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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A - Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission file number 0-26146
HNC SOFTWARE INC.
(Exact name of registrant as specified in its charter)
DELAWARE NO. 33-0248788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5930 Cornerstone Court West, San Diego, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 546-8877
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price as reported on the Nasdaq Stock
Market at February 28, 1997, was approximately $440 million. The number of
shares of the registrant's Common Stock outstanding at February 28, 1997 was
19,230,575 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Parts
II, III and IV of this Annual Report on Form 10-K: (1) Registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1996 - Parts II
and IV, and (2) Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be filed with the Commission on or before April 30, 1997 - Part
III. With the exception of those portions which are specifically incorporated
by reference in this Annual Report on Form 10-K, such Annual Report to
Stockholders and Proxy Statement shall not be deemed filed as part of this
Report or incorporated by reference herein.
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The Registrant hereby amends Item 14 of its Annual Report on Form 10-K for the
year ended December 31, 1996 as follows:
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements of the Company listed below are
incorporated herein by reference to the following pages of the
1996 Annual Report to Stockholders:
<TABLE>
<CAPTION>
Page in
Annual Report
-------------
<S> <C>
Consolidated Balance Sheet as of December 31, 1996 and 1995 24
Consolidated Statement of Income for the years ended December 31,
1996, 1995 and 1994 25
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994 26
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1995 and 1994 27
Notes to Consolidated Financial Statements 28
Report of Independent Accountants 37
</TABLE>
2. Financial Statement Schedules:
The financial statement schedules of the Company are included
in Part IV of this report on the pages indicated:
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Report of Independent Accountants on Financial Statement Schedule 29
For the three fiscal years ended December 31, 1996--
Schedule II - Valuation and Qualifying Accounts and Reserves 30
All other schedules are omitted because they are not applicable, not
required, or the required information is shown in the Financial
Statements or notes thereto.
</TABLE>
3. Exhibits:
<TABLE>
<S> <C>
2.01 Agreement and Plan of Merger by and between the Registrant
and HNC Software Inc., a California corporation (1)
2.02 Agreement and Plan of Reorganization dated as of July 19, 1996 by and among
the Registrant, HNC Merger Corp. and Risk Data Corporation, as amended (2)
2.03 Agreement of Merger dated August 30, 1996 by and between HNC Merger
Corp. and Risk Data Corporation (2)
2.04 Exchange Agreement dated as of October 25, 1996 by and among the Registrant,
Retek Distribution Corporation and the shareholders of Retek
Distribution Corporation (3)
2.05 Form of Option Exchange Agreement between the Registrant and each person
who held outstanding options to purchase shares of Retek Distribution
Corporation on November 29, 1996 (3)
3(i).01 Registrant's Certificate of Designation of Preferred Stock (1)
</TABLE>
2
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<TABLE>
<S> <C>
3(i).02 Registrant's Certificate of Elimination (4)
3(i).03 Registrant's Restated Certificate of Incorporation filed with the Secretary of
State of Delaware on June 13, 1996 (5)
3(ii).04 Registrant's Bylaws (1)
3(ii).05 Registrants Bylaws, as amended (5)
4.01 Form of Specimen Certificate for Registrant's Common Stock (1)
4.02 Third Amended Registration Rights Agreement dated March 10, 1993,
as amended (1)
4.03 Second Waiver and Amendment to Third Amended Registration Rights
Agreement (4)
4.04 Registration Rights Agreement dated as of August 30, 1996 by and among the
Registrant and the former shareholders of Risk Data Corporation (2)
4.05 Registration Rights Agreement dated as of October 25, 1996 by and among the
Registrant and the former shareholders of Retek Distribution Corporation (3)
4.06 Amendment No. 1 to the Registration Rights Agreement dated as of February 24, 1997 by
and between the Registrant and the former shareholders of Retek Distribution
Corporation *
10.01 Registrant's 1987 Stock Option Plan and related documents (1)
10.02 Registrant's 1995 Equity Incentive Plan and related documents as amended
December 6, 1996 *
10.03 Registrant's 1995 Directors Stock Option Plan and related documents (1)
10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents (1)
10.05 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers (1)
10.06 Office Building Lease dated as of December 1, 1993, as amended effective
February 1, 1994 and June 1, 1994, between Registrant and PacCor Partners (1)
10.07 Marketing Agreement dated as of June 24, 1993 between Registrant and
First Data Resources, Inc. (1) (6)
10.08 License Agreement dated as of June 24, 1993, as amended October 18, 1993,
September 16, 1994 and by letter amendment, with Addendum dated
January 21, 1994, as amended February 15, 1995, between Registrant and
First Data Resources, Inc. (1) (6)
10.09 Loan and Security Agreement dated as of September 23, 1992, as amended
October 28, 1993, July 21, 1994, May 26, 1995 and August 31, 1995,
between Registrant and Silicon Valley Bank (4)
10.10 Amended Loan and Security Agreement dated as of July 10, 1996, between
the Company and Silicon Valley Bank (7)
10.12 Office Building Lease dated as of June 17, 1996, between Registrant and Williams
Properties I, LLC & Williams Properties II, LLC
10.13 Employment Agreement dated as of September 10, 1996, by and between Aptex
Software Inc. and Michael A. Thiemann (8)
10.14 Investors' Rights Agreement dated as of September 10, 1996, by and among
Aptex Software Inc., HNC Software Inc. and Michael A. Thiemann (8)
Restricted Stock Purchase Agreement dated as of September 10, 1996, by and
between Aptex Software Inc. and Michael Thiemann (8)
10.16 Aptex Software Inc.'s 1996 Equity Incentive Plan and related documents
11.01 Statement Regarding Computation of Per Share Earnings
13.01 1996 Annual Report to Stockholders (to be deemed filed only to the extent
provided in Item 6.01(b) (13) of Regulation S-K) *
21.01 List of Registrant's subsidiaries
23.01 Consent of Price Waterhouse LLP, Independent Accountants *
24.01 Power of Attorney (See "Signatures")
27.01 Financial Data Schedule
</TABLE>
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* Filed herewith as a part of this amendment to Report.
(1) Incorporated by reference to the Registrant's Form S-1
Registration Statement (File No. 33-91932).
(2) Incorporated by reference to the Registrant's Report on Form
8-K filed on September 12, 1996.
(3) Incorporated by reference to the Registrant's Report on Form
8-K filed on December 12, 1996.
(4) Incorporated by reference to the Registrant's Form S-1
Registration Statement (File No. 33-99980).
(5) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 as
originally filed on August 13, 1996.
(6) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996 as
originally filed on November 14, 1996.
(7) Confidential treatment has been granted for certain portions of
this document. Such portions have been omitted from the
filing and have been filed separately with the Securities and
Exchange Commission.
(8) Management Contract.
(b) Reports on Form 8-K
(i) A Report on Form 8-K was filed on December 12, 1996 with
respect to an event dated November 29, 1996 (the acquisition
of Retek Distribution Corporation).
(ii) A Report on Form 8-K was filed on December 19, 1996 to file
the Consolidated Balance Sheet as of December 31, 1996 and
1995, the Consolidated Statement of Income for the years
ended December 31, 1996, 1995 and 1994, the Consolidated
Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994, the Consolidated Statement of Changes in
Stockholders' Equity (Deficit) for the years ended December
31, 1996, 1995 and 1994, the Notes to Consolidated Financial
Statements, and the Report of Independent Accountants, in
order to satisfy the financial statement requirements for a
Registration Statement on Form S-8 that was filed subsequent
to the filing of this Report on Form 8-K, which incorporated
this Report on Form 8-K by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 10, 1997
HNC SOFTWARE INC.
BY: /S/ RAYMOND V. THOMAS
--------------------------------------------
Raymond V. Thomas
Vice President, Finance & Administration
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ Robert L. North* President and Chief Executive Officer April 10, 1997
- ----------------------------------- (Principal Executive Officer)
Robert L. North
/s/ Raymond V. Thomas Vice President, Finance & Administration April 10, 1997
- ----------------------------------- and Chief Financial Officer (Principal
Raymond V. Thomas Financial Officer and Principal Accounting
Officer)
/s/ Edward K. Chandler* Director April 10, 1997
- -----------------------------------
Edward K. Chandler
/s/ Oliver D. Curme* Director April 10, 1997
- -----------------------------------
Oliver D. Curme
/s/ Roger L. Evans* Director April 10, 1997
- -----------------------------------
Roger L. Evans
/s/ Thomas F. Farb* Director April 10, 1997
- -----------------------------------
Thomas F. Farb
</TABLE>
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<TABLE>
<S> <C> <C>
/s/ Charles H. Gaylord, Jr.* Director April 10, 1997
- -----------------------------------
Charles H. Gaylord, Jr.
* BY:/S/ RAYMOND V. THOMAS
-----------------------
Raymond V. Thomas
Attorney-in-fact
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
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<S> <C>
2.01 Agreement and Plan of Merger by and between the Registrant
and HNC Software Inc., a California corporation (1)
2.02 Agreement and Plan of Reorganization dated as of July 19, 1996 by and among
the Registrant, HNC Merger Corp. and Risk Data Corporation, as amended (2)
2.03 Agreement of Merger dated August 30, 1996 by and between HNC Merger
Corp. and Risk Data Corporation (2)
2.04 Exchange Agreement dated as of October 25, 1996 by and among the Registrant,
Retek Distribution Corporation and the shareholders of Retek
Distribution Corporation (3)
2.05 Form of Option Exchange Agreement between the Registrant and each person
who held outstanding options to purchase shares of Retek Distribution
Corporation on November 29, 1996 (3)
3(i).01 Registrant's Certificate of Designation of Preferred Stock (1)
3(i).02 Registrant's Certificate of Elimination (4)
3(i).03 Registrant's Restated Certificate of Incorporation filed with the Secretary of
State of Delaware on June 13, 1996 (5)
3(ii).04 Registrant's Bylaws (1)
3(ii).05 Registrant's Bylaws, as amended (5)
4.01 Form of Specimen Certificate for Registrant's Common Stock (1)
4.02 Third Amended Registration Rights Agreement dated March 10, 1993,
as amended (1)
4.03 Second Waiver and Amendment to Third Amended Registration Rights
Agreement (4)
4.04 Registration Rights Agreement dated as of August 30, 1996 by and among the
Registrant and the former shareholders of Risk Data Corporation (2)
4.05 Registration Rights Agreement dated as of October 25, 1996 by and among the
Registrant and the former shareholders of Retek Distribution Corporation (3)
4.06 Amendment No. 1 to the Registration Rights Agreement dated as of February 24, 1997
by and between the Registrant and the former shareholders of Retek Distribution
Corporation*
10.01 Registrant's 1987 Stock Option Plan and related documents (1)
10.02 Registrant's 1995 Equity Incentive Plan and related documents, as amended December 6, 1996*
10.03 Registrant's 1995 Directors Stock Option Plan and related documents (1)
10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents (1)
10.05 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers (1)
10.06 Office Building Lease dated as of December 1, 1993, as amended effective
February 1, 1994 and June 1, 1994, between Registrant and PacCor Partners (1)
10.07 Marketing Agreement dated as of June 24, 1993 between Registrant and
First Data Resources, Inc. (1) (6)
10.08 License Agreement dated as of June 24, 1993, as amended October 18, 1993,
September 16, 1994 and by letter amendment, with Addendum dated
January 21, 1994, as amended February 15, 1995, between Registrant and
First Data Resources, Inc. (1) (6)
10.09 Loan and Security Agreement dated as of September 23, 1992, as amended
October 28, 1993, July 21, 1994, May 26, 1995 and August 31, 1995,
between Registrant and Silicon Valley Bank (4)
10.10 Amended Loan and Security Agreement dated as of July 10, 1996, between
the Company and Silicon Valley Bank (7)
10.12 Office Building Lease dated as of June 17, 1996, between Registrant and Williams
Properties I, LLC & Williams Properties II, LLC
10.13 Employment Agreement dated as of September 10, 1996, by and between Aptex
</TABLE>
7
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<TABLE>
<S> <C>
Software Inc. and Michael A. Thiemann (8)
10.14 Investors' Rights Agreement dated as of September 10, 1996, by and among
Aptex Software Inc., HNC Software Inc. and Michael A. Thiemann (8)
10.15 Restricted Stock Purchase Agreement dated as of September 10, 1996, by and between
Aptex Software Inc. and Michael Thiemann (8)
10.16 Aptex Software Inc.'s 1996 Equity Incentive Plan and related documents
11.01 Statement Regarding Computation of Per Share Earnings
13.01 1996 Annual Report to Stockholders (to be deemed filed only to the extent
provided in Item 6.01(b) (13) of Regulation S-K)*
21.01 List of Registrant's subsidiaries
23.01 Consent of Price Waterhouse LLP, Independent Accountants*
24.01 Power of Attorney (See "Signatures")
27.01 Financial Data Schedule
</TABLE>
__________________________________
* Filed herewith as a part of this amendment to Report.
(1) Incorporated by reference to the Registrant's Form S-1 Registration
Statement (File No. 33-91932).
(2) Incorporated by reference to the Registrant's Report on Form 8-K filed on
September 12, 1996.
(3) Incorporated by reference to the Registrant's Report on Form 8-K filed on
December 12, 1996.
(4) Incorporated by reference to the Registrant's Form S-1 Registration
Statement (File No. 33-99980).
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996 as originally filed on August 13,
1996.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 as originally filed on November
14, 1996.
(7) Confidential treatment has been granted for certain portions of this
document. Such portions have been omitted from the filing and have been
filed separately with the Securities and Exchange Commission.
(8) Management Contract.
8
<PAGE> 1
Exhibit 4.06
AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT
This Amendment No. 1 to Registration Rights Agreement (this "AMENDMENT")
is made and entered into as of February 24, 1997, by and between HNC Software
Inc., a Delaware corporation ("HNC"), St. George's Trust Company Limited, as
Trustee of The Mulberry Trust ("MULBERRY"), St. George's Trust Company
Limited, as Trustee of The Kulmor Trust ("KULMOR"), Miurkirk Investments Ltd.,
a company incorporated under the laws of the Commonwealth of the Bahamas
("MIURKIRK") and Oyster Pursuits Ltd., a company incorporated under the laws of
the Commonwealth of the Bahamas ("OYSTER")
R E C I T A L S
A. HNC, Mulberry and Kulmor previously entered into a certain
Registration Rights Agreement dated as of October 25, 1996 (the "REGISTRATION
RIGHTS AGREEMENT") in connection with the issuance of shares of HNC's Common
Stock to Mulberry and Kulmor pursuant to an Exchange Agreement dated as of
October 25, 1996 (the "EXCHANGE AGREEMENT").
B. Mulberry has privately transferred to Miurkirk One Million One
Hundred Sixty-Two Thousand One Hundred Seventeen (1,162,117) shares of HNC's
Common Stock (the "MULBERRY SHARES") that Mulberry acquired pursuant to the
Exchange Agreement.
C. Kulmor has privately transferred to Oyster Two Hundred Five
Thousand Seventy-Nine (205,079) shares of HNC's Common Stock (the "KULMOR
SHARES") that Kulmor acquired pursuant to the Exchange Agreement.
D. Mulberry desires to assign its rights under the Registration
Rights Agreement with respect to the Mulberry Shares to Miurkirk, which is
wholly-owned by Mulberry, and Kulmor desires to assign its rights under the
Registration Rights Agreement with respect to the Kulmor Shares to Oyster,
which is wholly-owned by Kulmor, and HNC desires to permit such assignment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ACKNOWLEDGMENT; CERTAIN TERMS. Each party to this Amendment
acknowledges that it has reviewed and understood the terms and conditions of
the Registration Rights Agreement. Unless otherwise expressly defined in this
Amendment, all capitalized terms used in this Amendment will have the same
meanings given to such terms in the Registration Rights Agreement.
