<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-26146
HNC SOFTWARE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0248788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5935 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(858) 546-8877
(Registrant's telephone number, including area code)
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
AS OF JULY 31, 2000 THERE WERE 27,329,634 SHARES OF REGISTRANT'S COMMON STOCK,
$0.001 PAR VALUE, OUTSTANDING.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
HNC Retek
--- -----
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 2000 (Unaudited)
and December 31, 1999....................................................... 3 28
Consolidated Statement of Operations (Unaudited) for the three and six
months ended June 30, 2000 and 1999......................................... 4 29
Consolidated Statement of Cash Flows (Unaudited) for
the six months ended June 30, 2000 and 1999................................. 5 30
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income (Unaudited) for the six
months ended June 30, 2000.................................................. 6 31
Notes to Consolidated Financial Statements (Unaudited)......................... 7 32
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 15 35
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 48 48
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K............................................... 51 --
Signatures .................................................................................... 52 --
Exhibit Index ................................................................................. 53 --
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 80,983 $ 136,340
Short-term investments available for sale - debt 55,397 22,368
Short-term investments available for sale - equity 1,833 6,810
Trade accounts receivable, net 62,938 64,189
Deferred income taxes 1,454 20,384
Other current assets 16,040 11,144
--------- ---------
Total current assets 218,645 261,235
--------- ---------
Long-term investments available for sale-debt 76,654 68,563
Equity investments 11,469 14,219
Property and equipment, net 34,585 22,219
Intangible assets, net 137,501 29,068
Deferred income taxes 54,719 18,085
Other assets 4,883 3,032
========= =========
$ 538,456 $ 416,421
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 33,276 $ 30,049
Deferred revenue 45,286 15,274
Other current liabilities 3,539 --
--------- ---------
Total current liabilities 82,101 45,323
--------- ---------
Non-current liabilities 5,325 4,111
--------- ---------
Convertible Subordinated Notes 100,000 100,000
--------- ---------
Contingencies (Note 9)
Minority interest in consolidated subsidiaries 14,855 17,414
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value -- 4,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $0.001 par value -- 120,000 shares authorized;
27,180 and 25,704 shares issued and outstanding, respectively 27 26
Common stock in treasury, at cost -- 233 and 882 shares, respectively (15,507) (19,613)
Paid-in capital 389,214 275,955
Retained earnings (deficit) (20,152) 12,209
Accumulated other comprehensive income (loss) (2,120) 1,507
Unearned stock-based compensation (15,287) (20,511)
--------- ---------
Total stockholders' equity 336,175 249,573
========= =========
$ 538,456 $ 416,421
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance $ 42,393 $ 41,336 $ 74,184 $ 77,807
Services and other 25,039 14,597 47,811 27,315
--------- --------- --------- ---------
Total revenues 67,432 55,933 121,995 105,122
--------- --------- --------- ---------
Operating expenses:
License and maintenance (excluding non-cash stock-based
Compensation expense of $167 and $293 for the three
and six months ended June 30, 2000) 13,669 10,122 26,288 20,839
Services and other (excluding non-cash stock based
compensation expense of $401 and $795 for the three
and six months ended June 30, 2000) 18,414 10,327 33,462 18,984
Research and development (excluding non-cash stock based
compensation expense of $1,348 and $2,553 for the three
and six months ended June 30, 2000) 18,965 11,608 35,186 21,128
Sales and marketing (excluding non-cash stock based
compensation expense of $1,020 and $1,601 for the three
and six months ended June 30, 2000) 18,582 10,763 35,160 20,541
General and administrative (excluding non-cash stock based
compensation income of $315 and $705 for the three and
six months ended June 30, 2000, and excluding acquisition-
related amortization) 9,047 5,063 16,832 9,643
Stock-based compensation 2,621 -- 4,537 --
Acquisition-related amortization 11,546 2,056 15,512 4,308
In-process research and development 5,050 -- 6,472 --
--------- --------- --------- ---------
Total operating expenses 97,894 49,939 173,449 95,443
Operating income (loss) (30,462) 5,994 (51,454) 9,679
Interest and other income, net 2,995 1,325 6,335 2,970
Interest expense related to convertible debt (1,342) (1,342) (2,684) (2,684)
Minority interest in losses of consolidated subsidiaries 3,028 -- 5,419 --
--------- --------- --------- ---------
Income (loss) before income taxes (25,781) 5,977 (42,384) 9,965
Income tax provision (benefit) (5,636) 2,632 (10,023) 4,496
--------- --------- ========= =========
Net income (loss) $ (20,145) $ 3,345 $ (32,361) $ 5,469
========= ========= ========= =========
Net income (loss) per share:
Basic net income (loss) per share $ (0.75) $ 0.14 $ (1.22) $ 0.22
========= ========= ========= =========
Diluted net income (loss) per share $ (0.75) $ 0.13 $ (1.22) $ 0.21
========= ========= ========= =========
Shares used in computing basic net income (loss) per share 26,955 24,498 26,529 25,078
========= ========= ========= =========
Shares used in computing diluted net income (loss) per share 26,955 25,000 26,529 25,706
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (32,361) $ 5,469
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for doubtful accounts 1,797 2,099
Depreciation and amortization 20,314 8,571
In-process research and development 6,450 --
(Gain) loss on disposals of property and equipment (2) 141
Stock-based compensation expense 4,537 --
Deferred income tax benefit (10,023) --
Tax benefit from stock option transactions 20,691 777
Minority interest in losses of consolidated subsidiary (5,419) --
Changes in assets and liabilities:
Trade accounts receivable (20,228) (6,080)
Deferred income taxes (20,640) 2,334
Other assets (4,598) 1,379
Accounts payable and accrued liabilities 4,268 809
Deferred revenue 29,419 569
--------- ---------
Net cash provided by (used in) operating activities (5,795) 16,068
--------- ---------
Cash flows from investing activities:
Net sales (purchases) of investments available for sale (40,847) 24,153
Equity investments (2,500) (11,720)
Issuance of employee loans (1,300) --
Acquisitions of property and equipment (16,045) (10,339)
Cash paid in business acquisitions, net of cash acquired (18,811) --
Proceeds from sale of property and equipment -- 184
--------- ---------
Net cash provided by (used in) investing activities (79,503) 2,278
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of HNC common stock 24,408 2,666
Net proceeds from issuance of Retek common stock 5,635 --
Repurchase of HNC common stock for treasury (18,616) (50,381)
Net proceeds from sales of receivables 20,730 --
Repayment of debt and capital lease obligations (1,553) (60)
--------- ---------
Net cash provided by (used in) financing activities 30,604 (47,775)
--------- ---------
Effect of exchange rate changes on cash (663) (432)
--------- ---------
Net decrease in cash and cash equivalents (55,357) (29,861)
Cash and cash equivalents at beginning of the period 136,340 54,267
--------- ---------
Cash and cash equivalents at end of the period $ 80,983 $ 24,406
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited, in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK TREASURY STOCK PAID-IN RETAINED COMPREHENSIVE
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS)
------ ------ ------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999......... 25,704 $ 26 882 $ (19,613) $ 275,955 $ 12,209 $ 1,507
Common stock options exercised....... 982 1 (882) 23,056 (354)
Purchase of HNC common stock
for treasury....................... (250) 250 (18,616)
Release of FTI escrow shares
into treasury (49) 49 (1,808)
Common stock issued under
Employee Stock Purchase Plan....... 66 (66) 1,474 231
Effect of common stock issued under
Retek Employee Stock Purchase
Plan............................... 3,635
Tax benefit from stock option
transactions....................... 20,691
Amortization of unearned
stock-based compensation expense...
Stock-based compensation expense..... (515)
Retek initial public offering costs.. (243)
Common stock issued in business
acquisitions....................... 727 84,382
Effect of Retek common stock issued
in business acquisition............ 5,432
Unrealized loss on investments, net
of tax.............................. (2,952)
Foreign currency translation
adjustment, net of tax............. (675)
Net loss............................. (32,361)
------ ----- --- -------- --------- --------- --------
BALANCE AT JUNE 30, 2000............. 27,180 $ 27 233 $(15,507) $ 389,214 $ (20,152) $ (2,120)
====== ===== === ======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
UNEARNED TOTAL
STOCK-BASED STOCKHOLDERS' COMPREHENSIVE
COMPENSATION EQUITY INCOME (LOSS)
------------ ------ -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999......... $ (20,511) $ 249,573 $ (4,605)
Common stock options exercised....... 22,703
Purchase of HNC common stock
for treasury....................... (18,616)
Release of FTI escrow shares (1,808)
into treasury
Common stock issued under
Employee Stock Purchase Plan....... 1,705
Effect of common stock issued under
Retek Employee Stock Purchase
Plan............................... 3,635
Tax benefit from stock option
transactions....................... 20,691
Amortization of unearned
stock-based compensation expense... 172 172
Stock-based compensation expense..... 5,052 4,537
Retek initial public offering costs.. (243)
Common stock issued in business
acquisitions....................... 84,382
Effect of Retek common stock issued
in business acquisition............ 5,432
Unrealized loss on investments, net
of tax.............................. (2,952) (2,952)
Foreign currency translation
adjustment, net of tax............. (675) (675)
Net loss............................. (32,361) (32,361)
--------- --------- ----------
BALANCE AT JUNE 30, 2000............. $ (15,287) $ 336,175 $ (35,988)
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- GENERAL
HNC Software Inc.
Headquartered in San Diego, California, we develop, market, and support
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 vector technology to convert existing data and business
experiences into meaningful recommendations and actions. We provide innovative
predictive software systems in the insurance, financial services,
telecommunications, e-business, and retail markets. In this Report, HNC Software
Inc. is referred to as "we," "our," and "HNC". Our subsidiary, Retek Inc., is
referred to as "Retek".
Basis of Presentation
We have prepared the accompanying interim consolidated financial statements,
without audit, in accordance with the instructions to Form 10-Q and, therefore,
have not necessarily included all information and footnotes required for audited
financial statements.
In our opinion, the accompanying unaudited interim consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of our financial position and
results of operations. These consolidated financial statements and notes thereto
should be read in conjunction with our audited financial statements and notes
thereto presented in our Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999. The interim financial information contained in this Report is
not necessarily indicative of the results to be expected for any other interim
period or for an entire fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain prior period balances
have been reclassified to conform to the current presentation.
Sales of Receivables
From time to time, we enter into agreements to sell an undivided interest in
specifically identified trade accounts receivable. We generally sell these trade
accounts receivable at a discount to a bank, based upon defined short-term
market rates. Uncollected receivables that have been sold are not included in
our trade accounts receivable balance on our consolidated balance sheet. In the
quarters ended March 31, 2000, and June 30, 2000, we sold $5.6 and $15.1 million
of receivables (of which $0.0 and $14.6 million were Retek receivables),
respectively, representing approximately 8% and 18% of our total cash collected
from customers during these respective periods. We did not sell any receivables
during the first six months of 1999. Expenses related to receivables sold
totaled $43 and $73 during the three and six months ended June 30, 2000,
respectively, and are included in interest and other income, net in our
consolidated statement of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", or FAS 133. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" which defers the adoption
7
<PAGE> 8
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
requirement to the first quarter of 2001. We have not yet determined the impact
of the adoption of this new accounting standard on our consolidated financial
position, results of operations or disclosures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101,
which provides additional guidance in applying generally accepted accounting
principles for the recognition and reporting of revenue for certain transactions
that existing accounting rules do not specifically address. An amendment in June
2000 delayed SAB 101's effective date until the fourth quarter of 2000. We are
currently evaluating the impact, if any, that SAB 101 may have on our
consolidated financial statements.
In January 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
including internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the internet industry and technology in general.
Adoption of EITF 00-2 is required for the third quarter of 2000. We are
currently evaluating the impact, if any, that EITF 00-2 may have on our
consolidated financial statements.
NOTE 2 -- INITIAL PUBLIC OFFERING AND SPIN-OFF OF RETEK INC.
On September 10, 1999, Retek filed a registration statement with the Securities
and Exchange Commission relating to an initial public offering of Retek's common
stock. The offering was consummated in November 1999. In the offering, 6,325
shares of Retek's common stock were sold by Retek. Prior to the offering, we
transferred to Retek all of the shares of our wholly owned subsidiary, Retek
Information Systems, Inc. We now own approximately 84.5% of the outstanding
shares of Retek common stock. As discussed in Note 9, we announced on August 7,
2000, that our board of directors declared a dividend on our common stock of all
the shares of Retek common stock that we own, and that we have received a
private letter ruling from the Internal Revenue Service that this stock dividend
will be tax-free to HNC and our stockholders for U.S. federal income tax
purposes.
NOTE 3 -- ACQUISITIONS
In March 2000, we acquired all of the outstanding stock and other securities of
Onyx Technologies, Inc., or Onyx, in exchange for approximately 383 shares of
our common stock, including shares subject to options we assumed, and $1,500 in
cash. We applied the purchase method of accounting for the acquisition of Onyx,
which resulted in a purchase price of $49,555, including $3,500 which represents
our initial 1999 investment in Onyx.
In March 2000, we acquired all of the outstanding stock and other securities of
the Center for Adaptive Systems Applications, Inc., or CASA, in exchange for
approximately 142 shares of our common stock, 38 of which are in escrow,
including shares subject to options and warrants we assumed. These shares are in
escrow to secure indemnification obligations of the former CASA stockholders. We
applied the purchase method of accounting for the acquisition of CASA, which
resulted in a purchase price of $23,756.
In March 2000, we also acquired all of the outstanding stock and other
securities of Adaptive Systems Applications, Inc., or AIM, in exchange for
approximately 9 shares of our common stock, including shares subject to options
we assumed. We applied the purchase method of accounting for the acquisition of
AIM, which resulted in a purchase price of $1,656, including $750 which
represents our initial 1999 investment in AIM.
8
<PAGE> 9
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In April 2000, we acquired all of the outstanding stock and other securities of
Celerity Technologies, Inc., or Celerity, in exchange for approximately 220
shares of our common stock and $2,400 in cash. We applied the purchase method of
accounting for the acquisition of Celerity, which resulted in a purchase price
of $18,591.
In May 2000, Retek acquired all of the outstanding stock and other securities of
HighTouch Technologies, Inc., or HighTouch, in exchange for approximately 389
shares of Retek's common stock and $18,000 in cash. Retek applied the purchase
method of accounting for the acquisition of HighTouch, which resulted in a
purchase price of $26,308.
In connection with the CASA, Celerity and HighTouch acquisitions, we recorded
in-process research and development expenditures totaling $1,400, $1,050 and
$4,000, respectively, relating to the write-off of acquired in-process research
and development in connection with these acquisitions. We made our assessment of
whether acquired technologies in these acquisitions were complete or under
development in accordance with the guidelines prescribed by Statement of
Financial Accounting Standards No. 86, Statement of Financial Accounting
Standards No. 2, and Financial Accounting Standards Board Interpretation No. 4.
The unaudited pro forma results of operations below present the impact on our
results of operations as if the Celerity, HighTouch, Onyx, CASA and AIM
acquisitions had occurred on January 1, 1999, instead of on their respective
later acquisition dates (unaudited):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999
---------------------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED HISTORICAL COMBINED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total revenues $ 121,995 $ 124,104 $ 105,122 $ 111,373
Net income (loss) (32,361) (34,737) 5,469 3,054
Basic net income (loss)
per share $ (1.22) $ (1.31) $ 0.22 $ 0.12
Diluted net income (loss)
per share $ (1.22) $ (1.31) $ 0.21 $ 0.12
</TABLE>
In May 2000, we entered into a settlement agreement with the former shareholders
of Financial Technology Inc., or FTI, pertaining to the release and distribution
of the 97 shares of our common stock that were placed into escrow to secure
potential indemnification obligations resulting from our April 1998 acquisition
of FTI. In accordance with this settlement agreement, one-half of the escrow
shares were released to us and placed into treasury while the remaining escrow
shares were released to the former FTI shareholders, representing a full and
complete release of the former FTI shareholders' indemnification obligations to
us.
NOTE 4 -- EQUITY INVESTMENTS
In March 2000, Open Solutions Inc., or OSI, completed a private placement of its
preferred stock. We participated in this financing by purchasing 161 shares
of OSI Series F preferred stock for $9.32 per share in order to maintain our
approximate 6% ownership of OSI.
