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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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)
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DELAWARE 33-0248788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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. [ ]
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 January 30, 1998, was approximately $809 million. The number of shares
of the Registrant's Common Stock outstanding at January 30, 1998 was 24,570,578
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be filed with the Commission on or before April 30, 1998 are
incorporated by reference in Part III of this Annual Report on Form 10-K. With
the exception of those portions that are specifically incorporated by reference
in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed
filed as part of this Report or incorporated by reference herein.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................................. 3
Item 2. Properties................................................................ 24
Item 3. Legal Proceedings......................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders....................... 24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................... 25
Item 6. Selected Financial Data................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 34
Item 8. Financial Statements and Supplementary Data............................... 35
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................ 56
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 56
Item 11. Executive Compensation.................................................... 57
Item 12. Security Ownership of Certain Beneficial Owners And Management............ 57
Item 13. Certain Relationships and Related Transactions............................ 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K........... 57
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ProfitMax(R) is a registered trademark of the Company. CRLink(TM),
CompCompare(TM), ProviderCompare(TM), PMA Advisor(TM), VeriComp(TM), MIRA(TM),
Falcon(TM), Falcon Export(TM), Falcon Select(TM), Falcon Debit(TM), Falcon
Retail(TM), Falcon Sentry(TM), Eagle(TM), Capstone(TM), Capstone for Payment
Cards(TM), Capstone for Consumer Lending(TM), Capstone for Mortgage Lending(TM),
ProfitMax Bankruptcy(TM), AREAS(TM), Retek Merchandising System(TM), Retek Data
Warehouse(TM), Active Retail Intelligence(TM), Retek Demand Forecasting(TM),
Falcon Retail(TM), MatchPlus(TM), SelectCast(TM), SelectResponse(TM) and
SelectResource(TM) are trademarks of the Company. All other trademarks or trade
names referred to in this Report are the property of their respective owners.
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.
The Company was founded in 1986 under the laws of California and was
reincorporated in June 1995 under the laws of Delaware. The Company's principal
executive offices are located at 5930 Cornerstone Court West, San Diego,
California 92121-3728, and its telephone number is (619) 546-8877. In this
Prospectus, the terms "HNC" and the "Company" each refer to HNC Software Inc., a
Delaware corporation, and its consolidated subsidiaries unless the context
otherwise requires.
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PART I
ITEM 1. BUSINESS
HNC develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ
proprietary neural-network predictive decision engines, profiles, traditional
statistical modeling, business models, expert rules and context vectors to
convert existing data and business experiences into meaningful recommendations
and actions. Just as manufacturing organizations have implemented manufacturing
resource planning ("MRP") software to automate routine transactions, leading
service industries such as the health-care/insurance, financial services and
retail industries are using predictive software solutions to improve
profitability, competitiveness and customer satisfaction.
INDUSTRY BACKGROUND
Today's competitive business environment has forced many service companies
to increase business efficiency while improving their flexibility and
responsiveness to changing market conditions. Businesses continually seek new
ways to make better decisions by collecting and analyzing data. Consequently,
service companies have made, and continue to make, significant investments in
computer systems designed to gather and electronically store ever increasing
amounts of data. In most cases, these computerized systems automate manual tasks
and activities, resulting in the conversion of significant amounts of corporate
data from paper to electronic form. However, these systems generally do not
synthesize data in ways that help businesses make better real-time decisions.
Historically, the development of predictive software solutions was
inhibited by the lack of computing standards and effective computational
intelligence techniques. The emergence of client-server standards, including
relational database management systems, the Windows operating system and network
communications protocols, has fostered the increased transmission and
dissemination of electronically stored data within and among businesses. MRP
software systems were developed to automate production, accounting, human
resources and distribution transactions for primarily manufacturing
organizations. These systems manage and store large amounts of diverse business
information, providing continuous and simultaneous availability of information
to geographically dispersed employees, customers and suppliers. However, MRP
systems generally do not provide businesses with the functionality and
flexibility needed to utilize this data to simulate operations and make
real-time decisions and recommendations in diverse and rapidly changing business
environments.
Several service industries have a particular need to leverage large volumes
of real-time transactional and operational data in order to address systemic
issues that have historically affected profitability, competitiveness and
customer satisfaction. These industries and issues include:
- HEALTHCARE/INSURANCE INDUSTRY. Workers' compensation fraud and abuse is
currently receiving widespread attention in the healthcare/insurance
industry. Conning & Co. recently estimated that 10%-25% of the dollar
amount of filed workers' compensation claims in the United States are
fraudulent. This translates to more than $5 billion lost each year to
workers' compensation fraud.
- FINANCIAL SERVICES INDUSTRY. Based on reports from Visa and Mastercard,
Faulkner & Gray estimates that United States credit card credit losses
and chargeoffs were $18 billion in 1996.
- RETAIL INDUSTRY. Rapid changes in consumer buying patterns have caused
merchants to place increased emphasis on predicting consumer demand and
managing retail inventories. The change from mass to individual retail
marketing has multiplied the number of promotional offers and
stock-keeping units ("SKUs") required to address market opportunities.
The U.S. Department of Commerce estimates that the inventory carrying
costs for retail inventories nationwide were $316 billion at the end of
March 1997.
Historically, many companies in the healthcare/insurance, financial
services and retail industries have developed specialized in-house applications
to address these issues. Such applications are generally designed to access
large volumes of operational and transactional data stored on mainframe
computers. However, such
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systems are expensive, costly to support and maintain, and do not offer flexible
and enterprise-wide access to data. Furthermore, most of these systems are not
designed to meet the need for real-time recommendations and actions. The
widespread adoption of distributed client-server computing has provided
organizations with a much greater ability to access and manipulate stored
information but also has created the need for third-party vendors of packaged
applications software solutions that provide the same degree of functionality
and reliability as traditional in-house applications. These vendors are able to
provide a higher degree of functionality and reliability than traditional
in-house applications by combining the domain knowledge from their customers and
partners with expertise in computational intelligence and client-server
technologies.
THE HNC SOLUTION
HNC's predictive software solutions enable leading service industries, such
as the healthcare/insurance, financial services and retail industries, to
analyze and act upon operational and transactional data in real time. The
Company's products provide the following benefits:
Core predictive software technology. The Company's software includes a
variety of computational intelligence technologies such as proprietary
neural-network predictive decision engines, profiles, expert rules, context
vectors, traditional statistical modeling and business models that can be
customized to specific business applications. Neural networks can be adapted to
changing environments and applications quickly and have proven to be accurate
and effective in real-time operating environments. The Company's decision engine
also includes a user-defined rule-based technology. The neural networks and
rulebases are delivered through software that allows the Company's products to
adapt to many customer-specific business needs without extensive custom
programming. Adaptable functions include workflow queuing management, policy and
procedure guidelines, input data modification, flexible graphical user interface
("GUI") display, decision criteria and report formats.
Quick payback for customers. The Company's software solutions are designed
for quick customer payback. The Company typically installs its products in two
to six months, and customer payback periods for installation and first year
usage fees are typically less than one year. Payback is rapid because the
software products address applications that have a significant profit impact.
HNC personnel focus not only on the technical integration, but also on
delivering direct benefits to the customer throughout the service contract
period.
Transaction-based, real-time decision capability. HNC's software can
operate in real time, providing an immediate, situation-specific response to
each customer transaction. For example, the Falcon system for credit/debit card
fraud can monitor millions of transactions each day, identify fraudulent
transactions in progress and permit the card issuing bank to withhold an
authorization before the perpetrator completes a purchase. The Falcon system
differs from traditional modeling implementations, which operate in a batch or
off-line mode on a collection of historical transactions.
Flexible client-server solutions. HNC's solutions can be integrated into a
customer's existing environment or architecture. The Company's products are
available on industry-standard, client-server platforms, including Windows and
UNIX clients, NetWare, Windows NT, UNIX and CICS servers and IBM, Oracle, Sybase
and Informix databases. HNC's application products represent a complete software
solution, including decision models, deployment software, communications
interfaces and GUIs. The Company also supplies systems integration, ongoing
performance analysis, model rebuilding and application consulting services to
help ensure ongoing success for the customer. The Company believes that this
flexible combination of products, services and deployment platforms represents
an advance that enables successful predictive software system deployment in many
mission-critical applications.
Turnkey, customized and user-developed model options. The choice of data
source is important to customers because data are the fundamental building
blocks used to create accurate predictive models. HNC provides various models
built on industry-specific or customer-specific data to meet individual
application requirements. Customers and data suppliers provide the Company with
historical transaction data for turnkey models, trend analyses and product
updates. This combination of proprietary turnkey (from data and
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individual consumer profiles), customized and user-developed models allows the
Company to offer products that solve a broad range of predictive application
problems.
HNC'S STRATEGY
HNC's objective is to be the leading supplier of predictive software
solutions by leveraging its core computational intelligence technology across a
series of product families targeted at specific service industries. The
Company's strategy for achieving this objective contains the following key
elements:
Maintain and strengthen HNC's position at the core of its customers'
applications infrastructure. Customers rely heavily on HNC's predictive software
solutions to anticipate and react to rapidly changing business conditions. The
Company's core computational intelligence technology serves as a platform upon
which services businesses can deploy and combine the Company's products to
manage and respond to operational and transactional data in real time.
Therefore, HNC attempts to establish a strong position within the applications
infrastructure of its customers. For example, the Company's first predictive
solution product, Falcon, is a credit/debit card fraud detection system for
monitoring individual credit card accounts. By adapting the core technology
developed for Falcon, the Company later introduced ProfitMax, a transaction-
based, real-time credit authorization system that manages the profitability of
credit card portfolios. The Company believes that the opportunity exists for
similar penetration within each of its core vertical markets, including
opportunities such as retail banking within the financial services industry. As
another example, the Company's context vectoring technology could profile
visitors to a financial institution's Web site and send proactive direct e-mails
regarding financial products.
Leverage core predictive technologies to enter new market segments.
Historically, the Company has applied its core predictive technology to the
domain knowledge of companies it has acquired to introduce new products. For
example, in August 1996, HNC acquired Risk Data, a developer of decision systems
in the workers' compensation industry. By combining Risk Data's industry
expertise with HNC's fraud detection technology, HNC is developing a VeriComp
module that applies predictive technology to employer fraud in the workers'
compensation industry. In addition, the Company is evaluating opportunities in
other data-intensive industries, such as telecommunications, where predictive
software may have the ability to improve business performance and profitability.
Earn recurring revenues through long-term contracts. The Company markets
most of its predictive software solutions as an ongoing service that includes
software licenses, decision model updates, application consulting and on-line or
on-site support and maintenance. Since many of the Company's applications are
enhanced by periodic model updates, customers derive significant value from the
Company's ongoing services. In addition, the mission-critical nature of many of
HNC's predictive software solutions creates customer demand for long-term
support commitments. Accordingly, the Company's customers typically pay for this
package of software and service with a monthly usage fee and a three to seven
year contract commitment.
Use strategic relationships to support direct distribution. In each of its
primary markets, the Company uses strategic relationships with system
integrators and third-party service providers to support its direct distribution
efforts. These partners provide varying levels of distribution support, from
lead generation to resale of the Company's products. The Company maintains such
strategic relationships with Electronic Data Systems ("EDS"), Intracorp and
Marsh McLennan, Inc. in healthcare/insurance, First Data and EDS in financial
services, and Andersen Consulting and KPMG Peat Marwick LLP in retail.
Growth Through Acquisitions. The Company acquired First Data, Retek and
CompReview in 1996 and 1997, thereby significantly expanding its product
offerings in its target markets. On January 30, 1998, the Company signed a
definitive agreement to acquire Practical Control Systems Technologies, Inc.
("PCS"), a distribution center management software vendor based in Cincinnati,
Ohio, subject to the satisfaction of certain closing conditions and the approval
of PCS' shareholders. The Company expects to continue to review acquisitions of
businesses, products and technologies as a means to expand its product offerings
for existing and new target markets.
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MARKETS AND PRODUCTS
HNC has a broad family of predictive software products that provide
specific solutions for each of the healthcare/insurance, financial services and
retail markets. Revenues from each of the Company's three product lines
accounted for more than one-quarter of the Company's total revenues in 1997.
Revenues from three products, CRLink, Retek Merchandising System and Falcon,
accounted for 57.9% of the Company's total revenues in 1997. See "Risk
Factors -- Product Concentration."
Healthcare/Insurance
HNC offers and is developing products in the healthcare/insurance market.
These products are targeted to insurance carriers, insurance providers, managed
care organizations, state insurance funds, third-party administrators and large,
self-insured employers. HNC has developed predictive software solutions that
address the containment of the medical costs of workers' compensation and auto
accident insurance claims, workers' compensation loss reserving, workers'
compensation fraud, managed care effectiveness and provider effectiveness. These
solutions, CRLink, MIRA, CompCompare, ProviderCompare, PMAdvisor and VeriComp,
allow users the ability to reduce fraud losses and streamline operations.
HNC HEALTHCARE/INSURANCE INDUSTRY PRODUCTS
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PRODUCT PRODUCT DESCRIPTION
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CRLink CRLink operates as the bill review engine that links all of the critical
components of an effective cost containment program to help clients control
the cost of workers' compensation, personal injury and other casualty risks.
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MIRA MIRA uses statistical predictive methods to automatically determine workers'
compensation loss reserves based on historical data gathered from insurance
carriers, third-party administrators and state insurance funds throughout the
United States.
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CompCompare CompCompare enables clients to compare claims costs or the effectiveness of
managed care programs by using benchmarking data from HNC's proprietary
workers' compensation database.
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ProviderCompare ProviderCompare is a physician profiling product that provides on-line access
to HNC's proprietary workers' compensation database. ProviderCompare enables
clients to generate a detailed comparative analysis, such as treatment costs,
among providers within the same specialty.
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PMAdvisor PMAdvisor enables claim payors to verify that the number of visits and type of
treatment for claims involving physical medicine (primarily chiropractic and
physical therapy) are appropriate for the diagnosis and severity of the injury
and to identify chiropractic and physical therapy claims that exceed
appropriate treatment guidelines.
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VeriComp VeriComp is a workers' compensation claimant system designed to assist in
identifying claimant behavior that is likely to indicate the presence of fraud
or abuse.
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Financial Services
The increasing volume of electronic financial transactions requires
mission-critical decision-making in real time for applications such as credit
card charge authorization, that carry a substantial risk of consumer and
merchant fraud. HNC's Falcon and ProfitMax product lines are targeted at bank
and private label card issuers and payment processors. Falcon employs a
client/server architecture that consists of an interface into the customer's
legacy system, a decision engine, a cardholder profile database, a case
management database and a fraud workstation.
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HNC estimates that loan underwriting costs in the United States currently
exceed $2.5 billion each year. Competitive pressures including cost reduction,
rapid loan approval and the growth of on-line banking have compelled lenders to
turn to software solutions that can automate loan origination in order to lower
costs, improve customer service and provide remote access to lending services.
HNC's predictive software solutions for the loan origination markets, Capstone
and AREAS, allow lenders such as banks and private label card issuers, home
equity lenders, auto lenders and mortgage lenders to automate the loan approval
decision process.
HNC FINANCIAL SERVICES INDUSTRY PRODUCTS
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Falcon Product Line
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Falcon Falcon products are neural network-based solutions that examine
Falcon Expert transaction, cardholder and merchant data to detect a wide range of
Falcon Select credit and debit card fraud. Using predictive software techniques,
Falcon Debit Falcon captures relationships and patterns that often are missed by
Falcon Retail traditional methods of detecting suspicious transactions.
Falcon Sentry
Eagle
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Capstone Product Line
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Capstone for Payment Capstone is an intelligent, high-performance new account decision
Cards processing solution. Based on expert rules, Capstone allows users to
Capstone for automate lending decisions and design, test, implement and track lending
Consumer Lending policies.
Capstone for Mortgage
Lending
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ProfitMax Product Line
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ProfitMax ProfitMax provides transaction-based, real-time authorization and action
ProfitMax Bankruptcy decisions from within a complete infrastructure for managing the
profitability of credit card portfolios. ProfitMax uses neural networks,
expert rules and HNC's cardholder behavior profiling technology to
analyze the expected profitability of each account in an issuer's
portfolio using the issuer's definition of financial profit. ProfitMax
Bankruptcy uses the basic ProfitMax structure to predict the likelihood
of cardholder bankruptcy even before the cardholder is delinquent.
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AREAS AREAS automated property valuation software uses neural networks and
other computational intelligence to provide an objective prediction of
the current market value of residential property.
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Retail
Although retailers have made significant investments in customer
information, point-of-sale and quick-response ordering systems, these
applications often do not include the forecasting ability required to maximize
profitability and respond to competition through timely "in-store"
replenishment, electronic networking and quick response initiatives. HNC has
developed a group of products that effectively addresses inventory control,
merchandise management and financial control management. These software
solutions allow retailers to build forecasting and marketing models to carry out
day-to-day buying and selling activities, thereby reducing carrying costs for
inventories and improving purchasing, promotion and logistics efficiencies. The
target
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markets for the Company's retail products are department stores, mass
merchandisers and specialty retail chains in multi-store and multi-warehouse
environments with gross sales in excess of $200 million.
HNC RETAIL INDUSTRY PRODUCTS
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Retek Merchandising The Retek Merchandising System provides inventory control, merchandise
System management and financial control and addresses the definition and
management of merchandise at the SKU level and reporting and financial
control through stock ledgers.
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Retek Data Warehouse Retek Data Warehouse provides the transaction infrastructure needed for
retailers to plan, buy, move, sell and pay for their merchandise.
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Active Retail Active Retail Intelligence identifies performance exceptions and
Intelligence recommends the appropriate corrective action.
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Retek Demand Retek Demand Forecasting provides forecasts to retailers' supply chain
Forecasting planning allocation and replenishment functions and uses predictive
causal techniques with automated forecasting and multi-dimensional
on-line analysis.
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Falcon Retail Falcon Retail provides proactive detection of private label card
application and transaction fraud.
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EMERGING MARKET OPPORTUNITIES
The Company's experience and technology capabilities in the
healthcare/insurance, financial services and retail markets often lead to new
product ideas and concepts. The Company also evaluates new market opportunities
that arise through its commercial and government contract work. As contracts are
completed, the end products are evaluated for commercialization. For example,
contracts for the Advanced Research Projects Agency, United States Army Research
Laboratory, United States Air Force, Office of Naval Research, DataTimes
Corporation and Tracor Applied Sciences, Inc. generated a context-based text
analysis technology called MatchPlus. This core text analysis technology has
been under development at HNC for the last four years for Department of Defense
applications. During 1996, the Company formed Aptex to commercialize HNC's
MatchPlus text analysis technology for emerging markets. Aptex has developed a
strategic partnership with InfoSeek Corporation, an Internet search and
navigation service, to deliver products using this text analysis technology to
the Internet market. To date, three new Internet products have been launched:
SelectCast, SelectResponse and SelectResource.
Substantially all of the Company's revenues in recent years have been
attributable to sales of predictive software solutions and services, and these
products and services are currently expected to continue to account for a
substantial amount of the Company's future revenues. The market for predictive
software solutions is still emerging. The rate at which businesses have adopted
the Company's products has varied significantly by market and by product within
each market, and the Company expects to continue to experience such variations
with respect to its target markets and products in the future. The Company has
introduced products for the healthcare/insurance, financial services and retail
markets. The Company has recently announced several new products, including
PMAdvisor, VeriComp, SelectCast, SelectResponse and SelectResource. To date,
none of these products has achieved any significant degree of market acceptance,
and there can be no assurance that such products will ever be widely accepted.
Although businesses in the Company's target markets have recognized the
advantages of using predictive software solutions to automate the decision-
making process, many have developed decision automation systems internally
rather than licensing them from outside vendors. There can be no assurance that
the markets for the Company's products will continue to develop or that the
Company's products will be widely accepted, if at all. If the markets for the
Company's new or existing products fail to develop, or develop more slowly than
anticipated, the Company's sales would be negatively impacted, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
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CUSTOMER SERVICE AND SUPPORT
A high level of continuing maintenance, service and support is critical to
maintaining the performance of the Company's predictive software solutions.
Service and support are also essential to the Company's objective of developing
long-term relationships with, and obtaining recurring revenues from, customers.
The Company's service and support activities are related to system installation,
performance validation and ongoing consultation on the optimal use of HNC
products.
Model and Rule Updates. Most HNC product license agreements include
periodic data, model and/or rule updates to maintain system performance. HNC
technical personnel generally assist the customer with installation of updates.
The Company makes commitments to update models and rules at varying intervals,
from fixed times (such as quarterly and annually) to unscheduled times, provided
the customer has met its commitments to provide data to HNC.
Education. The Company offers comprehensive education and training programs
to its customers. The Company provides on-site training services associated with
many of its products. Fees for education and training services are generally
included in usage-priced products, but may be charged separately in other cases.
Consulting. The Company's consultants are available to work with customers'
user application groups and information systems organizations. Customers that
buy consulting services are usually planning large implementations or want to
optimize performance of the Company's products in their operating environments.
Fees for consulting are generally included in usage-priced products, but may be
charged separately in other cases.
