<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): August 30, 1996
HNC SOFTWARE INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-26146 33-0248788
(Commission File Number) (I.R.S. Employer Identification Number)
5930 Cornerstone Court West, San Diego, CA 92121
(Address of Principal Executive Offices)
(619) 546-8877
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
This report on Form 8-K/A-1 supplements the report on Form 8-K filed
with the Securities and Exchange Commission on September 12, 1996 by HNC
Software Inc., a Delaware corporation (the "Company", "HNC" or the "registrant")
to report its acquisition of all of the stock of Risk Data Corporation ("RDC"),
a California corporation.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
The following financial information is being filed in order to satisfy the
financial statement requirements for the Form 8-K filed on September 12, 1996
and Registration Statement on Form S-8 to be filed subsequent to this document
which will incorporate this document by reference.
<TABLE>
<CAPTION>
Page
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<S> <C>
(a) Financial Statements of Business Acquired.
The following financial statements are filed herewith:
Unaudited Condensed Balance Sheet at June 30, 1996 4
Unaudited Condensed Statement of Operations for the six months ended
June 30, 1996 and 1995 5
Unaudited Condensed Statement of Cash Flows for the six months ended
June 30, 1996 and 1995 6
Notes to Unaudited Condensed Financial Statements 7
Report of Independent Auditors 8
Balance Sheets at December 31, 1995 and 1994 9
Statements of Operations for the year ended December 31, 1995, the period
from September 1, 1994 to December 31, 1994, and the years ended
August 31, 1994 and 1993 10
Statements of Common Shareholders' Equity for the year ended
December 31, 1995, the period from September 1, 1994 to
December 31, 1994, and the years ended August 31, 1994 and 1993 11
Statements of Cash Flows for the year ended December 31, 1995, the period
from September 1, 1994 to December 31, 1994, and the years ended
August 31, 1994 and 1993 12
Notes to Financial Statements 13
(b) Pro Forma, Historical and Supplemental Financial Information.
(1) The following pro forma financial information is being filed herewith:
Unaudited Pro Forma Combined Condensed Balance Sheet at June 30, 1996 22
Unaudited Pro Forma Combined Condensed Statement of Operations for the
six months ended June 30, 1996 23
Unaudited Pro Forma Combined Condensed Statement of Operations for the
six months ended June 30, 1995 24
Notes to Unaudited Pro Forma Combined Condensed Financial Statements 25
(2) Financial Statements of HNC Software Inc.
The following financial statements are being filed herewith:
Report of Independent Accountants 26
Consolidated Balance Sheet at December 31, 1995 and 1994 27
Consolidated Statement of Income for the years ended December 31, 1995,
1994 and 1993 28
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1994 and 1993 29
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1995, 1994 and 1993 30
Notes to Consolidated Financial Statements 31
(3) Supplemental Financial Information.
The following supplemental financial information is being filed
herewith:
Supplemental Consolidated Balance Sheet at December 31, 1995 and 1994
Supplemental Consolidated Statement of Income for the years ended
December 31, 1995,
1994 and 1993 42
Supplemental Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1994 and 1993 43
Supplemental Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1995, 1994 and 1993 44
Notes to Supplemental Consolidated Financial Statements 45
(4) Financial Statement Schedule.
Report of Independent Accountants on Financial Statement Schedule 57
For the three years ended December 31, 1995 -
Schedule II - Valuation and Qualifying Accounts and Reserves 58
</TABLE>
(c) Exhibits.
The following exhibits are filed herewith:
*2.01 Agreement and Plan of Reorganization dated as of July 19, 1996
by and among the Company, HNC Merger Corp. and Risk Data
Corporation, as amended. 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.
*2.02 Agreement of Merger dated as of August 30, 1996 by and between
HNC Merger Corp. and Risk Data Corporation.
*4.01 Registration Rights Agreement dated as of August 30, 1996 by
and among the Company and the former shareholders of Risk Data
Corporation.
<TABLE>
<S> <C>
11.01 Statement Regarding Computation of Per Share Earnings (Loss). 61
23.01 Consent of Price Waterhouse LLP, Independent Accountants. 62
23.02 Consent of Ernst & Young LLP, Independent Auditors. 63
</TABLE>
- ----------------------
*The asterisked exhibits were included in the registrant's report on Form 8-K as
filed by the registrant on September 12, 1996.
3
<PAGE> 4
RISK DATA CORPORATION
UNAUDITED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1996
----
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents ............................................... $ 59
Accounts receivable, net ................................................ 3,159
Other current assets .................................................... 341
-------
Total current assets ................................................ 3,559
Property and equipment, net .................................................. 1,463
Other assets ................................................................. 702
-------
$ 5,724
=======
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................................ $ 154
Accrued liabilities ..................................................... 536
Deferred revenue ........................................................ 1,068
Notes payable ........................................................... 4,880
Other current liabilities ............................................... 545
-------
Total current liabilities ........................................... 7,183
-------
Other non-current liabilities ................................................ 658
-------
Mandatorily redeemable preferred stock, no par value:
Series A, 1,363 authorized, 1,356 shares issued and outstanding ..... 2,250
Series B, 514 authorized, 464 shares issued and outstanding ......... 4,050
-------
6,300
-------
Stockholders' deficit:
Common stock, no par value - 10,000 shares authorized:
1,000 shares issued and outstanding ................................. 46
Accumulated deficit ..................................................... (8,463)
-------
Total stockholders' deficit ......................................... (8,417)
-------
$ 5,724
=======
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
4
<PAGE> 5
RISK DATA CORPORATION
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
------- -------
<S> <C> <C>
Revenues ................................. $ 2,600 $ 2,418
Cost of revenues ......................... 2,173 1,210
------- -------
Gross profit ............................. 427 1,208
------- -------
Operating expenses:
Research and development ............. 717 739
Sales and marketing .................. 954 526
General and administrative ........... 655 462
------- -------
Total operating expenses .......... 2,326 1,727
------- -------
Operating loss ........................... (1,899) (519)
Interest and other income ................ 2 13
Interest expense ......................... (286) (170)
------- -------
Loss before income tax provision (2,183) (676)
Income tax provision ..................... 1 --
------- -------
Net loss ....................... $(2,184) $ (676)
======= =======
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
5
<PAGE> 6
RISK DATA CORPORATION
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net loss .............................................. $ (2,184) $ (676)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 265 218
Changes in assets and liabilities:
Accounts receivable, net ........................ (947) (328)
Other assets .................................... 24 (475)
Accounts payable ................................ 27 18
Accrued liabilities ............................. 257 17
Deferred revenue ................................ 1,008 --
Other liabilities ............................... (49) 48
------- -------
Net cash used in operating activities ....... (1,599) (1,178)
------- -------
Cash flows from investing activities:
Acquisitions of property and equipment ................ (67) (26)
------- -------
Net cash used in investing activities ....... (67) (26)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock ................ 41 --
Proceeds from issuance of notes payable to stockholders -- 500
Proceeds under revolving line of credit ............... 309 495
Repayments under revolving line of credit ............. (623) (230)
Proceeds under bridge loan ............................ 1,999 --
Repayment of capital lease obligations ................ (267) (239)
------- -------
Net cash provided by financing activities ... 1,459 526
------- -------
Net decrease in cash and cash equivalents ................. (207) (678)
Cash and cash equivalents at beginning of period .......... 266 746
------- -------
Cash and cash equivalents at end of period ................ $ 59 $ 68
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid ........................................ $ 324 $ 203
=======
Income taxes paid .................................... $ -- $ 1
======= =======
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
6
<PAGE> 7
RISK DATA CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
In management's opinion, the accompanying unaudited condensed financial
statements for Risk Data Corporation ("the Company") as of June 30, 1996 and for
the six months ended June 30, 1996 and 1995 have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and include all adjustments (consisting only of normal recurring accruals) that
the Company considers necessary for a fair presentation of its financial
position, results of operations, and cash flows for such periods. Accordingly,
they do not contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All such
financial statements are unaudited. This report and the accompanying unaudited
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto presented elsewhere in this filing for
the year ended December 31, 1995. Footnotes and other disclosures as of June 30,
1996 and for the six months ended June 30, 1996 and 1995, which would
substantially duplicate the disclosures in the Company's audited financial
statements for fiscal year ended December 31, 1995, have been omitted. The
interim financial information herein is not necessarily indicative of the
results to be expected for the full year ending December 31, 1996.
NOTE 2 - FINANCING ARRANGEMENTS
Effective January 6, 1996, the Company renewed its credit facility with
revised terms and conditions. The new credit facility is comprised of a
revolving line of credit secured by eligible accounts receivable as well as a
bridge loan that is secured by certain stockholders. During the six months ended
June 30, 1996, the Company borrowed $1,999,000 against the bridge loan (Note 4).
NOTE 3 - STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation." FAS 123 was adopted by the Company as required for its fiscal
1996 financial statements and did not have a material effect on the Company's
financial position or results of operations. The Company continues to measure
compensation expense for its stock-based employee compensation plan using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and will provide pro forma disclosures of net income and
earnings per share in its 1996 annual financial statements as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
NOTE 4 - SUBSEQUENT EVENTS
Effective August 30, 1996, the Company was acquired by HNC Software Inc.
(HNC). Under the terms of the acquisition, accounted for as a pooling of
interest, the Company exchanged all of its outstanding common and preferred
shares for 1,891,456 common shares of HNC.
During September 1996, all of the Company's outstanding debt, including
$3,901,000 of bank notes payable and $1,000,000 of notes payable to
stockholders, was repaid.
7
<PAGE> 8
Report of Independent Auditors
The Board of Directors and Shareholders
Risk Data Corporation
We have audited the accompanying balance sheets of Risk Data Corporation as of
December 31, 1995 and 1994, and the related statements of operations, common
shareholders' equity, and cash flows for the year ended December 31, 1995, the
period September 31, 1994 to December 31, 1994 and the years ended August 31,
1994 and 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Risk Data Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the year ended December 31, 1995, the period September 31, 1994 to December
31, 1994 and the years ended August 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
March 8, 1996,
except for Note 6 as to which the date is
August 30, 1996
8
<PAGE> 9
Risk Data Corporation
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 266,126 $ 745,894
Accounts receivable, net of allowance for doubtful accounts of $41,000 in
1995 and $162,380 in 1994 2,211,524 2,149,422
Deferred charges, net 260,962 279,142
Prepaid expenses and other current assets 150,339 153,161
------------------------------------
Total current assets 2,888,951 3,327,619
Property and equipment, at cost:
Computer equipment 1,790,407 1,299,348
Furniture and fixtures 503,610 483,691
Leasehold improvements 30,562 30,133
------------------------------------
2,324,579 1,813,172
Accumulated depreciation and amortization (974,944) (518,805)
------------------------------------
1,349,635 1,294,367
Software development costs 517,005 109,402
Other assets 138,716 192,484
------------------------------------
Total assets $4,894,307 $4,923,872
====================================
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND COMMON SHAREHOLDERS'
EQUITY
Current liabilities:
Bank line of credit $2,195,225 $1,375,000
Accounts payable 126,788 31,917
Accrued liabilities 278,997 235,288
Deferred revenue 59,590 -
Current portion of capital lease obligations 460,970 415,780
Current portion of reserve for loss on sublease 87,569 90,314
------------------------------------
Total current liabilities 3,209,139 2,148,299
Capital lease obligations due after one year 373,414 515,855
Notes payable to shareholders 1,000,001 -
Deferred rent and reserve for loss on sublease 238,635 243,590
Other long-term liabilities 46,890 37,890
Commitments
Redeemable preferred stock:
Series A redeemable preferred stock, no par value:
Authorized shares - 1,362,831
Issued and outstanding shares - 1,355,831 2,249,999 2,249,999
Series B redeemable preferred stock, no par value:
Authorized shares - 514,450
Issued and outstanding shares - 464,450 4,050,004 4,050,004
Common shareholders' equity:
Common stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 1,000,000 5,000 5,000
Accumulated deficit (6,278,775) (4,326,765)
------------------------------------
Total common shareholders' equity (deficiency) (6,273,775) (4,321,765)
------------------------------------
Total liabilities, redeemable preferred stock, and common
shareholders' equity $4,894,307 $4,923,872
====================================
</TABLE>
9
<PAGE> 10
Risk Data Corporation
Statements of Operations
<TABLE>
<CAPTION>
PERIOD
YEAR SEPTEMBER 1, YEAR YEAR
ENDED DECEMBER 31 1994 TO ENDED ENDED
1995 DECEMBER 31, 1994 AUGUST 31 1994 AUGUST 31 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,577,291 $ 678,297 $ 4,218,503 $2,352,411
Cost of revenues 2,407,520 592,607 1,612,538 1,025,607
------------------------------------------------------------------------
Gross profit 2,169,771 85,690 2,605,965 1,326,804
Operating costs:
Selling, general and administrative
expenses 3,282,057 1,309,532 2,402,682 1,136,882
Research and development expenses 463,678 195,802 410,210 276,114
------------------------------------------------------------------------
Total operating costs 3,745,735 1,505,334 2,812,892 1,412,996
------------------------------------------------------------------------
Loss from operations (1,575,964) (1,419,644) (206,927) (86,192)
Interest expense, net 375,246 93,666 177,904 99,281
------------------------------------------------------------------------
Loss before provision for taxes (1,951,210) (1,513,310) (384,831) (185,473)
Provision for state taxes 800 1,600 800 800
------------------------------------------------------------------------
Net loss $(1,952,010) $(1,514,910) $ (385,631) $ (186,273)
========================================================================
</TABLE>
See accompanying notes.