In June 2000, Burning Glass Technologies LLC, or Burning Glass, completed a
private placement of its preferred and common stock. We participated in this
financing by purchasing 239 shares of Burning Glass Preferred Issue stock for
$4.18 per share, representing an approximate 3.9% ownership in Burning Glass.
9
<PAGE> 10
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- TREASURY SHARE PURCHASE
During April 2000, we repurchased 250 shares of our outstanding common stock for
our treasury at an aggregate purchase price of $18,616.
NOTE 6 -- PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Net income (loss) $(20,145) $ 3,345
======== ========
Shares used in computing basic net income
(loss) per common share 26,955 24,498
Weighted average options to purchase common
stock as determined by application of the
treasury stock method -- 450
Employee Stock Purchase Plan common stock equivalents
-- 52
-------- --------
Shares used in computing diluted net income
(loss) per common share 26,955 25,000
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Net income (loss) $(32,361) $ 5,469
======== ========
Shares used in computing basic net income
(loss) per common share 26,529 25,078
Weighted average options to purchase common
stock as determined by application of the
treasury stock method -- 576
Employee Stock Purchase Plan common stock equivalents
-- 52
-------- --------
Shares used in computing diluted net income
(loss) per common share 26,529 25,706
======== ========
</TABLE>
The 2,230 shares of our common stock now issuable upon the conversion of our
4.75% convertible subordinated notes were not used to calculate diluted net
income (loss) per common share for the three and six month periods ended June
30, 2000 and 1999, as the effect would be anti-dilutive.
10
<PAGE> 11
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the three and six month periods ended June 30, 2000, weighted average
options to purchase 1,355 and 2,320 shares of common stock and Employee Stock
Purchase Plan common stock equivalents of 24 and zero shares, and warrant common
stock equivalents of 6 and 6 shares, respectively, were not included in the
computation of diluted net loss per common share, as their effect in these
periods would be anti-dilutive.
NOTE 7 -- SEGMENT DATA
Our reportable segments are based upon our method of internal reporting to
management, whom view our business by functional market. Our operating segments
reflect the way our management team organizes and evaluates internal financial
information, in order to make operating decisions and assess performance. Each
segment represents a strategic business unit that offers unique products and
services to its functional market. Our segments are as follows: the Service
Industries Group, which includes our HNC Insurance Solutions segment, or IS, our
HNC Financial Solutions segment, or FS, and HNC Telecom Solutions, or TS; eHNC;
and Retek Inc., or Retek. IS provides users with the ability to reduce fraud
losses and streamline operations in the containment of the medical costs of
workers' compensation and automobile accident insurance claims, workers'
compensation loss reserving, workers' compensation fraud, managed care
effectiveness and provider effectiveness. FS provides transaction-based,
real-time fraud detection, authorization and action decisions for applications
such as credit card charge authorization and the loan approval decision process.
TS provides our telecommunications users with the ability to reduce fraud losses
and determine customer profitability. eHNC serves e-businesses by providing
products that allow online merchants to maximize customer service capabilities
and point-of-sale transactions. Retek offers predictive software solutions that
allow retailers to build forecasting and marketing models. For presentation
purposes in this Report, our former Aptex entity's historical financial
information has been combined with eHNC's. Reflected in our "Other" category are
TS and our Advanced Technology Solutions group, which primarily provides
research and development for the United States government, as well as any
corporate activity.
The table below presents segment data for the three and six months ended June
30, 2000 and 1999.
Segment revenue and operating income (loss), which excludes all non-cash
expenses such as stock-based compensation expense, acquisition related
amortization, and in-process research and development expenses, are as follows
(unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------
2000 1999
------------ --------
<S> <C> <C>
Segment revenue:
IS $ 20,055 $ 14,838
FS 22,124 16,357
Other 3,844 2,148
-------------- -------------
Service Industries Group 46,023 33,343
eHNC 1,821 1,547
Retek 19,588 21,043
============== =============
Total consolidated revenue $ 67,432 $ 55,933
============== =============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2000 1999
------------ --------
<S> <C> <C>
Segment revenue:
IS $ 39,477 $ 28,487
FS 40,728 30,556
Other 5,065 4,926
-------------- -------------
Service Industries Group 85,270 63,969
eHNC 3,173 3,464
Retek 33,552 37,689
</TABLE>
11
<PAGE> 12
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C>
============== =============
Total consolidated revenue $ 121,995 $ 105,122
============== =============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Segment operating income (loss):
IS $ 1,848 $ 2,721
FS 3,613 2,878
Other (769) (523)
-------- --------
Service Industries Group 4,692 5,076
eHNC (3,200) (259)
Retek (12,737) 3,233
-------- --------
Total segment operating income (loss) (11,245) 8,050
Stock-based compensation (2,621) --
Acquisition related amortization (11,546) (2,056)
In-process research and development (5,050) --
-------- --------
Consolidated operating income (loss) (30,462) 5,994
Interest and other income, net 2,995 1,325
Interest expense (1,342) (1,342)
Minority interest in losses of consolidated subsidiary 3,028 --
======== ========
Income (loss) before income tax provision (benefit) $(25,781) $ 5,977
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Segment operating income (loss):
IS $ 4,917 $ 3,426
FS 7,297 5,030
Other
(2,719) (723)
-------- --------
Service Industries Group 9,495 7,733
eHNC (6,996) (55)
Retek (27,432) 6,309
-------- --------
Total segment operating income (loss) (24,933) 13,987
Stock-based compensation (4,537) --
Acquisition related amortization (15,512) (4,308)
In-process research and development (6,472) --
-------- --------
Consolidated operating income (loss) (51,454) 9,679
Interest and other income, net 6,335 2,970
Interest expense (2,684) (2,684)
Minority interest in losses of consolidated subsidiary 5,419 --
======== ========
Income (loss) before income tax provision (benefit) $(42,384) $ 9,965
======== ========
</TABLE>
Corporate assets are primarily comprised of cash, short-term and long-term
investments available for sale, deferred tax assets and inter-segment
receivables. All tax related assets and liabilities are included within the
Corporate line item. Eliminations primarily relate to intercompany payables and
investments in subsidiaries.
Total assets:
12
<PAGE> 13
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Total segment assets:
IS $ 59,733 $ 27,174
FS 101,685 38,236
Other 43,498 5,409
--------- ---------
Service Industries Group 204,916 70,819
eHNC 7,154 8,101
Retek 158,049 34,980
--------- ---------
Total segment assets 370,119 107,400
Corporate 290,893 154,432
Eliminations (122,556) (24,325)
========= =========
Total consolidated assets $ 538,456 $ 244,007
========= =========
</TABLE>
NOTE 8 -- STOCK-BASED COMPENSATION
Net compensation expense related to stock-based awards totaled $2,621 and $4,537
for the three and six months ended June 30, 2000, respectively. This net
compensation expense included net compensation income related to stock-based
awards of $651 and $1,364, and amortization of unearned stock-based compensation
of $3,272 and $5,901, of which $2,794 and $5,424 related to Retek, during the
three and six month periods ended June 30, 2000, respectively.
The compensation income was related to reversals of compensation expense
recorded in the fourth quarter of 1999, due to a decrease in the fair values of
the options on March 31, 2000 and June 30, 2000. The stock-based awards were
granted to consultants, and the fair values of these awards were estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0.0%, risk-free interest rate of 6.42%,
volatility of 100.0%, and an expected life of 5 months. The unearned stock-based
compensation was related to options granted to eHNC employees in the first
quarter of 2000. The expense was generated as the options were granted at an
exercise price less than deemed fair value for financial reporting purposes.
This expense will be amortized over the option vesting periods.
Retek's amortization of unearned stock-based compensation was related to the
stock options Retek granted in connection with its initial public offering in
the fourth quarter of 1999. The expense was generated as these options were
granted at an exercise price less than the deemed fair value for financial
reporting purposes.
NOTE 9 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages and
other relief, are pending. The amount of the liability, if any, cannot be
determined with certainty; however, in the opinion of management, the ultimate
liability will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
In November 1998, Nestor filed a complaint against us in the United States
District Court for the District of Rhode Island (C.A. No. 98 569). In the
complaint, Nestor alleged that we violated the federal Sherman Antitrust Act and
the Rhode Island Antitrust Act and tortuously interfered with prospective
contractual business relationships of Nestor in connection with our marketing of
our Falcon credit card fraud detection product. The complaint also alleged that
we infringed United States patents Nos. 4,326,259 and 4,760,604 held by Nestor.
Nestor seeks to recover unspecified compensatory damages, treble damages and
punitive damages and to obtain injunctive relief arising from these claims. The
complaint also sought a declaratory judgment that a United States patent we hold
relating to technology used in our Falcon products is invalid and unenforceable
due to our alleged inequitable conduct in obtaining this patent, and that
Nestor's products do not infringe this patent.
In January 2000, Nestor dropped its claim of patent infringement against us. In
July 2000 we filed a motion with the Court to dismiss our counter-claim that
Nestor infringes our patent, and Nestor's claims that the
13
<PAGE> 14
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
patent is invalid or unenforceable. That motion is still before the court in
Rhode Island. The other Nestor claims for antitrust and unfair competition were
severed by the court in an earlier ruling and will not be considered until after
resolution of the patent issues.
Our claims for patent infringement and unfair competition which were pending in
the United States District Court venued in San Diego against Nestor's
distributors Transaction Systems Architects, Inc., or TSAI, and ACI Worldwide,
Inc., or ACI, where dismissed in April 2000. We agreed with TSAI and ACI to
dismiss our lawsuit against them in order to enable us to commence discussions
with them regarding a possible future business relationship. However, no
agreements have been reached to date with TSAI or ACI.
We believe that these legal proceedings will not result in a material negative
impact on our results of operations, liquidity or financial condition.
NOTE 10 -- SUBSEQUENT EVENTS
We announced on August 7, 2000 that our board of directors declared a dividend
on our common stock of all the shares of Retek common stock we own. The Retek
shares will be distributed on or about September 29, 2000 to our stockholders
who are holders of record of our common stock at 5 p.m. Eastern Daylight Time on
September 15, 2000, the record date for the dividend. We currently own 40
million Retek shares, representing approximately 84.5% of Retek's outstanding
common stock. We have received a private letter ruling from the Internal Revenue
Service that the dividend of our shares of Retek stock will be tax-free to HNC
and our stockholders for U.S. federal income tax purposes. Our stockholders of
record at the record date will receive whole shares of Retek common stock and
cash payments for fractional shares. Cash received in lieu of fractional shares
will be taxable for U.S. federal income tax purposes.
The number of Retek shares that will be distributed as a dividend on each share
of HNC common stock that is outstanding on the September 15, 2000 dividend
record date will be determined by the total number of shares of HNC common stock
that are outstanding on September 15, 2000. On August 7, 2000, HNC accelerated
the vesting of 25 percent of its outstanding stock options that would have been
unvested as of the September 15, 2000 record date to afford its option holders
the opportunity to participate in receipt of the dividend. As a result of this
vesting acceleration, options to purchase approximately 2.8 million shares of
HNC common stock will be vested and exercisable between August 7, 2000 and the
September 15 record date. In addition, HNC has $100 million of convertible notes
outstanding that could be converted into approximately 2.2 million shares of HNC
common stock before the record date.
In connection with the Retek dividend, HNC will adjust the exercise price of all
of its stock options that are outstanding immediately following payment of the
dividend. Because HNC anticipates that this adjustment will be less than the
change in value of unvested HNC stock options resulting from the Retek
distribution, HNC will pay cash bonuses to employees who hold unvested stock
options as of the record date. Based on current analyses, HNC estimates that the
aggregate amount of these cash bonuses will be approximately $39 million. HNC
anticipates that the adjustment to the exercise price of its unvested options
and the cash bonus, taken together, will be less than the change in value of
unvested HNC options arising from the Retek distribution. HNC does not plan to
pay any cash bonuses to holders of its stock options that vest on or before the
record date.
As of July 31, 2000 there were approximately 7.2 million stock options
outstanding. As mentioned above, on August 7, 2000 HNC vested 25 percent of its
outstanding stock options that would have been unvested as of the September 15,
2000 record date. Such options are exercisable for approximately 1.4 million
shares of HNC common stock, resulting in options to purchase approximately 2.8
million shares of HNC common stock vested and exercisable between now and the
September 15 record date.
14
<PAGE> 15
HNC SOFTWARE INC.
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 regarding HNC and its business,
financial condition, results of operations and prospects. Words like "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions or variations of these 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, for example 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. In this Report,
HNC Software Inc. is referred to as "we," "our," and "HNC".
Although forward-looking statements in this Report reflect the good faith
judgment of our management, these statements can only be based on facts and
factors currently known to us and might change if future factual circumstances
change. Consequently, all forward-looking statements have inherent risks and
uncertainties and actual results and outcomes may differ materially from the
results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to differences in results and
outcomes include without limitation whether we are successful in integrating new
businesses we have recently acquired, decisions we make regarding future
strategic directions of our business units, whether we are successful in
transitioning many of our products to solutions based on the application service
provider, or ASP, business model, as well as those factors discussed in our
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1999, or
1999 Annual Report, and this Report should be read in conjunction with our 1999
Annual Report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report. We
undertake 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 in this Report, which attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, results
of operations and prospects.
OVERVIEW
We are a business-to-business software company that develops, markets, licenses
and supports predictive software solutions for various service industries,
including companies in the insurance, financial services, telecommunications,
e-commerce, and retail industries. Our predictive software solutions help
service industry companies manage and optimize their customer relationships. By
analyzing high volumes of customer transactions in real-time, our predictive
solutions help companies shift the decision-making process from a retrospective
to prospective basis. The increasing conduct of e-business over the Internet
increases the demand for analysis of large volumes of real-time information,
which our products provide. Electronic customer interaction is necessary to
manage and respond to customer activity and expectations in all markets.
Our business is currently organized as follows: the Service Industries Group,
which includes the HNC Insurance Solutions segment, or IS, the HNC Financial
Solutions segment, or FS, and the HNC Telecom Solutions, or TS; eHNC; and Retek
Inc., or Retek.
- SERVICE INDUSTRIES GROUP
Our Service Industries Group delivers predictive solutions and services
that automate key decision functions for customers in the insurance,
financial services and telecommunications markets. Most of our predictive
solutions address customer relationship management, or CRM, issues to
optimize interactions with customers over the life-cycle of the customer
relationship, including customer acquisition, account management, customer
service, marketing and risk management.
INSURANCE SOLUTIONS
IS develops software solutions for the insurance industry that are
designed to add value to its customers' businesses through cost
reduction and improved management of risks. Customers in this segment
include insurance carriers, third-party administrators, managed care
organizations, preferred provider organizations, insurance industry
trade groups, brokers, and other service organizations. Our current
product offerings are targeted to the workers' compensation and
15
<PAGE> 16
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
automobile segments of the property and casualty insurance market, as
well as the group health segment of the insurance market.
FINANCIAL SOLUTIONS
FS provides a suite of Predictive CRM products that addresses the
customer-lifecycle management needs of banks and other financial
institutions.
TELECOM SOLUTIONS
TS provides solutions designed to help telecommunications carriers
acquire more customers and enhance relationships with existing
customers in order to retain customers for longer periods.
- eHNC
eHNC helps online merchants and merchant service providers increase sales
and minimize risks through an Applications Service Provider, or ASP,
product delivery model. eHNC's solutions analyze electronic interactions
with consumers, and help online merchants manage risk and understand,
forecast and recommend critical next steps in each consumer relationship.
For presentation purposes in this Report, our former Aptex subsidiary's
historical financial information has been combined with eHNC's.
- RETEK
Retek completed its initial public offering in November of 1999 and, as of
June 30, 2000, we owned approximately 84.5% of Retek's outstanding common
stock. Retek provides Internet-based, business-to-business software
solutions for retailers and their trading partners, including retail.com,
an electronic commerce network that connects retailers to members of their
supply chain. Retek also provides a suite of software solutions that
address the particular needs of retailers.