2. ASSIGNMENT AND ASSUMPTION AND CONSENT.
(a) Mulberry and Miurkirk. Mulberry hereby assigns and
transfers to Miurkirk all of Mulberry's rights, duties, obligations and
responsibilities under the Registration Rights Agreement, and, in consideration
of such assignment and transfer and the consents and agreements of HNC herein,
Miurkirk hereby agrees with HNC to assume all Mulberry's duties, obligations
and responsibilities under the Registration Rights Agreement (including without
limitation all such duties, obligations and responsibilities that arose prior
to the date of this Amendment) and to be bound by all of the terms and
<PAGE> 2
conditions of the Registration Rights Agreement as a party thereto (including
but not limited to the indemnification provisions of Section 1.9 of the
Registration Rights Agreement).
(b) Kulmor and Oyster. Kulmor hereby assigns and
transfers to Oyster all of Kulmor's rights, duties, obligations and
responsibilities under the Registration Rights Agreement, and, in consideration
of such assignment and transfer and the consents and agreements of HNC herein,
Oyster hereby agrees with HNC to assume all Kulmor's duties, obligations and
responsibilities under the Registration Rights Agreement (including without
limitation all such duties, obligations and responsibilities that arose prior
to the date of this Amendment) and to be bound by all of the terms and
conditions of the Registration Rights Agreement as a party thereto (including
but not limited to the indemnification provisions of Section 1.9 of the
Registration Rights Agreement).
(c) Consent. In consideration of the agreements of
Miurkirk and Oyster herein, HNC hereby consents to: (i) the assignment and
transfer to Miurkirk of Mulberry's rights, duties, obligations and
responsibilities under the Registration Rights Agreement with respect to the
Mulberry Shares; and (ii) the assignment and transfer to Oyster of Kulmor's
rights, duties, obligations and responsibilities under the Registration Rights
Agreement with respect to the Kulmor Shares.
3. AMENDMENTS. The Registration Rights Agreement is hereby
amended as follows (and by signing this Amendment, Miurkirk and Oyster each
agree to be bound by all of the following provisions of this Section 3):
(a) Shareholders. Miurkirk and Oyster shall each become
parties to the Registration Rights Agreement as "Shareholders" thereunder (and
Mulberry and Kulmor shall cease to be parties to the Registration Rights
Agreement). Miurkirk and Oyster agree that they shall each be bound by all of
the rights, duties, and obligations applicable to Shareholders under the
Registration Rights Agreement and by all of the terms and conditions of the
Registration Rights Agreement. The term "Shareholders" as used in the
Registration Rights Agreement, shall mean Miurkirk and Oyster, collectively and
the term "Shareholder" as used in the Registration Rights Agreement, shall mean
either Miurkirk or Oyster, individually.
(b) Registrable Securities. The parties acknowledge and
agree that the shares of HNC Common Stock referred to in Section 1.1(d)(i) of
the Registration Rights Agreement are the Mulberry Shares and the Kulmor
Shares, as defined in the recitals to this Amendment.
(c) Exhibit A. Exhibit A to the Registration Rights
Agreement will be amended and restated in its entirety as set forth in Exhibit
A to this Amendment.
4. MISCELLANEOUS.
(a) Material Inducements. Miurkirk and Oyster understand
that their agreements under this Amendment are material inducements to HNC to
enter into this Amendment.
(b) Counterparts. This Amendment may be executed in any
number of counterparts, each of which when so executed and delivered will be
deemed to be an original and all of which taken together will constitute one
and the same instrument.
(c) Effect of Amendment. Except as amended hereby, the
Registration Rights Agreement remains in full force and effect. In the event
of any conflict between this Amendment and the Registration Rights Agreement,
this Amendment will control and govern.
-2-
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IN WITNESS WHEREOF, the undersigned parties have executed this
Amendment effective as of the date and year first above written.
HNC SOFTWARE INC.
MIURKIRK INVESTMENTS LTD.
By: _____________________________ By: _____________________________
Name: ___________________________ Name: ___________________________
Title: __________________________ Title: __________________________
THE MULBERRY TRUST OYSTER PURSUITS LTD.
By: St. George's Trust Company Limited,
as Trustee
By: _____________________________ By: _____________________________
Name: ___________________________ Name: ___________________________
Title: __________________________ Title: __________________________
THE KULMOR TRUST
By: St. George's Trust Company Limited,
as Trustee
By: ______________________________
Name: ____________________________
Title: _____________________________
ATTACHMENTS:
Exhibit A List of Shareholders
[SIGNATURE PAGE TO AMENDMENT TO REGISTRATION RIGHTS AGREEMENT]
-3-
<PAGE> 4
EXHIBIT A
LIST OF SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares of HNC
Name and Address Common Stock Held
- ---------------- -----------------
<S> <C>
Miurkirk Investments Ltd. 1,162,117
4th Floor, 33 Reid Street
Hamilton, Bermuda
Oyster Pursuits Ltd. 205,079
4th Floor, 33 Reid Street
Hamilton, Bermuda
</TABLE>
<PAGE> 1
EXHIBIT 10.02
HNC SOFTWARE INC.
1995 EQUITY INCENTIVE PLAN
As Adopted May 4, 1995
As Amended December 6, 1996
1. PURPOSE. The purpose of this Plan is to provide
incentives to attract, retain and motivate eligible persons whose present and
potential contributions are important to the success of the Company, its
Parent, Subsidiaries and Affiliates, by offering them an opportunity to
participate in the Company's future performance through awards of Options,
Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text
are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to
Sections 2.2 and 18, the total number of Shares reserved and available for
grant and issuance pursuant to this Plan will be 2,800,000(1) Shares plus any
Shares that are made available for grant and issuance under this Plan pursuant
to the following sentence. Any Shares remaining unissued under the 1987 Stock
Option Plan adopted by HNC Software Inc., a California corporation that is the
Company's predecessor (the "PRIOR PLAN") on the Effective Date (as defined
below) and any Shares issuable upon exercise of options granted pursuant to the
Prior Plan that expire or become unexercisable for any reason without having
been exercised in full, will no longer be available for grant and issuance
under the Prior Plan, but will also be available for grant and issuance under
this Plan. Subject to Sections 2.2 and 18, Shares that: (a) are subject to
issuance upon exercise of an Option but cease to be subject to such Option for
any reason other than exercise of such Option; (b) are subject to an Award
granted hereunder but are forfeited or are repurchased by the Company at the
original issue price; or (c) are subject to an Award that otherwise terminates
without Shares being issued; will again be available for grant and issuance in
connection with future Awards under this Plan. At all times the Company shall
reserve and keep available a sufficient number of Shares as shall be required
to satisfy the requirements of all outstanding Options granted under this Plan
and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the
number of outstanding Shares is changed by a stock dividend, recapitalization,
stock split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be
proportionately adjusted, subject to any required action by the Board or the
stockholders of the Company and compliance with applicable securities laws;
provided, however, that fractions of a Share will not be issued but will either
be replaced by a cash payment equal to the Fair Market Value of such fraction
of a Share or will be rounded up to the nearest whole Share, as determined by
the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may
be granted only to employees (including officers and directors who are also
employees) of the Company or of a Parent or Subsidiary of the Company. All
other Awards may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or any Parent, Subsidiary
or Affiliate of the Company; provided such consultants, contractors and
advisors render bona fide services not in connection with the offer and sale of
securities in a capital-raising transaction. No person will be eligible to
receive more than 500,000(2) Shares in any calendar year under this
__________________________________
(1) Adjusted to reflect (i) the 2-for-1 split of the Company's capital stock
effected in April 1996 and (ii) the authorization of 1,500,000 additional
shares of Common Stock for issuance under the Plan approved by the
Company's stockholders on December 6, 1996.
(2) Adjusted to reflect the 2-for-1 split of the Company's capital stock
effected in April 1996.
<PAGE> 2
HNC Software Inc.
1995 Equity Incentive Plan
Plan pursuant to the grant of Awards hereunder, other than new employees of the
Company or of a Parent, Subsidiary or Affiliate of the Company (including new
employees who are also officers and directors of the Company or any Parent,
Subsidiary or Affiliate of the Company) who are eligible to receive up to a
maximum of 700,000(3) Shares in the calendar year in which they commence their
employment. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be
administered by the Committee or by the Board acting as the Committee. Subject
to the general purposes, terms and conditions of this Plan, and to the
direction of the Board, the Committee will have full power to implement and
carry out this Plan. Without limitation, the Committee will have the authority
to:
(a) construe and interpret this Plan, any Award Agreement
and any other agreement or document executed pursuant
to this Plan;
(b) prescribe, amend and rescind rules and regulations
relating to this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration
subject to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of, or
as alternatives to, other Awards under this Plan or any
other incentive or compensation plan of the Company or
any Parent, Subsidiary or Affiliate of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of
Awards;
(i) correct any defect, supply any omission or reconcile
any inconsistency in this Plan, any Award or any Award
Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable
for the administration of this Plan.
4.2 Committee Discretion. Any determination made
by the Committee with respect to any Award will be made in its sole discretion
at the time of grant of the Award or, unless in contravention of any express
term of this Plan or Award, at any later time, and such determination will be
final and binding on the Company and on all persons having an interest in any
Award under this Plan. The Committee may delegate to one or more officers of
the Company the authority to grant an Award under this Plan to Participants who
are not Insiders of the Company.
4.3 Exchange Act Requirements. If two or more
members of the Board are Outside Directors, the Committee will be comprised of
at least two (2) members of the Board, all of whom are Outside Directors and
Disinterested Persons. During all times that the Company is subject to Section
16 of the Exchange Act, the Company will take appropriate steps to comply with
the disinterested administration requirements of Section 16(b) of the Exchange
Act, which will consist of the appointment by the Board of a Committee
consisting of not less than two (2) members of the Board, each of whom is a
Disinterested Person.
__________________________________
(3) Adjusted to reflect the 2-for-1 split of the Company's capital stock
effected in April 1996.
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HNC Software Inc.
1995 Equity Incentive Plan
5. OPTIONS. The Committee may grant Options to eligible
persons and will determine whether such Options will be Incentive Stock Options
within the meaning of the Code ("ISOS") or Nonqualified Stock Options
("NQSOS"), the number of Shares subject to the Option, the Exercise Price of
the Option, the period during which the Option may be exercised, and all other
terms and conditions of the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted
under this Plan will be evidenced by an Award Agreement which will expressly
identify the Option as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will
be in such form and contain such provisions (which need not be the same for
each Participant) as the Committee may from time to time approve, and which
will comply with and be subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option
will be the date on which the Committee makes the determination to grant such
Option, unless otherwise specified by the Committee. The Stock Option
Agreement and a copy of this Plan will be delivered to the Participant within a
reasonable time after the granting of the Option.
5.3 Exercise Period. Options will be exercisable
within the times or upon the events determined by the Committee as set forth in
the Stock Option Agreement governing such Option; provided, however, that no
Option will be exercisable after the expiration of ten (10) years from the date
the Option is granted; and provided further that no ISO granted to a person who
directly or by attribution owns more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of any Parent
or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable
after the expiration of five (5) years from the date the ISO is granted. The
Committee also may provide for the exercise of Options to become exercisable at
one time or from time to time, periodically or otherwise, in such number of
Shares or percentage of Shares as the Committee determines.
5.4 Exercise Price. The Exercise Price of an
Option will be determined by the Committee when the Option is granted and may
be not less than 100% of the Fair Market Value of the Shares on the date of
grant; provided that: the Exercise Price of any ISO granted to a Ten Percent
Shareholder will not be less than 110% of the Fair Market Value of the Shares
on the date of grant. Payment for the Shares purchased may be made in
accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised
only by delivery to the Company of a written stock option exercise agreement
(the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not
be the same for each Participant), stating the number of Shares being
purchased, the restrictions imposed on the Shares purchased under such Exercise
Agreement, if any, and such representations and agreements regarding
Participant's investment intent and access to information and other matters, if
any, as may be required or desirable by the Company to comply with applicable
securities laws, together with payment in full of the Exercise Price for the
number of Shares being purchased.
5.6 Termination. Notwithstanding the exercise
periods set forth in the Stock Option Agreement, exercise of an Option will
always be subject to the following:
(a) If the Participant is Terminated for any reason except
death or Disability, then the Participant may exercise
such Participant's Options only to the extent that such
Options would have been exercisable upon the
Termination Date no later than three (3) months after
the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be
determined by the Committee, with any exercise beyond
three (3) months after the Termination Date deemed to
be an NQSO), but in any event, no later than the
expiration date of the Options.
(b) If the Participant is Terminated because of
Participant's death or Disability (or the Participant
dies within three (3) months after a Termination other
than because of
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HNC Software Inc.
1995 Equity Incentive Plan
Participant's death or disability), then Participant's
Options may be exercised only to the extent that such
Options would have been exercisable by Participant on
the Termination Date and must be exercised by
Participant (or Participant's legal representative or
authorized assignee) no later than twelve (12) months
after the Termination Date (or such shorter or longer
time period not exceeding five (5) years as may be
determined by the Committee, with any such exercise
beyond (a) three (3) months after the Termination Date
when the Termination is for any reason other than the
Participant's death or Disability, or (b) twelve (12)
months after the Termination Date when the Termination
is for Participant's death or Disability, deemed to be
an NQSO), but in any event no later than the expiration
date of the Options.
5.7 Limitations on Exercise. The Committee may
specify a reasonable minimum number of Shares that may be purchased on any
exercise of an Option, provided that such minimum number will not prevent
Participant from exercising the Option for the full number of Shares for which
it is then exercisable.
5.8 Limitations on ISOs. The aggregate Fair Market
Value (determined as of the date of grant) of Shares with respect to which ISOs
are exercisable for the first time by a Participant during any calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Affiliate, Parent or Subsidiary of the Company) will not exceed
$100,000. If the Fair Market Value of Shares on the date of grant with respect
to which ISOs are exercisable for the first time by a Participant during any
calendar year exceeds $100,000, then the Options for the first $100,000 worth
of Shares to become exercisable in such calendar year will be ISOs and the
Options for the amount in excess of $100,000 that become exercisable in that
calendar year will be NQSOs. In the event that the Code or the regulations
promulgated thereunder are amended after the Effective Date of this Plan to
provide for a different limit on the Fair Market Value of Shares permitted to
be subject to ISOs, such different limit will be automatically incorporated
herein and will apply to any Options granted after the effective date of such
amendment.
5.9 Modification, Extension or Renewal. The
Committee may modify, extend or renew outstanding Options and authorize the
grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of a Participant, impair any of such
Participant's rights under any Option previously granted. Any outstanding ISO
that is modified, extended, renewed or otherwise altered will be treated in
accordance with Section 424(h) of the Code. The Committee may reduce the
Exercise Price of outstanding Options without the consent of Participants
affected by a written notice to them; provided, however, that the Exercise
Price may not be reduced below the minimum Exercise Price that would be
permitted under Section 5.4 of this Plan for Options granted on the date the
action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other
provision in this Plan, no term of this Plan relating to ISOs will be
interpreted, amended or altered, nor will any discretion or authority granted
under this Plan be exercised, so as to disqualify this Plan under Section 422
of the Code or, without the consent of the Participant affected, to disqualify
any ISO under Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer
by the Company to sell to an eligible person Shares that are subject to
restrictions. The Committee will determine to whom an offer will be made, the
number of Shares the person may purchase, the price to be paid (the "PURCHASE
PRICE"), the restrictions to which the Shares will be subject, and all other
terms and conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases
under a Restricted Stock Award made pursuant to this Plan will be evidenced by
an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such
form (which need not be the same for each Participant) as the Committee will
from time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The offer of Restricted Stock will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase
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HNC Software Inc.
1995 Equity Incentive Plan
Agreement along with full payment for the Shares to the Company within thirty
(30) days, then the offer will terminate, unless otherwise determined by the
Committee.
6.2 Purchase Price. The Purchase Price of Shares
sold pursuant to a Restricted Stock Award will be determined by the Committee
and will be at least 100% of the Fair Market Value of the Shares on the date
the Restricted Stock Award is granted. Payment of the Purchase Price may be
made in accordance with Section 8 of this Plan.
6.3 Restrictions. Restricted Stock Awards will be
subject to such restrictions (if any) as the Committee may impose. The
Committee may provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions, in whole or part, based on length of
service, performance or such other factors or criteria as the Committee may
determine.
