidated balance sheet.
DECEMBER 31, ----------------------- 2000 1999 -------- -------- Property and equipment, net: Computer equipment and software ................. $ 34,389 $ 28,320 Furniture and fixtures .......................... 8,312 11,397 Leasehold improvements .......................... 4,897 3,585 -------- -------- 47,598 43,302 Less accumulated depreciation and amortization .............................. (26,772) (21,083) -------- -------- $ 20,826 $ 22,219 ======== ======== Goodwill, net: Goodwill ........................................ 126,053 22,740 Less accumulated amortization ................... (29,243) (5,460) -------- -------- $ 96,810 $ 17,280 ======== ======== Intangible assets, net: Acquired software development costs ............. 41,538 14,532 Customer base ................................... 9,935 1,377 Assembled work force ............................ 6,779 1,106 Other ........................................... 4,266 2,234 -------- -------- 62,518 19,249 Less accumulated amortization ................... (14,996) (7,461) -------- -------- $ 47,522 $ 11,788 ======== ======== Accounts payable and accrued liabilities: Accounts payable ................................ $ 5,712 $ 9,867 Accrued payroll and related benefits ............ 16,539 12,572 Accrued interest payable ........................ 260 1,583 Accrued external costs related to spin-off ...... 6,913 -- Income taxes payable ............................ 2,662 45 Other ........................................... 6,589 5,982 -------- -------- $ 38,675 $ 30,049 ======== ========
F-31 62 The carrying amounts of accrued liabilities approximate fair value because of the short-term maturities of these financial instruments. NOTE 5-- MARKETABLE SECURITIES At December 31, 2000 and 1999, the amortized cost and estimated fair value of marketable securities available for sale were as follows:
DECEMBER 31, 2000 -------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- U.S. government and federal agencies ... $59,841 $ 13 $ -- $59,854 U.S. corporate debt .................... 30,765 111 -- 30,876 U.S. corporate equity .................. 250 -- -- 250 Foreign corporate debt ................. 2,500 2 -- 2,502 ------- ------- --------- ------- $93,356 $ 126 -- $93,482 ======= ======= ========= =======
DECEMBER 31, 1999 -------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- U.S. government and federal agencies ... $62,233 $ -- $ (54) $62,179 U.S. corporate debt .................... 22,415 -- (109) 22,306 U.S. corporate equity .................. 3,000 3,810 -- 6,810 Foreign corporate debt ................. 6,484 -- (38) 6,446 ------- ------- --------- ------- $94,132 $ 3,810 $ (201) $97,741 ======= ======= ========= =======
During the fourth quarter of 2000, we assessed the impairment in value of our $3,000 investment in Network Commerce Inc. (See Note 6) to be other than temporary and, accordingly, we wrote this investment down to $250 as of December 31, 2000, representing the aggregate fair value of our investment in this entity based on the closing market price of this publicly traded security on December 31, 2000. As a result of this write-down, we recorded a loss of $2,750 that is included in other expense, net in our statement of operations. As of December 31, 1999, we had recorded an unrealized gain of $3,810 related to our investment in this entity. No significant gains or losses were realized on our investments during 1999 or 1998. At December 31, 2000 and 1999, all foreign corporate debt investments were denominated in U.S. dollars. NOTE 6--EQUITY INVESTMENTS In July 2000, we became a limited partner in Azure Capital Partners Venture Fund, a venture capital investment management fund, through an initial investment of $2,250. We have committed to invest an additional $2,750 into this fund during 2001. Our commitment to this fund will not exceed 2% of total fund ownership. This investment is being accounted for using the cost method. In July 2000, we invested $1,000 to purchase an approximate 4% interest in Burning Glass Technologies, LLC, a privately held developer of statistical and predictive technologies for use in the employment marketplace. This investment is being accounted for using the cost method. In March 2000, we invested $1,500 to maintain our approximate 6% ownership interest in Open Solutions Inc. ("OSI"). In April 1999, we had previously invested $6,000 to purchase an approximate 6% interest in OSI. OSI is a developer of client/server core data processing solutions for community banks and credit unions. This investment is being accounted for using the cost method. In October 1999, we invested $3,500 to purchase an approximate 13% interest in Onyx Technologies, Inc. ("Onyx"), a provider of online data access and customer acquisition analysis for telecommunications, financial and retail service companies. In March 2000, we acquired Onyx (see Note 3). F-32 63 In June 1999, we invested $3,000 to purchase an approximate 1% interest in Network Commerce Inc. ("Network Commerce"; formerly ShopNow.com Inc.), an e-commerce company that helps customers and merchants buy and sell merchandise online. In September 1999, Network Commerce became a public company. As a result, we reclassified our investment in Network Commerce in our consolidated balance sheet to a short-term available for sale investment classification (see Note 5). In July 1999, we invested $2,000 to purchase an approximate 16% interest in KeyLime Software Inc., a privately held software company specializing in the development of certain data mining technologies. This investment is accounted for using the cost method. In March 1999, we invested $2,000 to purchase an approximate 3% interest in Qpass Inc., a Web-wide transaction and customer service network enabling commerce in digital goods and services. This investment is accounted for using the cost method. In March 1999, we invested $750 to purchase an approximate 16% interest in AIM Solutions, Inc. ("AIM"), a company that provides marketing process automation, campaign execution software, and client-to-vendor data management to direct marketers of enhancement services. In March 2000, we acquired AIM (see Note 3). NOTE 7--CREDIT AGREEMENT We have a Credit Agreement with a bank that provides for a $15,000 revolving line of credit through July 11, 2001. During 2000 and 1999, we had no amounts outstanding under this revolving line of credit. The agreement contains covenants that restrict our ability to pay cash dividends and make loans, advances or investments without the bank's consent. As of December 31, 2000, we were in compliance with all covenants under this agreement. Borrowings under this agreement bear interest at LIBOR plus 0.5%, which is payable monthly. The applicable interest rate was 7.06% at December 31, 2000. NOTE 8--OPERATING LEASES At December 31, 2000, we are obligated through 2007 under non-cancelable operating leases for our facilities and equipment as follows:
NET FUTURE FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE LEASE PAYMENTS INCOME PAYMENTS -------------- ------------- ------------- 2001 ............... $ 7,546 $ (283) $ 7,263 2002 ............... 7,052 -- 7,052 2003 ............... 5,007 -- 5,007 2004 ............... 2,377 -- 2,377 2005 ............... 1,832 -- 1,832 After 2005 ......... 622 -- 622 -------- -------- -------- $ 24,436 $ (283) $ 24,153 ======== ======== ========
Our corporate headquarters lease provides for scheduled rent increases and an option to extend the lease for five years with changes to the terms of the lease agreement and a refurbishment allowance. Rent expense under operating leases totaled $9,075, $6,172 and $3,689 during 2000, 1999, and 1998, respectively, net of sublease income of $555, $1,286, and $1,029, respectively. NOTE 9--CONVERTIBLE SUBORDINATED NOTES In March 1998, we completed an offering of $100,000 of 4.75% Convertible Subordinated Notes (the "Notes"), due on March 1, 2003, which we fully and unconditionally guaranteed. The Notes were originally convertible into our common stock at any time prior to the close of business on the maturity date at a conversion rate of 22.30 shares per $1,000 principal amount of the Notes (equivalent to a conversion price of $44.85 per share). We also had the right to redeem the Notes, in whole or in part, on or after March 6, 2001, at redemption prices (plus accrued interest), as follows: a premium of 101.9 after one year, 100.95 after two years, and at par as of the third year. This offering resulted in net proceeds to us F-33 64 of $97,000 after the payment of underwriters' commissions but before the deduction of offering expenses. Debt issuance costs were recorded at cost and are being amortized using the straight-line method, which approximates the effective interest-method, over the life of the Notes. During 2000, $83,643 of the Notes were converted into HNC common stock at a conversion rate of 22.30 shares per $1,000 principal amount of the Notes (equivalent to a conversion price of $44.85 per share). In connection with these note conversions, we issued 1,872 shares of our common stock. Additionally, we paid $12,676 million in conversion premiums to the converting note holders, which we recorded as a debt conversion charge. As of December 31, 2000, $16,357 of the Notes remained outstanding. In connection with the spin-off of our Retek subsidiary, the indenture governing the Notes required an adjustment to the conversion price of the remaining outstanding Notes. This conversion price was based upon a formula that calculated an adjusted conversion rate using the relative per common share values of HNC and Retek as of the date of the spin-off. As a result of this adjustment, the remaining Notes became convertible into our common stock at a conversion rate of 100.20 shares per $1,000 principal amount of the Notes (equivalent to a conversion price of $9.98 per share). As discussed in Note 15, the remaining outstanding Notes were converted into our common stock in March 2001. The fair value of the Notes at December 31, 2000 was estimated to be $48,657, calculated based upon the fair value of the underlying shares of HNC common stock that the Notes were convertible into as of this date based upon the revised conversion rate. Cash amounts paid for interest related to the Notes totaled $4,750, $4,750, and $2,335 during 2000, 1999, and 1998, respectively. NOTE 10--TREASURY, COMMON AND PREFERRED STOCK During 2000, we repurchased 250 shares of our outstanding common stock for treasury at a cost of $18,616. During 1999, we repurchased 2,266 shares of our outstanding common stock for treasury at a cost of $50,383. During March 1998, we completed a secondary public offering of 2,100 shares of common stock (of which 2,080 shares were sold by selling stockholders and 20 shares were sold by us) at a price to the public of $34.50 per share, which resulted in net proceeds of $655 after the payment of underwriters' commissions but before the deduction of offering expenses. Our Board of Directors is authorized to issue up to 4,000 shares of preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of common stockholders will be superceded by the rights of any preferred stock holders, if preferred stock is issued in the future. NOTE 11--INCOME TAXES The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2000 1999 1998 -------- -------- -------- CURRENT: Federal ................... $ -- $ 3,869 $ 6,659 State ..................... -- 1,042 1,549 Foreign ................... 2,282 250 511 DEFERRED: Federal ................... (33,899) (3,958) 3,218 State ..................... (1,485) (694) 715 Foreign ................... 27 106 -------- -------- -------- $(33,102) $ 536 $ 12,758 ======== ======== ========
F-34 65 Income before income tax provision (benefit) was taxed under the following jurisdictions:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 --------- --------- --------- Domestic ......... $(154,945) $ (6,521) $ 21,388 Foreign .......... 5,425 785 1,822 --------- --------- --------- $(149,520) $ (5,736) $ 23,210 ========= ========= =========
A reconciliation of the income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate to income before income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 -------- -------- -------- Amounts computed at statutory federal rate ............ $(52,332) $ (2,008) $ 8,123 State income taxes, net of federal benefit ............ (965) 226 1,472 Non-deductible debt conversion expense ................ 4,437 -- -- Non-deductible spin-off expense ....................... 4,820 -- -- Tax credit carry-forwards generated ................... (1,005) (642) (949) Non-deductible stock redemption compensation expense ............................................ -- 543 835 Non-deductible acquired technology and amortization ....................................... 12,110 1,947 2,895 Minority interest in Retek ............................ (2,654) (253) -- Stock based compensation .............................. 1,910 407 -- Other, net ............................................ 577 316 382 -------- -------- -------- Income tax provision (benefit) ........................ $(33,102) $ 536 $ 12,758 ======== ======== ========
During 2000, 1999 and 1998, we realized certain tax benefits related to stock option transactions in the amounts of $36,392, $16,993 and $7,569, respectively. The tax benefits from these stock option tax deductions were credited directly to paid-in capital. Deferred tax assets (liabilities) are summarized as follows:
DECEMBER 31, ------------------------ 2000 1999 -------- -------- Taxable pooling basis difference ............ $ -- $ 14,955 Net operating loss carry-forwards ........... 54,953 11,257 Tax credit carry-forwards ................... 5,713 6,251 Allowance for doubtful accounts ............. 1,431 2,506 Deferred tax liabilities related to purchase accounting ....................... (18,159) -- Stock based compensation .................... 741 4,106 Other ....................................... 4,210 (606) -------- -------- 48,889 38,469 Deferred tax asset valuation allowance ...... -- -- -------- -------- Net deferred tax assets ........... $ 48,889 $ 38,469 ======== ========
No valuation allowance has been recorded against our net deferred tax assets as we believe it to be more likely than not that our tax assets will be realized. At December 31, 2000, we had federal and state net operating loss carry-forwards totaling $143,187 and $84,189, respectively. The federal net operating loss carry-forwards include $4,772 that expires in 2011, $24,618 that expires in 2019 and $113,797 that expires in 2020. The state net operating loss carry-forwards expire from 2002 through 2010. F-35 66 At December 31, 2000, we also had $2,391 of federal research and development credit carry-forwards that expire from 2001 to 2020, $1,643 of state research and development credit carry-forwards that have no expiration dates, $1,525 of foreign tax credit carry-forwards that expire from 2000 to 2005, and federal and state alternative minimum tax credits of $150 and $4, respectively, that have no expiration dates. These net operating loss and research and development credit carry-forwards are subject to annual limitations and also are limited to utilization solely by the segment that generated them. Should a substantial change in our ownership occur, as defined by the Tax Reform Act of 1986, there will be additional annual limitations on our utilization of net operating loss and research and development credit carry-forwards. We paid $484, $6,312 and $1,151 of income taxes during 2000, 1999 and 1998, respectively. NOTE 12--SEGMENT INFORMATION During 2000, 1999 and 1998, our reportable segments were based upon our method of internal reporting to management, who viewed our business for these periods by functional market. During 2000, 1999 and 1998, our operating segments reflected the way management organized and evaluated internal financial information to make operating decisions and assess performance. Excluding Retek, our primary operating segments include HNC Financial Solutions ("HNC FS"), HNC Insurance Solutions ("HNC IS") and HNC Telecommunications Solutions ("HNC TS"). HNC FS provides transaction-based, real-time fraud detection, authorization and action decisions for applications such as credit card charge authorization and the loan approval decision process. Our HNC FS segment also includes the activities associated with our former eHNC division, the activities of which we reintegrated into FS in July 2000. HNC IS provides users with the ability to reduce fraud losses and streamline operations in the containment of the medical costs of workers' compensation and automobile accident insurance claims, workers' compensation loss reserving, workers' compensation fraud, managed care effectiveness and provider effectiveness. HNC TS provides our telecommunications carrier customers with the ability to reduce fraud losses and determine customer profitability. HNC TS is presented below along with activities associated with our Advanced Technology Solutions group, which primarily conducts research and development for the United States government, as well as corporate activity. Retek, which we spun-off to stockholders effective September 29, 2000, is also presented separately below. The accounting policies of the segments are the same as those described in Note 1. We evaluate the performance of our segments and allocate resources to them based on operating income. Inter-segment sales are accounted for at fair value as if the sales were to third parties. Our operating segments reflect the way our management team organizes and evaluates internal financial information, in order to make operating decisions and assess performance. Each segment represents a strategic business unit that offers unique products and services to their functional markets. The table below presents segment data for certain statement of operations and balance sheet line items as of and for the years ended December 31, 2000, 1999 and 1998. Segment revenues are summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Segment revenue: HNC FS $ 95,668 $ 73,641 $ 63,244 HNC IS 81,382 66,790 52,140 HNC TS and other 17,899 7,299 6,555 -------- -------- -------- HNC, excluding Retek 194,969 147,730 121,939 Retek 59,915 69,159 56,669 -------- -------- -------- Total consolidated revenue $254,884 $216,889 $178,608 ======== ======== ========