PRICING
The Company generally establishes prices in one of two ways: usage-based
fees and fixed-fee licenses with maintenance. The Company generally employs
usage-based pricing for its healthcare/insurance products, Falcon, ProfitMax and
AREAS. Under the usage-based pricing structure, HNC generally provides a fixed-
term software license, software maintenance, model updates (in the case of
HNC-supplied models) and ongoing consulting services in exchange for recurring
revenue based on usage. Usage-based term contracts typically include annual
price index adjustments. In 1995, 1996 and 1997, recurring revenues from these
contracts represented 61.2%, 56.1% and 55.2% of the Company's total revenues,
respectively. The Company generally employs fixed-fee license pricing for
Capstone and all of the Company's retail products except Falcon Retail. Under
the fixed-fee license pricing structure, the Company generally licenses the
product for the customer's internal use on a perpetual basis. In most cases, the
user can separately contract for maintenance services on an annual basis. The
Company typically offers early adopter pricing for its usage-based products to
customers that agree to be part of pilot or other early product life cycle
installations. Early adopter pricing might include reduced-fee perpetual
licenses, reduced-fee services or both.
The Company often contracts for installation services associated with its
predictive software solutions. The Company provides user-specific proposals
priced at either fixed-fee levels or on a time and materials basis. In nearly
all cases, travel expenses are billed separately at cost.
The Company offers contract consulting services. Because of the complexity
associated with predictive software solutions, users often request that HNC help
them to develop models or analyze problems. Also, the Company from time to time
accepts engagements not associated with current product offerings in order to
become more familiar with a new application area and determine the potential for
new product development. Although consulting services are included with many of
the Company's usage-based products, customers may request additional consulting,
often associated with custom modeling.
SALES AND MARKETING
The Company sells and markets its software and services in North America
and internationally through its direct sales organization, joint marketing and
distribution agreements. The Company's worldwide sales and marketing
organization consisted of 125 employees as of December 31, 1997. The domestic
sales staff is based at the Company's corporate headquarters in San Diego and in
United States field offices in California,
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Colorado, Connecticut, Georgia, Minnesota, New York, Pennsylvania, Texas and
Virginia. Internationally, the Company has field sales offices in Australia,
Canada, France, Germany, Japan, Singapore, South Africa and the United Kingdom.
To support its sales force, the Company conducts comprehensive marketing
programs, which include direct mail, public relations, advertising, seminars,
trade shows and ongoing customer communication programs. The sales staff is
generally product-based, and each representative is assigned a geographic
territory.
The Company has licensed First Data and EDS to act as service bureaus to
provide an alternate channel of distribution for end-users to utilize the Falcon
product to process credit card receipts for banks and other credit card issuers.
The Company generally assists its service bureau partners in the sales effort,
often employing the Company's direct sales force in the process. Company sales
representatives earn a commission for service bureau sales in their territory.
These service bureaus pay the Company monthly usage fees based on the volume of
transactions processed for such credit card issuers. Product licenses to First
Data, the largest provider of credit card charge receipt processing services to
banks, accounted for 8.7%, 8.6% and 7.6% of the Company's total revenues in
1995, 1996 and 1997, respectively. The Company has licensed First Data to
provide its customers with access to the Company's ProfitMax product pursuant to
a license agreement entered into in January 1996. The Company's revenues under
the ProfitMax Contract represented approximately one-quarter of the Company's
revenues from First Data in 1997. In late January 1998, First Data asserted that
certain restrictive covenants under the ProfitMax Contract violated certain
intellectual property laws. First Data also asserted that the existence of such
restrictions made the ProfitMax Contract at least temporarily unenforceable and
that First Data is therefore not obligated to pay the Company license fees due
under the ProfitMax contract. The Company disputed First Data's claim, released
and waived the above-mentioned restrictive covenants in the ProfitMax Contract
and gave First Data written notice that the Company intended to terminate the
ProfitMax Contract pursuant to its terms unless First Data cured its failure to
pay the delinquent license fees in a timely manner. Currently, First Data and
the Company are working to resolve their dispute regarding the ProfitMax
Contract by negotiating a new agreement. First Data has resumed making license
fee payments on a delayed basis, and HNC has agreed to extend the date for First
Data to pay past due license fees until mid-April 1998. Although HNC expects to
reach a new agreement with First Data that will resolve the pending dispute,
there can be no assurance that such an agreement will be reached or that the
terms of such an agreement would be as favorable to HNC as its existing
contractual arrangements with First Data. If no such agreement can be reached
and First Data maintains its current position, it is possible that litigation or
arbitration could ensue, which would likely result in a loss of anticipated
revenue to the Company under the ProfitMax Agreement and possibly other
agreements between the Company and First Data, which could have a material
adverse affect on the Company's business, financial condition and results of
operation.
The Company also uses representative agents for certain products in certain
territories outside of North America. The Company has agents covering Australia,
Austria, France, Germany, Italy, New Zealand, Spain and Switzerland. In 1995,
1996 and 1997, international operations and export sales (includes sales in
Canada) represented 12.6%, 17.7% and 16.8% of the Company's total revenues,
respectively. International sales result primarily from Falcon product sales and
sales of retail products. The Company intends to continue to expand its
operations outside the United States and to enter additional international
markets, including by adding sales and support offices in Europe and Japan,
which will require significant management attention and financial resources. The
Company has committed and continues to commit significant time and development
resources to customizing certain of its products for selected international
markets and to developing international sales and support channels. There can be
no assurance that the Company's efforts to develop products, databases and
models for targeted international markets or to develop additional international
sales and support channels will be successful. The failure of such efforts,
which can entail considerable expense, could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Risks Associated with International Sales."
International sales are subject to additional inherent risks, including
longer payment cycles, unexpected changes in regulatory requirements, import and
export restrictions and tariffs, difficulties in staffing and managing foreign
operations, the burdens of complying with a variety of foreign laws, greater
difficulty or delay
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in accounts receivable collection, potentially adverse tax consequences and
political and economic instability. The Company's international sales are
currently denominated predominantly in United States dollars and a small portion
are denominated in British pounds sterling. An increase in the value of the
United States dollar relative to foreign currencies could make the Company's
products more expensive, and therefore potentially less competitive, in foreign
markets. In the future, to the extent the Company's international sales are
denominated in local currencies, foreign currency translations may contribute to
significant fluctuations in the Company's business, financial condition and
results of operations. If for any reason exchange or price controls or other
restrictions on foreign currencies are imposed, the Company's business,
financial condition and results of operations could be materially adversely
affected.
Due in part to the mission-critical nature of certain of the Company's
applications, potential customers perceive high risk in connection with adoption
of the Company's products. As a result, customers have been cautious in making
decisions to acquire the Company's products. In addition, because the purchase
of the Company's products typically involves a significant commitment of capital
and may involve shifts by the customer to a new software and/or hardware
platform, delays in completing sales can arise while customers complete their
internal procedures to approve large capital expenditures and test and accept
new technologies that affect key operations. For these and other reasons, the
sales cycle associated with the purchase of the Company's products is typically
lengthy, unpredictable and subject to a number of significant risks over which
the Company has little or no control, including customers' budgetary constraints
and internal acceptance reviews. The sales cycle associated with the licensing
of the Company's products can typically range from 60 days to 18 months. As a
result of the length of the sales cycle and the typical size of customers'
orders, the Company's ability to forecast the timing and amount of specific
sales is limited. A lost or delayed sale could have a material adverse effect on
the Company's business, financial condition and results of operations.
TECHNOLOGY
The Company seeks to develop innovative products by combining industry and
application knowledge with its core neural-network technology to address
specific market needs. The Company's systems also employ rule-based technology
to implement customer strategy, policy and procedures. These technologies are
incorporated in computer software and hardware architectures, including
client-server hardware, relational databases and object-oriented programming.
The Company intends to continue to develop state-of-the-art technologies to
enhance its current products and broaden development opportunities.
Neural-Network Technology. Neural networks have predictive power that can
be improved with experience as the historical database increases in size. The
term "neural network" refers to a family of nonlinear, statistical modeling
techniques, sometimes called "computational intelligence." These techniques
distinguish themselves through a process of automated "learning" or "training"
that replaces the time-consuming manual techniques of traditional nonlinear,
statistical modeling. The neural-network architecture itself consists of groups
of "processing elements," or equations with several inputs and a single output.
The output of each element becomes either the input to another element or part
of the dependent output. Each input receives a "weight" or value, in the
equation, which is adjusted during the training process. The actual result from
each training record is compared with the answer from the neural network, and
the weights are adjusted to reduce the error between the two. This process can
become computationally intensive, as millions of training data records must be
processed hundreds or thousands of times. HNC has developed proprietary
high-speed and parallel-processor boards to accelerate training and execution of
its neural-network software. The Company believes that the rapid model
development afforded by its technology provides a competitive advantage in the
development of predictive software solutions.
Rule-Based Technology. The Company's systems also employ rule-based
technology to implement customer strategy, policy and procedures. The rules are
implemented as part of predictive processes. The Company believes that its
combination of neural networks and rule bases in a single decision engine
represents a significant competitive advantage over more traditional approaches
to decision automation.
Context Vector Technology. Context vector technology that originated at HNC
and is being commercialized at Aptex is a way to explore, analyze and model
unstructured textual data. Context vector technology
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automatically discovers the underlying structure of free form symbolic data.
This structure enables modeling from data elements previously considered
impossible to include in predictive software applications. Context vector
technology also models behavior. Just as relationships are discovered in
unstructured data, observing electronic transaction behavior identifies
patterns. Compatibility predictions can be made between information, behavior,
people and products. When combined with other HNC technologies, such as neural
networks and rule-based systems, the Company believes that context vectors can
improve the performance of existing applications while opening new market
opportunities. Context vector technology has been demonstrated to increase
banner advertising click rates on the Internet, automate e-mail responses and
discover unknown relationships in credit card transaction data.
The Company's success depends upon its ability to enter new markets by
successfully developing new products for such markets 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 (particularly new products for markets not previously served by the
Company) 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 a market presence and credibility in the new market. These
potential customers, most of which have significantly greater financial and
marketing resources than the Company, may compete with the Company in the future
or otherwise discontinue their relationships with or support of the Company,
either during development of the Company's products or thereafter. The failure
by the Company to obtain adequate third-party support for new product
development would have a material adverse effect on the Company's ability to
enter new markets and, consequently, on the Company's business, financial
condition and results of operations. See "Risk Factors -- Risks Associated with
Technological Change and Delays in Developing New Products."
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part on its ability
to maintain and improve its core technologies, enhance its existing products and
develop new products that meet an expanding range of markets and customer
requirements. The Company intends to expand its existing product offerings and
to introduce new predictive software solutions. In the development of new
products and enhancements to existing products, the Company uses its own tools
extensively. Until 1996, the Company relied primarily on internal development of
its products. Based on timing and cost considerations, however, the Company has
acquired, and in the future may consider acquiring, technology or products from
third parties. For example, the Company acquired technology and products in
connection with its acquisitions of Risk Data and Retek in 1996 and CompReview
in 1997.
The Company performs all quality assurance and develops documentation
internally. The Company intends to continue to support industry standard
operating environments, client-server architectures and network protocols. The
Company's specialists in neural network model development, software engineering,
user interface design, product documentation and quality improvement are
responsible for maintaining and enhancing the performance, quality and usability
of all HNC predictive software solutions. The marketing services organization is
responsible for authoring and updating all user documentation and other
publications. See "Risk Factors -- Risks Associated with Technological Change
and Delays in Developing New Products."
The Company strategically targets its long-term research projects. In
addition to funds allocated by the Company for research, HNC receives research
contracts from a range of commercial sources and the United States Government.
Government and commercial contract customers have included the Advanced Research
Projects Agency, United States Air Force, Office of Naval Research and Tracor
Applied Sciences, Inc. The Company believes that these contracts augment its
ability to maintain existing technologies and investigate new technologies that
may or may not become part of its products. The United States Government
typically retains certain intellectual property rights and licenses in the
technologies the Company develops under research contracts directly or
indirectly sponsored by the government, and in some cases can terminate the
Company's rights in such technologies if the Company fails to commercialize them
on a timely basis.
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Historically, these contracts have not resulted in development of products
contributing to the Company's revenues in the fiscal year in which the research
contract is performed, or in the subsequent fiscal year.
The market for the Company's predictive software solutions for service
industries is characterized by rapidly changing technology and improvements in
computer hardware, network operating systems, programming tools, programming
languages, operating systems and database technology. The Company's success will
depend upon its ability to continue to develop and maintain competitive
technologies, enhance its current products and develop, in a timely and
cost-effective manner, new products that meet changing market conditions,
including evolving customer needs, new competitive product offerings, emerging
industry standards and changing technology. For example, the rapid growth of the
Internet environment creates new opportunities, risks and uncertainties for
businesses, such as the Company, which develop software solutions that now may
have to be designed to operate in Internet, intranet and other on-line
environments. The Company may not be able to develop and market, on a timely
basis, or at all, product enhancements or new products that respond to changing
technologies. The Company has previously experienced significant delays in the
development and introduction of new products and product enhancements, primarily
due to difficulties with model development, which has in the past required
multiple iterations, as well as difficulties with acquiring data and adapting to
particular operating environments. The length of these delays has varied
depending upon the size and scope of the project and the nature of the problems
encountered. Any significant delay in the completion of new products, or the
failure of such products, if and when installed, to achieve any significant
degree of market acceptance, would have a material adverse effect on the
Company's business, financial condition and results of operations. Any failure
by the Company to anticipate or to respond adequately to changing technologies,
or any significant delays in product development or introduction, could cause
customers to delay or decide against purchases of the Company's products and
would have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and confidentiality procedures to protect its proprietary
rights. The Company currently owns seven issued United States patents and has
four United States patent applications pending. The Company has applied for
additional patents for its Falcon technology in Canada, Europe and Japan and for
its MIRA product in Australia, Canada and Europe. There can be no assurance that
patents will be issued with respect to pending or future patent applications or
that the Company's patents will be upheld as valid or will prevent the
development of competitive products. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. As part of its confidentiality procedures,
the Company generally enters into invention assignment and proprietary
information agreements with its employees and independent contractors and
nondisclosure agreements with its distributors, corporate partners and
licensees, and limits access to and distribution of its software, documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise to obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently. In addition, to ensure that customers will not be adversely
affected by an interruption in the Company's business, the Company places source
code for certain of its products into escrow, which may increase the likelihood
of misappropriation or other misuse of the Company's intellectual property.
Moreover, effective protection of intellectual property rights may be
unavailable or limited in certain foreign countries in which the Company has
done and may do business. Also, the Company has developed technologies under
research projects conducted under agreements with various United States
Government agencies or subcontractors to such agencies. Although the Company has
acquired certain commercial rights to such technologies, the United States
Government typically retains ownership of certain intellectual property rights
and licenses in the technologies developed by the Company under such contracts,
and in some cases can terminate the Company's rights in such technologies if the
Company fails to commercialize them on a timely basis. In addition, under
certain United States Government contracts, the results of the Company's
research may be made public by the government, which could limit the Company's
competitive advantage with respect to future products based on such research.
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In the past, the Company has received communications from third parties
asserting that Company trademarks infringe such other parties' trademarks, none
of which has resulted in litigation or losses to the Company. Given the
Company's ongoing efforts to develop and market new technologies and products,
the Company may receive communications from third parties asserting that the
Company's products infringe, or may infringe, their intellectual property
rights. If as a result of any such claims the Company were precluded from using
certain technologies or intellectual property rights, licenses to such disputed
third-party technology or intellectual property rights might not be available on
reasonable commercial terms, if at all. Furthermore, the Company may initiate
claims or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation, either as plaintiff or defendant, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation is resolved in favor of the Company. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology, and the court might invalidate the Company's patents, trademarks or
other proprietary rights. In the event of a successful claim against the Company
and the failure of the Company to develop or license a substitute technology,
the Company's business, financial condition and results of operations would be
materially and adversely affected.
As the number of software products increases and the functionality of these
products further overlaps, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend and could
materially and adversely affect the Company's business, financial condition and
results of operations.
COMPETITION
The market for predictive software solutions for service industries is
intensely competitive and subject to rapid change. Competitors, many of which
have substantially greater financial resources than the Company, vary in size
and in the scope of the products and services they offer. The Company encounters
competition from a number of sources, including (i) other application software
companies, (ii) management information systems departments of customers and
potential customers, including banks, insurance companies and retailers, (iii)
third party professional services organizations, including without limitation,
consulting divisions of public accounting firms, (iv) hardware suppliers that
bundle or develop complementary software, (v) network and service providers that
seek to enhance their value-added services, (vi) neural-network tool suppliers,
and (vii) managed care organizations. In the healthcare/insurance market, the
Company has experienced competition primarily from NCCI, Corporate Systems and
CSC Incorporated. In the workers' compensation and medical cost administration
market, the Company has experienced competition from MediCode, Medata, Inc. and
Embassy Software with regard to software licensing, and Intracorp and Corvel
Corporation in the service bureau operations market. Additionally, the Company
has faced competition from ADP in the automobile accident medical claims market.
In the financial services market, the Company has experienced competition from
Fair, Isaac & Co., Inc., Cogensys (a subsidiary of Policy Management Systems
Corporation), Fannie Mae, Freddie Mac, IBM, Nestor, Inc., NeuralTech Inc.,
Neuralware Inc., PMI Mortgage Services Co., VISA International and others. In
the retail market, the Company has experienced competition from JDA Software
Group, Inc., SAP AG, PeopleSoft, Inc., IBM, Manugistics Group, Inc. and others.
The Company expects to experience additional competition from other established
and emerging companies, as well as other technologies. For example, the
Company's Falcon product competes against other methods of preventing credit
card fraud, such as card activation programs, credit cards that contain the
cardholder's photograph, smart cards and other card authorization techniques.
Increased competition, whether from other products or new technologies, could
result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, financial condition and results of operations.
The Company believes that most of its products are currently priced at a
premium when compared to its competitors' products. The market for the Company's
products is highly competitive, and the Company expects that it will face
increasing pricing pressures from its current competitors and new market
entrants. In
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particular, increased competition could reduce or eliminate such premiums and
cause further price reductions. In addition, such competition could adversely
affect the Company's ability to obtain new long-term contracts and renewals of
existing long-term contracts on terms favorable to the Company. Any reduction in
the price of the Company's products could materially adversely affect the
Company's business, financial condition and results of operations.
The Company believes that the principal competitive factors affecting its
market include technical performance (for example, accuracy in detecting credit
card fraud or evaluating workers' compensation claims), access to unique
proprietary databases and product attributes such as adaptability, scalability,
ability to integrate with products produced by other vendors, functionality,
ease-of-use, product reputation, quality, performance, price, customer service
and support, the effectiveness of sales and marketing efforts and Company
reputation. Although the Company believes that its products currently compete
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Some of the Company's current, and many of the Company's potential,
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly gain
significant market share. Also, the Company relies upon its customers to provide
data, expertise and other support for the ongoing updating of the Company's
models. The Company's customers, most of which have significantly greater
financial and marketing resources than the Company, may compete with the Company
in the future or otherwise discontinue their relationships with or support of
the Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, the Company had 706 employees, including 316 in
product development and support, 87 in customer service, 125 in sales and
marketing and 178 in finance, administration and MIS. Most of these employees
are located in the United States. None of the Company's employees are
represented by a labor union. The Company has experienced no work stoppages and
believes that its employee relationships are generally good.
The Company's success depends to a significant degree upon the continued
service of members of the Company's senior management and other key research,
development, sales and marketing personnel. Accordingly, the loss of any of the
Company's senior management or key research, development, sales or marketing
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. Only a small number of employees
have employment agreements with the Company, and there can be no assurance that
such agreements will result in the retention of these employees for any
significant period of time. In addition, the untimely loss of a member of the
management team or a key employee of a business acquired by the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations, particularly if such loss occurred before the Company
has had adequate time to familiarize itself with the operating details of that
business. In the past, the Company has experienced difficulty in recruiting a
sufficient number of qualified sales and technical employees. In addition,
competitors may attempt to recruit the Company's key employees. There can be no
assurance that the Company will be successful in attracting, assimilating and
retaining such personnel. The failure to attract, assimilate and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Risks
Associated with Managing Growth."
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RISK FACTORS
This Report (including without limitation the following Risk Factors)
contains forward-looking statements (within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act) regarding the Company and
its business, financial condition, results of operations and prospects. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Report. Additionally, statements
concerning future matters such as the development of new products, enhancements
or technologies, possible changes in legislation and other statements regarding
matters that are not historical are forward-looking statements.
Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
below as well as those discussed elsewhere in this Report. Readers are urged 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 or
update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Report. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this Report, which attempts to advise interested parties of the risks and
factors that may affect the Company's business, financial condition and results
of operations and prospects.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and
operating results have varied significantly in the past and may do so in the
future. Because 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, the Company may be unable to adjust its spending in time to
compensate for any unexpected revenue shortfall. Factors affecting operating
results include market acceptance of the Company's products; the relatively
large size and small number of customer orders that may be received during a
given period; customer cancellation of long-term contracts yielding recurring
revenues or customers' ceasing their use of Company products for which the
Company's fees are usage based; the length of the Company's sales cycle; the
Company's ability to develop, introduce and market new products and product
enhancements; the timing of new product announcements and introductions by the
Company and its competitors; changes in the mix of distribution channels;
changes in the level of operating expenses; the Company's ability to achieve
progress on percentage-of-completion contracts; the Company's success in
completing certain pilot installations for contracted fees; competitive
conditions in the industry; domestic and international economic conditions; and
market conditions in the Company's targeted markets. Furthermore, the Company's
operating results may be affected by factors unique to certain of its product
lines. For example, the Company derives a substantial and increasing portion of
its revenues from its retail products, which are generally priced as "perpetual"
license transactions in which the Company receives a one-time license fee. The
Company recognizes these fees as revenue upon delivery of the software and
acceptance by the customer. Thus, failure to complete a perpetual license
transaction during a fiscal quarter would have a disproportionate adverse impact
on the Company's operating results for that quarter.
