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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 28, 1997
HNC SOFTWARE INC.
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(Exact name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-26146 33-0248788
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(Commission File Number) (I.R.S. Employer Identification Number)
5930 Cornerstone Court West, San Diego, CA 92121
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(Address of Principal Executive Offices)
(619) 546-8877
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(Registrant's Telephone Number, Including Area Code)
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ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
CompReview, Inc. Acquisition
On November 28, 1997, HNC Software Inc., a Delaware corporation ("HNC"),
acquired all the stock of privately held CompReview, Inc., a California
corporation ("CompReview") in exchange for the issuance of 4,885,560 shares of
HNC common stock. All outstanding CompReview options were exchanged for options
to purchase 195,419 shares of HNC common stock. The acquisition was effected
through a statutory merger (the "Merger") in which FW1 Acquisition Corp., a
wholly-owned subsidiary of HNC ("Sub"), was merged into CompReview, with
CompReview surviving the Merger. As a result of the Merger, CompReview became a
wholly-owned subsidiary of HNC. The issuance of the shares of HNC common stock
and options to purchase HNC common stock to CompReview's stockholders and option
holders in the Merger was approved by HNC's stockholders at a special
stockholders' meeting held on November 25, 1997.
The Merger was consummated pursuant to an Agreement and Plan of
Reorganization dated as of July 14, 1997 (the "Plan") entered into by HNC, Sub,
CompReview and by Robert L. Kaaren and Mishel ("Michael") Munayyer, trustee of
the Michael Munayyer Trust dated August 11, 1995 (the "Munayyer Trust") and an
Agreement of Merger dated as of November 28, 1997 between Sub and CompReview.
Mr. Kaaren and Mr. Munayyer were CompReview's founders and directors and Mr.
Kaaren and the Munayyer Trust (the "CompReview Stockholders") were CompReview's
sole stockholders prior to the Merger. HNC intends to account for the
acquisition of CompReview as a "pooling of interests" transaction for financial
reporting purposes, and the Merger was structured to be a "tax-free"
reorganization for federal income tax purposes. The executive officers of
CompReview were not changed as a result of the Merger, except that Raymond V.
Thomas, HNC's Chief Financial Officer, has been appointed as CompReview's Chief
Financial Officer and Secretary.
CompReview, based in Costa Mesa, California, develops, markets and
supports CRLink, a software-based system that enables CompReview's customers to
manage and contain the medical costs of workers' compensation and automobile
accident insurance claims. CompReview's customers primarily consist of insurance
companies that provide workers' compensation or automobile accident insurance,
large employers who self-insure against workers' compensation claims, third
party administrators that administer such claims for insurers and managed care
companies that implement cost-containment strategies. To date, the vast majority
of CompReview's revenues have been derived from the workers' compensation
insurance field.
CRLink automates the review and analysis of medical bills related to
workers' compensation and automobile accident insurance claims by comparing
medical providers' charges against mandatory state workers' compensation fee
schedules (which impose limits on the amounts charged for workers' compensation
claims), against usual, customary and reasonable ("UCR") charges for the billed
services in the relevant geographic area and against preferred provider
organization ("PPO") contract fee rates. CRLink then automatically reprices and
reduces medical bills to conform them to state fee schedules, UCR rates and PPO
rates, as applicable, thus reducing reimbursement amounts. In addition to its
bill analysis and repricing functions, CRLink also includes tools that enable
insurers to manage the entire claims handling process, to centralize repricing
programs with PPO networks, to conduct utilization reviews and to generate
reports on a claim's status. Customers can also purchase add-on modules to
CRLink to expand its functions, including a module that enables insurance payors
to expand their coverage to new preferred provider organizations through a
provider organization database. CRLink is offered to customers either as a
licensed product used by the client internally, or as an outsourced service
provided by CompReview's own service bureau.
Under the terms of the Plan, the outstanding shares of CompReview common
stock and all options to purchase CompReview common stock that were outstanding
under CompReview's 1995 Stock Option Plan prior to the Merger ("CompReview
Options") were converted in the Merger into a total number of shares of HNC
Common Stock issued and subject to options to purchase HNC Common Stock ("HNC
Options") equal to the sum of (a) 5,000,000 shares of HNC common stock plus (b)
the number of shares of HNC Common Stock equal to the amount of CompReview's
retained
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earnings at October 31, 1997 (the last calendar month end prior to the closing
of the Merger) divided by the average of the closing prices per share of HNC
common stock for the 20 trading days immediately preceding the closing date of
the Merger. Based on this formula, each share of CompReview common stock that
was issued and outstanding immediately prior to the Merger was converted into
approximately 0.488556154 shares of HNC common stock (subject to rounding to
eliminate fractional shares), and each CompReview Option that was outstanding
immediately prior to the Merger was assumed by HNC on the terms of CompReview's
1995 Stock Option Plan and converted into an option (an "HNC Option") to
purchase 0.488556154 shares of HNC common stock (subject to rounding to
eliminate fractional options) at an exercise price per share of HNC Common Stock
equal to the exercise price per share that was in effect for such CompReview
Option immediately prior to the Merger divided by the 0.488556154 conversion
rate. The conversion ratio described above was negotiated and determined on the
basis of: (i) the assumed value of CompReview, as determined by HNC's management
following its review of CompReview's business and financial position, and its
discussions with CompReview's management (ii) other information provided to
HNC's management by its investment banking firm; (iii) a comparison of certain
financial and stock valuation information for HNC and CompReview with similar
types of information for certain other companies in businesses comparable to
those of HNC and CompReview.
Based on this conversion ratio, the 10,000,000 shares of CompReview
common stock that were outstanding immediately prior to the effective time of
the Merger were converted into a total of 4,885,560 shares of HNC common stock
(which represented approximately 20% of HNC's outstanding common stock
immediately after the effectiveness of the Merger) and the 400,000 CompReview
Options that were outstanding immediately prior to the Merger were converted
into HNC Options to purchase approximately 195,419 shares of HNC common stock.
The two CompReview Stockholders each received fifty percent (50%) of the
4,885,560 shares of HNC Common Stock issued in the Merger and the HNC Options
issued in the Merger were issued to three officers of CompReview.
The issuance of the shares of HNC common stock and the HNC Options in
the Merger was not registered under the Securities Act of 1933, as amended (the
"1933 Act"), in reliance on the exemption from registration provided by Section
4(2) thereof and Rule 506 of Regulation D promulgated thereunder. Accordingly,
such shares are subject to the resale restrictions imposed by Rule 144 under the
1933 Act. HNC intends to register the issuance of the shares of HNC's common
stock that are subject to the HNC Options issued in the Merger on a Form S-8
registration statement in December 1997. Additionally, HNC has agreed with the
CompReview Stockholders in a Registration Rights Agreement to use its best
efforts to promptly register the resale of the shares of HNC common stock issued
to the CompReview Stockholders in the Merger on a "shelf" Form S-3 registration
statement that would be kept effective until the first anniversary of the
effective date of the Merger.
In order to comply with the requirements for pooling accounting
treatment, the affiliates of HNC and the former affiliates of CompReview have
agreed not to sell or transfer their shares of HNC stock until HNC has publicly
released a report including the combined financial results of HNC and CompReview
covering a period of at least thirty (30) days of post-Merger combined
operations of HNC and CompReview.
Pursuant to the terms of the Plan, HNC, CompReview, the stockholders of
CompReview and an escrow agent entered into an Escrow Agreement, pursuant to
which ten percent (10%) of the shares of HNC common stock that were issued to
the CompReview Stockholders in the Merger have been placed in an escrow account
to secure and collateralize certain indemnification obligations of the
CompReview Stockholders to HNC.