10
<PAGE> 11
Risk Data Corporation
Statements of Common Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-----------------------------------
SHARES AMOUNT DEFICIT TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1992 1,000,000 $5,000 $(2,239,951) $(2,234,951)
Net loss - - (186,273) (186,273)
----------------------------------------------------------------------
Balance at August 31, 1993 1,000,000 5,000 (2,426,224) (2,421,224)
Net loss - - (385,631) (385,631)
----------------------------------------------------------------------
Balance at August 31, 1994 1,000,000 5,000 (2,811,855) (2,806,855)
Net loss - - (1,514,910) (1,514,910)
----------------------------------------------------------------------
Balance at December 31, 1994 1,000,000 5,000 (4,326,765) (4,321,765)
Net loss - - (1,952,010) (1,952,010)
======================================================================
Balance at December 31, 1995 1,000,000 $5,000 $(6,278,775) $(6,273,775)
======================================================================
</TABLE>
See accompanying notes.
11
<PAGE> 12
Risk Data Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD
YEAR SEPTEMBER 1 YEAR YEAR
ENDED 1994 TO ENDED ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31 AUGUST 31
1995 1994 1994 1993
------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $(1,952,010) $(1,514,910) $ (385,631) $ (186,273)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 456,139 116,885 242,577 77,353
Loss on disposal of property and equipment - - 10,145 -
Changes in operating assets and liabilities:
Accounts receivable (62,102) 769,760 (1,438,569) (1,222,339)
Deferred charges 18,180 154,787 (286,914) 187,934
Prepaid expenses 2,822 (17,631) (85,583) (17,581)
Other assets 53,768 52,451 (158,227) (78,626)
Accounts payable and accrued liabilities 138,580 (65,431) 127,584 120,458
Deferred rent and reserve for loss on sublease (7,700) 141,919 95,931 (972)
Deferred revenue 59,590 - - -
Other long-term liabilities 9,000 8,960 28,930 -
------------------------------------------------------------
Net cash used in operating activities (1,283,733) (353,210) (1,849,757) (1,120,046)
INVESTING ACTIVITIES
Purchases of property and equipment (106,367) (61,697) (111,964) (92,673)
Capitalization of software development costs (407,603) (109,402) - -
------------------------------------------------------------
Net cash used in investing activities (513,970) (171,099) (111,964) (92,673)
FINANCING ACTIVITIES
Proceeds from (repayments of) notes payable to
shareholders 1,000,001 - (800,000) 300,000
Issuance of preferred stock - - 4,050,004 -
Net proceeds (repayments) under line of credit agreement
820,225 615,000 (300,000) 970,000
Payment of capital lease obligations (502,291) (119,535) (256,512) (62,022)
------------------------------------------------------------
Net cash provided by financing activities 1,317,935 495,465 2,693,492 1,207,978
------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (479,768) (28,844) 731,771 (4,741)
Cash and cash equivalents at beginning of period 745,894 774,738 42,667 47,408
------------------------------------------------------------
Cash and cash equivalents at end of period $ 266,126 $ 745,894 $ 774,438 $ 42,667
============================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 356,725 $ 73,334 $ 278,480 $ 47,028
Taxes paid 1,700 800 800 800
SUPPLEMENTAL DISCLOSURE OF NONCASH FUNDING ACTIVITY
Equipment acquired under capital lease $ 411,273 $ 134,291 $1,038,002 $ 47,028
</TABLE>
See accompanying notes.
12
<PAGE> 13
Risk Data Corporation
Notes to Financial Statements
December 31, 1995
1. ACCOUNTING POLICIES
BUSINESS
Risk Data Corporation (the Company) was incorporated in 1987 under the laws of
the State of California. The Company is an insurance information systems firm
that generates revenues primarily by developing and licensing proprietary
software products to the insurance industry throughout the United States.
DEFERRED CHARGES
Costs incurred to develop custom systems for specific customers are deferred
until the system is installed.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets, ranging from three to seven
years.
SOFTWARE DEVELOPMENT COSTS
Research and development expenses incurred in the design, development and
testing of new software until technological feasibility has been established for
the product, and software maintenance and enhancement costs, are expensed as
incurred. Thereafter, certain costs such as coding and testing are capitalized
until the product is available for general release to customers. The Company
uses the working model approach to establish technological feasibility and, to
date, $517,005 of software development costs related to the Provider Compare and
Comp Compare programs have been capitalized.
REVENUE RECOGNITION
Licensing agreements generally provide for a guaranteed minimum license fee and
transactional fees. The first year of the minimum fee is recognized as revenue
on the date a system is installed and transactional fees are recognized as
revenue when system usage exceeds the monthly minimum license fee. The Company
recognized $1,103,721, $521,326, $2,055,519 and $705,207 of transactional fees
in excess of minimum license fees in fiscal 1995, the period September 1, 1994
to December 31, 1994 and fiscal 1994 and 1993, respectively. As of December 31,
1995 and 1994, $1,686,527 and $1,006,386 respectively, of receivables remain
unbilled and are billable at contractually specified dates over the minimum
noncancelable term, not to exceed one year.
13
<PAGE> 14
Risk Data Corporation
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company licenses its software primarily to large insurance companies, state
insurance funds and third-party insurance administrators. Significant customers
accounted for 19% and 11% of revenues in 1995; 20%, 17%, 15%, 12% and 12% of
revenues for the period September 1, 1994 to December 31, 1994; 13%, 12% and 11%
of revenues for fiscal 1994; and 13% and 13% of revenues for fiscal 1993.
Credit is extended based on an evaluation of the customer's financial condition
and collateral is generally not required. Credit losses have traditionally not
been material and such losses have been within management's expectations.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INCOME TAXES
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the liability method, deferred taxes are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are recognized and
measured based on the likelihood of realization of the related tax benefit in
the future.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Significant estimates made in
preparing these financial statements include the allowance for doubtful accounts
and the allowance for deferred charges.
14
<PAGE> 15
Risk Data Corporation
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, cash equivalents, accounts receivable and
accounts payable approximated their carrying accounts due to the relatively
short maturity of these items. The fair value of debt approximated its carrying
amount at December 31, 1995 based on rates currently available to the Company
for debt with similar terms and remaining maturities.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
Company will adopt Statement 121 in 1996 and, based on current circumstances,
does not believe the effect of the adoption will be material.
In October 1995, the Financial Accounting Standards Board issued FASB Statement
No. 123 (FAS 123), Accounting for Stock-Based Compensation. The Company will be
required to adopt FAS 123 in 1996. The Company intends to continue to account
for stock option grants in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees, and to adopt the "disclosure only" alternative
available under FAS 123.
2. FINANCING ARRANGEMENTS
CREDIT FACILITY
As of December 31, 1995, the Company had a $3,000,000 revolving line of credit
with a bank, secured by the Company's assets. Advances under the line were
limited to 75% of eligible accounts receivable. The line bore interest at the
bank's prime rate plus 2% (10.75% at December 31, 1995).
15
<PAGE> 16
Risk Data Corporation
Notes to Financial Statements (continued)
2. FINANCING ARRANGEMENTS (CONTINUED)
CREDIT FACILITY (CONTINUED)
Effective January 6, 1996, the Company renewed its credit facility with revised
terms and conditions. The new credit facility is comprised of a revolving line
of credit secured by eligible accounts receivable as well as a bridge loan that
is secured by the guarantees of certain shareholders. The maximum amount
currently available under the revolving line of credit is $1,600,000. Future
borrowings under the revolving line of credit may increase to the lesser of 75%
of eligible accounts receivables or $3,000,000, when certain financial covenants
are met. The revolving line of credit matures on January 5, 1997. The bridge
loan portion of the credit facility has no financial covenants and may be drawn
against up to $2,000,000. The bridge loan matures on September 5, 1996. All
borrowings under the credit facility bear interest at the bank's prime rate plus
3%.
The line of credit agreement contains financial covenants including the
maintenance of key financial ratios and covenants that limit the incurrence of
additional debt and expenditures for the repurchase of the Company's common
stock. At December 31, 1995, the Company was in compliance with the terms and
covenants of the agreement or had obtained the necessary waivers from the bank.
NOTES PAYABLE TO SHAREHOLDERS
During 1995, the preferred stock shareholders loaned the Company $1,000,001
under subordinated note agreements (secured by the assets of the Company but
subordinated to borrowings under the line of credit) bearing interest at 9%. The
unpaid principal balance, together with accrued interest, is due in January
1997, subject to acceleration under certain conditions.
CAPITAL LEASE OBLIGATIONS
Obligations under capital leases are as follows for the years ending December
31:
<TABLE>
<S> <C>
1996 $569,541
1997 320,817
1998 54,912
------------------
Total minimum lease payments 945,270
Less amount representing interest 110,886
------------------
Present value of minimum lease payments 834,384
Less current portion 460,970
------------------
Obligations under capital leases due after one year $373,414
==================
</TABLE>
16
<PAGE> 17
Risk Data Corporation
Notes to Financial Statements (continued)
2. FINANCING ARRANGEMENTS (CONTINUED)
CAPITAL LEASE OBLIGATIONS (CONTINUED)
The book value of assets under the capital leases at December 31, 1995 and 1994
was $1,613,918 and $1,054,418 net of accumulated amortization of $572,413 and
$391,228 respectively.
3. COMMITMENTS
OPERATING LEASES
The Company leases (and subleases) office facilities and certain equipment under
operating leases requiring the following future minimum lease payments for the
years ending December 31:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LEASE LESS SUBLEASE MINIMUM LEASE
PAYMENTS INCOME PAYMENTS
------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 494,198 $ (91,420) $ 402,778
1997 414,359 (27,374) 386,985
1998 280,932 - 280,932
1999 7,835 - 7,835
2000 4,570 - 4,570
------------------------------------------------------------------------
$1,201,894 $(118,794) $1,083,100
========================================================================
</TABLE>
A deferred lease obligation of $219,686 has been recorded through December 31,
1995 reflecting the difference between rent expense recognized on the
straight-line basis and required lease payments.
Rent expense charged to operations for fiscal 1995 was $446,896 net of sublease
income of $83,005, for the period September 1, 1994 to December 31, 1994 was
$97,726 net of sublease income of $25,484 for fiscal 1994 was $209,871 net of
sublease income of $14,267 and for fiscal 1993 was $127,000.
17
<PAGE> 18
Risk Data Corporation
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
Holders of preferred stock are entitled to receive dividends at the rate of
$.1327 per annum per share of Series A preferred stock and $.6976 per annum per
share of Series B preferred stock, only when and if declared by the Company's
Board of Directors. These dividends are to be paid prior to any dividends on
common stock, and are not cumulative. In the event of voluntary or involuntary
liquidation, holders of preferred stock shall be entitled to receive ratably,
prior to any distribution to common shareholders, an amount equal to $1.66 per
outstanding share of Series A preferred stock and $8.72 per outstanding share of
Series B preferred stock. Subsequent to the preferred distributions, the common
shareholders shall receive ratable distributions equal to $.55 per share.
Thereafter, all distributions shall be made pro rata among all preferred and
common shareholders based upon the number of shares held by each (assuming
conversion of the preferred shares to common).
The preferred stock is redeemable at the election of the holders after October
31, 1997, at a price equal to the original issue price, plus any declared but
unpaid dividends, subject to the conditions that (i) the Company is not required
to redeem in any 12-month period more than 33 1/3% of the original number, as
adjusted, of a holder's shares, and (ii) the holder of 80% or more of the
outstanding preferred stock may postpone for a specified period of time or waive
such rights to redemption of all holders of preferred stock.
Subject to certain conditions, each preferred share is convertible into one
share of common stock. Upon the closing of an initial public offering, subject
to certain conditions, the preferred stock automatically converts into common
stock. The conversion ratio shall be adjusted in the future to protect the
holders of such preferred stock from dilution resulting from stock splits, stock
dividends, and other similar capital transactions and from dilution due to the
issuance of shares at a price less than the conversion price of the preferred
shares in effect immediately prior to the issuance of such additional shares.