The Company expects fluctuations in its operating results 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 future performance. The Company may not be able to 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 that
event, the price of the Company's Common Stock and, in turn, the market price of
the Notes, would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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LENGTHY AND UNPREDICTABLE SALES CYCLE. Due in part to the mission-critical
nature of certain of the Company's applications, potential customers perceive
high risk in connection with adoption of the Company's products. As a result,
customers have been cautious in making decisions to acquire the Company's
products. In addition, because the purchase of the Company's products typically
involves a significant commitment of capital and may involve shifts by the
customer to a new software and/or hardware platform, delays in completing sales
can arise while customers complete their internal procedures to approve large
capital expenditures and test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
purchase of the Company's products is typically lengthy, unpredictable and
subject to a number of significant risks over which the Company has little or no
control, including customers' budgetary constraints and internal acceptance
reviews. The sales cycle associated with the licensing of the Company's products
can typically range from 60 days to 18 months. As a result of the length of the
sales cycle and the typical size of customers' orders, the Company's ability to
forecast the timing and amount of specific sales is limited. A lost or delayed
sale could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
ACQUISITIONS. Between August 1996 and November 1997, the Company acquired
three businesses. In August 1996, the Company acquired Risk Data, a company that
develops, markets and supports proprietary software decision products for use in
the insurance industry. In November 1996, the Company acquired Retek, a company
that develops, markets and supports management decision software products for
retailers and their vendors. In November 1997, the Company acquired CompReview,
a company that develops, markets and supports a software product and related
services designed to assist in the management and containment of the medical
costs of workers' compensation and automobile accident medical claims. The
Company believes that its future growth depends, in part, upon the success of
these and possible future acquisitions. There can be no assurance that the
Company will successfully identify, acquire on favorable terms or integrate such
businesses, products, services or technologies. The Company may in the future
face increased competition for acquisition opportunities, which may inhibit the
Company's ability to consummate suitable acquisitions and increase the costs of
completing such acquisitions. The acquisitions of Risk Data, Retek and
CompReview, as well as other potential future acquisitions, will require the
Company to successfully manage and integrate such acquired businesses, which may
be located in diverse geographic locations. Acquiring other businesses also
requires the Company to successfully develop and market products to new
industries and markets with which the Company may not be familiar. It also
requires the Company to coordinate (and possibly change) the diverse operating
structures, policies and practices of the acquired companies and to integrate
the employees of the acquired companies into the Company's organization and
culture. Failure of the Company to successfully integrate and manage acquired
businesses, to retain their employees, and to successfully address new
industries and markets associated with such acquired businesses, would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, although the acquisitions of Risk Data,
Retek and CompReview have been accounted for as poolings of interests, future
acquisitions may be accounted for as purchases, resulting in potential charges
that may adversely affect the Company's earnings. Additional acquisitions may
also involve the issuance of shares of the Company's stock to owners of acquired
businesses, resulting in dilution in the percentage of the Company's stock owned
by other stockholders. See "Business -- HNC's Strategy."
RISKS ASSOCIATED WITH MANAGING GROWTH. In recent years, the Company has
experienced changes in its operations that have placed significant demands on
the Company's administrative, operational and financial resources. The growth in
the Company's customer base and expansion of its product functionality, together
with its acquisition of other businesses and their employees, have challenged
and are expected to continue to challenge the Company's management and
operations, including its sales, marketing, customer support, research and
development and finance and administrative operations. The Company's future
performance will depend in part on its ability to successfully manage change,
both in its domestic and international operations, and to adapt its operational
and financial control systems, if necessary, to respond to changes in its
business and to facilitate the integration of acquired businesses with the
Company's operations. The failure of the Company's management to effectively
respond to and manage growth could have a material adverse effect on the
Company's business, financial condition and results of operations.
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DEPENDENCE ON EMERGING TECHNOLOGIES AND MARKETS. The market for predictive
software solutions is still emerging. The rate at which businesses have adopted
the Company's products has varied significantly by market and by product within
each market, and the Company expects to continue to experience such variations
with respect to its target markets and products in the future. The Company has
introduced products for the healthcare/insurance, financial services and retail
markets. The Company has recently announced several new products, including
PMAdvisor, VeriComp, SelectCast, SelectResponse and SelectResource. To date,
none of these products has achieved any significant degree of market acceptance,
and there can be no assurance that such products will ever be widely accepted.
Although businesses in the Company's target markets have recognized the
advantages of using predictive software solutions to automate the decision-
making process, many have developed decision automation systems internally
rather than licensing them from outside vendors. There can be no assurance that
the markets for the Company's products will continue to develop or that the
Company's products will be widely accepted, if at all. If the markets for the
Company's new or existing products fail to develop, or develop more slowly than
anticipated, the Company's sales would be negatively impacted, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Emerging Market Opportunities."
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE AND DELAYS IN DEVELOPING NEW
PRODUCTS. The market for the Company's predictive software solutions for service
industries is characterized by rapidly changing technology and improvements in
computer hardware, network operating systems, programming tools, programming
languages, operating systems and database technology. The Company's success will
depend upon its ability to continue to develop and maintain competitive
technologies, enhance its current products and develop, in a timely and
cost-effective manner, new products that meet changing market conditions,
including evolving customer needs, new competitive product offerings, emerging
industry standards and changing technology. For example, the rapid growth of the
Internet environment creates new opportunities, risks and uncertainties for
businesses, such as the Company, which develop software solutions that now may
have to be designed to operate in Internet, intranet and other on-line
environments. The Company may not be able to develop and market, on a timely
basis, or at all, product enhancements or new products that respond to changing
technologies. The Company has previously experienced significant delays in the
development and introduction of new products and product enhancements, primarily
due to difficulties with model development, which has in the past required
multiple iterations, as well as difficulties with acquiring data and adapting to
particular operating environments. The length of these delays has varied
depending upon the size and scope of the project and the nature of the problems
encountered. Any significant delay in the completion of new products, or the
failure of such products, if and when installed, to achieve any significant
degree of market acceptance, would have a material adverse effect on the
Company's business, financial condition and results of operations. Any failure
by the Company to anticipate or to respond adequately to changing technologies,
or any significant delays in product development or introduction, could cause
customers to delay or decide against purchases of the Company's products and
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Technology" and
"-- Research and Development."
PRODUCT CONCENTRATION. The Company currently has one product or product
line in each of its three target markets that accounts for a majority of the
Company's total revenues from that market. These products in the aggregate
accounted for 60.0%, 59.1% and 57.9% of the Company's total revenues in 1995,
1996 and 1997, respectively. In the healthcare/insurance market, the Company's
revenues from its CRLink product accounted for 29.8%, 24.6% and 23.0% of the
Company's total revenues in 1995, 1996 and 1997, respectively, and are expected
to account for a substantial portion of the Company's total revenues for the
foreseeable future. Continued market acceptance of CRLink will be affected by
future product enhancements and competition. Decline in demand for, or use of,
CRLink, whether as a result of competition, simplification of state workers'
compensation fee schedules, changes in the overall payment system or regulatory
structure for workers' compensation claims, technological change, an inability
to obtain or use state fee schedule or claims data, saturation of market demand,
industry consolidation or otherwise, could result in decreased revenues from
CRLink, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, revenues from the Retek
Merchandising System ("RMS"), a retail management product, accounted for 2.2%,
13.6% and 18.9% of the Company's total revenues in 1995, 1996 and 1997,
18
<PAGE> 19
respectively, and are expected to continue to account for a substantial portion
of the Company's revenues in the foreseeable future. Continued market acceptance
of RMS will be affected by the quality and timely introduction of future product
enhancements and competition. Decline in demand for, or use of, RMS as a result
of continued entry into the retail inventory management market by vendors that
may have significantly greater resources and a broader customer base than the
Company could result in decreased revenues from RMS, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, decline in demand for RMS, as a result of technological
change, saturation of market demand, industry consolidation or otherwise would
have a material adverse effect on the Company's business, financial condition
and results of operations. Revenues from the Company's Falcon product line for
credit card fraud detection for financial institutions accounted for 28.0%,
20.9% and 16.0% of the Company's total revenues in 1995, 1996 and 1997,
respectively, and are expected to continue to account for a substantial portion
of the Company's total revenues in the foreseeable future. Continued market
acceptance of the Falcon product line will be affected by the quality and timely
introduction of future product enhancements and competition. In addition, it is
possible that patterns of credit card fraud may change in a manner that the
Falcon product line would not detect and that other methods of credit card fraud
prevention may reduce customers' needs for the Falcon product line. As a result
of increasing saturation of market demand for the Falcon product line, the
Company may also need to rely increasingly on international sales to maintain or
increase Falcon revenue levels. Furthermore, Falcon customers are banks and
related financial institutions. Accordingly, the Company's future success
depends upon the capital expenditure budgets of such customers and the continued
demand by such customers for Falcon products. The financial services industry
tends to be cyclical in nature, which may result in variations in demand for the
Company's products. In addition, there has been and continues to be
consolidation in the financial services industry, which in some cases has
lengthened the sales cycle and may lead to reduced demand for the Company's
products. Decline in demand for, or use of, Falcon, whether as a result of
competition, technological change, change in fraud patterns, the cyclical nature
of the financial services industry, saturation of market demand, fluctuations in
interest rates, industry consolidation, reduction in capital spending or
otherwise, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Markets and
Products."
DEPENDENCE ON DATA. The development, installation and support of the
Company's credit card fraud control and profitability management, loan
underwriting, home valuation and certain healthcare/insurance products require
periodic model updates. The Company must develop or obtain a reliable source of
sufficient amounts of current and statistically relevant data to analyze
transactions and update its models. For example, in the electronic payments
market, the data required by the Company are collected privately and maintained
in proprietary databases. As a result, the Company and its Falcon and ProfitMax
customers enter into agreements pursuant to and build new fraud detection and
profitability models. For its AREAS home valuation product, the Company obtains
data from commercial databases on available terms and conditions. Many of the
Company's healthcare/insurance products use historical workers' compensation
claims data obtained from customers. CRLink also uses data from state workers'
compensation fee schedules adopted by state regulatory agencies, and certain
third parties have asserted copyright interests in such data. In most cases,
such data must be periodically updated and refreshed to enable the Company's
predictive software products to continue to work effectively. In addition, the
development of new and enhanced products also depends to a significant extent on
the availability of sufficient amounts of statistically relevant data to enable
the Company to develop models. For example, to expand the geographic coverage of
its AREAS product, the Company would be required to develop or obtain data on
home sales in each county for which AREAS is marketed. There can be no assurance
that the Company will be able to continue to obtain adequate amounts of
statistically relevant data on a timely basis, in the required formats or on
reasonable terms and conditions, whether from customers or commercial suppliers.
Any such failure by the Company to obtain required data when it is needed, for a
reasonable price and on reasonable terms, could have a significant negative
impact on existing product performance, new product development and product
pricing which could in turn have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Customer Service and Support."
COMPETITION. The market for predictive software solutions for service
industries is intensely competitive and subject to rapid change. Competitors,
many of which have substantially greater financial resources than
19
<PAGE> 20
the Company, vary in size and in the scope of the products and services they
offer. The Company encounters competition from a number of sources, including
(i) other application software companies, (ii) management information systems
departments of customers and potential customers, including banks, insurance
companies and retailers, (iii) third-party professional services organizations,
including without limitation, consulting divisions of public accounting firms,
(iv) hardware suppliers that bundle or develop complementary software, (v)
network and service providers that seek to enhance their value-added services,
(vi) neural-network tool suppliers and (vii) managed care organizations. In the
healthcare/insurance market, the Company has experienced competition primarily
from National Council on Compensation Insurance ("NCCI"), Corporate Systems and
CSC Incorporated. In the workers' compensation and medical cost administration
market, the Company has experienced competition from MediCode, Inc.
("MediCode"), Medata, Inc. and Embassy Software with regard to software
licensing, and Intracorp and Corvel Corporation in the service bureau operations
market. Additionally, the Company has faced competition from Automatic Data
Processing, Inc. ("ADP") in the automobile accident medical claims market. In
the financial services market, the Company has experienced competition from
Fair, Isaac & Co., Inc., Cogensys (a subsidiary of Policy Management Systems
Corporation), Federal National Mortgage Association ("Fannie Mae"), Federal Home
Loan Mortgage Corporation ("Freddie Mac"), International Business Machines
Corporation ("IBM"), Nestor, Inc., NeuralTech Inc., Neuralware Inc., PMI
Mortgage Services Co., VISA International and others. In the retail market, the
Company has experienced competition from JDA Software Group, Inc., SAP AG,
PeopleSoft, Inc., IBM, Manugistics Group, Inc. and others. The Company expects
to experience additional competition from other established and emerging
companies, as well as other technologies. For example, the Company's Falcon
product competes against other methods of preventing credit card fraud, such as
card activation programs, credit cards that contain the cardholder's photograph,
smart cards and other card authorization techniques. Increased competition,
whether from other products or new technologies, could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any of which could materially adversely affect the Company's business,
financial condition and results of operations.
The Company believes that most of its products are currently priced at a
premium when compared to its competitors' products. The market for the Company's
products is highly competitive, and the Company expects that it will face
increasing pricing pressures from its current competitors and new market
entrants. In particular, increased competition could reduce or eliminate such
premiums and cause further price reductions. In addition, such competition could
adversely affect the Company's ability to obtain new long-term contracts and
renewals of existing long-term contracts on terms favorable to the Company. Any
reduction in the price of the Company's products could materially adversely
affect the Company's business, financial condition and results of operations.
Some of the Company's current, and many of the Company's potential,
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly gain
significant market share. Also, the Company relies upon its customers to provide
data, expertise and other support for the ongoing updating of the Company's
models. The Company's customers, most of which have significantly greater
financial and marketing resources than the Company, may compete with the Company
in the future or otherwise discontinue their relationships with or support of
the Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See
"Business -- Competition."
RISKS ASSOCIATED WITH RECRUITING AND RETAINING QUALIFIED PERSONNEL. The
Company's success depends to a significant degree upon the continued service of
members of the Company's senior management and other key research, development,
sales and marketing personnel. Accordingly, the loss of any such personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations. Only a
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<PAGE> 21
small number of employees have employment agreements with the Company, and there
can be no assurance that such agreements will result in the retention of these
employees for any significant period of time. In addition, the untimely loss of
a member of the management team or a key employee of a business acquired by the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly if such loss
occurred before the Company has had adequate time to familiarize itself with the
operating details of that business. In the past, the Company has experienced
difficulty in recruiting a sufficient number of qualified sales and technical
employees. In addition, competitors may attempt to recruit the Company's key
employees. There can be no assurance that the Company will be successful in
attracting, assimilating and retaining such personnel. The failure to attract,
assimilate and retain key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Employees" and "Management."
CUSTOMER CONCENTRATION. Product licenses to First Data Resources, Inc.
("First Data"), the largest provider of credit card charge receipt processing
services to banks, accounted for 8.7%, 8.6% and 7.6% of the Company's total
revenues in 1995, 1996 and 1997, respectively. The Company has licensed First
Data to provide its customers with access to the Company's ProfitMax product
pursuant to a license agreement entered into in January 1996 (the "ProfitMax
Contract"). The Company's revenues under the ProfitMax Contract represented
approximately one-quarter of the Company's revenues from First Data in 1997. In
late January 1998, First Data asserted that certain restrictive covenants under
the ProfitMax Contract violated certain intellectual property laws. First Data
also asserted that the existence of such restrictions made the ProfitMax
Contract at least temporarily unenforceable and that First Data is therefore not
obligated to pay the Company license fees due under the ProfitMax Contract. The
Company disputed First Data's claim, released and waived the above-mentioned
restrictive covenants in the ProfitMax Contract and gave First Data written
notice that the Company intended to terminate the ProfitMax Contract pursuant to
its terms unless First Data cured its failure to pay the delinquent license fees
in a timely manner. Currently, First Data and the Company are working to resolve
their dispute regarding the ProfitMax Contract by negotiating a new agreement;
however, there can be no assurance that such an agreement will be reached or
that the terms of such an agreement would be as favorable to HNC as its existing
contractual arrangements with First Data. If no such agreement can be reached
and First Data maintains its current position, it is possible that litigation or
arbitration could ensue, which would likely result in a loss of anticipated
revenue to the Company under the ProfitMax Agreement and possibly other
agreements between the Company and First Data, which could have a material
adverse affect on the Company's business, financial condition and results of
operation. See "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 1995, 1996 and 1997,
international operations and export sales (including sales in Canada)
represented 12.6%, 17.7% and 16.8% of the Company's total revenues,
respectively. The Company intends to continue to expand its operations outside
the United States and to enter additional international markets, including by
adding sales and support offices in Europe and Japan, which will require
significant management attention and financial resources. For certain more
mature products, such as Falcon, the Company may need to increase international
sales in order to continue to expand the product's customer base. The Company
has committed and continues to commit significant time and development resources
to customizing certain of its products for selected international markets and to
developing international sales and support channels. There can be no assurance
that the Company's efforts to develop products, databases and models for
targeted international markets or to develop additional international sales and
support channels will be successful. The failure of such efforts, which can
entail considerable expense, could have a material adverse effect on the
Company's business, financial condition and results of operations.
International sales are subject to additional inherent risks, including
longer payment cycles, unexpected changes in regulatory requirements, import and
export restrictions and tariffs, difficulties in staffing and managing foreign
operations, the burdens of complying with a variety of foreign laws, greater
difficulty or delay in accounts receivable collection, potentially adverse tax
consequences and political and economic instability. The Company's international
sales are currently denominated predominantly in United States dollars and a
small portion are denominated in British pounds sterling. An increase in the
value of the United States dollar relative to foreign currencies could make the
Company's products more expensive, and therefore potentially
21
<PAGE> 22
less competitive, in foreign markets. In the future, to the extent the Company's
international sales are denominated in local currencies, foreign currency
translations may contribute to significant fluctuations in the Company's
business, financial condition and results of operations. If for any reason
exchange or price controls or other restrictions on foreign currencies are
imposed, the Company's business, financial condition and results of operations
could be materially adversely affected. See "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH CHANGING REGULATORY ENVIRONMENT. The Company's
customers are subject to a number of government regulations and certain other
industry standards with which the Company's products must comply. For example,
the Company's financial services products are affected by Regulation B
promulgated under the Equal Credit Opportunity Act, by regulations governing the
extension of credit to consumers and by Regulation E promulgated under the
Electronic Fund Transfers Act governing the transfer of funds from and to
consumer deposit accounts, as well as VISA and MasterCard electronic payment
standards. In the mortgage services market, the Company's products are affected
by regulations such as Fannie Mae and Freddie Mac regulations for conforming
loans, Uniform Standards of Professional Appraisal Practice and appraisal
standards for federally insured institutions under the Financial Institutions
Reform, Recovery and Enforcement Act. In addition, recent regulatory initiatives
have restricted the availability of bank and credit bureau data, reflecting a
consumer privacy trend that could limit the Company's ability to obtain or use
certain credit-related information. It is also possible that insurance-related
regulations may in the future apply to the Company's healthcare/insurance
products. In many states, including California, there have been periodic
legislative efforts to reform workers' compensation laws in order to reduce the
cost of workers' compensation insurance and to curb abuses of the workers'
compensation system, and such changes, if adopted, might adversely affect the
Company's healthcare/insurance business. In addition, if state-mandated workers'
compensation laws or regulations or state workers' compensation fee schedules
are simplified, such changes would diminish the need for, and the benefit
provided by, the CRLink product. Changes in workers' compensation laws or
regulations could also adversely affect the Company's healthcare/ insurance
products by making them obsolete, or by requiring extensive changes in these
products to reflect new workers' compensation rules. To the extent that the
Company sells new products targeted to markets that include regulated industries
and businesses, the Company's products will need to comply with these additional
regulations. Any failure of the Company's products to comply with existing or
new regulations and standards could result in legal action against the Company
or its customers by regulatory authorities or by third parties, including
actions seeking civil or criminal penalties, injunctions against the Company's
use of data or civil damages, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company may also be liable to its customers for failure of its products to
comply with such regulatory requirements. Furthermore, changes to these
regulations and standards or the adoption of new regulations or standards that
affect the Company's products could affect the performance of such products and
have a material adverse effect on the Company's business, financial condition
and results of operations.
PROTECTION OF INTELLECTUAL PROPERTY. The Company relies on a combination of
patent, copyright, trademark and trade secret laws and confidentiality
procedures to protect its proprietary rights. The Company currently owns seven
issued United States patents and has four United States patent applications
pending. The Company has applied for additional patents for its Falcon
technology in Canada, Europe and Japan and its MIRA product in Australia, Canada
and Europe. There can be no assurance that patents will be issued with respect
to pending or future patent applications or that the Company's patents will be
upheld as valid or will prevent the development of competitive products. The
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. As
part of its confidentiality procedures, the Company generally enters into
invention assignment and proprietary information agreements with its employees
and independent contractors and nondisclosure agreements with its distributors,
corporate partners and licensees, and limits access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. In addition, to ensure that customers
will not be adversely affected by an interruption in the Company's business, the
Company places source code for certain of its products into escrow, which may
increase the likelihood of misappropriation or other misuse of the Company's
intellectual
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<PAGE> 23
property. Moreover, effective protection of intellectual property rights may be
unavailable or limited in certain foreign countries in which the Company has
done and may do business. Also, the Company has developed technologies under
research projects conducted under agreements with various United States
Government agencies or subcontractors to such agencies. Although the Company has
acquired certain commercial rights to such technologies, the United States
Government typically retains ownership of certain intellectual property rights
and licenses in the technologies developed by the Company under such contracts,
and in some cases can terminate the Company's rights in such technologies if the
Company fails to commercialize them on a timely basis. In addition, under
certain United States Government contracts, the results of the Company's
research may be made public by the government, which could limit the Company's
competitive advantage with respect to future products based on such research.
