1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): SEPTEMBER 22, 2000 HNC SOFTWARE INC. (Exact name of Registrant as Specified in its Charter) DELAWARE (State or Other Jurisdiction of Incorporation) 0-26146 33-0248788 (Commission File Number) (I.R.S. Employer Identification Number) 5935 CORNERSTONE COURT WEST, SAN DIEGO, CA 92121 (Address of Principal Executive Offices) (858) 546-8877 (Registrant's Telephone Number, Including Area Code) 2 CONTENTS ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED....................... 2 The Registrant herewith files the following financial statements of Systems/Link Corporation ("Systems/Link"): (i) Audited balance sheet as of December 31, 1999 and related statements of operations, shareholders' deficit and cash flows for the year then ended. (ii) Unaudited balance sheet as of June 30, 2000 and the unaudited statements of operations and cash flows for the six months ended June 30, 2000 and 1999. (b) PRO FORMA FINANCIAL INFORMATION................................. 19 The following unaudited pro forma financial information is filed herewith: (i) Unaudited pro forma condensed consolidated balance sheet of HNC Software Inc. as of June 30, 2000; (ii) Unaudited pro forma condensed consolidated statement of operations of HNC Software Inc. for the six months ended June 30, 2000; (iii) Unaudited pro forma condensed consolidated statement of operations of HNC Software Inc. for the year ended December 31, 1999; (iv) Notes to unaudited pro forma financial information. (c) EXHIBITS........................................................ 25 SIGNATURES...................................................... 26 1 3 HNC Software Inc. ("HNC") originally filed a report on Form 8-K on September 22, 2000 to report, under Item 2 of Form 8-K, HNC's acquisition of Systems/Link Corporation (the "Original 8-K"). Pursuant to the provisions of paragraphs (a) (4) and (b) (2) of Item 7 of Form 8-K, HNC indicated in the Original 8-K that it would file certain financial information relating to the subject matter of the Original 8-K no later than the date required by Item 7 of Form 8-K. This Amendment No. 1 on Form 8-K/A is being filed to provide such additional financial information: ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Systems/Link Corporation In our opinion, the accompanying balance sheet and the related statements of operations, shareholders' deficit, and cash flows present fairly, in all material respects, the financial position Systems/Link Corporation as of December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 3, the December 31, 1999 financial statements, previously audited by other independent accountants, have been restated with respect to revenues, accrued royalties and depreciation. PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey November 7, 2000 2 4 SYSTEMS/LINK CORPORATION BALANCE SHEET DECEMBER 31, 1999 ASSETS Current assets Cash $ 840,501 Accounts receivable 3,571,541 Prepaid expenses 38,173 ----------- Total current assets 4,450,215 Property and equipment, net 1,178,698 Other assets 438,356 ----------- Total assets $ 6,067,269 =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Accounts payable and accrued expenses $ 1,021,341 Deferred revenue 4,276,588 Due to former shareholder, current portion 667,269 Bank loan payable, current portion 1,082,437 Notes payable, current portion 122,192 Deferred state and local income taxes 13,000 ----------- Total current liabilities 7,182,827 Due to former shareholder, less current portion 685,302 Bank loan payable, less current portion 1,376,025 Notes payable, less current portion 57,396 ----------- Total liabilities 9,301,550 =========== Shareholders' Deficit Common stock - par value $.001 (25,000,000 shares authorized; 11,664,122 shares issued and outstanding) 11,664 Additional paid-in capital 6,756 Retained earnings 497,299 Treasury stock at cost (3,664,122 shares) (3,750,000) ----------- Total shareholders' deficit (3,234,281) ----------- Total liabilities and shareholders' deficit $ 6,067,269 =========== The accompanying notes are an integral part of these financial statements. 3 5 SYSTEMS/LINK CORPORATION STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 Revenue $ 13,364,940 Cost of revenue 4,608,764 ------------ Gross profit 8,756,176 ------------ OPERATING EXPENSES General and administrative 2,783,639 Sales and marketing 2,698,063 Research and development 2,752,986 ------------ Total operating expenses 8,234,688 ------------ Income from operations 521,488 OTHER INCOME (EXPENSE) Interest income 31,481 Interest expense (291,100) ------------ Income before state and local income taxes 261,869 Provision for state and local income taxes 38,000 ------------ Net income $ 223,869 ============ The accompanying notes are an integral part of these financial statements. 4 6 SYSTEMS/LINK CORPORATION STATEMENT OF SHAREHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1999 COMMON STOCK ADDITIONAL TOTAL ------------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS STOCK DEFICIT ----------- ----------- ----------- ----------- ----------- ------------- Balance as of December 31, 1998 11,664,122 $ 11,664 $ 6,756 $ 351,506 $(3,750,000) $(3,380,074) Distributions to shareholders (78,076) (78,076) Net income 223,869 223,869 ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 31, 1999 11,664,122 $ 11,664 $ 6,756 $ 497,299 $(3,750,000) $(3,234,281) =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements. 