Holders of preferred stock have full voting rights and powers, equal to the
voting rights and powers of the holders of common stock. Each preferred share is
entitled to one vote for each share of common stock into which such preferred
stock could be converted. In addition, the preferred shareholders have certain
rights with respect to the election of directors.
18
<PAGE> 19
Risk Data Corporation
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANT AND OPTIONS
At December 31, 1995, the Company had warrants outstanding for the purchase of
7,000 shares and 12,614 shares of Series A and B preferred stock at a price of
$7.13 and $8.72 per share, respectively. The warrants are currently exercisable,
and expire in August 1997 and May 2004, respectively. In connection with the
renewal of the credit facility on January 6, 1996, the Company lowered the
exercise price on the warrant to purchase 7,000 shares of Series A preferred
stock from $7.13 per share to $3.00 per share.
At December 31, 1995, there were 608,500 nonqualified stock options outstanding
(511,229 exercisable) under the Company's stock option plan. The options provide
for the purchase of the Company's common stock at prices ranging from $.01 to
$.87 per share, and generally vest over a four-year period and expire 10 years
after date of grant. The Company's Board of Directors has authorized the
issuance of up to an additional 135,500 options under similar terms. No options
were exercised during 1995.
There are 2,332,955 shares of common stock reserved for issuance pursuant to the
preferred stock conversion rights, the warrant agreements and the option plan.
5. TAXES BASED ON INCOME
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Tax operating loss carryforwards $ 2,053,000 $ 1,555,000
Research and development credit carryforwards 176,000 133,000
Deferred rent 130,000 134,000
Reserves 121,000 114,000
Accruals not currently deductible 95,000 79,000
-----------------------------------
Total deferred tax assets 2,575,000 2,015,000
Valuation reserve (2,575,000) (2,015,000)
-----------------------------------
Net deferred tax assets $ - $ -
===================================
</TABLE>
19
<PAGE> 20
Risk Data Corporation
Notes to Financial Statements (continued)
5. TAXES BASED ON INCOME (CONTINUED)
A valuation allowance has been recognized to fully reserve the deferred tax
asset because the Company cannot yet determine if the asset will be realized.
The difference between the effective tax rate and the statutory U.S. federal
income tax rate is due primarily to the provision of such valuation allowance.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $5,300,000 and $2,650,000 for federal and California income tax
purposes, respectively, which will begin expiring in the year 1996. Pursuant to
the Tax Reform Act of 1986, use of the Company's net operating loss
carryforwards and other tax attributes may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period.
6. SUBSEQUENT EVENTS
Effective August 30, 1996, the Company was acquired by HNC Software, Inc. (HNC).
Under the terms of the acquisition, accounted for as a pooling of interests, the
Company exchanged all of its outstanding common and preferred shares for
1,891,456 common shares of HNC.
20
<PAGE> 21
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
assume a business combination between HNC and RDC accounted for as a pooling of
interests and are based on the Company's respective historical financial
statements and the notes thereto. The unaudited pro forma combined condensed
balance sheet gives effect to the RDC acquisition as if it had occurred on June
30, 1996, combining the balance sheets of HNC and RDC at June 30, 1996. The
unaudited pro forma combined condensed statements of operations give effect to
the RDC acquisition as if it had occurred at the beginning of the periods
presented, combining HNC's historical results for the six months ended June 30,
1996 and 1995 with the corresponding RDC results for the six months ended June
30, 1996 and 1995, respectively.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the RDC acquisition had been consummated at the beginning
of the earliest period presented, nor is it necessarily indicative of future
operating results or financial position.
These unaudited pro forma combined condensed financial statements are
based on, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of HNC and RDC included in
this filing.
21
<PAGE> 22
HNC SOFTWARE INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
-------------------------- ---------------------
HNC RDC NOTES ADJUSTMENTS COMBINED
-------- -------- ----- ----------- --------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 1,184 $ 59 $ -- $ 1,243
Investments available for sale ................................ 13,617 -- -- 13,617
Accounts receivable, net ...................................... 7,419 3,159 -- 10,578
Other current assets .......................................... 3,910 341 -- 4,251
-------- -------- -------- --------
Total current assets ...................................... 26,130 3,559 -- 29,689
Investments available for sale ..................................... 27,001 -- -- 27,001
Property and equipment, net ........................................ 3,477 1,463 -- 4,940
Other assets ....................................................... 3,818 702 -- 4,520
-------- -------- -------- --------
$ 60,426 $ 5,724 $ -- $ 66,150
======== ======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 721 $ 154 $ -- $ 875
Accrued liabilities ........................................... 2,060 536 -- 2,596
Deferred revenue .............................................. 2,006 1,068 -- 3,074
Notes payable and other debt .................................. -- 4,880 (4) -- 4,880
Other current liabilities ..................................... -- 545 -- 545
-------- -------- -------- --------
Total current liabilities ................................. 4,787 7,183 -- 11,970
-------- -------- -------- --------
Other non-current liabilities ...................................... -- 658 -- 658
-------- -------- -------- --------
Mandatorily redeemable preferred stock, no par value:
Series A, 1,363 authorized, 1,356 shares issued and
outstanding ............................................... -- 2,250 (2) (2,250) --
Series B, 514 authorized, 464 shares issued and
outstanding ............................................... -- 4,050 (2) (4,050) --
-------- -------- -------- --------
-- 6,300 (6,300) --
-------- -------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value - 50,000 shares
authorized: 17,352 shares issued and
outstanding ............................................... 15 46 (2) (44) 17
Paid-in capital ............................................... 54,714 -- (2) 6,344 61,058
Retained earnings (accumulated deficit) ....................... 910 (8,463) -- (7,553)
-------- -------- -------- --------
Total stockholders' equity (deficit) ...................... 55,639 (8,417) 6,300 53,522
-------- -------- -------- --------
$ 60,426 $ 5,724 $ -- $ 66,150
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
22
<PAGE> 23
HNC SOFTWARE INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
----------------------- -------------
HNC RDC NOTES COMBINED
-------- -------- ----- --------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation ............... $ 10,448 $ 2,600 $ 13,048
Contracts and other ............................. 6,030 -- 6,030
-------- -------- --------
Total revenues ............................... 16,478 2,600 19,078
-------- -------- --------
Operating expenses:
Software license and installation ............... 2,126 2,173 4,299
Contracts and other ............................. 4,009 -- 4,009
Research and development ........................ 3,602 717 4,319
Sales and marketing ............................. 3,169 954 4,123
General and administrative ...................... 1,734 655 2,389
-------- -------- --------
Total operating expenses ..................... 14,640 4,499 19,139
-------- -------- --------
Operating income (loss) ............................. 1,838 (1,899) (61)
Interest and other income ........................... 1,116 2 1,118
Interest expense .................................... -- (286) (286)
-------- -------- --------
Income (loss) before income tax provision . 2,954 (2,183) 771
Income tax provision ................................ 1,174 1 1,175
-------- -------- --------
Net income (loss) ......................... $ 1,780 $ (2,184) $ (404)
======== ======== ========
Net income (loss) per share ......................... $ 0.11 (3) $ (0.02)
======== ========
Shares used in computing net income (loss) per share 16,870 18,889
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
23
<PAGE> 24
HNC SOFTWARE INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
------------------------ -------------
HNC RDC NOTES COMBINED
-------- -------- ----- --------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation ............... $ 6,808 $ 2,418 $ 9,226
Contracts and other ............................. 4,200 -- 4,200
-------- -------- --------
Total revenues ............................... 11,008 2,418 13,426
-------- -------- --------
Operating expenses:
Software license and installation ............... 1,304 1,210 2,514
Contracts and other ............................. 3,080 -- 3,080
Research and development ........................ 2,063 739 2,802
Sales and marketing ............................. 2,262 526 2,788
General and administrative ...................... 1,100 462 1,562
-------- -------- --------
Total operating expenses ..................... 9,809 2,937 12,746
-------- -------- --------
Operating income (loss) ............................. 1,199 (519) 680
Interest and other income ........................... 91 13 104
Interest expense .................................... -- (170) (170)
-------- -------- --------
Income (loss) before income tax provision . 1,290 (676) 614
Income tax provision ................................ 400 -- 400
-------- -------- --------
Net income (loss) ......................... $ 890 $ (676) $ 214
======== ======== ========
Net income (loss) per share ......................... $ 0.07 (3) $ 0.01
======== ========
Shares used in computing net income (loss) per share 12,870 14,762
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
24
<PAGE> 25
HNC SOFTWARE INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) The unaudited pro forma combined condensed financial statements of HNC and
RDC give retroactive effect to the RDC acquisition which is being accounted
for as a pooling of interests and, as a result, such statements are
presented as if the combining companies had been combined for all periods
presented.
There were no material differences between the accounting policies of HNC
and RDC. Certain amounts have been reclassified to conform to the pro forma
presentation.
(2) These pro forma adjustments reflect the exchange of RDC's capital stock
(including options and rights under RDC's option plan) for an aggregate of
1,891,456 shares of HNC common stock to effect the RDC acquisition. No
changes were made to the terms of the RDC options in connection with the
merger.
(3) Pro forma per share amounts are based on weighted average shares
outstanding during each period, assuming each then outstanding Series A
preferred share of RDC stock is exchanged for .61893 shares of common
stock, each then outstanding Series B share of RDC stock is exchanged for
.86747 shares of common stock, and each then outstanding common share of
RDC stock is exchanged for .57999 shares of common stock.
(4) Subsequent to the acquisition, the $4,880,000 of outstanding debt of RDC
was repaid.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HNC Software Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity (deficit) present fairly, in all material respects, the financial
position of HNC Software Inc. and its subsidiary at December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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 the opinion expressed above.
As described in Note 2, on August 30, 1996, HNC Software Inc. merged with Risk
Data Corporation in a transaction accounted for as a pooling of interests. The
accompanying supplemental consolidated financial statements give retroactive
effect to the merger of HNC Software Inc. with Risk Data Corporation.
In our opinion, the accompanying supplemental consolidated balance sheet and the
related supplemental consolidated statements of income, of cash flows and of
changes in stockholders' equity (deficit) present fairly, in all material
respects, the financial position of HNC Software Inc. and its subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
January 30, 1996,
except as to the stock split which is as of April 3, 1996
and as to the pooling of interests with Risk Data Corporation
which is as of August 30, 1996 and as to the repayment of all of Risk
Data Corporation's outstanding debt which is as of September 11, 1996
26
<PAGE> 27
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
ASSETS ------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................... $ 19,929 $ 4,786
Investments available for sale ...................................................... 14,590 1,182
Accounts receivable, net ............................................................ 4,597 3,453
Other current assets ................................................................ 2,852 602
-------- --------
Total current assets ............................................................ 41,968 10,023
Investments available for sale ........................................................... 8,336 --
Property and equipment, net .............................................................. 2,593 1,567
Other assets ............................................................................. 533 625
-------- --------
$ 53,430 $ 12,215
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................................................... $ 669 $ 744
Accrued liabilities ................................................................. 2,451 827
Deferred revenue .................................................................... 2,041 764
Current portion of bank notes payable ............................................... -- 286
-------- --------
Total current liabilities ....................................................... 5,161 2,621
-------- --------
Bank notes payable, less current portion ................................................. -- 401
-------- --------
Mandatorily redeemable convertible preferred stock, $0.001 par value, including accretion:
Series B, none and 1,208 shares issued and outstanding, respectively ................ -- 4,015
Series C, none and 2,834 shares issued and outstanding, respectively ................ -- 5,124
Series D, none and 2,128 shares issued and outstanding, respectively ................ -- 4,030
-------- --------
-- 13,169
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value - 8,000 shares authorized:
Series A, none and 380 shares issued and outstanding, respectively .............. -- --
Series E, none and 1,282 shares issued and outstanding, respectively ............ -- 1
Common stock, $0.001 par value - 40,000 shares authorized:
14,718 and 1,974 shares issued and outstanding, respectively .................... 15 2
Paid-in capital ..................................................................... 49,033 4,241
Unrealized gain on investments available for sale ................................... 92 --
Accumulated deficit ................................................................. (871) (8,220)
-------- --------
Total stockholders' equity (deficit) ............................................ 48,269 (3,976)
-------- --------
$ 53,430 $ 12,215
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Revenues:
Software license and installation ..................... $ 16,028 $ 8,822 $ 3,688
Contracts and other ................................... 9,146 7,651 6,614
-------- -------- --------
Total revenues .................................... 25,174 16,473 10,302
-------- -------- --------
Operating expenses:
Software license and installation ..................... 2,990 2,830 1,219
Contracts and other ................................... 6,894 5,040 4,022
Research and development .............................. 4,598 2,733 1,489
Sales and marketing ................................... 4,979 2,869 1,536
General and administrative ............................ 2,614 1,592 1,103
-------- -------- --------
Total operating expenses .......................... 22,075 15,064 9,369
-------- -------- --------
Operating income ........................................... 3,099 1,409 933
Interest and other income .................................. 815 114 14
Interest expense ........................................... (33) (57) (26)
-------- -------- --------
Income before income tax (benefit) provision.. 3,881 1,466 921
Income tax (benefit) provision ............................. (576) (457) 13
-------- -------- --------
Net income ................................... $ 4,457 $ 1,923 $ 908
======== ======== ========
Pro forma net income per share (unaudited) (Note 1) ........ $ 0.31 $ 0.16
======== ========
Shares used in computing pro forma net income
per share (unaudited) (Note 1) ........................ 14,292 12,362
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 4,457 $ 1,923 $ 908
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 1,124 306 115
Changes in assets and liabilities:
Accounts receivable, net .................................... (1,144) (1,172) (287)
Other assets ................................................ (2,158) (1,007) 94
Accounts payable ............................................ (75) 185 (124)
Accrued liabilities ......................................... 1,624 250 131
Deferred revenue ............................................ 1,277 (92) (689)
-------- -------- --------
Net cash provided by operating activities ............... 5,105 393 148
-------- -------- --------
Cash flows from investing activities:
Purchases of investments ............................................. (28,666) (7,134) --
Maturities of investments ............................................ 4,182 6,000 --
Proceeds from sale of investments .................................... 2,467 -- --
Acquisitions of property and equipment ............................... (1,784) (1,362) (341)
-------- -------- --------
Net cash used in investing activities ................... (23,801) (2,496) (341)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock ........................... 33,726 10 28
Net proceeds from issuance of preferred stock ........................ -- 4,949 --
Tax benefit from stock option transactions ........................... 800 -- --
Proceeds from issuance of bank notes payable ......................... -- 603 228
Repayments of bank notes payable ..................................... (687) (348) (93)
-------- -------- --------
Net cash provided by financing activities ............... 33,839 5,214 163
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... 15,143 3,111 (30)
Cash and cash equivalents at beginning of period .......................... 4,786 1,675 1,705
-------- -------- --------
Cash and cash equivalents at end of period ................................ $ 19,929 $ 4,786 $ 1,675
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Conversion of preferred stock ........................................ $13,518 $ -- $ --
======== ======== ========
Accretion of dividends on mandatorily redeemable convertible preferred
stock ............................................................ $ 348 $ 717 $ 717
======== ======== ========
Interest paid ........................................................ $ 33 $ 50 $ 26
======== ======== ========
Income taxes paid .................................................... $ 142 $ 28 $ 12
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
SERIES A SERIES E COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 ......... 380 $ -- -- $ -- 1,802 $ 2 $ --
Common stock options exercised ....... 132 28
Accretion of dividends ............... (28)
Net income ...........................