Contemporaneously with the Merger, Robert L. Kaaren and Michael E.
Munayyer each entered into: (i) an Employment Agreement with CompReview, as the
surviving corporation in the Merger, providing for, among other things, certain
terms of employment at a specified minimum salary; and (ii) a Non-Competition
Agreement with HNC and CompReview providing, among other things, that the
employee will not engage in certain activities competitive with CompReview's
business for a period of up to three years.
More detailed information regarding the CompReview acquisition can be
found in HNC's definitive proxy statement for its special meeting of
stockholders held on November 25, 1997, which has been filed with the Securities
and Exchange Commission.
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ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
Page
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(a) Financial Statements of Business Acquired.
The following financial statements are filed herewith:
Unaudited Condensed Balance Sheet at September 30, 1997 6
Unaudited Condensed Statement of Income for the nine months ended
September 30, 1997 and 1996 7
Unaudited Condensed Statement of Cash Flows for the nine months ended
September 30, 1997 and 1996 8
Notes to Unaudited Condensed Financial Statements 9
Independent Auditor's Report 11
Balance Sheets at December 31, 1996 and 1995 12
Statements of Income for the years ended December 31, 1996, 1995 and 1994 13
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 14
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 15
Notes to Financial Statements 16
(b) Pro Forma, Historical and Supplemental Financial Information.
(1) Unaudited Pro Forma Consolidated Combined Condensed Financial
Information of HNC Software Inc.
The following pro forma consolidated combined condensed financial information
is being filed herewith:
Unaudited Pro Forma Consolidated Combined Condensed Balance Sheet at
September 30, 1997 21
Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the
nine months ended September 30, 1997 22
Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the
nine months ended September 30, 1996 23
Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the
years ended December 31, 1996, 1995 and 1994. 24-26
Notes to Unaudited Pro Forma Consolidated Combined Condensed Financial
Information 27
(2) Consolidated Financial Statements of HNC Software Inc.
The following consolidated financial statements are being filed herewith:
Report of Independent Accountants 28
Consolidated Balance Sheet at December 31, 1996 and 1995 29
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994 30
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994 31
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994 32
Notes to Consolidated Financial Statements 33
(3) Supplemental Consolidated Financial Statements of HNC Software Inc.
The following supplemental consolidated financial statements are being
filed herewith:
Supplemental Consolidated Balance Sheet at December 31, 1996 and 1995 46
Supplemental Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994 47
Supplemental Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994 48
Supplemental Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994 49
Notes to Supplemental Consolidated Financial Statements 50
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(4) Financial Statement Schedule.
Report of Independent Accountants on Financial Statement Schedule 65
For the three years ended December 31, 1996 -
Schedule II - Valuation and Qualifying Accounts and Reserves 66
Signatures 67
(c) Exhibits.
The following exhibits are filed herewith:
2.01 Agreement and Plan of Reorganization dated as of July 14, 1997 by
and among HNC, FW1 Acquisition Corp., CompReview, Inc., Robert L.
Kaaren and Mishel E. Munnayer, a.k.a. Michael Munayyer, Trustee
of the Michael Munayyer Trust dated August 11, 1995. (Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the Commission
upon request).
2.02 Agreement of Merger dated as of November 28, 1997 by and between
FW1 Acquisition Corp. and CompReview, Inc.
4.01 Registration Rights Agreement dated as of November 28, 1997 by
and among HNC and the former shareholders of CompReview, Inc.
11.01 Statement Regarding Computation of Per Share Earnings (Loss).
23.01 Consent of Price Waterhouse LLP, Independent Accountants.
23.02 Consent of Deloitte & Touche LLP, Independent Auditors.
27.01 Financial Data Schedule
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COMPREVIEW, INC.
UNAUDITED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1997
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PRO FORMA
HISTORICAL (NOTE 4)
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ASSETS
Current assets:
Cash and cash equivalents $ 927 $ 927
Accounts receivable, net 4,164 4,164
Other current assets 35 35
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Total current assets 5,126 5,126
Property and equipment, net 915 915
Other assets 128 128
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$ 6,169 $ 6,169
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,150 $ 2,150
Accrued liabilities 541 541
Deferred income tax liability 17 607
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Total current liabilities 2,708 3,298
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Stockholders' equity:
Preferred stock, $0.001 par value - 500 shares authorized:
none issued and outstanding
Common stock, $0.001 par value - 20,000 shares authorized:
10,000 shares issued and outstanding 442 442
Retained earnings 3,019 2,429
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3,461 2,871
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Total stockholders' equity $ 6,169 $ 6,169
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See accompanying notes to the unaudited condensed financial statements.
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COMPREVIEW, INC.
UNAUDITED CONDENSED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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Revenues:
License and maintenance $ 15,069 $ 9,042
Service bureau 3,902 3,589
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Total revenues 18,971 12,631
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Operating expenses:
License and maintenance 5,599 3,580
Service bureau 2,986 2,628
Research and development 494 367
Sales and marketing 995 912
General and administrative 2,097 1,431
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Total operating expenses 12,171 8,918
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Operating income 6,800 3,713
Other income, net 45 39
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Income before income tax provision 6,845 3,752
Income tax provision 143 73
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Net income $ 6,702 $ 3,679
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Unaudited pro forma data (Note 3):
Add:
S corporation state income tax provision 143 73
Deduct:
Pro forma federal and state income tax provision (2,738) (1,501)
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Pro forma net income $ 4,107 $ 2,251
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Pro forma adjusted net income per share $ 0.41 $ 0.23
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Shares used in computing pro forma adjusted net income per share 10,000 10,000
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See accompanying notes to the unaudited condensed financial statements.
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COMPREVIEW, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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Cash flows from operating activities:
Net income $ 6,702 $ 3,681
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 173 194
Changes in assets and liabilities:
Accounts receivable, net (1,141) (725)
Other assets (90) (46)
Accounts payable and accrued expenses 1,193 (246)
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Net cash provided by operating activities 6,837 2,858
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Cash flows from investing activities:
Acquisitions of property and equipment (714) (160)
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Net cash used in investing activities (714) (160)
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Cash flows from financing activities:
Distributions (5,800) (3,762)
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Net cash used in financing activities (5,800) (3,762)
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Net increase (decrease) in cash and cash equivalents 323 (1,064)
Cash and cash equivalents at beginning of period 604 1,466
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Cash and cash equivalents at end of period $ 927 $ 402
========== ==========
See accompanying notes to the unaudited condensed financial statements.
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COMPREVIEW, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
In management's opinion, the accompanying unaudited condensed financial
statements for CompReview, Inc. ("CompReview" or the "Company") as of September
30, 1997 and for the nine months ended September 30, 1997 and 1996 have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustments (consisting only of normal
recurring accruals) that the Company considers necessary for a fair presentation
of its financial position, results of operations, and cash flows for such
periods. Accordingly, they do not contain all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All such financial statements are unaudited. The accompanying
unaudited financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
1996 presented elsewhere in this filing. Footnotes and other disclosures as of
September 30, 1997 and for the nine months ended September 30, 1997 and 1996,
which would substantially duplicate the disclosures in the Company's audited
financial statements for the year ended December 31, 1996, have been omitted.
The interim financial information herein is not necessarily indicative of the
results to be expected for any other interim period or the full year ending
December 31, 1997.