Our revenues and operating results have varied significantly in the past and may
do so in the future. Factors affecting our revenues and operating results
include: the degree of market acceptance of our 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 our products for which our fees are based on
customer useage; the length of our products' sales cycle; our ability to
successfully develop, introduce and market new products and product
enhancements; the timing of new product announcements and introductions by us
and our competitors; changes in the mix of our distribution channels; changes in
the level of our operating expenses; our ability to achieve progress on
percentage-of-completion contracts; our success in completing pilot product
installations for contracted fees; competitive conditions in the industry;
domestic and international economic conditions; and market conditions in our
targeted markets. In addition, license agreements we enter into during a given
quarter may not meet our revenue recognition criteria, and thus may not produce
revenue in that quarter. Therefore, even if we meet or exceed our forecast of
aggregate licensing and other contracting activity, it is possible that our
revenues would not meet our expectations or those of securities analysts.
Furthermore, our operating results may be affected by other factors unique to
our product lines. For example, in the past we have, through our Retek
subsidiary, derived a substantial portion of our revenues from our retail
products, which generally have been priced as "perpetual" license transactions
in which we receive a one-time license fee, most of which is typically
recognized as revenue upon signing and delivery. Thus, failure to sign a
significant perpetual license in the quarter it was anticipated to be signed
could result in a material shortfall of revenue for that quarter.
Beginning in the fourth quarter of 1999, Retek began to enter into their
software licensing agreements with revised terms for the majority of their
software sold, and this is expected to continue going forward. Revenue from the
sale of software licenses and technical advisory services under these agreements
will be recognized as the services are performed over the contract period, which
we generally expect to be 12 to 24 months, as determined by the customers'
objectives. As Retek begins to recognize license and service revenues over a
period of time, rather than upon delivery of their products, they will recognize
significantly less revenue and their associated margins will be lower for
several quarters as compared to their prior quarters, and they will incur
operating losses during these periods. In the past, we recognized many of these
perpetual license agreements as revenue according to the revenue recognition
criteria set
16
<PAGE> 17
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
forth in the Statement of Position 97-2 "Software Revenue Recognition", and
related pronouncements. Failure to complete a perpetual license transaction
during a fiscal quarter would preclude us from recognizing revenue from that
transaction in that quarter, and thus would harm our operating results for that
quarter.
We expect fluctuations in our operating results to continue for the foreseeable
future. Consequently, we believe that period-to-period comparisons of our
financial results should not be relied upon as an indication of our future
performance. Because our expense levels are based in part on our expectations
regarding future revenues and in the short term are fixed to a large extent, we
may be unable to adjust our spending in time to compensate for any unexpected
revenue shortfall. We may not be able to maintain profitability on a quarterly
or annual basis in the future. Due to the foregoing factors, it is possible that
in some future quarter our operating results will be below the expectations of
public market analysts and investors. In that event, the price of our Common
Stock and, in turn, the price of our 4.75% Convertible Subordinated Notes due
2003, would likely be harmed.
RESULTS OF OPERATIONS
REVENUES
Our revenues are comprised of license and maintenance revenues and services and
other revenues. Our revenues for the three months ended June 30, 2000 were $67.4
million, an increase of 20.6% over revenues of $55.9 million for the same period
in the prior year. Our revenues for the six months ended June 30, 2000 were
$122.0 million, an increase of 16.1% over revenues of $105.1 million for the
same period in the prior year.
For a discussion of Retek's license and maintenance revenues and services and
other revenues, see pages 37 and 38.
LICENSE AND MAINTENANCE REVENUES. We recognize license and maintenance revenues
in several different ways, depending on the terms on which the software and
maintenance are provided. Revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license periods.
Revenue from short-term periodic software license and maintenance agreements,
with guaranteed minimum license fees, is recognized as related services are
performed. Transaction-based 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 our 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. Amounts received under contracts in advance of performance are
recorded as deferred revenue and are generally recognized within one year from
receipt.
SERVICES AND OTHER REVENUES. Services and other revenues are comprised of
installation and implementation revenues, service bureau operations revenues and
revenues which are derived from consulting contracts, new product development
contracts with commercial customers and, to a lesser extent, research and
development contracts with the United States Government. Revenue from software
installation and implementation and from contract services is generally
recognized as the services are performed using the percentage of completion
method based on costs incurred to date compared to total estimated costs at
completion. Amounts received under contracts in advance of performance are
recorded as deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period any
losses are first identified. Unbilled accounts receivable are stated at
estimated realizable value.
Service bureau fees are derived from review of and re-pricing of customers'
medical bills and are assessed to customers on the basis of volume of bills
processed. Service bureau customers typically subscribe for services under
month-to-month agreements and service bureau fees are recognized as revenue when
the processing services are performed.
17
<PAGE> 18
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
THREE MONTHS ENDED JUNE 30, 2000
LICENSE AND MAINTENANCE REVENUES. License and maintenance revenues were $42.4
million for the second quarter in 2000, an increase of 2.6% from $41.3 million
for the second quarter in 1999. This $1.1 million increase from the prior year
quarter was driven by a $4.1 million decrease at Retek, and offset by a combined
increase of $5.2 million at our Service Industries Group and eHNC. The decrease
in our Retek segment's license and maintenance revenues quarter over quarter is
due to Retek's revised contract terms, generally resulting in revenue being
recognized over a number of quarters rather than upon delivery. Our recurring
license and maintenance revenues, as a percentage of total license and
maintenance revenues, increased to 73.6% in the second quarter of 2000, up from
59.0% for the same period in 1999.
Within our Service Industries Group, our IS segment license and maintenance
revenues decreased by $.5 million, or 4.1%, from the second quarter in 1999 to
the second quarter in 2000, offset primarily by a $3.6 million, or 33.1%,
increase at our FS segment and a $1.6 million, or 112%, increase in our other
aggregated Service Industries Group revenues. The decrease at our IS segment
resulted in part from IS's transfer of customer contracts for the CompCompare
and ProviderCompare products to a third party under a master license agreement
signed in the third quarter of 1999. We no longer receive license and
maintenance fees from the transferred contracts and instead receive royalty fees
which are classified as services and other. Also contributing to the IS decrease
was a decline in PPO revenues as a result of industry consolidations and
increasing price competition, offset in part by the addition of new customers.
The increase at our FS segment is primarily due to increases in sales of our
Falcon and Capstone products while the increase in other aggregated Service
Industies Group revenues is attributable primarily to growth in the TS license
and maintenance business.
SERVICES AND OTHER REVENUES. Services and other revenues increased 71.5% from
the second quarter in 1999 to the second quarter in 2000, from $14.6 million to
25.0 million. This $10.4 million increase from the prior year quarter was driven
primarily by a $7.9 million increase at our Service Industries Group and a $2.7
million increase at Retek.
Within our Service Industries Group, our IS segment services and other revenues
increased $5.7 million, or 208.1%, from the second quarter in 1999 to the second
quarter in 2000. Of this increase, $2.7 million is related to the commencement
of full-scale service bureau operations for a primary customer. The remaining
$3.0 million is primarily due to overall growth in our service bureau customer
base at IS. Our FS segment services and other revenues increased $2.1 million,
or 39.6%, from the second quarter in 1999 to the second quarter in 2000. The
increase at FS was primarily related to a higher volume of Capstone
implementations.
SIX MONTHS ENDED JUNE 30, 2000
LICENSE AND MAINTENANCE REVENUES. License and maintenance revenues were $74.2
million for the six months ended June 30, 2000, a decrease of 4.7% from $77.8
million for the same period in 1999. This $3.6 million decrease from the prior
year quarter was driven by a $9.4 million decrease at Retek, and offset by an
increase of $5.8 million at our Service Industries Group and eHNC. The decrease
in our Retek segment's license and maintenance revenues from the six months
ended June 30, 1999 to the six months ended June 30, 2000 is due to Retek's
revised contract terms, generally resulting in revenue being recognized over a
number of quarters rather than upon delivery. Our recurring license and
maintenance revenues, as a percentage of total license and maintenance revenues,
increased to 77.5% in the six months ended June 30, 2000, up from 62.0% for the
same period in 1999.
Within our Service Industries Group, our IS segment license and maintenance
revenues decreased $.9 million, or 3.7%, from the six months ended June 30, 1999
to the six months ended June 30, 2000, offset primarily by a $6.2, or 29.8%,
increase at our FS segment and a $.3 million, or 8.5%, increase in our other
aggregated Service Industries Group revenues. The decrease in the six months
ended June 30, 2000 at our IS segment resulted in part from IS's transfer of
customer contracts for the CompCompare and ProviderCompare products to a third
party under a master license agreement signed in the third quarter of 1999. We
no longer receive license and maintenance fees from the transferred contracts
and instead
18
<PAGE> 19
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
receive royalty fees, which are classified as services and other. Also
contributing to the decrease was a decline in PPO revenues as a result of
industry consolidations and increasing price competition, offset in part by the
addition of new customers. The increase at our FS segment is primarily due to
increases in sales of our Falcon and Capstone products while the increase in
other aggregated Service Industies Group revenues is attributable primarily to
growth in the TS license and maintenance business.
SERVICES AND OTHER REVENUES.
Services and other revenues increased 75.0% from the six months ended June 30,
1999 to the six months ended June 30, 2000, from $27.3 million to $47.8 million.
This $20.5 million increase from the prior year was driven primarily by a $15.7
million increase at our Service Industries Group and eHNC and a $5.2 million
increase at Retek.
Within our Service Industries Group, our IS segment services and other revenues
increased $11.9 million, or 263.7%, from the second quarter in 1999 to the
second quarter in 2000. Of this increase, $6.9 million is related to the
commencement of full scale service bureau operations for a primary customer. The
remaining $5.0 million is primarily due to growth in our service bureau customer
base at IS. Our FS segment services and other revenues increased $4.0 million,
or 40.6%, from the six months ended June 30, 1999 to the six months ended June
30, 2000. The increase at FS was primarily related to a higher volume of
Capstone implementations.
GROSS MARGIN
LICENSE AND MAINTENANCE GROSS MARGIN. License and maintenance costs primarily
represent our expenses for personnel engaged in customer support, travel to
customer sites and documentation materials, and exclude non-cash stock
compensation expense of $167 and $293 for the three and six months ended June
30, 2000, respectively.
For discussion of Retek's license and maintenance cost of revenues, see page 38.
SERVICES AND OTHER GROSS MARGIN. Services and other expenses consist of
personnel and other expenses associated with providing installation and
implementation services and performing development, consulting, and research and
development contracts, and the costs associated with service bureau operations
and exclude non-cash stock compensation expense of $401 and $795 for the three
and six months ended June 30, 2000, respectively.
For discussion of Retek's services and other cost of revenues, see page 38.
THREE MONTHS ENDED JUNE 30, 2000
LICENSE AND MAINTENANCE GROSS MARGIN. Our gross margins on license and
maintenance revenues decreased 7.7% from the second quarter in 1999 to the
second quarter in 2000, from 75.5% to 67.8%. This decrease was driven by a 29.8%
decline at Retek, and was offset by an increase of 4.1% at our Service
Industries Group.
Within our Service Industries Group from the second quarter of 1999 to the
second quarter of 2000, license and maintenance gross margin from our IS segment
remained relatively constant, decreasing 1.5%, while gross margin from our FS
segment also remained relatively constant, increasing 2.2%. Gross margin from
our other aggregated Service Industries Group's segments increased by 6.9% due
primarily to growth in the TS license and maintenance business.
SERVICES AND OTHER GROSS MARGIN. Our gross margin on services and other revenues
decreased 2.8%, to 26.5% for the second quarter of 2000 from 29.3% for the
second quarter of 1999. The decrease in our services and other gross margin was
driven by a 6.7% decrease for our Service Industries Group, and was offset by a
5.9% increase at Retek.
Within our Service Industries Group, services and other gross margin from our IS
segment improved 5.0% from the second quarter of 1999 to the second quarter of
2000, while gross margin from our FS segment decreased by 16.3%. Our IS
segment's gross margins increased quarter over quarter primarily because
19
<PAGE> 20
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
of improved efficiencies in their service bureau operations. FS decreased
primarily due to the increased use of third party consultants, who have a higher
average cost and lower gross margin than internal resources, for Capstone
implementations.
SIX MONTHS ENDED JUNE 30, 2000
LICENSE AND MAINTENANCE GROSS MARGIN. Our gross margins on license and
maintenance revenues decreased 8.6% from the six months ended June 30, 1999 to
the six months ended June 30, 2000, from 73.2% to 64.6%, respectively. This
decrease was driven by a 37.0% decline at Retek, and was offset by an increase
of 5.1% at our Service Industries Group.
Within our Service Industries Group from the six months ended June 30, 1999 to
the six months ended June 30, 2000, license and maintenance gross margin from
our IS segment increased 4.2%, while gross margin from our FS segment remained
relatively constant, increasing by 2.3%. IS gross margins increased primarily
due to reductions in PPO access fees and the re-alignment of resources.
SERVICES AND OTHER GROSS MARGIN. Our gross margin on services and other revenues
remained relatively flat, to 30.0% for the six months ended June 30, 2000 from
30.5% for the six months ended June 30, 1999. The activity in our services and
other gross margin was driven by a 3.2% increase for our Service Industries
Group, and was offset by a 5.4% decrease at Retek.
Within our Service Industries Group, services and other gross margin from our IS
segment improved 20.4% from the six months ended June 30, 1999 to the six months
ended June 30, 2000, while gross margin from our FS segment decreased by 9.0%.
Our IS segment's gross margins increased primarily because of improved
efficiencies in their service bureau operations. Our FS segment's gross margins
decreased primarily due to the increased use of third party consultants, who
have a higher average cost and lower gross margin than internal resources, for
Capstone implementations.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses consist primarily of salaries and other
personnel-related expenses, subcontracted development services, depreciation for
development equipment, and supplies and exclude non-cash stock compensation
expense of $1,348 and $2,553 for the three and six months ended June 30, 2000,
respectively.
For a discussion of Retek's research and development expense see page 38.
THREE MONTHS ENDED JUNE 30, 2000
Research and development expenses increased $7.4 million or 63.4%, to $19.0
million in the second quarter of 2000 from $11.6 million in the second quarter
of 1999.
Research and development expenses from the Service Industries Group increased to
$9.3 million in the second quarter of 2000 from $5.6 million in the second
quarter of 1999. Research and development expenses from our Insurance Solutions
segment increased to $3.4 million in the second quarter of 2000 from $1.9
million in the second quarter of 1999; research and development expenses from
our Financial Solutions segment increased to $4.5 million in the second quarter
of 2000 from $3.0 million in the second quarter of 1999; and research and
development expenses associated with our other aggregated Service Industries
Group segments increased to $1.4 million in the second quarter of 2000 from $0.7
million in the second quarter of 1999. The increases in absolute dollars quarter
over quarter were attributable to increases in staffing and related costs to
support new product development activities primarily for our CompAdvisor,
Capstone and Falcon products. We anticipate that research and development
expenses will increase in dollar amount and could increase as a percentage of
total revenues for the foreseeable future.
SIX MONTHS ENDED JUNE 30, 2000
20
<PAGE> 21
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Research and development expenses increased $14.1 million or 66.5%, to $35.2
million in the six months ended June 30, 2000 from $21.1 million in the six
months ended June 30, 1999.
Research and development expenses from the Service Industries Group increased to
$16.1 million in the six months ended June 30, 2000 from $10.5 million in the
six months ended June 30, 1999. Research and development expenses from our
Insurance Solutions segment increased to $5.9 million in six months ended June
30, 2000 from $3.7 million in the six months ended June 30, 1999, research and
development expenses from our Financial Solutions segment increased to $7.7
million in the six months ended June 30, 2000 from $5.6 million in the six
months ended June 30, 1999, while research and development expenses associated
with our other aggregated Service Industries Group segments increased to $2.4
million in the six months ended June 30, 2000 from $1.2 million in the six
months ended June 30, 1999. The increases in absolute dollars period over period
were attributable to increases in staffing and related costs to support new
product development activities primarily for our CompAdvisor, Capstone and
Falcon products. We anticipate that research and development expenses will
increase in dollar amount and could increase as a percentage of total revenues
for the foreseeable future.
SALES AND MARKETING EXPENSE
Sales and marketing expenses consist primarily of salaries and benefits,
commissions, travel, entertainment and promotional expenses and exclude non-cash
stock compensation expense of $1,020 and $1,601 for the three and six months
ended June 30, 2000, respectively.