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1993 ......... 380 -- -- -- 1,934 2 --
Common stock options exercised ....... 40 10
Issuance of Series E preferred
stock, net of issuance costs .... 1,282 1 4,948
Accretion of dividends ............... (717)
Net income ...........................
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1994 ......... 380 -- 1,282 1 1,974 2 4,241
Common stock options exercised ....... 196 85
Accretion of dividends ............... (348)
Issuance of common stock in initial
public offering, net of issuance
costs ........................... 2,376 2 14,329
Conversion of convertible
preferred stock into common
stock ........................... (380) (1,282) (1) 8,956 9 10,618
Issuance of common stock in
secondary public offering, net of
issuance costs .................. 1,116 2 19,184
Tax benefit from stock option
transactions .................... 800
Unrealized gain on investments
available for sale, net of tax ..
Stock warrant exercised .............. 100 124
Net income ...........................
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 ......... -- $ -- -- $ -- 14,718 $ 15 $ 49,033
======== ======== ======== ======== ======== ======== ========
<CAPTION>
UNREALIZED
GAIN ON TOTAL
INVESTMENTS STOCKHOLDERS'
AVAILABLE ACCUMULATED EQUITY
FOR SALE DEFICIT (DEFICIT)
-------- -------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 ......... $ -- $(10,362) $(10,360)
Common stock options exercised ....... 28
Accretion of dividends ............... (689) (717)
Net income ........................... 908 908
-------- -------- --------
BALANCE AT DECEMBER 31, 1993 ......... -- (10,143) (10,141)
Common stock options exercised ....... 10
Issuance of Series E preferred
stock, net of issuance costs .... 4,949
Accretion of dividends ............... (717)
Net income ........................... 1,923 1,923
-------- -------- --------
BALANCE AT DECEMBER 31, 1994 ......... -- (8,220) (3,976)
Common stock options exercised ....... 85
Accretion of dividends ............... (348)
Issuance of common stock in initial
public offering, net of issuance
costs ........................... 14,331
Conversion of convertible
preferred stock into common
stock ........................... 2,892 13,518
Issuance of common stock in
secondary public offering, net of
issuance costs .................. 19,186
Tax benefit from stock option
transactions .................... 800
Unrealized gain on investments
available for sale, net of tax .. 92 92
Stock warrant exercised .............. 124
Net income ........................... 4,457 4,457
-------- -------- --------
BALANCE AT DECEMBER 31, 1995 ......... $ 92 $ (871) $ 48,269
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
HNC Software Inc. (the "Company") develops, markets and supports intelligent
client-server software solutions for mission-critical decision applications in
real-time environments. The Company also performs contract research and
development using neural networks and other computational intelligence methods.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Neil Thall Associates, Inc. All significant
intercompany transactions and balances have been eliminated.
Financial Statement Preparation
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments in
money market accounts and commercial paper purchased with maturities of three
months or less.
Investments
During 1994, the Company adopted Statement of Financial Accounting Standards
No. 115 ("FAS 115") on a prospective basis. The adoption of FAS 115 did not have
a significant impact on the Company's financial position or results of
operations. Management determines the appropriate classification of its
investments in marketable debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. As of and for the
year ended December 31, 1994, the Company recorded these securities at amortized
cost, which approximated market value, since it designated them as "held to
maturity." As of December 31, 1995, the Company reassessed its intent with
respect to these securities as holding them "available for sale" prior to
maturity should the Company require additional cash from their early liquidation
in order to finance operating, investing, or other financing activities. As a
result of this reassessment, the Company reclassified these securities as
"available for sale" and will account for them accordingly on a prospective
basis. Unrealized gains related to these securities as of December 31, 1995 are
included in stockholders' equity in the Company's consolidated balance sheet,
net of tax.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets of three
to seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the related lease. Repair and
maintenance costs are charged to expense as incurred.
Software Costs
Software product development costs incurred from the time technological
feasibility is reached 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, 1995, no significant amounts were expended
subsequent to reaching technological feasibility.
31
<PAGE> 32
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the
Company will adopt prospectively as required in 1996. Pursuant to this
Statement, companies are required to investigate potential impairments of
long-lived assets, certain identifiable intangibles, and associated goodwill, on
an exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. The adoption of FAS 121 is
not expected to have a significant impact on the Company's financial position or
results of operations.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation." FAS 123 will be adopted by the Company as required for its fiscal
1996 financial statements and is not expected to have a material effect on the
Company's financial position or results of operations. Upon adoption of FAS 123,
the Company will continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Revenue Recognition
Revenue from long-term software license agreements is recognized ratably
over the respective license periods. Non-refundable license fees are recognized
as revenue when there is no significant continuing performance obligation under
the agreement and collection of the fees is probable.
Revenue from software installation 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 in advance of performance under contracts are
recorded as deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period such
losses are first identified. Unbilled receivables are stated at estimated
realizable value. Contract costs under government contracts, including indirect
costs, are subject to audit and adjustment by negotiations between the Company
and government representatives. Through 1990, indirect government contract costs
have been agreed upon with government representatives. Revenues from government
contracts have been recorded in amounts that are expected to be realized upon
final settlement.
Revenue from product sales, which is included in contracts and other, is
recognized when title passes to the customer.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
computed for the expected future impact of differences between the financial
reporting and tax basis of assets and liabilities as well as the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Deferred
income tax expense (benefit) is generally the net change during the year in the
deferred income tax asset or liability. 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 are reflected in
income during the period such changes are enacted.
32
<PAGE> 33
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments and trade
accounts receivable which are generally not collateralized. The Company's policy
is to place its cash, cash equivalents and investments with high credit quality
financial institutions and government agencies in order to limit the amount of
credit exposure. The Company's software license and installation agreements are
primarily with customers in the financial services industry. The Company
maintains reserves for potential credit losses.
During 1995, 1994 and 1993, sales under prime and subcontracts with the
federal government represented 8.8%, 14.2%, and 24.3% respectively, of the
Company's total revenues; related accounts receivable were $689,000 and $843,000
respectively, at December 31, 1995 and 1994. Mitek Systems, Inc. ("Mitek") (Note
5) accounted for 21.2% of total revenues in 1993, and another domestic customer
accounted for 15.1% of total revenues in 1995 and 14.6% of revenues in 1994.
Revenues from international customers, primarily in Western Europe and Canada,
were approximately 18.3%, 14.3%, and 7.1% of total revenues in 1995, 1994 and
1993, respectively.
Disclosures about fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable net
of allowance for doubtful accounts, accounts payable and accrued liabilities
approximate fair value because of the short maturities of these financial
instruments.
Reincorporation
In May 1995, the stockholders approved an Agreement and Plan of Merger
whereby the Company merged with and into a newly incorporated Delaware
corporation ("HNC Delaware"), which is the surviving corporation. In conjunction
with the merger, each share of the Company's common stock was exchanged for
one-half share of HNC Delaware's common stock. Each share of the Company's
Series A, B, C, D and E preferred stock was exchanged for one-half share of HNC
Delaware's Series A, B, C, D and E preferred stock, respectively, such stock
having substantially identical rights, preferences and privileges to the
Company's existing preferred stock. In addition, options and warrants to
purchase the Company's common stock were exchanged for options and warrants to
purchase one-half the amount of HNC Delaware's common stock at twice the
exercise price.
All references to share and per share amounts of common and preferred stock
and other data in these financial statements have been retroactively restated to
reflect the reincorporation (Note 10).
Pro forma net income per share (unaudited)
Pro forma net income per share is computed based on the weighted average
number of common shares and common stock equivalents, using the treasury stock
method, outstanding during the respective periods after giving retroactive
effect to the conversion, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into
8,956,664 shares of common stock. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, all stock options granted since May 5, 1994
and through May 5, 1995 have been included in as outstanding for all periods
prior to June 26, 1995 using the treasury stock method and the $7.00 initial
public offering price per share. Historical earnings per share are not presented
because such amounts are not deemed meaningful due to the significant change in
the Company's capital structure that occurred in connection with the initial
public offering.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
33
<PAGE> 34
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
---- ----
<S> <C> <C>
Accounts receivable, net:
Billed ............................................................. $3,795 $2,584
Unbilled ........................................................... 1,263 1,221
-------- --------
5,058 3,805
Less allowance for doubtful accounts and sales returns .................. (461) (352)
-------- --------
$4,597 $3,453
====== ======
</TABLE>
Unbilled amounts relate to installation and technology development contracts
and generally become billable at contractually specified dates or upon the
attainment of milestones.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
---- ----
<S> <C> <C>
Property and equipment:
Computer equipment ................................................. $3,087 $1,598
Furniture and fixtures ............................................. 765 511
Leasehold improvements ............................................. 136 95
------ ------
3,988 2,204
Less accumulated depreciation and amortization .......................... (1,395) (637)
------ ------
$2,593 $1,567
====== ======
Accrued liabilities:
Payroll and related benefits ....................................... $1,078 $ 273
Vacation ........................................................... 344 204
Offering costs ..................................................... 295 -
Other .............................................................. 734 350
------ ------
$2,451 $ 827
====== ======
</TABLE>
NOTE 3 - INVESTMENTS
At December 31, 1995, the amortized cost and estimated fair value of
investments held as available-for-sale were as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
CURRENT:
U.S. Government and Federal agencies ............. $ 1,481 $ 9 $ -- $ 1,490
Foreign government debt .......................... 1,017 2 -- 1,019
U.S. corporate debt .............................. 8,870 45 -- 8,915
Foreign corporate debt ........................... 3,164 2 -- 3,166
------- --- ----- -------
14,532 58 -- 14,590
------- --- ----- -------
</TABLE>
34
<PAGE> 35
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
NON-CURRENT:
Foreign government debt .......................... 1,019 2 -- 1,021
U.S. corporate debt .............................. 7,077 32 -- 7,109
Foreign corporate debt ........................... 206 -- -- 206
--------- --- ----- -------
8,302 34 -- 8,336
--------- --- ----- -------
$22,834 $92 $ -- $22,926
========= === ===== =======
</TABLE>
Maturities for non-current investments in securities range from one to two
years. Included in the Company's 1995 income statement is a realized gain in the
amount of $3,000 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464,000. These securities were sold
and reinvested in order to reduce the average maturity of the portfolio in order
to limit the Company's credit exposure. The cost of securities sold is
determined by the specific identification method.