NOTE 2 - NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("FAS130"), "Reporting Comprehensive
Income." The Company will adopt FAS130 as required for all periods beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income is defined as "the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners." The Company is currently evaluating the impact that the adoption of
FAS130 will have on its financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("FAS131"), "Disclosures about
Segments of an Enterprise and Related Information." The Company will adopt
FAS131 as required for all periods beginning after December 15, 1997, commencing
with its annual financial statements for the year ending December 31, 1998. This
statement requires the disclosure of certain information about operating
segments in the financial statements. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
is currently evaluating the impact that the adoption of FAS131 will have on its
financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("FAS128"), "Earnings Per
Share," which the Company will adopt as required for all periods ending after
December 15, 1997. Pursuant to this Statement, companies will replace the
reporting of "primary" earnings per share ("EPS") with "basic" EPS. Basic EPS is
calculated by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period, not
including potential common stock. "Fully diluted" EPS will be replaced by
"diluted" EPS. Diluted EPS is computed similarly to fully diluted EPS under the
provisions of APB Opinion No. 15.
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COMPREVIEW, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The effect of the adoption of FAS128 on earnings per share is as
follows:
NINE MONTHS ENDED
-------------------------
9/30/97 9/30/96
-------- --------
Basic earnings per share $ 0.67 $ 0.37
Diluted earnings per share $ 0.67 $ 0.37
The effect of the adoption of FAS128 on pro forma adjusted earnings per
share is as follows:
NINE MONTHS ENDED
-------------------------
9/30/97 9/30/96
-------- --------
Basic earnings per share $ 0.41 $ 0.23
Diluted earnings per share $ 0.41 $ 0.23
NOTE 3 - PRO FORMA NET INCOME
CompReview is a subchapter S corporation for federal and certain state income
tax purposes, and its historical financial statements reflect only certain state
taxes on subchapter S corporations. Federal and state income taxes have been
provided as if CompReview had filed subchapter C corporation income tax returns
for the periods presented.
NOTE 4 - PRO FORMA BALANCE SHEET
The accompanying pro forma balance sheet reflects the recognition of a net
deferred tax liability relating to federal and state income taxes as if
CompReview had been taxed as a C corporation rather than a subchapter S
corporation.
Deferred tax assets (liabilities) at September 30, 1997 are summarized as
follows:
Accounts receivable ............................. $(1,666)
Accounts payable and accrued liabilities ........ 1,076
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$ (590)
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INDEPENDENT AUDITORS' REPORT
Board of Directors
CompReview, Inc.
Newport Beach, California
We have audited the accompanying balance sheets of CompReview, Inc. (the
Company) as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of CompReview, Inc. as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
January 30, 1997
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COMPREVIEW, INC.
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
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CURRENT ASSETS:
Cash and cash equivalents $ 603,567 $1,466,109
Accounts receivable, less allowance for doubtful
accounts of $86,123 in 1996 and $50,000 in 1995 3,023,798 2,146,156
Other current assets 48,354 11,726
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Total current assets 3,675,719 3,623,991
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization (Note 2) 373,498 509,515
OTHER ASSETS - deposits 25,146 32,046
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$4,074,363 $4,165,552
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,097,514 $ 865,789
Accrued compensation and benefits 374,646 275,812
Other accrued expenses 18,925 18,286
Income taxes payable (Note 3) 8,000 47,702
Deferred income taxes (Note 3) 17,500 10,000
---------- ----------
Total current liabilities 1,516,585 1,217,589
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 500,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 20,000,000 shares
authorized; 10,000,000 shares issued and outstanding 441,963 441,963
Retained earnings 2,115,815 2,506,000
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Total stockholders' equity 2,557,778 2,947,963
---------- ----------
$4,074,363 $4,165,552
========== ==========
See accompanying notes to financial statements.
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COMPREVIEW, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues:
Software license and installation $ 12,875,673 $ 7,683,120 $ 4,105,389
Service bureau 4,729,955 5,348,882 5,058,170
------------ ------------ ------------
Total revenues 17,605,628 13,032,002 9,163,559
Operating expenses:
Software license and installation 5,028,289 3,393,800 2,229,517
Service bureau 3,364,610 3,025,363 2,203,003
Research and development 536,631 416,740 334,567
Sales and marketing 1,218,362 854,347 674,833
General and administrative 1,916,986 1,402,237 1,090,047
------------ ------------ ------------
Total operating expenses 12,064,878 9,092,487 6,531,967
------------ ------------ ------------
Operating income 5,540,750 3,939,515 2,631,592
Other income, net 50,505 78,470 16,516
------------ ------------ ------------
Income before S corporation state income tax provision 5,591,255 4,017,985 2,648,108
S corporation state income tax provision 74,119 63,514 54,320
------------ ------------ ------------
Net income $ 5,517,136 $ 3,954,471 $ 2,593,788
============ ============ ============
Add:
S corporation state income tax provision 74,119 63,514 54,320
Deduct:
Pro forma federal and state income tax provision
(unaudited) (2,236,502) (1,607,194) (1,059,243)
------------ ------------ ------------
Pro forma net income (unaudited) $ 3,354,753 $ 2,410,791 $ 1,588,865
============ ============ ============
Pro forma net income per share (unaudited) $ 0.34 $ 0.24 $ 0.16
============ ============ ============
Shares used in computing pro forma
net income per share 10,000,000 10,000,000 10,000,000
============ ============ ============
See accompanying notes to financial statements.
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COMPREVIEW, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK TOTAL
-------------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- -------------
BALANCE, January 1, 1994 10,000,000 $ 441,963 $ 792,741 $ 1,234,704
Distributions (990,000) (990,000)
Net income 2,593,788 2,593,788
----------- ----------- ----------- -------------
BALANCE, December 31, 1994 10,000,000 441,963 2,396,529 2,838,492
Distributions (3,845,000) (3,845,000)
Net income 3,954,471 3,954,471
----------- ----------- ----------- -------------
BALANCE, December 31, 1995 10,000,000 441,963 2,506,000 2,947,963
Distributions (5,907,321) (5,907,321)
Net income 5,517,136 5,517,136
----------- ----------- ----------- -------------
BALANCE, December 31, 1996 10,000,000 $ 441,963 $ 2,115,815 $ 2,557,778
=========== =========== =========== =============
See accompanying notes to financial statements.
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COMPREVIEW, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,517,136 $ 3,954,471 $ 2,593,788
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 260,734 280,208 159,900
Loss on disposal of property 4,745
Deferred income taxes 7,500 (3,000) 13,000
Changes in assets and liabilities:
Accounts receivable (877,642) (265,081) (1,282,480)
Other current assets (36,628) (9,686) 16,019
Other assets 6,900 8,968
Accounts payable and accrued expenses 331,198 514,367 416,790
Income taxes payable (39,702) 20,789 17,151
----------- ----------- -----------
Net cash provided by operating activities 5,169,496 4,496,813 1,943,136
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 6,000
Payments to acquire property and equipment (124,717) (304,800) (386,094)
----------- ----------- -----------
Net cash used in investing activities (124,717) (298,800) (386,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (5,907,321) (3,845,000) (990,000)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (862,542) 353,013 567,042
CASH AND CASH EQUIVALENTS, beginning of year 1,466,109 1,113,096 546,054
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 603,567 $ 1,466,109 $ 1,113,096
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid for income taxes $ 115,242 $ 45,725 $ 24,169
=========== =========== ===========
See accompanying notes to financial statements.
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COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - CompReview, Inc. (the Company) develops cost containment
software and services for the healthcare industry, primarily related to
billing reviews of workers' compensation and personal injury claims
throughout the United States. Corporate headquarters are located in
Newport Beach, California, with an additional office located in Irving,
Texas. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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 years. Actual results could differ from
those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include savings
accounts and certificates of deposit. Cash equivalents are deemed to be
any short-term, nonequity investment that is readily convertible to cash,
is not subject to market fluctuations, and has an original maturity of
three months or less.