7. STOCK BONUSES.
7.1 Awards of Stock Bonuses. A Stock Bonus is an
award of Shares (which may consist of Restricted Stock) for services rendered
to the Company or any Parent, Subsidiary or Affiliate of the Company. A Stock
Bonus may be awarded for past services already rendered to the Company, or any
Parent, Subsidiary or Affiliate of the Company (provided that the Participant
pays the Company the par value of the Shares awarded by such Stock Bonus in
cash) pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will be
in such form (which need not be the same for each Participant) as the Committee
will from time to time approve, and will comply with and be subject to the
terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS
AGREEMENT") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses
may vary from Participant to Participant and between groups of Participants,
and may be based upon the achievement of the Company, Parent, Subsidiary or
Affiliate and/or individual performance factors or upon such other criteria as
the Committee may determine.
7.2 Terms of Stock Bonuses. The Committee will
determine the number of Shares to be awarded to the Participant and whether
such Shares will be Restricted Stock. If the Stock Bonus is being earned upon
the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will determine: (a) the nature, length and
starting date of any period during which performance is to be measured (the
"PERFORMANCE PERIOD") for each Stock Bonus; (b) the performance goals and
criteria to be used to measure the performance, if any; (c) the number of
Shares that may be awarded to the Participant; and (d) the extent to which such
Stock Bonuses have been earned. Performance Periods may overlap and
Participants may participate simultaneously with respect to Stock Bonuses that
are subject to different Performance Periods and different performance goals
and other criteria. The number of Shares may be fixed or may vary in
accordance with such performance goals and criteria as may be determined by the
Committee. The Committee may adjust the performance goals applicable to the
Stock Bonuses to take into account changes in law and accounting or tax rules
and to make such adjustments as the Committee deems necessary or appropriate to
reflect the impact of extraordinary or unusual items, events or circumstances
to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock
Bonus may be paid currently or on a deferred basis with such interest or
dividend equivalent, if any, as the Committee may determine. Payment may be
made in the form of cash, whole Shares, including Restricted Stock, or a
combination thereof, either in a lump sum payment or in installments, all as
the Committee will determine.
7.4 Termination During Performance Period. If a
Participant is Terminated during a Performance Period for any reason, then such
Participant will be entitled to payment (whether in Shares, cash or otherwise)
with respect to the Stock Bonus only to the extent earned as of the date of
Termination in accordance with the Performance Stock Bonus Agreement, unless
the Committee will determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
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HNC Software Inc.
1995 Equity Incentive Plan
8.1 Payment. Payment for Shares purchased pursuant
to this Plan may be made in cash (by check) or, where expressly approved for
the Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been
owned by Participant for more than six (6) months and
have been paid for within the meaning of SEC Rule 144
(and, if such shares were purchased from the Company by
use of a promissory note, such note has been fully paid
with respect to such shares); or (2) were obtained by
Participant in the public market;
(c) by tender of a full recourse promissory note having
such terms as may be approved by the Committee and
bearing interest at a rate sufficient to avoid
imputation of income under Sections 483 and 1274 of the
Code; provided, however, that Participants who are not
employees or directors of the Company will not be
entitled to purchase Shares with a promissory note
unless the note is adequately secured by collateral
other than the Shares; provided, further, that the
portion of the Purchase Price equal to the par value of
the Shares, if any, must be paid in cash;
(d) by waiver of compensation due or accrued to the
Participant for services rendered; provided, further,
that the portion of the Purchase Price equal to the par
value of the Shares, if any, must be paid in cash;
(e) with respect only to purchases upon exercise of an
Option, and provided that a public market for the
Company's stock exists:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a
member of the National Association of
Securities Dealers (an "NASD DEALER") whereby
the Participant irrevocably elects to exercise
the Option and to sell a portion of the Shares
so purchased to pay for the Exercise Price, and
whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the
Exercise Price directly to the Company; or
(2) through a "margin" commitment from the
Participant and a NASD Dealer whereby the
Participant irrevocably elects to exercise the
Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security
for a loan from the NASD Dealer in the amount
of the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly
to the Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the
Participant pay for Shares purchased under this Plan by authorizing a guarantee
by the Company of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 Withholding Generally. Whenever Shares are to
be issued in satisfaction of Awards granted under this Plan, the Company may
require the Participant to remit to the Company an amount sufficient to satisfy
federal, state and local withholding tax requirements prior to the delivery of
any certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding
tax requirements.
9.2 Stock Withholding. When, under applicable tax
laws, a Participant incurs tax liability in connection with the exercise or
vesting of any Award that is subject to tax withholding and the
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HNC Software Inc.
1995 Equity Incentive Plan
Participant is obligated to pay the Company the amount required to be withheld,
the Committee may allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be
issued that number of Shares having a Fair Market Value equal to the minimum
amount required to be withheld, determined on the date that the amount of tax
to be withheld is to be determined (the "TAX DATE"). All elections by a
Participant to have Shares withheld for this purpose will be made in writing in
a form acceptable to the Committee and will be subject to the following
restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, then except as provided below, the election
will be irrevocable as to the particular Shares as to
which the election is made;
(c) all elections will be subject to the consent or
disapproval of the Committee;
(d) if the Participant is an Insider and if the Company is
subject to Section 16(b) of the Exchange Act: (1) the
election may not be made within six (6) months of the
date of grant of the Award, except as otherwise
permitted by SEC Rule 16b- 3(e) under the Exchange Act,
and (2) either (A) the election to use stock
withholding must be irrevocably made at least six (6)
months prior to the Tax Date (although such election
may be revoked at any time at least six (6) months
prior to the Tax Date) or (B) the exercise of the
Option or election to use stock withholding must be
made in the ten (10) day period beginning on the third
day following the release of the Company's quarterly or
annual summary statement of sales or earnings; and
(e) in the event that the Tax Date is deferred until six
(6) months after the delivery of Shares under Section
83(b) of the Code, the Participant will receive the
full number of Shares with respect to which the
exercise occurs, but such Participant will be
unconditionally obligated to tender back to the Company
the proper number of Shares on the Tax Date.
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 Voting and Dividends. No Participant will
have any of the rights of a stockholder with respect to any Shares until the
Shares are issued to the Participant. After Shares are issued to the
Participant, the Participant will be a stockholder and have all the rights of a
stockholder with respect to such Shares, including the right to vote and
receive all dividends or other distributions made or paid with respect to such
Shares; provided, that if such Shares are Restricted Stock, then any new,
additional or different securities the Participant may become entitled to
receive with respect to such Shares by virtue of a stock dividend, stock split
or any other change in the corporate or capital structure of the Company will
be subject to the same restrictions as the Restricted Stock; provided, further,
that the Participant will have no right to retain such stock dividends or stock
distributions with respect to Shares that are repurchased at the Participant's
original Purchase Price pursuant to Section 12.
10.2 Financial Statements. The Company will
provide financial statements to each Participant prior to such Participant's
purchase of Shares under this Plan, and to each Participant annually during the
period such Participant has Awards outstanding; provided, however, the Company
will not be required to provide such financial statements to Participants whose
services in connection with the Company assure them access to equivalent
information.
11. TRANSFERABILITY. Awards granted under this Plan, and
any interest therein, will not be transferable or assignable by Participant,
and may not be made subject to execution, attachment or similar process,
otherwise than by will or by the laws of descent and distribution or as
consistent with the specific Plan and Award Agreement provisions relating
thereto. During the lifetime of the Participant an Award will be exercisable
only by the Participant, and any elections with respect to an Award, may be
made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the
Committee, the Company may reserve to itself and/or its assignee(s) in the
Award Agreement (a) a right of first refusal to purchase all Shares that a
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HNC Software Inc.
1995 Equity Incentive Plan
Participant (or a subsequent transferee) may propose to transfer to a third
party, and/or (b) a right to repurchase a portion of or all Shares held by a
Participant following such Participant's Termination at any time within ninety
(90) days after the later of Participant's Termination Date and the date
Participant purchases Shares under this Plan, for cash and/or cancellation of
purchase money indebtedness, at: (A) with respect to Shares that are "Vested"
(as defined in the Award Agreement), the higher of: (l) Participant's original
Purchase Price, or (2) the Fair Market Value of such Shares on Participant's
Termination Date, provided, that such right of repurchase (i) must be exercised
as to all such "Vested" Shares unless a Participant consents to the Company's
repurchase of only a portion of such "Vested" Shares and (ii) terminates when
the Company's securities become publicly traded; or (B) with respect to Shares
that are not "Vested" (as defined in the Award Agreement), at the Participant's
original Purchase Price, provided, that the right to repurchase at the original
Purchase Price lapses at the rate of at least 20% per year over five (5) years
from the date the Shares were purchased (or from the date of grant of options
in the case of Shares obtained pursuant to a Stock Option Agreement and Stock
Option Exercise Agreement), and if the right to repurchase is assignable, the
assignee must pay the Company, upon assignment of the right to repurchase, cash
equal to the excess of the Fair Market Value of the Shares over the original
Purchase Price.
13. CERTIFICATES. All certificates for Shares or other
securities delivered under this Plan will be subject to such stock transfer
orders, legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations and other requirements of the
SEC or any stock exchange or automated quotation system upon which the Shares
may be listed or quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions
on a Participant's Shares, the Committee may require the Participant to deposit
all certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause
a legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will
be required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to
the Company under the promissory note; provided, however, that the Committee
may require or accept other or additional forms of collateral to secure the
payment of such obligation and, in any event, the Company will have full
recourse against the Participant under the promissory note notwithstanding any
pledge of the Participant's Shares or other collateral. In connection with any
pledge of the Shares, Participant will be required to execute and deliver a
written pledge agreement in such form as the Committee will from time to time
approve. The Shares purchased with the promissory note may be released from
the pledge on a pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at
any time or from time to time, authorize the Company, with the consent of the
respective Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time
buy from a Participant an Award previously granted with payment in cash, Shares
(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An
Award will not be effective unless such Award is in compliance with all
applicable federal and state securities laws, rules and regulations of any
governmental body, and the requirements of any stock exchange or automated
quotation system upon which the Shares may then be listed or quoted, as they
are in effect on the date of grant of the Award and also on the date of
exercise or other issuance. Notwithstanding any other provision in this Plan,
the Company will have no obligation to issue or deliver certificates for Shares
under this Plan prior to: (a) obtaining any approvals from governmental
agencies that the Company determines are necessary or advisable; and/or (b)
completion of any registration or other qualification of such Shares under any
state or federal law or ruling of any governmental body that the Company
determines to be necessary or advisable. The Company will be under no
obligation to register the Shares with the SEC or to effect compliance with the
registration, qualification or listing requirements of any state securities
laws, stock exchange or automated quotation system, and the Company will have
no liability for any inability or failure to do so.
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1995 Equity Incentive Plan
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any
Award granted under this Plan will confer or be deemed to confer on any
Participant any right to continue in the employ of, or to continue any other
relationship with, the Company or any Parent, Subsidiary or Affiliate of the
Company or limit in any way the right of the Company or any Parent, Subsidiary
or Affiliate of the Company to terminate Participant's employment or other
relationship at any time, with or without cause.
18. CORPORATE TRANSACTIONS.
18.1 Assumption or Replacement of Awards by
Successor. In the event of (a) a dissolution or liquidation of the Company,
(b) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders
of the Company or their relative stock holdings and the Awards granted under
this Plan are assumed, converted or replaced by the successor corporation,
which assumption will be binding on all Participants), (c) a merger in which
the Company is the surviving corporation but after which the stockholders of
the Company (other than any stockholder which merges (or which owns or controls
another corporation which merges) with the Company in such merger) cease to own
their shares or other equity interests in the Company, (d) the sale of
substantially all of the assets of the Company, or (e) any other transaction
which qualifies as a "corporate transaction" under Section 424(a) of the Code
wherein the stockholders of the Company give up all of their equity interest in
the Company (except for the acquisition, sale or transfer of all or
substantially all of the outstanding shares of the Company from or by the
stockholders of the Company), any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement will be binding on all Participants. In the
alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
stockholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant. In
the event such successor corporation (if any) refuses to assume or substitute
Options, as provided above, pursuant to a transaction described in this
Subsection 18.1, such Options will expire on such transaction at such time and
on such conditions as the Board will determine.
18.2 Other Treatment of Awards. Subject to any
greater rights granted to Participants under the foregoing provisions of this
Section 18, in the event of the occurrence of any transaction described in
Section 18.1, any outstanding Awards will be treated as provided in the
applicable agreement or plan of merger, consolidation, dissolution,
liquidation, sale of assets or other "corporate transaction."
18.3 Assumption of Awards by the Company. The
Company, from time to time, also may substitute or assume outstanding awards
granted by another company, whether in connection with an acquisition of such
other company or otherwise, by either; (a) granting an Award under this Plan in
substitution of such other company's award; or (b) assuming such award as if it
had been granted under this Plan if the terms of such assumed award could be
applied to an Award granted under this Plan. Such substitution or assumption
will be permissible if the holder of the substituted or assumed award would
have been eligible to be granted an Award under this Plan if the other company
had applied the rules of this Plan to such grant. In the event the Company
assumes an award granted by another company, the terms and conditions of such
award will remain unchanged (except that the exercise price and the number and
nature of Shares issuable upon exercise of any such option will be adjusted
appropriately pursuant to Section 424(a) of the Code). In the event the
Company elects to grant a new Option rather than assuming an existing option,
such new Option may be granted with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will
become effective on the date on which the registration statement filed by the
Company with the SEC under the Securities Act registering the initial public
offering of the Company's Common Stock is declared effective by the SEC (the
"EFFECTIVE DATE"); provided, however, that if the Effective Date does not occur
on or before December 31, 1995, this Plan will terminate as of December 31,
1995 having never become effective. This Plan shall be approved by the
stockholders of the Company (excluding Shares issued pursuant to this Plan),
consistent with applicable laws, within twelve (12) months before or after the
date this Plan is adopted by the Board. Upon the Effective Date, the Board may
grant
- 9 -
<PAGE> 10
HNC Software Inc.
1995 Equity Incentive Plan
Awards pursuant to this Plan; provided, however, that: (a) no Option may be
exercised prior to initial stockholder approval of this Plan; (b) no Option
granted pursuant to an increase in the number of Shares subject to this Plan
approved by the Board will be exercised prior to the time such increase has
been approved by the stockholders of the Company; and (c) in the event that
stockholder approval of such increase is not obtained within the time period
provided herein, all Awards granted hereunder will be canceled, any Shares
issued pursuant to any Award will be canceled, and any purchase of Shares
hereunder will be rescinded. So long as the Company is subject to Section
16(b) of the Exchange Act, the Company will comply with the requirements of
Rule 16b-3 (or its successor), as amended, with respect to stockholder
approval.
20. TERM OF PLAN. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any
time terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
of the stockholders of the Company, amend this Plan in any manner that requires
such stockholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or (if the Company is subject
to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the
Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder,
respectively.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of
this Plan by the Board, the submission of this Plan to the stockholders of the
Company for approval, nor any provision of this Plan will be construed as
creating any limitations on the power of the Board to adopt such additional
compensation arrangements as it may deem desirable, including, without
limitation, the granting of stock options and bonuses otherwise than under this
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
23. DEFINITIONS. As used in this Plan, the following terms
will have the following meanings:
"AFFILIATE" means any corporation that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, another corporation, where "control" (including
the terms "controlled by" and "under common control with") means the
possession, direct or indirect, of the power to cause the direction of the
management and policies of the corporation, whether through the ownership of
voting securities, by contract or otherwise.
"AWARD" means any award under this Plan, including any Option, Restricted Stock
or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award,
the signed written agreement between the Company and the Participant setting
forth the terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as
amended.
"COMMITTEE" means the committee appointed by the Board
to administer this Plan, or if no such committee is appointed, the Board.
"COMPANY" means HNC Software Inc., a corporation
organized under the laws of the State of Delaware, or any successor
corporation.