5 7 SYSTEMS/LINK CORPORATION STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 OPERATING ACTIVITIES Net income $ 223,869 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 670,550 Deferred state and local income taxes (19,000) Changes in assets and liabilities Accounts receivable (848,373) Other assets (291,038) Accounts payable and accrued expenses 221,575 Deferred revenue 2,695,340 ----------- Net cash provided by operating activities 2,652,923 ----------- INVESTING ACTIVITIES Purchases of property and equipment (710,414) ----------- Net cash used in investing activities (710,414) FINANCING ACTIVITIES Distributions to shareholders (78,076) Proceeds from bank loan payable 120,000 Principal payments on bank loan payable (599,038) Principal payments on notes payable (118,119) Principal payments to former shareholder (650,618) ----------- Net cash used in financing activities (1,325,851) ----------- Net increase in cash 616,658 Cash - January 1, 1999 223,843 ----------- Cash - December 31, 1999 $ 840,501 =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for Interest $ 291,100 =========== Income taxes $ 24,317 =========== The accompanying notes are an integral part of these financial statements. 6 8 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Systems/Link Corporation (the "Company") designs, develops and markets diversified data management software and consulting services to the wireless telephone industry. The Company's products are specifically structured for use with wireless carrier applications in the areas of fraud control, roaming services and prepaid billing software. The Company's revenues are primarily derived from its RoamEx and FraudTec products. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Company have been prepared on the accrual basis of accounting. The significant accounting policies followed are described below. RISKS AND UNCERTAINTIES The Company is subject to all of the risks inherent in a business in the technology/communications industry. These risks include, but are not limited to, rapidly changing communications hardware, the software and e-commerce business environment, reliance on third parties, the competitive nature of the industry, dependence on skilled resources and the on-going evolution, development and maintenance of communication technologies. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. REVENUE RECOGNITION Software revenue is recognized upon meeting all of the following criteria: execution of a written purchase order, license agreement, or contract; delivery of software; a fixed and determinable license fee; 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. Vendor-specific objective evidence is based on the price charged when an element is sold separately, or if not yet sold separately, is established by authorized management. Revenue from 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. Transactional fees are recognized as revenue based on system usage or when fees based on system usage exceed the monthly minimum license fees. Revenue from perpetual licenses of the Company's software for which there are no significant continuing obligations and collection of the related receivables is probable is recognized on delivery of the software and acceptance by the customer. Revenue from network service agreements is recognized ratably over the respective service periods. Installation fees associated with network service agreements are recognized ratably over the longer of the contractual or expected customer service periods. Deferred revenue consists primarily of deferred installation and setup fees and maintenance revenue. 7 9 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED RECOVERABILITY OF LONG-LIVED ASSETS The Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions or other uncertainties which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company's ability to recover the unamortized balance of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. SOFTWARE DEVELOPMENT COSTS The Company has capitalized purchased software, which is included in property and equipment. These costs are amortized based on the straight-line method over their estimated useful lives. Development costs for software to be licensed or sold that are incurred from the time technological feasibility is established until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through December 31, 1999, no significant development costs were incurred after technological feasibility was reached. PROPERTY AND EQUIPMENT, NET Property and equipment are carried at cost less accumulated depreciation. Depreciation for financial accounting purposes is computed using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives. INCOME TAXES The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based upon differences arising from the carrying amounts of the Company's assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company, with the consent of its shareholders, is taxed under the Internal Revenue Code as an S Corporation, cash basis, for federal and state income tax purposes. In lieu of corporate income taxes, the shareholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. As a result, the Company is not subject to federal income taxes. The accompanying financial statements include provisions for certain state and local income taxes which were imposed at the corporate level. STOCK-BASED COMPENSATION The Company measures compensation expense for its stock compensation plans using the intrinsic value method, and provides pro forma disclosures of net income as if a fair value-based method had been applied in measuring stock compensation expense. 