Property and Equipment - Property and equipment are stated at cost. The
Company provides for depreciation primarily on accelerated methods over
estimated useful lives, ranging from five to seven years. Leasehold
improvements are amortized over the lesser of the life of the improvement
or the term of the lease.
Income Taxes - The Company has elected to be taxed for federal and state
purposes under Subchapter S of the Internal Revenue Code and California
Revenue and Taxation Code, respectively. Accordingly, current taxable
income or loss is allocated to the stockholders who are responsible for
payment of taxes or receive credit for taxes thereon. In accordance with
provisions of the California Revenue and Taxation Code regarding S
corporations, the Company pays California taxes at the rate of 1.5% of
taxable income.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109,
deferred tax assets and liabilities are established for temporary
differences in recording such items for financial reporting purposes and
for income tax purposes.
Stock Split - In February 1996, the Company effected a ten-for-one split
of its common stock and increased the number of shares authorized to
20,000,000. All share amounts in the accompanying financial statements and
footnotes have been restated to reflect the stock split.
Revenue Recognition - The Company licenses its software primarily to
insurers, health maintenance organizations, self-insured employers and
other businesses that reimburse health care costs. Software licensing
agreements generally provide for a guaranteed minimum license fee and
transactional fees. The guaranteed minimum license fees are recognized
ratably over the respective license periods. Transactional fees are
recognized as revenue when fees based on system usage exceed the monthly
minimum license fees.
The Company offers payors the option of retaining the Company to review
and reprice medical bills for them rather that licensing the software.
Related service bureau fees are assessed to customers on the basis of
volume of bills processed and are recognized as revenue when the
processing services are performed.
Installation and implementation services fees are billed separately and
recognized as revenue on a time and materials basis.
16
17
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Software Costs - Software product development costs incurred from the time
technological feasibility is reached until the product is available for
general release to customers are capitalized and reported at the lower of
cost or net realizable value. Through December 31, 1996, no significant
amounts were expended subsequent to reaching technological feasibility.
Long-Lived Assets - The Company investigates potential impairments of
long-lived assets, on an exception basis, when events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss is recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. No such impairments
of long-lived assets existed through December 31, 1996.
Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has determined that it will not change to the
fair value method and will continue to use Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, for
measurement and recognition of employee-based stock transactions.
Reclassifications - Certain reclassifications have been made to the fiscal
year 1995 and 1994 financial statements to conform to the 1996
presentation.
Pro forma net income - Pro forma net income represents the results of
operations adjusted to reflect a provision for income tax on historical
income before S corporation state income tax provision, which gives effect
to the change in the Company's income tax status to a C corporation
subsequent to the merger with HNC (Note 8).
Pro forma net income per share - Pro forma net income per share has been
computed by dividing pro forma net income by the weighted average number
of common shares and common stock equivalents, using the treasury stock
method, outstanding during the period.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1996 1995
----------- -----------
Computer equipment $ 893,126 $ 806,008
Furniture and fixtures 173,723 166,512
Machinery and equipment 111,370 80,982
Leasehold improvements 40,705 40,705
----------- -----------
1,218,924 1,094,207
Less accumulated depreciation and amortization (845,426) (584,692)
----------- -----------
$ 373,498 $ 509,515
=========== ===========
17
18
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. INCOME TAXES
The provision for state income taxes for the years ended December 31 are
as follows:
1996 1995 1994
-------- -------- --------
Current $ 66,619 $ 66,514 $ 41,320
Deferred 7,500 (3,000) 13,000
-------- -------- --------
$ 74,119 $ 63,514 $ 54,320
======== ======== ========
Deferred state income taxes are primarily attributable to timing
differences in the recognition of revenues and expenses on a cash basis
for tax purposes.
Deferred tax assets (liabilities) at December 31 are summarized as
follows:
1996 1995
---------- ----------
Accounts receivable $ (35,100) $ (22,200)
Accounts payable and accrued liabilities 17,600 12,200
---------- ----------
$ (17,500) $ (10,000)
========== ==========
4. 401(K) SAVINGS PLAN
Effective May 1, 1995, the Company established a 401(k) savings plan to
which eligible employees can make contributions. The Company may make
annual discretionary contributions. The Company made contributions of
$3,375 and $0 in 1996 and 1995, respectively.
5. COMMITMENTS
Leases - The Company leases office facilities and equipment under
operating leases expiring at various dates through 2001. The following is
a schedule, by year, of future minimum rental payments required under
operating leases that have noncancelable lease terms in excess of one year
as of December 31, 1996:
Year ending December 31:
1997 $158,810
1998 4,284
1999 4,284
2000 4,284
2001 1,071
--------
$172,733
========
Rent expense under operating lease agreements amounted to $283,120,
$310,783 and $292,576 for the years ended December 31, 1996, 1995 and
1994, respectively.
18
19
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. MAJOR CUSTOMERS
During the years ended December 31, 1996, 1995 and 1994, sales to one
customer were approximately 25%, 27% and 26% of net sales, respectively.
Another customer accounted for approximately 12%, 11% and 14% of net sales
in 1996, 1995 and 1994, respectively. A third customer accounted for
approximately 20% of net sales in 1994. The Company generally provides
services to customers under contacts with terms of one to five years,
which can generally be cancelled by the customer on 90 days' notice. A
decision by a significant customer to decrease the amount of services
purchased from the Company or to not renew a contract could have a
material adverse effect on the Company's financial condition and results
of operations.
7. STOCK OPTIONS
On October 16, 1995, the Company adopted the 1995 Stock Option Plan (the
Plan) which permits the Company to grant stock options to officers,
directors, key employees and other qualified persons. The Plan provides
that the option price shall be fixed by the Board of Directors or by a
committee appointed by the Board of Directors (the Committee), but shall
not be less than 85% of the fair market value at date of grant as
determined by the Board of Directors or the Committee. An aggregate of
600,000 shares of the Company's common stock may be issued pursuant to the
Plan. Options are exercisable at various dates and expire ten years after
the date of grant. As of December 31, 1996 and 1995, 400,000 and 350,000
options, respectively, were outstanding with an exercise price equal to
the fair market value of the Company's common stock ($1.14) at the date of
grant.
At December 31, 1996, 200,000 shares were available for future grant under
the Plan. Stock option activity for the two years ended December 31, 1996
was as follows:
NUMBER PRICE
OF SHARES PER SHARE
----------- -----------
Outstanding January 1, 1995 -- $ --
Options granted 350,000 1.14
-----------
Outstanding December 31, 1995 350,000 1.14
Options granted 110,000 1.14
Options canceled (60,000) 1.14
-----------
Outstanding December 31, 1996 400,000 $1.14
===========
The weighted average fair value of options granted during 1996 and 1995
was $0.21 and $0.39, respectively. The weighted average remaining
contractual life of outstanding options at December 31, 1996 was 8.9
years. No shares were exercisable at December 31, 1996.
19
20
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
As discussed in Note 1, the Company has elected to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25 and its related interpretations. No compensation expense
has been recognized in the financial statements for employee stock
arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income had the Company adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of
option-pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected life, 10 years; stock volatility, 0%; risk-free
interest rate, 6.0%; and no dividends during the expected term. The
Company's calculations are based on a single-option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of
the 1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, net income would have been reduced to $5,435,324 and
$3,924,750 in 1996 and 1995, respectively.
8. SUBSEQUENT EVENT (UNAUDITED)
On November 28, 1997, HNC Software Inc.(HNC), acquired all the stock of
the Company, in exchange for the issuance of 4,885,560 shares of HNC
common stock. All outstanding options to purchase the Company's common
stock were exchanged for options to purchase 195,419 shares of HNC common
stock. The acquisition was effected through a statutory merger for which
HNC intends to account as a "pooling of interests" transaction for
financial reporting purposes, and the merger was structured to be a
"tax-free" reorganization for income tax purposes.