During 2000, 1999 and 1998, one product line in the HNC FS segment accounted for 16.8%, 15.4% and 14.5% of our total revenues, respectively. During those same periods, revenues from one product in the HNC IS segment accounted for 23.5%, 20.9% and 21.5% of our total revenues, respectively. During 1999 and 1998, one product in the Retek segment accounted for 10.1% and 13.2% of our total revenues, respectively. Segment operating income (loss), excluding all non-cash and non-recurring charges that we do not allocate between segments, is summarized as follows: F-36 67
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Segment operating income (loss): HNC FS $ 603 $ 9,935 $ 10,936 HNC IS 10,572 13,390 7,651 HNC TS and other (1,709) (5,168) 700 -------- -------- -------- HNC, excluding Retek 9,466 18,157 19,287 Retek (36,845) (2,318) 11,031 -------- -------- -------- Total operating income (loss) $(27,379) $ 15,839 $ 30,318 ======== ======== ========
A reconciliation of the operating income (loss) reported by each of our segments to our consolidated operating income (loss) is set forth below:
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Segment operating income (loss) $ (27,379) $ 15,839 $ 30,318 Stock-based compensation (21,670) (11,985) -- Transaction-related costs and amortization (43,734) (9,158) (3,202) Expense related to spin-off of Retek (48,185) -- -- Acquired in-process research and development (7,601) (1,480) (6,090) Other (Note 1) (1,172) -- -- --------- -------- -------- Consolidated operating income (loss) (149,741) (6,784) 21,026 Interest income 12,924 6,299 6,799 Interest expense (4,231) (5,747) (4,460) Expense related to debt conversion (12,676) -- -- Other expense, net (3,378) (226) (29) Minority interest in losses (income) of consolidated Subsidiaries 7,582 722 (126) --------- -------- -------- Income (loss) before income tax provision $(149,520) $ (5,736) $ 23,210 ========= ======== ========
Segment depreciation expense, included in operating income, is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Segment depreciation expense: HNC FS $ 4,533 $ 2,971 $ 2,921 HNC IS 2,510 2,134 1,564 HNC TS and other 1,122 801 355 -------- -------- -------- HNC, excluding Retek 8,165 5,906 4,840 Retek 3,588 2,309 1,262 -------- -------- -------- Total segment depreciation expense $ 11,753 $ 8,215 $ 6,102 ======== ======== ========
Segment assets are summarized as follows:
DECEMBER 31, -------------------------- 2000 1999 --------- --------- Total segment assets: HNC FS $ 96,553 $ 49,492 HNC IS 60,106 40,491 HNC TS and other 67,003 5,872 --------- --------- HNC, excluding Retek 223,662 95,855 Retek -- 129,099 --------- --------- Total segment assets 223,662 224,954 Corporate 295,762 291,098 Eliminations (71,683) (99,631) --------- --------- Total consolidated assets $ 447,741 $ 416,421 ========= =========
Corporate assets are primarily comprised of cash and cash equivalents, marketable securities, deferred tax assets and inter-company receivables. Eliminations primarily relate to inter-company balances and investments in subsidiaries. F-37 68 Segment capital expenditures are summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Segment capital expenditures: HNC FS $ 7,053 $ 4,455 $ 2,909 HNC IS 2,252 4,336 1,831 HNC TS and other 3,991 1,565 407 -------- -------- -------- HNC, excluding Retek 13,296 10,356 5,147 Retek 12,070 5,737 2,939 -------- -------- -------- Total capital expenditures $ 25,366 $ 16,093 $ 8,086 ======== ======== ========
Revenue and long-lived assets by geographical area are summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Revenue by geographical area: United States ......................... $205,361 $166,505 $137,332 Foreign ............................... 49,523 50,384 41,276 -------- -------- -------- Total revenue ................. $254,884 $216,889 $178,608 ======== ======== ========
DECEMBER 31, ----------------------- 2000 1999 -------- -------- Long-lived assets by geographical area: United States ............................... $169,963 $ 54,174 Foreign ..................................... 159 145 -------- -------- Total long-lived assets ............. $169,122 $ 54,319 ======== ========
Our foreign revenues are from export sales and international operations. Export sales include sales from the United States to foreign countries. International operations include sales by foreign operations. Revenues from international operations and export sales, primarily to Western Europe, Japan and Canada, represented 19.3%, 23.2% and 23.1% of total revenues in 2000, 1999 and 1998, respectively. Export sales totaled $42,540, $37,713 and $27,840 in 2000, 1999 and 1998, respectively. NOTE 13--STOCK COMPENSATION PLANS We apply Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for our stock-based compensation. Had compensation cost for our stock-based compensation awards been determined based on the fair value at the grant dates of awards, consistent with the method of Financial Accounting Standards Board Statement No. 123, our net income (loss) and basic and diluted pro forma net income (loss) per common share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 --------- -------- -------- Net income (loss): As reported ............................. $(116,418) $ (6,272) $ 10,452 Pro forma ............................... $(230,171) $(43,583) $(21,678) Basic net income (loss) per common share: As reported ............................. $ (4.08) $ (0.25) $ 0.41 Pro forma ............................... $ (8.07) $ (1.75) $ (0.84) Diluted net income (loss) per common share: As reported ............................. $ (4.08) $ (0.25) $ 0.39 Pro forma ............................... $ (8.07) $ (1.75) $ (0.85)
HNC Software Inc. Sponsored Plans We administer several employee benefit plans, both active and inactive. Our active plans include our 1995 Equity Incentive Plan, our 1995 Directors Stock Option Plan, our 1995 Employee Stock Purchase Plan, and our 1998 Stock F-38 69 Option Plan. Our inactive plans include our original 1987 Stock Option Plan and various plans that we acquired in conjunction with our acquisitions. Our inactive plans also include the eHNC 1999 Equity Incentive and Executive Equity Incentive Plans. As a result of a short-form merger of eHNC into HNC in July 2000, all outstanding options under eHNC plans were assumed. These assumed plans were amended to convert their respective options into HNC options as of the respective acquisition or merger dates. While subsequent to the assumption of these plans the acquired employees participated in our own stock option plans and are subject to our plans' terms and conditions, options issued prior to the acquisition or merger dates are subject to their respective plan terms and conditions. Our inactive plans are not discussed herein. For purposes of the discussion regarding our active plans below, "fair market value" means the closing price of our common stock on the Nasdaq National Market on the grant date. Our 1995 Directors Stock Option Plan ("Directors Plan"), as amended, provides for the issuance of up to 600 nonqualified stock options to our outside directors. Under the provisions of the Directors Plan, nonqualified options to purchase 25 shares of our common stock are granted to outside directors upon their respective dates of becoming members of the Board of Directors, and nonqualified options to purchase ten shares of our stock will be granted on each anniversary date. Options under the Directors Plan are to be granted at the fair market value of the stock at the grant date and vest at specific times over a four-year period. As of December 31, 2000, 255 shares remained available for future grant under this plan. Our 1995 Equity Incentive Plan ("Incentive Plan") as amended, provides for the issuance of up to 9,100 shares of our common stock in the form of nonqualified or incentive stock options, restricted stock or stock bonuses. Nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award. Options granted under the Incentive Plan may have a term of up to ten years. We have the discretion to provide for restrictions, and the lapse of restrictions, in respect of restricted stock awards. Options typically vest at the rate of 25% of the total grant per year over a four-year period; however, we may, at our discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 2000, 1,172 shares remained available for future grant under this plan. Our 1998 Stock Option Plan ("1998 Plan"), as amended, provides for the issuance of up to 2,980 shares of our common stock in the form of nonqualified stock options to our employees, officers, consultants and independent advisors. Options granted under the 1998 Plan may have a term of up to ten years and typically vest at the rate of 25% of the total grant per year over a four-year period; however, we may, at our discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 2000, 1,148 shares remained available for future grant under this plan. Our 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"), as amended, provides for the issuance of a maximum of 850 shares of common stock. Each purchase period, eligible employees may designate between 2% and 10% of their cash compensation, up to legally permitted amounts, to be deducted from their compensation for the purchase of common stock under the Stock Purchase Plan. The purchase price of the shares under the Stock Purchase Plan is equal to 85% of the lesser of the fair market value per share on the first day of the twelve-month offering period or the last day of each six-month purchase period. During 2000, 1999 and 1998, 106, 115 and 68 shares of our common stock were issued under the Stock Purchase Plan at an average price of $29.55, $24.46 and $28.34 per share, respectively. As of December 31, 2000, 416 shares were reserved for future issuance under the Stock Purchase Plan. F-39 70 Option transactions under HNC's plans during the three years ending December 31, 2000 are summarized as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE -------- -------- Outstanding at December 31, 1997 ................ 4,591 $ 23.92 Options granted/exchanged ..................... 3,333 34.59 Options exercised ............................. (732) 12.12 Options canceled .............................. (718) 32.04 -------- -------- Outstanding at December 31, 1998 ................ 6,474 29.84 Options granted ............................... 3,845 33.67 Options exercised ............................. (1,916) 24.68 Options canceled .............................. (2,368) 32.11 -------- -------- Outstanding at December 31, 1999 ................ 6,035 33.03 Options granted/exchanged ..................... 3,747 69.84 Options exercised ............................. (3,227) 29.76 Options canceled .............................. (1,249) 47.57 -------- -------- Outstanding at September 29, 2000 (a) ........... 5,306 57.60 Options granted ............................... 1,559 17.46 Options exercised ............................. (98) 12.44 Options canceled .............................. (848) 10.92 -------- -------- Outstanding at December 31, 2000 ................ 5,919 12.88 ======== ========
(a) On September 29, 2000, in connection with the spin-off of Retek, we adjusted the exercise price of all outstanding stock options in accordance with the distribution ratio discussed in Note 2. The weighted average exercise price of options outstanding at September 29, 2000 after consummation of the spin-off was $11.21. The fair value of each option grant under our HNC plans was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants during 2000, 1999 and 1998, respectively: dividend yield of 0.0% for all three years; risk-free interest rates of 6.21%, 5.47% and 5.14%; expected volatilities of 100%, 100% and 65%; and expected lives of 4.1, 4.1 and 5.0 years. The weighted average fair value of options granted under HNC plans during 2000, 1999 and 1998 was $37.61, $23.15 and $22.17, respectively. The fair value of the employees' purchase rights issued pursuant to the Stock Purchase Plan were estimated using the Black-Scholes option pricing model with the following weighted average assumptions during 2000, 1999 and 1998, respectively: dividend yield of 0.0% for all three years; risk-free interest rates of 6.18%, 4.98% and 5.02%; expected volatilities of 100%, 100% and 65%; and an expected life of 6 months for all three years. The weighted average fair value of those purchase rights granted in 2000, 1999 and 1998 was $7.29, $16.66 and $16.25, respectively. The following table summarizes information about employee stock options outstanding at December 31, 2000 under HNC's plans:
OPTIONS OUTSTANDING ------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED ------------------------------- NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 2000 LIFE (IN YEARS) PRICE 2000 PRICE ----------------- -------------- --------------- --------- -------------- --------- $ 0.03 to $6.23 814 7.73 $5.23 126 $5.21 6.24 7.46 733 7.23 6.92 100 6.97 7.47 10.42 758 6.58 8.58 96 8.32 10.43 13.22 618 6.73 11.24 130 10.99 13.23 16.25 1,036 6.85 15.13 109 14.40 16.33 18.10 858 6.22 17.41 195 17.39 18.11 20.25 599 6.43 19.05 94 19.38 20.36 29.69 503 6.60 22.71 50 22.00 ----- ------ 0.03 29.69 5,919 6.81 12.88 900 12.73 ===== ======
Retek Inc. Sponsored Plans During 1999, Retek adopted the 1999 Equity Incentive Plan, the 1999 Director Stock Option Plan and the Employee Stock Option Exchange Program, under which options to purchase common stock in our former subsidiary Retek had been granted. During 1999, Retek also adopted the 1999 Employee Stock Purchase Plan, which provides for the issuance of Retek's common stock to eligible employee participants at a purchase price equal to 85% of the lesser of the fair market F-40 71 value per share on the first day of the two-year offering period and the date of purchase. As a result of our September 2000 spin-off of Retek, HNC is no longer affiliated with any Retek stock compensation plans. During the period from January 1, 2000 through the Retek spin-off date of September 29, 2000, 464 shares of Retek common stock were issued under Retek's employee stock purchase plan at an average price of $12.75 per share. No shares were issued under this plan during 1999. Option activity under Retek's option plans during 1999 and during the period from January 1, 2000 through the spin-off date, is summarized as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE -------- -------- Outstanding at December 31, 1998 ................ -- -- Options granted ............................... 7,416 10.38 Options canceled .............................. (5) 10.00 -------- -------- Outstanding at December 31, 1999 ................ 7,411 10.38 Options granted ............................... 1,496 27.82 Options canceled .............................. (247) 19.93 -------- -------- Outstanding at September 29, 2000 (a) ........... 8,660 13.06 ======== ========
(a) As a result of the Retek spin-off, HNC has no further affiliation with Retek's plans or underlying options, including those outstanding as of the September 29, 2000 spin-off date. The fair value of each option granted under Retek's plans was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions used for grants during the period from January 1, 2000 through the September 29, 2000 spin-off date and during 1999, respectively: dividend yield of 0.0% for both years; risk-free interest rates of 5.12% and 5.47%; expected volatility of 130% and 100%; and expected lives of 4.4 and 4.1 years. The weighted average fair value of options granted under Retek plans during the period from January 1, 2000 through September 29, 2000, and during 1999, was $24.49 and $7.62, respectively. The fair value of the employees' purchase rights issued pursuant to Retek's stock purchase plan in 2000 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0.0%; risk-free interest rate of 5.50%; expected volatility of 130%; and an expected life of 6 months. The weighted average fair value of those purchase rights granted was $8.33. Stock-Based Compensation During 2000, we recorded net stock-based compensation expense totaling $21,670, consisting of $13,762 in stock-based compensation charges attributable to our Retek spin-off, which are discussed separately below, and $7,908 in additional net compensation expense. This additional net compensation expense relates primarily to the amortization of unearned stock-based compensation of $8,772 (of which $8,266 related to Retek) and also includes additional net compensation income of $864, primarily related to the reversal of compensation expense recorded in 1999 on variable awards, as a result of a decline in the fair values of these awards during 2000. During 1999, Retek granted stock options to employees and directors to purchase Retek common stock at an exercise price of $10.00 per share when the deemed fair market value of Retek's common stock was $13.00 per share. As a result, Retek recorded unearned stock-based compensation totaling $21,886 representing the aggregate intrinsic value of the options on the date of grant. Additionally, during 2000, Retek recorded additional unearned stock-based compensation totaling $1,750 related to an employee option grant having an exercise price below the fair value of Retek's common stock on the date of grant. Amortization of Retek's unearned stock-based compensation totaled $1,908 during 1999 and $8,266 during the period from January 1, 2000 through the Retek spin-off date of September 29, 2000. Retek's unearned stock-based compensation balance of $13,255 at September 29, 2000, net of forfeiture reductions, was removed from our consolidated equity accounts in connection with the Retek spin-off. During 1999, in addition to Retek's amortization of unearned stock-based compensation as described above, we recorded stock-based compensation expense totaling $10,077. This compensation expense relates primarily to stock awards granted to former employees and non-employee consultants, of which $7,972 was calculated at intrinsic value while the remainder