8 10 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED 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. The Company has not yet determined the impact of the adoption of this new accounting standard on its consolidated financial position, results of operations or disclosures. 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. The Company has not yet determined the impact of the adoption of this new accounting standard on its consolidated financial position, results of operations or disclosures. In January 1999, the American Institute of Certified Public Accountants issued Statement of Position No. 98-9, or SOP 98-9, "Modification of SOP 97-2, `Software Revenue Recognition,' with Respect to Certain Transactions." This SOP extends the deferral of the application of certain provisions of SOP 97-2 to the Company's first quarter of 2000. The adoption of SOP 98-9 in the first quarter of 2000 did not have a significant impact on the Company's consolidated financial position, results of operations or disclosures. 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 was required for the third quarter of 2000. The adoption of EITF 00-2 in the third quarter of 2000 did not have a significant impact on the Company's consolidated financial position, results of operations or disclosures. 3. RESTATEMENT The financial statements as of and for the year ended December 31, 1999 were previously audited by other independent accountants. These financial statements have been restated herein to reflect the impact of revenue adjustments relating to software licenses and service installation fees, additional accruals for royalties payable and accelerated depreciation expense for certain fixed assets. 9 11 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of the following at December 31, 1999: LIVES ----- Furniture and fixtures $ 323,117 7 years Office equipment 1,443,162 5 years Software 354,106 3 years Network equipment 245,529 3 years Leasehold improvements 200,477 5 years ----------- 2,566,391 Less accumulated depreciation (1,387,693) ----------- $ 1,178,698 =========== 5. CONCENTRATION OF CREDIT RISK The Company extends credit to its customers in the ordinary course of business. As of December 31, 1999, ten customers accounted for 56% of accounts receivable. For the year ended December 31, 1999, these same customers accounted for 35% of revenue. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at December 31, 1999: Accounts payable $ 197,280 Accrued royalties 457,559 Accrued professional fees 100,706 Accrued commissions 86,453 Accrued benefits and other 179,343 ---------- $1,021,341 ========== 7. INCOME TAXES The provision for state and local income taxes consists of the following for the year ended December 31, 1999: Current - state and local $ 57,000 Deferred - state and local (19,000) -------- Provision for income taxes $ 38,000 ======== Net deferred tax liabilities as of December 31, 1999 arise from the Company's status as a cash basis tax-payer. 8. OPERATING LEASES The Company leases various office space with leases expiring at various times through 2003. The leases provide for escalations based upon increases in real estate taxes, 10 12 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED operating expenses and cost of living increases. Total rent expense for the year ended December 31, 1999 was $372,480. The future minimum annual lease payments are as follows for the years ending December 31: 2000 $310,473 2001 303,796 2002 273,100 2003 38,084 -------- $925,453 ======== 9. NOTES PAYABLE The Company financed the purchase of computer hardware and related equipment with term loans from a financial institution. The original amounts of the loans were $181,588 payable monthly in installments of $12,143, including interest at approximately 11%. The loans, which come due through September 1, 2001, are guaranteed by the two majority shareholders of the Company and were incorporated under the Term Loan described in Note 11. 10. STOCK OPTION PLANS In 1999, the Board of Directors and Shareholders of the Company adopted a stock option plan (the "Plan") under which certain officers and employees may be granted the right to purchase shares of common stock at an exercise price determined by the Company's Board of Directors. The Plan provides that the exercise price may be less than, equal to or greater than the fair market value of the common stock on the date of grant. The Company has reserved an aggregate of 1,675,882 shares of common stock for issuance under the Plan. A summary of the stock option transactions under the Plan is presented below: WEIGHTED- AVERAGE EXERCISE NUMBER OF PRICES SHARES PER SHARE --------- --------- Outstanding as of December 31, 1998 -- $ -- Granted 1,512,882 1.90 Exercised -- -- Forfeited -- -- --------- --------- Outstanding as of December 31, 1999 1,512,882 $ 1.90 ========= ========= 11 13 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED The following table summarizes information about stock options outstanding and exercisable as of December 31, 1999. OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------ WEIGHTED- NUMBER WEIGHTED- AVERAGE WEIGHTED- RANGE OF OUTSTANDING AT AVERAGE REMAINING AVERAGE EXERCISE DECEMBER 31, EXERCISE CONTRACT NUMBER EXERCISE PRICES 1999 PRICE LIFE EXERCISABLE PRICE - ------------- -------------- --------- --------- ----------- --------- $1.04 - $1.84 759,365 $ 1.29 9 yrs. 759,365 $ 1.29 $2.45 - $3.14 753,517 2.51 9 yrs. 668,017 2.45 --------- --------- --------- --------- --------- 1,512,882 $ 1.90 9 yrs. 1,427,382 $ 1.84 ========= ========= ========= ========= ========= Pro forma net income using the fair value based method of accounting is summarized as follows for the year ended December 31, 1999: Net income As reported $223,869 Pro forma 153,619 The estimated fair value at date of grant for options granted during 1999 was approximately $281,000. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing method with weighted average assumptions for risk free interest rate (5.8%), expected dividend yield ($0) and expected life of option (1-4 years). Because the Company does not have actively traded equity securities, volatility is not considered in determining the value of options granted to employees. As additional options are expected to be granted in future years and the options vest over several years, the above pro forma results are not necessarily indicative of future pro forma results. 11. SHAREHOLDER LITIGATION In October 1997, a then shareholder of the Company commenced a lawsuit for wrongful termination against the Company and three of its officers, who are also directors and shareholders of the Company. On August 31, 1998, a Stipulation of Settlement Agreement (the "Settlement Agreement") was entered into by the parties to the litigation. A closing of the transactions contemplated by the Settlement Agreement was completed on October 7, 1998. In conjunction with the Settlement Agreement, the Company paid to the shareholder $74,400 for the purchase of the shareholder's 1,200 shares, $2,325,600 in settlement of the claims which related to the value of the shareholder's shares, $500,000 in consideration of the settlement of employment claim and $100,000 for an agreement from the shareholder not to compete. The summation of the aforementioned amounts is $3,000,000 and was paid to the former shareholder under the term loan described below. In addition to the above, the Company agreed to pay to the former shareholder a total of $2,100,000 which is payable at the rate of $700,000 on the first, second and third year anniversaries of the closing, of which $250,000 of each payment relates to employment claims and $450,000 relates to Treasury Stock. In connection with the loan and security agreement executed by the Company, as described below, the former shareholder executed a Subordination Agreement in regard to the $2,100,000 owed to him by the Company. No payment of any kind may be made under the Subordination Agreement, if such payment would create an event of default or if the 12 14 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Company is in default on any senior debt, as defined. If no event of default exists or would exist if a scheduled payment was made, then the Company may pay the scheduled $700,000 payments. Any amounts owed to the former shareholder will become immediately due under certain circumstances, primarily relating to a change in control of the Company or a sale or other disposition of substantially all of the Company's assets. In connection with the funding of the payments required by the settlement, the Company entered into a loan and security agreement with a bank on October 7, 1998 (the "Term Loan"). The $3,000,000 proceeds from the Term Loan were paid to the former shareholder to satisfy the amounts due currently under the Settlement Agreement. The Term Loan also enables the Company to borrow an additional $250,000 under a revolving credit facility which matures on June 30, 2001. The $3,000,000 Term Loan is due on September 30, 2001 and annual maturities for the years following December 31, 1999 are as follows for the years ending December 31: 2000 $1,082,437 2001 1,376,025 ---------- $2,458,462 ========== Interest on the Term Loan is based upon a Libor Rate. The interest rate on the revolving credit facility is at the Prime Rate plus 50 basis points. All tangible and intangible property of the Company has been pledged to secure any outstanding bank debt, which is also guaranteed by the two majority shareholders of the Company. The Term Loan contains convenants regarding various financial statement amounts, ratios and activities of the Company, as well as establishing a cash collateral account and a receivable lock box with the lender. 12. ROYALTY EXPENSE The Company developed certain software with a third party. The Company and the third party have an agreement which provides that the Company will compensate the third party 10% and 15% of the gross fees billed to any licensee for the maintenance and license, respectively, from the aforementioned software. Royalties are accrued for as a component of accounts payable and accrued expenses. While the Company is presently in negotiations with the third party to retroactively terminate the payment of license fees as of June 1998, the outcome of these negotiations is not yet determinable. 13. RETIREMENT PLAN The Company maintains a 401(k) profit sharing plan. The plan covers all eligible employees who elect to participate. Participants may contribute up to 15% of eligible compensation, up to the maximum permitted under the Internal Revenue Code. The Company, at its sole discretion, may elect to make matching contributions for all or any part of the participants' contributions. The Company also, at its own discretion, may elect to make profit sharing contributions. All participants, whether making elective contributions or not, will receive this discretionary contribution. 13 15 SYSTEMS/LINK CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED For the year ended December 31, 1999, the Company made a matching contribution of $86,881. 14. SUBSEQUENT EVENT On September 8, 2000, the Company was acquired by a wholly-owned subsidiary of HNC Software, Inc. ("HNC") in a reverse triangular merger transaction (the "Merger"). The Company's shareholders received approximately 594,000 shares of HNC common stock and approximately $5.5 million in cash. In connection with the Merger, HNC also repaid the liabilities (both current and long-term) reflected on the balance sheet of i) due to former shareholder; ii) bank loan payable; and, iii) notes payable. 