"DISABILITY" means a disability, whether temporary or
permanent, partial or total, within the meaning of Section 22(e)(3) of the
Code, as determined by the Committee.
- 10 -
<PAGE> 11
HNC Software Inc.
1995 Equity Incentive Plan
"DISINTERESTED PERSON" means a director who has not,
during the period that person is a member of the Committee and for one year
prior to commencing service as a member of the Committee, been granted or
awarded equity securities pursuant to this Plan or any other plan of the
Company or any Parent, Subsidiary or Affiliate of the Company, except in
accordance with the requirements set forth in Rule 16b- 3(c)(2)(i) (and any
successor regulation thereto) as promulgated by the SEC under Section 16(b) of
the Exchange Act, as such rule is amended from time to time and as interpreted
by the SEC.
"EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
"EXERCISE PRICE" means the price at which a holder of
an Option may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of
a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq
National Market, its closing price on the Nasdaq
National Market on the last trading day prior to the
date of determination as reported in The Wall Street
Journal;
(b) if such Common Stock is publicly traded and is then
listed on a national securities exchange, its closing
price on the last trading day prior to the date of
determination on the principal national securities
exchange on which the Common Stock is listed or
admitted to trading as reported in The Wall Street
Journal;
(c) if such Common Stock is publicly traded but is not
quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities exchange,
the average of the closing bid and asked prices on the
last trading day prior to the date of determination as
reported in The Wall Street Journal; or
(d) if none of the foregoing is applicable, by the
Committee in good faith.
"INSIDER" means an officer or director of the Company
or any other person whose transactions in the Company's Common Stock are
subject to Section 16 of the Exchange Act.
"OUTSIDE DIRECTOR" means any director who is not; (a) a
current employee of the Company or any Parent, Subsidiary or Affiliate of the
Company; (b) a former employee of the Company or any Parent, Subsidiary or
Affiliate of the Company who is receiving compensation for prior services
(other than benefits under a tax-qualified pension plan); (c) a current or
former officer of the Company or any Parent, Subsidiary or Affiliate of the
Company; or (d) currently receiving compensation for personal services in any
capacity, other than as a director, from the Company or any Parent, Subsidiary
or Affiliate of the Company; provided, however, that at such time as the term
"Outside Director", as used in Section 162(m) of the Code is defined in
regulations promulgated under Section 162(m) of the Code, "Outside Director"
will have the meaning set forth in such regulations, as amended from time to
time and as interpreted by the Internal Revenue Service.
"OPTION" means an award of an option to purchase Shares
pursuant to Section 5.
"PARENT" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company, if at the time of
the granting of an Award under this Plan, each of such corporations other than
the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award
under this Plan.
"PLAN" means this HNC Software Inc. 1995 Equity
Incentive Plan, as amended from time to time.
- 11 -
<PAGE> 12
HNC Software Inc.
1995 Equity Incentive Plan
"RESTRICTED STOCK AWARD" means an award of Shares
pursuant to Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as
amended.
"SHARES" means shares of the Company's Common Stock
reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and
18, and any successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu
of Shares, pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if, at
the time of granting of the Award, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of
this Plan with respect to a Participant, that the Participant has for any
reason ceased to provide services as an employee, director, consultant,
independent contractor or advisor to the Company or a Parent, Subsidiary or
Affiliate of the Company, except in the case of sick leave, military leave, or
any other leave of absence approved by the Committee, provided that such leave
is for a period of not more than ninety (90) days, or reinstatement upon the
expiration of such leave is guaranteed by contract or statute. The Committee
will have sole discretion to determine whether a Participant has ceased to
provide services and the effective date on which the Participant ceased to
provide services (the "TERMINATION DATE").
- 12 -
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT
1996
[HNC LOGO]
[GRAPHIC BALD EAGLE, THE EARTH & A BANNER RIBBON]
HNC SOFTWARE INC.
<PAGE> 2
ABOUT HNC SOFTWARE INC.
[GRAPHIC OF FALCON IN FLIGHT]
Headquartered in San Diego, California, HNC Software Inc. (NASDAQ: HNCS) is a
leader in applying neural network technology in client/server environments to
provide intelligent decision-making tools for businesses in various industries.
HNC and its subsidiaries -- Retek Distribution Corporation, Risk Data
Corporation, and Aptex Software Inc. -- provide advanced decision software
solutions in the areas of electronic payments, financial services, retail,
insurance, direct marketing, and Internet applications.
HNC products offer an automated, faster, and more flexible alternative to
traditional consumer customer management. Our goal is to maximize our clients'
profits with products that enable them to create and maintain high-value
customer relationships by decreasing expenses and credit and fraud losses,
increasing the profitability of existing customers, and generating new
customers.
HNC sells its products internationally through a direct sales organization
with offices in San Diego, Irvine, Minneapolis, Atlanta, Philadelphia, London,
and Tokyo. Some products are also marketed through licensed distributors, such
as First Data Resources, Inc. and Electronic Data Systems.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
IN THOUSANDS; EXCEPT PER SHARE DATA 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues $53,833 $30,672 $ 20,674 $12,829
Operating Income 4,118 1,142 249 411
Income before income tax (benefit) provision 5,768 1,548 93 276
Income tax (benefit) provision (608) (575) (455) 13
Net Income 6,376 2,123 548 263
- -----------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
Pro forma net income per share $ 0.13 $ 0.04
Shares used in computing pro forma
net income per share 16,901 13,870
Net income per share $ 0.31
Shares used in computing
net income per share 20,367
- -----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash and investments $34,245 $43,509 $ 6,714 $ 4,133
Total assets 94,219 58,947 17,139 9,741
Long-term obligations, less current portion 264 1,373 931 367
Stockholders' equity including mandatorily
redeemable convertible preferred stock 82,413 47,913 11,171 5,664
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
IN MILLIONS; EXCEPT
PER SHARE DATA 1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES $12.8 $20.6 $30.6 $53.8
NET INCOME .26 .54 2.12 6.3
NET INCOME PER SHARE .04 .13 .31
</TABLE>
<PAGE> 3
TO OUR STOCKHOLDERS
1996 was a year of significant progress and growth for HNC Software, with
substantial investments in new product introductions, two acquisitions that
extended our presence in the marketplace, and strong financial results for the
year.
STRATEGIC ACQUISITIONS We significantly expanded our market access and product
offerings with the completion of two important strategic acquisitions: Risk Data
Corporation, completed on August 30,1996, and Retek Distribution Corporation,
completed on November 29, 1996. Risk Data is a client/server information system
solution provider to the insurance industry with particular emphasis on workers'
compensation insurance. Its offerings include claims risk management software
with predictive models based on the Risk Data historical claims data warehouse.
Retek provides merchandise management software products to the retail market,
partnering with Oracle and Andersen Consulting, which provide implementation and
customization services. Both Risk Data and Retek are working to incorporate
HNC's core technology, neural network predictive models, in their new products.
I am very pleased to have both organizations as part of the HNC family and
believe there is significant opportunity for growth resulting from these
acquisitions.
FINANCIAL PERFORMANCE Revenues for the twelve months of 1996 (after giving
retroactive effect to the Risk Data and Retek acquisitions) were $53.8 million,
an increase of 76% over the $30.7 million in 1995. Earnings per share for the
twelve months of 1996 were $0.31 (after $1.2 million of acquisition expenses and
including a $2.7 million 1996 tax benefit), or $0.21 per share (excluding
acquisition expenses and fully taxed at 38%), compared to 1995's $0.13 per share
(including the 1995 tax benefit), or $0.06 per share (excluding the 1995 tax
benefit and fully taxed at 38%). As of December 31, 1996, the company had $34.2
million in cash and investments.
INVESTMENTS IN NEW PRODUCTS We continue to execute our strategy of extending our
family of products in each of the markets we serve. In the financial market we
introduced four major new products: ProfitMax, a profitability management system
for the payment card industry; ProfitMax Bankruptcy, a bankruptcy prediction
system; Falcon Sentry, an application fraud detection system; and Capstone, an
application decision processing system. In the insurance market we introduced
two new products: CompCompare, a benchmarking product for comparative analysis
between our customers' claims and industry data; and ProviderCompare, which
profiles the performance of health care providers. In the retail market we
introduced two new products: Retek Data Warehouse and the Active Retail
Intelligence system, which allows detailed operational analysis for the
retailer. I believe we have entered 1997 with strong product offerings in all
three of our key target markets: financial payment systems, insurance, and
retail.
We look forward to a strong 1997 that continues our growth.
/s/ Robert L. North
- ---------------------------------------
Robert L. North
President and Chief Executive Officer
[GRAPHIC -- BUSINESSMAN]
3
<PAGE> 4
[GRAPHIC -- FALCON IN FLIGHT]
PAYMENT SYSTEMS
Falcon, the flagship product of HNC's Payment Systems division, continued in
1996 as the market leader in payment card fraud detection. Now under contract to
monitor the transactions of more than 150 million cards, Falcon helped save its
users over $100 million dollars last year. New customers in 1996 include such
international giants as Sumitomo Credit, Banamex, and Credicard Brazil.
The outstanding performance of Falcon demonstrates the power of real-time
transaction-based risk management. By applying its neural network and profiling
technology to transaction data in real time, HNC has been able to provide
solutions to some of the most critical issues facing the payment card industry
today. For example, the division's newest product, ProfitMax Bankruptcy,
addresses the recent alarming increase in bankruptcy filings by providing a way
to predict potential bankrupts in a card portfolio before the cardholder has
become delinquent. ProfitMax Bankruptcy correctly predicts bankruptcy at nearly
double the success rate of the method usually employed by issuers. HNC's
bankruptcy solution seamlessly integrates with the ProfitMax cardholder
profitability prediction suite (which includes credit risk, revenue potential,
and attrition risk models), another Payment Systems product that gets a
significant lift from transaction-based scoring.
With solid, transaction-based management products in place, look for
application risk management and collection solutions in the near future, as HNC
expands its product family to address more of the major problems facing issuing
banks. HNC is committed to providing a comprehensive set of solutions for the
payment card industry.
- --------------------------------------------------------------------------------
[GRAPHIC] Capstone
Falcon Sentry
Falcon
ABC Bank Profit Max
ProfitMax Bankruptcy
Eagle
HNC's neural network and rules-based product suite -- including Capstone, Falcon
Sentry, Falcon, ProfitMax, ProfitMax Bankruptcy, and Eagle -- enables bankers to
access more information about their cardholders and to use the information more
effectively to build revenue and avoid loss.
- --------------------------------------------------------------------------------
4
<PAGE> 5
[BACKGROUND -- VISA CARDS, A FALCON AND BANNER RIBBON]
TESTING THE LIMITS WITH TRANSACTION DATA
PROFITABILITY ANALYSIS
FRAUD
RETAIL
CARDHOLDER PROFILES
MERCHANT RISK
PB
DEBIT
5
<PAGE> 6
[PICTURE BACKGROUNDS - TWO PEOPLE, STACKS OF MONEY, STEPS OF A BUILDING]
STREAMLINING DECISION FLOW
6
<PAGE> 7
FINANCIAL SYSTEMS
HNC Software both refined and grew its vision of the enterprise-wide lending
decision platform in 1996. The increasing use of data warehouses, as well as the
need to be able to deliver lending decisions anywhere, any time, gave impetus to
expanding HNC's Colleague product in a number of creative directions. First,
Colleague has been ported to a high-speed, UNIX(TM)-based platform in order to
reduce cycle time and enable enterprise-wide distributed processing. The result
of this project was the introduction of Capstone, a high-performance,
intelligent application processing system for credit cards.
Capstone is capable of processing 10,000 applications per hour, with
real-time credit pulls and high-speed network access for analyst workstations.
In an advance beyond older-technology application processing systems, Capstone
lets issuers define their own rules and derived variables, enabling issuers to
customize the decisioning logic to meet their card portfolio goals. This
state-of-the-art system is targeted to a market in which major card issuers
often use 25-year-old technology to process applications.
In addition, Colleague's functionality was expanded to serve both consumer
and mortgage lending decisions. The Halifax Building Society, the largest
residential mortgage lender in the United Kingdom, put Colleague to the supreme
test in a pilot program to demonstrate this new technology's ability to improve
service to The Halifax customers while reducing costs and risk in lending
operations. The strength of HNC Software's concept for a lending decision
management system was corroborated when The Halifax made the decision to deploy
Colleague both in The Halifax mortgage processing centres and at the point of
sale.
[GRAPHIC OF A CAR AND A HOUSE]
7
<PAGE> 8
RETAIL SYSTEMS
On November 29, 1996, HNC acquired Retek Distribution Corporation, a developer
of client/server merchandise management software for the retail industry
worldwide. A natural fit with HNC's plan to expand its presence in the retail
market, Retek had several common client projects with HNC to provide an
integrated set of retail solutions -- the Retek Merchandising System and HNC's
SkuPLAN inventory replenishment and forecasting system.
Intended for the large retailer, the Retek product suite of integrated
retail management solutions ensures that information flows through the
organization in a continuous loop. The Retek Merchandising System generates
greater control of three key areas: Inventory, Merchandise Management, and
Finance. The Retek Data Warehouse, Retek's enterprise-wide retail data
storehouse, extends decision-making ability by allowing the extraction and
delivery of information from retail enterprise transaction systems to buyers,
merchandisers, and management. Active Retail Intelligence ("ARI"), closes the
information loop by identifying necessary actions and automatically feeding them
to the appropriate users.
[GRAPHICS - TWO RINGS]
Retek has achieved a substantial global market share position in the last two
years, with 40% of its installed base of customers located outside North
America. Retek customers include Hallmark, Tandy, Zales, Cracker Barrel, The
Container Store, Sears UK, Littlewoods, and Tru-Worth.
Bringing Retek under the HNC umbrella has already resulted in product
synergy. Retek is incorporating HNC's advanced, neural network technology into
ARI. HNC is also extending its financial risk management and marketing products
to the retail market, in an effort to provide customers with an enterprise-wide
retail solution.
[GRAPHICS - SHIRTS HANGING ON A ROD FROM HANGERS]
8
<PAGE> 9
[GRAPHICS OF A COMPUTER, DISK, LIP STICK, PEARLS, STEREO, POCKET WATCH]
MANAGING THE RETAIL WAREHOUSE
TODAY'S FORECAST:
MERCHANDISE MANAGEMENT
9
<PAGE> 10
[GRAPHICS OF TWO PEOPLE LOOKING AT XRAYS, CONSTRUCTION WORKER]
UNDERSTANDING INSURANCE RISK
10
<PAGE> 11
INSURANCE SYSTEMS
1996 also saw HNC's acquisition of Risk Data Corporation. Risk Data is a
California-based insurance information technology services firm that develops
analytical benchmarking and other risk management software products primarily
for insurance carriers, state funds, and third-party administrators. Its
customers include companies such as CNA, The Hartford, and Sedgwick Claims
Management Services, as well as 16 state funds.
Risk Data has an extensive industry database of comprehensive workers'
compensation data collected from more than 35 insurance companies and
third-party administrators throughout the U.S. Risk Data products provide
important management data to its clients. For example, MIRA, Risk Data's initial
product, automatically calculates workers' compensation loss reserves for each
case, using statistical models based on historical claim information. The system
is a result of years of research, coupled with in-depth workers' compensation
industry knowledge and experience.
Risk Data's expertise in the insurance market and HNC's proven success with
fraud detection technology provide a natural synergy that has already resulted
in a new product. Designed to compare workers' compensation insurance claims
against historical patterns of fraudulent claims, the Claimant Fraud Detection
System (CFDS) will red-flag claims with a high probability of fraud for special
investigation.
According to a recent study by Conning and Company (Hartford, Connecticut),
most insurance fraud goes undetected and may have cost the industry $120 billion
in 1995, a 30 percent increase from the $90 billion in losses estimated in 1990.
HNC and Risk Data have only begun to address this vast new opportunity within
the insurance market.