related to variable awards measured at fair value. The intrinsic value charge consisted primarily of a one-time charge of $6,064 related to a key employee severance agreement executed in the fourth quarter of 1999. F-41 72 The fair values of HNC's variable awards during 2000 and 1999 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0.0% for both years; risk-free interest rate of 5.02% and 5.23% in 2000 and 1999, respectively; volatility of 100% for both years; and expected lives from four months to one year according to the vesting date and subsequent exercise period of each option grant, and our stock prices on the various grant dates as well as on December 31, 2000 and 1999. In August 2000, we accelerated the vesting of 25 percent of the outstanding stock options that would have been unvested as of the September 15, 2000 record date to afford our option holders the opportunity to participate in receipt of the Retek share dividend. As a result of this award modification, we recorded a non-cash stock-based compensation charge of $6,688 during the third quarter of 2000 in accordance with Financial Accounting Standards Board Interpretation No. 44, or FIN 44. Additionally, as a result of the proportionate option repricing in connection with the Retek spin-off, certain options failed to qualify for fixed accounting treatment under FIN 44. As a result, we recorded a one-time charge to operations of $7,074 related to the modification and cash repurchase of options in connection with the Retek spin-off. NOTE 14--CONTINGENCIES Various claims arising in the course of business, seeking monetary damages and other relief, are pending. We believe that these claims will not result in a material negative impact on our results of operations, liquidity or financial condition. However, the amount of the liability associated with these claims, if any, cannot be determined with certainty. We recently settled, without liability, a suit that Nestor Inc. filed against us in November 1998 in the United States District Court for the District of Rhode Island. In this suit, Nestor had alleged antitrust violations and unfair competition claims with respect to our marketing of our Falcon credit card fraud detection product. Nestor's complaint also alleged that we infringed United States patents held by Nestor and sought a declaratory judgment that a United States patent we hold relating to technology used in our Falcon products is invalid and unenforceable. In January 2000 Nestor dropped its claim of patent infringement against us and in January 2001 the case settled and Nestor's remaining claims for antitrust and unfair competition were dismissed. NOTE 15 - SUBSEQUENT EVENT In February 2001, we announced the call for redemption of our outstanding Convertible Subordinated Notes on March 6, 2001. In March 2001, all remaining outstanding Notes were converted into 1,639 shares of our common stock at a conversion ratio of 100.2004 shares per $1,000 principal amount of Notes held. NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for 2000 and 1999 is as follows:
YEAR ENDED DECEMBER 31, 2000(1)(2) ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR --------- --------- --------- --------- --------- (IN THOUSANDS) Revenues .................................... $ 54,564 $ 67,432 $ 77,812 $ 55,076 $ 254,884 Gross Profit ................................ 26,896 35,349 43,543 33,609 139,397 Operating loss .............................. (20,992) (30,462) (85,363) (12,924) (149,741) Net loss .................................... (12,215) (20,145) (78,519) (5,539) (116,418) Basic net income (loss) per share (a) ....... $ (0.47) $ (0.75) $ (2.71) $ (0.17) $ (4.08) Diluted net income (loss) per share (a) .... $ (0.47) $ (0.75) $ (2.71) $ (0.17) $ (4.08)
YEAR ENDED DECEMBER 31, 1999(3) ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR --------- --------- --------- --------- --------- (IN THOUSANDS) Revenues .................................... $ 49,189 $ 55,933 $ 58,773 $ 52,994 $ 216,889 Gross Profit ................................ 29,815 35,484 38,697 30,704 134,700 Operating Income (loss) ..................... 3,685 5,994 7,599 (24,062) (6,784) Net Income (loss) ........................... 2,124 3,345 3,331 (15,072) (6,272) Basic net income (loss) per share (4) ....... $ 0.08 $ 0.14 $ 0.14 $ (0.60) $ (0.25) Diluted net income (loss) per share (4) ..... $ 0.08 $ 0.13 $ 0.13 $ (0.60) $ (0.25)
(1) Results of operations in 2000 include: i) charges of $1.4 million, $5.0 million and $1.2 million related to the write-off of in-process research and development in the first, second and third quarters, respectively; ii) $12.7 million in non-recurring debt conversion expense and $48.2 million in non-recurring Retek spin-off charges in the third quarter, and iii) a $2.8 million charge relating to the write-down of our investment in Network Commerce and a $1.2 million impairment charge related to the abandonment of a lease and associated property and equipment in the fourth quarter. (2) Results of operations in 2000 exclude Retek's results of operations in the fourth quarter, as a result of our spin-off of Retek on September 29, 2000. (3) Results of operations in 1999 include a charge of $1.5 million related to the write-off of in-process research and development in the fourth quarter. (4) Net income (loss) per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net income (loss) amounts per share do not equal the total for the year. F-42 73 EXHIBIT LIST
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.01 Agreement and Plan of Reorganization dated as of April 6, 1998 by and among the Registrant, FW2 Merger Corp. and the shareholders of Financial Technology, Inc. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Commission upon request. (Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K filed April 22, 1998.) 2.02 Plan of Merger dated December 21, 1998 adopted by Registrant and Aptex Software Inc. (Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K filed February 5, 1999). 2.03 Agreement and Plan of Reorganization dated as of March 9, 2000 among the Registrant, ONYX Technologies, Inc. and FW2 Acquisition Corp. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Commission upon request. (Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K filed March 27, 2000.) 2.04 Agreement and Plan of Merger among Retek Inc., HT Acquisition, Inc., HighTouch Technologies, Inc. and Kipling Investments Labvan Limited dated as of April 17, 2000. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Commission upon request. (Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K filed May 25, 2000.) 2.05** Agreement and Plan of Reorganization dated as of September 7, 2000 among Registrant, Systems/Link Corporation and SLC Merger Corp. Pursuant to Item 601(b)(2) of Regulation S-K, certain exhibits and schedules have been omitted but will be furnished supplementally to the Commission upon request. (Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K, as amended, filed September 22, 2000.) 3.01 Registrant's Restated Certificate of Incorporation filed with the Secretary of State of Delaware on June 13, 1996. (Incorporated by reference to Exhibit 3(i).04 to Registrant's Form 10-Q for the quarter ended June 30, 1996.) 3.02 Certificate of Amendment to Registrant's Restated Certificate of Incorporation filed with the Secretary of State of Delaware on June 12, 2000. (Incorporated by reference to Exhibit 4.08 to Registrant's Form S-8 Registration Statement, File No. 333-40344, filed June 28, 2000.) 3.03* Registrant's Bylaws, as amended. 4.01 Form of Specimen Certificate for Registrant's Common Stock. (Incorporated by reference to Exhibit 4.01 to Registrant's Form S-1 Registration Statement, as amended (File No. 33-91932) (the "IPO S-1").) 10.01 Registrant's 1987 Stock Option Plan and related documents. (Incorporated by reference to Exhibit 10.01 to the IPO S-1.)(1) 10.02 Registrant's 1995 Equity Incentive Plan, as amended through March 30, 2000. (Incorporated by reference to Exhibit 4.01 to Registrant's Form S-8 Registration Statement, File No. 333-40344, filed June 28, 2000.)(1) 10.03 Form of 1995 Equity Incentive Plan Stock Option Agreement and Stock Option Exercise Agreement. (Incorporated by reference to Exhibit 10.02 to Registrant's Form S-4 Registration Statement, File No. 333-64527, as amended December 21, 1998.)(1) 10.04 Registrant's 1995 Directors Stock Option Plan, as amended through April 30, 2000. (Incorporated by reference to Exhibit 4.05 to Registrant's Form S-8 Registration Statement, File No. 333-40344, filed June 28, 2000.)(1) 10.05 Form of 1995 Directors Stock Option Plan Option Agreement and Stock Option Exercise Agreement. (Incorporated by reference to Exhibit 10.01 to Registrant's Form 10-Q for the quarter ended June 30, 1999)(1) 10.06 Registrant's 1995 Employee Stock Purchase Plan, as amended through January 1, 2001. (Incorporated by reference to Exhibit 4.01 to Registrant's Form S-8 Registration Statement, File No. 333-55398, filed February 12, 2001.)(1) 10.07 Registrant's 1998 Stock Option Plan, as amended through September 1, 2000 and related form of option agreement. (Incorporated by reference to Exhibit 4.05 to Registrant's Form S-8 Registration Statement, File No. 333-45442, filed September 8, 2000.)(1) 10.08 Aptex Software Inc. 1996 Equity Incentive Plan assumed by Registrant. (Incorporated by reference to Exhibit 4.03 to Registrant's Form S-8 Registration Statement, File No. 333-71923, filed February
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EXHIBIT NUMBER DESCRIPTION ------ ----------- 5, 1999.)(1) 10.09 Form of Aptex Software Inc. 1996 Equity Incentive Plan Stock Option Agreement and Stock Option Exercise Agreement. (Incorporated by reference to Exhibit 4.04 to Registrant's Form S-8 Registration Statement, File No. 333-71923, filed February 5, 1999.)(1) 10.10 Practical Control Systems Technologies, Inc. 1998 Stock Option Plan assumed by Registrant. (Incorporated by reference to Exhibit 4.03 to Registrant's Form S-8 Registration Statement, File No. 333-50623, filed April 21, 1998.)(1) 10.11 Form of Practical Control Systems Technologies, Inc. 1998 Stock Option Plan Stock Option Agreement and Stock Option Exercise Agreement. (Incorporated by reference to Exhibit 4.04 to Registrant's Form S-8 Registration Statement, File No. 333-50623, filed April 21, 1998.)(1) 10.12 Advanced Information Management Solutions, Inc. Stock Option Plan assumed by Registrant. (Incorporated by reference to Exhibit 4.01 to Registrant's Form S-8 Registration Statement, File No. 333-33952, filed April 4, 2000.)(1) 10.13 Form of Advanced Information Management Solutions, Inc. Stock Option Agreement. (Incorporated by reference to Exhibit 4.02 to Registrant's Form S-8 Registration Statement, File No. 333-33952, filed April 4, 2000.)(1) 10.14 ONYX Technologies, Inc. 1999 Stock Plan assumed by Registrant. (Incorporated by reference to Exhibit 4.03 to Registrant's Form S-8 Registration Statement, File No. 333-33952, filed April 4, 2000.)(1) 10.15 Form of ONYX Technologies, Inc. Stock Option Agreement. (Incorporated by reference to Exhibit 4.04 to Registrant's Form S-8 Registration Statement, File No. 333-33952, filed April 4, 2000.)(1) 10.16 The Center for Adaptive Systems Applications, Inc. 1995 Stock Option Plan assumed by Registrant. (Incorporated by reference to Exhibit 4.05 to Registrant's Form S-8 Registration Statement, File No. 333-33952, filed April 4, 2000.)(1) 10.17 Forms of The Center for Adaptive Systems Applications, Inc. Stock Option Agreements. (Incorporated by reference to Exhibit 4.06 to Registrant's Form S-8 Registration Statement, File No. 333-33952, filed April 4, 2000.)(1) 10.18 eHNC Inc. 1999 Equity Incentive Plan, as amended, assumed by Registrant. (Incorporated by reference to Exhibit 4.01 to Registrant's Form S-8 Registration Statement, File No. 333-41388, filed July 13, 2000.)(1) 10.19 Forms of eHNC Inc. Stock Option Agreements and Stock Option Exercise Agreements under the eHNC Inc. 1999 Equity Incentive Plan. (Incorporated by reference to Exhibit 4.02 to Registrant's Form S-8 Registration Statement, File No. 333-41388, filed July 13, 2000.)(1) 10.20 eHNC Inc. 1999 Executive Equity Incentive Plan assumed by Registrant. (Incorporated by reference to Exhibit 4.03 to Registrant's Form S-8 Registration Statement, File No. 333-41388, filed July 13, 2000.)(1) 10.21 Forms of eHNC Inc. Stock Option Agreements and Stock Option Exercise Agreements under the eHNC Inc. 1999 Executive Equity Incentive Plan. (Incorporated by reference to Exhibit 4.04 to Registrant's Form S-8 Registration Statement, File No. 333-41388, filed July 13, 2000.)(1) 10.22 Systems/Link Corporation 1999 Stock Option Plan assumed by Registrant and related forms of agreements. (Incorporated by reference to Exhibit 4.04 to Registrant's Form S-8 Registration Statement, File No. 333-45442, filed September 8, 2000.)(1) 10.23 Separation Agreement dated December 14, 1999 between the Registrant and Robert L. North. (Incorporated by reference to Exhibit 10.23 to Registrant's Form 10-K, as amended, for the year ended December 31, 1999.)(1) 10.24 Separation Agreement dated December 13, 1999 between the Registrant and Raymond V. Thomas. (Incorporated by reference to Exhibit 10.24 to Registrant's Form 10-K, as amended, for the year ended December 31, 1999.)(1) 10.25 Employment Agreement dated October 13, 1999 between the Registrant and John Mutch. (Incorporated by reference to Exhibit 10.25 to Registrant's Form 10-K, as amended, for the year ended December 31, 1999.)(1) 10.26 Employment Agreement dated December 13, 1999 between the Registrant and John Mutch. (Incorporated by reference to Exhibit 10.26 to Registrant's Form 10-K, as amended, for the year ended December 31, 1999.)(1)
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EXHIBIT NUMBER DESCRIPTION ------ ----------- Employment Agreement dated December 13, 1999 between Registrant and Kenneth J. 10.27 Saunders. (Incorporated by reference to Exhibit 10.27 to Registrant's Form 10-K, as amended, for the year ended December 31, 1999.)(1) 10.28 Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers. (Incorporated by reference to Exhibit 10.08 to the IPO S-1.)(1) 10.29 Loan and Security Agreement by and among Registrant and John Mutch and Teresa Mutch, dated as of May 31, 2000. (Incorporated by reference to Exhibit 20.02 to Registrant's Form 10-Q, as amended, for the quarter ended June 30, 2000.)(1) 10.30 Loan and Security Agreement by and among Registrant and Bruce Hansen and Jody Hansen, dated as of June 2, 2000. (Incorporated by reference to Exhibit 20.03 to Registrant's Form 10-Q, as amended, for the quarter ended June 30, 2000.)(1) 10.31* First Amendment to Loan and Security Agreement by and among Registrant and Bruce Hansen and Jody Hansen, effective as of December 1, 2000.(1) 10.32 Employee Option Exercise Assistance documents used under Registrant's option plans, consisting of forms of Secured Full Recourse Promissory Note, Stock Pledge Agreement and related documents. (Incorporated by reference to Exhibit 10.01 to Registrant's Form 10-Q for the quarter ended September 30, 2000.)(1) 10.33* Amended Employee Option Exercise Assistance documents, consisting of forms of Secured Full Recourse Promissory Note, Stock Pledge Agreement and related documents.(1) 10.34 [Intentionally Omitted] 10.35* Strategic Partnership Agreement dated as of October 23, 2000, between Registrant and GeoTrust, Inc., as amended by Amendment No. 1 dated March 6, 2001. 10.36 Office Building Lease dated as of December 1, 1993, as amended effective February 1, 1994 and June 1, 1994, between Registrant and PacCor Partners. (Incorporated by reference to Exhibit 10.09 to the IPO S-1.) 10.37 Credit Agreement dated as of July 11, 1997, between Registrant and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.02 to Registrant's Form 10-Q, as amended, for the quarter ended June 30, 1997.) 10.38 Office Building Lease dated as of May 30, 1997, between Retek Information Systems, Inc. and Midwest Real Estate Holdings, Inc. (Incorporated by reference to Exhibit 10.01 to Registrant's Form 10-Q, as amended, for the quarter ended June 30, 1997.) 10.39 Lease Agreement dated as of June 17, 1996, between Registrant and Williams Properties I, LLC & Williams Properties II, LLC. (Incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K, as amended, for the year ended December 31, 1996.) 10.40 Office Building Lease dated June 17, 1993, between Linsco/Private Ledger Corp. and PacCor Partners and Assignment of the lease to the Registrant. (Incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K, as amended, for the year ended December 31, 1997.) 10.41 First Amendment to Lease Agreement between Williams Properties I, LLC and Williams Properties II, LLC and the Registrant dated June 17, 1996, amended October 28, 1997. (Incorporated by reference to Exhibit 10.16 to Registrant's Form S- 4 Registration Statement, as amended, File No. 333-64527.) 10.42 Second Amendment to Lease between the Registrant and W9/PC Real Estate Limited Partnership dated as of April 13, 1998. (Incorporated by reference to Exhibit 10.17 to Registrant's Form S-4 Registration Statement, as amended, File No. 333-64527.) 10.43 Industrial Lease dated as of October 2, 1998, between the Registrant and The Irvine Company. (Incorporated by reference to Exhibit 99.01 to Registrant's Registration Statement on Form S-8, File No. 333-71923, filed February 5, 1999.) 10.44 Supplement and Amendment No. 1 dated as of November 30, 1998, between Retek Information Systems, Inc. and Midwest Real Estate Holdings LLC. (Incorporated by reference to Exhibit 99.02 to Registrant's Form S-8 Registration Statement, File No. 333-71923, filed February 5, 1999.) 10.45 Supplement and Amendment No. 2 dated as of December 18, 1998, between Retek Information Systems, Inc. and Midwest Real Estate Holdings LLC. (Incorporated by reference to Exhibit 99.03 to Registrant's Form S-8 Registration Statement, File No. 333-71923, filed February 5, 1999.) 10.46 Multi-Tenant Industrial Lease between LBA VF-1, LLC and eHNC. (Incorporated by reference to Exhibit 10.01 to Registrant's Form 10-Q for the quarter ended March 31, 2000.) 21.01* List of Registrant's subsidiaries.