For a discussion of Retek's sales and marketing expenses see page 39.
THREE MONTHS ENDED JUNE 30, 2000
Sales and marketing expenses increased 72.6% to $18.6 million in the second
quarter of 2000, from $10.8 million in the second quarter of 1999. This increase
was primarily driven by a 111.6% increase at Retek, and by a 24.6% increase from
the Service Industries Group. Within our Service Industries Group, sales and
marketing expense increased by 89.3% at our IS segment, remained relatively
constant at our FS segment, increasing by 2.0%, and increased by 45.3% within
our other aggregated Service Industries Group segments, primarily related to our
TS business unit. The increases in IS and TS sales and marketing expenses were
due primarily to increases in staffing related to the expansion of direct sales
and marketing staff. Contributing to the increases were increased expenses for
trade shows, advertising, corporate marketing programs and other expenses to
support recently acquired businesses. We expect sales and marketing expenses to
continue to increase in absolute dollars for the foreseeable future. These
expenses could also increase as a percentage of total revenues as we continue to
develop a direct sales force in Europe and other international markets, expand
our domestic sales and marketing organization and increase the breadth of our
product lines.
SIX MONTHS ENDED JUNE 30, 2000
Sales and marketing expenses increased 71.2% to $35.2 million in the six months
ended June 30, 2000, from $20.5 million in the six months ended June 30, 1999.
This increase was primarily driven by a 118.7% increase at Retek, and by a 17.8%
increase from the Service Industries Group.
Within our Service Industries Group, sales and marketing expense increased 94.4%
at our IS segment, remained relatively flat at our FS segment, decreasing by
2.0%, and increased by 10.9% within our other aggregated Service Industries
Group segments, primarily related to our TS business unit. The increases in IS
and TS sales and marketing expenses were due primarily to increases in staffing
related to the expansion of direct sales and marketing staff. Contributing to
the increases were increased expenses for trade shows, advertising, corporate
marketing programs and other expenses to support recently acquired businesses.
The decrease FS experienced during the six months ended June 30, 2000, was
related to the timing of various marketing efforts. We expect sales and
marketing expenses to continue to increase in absolute dollars for the
foreseeable future. These expenses could also increase as a percentage of total
revenues as we continue to develop a direct sales force in Europe and other
international markets, expand our domestic sales and marketing organization and
increase the breadth of our product lines.
21
<PAGE> 22
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses consist
primarily of personnel costs for finance, contract administration, human
resources and general management, as well as acquisition, insurance and
professional services expenses and exclude non-cash stock compensation income of
$315 and $705 for the three and six months ended June 30, 2000, respectively.
For a discussion of Retek's general and administrative expenses see page 39.
THREE MONTHS ENDED JUNE 30, 2000
General and administrative expenses increased 78.6%, to $9.0 million in the
second quarter of 2000, from $5.1 million in the second quarter of 1999. This
growth was primarily driven by a 99.3% increase at Retek, and related to
increased staffing and related expenses, including recruiting costs, to support
higher levels of sales and development activity, resulting in part from our
recent acquisitions and to support Retek's status as a public company. Our
Service Industries Group's general and administrative expense increased $1.5
million quarter over quarter, driven by a $0.7 million increase at our FS
segment, a $0.5 million increase at our IS segment and a $.3 million increase at
our other aggregated Service Industries Group segments, due primarily to
increased staffing to support a higher volume of business
SIX MONTHS ENDED JUNE 30, 2000
General and administrative expenses increased 74.5%, to $16.8 million in the six
months ended June 30, 2000, from $9.6 million in the six months ended June 30,
1999. This growth was primarily driven by a 78.6% increase at Retek, and related
to increased staffing and related expenses, including recruiting costs, to
support higher levels of sales and development activity, resulting in part from
our recent acquisitions and to support Retek's status as a public company. Our
Service Industries Group's general and administrative expense increased $2.9
million from the prior year, driven by a $1.3 million increase at our FS
segment, a $0.8 million increase at our IS segment and a $0.8 million increase
at our other aggregated Service Industries Group segments, due primarily to
increased staffing to support a higher volume of business.
STOCK-BASED COMPENSATION EXPENSE
THREE MONTHS ENDED JUNE 30, 2000
We recognized $2.6 million of stock-based compensation expense related to
stock-based compensation agreements, calculated at fair value. This net expense
consisted of approximately $2.8 million of stock-based compensation expense for
Retek, offset by approximately $0.2 million of stock-based compensation income,
net, for our Service Industries Group and eHNC in the second quarter of 2000.
Stock-based awards issued to non-employees are accounted for using a fair value
method and are marked to fair value at each period end until the earlier of the
date the performance by the non-employee is complete or the awards are fully
vested. See Note 8 to the financial statements in this Report for further
discussion.
SIX MONTHS ENDED JUNE 30, 2000
We recognized $4.5 million of stock-based compensation expense related to
stock-based compensation agreements, calculated at fair value. This net expense
consisted of approximately $5.4 million of stock-based compensation expense for
Retek, offset by $0.9 million of stock-based compensation income, net, for our
Service Industries Group and eHNC in the six months ended June 30, 2000.
Stock-based awards issued to non-employees are accounted for using a fair value
method and are marked to fair value at each period end until the earlier of the
date the performance by the non-employee is complete or the awards are fully
vested. See Note 8 to the financial statements in this Report for further
discussion.
For a discussion of Retek's stock-based compensation expense see page 41.
ACQUISITION-RELATED AMORTIZATION EXPENSE
22
<PAGE> 23
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
THREE MONTHS ENDED JUNE 30, 2000
Acquisition-related amortization expense was $11.5 million in the second quarter
of 2000, compared to $2.1 million in the second quarter of 1999. These expenses
represent the amortization of intangible assets purchased in conjunction with
our acquisitions of Celerity and HighTouch in the second quarter of 2000; AIM,
CASA and Onyx in the first quarter of 2000; WebTrak in 1999; and our
acquisitions of Practical Control Systems Technologies, Inc. or PCS, FTI (now
HNC Financial Solutions, Inc.) and the Advanced Telecommunications Abuse Control
System, or ATACS product line assets during 1998. The average amortization
period and useful life for these intangible assets is approximately 3.5 years.
SIX MONTHS ENDED JUNE 30, 2000
Acquisition-related amortization expense was $15.5 million in the six months
ended June 30, 2000, compared to $4.3 million in the six months ended June 30,
1999. These expenses represent the amortization of intangible assets purchased
in conjunction with our acquisitions of Celerity and HighTouch in the second
quarter of 2000; AIM, CASA and Onyx in the first quarter of 2000; WebTrak in
1999; and our acquisitions of Practical Control Systems Technologies, Inc. or
PCS, FTI (now HNC Financial Solutions, Inc.) and the Advanced Telecommunications
Abuse Control System, or ATACS product line assets during 1998. The average
amortization period and useful life for these intangible assets is approximately
3.5 years.
For a discussion of Retek's acquisition related amortization expense see page
39.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE
THREE AND SIX MONTHS ENDED JUNE 30, 2000
During the quarter ended March 31, 2000, we recorded in-process research and
development expense of $1.4 million related to our acquisition of CASA. During
the quarter ended June 30, 2000, we recorded additional in-process research and
development expense of $5.1 million, consisting of $1.1 million and $4.0 million
related to our acquisitions of Celerity and HighTouch, respectively.
CASA is an advanced analytics solutions company that provides account
optimization and precision marketing solutions through an ASP delivery platform.
The classification of the technology as complete or under development was made
in accordance with the guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards No. 2 and Financial
Accounting Standards Board Interpretation No. 4. Prior to 2000, CASA primarily
sold its Adaptive Dynamic Marketing ("ADM") ASP solution to businesses to
improve revenue and customer retention. At the time of acquisition, CASA had a
number of new technologies under development related to account management
algorithms and pricing algorithms. These in-process R&D projects were estimated
to achieve technological feasibility in the second quarter of 2000.
Celerity is involved in electronic data interchange ("EDI") for the workers'
compensation industry. The company is a developer and provider of translation
software, desktop software, and value-added network services in support of the
claims handling process. The classification of the technology as complete or
under development was made in accordance with the guidelines of Statement of
Financial Accounting Standards No. 86, Statement of Financial Accounting
Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4.
Prior to its acquisition, Celerity primarily sold its software and network
services to insurance carriers, third party administrators managed care
organizations, employers, and medical providers to facilitate the workers
compensation claims handling process. At the time of acquisition, Celerity had a
number of new technologies under development related to world-wide web-enabling
and EDI network technology. These in-process R&D projects were estimated to
achieve technological feasibility in the second and third quarters of 2000.
HighTouch is a provider of customized software and services relating to customer
relationship management ("CRM"). The classification of the technology as
complete or under development was made in accordance with the guidelines of
Statement of Financial Accounting Standards No. 86, Statement of Financial
Accounting Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4.
23
<PAGE> 24
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Prior to its acquisition, HighTouch primarily sold customized software and
services to a variety of customers in the retail industry. At the time of
acquisition, HighTouch had technology under development relating to the creation
of the company's first fully integrated standardized off-the-shelf CRM product.
This in-process R&D project was estimated to achieve technological feasibility
in the third quarter of 2000.
We used an independent appraisal firm to assist us with our valuations of the
fair market values of the purchased assets of CASA, Celerity and HighTouch. Fair
market value is defined as the estimated amount at which an asset might be
expected to be exchanged between a willing buyer and willing seller assuming the
buyer continues to use the assets in its current operations. The in-process R&D
projects were valued through the use of a discounted cash flow analysis, taking
into account projected future cash flows associated with these projects once
they achieve technological feasibility, their stage of completion as of the
acquisition date, and the expected return requirements (i.e. discount rate) for
present valuing of the projected cash flows. Stage of completion was estimated
by considering time, cost, and complexity of tasks completed prior to the
acquisition as a percentage of total time, cost and effort required for the
total project up to achieving technological feasibility.
With respect to the projected financial information provided to our appraiser,
CASA prepared a detailed set of projections forecasting revenue from the new
algorithms as well as gross profit and operating profit margins, Celerity
prepared a detailed set of projections forecasting revenue from the web-enabling
and EDI technology as well as gross profit and operating profit margins, and
Retek prepared a detailed set of projections forecasting revenue from the CRM
technology as well as gross profit and operating profit margins. These
projections were made based on an assessment of customer needs and the expected
pricing and cost structure.
With respect to the discount rates used in the valuation approach, the
incomplete technology represents a mix of near and mid-term prospects for the
business and imparts a level of uncertainty to its prospects. A reasonable
expectation of return on the incomplete technology would be higher than that of
completed technology due to these inherent risks. As a result, for CASA,
Celerity and HighTouch, the earnings associated with incomplete technology were
discounted at rates of 27.0%, 24.3% and 26.2%, respectively, based upon the
methodologies described below.
The Capital Asset Pricing Model was used to determine the cost of equity. It
combines a risk free rate of return with an equity risk premium multiplied by a
factor, referred to as Beta, which is based on the performance of common stock
prices of similar publicly traded companies. Employing these data for CASA,
Celerity and HighTouch, the discount rates attributable to the businesses were
22.0%, 19.3%, and 21.2%, respectively, which was used for valuing completed
technology. Since incomplete technology would require a higher return than
completed technology, the valuation report prepared by our appraiser used rates
of 27.0%, 24.3% and 26.2% for CASA, Celerity and HighTouch, respectively, to
present value cash flows (in excess of a return on other assets of the business)
attributable to in-process research and development projects.
The Casa, Celerity and HighTouch in-process research and development projects
continue to progress, in all material respects, consistently with our original
assumptions that were provided to the independent appraiser and used to value
the in-process research and development.
These statements regarding revenues and expenses are forward-looking statements,
which are subject to risks and uncertainties. Actual results may differ
materially from those anticipated. Our inability to complete the in-process
technologies within the expected timeframes could materially impact future
revenues and earnings, which could have a negative impact on our business,
financial condition and results of operations.
For a discussion of Retek's in-process research and development, see page 40.
OTHER INCOME, NET
24
<PAGE> 25
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
THREE AND SIX MONTHS ENDED JUNE 30, 2000
Other income, net is comprised primarily of interest income earned on cash and
investment balances. Other income, net for the second quarter of 2000 was $3.0
million, compared to $1.3 million in the second quarter of 1999. Other income,
net for the six months ended June 30, 2000 was $6.3 million, compared to $3.0
million in the six months ended June 30, 1999. The increase in other income,
net during the three and six months ended June 30, 2000 was attributable
primarily to an increase in interest income as a result of higher average cash
and investment balances during the first and second quarters in 2000 as compared
to the same periods in 1999. The higher cash and investment balances can be
attributed in part to the net proceeds received from Retek's initial public
offering in November 1999, proceeds from stock option exercises and employee
stock purchase plan contributions, as well as the net effect of other operating,
investing and financing activities between the respective periods.
INCOME TAXES
THREE MONTHS ENDED JUNE 30, 2000
The income tax benefit was $5.6 million in the second quarter of 2000, compared
to an income tax expense of $2.6 million in the second quarter of 1999. The
income tax benefit for the second quarter of 2000 includes the effects of:
non-deductible, one-time write-offs of in-process research and development
related to the purchases of AIM, CASA, Onyx, Celerity and HighTouch; Retek
minority interest; stock-based compensation expense; and non-deductible
acquisition related amortization expense. The income tax expense for the second
quarter of 1999 includes the effects of non-deductible acquisition related
amortization expense. These provisions are based on our estimates of the
effective tax rates during those respective full fiscal years.
SIX MONTHS ENDED JUNE 30, 2000
The income tax benefit was $10.0 million in the six months ended June 30, 2000,
compared to an income tax expense of $4.5 million in the six months ended June
30, 1999. The income tax benefit for the six months ended June 30, 2000 includes
the effects of: non-deductible, one-time write-offs of in-process research and
development related to the purchases of AIM, CASA, Onyx, Celerity and HighTouch;
Retek minority interest; stock-based compensation expense; and non-deductible
acquisition related amortization expense. The income tax expense for the six
months ended June 30, 1999 includes the effects of non-deductible acquisition
related amortization expense. These provisions are based on our estimates of the
effective tax rates during those respective full fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 2000
Net cash used in operating activities was $5.8 million for the six months ended
June 30, 2000, compared to net cash provided by operating activities of $16.1
million during the same period in 1999. Cash used in operating activities
during the first six months of 2000 includes $6.0 million of net cash provided
by operations, offset by $11.8 million of net working capital requirements. The
net working capital requirements primarily reflect increases in trade accounts
receivable and deferred income taxes, offset by an increase in deferred revenue.
Net cash used in investing activities was $79.5 million for the six months ended
June 20, 2000, compared to net cash provided by investing activities of $2.3
million during the same period in 1999. Cash used in investing activities
during the first six months of 2000 included $40.8 million in net investment
purchases, $16.1 million expended for the purchase of property and equipment,
$18.8 million paid in connection with our business acquisitions, net of cash
acquired, and $3.8 million paid out in connection with equity investments and
employee loans made.
25
<PAGE> 26
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Net cash provided by financing activities was $30.6 million for the six months
ended June 30, 2000, compared to net cash used in financing activities of $47.8
million during the same period in 1999. Cash provided by financing activities
during the first six months of 2000 includes $30.0 million in proceeds resulting
from stock option exercises and employee stock purchase plan contributions under
both HNC and Retek plans and $20.7 million in proceeds from the sale of trade
receivables, offset by $18.6 million in cash expended to repurchase HNC common
stock for treasury and $1.5 million used to repay debt and capital lease
obligations.
As of June 30, 2000, we had $150.0 million in cash, cash equivalents and
investments available for sale. We believe that our current cash, cash
equivalents and investments available for sale balances, borrowings under our
credit facility as well as expected net cash provided by operating activities,
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months. We expect to continue making
significant investments in capital assets, including computer equipment and
building improvements, during 2000. We intend to invest our cash in excess of
current operating requirements in short-term, interest-bearing, investment-grade
securities. A portion of our 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. The proceeds from the Notes will continue
to be used for general corporate purposes, including working capital and
possibly to acquire complementary businesses, products or technologies.