[GRAPHIC OF STETHOSCOPE]
11
<PAGE> 12
EMERGING MARKETS
HNC established Aptex Software Inc. in 1996 to commercialize HNC's text analysis
technology (called Content Mining) for emerging markets. The rapidly growing
Internet market presented a unique opportunity, and Aptex developed a strategic
partnership with Infoseek Corporation, a leading Internet search and navigation
service. Two new Internet products, Convectis and SelectCast for Ad Servers,
were introduced. Convectis, winner of the UCSD Connect award for Most Innovative
Software Product of the Year, automatically categorizes and summarizes
high-volume document streams. In actual use, Convectis built Infoseek's Guide
into the Internet's largest directory, analyzing millions of Web pages and
categorizing only the best into more than 10,000 categories. SelectCast for Ad
Servers improves Internet advertising effectiveness by analyzing audiences and
user behavior, maximizing on-line ad click-through rates, and selectively
targeting on-line audiences. Select Cast for Ad Servers acts as an "intelligent
observer," mining the context and content of all user actions to understand
users' current interests. Additional new products, designed to enhance market
competitiveness, are under development and scheduled for introduction in 1997.
The education market presents another opportunity for Aptex products. VITAL
Resource Miner, introduced in 1996, is the first electronic solution to
correlate textbook content to state and school district curriculum standards and
objectives. Aptex has entered into a partnership with Jostens Learning
Corporation to deliver VITAL Resource Miner and lesson plans in 1997 over the
Internet.
The Content Mining technology used by Aptex was developed by HNC's Technology
Development group, which is still focused on evaluating and developing
technologies for emerging markets.
[PICTURE OF STUDENT STUDYING]
12
<PAGE> 13
[PICTURE]
NEW ACCOUNT ACQUISITION.
New HNC products provide sophisticated decision processing and risk management
solutions to help card issuers and lenders with application approval and credit
line decisions.
[PICTURE -- A COUPLE]
MERCHANDISE CUSTOMER MANAGEMENT.
The Retek suite of integrated merchandise management software will incorporate
HNC's financial risk management and marketing products to create an
enterprise-wide retail solution.
[PICTURE]
ACTIVE ACCOUNT MANAGEMENT.
HNC's account management products implement flexible and effective management of
the decision processes that ultimately drive the profitability of card
portfolios.
[HNC GRAPHIC OF EARTH]
[PICTURE]
CLAIMS ANALYSIS.
Risk Data's products enable objective analyses of claims costs that are
essential to measuring the effectiveness of managed care programs and
controlling costs. Ever more effective cost control will be possible with HNC's
fraud detection technology.
[PICTURE -- STUDENTS]
EDUCATION.
Aptex applies Content Mining to innovative solutions for the education market's
need for curriculum and resource development.
[PICTURE -- PERSON AT COMPUTER]
INTERNET.
Two Internet products have already been launched by Aptex, and others are under
development. HNC's Financial Systems division is also exploring this hot market.
13
<PAGE> 14
FINANCIAL INFORMATION
Selected Consolidated Financial Data 15
Selected Consolidated Quarterly Operating Results (Unaudited) 16
Stock Market Data 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Consolidated Balance Sheet 24
Consolidated Statement of Income 25
Consolidated Statement of Cash Flows 26
Consolidated Statement of Changes in Stockholders' Equity (Deficit) 27
Notes to Consolidated Financial Statements 28
Report of Independent Accountants 37
[PICTURE OF BIRD FLYING]
14
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS; EXCEPT PER SHARE DATA 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA (1):
Revenues:
Software license and installation $ 42,705 $ 21,526 $ 13,023 $ 6,215 $ 2,731
Contracts and other 11,128 9,146 7,651 6,614 6,716
-------- -------- -------- -------- -------
Total revenues 53,833 30,672 20,674 12,829 9,447
-------- -------- -------- -------- -------
Operating expenses:
Software license and installation 11,411 5,934 4,847 2,528 931
Contracts and other 7,694 6,894 5,040 4,022 4,217
Research and development 13,271 6,581 4,344 2,095 1,484
Sales and marketing 10,705 6,422 3,603 2,096 1,227
General and administrative 6,634 3,699 2,591 1,677 1,564
-------- -------- -------- -------- -------
Total operating expenses 49,715 29,530 20,425 12,418 9,423
-------- -------- -------- -------- -------
Operating income 4,118 1,142 249 411 24
Other income (expense), net 1,650 406 (156) (135) (16)
-------- -------- -------- -------- -------
Income before income tax (benefit) provision 5,768 1,548 93 276 8
Income tax (benefit) provision (608) (575) (455) 13 18
-------- -------- -------- -------- -------
Net income (loss) $ 6,376 $ 2,123 $ 548 $ 263 $ (10)
-------- -------- -------- -------- -------
Pro forma net income per share (2) $ 0.13 $ 0.04
-------- -------- -------- -------- -------
Shares used in computing pro forma net income per share (2) 16,901 13,870
-------- -------- -------- -------- -------
Net income per share $ 0.31
-------- -------- -------- -------- -------
Shares used in computing net income per share 20,367
-------- -------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash, cash equivalents, and investments $34,245 $43,509 $ 6,714 $ 4,133 $ 1,715
Working capital 31,484 36,057 8,582 5,008 3,245
Total assets 94,219 58,947 17,139 9,471 5,542
Long-term obligations, less current portion 264 1,373 931 367 957
Mandatorily redeemable convertible preferred stock -- -- 13,169 12,452 11,735
Total stockholders' equity (deficit)(3) 82,413 47,913 (1,998) (6,788) (10,412)
======= ======= ======== ======== ========
</TABLE>
(1)THE CONSOLIDATED FINANCIAL DATA GIVES RETROACTIVE EFFECT TO THE MERGERS ON
AUGUST 30, 1996 WITH RISK DATA AND ON NOVEMBER 29, 1996 WITH RETEK, FOR ALL
PERIODS PRESENTED, ACCOUNTED FOR AS POOLINGS OF INTERESTS.
(2)FOR AN EXPLANATION OF THE DETERMINATION OF THE NUMBER OF SHARES USED IN
COMPUTING PRO FORMA NET INCOME PER SHARE, SEE NOTE 1 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS. THESE AMOUNTS GIVE EFFECT TO THE COMMON STOCK DIVIDEND
DECLARED ON MARCH 5, 1996 AND PAID ON APRIL 3, 1996. SEE NOTE 1 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
(3)EXCLUDES MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AS OF DECEMBER
31, 1994, 1993, AND 1992.
DIVIDEND POLICY
The Company has never paid cash dividends and has no present plans to do so. The
Company currently anticipates that it will retain all future earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's bank credit agreement currently
prohibits the Company from paying or declaring any cash dividends without the
bank's consent.
[HNC LOGO]
HNC SOFTWARE INC.
15
<PAGE> 16
SELECTED CONSOLIDATED QUARTERLY OPERATING
RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
IN THOUSANDS; EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER YEAR
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
As restated for pooling transactions $ 9,899 $12,556 $14,603 $16,775 $53,833
As previously reported 7,768 8,710 12,345 -- --
OPERATING INCOME:
As restated for pooling transactions $ (627) $ 609 $ 1,574 $ 2,562 $ 4,118
As previously reported 788 1,050 1,524 -- --
NET INCOME:
As restated for pooling transactions $ (727) $ 366 $ 1,429 $ 5,308 $ 6,376
As previously reported 813 967 1,379 -- --
NET INCOME PER SHARE (1):
As restated for pooling transactions $ (0.04) $ 0.02 $ 0.07 $ 0.26 $ 0.31
As previously reported 0.05 0.06 0.07 -- --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
IN THOUSANDS; EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
As restated for pooling transactions $6,414 $7,012 $8,738 $ 8,508 $30,672
As previously reported 5,088 5,920 6,912 7,254 25,174
OPERATING INCOME:
As restated for pooling transactions $ 323 $ 293 $ 704 $ (178) $ 1,142
As previously reported 507 692 865 1,035 3,099
NET INCOME:
As restated for pooling transactions $ 119 $ 31 $2,458 $ (485) $ 2,123
As previously reported 373 517 2,738 829 4,457
PRO FORMA NET INCOME PER SHARE (1):
As restated for pooling transactions $ 0.01 $ 0.00 -- -- $ 0.13
As previously reported 0.06 0.08 -- -- 0.62
NET INCOME PER SHARE (1):
As restated for pooling transactions -- -- $ 0.13 $ (0.03) --
As previously reported -- -- 0.36 0.11 --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1)PRO FORMA NET INCOME PER SHARE AND NET INCOME PER SHARE COMPUTATIONS FOR EACH
QUARTER ARE INDEPENDENT AND MAY NOT ADD TO THE PRO FORMA NET INCOME PER SHARE
COMPUTATION FOR THE YEAR. SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR PRO FORMA NET INCOME PER SHARE METHODOLOGY. THESE AMOUNTS GIVE
RETROACTIVE EFFECT TO THE COMMON STOCK DIVIDEND PAID ON APRIL 3, 1996 AND THE
MERGERS ON AUGUST 30, 1996 WITH RISK DATA AND ON NOVEMBER 29, 1996 WITH RETEK,
FOR ALL PERIODS PRESENTED. SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. NET INCOME PER SHARE FOR THE QUARTERS ENDED SEPTEMBER 30, 1995 AND
DECEMBER 31, 1995 WAS COMPUTED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES BOARD
OPINION NO. 15, AS ALL OUTSTANDING SHARES OF PREFERRED STOCK WERE CONVERTED INTO
SHARES OF COMMON STOCK PRIOR TO THE BEGINNING OF THOSE PERIODS.
[HNC LOGO]
HNC SOFTWARE INC.
16
<PAGE> 17
STOCK MARKET DATA
Since the initial public offering of the Company's Common Stock at $7.00 per
share on June 20, 1995, the Common Stock has been traded on the Nasdaq National
Market under the symbol "HNCS." Prior to such date, there was no public market
for the Common Stock.
The following table sets forth for the periods indicated the high and low
closing price per share of Common Stock on the Nasdaq National Market as
reported by Nasdaq.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
IN THOUSANDS; EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common stock price range (1) (2):
High $38.38 $50.62 $45.75 $44.00 $50.62
Low 18.88 34.50 22.06 26.75 18.88
</TABLE>
(1)THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER MARKET ON THE
NASDAQ NATIONAL MARKET SYSTEM UNDER THE SYMBOL HNCS. AT DECEMBER 31, 1996 THERE
WERE APPROXIMATELY 212 SHAREHOLDERS OF RECORD BASED UPON INFORMATION RECEIVED
FROM THE COMPANY'S TRANSFER AGENT. COMMON STOCK PRICES ARE CLOSING PRICES AS
REPORTED ON THE NASDAQ NATIONAL MARKET SYSTEM. PRIOR TO JUNE 20, 1995, THERE WAS
NO ESTABLISHED PUBLIC TRADING MARKET FOR THE COMPANY'S COMMON STOCK.
(2) ON MARCH 5, 1996, THE COMPANY ANNOUNCED THAT ITS BOARD OF DIRECTORS HAD
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. THE CORPORATION'S
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 WITH DISTRIBUTION OF SHARES ISSUED PURSUANT TO THE DIVIDEND
OCCURRING ON APRIL 3, 1996. ALL REFERENCES IN THE ACCOMPANYING FINANCIAL
INFORMATION TO SHARE AND PER SHARE AMOUNTS HAVE BEEN ADJUSTED TO GIVE
RETROACTIVE EFFECT TO THE STOCK SPLIT.
[HNC LOGO]
HNC SOFTWARE INC.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by, or described in, such
forward-looking statements. Factors that may affect such forward-looking
statements include, without limitation: the Company's ability to successfully
develop new products for its current markets and new markets; the Company's loss
of a large customer; the Company's inability to secure new government contracts
for technology development; the impact of competition on the Company's revenues,
market share or ability to maintain its premium usage-based pricing terms and to
generate recurring revenue; the availability to the Company, at reasonable cost,
of data required to operate or update its intelligent decision software
products; changes in law or regulatory requirements that adversely affect or
preclude customers from using the Company's products for certain applications;
delays in the Company's introduction of new products; and failure by the Company
to keep pace with emerging technologies.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's reports on
Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.
OVERVIEW
HNC Software Inc. develops, markets and supports intelligent client-server
software solutions for mission-critical decision applications in real-time
environments. HNC employs proprietary neural-network predictive models in many
of its products to convert existing data and business experiences into
meaningful recommendations and actions. HNC was founded in 1986 to provide
software tools and contracted technology services using neural-network
technology. The Company has leveraged its client-server software architecture
across a wide range of markets. Current HNC software products detect
credit/debit card fraud (Falcon), manage merchant risk (Eagle), manage credit
card profitability (ProfitMax), detect fraud in credit card applications (Falcon
Sentry), process credit card applications (Capstone), analyze multiple credit
card portfolios (Falcon Select), automate lending decisions (Colleague),
automate home valuation (AREAS), manage retail inventories (SkuPLAN), provide
management solutions to retailers (the Retek Merchandising System), extract
information from customers' databases (DataBase Mining Workstation) and estimate
loss reserves for workers' compensation insurance claims (MIRA).
During fiscal 1996, the Company continued new product development with the
announcements of ProfitMax Bankruptcy, a neural network module to predict credit
card bankruptcy cases, Falcon Expert, an add-on module to Falcon that allows
Falcon users to customize their fraud management operations, ProviderCompare,
which enables insurers to compare the relative costs of health care providers
with respect to treating workers' compensation injuries, CompCompare, a product
that permits insurers to compare historical costs of workers' compensation
insurance claims, PMAdvisor, a software system to automate comparisons of
therapy treatments against clinical guidelines, Retek Data Warehouse, an
enterprise-wide data warehouse tuned and tailored for the retail industry, and
Active Retail Intelligence (ARI), a management decision system that can identify
performance exceptions and appropriate corrective actions. The Company also
performs contract research and development using neural networks and other
computational intelligence methods.
During 1996, the Company established Aptex Software Inc. ("Aptex"), a
partially owned subsidiary, in order to exploit certain text analysis
technology that is being used to develop products for the Internet environment
and other markets, such as the education market. Aptex develops commercial
applications of the Company's Content Vector modeling techniques that were
originally developed by the Company under U.S. Government contracts. During
1996, Aptex introduced three new products; Convectis, an intelligent document
categorization and routing server; VITAL ResourceMiner, an interactive textbook
correlation system for publishers and school districts; and SelectCast, an
Internet advertising placement server.
[HNC LOGO]
HNC SOFTWARE INC.
18
<PAGE> 19
On August 30, 1996 the Company consummated its acquisition of Risk Data
Corporation ("RDC"), a company based in Irvine, California that is engaged in
the business of developing and marketing proprietary software decision products
for the workers' compensation insurance industry, including MIRA, a product for
predicting loss reserves for workers' compensation insurance claims. Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company exchanged 1,891,456 common shares for all of the outstanding shares of
RDC and RDC became a wholly owned subsidiary of the Company. See Note 2 of Notes
to Consolidated Financial Statements. In addition, on November 29, 1996, the
Company consummated its acquisition of Retek Distribution Corporation ("Retek"),
a company that develops and markets merchandise management products for
retailers and their vendors. Under the terms of the Retek agreement, which was
accounted for as a pooling of interests, the Company exchanged 1,367,196 common
shares for all of Retek's outstanding shares and Retek became a wholly owned
subsidiary of the Company. See Note 2 of Notes to Consolidated Financial
Statements. The Company anticipates that in the future it will from time to time
continue to consider acquisitions of other businesses in order to expand the
markets served by the Company and to acquire complementary technologies,
products and personnel.
During, 1996, the Company completed a distribution of common shares pursuant
to a two-for-one common stock split as approved by its Board of Directors. The
stock dividend was paid to the Company's stockholders of record as of the close
of business on March 18, 1996, who received stock certificates representing one
additional share of HNC common stock for each outstanding share then held. In
addition, at a Special Meeting of Stockholders held on December 6, 1996, the
number of shares of common stock reserved for issuance under the Company's 1995
Equity Incentive Plan was increased by 1,500,000 shares.