14 16 SYSTEMS/LINK CORPORATION UNAUDITED BALANCE SHEET JUNE 30, 2000 ASSETS Current assets Cash $ 433,088 Accounts receivable 2,289,306 Prepaid expenses 94,664 ----------- Total current assets 2,817,058 Property and equipment, net 1,253,014 Other assets 106,398 ----------- Total assets $ 4,176,470 =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Accounts payable and accrued expenses $ 1,054,299 Deferred revenue 3,544,151 Due to former shareholder, current portion 667,269 Bank loan payable, current portion 954,931 Notes payable, current portion 57,880 Deferred state and local income taxes 13,000 ----------- Total current liabilities 6,291,530 Due to former shareholder, less current portion 685,302 Bank loan payable, less current portion 1,313,526 Notes payable, less current portion 57,396 ----------- Total liabilities 8,347,754 ----------- Shareholders' Deficit Common stock - par value $.001 (25,000,000 shares authorized; 11,664,122 shares issued and outstanding) 11,664 Additional paid-in capital 6,756 Retained earnings (439,704) Treasury stock at cost (3,664,122 shares) (3,750,000) ----------- Total shareholders' deficit (4,171,284) ----------- Total liabilities and shareholders' deficit $ 4,176,470 =========== The accompanying notes are an integral part of these financial statements. 15 17 SYSTEMS/LINK CORPORATION UNAUDITED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, ---------------------------------- 2000 1999 ----------- ----------- Revenue $ 7,573,731 $ 6,260,033 Cost of revenue 1,878,165 1,846,505 ----------- ----------- Gross profit 5,695,566 4,413,528 ----------- ----------- OPERATING EXPENSES General and administrative 1,943,433 1,109,783 Sales and marketing 1,411,005 1,149,890 Research and development 2,090,516 1,216,060 Depreciation and amortization ----------- ----------- Total operating expenses 5,444,954 3,475,733 ----------- ----------- Income from operations 250,612 937,795 OTHER INCOME (EXPENSE) Interest income 13,203 3,089 Interest expense (113,255) (124,392) ----------- ----------- Income before state and local income taxes 150,560 816,492 Provision for state and local income taxes 20,563 7,316 ----------- ----------- Net income $ 129,997 $ 809,176 =========== =========== The accompanying notes are an integral part of these financial statements. 16 18 SYSTEMS/LINK CORPORATION UNAUDITED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, ---------------------------------- 2000 1999 ----------- ----------- OPERATING ACTIVITIES Net income $ 129,997 $ 809,177 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 335,689 264,518 Changes in assets and liabilities Accounts receivable 1,282,235 (20,191) Other assets 243,509 (73,209) Accounts payable and accrued expenses 32,958 (400,342) Deferred revenue (732,437) 701,316 ----------- ----------- Net cash provided by operating activities 1,291,951 1,281,269 ----------- ----------- INVESTING ACTIVITIES Purchases of property and equipment (378,047) (343,308) ----------- ----------- Net cash used in investing activities (378,047) (343,308) FINANCING ACTIVITIES Distributions to shareholders (1,067,000) -- Principal payments on bank loan payable (190,005) (107,159) Principal payments on notes payable (64,312) (57,415) ----------- ----------- Net cash used in financing activities (1,321,317) (164,574) ----------- ----------- Net increase in cash (407,413) 773,387 Cash - Beginning of period 840,501 223,843 ----------- ----------- Cash - End of period $ 433,088 $ 997,230 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for Interest $ 113,255 $ 124,392 =========== =========== Income taxes $ 20,563 $ 7,316 =========== =========== The accompanying notes are an integral part of these financial statements. 17 19 SYSTEMS/LINK CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying balance sheet as of June 30, 2000 and the statements of operations and cash flows for the six months ended June 30, 2000 and 1999 are unaudited and do not necessarily include all information and footnotes required for audited financial statements. These unaudited financial statements have been prepared on the same basis as the audited financial statements, and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the financial information for all periods presented, in accordance with generally accepted accounting principles. These unaudited financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1999, presented elsewhere herein. 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. NOTE 2 - SUBSEQUENT EVENT On September 8, 2000, the Company was acquired by a wholly-owned subsidiary of HNC Software, Inc. ("HNC") in a reverse triangular merger transaction (the "Merger"). The Company's shareholders received approximately 594,000 shares of HNC common stock and approximately $5.5 million in cash. In connection with the Merger, HNC also repaid the liabilities (both current and long-term) reflected on the balance sheet of i) due to former shareholder; ii) bank loan payable; and, iii) notes payable. 