During March 1998, we completed an offering of $100,000 of 4.75% Convertible
Subordinated Notes, or the Notes, due on March 1, 2003. We fully and
unconditionally guarantee the Notes. The Notes are convertible into our common
stock at any time prior to the close of business on the maturity date at a
conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). We have the right to
redeem the Notes, in whole or in part, on or after March 6, 2001, at redemption
prices (plus accrued interest), as follows: a premium of 101.9 after one year,
100.95 after two years, and at par as of the third year. As a result of the
Retek spin-off that we intend to complete during 2000, and pursuant to a
resolution by our Board of Directors, our Notes conversion price may be
significantly reduced based upon a formula that calculates a revised conversion
rate using the relative per common share values of HNC and Retek as of the date
of the spin.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", or FAS 133. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" which defers the adoption requirement
to the first quarter of 2001. We have not yet determined the impact of the
adoption of this new accounting standard on our consolidated financial position,
results of operations or disclosures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101,
which provides additional guidance in applying generally accepted accounting
principles for the recognition and reporting of revenue for certain transactions
that existing accounting rules do not specifically address. An amendment in June
2000 delayed SAB 101's effective date until the fourth quarter of 2000. We are
currently evaluating the impact, if any, that SAB 101 may have on our
consolidated financial statements.
In January 200, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance
26
<PAGE> 27
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
given in the American Institute of Certified Public Accountants's Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", or SOP 98-1, to Web site development costs. Under
SOP 98-1, software development costs, consisting of internally developed
software and Web site development costs, include internal and external costs
incurred to develop internal-use computer software during the application
development stage are capitalized. Application development stage costs generally
include software configuration, coding, installation to hardware and testing.
Costs of significant upgrades and enhancements that result in additional
functionality are also capitalized. Costs incurred for maintenance and minor
upgrades and enhancements are expensed as incurred. The estimated useful lives
are based on planned or expected significant modification or replacement of
software applications, in response to the rapid rate of change in the internet
industry and technology in general. Adoption of EITF 00-2 is required for the
third quarter of 2000. We are currently evaluating the impact, if any, that EITF
00-2 may have on our consolidated financial statements.
27
<PAGE> 28
RETEK INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,379 $ 83,680
Short-term investments available for sale - debt 3,898 --
Trade accounts receivable, net 22,044 24,383
Current portion of deferred income taxes 1,589 11,177
Other current assets 9,861 5,560
--------- ---------
Total current assets 75,771 124,800
--------- ---------
Long-term investments available for sale 6,045 --
Property and equipment, net 17,078 8,291
Intangible assets, net 32,978 8,958
Deferred income taxes, less current portion 34,746 12,151
Other assets 59 33
========= =========
$ 166,677 $ 154,233
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,494 $ 5,946
Accrued liabilities 3,600 3,030
Deferred revenue 33,766 5,883
Note payable 3,501 --
Payable to HNC Software Inc. 755 15,399
--------- ---------
Total current liabilities 47,116 30,258
--------- ---------
Deferred revenue, net of current portion 762 --
--------- ---------
Total liabilities 47,878 30,258
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value -- 5,000 shares
authorized; no shares issued and outstanding; -- --
Common stock, $0.01 par value -- 150,000 shares authorized
and outstanding at June 30, 200 and December 31, 1999,
respectively; 47,356 and 46,503 shares issued and outstanding
at June 30, 2000 and December 31, 1999,respectively 474 465
Paid-in capital 156,638 140,089
Unearned stock-based compensation (14,554) (19,978)
Accumulated other comprehensive loss (1,240) (582)
Retained earnings (deficit) (22,519) 3,981
--------- ---------
Total stockholders' equity 118,799 123,975
========= =========
$ 166,677 $ 154,233
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
RETEK INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
License and maintenance $ 11,508 $ 15,656 $ 17,938 $ 27,314
Services and other 8,081 5,387 15,615 10,376
-------- -------- -------- --------
Total Revenue 19,589 21,043 33,553 37,690
-------- -------- -------- --------
Cost of revenue:
License and maintenance (1), (2) 5,305 1,854 9,473 3,258
Services and other (1) 5,878 4,577 11,387 7,462
-------- -------- -------- --------
Total cost of revenue 11,183 6,431 20,860 10,720
-------- -------- -------- --------
Gross Profit 8,406 14,612 12,693 26,970
Operating expenses:
Research and development (1) 8,786 5,460 16,794 9,737
Sales and marketing(1) 9,642 4,556 18,313 8,374
General and administrative 2,715 1,363 5,018 2,551
Amortization of stock-based compensation 2,794 5,424
Acquired in-process research and
development 4,000 4,000
Acquisition related amortization of intangibles 1,763 258 2,542 516
-------- -------- -------- --------
Total operating expenses 29,700 11,637 52,091 21,178
-------- -------- -------- --------
Operating (loss) income (21,294) 2,975 (39,398) 5,792
Other income, net 409 (2) 1,451 14
-------- -------- -------- --------
(Loss) income before tax (benefit)
provision (20,885) 2,973 (37,947) 5,806
Income tax (benefit) provisions (5,671) 1,201 (11,447) 2,346
-------- -------- -------- --------
Net (loss) income (15,214) 1,772 (26,500) 3,460
======== ======== ======== ========
Basic and diluted net loss per common share (0.32) (0.57)
======== ========
Weighted average shares used in computing
basic and diluted net loss per common share 47,036 46,770
======== ========
Pro forma basic net income per common share 0.04 0.09
======== ========
Weighed average shares used in computing
pro forma basic net income per common share 40,000 40,000
======== ========
(1) Excludes non-cash, amortization of stock-
based compensation as follows:
Cost of revenue:
License and maintenance 158 306
Services and other 401 779
Operating expenses:
Research and development 1,334 589
Sales and marketing 626 1,216
General and administrative 275 534
-------- --------
Total amortization of stock-based
compensation $ 2,794 $ 5,424
======== ========
(2) Excludes non-cash, acquisitions related
amortization of tangibles:
License and maintenance $ 770 $ 92 $ 1,273 $ 183
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
RETEK INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ......................................... $(26,500) $ 3,460
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for doubtful accounts ........................... 445 1,491
Depreciation and amortization expense ..................... 4,608 1,873
Amortization of stock-based compensation .................. 5,424 --
Acquired in-process research and development .............. 4,000 --
Deferred tax benefit ............................... (14,868) (206)
Tax benefit from stock option transactions ................ 3,420 37
Changes in assets and liabilities, excluding business
Acquisitions:
Accounts receivable ................................. 1,894 (8,165)
Other assets ........................................ (4,282) 1,415
Accounts payable .................................... (523) 1,552
Accrued liabilities ................................. 274 276
Deferred revenue .................................... 28,034 (435)
-------- --------
Net cash provided by operating activities ............. 1,926 1,298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash purchased in business acquisitions ................... 166 --
Cash paid for business acquisition ........................ (18,694) --
--------
Net purchases of investments for sale .................... (9,953) --
Acquisitions of property and equipment .................... (10,646) (2,753)
-------- --------
Net cash used in investing activities ................. (39,127) (2,753)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITES:
Net proceeds from the insurance of Retek common stock ....... 5,635 --
Proceeds from insurance notes ............................... 2,250 --
Repayment of debt ........................................... (693) --
Borrowings from HNC Software Inc. ........................... 755 28,656
Repayments to HNC Software Inc. ............................. (15,399) (26,673)
-------- --------
Net cash (used in) provided by financing activities ... (7,452) 1,983
-------- --------
Effect of exchange rate changes on cash ...................... (658) (13)
-------- --------
Net (decrease) increase in cash and cash equivalents ........ (45,311) 515
Cash and cash equivalents at beginning of period ............. 83,680 415
-------- --------
Cash and cash equivalents at end of period ................... $ 38,369 $ 930
======== ========
SIGNIFICANT NON-CASH FINANCING ACTIVITES:
Business acquisitions through issuance of Retek Common stock and
options ........................................................ $ 7,503
========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
RETEK INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK DEFERRED OTHER
----------------------- PAID-IN STOCK-BASED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
------ ------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1999 ........................ 46,503 $465 $ 140,089 $(19,978) $ (582)
Tax benefit from exercise of
HNC Software Inc. stock
options ...................... -- -- 3,420 -- --
Common stock issuance
Costs ........................ -- -- (287) -- --
Common stock issued under
employee stock purchase plan.. 464 5 5,917 -- --
Common stock and stock
options issues for acquisition
of High Touch ................ 389 4 7,499 -- --
Amortization of stock-based
compensation ................. -- -- -- 5,424 --
Unrealized loss on
investments .................. -- -- -- -- (54)
Foreign currency translation
adjustment ................... -- -- -- -- (604)
Net loss ...................... -- -- -- -- --
------ ---- --------- -------- -------
BALANCE AT MARCH 31, 2000 ..... 47,356 $474 $ 156,638 $(14,554) $(1,240)
====== ==== ========= ======== =======
</TABLE>
<TABLE>
<CAPTION>
RETAINED STOCKHOLDERS' COMPREHENSIVE
EARNINGS EQUITY INCOME (LOSS)
-------- ------ -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31,
1999 ........................ $ 3,981 $ 123,975 --
Tax benefit from exercise of
HNC Software Inc. stock
options ...................... -- 3,420 --
Common stock issuance
Costs ........................ -- (287) --
Common stock issued under
employee stock purchase plan.. -- 5,922 --
Common stock and stock
options issues for acquisition
of High Touch ................ -- 7,503 --
Amortization of stock-based
compensation ................. -- 5,424 --
Unrealized loss on
investments .................. -- (54) $ (54)
Foreign currency translation
adjustment ................... -- (604) (604)
Net loss ...................... (26,554) (26,500) (26,554)
-------- --------- --------
BALANCE AT MARCH 31, 2000 ..... $(22,519) $ 118,799 $(27,212
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION
The Company
Retek Inc. and its wholly owned subsidiaries, Retek Information Systems, Inc.,
WebTrak Limited and HighTouch Technologies ("Retek" or the "Company") develop
Internet based business-to-business commerce networks, warehouse management
software solutions, and market and support management decision software products
for retailers and their trading partners. The Internet based
business-to-business commerce networks provide retailers a single point of
access for all members of the retail supply chain. Additional solutions offered
through the retail.com portal provide a collaborative approach to traditional
retail challenges. These solutions are designed to increase efficiencies by
sharing data among retailers and their trading partners, effectively shortening
their supply chains. The 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. The
Company is headquartered in Minneapolis, Minnesota.
Basis of Presentation
We have prepared the accompanying interim condensed consolidated financial
statements, without audit, in accordance with the instructions to Form 10-Q and,
therefore, do not necessarily include all information and footnotes necessary
for a fair presentation of our financial position, results of operations and
cash flows in accordance with generally accepted accounting principles.
In our opinion, the accompanying unaudited financial information for interim
periods presented reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. These condensed consolidated
financial statements and notes thereto should be read in conjunction with our
audited financial statements and notes thereto presented in our Annual Report on
Form 10-K for the fiscal year ended December 31, 1999. The interim financial
information contained in this Report is not necessarily indicative of the
results to be expected for any other interim period or for an entire fiscal
year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain prior year balances
have been reclassified to conform to the current presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement establishes a new
model for accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" which defers the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
FAS 133 is not expected to have a significant impact on our consolidated
financial position or results of operations.
In January 200, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
include internal and external costs incurred to develop internal-
32
<PAGE> 33
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
use computer software during the application development stage are capitalized.
Application development stage costs generally include software configuration,
coding, installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the internet industry and technology in general.
Adoption of EITF 00-2 is required for the third quarter of 2000. We have not yet
determined the impact of the adoption of this new accounting standard on our
consolidated financial position, results of operations or disclosures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition." Amendments to the Bulletin delayed the
effective date until the fourth quarter of 2000. Retek is reviewing the
requirements of this standard and have not yet determined the impact of this
standard on its consolidated financial statements.
NOTE 2 -- PER SHARE DATA
Basic net loss per share is calculated based only on the weighted average common
shares outstanding during the period. Diluted earnings per share is computed on
the basis of the weighted average basic shares outstanding plus the dilutive
effect of outstanding stock options using the "treasury stock" method. For
periods prior to Retek's initial public offering, the weighted average basic
shares outstanding is a pro forma amount which reflects the September 1999
reincorporation of Retek Inc. and the 40 for .001 stock split of Retek Inc.
common shares.
For the three months and six months ended June 30, 2000, the calculation of
diluted loss per share excludes the impact of the potential exercise of
8,503,101outstanding stock options outstanding at June 30, 2000, because their
effect would be antidilutive.
Pro forma unaudited income per common share for the three months and six months
ended June 30, 1999 is calculated for basic income per share only since Retek
had no outstanding stock options during those periods.
NOTE 3 -- CONTINGENCIES
At June 30, 2000, Retek has factored accounts receivable to a financial
institution aggregating $14.6 million, which we are contingently liable in the
event of non-collection.
NOTE 4 -- ACQUISITIONS
On May 10, 2000, Retek acquired HighTouch Technologies, Inc. ("HighTouch") for a
cash payment of $18.7 million, including direct acquisition costs and 389 shares
of Retek common stock. The application of the purchase method of accounting for
the acquisition resulted in an excess of cost over net assets acquired of
approximately $29.6 million, of which $25.6 million has been allocated to
intangible assets and $4 million has been allocated to in-process research and
development.
In connection with Retek's acquisition of HighTouch in May 2000, acquired
research and development of $4 million was charged to operations on the
acquisition date. HighTouch's products provide real-time transaction management
and customer service solutions that support multi-channel customer interactions.
HighTouch owns certain direct consumer management technologies that we have
incorporated into Retek CRM, our enterprise-level customer interaction system.
The classification of the technology as complete or under development was made
in accordance with the guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Standards No. 2 and Financial Accounting
Standards Board Interpretation No. 4. At the time of the acquisition, HighTouch
had three products under development including Customer Order Management, which
was subsequently completed by Retek in July of 2000 and Customer Direct
Marketing and Customer Loyalty and Retention , which are still in development.
33
<PAGE> 34
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of HighTouch Technologies, Inc.
had taken place at the beginning of each year (dollars in thousands).
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- -------
<S> <C> <C>
Net revenues ........................ $ 33,586 $38,963
Net (loss) income ................... (30,649) 1,873
Pro forma net (loss) income
per share......................... (0.65) 0.05
</TABLE>
The unaudited pro forma results of operations are for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisition occurred at the beginning of the periods presented or the results
which may occur in the future.
NOTE 5 -- SUBSEQUENT EVENTS
On August 7, 2000, HNC Software Inc. announced that its board of directors has
declared a dividend on HNC common stock of all the shares of Retek Inc. common
stock owned by HNC. The 40 million Retek common shares owned by HNC will be
distributed by HNC on or about September 29, 2000 as a dividend on each share of
HNC common stock that are outstanding on the September 15, 2000 dividend record
date. Currently, HNC owns approximately 84.5% of the outstanding Retek common
stock. HNC has received a private letter ruling from the Internal Revenue
Service that HNC's dividend of its shares of Retek common stock will be tax-free
to HNC and its stockholders for U.S. federal income tax purposes.
Effective August 6, 2000, Charles H. Gaylord resigned from our board of
directors.
NOTE 6 -- RECLASSIFICATIONS
Certain reclassifications have been made to our December 31, 1999 consolidated
balance sheet to conform with the presentation at June 30, 2000. These
reclassifications had no impact on previously reported stockholders' equity.
34
<PAGE> 35
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Retek's, financial condition and results of
operations should be read in conjunction with Retek's consolidated financial
statements and the related notes, and the other financial information included
in Retek's Quarterly Report on Form 10-Q. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Retek's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of specified factors, including those set forth in the
section below entitled "Factors That May Impact Future Results of Operations"
and elsewhere in this Quarterly Report on Form 10-Q. Retek is a subsidiary of
HNC Software Inc., and in this Report, HNC Software Inc. is referred to as "we,"
"our," and "HNC".