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EXHIBIT NUMBER DESCRIPTION ------ ----------- 23.01* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
- ---------- * Filed herewith. ** Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from this exhibit and have been filed separately with the Commission. (1) Management contract or compensatory plan or arrangement. F-46 EX-3.03 2 a70938ex3-03.txt EXHIBIT 3.03 1 EXHIBIT 3.03 CERTIFICATION OF BYLAWS OF HNC SOFTWARE INC. (A DELAWARE CORPORATION) I, Russell C. Clark, certify on behalf of HNC Software Inc., a Delaware corporation (the "Company"), as follows: 1. I am the duly elected and acting Assistant Secretary of the Company. 2. I am duly authorized to make, execute and deliver this Certificate on behalf of the Company. 3. The attached Bylaws are a true and complete copy of the Bylaws of the Company in effect as of the date of this Certificate. Dated: February 9, 2001 /s/ Russell C. Clark -------------------------------------- Russell C. Clark, Assistant Secretary 2 --------------------------------- BYLAWS OF HNC SOFTWARE INC. (A DELAWARE CORPORATION) AS ADOPTED APRIL 19, 1995 AND AMENDED DECEMBER 10, 1999 --------------------------------- 3 BYLAWS OF HNC SOFTWARE INC. (a Delaware corporation) TABLE OF CONTENTS
PAGE ---- ARTICLE I - STOCKHOLDERS................................................ 1 Section 1.1: Annual Meetings.................................. 1 Section 1.2: Special Meetings................................. 1 Section 1.3: Notice of Meetings............................... 1 Section 1.4: Adjournments..................................... 1 Section 1.5: Quorum........................................... 2 Section 1.6: Organization..................................... 2 Section 1.7: Voting; Proxies.................................. 2 Section 1.8: Fixing Date for Determination of Stockholders of Record ..................................... 3 Section 1.9: List of Stockholders Entitled to Vote............ 3 Section 1.10: Action by Written Consent of Stockholders......... 4 Section 1.11: Inspectors of Elections.......................... 5 Section 1.12: Notice of Stockholder Business; Nominations...... 6 ARTICLE II - BOARD OF DIRECTORS......................................... 8 Section 2.1: Number; Qualifications........................... 8 Section 2.2: Election; Resignation; Removal; Vacancies........ 8
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PAGE ---- Section 2.3: Regular Meetings................................. 8 Section 2.4: Special Meetings................................. 8 Section 2.5: Telephonic Meetings Permitted.................... 9 Section 2.6: Quorum; Vote Required for Action................. 9 Section 2.7: Organization..................................... 9 Section 2.8: Written Action by Directors...................... 9 Section 2.9: Powers........................................... 9 Section 2.10: Compensation of Directors........................ 9 ARTICLE III - COMMITTEES................................................ 10 Section 3.1: Committees....................................... 10 Section 3.2: Committee Rules.................................. 10 ARTICLE IV - OFFICERS ................................................. 11 Section 4.1: Generally........................................ 11 Section 4.2: Chief Executive Officer.......................... 11 Section 4.3: Chairman of the Board............................ 12 Section 4.4: President........................................ 12 Section 4.5: Vice President................................... 12 Section 4.6: Chief Financial Officer.......................... 12 Section 4.7: Treasurer........................................ 12 Section 4.8: Secretary........................................ 12 Section 4.9: Delegation of Authority.......................... 12
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PAGE ---- Section 4.10: Removal.......................................... 13 ARTICLE V - STOCK ................................................. 13 Section 5.l: Certificates..................................... 13 Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificate...................... 13 Section 5.3: Other Regulations................................ 13 ARTICLE VI - INDEMNIFICATION............................................ 13 Section 6.1: Indemnification of Officers and Directors........ 13 Section 6.2: Advance of Expenses.............................. 14 Section 6.3: Non-Exclusivity of Rights........................ 14 Section 6.4: Indemnification Contracts........................ 14 Section 6.5: Effect of Amendment.............................. 14 ARTICLE VII - NOTICES ................................................. 15 Section 7.l: Notice........................................... 15 Section 7.2: Waiver of Notice................................. 15 ARTICLE VIII - INTERESTED DIRECTORS..................................... 15 Section 8.1: Interested Directors; Quorum..................... 15 ARTICLE IX - MISCELLANEOUS.............................................. 16 Section 9.1: Fiscal Year...................................... 16
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PAGE ---- Section 9.2: Seal............................................. 16 Section 9.3: Form of Records.................................. 16 Section 9.4: Reliance Upon Books and Records.................. 16 Section 9.5: Certificate of Incorporation Governs............. 16 Section 9.6: Severability..................................... 16 ARTICLE X - AMENDMENT ................................................. 17 Section 10.1: Amendments....................................... 17
-iv- 7 BYLAWS OF HNC SOFTWARE INC. (A DELAWARE CORPORATION) AS ADOPTED APRIL 19, 1995 AND AMENDED DECEMBER 10, 1999 ARTICLE I STOCKHOLDERS Section 1.1: Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as the Board of Directors shall each year fix. Any other proper business may be transacted at the annual meeting. Section 1.2 Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Chairman of the Board, the Chief Executive Officer, the President, the holders of shares of the Corporation that are entitled to cast not less than ten percent (10%) of the total number of votes entitled to be cast by all shareholders at such meeting, or by a majority of the members of the Board of Directors. Special meetings may not be called by any other person or persons. If a special meeting of stockholders is called by any person or persons other than by a majority of the members of the Board of Directors, then such person or persons shall call such meeting by delivering a written request to call such meeting to each member of the Board of Directors, and the Board of Directors shall then determine the time, date and place of such special meeting, which shall be held not more than one hundred twenty (120) nor less than thirty-five (35) days after the written request to call such special meeting was delivered to each member of the Board of Directors. Section 1.3: Notice of Meetings. Written notice of all meetings of stockholders shall be given stating the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation, such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 1.4: Adjournments. Any meeting of stockholders may adjourn from time to time to reconvene at the same or another place, and notice need not be given of any such adjourned meeting if the time, date and place thereof are announced at the meeting at which the 8 adjournment is taken; provided, however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. Section 1.5: Quorum. At each meeting of stockholders the holders of a majority of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, except if otherwise required by applicable law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporation's stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation's stock held by it in a fiduciary capacity. Section 1.6: Organization. Meetings of stockholders shall be presided over by such person as the Board of Directors may designate, or, in the absence of such a person, the Chairman of the Board, or, in the absence of such person, the President of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting. Such person shall be chairman of the meeting and, subject to Section 1.11 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7: Voting; Proxies. Unless otherwise provided by law or the Certificate of Incorporation, and subject to the provisions of Section 1.8 of these Bylaws, each stockholder shall be entitled to one (1) vote for each share of stock held by such stockholder. Each stockholder entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Voting at meetings of stockholders need not be by written ballot unless such is demanded at the meeting before voting begins by a stockholder or stockholders holding shares representing at least one percent (1%) of the votes entitled to vote at such meeting, or by such stockholder's or stockholders' proxy; provided, however, that an election of directors shall be by written ballot if demand is so made by any stockholder at the meeting before voting begins. If a vote is to be taken by written ballot, then each such ballot shall state the name of the stockholder or proxy voting and such other information as the chairman of the meeting deems appropriate. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided by applicable law, the Certificate of -2- 9 Incorporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the shares of stock entitled to vote thereon that are present in person or represented by proxy at the meeting and are voted for or against the matter. Section 1.8: Fixing Date for Determination of Stockholders of Record. (a) Generally. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board of Directors, then the record date shall be as provided by applicable law. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) Stockholder Request for Action by Written Consent. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice to the Secretary of the Corporation, request the Board of Directors to fix a record date for such consent. Such request shall include a brief description of the action proposed to be taken. The Board of Directors shall, within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. Such record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors within ten (10) days after the date on which such a request is received, then the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, to its principal place of business, or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, then the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. -3- 10 Section 1.9: List of Stockholders Entitled to Vote. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. Section 1.10: Action by Written Consent of Stockholders. (a) Procedure. Unless otherwise provided by the Certificate of Incorporation, and except as set forth in Section 1.8(b) above, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Written stockholder consents shall bear the date of signature of each stockholder who signs the consent and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, to its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. No written consent shall be effective to take the action set forth therein unless, within sixty (60) days of the earliest dated consent delivered to the Corporation in the manner provided above, written consents signed by a sufficient number of stockholders to take the action set forth therein are delivered to the Corporation in the manner provided above. (b) Notice of Consent. Prompt notice of the taking of corporate action by stockholders without a meeting by less than unanimous written consent of the stockholders shall be given to those stockholders who have not consented thereto in writing and, in the case of a Certificate Action (as defined below), if the Delaware General Corporation Law so requires, such notice shall be given prior to filing of the certificate in question. If the action which is consented to requires the filing of a certificate under the Delaware General Corporation Law (a "Certificate Action"), then if the Delaware General Corporation Law so requires, the certificate so filed shall state that written stockholder consent has been given in accordance with Section 228 of the Delaware General Corporation Law and that written notice of the taking of corporate action by stockholders without a meeting as described herein has been given as provided in such section. Section 1.11: Inspectors of Elections. (a) Applicability. Unless otherwise provided in the Corporation's Certificate of Incorporation or required by the Delaware General Corporation Law, the following provisions of -4- 11 this Section 1.11 shall apply only if and when the Corporation has a class of voting stock that is: (i) listed on a national securities exchange; (ii) authorized for quotation on an interdealer quotation system of a registered national securities association; or (iii) held of record by more than 2,000 stockholders; in all other cases, observance of the provisions of this Section 1.11 shall be optional, and at the discretion of the Corporation. (b) Appointment. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. (c) Inspector's Oath. Each inspector of election, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (d) Duties of Inspectors. At a meeting of stockholders, the inspectors of election shall (i) ascertain the number of shares outstanding and the voting power of each share, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (e) Opening and Closing of Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the inspectors at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. (f) Determinations. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.11 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the -5- 12 information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. Section 1.12: Notice of Stockholder Business; Nominations. (a) Annual Meeting of Stockholders. (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders shall be made at an annual meeting of stockholders (A) pursuant to the Corporation's notice of such meeting, (B) by or at the direction of the Board of Directors or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.12, who is entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1.12. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i) of this Section 1.12, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting (except in the case of the 1995 annual meeting, for which such notice shall be timely if delivered in the same time period as if such meeting were a special meeting governed by subparagraph (b) of this Section 1.12); provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (2) the class and number of shares of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner. -6- 13 (iii) Notwithstanding anything in the second sentence of subparagraph (a)(ii) of this Section 1.12 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased board of directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy (70) days prior to such annual meeting), a stockholder's notice required by this Section 1.12 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of such meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.12. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by subparagraph (a)(ii) of this Section 1.12 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.12 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.12. Except as otherwise provided by law or these bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.12 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded. -7- 14 (ii) For purposes of this Section 1.12, the term "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to section 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 1.12, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE II BOARD OF DIRECTORS Section 2.1: Number; Qualifications. The Board of Directors shall consist of one or more members. The current number of directors shall be six (6),* and thereafter shall be fixed from time to time by resolution of the Board of Directors. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation. Section 2.2: Election; Resignation; Removal; Vacancies. The Board of Directors shall initially consist of the person or persons elected by the incorporator or named in the Corporation's initial Certificate of Incorporation. Each director shall hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Any director may resign at any time upon written notice to the Corporation. Subject to the rights of any holders of Preferred Stock then outstanding: (i) any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors and (ii) any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors to be elected by all stockholders having the right to vote as a single class, may be filled by the stockholders, by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Section 2.3: Regular Meetings. Regular meetings of the Board of Directors may be held at such places, within or without the State of Delaware, and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board of Directors. Section 2.4: Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or a majority of the members of the Board of Directors then in office and may be held at any time, date or place, within or without the State of - -------- * Amendment on December 10, 1999 changed the number of directors from five (5) to six (6). -8- 15 Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally or in writing, by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile or similar communication method. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. Section 2.5: Telephonic Meetings Permitted. Members of the Board of Directors, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or similar communications equipment shall constitute presence in person at such meeting. Section 2.6: Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the total number of authorized directors shall constitute a quorum for the transaction of business. Except as otherwise provided herein or in the Certificate of Incorporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.7: Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his or her absence by the President, or in his or her absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8: Written Action by Directors. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee, respectively. Section 2.9: Powers. The Board of Directors may, except as otherwise required by law or the Certificate of Incorporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Section 2.10: Compensation of Directors. Directors, as such, may receive, pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board of Directors. -9- 16 ARTICLE III COMMITTEES Section 3.1: Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in subsection (a) of Section 151 of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation, or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation, or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation under Sections 251 or 252 of the Delaware General Corporation Law, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and unless the resolution of the Board of Directors expressly so provides, no such committee shall have the power or authority to declare a dividend, authorize the issuance of stock or adopt a certificate of ownership and merger pursuant to section 253 of the Delaware General Corporation Law. Section 3.2: Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. -10- 17 ARTICLE IV OFFICERS Section 4.1: Generally. The officers of the Corporation shall consist of a Chief Executive Officer and/or a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers, including a Chairman of the Board of Directors and/or Chief Financial Officer, as may from time to time be appointed by the Board of Directors. All officers shall be elected by the Board of Directors; provided, however, that the Board of Directors may empower the Chief Executive Officer of the Corporation to appoint officers other than the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors. Section 4.2: Chief Executive Officer. Subject to the control of the Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Corporation are: (a) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Corporation; (b) To preside at all meetings of the stockholders; (c) To call meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and (d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board of Directors, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board of Directors has not designated any other officer to be the Chief Executive Officer, then the Chairman of the Board shall be the Chief Executive Officer. -11- 18 Section 4.3: Chairman of the Board. The Chairman of the Board shall have the power to preside at all meetings of the Board of Directors and shall have such other powers and duties as provided in these bylaws and as the Board of Directors may from time to time prescribe. Section 4.4: President. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board of Directors to the Chairman of the Board and/or to any other officer, the President shall have the responsibility for the general management the control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board of Directors. Section 4.5: Vice President. Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board of Directors or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer's absence or disability. Section 4.6: Chief Financial Officer. Subject to the direction of the Board of Directors and the President, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of chief financial officer. Section 4.7: Treasurer. The Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board of Directors or the President may from time to time prescribe. Section 4.8: Secretary. The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board of Directors or the President may from time to time prescribe. Section 4.9: Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. -12- 19 Section 4.10: Removal. Any officer of the Corporation shall serve at the pleasure of the Board of Directors and may be removed at any time, with or without cause, by the Board of Directors. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. ARTICLE V STOCK Section 5.1: Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.3: Other Regulations. The issue, transfer, conversion and registration of stock certificates shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI INDEMNIFICATION Section 6.1 Indemnification of Officers and Directors. Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he or she (or a person of whom he or she is the legal representative), is or was a director or officer of the Corporation or a Reincorporated Predecessor (as defined below) or is or was serving at the request of the Corporation or a Reincorporated Predecessor (as defined below) as a director or officer of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law, against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably -13- 20 incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. As used herein, the term "Reincorporated Predecessor" means a corporation that is merged with and into the Corporation in a statutory merger where (a) the Corporation is the surviving corporation of such merger; (b) the primary purpose of such merger is to change the corporate domicile of the Reincorporated Predecessor to Delaware. Section 6.2: Advance of Expenses. The Corporation shall pay all expenses (including attorneys' fees) incurred by such a director or officer in defending any such proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by such a director or officer in advance of the final disposition of such proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article VI or otherwise; and provided, further, that the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a proceeding, alleging that such person has breached his or her duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction. Section 6.3: Non-Exclusivity of Rights. The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI. Section 6.4: Indemnification Contracts. The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article VI. Section 6.5: Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. -14- 21 ARTICLE VII NOTICES Section 7.1: Notice. Except as otherwise specifically provided herein or required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, mailgram or facsimile. Any such notice shall be addressed to the person to whom notice is to be given at such person's address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, on the first business day after such notice is dispatched, and (iv) in the case of delivery via telegram, telex, mailgram, or facsimile, when dispatched. Section 7.2: Waiver of Notice. Whenever notice is required to be given under any provision of these bylaws, a written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. ARTICLE VIII INTERESTED DIRECTORS Section 8.1: Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the -15- 22 stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IX MISCELLANEOUS Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. Section 9.2: Seal. The Board of Directors may provide for a corporate seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors. Section 9.3: Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, magnetic tape, diskettes, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 9.4: Reliance Upon Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 9.5: Certificate of Incorporation Governs. In the event of any conflict between the provisions of the Corporation's Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern. Section 9.6: Severability. If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Corporation's Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not -16- 23 themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect. ARTICLE X AMENDMENT Section 10.1: Amendments. Stockholders of the Corporation holding a majority of the Corporation's outstanding voting stock shall have the power to adopt, amend or repeal Bylaws. To the extent provided in the Corporation's Certificate of Incorporation, the Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation, except insofar as Bylaws adopted by the stockholders shall otherwise provide. -17- EX-10.31 3 a70938ex10-31.txt EXHIBIT 10.31 1 EXHIBIT 10.31 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT This First Amendment to Loan and Security Agreement (this "AMENDMENT") is made and entered into effective as of December 1, 2000 by and among HNC SOFTWARE INC., a Delaware corporation ("LENDER"), on the one hand, and BRUCE HANSEN, an individual, and JODY A. HANSEN, his spouse (hereinafter collectively and individually referred to as "BORROWER"), on the other hand. R E C I T A L S A. Borrower has previously executed and delivered to Lender a certain Secured Full Recourse Promissory Note of Borrower dated June 2, 2000 (the "ORIGINAL NOTE") which is payable to Lender in the principal amount of Six Hundred Thousand Dollars ($600,000). Lender and Borrower are parties to that certain Loan and Security Agreement dated as of June 2, 2000 (the "LOAN AGREEMENT") pursuant to which Lender loaned Borrower funds in an amount equal to the principal amount of the Original Note (the "FUNDS"). B. Section 6.10 of the Loan Agreement and Section 13 of the Original Note provide that the Loan Agreement and the Original Note, respectively, may be amended by a written agreement executed by Lender and Borrower. C. The Funds were originally used by Borrower to purchase an improved real property residence located at [OLD PERSONAL RESIDENTIAL ADDRESS] (the "ORIGINAL PROPERTY"). Borrower's obligations under the Original Note and the Loan Agreement were secured by a second deed of trust on the Original Property in favor of Lender. D. Borrower has since sold the Original Property and has purchased a new improved real property residence located at [NEW PERSONAL RESIDENTIAL ADDRESS] (the "NEW PROPERTY"). E. The loan under the Original Note is still outstanding, and Lender and Borrower mutually desire to (i) amend the Loan Agreement pursuant to this Amendment and (ii) replace the Original Note with a new Secured Full Recourse Promissory Note of Borrower dated June 2, 2000 (the "NEW NOTE") in order to reflect and document the agreement of the parties that Borrower's obligations under the Loan Agreement and the New Note, respectively, shall now be secured by a second deed of trust on the New Property in lieu of the second deed of trust on the Original Property. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises set forth herein, Lender and Borrower hereby agree as follows: 1. AMENDMENT OF RECITALS. The "WHEREAS" clauses in the recitals of the Loan Agreement are hereby amended and restated in their entirety to read as follows: "WHEREAS, Lender desired to loan certain funds to Borrower and Borrower wished to borrow certain funds from Lender on the terms and conditions set forth herein; 1 2 WHEREAS, the proceeds of such loan were originally used by Borrower to purchase an improved real property residence located at [OLD PERSONAL RESIDENTIAL ADDRESS] (the "ORIGINAL PROPERTY"); WHEREAS, Borrower has since sold the Original Property and has purchased a new improved real property residence located at [NEW PERSONAL RESIDENTIAL ADDRESS] (the "Property"); and" 2. AMENDMENT OF SECTION 1.2. The first sentence of Section 1.2 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "1.2 PROMISSORY NOTE: INTEREST. Borrower's indebtedness to Lender under the Loan Documents shall be evidenced by a Secured Full Recourse Promissory Note executed by Borrower and promptly delivered to Lender in substantially the form attached hereto as Exhibit A (the "NOTE")." 3. AMENDMENT OF SECTION 1.4. Section 1.4 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "1.4 SECURITY. Effective as of December 1, 2000, Borrower's indebtedness to Lender under the Loan Documents will be secured by a second deed of trust in customary form (the "SECOND DEED OF TRUST") on the Property, which is the improved real property located at [NEW PERSONAL RESIDENTIAL ADDRESS]. Borrower agrees to execute the Second Deed of Trust in favor of Lender, with a company that is approved by both Borrower and Lender to act as trustee, and to promptly deliver such executed Second Deed of Trust to Lender by no later than December 15, 2000. In the event that Borrower has granted a first deed of trust or similar lien on the Property to secure a loan used to fund Borrower's payment of the purchase price of the Property, Lender agrees not to file the Second Deed of Trust with the County Recorder until Borrower's first lender has filed its deed of trust on the Property, and the Second Deed of Trust shall be senior to all liens on the Property excepting only such first deed of trust." 4. AMENDMENT OF SECTION 6.3. The third paragraph of Section 6.3 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "If to Lender: If to Borrower: -------------- --------------- HNC Software Inc. Bruce Hansen and Jody A. Hansen 5935 Cornerstone Court West [NEW PERSONAL RESIDENTIAL ADDRESS] San Diego, CA 92121 Attention: Vice President, Corporate Finance Facsimile: (858) 452-3220 5. EFFECT OF AMENDMENT. This Amendment shall be effective and binding on all parties hereto. To the extent that this Amendment is inconsistent with or conflicts with the Loan 2 3 Agreement, the terms of this Amendment shall govern. The Loan Agreement is not being amended except as expressly provided in this Amendment. 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Amendment will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all parties reflected hereon as signatories. [THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK.] 3 4 IN WITNESS WHEREOF, the parties have duly executed and delivered this Amendment as of the date and year first written above. BORROWER: LENDER: HNC SOFTWARE INC. /s/ Bruce Hansen By: /s/ Russell C. Clark - ------------------------------- ----------------------------- Bruce Hansen Russell C. Clark Vice President, Corporate Finance /s/ Jody A. Hansen - ------------------------------- Jody A. Hansen [SIGNATURE PAGE TO FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT] 4 5 SECURED FULL RECOURSE PROMISSORY NOTE San Diego, California $600,000 June 2, 2000 For value received, Bruce Hansen, an individual, and Jody A. Hansen, his spouse (collectively and individually referred to as the "BORROWER"), hereby jointly and severally promise to pay to the order of HNC Software Inc., a Delaware corporation (the "LENDER"), at the Lender's principal place of business at 5935 Cornerstone Court West, San Diego, California 92121, or at such other place as the Lender may direct, the principal sum of Six Hundred Thousand Dollars ($600,000), together with interest accrued on unpaid principal from June 2, 2000 at the rate of eight and fifty one-hundredths percent (8.50%) per annum, which rate is not less than the minimum rate established pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as amended; provided, however, that the rate at which interest will accrue on unpaid principal under this Note will not exceed the highest rate permitted by applicable law. This Secured Full Recourse Promissory Note, as it may be amended, restated, supplemented or otherwise modified from time to time, is referred to herein as this "NOTE", and the loan evidenced by this Note is hereafter referred to as the "LOAN". All payments under this Note shall be made in lawful money of the United States. Interest will begin to accrue on June 2, 2000 and will continue to accrue until the date on which the entire principal amount owing under this Note has been repaid in full. This Note is issued pursuant to and governed by the terms and conditions of that certain Loan and Security Agreement dated June 2, 2000, as amended, between the Lender and Borrower (the "LOAN AGREEMENT"). The following is a statement of the additional rights and obligations of the holder of this Note and the terms and conditions to which this Note is subject, and to which the holder, by the acceptance of this Note, agrees: 1. SECURITY. Payment of this Note is secured by a second deed of trust (the "SECOND DEED OF TRUST") on certain real property located at [New Personal Residential Address] (the "PROPERTY"). The Second Deed of Trust will be executed by Borrower in favor of the Lender, with a company that is approved by both Borrower and the Lender to act as trustee, and will be delivered by Borrower to the Lender at or prior to the closing of escrow of Borrower's purchase of the Property. 2. MATURITY OF LOAN. The unpaid principal amount of this Note and all unpaid interest accrued thereon shall be immediately due and payable to the Lender in full on the date (the "MATURITY DATE") that is the earlier to occur of the following: (a) June 2, 2005; and (b) ninety (90) days after the date of termination of Bruce Hansen's employment with Lender for any reason or no reason (where, for this purpose, Bruce Hansen will 1 6 be deemed to be employed by Lender if he is employed by Lender or a wholly-owned subsidiary of Lender). 3. DEFAULT. Borrower will be deemed to be in default of this Note ("DEFAULT") upon the occurrence of one of the following events: (a) failure by Borrower to pay the Lender (or, in the event another party holds this Note, such holder) in full the amount of unpaid principal and accrued interest due under this Note on or before Maturity Date, and failure by Borrower to cure this failure to pay within five (5) calendar days after the Lender gives Borrower written notice of such failure to pay; or (b) Borrower's sale, gift, assignment or other transfer of the Property, except for transfers which, by law, cannot be restricted by a due-on-sale clause. 4. REMEDIES UPON DEFAULT. Upon the occurrence of a Default, the Lender may pursue all its rights and remedies available at law or in equity, including, but not limited to, the following: (a) the right to accelerate the payment of all of the unpaid principal and accrued interest due under this Note so that such payment will automatically become immediately due and payable in full without the need for any further action on the part of the Lender or any other holder of this Note; and (b) the right to bring suit to enforce payment under this Note of all of the unpaid principal and accrued interest under this Note. The rights and remedies of the Lender herein provided will be cumulative and not exclusive of any other rights or remedies provided by law or otherwise. 5. PREPAYMENT. Borrower may prepay any unpaid principal and interest due under this Note at any time, without penalty, in whole or in part in increments of at least One Thousand Dollars ($1,000). Each prepayment will be applied as follows: (a) first to the payment of accrued interest, and (b) second, to the extent that the amount of such prepayment exceeds the amount of all such accrued interest, to the payment of principal. 6. SUCCESSORS AND ASSIGNS; ASSIGNMENT. Except as otherwise provided in this Note, this Note and the rights and obligations of the parties hereunder, will be binding upon and will inure to the benefit of their respective successors, assigns, heirs, executors, administrators and legal representatives. The Lender may assign any of its rights and obligations under this Note. Borrower shall not assign any of its rights and obligations under this Note, except with the prior written consent of the Lender. 7. GOVERNING LAW. This Note will be governed by and construed in accordance with the internal laws of the State of California as applied to agreements entered into in California by California residents, without giving effect to that body of laws pertaining to conflict of laws. 8. NOTICES. Any and all notices required or permitted to be given to a party pursuant to the provisions of this Note must be in writing and will be effective and deemed to provide such party sufficient notice under this Note on the earliest of the following: (a) at the time of personal delivery, if delivery of the notice is in person; (b) at the time of transmission by facsimile or telecopier, addressed to the other party at its facsimile number or telecopier address specified herein (or hereafter modified by subsequent notice to the parties hereto), with 2 7 confirmation of receipt made by printed confirmation sheet verifying successful transmission of the facsimile; (c) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business days after such deposit for deliveries outside of the United States, with proof of delivery from the courier requested; or (d) three (3) business days after deposit in the United States mail by registered or certified mail (return receipt requested) for United States deliveries. All notices for delivery outside the United States will be sent by facsimile or by express courier. All notices not delivered personally or by facsimile will be sent with postage and/or other charges prepaid and properly addressed to the party to be notified at the address set forth below, or at such other address as such other party may designate by ten (10) days advance written notice to the other parties hereto. Notices to the Lender will be marked "Attention: Vice President, Corporate Finance." If to Lender: If to Borrower: HNC Software Inc. Bruce Hansen and Jody A. Hansen 5935 Cornerstone Court West [New Personal Residential Address] San Diego, CA 92121 Attention: Vice President, Corporate Finance Facsimile: (858) 452-3220 9. FURTHER ASSURANCES. The parties agree to execute such further documents and instruments and to take such further actions as may be reasonably necessary to carry out the purposes and intent of this Note. 10. TITLES AND HEADINGS. The titles, captions and headings of this Note are included for ease of reference only and will be disregarded in interpreting or construing this Note. Unless otherwise specifically stated, all references herein to "sections" and "exhibits" will mean "sections" and "exhibits" to this Note. 11. ENTIRE AGREEMENT. This Note and the documents referred to herein constitute the entire agreement and understanding of the parties with respect to the subject matter of this Note, and supersede all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof. 12. SEVERABILITY. The invalidity or unenforceability of any term or provision of this Note will not affect the validity or enforceability of any other term or provision. 