NOTE 4 -- BANK NOTES PAYABLE
The Company has a Loan and Security Agreement, with a bank, which provides
for a revolving line of credit and equipment loans through May 5, 1996. The
agreement requires that the Company maintain certain financial ratios and levels
of working capital, tangible net worth and profitability and also restricts the
Company's ability to pay cash dividends without the bank's consent.
At December 31, 1995 and 1994, the Company had $0 outstanding under the
revolving line of credit, which allowed for maximum borrowings in an amount up
to the lower of 75% of eligible accounts receivable or $1,000,000. Any
borrowings under the agreement will be collateralized by substantially all of
the Company's assets. Interest is payable monthly at the bank's prime rate,
which was 8.5% at December 31, 1995.
The Company also had $0 and $687,000 of equipment loans outstanding at
December 31, 1995 and 1994, respectively. The equipment line allows for maximum
borrowings of $1,000,000 and is collateralized by the equipment purchased.
Principal is payable in 36 equal installments from the inception of each loan at
an 11% interest rate at December 31, 1995.
NOTE 5 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY
In November 1992, the Company entered into an agreement that granted Mitek a
license to use certain character recognition technology developed by the
Company. The agreement provided for the Company to receive an initial license
and support fee payment of $1,350,000 and an additional license and support fee
based on a percentage of Mitek's revenue from the sale of character recognition
products through November 1995. The agreement also required that the Company
sell certain proprietary computer boards to Mitek at a substantial discount from
normal sales prices, but in excess of cost, and provide ongoing engineering and
technical support over the agreement period, which ended during November 1995.
As the Company had a significant continuing obligation under this agreement, the
initial license and support fee received thereunder was deferred on receipt and
recognized as revenue over the performance period based on estimated sales of
proprietary computer boards. The additional license and support fees were
recognized as a percentage of actual Mitek revenues pursuant to the agreement.
35
<PAGE> 36
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Initial license fee ................................................ $ 47 $ 295 $ 939
Additional license and support fee ................................. 314 476 495
Computer board sales ............................................... 527 657 748
------- ------ ------
$ 888 $1,428 $2,182
======= ====== ======
</TABLE>
NOTE 6 -- CAPITAL STOCK AND STOCK WARRANTS
During June 1995, the Company completed its initial public offering for sale
of 5,175,000 shares of common stock (of which 2,375,000 shares were sold by the
Company and 2,800,000 shares were sold by certain selling stockholders) at a
price to the public of $7.00 per share, which resulted in net proceeds to the
Company of $15,461,000 after the payment of underwriters' commissions but before
the deduction of offering expenses. Upon the closing of the Company's initial
public offering, all outstanding shares of Series A, B, C, D, and E convertible
preferred stock were automatically converted into shares of common stock at
their then effective conversion prices. Upon conversion, the preferred
stockholders were no longer entitled to any undeclared cumulative dividends and
all class voting rights terminated.
During June 1995, in connection with the Company's initial public offering,
holders of warrants to purchase 82,500 and 17,730 shares of common stock at
exercise prices of $1.20 and $1.41 per share, respectively, exercised such
warrants for proceeds to the Company of $124,000.
During December 1995, the Company completed a secondary public offering for
sale of 3,000,000 shares of common stock (of which 1,115,574 shares were sold by
the Company and 1,884,426 shares were sold by certain selling stockholders) at a
price to the public of $18.50 per share, which resulted in net proceeds to the
Company of $19,606,000 after the payment of underwriters' commissions but before
the deduction of offering expenses.
NOTE 7 -- INCOME TAXES
The income tax provision (benefit) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ...................................................... $ 97 $ 17 $10
State ........................................................ 75 26 3
Deferred:
Federal ...................................................... (565) (425) --
State ........................................................ (183) (75) --
----- ----- ---
$(576) $(457) $13
===== ===== ===
</TABLE>
36
<PAGE> 37
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets (liabilities) are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
---- ----
<S> <C> <C>
Gross deferred tax liability - commission advances ................. $ (340) $ (133)
Net operating loss carryforwards ................................... 773 1,458
Research and development credit carryforwards ...................... 1,194 1,066
Reserves and allowances ............................................ 293 225
Other .............................................................. 128 107
------- -------
Gross deferred tax assets .......................................... 2,048 2,723
Deferred tax asset valuation allowance ............................. 0 (2,223)
------- -------
Net deferred tax asset ........................................ $ 2,048 $ 500
======= =======
</TABLE>
At December 31, 1994, the Company provided deferred tax asset valuation
allowances for deferred tax assets which management determined were not "more
likely than not" to be realized based on recent trends in operating results
after eliminating the effects of non-recurring revenue (Note 5). During the
third quarter of 1995, the Company released the valuation allowance based on
management's assessment that it was more likely than not that the Company will
realize the asset in future periods due to recent improvements in operating
results.
During December 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $800,000. The benefit from the stock option
tax deduction is credited directly to paid-in capital.
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 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Amounts computed at statutory Federal rate ........................ $ 1,320 $ 498 $ 313
Utilization of net operating loss carryforwards
in current year return ....................................... (1,261) (226) (296)
Release of valuation allowance .................................... (767) (782) (79)
State income taxes ................................................ 75 26 3
Other ............................................................. 57 27 72
------- ----- -----
Income tax provision (benefit) .................................... $ (576) $(457) $ 13
======= ===== =====
</TABLE>
At December 31, 1995, the Company had federal and state net operating loss
carryforwards of $2,186,000 and $481,000, respectively. The federal and state
net operating loss carryforwards expire from 2003 to 2009 and from 1996 to 1998,
respectively. The Company also has $881,000 of federal research and development
credit carryforwards, which expire from 2001 through 2008, and $313,000 of state
research and development credit carryforwards, which have no expiration date.
Should a substantial change in the Company's ownership occur, there will be an
annual limitation on the utilization of net operating loss and research and
development credit carryforwards.
37
<PAGE> 38
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500,000
shares of the Company's common stock were reserved for issuance pursuant to
nonqualified and incentive stock options to its officers, directors, key
employees and consultants. The plan, as amended, is administered by the Board of
Directors or its designees and provides generally that, for incentive stock
options and nonqualified stock options, the exercise price must not be less than
the fair market value of the shares as determined by
the Board of Directors at the date of grant. The options expire no later than
ten years from the date of grant and may be exercised in installments based upon
stipulated timetables (not in excess of seven years) or, for certain options,
upon achievement of specified performance goals, if earlier. At December 31,
1995, options to purchase 1,124,578 shares were exercisable.
During June 1995, the Company adopted the 1995 Directors Stock Option Plan
(the "Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan")
and the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of
the discussion contained in the three paragraphs below, "fair market value"
means the closing price of the Company's Common Stock on the Nasdaq National
Market on the grant date.
The Directors Plan provides for the issuance of up to 300,000 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25,000 shares of the Company's common stock
were granted to outside directors upon the later to occur of the effective date
of the initial public offering or their respective dates of becoming members of
the Board of Directors and 10,000 additional options will be granted on each
anniversary of such dates. Options under the Directors Plan are granted at the
fair market value of the stock at the grant date and vest at specific times over
a four-year period. No options granted under the Directors Plan were exercisable
at December 31, 1995.
The Incentive Plan provides for the issuance of up to 1,300,000 shares of
the Company's common stock in the form of nonqualified or incentive stock
options, restricted stock or stock bonuses. In addition, any shares remaining
unissued under the 1987 Stock Option Plan on the effective date of the Incentive
Plan, and any shares issuable upon exercise of options granted pursuant to the
1987 Stock Option Plan that expire or become unexercisable for any reason
without having been exercised in full, will no longer be available for issuance
under the 1987 Stock Option Plan but will be available for issuance under the
Incentive Plan. 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, or 110% of
fair market value for awards to more than 10% stockholders. Options granted
under the Incentive Plan may have a term of up to 10 years. The Company has the
discretion to provide for restrictions and the lapse thereof in respect of
restricted stock awards and typically vest at the rate of 25% of the total grant
per year over a four-year period. However, the Company may, at its discretion,
implement a different vesting schedule with respect to any new stock option
grant. At December 31, 1995, 8,792 shares were exercisable under the Incentive
Plan.
The Purchase Plan provides for the issuance of a maximum of 400,000 shares
of common stock. Each purchase period, eligible employees may designate between
2% and 10% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the twelve-month offering period and the last day of
each six-month purchase period.
38
<PAGE> 39
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions under the stock option plan during the years ended December 31,
1993, 1994 and 1995 are summarized as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
SHARES
AVAILABLE
FOR OPTIONS OUTSTANDING
GRANT SHARES PRICE
----- ------ ------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 .......................... 466 1,522 $.20 - $ .30
Options granted ...................................... (232) 232 $.40 - $ .75
Options exercised .................................... -- (132) $.20 - $ .30
Options canceled ..................................... 16 (16) $ .40
Outstanding at December 31, 1993 .......................... 250 1,606 $.20 - $ .75
Additional options authorized ........................ 450 -- --
Options granted ...................................... (242) 242 $1.00- $2.50
Options exercised .................................... -- (40) $.20 - $ .40
Options canceled ..................................... 54 (54) $.20 - $2.25
------ -----
Outstanding at December 31, 1994 .......................... 512 1,754 $.20 - $2.50
Additional options authorized ........................ 1,600 -- --
Options granted ...................................... (1,010) 1,010 $3.00- $22.75
Options exercised .................................... -- (196) $.20 - $ .30
Options canceled ..................................... 262 (262) $.30 - $18.88
------ -----
Outstanding at December 31, 1995 .......................... 1,364 2,306 $.20 - $22.75
====== =====
</TABLE>
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company is obligated under noncancelable operating
leases for its facilities and certain equipment through 2003 as follows: 1996 --
$698,000; 1997 -- $750,000; 1998 -- $682,000; 1999 -- $697,000; 2000 --
$707,000; and thereafter -- $1,700,000. The lease for the Company's corporate
headquarters provides for scheduled rent increases and an option to extend the
lease for five years with certain changes to the terms of the lease agreement
and a refurbishment allowance. Rent expense under operating leases for the years
ended December 31, 1995, 1994, and 1993 was approximately $745,000, $655,000,
and $650,000 respectively.
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse affect on the Company's consolidated financial position or results of
operations.
NOTE 10 - SUBSEQUENT EVENTS
On March 5, 1996, the company announced that its Board of Directors approved
a two-for-one stock split effected in the form of a common stock dividend. This
stock dividend was paid to the corporation's stockholders of record as of the
close of business on March 18, 1996. Such stockholders of record received stock
certificates representing one additional share of HNC Software Inc. common stock
for each outstanding share of common stock then held. Distribution of shares
issued pursuant to the stock dividend occurred on April 3, 1996. All references
in these consolidated financial statements to share and per share amounts have
been adjusted to give retroactive effect to the stock split.
39
<PAGE> 40
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 30, 1996, the Company completed the acquisition of Risk Data
Corporation ("RDC") upon the approval of the stockholders of RDC. Under the
terms of the acquisition, accounted for as a pooling of interests, the Company
exchanged 1,891,456 common shares for each then outstanding Series A preferred
share of RDC stock for .61893 shares of common stock, each then outstanding
Series B share of RDC stock for .86747 shares of common stock, and each then
outstanding common share of RDC stock for .57999 shares of common stock.