See "Business -- Intellectual Property and Other Proprietary Rights."
INFRINGEMENT OF PROPRIETARY RIGHTS. In the past, the Company has received
communications from third parties asserting that Company trademarks infringed
such other parties' trademarks, none of which have resulted in litigation or
losses to the Company. Given the Company's ongoing efforts to develop and market
new technologies and products, the Company may receive communications from third
parties asserting that the Company's products infringe, or may infringe, their
intellectual property rights. If as a result of any such claims the Company were
precluded from using certain technologies or intellectual property rights,
licenses to such disputed third-party technology or intellectual property rights
might not be available on reasonable commercial terms, if at all. Furthermore,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation, either as plaintiff or defendant,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is resolved in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company might be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology, and the court might invalidate the Company's patents,
trademarks or other proprietary rights. In the event of a successful claim
against the Company and the failure of the Company to develop or license a
substitute technology, the Company's business, financial condition and results
of operations would be materially and adversely affected. As the number of
software products increases and the functionality of these products further
overlaps, the Company believes that software developers may become increasingly
subject to infringement claims. Any such claims, with or without merit, can be
time consuming and expensive to defend and could materially and adversely affect
the Company's business, financial condition and results of operations. See
"Business -- Intellectual Property and Other Proprietary Rights."
RISK OF PRODUCT DEFECTS AND PRODUCT LIABILITY. Software products as complex
as those offered by the Company often contain undetected errors or failures when
first introduced or as new versions are released. In addition, to the extent
that the Company may have to develop new products that operate in new
environments, such as the Internet, the possibility for program errors and
failures may increase due to factors such as the use of new technologies or the
need for more rapid product development that is characteristic of the Internet
market. Despite pre-release testing by the Company and by current and potential
customers, there still may be errors in new products, even after commencement of
commercial shipments. The occurrence of such errors could result in delay in, or
failure to achieve, market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective as a result of existing or future laws or unfavorable
judicial decisions. Because the Company's products are used in business-critical
applications, any errors or failures in such products may give rise to
substantial product liability claims, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems
23
<PAGE> 24
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. The
Company anticipates that it will need to devote resources in the next two years
to modify its CRLink product to properly process dates beyond December 31, 1999.
The Company expects that the cost of making these modifications and distributing
the modified product to existing customers will be approximately $500,000. These
modifications and the resources that the Company expects to devote to such
modifications may divert management and engineering attention from, or delay the
development and introduction of, new products and enhancements to existing
products. The inability of the Company to complete such modifications
successfully and on a timely basis, or the inability of the Company to devote
sufficient resources to continuing updates and enhancements to the CRLink
product, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company believes
that the purchasing patterns of customers and potential customers may be
affected by Year 2000 issues as companies expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company, which could result in a material adverse
effect on the Company's business, financial condition and results of operations.
FACTORS INHIBITING TAKEOVER. The Board of Directors is authorized to issue
up to 4,000,000 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, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue shares of Preferred Stock. In addition, Section 203 of
the Delaware General Corporation Law restricts certain business combinations
with any "interested stockholder" as defined by such statute. The statute may
have the effect of delaying, deferring or preventing a change in control of the
Company.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, support, research
and development facilities are located in approximately 85,000 square feet of
space in San Diego, California. The Company and its subsidiaries also lease an
aggregate of approximately 95,000 square feet of additional office space
elsewhere in San Diego and in Atlanta, Georgia; Minneapolis, Minnesota; Costa
Mesa, California; and Irvine, California. The Company and its subsidiaries also
maintain numerous field offices in the United States and in foreign countries.
The Company believes that its current facilities are adequate to meet its needs
for the foreseeable future. The Company believes that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation other than ordinary routine
litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on November 25, 1997 to approve
two proposals: (1) a proposal to approve the issuance by the Company of shares
of HNC Common Stock and options to purchase HNC Common Stock to the stockholders
and optionholders, respectively, of CompReview, Inc; and (2) a proposal to
approve an amendment to the Company's 1995 Equity Incentive Plan increasing the
number of
24
<PAGE> 25
shares of the Company's Common Stock reserved for issuance thereunder by 750,000
shares. The proposals passed by the following vote:
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
VOTES FOR VOTES AGAINST NON-VOTES
---------- ------------- -----------
<S> <C> <C> <C>
Proposal(1)....................... 15,748,682 80,072 791,746
Proposal(2)....................... 15,578,243 1,026,607 15,650
</TABLE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
since June 1995 under the symbol "HNCS." The following table sets forth for the
periods indicated the high and low sales prices of the Common Stock. Prior to
June 1995, there was no established public trading market for the Common Stock.
All prices have been adjusted to give effect to a two-for-one stock split
effected in the form of a stock dividend paid in April 1996.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1996:
First Quarter.................................... $38 3/4 $18 1/4
Second Quarter................................... 51 31 1/4
Third Quarter.................................... 47 1/2 20 3/4
Fourth Quarter................................... 45 1/4 26 1/4
1997:
First Quarter.................................... $36 3/4 $23 1/4
Second Quarter................................... 42 3/8 18 1/4
Third Quarter.................................... 43 5/8 33 3/4
Fourth Quarter................................... 43 1/2 30
</TABLE>
On February 13, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $36.00 per share. As of February 13, 1998, there
were approximately 186 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock. 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. The Company's bank credit agreement prohibits the Company
from declaring or paying any cash dividends without the bank's consent.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1996 and 1997
and for each of the years in the three-year period ended December 31, 1997 have
been derived from HNC's Consolidated Financial Statements included elsewhere in
this Report, which have been audited by Price Waterhouse LLP, independent
accountants, as indicated in their report thereon appearing elsewhere herein.
The selected consolidated financial data as of December 31, 1994 and 1995 and
for the year ended December 31, 1994 have been derived from separate audited
financial statements for HNC and CompReview not included herein. The selected
consolidated financial data as of and for the year ended December 31, 1993 have
been derived from separate financial data for HNC and CompReview not included
herein. The data set forth below are qualified in their entirety by reference
to, and should be read in conjunction with, "Management's Discussion and
25
<PAGE> 26
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related notes thereto included elsewhere in this
Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Revenues:
License and maintenance.............................................. $ 24,561 $48,890 $89,643
Installation and implementation...................................... 4,648 6,691 10,702
Contracts and other.................................................. 9,146 11,128 7,772
Service bureau....................................................... 5,349 4,730 5,618
-------- ------- -------
Total revenues................................................ 43,704 71,439 113,735
-------- ------- -------
Operating expenses:
License and maintenance.............................................. 7,903 13,725 19,937
Installation and implementation...................................... 1,425 2,714 5,174
Contracts and other.................................................. 6,894 7,694 5,438
Service bureau....................................................... 3,025 3,365 4,320
Research and development............................................. 6,998 13,808 21,151
Sales and marketing.................................................. 7,276 11,923 22,049
General and administrative........................................... 5,101 8,551 12,626
-------- ------- -------
Total operating expenses...................................... 38,622 61,780 90,695
-------- ------- -------
Operating income....................................................... 5,082 9,659 23,040
Interest and other income.............................................. 912 2,178 2,003
Interest expense....................................................... (428) (478) (81)
Minority interest in income of consolidated subsidiary................. -- -- (43)
-------- ------- -------
Income before income tax (benefit) provision.................. 5,566 11,359 24,919
Income tax (benefit) provision......................................... (511) (534) 7,354
-------- ------- -------
Net income.................................................... $ 6,077 $11,893 $17,565
======== ======= =======
Earnings per share:
Basic net income per common share(2)................................. $ 0.38 $ 0.50 $ 0.72
======== ======= =======
Diluted net income per common share(2)............................... $ 0.28 $ 0.47 $ 0.68
======== ======= =======
Unaudited pro forma data(3):
Income before income tax provision................................... $ 5,566 $11,359 $24,919
Income tax provision................................................. 1,032 1,628 9,502
-------- ------- -------
Net income.................................................... $ 4,534 $ 9,731 $15,417
======== ======= =======
Basic pro forma net income per common share(3)....................... $ 0.64
=======
Diluted pro forma net income per common share(3)..................... $ 0.60
=======
Shares used in computing basic net income per common share and
unaudited basic pro forma net income per common share................ 15,195 23,552 24,275
======== ======= =======
Shares used in computing diluted net income per common share and
unaudited diluted pro forma net income per common share.............. 21,510 25,363 25,681
======== ======= =======
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
ADDITIONAL STATEMENT OF INCOME DATA:(1)
Total revenues........................................ $16,167 $29,838 $43,704 $71,439 $113,735
Operating income...................................... 1,034 2,881 5,082 9,659 23,040
Net income............................................ 875 3,142 6,077 11,893 17,565
Basic net income per common share(2).................. 0.02 0.28 0.38 0.50 0.72
Diluted net income per common share(2)................ 0.02 0.17 0.28 0.47 0.68
Pro forma net income(3)............................... 641 2,137 4,534 9,731 15,417
Basic pro forma net income per common share(3)........ 0.64
Diluted pro forma net income per common share(3)...... 0.60
Shares used in computing unaudited basic net income
per common share and basic pro forma net income per
common share........................................ 8,591 8,642 15,195 23,552 24,275
Shares used in computing unaudited diluted net income
per common share and diluted pro forma net income
per common share.................................... 9,289 18,142 21,510 25,363 25,681
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments available for
sale................................................ $ 4,679 $ 7,827 $44,975 $34,849 $ 42,946
Total assets.......................................... 10,944 20,663 63,113 98,293 119,877
Long-term obligations, less current portion........... 367 931 1,373 264 63
Mandatorily redeemable convertible preferred stock.... 12,452 13,169 -- -- --
</TABLE>
- ---------------
(1) The selected consolidated financial data gives retroactive effect to the
acquisitions of Risk Data, Retek and CompReview for all periods presented,
accounted for as poolings of interests.
(2) The computations of basic net income per common share for 1993, 1994 and
1995 include reductions of consolidated net income in the amounts of
$717,000, $717,000 and $348,000, respectively, related to the accretion of
dividends on mandatorily redeemable convertible Preferred Stock, which
converted into Common Stock upon the closing of the Company's initial public
offering on June 26, 1995. The computation of diluted net income per common
share for 1993 does not include the assumed conversion of all outstanding
shares of mandatorily redeemable convertible Preferred Stock into 7,675,000
shares of Common Stock or an increase to net income per common share related
to the elimination of dividend accretion on such Preferred Stock as the
impact would be antidilutive.
(3) Pro forma net income and net income per common share reflect a provision for
taxes on the income of CompReview, which was a subchapter S corporation
prior to its acquisition by HNC, as if CompReview had been subject to
corporate income taxes as a C corporation for all periods presented.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report (including without limitation the following section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements (within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act) regarding the
Company and its business, financial condition, results of operations and
prospects. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this Report.
Additionally, statements concerning future matters such as the development of
new products, enhancements or technologies, possible changes in legislation and
other statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
27
<PAGE> 28
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
in "Risk Factors" as well as those discussed elsewhere in this Report. Readers
are urged 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 or update any forward-looking statements in order to reflect any event
or circumstance that may arise after the date of this Report. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this Report, which attempt to advise interested parties of the risks and factors
that may affect the Company's business, financial condition, results of
operations and prospects.
OVERVIEW
HNC develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ
proprietary neural-network predictive decision engines, profiles, traditional
statistical modeling, business models, expert rules and context vectors 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.
In August 1996, HNC completed its acquisition of Risk Data in a transaction
accounted for as a pooling of interests. Risk Data is based in Irvine,
California and develops, markets and supports proprietary software decision
products for use in the insurance industry. In 1996, HNC formed Aptex Software
Inc. ("Aptex"), a majority-owned subsidiary located in San Diego, California
that develops, markets and supports electronic text analysis technology in
products designed for the Internet and other environments. In November 1996, HNC
completed its acquisition of Retek in a transaction accounted for as a pooling
of interests. Retek is based in Minneapolis, Minnesota and develops, markets and
supports software products that provide merchandise management and other
management tools to retailers and their vendors. In November 1997, the Company
completed its acquisition of CompReview, in a transaction accounted for as a
pooling of interests. CompReview is located in Costa Mesa, California and
develops, markets and supports a software product and related services designed
to assist in the management and containment of the medical costs of workers'
compensation and automobile accident medical claims. CompReview provides its
product and services primarily to insurance companies, managed care
organizations, third party administrators and large self-insured employers. The
Company anticipates that from time to time it will consider acquisitions of
other businesses in order to expand the markets served by the Company and to
acquire complementary technologies, products and personnel. See
"Business -- Risk Factors -- Acquisitions" and "Business -- HNC's Strategy."
After giving retroactive effect to the Company's acquisitions of Risk Data,
Retek and CompReview, HNC experienced compound annual growth in total revenues
of 63% from 1993 through 1997. See "Business -- Risk Factors -- Risks Associated
with Managing Growth." This revenue growth resulted primarily from increased
license fees for the Retek Merchandising System, CRLink, Falcon, MIRA and
ProfitMax products and, to a lesser extent, from increased license fees for the
Active Retail Intelligence, Retek Data Warehouse, PMAdvisor, CompCompare,
Capstone and AREAS products. Because of the long sales and development cycle
associated with the Company's products, the Company has not received significant
revenues to date from the SelectCast, SelectResponse, SelectResource, VeriComp
or PMAdvisor products. See "Business -- Risk Factors -- Lengthy and
Unpredictable Sales Cycle."
The Company markets most of its predictive 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 the CRLink, the Falcon products, MIRA, ProfitMax, AREAS, PMAdvisor,
CompCompare and ProviderCompare products typically includes an annual or monthly
usage fee and a one to seven year contract commitment. In 1995, 1996 and 1997,
annual license and maintenance revenues from these contracts represented 61.2%,
56.1% and 55.2% of the Company's total revenues, respectively.
The Company's revenues and operating results have varied significantly in
the past and may do so in the future. Because the Company's expense levels are
based in part on its expectations regarding future revenues
28
<PAGE> 29
and in the short term are fixed to a large extent, the Company may be unable to
adjust its spending in time to compensate for any unexpected revenue shortfall.
Factors affecting operating results include market acceptance of the Company's
products; the relatively large size and small number of customer orders that may
be received during a given period; customer cancellation of long-term contracts
yielding recurring revenues or customers' ceasing their use of Company products
for which the Company's fees are usage based; the length of the Company's sales
cycle; the Company's ability to develop, introduce and market new products and
product enhancements; the timing of new product announcements and introductions
by the Company and its competitors; changes in the mix of distribution channels;
changes in the level of operating expenses; the Company's ability to achieve
progress on percentage-of-completion contracts; the Company's success in
completing certain pilot installations for contracted fees; competitive
conditions in the industry; domestic and international economic conditions; and
market conditions in the Company's targeted markets. Furthermore, the Company's
operating results may be affected by factors unique to certain of its product
lines. For example, the Company derives a substantial and increasing portion of
its revenues from its retail products, which are generally priced as "perpetual"
license transactions in which the Company receives a one-time license fee. The
Company recognizes these fees as revenue upon delivery of the software and
acceptance by the customer. Thus, failure to complete a perpetual license
transaction during a fiscal quarter could have a disproportionate adverse impact
on the Company's operating results for that quarter.
The Company expects fluctuations in its operating results 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 future performance. The Company may not be able to 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 that
event, the price of the Company's Common Stock and, in turn, the market price of
the Notes, would likely be materially adversely affected.
RESULTS OF OPERATIONS
The Company's statements of income for all periods presented give
retroactive effect to the acquisitions of Risk Data, Retek and CompReview in
August 1996, November 1996 and November 1997, respectively, each of which was
accounted for as a pooling of interests.
Total Revenues
The Company's revenues are comprised of license and maintenance revenues,
installation and implementation revenues, contracts and other revenues and
service bureau revenues. Total revenues increased by 63.5% to $71.4 million in
1996 and by 59.2% to $113.7 million in 1997. International operations and export
sales represented 12.6%, 17.7% and 18.5% of total revenues in 1995, 1996 and
1997, respectively. The retail product line currently has more sales in
international markets than the healthcare/insurance and financial services
product lines combined. 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.
License and Maintenance Revenues. The Company's license and
maintenance revenues are derived from annual license fees, monthly license
fees, perpetual license fees and annual maintenance 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, and on-line or on-site support and
maintenance. The Company's revenue from periodic software license and
maintenance agreements is generally recognized ratably over the respective
license or agreement periods. Revenue from certain short-term periodic
software license and maintenance agreements with guaranteed minimum license
fees is recognized as related services are performed. Transactional fees
are recognized as revenue based on system usage or when fees based on
system usage exceed the monthly minimum license fees. Revenue from
perpetual 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.
29
<PAGE> 30
License and maintenance revenues increased by 99.1% to $48.9 million
in 1996 and by 83.4% to $89.6 million in 1997. The increase from 1995 to
1996 was due primarily to the growth of license fees in all markets,
particularly from the Retek Merchandising System, CRLink and Falcon, and,
to a lesser extent, MIRA and CompCompare. The increase from 1996 to 1997
was due primarily to the growth of license fee revenues from the Retek
Merchandising System and CRLink. Also contributing to the increase were
increased license fees from other retail products, such as ARI and Retek
Data Warehouse, financial services products such as Falcon, ProfitMax and
Capstone, and other healthcare/insurance products, such as PMAdvisor and
MIRA.
Installation and Implementation Revenues. Revenues from software
installations and implementations 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. Amounts
received in advance of performance under the contracts are recorded as
deferred revenue and are generally recognized within one year from receipt.
Installation and implementation revenues increased by 44.0% to $6.7
million in 1996 and by 59.9% to $10.7 million in 1997. Substantially all of
the increase from 1995 to 1996 was due primarily to growth in the
installations of Retek Data Forecasting as this product moved from
development into production. The increase from 1996 to 1997 was due
primarily to growth in the installations of Capstone and ProfitMax.
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. Revenue from hardware product sales, which
is included in contracts and other revenue, is recognized upon shipment to
the customer.
Contracts and other revenues increased by 21.7% to $11.1 million in
1996 and decreased by 30.2% to $7.8 million in 1997. 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, SelectCast, Falcon Sentry and Capstone. The
decrease in 1997 was primarily the result of products such as ProfitMax,
Retek Data Forecasting and Capstone moving from development into
production.
During 1997, the Company had fewer new product development projects
and new product pilot installations than during 1996. 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 discontinue the release of production versions of
these products or bear increased expense to bring these pilot products to
market, either of which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Service Bureau Revenues. Service bureau revenues are derived from the
Company's service bureau operations, which provide CRLink's functionality
to customers that do not wish to obtain a license, that use this service
until they can implement their own internal CRLink operation or that use
this service when their volumes peak to high levels. Service bureau
customers typically subscribe for services under month-to-month agreements.
Service bureau fees are recognized as revenue when the processing services
are performed.
Service bureau revenues decreased by 11.6% to $4.7 million in 1996 and
increased by 18.8% to $5.6 million in 1997. The decrease in 1996 was
primarily a result of the significant increase in license revenues as the
Company's sales efforts were focused on licensing CRLink to customers
rather than marketing
30
<PAGE> 31
service bureau services. The increase in 1997 was primarily due to an
increase in the number of customers utilizing service bureau 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>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
License and maintenance.............................. 67.8% 71.9% 77.8%
Installation and implementation...................... 69.3 59.4 51.7
Contracts and other.................................. 24.6 30.9 30.0
Service bureau....................................... 43.4 28.9 23.1
</TABLE>
License and Maintenance Gross Margin. License and maintenance costs
primarily represent the Company's expenses for personnel engaged in
customer support, travel to customer sites and documentation materials. The
Company's gross margin on licenses and maintenance revenues was 67.8%,
71.9% and 77.8% in 1995, 1996 and 1997, respectively. In 1996, the
improvement in gross margin was the 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 as well as a higher volume of
international licenses, which generate relatively higher margins than
domestic operations due, in part, to lower overhead expenses as a result of
less corporate infrastructure. Gross margin improved in 1997 due primarily
to license fees increasing at a higher rate than the costs associated with
providing these licenses. This increase was primarily attributable to
increased pricing producing higher margins in the retail and
healthcare/insurance markets.
Installation and Implementation Gross Margin. Installation and
implementation costs consist primarily of personnel-related costs, travel
and equipment. The Company's gross margin on installation and
implementation revenues was 69.3%, 59.4% and 51.7% in 1995, 1996 and 1997,
respectively. In 1996, the improved margin was due primarily to new
installations of Retek Data Forecasting, which have substantially lower
margins than installations of Falcon products, which represented a majority
of installations in 1995. Gross margin improved in 1997 due primarily to an
increase in Capstone implementations, which have substantially lower
margins than implementations of Falcon products.