13. AMENDMENT AND WAIVERS. This Note may not be amended except by a written agreement executed by each of the parties hereto. No amendment of or waiver of, or modification of any obligation under this Note or any other Loan Document will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. Any amendment effected in accordance with this Section will be binding upon all parties hereto and each of their respective successors and assigns. No delay or failure to require performance of any provision of this Note shall constitute a waiver of that provision as to that or any other instance. No waiver granted under this Note or any other Loan Document as to any one provision herein or therein shall constitute a subsequent waiver of such provision or of any other 3 8 provision herein or therein, nor shall it constitute the waiver of any performance other than the actual performance specifically waived. 14. ADDITIONAL WAIVERS. The parties waive any right they may have to a trial by jury in respect of any litigation based on, or arising out of, under or in connection with, this Note, or any course of conduct, course of dealing, verbal or written statement or other action of any loan party or any secured party. In addition, Borrower hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year first above written. BORROWER: ------------------------------ Bruce Hansen ------------------------------ Jody A. Hansen 4 EX-10.33 4 a70938ex10-33.txt EXHIBIT 10.33 1 EXHIBIT 10.33 SECURED FULL RECOURSE PROMISSORY NOTE San Diego, California $_______________________ JANUARY 2, 2001 [ADD TOTAL PRINCIPAL] [ADD EFFECTIVE DATE] Reference is made to that certain Secured Full Recourse Promissory Note made and given by the undersigned ("PAYOR") to HNC Software Inc., a Delaware corporation (the "COMPANY") attached hereto as Exhibit 1 (the "PRIOR NOTE") that was tendered to the Company by Payor as partial payment for the shares of the Common Stock of the Company purchased by Payor pursuant to that certain Stock Option Exercise Agreement or Agreements between Payor and the Company dated as of the same date as the Prior Note (the "PURCHASE AGREEMENT"). The Purchase Agreement was executed by Payor under certain stock plans of the Company (each of such plans is referred to herein as "PLAN"). This Secured Full Recourse Promissory Note (this "NOTE") is being tendered by Payor to the Company as a modification and extension of the Prior Note and will replace the Prior Note. 1. OBLIGATION. In modification and extension of the Prior Note, which was tendered by the Payor to the Company in exchange for the issuance to the Payor, pursuant to the Purchase Agreement, of ______ shares of the Company's Common Stock (the "SHARES"), receipt of which is hereby acknowledged and _____, shares of Retek Inc., receipt of which is also hereby acknowledged, Payor hereby promises to pay to the order of the Company on or before the Maturity Date (as defined below),at the Company's principal place of business located at 5935 Cornerstone Ct. W. San Diego, CA 92121 or at such other place as the Company may direct, the principal sum of ___________________________________________________ Dollars ($__________) together with interest accrued on the unpaid principal at the rate of ten percent (10%) per annum (which rate is not less than the minimum rate established pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as amended, on the earliest date on which there was a binding contract in writing for the purchase of the Shares); provided, however, that the rate at which interest will accrue on unpaid principal under this Note will not exceed the highest rate permitted by applicable law. All payments hereunder shall be made in lawful tender of the United States. As used herein, the term "MATURITY DATE" means that time and date which is the earliest to occur of: (a) the sale of any of the Shares or other securities that are pledged to the Company pursuant to a Stock Pledge Agreement dated of even date with this Note between the Company and Payor (the "PLEDGE AGREEMENT"); (b) the expiration date of the stock option agreement pursuant to which the Purchase Agreement is executed; (c) the Payor's termination of employment or other service with the Company or any subsidiary of the Company; (d) the occurrence of an Event of Default as provided in Section 3 below; or (e) September 14, 2001. 2. SECURITY. The performance of Payor's obligations under this Note shall be secured by a first security interest in the Shares and certain other collateral granted to the Company by Payor under the Pledge Agreement. If the Payor is not an employee or director of the Company or subsidiary of Company, Purchase must pledge other collateral acceptable to Company. 3. EVENTS OF DEFAULT. (a) Payor will be deemed to be in default under this Note upon the occurrence of any of the following events (each, an "EVENT OF DEFAULT"): (i) Payor's failure to make any payment when due under this Note; (ii) Payor's employment or other service with the Company or a subsidiary of the Company has Terminated (as set forth in the Plan); (iii) the failure of any representation 1 2 or warranty of Payor in the Pledge Agreement to have been true, the failure of Payor to perform any obligation of Payor under the Pledge Agreement, or any other breach by the Payor of the Pledge Agreement; (iv) any voluntary or involuntary transfer of any of the Shares or any of the other collateral pledged by Payor to the Company under the Pledge Agreement or any interest therein (except a transfer to the Company); (v) the filing by or against Payor of any voluntary or involuntary petition for relief under the United States Bankruptcy Code or the initiation of any proceeding by or against Payor under federal law or any law of any other jurisdiction for the general relief of debtors; (vi) the execution by Payor of an assignment for the benefit of creditors or the appointment of a receiver, custodian, trustee or similar party to take possession of Payor's assets or property; or (vii) a decrease in the aggregate value of the Collateral below the limit set forth in Section 3(b) that is deemed to be an Event of Default under Section 3(b) below. (b) Event of Default due to decline in Value of Collateral. As noted in Section 2 and pursuant to the Pledge Agreement, Payor is granting the Company a first security interest in, and is pledging to the Company, the shares, certain shares of the common stock of Retek, Inc., a Delaware corporation ("RETEK") and other properties, including any stock dividends declared or paid on the Shares or on such Retek shares (the Shares, the Retek shares and such other properties and assets pledged to the Company under the Pledge Agreement being hereinafter collectively referred to as the "COLLATERAL") as security for the repayment of this Note. Beginning on the first Friday after the date of this Note, and on each successive Friday thereafter (or the next trading day, if such Friday is not a trading day) while any balance is still due and outstanding under this Note (each such Friday being hereinafter called a "VALUATION DATE"), all Collateral shall be valued by the Company as follows: (a) the Shares and the shares of Retek common stock included in the Collateral and any other publicly traded securities that may be included in the Collateral shall be deemed to have a value equal to the publicly announced closing price of such shares or securities on the Valuation Date; and (b) any Collateral that does not consist of publicly traded securities shall be valued by the Audit Committee of HNC's Board of Directors in good faith as of the applicable Valuation Date. If the aggregate value of all the Collateral on a Valuation Date (determined as provided above) is less than the total amount of principal and accrued interest remaining due under this Note, then such fact shall constitute the occurrence of an Event of Default (within the meaning of Sections 1 and 3(a)) under this Note effective as of the next Valuation Date occurring after the aforementioned Valuation Date ("NEXT VALUATION DATE") unless, on and as of the next Valuation Date, the aggregate value of all the Collateral (determined as of the next Valuation Date in the manner provided above) is greater than the amount of all the unpaid principal and accrued interest outstanding under this Note as of the next Valuation Date, after taking into account any partial payments on this Note made by Payor on or prior to the next Valuation Date. 4. ACCELERATION; REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default, at the option of the Company, all principal and other amounts owed under this Note shall become immediately due and payable in full without notice or demand on the part of the Company, and the Company will have, in addition to its rights and remedies under this Note, the Pledge Agreement, full recourse against any real, personal, tangible or intangible assets of Payor, and may pursue any legal or equitable remedies that are available to it. In full or partial payment of any amounts due under this Note in the event of Default, Payor expressly authorizes the Company to withhold up to (a) 25% of the amount of each of Payor's paycheck or bonus from Company (after other reductions for taxes and benefits); and (b) 100% of any expense reimbursement. 6. PREPAYMENT. Prepayment of all or a portion of any outstanding principal and/or other amounts owed under this Note may be made at any time without penalty. Unless otherwise agreed in writing by the Company, each payment on this Note (including but not limited to any payments made as contemplated by Section 3(b) to keep the balance due under this Note from exceeding the value of the Collateral) will be applied to the extent of available funds from such payment in the following order: (i) first to the accrued and unpaid costs and expenses under the Note or the Pledge Agreement, (ii) then to accrued but unpaid interest, and (iii) lastly to the outstanding principal. While partial payments are permitted, no security shall be released until the Note is paid in full. 2 3 7. GOVERNING LAW; WAIVERS. The validity, construction and performance of this Note will be governed by the internal laws of the State of California, excluding that body of law pertaining to conflicts of law. Payor hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. 8. ATTORNEYS' FEES. If suit is brought for collection of this Note, Payor agrees to pay all reasonable expenses, including attorneys' fees, incurred by the holder in connection therewith whether or not such suit is prosecuted to judgment. IN WITNESS WHEREOF, Payor has executed this Note as of the date and year first above written. __________________________________ __________________________________ Payor's Name [type or print] Payor's Signature [SIGNATURE PAGE TO SECURED FULL RECOURSE PROMISSORY NOTE PAYABLE TO HNC SOFTWARE INC.] 3 4 STOCK PLEDGE AGREEMENT This Stock Pledge Agreement (the "PLEDGE AGREEMENT") is made and entered into as of JANUARY 2, 2001 between HNC Software Inc., a Delaware corporation (the "COMPANY"), and _________________ (the "PLEDGOR"). Capitalized terms that are not defined herein shall have the meanings ascribed to them in the Secured Full Recourse Promissory Note ("Note") of even date herewith delivered by Pledgor to the Company on any extension thereof (such note and extension referred to as the "NOTE"). R E C I T A L S A. In exchange for delivery of the Note to the Company, the Company has issued and sold to Pledgor ________ shares of its Common Stock, $0.001 par value per share, (the "SHARES") and ________ shares of Retek Inc. Common Stock, pursuant to the terms and conditions of that certain Purchase Agreement. In connection therewith, Pledgor made a promissory note payable ("PRIOR NOTE") to the Company and executed a pledge agreement pursuant to that promissory note. B. The Note has been entered into as a modification and extension of the Prior Note and Pledgor has agreed that repayment of the Note will be secured by the pledge of the Shares pursuant to this Pledge Agreement, which is a modification and extension of the prior pledge agreement. NOW, THEREFORE, the parties agree as follows: 1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of the California Commercial Code, Pledgor hereby grants to the Company, and the Company hereby accepts, a first and present security interest in (i) the Shares, including all Retek shares received as a dividend in connection with ownership of Shares (iii) all Dividends (as defined in Section 5 hereof), (iv) all Additional Securities (as defined in Section 6 hereof), to secure payment of the Note and performance of all Pledgor's obligations under this Pledge Agreement. Pledgor herewith delivers to the Company Common Stock certificate(s) No(s). _______________________________, and Retek Common Stock certificate(s) No(s). _________, together with one or more stock power(s) for each certificate so delivered in the form attached as an Exhibit to the Purchase Agreement, duly executed (with the date and number of shares left blank) by Pledgor and Pledgor's spouse, if any and (iv) such other property acceptable to Company if Payor is not an employee or director of the Company or subsidiary of Company. For purposes of this Pledge Agreement, the Shares, including Retek shares, all Dividends, and all Additional Securities will hereinafter be collectively referred to as the "COLLATERAL." Pledgor agrees that the Collateral will be deposited with and held by the Escrow Holder (as defined in the below) and that, notwithstanding anything to the contrary in the Purchase Agreement, for purposes of carrying out the provisions of this Pledge Agreement, Escrow Holder will act solely for the Company as its agent. 2. REPRESENTATIONS AND WARRANTIES AND COVENANTS REGARDING COLLATERAL. Pledgor hereby represents and warrants to the Company that Pledgor has good title (both record and beneficial) to the Collateral, free and clear of all claims, pledges, security interests, liens or encumbrances of every nature whatsoever, and that Pledgor has the right to pledge and grant the Company the security interest in the Collateral granted under this Pledge Agreement. Pledgor further agrees that, until all sums due under the Note have been paid in full, and all of Payor's obligations under this Pledge Agreement have been performed, Payor will not, without the Company's prior written consent, (i) sell, assign or transfer, or attempt to sell, assign or transfer, any of the Collateral, or (ii) grant or create, or attempt to grant or create, any security interest, lien, pledge, claim or other encumbrance with respect to any of the 4 5 Collateral or (iii) suffer or permit to continue upon any of the Collateral during the term of this Pledge Agreement, an attachment, levy, execution or statutory lien. 3. RIGHTS ON DEFAULT. Upon an occurrence of an Event of Default under the Note, the Company will have full power to sell, assign and deliver or otherwise dispose the whole or any part of the Collateral at any broker's exchange or elsewhere, at public or private sale, at the option of the Company, in order to satisfy any part of the obligations of Pledgor now existing or hereinafter arising under the Note or under this Pledge Agreement. On any such sale, the Company or its assigns may purchase all or any part of the Collateral. In addition, at its sole option, the Company may elect to retain all the Collateral in full satisfaction of Pledgor's obligation under the Note, in accordance with the provisions and procedures set forth in the California Uniform Commercial Code. Pledgor agrees at the Company's request, to cooperate with the Company in connection with the disposition of any and all of the Collateral and to execute and deliver any documents which the Company shall reasonably request to permit disposition of the Collateral. 4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company herein upon an Event of Default will be in addition to all the rights, powers and remedies of the Company under the California Uniform Commercial Code and applicable law and such rights, powers and remedies will be exercisable by the Company with respect to all of the Collateral. Pledgor agrees that the Company's reasonable expenses of holding the Collateral, preparing it for resale or other disposition, and selling or otherwise disposing of the Collateral, including attorneys' fees and other legal expenses, will be deducted from the proceeds of any sale or other disposition and will be included in the amounts Pledgor must tender to redeem the Collateral. All rights, powers and remedies of the Company will be cumulative and not alternative. Any forbearance or failure or delay by the Company in exercising any right, power or remedy hereunder will not be deemed to be a waiver of any such right, power or remedy and any single or partial exercise of any such right, power or remedy hereunder will not preclude the further exercise thereof. 5. DIVIDENDS; VOTING. All dividends hereinafter declared on or payable with respect to any Collateral during the term of this Pledge Agreement (excluding only ordinary cash dividends, which will be payable to Pledgor so long as no Event of Default has occurred under the Note) (the "DIVIDENDS") will be immediately delivered to the Company to be held in pledge under this Pledge Agreement. Notwithstanding this Pledge Agreement, so long as Pledgor owns the Shares and no Event of Default has occurred under the Note, Pledgor will be entitled to vote any shares comprising the Collateral, subject to any proxies granted by Pledgor. 6. ADJUSTMENTS. In the event that during the term of this Pledge Agreement, any stock dividend, reclassification, readjustment, stock split or other change is declared or made with respect to the Collateral, or if warrants or any other rights, options or securities are issued in respect of the Collateral, (the "ADDITIONAL SECURITIES") then all new, substituted and/or additional shares or other securities issued by reason of such change or by reason of the exercise of such warrants, rights, options or securities, will be (if delivered to Pledgor, immediately surrendered to the Company and) pledged to the Company to be held under the terms of this Pledge Agreement as and in the same manner as the Collateral is held hereunder. 7. ESCROW HOLDER. The Escrow Holder shall be the Company or its designee. 