20
21
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1)
----------------------- -----------------------
HNC CR NOTES ADJUSTMENTS COMBINED
--------- ----------- ----- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,974 $ 927 (2) $ (1,400) $ 3,501
Short-term investments 18,430 -- -- 18,430
Accounts receivable, net 25,989 4,164 -- 30,153
Current portion of deferred
income taxes 6,668 -- 6,668
Other current assets 3,302 35 -- 3,337
--------- ----------- ---------- --------
Total current assets 58,363 5,126 (1,400) 62,089
Property and equipment, net 9,664 915 -- 10,579
Deferred income taxes, less current
portion 19,754 -- -- 19,754
Other assets 2,624 128 -- 2,752
Long-term investments 18,157 -- -- 18,157
--------- ----------- ---------- --------
$ 108,562 $ 6,169 $ (1,400) $113,331
========= =========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,543 $ 2,150 $ -- $ 6,693
Accrued liabilities 6,101 541 -- 6,642
Deferred revenue 2,611 -- -- 2,611
Other current liabilities 226 17 (3) 590 833
--------- ----------- ---------- --------
Total current liabilities 13,481 2,708 590 16,779
--------- ----------- ---------- --------
Other non-current liabilities 360 -- -- 360
--------- ----------- ---------- --------
Stockholders' equity:
Common stock, $0.001 par value - 50,000
shares authorized: 19,540 and 19,126
shares issued and outstanding,
respectively 20 442 (4) (437) 25
Paid-in capital 88,218 -- (4) 437 89,684
(5) 1,029
Foreign currency translation adjustment 40 -- -- 40
Unrealized gain on investments 1 -- -- 1
Retained earnings 6,442 3,019 (2) (1,400) 6,442
(3) (590)
(5) (1,029)
(6)
--------- ----------- ---------- --------
Total stockholders' equity 94,721 3,461 (1,990) 96,192
--------- ----------- ---------- --------
$ 108,562 $ 6,169 $ (1,400) $113,331
========= =========== ========== ========
See accompanying notes to unaudited pro forma
consolidated combined condensed financial information.
21
22
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1)
------------------------ ---------
HNC CR NOTES COMBINED
--------- --------- --------
Revenues:
License and maintenance $ 49,278 $ 15,069 $ 64,347
Installation and implementation 7,203 -- 7,203
Contracts and other 6,202 -- 6,202
Service bureau -- 3,902 3,902
--------- --------- --------
Total revenues 62,683 18,971 81,654
--------- --------- --------
Operating expenses:
License and maintenance 8,388 5,599 13,987
Installation and implementation 3,551 -- 3,551
Contracts and other 4,415 -- 4,415
Service bureau -- 2,986 2,986
Research and development 14,882 494 15,376
Sales and marketing 14,482 995 15,477
General and administrative 6,271 2,097 8,368
--------- --------- --------
Total operating expenses 51,989 12,171 64,160
--------- --------- --------
Operating income 10,694 6,800 17,494
Other income, net 1,365 45 1,410
--------- --------- --------
Income before income tax provision 12,059 6,845 18,904
Income tax provision 4,462 143 4,605
--------- --------- --------
Net income $ 7,597 $ 6,702 $ 14,299
========= ========= ========
Add:
S corporation state income tax provision 143 (7) 143
Deduct:
Pro forma federal and state income tax provision (2,738) (7) (2,738)
--------- --------
Pro forma net income $ 4,107 $ 11,704
========= ========
Net income per share $ 0.37
=========
Shares used in computing net income per share 20,572
=========
Pro forma net income per share $0.41 (8) $0.46
========= ========
Shares used in computing pro forma net income per share 10,000 (8) 25,573
========= ========
See accompanying notes to unaudited pro forma
consolidated combined condensed financial information.
22
23
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1)
-------------------------- -----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
Revenues:
License and maintenance $ 24,431 $ 9,042 $ 33,473
Installation and implementation 3,813 3,813
Contracts and other 8,814 -- 8,814
Service bureau -- 3,589 3,589
---------- ---------- ----------
Total revenues 37,058 12,631 49,689
---------- ---------- ----------
Operating expenses:
License and maintenance 6,409 3,580 9,989
Installation and implementation 1,746 1,746
Contracts and other 5,869 -- 5,869
Service bureau -- 2,628 2,628
Research and development 9,173 367 9,540
Sales and marketing 7,595 912 8,507
General and administrative 4,710 1,431 6,141
---------- ---------- ----------
Total operating expenses 35,502 8,918 44,420
---------- ---------- ----------
Operating income 1,556 3,713 5,269
Other income, net 1,203 39 1,242
---------- ---------- ----------
Income before income tax provision 2,759 3,752 6,511
Income tax provision 1,691 73 1,764
---------- ---------- ----------
Net income $ 1,068 $ 3,679 $ 4,747
========== ========== ==========
Add:
S corporation state income tax provision 73 (7) 73
Deduct:
Pro forma federal and state income tax provision (1,501) (7) (1,501)
---------- ----------
Pro forma net income $ 2,251 $ 3,319
========== ==========
Net income per share $ 0.05
==========
Shares used in computing net income per share 20,331
==========
Pro forma net income per share $ 0.23 (8) $ 0.13
========== ==========
Shares used in computing pro forma net income per share 10,000 (8) 25,316
========== ==========
See accompanying notes to unaudited pro forma
consolidated combined condensed financial information.
23
24
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1)
--------------------------- ----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
Revenues:
License and maintenance $ 36,014 $ 12,876 $ 48,890
Installation and implementation 6,691 6,691
Contracts and other 11,128 -- 11,128
Service bureau -- 4,730 4,730
---------- ---------- ----------
Total revenues 53,833 17,606 71,439
---------- ---------- ----------
Operating expenses:
License and maintenance 8,697 5,028 13,725
Installation and implementation 2,714 2,714
Contracts and other 7,694 -- 7,694
Service bureau -- 3,365 3,365
Research and development 13,271 537 13,808
Sales and marketing 10,705 1,218 11,923
General and administrative 6,634 1,917 8,551
---------- ---------- ----------
Total operating expenses 49,715 12,065 61,780
---------- ---------- ----------
Operating income 4,118 5,541 9,659
Other income, net 1,650 50 1,700
---------- ---------- ----------
Income before income tax (benefit) provision 5,768 5,591 11,359
Income tax (benefit) provision (608) 74 (534)
---------- ---------- ----------
Net income $ 6,376 $ 5,517 $ 11,893
========== ========== ==========
Add:
S corporation state income tax provision 74 (7) 74
Deduct:
Pro forma federal and state income tax provision (2,236) (7) (2,236)
---------- ----------
Pro forma net income $ 3,355 $ 9,731
========== ==========
Net income per share $ 0.31
==========
Shares used in computing net income per share 20,367
==========
Pro forma net income per share $ 0.34 (8) $ 0.38
========== ==========
Shares used in computing pro forma net income per share 10,000 (8) 25,348
========== ==========
See accompanying notes to unaudited pro forma consolidated
combined condensed financial information.