40
<PAGE> 41
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $20,195 $ 5,532
Investments available for sale ........................................... 14,590 1,182
Accounts receivable, net ................................................. 6,809 5,603
Other current assets ..................................................... 3,263 1,034
------- -------
Total current assets ................................................. 44,857 13,351
Investments available for sale ................................................ 8,336 -
Property and equipment, net ................................................... 3,942 2,861
Other assets .................................................................. 1,189 927
------- -------
$58,324 $17,139
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable ......................................................... $ 796 $ 776
Accrued liabilities ...................................................... 2,730 1,062
Deferred revenue ......................................................... 2,101 764
Current portion of long-term debt ........................................ 2,195 1,661
Other current liabilities ................................................ 548 506
------- ---------
Total current liabilities ............................................ 8,370 4,769
------- ---------
Subordinated notes payable to stockholders .................................... 1,000 -
Long-term debt ................................................................ - 401
Other non-current liabilities ................................................. 659 798
------- ---------
Mandatorily redeemable convertible preferred stock, $0.001 par value, including accretion:
Series B, none and 1,208 shares issued and outstanding, respectively ..... - 4,015
Series C, none and 2,834 shares issued and outstanding, respectively ..... - 5,124
Series D, none and 2,128 shares issued and outstanding, respectively ..... - 4,030
------- ---------
- 13,169
------- ---------
Commitments and Contingencies (Notes 6 and 11)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value - 8,000 shares authorized:
Series A, none and 380 shares issued and outstanding, respectively ... - -
Series E, none and 1,282 shares issued and outstanding, respectively .. - 1
Common stock, $0.001 par value - 40,000 shares authorized:
16,514 and 3,770 shares issued and outstanding, respectively ......... 17 4
Paid-in capital .......................................................... 55,336 10,544
Unrealized gain on investments available for sale ........................ 92 -
Accumulated deficit ...................................................... (7,150) (12,547)
------- ---------
Total stockholders' equity (deficit) ................................. 48,295 (1,998)
------- ---------
$58,324 $ 17,139
======= =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
41
<PAGE> 42
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Revenues:
Software license and installation ............................. $20,605 $13,023 $ 6,215
Contracts and other ........................................... 9,146 7,651 6,614
------- ------- -------
Total revenues ............................................ 29,751 20,674 12,829
------- ------- -------
Operating expenses:
Software license and installation ............................. 5,424 4,847 2,528
Contracts and other ........................................... 6,894 5,040 4,022
Research and development ...................................... 6,164 4,344 2,095
Sales and marketing ........................................... 6,151 3,603 2,096
General and administrative .................................... 3,594 2,591 1,677
------- ------- -------
Total operating expenses .................................. 28,227 20,425 12,418
------- ------- -------
Operating income ................................................... 1,524 249 411
Interest and other income .......................................... 834 156 14
Interest expense ................................................... (428) (312) (149)
------- ------- -------
Income before income tax (benefit) provision ......... 1,930 93 276
Income tax (benefit) provision ..................................... (575) (455) 13
------- ------- -------
Net income ........................................... $ 2,505 $ 548 $ 263
======= ======= =======
Pro forma net income per share (unaudited) (Note 1) ................ $ 0.15 $ 0.04
======= =======
Shares used in computing pro forma net income
per share (unaudited) (Note 1) ................................ 16,198 13,764
======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
42
<PAGE> 43
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 2,505 $ 548 $ 263
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................... 1,580 629 202
Changes in assets and liabilities:
Accounts receivable, net ................................... (1,206) (1,754) (1,275)
Other assets ............................................... (2,491) (1,348) 27
Accounts payable ........................................... 20 139 (68)
Accrued liabilities ........................................ 1,668 390 168
Deferred revenue ........................................... 1,337 (92) (717)
Other liabilities .......................................... - 280 (8)
------- ------- -------
Net cash provided by (used in) operating activities .... 3,413 (1,208) (1,408)
------- ------- -------
Cash flows from investing activities:
Purchases of investments ............................................ (28,666) (7,134) -
Maturities of investments ........................................... 4,182 6,000 -
Proceeds from sale of investments ................................... 2,467 - -
Acquisitions of property and equipment .............................. (1,890) (1,534) (469)
------- ------- -------
Net cash used in investing activities .................. (23,907) (2,668) (469)
------- ------- -------
Cash flows from financing activities:
Net proceeds from issuances of common stock ......................... 33,726 10 28
Net proceeds from issuances of preferred stock ...................... - 4,949 4,050
Tax benefit from stock option transactions .......................... 800 - -
Proceeds from issuances of notes payable to stockholders ............ 1,000 - -
Repayment of notes payable to stockholders .......................... - - (800)
Proceeds under revolving line of credit agreement ................... 1,085 3,255 1,280
Repayments under revolving line of credit agreement ................. (265) (2,890) (360)
Capital lease payments .............................................. (502) (304) (41)
Proceeds from issuance of bank notes payable ........................ - 603 228
Repayments of bank notes payable .................................... (687) (348) (93)
------- ------- -------
Net cash provided by financing activities .............. 35,157 5,275 4,292
------- ------- -------
Net increase in cash and cash equivalents ................................ 14,663 1,399 2,415
Cash and cash equivalents at beginning of period ......................... 5,532 4,133 1,718
------- ------- -------
Cash and cash equivalents at end of period ............................... $20,195 $ 5,532 $ 4,133
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Conversion of preferred stock ....................................... $13,518 $ - $ -
======= ======= =======
Accretion of dividends on mandatorily redeemable convertible preferred
stock ........................................................... $ 348 $ 717 $ 717
======= ======= =======
Interest paid ....................................................... $ 390 $ 305 $ 149
======= ======= =======
Income taxes paid ................................................... $ 144 $ 30 $ 12
======= ======= =======
Capital lease purchases ............................................. $ 411 $ 1,128 $ -
======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
43
<PAGE> 44
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
SERIES A SERIES E COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992.......... 380 $ - - $ - 3,195 $3
Common stock options exercised........ 132
Issuance of common stock ........... 403 1
Accretion of dividends................
Net income............................
--- ----- ----- ----- ----- ---
BALANCE AT DECEMBER 31, 1993.......... 380 - - - 3,730 4
Common stock options exercised........ 40
Issuance of Series E preferred
stock, net of issuance costs..... 1,282 1
Accretion of dividends................
Net income............................
--- ----- ----- ----- ----- ---
BALANCE AT DECEMBER 31, 1994.......... 380 - 1,282 1 3,770 4
Common stock options exercised........ 196
Accretion of dividends................
Issuance of common stock in initial
public offering, net of issuance
costs............................ 2,376 2
Conversion of convertible
preferred stock into common
stock............................ (380) (1,282) (1) 8,956 9
Issuance of common stock in
secondary public offering, net of
issuance costs................... 1,116 2
Tax benefit from stock option
transactions.....................
Unrealized gain on investments
available for sale, net of tax
Stock warrant exercised............... 100
Net income............................
--- ----- ----- ----- ----- ---
BALANCE AT DECEMBER 31, 1995.......... - $ - - $ - 16,514 $17
=== ===== ===== ===== ====== ===
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TOTAL
INVESTMENTS STOCKHOLDERS'
PAID-IN AVAILABLE ACCUMULATE EQUITY
CAPITAL FOR SALE DEFICIT (DEFICIT)
------- -------- ------- ---------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992.......... $ 2,254 $ - $(12,669) $(10,412)
Common stock options exercised........ 28 28
Issuance of common stock ........... 4,049 4,050
Accretion of dividends................ (28) (689) (717)
Net income............................ 263 263
-------- ----- -------- --------
BALANCE AT DECEMBER 31, 1993.......... 6,303 - (13,095) (6,788)
Common stock options exercised........ 10 10
Issuance of Series E preferred
stock, net of issuance costs..... 4,948 4,949
Accretion of dividends................ (717) (717)
Net income............................ 548 548
-------- ----- -------- --------
BALANCE AT DECEMBER 31, 1994.......... 10,544 - (12,547) (1,998)
Common stock options exercised........ 85 85
Accretion of dividends................ (348) (348)
Issuance of common stock in initia
public offering, net of issuance
costs............................ 14,329 14,331
Conversion of convertible
preferred stock into common
stock............................ 10,618 2,892 13,518
Issuance of common stock in
secondary public offering, net of
issuance costs................... 19,184 19,186
Tax benefit from stock option
transactions..................... 800 800
Unrealized gain on investments
available for sale, net of tax 92 92
Stock warrant exercised............... 124 124
Net income............................ 2,505 2,505
-------- ----- -------- --------
BALANCE AT DECEMBER 31, 1995.......... $55,336 $92 $ (7,150) $ 48,295
======== ===== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
44
<PAGE> 45
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
HNC Software Inc. (the "Company" or "HNC") develops, markets and supports
intelligent client-server software solutions for mission-critical decision
applications in real-time environments. The Company also performs contract
research and development using neural networks and other computational
intelligence methods.
Basis of Presentation
The supplemental consolidated financial statements and related notes give
retroactive effect to the merger on August 30, 1996 with Risk Data Corporation
("RDC"), for all periods presented, accounted for as a pooling of interests. RDC
is an insurance information technology services firm engaged in the business of
developing and marketing analytical benchmarking and risk management software
products primarily for insurance carriers, state insurance funds and third party
administrators. The supplemental consolidated balance sheet as of December 31,
1995 and 1994 includes the accounts of RDC as of December 31, 1995 and 1994. The
supplemental consolidated statement of income and of cash flows for each of the
three years in the period ended December 31, 1995 include the results of RDC for
the years then ended. The term "Company" as used in these supplemental
consolidated financial statements refers to HNC Software Inc. and its
subsidiaries, including RDC.
No adjustments to conform accounting methods were required. Certain amounts
have been reclassified with regard to presentation of the financial information
of the two companies. Revenues and net income (loss) for each of the previously
separate companies for the periods prior to the RDC acquisition are as follows
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
HNC .......... $ 25,174 $ 16,473 $ 10,302 $ 16,478 $ 11,008
RDC .......... 4,577 4,201 2,527 2,600 2,418
-------- -------- -------- -------- --------
............ $ 29,751 $ 20,674 $ 12,829 $ 19,078 $ 13,426
======== ======== ======== ======== ========
Net income (loss):
HNC .......... $ 4,457 $ 1,923 $ 908 $ 1,780 $ 890
RDC .......... (1,952) (1,375) (645) (2,184) (676)
-------- -------- -------- -------- --------
$ 2,505 $ 548 $ 263 $ (404) $ 214
======== ======== ======== ======== ========
</TABLE>
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Financial Statement Preparation
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
45
<PAGE> 46
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments in
money market accounts and commercial paper purchased with maturities of three
months or less.
Investments
During 1994, the Company adopted Statement of Financial Accounting Standards
No. 115 ("FAS 115") on a prospective basis. The adoption of FAS 115 did not have
a significant impact on the Company's financial position or results of
operations. Management determines the appropriate classification of its
investments in marketable debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. As of and for the
year ended December 31, 1994, the Company recorded these securities at amortized
cost, which approximated market value, since it designated them as "held to
maturity." As of December 31, 1995, the Company reassessed its intent with
respect to these securities as holding them "available for sale" prior to
maturity should the Company require additional cash from their early liquidation
in order to finance operating, investing, or other financing activities. As a
result of this reassessment, the Company reclassified these securities as
"available for sale" and will account for them accordingly on a prospective
basis. Unrealized gains related to these securities as of December 31, 1995 are
included in stockholders' equity in the Company's consolidated balance sheet,
net of tax.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets of three
to seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the related lease. Repair and
maintenance costs are charged to expense as incurred.
Software Costs
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Capitalized software costs are amortized to software license and
installation expense over the estimated useful life of the related product.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the
Company will adopt prospectively as required in 1996. Pursuant to this
Statement, companies are required to investigate potential impairments of
long-lived assets, certain identifiable intangibles, and associated goodwill, on
an exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. The adoption of FAS 121 is
not expected to have a significant impact on the Company's financial position or
results of operations.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation." FAS 123 will be adopted by the Company as required for its fiscal
1996 financial statements and is not expected to have a material effect on the
Company's financial position or results of operations. Upon adoption of FAS 123,
the Company will continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
46
<PAGE> 47
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Revenue from long-term software license agreements is generally recognized
ratably over the respective license periods. Non-refundable license fees are
recognized as revenue when there is no significant continuing performance
obligation under the agreement and collection of the fees is probable.
Revenue from software installation 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 in advance of performance under contracts are
recorded as deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period such
losses are first identified. Unbilled receivables are stated at estimated
realizable value. Contract costs under government contracts, including indirect
costs, are subject to audit and adjustment by negotiations between the Company
and government representatives. Through 1990, indirect government contract costs
have been agreed upon with government representatives. Revenues from government
contracts have been recorded in amounts that are expected to be realized upon
final settlement.
Revenue from product sales, which is included in contracts and other, is
recognized when title passes to the customer.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
computed for the expected future impact of differences between the financial
reporting and tax basis of assets and liabilities as well as the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Deferred
income tax expense (benefit) is generally the net change during the year in the
deferred income tax asset or liability. 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 are reflected in
income during the period such changes are enacted.
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments and trade
accounts receivable which are generally not collateralized. The Company's policy
is to place its cash, cash equivalents and investments with high credit quality
financial institutions and government agencies in order to limit the amount of
credit exposure. The Company's software license and installation agreements are
primarily with customers in the financial services and insurance industries. The
Company maintains reserves for potential credit losses.
During 1995, 1994 and 1993, sales under prime and subcontracts with the
federal government represented 7.5%, 11.3%, and 19.5% respectively, of the
Company's total revenues; related accounts receivable were $689,000 and $843,000
respectively, at December 31, 1995 and 1994. Mitek Systems, Inc. ("Mitek") (Note
7) accounted for 17.0% of total revenues in 1993, and another domestic customer
accounted for 12.8% of total revenues in 1995 and 11.6% of revenues in 1994.
Revenues from international customers, primarily in Western Europe and Canada,
were approximately 15.4%, 11.4%, and 5.7% of total revenues in 1995, 1994 and
1993, respectively.
Disclosures about fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable net
of allowance for doubtful accounts, accounts payable and accrued liabilities
approximate fair value because of the short maturities of these financial
instruments. The carrying amounts of debt and capital lease obligations
approximate their fair values based on interest rates currently available to the
Company for borrowings with similar terms and maturities.