After giving retroactive effect to the Company's acquisitions of RDC and
Retek, accounted for as poolings of interests, from fiscal 1992 through fiscal
1996, HNC experienced compound annual growth in total revenues of 55%. This
revenue growth resulted primarily from increased license fees for Falcon, Retek
Merchandising System, MIRA and, to a lesser extent, from increased license and
installation fees for Colleague, AREAS and SkuPLAN. Because of the sales,
development and customization cycle associated with the Company's products, the
Company has not received significant revenues to date from Falcon Select, Falcon
Expert, Capstone, Sentry, Convectis, VITAL ResourceMiner, SelectCast,
CompCompare or ProviderCompare.
Since many of the Company's software solutions are enhanced by periodic
decision model updates, the Company's customers realize significant value from
the Company's ongoing services. In addition, the mission-critical nature of many
of HNC's software solutions creates customer demand for long-term support
commitments. The Company therefore markets most of its intelligent decision
software solutions as an ongoing service that includes software licenses,
decision model updates, application consulting and on-line or on-site support
and maintenance. The Company's pricing for Falcon, Falcon Debit, Eagle, Areas,
ProfitMax, MIRA, CompCompare and ProviderCompare typically includes an annual or
monthly usage fee and a three to seven year contract commitment. In 1996, 1995
and 1994, recurring revenues from these long-term contracts represented 41.8%,
44.8% and 37.3% of the Company's total revenues and 52.7%, 63.8% and 59.2% of
the Company's software license and installation revenues, respectively. As of
December 31, 1996, the average recurring revenue contract term was approximately
four and one-half years.
The Company also derives a portion of its revenues from funded government and
other contract research into solutions using neural networks and other
computational intelligence methods. The Company currently performs contract
research for the United States Government in areas that support HNC's commercial
product development plans, such as mathematical modeling, automated text
analysis and image understanding. Because of the Company's shift in strategy
from being a software tools and contracted technology services company to a
complete software solutions company, sales under prime contracts and
subcontracts with the United States Government have declined to 3.0% of the
Company's total revenues in 1996 from 7.3% in 1995 and from 11.3% in 1994. Most
of these contracts, however, result in funding for basic research that may be
useful in development of commercial products that would otherwise have been
financed entirely by the Company.
The Company's quarterly revenues and operating results have varied
significantly in the past and may do so in the future. Although to date a
significant portion of the Company's revenues has come from monthly usage fees
under long-term contracts, there can be no assurance that the Company will
continue to realize
[HNC LOGO]
HNC SOFTWARE INC.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
such recurring revenues or that customers under such contracts would not seek to
cancel such contracts if the Company's products were not competitive or did not
achieve effective results. A significant portion of the Company's business has
been derived from substantial orders placed by large organizations, and the
timing of such orders has caused material fluctuations in the Company's
operating results. In addition, because the Company's Retek subsidiary generally
provides its products to customers under perpetual licenses, it tends to
recognize the majority of its revenue upon delivery and the customer's
acceptance of the software. Thus, revenues derived by Retek may be more likely
to be recognized in irregular patterns that can result in quarterly variations
in the Company's revenues. The Company's expense levels are based in part on its
expectations regarding future revenues and in the short term are fixed to a
large extent. Therefore, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. As a result,
if anticipated revenues in any quarter do not occur or are delayed, the
Company's operating results for that quarter would be disproportionately
affected. The Company's operating results are also affected by seasonal trends.
Such trends may include higher revenues in the third quarter and lower revenues
in the fourth quarter as a result of fewer installations of the Falcon product
scheduled during the fourth quarter when credit card activity is at peak levels.
Operating results also may fluctuate due to factors such as the demand for the
Company's products, product life cycles, the introduction and acceptance of new
products and product enhancements by the Company or its competitors, changes in
the mix of distribution channels through which the Company's products are
offered, changes in the level of operating expenses, customer order deferrals in
anticipation of new products, competitive conditions in the industry and
economic conditions generally or in various industry segments.
The Company expects quarterly fluctuations to continue for the foreseeable
future. Accordingly, the Company believes that period-to-period comparisons of
its financial results should not be relied upon as an indication of the
Company's future performance. No assurance can be given that the Company will be
able to achieve or maintain profitability on a quarterly or annual basis in the
future. Due to all of the foregoing factors, it is possible that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
RESULTS OF OPERATIONS
The consolidated financial data gives retroactive effect to the mergers on
August 30, 1996 with Risk Data and on November 29, 1996 with Retek, for all
periods presented, accounted for as poolings of interests.
TOTAL REVENUES. The Company's revenues are comprised of software license and
installation revenues and contracts and other revenues. Total revenues increased
by 75.5% to $53.8 million in 1996 and by 48.4% to $30.7 million in 1995.
International revenues represented 23.5% of total revenues in 1996, 17.9% in
1995, and 11.4% in 1994. Product licenses to First Data Resources, Inc., the
largest provider of credit card charge receipt processing services to banks,
accounted for 11.4%, 12.4% and 11.6% of the Company's total revenues during
1996, 1995 and 1994, respectively. Retek is currently more focused in
international markets than HNC historically. The Company believes that
international sales represent a significant opportunity for revenue growth and
expects international sales to increase as a percent of total revenue. The
Company intends to continue the expansion of its international sales efforts.
Software License and Installation Revenues. The Company's software license
and installation revenues are derived from annual license fees, monthly license
fees, perpetual license fees, annual maintenance fees and installation fees. The
Company typically licenses many of its products for an annual or monthly usage
fee under long-term contracts that include software licenses, decision model
updates, application consulting, on-line or on-site support and maintenance.
Revenues from long-term software license agreements are recognized ratably over
the respective license periods. Revenue from licenses is recognized when there
is no significant continuing performance obligation under the agreement and
collection is probable. Revenues from perpeptual software licenses are generally
recognized upon delivery and acceptance by the customer. Revenues from software
installations generally are 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 the contracts are recorded as deferred revenue and are generally
recognized within one year from receipt. See Note 1 of Notes to Consolidated
Financial Statements.
Software license and installation revenues increased by 98.4% to $42.7
million in 1996 and by 65.3% to $21.5 million in 1995. The increase from 1995 to
[HNC LOGO]
HNC SOFTWARE INC.
20
<PAGE> 21
1996 was due primarily to the growth in Falcon license fees and the growth of
license fees of new products, including Retek's Merchandise Management System,
MIRA, and SkuPLAN. Substantially all of the increase from 1994 to 1995 was
derived from new customer installations of Falcon, as Falcon continued to gain
market acceptance.
Contracts and Other Revenues. Contracts and other revenues are derived
primarily from new product development contracts with commercial customers and
research contracts with the United States Government. The Company typically
contracts with one or two commercial partners for pilot development and
installation of its new products and with the United States Government for
additional research funds. Revenues from contract services are 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. See Note 1 of Notes to Consolidated Financial Statements.
Contracts and other revenues increased by 21.7% to $11.1 million in 1996 and
by 19.5% to $9.1 million in 1995. The increase in 1996 was primarily the result
of greater revenues from commercial new product pilot installation contracts
with customers in support of the Company's development of ProfitMax, a credit
card portfolio management system, Capstone, an application processing system,
and Sentry, an application fraud detection system. Increases in 1995 were
primarily the result of new product pilot contracts for Colleague, SkuPLAN and
Eagle. These products concluded their pilot phase during 1996. The increases in
1995 were partially offset by reduced revenues from Mitek Systems, Inc.
("Mitek"), pursuant to a license agreement and a computer board supply agreement
which expired during November 1995. Under this agreement, the Company received
an initial license and support fee, received additional fees based on a
percentage of Mitek's revenues and sold certain computer boards to Mitek. The
Company does not expect material revenues in the future under this agreement.
See Note 7 of Notes to Consolidated Financial Statements.
During 1996 the Company had a significant number of new product development
projects and new product pilot installations in process for products which it
expects to begin shipping in production versions in 1997. There can be no
assurance that any of these product development projects or pilot installations
will be successful or be completed within anticipated time schedules or that the
customers who serve as pilot installation sites will be satisfied with these
products or agree to license them. If the Company's new product development
efforts are unsuccessful, are not completed on a timely basis, or are not well
received by pilot customers, the Company may be compelled to delay or entirely
discontinue the release of production versions of these products, which would
have a material adverse effect on the Company's results of operations.
United States Government contracts accounted for 3.0%, 7.3% and 11.3% of the
Company's total revenues during 1996, 1995, and 1994, respectively. Revenues
from government contracts decreased to $1.6 million in 1996 from $2.3 million in
1995 and $2.3 million in 1994. This decrease was due primarily to a lengthening
of the award process and budgetary constraints within the federal government. In
each of 1996, 1995 and 1994, over 90% of the Company's total revenues from the
United States Government were derived from research projects performed for
various government defense agencies and companies under contract to such
agencies. Any change in the pattern of government spending, reduced demand from
the defense industry or the loss of any of the Company's major government
contracts could have an adverse effect on the Company's business, financial
condition and results of operations.
GROSS MARGIN. The following table sets forth the gross margin for each of the
Company's revenue categories for each of the comparison periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Software license and installation 73.3% 72.4% 62.8%
Contracts and other 30.9% 24.6% 34.1%
- --------------------------------------------------------------------------------
</TABLE>
Software License and Installation Gross Margin. Software license and
installation costs primarily represent the Company's expenses for personnel
engaged in installation and support, travel to customer sites and the costs of
documentation materials. The Company's gross margin on software licenses and
installation improved to 73.3% in 1996 from 72.4% in 1995 and 62.8% in 1994.
Gross margins improved primarily as a result of the Company's ability to move
from price discounts for early adopters of its products to full pricing for
products sold to subsequent customers. The Company anticipates that gross
margins on software licenses and installation will not change significantly,
with some variation depending upon early adopter pricing for new products as
they are introduced.
Contracts and Other Gross Margin. Contracts and other costs consist primarily
of personnel-related costs.
[HNC LOGO]
HNC SOFTWARE INC.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
The Company's gross margin on contracts and other revenues was 30.8% in 1996,
24.6% in 1995 and 34.1% in 1994. The improvement in gross margins during 1996 is
due primarily to the Company's increased ability to better price its new pilot
projects with its customer base. Decreases in gross margins during 1995 were due
primarily to the completion of the Mitek License Agreement and the corresponding
decrease in Mitek revenues. Since the majority of the revenues from Mitek had
relatively higher gross margins, contracts and other gross margins in 1994 were
positively affected by the Company's relationship with Mitek. With the Mitek
agreement substantially completed during 1995, the Company does not anticipate
that its gross margin on contracts and other revenue will change significantly
from the current level.
OPERATING EXPENSES. Research and Development Expenses. Research and development
expenses consist primarily of salaries and other personnel-related expenses,
subcontracted services, depreciation for development equipment and supplies.
Research and development expenses increased by 101.7% to $13.3 million in 1996
and by 51.5% to $6.6 million in 1995. Research and development expenses as a
percentage of total revenues were 24.7% in 1996, 21.5% in 1995 and 21.0% in
1994. The primary reason for the increases was greater staffing to support more
new product development programs, primarily for ProfitMax, Capstone,
CompCompare, ProviderCompare, and Retek Merchandising 6.0. These costs also
included the initial product development costs of the Company's Aptex business
unit, which has not had a significant impact on revenues. Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process, technological
feasibility is not established until completion of a working model. Costs
incurred by the Company between completion of the working model and the point at
which the product is ready for general release have been insignificant. As a
result, no significant software development costs were capitalized through
December 31, 1996. The Company anticipates that research and development
expenses will increase in dollar amount for the foreseeable future.
The Company's success depends upon its ability
to successfully enter new markets by developing new products on a timely and
cost-effective basis. The Company's products often require customer data for
decision model development and system installation. As a result, completion of
new products may be delayed while the Company extracts sufficient amounts of
statistically relevant data and develops the models. During this development
process, the Company relies on its potential customers in the new market to
provide data and to help train Company personnel in the use and meaning of the
data in the specific industry. These relationships also assist the Company in
establishing presence and credibility in the new market. There can be no
assurance that these potential customers, most of which have significantly
greater financial and marketing resources than the Company, will not compete
with the Company in the future or will not otherwise discontinue their
relationships with or support of the Company, either during development of the
Company's products or thereafter.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, commissions, travel, entertainment and promotional expenses. Sales
and marketing expenses increased by 66.7% to $10.7 million in 1996 and by 78.2%
to $6.4 million in 1995. Sales and marketing expenses as a percentage of total
revenues were 19.9% in 1996, 20.9% in 1995 and 17.4% in 1994. The increases are
primarily a result of increased staffing as the Company builds its direct sales
and marketing staff, including opening sales offices in both Europe and Japan,
and increased expenses for trade shows, advertising and other marketing
programs. The Company expects sales and marketing expenses to continue to
increase for the foreseeable future. Such expenses could also increase as a
percentage of total revenues as the Company continues to develop a direct sales
force in Europe, Japan and other international markets, expand its domestic
sales and marketing organization and increase the breadth of its product line.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs for finance, contract administration, human
resources and general management, as well as acquisition, insurance and
professional services expenses. General and administrative expenses, excluding
$1.2 million of acquisition expenses in 1996, were $5.5 million in 1996, a 47.5%
increase, and $3.7 million in 1995, a 42.8% increase. The primary reason for
these increases was increased staffing to support the Company's growth and
additional expenses associated with being a public company. General and
administrative expenses, excluding acquisition expenses, as a per-
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HNC SOFTWARE INC.
22
<PAGE> 23
centage of total revenues were 10.1% in 1996, 12.1% in 1995, and 12.5% in 1994.
OTHER INCOME (EXPENSE), NET Interest and other income in 1996 was $2.1
million compared to $834,000 in 1995. The increase was primarily due to
increased interest income in 1996 from higher cash and investment balances,
which consisted primarily of the proceeds from the Company's initial public
offering in June 1995 and secondary public offering in December 1995.
INCOME TAX (BENEFIT) PROVISION. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The income tax (benefit) provision takes into account the
effects of state income taxes, offset by utilization of net operating loss
carryforwards. The income tax benefit of $608,000 in 1996 was primarily
attributable to the recognition of a $2.7 million deferred tax asset based on
anticipated future utilization of all of the remaining net operating loss
carryforwards and research and development credit carryforwards relating to Risk
Data Corporation and Retek Distribution Corporation, two companies that HNC
acquired during fiscal 1996. That deferred tax asset had previously been offset
by a valuation allowance. The Company released the valuation allowance during
the fourth quarter of 1996, based upon management's assessment that it was more
likely than not that the Company would realize the asset in future periods.
Therefore, management does not anticipate recording significant income tax
benefits in the future. The income tax benefit of $575,000 in 1995 was primarily
attributable to the recognition of a $1.7 million deferred tax asset based on
anticipated future utilization of all of the remaining net operating loss
carryforwards and research and development credit carryforwards. The income tax
benefit of $455,000 in 1994 was primarily attributable to the utilization of net
operating loss carryforwards and the recognition of a $500,000 deferred tax
asset based primarily on anticipated future utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES. Net cash provided by operating activities in
1996 of $641,000 represented net income before depreciation and amortization of
approximately $9.7 million, further increased by contract and license
prepayments of $1.5 million, and accounts payable of $1.8 million offset by
increases in accounts receivable of $10.1 million and deferred taxes of $1.3
million. Net cash provided by operating activities in 1995 of $3.9 million
represented net income before depreciation and amortization of approximately
$3.7 million, further increased by contract and license prepayments of $1.3
million and accrued liabilities of $1.8 million, largely offset by increases in
accounts and other receivables of $1.4 million and deferred income taxes of $1.5
million.
Net cash used in investing activities was $8.1 million in 1996 primarily due
to net purchases of investments of $4.3 million. In addition, the Company
expended $3.9 million for property and equipment during 1996, including $3.2
million for computer equipment and $0.7 million for furniture, fixtures and
leasehold improvements. Net cash used in investing activities was $24.0 million
in 1995 primarily as a result of $22.0 million of net purchases of investments.
The Company also acquired approximately $1.9 million of property and equipment
in 1995, primarily for computer equipment.