24
25
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1)
--------------------------- ----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
Revenues:
License and maintenance $ 16,878 $ 7,683 $ 24,561
Installation and implementation 4,648 4,648
Contracts and other 9,146 -- 9,146
Service bureau -- 5,349 5,349
---------- ---------- ----------
Total revenues 30,672 13,032 43,704
---------- ---------- ----------
Operating expenses:
License and maintenance 4,509 3,394 7,903
Installation and implementation 1,425 1,425
Contracts and other 6,894 -- 6,894
Service bureau -- 3,025 3,025
Research and development 6,581 417 6,998
Sales and marketing 6,422 854 7,276
General and administrative 3,699 1,402 5,101
---------- ---------- ----------
Total operating expenses 29,530 9,092 38,622
---------- ---------- ----------
Operating income 1,142 3,940 5,082
Other income, net 406 78 484
---------- ---------- ----------
Income before income tax (benefit) provision 1,548 4,018 5,566
Income tax (benefit) provision (575) 64 (511)
---------- ---------- ----------
Net income $ 2,123 $ 3,954 $ 6,077
========== ========== ==========
Add:
S corporation state income tax provision 64 (7) 64
Deduct:
Pro forma federal and state income tax provision (1,607) (7) (1,607)
---------- ----------
Pro forma net income $ 2,411 $ 4,534
========== ==========
Pro forma net income per share $ 0.13 $ 0.24 (8) $ 0.21
========== ========== ==========
Shares used in computing pro forma net income per share 16,901 10,000 (8) 21,804
========== ========== ==========
See accompanying notes to unaudited pro forma consolidated
combined condensed financial information.
25
26
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1)
--------------------------- ----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
Revenues:
License and maintenance $ 9,266 $ 4,106 $ 13,372
Installation and implementation 3,757 3,757
Contracts and other 7,651 -- 7,651
Service bureau -- 5,058 5,058
---------- ---------- ----------
Total revenues 20,674 9,164 29,838
---------- ---------- ----------
Operating expenses:
License and maintenance 3,593 2,229 5,822
Installation and implementation 1,254 1,254
Contracts and other 5,040 -- 5,040
Service bureau -- 2,203 2,203
Research and development 4,344 335 4,679
Sales and marketing 3,603 675 4,278
General and administrative 2,591 1,090 3,681
---------- ---------- ----------
Total operating expenses 20,425 6,532 26,957
---------- ---------- ----------
Operating income 249 2,632 2,881
Other (expense) income, net (156) 16 (140)
---------- ---------- ----------
Income before income tax (benefit) provision 93 2,648 2,741
Income tax (benefit) provision (455) 54 (401)
---------- ---------- ----------
Net income $ 548 $ 2,594 $ 3,142
========== ========== ==========
Add:
S corporation state income tax provision 54 (7) 54
Deduct:
Pro forma federal and state income tax provision (1,059) (7) (1,059)
---------- ----------
Pro forma net income $ 1,589 $ 2,137
========== ==========
Pro forma net income per share $ 0.04 $ 0.16 (8) $ 0.11
========== ========== ==========
Shares used in computing pro forma net income per share 13,870 10,000 (8) 18,756
========== ========== ==========
See accompanying notes to unaudited pro forma consolidated
combined condensed financial information.
26
27
HNC SOFTWARE INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
FINANCIAL INFORMATION
(1) The unaudited pro forma consolidated combined condensed financial statements
of HNC and CompReview give retroactive effect to the CompReview acquisition
which will be accounted for as a pooling of interests and, as a result, such
statements are presented as if the companies had been combined for all
periods presented.
There were no material differences between the accounting policies of HNC
and CompReview. Certain amounts have been reclassified to conform to the pro
forma presentation.
(2) Transaction costs expected to be incurred to complete the Merger approximate
$1.4 million and consist primarily of investment banking, legal and
accounting fees, and printing, mailing and registration expenses. Due to the
non-recurring nature of these costs, they have not been reflected in the pro
forma statement of operations.
(3) The pro forma deferred income tax adjustment reflects the recognition of a
net deferred tax liability relating to federal and state income taxes as if
CompReview had been taxed as a C corporation rather than a subchapter S
corporation.
(4) The pro forma adjustment reflects the exchange of all outstanding shares of
CompReview's capital stock for an aggregate of approximately 4,885,560
shares of HNC Common Stock and the exchange of all outstanding options to
purchase CompReview Common Stock for options to purchase HNC Common Stock to
effect the CompReview acquisition. No changes will be made to the terms of
the CompReview Options in connection with the merger.
(5) As CompReview terminated its subchapter S corporation election in connection
with the Merger, undistributed earnings of CompReview have been reflected as
a contribution to the capital of the combined company.
(6) CompReview is a Subchapter S corporation for federal and certain state
income tax purposes, and has in the ordinary course of its business
historically paid cash distributions to its stockholders to provide them
with sufficient cash to meet their tax liabilities arising from CompReview's
operations. Consistent with its current dividend practices, CompReview
distributed to its stockholders additional cash dividends of $0.05 per share
during October 1997 prior to the Effective Time of the Merger.
(7) CompReview is a subchapter S corporation for federal and certain state
income tax purposes, and its historical financial statements reflect only
certain state taxes on subchapter S corporations as such taxable income or
loss is allocable to its stockholders, who are responsible for payment of
taxes.
For purposes of the unaudited pro forma consolidated combined condensed
statements of income for the nine month periods ended September 30, 1997 and
1996, and each of the three years in the period ended December 31, 1996,
federal and state income taxes have been provided as if CompReview had filed
subchapter C corporation income tax returns for the periods presented.
(8) Pro forma per share amounts are based on weighted average options, using the
treasury stock method, and shares outstanding during each period, assuming
each then outstanding share of CompReview Common Stock or CompReview Option
is exchanged for 0.4886 shares or options to purchase 0.4886 shares of HNC
Common Stock. The 0.4886 Conversion Ratio is based on application of the
Merger conversion formula.
27
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HNC Software Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity (deficit) present fairly, in all material respects, the financial
position of HNC Software Inc. and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 2, on November 28, 1997, HNC Software Inc. merged with
CompReview, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplemental consolidated financial statements give retroactive
effect to the merger of HNC Software Inc. with CompReview, Inc.
In our opinion, the accompanying supplemental consolidated balance sheet and the
related supplemental consolidated statements of income, of cash flows and of
changes in stockholders' equity (deficit) present fairly, in all material
respects, the financial position of HNC Software Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express and opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
January 21, 1997,
except as to the pooling of interests with CompReview, Inc.
which is as of November 28, 1997
28
29
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-----------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 7,517 $ 20,583
Investments available for sale ...................................... 7,353 14,590
Accounts receivable, net ............................................ 19,468 6,996
Current portion of deferred income taxes ............................ 6,400 1,702
Other current assets ................................................ 1,869 1,561
-------- --------
Total current assets ............................................ 42,607 45,432
Investments available for sale .......................................... 19,375 8,336
Deferred income taxes, less current portion ............................. 22,966 346
Property and equipment, net ............................................. 5,966 3,991
Other assets ............................................................ 3,305 842
-------- --------
$ 94,219 $ 58,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 3,270 $ 1,434
Accrued liabilities ................................................. 4,058 2,818
Deferred revenue .................................................... 3,377 2,101
Bank line of credit ................................................. -- 2,195
Other current liabilities ........................................... 418 827
-------- --------
Total current liabilities ....................................... 11,123 9,375
-------- --------
Notes payable to stockholders ........................................... -- 1,000
-------- --------
Other non-current liabilities ........................................... 683 659
-------- --------
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred stock, $0.001 par value - 4,000 shares authorized:
no shares issued or outstanding ................................. -- --
Common stock, $0.001 par value - 50,000 and 40,000 shares authorized:
19,126 and 17,892 shares issued and outstanding, respectively ... 19 18
Paid-in capital ..................................................... 83,554 55,334
Unrealized (loss) gain on investments available for sale ............ (59) 92
Foreign currency translation adjustment ............................. 54 --
Accumulated deficit ................................................. (1,155) (7,531)
-------- --------
Total stockholders' equity ...................................... 82,413 47,913
-------- --------
$ 94,219 $ 58,947
======== ========
See accompanying notes to consolidated financial statements.