8. REDELIVERY OF COLLATERAL; NO RELEASE FOR PARTIAL PAYMENT. 5 6 (a) Until all obligations of Pledgor under the Note and under this Pledge Agreement have been satisfied in full, all Collateral will continue to be held in pledge under this Pledge Agreement (b) Upon performance of all Pledgor's obligations under the Note and this Pledge Agreement, and subject to the terms and conditions of the Purchase Agreement, the Company will immediately redeliver the Collateral to Pledgor and this Pledge Agreement will terminate. 9. FURTHER ASSURANCES. Pledgor shall, at the Company's request, execute and deliver such further documents and take such further actions as the Company shall reasonably request to perfect and maintain the Company's security interest in the Collateral, or in any part thereof. 10. SUCCESSORS AND ASSIGNS. This Pledge Agreement will inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties hereto. 11. GOVERNING LAW; SEVERABILITY. This Pledge Agreement will be governed by and construed in accordance with the internal laws of the State of California, excluding that body of law relating to conflicts of law. Should one or more of the provisions of this Pledge Agreement be determined by a court of law to be illegal or unenforceable, the other provisions nevertheless will remain effective and will be enforceable. 12. MODIFICATION; ENTIRE AGREEMENT. This Pledge Agreement will not be amended without the written consent of both parties hereto. This Pledge Agreement, together with the Note constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of the date and year first above written. HNC SOFTWARE INC. PLEDGOR By:________________________________ ___________________________________ (Signature) ___________________________________ ___________________________________ (Please print name) (Please print name) ___________________________________ (Please print title) 6 7 FINANCIAL DISCLOSURE STATEMENT NAME:___________________________________________________________ SOCIAL SECURITY NUMBER:_________________________________________ NAME OF SPOUSE:_________________________________________________ SOCIAL SECURITY NUMBER:_________________________________________ NUMBER OF DEPENDENTS:___________________________________________ COMBINED ANNUAL INCOME:_________________________________________ COMBINED NET WORTH:_____________________________________________ COMBINED LIQUID ASSETS (INCLUDING LOAN COLLATERAL):_____________ RESIDENCE: RENT/OWN?________________________________________ ANNUAL MORTGAGE:________________________________________________ I CERTIFY, UNDER PENALTIES OF PERJURY, THAT THE INFORMATION PROVIDED ON THIS FORM ARE TRUE, CORRECT AND COMPLETE. SIGNATURE:__________________________________________________ DATE:______________ SIGNATURE OF SPOUSE:________________________________________ DATE:______________ 7 EX-10.35 5 a70938ex10-35.txt EXHIBIT 10.35 1 EXHIBIT 10.35 STRATEGIC PARTNERSHIP AGREEMENT This Strategic Partnership Agreement is made on October 23, 2000 (the "Effective Date") between GeoTrust, Inc. ("GeoTrust"), an Oregon corporation, whose principal place of business is 309 SW 6th Avenue, Suite 700, Portland, OR 97204, and HNC Software Inc. ("HNC"), a Delaware corporation, whose principal place of business is at 5935 Cornerstone Court West, San Diego, CA 92121. 1. SERVICES (a) Installation. HNC will perform services described in Exhibit A related to the installation and integration of the Capstone(TM) Model Manager ("CMM"), the Capstone Strategy Manager ("CSM") and the Capstone Decision Manager ("CDM") (as an integrated suite of applications, the "HNC Software"), subject to GeoTrust's cooperation and timely performance of any responsibilities described in Exhibit A. HNC may perform further services related to the HNC Software as mutually agreed by the parties, which shall be reflected in amendments or supplements to Exhibit A (serially numbered A-1, A-2, etc), signed by the parties and attached hereto. (b) Other Services. From time to time during the term of this Agreement, HNC may perform services other than those relating to the HNC Software. Such services shall be performed pursuant to terms agreed by the parties in writing and attached hereto pursuant to Section 11(j). Fees for such services shall not be subject to the discounts described in Section 4 of this Agreement. 2. SERVICE FEES (a) Discounted Service Fees; Fee Limit. GeoTrust shall pay HNC fees for services relating to the HNC Software, on a time and materials basis, at the discounted rates set forth in Exhibit B ("Discounted Fees"). Such rates shall apply until the first anniversary of the Effective Date (the "Discount Period"). Without the prior written consent of GeoTrust, in no event shall the total of all fees invoiced for services performed hereunder by HNC with respect to the HNC Software during the Discount Period exceed US$500,000, taking into account the foregoing discount and excluding all travel-related expenses. (b) Warrants. Within 60 days after the end of each of the four three-month periods during the Discount Period (each, a "Warrant Period"), Geotrust will issue to HNC a warrant, in the form attached hereto as Exhibit C, to purchase such number of shares of GeoTrust common stock as equals the total of all Discounted Fees invoiced during such Warrant Period (excluding travel-related expenses and any tax or usage fees) divided by $10. The per-share exercise price of such warrant shall be the fair market value of one share of Geotrust's common stock at the time of grant, as determined by Geotrust's board of directors in its sole discretion. If GeoTrust fails to deliver to HNC the warrant to which HNC is entitled within 90 days after the end of the Warrant Period therefor, the discounted rates set forth in Exhibit B shall no longer apply to services performed in such Warrant Period, and GeoTrust shall promptly pay HNC in cash such additional fees as would have been payable if such discounts did not apply to services in such Warrant Period. In addition, if GeoTrust is unable to obtain required board and/or shareholder approval to issue the warrants required under this Section within 180 days after the Effective Date, the discounted rates set forth in Exhibit B shall no longer apply, HNC shall thereafter invoice GeoTrust at full non-discounted rates for all services performed hereunder, and GeoTrust shall pay such amounts in cash. (c) Adjustments. The terms governing the Discount Period, and the number of Warrant Periods associated therewith, may be changed by mutual agreement of the parties pursuant to Section 11(j). After the Discount Period, HNC's obligation to offer GeoTrust any discounts on services, and to accept warrants as consideration for services, will terminate. (d) Travel Expense Reimbursement. GeoTrust will reimburse HNC for any reasonable, pre-approved travel-related expenses incurred by HNC in connection with performing services hereunder, which shall be invoiced separately from any other charges billed by HNC to GeoTrust. 1 2 (e) Payment. HNC will submit invoices for services performed and applicable travel-related expenses, and GeoTrust shall pay HNC no later than 30 days after receipt of invoice. Where applicable, such invoices shall include a memo line indicating the number of GeoTrust warrant shares earned according to this Section. 3. LICENSES; OWNERSHIP; MAINTENANCE AND SUPPORT (a) License Grant. Subject to the terms of this Agreement, HNC grants to GeoTrust a worldwide, nonexclusive, nontransferable, royalty-bearing license during the term of this Agreement to use the HNC Software, in object code form only, internally on one or more servers controlled by or on behalf of GeoTrust solely for purposes of developing and using the GeoTrust products known as True Credentials, True Identity and True Record. The scope of the foregoing license encompasses GeoTrust's internal use of HNC Software in connection with providing services to its customers, but excludes any sublicensing, uploading or otherwise transferring, or providing direct access to, the HNC Software to any third party without HNC's prior written consent, including access by any third party to the HNC Software on a stand-alone or "service bureau" basis. (b) Ownership. HNC and its licensors solely own all right, title and interest in and to the HNC Software, and reserve all rights therein not expressly granted under this Agreement. (i) Without limiting the generality of the foregoing, except as expressly stated in paragraph (a), GeoTrust may not directly or through any third party (a) transfer or sublicense, in whole or part, any copies of the HNC Software to any third party; (b) modify, decompile, reverse engineer, or otherwise attempt to access the source code of the HNC Software; or (c) copy the HNC Software, except such copies as necessary for reasonable and customary back-up and disaster recovery purposes. GeoTrust will not delete or alter the copyright, trademark or other proprietary rights notices of HNC and its licensors included with the HNC Software as delivered to GeoTrust, and will reproduce such notices on all copies of the HNC Software. If derivative works of the HNC Software are prepared by or on behalf of HNC based on suggestions or requests by GeoTrust, HNC will solely own such modifications. (ii) HNC acknowledges that GeoTrust may develop products that interface or are intended for use with the HNC Software ("Add-On Products"). So long as such Add-On Products do not infringe any intellectual property rights of HNC, HNC acknowledges that it shall have no rights in any such Add-on Products. (c) Maintenance and Support. Subject to payment of fees therefor described in Section 4, HNC will perform the services described in Exhibit D related to the maintenance and support of the HNC Software licensed hereunder. 4. LICENSE AND MAINTENANCE FEES (a) Fixed Monthly License Fee. As partial consideration for the licenses granted hereunder, GeoTrust shall pay HNC a fixed monthly fee of (i) until the first anniversary of the Effective Date, US$20,000 per month; (ii) thereafter, until the second anniversary of the Effective Date, US$30,000 per month; and (iii) thereafter, US$40,000 per month during the term of this Agreement. Each such fixed monthly fee shall be due and payable on the first business day of each month. (b) Variable Revenue-Based License Fee. As further consideration for the licenses granted hereunder, GeoTrust shall pay HNC a fee based on GeoTrust's revenue attributable to use of the HNC Software, determined according to the terms set forth in Exhibit E. GeoTrust will establish records of transactions involving use of the HNC Software, and maintain such records for two years thereafter, sufficient in form and substance to confirm the calculation of revenue-sharing fees in compliance with the terms of Exhibit E. At its expense and on reasonable notice, HNC may cause such records to be audited during regular business hours at GeoTrust's facilities. If an audit reveals underpayment of fees due under this Agreement, all such amounts will be promptly paid with interest at the prevailing U.S. dollar prime rate accruing from the original due date. If any such underpayment exceeds 5% of the fees due for the period audited, GeoTrust will also pay HNC's reasonable costs of conducting the audit. (c) Maintenance Fees. In consideration of maintenance services provided hereunder, GeoTrust shall pay HNC fees of (i) until the first anniversary of the Effective Date, US$10,000 per month, (ii) thereafter, until the second anniversary of the Effective Date, US$9,000 per month; and (iii) thereafter, US$8,000 per month during the term of this Agreement. Each such payment shall be due on the first business day of each month. The foregoing 2 3 maintenance fees are subject to reasonable annual cost-of-living increase, not to exceed 10% of fees then in effect, as such increase is generally applied to the other agreements of HNC related to the HNC Software. 5. JOINT MARKETING (a) Joint Marketing. The parties agree to participate jointly in advertising, trade shows, sales calls to GeoTrust prospects and other similar promotional activities. The exact nature of the participation will be determined by mutual agreement of the parties on a case-by-case basis. Each party will use reasonable commercial efforts to provide business introductions of such party's significant customers and prospects to the sales and marketing teams of the other party. (b) Website Links; Website Presence. Each party will establish and maintain on its website a hypertext link to the other party's website. Each link will be indicated by a graphic/textual icon, the content, size and placement of each of which will be approved by both parties. Each party may reference the other party as a "Strategic Partner" on their website, and may include factual (and non-confidential) content about the relationship of the parties; provided that such content shall not be posted, unless substantially the same as content previously approved for public disclosure, without the prior approval of the other party, which shall not be unreasonably withheld. (c) HNC as Preferred Partner of GeoTrust. During the term of this Agreement, GeoTrust will ensure that HNC is a "preferred partner" for decisioning, workflow and predictive technology. As such, GeoTrust agrees to work closely with HNC regarding potential licenses of components and contracting for services related to HNC's core competencies (e.g., complex decisioning systems, complex workflow management systems and predictive analytics related to financial transactions). Nothing in this Section 5(c) is intended to limit or otherwise restrict GeoTrust's choice of vendor(s) from which to purchase components and/or services. (d) GeoTrust as Preferred Partner of HNC. During the term of this Agreement, HNC will ensure that GeoTrust is a "preferred partner" for trust-related services in B2B eCommerce. Specifically, HNC agrees, whenever commercially reasonable and technically feasible, to include in its B2B products such enhancements as GeoTrust may offer from time to enable purchasers to realize cost savings from ease of integration with the GeoTrust products. (e) Trademark License. Each party hereby grants the other party a non-exclusive, non-transferable license to use the trademarks identified and attributed to such party in Exhibit F for the purpose of participating in the joint marketing efforts described in this Section. Each party will submit any use it proposes to make of the other party's trademarks for prior approval by such other party, and the trademark owner will approve or direct changes thereto within five days after submission, failure to respond within such five-day period being deemed the trademark owner's approval of such use. (f) Periodic Checkpoints on Strategy and Alignment. During the term of this Agreement, appropriate representatives of HNC and GeoTrust will meet in person or by telephone, as mutually agreed by the parties from time to time, at least four times per year to review strategic plans, marketing programs, partnership opportunities and other matters relevant to the success of the joint initiatives described herein. 6. WARRANTY (a) Limited Warranty. HNC warrants that, for 90 days after installation (the "Warranty Period"), the HNC Software will function in all material respects in compliance with its accompanying documentation. If the HNC Software exhibits a defect that breaches this warranty, HNC will use reasonable commercial efforts to correct, cure, replace or otherwise remedy, at HNC's option, such defect without additional charge to GeoTrust within 120 days after written notification of such defect, provided that such notice is furnished to HNC during the Warranty Period. Client agrees to cooperate and work closely with HNC in a prompt and reasonable manner in connection with HNC's correction efforts. If despite HNC's reasonable commercial efforts to cure, replace, or otherwise remedy such warranty-breaching defect, HNC is unable to resolve the defect at the end of such 120-day period, HNC shall immediately terminate this Agreement. CLIENT'S SOLE REMEDY FOR ANY BREACH OF WARRANTY UNDER THIS SECTION WILL BE TO HAVE HNC USE ITS REASONABLE COMMERCIAL EFFORTS TO CURE SUCH BREACH AS PROVIDED HEREIN. 3 4 (b) DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED ABOVE, HNC MAKES NO REPRESENTATIONS OR WARRANTIES, WRITTEN, ORAL, EXPRESS, IMPLIED OR STATUTORY, REGARDING THE LICENSED PRODUCT, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. 7. INDEMNIFICATION (a) Infringement Indemnity. HNC will defend and hold harmless GeoTrust from any losses or expenses (including reasonable legal fees) arising from any third-party action brought against GeoTrust to the extent based on a claim that the HNC Software infringes any currently existing U.S. patent or copyright. GeoTrust will defend and hold harmless HNC from any losses or expenses (including reasonable legal fees) arising from any third-party action brought against HNC to the extent based on a claim that an Add-On Product, or other product used in connection with the HNC Software, infringes any currently existing U.S. patent or copyright. The party entitled to indemnification hereunder will (a) promptly notify the other party in writing of the claim, (b) grant the other party sole control of the defense and settlement of the claim, and (c) reasonably assist the other party in defending the claim. (b) Injunctions Against Use of HNC Software. If HNC reasonably anticipates that GeoTrust's use of the HNC Software will be enjoined due to a claim indemnified under paragraph (a) above, HNC may, at its sole option and expense, (i) procure for GeoTrust the right to continue using such HNC Software under the terms of this Agreement; or (ii) replace or modify such HNC Software so that it is non-infringing while maintaining substantially equivalent functionality. (c) Exclusions. This Section does not apply to the extent an otherwise indemnifiable claim relates to (i) modification of the HNC Software other than by HNC; (ii) use of the HNC Software with hardware or software not supplied by HNC; (iii) use of other than the most current version of the HNC Software; or (iv) use of the HNC Software outside the scope of the licenses granted hereunder. (d) SOLE REMEDY. THIS SECTION 7 SETS FORTH EACH PARTY'S SOLE OBLIGATION, AND THE OTHER PARTY'S EXCLUSIVE REMEDY, FOR ANY THIRD-PARTY CLAIMS OF INFRINGEMENT ARISING IN CONNECTION WITH THIS AGREEMENT. 8. LIMITATION OF LIABILITY EXCEPT AS TO THE INDEMNIFICATION OBLIGATIONS UNDER SECTION 7 AND THE CONFIDENTIALITY OBLIGATIONS UNDER SECTION 10, EACH PARTY WILL BE NOT LIABLE TO THE OTHER PARTY UNDER ANY THEORY OF LIABILITY FOR (A) DAMAGES IN EXCESS OF ALL AMOUNTS PAID IN THE PRECEDING 12-MONTH PERIOD UNDER THIS AGREEMENT, OR (B) SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING IN CONNECTION WITH THIS AGREEMENT, EVEN IF SUCH OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 9. TERMINATION (a) Term. This Agreement is effective as of the Effective Date and, unless earlier terminated as provided below, will continue in effect until the fifth anniversary of the Effective Date. The parties may extend the term of this Agreement by mutual agreement in writing pursuant to Section 11(j). (b) Termination for Breach. Except as provided herein, either party may terminate this Agreement if the other party commits a material breach of this Agreement that is not cured within 30 days after notice thereof from the non-breaching party; provided that the cure period for a payment default will be two business days after notice thereof. (c) Automatic Termination. Either party may terminate this Agreement by notice to the other party if the other party (a) voluntarily becomes the subject of any petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors; or (b) involuntarily becomes the subject of such a petition or proceeding that is not dismissed within 60 days after filing. 