Contracts and Other Gross Margin. Contracts and other costs consist
primarily of personnel-related costs. The Company's gross margin on
contracts and other revenues was 24.6%, 30.9% and 30.0% in 1995, 1996 and
1997, respectively. The improvement in gross margin during 1996 was due
primarily to the Company's increased ability to better price its new pilot
projects. The slight decrease in gross margin for 1997 was due to the
decrease in new product development contracts, while government projects
with substantially lower margins remained relatively constant in absolute
dollars.
Service Bureau Gross Margin. Service bureau costs consist primarily of
the personnel and facilities costs of operating the service bureaus. The
Company's gross margin on service bureau revenues was 43.4%, 28.9% and
23.1% in 1995, 1996 and 1997. The decrease in 1996 was a result of the loss
of a customer in early 1996 for which the Company was able to recognize
higher than usual margins during 1995. The decrease in 1997 was
attributable to an increase in fixed costs and in labor costs required to
support the service bureau business that outpaced the increase in revenue.
This was the result of a more static customer base and higher fixed costs
associated with the infrastructure necessary to run the service bureau
operation.
Other Operating Expenses
Research and Development Expenses. Research and development expenses
consist primarily of salaries and other personnel-related expenses,
subcontracted development services, depreciation for development equipment
and supplies. Research and development expenses increased from $7.0 million
in
31
<PAGE> 32
1995 to $13.8 million in 1996 and to $21.2 million in 1997, representing
16.0%, 19.3% and 18.6% of total revenues in 1995, 1996 and 1997,
respectively. Research and development expenses increased in absolute
dollars due to the development costs associated with new releases of
several products in the retail and financial services product lines. The
increased research and development expenses in absolute dollars and as a
percentage of revenues in 1996 was primarily the result of greater staffing
to support more new product development programs, primarily for ProfitMax,
Capstone, CompCompare, ProviderCompare and the Retek Merchandising System.
The 1996 costs also included the initial product development costs of the
Company's Aptex business unit, which did not have 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 a
product is ready for general release have been insignificant. As a result,
no significant software development costs were capitalized through December
31, 1997. The Company anticipates that research and development expenses
will increase in dollar amount and could increase as a percentage of total
revenues for the foreseeable future.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and benefits, commissions, travel, entertainment and
promotional expenses. Sales and marketing expenses increased from $7.3
million in 1995 to $11.9 million in 1996 and to $22.0 million in 1997,
representing 16.6%, 16.7% and 19.4% of total revenues in 1995, 1996 and
1997, respectively. The increases were primarily a result of increased
staffing as the Company built its direct sales and marketing staff, opened
sales offices in Japan and in several locations in Europe, 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 and other international markets, expand its domestic sales and
marketing organization and increase the breadth of its product lines.
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 increased from $5.1 million in 1995 to $8.6 million
in 1996 and $12.6 million in 1997, representing 11.7%, 10.3% and 9.8% of
total revenues, respectively. General and administrative expenses included
$1.2 million of acquisition expenses related to the acquisitions of Risk
Data and Retek in 1996 and $1.4 million of acquisition expenses primarily
related to the acquisition of CompReview in 1997. Excluding acquisition
expenses, general and administrative expenses were $5.1 million, $7.4
million and $11.2 million in 1995, 1996 and 1997, respectively. The primary
reason for these increases in absolute dollars was increased staffing to
support the Company's growth and additional expenses associated with being
a public company.
Operating Income
The above factors resulted in operating income of $5.1 million,
constituting 11.6% of total revenues in 1995, $9.7 million, constituting 13.5%
of total revenues in 1996, and $23.0 million, constituting 20.3% of total
revenues in 1997. The Company does not expect that operating income will
continue to increase significantly as a percentage of total revenues.
Other Income (Expense) Net
Interest and other income, net of interest expense, increased from $484,000
in 1995 to $1.7 million in 1996 and to $1.9 million in 1997. The increase in
1996 was primarily attributable 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. The increase in 1997 was primarily due to a decrease in interest
expense of approximately $397,000 primarily related to the
32
<PAGE> 33
repayment of Risk Data's bank notes payable during the third quarter of 1996,
offset by a decrease in interest income of approximately $165,000.
Income Tax (Benefit) Provision
The income tax benefit of $511,000 in 1995 was primarily attributable to
the recognition of a $2.2 million deferred tax asset based on anticipated future
utilization of all of the Company's remaining net operating loss carryforwards
and research and development credit carryforwards. The income tax benefit of
$534,000 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 and Retek. 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.
The 1997 income tax provision of $7.4 million, or 29.5% of pre-tax income,
was lower than 1997 taxes at statutory rates primarily as a result of
CompReview's subchapter S corporation status prior to the acquisition, which
resulted in most of CompReview's tax liability being borne by its former
shareholders. As of the date of the acquisition, CompReview's tax status was
changed to C corporation. In the future, the Company expects that the effective
tax rate will be reflective of the tax rate of other California-based companies.
LIQUIDITY AND CAPITAL RESOURCES
The $21.0 million of net cash provided by operating activities in 1997
represented net income before depreciation and amortization of approximately
$22.4 million, further increased by a decrease in deferred income taxes of $6.9
million and offset by an increase in accounts receivable of $11.1 million. Net
cash used in investing activities was $7.7 million in 1997 primarily due to $9.6
million expended for property and equipment during 1997, including $6.0 million
for computer equipment to support the increased staffing across the Company, and
$1.9 million for furniture and fixtures primarily related to the relocation of
the Company's Minneapolis facility, offset by approximately $1.9 million of net
proceeds from the sale and maturity of investments. Net cash used in financing
activities was $3.2 million in 1997 primarily due to $6.8 million in
distributions to the former CompReview stockholders offset by $4.0 million in
net proceeds from issuances of common stock.
As of December 31, 1997, the Company had $42.9 million in cash, cash
equivalents and investments. The Company believes that its current cash, cash
equivalents and investments available for sale balances, borrowings under 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. A portion of the Company's cash could be used to
repurchase shares of the Company's Common Stock from time to time in the open
market. 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 also be used to acquire or
invest in complementary businesses or products or otherwise 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. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions of other businesses, products or technologies.
YEAR 2000 COMPLIANCE
The Company anticipates that it will need to devote resources in the next
two years to modify its CRLink product to properly process dates beyond December
31, 1999. The Company expects that the cost of making these modifications and
distributing the modified product to existing customers will be approximately
$500,000. These modifications and the resources that the Company expects to
devote to such modifications may divert management and engineering attention
from, or delay the development and introduction of, new products and
enhancements to existing products. The inability of the Company to complete such
modifications
33
<PAGE> 34
successfully and on a timely basis, or the inability of the Company to devote
sufficient resources to continuing updates and enhancements to the CRLink
product, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company believes
that the purchasing patterns of customers and potential customers may be
affected by Year 2000 issues as companies expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company, which could result in a material adverse
effect on the Company's business, financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company is required to adopt for 1998. This
statement will require the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. Upon adoption of FAS 130, the Company is also
required to reclassify financial statements for earlier periods provided for
comparative purposes. The adoption of FAS 130 will not have a significant impact
on the Company's consolidated financial statement disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company is required to adopt for its 1998 annual
financial statements. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Under FAS
131, operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company has not determined
the impact of the adoption of this new accounting standard on its consolidated
financial statement disclosures.
In November 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company is required to adopt for agreements entered into
with customers beginning in 1998. This statement provides guidance for
recognizing revenue related to sales by software vendors. The adoption of SOP
97-2 will not have a significant impact on the timing of the Company's revenue
recognition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
34
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
DESCRIPTION PAGE
------------------------------------------------------------------- -------
<S> <C>
Report of Independent Accountants.................................. 36
Consolidated Balance Sheet as of December 31, 1996 and 1997........ 37
Consolidated Statement of Income for the years ended December 31, 38
1995, 1996 and 1997...........................................
Consolidated Statement of Cash Flows for the years ended 39
December 31, 1995, 1996 and 1997..............................
Consolidated Statement of Changes in Stockholders' Equity for the 40
years ended December 31, 1995, 1996 and 1997..................
Notes to Consolidated Financial Statements......................... 41
Selected Consolidated Quarterly Operating Results (unaudited)...... 56
</TABLE>
35
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HNC Software Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of HNC
Software Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
January 29, 1998,
except as to Note 11
which is as of February 13, 1998
36
<PAGE> 37
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 8,121 $ 18,068
Investments available for sale........................................ 26,728 24,878
Accounts receivable, net.............................................. 21,856 32,980
Current portion of deferred income taxes.............................. 6,383 11,310
Other current assets.................................................. 2,553 2,802
------- --------
Total current assets.......................................... 65,641 90,038
Deferred income taxes, less current portion............................. 22,966 15,322
Property and equipment, net............................................. 6,339 12,102
Other assets............................................................ 3,330 2,415
------- --------
$98,276 $119,877
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 4,368 $ 5,728
Accrued liabilities................................................... 4,433 5,933
Deferred revenue...................................................... 3,377 3,883
Other current liabilities............................................. 445 191
------- --------
Total current liabilities..................................... 12,623 15,735
Non-current liabilities................................................. 683 239
Minority interest in consolidated subsidiary............................ -- 43
Commitments and contingencies (Notes 5 and 10)
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 shares authorized:
24,012 and 24,538 shares issued and outstanding, respectively...... 24 25
Paid-in capital....................................................... 83,991 95,919
Unrealized loss on investments available for sale..................... (59) (2)
Foreign currency translation adjustment............................... 54 (111)
Retained earnings..................................................... 960 8,029
------- --------
Total stockholders' equity.................................... 84,970 103,860
------- --------
$98,276 $119,877
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
37
<PAGE> 38
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues:
License and maintenance.................................... $ 24,561 $48,890 $89,643
Installation and implementation............................ 4,648 6,691 10,702
Contracts and other........................................ 9,146 11,128 7,772
Service bureau............................................. 5,349 4,730 5,618
-------- ------- -------
Total revenues..................................... 43,704 71,439 113,735
-------- ------- -------
Operating expenses:
License and maintenance.................................... 7,903 13,725 19,937
Installation and implementation............................ 1,425 2,714 5,174
Contracts and other........................................ 6,894 7,694 5,438
Service bureau............................................. 3,025 3,365 4,320
Research and development................................... 6,998 13,808 21,151
Sales and marketing........................................ 7,276 11,923 22,049
General and administrative................................. 5,101 8,551 12,626
-------- ------- -------
Total operating expenses........................... 38,622 61,780 90,695
-------- ------- -------
Operating income............................................. 5,082 9,659 23,040
Interest and other income.................................... 912 2,178 2,003
Interest expense............................................. (428) (478) (81)
Minority interest in income of consolidated subsidiary....... -- -- (43)
-------- ------- -------
Income before income tax (benefit) provision....... 5,566 11,359 24,919
Income tax (benefit) provision............................... (511) (534) 7,354
-------- ------- -------
Net income......................................... $ 6,077 $11,893 $17,565
======== ======= =======
Earnings per share:
Basic net income per common share.......................... $ 0.38 $ 0.50 $ 0.72
======== ======= =======
Diluted net income per common share........................ $ 0.28 $ 0.47 $ 0.68
======== ======= =======
Unaudited pro forma data (Note 1):
Income before income tax provision......................... $ 5,566 $11,359 $24,919
Income tax provision....................................... 1,032 1,628 9,502
-------- ------- -------
Net income......................................... $ 4,534 $ 9,731 $15,417
======== ======= =======
Basic pro forma net income per common share................ $ 0.64
=======
Diluted pro forma net income per common share.............. $ 0.60
=======
Shares used in computing basic net income per common share
and unaudited basic pro forma net income per common share
(Notes 1 and 8)............................................ 15,195 23,552 24,275
======== ======= =======
Shares used in computing diluted net income per common share
and unaudited diluted pro forma net income per common share
(Notes 1 and 8)............................................ 21,510 25,363 25,681
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 6,077 $ 11,893 $ 17,565
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 1,874 3,605 4,833
Tax benefit from stock option transactions........................... 800 896 3,848
Changes in assets and liabilities:
Accounts receivable, net........................................... (1,658) (10,978) (11,124)
Other assets....................................................... (674) (1,207) (295)
Deferred income taxes.............................................. (1,551) (1,324) 6,909
Accounts payable................................................... 1,172 2,167 1,360
Accrued liabilities................................................ 1,756 625 (2,348)
Deferred revenue................................................... 1,337 1,472 375
Other liabilities.................................................. 22 (441) (116)
-------- -------- --------
Net cash provided by operating activities....................... 9,155 6,708 21,007
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments available for sale............................. (28,666) (26,113) (26,517)
Maturities of investments available for sale........................... 4,182 18,125 24,666
Proceeds from sales of investments available for sale.................. 2,467 3,707 3,716
Acquisitions of property and equipment................................. (2,246) (3,978) (9,593)
-------- -------- --------
Net cash used in investing activities........................... (24,263) (8,259) (7,728)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of common stock............................ 33,726 1,935 4,039
Proceeds from issuances of notes payable to stockholders............... 1,000 -- --
Repayments of notes payable to stockholders............................ -- (1,000) --
Proceeds from bank line of credit...................................... 1,085 309 --
Repayments of bank line of credit...................................... (265) (2,504) --
Repayments of debt from asset purchases................................ -- (4,710) --
Capital lease payments................................................. (502) (553) (408)
Proceeds from issuances of bank notes payable.......................... -- 1,999 --
Repayments of bank notes payable....................................... (687) (1,999) --
Distributions to CompReview stockholders............................... (3,845) (5,908) (6,798)
-------- -------- --------
Net cash provided by (used in) financing activities............. 30,512 (12,431) (3,167)
-------- -------- --------
Effect of exchange rate changes on cash.................................. -- 54 (165)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents..................... 15,404 (13,928) 9,947
Cash and cash equivalents at beginning of period......................... 6,645 22,049 8,121
-------- -------- --------
Cash and cash equivalents at end of period............................... $ 22,049 $ 8,121 $ 18,068
======== ======== ========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets purchased through issuance of debt.............................. $ -- $ 4,710 $ --
======== ======== ========
Acquisitions of property and equipment under capital leases............ $ 411 $ 344 $ --
======== ======== ========
Conversion of preferred stock.......................................... $ 13,518 $ -- $ --
======== ======== ========
Accretion of dividends on mandatorily redeemable convertible preferred
stock................................................................ $ 348 $ -- $ --
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.......................................................... $ 390 $ 448 $ 101
======== ======== ========
Income taxes paid...................................................... $ 190 $ 165 $ 547
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
39
<PAGE> 40
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
--------------------------------- UNREALIZED
GAIN (LOSS) ON
SERIES A SERIES E COMMON STOCK INVESTMENTS
--------------- --------------- --------------- PAID-IN AVAILABLE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL FOR SALE
------ ------ ------ ------ ------ ------ ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994................... 380 $ -- 1,282 $ 1 8,656 $ 9 $10,980 $ --
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 follow-on public
offering, net of issuance costs............... 1,116 2 19,184
Issuance of common stock at inception of Retek
(Note 1)...................................... 1,367 1 (1)
Tax benefit from stock option transactions..... 800
Unrealized gain on investments................. 92
Stock warrant exercised........................ 100 124
Distributions to CompReview stockholders.......
Net income.....................................
---- ----- ------ --- ------ --- ------- -----
BALANCE AT DECEMBER 31, 1995................... -- -- -- -- 22,778 23 55,771 92
Common stock options exercised................. 1,140 1 1,095
Common stock issued under Employee Stock
Purchase Plan................................. 94 839
Tax benefit from stock option transactions..... 7,889
Tax benefit from Retek taxable pooling (Note
7)............................................ 18,397
Unrealized loss on investments................. (151)
Foreign currency translation adjustment........
Distributions to CompReview stockholders.......
Net income.....................................
---- ----- ------ --- ------ --- ------- -----
BALANCE AT DECEMBER 31, 1996................... -- -- -- -- 24,012 24 83,991 (59)
Common stock options exercised................. 475 1 2,845
Common stock issued under Employee Stock
Purchase Plan................................. 51 1,193
Tax benefit from stock option transactions..... 4,192
Unrealized gain on investments................. 57
Foreign currency translation adjustment........
Distributions to CompReview stockholders.......
CompReview contribution to capital............. 3,698
Net income.....................................
---- ----- ------ --- ------ --- ------- -----
BALANCE AT DECEMBER 31, 1997................... -- $ -- -- $ -- 24,538 $ 25 $95,919 $ (2)
==== ===== ====== === ====== === ======= =====
<CAPTION>
FOREIGN (ACCUMULATED
CURRENCY DEFICIT) TOTAL
TRANSLATION RETAINED STOCKHOLDERS'
ADJUSTMENT EARNINGS EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994................... $ -- $(10,149) $ 841
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 follow-on public
offering, net of issuance costs............... 19,186
Issuance of common stock at inception of Retek
(Note 1)...................................... --
Tax benefit from stock option transactions..... 800
Unrealized gain on investments................. 92
Stock warrant exercised........................ 124
Distributions to CompReview stockholders....... (3,845) (3,845)
Net income..................................... 6,077 6,077
----- -------- --------
BALANCE AT DECEMBER 31, 1995................... -- (5,025) 50,861
Common stock options exercised................. 1,096
Common stock issued under Employee Stock
Purchase Plan................................. 839
Tax benefit from stock option transactions..... 7,889
Tax benefit from Retek taxable pooling (Note
7)............................................ 18,397
Unrealized loss on investments................. (151)
Foreign currency translation adjustment........ 54 54
Distributions to CompReview stockholders....... (5,908) (5,908)
Net income..................................... 11,893 11,893
----- -------- --------
BALANCE AT DECEMBER 31, 1996................... 54 960 84,970
Common stock options exercised................. 2,846
Common stock issued under Employee Stock
Purchase Plan................................. 1,193
Tax benefit from stock option transactions..... 4,192
Unrealized gain on investments................. 57
Foreign currency translation adjustment........ (165) (165)
Distributions to CompReview stockholders....... (6,798) (6,798)
CompReview contribution to capital............. (3,698) --
Net income..................................... 17,565 17,565
----- -------- --------
BALANCE AT DECEMBER 31, 1997................... $(111) $ 8,029 $ 103,860
===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE> 41
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Headquartered in San Diego, California, HNC Software Inc. (the "Company" or
"HNC") develops, markets and supports predictive software solutions in
client/server environments. HNC provides innovative predictive software systems
in the healthcare/insurance, financial services and retail markets.
Acquisitions
On August 30, 1996, the Company completed an acquisition of all of the
outstanding shares of Risk Data Corporation ("Risk Data"). Risk Data is an
insurance information technology services firm that develops, markets and
supports analytical benchmarking and risk management software products primarily
for insurance carriers, state insurance funds and third party administrators
primarily in the workers' compensation insurance field. Under the terms of the
acquisition, accounted for as a pooling of interests, the Company exchanged
1,891 shares of common stock for all of the then outstanding shares of Risk Data
preferred and common stock.
On November 29, 1996, the Company completed an acquisition of all of the
outstanding shares of Retek Distribution Corporation ("Retek"). Retek develops,
markets and supports inventory management system software primarily for
customers in the retail industry. Under the terms of the acquisition, accounted
for as a pooling of interests, the Company exchanged 1,367 shares of common
stock for all of the then outstanding shares of Retek common stock.
On November 28, 1997, the Company completed an acquisition of all of the
outstanding shares of CompReview, Inc. ("CompReview"). CompReview develops,
markets and supports cost containment software for workers' compensation
insurance carriers and for insurers that handle automobile accident personal
injury claims. Under the terms of the acquisition, accounted for as a pooling of
interests, the Company exchanged 4,886 shares of common stock for all of the
then outstanding shares of CompReview common stock.
The consolidated financial statements and related notes give retroactive
effect to all three acquisitions for all of the periods presented. The
consolidated balance sheet as of December 31, 1996 and 1997 includes the
accounts of Risk Data, Retek and CompReview as of December 31, 1996 and 1997.
The consolidated statements of income, of cash flows and of changes in
stockholders' equity for each of the three years in the period ended December
31, 1997 include the results of Risk Data, Retek and CompReview for each of the
years then ended. The term "Company" as used in these consolidated financial
statements refers to HNC and its subsidiaries, including Risk Data, Retek and
CompReview.
41
<PAGE> 42
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
No adjustments to conform the accounting methods of the acquired companies
to the accounting methods of HNC were required. Certain amounts have been
reclassified with regard to presentation of the financial information of the
acquired companies. Revenues and net income (loss) for each of the previously
separate companies for the periods prior to their respective acquisition dates
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- JUNE 30, -----------------
1995 1996 1997 1996 1996 1997
------- ------- -------- ---------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
HNC......................... $25,174 $53,833 $113,735 $ 16,478 $31,423 $62,683
Risk Data................... 4,577 -- -- 2,600 -- --
Retek....................... 921 -- -- 3,377 5,635 --
CompReview.................. 13,032 17,606 -- 8,119 12,631 18,971
------- ------- -------- ------- ------- -------
$43,704 $71,439 $113,735 $ 30,574 $49,689 $81,654
======= ======= ======== ======= ======= =======
Net income (loss):
HNC......................... $ 4,457 $ 6,376 $ 17,565 $ 1,780 $ 975 $ 7,597
Risk Data................... (1,952) -- -- (2,184) -- --
Retek....................... (382) -- -- 43 93 --
CompReview.................. 3,954 5,517 -- 2,123 3,679 6,702
------- ------- -------- ------- ------- -------
$ 6,077 $11,893 $ 17,565 $ 1,762 $ 4,747 $14,299
======= ======= ======== ======= ======= =======
</TABLE>
Transaction costs of $563, $515 and $1,440 were incurred to complete the
acquisitions of Risk Data, Retek and CompReview, respectively. Transaction costs
were deferred and charged to income when the related transactions were
consummated. Transaction costs consisted primarily of investment banker, legal
and accounting fees, and printing, mailing and registration expenses.