29
30
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
License and maintenance ................. $ 36,014 $ 16,878 $ 9,266
Installation and implementation ......... 6,691 4,648 3,757
Contracts and other ..................... 11,128 9,146 7,651
-------- -------- --------
Total revenues ...................... 53,833 30,672 20,674
-------- -------- --------
Operating expenses:
License and maintenance ................. 8,697 4,509 3,593
Installation and implementation ......... 2,714 1,425 1,254
Contracts and other ..................... 7,694 6,894 5,040
Research and development ................ 13,271 6,581 4,344
Sales and marketing ..................... 10,705 6,422 3,603
General and administrative .............. 6,634 3,699 2,591
-------- -------- --------
Total operating expenses ............ 49,715 29,530 20,425
-------- -------- --------
Operating income ............................ 4,118 1,142 249
Interest and other income ................... 2,128 834 156
Interest expense ............................ (478) (428) (312)
-------- -------- --------
Income before income tax benefit . 5,768 1,548 93
Income tax benefit .......................... (608) (575) (455)
-------- -------- --------
Net income ....................... $ 6,376 $ 2,123 $ 548
======== ======== ========
Pro forma net income per share .............. $ 0.13 $ 0.04
======== ========
Shares used in computing pro forma net income
per share ............................... 16,901 13,870
======== ========
Net income per share ........................ $ 0.31
========
Shares used in computing net income per share 20,367
========
See accompanying notes to consolidated financial statements.
30
31
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income ......................................................... $ 6,376 $ 2,123 $ 548
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................. 3,344 1,589 629
Changes in assets and liabilities:
Accounts receivable, net .................................... (10,100) (1,393) (1,754)
Other assets ................................................ (1,178) (664) (1,348)
Deferred income taxes ....................................... (1,332) (1,548) --
Accounts payable ............................................ 1,836 658 139
Accrued liabilities ......................................... 625 1,756 390
Deferred revenue ............................................ 1,472 1,337 (92)
Other liabilities ........................................... (402) -- 280
-------- -------- --------
Net cash provided by (used in) operating activities ..... 641 3,858 (1,208)
-------- -------- --------
Cash flows from investing activities:
Purchases of investments ........................................... (26,113) (28,666) (7,134)
Maturities of investments .......................................... 18,125 4,182 6,000
Proceeds from sale of investments .................................. 3,707 2,467 --
Acquisitions of property and equipment ............................. (3,853) (1,947) (1,534)
-------- -------- --------
Net cash used in investing activities ................... (8,134) (23,964) (2,668)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuances of common stock ........................ 1,935 33,726 10
Net proceeds from issuance of preferred stock ...................... -- -- 4,949
Tax benefit from stock options ..................................... 896 800 --
Proceeds under bank line of credit ................................. 309 1,085 3,255
Repayments under bank line of credit ............................... (2,504) (265) (2,890)
Proceeds from issuances of notes payable to stockholders ........... -- 1,000 --
Repayment of notes payable to stockholders ......................... (1,000) -- --
Repayment of debt from asset purchases ............................. (4,710) -- --
Capital lease payments ............................................. (553) (502) (304)
Proceeds from issuances of bank notes payable ...................... 1,999 -- 603
Repayments of bank notes payable ................................... (1,999) (687) (348)
-------- -------- --------
Net cash (used in) provided by financing activities ..... (5,627) 35,157 5,275
-------- -------- --------
Effect of exchange rate changes on cash ................................ 54 -- --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................... (13,066) 15,051 1,399
Cash and cash equivalents at beginning of period ....................... 20,583 5,532 4,133
-------- -------- --------
Cash and cash equivalents at end of period ............................. $ 7,517 $ 20,583 $ 5,532
======== ======== ========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets purchased through issuance of debt .......................... $ 4,710 $ -- $ --
======== ======== ========
Acquisitions of property and equipment under capital leases ........ $ 344 $ 411 $ 1,128
======== ======== ========
Conversion of preferred stock ...................................... $ -- $ 13,518 $ --
======== ======== ========
Accretion of dividends on mandatorily redeemable convertible
preferred stock ................................................ $ -- $ 348 $ 717
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid ...................................................... $ 448 $ 390 $ 305
======== ======== ========
Income taxes paid .................................................. $ 50 $ 144 $ 30
======== ======== ========
See accompanying notes to consolidated financial statements.
31
32
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK
------------------------------------
SERIES A SERIES E COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1993 380 $ -- -- $ -- 3,730 $ 4
Common stock options exercised................ 40
Issuance of Series E preferred stock, net
of issuance costs...................... 1,282 1
Accretion of dividends........................
Net income....................................
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1994 380 -- 1,282 1 3,770 4
Common stock options exercised................ 207
Accretion of dividends........................
Issuance of common stock in initial public
offering, net of issuance costs........ 2,376 2
Conversion of convertible preferred stock
into common stock...................... (380) (1,282) (1) 8,956 9
Issuance of common stock in secondary
public offering, net of
issuance costs......................... 1,116 2
Issuance of common stock at inception of
Retek (Note 2)......................... 1,367 1
Tax benefit from stock option transactions....
Unrealized gain on investments
available for sale.....................
Stock warrant exercised....................... 100
Net income....................................
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1995 -- -- -- -- 17,892 18
Common stock options exercised................ 1,140 1
Common stock issued for
Employee Stock Purchase Plan........... 94
Tax benefit from stock option transactions....
Tax benefit from Retek taxable pooling
(Note 9)....................................
Unrealized loss on investments
available for sale.....................
Foreign currency translation adjustment.......
Net income....................................
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1996 -- $ -- -- $ -- 19,126 $ 19
====== ====== ====== ====== ====== =======
UNREALIZED
GAIN (LOSS) ON FOREIGN TOTAL
INVESTMENTS CURRENCY STOCKHOLDERS'
PAID-IN AVAILABLE TRANSLATION ACCUMULATED EQUITY
CAPITAL FOR SALE ADJUSTMENT (DEFICIT) (DEFICIT)
------ -------------- ----------- ----------- --------------
BALANCE AT DECEMBER 31, 1993 $ 6,302 $ -- $ -- $(13,094) $ (6,788)
Common stock options exercised .................. 10 10
Issuance of Series E preferred stock, net
of issuance costs ........................ 4,948 4,949
Accretion of dividends .......................... 717 (717)
Net income ...................................... 548 548
------- ------ ----- -------- ---------
BALANCE AT DECEMBER 31, 1994 10,543 -- -- (12,546) (1,998)
Common stock options exercised .................. 85 85
Accretion of dividends .......................... (348) (348)
Issuance of common stock in initial public
offering, net of issuance costs .......... 14,329 14,331
Conversion of convertible preferred stock
into common stock ........................ 10,618 2,892 13,518
Issuance of common stock in secondary
public offering, net of issuance costs ... 19,184 19,186
Issuance of common stock at inception of
Retek (Note 2) ........................... (1) --
Tax benefit from stock option transactions ...... 800 800
Unrealized gain on investments
available for sale ....................... 92 92
Stock warrant exercised ......................... 124 124
Net income ...................................... 2,123 2,123
------- ------ ----- -------- ---------
BALANCE AT DECEMBER 31, 1995 55,334 92 -- (7,531) 47,913
Common stock options exercised .................. 1,095 1,096
Common stock issued for
Employee Stock Purchase Plan ............. 839 839
Tax benefit from stock option transactions ...... 7,889 7,889
Tax benefit from Retek taxable
pooling (Note 9) ............................ 18,397 18,397
Unrealized loss on investments
available for sale ....................... (151) (151)
Foreign currency translation adjustment.......... 54 54
Net income ...................................... 6,376 6,376
------- ------ ----- -------- ---------
BALANCE AT DECEMBER 31, 1996 $83,554 $ (59) $ 54 $ (1,155) $ 82,413
======= ====== ===== ======== =========
See accompanying notes to consolidated financial statements.