18 20 (b) PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated financial information has been prepared to give effect to the acquisition of Systems/Link as well as the distribution of our former wholly owned subsidiary, Retek Inc. ("Retek"), to our stockholders. The acquisition of Systems/Link occurred on September 8, 2000 - -- For more information, please see the Form 8-K filed on September 22, 2000. The distribution of Retek common stock to our stockholders occurred on September 29, 2000 -- for more information regarding the final distribution, please see the Form 8-K filed on October 13, 2000. The pro forma condensed consolidated financial information is based on the following: 1. Our unaudited historical condensed consolidated financial statements as of June 30, 2000 and for the six month period then ended; 2. Systems/Link's unaudited historical financial statements as of June 30, 2000 and for the six month period then ended; 3. Retek's unaudited historical consolidated financial statements as of June 30, 2000 and for the six months then ended; 4. Our audited historical consolidated financial statements for the year ended December 31, 1999; 5. Systems/Link's audited historical financial statements for the year ended December 31, 1999; 6. Retek's audited historical financial statements for the year ended December 31, 1999; and 7. Pro forma adjustments as described in the accompanying notes. The pro forma condensed consolidated balance sheet at June 30, 2000 gives effect to the acquisition of Systems/Link and the distribution of Retek as if they occurred as of June 30, 2000. The pro forma condensed consolidated statements of operations for the six months ended June 30, 2000 and the year ended December 31, 1999 give effect to the acquisition of Systems/Link and the distribution of Retek as if they occurred as of January 1, 2000 and 1999, respectively. The related adjustments are described in the accompanying notes. The unaudited pro forma condensed consolidated financial information is based upon available information and certain assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information, which have been made solely for purposes of developing such unaudited pro forma financial information. The unaudited pro forma condensed consolidated financial information does not purport to represent what our results of operations or financial condition would actually have been had the acquisition of Systems/Link or the distribution of our investment in Retek to our stockholders occurred as of January 1, 2000 or 1999, respectively, or to project our results of operations or financial condition for any future period or date. The unaudited pro forma condensed consolidated financial information should be read in conjunction with our historical financial statements and notes thereto, including the Annual Report on Form 10-K/A for the year ended December 31, 1999 and the Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2000, Retek's historical financial statements and notes thereto, including Retek's Annual Report on Form 10-K for the year ended December 31, 1999 and Retek's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and the historical financial statements of Systems/Link and notes thereto, including Systems/Link's audited financial statements for the year ended December 31, 1999 and Systems/Link's unaudited balance sheet as of June 30, 2000 and unaudited statements of operations and cash flows for the six months ended June 30, 2000 and 1999, included herein. 19 21 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2000 (In thousands) HNC DISTRIBUTION PRO FORMA ACQUISITION OF PRO FORMA PRO FORMA AS REPORTED OF RETEK CORE HNC SYSTEMS/LINK ADJUSTMENTS COMBINED HNC ----------- ------------ --------- -------------- ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 80,983 $ (38,379)(a) $ 42,604 $ 433 $ (5,512)(b) $ 37,525 Short-term investments available for sale-debt 55,397 (3,898)(a) 51,499 -- -- 51,499 Short-term investments available for sale-equity 1,833 -- 1,833 -- -- 1,833 Trade accounts receivable, net 62,938 (22,044)(a) 40,894 2,289 -- 43,183 Current portion of deferred income taxes 1,454 (121)(a) 1,333 -- -- 1,333 Other current assets 16,040 (9,861)(a) 6,179 95 -- 6,274 --------- --------- --------- --------- --------- --------- Total current assets 218,645 (74,303) 144,342 2,817 (5,512) 141,647 --------- --------- --------- --------- --------- --------- Long term investments available for sale-debt 76,654 (6,045)(a) 70,609 -- -- 70,609 Equity investments 11,469 -- 11,469 -- -- 11,469 Property and equipment, net 34,585 (17,078)(a) 17,507 1,253 -- 18,760 Intangible assets, net 137,501 (32,978)(a) 104,523 -- 53,190 (c) 157,713 Deferred income taxes, less current portion 54,719 (36,688)(a) 18,031 -- -- 18,031 Other assets 4,883 415 (a) 5,298 106 -- 5,404 --------- --------- --------- --------- --------- --------- Total assets $ 538,456 $(166,677) $ 371,779 $ 4,176 $ 47,678 $ 423,633 ========= ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 33,276 $ (9,094)(a) $ 24,182 $ 1,054 $ 624 (d) $ 25,860 Deferred revenue 45,286 (33,766)(a) 11,520 3,544 (1,850)(e) 13,214 Other current liabilities 3,539 (4,256)(a) (717) 1,693 -- 976 --------- --------- --------- --------- --------- --------- Total current liabilities 82,101 (47,116) 34,985 6,291 (1,226) 40,050 --------- --------- --------- --------- --------- --------- Noncurrent liabilities 5,325 -- 5,325 2,056 9,050 (f) 16,431 --------- --------- --------- --------- --------- --------- Convertible Subordinated Notes 100,000 -- 100,000 -- -- 100,000 --------- --------- --------- --------- --------- --------- Deferred revenue, net of current portion -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Contingencies Minority interest in consolidated subsidiaries 14,855 (14,855)(a) -- -- -- -- --------- --------- --------- --------- --------- --------- Total liabilities 202,281 (61,971) 140,310 8,347 7,824 156,481 --------- --------- --------- --------- --------- --------- Stockholders' equity: Preferred stock -- -- -- -- -- -- Common