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.
During 1996, the Company established Aptex Software Inc. ("Aptex"), a
majority owned subsidiary, in order to develop, market and support certain text
analysis technology that is being used to develop products for the Internet
market. The minority stockholders' interest in Aptex's financial position and
results of operations is presented as a minority interest in the Company's
consolidated financial statements.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. 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.
42
<PAGE> 43
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. The Company classifies all
securities as "available for sale" and carries them 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. The Company computes
depreciation and amortization using either the straight-line method over the
estimated useful lives of the assets of three to seven years or an accelerated
method over the estimated useful lives of the assets of five to seven years. The
Company amortizes leasehold improvements over the shorter of their estimated
useful lives or the remaining term of the related lease. Repair and maintenance
costs are charged to expense as incurred.
Software Costs
Software 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 that are stated at the lower of cost or net realizable
value. At December 31, 1996 and 1997, software costs of $2,561 and $2,581,
respectively, were included in other assets in the consolidated balance sheet
net of accumulated amortization of $642 and $1,451, respectively.
Development costs for software to be licensed or sold that are incurred
from the time technological feasibility is established until the product is
available for general release to customers are capitalized and reported at the
lower of cost or net realizable value. Through December 31, 1997, 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 when events or changes
in circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized if the sum of the expected future net cash
flows were less than the carrying amount of the asset. No such impairments of
long-lived assets existed through December 31, 1997.
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.
Revenue Recognition
The Company's revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license periods.
Revenue from certain short-term periodic software license and maintenance
agreements with guaranteed minimum license fees is recognized as related
services are performed. Transactional fees are recognized as revenue based on
system usage or when fees based on system usage exceed the monthly minimum
license fees. Revenue from perpetual 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 hardware product sales, which is
included in contracts and other revenue, is recognized upon shipment to the
customer.
43
<PAGE> 44
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's revenue from software installation and implementation and
from contract services is generally recognized as the services are performed
using the percentage of completion method based on costs incurred to date
compared to total estimated costs at completion. Amounts received under
contracts in advance of performance are recorded as deferred revenue and are
generally recognized within one year from receipt. Contract losses are recorded
as a charge to income in the period such losses are first identified. Unbilled
accounts receivable are stated at estimated realizable value.
Service bureau fees are from review and repricing of customers' medical
bills and are assessed to customers on the basis of volume of bills processed
and are recognized as revenue when the processing services are performed.
Income Taxes
The Company's 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.
Net Income Per Common Share
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), "Earnings per Share," for fiscal 1997 and retroactively restated
all prior periods to conform with FAS 128 as required. Basic net income per
common share is computed as net income less accretion of dividends on
mandatorily redeemable convertible preferred stock divided by the weighted
average number of common shares outstanding during the period. Diluted net
income per common share is computed as net income divided by the weighted
average number of common shares and potential common shares, using the treasury
stock method, outstanding during the period and assumes conversion into common
stock at the beginning of each period of all outstanding shares of convertible
preferred stock (Note 8).
Unaudited Pro Forma Data
Prior to the acquisition of CompReview by HNC on November 28, 1997,
CompReview had elected subchapter S corporation status for income tax purposes;
therefore, its income was included in the tax returns of its stockholders, and
no income tax provision was recorded for CompReview other than certain minimum
state taxes on subchapter S corporations. As a result of the acquisition,
beginning November 29, 1997, CompReview became subject to corporate income taxes
on its taxable income. For comparative purposes, the consolidated statement of
income includes unaudited pro forma adjusted data with respect to the merged
companies' income tax provision as if CompReview had been subject to corporate
income taxes on its taxable income for all periods presented.
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 recorded 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.
44
<PAGE> 45
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments available for
sale and accounts receivable, which are generally not collateralized. The
Company's policy is to place its cash, cash equivalents and investments
available for sale 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 large customers in the
healthcare/insurance, financial services and retail industries. The Company
maintains reserves for potential credit losses.
The Company has one major product or product line in each of its three
target markets. In the healthcare/insurance market, revenues from one product
accounted for 29.8%, 24.6% and 23.0% of the Company's total revenues for 1995,
1996 and 1997, respectively. During those same periods, one product in the
retail market accounted for 2.2%, 13.6% and 18.9%, respectively, of the
Company's total revenues, and one product line in the financial services market
accounted for 28.0%, 20.9% and 16.0%, respectively, of the Company's total
revenues. Revenues from international operations and export sales, primarily to
Western Europe and Canada, represented approximately 12.6%, 17.7% and 16.8% of
total revenues in 1995, 1996 and 1997, respectively. Export sales were $4,595,
$7,310 and $7,896 in 1995, 1996 and 1997, respectively.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and accrued liabilities
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 Company's 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. In April 1996, the Company consummated a two-for-one
stock split effected in the form of a common stock dividend. 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 and stock split.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company is required to adopt for 1998. This
statement will require the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. Upon adoption of FAS 130, the Company is also
required to reclassify financial statements for earlier periods provided for
comparative purposes. The adoption of FAS 130 will not have a significant impact
on the Company's consolidated financial statement disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company is required to
45
<PAGE> 46
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
adopt for its 1998 annual financial statements. This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Under FAS 131, operating segments are to be determined consistent
with the way that management organizes and evaluates financial information
internally for making operating decisions and assessing performance. The Company
has not determined the impact of the adoption of this new accounting standard on
its consolidated financial statement disclosures.
In November 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company is required to adopt for agreements entered into
with customers beginning in 1998. This statement provides guidance for
recognizing revenue related to sales by software vendors. The adoption of SOP
97-2 will not have a significant impact on the timing of the Company's revenue
recognition.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Accounts receivable, net:
Billed................................................. $13,266 $27,812
Unbilled............................................... 9,299 8,368
------- -------
22,565 36,180
Less allowance for doubtful accounts..................... (709) (3,200)
------- -------
$21,856 $32,980
======= =======
</TABLE>
Unbilled accounts receivable represent revenue recorded in excess of
amounts billable pursuant to contract provisions and generally become billable
at contractually specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be realized within one year.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Property and equipment, net:
Computer equipment..................................... $ 9,302 $15,611
Furniture and fixtures................................. 2,210 4,632
Leasehold improvements................................. 273 1,012
------- -------
11,785 21,255
Less accumulated depreciation and amortization........... (5,446) (9,153)
------- -------
$ 6,339 $12,102
======= =======
</TABLE>
46
<PAGE> 47
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Accrued liabilities:
Payroll and related benefits........................... $ 1,645 $ 3,456
Vacation............................................... 860 927
Other.................................................. 1,928 1,550
------- -------
$ 4,433 $ 5,933
======= =======
</TABLE>
NOTE 3 -- INVESTMENTS
At December 31, 1996 and 1997, 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>
U.S. government and federal agencies... $18,212 $ -- $ (38) $18,174
Foreign government debt................ 1,006 -- (2) 1,004
U.S. corporate debt.................... 4,851 -- (14) 4,837
Foreign corporate debt................. 2,718 -- (5) 2,713
------- ------- ------- -------
$26,787 $ -- $ (59) $26,728
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government and federal agencies... $20,682 $ -- $ (1) $20,681
U.S. corporate debt.................... 1,894 -- (1) 1,893
Foreign corporate debt................. 2,304 -- -- 2,304
------- ------- ------- -------
$24,880 $ -- $ (2) $24,878
======= ======= ======= =======
</TABLE>
No significant gains or losses were realized during the years ended
December 31, 1996 and 1997. The cost of securities sold is determined by the
specific identification method.
NOTE 4 -- NOTES PAYABLE
The Company has a Credit Agreement with a bank which provides for a $15,000
revolving line of credit through July 11, 1999. The agreement requires that the
Company maintain certain financial ratios and levels of working capital,
tangible net worth and profitability, and also restricts the Company's ability
to pay cash dividends and make loans, advances or investments without the bank's
consent. At December 31, 1997, the Company had no amounts outstanding under the
revolving line of credit. Interest is payable monthly at the bank's prime rate
or LIBOR rate plus 1.5%. The applicable interest rate was 7.22% at December 31,
1997.
The Risk Data credit facilities were comprised of a revolving line of
credit secured by eligible accounts receivable, as well as a bridge loan that
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.
47
<PAGE> 48
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During 1995, the preferred stockholders of Risk Data loaned the Company
$1,000 under subordinated note agreements (secured by the assets of Risk Data
but subordinated to borrowings under the Risk Data line of credit) bearing
interest at 9%. All outstanding amounts were repaid during 1996.
NOTE 5 -- LEASES
At December 31, 1997, the Company was obligated through 2004 under
noncancelable operating leases for its facilities and certain equipment as
follows:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
<S> <C> <C> <C>
1998.................................. $2,984 $ 127 $ 2,857
1999.................................. 3,047 -- 3,047
2000.................................. 3,043 -- 3,043
2001.................................. 2,994 -- 2,994
2002.................................. 2,884 -- 2,884
thereafter............................ 1,535 -- 1,535
</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, 1995, 1996 and
1997 was approximately $1,503, $1,623 and $2,687, respectively, net of sublease
income of $83, $125 and $477, respectively.
Risk Data maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are $222 for 1998 and $66 for 1999 with a total of $34 of such amounts
representing interest.
The gross value of assets under capital leases at December 31, 1996 and
1997 was $1,481 and $714, and accumulated amortization was $599 and $556,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
NOTE 6 -- CAPITAL STOCK
During June 1995, the Company completed its initial public offering of
5,176 shares of common stock (of which 2,376 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.
During December 1995, the Company completed a follow-on public offering 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 Company's 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
48
<PAGE> 49
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 7 -- INCOME TAXES
Income (loss) before income tax (benefit) provision was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Domestic....................................... $5,764 $ 8,599 $23,907
Foreign........................................ (198) 2,760 1,012
------ ------- -------
$5,566 $11,359 $24,919
====== ======= =======
</TABLE>
The income tax (benefit) provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
CURRENT:
Federal...................................... $ 97 $ 1,132 $ 2,257
State........................................ 143 204 537
Foreign...................................... -- 51 233
DEFERRED:
Federal...................................... (521) (1,569) 3,197
State........................................ (186) (56) 985
Foreign...................................... (44) (296) 145
------ ------- -----
$ (511) $ (534) $ 7,354
====== ======= =====
</TABLE>
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Taxable pooling basis difference......................... $18,397 $16,955
Net operating loss carryforwards......................... 8,587 7,404
Tax credit carryforwards................................. 1,878 2,059
Other.................................................... 487 214
------- -------
Gross deferred tax assets................................ 29,349 26,632
Deferred tax asset valuation allowance................... -- --
------- -------
Net deferred tax asset......................... $29,349 $26,632
======= =======
</TABLE>
During 1995, the Company released the valuation allowance related to its
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 the Company's operating results. During 1996, the
Company released the valuation allowances related to Risk Data's and Retek's
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.
49
<PAGE> 50
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During 1995, 1996 and 1997, the Company realized certain tax benefits
related to stock option transactions in the amount of $800, $7,889 and $4,192,
respectively. The benefit from the stock option tax deduction is credited
directly to paid-in capital.
During 1996, 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) provision 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,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Amounts computed at statutory federal rate.... $ 1,892 $ 3,862 $ 8,472
State income taxes....................... 465 554 1,407
Subchapter S corporation earnings........ (1,366) (1,901) (2,888)
Change in tax status of S corporation.... -- -- 869
Tax credit carryforwards generated....... (68) (334) (284)
Release of valuation allowance........... (2,223) (2,717) --
Foreign income taxes..................... (44) (296) 27
Losses without tax benefit............... 794 -- --
Other.................................... 39 298 (249)
------- ------- -------
Income tax (benefit) provision................ $ (511) $ (534) $ 7,354
======= ======= =======
</TABLE>
Prior to the acquisition of CompReview by the Company on November 28, 1997,
CompReview had elected subchapter S corporation status and the cash basis of
accounting for income tax purposes; therefore, its cash basis income was
included in the tax returns of its stockholders, and no income tax provision was
recorded for CompReview other than certain minimum state taxes on subchapter S
corporations. As of the date of CompReview's acquisition, its tax status was
changed to C corporation status with the accrual basis of accounting. As a
result of this change in tax status, the Company recorded a deferred tax
liability in the amount of $869 based on the cumulative income recognition
differences as of the date of acquisition between CompReview's former and
prospective tax accounting methods.
At December 31, 1997, the Company had federal, state and foreign net
operating loss carryforwards of approximately $19,992, $7,785 and $352,
respectively. The net operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
2001....................................... $ 6,982
2003....................................... 84
2005....................................... 123
2006....................................... 1,670
2007....................................... 17
2008....................................... 1,692
2009....................................... 1,370
2010....................................... 1,840
2011....................................... 14,086
</TABLE>
The Company also has approximately $1,295 of federal research and
development credit carryforwards, which expire from 2000 to 2012, $711 of state
research and development credit carryforwards, which have no
50
<PAGE> 51
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
expiration date, and $53 of foreign tax credit carryforwards, which expire from
1999 to 2002. Certain of these net operating loss and research and development
credit carryforwards generated by Risk Data, Retek and CompReview prior to their
acquisitions by HNC are subject to annual limitations on their utilization and
also are limited to utilization solely by the company that 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 its utilization of net
operating loss and research and development credit carryforwards.
NOTE 8 -- RECONCILIATION OF NET INCOME AND SHARES USED IN PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
NET INCOME USED:
Net income used in computing basic net income per common share.......... $ 5,729 $11,893 $17,565
Add back accretion of dividends on mandatorily redeemable convertible
preferred stock....................................................... 348 -- --
------- ------- -------
Net income used in computing diluted net income per common share........ $ 6,077 $11,893 $17,565
======= ======= =======
SHARES USED:
Weighted average common shares outstanding used in computing basic net
income per common share............................................... 15,195 23,552 24,275
Weighted average options and warrants to purchase common stock as
determined by application of the treasury stock method.............. 1,995 1,796 1,383
Incremental shares for assumed conversion of convertible preferred
stock............................................................... 4,265 -- --
Purchase Plan common stock equivalents................................ 55 15 23
------- ------- -------
Shares used in computing diluted net income per common share............ 21,510 25,363 25,681
======= ======= =======
</TABLE>
All outstanding shares of the Company's preferred stock automatically
converted into shares of common stock upon the closing of the Company's initial
public offering on June 26, 1995. Shares used in computing diluted net income
per common share for 1995 assume conversion of all outstanding shares of
convertible preferred stock were converted at the beginning of that year.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan and reserved
2,500 shares of the Company's common stock 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, 1997, options to purchase 490 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 options to purchase ten shares of such stock will be
granted on each anniversary of such dates.
51
<PAGE> 52
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, 1997, options to purchase 72 shares were exercisable.
The Incentive Plan provides for the issuance of up to 3,550 shares of the
Company's common stock in the form of nonqualified or incentive stock options,
restricted stock or stock bonuses. In addition, all shares that remained
unissued under the 1987 Stock Option Plan on the effective date of the Incentive
Plan, and all 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 are 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. Options
granted under the Incentive Plan may have a term of up to ten years. The Company
has the discretion to provide for restrictions and the lapse thereof in respect
of restricted stock awards. Options typically vest at the rate of 25% of the
total grant per year over a four-year period; however, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1997, 316 shares were exercisable.
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 compensation 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 on the first day of the
twelve-month offering period or the last day of each six-month purchase period.
Approximately 60% of eligible employees have participated in the Purchase Plan
in the last two years.
Risk Data's stock option plan is administered by HNC's Board of Directors.
All outstanding Risk Data options were converted into options to purchase HNC
common stock and adjusted to give effect to the acquisition exchange ratio in
the Risk Data acquisition. No changes were made to the terms of the Risk Data
options in connection with the exchange. Options granted under the Risk Data
stock option plan generally vest at the rate of 25% of the total grant per year
and expire ten years after the date of grant. At December 31, 1997, 30 shares
were exercisable under the Risk Data 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 acquisition exchange ratio in
the Retek acquisition. 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 ten years. At December 31, 1997, options
to purchase 32 shares were exercisable.
The CompReview 1995 Stock Option Plan is administered by HNC's Board of
Directors. All outstanding CompReview stock options were converted into options
to purchase HNC common stock in the CompReview acquisition and adjusted to give
effect to the acquisition exchange ratio. No changes were made to the terms of
the CompReview options in connection with the exchange. Options granted under
the CompReview Stock Option Plan generally vest ratably over periods from two to
four years and expire ten years after the date of grant. At December 31, 1997,
options to purchase 156 shares were exercisable.
52
<PAGE> 53
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Transactions under the Company's stock option and purchase plans during the
years ended December 31, 1995, 1996 and 1997, including options under the Risk
Data stock option plan, options under the Retek stock option plan and options
under the CompReview Stock Option Plan, but excluding options to purchase stock
of Aptex, a subsidiary of the Company, are summarized as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ ------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 2,080 $ 0.49 2,868 $ 2.84 3,215 $15.65
Options granted................... 1,272 6.08 1,645 27.98 2,177 32.61
Options exercised................. (207) 0.52 (1,140) 0.96 (475) 6.16
Options canceled.................. (277) 1.80 (158) 17.62 (326) 26.33
------ ------
Outstanding at end of year.......... 2,868 2.84 3,215 15.65 4,591 23.92
====== ======
Options exercisable at end of
year.............................. 1,437 841 1,096
Weighted average fair value of
options granted during the year... $ 3.10 $14.50 $19.79
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE (IN YEARS) PRICE 1997 PRICE
------------------------------ -------------- --------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 to $ 3.00.............. 1,002 5.90 $ 1.90 702 $ 1.60
4.50 25.38.............. 793 8.21 19.22 188 15.69
25.60 30.75.............. 791 8.86 29.39 147 30.33
30.81 31.50.............. 944 9.57 31.40 1 30.94
31.88 39.00.............. 774 9.42 36.03 32 34.24
39.09 49.50.............. 287 9.27 41.42 26 42.64
----- -----
0.02 49.50.............. 4,591 8.37 23.92 1,096 9.82
===== =====
</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, as
determined by the Board of Directors, 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 ten 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. 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 at fair market value under the
Aptex Plan for cash consideration of $0.03 per share. At December 31, 1997,
options to purchase 79 shares were exercisable under the Aptex Plan.
53
<PAGE> 54
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 1997 and
1996 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards Board Statement No.
123 ("FAS 123"), the Company's net income and basic and diluted pro forma net
income per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Net income:
As reported...................................... $6,077 $11,893 $17,565
Pro forma........................................ 5,126 6,122 2,232
Basic net income per common share:
As reported...................................... 0.38 0.50 0.72
Pro forma........................................ 0.31 0.26 0.09
Diluted net income per common share:
As reported...................................... 0.28 0.47 0.68
Pro forma........................................ 0.24 0.24 0.09
</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, 1995, 1996 and
1997, respectively: dividend yield of 0.0% for all three years, risk-free
interest rates of 6.29%, 6.03% and 6.10%, expected volatilities of 75%, 70% and
65% (0% for 1995 and 1996 options granted by Risk Data, Retek and CompReview
prior to their acquisition by HNC), and expected lives of 3.5, 3.5 and 3.0
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 all three years, risk-free interest rates of 5.66%,
5.36% and 5.32%, expected volatilities of 75%, 70% and 65%, and an expected life
of 6 months for all three years. The weighted average fair value of those
purchase rights granted in 1995, 1996 and 1997 was $2.75, $9.61 and $14.10,
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 years ended
December 31, 1996 and 1997: dividend yield of 0.0% for both years, risk-free
interest rates of 6.42% and 6.33%, expected volatility of 90% for both years,
and expected lives of 9.25 and 8.0 years. Options to purchase 704 shares and 214
shares were granted during 1996 and 1997, with weighted average exercise prices
per share of $0.03 and $0.08, respectively. During 1997, options to purchase 173
shares with a weighted average exercise price of $0.03 per share were exercised.
During 1997, options to purchase 58 shares with a weighted average exercise
price of $0.03 per share were cancelled. The weighted average fair value per
share of options granted during 1996 and 1997 was $0.03 and $0.07, respectively.
54
<PAGE> 55
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about Aptex employee stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE (IN YEARS) PRICE 1997 PRICE
--------------------------- -------------- --------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.03 to $0.03 497 8.75 $ 0.03 79 $ 0.03
0.05 0.05 39 9.40 0.05 -- --
0.10 0.10 151 9.82 0.10 -- --
--- ---
0.03 0.10 687 9.03 0.05 79 0.03
=== ===
</TABLE>
NOTE 10 -- 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.
NOTE 11 -- SUBSEQUENT EVENTS
On January 30, 1998, the Company signed a definitive agreement to acquire
Practical Control Systems Technologies, Inc. ("PCS"), a distribution center
management software vendor based in Cincinnati, Ohio, subject to the
satisfaction of certain closing conditions and the approval of PCS'
shareholders. If consummated, the acquisition of PCS will be accounted for under
the purchase method and will not be considered a "significant" acquisition
pursuant to regulations set forth by the Securities and Exchange Commission.