OVERVIEW
Retek completed its initial public offering on November 23, 1999. Prior to the
completion of Retek's initial public offering, they were our wholly owned
subsidiary. As of March 31, 2000, we owned approximately 84.5% of Retek's
outstanding common stock. On August 7, 2000, HNC Software Inc. announced that
its board of directors has declared a dividend on HNC common stock of all the
shares of Retek Inc. common stock owned by HNC. The 40 million Retek common
shares owned by HNC will be distributed by HNC on or about September 29, 2000 as
a dividend on each share of HNC common stock that are outstanding on the
September 15, 2000 dividend record date. Currently, HNC owns approximately 84.5%
of the outstanding Retek common stock. HNC has received a private letter ruling
from the Internal Revenue Service that HNC's dividend of its shares of Retek
common stock will be tax-free to HNC and its stockholders for U.S. federal
income tax purposes.
Retek's business combines the business activities of Retek Information Systems,
Inc. and Retek Inc., formerly Retek Logistics, Inc. Founded in 1995, Retek
Information Systems, a developer and marketer of Internet-based,
business-to-business software solutions for retailers, was acquired by HNC in
1996. On September 9, 1999, Retek Logistics was reincorporated as a Delaware
corporation and renamed "Retek Inc." Immediately prior to the completion of our
initial public offering on November 23, 1999, in connection with the separation
of our business from HNC, HNC contributed all of the outstanding capital stock
of Retek Information Systems to Retek Inc. Retek Information Systems currently
operates as a wholly owned subsidiary.
Our acquisition of Retek Information Systems allowed for the integration of
HNC's patented predictive technology into Retek's software solutions for
retailers. Retek formalized a marketing relationship with Oracle in September
1998, providing Retek with an effective partnership with a world leader in
electronic commerce, an international channel to the largest retailers and the
support of Oracle's worldwide sales force.
Retek generates revenue from the sale of software licenses, maintenance and
support contracts, and professional consulting and contract development
services. Until the fourth quarter of 1999, Retek generally licensed products to
customers on a perpetual basis and recognized revenue upon delivery of the
products. Starting in the fourth quarter of 1999, Retek revised the terms of our
software licensing agreements for the majority of our software products sold.
Under the revised terms, Retek provides technical advisory services after the
delivery of its products to help customers exploit their full value and
functionality. Revenue from the sale of software licenses under these agreements
will be recognized as the technical advisory services are performed. Retek
expects the periods of technical advisory services will generally be from 12 to
24 months, as determined by the customers' objectives. As Retek begins to
recognize license and service revenue over a period of time, rather than upon
delivery of the product, it will recognize significantly less revenue, have
lower associated margins for several quarters, as compared to previous quarters,
have higher operating expenses as a percentage of total revenues and incur
operating losses for several quarters. Deferred revenue consists principally of
the unrecognized portion of revenue received under license and maintenance
service agreements. Deferred license revenue is recognized ratably or as a
percentage of completion based on the contract terms. Deferred maintenance
revenue is recognized ratably over the term of the service agreement.
Customers who license Retek's software generally purchase maintenance contracts,
typically covering renewable annual periods. In addition, customers may purchase
consulting services, which are
35
<PAGE> 36
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
customarily billed at a fixed daily rate plus out-of-pocket expenses. Contract
development services, including new product development services, are typically
performed for a fixed fee. Retek also offers training services that are billed
on a per student or per class session basis.
The growth in Retek's customer base has resulted from a combination of increased
market penetration and an expanding product offering. Retek's investment in
research and development, acquisitions and alliances have helped bring new
software solutions to market. These investments produced a suite of decision
support solutions in 1997; the re-tooling of its applications for the Web in
1998; and the delivery of Internet-based, business-to-business collaborative
planning, critical path and product design solutions in 1999; and several
additional collaborative offerings on the retail.com network through the first
quarter of 2000. To support Retek's growth during these periods, it also
continued to invest in internal infrastructure by hiring employees throughout
various departments of the organization.
Retek markets its software solutions worldwide through direct and indirect
sales channels. Revenue generated from direct sales channel accounted for
approximately 91.1% and 90.0% for the three months and six months ended June 30,
2000, respectively as compared to 64.1% and 73.6% for the same periods as of
June 30, 1999. Indirect sales channel revenue primarily arises from our
relationship with Oracle.
On October 29, 1999, Retek completed the purchase of all the outstanding capital
stock of WebTrak Limited. WebTrak owns the WebTrack Critical Path and Portfolio
Private Label products that Retek currently distributes. In connection with the
purchase of WebTrak, Retek issued to former WebTrak shareholders notes, which
were due on November 26, 1999, in the principal amount of $5.33 million and a
convertible note, which was due on November 26, 1999, in the principal amount of
$2.67 million. The convertible note was at the option of the holder convertible
at the time of payment into the number of shares of Retek's common stock equal
to the principal amount of the note divided by the initial offering price of
$15.00. On November 29, 1999 Retek issued 177,778 shares of its common stock to
the holder of the convertible note in full satisfaction of its obligations. The
remaining notes were satisfied in full on their due date.
On May 10, 2000, Retek completed its purchase of all of the outstanding capital
stock of HighTouch Technologies, Inc., or HighTouch, a provider of real-time
transaction management and customer service solutions, which support
multi-channel customer interactions. HighTouch owns certain direct consumer
management technologies that Retek has incorporated into its Retek Retail CRM,
an enterprise-level customer interaction system. In connection with the purchase
of HighTouch, Retek paid $18.7 million, including direct acquisition costs in
cash and issued approximately 389,057 shares of its common stock to the former
sole shareholder of HighTouch.
Revenue attributable to customers outside of North America accounted for
approximately 28.9% and 29.9% for the three months and six months ended June 30,
2000, respectively as compared to 30.4% and 42.6% for the same periods as of
June 30, 1999. Approximately 6.1 % and 8.9% of Retek's sales were denominated
in currencies other than the U.S. dollar for the three months and six months as
of June 30, 2000, respectively as compared to 3.6% and 19.4% for the same
periods as of June 30, 1999.
Retek primarily sells perpetual licenses for which it recognizes revenue in
accordance with generally accepted accounting principles, upon meeting each of
the following criteria:
- execution of a written purchase order, license agreement or
contract;
- delivery of software authorization keys;
- the license fee is fixed and determinable;
- collectibility of the proceeds is assessed as being probable; and
- vendor-specific objective evidence exists to allocate the total fee
to elements of the arrangement.
36
<PAGE> 37
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Vendor-specific objective evidence is based on the price charged when an element
is sold separately, or if not yet sold separately, is established by authorized
management. All elements of each order are valued at the time of revenue
recognition. Retek recognizes revenue:
- for sales made through our distributors, resellers and original
equipment manufacturers, at the time these partners report to us that they
have sold the software to the end-user and after all revenue recognition
criteria have been met;
- from maintenance agreements related to our software, over the respective
maintenance periods;
- from customer modifications, as the services are performed using the
percentage of completion method; and
- from services, using the percentage of completion method, based on costs
incurred to date compared to total estimated costs at completion.
Retek records amounts received under contracts in advance of performance as
deferred revenue and generally recognize these amounts within one year from
receipt. Any amount not to be recognized within one year of receipt recorded in
non-current deferred revenue.
RESULTS OF OPERATIONS
The following table presents selected financial data for the periods
indicated as a percentage of our total revenue. Retek's historical reporting
results are not necessarily indicative of the results to be expected for any
future
<TABLE>
<CAPTION>
AS A PERCENTAGE OF AS A PERCENTAGE OF
TOTAL REVENUE TOTAL REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
License and maintenance .......................... 58.7% 74.4% 53.5% 72.5%
Services and other ............................... 41.3 25.6 46.5 27.5
Total revenue ............................ 100.0 100.0 100.0 100.0
Cost of revenue:
License and maintenance .......................... 27.1 8.8 28.2 8.6
Services and other ............................... 30.0 21.8 33.9 19.8
Total cost of revenue .................... 57.1 30.6 62.2 28.4
Gross margin ....................................... 42.9 69.4 37.8 71.6
Operating expenses:
Research and development ......................... 44.8 25.9 50.1 25.8
Sales and marketing .............................. 49.2 21.7 54.6 22.2
General and administrative ....................... 13.9 6.5 15.0 6.8
Amortization of stock-based compensation ......... 14.3 -- 16.2 --
Acquired in-process research and development ..... 20.4 -- 11.9 --
Acquisition related amortization of intangibles .. 9.0 1.2 7.6 1.4
Total operating expenses ................. 151.6 55.3 155.2 56.2
Operating (loss) income ............................ (108.7) 14.1 (117.4) 15.4
Other income, net .................................. 2.1 -- 4.3 --
(Loss) income before income tax (benefit) provision (106.6) 14.1 (113.1) 15.4
Income tax (benefit) provision ..................... (28.8) 5.7 (34.1) 6.2
Net (loss) income .................................. (77.7) 8.4 (79.0) 9.2
Cost of license and maintenance revenue, as a
percentage of license and maintenance revenue ...... 46.1 11.8 52.8 11.9
Cost of services and other revenue, as a percentage
of services and other revenue ...................... 72.7 85.0 72.9 71.9
</TABLE>
TOTAL REVENUES. Total revenue decreased 26.5% and 34.3% to $19.6 and $33.6
million for the quarter and six months ended June 30, 2000, respectively, from
$21.0 and $37.7 million for the same periods in 1999.
LICENSE AND MAINTENANCE REVENUES. License and maintenance revenue decreased to
$11.5 and $17.9 million for the quarter and six months ended June 30, 2000,
respectively, a decrease of 26.5% and 34.3% from comparable periods in prior
year. The decrease in license revenue for the quarter and six months
37
<PAGE> 38
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
ended June 30, 2000 was primarily due to the revised terms used in negotiating
license contracts. As noted above in the section entitled "Overview", Retek
recently revised the terms of their software license agreements so that revenue
is recognized over a number of quarters rather than upon delivery. As a result,
year over year period revenue decreased in the quarter and six-month period
ended June 30, 2000 compared to similar periods in 1999. Maintenance revenue
increased $1.3 and $2.5 million for the quarter and six months ended June 30,
2000, respectively, due to the growing base of customers that have installed
Retek's software solutions.
SERVICES AND OTHER REVENUES. Services and other revenue totaled $8.1 and $15.6
million for the quarter and six months ended June 30, 2000, respectively, an
increase of 50.0% and 50.5% from comparable periods in prior year. The increase
was due to a $3.4 and $6.9 million increase in consulting services and custom
development projects for the quarter and six months ended in June 30, 2000,
respectively. The number of billable employees increased to 89 as of June 30,
2000 from 65 as of June 30, 1999. In addition, third party consultants are used
on an as needed basis depending upon our allocation of internal resources.
COST OF REVENUES
COST OF LICENSE AND MAINTENANCE REVENUES. Cost of license and maintenance
revenue consists primarily of fees for third party software products that are
integrated into Retek's products; third party license consultant costs; salaries
and related expenses of their customer support organization; and an allocation
of their facilities and depreciation expense. Cost of license and maintenance
revenue increased to $5.3 and $9.5 million for the quarter and six months ended
June 30, 2000, respectively an increase of 186.1% and 190.8% over comparable
periods in prior year. As license and maintenance revenue increases, Retek
expects to experience increased costs resulting from increased royalty fees and
an increase in the number of support personnel required to service their growing
customer base. The number of cost of license and maintenance revenue personnel
increased to 35 as of June 30, 2000 from 8 as of June 30, 1999. In addition,
Retek incurred higher third party license consultant costs. They expect the cost
of license and maintenance revenue to continue to increase in absolute dollars
as license and maintenance revenue increases.
COST OF SERVICES AND OTHER REVENUES. Cost of services and other revenue includes
salaries and related expenses of Retek's consulting organization; cost of third
parties contracted to provide consulting services to their customers; and an
allocation of facilities and depreciation expense. Cost of services and other
revenue increased to $5.9 and $11.4 million for the quarter and six months ended
June 30, 2000, respectively an increase of 28.4% and 52.6% over comparable
periods in prior year. As a percentage of services and other revenue, cost of
services and other revenue was 72.7% and 85.0% in the quarter ended June 30,
2000 and 1999 respectively and 72.9% and 71.9% for the six-month period ended
June 30, 2000 and 1999, respectively. During the second quarter of 2000, Retek
continued to expand its consulting services business by increasing the number of
personnel to 89 from 65 as of June 30, 2000 and 1999, respectively.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses, which are expensed as incurred, consist
primarily of salaries and related costs of Retek's engineering organization;
fees paid to third-party consultants; and an allocation of facilities and
depreciation expenses. Retek increased investment in research and development in
absolute dollars each year since 1995. Research and development expenses
increased to $8.8 million and $16.8 million for the quarter and six months ended
June 30, 2000 and 1999, respectively, an increase of 60.9% and 72.5% over
comparable periods in prior year. The absolute dollar increase in research and
development expenses was due to significant increases in personnel costs, which
included hired personnel and third party consultants. In the second quarter of
2000, research and development personnel increased to 296 from 139 in the second
quarter of 1999. Retek invested heavily in the development of new product
solutions during the first two quarters of 2000. Also, the allocation for
facilities and depreciation expense increased as a result of expenditures
required for additional office space and capital equipment to support the
additional personnel. Retek expects the absolute dollar increase in research and
development to continue as it invests in the development of other new solutions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
SALES AND MARKETING EXPENSE
Sales and marketing expenses consist primarily of salaries and related costs of
the sales and marketing organization; sales commissions; costs of marketing
programs, including public relations, advertising, trade shows and sales
collateral; and an allocation of facilities and depreciation expenses. Sales and
marketing expenses increased to $9.6 and $18.3 million for the quarter and six
months ended June 30, 2000, respectively, an increase of 111.6% and 118.7% over
comparable periods in prior year. The increase was primarily due to an increase
in personnel and related costs of $1.8 and $3.9 million for the quarter and
six-month period ended June 30, 2000, respectively, an increase in third party
consulting of $978,000 and $1.5 million for the quarter and six-month period
ended June 30, 2000, respectively, and an increase in marketing costs of $1.6
and $3.1 million for the quarter and six-month period ended June 30, 2000,
respectively. In the second quarter of 2000 personnel and related costs
increased due to an increase in the number of sales and marketing employees to
139 from 60 in the second quarter of 1999. The increase during the second
quarter of 2000 in personnel and related costs was due to the continued build up
of Retek's sales force and marketing operations. Also, the allocation for
facilities and depreciation expense increased as a result of expenditures
required for additional office space and capital equipment to support the
additional personnel.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses consist primarily of costs from finance and
human resources organizations; legal and other professional service fees; and an
allocation of facilities costs and depreciation expenses. General and
administrative expenses increased to $2.7 million and $5.0 million for the
quarter and six-month period ended June 30, 2000, respectively, an increase of
99.2% and 96.7% over comparable periods in prior year. The increase in absolute
dollars in general and administrative expenses in the quarter and six months
ended June 30, 2000 was attributable to the growth of the administrative
organization to support overall growth. Personnel costs increased $440,000 and
$1.0 million for the quarter and six-month period ended June 30, 2000,
respectively. In the second quarter of 2000 total general and administrative
employees increased to 61 from 38 in the second quarter of 1999. The increase
was also due to us incurring additional compliance expenses and other
professional fees associated with being an independent public company. Also, the
allocation for facilities and depreciation expense increased as a result of
expenditures required for additional office space and capital equipment to
support the additional personnel. Retek expects general and administrative
expenses to increase in absolute dollars in the foreseeable future to support
infrastructure growth.
STOCK-BASED COMPENSATION EXPENSE
Deferred stock-based compensation represents the difference between the exercise
price and the fair value of Retek's common stock for accounting purposes on the
date that certain stock options were granted. This deferred amount is included
as a component of stockholders' equity and is being amortized on an accelerated
basis by charges to operations over the vesting period of the options,
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28. Retek granted stock options to its employees under the
1999 Equity Incentive Plan and the HighTouch Technologies, Inc 1999 Stock Option
Plan and to members of its board of directors through both the 1999 Equity
Incentive Plan and the 1999 Directors Stock Option Plan. Amortization of
stock-based compensation was $2.8 and $5.4 million for the quarter and six-month
period ended June 30, 2000 respectively.