stock 27 -- 27 12 (12)(g) 28 1 (h) Common stock in treasury (15,507) -- (15,507) (3,750) 3,750 (g) (15,507) Paid-in capital 389,214 (120,500)(a) 268,714 7 (7)(g) 305,919 37,205 (h) Retained earnings (accumulated deficit) (20,152) -- (20,152) (440) 440 (g) (20,882) (730)(i) Accumulated other comprehensive income (loss) (2,120) 1,240 (a) (880) -- -- (880) Unearned stock-based compensation (15,287) 14,554 (a) (733) -- (793)(h) (1,526) --------- --------- --------- --------- --------- --------- Total stockholders' equity 336,175 (104,706) 231,469 (4,171) 39,854 267,152 --------- --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 538,456 $(166,677) $ 371,779 $ 4,176 $ 47,678 $ 423,633 ========= ========= ========= ========= ========= ========= See accompanying notes to unaudited pro forma condensed consolidated financial information. 20 22 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) HNC DISTRIBUTION PRO FORMA PRO FORMA PRO FORMA AS REPORTED OF RETEK CORE HNC SYSTEMS/LINK ADJUSTMENTS COMBINED HNC ----------- ------------ --------- ------------ ----------- ------------ Revenues 121,995 (33,553)(j) 88,442 7,574 -- 96,016 Operating expenses: Cost of revenues 59,750 (20,860)(j) 38,890 1,878 -- 40,768 Research and development 35,186 (16,794)(j) 18,392 2,091 -- 20,483 Sales and marketing 35,160 (18,313)(j) 16,847 1,411 -- 18,258 General and administrative 16,832 (5,018)(j) 11,814 1,943 -- 13,757 Stock-based compensation 4,537 (5,424)(j) (887) -- 141 (k) (746) Acquisition-related amortization 15,512 (2,542)(j) 12,970 -- 6,664 (l) 19,634 Acquired in-process research and development 6,472 (4,000)(j) 2,472 -- -- 2,472 --------- --------- --------- --------- --------- --------- Total operating expenses 173,449 (72,951) 100,498 7,323 6,805 114,626 Operating income (loss) (51,454) 39,398 (12,056) 251 (6,805) (18,610) Other income (expense): Interest and other income, net 6,335 (1,451)(j) 4,884 (100) -- 4,784 Interest expense related to convertible debt (2,684) -- (2,684) -- -- (2,684) Minority interest in income (loss) of consolidated subsidiary 5,419 (5,419)(j) -- -- -- -- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes (42,384) 32,528 (9,856) 151 (6,805) (16,510) Income tax provision (benefit) (10,023) 11,447 (j) 1,426 21 (1,131)(m) 316 -- 2 (j) -- -- -- -- --------- --------- --------- --------- --------- --------- Net income (loss) $ (32,361) $ 21,079 $ (11,282) $ 130 $ (5,674) $ (16,826) ========= ========= ========= ========= ========= ========= Earnings per share: Basic net income (loss) per common share $ (1.22) $ (0.43) $ (0.62)(n) ========= ========= ========= Diluted net income (loss) per common share $ (1.22) $ (0.43) $ (0.62)(n) ========= ========= ========= Shares used in computing basic net income (loss) per common share 26,529 26,529 27,123 (n) ========= ========= ========= Shares used in computing diluted net income (loss) per common share 26,529 26,529 27,123 (n) ========= ========= ========= See accompanying notes to unaudited pro forma condensed consolidated financial information. 21 23 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) HNC DISTRIBUTION PRO FORMA PRO FORMA PRO FORMA AS REPORTED OF RETEK CORE HNC SYSTEMS/LINK ADJUSTMENTS COMBINED HNC ----------- ------------ --------- ------------ ----------- ------------ Revenues 216,889 (69,159)(o) 147,730 13,365 -- 161,095 Operating expenses: Cost of revenues 82,189 (22,983)(o) 59,206 4,609 -- 63,815 Research and development 49,055 (22,612)(o) 26,443 2,753 -- 29,196 Sales and marketing 45,818 (19,625)(o) 26,193 2,698 -- 28,891 General and administrative 24,547 (6,257)(o) 18,290 2,784 -- 21,074 Stock-based compensation 11,985 (1,908)(o) 10,077 -- 282 (p) 10,359 Acquisition-related amortization 8,599 (1,390)(o) 7,209 -- 13,328 (q) 20,537 Acquired in-process research and development 1,480 (1,480)(o) -- -- -- -- --------- --------- --------- --------- --------- --------- Total operating expenses 223,673 (76,255) 147,418 12,844 13,610 173,872 Operating income (loss) (6,784) 7,096 312 521 (13,610) (12,777) Other income (expense): Interest and other income, net 6,149 (30)(o) 6,119 (259) -- 5,860 Interest expense related to convertible debt (5,823) -- (5,823) -- -- (5,823) Minority interest in income (loss) of consolidated subsidiary 722 (722)(o) -- -- -- -- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes (5,736) 6,344 608 262 (13,610) (12,740) Income tax provision (benefit) 536 1,697 (o) 2,648 38 (2,263)(m) 423 -- 415 (o) -- -- -- -- --------- --------- --------- --------- --------- --------- Net income (loss) $ (6,272) $ 4,232 $ (2,040) $ 224 $ (11,347) $ (13,163) ========= ========= ========= ========= ========= ========= Earnings per share: Basic net income (loss) per common share $ (0.25) $ (0.08) $ (0.51)(n) ========= ========= ========= Diluted net income (loss) per common share $ (0.25) $ (0.08) $ (0.51)(n) ========= ========= ========= Shares used in computing basic net income (loss) per common share 24,969 24,969 25,563 (n) ========= ========= ========= Shares used in computing diluted net income (loss) per common share 24,969 24,969 25,563 (n) ========= ========= ========= See accompanying notes to unaudited pro forma condensed consolidated financial information. 