On February 13, 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan"), under which 1,000,000 shares of HNC Common Stock were reserved for
issuance pursuant to nonqualified stock options. The 1998 Plan is administered
by the Board of Directors of HNC or a committee appointed by the Board and
provides that nonqualified stock options granted under the plan must be awarded
at an exercise price of not less than 100% of the fair market value of the stock
at the date of grant. Options granted under the 1998 Plan may have a term of up
to ten years. No options have been granted under the 1998 Plan to date.
55
<PAGE> 56
SELECTED CONSOLIDATED QUARTERLY OPERATING RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
As restated for pooling transactions.... $24,072 $27,593 $29,989 $32,081 $113,735
As previously reported.................. 18,481 20,989 23,213 -- --
OPERATING INCOME:
As restated for pooling transactions.... 5,120 6,002 6,371 5,547 23,040
As previously reported.................. 3,061 3,464 4,169 -- --
NET INCOME:
As restated for pooling transactions.... 4,212 4,959 5,127 3,267 17,565
As previously reported.................. 2,183 2,458 2,956 -- --
PRO FORMA NET INCOME(1):
As restated for pooling transactions.... $ 3,434 $ 4,008 $ 4,286 $ 3,689 $ 15,417
As previously reported.................. 2,183 2,458 2,956 -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
As restated for pooling transactions.... $13,877 $16,697 $19,115 $21,750 $ 71,439
As previously reported.................. 9,899 12,556 14,603 16,775 53,833
OPERATING INCOME:
As restated for pooling transactions.... 351 1,801 3,117 4,390 9,659
As previously reported.................. (627) 609 1,574 2,562 4,118
NET (LOSS) INCOME:
As restated for pooling transactions.... 258 1,504 2,984 7,147 11,893
As previously reported.................. (727) 366 1,429 5,308 6,376
PRO FORMA NET (LOSS) INCOME(1):
As restated for pooling transactions.... $ (131) $ 1,088 $ 2,363 $ 6,411 $ 9,731
As previously reported.................. (727) 366 1,429 5,308 6,376
</TABLE>
(1) Pro forma net income reflects a provision for taxes on the income of
CompReview, which was a subchapter S corporation prior to its acquisition by
HNC, as if CompReview had been subject to corporate income taxes as a C
corporation for all periods presented.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, which will be set forth under the
captions "Proposal No. 1 Election of Directors," "Executive Officers" and
"Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, is
incorporated herein by reference.
56
<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which will be set forth under the
captions "Director Compensation," "Executive Compensation" and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy Statement
for its 1998 Annual Meeting of Stockholders, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which will be set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which will be set forth under the
caption "Certain Transactions" in the Company's Proxy Statement for its 1998
Annual Meeting of Stockholders, is incorporated herein by reference.
PART IV
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 and the report
thereon are included in Item 8 hereof:
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1996 and 1997
Consolidated Statement of Income for the years ended December 31,
1995, 1996 and 1997
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1996 and 1997
Consolidated Statement of Changes in Stockholders' Equity for the
years ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
The financial statement schedule of the Company listed below and the
report thereon are included herein:
Report of Independent Accountants on Financial Statement Schedule
(See page 62.)
Schedule II -- Valuation and Qualifying Accounts and Reserves for
each of the years in the three-year period ended December 31, 1997
(See page 63.)
All other schedules are omitted because they are not applicable or
not required or because the required information is shown in the
Financial Statements or notes thereto.
57
<PAGE> 58
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -------------------------------------------------------------------------
<S> <C>
2.01 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. (Incorporated by reference to Exhibit Number 2.01 to
Registrant's Current Report on Form 8-K filed on September 12, 1996, as
amended (the "Risk Data 8-K").)
2.02 Agreement of Merger dated August 30, 1996 by and between HNC Merger Corp.
and Risk Data Corporation. (Incorporated by reference to Exhibit Number
2.02 to the Risk Data 8-K.)
2.03 Exchange Agreement dated as of October 25, 1996 by and among the
Registrant, Retek Distribution Corporation and the shareholders of Retek
Distribution Corporation. (Incorporated by reference to Exhibit Number
2.01 to Registrant's Current Report on Form 8-K filed on December 12,
1996 (the "Retek 8-K").)
2.04 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. (Incorporated by reference to Exhibit
Number 2.02 to the Retek 8-K.)
2.05 Agreement and Plan of Reorganization dated as of July 14, 1997 by and
among the Registrant, FW1 Acquisition Corp., CompReview, Inc., Robert L.
Kaaren and Mishel E. Munnayer, a.k.a. Michael Munayyer, Trustee of the
Michael Munayyer Trust dated August 11, 1995. (Pursuant to Item 601(b)(2)
of Regulation S-K, certain schedules have been omitted but will be
furnished supplementally to the Commission upon request.) (Incorporated
by reference to Exhibit Number 2.01 to Registrant's Current Report on
Form 8-K filed on December 15, 1997 (the "CompReview 8-K").)
2.06 Agreement of Merger dated as of November 28, 1997 by and between FW1
Acquisition Corp. and CompReview, Inc. (Incorporated by reference to
Exhibit Number 2.02 to the CompReview 8-K.)
3(i).01 Registrant's Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on June 13, 1996. (Incorporated by
reference to Exhibit Number 3(i).04 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (the "Second Quarter 1996
10-Q").)
3(ii).02 Registrant's Bylaws, as amended. (Incorporated by reference to Exhibit
Number 3(ii).05 to the Second Quarter 1996 10-Q.)
4.01 Form of Specimen Certificate for Registrant's Common Stock. (Incorporated
by reference to Exhibit Number 4.01 to Registrant's Form S-1 Registration
Statement, as amended (File No. 33-91932) (the "IPO S-1").)
4.02 Third Amended Registration Rights Agreement dated March 10, 1993, as
amended. (Incorporated by reference to Exhibit Number 4.02 to the IPO
S-1.)
4.03 Second Waiver and Amendment to Third Amended Registration Rights
Agreement. (Incorporated by reference to Exhibit Number 4.03 to
Registrant's Form S-1 Registration Statement, as amended (File No.
33-99980) (the "Second S-1").)
4.04 Registration Rights Agreement dated as of August 30, 1996 by and among
the Registrant and the former shareholders of Risk Data Corporation.
(Incorporated by reference to Exhibit Number 4.01 to the Risk Data 8-K.)
4.05 Registration Rights Agreement dated as of October 25, 1996 by and among
the Registrant and the former shareholders of Retek Distribution
Corporation. (Incorporated by reference to Exhibit Number 4.01 to the
Retek 8-K.)
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -------------------------------------------------------------------------
<S> <C>
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. (Incorporated by reference to Exhibit
Number 4.06 to Registrant's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1996 (the "1996 10-K").)
4.07 Registration Rights Agreement dated as of November 28, 1997 by and among
the Registrant and the former shareholders of CompReview, Inc.
(Incorporated by reference to Exhibit Number 4.01 to the CompReview 8-K.)
10.01 Registrant's 1987 Stock Option Plan and related documents. (Incorporated
by reference to Exhibit Number 10.01 to the IPO S-1.)(1)
*10.02 Registrant's 1995 Equity Incentive Plan and related documents, as
amended.(1)
10.03 Registrant's 1995 Directors Stock Option Plan and related documents.
(Incorporated by reference to Exhibit Number 10.03 to the IPO S-1.)(1)
10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents.
(Incorporated by reference to Exhibit Number 10.04 to the IPO S-1.)(1)
*10.05 Registrant's 1998 Stock Option Plan.(1)
10.06 Form of Indemnity Agreement entered into by Registrant with each of its
directors and executive officers. (Incorporated by reference to Exhibit
Number 10.08 to the IPO S-1.)(1)
10.07 Office Building Lease dated as of December 1, 1993, as amended effective
February 1, 1994 and June 1, 1994, between Registrant and PacCor
Partners. (Incorporated by reference to Exhibit Number 10.09 to the IPO
S-1.)
10.08 Marketing Agreement dated as of June 24, 1993 between Registrant and
First Data Resources, Inc. (Incorporated by reference to Exhibit Number
10.11 to the IPO S-1.)(2)
10.09 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. (Incorporated by reference to Exhibit Number 10.12 to the
IPO S-1.)(2)
10.10 Loan and Security Agreement dated as of July 11, 1997, between Registrant
and Wells Fargo Bank, National Association. (Incorporated by reference to
Exhibit Number 10.01 to Registrant's Quarterly Report on Form 10-Q, as
amended, for the quarter ended June 30, 1997 (the "Second Quarter 1997
10-Q").)
10.11 Office Building Lease dated as of May 30, 1997, between Retek Information
Systems, Inc. and Midwest Real Estate Holdings, Inc. (Incorporated by
reference to Exhibit Number 10.02 to the Second Quarter 1997 10-Q.)
10.12 Office Building Lease dated as of June 17, 1996, between Registrant and
Williams Properties I, LLC & Williams Properties II, LLC. (Incorporated
by reference to Exhibit Number 10.12 to the 1996 10-K.)
10.13 Employment Agreement dated as of September 10, 1996, by and between Aptex
Software Inc. and Michael A. Thiemann. (Incorporated by reference to
Exhibit Number 10.13 to the 1996 10-K.)(1)
10.14 Investors' Rights Agreement dated as of September 10, 1996, by and among
Aptex Software Inc., HNC Software Inc. and Michael A. Thiemann.
(Incorporated by reference to Exhibit Number 10.14 to the 1996 10-K.)(1)
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -------------------------------------------------------------------------
<S> <C>
10.15 Restricted Stock Purchase Agreement dated as of September 10, 1996, by
and between Aptex Software Inc. and Michael Thiemann. (Incorporated by
reference to Exhibit Number 10.15 to the 1996 10-K.)(1)
10.16 Aptex Software Inc.'s 1996 Equity Incentive Plan and related documents.
(Incorporated by reference to Exhibit Number 10.16 to the 1996 10-K.)(1)
*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.
(1) Management contract or compensatory plan or arrangement.
(2) 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.
(b) Reports on Form 8-K
(i) A Report on Form 8-K was filed on October 24, 1997 to report, under
Item 5, the earnings press release for the quarter ended September 30,
1997.
(ii) A Report on Form 8-K was filed on December 15, 1997 to report the
acquisition of CompReview, Inc. (event dated November 28, 1997), under
Items 2 and 7 of Form 8-K. Filed therewith were the financial
statements of CompReview, Inc. as of September 30, 1997 and for the
nine months ended September 30, 1996 and 1997 and as of December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994. Also filed therewith were pro forma consolidated combined
condensed financial information at September 30, 1997 and for the nine
months ended September 30, 1997 and 1996 and for the years ended
December 31, 1996, 1995 and 1994 and historical and supplemental
consolidated financial statements of the Company at December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994.
60
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 16, 1998 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
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ ROBERT L. NORTH President and Chief February 16, 1998
- --------------------------------------------- Executive Officer (Principal
Robert L. North Executive Officer)
/s/ RAYMOND V. THOMAS Vice President, Finance & February 16, 1998
- --------------------------------------------- Administration and Chief
Raymond V. Thomas Financial Officer (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ EDWARD K. CHANDLER Director February 16, 1998
- ---------------------------------------------
Edward K. Chandler
/s/ OLIVER D. CURME Director February 16, 1998
- ---------------------------------------------
Oliver D. Curme
Director February , 1998
- ---------------------------------------------
Thomas F. Farb
/s/ CHARLES H. GAYLORD JR. Director February 16, 1998
- ---------------------------------------------
Charles H. Gaylord, Jr.
</TABLE>
61
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of HNC Software Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 29, 1998, except as to Note 11 which is as of February 13, 1998,
appearing on page 36 of this Annual Report on Form 10-K of HNC Software Inc.
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
San Diego, California
January 29, 1998
62
<PAGE> 63
HNC SOFTWARE INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ALLOWANCE FOR DEFERRED TAX
DOUBTFUL ACCOUNTS ASSET VALUATION
AND SALES RETURNS ALLOWANCE
----------------- ---------------
<S> <C> <C>
Balance at December 31, 1994.................................. $ 514,000 $ 4,238,000
Provision................................................... 529,000 702,000
Write-off................................................... (472,000) --
Recovery.................................................... (18,000) (2,223,000)
---------- -----------
Balance at December 31, 1995.................................. 553,000 2,717,000
Provision................................................... 279,000 --
Write-off................................................... (94,000) --
Recovery.................................................... (29,000) (2,717,000)
---------- -----------
Balance at December 31, 1996.................................. 709,000 --
Provision................................................... 3,171,000 --
Write-off................................................... (505,000) --
Recovery.................................................... (175,000) --
---------- -----------
Balance at December 31, 1997.................................. $ 3,200,000 $ --
========== ===========
</TABLE>
63
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- -----------------------------------------------------------------------------------
<C> <S>
2.01 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. (Incorporated
by reference to Exhibit Number 2.01 to Registrant's Current Report on Form 8-K
filed on September 12, 1996, as amended (the "Risk Data 8-K").)....................
2.02 Agreement of Merger dated August 30, 1996 by and between HNC Merger Corp. and Risk
Data Corporation. (Incorporated by reference to Exhibit Number 2.02 to the Risk
Data 8-K.).........................................................................
2.03 Exchange Agreement dated as of October 25, 1996 by and among the Registrant, Retek
Distribution Corporation and the shareholders of Retek Distribution Corporation.
(Incorporated by reference to Exhibit Number 2.01 to Registrant's Current Report on
Form 8-K filed on December 12, 1996 (the "Retek 8-K").)............................
2.04 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. (Incorporated by reference to Exhibit Number 2.02 to the Retek
8-K.)..............................................................................
2.05 Agreement and Plan of Reorganization dated as of July 14, 1997 by and among the
Registrant, FW1 Acquisition Corp., CompReview, Inc., Robert L. Kaaren and Mishel E.
Munnayer, a.k.a. Michael Munayyer, Trustee of the Michael Munayyer Trust dated
August 11, 1995. (Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules
have been omitted but will be furnished supplementally to the Commission upon
request.) (Incorporated by reference to Exhibit Number 2.01 to Registrant's Current
Report on Form 8-K filed on December 15, 1997 (the "CompReview 8-K").).............
2.06 Agreement of Merger dated as of November 28, 1997 by and between FW1 Acquisition
Corp. and CompReview, Inc. (Incorporated by reference to Exhibit Number 2.02 to the
CompReview 8-K.)...................................................................
3(i).01 Registrant's Restated Certificate of Incorporation filed with the Secretary of
State of Delaware on June 13, 1996. (Incorporated by reference to Exhibit Number
3(i).04 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 (the "Second Quarter 1996 10-Q").)........................................
3(ii).02 Registrant's Bylaws, as amended. (Incorporated by reference to Exhibit Number
3(ii).05 to the Second Quarter 1996 10-Q.).........................................
4.01 Form of Specimen Certificate for Registrant's Common Stock. (Incorporated by
reference to Exhibit Number 4.01 to Registrant's Form S-1 Registration Statement,
as amended (File No. 33-91932) (the "IPO S-1").)...................................
4.02 Third Amended Registration Rights Agreement dated March 10, 1993, as amended.
(Incorporated by reference to Exhibit Number 4.02 to the IPO S-1.).................
4.03 Second Waiver and Amendment to Third Amended Registration Rights Agreement.
(Incorporated by reference to Exhibit Number 4.03 to Registrant's Form S-1
Registration Statement, as amended (File No. 33-99980) (the "Second S-1").)........
4.04 Registration Rights Agreement dated as of August 30, 1996 by and among the
Registrant and the former shareholders of Risk Data Corporation. (Incorporated by
reference to Exhibit Number 4.01 to the Risk Data 8-K.)............................
4.05 Registration Rights Agreement dated as of October 25, 1996 by and among the
Registrant and the former shareholders of Retek Distribution Corporation.
(Incorporated by reference to Exhibit Number 4.01 to the Retek 8-K.)...............
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. (Incorporated by reference to Exhibit Number 4.06 to Registrant's
Annual Report on Form 10-K, as amended, for the year ended December 31, 1996 (the
"1996 10-K").).....................................................................
4.07 Registration Rights Agreement dated as of November 28, 1997 by and among the
Registrant and the former shareholders of CompReview, Inc. (Incorporated by
reference to Exhibit Number 4.01 to the CompReview 8-K.)...........................
10.01 Registrant's 1987 Stock Option Plan and related documents. (Incorporated by
reference to Exhibit Number 10.01 to the IPO S-1.)(1)..............................
*10.02 Registrant's 1995 Equity Incentive Plan and related documents, as amended.(1)......
10.03 Registrant's 1995 Directors Stock Option Plan and related documents. (Incorporated
by reference to Exhibit Number 10.03 to the IPO S-1.)(1)...........................
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- -----------------------------------------------------------------------------------
<C> <S>
10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents. (Incorporated
by reference to Exhibit Number 10.04 to the IPO S-1.)(1)...........................
*10.05 Registrant's 1998 Stock Option Plan.(1)............................................
10.06 Form of Indemnity Agreement entered into by Registrant with each of its directors
and executive officers. (Incorporated by reference to Exhibit Number 10.08 to the
IPO S-1.)(1).......................................................................
10.07 Office Building Lease dated as of December 1, 1993, as amended effective February
1, 1994 and June 1, 1994, between Registrant and PacCor Partners. (Incorporated by
reference to Exhibit Number 10.09 to the IPO S-1.).................................
10.08 Marketing Agreement dated as of June 24, 1993 between Registrant and First Data
Resources, Inc. (Incorporated by reference to Exhibit Number 10.11 to the IPO
S-1.)(2)...........................................................................
10.09 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. (Incorporated
by reference to Exhibit Number 10.12 to the IPO S-1.)(2)...........................
10.10 Loan and Security Agreement dated as of July 11, 1997, between Registrant and Wells
Fargo Bank, National Association. (Incorporated by reference to Exhibit Number
10.01 to Registrant's Quarterly Report on Form 10-Q, as amended, for the quarter
ended June 30, 1997 (the "Second Quarter 1997 10-Q"))..............................
10.11 Office Building Lease dated as of May 30, 1997, between Retek Information Systems,
Inc. and Midwest Real Estate Holdings, Inc. (Incorporated by reference to Exhibit
Number 10.02 to the Second Quarter 1997 10-Q.).....................................
10.12 Office Building Lease dated as of June 17, 1996, between Registrant and Williams
Properties I, LLC & Williams Properties II, LLC. (Incorporated by reference to
Exhibit Number 10.12 to the 1996 10-K.)............................................
10.13 Employment Agreement dated as of September 10, 1996, by and between Aptex Software
Inc. and Michael A. Thiemann. (Incorporated by reference to Exhibit Number 10.13 to
the 1996 10-K.)(1).................................................................
10.14 Investors' Rights Agreement dated as of September 10, 1996, by and among Aptex
Software Inc., HNC Software Inc. and Michael A. Thiemann. (Incorporated by
reference to Exhibit Number 10.14 to the 1996 10-K.)(1)............................
10.15 Restricted Stock Purchase Agreement dated as of September 10, 1996, by and between
Aptex Software Inc. and Michael Thiemann. (Incorporated by reference to Exhibit
Number 10.15 to the 1996 10-K.)(1).................................................
10.16 Aptex Software Inc.'s 1996 Equity Incentive Plan and related documents.
(Incorporated by reference to Exhibit Number 10.16 to the 1996 10-K.)(1)...........
*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.
(1) Management contract or compensatory plan or arrangement.
(2) 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.
<PAGE> 1
EXHIBIT 10.02
HNC SOFTWARE INC.
1995 EQUITY INCENTIVE PLAN
As Adopted May 4, 1995
As Amended January 11, 1996 (effective as of July 27,1995), December 6, 1996 and
November 25, 1997
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 3,550,000(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 Plan pursuant to the grant of
Awards hereunder, other than new employees of the Company or of a Parent,
- ----------
(1) Adjusted to reflect (i) the 2-for-1 split of the Company's capital stock
effected in April 1996; (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; and (iii) the authorization of
750,000 additional shares of Common Stock for issuance under the Plan
approved by the Company's stockholders on November 25, 1997.
(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
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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<PAGE> 3
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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<PAGE> 4
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
-4-
<PAGE> 5
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.
-5-
<PAGE> 6
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.
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HNC Software Inc.
1995 Equity Incentive Plan
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 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.
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HNC Software Inc.
1995 Equity Incentive Plan
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 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
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<PAGE> 9
HNC Software Inc.
1995 Equity Incentive Plan
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.
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
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<PAGE> 10
HNC Software Inc.
1995 Equity Incentive Plan
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 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.
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HNC Software Inc.
1995 Equity Incentive Plan
"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.
"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
date of determination (if such day is a trading day) as
reported in The Wall Street Journal, and, if such date of
determination is not a trading day, then on the last trading
day prior to the date of determination;
(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.
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<PAGE> 12
HNC Software Inc.
1995 Equity Incentive Plan
"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.
"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").
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<PAGE> 13
NO.____
HNC SOFTWARE INC.
1995 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "AGREEMENT") is made and entered
into as of the date of grant set forth below (the "DATE OF GRANT") by and
between HNC Software Inc., a Delaware corporation (the "COMPANY"), and the
participant named below ("PARTICIPANT"). Capitalized terms not defined herein
shall have the meaning ascribed to them in the Company's 1995 Equity Incentive
Plan, as amended (the "PLAN").