47
<PAGE> 48
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Reincorporation
In May 1995, the stockholders approved an Agreement and Plan of Merger
whereby the Company merged with and into a newly incorporated Delaware
corporation ("HNC Delaware"), which is the surviving corporation. In conjunction
with the merger, each share of the Company's common stock was exchanged for
one-half share of HNC Delaware's common stock. Each share of the Company's
Series A, B, C, D and E preferred stock was exchanged for one-half share of HNC
Delaware's Series A, B, C, D and E preferred stock, respectively, such stock
having substantially identical rights, preferences and privileges to the
Company's existing preferred stock. In addition, options and warrants to
purchase the Company's common stock were exchanged for options and warrants to
purchase one-half the amount of HNC Delaware's common stock at twice the
exercise price.
All references to share and per share amounts of common and preferred stock
and other data in these financial statements have been retroactively restated to
reflect the reincorporation (Note 12).
Pro forma net income per share (unaudited)
Pro forma net income per share is computed based on the weighted average
number of common shares and common stock equivalents, using the treasury stock
method, outstanding during the respective periods after giving retroactive
effect to the conversion, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into
8,956,664 shares of common stock. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, all stock options granted since May 5, 1994
and through May 5, 1995 have been included in as outstanding for all periods
prior to June 26, 1995 using the treasury stock method and the $7.00 initial
public offering price per share. Historical earnings per share are not presented
because such amounts are not deemed meaningful due to the significant change in
the Company's capital structure that occurred in connection with the initial
public offering.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 -- ACQUISITION
On August 30, 1996, the Company completed the acquisition of Risk Data
Corporation ("RDC") upon the approval of the stockholders of RDC. Under the
terms of the acquisition, accounted for as a pooling of interests, the Company
exchanged 1,891,456 common shares for each then outstanding Series A preferred
share of RDC stock for .61893 shares of common stock, each then outstanding
Series B share of RDC stock for .86747 shares of common stock, and each then
outstanding common share of RDC stock for .57999 shares of common stock.
The fiscal year of RDC has been conformed to the Company's fiscal year
effective January 1, 1993, and all periods presented have been retroactively
restated (Note 1).
Transaction costs expected to be incurred to complete the RDC merger
approximate $550,000. Transaction costs are charged to income as incurred and
consist primarily of investment banker, attorney and accountant fees, and
printing, mailing and registration expenses.
48
<PAGE> 49
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------------------
<S> <C> <C>
Accounts receivable, net:
Billed ................................................ $ 4,361 $ 3,890
Unbilled .............................................. 2,950 2,227
------- -------
7,311 6,117
Less allowance for doubtful accounts and sales returns ..... (502) (514)
------- -------
$ 6,809 $ 5,603
======= =======
</TABLE>
Unbilled amounts relate to installation and technology development contracts
and generally become billable at contractually specified dates or upon the
attainment of milestones.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------------------
<S> <C>
Property and equipment:
Computer equipment .................................... $ 4,877 $ 2,897
Furniture and fixtures ................................ 1,269 995
Leasehold improvements ................................ 166 125
------- -------
6,312 4,017
Less accumulated depreciation and amortization ............. (2,370) (1,156)
------- -------
$ 3,942 $ 2,861
======= =======
Accrued liabilities:
Payroll and related benefits .......................... $ 1,126 $ 334
Vacation .............................................. 435 288
Offering costs ........................................ 295 -
Other ................................................. 874 440
------- -------
$ 2,730 $ 1,062
======= =======
</TABLE>
NOTE 4 - INVESTMENTS
At December 31, 1995, the amortized cost and estimated fair value of
investments held as available-for-sale were as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
CURRENT:
U.S. Government and Federal agencies $ 1,481 $ 9 $ -- $ 1,490
Foreign government debt ............ 1,017 2 -- 1,019
U.S. corporate debt ................ 8,870 45 -- 8,915
Foreign corporate debt ............. 3,164 2 -- 3,166
------- ------- ------- -------
14,532 58 -- 14,590
======= ======= ======= =======
</TABLE>
49
<PAGE> 50
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
NON-CURRENT:
Foreign government debt ...... 1,019 2 -- 1,021
U.S. corporate debt .......... 7,077 32 -- 7,109
Foreign corporate debt ....... 206 -- -- 206
------- ------- ------- -------
8,302 34 -- 8,336
------- ------- ------- -------
$22,834 $ 92 $ -- $22,926
======= ======= ======= =======
</TABLE>
Maturities for non-current investments in securities range from one to two
years. Included in the Company's 1995 income statement is a realized gain in the
amount of $3,000 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464,000. These securities were sold
and reinvested in order to reduce the average maturity of the portfolio in order
to limit the Company's credit exposure. The cost of securities sold is
determined by the specific identification method.
NOTE 5 -- NOTES PAYABLE
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------------------
<S> <C> <C>
RDC revolving credit facility ................ $ 2,195 $ 1,375
Subordinated notes ........................... 1,000 -
Equipment loans .............................. - 687
------- -------
3,195 2,062
Less current portion ......................... (2,195) (1,661)
------- -------
$ 1,000 $ 401
======= =======
</TABLE>
The Company has a Loan and Security Agreement, with a bank, which provides
for a revolving line of credit and equipment loans through May 5, 1996. The
agreement requires that the Company maintain certain financial ratios and levels
of working capital, tangible net worth and profitability and also restricts the
Company's ability to pay cash dividends without the bank's consent.
At December 31, 1995 and 1994, the Company had $0 outstanding under the
revolving line of credit, which allowed for maximum borrowings in an amount up
to the lower of 75% of eligible accounts receivable or $1,000,000. Any
borrowings under the agreement will be collateralized by substantially all of
the Company's assets. Interest is payable monthly at the bank's prime rate,
which was 8.5% at December 31, 1995.
The Company's equipment line allows for maximum borrowings of $1,000,000 and
is collateralized by the equipment purchased. Principal is payable in 36 equal
installments from the inception of each loan at an 11% interest rate at December
31, 1995.
As of December 31, 1995, RDC had $2,195,000 outstanding under a $3,000,000
revolving line of credit with a bank, secured by RDC's assets. Advances under
the line were limited to 75% of eligible accounts receivable. The line bore
interest at the bank's prime rate plus 2% , which was 10.75% at December 31,
1995 (Note 12).
Effective January 6, 1996, RDC renewed its credit facility with revised
terms and conditions. The new credit facility is comprised of a revolving line
of credit secured by eligible accounts receivable as well as a bridge loan which
is secured by the guarantees of certain stockholders of HNC. The maximum amount
currently available under the revolving line of credit is $1,600,000. Future
borrowings under the revolving line of credit may increase to the lesser of 75%
of eligible accounts receivable or $3,000,000, when certain financial covenants
are met. The revolving line of credit matures on January 5, 1997. The bridge
loan portion of the credit facility has no financial covenants and may be drawn
against up to $2,000,000. The bridge loan matures on September 5, 1996. All
borrowings under the credit facility bear interest at the bank's prime rate plus
3% (Note 12).
50
<PAGE> 51
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The RDC line of credit agreement contains financial covenants including the
maintenance of key financial ratios and covenants that limit the incurrence of
additional debt and expenditures for the repurchase of the Company's common
stock. At December 31, 1995, the Company was not in compliance with certain
financial covenants and had obtained the necessary waiver from the bank as of
that date (Note 12).
During 1995, the preferred stockholders of RDC loaned the Company $1,000,000
under subordinated note agreements (secured by the assets of Risk Data but
subordinated to borrowings under the Risk Data line of credit) bearing interest
at 9%. The unpaid balance, together with accrued interest, is due in January
1997, subject to acceleration under certain conditions (Note 12).
NOTE 6 - LEASES
At December 31, 1995, the Company is obligated under noncancelable operating
leases for its facilities and certain equipment through 2003 as follows: 1996 --
$1,101,000; 1997 -- $1,137,000; 1998 -- $963,000; 1999 -- $705,000; 2000 --
$712,000; and thereafter -- $1,700,000. The lease for the Company's corporate
headquarters provides for scheduled rent increases and an option to extend the
lease for five years with certain changes to the terms of the lease agreement
and a refurbishment allowance. Rent expense under operating leases for the years
ended December 31, 1995, 1994, and 1993 was approximately $1,192,000, $898,000,
and $766,000 respectively.
RDC maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are as follows (in thousands):
<TABLE>
<S> <C>
1996 ............................................. $ 569
1997 ............................................. 321
1998 ............................................. 55
-----
945
Less amounts representing interest ............... (111)
-----
Capital lease obligations ........................ 834
Less current portion ............................. (461)
-----
$ 373
=====
</TABLE>
The book value of assets under the capital leases at December 31, 1995 and
1994 was $1,614,000 and $1,054,000 net of accumulated amortization of $572,000
and $391,000, respectively.
NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY
In November 1992, the Company entered into an agreement that granted Mitek a
license to use certain character recognition technology developed by the
Company. The agreement provided for the Company to receive an initial license
and support fee payment of $1,350,000 and an additional license and support fee
based on a percentage of Mitek's revenue from the sale of character recognition
products through November 1995. The agreement also required that the Company
sell certain proprietary computer boards to Mitek at a substantial discount from
normal sales prices, but in excess of cost, and provide ongoing engineering and
technical support over the agreement period, which ended during November 1995.
As the Company had a significant continuing obligation under this agreement, the
initial license and support fee received thereunder was deferred on receipt and
recognized as revenue over the performance period based on estimated sales of
proprietary computer boards. The additional license and support fees were
recognized as a percentage of actual Mitek revenues pursuant to the agreement.
51
<PAGE> 52
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
--------------------------
<S> <C> <C> <C>
Initial license fee .................... $ 47 $ 295 $ 939
Additional license and support fee ..... 314 476 495
Computer board sales ................... 527 657 748
------ ------ ------
$ 888 $1,428 $2,182
====== ====== ======
</TABLE>
NOTE 8 -- CAPITAL STOCK AND STOCK WARRANTS
The Consolidated Statement of Stockholders' Equity (Deficit) has been
retroactively restated for all years presented to give effect to the acquisition
on August 30, 1996 of RDC through a stock-for-stock merger with each then
outstanding Series A preferred share of RDC stock exchanged for .61893 shares of
common stock, each then outstanding Series B share of RDC stock exchanged for
.86747 shares of common stock, and each then outstanding common share of RDC
stock exchanged for .57999 shares of common stock (Note 2).
During June 1995, the Company completed its initial public offering for sale
of 5,175,000 shares of common stock (of which 2,375,000 shares were sold by the
Company and 2,800,000 shares were sold by certain selling stockholders) at a
price to the public of $7.00 per share, which resulted in net proceeds to the
Company of $15,461,000 after the payment of underwriters' commissions but before
the deduction of offering expenses. Upon the closing of the Company's initial
public offering, all outstanding shares of Series A, B, C, D, and E convertible
preferred stock were automatically converted into shares of common stock at
their then effective conversion prices. Upon conversion, the preferred
stockholders were no longer entitled to any undeclared cumulative dividends and
all class voting rights terminated.
During June 1995, in connection with the Company's initial public offering,
holders of warrants to purchase 82,500 and 17,730 shares of common stock at
exercise prices of $1.20 and $1.41 per share, respectively, exercised such
warrants for proceeds to the Company of $124,000.
During December 1995, the Company completed a secondary public offering for
sale of 3,000,000 shares of common stock (of which 1,115,574 shares were sold by
the Company and 1,884,426 shares were sold by certain selling stockholders) at a
price to the public of $18.50 per share, which resulted in net proceeds to the
Company of $19,606,000 after the payment of underwriters' commissions but before
the deduction of offering expenses.
At December 31, 1995, the Company had warrants outstanding for the purchase
of 4,333 shares and 10,942 shares of common stock at a price of $12.29 and
$15.03 per share, respectively. The warrants are currently exercisable, and
expire in August 1997 and May 2004, respectively. In connection with the renewal
of an RDC credit facility on January 6, 1996, the Company lowered the exercise
price on the warrant to purchase 4,333 shares of common stock from $12.29 per
share to $5.17 per share. The Company recorded no charge to operations related
to the original grant or repricing of these warrants based on the insignificance
of their fair values.
On March 5, 1996, the company announced that its Board of Directors approved
a two-for-one stock split effected in the form of a common stock dividend. This
stock dividend was paid to the corporation's stockholders of record as of the
close of business on March 18, 1996. Such stockholders of record received stock
certificates representing one additional share of HNC Software Inc. common stock
for each outstanding share of common stock then held. Distribution of shares
issued pursuant to the stock dividend occurred on April 3, 1996. All references
in these supplemental consolidated financial statements to share and per share
amounts have been adjusted to give retroactive effect to the stock split.