4 5 (d) Effect of Termination. Upon any termination of this Agreement, GeoTrust will promptly return to HNC all copies of HNC Software or Confidential Information of HNC in its possession or control, and promptly provide HNC with an officer's written certification of GeoTrust's compliance with the foregoing. On termination or expiration of this Agreement, and Sections 2, 4, 8, 9(d), 10 and 11 will survive in accordance with their respective terms. GeoTrust acknowledges that in the event of such termination, it remains liable for any amounts incurred under Section 2 or Section 4 through, but not for any time after, the date of such termination. (e) Nonexclusive Remedy. Subject to Sections 7(d) and 8, termination of this Agreement by either party will be a nonexclusive remedy for breach and will be without prejudice to any other right or remedy of such party. 10. CONFIDENTIALITY "Confidential Information" means information that (i) is designated as such in writing by one party ("Disclosing Party") before or when disclosed to the other party ("Recipient") or (ii) Recipient may reasonably be expected to know, based on its nature or the circumstances of its disclosure, is maintained in confidence by Disclosing Party for competitive advantage or other commercial benefit. Recipient will not use Disclosing Party's Confidential Information except to perform obligations under this Agreement, and will not disclose such Confidential Information to any third party. This Section does not apply to Confidential Information that is (a) or becomes publicly known through no act of Recipient, (b) in Recipient's possession when disclosed without breach of any legal obligation, (c) received by Recipient from a third party without such party's breach of any legal obligation, (d) developed by Recipient without use of Disclosing Party's other Confidential Information, or (e) disclosed to comply with applicable law or governmental order; provided Disclosing Party is allowed the opportunity, within the law, to contest such disclosure. 11. GENERAL (a) Assignment. Neither party may assign its rights or obligations hereunder without the other party's prior written consent, which will not be unreasonably withheld, delayed or conditioned, and any assignment without such consent shall be void. Notwithstanding the foregoing, either party may assign this Agreement without consent to any entity that controls, is controlled by, or is under common control with, the assigning party; provided the assignee is not a competitor of the non-assigning party and agrees in writing to be bound by this Agreement. "Control" of an entity means power to elect a majority of such entity's board of directors or other similar governing body. (b) Governing Law and Jurisdiction. This Agreement will be governed by the state laws of the State of California. Any legal action or proceeding arising under this Agreement will be brought exclusively in the federal or state courts of California and the parties hereby consent to the personal jurisdiction and venue of such courts. (c) Severability. If for any reason any provision of this Agreement unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible and the other provisions of this Agreement will remain in full force and effect. (d) Waiver. The failure by either party to enforce any provision of this Agreement will not constitute a waiver of future enforcement of that or any other provision. (e) Notices. All notices required or permitted under this Agreement will be in writing and will be deemed given when personally delivered or three business days after being mailed by U.S. certified mail, first class, postage prepaid (or by reputable courier service with package tracking ability, such as Fed Ex, UPS, DHL, etc.), to such party at the address set forth in the first paragraph of this Agreement. Each party may change such address by notice to the other party in compliance with this Section. (f) Force Majeure. Neither party will be responsible for any failure or delay in its performance under this Agreement due to causes beyond its reasonable control, including but not limited to, labor disputes, strikes, lockouts, shortages of or inability to obtain labor, energy, raw materials or supplies, war, riot, act of God or governmental action. (g) Relationship of Parties. The parties to this Agreement are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise, or agency 5 6 between the parties. Neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. (h) Equitable Relief. Each party acknowledges that a breach of Section 10 or the scope of the licenses granted under this Agreement will cause the other party irreparable injury for which there are inadequate remedies at law, and therefore the non-breaching party will be entitled to seek equitable relief in addition to all other remedies provided by this Agreement or available at law. (i) Announcements. GeoTrust agrees that HNC may publicly announce and list GeoTrust as a customer of HNC. (j) Entire Agreement. This Agreement, together with the exhibits attached hereto, constitutes the complete and final expression of the agreement of the parties with respect to its subject matter, and supersedes all prior or contemporaneous agreements or statements relating to such subject matter. This Agreement may not be amended except in a writing signed by both parties and attached as an exhibit to this Agreement. Each of HNC and GeoTrust have cause this Agreement to be executed by its duly authorized representative as of the Effective Date. HNC SOFTWARE INC. GEOTRUST, INC. By: /s/ Daniel S. Chelew By: /s/ G. Elliott Troutman ------------------------------------ ------------------------------- Name: Daniel S. Chelew Name: G. Elliott Troutman ---------------------------------- ----------------------------- Title: V.P. Finance, Financial Solutions Title: Chief Financial Officer --------------------------------- ---------------------------- Date Signed: October 24, 2000 Date Signed: October 23, 2000 --------------------------- ---------------------- 6 7 EXHIBIT A Statement of Work for Services Relating to HNC Software The Statement of Work shall be substantially similar in all material respects to the documented output of the Project Assessment Meeting held by the parties at GeoTrust offices on October 9th and 10th of this year. 7 8 EXHIBIT B Discounted Fees GeoTrust shall be charged for services during the Discount Period based upon HNC's standard hourly time and materials rates for other agreements related to the HNC Software in effect at the time such services are performed, less a 50% discount therefrom. Such discounted rates shall not apply to reimbursable travel-related expenses incurred by HNC, and shall be based on HNC's standard hourly rates as in effect at the time the services invoiced at such discount were performed. The following table represents (for reference purposes only) HNC's standard hourly rates as of the Effective Date.
- ----------------------------------------------------------------------------------------------- Job Title Hourly Rate - ----------------------------------------------------------------------------------------------- Corporate Officer, Vice President, Chief and above US$400.00 - ----------------------------------------------------------------------------------------------- Executive Director US$370.00 - ----------------------------------------------------------------------------------------------- Director US$330.00 - ----------------------------------------------------------------------------------------------- Principal Implementation Project Manager, Principal Implementation Engineer, US$300.00 Principal Business Analyst, Principal Software Engineer, Principal Scientist - ----------------------------------------------------------------------------------------------- Implementation Project Manager, Software Project Engineer, Project Scientist US$275.00 - ----------------------------------------------------------------------------------------------- Senior Implementation Engineer, Senior Business Analyst, Senior Software US$220.00 Engineer, Senior Scientist, Database Administrator, System Administrator - ----------------------------------------------------------------------------------------------- Implementation Engineer, Business Analyst, Software Engineer, Scientist, Trainer US$195.00 - ----------------------------------------------------------------------------------------------- Associate Implementation Engineer, Associate Business Analyst, Associate US$165.00 Software Engineer, Associate Scientist - ----------------------------------------------------------------------------------------------- Administrative Support US$ 85.00 - -----------------------------------------------------------------------------------------------
HNC shall not bill GeoTrust for travel time of HNC employees. Reasonable travel-related expenses incurred in connection with services by HNC will be reimbursed as incurred subject to GeoTrust's pre-approval of the expense, which shall not be unreasonably withheld, delayed or conditioned. HNC shall notify GeoTrust of any modification to the standard time and materials rates no later than 90 days after the effective date of any such modification. 8 9 EXHIBIT C Form of Warrant The Warrants to be granted under Section 2(b) shall be substantially in all material respects in the form provided in electronic communication from Elliot Troutman to David Johnson on September 15, 2000. That document (entitled "Warrants for Facility (Ashford) 1") is incorporated by reference as a part of this Agreement. 9 10 EXHIBIT D Maintenance and Support Services HNC will provide the following maintenance and support services for the most current Version of the HNC Software and the next to most current Version of the HNC Software (for no longer than 18 months after the release date of the most recent Version): (a) supply a temporary fix or make a diligent effort attempt to make an emergency bypass of a malfunction of the HNC Software in accordance with this Section if HNC diagnoses the problem as a defect in the HNC Software that prevents it from functioning in substantial conformity with its documentation, provided the HNC Software has not been altered by GeoTrust; (b) provide GeoTrust with any known problem solutions relating to the HNC Software as delivered to GeoTrust pursuant to the Agreement as such solutions become known to HNC; (c) provide GeoTrust with new Versions or Releases of the HNC Software; (d) provide telephone access to HNC support resources to assist in resolving HNC Software problems. HNC will respond by telephone to any request by GeoTrust for maintenance and support services made during the hours of 5:00 A.M. to 6:00 P.M. Pacific Time, Monday through Friday, (excluding HNC-recognized holidays) ("Standard Business Hours"), within four hours of GeoTrust's initial request for such service. Outside Standard Business Hours, HNC agrees to provide support via a 1-800 telephone number and pager service. To enable the foregoing, GeoTrust agrees, at no cost to HNC, to provide an on-line or dial-up telecommunications link into GeoTrust's systems for the purpose of troubleshooting and support of the HNC Software. This telecommunications line shall have a minimum speed of 56 Kilobits per second. If a mutual determination is made that service must be performed at the GeoTrust site, then HNC agrees to report to the GeoTrust site to begin performing the requested service within three business days of GeoTrust's request. Such reasonable on-site support will not require additional payment except for reimbursement of all travel-related expenses HNC incurs. If the error is determined by HNC to not be caused by the HNC Software, or is otherwise not covered by this Agreement, then GeoTrust shall compensate HNC for its services on a time and materials basis in accordance with HNC's then-current hourly rates, billed in one-hour minimum increments per call. All Versions, Releases and other repairs to the HNC Software which are delivered by HNC to GeoTrust pursuant to performance of maintenance services hereunder will be considered part of the HNC Software as licensed to GeoTrust pursuant to the Agreement. All use of the such Versions, Releases, and other repairs by GeoTrust will be subject to the licensing terms and conditions of the Agreement. The following terms are defined as follows for purposes of this Exhibit: "ERROR" means a defect in the that prevents it from functioning in substantial conformity with its documentation. "RELEASE" means commercially released modifications to the HNC Software which correct any Errors or defects in the Version of the HNC Software originally delivered to GeoTrust, indicated by a change in the digit to the right of the decimal. "VERSION" means any commercially released modifications or enhancements to the HNC Software which improve the efficiency or effectiveness of the functions of or add new functionality to the HNC Software or its documentation (such as a release of a new full version of the HNC Software (by way of example only, "version 5.0", indicated by a change in the digit to the left of the decimal) delivered to GeoTrust pursuant to this Agreement. 10 11 EXHIBIT E Revenue-Sharing Fees The parties acknowledge that the method for determining the percentage of GeoTrust revenue attributable to GeoTrust's use of the HNC Software has not been determined as of the Effective Date. The parties agree that this fee should be in proportion to the value attributable to the Products and that such value may not be determinable until a sufficient volume of live, production data has flowed through the GeoTrust products. The parties agree to negotiate such determination criteria in good faith and to achieve a reasonable fee structure reflective of the collaborative, partnership nature of this Agreement. Such criteria shall be determined no later than one (1) year from the Effective Date and will be calculated retroactively to the Effective Date. If, despite reasonable good faith negotiations by the parties, the determination criteria cannot be agreed at the end of this one year period, either party may proceed under the terms of Section 9.2 ("Termination for Breach"). The parties mutually agree that license-related profits foregone by HNC each month under the terms of this Agreement are deemed to be US$17,500 ("Foregone Profits"). HNC will establish a ledger of Foregone Profits and update such ledger on a monthly to (a) add US$17,500 of Foregone Profits to the existing balance, and (b) deduct any monthly revenue-sharing fee payment paid by GeoTrust under the following terms. Within thirty days after each month during the first five years of the term of this Agreement, GeoTrust will pay to HNC the following revenue-sharing fee: (a) If the cumulative balance of Foregone Profits in the ledger is then greater than US$0, the lesser of US$35,000 and ten percent (10%) of GeoTrust's gross revenue for that month attributable to use of HNC Software; (b) If the cumulative balance of Foregone Profits in the ledger is then less than or equal to US$0, the lesser of US$150,000 and five percent (5%) of GeoTrust's gross revenue for that month attributable to use of HNC Software; or (c) If the total of all payments previously paid by GeoTrust pursuant to paragraphs (a) and (b) above equals or exceeds US$1,000,000, the lesser of US$300,000 and two and one-half percent (2.5%) of GeoTrust's gross revenue for that month attributable to use of HNC Software (regardless of Foregone Profits). 11 12 EXHIBIT F Licensed Trademarks Licensed Trademarks of HNC related to this Agreement: HNC HNC Software Capstone Capstone Decision Manager Capstone Model Manager Capstone Strategy Manager Licensed Trademarks of GeoTrust related to this Agreement: True Credentials True Identity True Record Safe Market GeoTrust TrustWatch 12 13 AMENDMENT 1 TO STRATEGIC PARTNERSHIP AGREEMENT This Amendment 1, effective as of October 23, 2000 (the "AMENDMENT 1 EFFECTIVE DATE"), modifies the License and Services Agreement entered into between GeoTrust, Inc. ("CLIENT") and HNC Software Inc. ("HNC") and dated October 23, 2000 ("AGREEMENT"). WHEREAS, the Agreement sets forth certain terms and conditions governing the license and sublicense of Capstone(TM) Model Manager and Capstone(TM) Decision Manager ("HNC SOFTWARE"); and WHEREAS, the parties desire to amend the Agreement to add a maintenance term. THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Maintenance and Support. The parties hereby agree amend Section 3(c) by adding the following maintenance term. "The maintenance term shall commence as of the Effective Date of the Agreement, and shall continue for a 1-year term (the "INITIAL TERM"). Thereafter, it shall continue on a year-to-year basis, unless terminated by either party ninety (90) days prior to the anniversary date of the Initial Term or any subsequent renewal term." 2. Maintenance Fees. Section 4(c) (iii) is hereby amended by adding the word "maintenance" before the word "term". 3. Entire Agreement. Any capitalized term not defined in this Amendment 1 shall have the meaning given it in the Agreement. Except as amended herein, all terms and conditions of the Agreement shall remain in full force and effect. Notwithstanding anything to the contrary set forth in the Agreement in the event of a conflict between the terms of the Agreement and the terms of this Amendment 1, this Amendment 1 shall control. IN WITNESS WHEREOF, Client and HNC have caused this Amendment 1 to be signed and delivered by their duly authorized representatives, all as of the Amendment 1 Effective Date. HNC SOFTWARE INC. GEOTRUST, INC. By: /s/ Daniel S. Chelew By: /s/ G. Elliott Troutman ------------------------------------ ------------------------------- Name: Daniel S. Chelew Name: G. Elliott Troutman --------------------------------- ----------------------------- Title: V.P. Finance, Financial Solutions Title: Chief Financial Officer --------------------------------- ---------------------------- Date Signed: March 6, 2001 Date Signed: March 6, 2001 --------------------------- ---------------------- 13 EX-21.01 6 a70938ex21-01.txt EXHIBIT 21.01 1 EXHIBIT 21.01 LIST OF REGISTRANT'S SUBSIDIARIES
AMOUNT OWNED NAME JURISDICTION BY REGISTRANT ---- ------------ ------------- HNC Insurance Solutions, Inc. California 100% HNC Financial Solutions, Inc.* Illinois 100% HNC Software International, Inc. Delaware 100% Center for Adaptive Systems Applications, Inc. Delaware 100% Onyx Technologies, Inc. Georgia 100% Advanced Information Management Solutions, Inc. California 100% Celerity Technologies, Inc. Ohio 100% Systems/Link Corporation Delaware 100% (*formerly Financial Technology, Inc.)
EX-23.01 7 a70938ex23-01.txt EXHIBIT 23.01 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-34778) and on Form S-8 (No. 33-92902, No. 333-14323, No. 333-18871, No. 333-42819, No. 333-46875, No. 333-50623, No. 333-62195, No. 333-71923, No. 333-80965, No. 333-89165, No. 333-33952, No. 333-40344, No. 333-41388, No. 333-45442 and No. 333-55398) of HNC Software Inc. of our report dated January 24, 2001, except as to Note 15, to which the date is March 6, 2001, relating to the financial statements, which appears in this Form 10-K. /s/PRICEWATERHOUSECOOPERS LLP San Diego, California March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----