PARTICIPANT:
----------------------------------------------------
SOCIAL SECURITY NUMBER:
----------------------------------------------------
PARTICIPANT'S ADDRESS:
----------------------------------------------------
----------------------------------------------------
TOTAL OPTION SHARES:
----------------------------------------------------
EXERCISE PRICE PER SHARE:
----------------------------------------------------
DATE OF GRANT:
----------------------------------------------------
VESTING START DATE:
----------------------------------------------------
EXPIRATION DATE:
----------------------------------------------------
TYPE OF STOCK OPTION
(CHECK ONE): [ ] INCENTIVE STOCK OPTION
[ ] NONQUALIFIED STOCK OPTION
1. GRANT OF OPTION. The Company hereby grants to Participant an
option (this "OPTION") to purchase up to the total number of shares of Common
Stock of the Company set forth above (collectively, the "SHARES") at the
Exercise Price Per Share set forth above (the "EXERCISE PRICE"), subject to all
of the terms and conditions of this Agreement and the Plan. If designated as an
Incentive Stock Option above, this Option is intended to qualify as an
"incentive stock option" ("ISO") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "CODE").
2. VESTING; EXERCISE PERIOD.
2.1 Vesting of Right to Exercise Option. This Option shall
become exercisable as to portions of the Shares as follows: (a) this Option
shall not be exercisable with respect to any of the Shares until _______ ___,
199_ (the "FIRST VESTING DATE"); (b) if Participant has continuously provided
services to the Company or any Subsidiary, Parent or Affiliate of the Company
from the Date of Grant through the First Vesting Date and has not been
Terminated on or before the First Vesting Date, then on the First Vesting Date
this Option shall become
<PAGE> 14
HNC Software Inc.
Stock Option Agreement
exercisable as to ____ percent (__%) of the Shares; and [ALTERNATIVE # 1 (ANNUAL
VESTING)] (c) thereafter, so long as Participant continuously provides services
to the Company or any Subsidiary, Parent or Affiliate of the Company and is not
Terminated, on the first anniversary of the First Vesting Date and on each
successive anniversary of the First Vesting Date thereafter, this Option shall
become exercisable as to an additional ______ percent (__%) of the Shares;
provided that this Option shall in no event ever become exercisable with respect
to more than 100% of the Shares.] OR [ALTERNATIVE # 2 (MONTHLY VESTING) (c)
thereafter, so long as Participant continuously provides services to the Company
or any Subsidiary, Parent or Affiliate of the Company and is not Terminated,
upon the expiration of each successive full month after the first anniversary of
the First Vesting Date, this Option shall become exercisable as to an additional
_____ percent (__%) of the Shares; provided that this Option shall in no event
ever become exercisable with respect to more than 100% of the Shares.]
2.2 Expiration. This Option shall expire on the Expiration Date
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3.
3. TERMINATION.
3.1 Termination for Any Reason Except Death or Disability. If
Participant is Terminated for any reason, except Participant's death or
Disability, then this Option, to the extent (and only to the extent) that it
would have been exercisable by Participant on the date of Termination, may be
exercised by Participant no later than three (3) months after the date of
Termination (or seven (7) months after the date of Termination if the Company is
then subject to Section 16 of the Exchange Act and Participant's transactions in
securities of the Company were subject to Section 16(b) of the Exchange Act on
the date of Termination), but in any event no later than the Expiration Date.
3.2 Termination Because of Death or Disability. If Participant
is Terminated because of death or Disability of Participant, then this Option,
to the extent that it is exercisable by Participant on the date of Termination,
may be exercised by Participant (or Participant's legal representative) no later
than twelve (12) months after the date of Termination, but in any event no later
than the Expiration Date.
3.3 No Obligation to Employ. Nothing in the Plan or this
Agreement shall confer on Participant any right to continue in the employ of, or
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.
4. MANNER OF EXERCISE.
4.1 Stock Option Exercise Agreement. To exercise this Option,
Participant (or in the case of exercise after Participant's death, Participant's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock
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<PAGE> 15
HNC Software Inc.
Stock Option Agreement
option exercise agreement in the form attached hereto as Exhibit A, or in such
other form as may be approved by the Company from time to time (the "EXERCISE
AGREEMENT"), which shall set forth, inter alia, Participant's election to
exercise this Option, the number of Shares being purchased, any restrictions
imposed on the Shares and any representations, warranties and agreements
regarding Participant's investment intent and access to information as may be
required by the Company to comply with applicable securities laws. If someone
other than Participant exercises this Option, then such person must submit
documentation reasonably acceptable to the Company that such person has the
right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by
full payment of the Exercise Price for the Shares being purchased in cash (by
check), or where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares of the Company's Common Stock 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 open public market; and
(3) are clear of all liens, claims, encumbrances or security
interests;
(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 of the Company shall not be entitled to purchase Shares
with a promissory note unless the note is adequately secured by
collateral other than the Shares; and provided further that the
portion of the Exercise 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 Participant for services
rendered;
(e) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Participant and a
broker-dealer that is a member of the National Association of
Securities Dealers (an "NASD DEALER") whereby Participant irrevocably
elects to exercise this 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 Participant and a NASD Dealer whereby Participant
irrevocably elects to exercise this Option
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<PAGE> 16
HNC Software Inc.
Stock Option Agreement
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.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
exercise of this Option, Participant must pay or provide for any applicable
federal or state withholding obligations of the Company. If the Committee
permits, Participant may provide for payment of withholding taxes upon exercise
of this Option by requesting that the Company retain Shares with a Fair Market
Value equal to the minimum amount of taxes required to be withheld. In such
case, the Company shall issue the net number of Shares to the Participant by
deducting the Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement
and payment are in form and substance satisfactory to counsel for the Company,
the Company shall issue the Shares registered in the name of Participant,
Participant's authorized assignee, or Participant's legal representative, and
shall deliver certificates representing the Shares with the appropriate legends
affixed thereto.
5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If this Option
is an ISO, and if Participant sells or otherwise disposes of any of the Shares
acquired pursuant to the ISO on or before the later of (a) the date two (2)
years after the Date of Grant, and (b) the date one (1) year after transfer of
such Shares to Participant upon exercise of this Option, then Participant shall
immediately notify the Company in writing of such disposition. Participant
agrees that Participant may be subject to income tax withholding by the Company
on the compensation income recognized by Participant from the early disposition
by payment in cash or out of the current wages or other compensation payable to
Participant.
6. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this Option
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Participant with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such issuance or
transfer. Participant understands that the Company is under no obligation to
register or qualify the Shares with the Securities and Exchange Commission, any
state securities commission or any stock exchange to effect such compliance.
7. NONTRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner other than by will or by the laws of descent and distribution and
may be exercised during the lifetime of Participant only by Participant. The
terms of this Option shall be binding upon the executors, administrators,
successors and assigns of Participant.
8. TAX CONSEQUENCES. Set forth below is a brief summary as of the
Date of Grant of some of the federal and California tax consequences of exercise
of this Option and
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<PAGE> 17
HNC Software Inc.
Stock Option Agreement
disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX
ADVISOR BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.
8.1 Exercise of ISO. If this Option qualifies as an ISO, there
will be no regular federal or California income tax liability upon the exercise
of this Option, although the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price will be treated as a tax
preference item for federal income tax purposes and may subject the Participant
to the alternative minimum tax in the year of exercise.
8.2 Exercise of Nonqualified Stock Option. If this Option does
not qualify as an ISO, there may be a regular federal and California income tax
liability upon the exercise of this Option. Participant will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the fair market value of the Shares on the date of
exercise over the Exercise Price. The Company will be required to withhold from
Participant's compensation or collect from Participant and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
8.3 Disposition of Shares. If the Shares are held for more than
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of this Option (and, in the case of an ISO, are disposed of more than
two (2) years after the Date of Grant), then any gain realized on disposition of
the Shares will be treated as long term capital gain for federal and California
income tax purposes. If Shares purchased under an ISO are disposed of within one
(1) year of exercise or within two (2) years after the Date of Grant, then any
gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of the
fair market value of the Shares on the date of exercise over the Exercise Price.
The Company will be required to withhold from Participant's compensation or
collect from Participant and pay to the applicable taxing authorities an amount
equal to a percentage of this compensation income at the time of exercise.
9. PRIVILEGES OF STOCK OWNERSHIP. Participant shall not have any of
the rights of a shareholder with respect to any Shares until Participant
exercises this Option and pays the Exercise Price.
10. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Participant or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Participant.
11. ENTIRE AGREEMENT. The Plan is incorporated herein by reference.
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
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<PAGE> 18
HNC Software Inc.
Stock Option Agreement
12. NOTICES. Any notice required to be given or delivered to the
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Participant shall be in writing and
addressed to Participant at the address indicated above or to such other address
as such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon: personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by rapifax or telecopier.
13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Participant and Participant's heirs, executors, administrators, legal
representatives, successors and assigns.
14. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
15. ACCEPTANCE. Participant hereby acknowledges receipt of a copy of
the Plan and this Agreement. Participant has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Participant acknowledges that there
may be adverse tax consequences upon exercise of this Option or disposition of
the Shares and that the Company has advised Participant to consult a tax advisor
prior to such exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in duplicate by its duly authorized representative and Participant has
executed this Agreement in duplicate as of the Date of Grant.
HNC SOFTWARE INC. PARTICIPANT
By:
-------------------------------- -----------------------------------------
(Signature)
- ------------------------------------ -----------------------------------------
(Please print name) (Please print name)
- ------------------------------------
(Please print title)
-6-
<PAGE> 19
EXHIBIT A
STOCK OPTION EXERCISE AGREEMENT
<PAGE> 20
EXHIBIT A
HNC SOFTWARE INC.
1995 EQUITY INCENTIVE PLAN (THE "PLAN")
STOCK OPTION EXERCISE AGREEMENT
I hereby elect to purchase the number of shares of Common Stock of HNC SOFTWARE
INC. (the "Company") as set forth below:
Participant
--------------------------------------------------------------------
Social Security Number:
---------------------------------------------------------
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
Daytime Phone:
------------------------------------------------------------------
Facsimile Number:
---------------------------------------------------------------
Type of Option: [ ] Incentive
Stock Option [ ] Nonqualified Stock Option
Number of Shares Purchased:
----------------------------------------------------
Purchase Price per Share:
----------------------------------------------------
Aggregate Purchase Price:
----------------------------------------------------
Date of Option Agreement:
----------------------------------------------------
Exact Name of Title to Shares:
-------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. DELIVERY OF PURCHASE PRICE. Participant hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $__________________, receipt of which
is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Participant in the
amount of $_______________________;
[ ] by delivery of ___________ fully-paid, nonassessable and vested shares
of the common stock of the Company owned by Participant for at least six
(6) months prior to the date hereof (and which have been paid for within
the meaning of SEC Rule 144), or obtained by Participant in the open
public market, and owned free and clear of all liens, claims, encumbrances
or security interests, valued at the current Fair Market Value of
$_________ per share;
[ ] by the waiver hereby of compensation due or accrued to Participant for
services rendered in the amount of $______________________ (except that
the par value of the Shares is tendered in cash (by check) receipt of
which is acknowledged by the Company);
[ ] through a "same-day-sale" commitment, delivered herewith, from
Participant and the NASD Dealer ("Broker") named therein, in the amount of
$___________________; or
[ ] through a "margin" commitment, delivered herewith from Participant and the
Broker named therein, in the amount of $_____________________.
Please complete the following if you elect to exercise your option through
a "same-day-sale" or "margin" commitment:
Exercised shares shall be registered
in the name of: Broker Phone:
------------------
Broker Fax:
------------------
Name of Broker:
-------------------------
Broker Account Number:
--------------------
The Broker will remit the exercise price and applicable withholding taxes
directly to the Company.
2. MARKET STANDOFF AGREEMENT. Participant, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Participant during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. TAX CONSEQUENCES. PARTICIPANT UNDERSTANDS THAT PARTICIPANT MAY SUFFER ADVERSE
TAX CONSEQUENCES AS A RESULT OF PARTICIPANT'S PURCHASE OR DISPOSITION OF THE
SHARES. PARTICIPANT REPRESENTS THAT PARTICIPANT HAS CONSULTED WITH ANY TAX
CONSULTANT(S) PARTICIPANT DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT PARTICIPANT IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE.
<PAGE> 21
4. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement constitute
the entire agreement and understanding of the parties and supersede in their
entirety all prior understandings and agreements of the Company and Participant
with respect to the subject matter hereof, and are governed by California law
except for that body of law pertaining to choice of law or conflict of law.
Date:
------------------------------ ---------------------------------------
Signature of Participant
This is to verify our receipt and acceptance of the attached Exercise Agreement
and our agreement to promptly issue and deliver the shares referred to above,
subject to our receipt of the Aggregate Purchase Price, and taxes due, if any.
The shares, when so issued will be fully paid and nonassessable.
HNC Software Inc.
Date:
------------------------------ ---------------------------------------
Signature of Participant
[SIGNATURE PAGE TO HNC SOFTWARE INC.
1995 EQUITY INCENTIVE PLAN STOCK OPTION EXERCISE AGREEMENT]
-2-
<PAGE> 22
SPOUSAL CONSENT
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "AGREEMENT") and that I know its contents. I hereby consent to
and approve all the provisions of the Agreement, and agree that the shares of
the Common Stock of HNC Software Inc. purchased thereunder (the "SHARES") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have on them.
Spouse of Participant
Date:
- ---------------------------------- ------------------
Signature of Spouse
- ---------------------------------
Spouse's Name
- ---------------------------------
Participant's Name
<PAGE> 1
EXHIBIT 10.05
HNC SOFTWARE INC.
1998 STOCK OPTION PLAN
As Adopted February 13, 1998
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. Capitalized terms not defined in
the text are defined in Section 21.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 16, the total
number of Shares reserved and available for grant and issuance pursuant to this
Plan will be 1,000,000 Shares plus any Shares that are made available for grant
and issuance under this Plan pursuant to the following sentence. Subject to
Sections 2.2 and 16, Shares that 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 will again be available for grant and issuance in connection with
future Options 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.
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 the number of
Shares reserved for issuance under this Plan and the Exercise Prices of and
number of Shares subject to outstanding Options 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. All Options issued under the Plan shall be nonqualified
stock options. Options may be granted to employees, officers, consultants,
independent contractors and advisors of the Company or any Parent, Subsidiary or
Affiliate of the Company; provided that Options awarded to officers of the
Company or any Parent, Subsidiary or Affiliate of the Company may not exceed 30%
of all Options that are available for grant under the Plan and provided further
that such consultants, independent 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
50,000 Shares in any calendar year under this Plan pursuant to the grant of
Options hereunder, other than new employees of the Company or of a Parent,
Subsidiary or Affiliate of the Company who are eligible to receive up to a
maximum of 75,000 Shares in the calendar year in which they commence their
employment. A person may be granted more than one Option 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 Stock Option 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 Options;
(d) determine the form and terms of Options;
(e) determine the number of Shares or other consideration subject to
Options;
<PAGE> 2
(f) determine whether Options will be granted singly, in combination with,
in tandem with, in replacement of, or as alternatives to, other Options
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 Option conditions;
(h) determine the vesting, exercisability and payment of Options;
(i) correct any defect, supply any omission or reconcile any inconsistency
in this Plan, any Option or any Stock Option Agreement;
(j) determine whether an Option 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 Option will be made in its sole discretion at the time of grant
of the Option or, unless in contravention of any express term of this Plan or
Option, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Option under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant Options under this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and will
determine 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 a Stock Option Agreement, which 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. 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 not be less than 100% 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 6 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
2
<PAGE> 3
shorter or longer time period not exceeding five (5) years as may be
determined by the Committee), 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 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), 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 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. 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.
6. PAYMENT FOR SHARE PURCHASES.
6.1 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 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 Exercise 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 Exercise
Price equal to the par value of the Shares, if any, must be paid in
cash;
(e) 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
3
<PAGE> 4
(f) by any combination of the foregoing.
6.2 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.
7. WITHHOLDING TAXES.
7.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Options 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 Options are to be made in cash, such payment will be net of
an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
7.2 Stock Withholding. When, under applicable tax laws, a Participant
incurs tax liability in connection with the exercise or vesting of any Option
that is subject to tax withholding and the 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. All elections by a Participant to have Shares withheld for this
purpose will be made in writing in a form acceptable to the Committee.
8. PRIVILEGES OF STOCK OWNERSHIP.
8.1 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 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 Exercise Price pursuant to Section 10.
8.2 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 Options
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.
9. TRANSFERABILITY. Options 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 Stock Option Agreement provisions relating thereto. During the lifetime
of the Participant an Option will be exercisable only by the Participant, and
any elections with respect to an Option, may be made only by the Participant.
10. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company
may reserve to itself and/or its assignee(s) in the Stock Option Agreement a
right to repurchase a portion of or all unvested Shares previously received upon
exercise of an Option and 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 the Participant's
Exercise Price.
11. 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.
12. 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
4
<PAGE> 5
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.
13. EXCHANGE AND BUYOUT OF OPTIONS. The Committee may, at any time or from
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Options in exchange for the surrender and
cancellation of any or all outstanding Options. The Committee may at any time
buy from a Participant an Option previously granted with payment in cash, Shares
or other consideration, based on such terms and conditions as the Committee and
the Participant may agree.
14. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Option will not be
effective unless such Option 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 Option 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.
15. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Option 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.
16. CORPORATE TRANSACTIONS.
16.1 Assumption or Replacement of Options 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 Options 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 Options may
be assumed, converted or replaced by the successor
5
<PAGE> 6
corporation (if any), which assumption, conversion or replacement will be
binding on all Participants. In the alternative, the successor corporation may
substitute equivalent Options or provide substantially similar consideration to
Participants as was provided to stockholders (after taking into account the
existing provisions of the Options). 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 16.1, such Options will
expire on such transaction at such time and on such conditions as the Board will
determine.
16.2 Other Treatment of Options. Subject to any greater rights granted to
Participants under the foregoing provisions of this Section 16, in the event of
the occurrence of any transaction described in Section 16.1, any outstanding
Options will be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, sale of assets or other
"corporate transaction."
16.3 Assumption of Options by the Company. The Company, from time to time,
also may substitute or assume outstanding options granted by another company,
whether in connection with an acquisition of such other company or otherwise, by
either; (a) granting an Option under this Plan in substitution of such other
company's option; or (b) assuming such option as if it had been granted under
this Plan if the terms of such assumed option could be applied to an Option
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed option would have been eligible to be
granted an Option under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an option granted by
another company, the terms and conditions of such option 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.
17. ADOPTION AND EFFECTIVE DATE. This Plan will become effective on the
date that it is adopted by the Board (the "EFFECTIVE DATE").
18. TERM OF PLAN. Unless earlier terminated as provided herein, this Plan
will terminate ten (10) years from the Effective Date.
19. 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 Stock Option Agreement or instrument to be executed pursuant to this
Plan; provided, however, that no amendments may be made to outstanding Options
without the consent of the Participant.
20. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
Board 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 otherwise than under this Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.
21. 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.
"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.
6
<PAGE> 7
"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.
"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 date of
determination (if such day is a trading day) as reported in The Wall
Street Journal, and, if such date of determination is not a trading
day, then on the last trading day prior to the date of determination;
(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.
"OPTION" means an award of a nonqualified stock 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 Option 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 Option under this Plan.
"PLAN" means this HNC Software Inc. 1998 Stock Option Plan, as amended from
time to time.
"SEC" means the Securities and Exchange Commission.
"SHARES" means shares of the Company's Common Stock reserved for issuance
under this Plan, as adjusted pursuant to Sections 2 and 16, and any successor
security.
"STOCK OPTION AGREEMENT" means, with respect to each Option, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Option.
"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 Option, 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, officer, 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").
7
<PAGE> 1
EXHIBIT 21.01
LIST OF REGISTRANT'S SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OWNED
NAME JURISDICTION OF ORGANIZATION BY REGISTRANT
---- ---------------------------- -------------
<S> <C> <C>
CompReview, Inc. California 100%
Retek Information Systems, Inc. Delaware 100%
Retek Information Systems Inc. Canada 100%
Retek Information Systems Ltd. United Kingdom 100%
Retek Information Systems Pty. Ltd. Australia 100%
Retek Information Systems France 100%
Retek Information Systems GmbH Germany 100%
Risk Data Corporation California 100%
Aptex Software Inc. California 87.2%
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby 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 29, 1998, except as to Note 11
which is as of February 13, 1998, appearing on page 36 of this Form 10-K. We
also 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 29, 1998, except as to Note 11 which is as of February
13, 1998, appearing on page 36 of this Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 62 of this Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
February 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,068
<SECURITIES> 24,878
<RECEIVABLES> 36,180
<ALLOWANCES> (3,200)
<INVENTORY> 304
<CURRENT-ASSETS> 90,038
<PP&E> 21,255
<DEPRECIATION> (9,153)
<TOTAL-ASSETS> 119,877
<CURRENT-LIABILITIES> 15,735
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 103,948
<TOTAL-LIABILITY-AND-EQUITY> 119,877
<SALES> 113,735
<TOTAL-REVENUES> 113,735
<CGS> 34,869
<TOTAL-COSTS> 34,869
<OTHER-EXPENSES> 55,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 24,919
<INCOME-TAX> 7,354
<INCOME-CONTINUING> 17,565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,565
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.68
</TABLE>