ACQUISITION-RELATED AMORTIZATION EXPENSE
Acquisition-related amortization of intangibles increased to $1.8 and $2.5
million for the quarter and six-month period ended June 30, 2000, respectively
from $258,000 and $516,000 for the comparable period in 1999. In connection with
the purchase of HighTouch Technologies, Inc in 2000 the application of the
purchase method of accounting for the acquisition resulted in an excess of cost
over net assets acquired of $19.3 million, of which $15.3 million was allocated
to intangibles and $4.0 million was allocated to in-process research and
development. In conjunction with the purchase, Retek recorded various intangible
assets, which are being
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
amortized over estimated useful lives ranging from three to five years. In
connection with the purchase of WebTrak in 1999, the application of the purchase
method of accounting for the acquisition resulted in an excess of cost over net
assets acquired of $8.1 million, of which $6.6 million was allocated to
intangibles and $1.5 million was allocated to in-process research and
development. In conjunction with the purchase, Retek recorded various intangible
assets, which are being amortized over estimated useful lives ranging from three
to five years. In connection with the purchase of Retek Logistics in 1998, the
application of the purchase method of accounting for the acquisition resulted in
an excess of cost over net assets acquired of approximately $5.8 million, of
which $4.0 million was allocated to intangibles and $1.8 million was allocated
to in-process research and development. In conjunction with the purchase, Retek
recorded various intangible assets, which are being amortized over estimated
useful lives ranging from three to five years.
IN-PROCESS RESEARCH AND DEVELOPMENT
HighTouch is a provider of customized software and services relating to customer
relationship management ("CRM"). The classification of the technology as
complete or under development was made in accordance with the guidelines of
Statement of Financial Accounting Standards No. 86, Statement of Financial
Accounting Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4. Prior to its acquisition, HighTouch primarily sold
customized software and services to a variety of customers in the retail
industry. At the time of acquisition, HighTouch had technology under development
relating to the creation of the company's first fully integrated standardized
off-the-shelf CRM product. This in-process R&D project was estimated to achieve
technological feasibility in the third quarter of 2000.
We used an independent appraisal firm to assist us with our valuation of the
fair market value of the purchased assets of HighTouch. Fair market value is
defined as the estimated amount at which an asset might be expected to be
exchanged between a willing buyer and willing seller assuming the buyer
continues to use the assets in its current operations. The in-process R&D
projects were valued through the use of a discounted cash flow analysis, taking
into account projected future cash flows associated with these projects once
they achieve technological feasibility, their stage of completion as of the
acquisition date, and the expected return requirements (i.e. discount rate) for
present valuing of the projected cash flows. Stage of completion was estimated
by considering time, cost, and complexity of tasks completed prior to the
acquisition as a percentage of total time, cost and effort required for the
total project up to achieving technological feasibility.
With respect to the projected financial information provided to the appraiser,
Retek prepared a detailed set of projections forecasting revenue from the CRM
technology as well as gross profit and operating profit margins. These
projections were made based on an assessment of customer needs and the expected
pricing and cost structure.
With respect to the discount rates used in the valuation approach, the
incomplete technology represents a mix of near and mid-term prospects for the
business and imparts a level of uncertainty to its prospects. A reasonable
expectation of return on the incomplete technology would be higher than that of
completed technology due to these inherent risks. As a result, the earnings
associated with incomplete technology were discounted at a rate of 26.2% based
upon the methodology outlined below:
The Capital Asset Pricing Model was used to determine the cost of equity. It
combines a risk free rate of return with an equity risk premium multiplied by a
factor, referred to as Beta, which is based on the performance of common stock
prices of similar publicly traded companies. Employing these data, the discount
rate attributable to the business was 21.2%, which was used for valuing
completed technology. Since incomplete technology would require a higher return
than completed technology, the valuation report prepared by the Company's
appraiser used a rate of 26.2% to present value cash flows (in excess of a
return on other assets of the business) attributable to in-process research and
development projects.
The HighTouch in-process research and development project continues to progress,
in all material respects, consistently with our original assumptions that were
provided to the independent appraiser and used to value the in-process research
and development.
These statements regarding revenues and expenses are forward-looking statements,
which are subject to risks and uncertainties. Actual results may differ
materially from those anticipated. Our inability to complete the in-process
technologies within the expected timeframes could materially impact future
revenues and earnings, which could have a material adverse effect on our
business, financial condition and results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OTHER INCOME (EXPENSE)
Other income, net increased to $409,000 and $1.5 million for the quarter months
and six months ended June 30, 2000, respectively up from (2,000) and 14,000 for
the same period in 1999. The increase was due to interest income earned on cash
equivalents and investments.
INCOME TAXES
The income tax (benefit)/provision was ($5.7) and ($11.4) million for the period
ending June 30, 2000, respectively, from $1.2 million and $2.3 million for the
same periods in 1999. These amounts are based on management's estimates of the
effective tax rates to be incurred by Retek during those respective fiscal
years.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, Retek funded operations primarily through
funding from HNC in the form of intercompany advances. Since the initial public
offering, Retek has not obtained any additional funding from HNC. At June 30,
2000, Retek's cash and cash equivalent balance was $38.4 million. In addition,
it had investments of $9.9 million.
Net cash provided by operating activities was $4.1 million for the six months
ended June 30, 2000 and $1.3 million for the comparable period in 1999.
Principal operating cash flow adjustments that offset Retek's net loss were
amortization of stock-based compensation, acquired in-process research and
development, depreciation and amortization, increases in deferred revenue and
accrued liabilities, and decreases in accounts receivable. Uses of cash in the
for the six months ended June 30, 2000 were due to increases in deferred income
taxes and other assets and a decrease in accounts payable.
Net cash used in investing activities was $42.0 million for the six months ended
June 30, 2000 and $2.8 million for the comparable period in 1999. In the six
months ended June 30, 2000, uses of cash were due to the cash paid for business
acquisitions, acquisition of capital equipment, primarily computer equipment and
software and purchase of investments.
Net cash used by financing activities was $6.8 million in the six months ended
June 30, 2000. Net cash provided by financing activities was $2.0 million for
the six months ended June 30, 1999. Net cash used in 2000 included $755,000 in
borrowings from HNC and $15.4 million in payments to HNC. Beginning in 1997, HNC
implemented a cash management policy that all cash balances were transferred
daily from all of HNC's subsidiaries, including Retek, into a centralized cash
management account at HNC. The financing activities with HNC include borrowings
and payment from these cash management activities in 1999. Starting in November
1999 these daily transfers to HNC ceased. Net cash provided by financing
activities in 2000 included proceeds from the issuance of common stock and
proceeds from the issuance of debt.
Retek believes that the net proceeds of its initial public offering, together
with its current cash and cash equivalents 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. Retek's management
intends to invest the excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.
A portion of Retek'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. Retek regularly evaluates, in the ordinary
course of business, potential acquisitions of such businesses, products,
technologies or data.
In addition, Retek's ability to enter into any acquisition of a business or
assets may be limited if HNC completes the distribution. Specifically, pursuant
to the terms of a corporate rights agreement between HNC, and Retek until two
years, and possibly longer, after the distribution of HNC's remaining shares of
Retek's common stock, Retek's ability to issue common stock in connection with
acquisitions, offerings or otherwise will be limited.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS
An investment in our common stock involves a high degree of risk. Investors
evaluating our company and its business should carefully consider the factors
described below and all other information contained in this Quarterly Report on
Form 10-Q before purchasing our common stock. Any of the following factors could
materially harm our business, operating results and financial condition.
Additional factors and uncertainties not currently known to us or that we
currently consider immaterial could also harm our business, operating results
and financial condition. Investors could lose all or part of their investment as
a result of these factors, in addition to others.
While Retek's management is optimistic about our long-term prospects, the
following factors, among others, could materially harm its business, operating
results and financial condition and should be considered in evaluating Retek.
Industry's rapid pace of change. If Retek is unable to develop new software
solutions or enhancements to its existing products on a timely and
cost-effective basis, or if new products or enhancements do not achieve market
acceptance, its sales may decline. The life cycles of its products are difficult
to predict because the business-to-business electronic commerce market for
Retek's products is new and emerging and is characterized by rapid technological
change and changing customer needs. The introduction of products employing new
technologies could render its existing products or services obsolete and
unmarketable.
In developing new products and services, Retek may:
- fail to respond to technological changes in a timely or cost-effective
manner;
- encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or that
shorten the life cycles of its existing products and services;
- experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services; or
- fail to achieve market acceptance of its products and services.
Fluctuations in quarterly operating results. Retek's quarterly operating results
have fluctuated in the past and are expected to continue to fluctuate in the
future. If its quarterly operating results fail to meet analysts' expectations,
the trading price of Retek common stock could decline. In addition, significant
fluctuations in its quarterly operating results may harm business operations by
making it difficult to implement its budget and business plan. Factors, many of
which are outside of Retek's control, which could cause its operating results to
fluctuate include:
- the size and timing of customer orders, which can be affected by
customer budgeting and purchasing cycles;
- the demand for and market acceptance of its software solutions;
- competitors' announcements or introductions of new software solutions,
services or technological innovations;
- its ability to develop, introduce and market new products on a timely
basis;
- customer deferral of material orders in anticipation of new releases or
new product introductions;
- its success in expanding our sales and marketing programs;
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
- increased sales of Oracle Retail(TM) during its second fiscal quarter
due to seasonally greater sales by Oracle near its fiscal year-end in May;
- technological changes or problems in computer systems; and
- general economic conditions which may affect its customers' capital
investment levels.
In addition, Retek has incurred, and will continue to incur, compensation
expense in connection with its grant of options under the 1999 Equity Incentive
Plan and the 1999 Directors Stock Option Plan. This expense will be amortized
over the vesting period of these granted options, which is generally four years,
resulting in lower quarterly income.
Quarterly expense levels are relatively fixed and are based, in part, on
expectations as to future revenue. As a result, if revenue levels fall below
Retek's expectations, net income will decrease because only a small portion of
its expenses vary with revenue.
New type of license agreement. Until recently, Retek generally licensed its
products to customers on a perpetual basis, and recognized revenue upon delivery
of the products. In the fourth quarter of 1999, Retek entered into software
licensing agreements with revised terms for the majority of new sales of
software products. Under these agreements, it will provide technical advisory
services after the delivery of the product to help customers exploit the full
value and functionality of its products. Revenue from the sale of software
licenses and technical advisory services under these agreements will be
recognized as the services are performed over the contract period, which Retek
expects will generally be 12 to 24 months, as determined by its customers'
objectives. As Retek begins to recognize license and service revenues over a
period of time, rather than upon the delivery of our products, it will recognize
significantly less revenue, have lower associated margins for several quarters,
as compared to previous quarters, have higher operating expenses as a percentage
of total revenues and will incur operating losses for several quarters.
Early stage of development of the retail.com network. Retek began operation of
the retail.com network on September 26, 1999. Retek incurred, and will continue
to incur, significant infrastructure costs in establishing this network. During
the first quarter of 2000 it invested approximately $10.4 million in retail.com.
Retek will continue to invest in new products and services to be offered over
the retail.com network in the foreseeable future. Broad and timely acceptance of
the retail.com network is subject to a number of significant risks. These risks
include:
- its need to provide value-enhancing software solutions and services on
the retail.com network to achieve widespread commercial acceptance of this
network;
- whether its network will be able to support large numbers of retailers
and the members of their supply chains; and
- its need to significantly expand internal resources and incur associated
expenses to support planned growth of the retail.com network.
Retek has established a subscription pricing model for the software solutions
provided on its retail.com network, whereby members pay an annual fee based on
the number of the member's employees who will have access to the network. As
additional services are added to the retail.com network, Retek will need to
establish pricing models for these new services. If the pricing models for the
retail.com network fail to be competitive and profitable or if they are not
acceptable to customers, its network will not be commercially successful, which
could harm Retek's revenue and business.
Increased operating expenses. Retek intends to significantly increase operating
expenses as it:
- increases research and development activities;
- increases services activities;
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
- develops and build the retail.com network;
- expands its distribution channels;
- increases sales and marketing activities, including expanding our direct
sales force;
- builds its internal information technology system; and
- operates as an independent public company.
Retek will incur expenses before it generates any revenue from this increase in
spending. If it does not significantly increase revenue from these efforts, its
business and operating results could be seriously harmed.
Competitive pressures. The market for Retek's software solutions is highly
competitive and subject to rapidly changing technology. Competition could
seriously impede its ability to sell additional products and services on terms
favorable Retek. Competitive pressures could reduce its market share or require
it to reduce prices, which would reduce its revenues and/or operating margins.
Many of Retek's competitors have substantially greater financial, marketing or
other resources, and greater name recognition. In addition, these companies may
adopt aggressive pricing policies that could compel Retek to reduce the prices
of its products and services in response. Retek's competitors may also be able
to respond more quickly than Retek can to new or emerging technologies and
changes in customer requirements. Retek's current and potential competitors may:
- develop and market new technologies that render its existing or future
products obsolete, unmarketable or less competitive;
- make strategic acquisitions or establish cooperative relationships among
themselves or with other solution providers, which would increase the
ability of their products to address the needs of its customers; and
- establish or strengthen cooperative relationships with its current or
future strategic partners, which would limit its ability to sell products
through these channels.
As a result, Retek may not be able to maintain a competitive position against
current or future competitors.
Loss of key personnel. Retek believes that its future success will depend upon
its ability to attract and retain highly skilled personnel, including John
Buchanan, its chairman and chief executive officer; Gordon Masson, its
president, core applications; John L. Goedert, its senior vice president,
research and development; Gregory A. Effertz, its vice president, finance and
administration and chief financial officer and Jeremy Thomas, its president,
retail.com. Retek currently does not have any key-man life insurance relating to
key personnel, who are employees at-will and are not subject to employment
contracts except for Jeremy Thomas who has a two year employment contract. The
loss of the services of any one or more of these key persons could harm Retek's
ability to grow the business.
Retek also must attract, integrate and retain skilled sales, research and
development, marketing and management personnel. Competition for these types of
employees is intense, particularly in Retek's industry. Failure to hire and
retain qualified personnel would harm its ability to grow the business.
Relationships with third parties who implement Retek's products. Retek relies,
and expects to continue to rely, on a number of third parties to implement its
software solutions at customer sites. If Retek is unable to establish and
maintain effective, long-term relationships with these implementation providers,
or if these providers do not meet the needs or expectations of its customers,
its revenue will be reduced and its customer relationships will be harmed.
Retek's current implementation partners are not contractually required to
continue to help implement its software solutions. If the number of product
implementations
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
continues to increase, Retek will need to develop new relationships with
additional third-party implementation providers to provide these services.
Retek may be unable to establish or maintain relationships with third parties
having sufficient qualified personnel resources to provide the necessary
implementation services to support its needs. If third-party services are
unavailable, Retek will be required to provide these services internally, which
would significantly limit our ability to meet customers' implementation needs
and would increase its operating expenses and could reduce gross margins. A
number of Retek's competitors, including IBM and SAP, have significantly more
established relationships with these third parties and, as a result, these third
parties may be more likely to recommend competitors' products and services
rather than Retek's. In addition, it cannot control the level and quality of
service provided by its current and future implementation partners.
Intellectual property of third parties. Retek must now, and may in the future
have to, license or otherwise obtain access to the intellectual property of
third parties and related parties, including HNC, Lucent, MicroStrategy and
Oracle. Retek's business would be seriously harmed if the providers from whom it
licenses such software cease to deliver and support reliable products or enhance
their current products. In addition, the third-party software may not continue
to be available to Retek on commercially reasonable terms or prices or at all.
Retek's inability to maintain or obtain this software could result in shipment
delays or reduced sales of its products. Furthermore, it might be forced to
limit the features available in its current or future product offerings. Either
alternative could seriously harm business and operating results.
Confidentiality of intellectual property. Retek depends on its ability to
develop and maintain the proprietary aspects of its technology. To protect
proprietary technology, Retek relies primarily on a combination of contractual
provisions, confidentiality procedures, trade secrets, and copyright and
trademark laws.
Retek seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. In
addition, Retek cannot assure investors that any of its proprietary rights with
respect to the retail.com network will be viable or of value in the future
because the validity, enforceability and type of protection of proprietary
rights in Internet-related industries are uncertain and still evolving.