52
<PAGE> 53
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- INCOME TAXES
The income tax provision (benefit) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal .................... $ 97 $ 17 $ 10
State ...................... 76 28 3
Deferred:
Federal .................... (565) (425) --
State ...................... (183) (75) --
----- ----- -----
$(575) $(455) $ 13
===== ===== =====
</TABLE>
Deferred tax assets (liabilities) are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
Gross deferred tax liability - commission advances ................. $ (340) $ (133)
Net operating loss carryforwards ................................... 2,826 3,013
Research and development credit carryforwards ...................... 1,370 1,199
Reserves and allowances ............................................ 414 339
Other .............................................................. 353 320
------- -------
Gross deferred tax assets .......................................... 4,623 4,738
Deferred tax asset valuation allowance ............................. (2,575) (4,238)
------- -------
Net deferred tax asset ........................................ $ 2,048 $ 500
======= =======
</TABLE>
At December 31, 1995 and 1994, the Company provided deferred tax asset
valuation allowances for deferred tax assets which management determined were
not "more likely than not" to be realized based on recent trends in operating
results after eliminating the effects of non-recurring revenue (Note 7). During
the third quarter of 1995, the Company partially released the valuation
allowance based on management's assessment that it was more likely than not that
the Company will realize a portion of the asset in future periods due to recent
improvements in operating results.
During December 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $800,000. The benefit from the stock option
tax deduction is credited directly to paid-in capital.
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 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Amounts computed at statutory Federal rate ........................ $ 656 $ 32 $ 94
Utilization of net operating loss carryforwards
in current year return ....................................... (1,261) (226) (296)
Losses without tax benefit ........................................ 664 466 219
Release of valuation allowance .................................... (767) (782) (79)
State income taxes ................................................ 76 28 3
Other ............................................................. 57 27 72
------- ----- -----
Income tax provision (benefit) .................................... $ (575) $(455) $ 13
======= ===== =====
</TABLE>
53
<PAGE> 54
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995, the Company had federal and state net operating loss
carryforwards of $2,186,000 and $481,000, respectively. The federal and state
net operating loss carryforwards expire from 2003 to 2009 and from 1996 to 1998,
respectively. The Company also has $881,000 of federal research and development
credit carryforwards, which expire from 2001 through 2008, and $313,000 of state
research and development credit carryforwards, which have no expiration date.
Should a substantial change in the Company's ownership occur, as defined by the
Tax Reform Act of 1986, there will be an annual limitation on the utilization of
net operating loss and research and development credit carryforwards.
At December 31, 1995, RDC had federal and state net operating loss
carryforwards of approximately $5,300,000 and $2,650,000, respectively, which
will begin to expire in 1996. RDC also has approximately $130,000 of federal
research and development credit carryforwards and $46,000 of state research and
development credit carryforwards, which will begin to expire in 2002. As a
result of the merger with HNC, the utilization of RDC's net operating loss
carryover tax attributes and other tax attributes are subject to certain
limitations. The net operating loss tax attributes are available to offset only
the post-merger taxable income of RDC. Additionally, the use of the tax
attributes is subject to an annual limitation because an ownership change, as
defined by the Tax Reform Act of 1986, occurred at the date of the merger.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby
2,500,000 shares of the Company's common stock were reserved for issuance
pursuant to nonqualified and incentive stock options to its officers, directors,
key employees and consultants. The plan, as amended, is administered by the
Board of Directors or its designees and provides generally that, for incentive
stock options and nonqualified stock options, the exercise price must not be
less than the fair market value of the shares as determined by the Board of
Directors at the date of grant. The options expire no later than ten years from
the date of grant and may be exercised in installments based upon stipulated
timetables (not in excess of seven years) or, for certain options, upon
achievement of specified performance goals, if earlier. At December 31, 1995,
options to purchase 1,124,578 shares were exercisable.
During June 1995, the Company adopted the 1995 Directors Stock Option Plan
(the "Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan")
and the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of
the discussion contained in the three paragraphs below, "fair market value"
means the closing price of the Company's Common Stock on the Nasdaq National
Market on the grant date.
The Directors Plan provides for the issuance of up to 300,000 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25,000 shares of the Company's common stock
were granted to outside directors upon the later to occur of the effective date
of the initial public offering or their respective dates of becoming members of
the Board of Directors and 10,000 additional options will be granted on each
anniversary of such dates. Options under the Directors Plan are granted at the
fair market value of the stock at the grant date and vest at specific times over
a four-year period. No options granted under the Directors Plan were exercisable
at December 31, 1995.
The Incentive Plan provides for the issuance of up to 1,300,000 shares of
the Company's common stock in the form of nonqualified or incentive stock
options, restricted stock or stock bonuses. In addition, any shares remaining
unissued under the 1987 Stock Option Plan on the effective date of the Incentive
Plan, and any shares issuable upon exercise of options granted pursuant to the
1987 Stock Option Plan that expire or become unexercisable for any reason
without having been exercised in full, will no longer be available for issuance
under the 1987 Stock Option Plan but will be available for issuance under the
Incentive Plan. 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, or 110% of
fair market value for awards to more than 10% stockholders. Options granted
under the Incentive Plan may have a term of up to 10 years. The Company has the
discretion to provide for restrictions and the lapse thereof in respect of
restricted stock awards and typically vest at the rate of 25% of the total grant
per year over a four-year period. However, the Company may, at its discretion,
implement a different vesting schedule with respect to any new stock option
grant. At December 31, 1995, 8,792 shares were exercisable under the Incentive
Plan.
54
<PAGE> 55
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The Purchase Plan provides for the issuance of a maximum of 400,000 shares
of common stock. Each purchase period, eligible employees may designate between
2% and 10% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the twelve-month offering period and the last day of
each six-month purchase period.
RDC's stock option plan is being administered by the Company subsequent to
the merger. All outstanding RDC options were converted into options to purchase
Company common stock and adjusted to give effect to the .58 exchange ratio. No
changes were made to the terms of the RDC options in connection with the
exchange. Options granted under the RDC stock option plan generally vest over a
four-year period and expire 10 years after the date of grant.
Transactions under the stock option plan during the years ended December 31,
1993, 1994 and 1995, including RDC options under the RDC stock option plan, are
summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES
AVAILABLE
FOR OPTIONS OUTSTANDING
GRANT SHARES PRICE
----- ------ -----
<S> <C> <C> <C>
Outstanding at December 31, 1992 .......................... 591 1,759 $ .02 - $ .40
Options granted ...................................... (293) 293 $ .40 - $ .76
Options exercised .................................... -- (132) $ .20 - $ .30
Options canceled ..................................... 33 (33) $ .02 $ .40
------ -----
Outstanding at December 31, 1993 .......................... 331 1,887 $ .02 - $ .76
Additional options authorized ........................ 450 -- --
Options granted ...................................... (288) 288 $1.00 - $ 2.50
Options exercised .................................... -- (40) $ .20 - $ .40
Options canceled ..................................... 54 (54) $ .20 - $ 2.25
------ -----
Outstanding at December 31, 1994 .......................... 547 2,081 $ .02 - $ 2.50
Additional options authorized ........................ 1,600 -- --
Options granted ...................................... (1,036) 1,036 $1.50 - $22.75
Options exercised .................................... -- (196) $ .20 - $ .30
Options canceled ..................................... 262 (262) $ .30 - $18.88
------ -----
Outstanding at December 31, 1995 .......................... 1,373 2,659 $ .02 - $22.75
====== =====
</TABLE>
NOTE 11 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
NOTE 12 - SUBSEQUENT EVENTS
On March 5, 1996, the company announced that its Board of Directors approved
a two-for-one stock split effected in the form of a common stock dividend. This
stock dividend was paid to the corporation's stockholders of record as of the
close of business on March 18, 1996. Such stockholders of record received stock
certificates representing one additional share of HNC Software Inc. common stock
for each outstanding share of common stock then held. Distribution of shares
issued pursuant to the stock dividend occurred on April 3, 1996. All references
in these supplemental consolidated financial statements to share and per share
amounts have been adjusted to give retroactive effect to the stock split.
55
<PAGE> 56
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1996, RDC had borrowed approximately $1,999,000 against the
bridge loan portion of the renewed credit facility to fund working capital
needs. During September 1996, all of the Company's outstanding debt, including
$3,901,000 of bank notes payable and $1,000,000 of notes payable to
stockholders, was repaid.
56
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of HNC Software Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 30, 1996, except as to the stock split which is as of April 3,
1996 and as to the pooling of interests with Risk Data Corporation which is as
of August 30, 1996 and as to the repayment of all of Risk Data Corporation's
outstanding debt which is as of September 11, 1996, appearing on page 26 of this
Current Report on Form 8-K/A-1 also included an audit of the Financial Statement
Schedule listed in Item 7(b)(4) of this Form 8-K/A-1. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
San Diego, California
January 30, 1996,
except as to the stock split which is as of April 3, 1996 and as to the pooling
of interests with Risk Data Corporation which is as of August 30, 1996 and as to
the repayment of all of Risk Data Corporation's outstanding debt which is as of
September 11, 1996
57
<PAGE> 58
SCHEDULE II
HNC SOFTWARE INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ALLOWANCE FOR DEFERRED TAX
DOUBTFUL ACCOUNTS ASSET VALUATION
& SALES RETURNS ALLOWANCE
----------------- ---------------
<S> <C> <C>
Balance at December 31, 1992 $ 168,000 $ 4,865,000
Provision 166,000 43,000
Write-off (42,000) -
Recovery - (250,000)
--------- -----------
Balance at December 31, 1993 292,000 4,658,000
Provision 484,000 972,000
Write-off (262,000) -
Recovery - (1,392,000)
--------- -----------
Balance at December 31, 1994 514,000 4,238,000
Provision 478,000 560,000
Write-off (472,000) -
Recovery (18,000) (2,223,000)
--------- -----------
Balance at December 31, 1995 $ 502,000 $ 2,575,000
========= ===========
</TABLE>
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements 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: October 14, 1996
HNC SOFTWARE INC.
By: /s/ Raymond V. Thomas
-------------------------------
Raymond V. Thomas
Chief Financial Officer
59
<PAGE> 60
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
*2.01 Agreement and Plan of Reorganization dated as of July 19, 1996 by
and among the Company, HNC Merger Corp. and Risk Data Corporation,
as amended
*2.02 Agreement of Merger dated as of August 30, 1996 by and between HNC
Merger Corp. and Risk Data Corporation
*4.01 Registration Rights Agreement dated as of August 30, 1996 by and
among the Company and the former shareholders of Risk Data
Corporation
11.01 Statement Regarding Computation of Per Share Earnings (Loss)
23.01 Consent of Price Waterhouse LLP, Independent Accountants
23.02 Consent of Ernst & Young LLP, Independent Auditors
*The asterisked exhibits were included in the registrant's report on
Form 8-K as filed by the registrant on September 12, 1996.
60
<PAGE> 1
EXHIBIT 11.01
HNC SOFTWARE INC.
STATEMENT REGARDING
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 2,505 $ 548 $ (404) $ 214
======= ======== ======= ========
SHARES (1)
Weighted average common shares outstanding 9,678 3,756 17,040 3,915
Weighted average common stock options and
warrants as determined by application of the
treasury stock method (2) 2,066 1,456 1,849 1,890
Weighted average preferred shares outstanding
assuming conversion to common stock 4,454 8,552 - 8,957
-------- -------- -------- --------
Pro forma weighted average common and common
equivalent shares outstanding 16,198 13,764 14,762
======== ======== ========
Weighted average common and common
equivalent shares outstanding 18,889
========
PRO FORMA NET INCOME PER SHARE OF COMMON STOCK $ 0.15 $ 0.04 $ 0.01
========
NET LOSS PER SHARE OF COMMON STOCK $ (0.02)
========
</TABLE>
- --------------------
(1) All share and per share amounts have been adjusted to give retroactive
effect to the stock split, which occurred on April 3, 1996.
(2) Includes an adjustment for options pursuant to SAB No. 83 using the
treasury stock method at the initial public offering price of $7.00 per
share for all periods presented prior to or including the Company's public
offering date of June 26, 1995.
61
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-92902) of HNC Software Inc. of our report dated
January 30, 1996, except as to the stock split which is as of April 3, 1996 and
as to the pooling of interests with Risk Data Corporation which is as of August
30, 1996 and as to the repayment of all of Risk Data Corporation's outstanding
debt which is as of September 11, 1996, appearing on page 26 of this Current
Report on Form 8-K/A-1. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 57 of this
Form 8-K/A-1.
PRICE WATERHOUSE LLP
San Diego, California
October 14, 1996
62
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-92902) of HNC Software Inc. of our report dated March 8, 1996,
except for Note 6 as to which the date is August 30, 1996, with respect to the
financial statements of Risk Data Corporation incorporated by reference from
this Current Report on Form 8-K/A-1.
Ernst & Young LLP
Orange County, California
October 14, 1996