Net cash used in financing activities was $5.6 million in 1996 primarily due
to the Company's repayment of $8.2 million of loans and notes payable of Risk
Data Corporation and Retek Distribution Corporation, partially offset by
proceeds from the issuance of common stock of $1.9 million and the tax benefit
from stock options of $896,000. Net cash provided by financing activities was
$35.2 million in 1995, primarily as a result of the Company's initial public
offering in June 1995 and secondary public offering in December 1995. Net cash
provided from financing activities was $5.3 million in 1994, primarily from
preferred stock financing.
As of December 31, 1996, the Company had $34.2 million in cash, cash
equivalents, and investments. In July 1996, the Company amended its loan
agreement with its bank. The amended loan agreement provides for a line of
credit of up to $5.0 million through July 10, 1997 bearing interest at the
bank's prime rate, which was 8.25% at December 31, 1996. The Company believes
that its current cash balances, its credit facility and net cash provided by
operating activities, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. Management intends to
invest the Company's cash in excess of current operating requirements in
short-term, interest-bearing, investment grade securities. A portion of the
Company's cash could be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies or data. From
time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products, technologies or data.
[HNC LOGO]
HNC SOFTWARE INC.
23
<PAGE> 24
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
IN THOUSANDS; EXCEPT PER SHARE DATA 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,517 $ 20,583
Investments available for sale 7,353 14,590
Accounts receivable, net 19,468 6,996
Current portion of deferred income taxes 6,400 1,702
Other current assets 1,869 1,561
-------- --------
Total current assets 42,607 45,432
Investments available for sale 19,375 8,336
Deferred income taxes, less current portion 22,966 346
Property and equipment, net 5,966 3,991
Other assets 3,305 842
-------- --------
$ 94,219 $ 58,947
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,270 $ 1,434
Accrued liabilities 4,058 2,818
Deferred revenue 3,377 2,101
Bank line of credit -- 2,195
Other current liabilities 418 827
-------- --------
Total current liabilities 11,123 9,375
-------- --------
Notes payable to stockholders -- 1,000
-------- --------
Other non-current liabilities 683 659
-------- --------
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred stock, $0.001 par value - 4,000 shares authorized:
no shares issued or outstanding -- --
Common stock, $0.001 par value - 50,000 and 40,000 shares authorized:
19,126 and 17,892 shares issued and outstanding, respectively 19 18
Paid-in capital 83,554 55,334
Unrealized (loss) gain on investments available for sale (59) 92
Foreign currency translation adjustment 54 --
Accumulated deficit (1,155) (7,531)
-------- --------
Total stockholders' equity 82,413 47,913
-------- --------
$ 94,219 $ 58,947
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[LOGO HNC]
HNC SOFTWARE INC.
24
<PAGE> 25
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
IN THOUSANDS; EXCEPT PER SHARE DATA 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Software license and installation $ 42,705 $ 21,526 $ 13,023
Contracts and other 11,128 9,146 7,651
-------- -------- --------
Total revenues 53,833 30,672 20,674
-------- -------- --------
OPERATING EXPENSES:
Software license and installation 11,411 5,934 4,847
Contracts and other 7,694 6,894 5,040
Research and development 13,271 6,581 4,344
Sales and marketing 10,705 6,422 3,603
General and administrative 6,634 3,699 2,591
-------- -------- --------
Total operating expenses 49,715 29,530 20,425
-------- -------- --------
Operating income 4,118 1,142 249
Interest and other income 2,128 834 156
Interest expense (478) (428) (312)
-------- -------- --------
Income before income tax benefit 5,768 1,548 93
Income tax benefit (608) (575) (455)
-------- -------- --------
Net income $ 6,376 $ 2,123 $ 548
-------- -------- --------
Pro forma net income per share $ .13 $ .04
-------- -------- --------
Shares used in computing pro forma
net income per share 16,901 13,870
-------- -------- --------
Net income per share $ .31
-------- -------- --------
Shares used in computing net income per share 20,367
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[HNC LOGO]
HNC SOFTWARE INC.
25
<PAGE> 26
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,376 $ 2,123 $ 548
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,344 1,589 629
Changes in assets and liabilities:
Accounts receivable, net (10,100) (1,393) (1,754)
Other assets (1,178) (664) (1,348)
Deferred income taxes (1,332) (1,548) --
Accounts payable 1,836 658 139
Accrued liabilities 625 1,756 390
Deferred revenue 1,472 1,337 (92)
Other liabilities (402) -- 280
-------- -------- -------
Net cash provided by (used in) operating activities 641 3,858 (1,208)
-------- -------- -------
Cash flows from investing activities:
Purchases of investments (26,113) (28,666) (7,134)
Maturities of investments 18,125 4,182 6,000
Proceeds from sale of investments 3,707 2,467 --
Acquisitions of property and equipment (3,853) (1,947) (1,534)
-------- -------- -------
Net cash used in investing activities (8,134) (23,964) (2,668)
-------- -------- -------
Cash flows from financing activities:
Net proceeds from issuances of common stock 1,935 33,726 10
Net proceeds from issuance of preferred stock -- -- 4,949
Tax benefit from stock options 896 800 --
Proceeds under bank line of credit 309 1,085 3,255
Repayments under bank line of credit (2,504) (265) (2,890)
Proceeds from issuances of notes payable to stockholders -- 1,000 --
Repayment of notes payable to stockholders (1,000) -- --
Repayment of debt from asset purchases (4,710) -- --
Capital lease payments (553) (502) (304)
Proceeds from issuances of bank notes payable 1,999 -- 603
Repayments of bank notes payable (1,999) (687) (348)
-------- -------- -------
Net cash (used in) provided by financing activities (5,627) 35,157 5,275
-------- -------- -------
Effect of exchange rate changes on cash 54 -- --
-------- -------- -------
Net (decrease) increase in cash and cash equivalents (13,066) 15,051 1,399
Cash and cash equivalents at beginning of period 20,583 5,532 4,133
-------- -------- -------
Cash and cash equivalents at end of period $ 7,517 $ 20,583 $ 5,532
-------- -------- -------
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
-------- -------- -------
Assets purchased through issuance of debt $ 4,710 $ -- $ --
-------- -------- -------
Acquisitions of property and equipment under capital leases $ 344 $ 411 $ 1,128
-------- -------- -------
Conversion of preferred stock $ -- $ 13,518 $ --
-------- -------- -------
Accretion of dividends on mandatorily redeemable
convertible preferred stock $ -- $ 348 $ 717
-------- -------- -------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
-------- -------- -------
Interest paid $ 448 $ 390 $ 305
-------- -------- -------
Income taxes paid $ 50 $ 144 $ 30
-------- -------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[HNC LOGO]
HNC SOFTWARE INC.
26
<PAGE> 27
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------------------------
SERIES A SERIES E COMMON STOCK
-------------------------------------------------------------------- PAID-IN
IN THOUSANDS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 380 $-- -- $-- 3,730 $ 4 $ 6,302
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 3,770 4 10,543
Common stock options exercised 207 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
Issuance of common stock at
inception of Retek (Note 2) 1,367 1 (1)
Tax benefit from stock option
transactions 800
Unrealized gain on investments
available for sale
Stock warrant exercised 100 124
Net income
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 -- -- -- -- 17,892 18 55,334
Common stock options exercised 1,140 1 1,095
Common stock issued for
Employee Stock Purchase Plan 94 839
Tax benefit from stock
option transactions 7,889
Tax benefit from Retek
taxable pooling (Note 9) 18,397
Unrealized loss on investments
available for sale
Foreign currency translation
adjustment
Net income
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 -- $-- -- $-- 19,126 $ 19 $ 83,554
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN ON FOREIGN TOTAL
INVESTMENTS CURRENCY STOCKHOLDERS'
AVAILABLE TRANSLATION ACCUMULATED EQUITY
FOR SALE ADJUSTMENT (DEFICIT) (DEFICIT)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $-- $-- $(13,094) $ (6,788)
Common stock options exercised 10
Issuance of Series E preferred
stock, net of issuance costs 4,949
Accretion of dividends (717)
Net income 548 548
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 -- -- (12,546) (1,998)
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
Issuance of common stock at
inception of Retek (Note 2) --
Tax benefit from stock option
transactions 800
Unrealized gain on investments
available for sale 92 92
Stock warrant exercised 124
Net income 2,123 2,123
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 92 -- (7,531) 47,913
Common stock options exercised 1,096
Common stock issued for
Employee Stock Purchase Plan 839
Tax benefit from stock
option transactions 7,889
Tax benefit from Retek
taxable pooling (Note 9) 18,397
Unrealized loss on investments
available for sale (151) (151)
Foreign currency translation
adjustment 54 54
Net income 6,376 6,376
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ (59) $54 $ (1,155) $ 82,413
===========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[HNC LOGO]
HNC SOFTWARE INC.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS; EXCEPT PER SHARE DATA
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.
BASIS OF PRESENTATION. The consolidated financial statements and related notes
give retroactive effect to the mergers on August 30, 1996 with Risk Data
Corporation ("RDC") and on November 29, 1996 with Retek Distribution Corporation
("Retek"), for all periods presented, accounted for as poolings 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. Retek develops, markets and installs inventory management system
software primarily for customers in the retail industry.
The consolidated balance sheet as of December 31, 1996 and 1995 includes the
accounts of RDC and Retek as of December 31, 1996 and 1995. The consolidated
statements of income, of cash flows and of changes in stockholders' equity
(deficit) for each of the three years in the period ended December 31, 1996
include the results of RDC and Retek for the years then ended. The term
"Company" as used in these consolidated financial statements refers to HNC
Software Inc. and its subsidiaries, including RDC and Retek.
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 their acquisitions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, 1996 JUNE 30, 1996 -------------------------
(UNAUDITED) (UNAUDITED) 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
HNC $ 31,423 $ 16,478 $ 25,174 $ 16,473
RDC -- 2,600 4,577 4,201
Retek 5,635 3,377 921 --
- ----------------------------------------------------------------------------------------
$ 37,058 $ 22,455 $ 30,672 $ 20,674
- ----------------------------------------------------------------------------------------
Net income (loss):
HNC $ 975 $ 1,780 $ 4,457 $ 1,923
RDC -- (2,184) (1,952) (1,375)
Retek 93 43 (382) --
- ----------------------------------------------------------------------------------------
$ 1,068 $ (361) $ 2,123 $ 548
- ----------------------------------------------------------------------------------------
</TABLE>
PRINCIPLES OF CONSOLIDATION. The 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.
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. Management determines the appropriate classification of its
investments in marketable debt and equity securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. As of and for the
year ended December 31, 1994 based upon the Company's intent and ability, the
Company classified such securities in the held-to-maturity category and recorded
these securities at amortized cost, which approximated market value. As of
December 31, 1995, the Company reassessed its intent and ability with respect to
these securities. As a result of this reassessment, the Company reclassified all
securities as "available for sale" and accounts for them accordingly on a
prospective basis. Available for sale securities are carried at fair value with
unrealized gains or losses related to these securities included in stockholders'
equity in the Company's consolidated balance sheet.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation and amortization are 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 terms of the related leases. Repair and maintenance costs are
charged to expense as incurred.
SOFTWARE COSTS. Software costs are recorded at cost and amortized over their
estimated useful lives of 36 to 42 months. Software costs are comprised of
purchased software and other rights which are recorded at the lower of cost or
net realizable value. At December 31, 1996 and 1995, software costs of $2,561
and $0,
[HNC LOGO]
HNC SOFTWARE INC.
28
<PAGE> 29
respectively, are included in other assets in the consolidated balance
sheet net of accumulated amortization of $642 and $0, respectively.
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, 1996, no significant amounts were expended
subsequent to reaching technological feasibility.
LONG-LIVED ASSETS. The Company investigates potential impairments of long-lived
assets, certain identifiable intangibles and associated goodwill, on an
exception basis, when events or changes in circumstances have made recovery of
an asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected future net cash flows is less than the carrying amount of
the asset. No such impairments of long-lived assets existed through December 31,
1996.
STOCK-BASED COMPENSATION. The Company measures compensation expense for its
stock-based employee compensation plans using the intrinsic value method and
provides pro forma disclosures of net income and earnings per share as if the
fair value-based method had been applied in measuring compensation expense (Note
10).
REVENUE RECOGNITION. Revenue from long-term software license agreements is
generally recognized ratably over the respective license periods. Revenue from
licenses of the Company's software for which there are no significant continuing
obligations and collection of the related receivables is probable is recognized
on delivery of the software and acceptance by the customer.
Revenue from software installation and 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 revenue,
is recognized upon shipment 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 bases of assets and liabilities as well as the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. 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.
FOREIGN CURRENCY TRANSLATION. The financial statements of the Company's
international operations are translated into U.S. dollars using period-end
exchange rates for assets and liabilities and average exchange rates during the
period for revenues and expenses. Cumulative translation gains and losses are
excluded from results of operations and accumulated as a separate component of
stockholders' equity. Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than the entity's
local currency) are included in the consolidated statement of income and are not
material.
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 commercial
companies and government agencies in order to limit the amount of its credit
exposure. The Company's software license and installation agreements and
commercial development contracts are primarily with customers in the financial
services, insurance and retail industries. The Company maintains reserves for
potential credit losses.
During 1996, 1995 and 1994, sales under prime and subcontracts with the
federal government represented 3.0%, 7.3%, and 11.3%, respectively, of the
Company's total revenues. One domestic customer accounted for 11.4%, 12.4% and
11.6% of total revenues in 1996, 1995 and 1994, respectively. Revenues from
interna-
[HNC LOGO]
HNC SOFTWARE INC.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
tional customers, primarily in Western Europe and Canada, were approximately
23.5%, 17.9%, and 11.4% of total revenues in 1996, 1995 and 1994, respectively.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of
cash and cash equivalents, accrued liabilities, the bank line of credit and
notes payable to stockholders approximate fair value because of the short term
maturities of these financial instruments. The carrying amounts of capital lease
obligations approximate their fair values based on interest rates currently
available to the Company for borrowings with similar terms and maturities.
REINCORPORATION AND STOCK SPLIT. 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, preferred stock and options and warrants to purchase the Company's common
stock was exchanged for one-half share of HNC Delaware's common stock, preferred
stock and options and warrants to purchase HNC Delaware's common stock, at twice
the exercise price for options and warrants. 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.
In April 1996, the Company consummated a two-for-one stock split effected in
the form of a common stock dividend. All references in these consolidated
financial statements to share and per share amounts have been adjusted to give
retroactive effect to the stock split.
PRO FORMA NET INCOME PER SHARE. 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 8,957 shares of common stock. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all stock options granted from May
5, 1994 through June 26, 1995 have been included 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. For periods prior to 1996, 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.
NET INCOME PER SHARE. 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 period.
RECLASSIFICATIONS. Certain prior year balances have been reclassified to conform
to the current year presentation.
NOTE 2 -- ACQUISITIONS
On August 30, 1996, the Company completed an acquisition of Risk Data
Corporation ("RDC"). Under the terms of the acquisition, accounted for as a
pooling of interests, the Company exchanged 1,891 common shares for all of the
then outstanding shares of RDC preferred and common stock. All periods presented
have been retroactively restated (Note 1).
On November 29, 1996, the Company completed an acquisition of all of the
outstanding shares of Retek Distribution Corporation. Under the terms of the
acquisition, accounted for as a pooling of interests, the Company exchanged
1,367 common shares for all of Retek's then outstanding shares. All periods
presented have been retroactively restated (Note 1).
Transaction costs of $563 and $515 were incurred
to complete the mergers with RDC and Retek, respectively. Transaction costs were
charged to income as incurred and consisted primarily of investment banker,
legal and accounting fees, and printing, mailing and registration expenses.
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
------------------------
<S> <C> <C>
Accounts receivable, net:
Billed $ 10,156 $ 4,048
Unbilled 9,299 2,955
Other 636 496
-------- -------
20,091 7,499
Less allowance for doubtful accounts (623) (503)
- -------------------------------------------------------------------
$ 19,468 $ 6,996
===================================================================
</TABLE>
[HNC LOGO]
HNC SOFTWARE INC.