Despite Retek's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of its products or obtain and use information that
it regards as proprietary. Policing unauthorized use of Retek's products is
difficult and expensive, and while it is unable to determine the extent to which
piracy of its software products exists, software piracy may be a problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent, as do the laws of the United States. Retek intends to
vigorously protect intellectual property rights through litigation and other
means. However, such litigation can be costly to prosecute and it cannot be
certain that it will be able to enforce its rights or prevent other parties from
developing similar technology, duplicating its products or designing around its
intellectual property.
Potential third party claims that Retek's products infringe on their
intellectual property. There has been a substantial amount of litigation in the
software industry and the Internet industry regarding intellectual property
rights. It is possible that in the future third parties may claim that Retek's
current or potential future products infringe their intellectual property. Retek
expects that software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims as the number of
products and competitors in its industry segment grow and the functionality of
products in different industry segments overlap. Any claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require Retek to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to Retek or at all, which could seriously harm its business.
International sales. Since Retek sells products worldwide, its business is
subject to risks associated with doing business internationally. To the extent
that its sales are denominated in foreign currencies, the revenue Retek receives
could be subject to fluctuations in currency exchange rates. If the effective
price of the products Retek sells to its customers were to increase due to
fluctuations in foreign currency
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
exchange rates, demand for Retek's technology could fall, which would, in turn,
reduce its revenue. Retek has not historically attempted to mitigate the effect
that currency fluctuations may have on its revenue through use of hedging
instruments, and it does not currently intend to do so in the future.
Retek anticipates that revenue from international operations will continue to
represent a substantial portion of its total revenue. Accordingly, its future
results could be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- greater risk of uncollectible accounts;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- international variations in technology standards;
- differing levels of protection of intellectual property; and
- unexpected changes in regulatory requirements.
Acceptance of the Internet. As Retek's software solutions are
Internet-based, it depends on the acceptance of the Internet as a communications
protocol. However, this acceptance may not continue. Rapid growth of the
Internet is a recent phenomenon. The Internet may not be accepted as a viable
long-term communications protocol for businesses for a number of reasons. These
reasons include:
- potentially inadequate development of the necessary communications and
computer network technology, particularly if rapid growth of the Internet
continues;
- delayed development of enabling technologies and performance
improvements;
- increased security risks in transmitting and storing confidential
information over public networks; and
- potentially increased governmental regulation.
Errors and defects in Retek's products. Retek's products are complex and,
accordingly, may contain undetected errors or failures when it first introduces
them or as it releases new versions. This may result in loss of, or delay in,
market acceptance of its products and could cause us to incur significant costs
to correct errors or failures or to pay damages suffered by customers as a
result of such errors or failures. In the past, Retek has discovered software
errors in new releases and new products after their introduction. Retek has
incurred costs during the period required to correct these errors, although to
date such costs, including costs incurred on specific contracts, have not been
material. Retek may in the future discover errors in new releases or new
products after the commencement of commercial shipments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), which is
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. In July 1999, the FASB issued
Statement of Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133," which defers the effective date to all fiscal quarters of fiscal years
beginning after June 15, 2000. The adoption of FAS 133 is not expected to have a
significant impact on Retek's consolidated financial position or results of
operations.
In January 200, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
include internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the internet industry and technology in general.
Adoption of EITF 00-2 is required for the third quarter of 2000. We have not yet
determined the impact of the adoption of this new accounting standard on our
consolidated financial position, results of
operations or disclosures.
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HNC SOFTWARE INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices.
INTEREST RATE RISK
The fair value of our cash, cash equivalents and investments available for sale
at June 30, 2000 was $48.4 million. The objectives of our investment policy are
safety and preservation of invested funds and liquidity of investments that is
sufficient to meet cash flow requirements. It is our policy to place 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 credit exposure. It is also our policy to maintain
certain concentration limits and to invest only in certain "allowable
securities" as determined by management. The investment policy also provides
that our investment portfolio must not have an average portfolio maturity of
beyond eighteen months. Investments are prohibited in certain industries and
speculative activities. Investments must be denominated in U.S. dollars. An
increase in market interest rates would not directly affect our financial
results, as it has no short- or long-term debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
We develop products in the United States and sell in North America, Asia and
Europe. As a result, financial results could be affected by various factors,
including changes in foreign currency exchange rates or weak economic conditions
in foreign markets. Our foreign currency risks are mitigated principally by
contracting primarily in US dollars and maintaining only nominal foreign
currency cash balances. Working funds necessary to facilitate the short-term
operations of our subsidiaries are kept in local currencies in which they do
business, with excess funds transferred to our offices in the United States.
Approximately 6.1 % and 15.1% of our sales were denominated in currencies other
than the U.S. dollar for the three and six months as of June 30, 2000,
respectively as compared to 3.6% and 19.4% for the same periods as of June 30,
1999.
EQUITY PRICE RISK
We have several equity investments we entered into for strategic business
purposes, and therefore are exposed to direct equity price risk. We mitigate
this risk by monitoring the financial performance of our investments. However,
many of our equity investments are in the common stock of privately held,
non-public companies and thus we may be unable to sell or achieve liquidity in
those investments prior to an adverse change in their values.
IMPACT OF EUROPEAN MONETARY CONVERSION
We are aware of the issues associated with the changes in Europe resulting from
the formation of a European economic and monetary union, or EMU. One change
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the euro, as of January 1, 1999, at
which date the euro became a functional legal currency of these countries.
Through December 31, 2002, business in the EMU member states will be conducted
in both the existing national currencies, such as the French franc or the
Deutsche mark, and the euro. As a result, companies operating or conducting
business in EMU member states will need to ensure that their financial and other
software systems are capable of processing transactions and properly handling
these currencies, including the euro. We are still assessing the impact that
conversion to the euro will have on our internal systems, the sale of our
solutions and the European and global economies. We will take appropriate
corrective actions based on the results of our assessment. We have not yet
determined the cost related to addressing this issue although we do not expect
these costs to be significant.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1998, Nestor filed a complaint against us in the United States
District Court for the District of Rhode Island (C.A. No. 98 569). In the
complaint, Nestor alleged that we violated the federal Sherman Antitrust
Act and the Rhode Island Antitrust Act and tortuously interfered with
prospective contractual business relationships of Nestor in connection
with our marketing of our Falcon credit card fraud detection product. The
complaint also alleged that we infringed United States patents Nos.
4,326,259 and 4,760,604 held by Nestor. Nestor seeks to recover
unspecified compensatory damages, treble damages and punitive damages and
to obtain injunctive relief arising from these claims. The complaint also
sought a declaratory judgment that a United States patent we hold relating
to technology used in our Falcon products is invalid and unenforceable due
to our alleged inequitable conduct in obtaining this patent, and that
Nestor's products do not infringe this patent.
In January 2000, Nestor dropped its claim of patent infringement against
us. In July,2000 we filed a motion with the Court to dismiss our
counter-claim that Nestor infringes our patent, and Nestor's claims that
the patent is invalid or unenforceable. That motion is still before the
court in Rhode Island. The other Nestor claims for antitrust and unfair
competition were severed by the court in an earlier ruling and will not be
considered until after resolution of the patent issues.
Our claims for patent infringement and unfair competition which were
pending in the United States District Court venued in San Diego against
Nestor's distributors Transaction Systems Architects, Inc., or TSAI, and
ACI Worldwide, Inc., or ACI, where dismissed in April, 2000. We agreed
with TSAI and ACI to dismiss our lawsuit against them in order to enable
us to commence discussions with them regarding a possible future business
relationship. However, no agreements have been reached to date with TSAI
or ACI.
We believe that these legal proceedings will not result in a material
negative impact on our results of operations, liquidity or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
(c)
As disclosed in the Report on Form 10-Q filed by HNC Software Inc. ("HNC")
for its fiscal quarter ended June 30, 2000, on April 10, 2000 we issued
220,000 shares of our common stock and paid $2,400,000 in cash as
consideration for our acquisition of Celerity Technologies, Inc. or
Celerity, a developer and provider of translation software, desktop
software, and value-added network services in support of the claims
handling process based in Dublin, Ohio. We issued these shares and paid
cash in a merger transaction in which Celerity became our wholly-owned
subsidiary. Of the 220,000 shares of common stock we issued to the sole
former Celerity shareholder, 33,000 shares are subject to an escrow to
secure certain indemnification obligations of this shareholder to HNC. The
shares we issued in this transaction were offered and sold solely to the
shareholder of Celerity in exchange for the transfer of the entire
ownership interests in Celerity in the merger. Our common stock issued in
the Celerity merger was issued without registration under the Securities
Act of 1933, as amended (the "1933 Act") in reliance on the exemptions
afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation D
promulgated under the 1933 Act. In relying upon the foregoing exemptions,
we took into account the limited number of Celerity shareholders (1 in
total), the limitation of our offering to this sole shareholder, the
information regarding Celerity , HNC and the merger furnished to this sole
shareholder, the representation of Celerity and its sole shareholder by
legal counsel in connection with the transaction and representations and
warranties made by Celerity and the sole Celerity shareholder to us in
connection with the transaction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders in San Diego, California on May
25, 2000, and re-adjourned this meeting on June 5, 2000. Of the 26,957,948
shares outstanding as of the record date for the meeting, 23,006,910 were
present or represented by proxy at the meeting on June 5, 2000. At our
annual meeting the following actions were voted upon:
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<PAGE> 50
a. The election of five directors, each to serve until the next annual
meeting of stockholders and until his successor has been elected and
qualified or until his earlier resignation, death or removal:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD AGAINST INSTRUCTED
<S> <C> <C> <C> <C>
Edward K. Chandler 22,946,677 55,728 -- 4,505
Thomas F. Farb 22,946,677 55,728 -- 4,505
Charles H. Gaylord, Jr. 22,946,677 55,728 -- 4,505
Alex W. Hart 22,946,677 55,728 -- 4,505
John Mutch 22,946,677 55,728 -- 4,505
</TABLE>
b. To amend our Certificate of Incorporation to increase the authorized
number of shares of common stock from 50,000,000 shares to 120,000,000.
FOR AGAINST ABSTAIN
18,697,745 4,290,550 18,615
c. To approve an amendment to our 1995 Equity Incentive Plan to increase
the number of shares of common stock reserved for issuance under the
plan by 1,850,000 shares.
FOR AGAINST ABSTAIN
9,793,919 9,419,856 166,126
d. To approve an amendment to our 1995 Employee Stock Purchase Plan to
increase the number of shares of common stock reserved for issuance
under the plan by 200,000 shares and to provide that the number of
shares of common stock reserved for issuance under the plan will be
automatically increased each January 1 by an amount equal to 1% of the
total number of shares outstanding on the previous December 31.
FOR AGAINST ABSTAIN
18,064,225 1,264,649 51,027
e. To approve an amendment to our 1995 Directors Stock Option Plan to
increase the number of shares of common stock reserved for issuance
under the plan by 100,000 shares.
FOR AGAINST ABSTAIN
15,949,288 3,371,044 59,569
f. To ratify the selection of PricewaterhouseCoopers LLP as our
independent accounts for 2000.
FOR AGAINST ABSTAIN
22,984,809 6,329 15,772
ITEM 5. OTHER INFORMATION
We announced on August 7, 2000 that our board of directors declared a
dividend on our common stock of all the shares of Retek common stock we
own. The Retek shares will be distributed on or about September 29, 2000
to our stockholders who are holders of record of our common stock at 5
p.m. Eastern Daylight Time on September 15, 2000, the record date for the
dividend. We currently own 40 million Retek shares, representing
approximately 84.5 percent of Retek's outstanding common stock. We have
received a private letter ruling from the Internal Revenue Service that
the dividend of our shares of Retek stock will be tax-free to HNC and our
stockholders for U.S. federal income tax purposes. Our stockholders of
record at the record date will receive whole shares of Retek common stock
and cash payments for fractional shares. Cash received in lieu of
fractional shares will be taxable for U.S. federal income tax purposes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.02 Registrant's Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on June 13, 1996 (Incorporated by
reference to Exhibit Number 4.07 to Registrant's Form S-8 filed on June
28, 2000, File Number 333-40344)
10.03 Certificate of Amendment to Registrant's Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on June 12,
2000 (Incorporated by reference to Exhibit Number 4.08 to Registrant's
Form S-8 filed on June 28, 2000, File Number 333-40344)
10.04 Registrant's Bylaws, as amended (Incorporated by reference to Exhibit
Number 4.09 to Registrant's Form S-8 filed on June 28, 2000, File Number
333-40344)
10.05 HNC Software Inc. 1995 Equity Incentive Plan, as amended through March
30, 2000 (Incorporated by reference to Exhibit Number 4.01 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.06 Form of 1995 Equity Incentive Plan Option Agreement and Stock Option
Exercise Agreement (Incorporated by reference to Exhibit Number 4.02 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.07 HNC Software Inc. 1995 Employee Stock Purchase Plan, as amended through
March 30, 2000 (Incorporated by reference to Exhibit Number 4.03 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.08 Form of 1995 Employee Stock Purchase Plan Subscription Agreement and
Enrollment Form (Incorporated by reference to Exhibit Number 4.04 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.09 HNC Software Inc. 1995 Directors Stock Option Plan, as amended through
April 30, 2000 (Incorporated by reference to Exhibit Number 4.05 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.10 Form of 1995 Directors Stock Option Plan Stock Option Plan and Stock
Option Exercise Agreement (Incorporated by reference to Exhibit Number
4.06 to Registrant's Form S-8 filed on June 28, 2000, File Number
333-40344)
20.02 Loan and Security Agreement by and among HNC Software Inc., John Mutch
and Teresa Mutch as of May 31, 2000.
20.03 Loan and Security Agreement by and among HNC Software Inc., Bruce
Hansen and Jody Hansen as of June 2, 2000.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K filed dated May 25, 2000 reporting
the acquisition of HighTouch Technologies, Inc. under Item 5.
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<PAGE> 52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
HNC SOFTWARE INC.
Date: August 25, 2000 By: /s/ KENNETH J. SAUNDERS
-------------------------------
Kenneth J. Saunders
Chief Financial Officer and Secretary
(for Registrant as duly authorized
officer and as Principal Financial
Officer)
/s/ RUSSELL C. CLARK
-------------------------------
Russell C. Clark
Vice President, Corporate Finance and
Principal Accounting Officer
(for Registrant as Principal
Accounting Officer)
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EXHIBIT INDEX
EXHIBITS
--------
10.02 Registrant's Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on June 13, 1996 (Incorporated by
reference to Exhibit Number 4.07 to Registrant's Form S-8 filed on June
28, 2000, File Number 333-40344)
10.03 Certificate of Amendment to Registrant's Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on June 12,
2000 (Incorporated by reference to Exhibit Number 4.08 to Registrant's
Form S-8 filed on June 28, 2000, File Number 333-40344)
10.04 Registrant's Bylaws, as amended (Incorporated by reference to Exhibit
Number 4.09 to Registrant's Form S-8 filed on June 28, 2000, File Number
333-40344)
10.05 HNC Software Inc. 1995 Equity Incentive Plan, as amended through March
30, 2000 (Incorporated by reference to Exhibit Number 4.01 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.06 Form of 1995 Equity Incentive Plan Option Agreement and Stock Option
Exercise Agreement (Incorporated by reference to Exhibit Number 4.02 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.07 HNC Software Inc. 1995 Employee Stock Purchase Plan, as amended through
March 30, 2000 (Incorporated by reference to Exhibit Number 4.03 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.08 Form of 1995 Employee Stock Purchase Plan Subscription Agreement and
Enrollment Form (Incorporated by reference to Exhibit Number 4.04 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.09 HNC Software Inc. 1995 Directors Stock Option Plan, as amended through
April 30, 2000 (Incorporated by reference to Exhibit Number 4.05 to
Registrant's Form S-8 filed on June 28, 2000, File Number 333-40344)
10.10 Form of 1995 Directors Stock Option Plan Stock Option Plan and Stock
Option Exercise Agreement (Incorporated by reference to Exhibit Number
4.06 to Registrant's Form S-8 filed on June 28, 2000, File Number
333-40344)
20.02 Loan and Security Agreement by and among HNC Software Inc., John Mutch
and Teresa Mutch as of May 31, 2000.
20.03 Loan and Security Agreement by and among HNC Software Inc., Bruce
Hansen and Jody Hansen as of June 2, 2000.
27.01 Financial Data Schedule
53