22 24 HNC SOFTWARE INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- BASIS OF PRESENTATION On September 8, 2000, we acquired all of the outstanding stock of Systems/Link Corporation, or Systems/Link, in exchange for approximately 634 shares of our common stock, including 40 shares representing options we exchanged, and $5,512 in cash. We applied the purchase method of accounting for the acquisition of Systems/Link, which resulted in a purchase price of $42,549. The fair value of the HNC common stock issued to effect the purchase was approximately $59.77 per share based on the average closing price of HNC common stock for the three day period ending on the acquisition date. The average fair value of the 40 exchanged options was approximately $42.59 per share, determined using the Black-Scholes option pricing model assuming a 6.11% risk-free interest rate, 100% volatility, and an expected life of 2.0 years, resulting in a total estimated fair value of $1,703. Of this total amount, $910 was allocated to the purchase price and $793 was allocated to unearned stock-based compensation. The total purchase price also included approximately $624 of acquisition costs we accrued. The allocation of the purchase price using balances at September 8, 2000 is summarized below: Goodwill $ 24,428 Software development costs 17,060 In-process research and development 730 Other identified intangible assets 5,148 Net liabilities assumed (4,817) ---------- Total purchase price $ 42,549 ========== The purchase price was based upon the estimated fair values of the acquired assets and assumed liabilities and an independent appraisal of intangible assets. The amount allocated to in-process research and development represents the purchased in-process research and development for projects that, as of the date of the acquisition, had not yet reached technological feasibility and had no alternative future use. The value of these projects was determined by estimating the resulting net cash flows from the sale of the products from completion of the projects, reduced by the portion of revenue attributable to developed technology and the percentage completion of the project. The resulting cash flows were then discounted back to their present value at appropriate discount rates. The amounts allocated to in-process research and development were charged to our statement of operations in the third quarter of 2000. NOTE 2 -- PRO FORMA ADJUSTMENTS (a) Reflects the distribution to our stockholders of Retek common stock in the form of a dividend, inclusive of pro forma income tax adjustments to present HNC Software Inc. on a stand-alone basis without Retek. 23 25 (b) Reflects cash we paid to Systems/Link shareholders. (c) Reflects goodwill and other intangible assets resulting from the acquisition based on the purchase price allocation described in Note 1 as if the acquisition had occurred on June 30, 2000. (d) Reflects accrued liabilities related to transactions costs incurred by HNC. (e) Reflects the adjustment of Systems/Link's assets and liabilities to fair value. (f) Reflects net deferred tax liabilities resulting from the acquisition and the purchase price allocation described in Note 1. (g) Reflects the elimination of Systems/Link's equity accounts. (h) Reflects the estimated value of common stock and options issued to effect the purchase, less amounts allocated to unearned stock-based compensation. (i) Reflects amount allocated to in-process research and development based on the purchase price allocation described in Note 1. (j) Reflects the reported results of operations of Retek Inc. as if our distribution of Retek Inc. common stock to our stockholders occurred as of January 1, 2000. (k) Reflects amortization of unearned stock-based compensation recorded in connection with the acquisition, as if the acquisition had occurred on January 1, 2000 (l) Reflects amortization of goodwill, software development costs and other identified intangible assets over their estimated useful lives of 3 to 4 years as if the acquisition had occurred on January 1, 2000. (m) Reflects the estimated tax benefit related to the change in deferred tax liabilities resulting from the amortization of the intangible assets recorded as part of the acquisition. (n) Basic and diluted net earnings per share is computed using the weighted average number of common stock outstanding during the period. Unaudited pro forma basic and diluted net earnings per share include 594 shares of common stock issued in connection with our acquisition of Systems/Link but exclude 40 shares of common stock issuable in connection with replacement stock options because their effect would anti-dilutive. (o) Reflects the reported results of operations of Retek Inc. as if our distribution of Retek Inc. common stock to our stockholders occurred as of January 1, 1999. (p) Reflects amortization of unearned stock-based compensation recorded in connection with the acquisition, as if the acquisition had occurred on January 1, 1999. (q) Reflects amortization of goodwill, software development costs and other identified intangible assets over their estimated useful lives of 3 to 4 years as if the acquisition had occurred on January 1, 1999. 24 26 (c) EXHIBITS 23.1 Consent of PricewaterhouseCoopers LLP(1) 99.1 Agreement and Plan of Reorganization dated as of September 8, 2000 among Registrant, Systems/Link and SLC Merger Corp. Pursuant to Item 601(b)(2) of Regulation of S-K, certain schedules have been omitted but will be furnished supplementally to the Commission upon request(2) - ------------ (1) Filed herein. (2) Incorporated by reference to Exhibit 2.01 of HNC Software Inc.'s Report on form 8-K filed on September 22, 2000. 25 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HNC SOFTWARE INC. By: Date: November 21, 2000 /s/ Kenneth J. Saunders ----------------------------- Kenneth J. Saunders, Chief Financial Officer and Secretary By: /s/ Russell C. Clark ----------------------------- Russell C. Clark, Vice President, Corporate Finance and Assistant Secretary 26