30
<PAGE> 31
Unbilled amounts represent revenue recorded in excess of amounts billable
pursuant to contract provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled amounts are
expected to be realized within one year.
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Property and equipment, net:
Computer equipment $ 8,409 $ 4,934
Furniture and fixtures 1,884 1,268
Leasehold improvements 273 167
- --------------------------------------------------------------------------------
10,566 6,369
Less accumulated depreciation
and amortization (4,600) (2,378)
- --------------------------------------------------------------------------------
$ 5,966 $ 3,991
================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued liabilities:
Payroll and related benefits $ 1,457 $ 1,126
Vacation 673 435
Other 1,928 1,257
- --------------------------------------------------------------------------------
$4,058 $2,818
================================================================================
</TABLE>
NOTE 4 -- INVESTMENTS
At December 31, 1996 and 1995, the amortized cost and estimated fair value of
investments available-for-sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT:
U.S. government and
federal agencies $ 1,999 $-- $ (2) $ 1,997
U.S. corporate debt 3,149 -- (6) 3,143
Foreign corporate debt 2,216 -- (3) 2,213
- -------------------------------------------------------------------------------------
7,364 -- (11) 7,353
- -------------------------------------------------------------------------------------
NON-CURRENT:
U.S. government and
federal agencies $16,213 $-- $ (36) $16,177
Foreign government debt 1,006 -- (2) 1,004
U.S. corporate debt 1,702 -- (8) 1,694
Foreign corporate debt 502 -- (2) 500
- -------------------------------------------------------------------------------------
19,423 -- (48) 19,375
- -------------------------------------------------------------------------------------
$26,787 $-- $ (59) $26,728
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
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
- -----------------------------------------------------------------------------------
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 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464. No significant gains or losses
were recognized during the year ended December 31, 1996. The cost of securities
sold is determined by the specific identification method.
NOTE 5 -- NOTES PAYABLE
The Company has a Loan and Security Agreement with a bank which provides for a
$5,000 revolving line of credit through July 10, 1997. The agreement requires
that the Company maintain certain financial ratios and levels of tangible net
worth and also restricts the Company's ability to pay cash dividends and
repurchase stock without the bank's consent. At December 31, 1996 and 1995, the
Company had $0 outstanding under the revolving line of credit. 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 8.25% at
December 31, 1996.
The RDC credit facility was comprised of a revolving line of credit secured
by eligible accounts receivable as well as a bridge loan which was secured by
the guarantees of certain stockholders. The revolving line of credit matured on
January 5, 1997. The bridge loan matured on September 5, 1996. All outstanding
amounts were repaid during 1996 and neither credit facility was renewed.
[HNC LOGO]
HNC SOFTWARE INC.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
During 1995, the preferred stockholders of RDC loaned the Company $1,000
under subordinated note agreements (secured by the assets of RDC but
subordinated to borrowings under the RDC line of credit) bearing interest at 9%.
All outstanding amounts were repaid during 1996.
NOTE 6 -- LEASES
At December 31, 1996, the Company is obligated under noncancelable operating
leases for its facilities and certain equipment through 2003 as follows:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
- -------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $1,943 $212 $1,731
1998 1,539 192 1,347
1999 1,189 149 1,040
2000 1,211 -- 1,211
2001 1,249 -- 1,249
thereafter 1,787 -- 1,787
- -------------------------------------------------------------------------
</TABLE>
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, 1996, 1995, and
1994 was approximately $1,340, $1,192, and $898, respectively, net of sublease
income of $125, $83 and $40, 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:
<TABLE>
<S> <C>
- ---------------------------------------------------------------
1997 $ 475
1998 232
1999 66
- ---------------------------------------------------------------
773
Less amounts representing interest (110)
- ---------------------------------------------------------------
Capital lease obligations 663
Less current portion (399)
- ---------------------------------------------------------------
$ 264
===============================================================
</TABLE>
The gross value of assets under capital leases at December 31, 1996 and 1995
was $1,481 and $2,186 and accumulated amortization was $599 and $572,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
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 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.
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
Initial license fee $ 47 $ 295
Additional license and support fee 314 476
Computer board sales 527 657
- ----------------------------------------------------------------------------
$ 888 $1,428
============================================================================
</TABLE>
NOTE 8 -- CAPITAL STOCK
During June 1995, the Company completed its initial public offering for sale of
5,175 shares of common stock (of which 2,375 shares were sold by the Company and
2,800 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
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.
[HNC LOGO]
HNC SOFTWARE INC.
32
<PAGE> 33
During December 1995, the Company completed a secondary public offering for
sale of 3,000 shares of common stock (of which 1,116 shares were sold by the
Company and 1,884 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 after the payment of underwriters' commissions but before the
deduction of offering expenses.
The Board of Directors is authorized to issue up to 4,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to the rights of the holders of any Preferred Stock that may be issued
in the future.
NOTE 9 -- INCOME TAXES
Income (loss) before income tax benefit was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $3,008 $ 1,746 $93
Foreign 2,760 (198) --
- --------------------------------------------------------------------------------
$5,768 $ 1,548 $93
================================================================================
</TABLE>
The income tax provision (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,132 $ 97 $ 17
State 137 76 28
Foreign 51 -- --
Deferred:
Federal (1,569) (521) (425)
State (63) (183) (75)
Foreign (296) (44) --
- --------------------------------------------------------------------------------
$ (608) $(575) $(455)
================================================================================
</TABLE>
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Taxable pooling basis difference $ 18,397 $ --
Net operating loss carryforwards 8,587 2,902
Tax credit carryforwards 1,878 1,370
Other 504 493
Gross deferred tax assets 29,366 4,765
Deferred tax asset valuation allowance -- (2,717)
- --------------------------------------------------------------------------------
Net deferred tax asset $29,366 $ 2,048
================================================================================
</TABLE>
At December 31, 1994, the Company provided a deferred tax asset valuation
allowance for deferred tax assets which management determined were "more likely
than not" unrealizable based on trends in operating results after eliminating
the effects of non-recurring revenue (Note 7). During 1995, the Company released
the valuation allowance related to HNC's deferred tax assets based on
management's assessment that it was more likely than not that the Company would
realize a portion of those assets in future periods due to improvements in HNC's
operating results. During 1996, the Company released the valuation allowances
related to RDC and Retek deferred tax assets based on management's assessment
that it was more likely than not that the Company would realize those assets in
future periods due to improvements in the operating results of those
subsidiaries.
During 1996 and 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $7,889 and $800, respectively. The benefit
from the stock option tax deduction is credited directly to paid-in capital.
In connection with the acquisition of Retek, the Company made an Internal
Revenue Code Section 338 election for federal and state tax purposes, resulting
in the treatment of the acquisition as a taxable transaction, whereby the tax
bases of the acquired assets and liabilities were adjusted to their fair values
as of the date of the acquisition. As the purchase price exceeded the carrying
value of the net assets acquired by approximately $46,000, the Company recorded
a deferred tax asset in the amount of $18,397.
A reconciliation of the income tax benefit to the amount computed by applying
the statutory federal income tax rate to income before income tax provision is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Amounts computed at
statutory federal rate $ 1,961 $ 526 $ 32
Release of valuation allowance (2,717) (2,223) (1,008)
Tax credit carryforwards
generated (334) (68) (51)
Losses without tax benefit -- 794 468
Separate return impact of
acquired businesses (154) -- --
Acquisition expenses not
tax deductible 367 -- --
State income tax expense 480 401 28
Foreign net operating loss
carryforwards generated (296) (44) --
Other 85 39 76
- --------------------------------------------------------------------------------
Income tax benefit $ (608) $ (575) $ (455)
================================================================================
</TABLE>
[HNC LOGO]
HNC SOFTWARE INC.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
At December 31, 1996, the Company had federal, state and foreign net
operating loss carryforwards of approximately $22,300, $10,800 and $800,
respectively. The federal and state net operating loss carryforwards expire from
1997 to 2011. The foreign net operating loss carryforwards expire from 2002 to
2003. The Company also has approximately $1,400 of federal research and
development credit carryforwards, which expire from 2000 to 2011, $400 of state
research and development credit carryforwards, which have no expiration date,
and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000.
Certain of these net operating loss and research and development credit
carryforwards generated by RDC and Retek prior to their acquisitions by HNC are
subject to annual limitations on their utilization and also are limited to
utilization solely by the Company which generated them. Should a substantial
change in HNC'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.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500 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). At December 31, 1996, options to purchase 545 shares
were exercisable.
During 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 nonqualified stock
options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25 shares of the Company's common stock are
granted to outside directors upon their respective dates of becoming members of
the Board of Directors and 10 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. At December 31, 1996, options to purchase 40 shares were
exercisable.
The Incentive Plan provides for the issuance of up to 2,800 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 options 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, 1996, 58 shares were exercisable under the
Incentive Plan.
The Purchase Plan provides for the issuance of a maximum of 400 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 or the last day of
each six-month purchase period. Approximately 65% of eligible employees have
participated in the Plan in the last two years. Under the Purchase Plan, the
Company sold 94 shares to employees in 1996.
[HNC LOGO]
HNC SOFTWARE INC.
34
<PAGE> 35
RDC's stock option plan is administered by HNC's Board of Directors. All
outstanding RDC options were converted into options to purchase HNC common stock
and adjusted to give effect to the exchange ratio (Note 2). 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 at the rate of 25% of the total
grant per year over a four-year period and expire 10 years after the date of
grant. At December 31, 1996, 63 shares were exercisable under the RDC plan.
Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase the Company's
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the Retek options in connection with the
exchange. Options granted vest ratably over periods from one to four years and
have a term of up to 10 years. At December 31, 1996, options to purchase 28
shares were exercisable.
Transactions under the Company's stock option and purchase plans during the
years ended December 31, 1996 and 1995, including options under the RDC stock
option plan and options under the Retek stock option plan but excluding options
to purchase stock of a subsidiary of the Company, Aptex Software Inc. ("Aptex"),
are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 2,722 $ 2.87 2,081 $ 0.49
Options granted 1,591 28.84 1,101 6.67
Options exercised (1,140) .96 (207) 0.41
Options canceled (150) 17.77 (253) 1.75
- ---------------------------------------------------------------------------------
Outstanding at
end of year 3,023 $16.53 2,722 $ 2.87
=================================================================================
Options exercisable
at end of year 734 1,427
Weighted average fair
value of options granted
during the year $16.94 $ 4.64
=================================================================================
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE (IN YEARS) PRICE 1996 PRICE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.02 to $ 0.92 554 4.66 $ 0.35 475 $ 0.30
1.00 to 3.00 607 8.10 2.67 157 2.67
4.50 to 21.38 505 8.73 13.06 92 10.91
21.50 to 30.25 510 9.38 26.64 1 22.55
30.50 to 30.75 568 9.73 30.68 9 30.75
30.81 to 49.50 279 9.47 37.81 - -
- ---------------------------------------------------------------------------------------------
$ 0.02 to $49.50 3,023 8.23 16.53 734 2.55
=============================================================================================
</TABLE>
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex Plan")
whereby 2,000 shares of Aptex common stock were reserved for issuance pursuant
to nonqualified and incentive stock options and restricted stock awards. The
plan is administered by the Board of Directors of Aptex or its designees and
provides generally that 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 options 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. During 1996, Aptex issued 1,000 shares of common stock under the
Aptex Plan at an issuance price of $0.03 per share. No options granted under the
Aptex Plan were exercisable at December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1996 and
1995 been determined based on the fair value at the grant
[HNC LOGO]
HNC SOFTWARE INC.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
dates of awards consistent with the method of Financial Accounting Standards
Board Statement No. 123, the Company's net income and pro forma net income per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 6,376 $ 2,123
Pro forma 2,137 1,549
Net income per share:
As reported $ .31 $ .13
Pro forma .11 .09
- --------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1996 and 1995,
respectively: dividend yield of 0.0% for both years, risk-free interest rates of
6.03% and 6.29%, expected volatility of 70% and 75%, and expected lives of 3.5
years for both years. The fair value of the employees' purchase rights pursuant
to the Purchase Plan is estimated using the Black-Scholes model with the
following assumptions: dividend yield of 0.0% for both years, risk-free interest
rates of 5.36% and 5.66%, expected volatility of 70% and 75%; and an expected
life of 6 months for both years. The weighted-average fair value of those
purchase rights granted in 1996 and 1995 was $9.61 and $2.75, respectively.
The fair value of each option granted under the Aptex Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%,
expected volatility of 90%, and an expected life of 9.25 years. Options to
purchase 704 shares were granted during 1996 at a weighted average exercise
price of $0.03 per share. The weighted average fair value of options granted
during the year was $0.03 per share. At December 31, 1996, there were 704
options outstanding under the Aptex Plan with a weighted average exercise price
of $0.03 per share and a weighted average remaining contractual life of 9.74
years.
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, results of
operations or cash flows.
[HNC LOGO]
HNC SOFTWARE INC.
36
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
[PRICE WATERHOUSE LLP LOGO]
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 subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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.
/s/ Price Waterhouse LLP
- ----------------------------------
San Diego, California
January 21, 1997
[HNC LOGO]
HNC SOFTWARE INC.
37
<PAGE> 38
OFFICERS
Robert L. North
President and Chief Executive Officer
Krishna Gopinathan
Vice President, Payment Systems
Todd W. Gutschow
Vice President, Technology Development
Allen P. Jost
Vice President, Marketing
Lee E. Martin
Vice President, North American Sales
Larry A. Spelhaug
Vice President, Financial Systems
Michael A. Thiemann
President, Aptex Software Inc.
Raymond V. Thomas
Vice President, Finance and Administration
and Chief Financial Officer
DIRECTORS
Edward K. Chandler
Prairie-EKC, Inc.
Oliver D. Curme
Battery Ventures, L.P.
Rogers L. Evans
Greylock Management Corporation
Thomas F. Farb
Interneuron Pharmaceuticals, Inc.
Charles H. Gaylord, Jr.
Private Technology Investor
Robert L. North
President and Chief Executive Officer
HNC Software Inc.
CORPORATE INFORMATION
STOCK LISTING: Common stock traded on Nasdaq
Symbol: HNCS
GENERAL COUNSEL
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
750 B Street
Suite 2400
San Diego, CA 92101
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
P.O. Box 1865
Mail Stop: 45-02-62
Boston, MA 02105-1865
FORM 10-K
The Company, upon written request, will provide without charge to each
stockholder a copy of its annual report on Securities and Exchange Commission
Form 10-K for the year ended December 31, 1996. Requests should be directed to:
HNC Software Inc.
Investor Relations
5930 Cornerstone Court West
San Diego, CA 92121-3728
The latest news and information about the Company can be found on the HNC
Software World Wide Web site: http://www.hncs.com and can also be accessed by
calling our Stockholder Information Line at 1-800-396-8052.
ANNUAL MEETING OF STOCKHOLDERS
The HNC Software Inc. annual meeting of stockholders will be on Thursday, May
22, 1997 at 9:30 a.m. at the Hyatt Regency La Jolla, 3777 La Jolla Village
Drive, San Diego, California.
(C) 1997 HNC Software Inc.
[HNC LOGO]
HNC SOFTWARE INC.
38
<PAGE> 39
[GRAPHIC OF WORLD AND RIBBON BANNER]
MANAGE CUSTOMER
INTERACTIONS
[HNC LOGO]
TO MAXIMIZE OUR
CLIENTS' PROFITS
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-92902, No. 333-14323 and No. 333-18871) of HNC
Software Inc. of our report dated January 21, 1997 appearing on page 37 of the
Annual Report to Stockholders which is incorporated in this Annual Report on
Form 10-K/A-Amendment No. 1. We also consent to the incorporation by reference
in the Prospectus constituting part of the Registration Statement on Form S-3
(No. 333-22735) of HNC Software Inc. of our report dated January 21, 1997
appearing on page 37 of the Annual Report to Stockholders which is incorporated
in this Annual Report on Form 10-K/A Amendment No. 1.
PRICE WATERHOUSE LLP
San Diego, California
April 10, 1997