32
33
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
HNC Software Inc. (the "Company") develops, markets and supports intelligent
client-server software solutions for mission-critical decision applications in
real-time environments. The Company also performs contract research and
development using neural networks and other computational intelligence methods.
Basis of Presentation
The consolidated financial statements and related notes give retroactive
effect to the mergers on August 30, 1996 with Risk Data Corporation ("RDC") and
on November 29, 1996 with Retek Distribution Corporation ("Retek"), for all
periods presented, accounted for as poolings of interests. RDC is an insurance
information technology services firm engaged in the business of developing and
marketing analytical benchmarking and risk management software products
primarily for insurance carriers, state insurance funds and third party
administrators. Retek develops, markets and installs inventory management system
software primarily for customers in the retail industry.
The consolidated balance sheet as of December 31, 1996 and 1995 includes the
accounts of RDC and Retek as of December 31, 1996 and 1995. The consolidated
statements of income, of cash flows and of changes in stockholders' equity
(deficit) for each of the three years in the period ended December 31, 1996
include the results of RDC and Retek for the years then ended. The term
"Company" as used in these consolidated financial statements refers to HNC
Software Inc. and its subsidiaries, including RDC and Retek.
No adjustments to conform accounting methods were required. Certain amounts
have been reclassified with regard to presentation of the financial information
of the two companies. Revenues and net income (loss) for each of the previously
separate companies for the periods prior to their acquisitions are as follows:
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED SIX MONTHS ENDED -----------------------------
SEPTEMBER 30, 1996 JUNE 30, 1996 1995 1994
------------------ ----------------- -------- --------
(unaudited) (unaudited)
Revenues:
HNC .................... $ 31,423 $ 16,478 $ 25,174 $ 16,473
RDC .................... -- 2,600 4,577 4,201
Retek .................. 5,635 3,377 921 --
-------- -------- -------- --------
$ 37,058 $ 22,455 $ 30,672 $ 20,674
======== ======== ======== ========
Net income (loss):
HNC .................... $ 975 $ 1,780 $ 4,457 $ 1,923
RDC .................... -- (2,184) (1,952) (1,375)
Retek .................. 93 43 (382) --
-------- -------- -------- --------
$ 1,068 $ (361) $ 2,123 $ 548
======== ======== ======== ========
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Financial Statement Preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
33
34
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments in
money market accounts and commercial paper purchased with maturities of three
months or less.
Investments
Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. As of and for the year ended
December 31, 1994 based upon the Company's intent and ability, the Company
classified such securities in the held-to-maturity category and recorded these
securities at amortized cost, which approximated market value. As of December
31, 1995, the Company reassessed its intent and ability with respect to these
securities. As a result of this reassessment, the Company reclassified all
securities as "available for sale" and accounts for them accordingly on a
prospective basis. Available for sale securities are carried at fair value with
unrealized gains or losses related to these securities included in stockholders'
equity in the Company's consolidated balance sheet.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets of three to seven years. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the remaining terms of the
related leases. Repair and maintenance costs are charged to expense as incurred.
Software Costs
Software costs are recorded at cost and amortized over their estimated useful
lives of 36 to 42 months. Software costs are comprised of purchased software and
other rights which are recorded at the lower of cost or net realizable value. At
December 31, 1996 and 1995, software costs of $2,561 and $0, respectively, are
included in other assets in the consolidated balance sheet net of accumulated
amortization of $642 and $0, respectively.
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Through December 31, 1996, no significant amounts were expended
subsequent to reaching technological feasibility.
Long-Lived Assets
The Company investigates potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill, on an exception basis, when
events or changes in circumstances have made recovery of an asset's carrying
value unlikely. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairments of long-lived assets existed through December 31, 1996.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense (Note 10).
Revenue Recognition
Revenue from long-term periodic software license agreements is generally
recognized ratably over the respective license periods. 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.
34
35
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue from software installation and contract services is generally
recognized as the services are performed using the percentage of completion
method based on costs incurred to date compared to total estimated costs at
completion. Amounts received in advance of performance under contracts are
recorded as deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period such
losses are first identified. Unbilled receivables are stated at estimated
realizable value. Contract costs under government contracts, including indirect
costs, are subject to audit and adjustment by negotiations between the Company
and government representatives. Through 1990, indirect government contract costs
have been agreed upon with government representatives. Revenues from government
contracts have been recorded in amounts that are expected to be realized upon
final settlement.
Revenue from product sales, which is included in contracts and other revenue,
is recognized upon shipment to the customer.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
computed for the expected future impact of differences between the financial
reporting and tax bases of assets and liabilities as well as the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount "more likely than not" to be realized in future tax returns. Tax rate
changes are reflected in income during the period such changes are enacted.
Foreign Currency Translation
The financial statements of the Company's international operations are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation gains and losses are excluded from results of
operations and accumulated as a separate component of stockholders' equity.
Gains and losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments and trade
accounts receivable which are generally not collateralized. The Company's policy
is to place its cash, cash equivalents and investments with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of its credit exposure. The Company's software license and
installation agreements and commercial development contracts are primarily with
customers in the financial services, insurance and retail industries. The
Company maintains reserves for potential credit losses.
During 1996, 1995 and 1994, sales under prime and subcontracts with the
federal government represented 3.0%, 7.3%, and 11.3%, respectively, of the
Company's total revenues. One domestic customer accounted for 11.4%, 12.4% and
11.6% of total revenues in 1996, 1995 and 1994, respectively. Revenues from
international operations and export sales, primarily to Western Europe and
Canada, represented approximately 23.4%, 17.9%, and 11.4% of total revenues in
1996, 1995 and 1994, respectively. Export sales were $7,310, $4,595 and $2,355
in 1996, 1995 and 1994, respectively.
Disclosures about fair value of financial instruments
The carrying amounts of cash and cash equivalents, accrued liabilities, the
bank line of credit and notes payable to stockholders approximate fair value
because of the short term maturities of these financial instruments. The
carrying amounts of capital lease obligations approximate their fair values
based on interest rates currently available to the Company for borrowings with
similar terms and maturities.
35
36
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reincorporation and stock split
In May 1995, the stockholders approved an Agreement and Plan of Merger
whereby the Company merged with and into a newly incorporated Delaware
corporation ("HNC Delaware"), which is the surviving corporation. In conjunction
with the merger, each share of the Company's common stock, preferred stock and
options and warrants to purchase the Company's common stock was exchanged for
one-half share of HNC Delaware's common stock, preferred stock and options and
warrants to purchase HNC Delaware's common stock, at twice the exercise price
for options and warrants. All references to share and per share amounts of
common and preferred stock and other data in these financial statements have
been retroactively restated to reflect the reincorporation.
In April 1996, the Company consummated a two-for-one stock split effected in
the form of a common stock dividend. All references in these consolidated
financial statements to share and per share amounts have been adjusted to give
retroactive effect to the stock split.
Pro forma net income per share
Pro forma net income per share is computed based on the weighted average
number of common shares and common stock equivalents, using the treasury stock
method, outstanding during the respective periods after giving retroactive
effect to the conversion, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into 8,957
shares of common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all stock options granted from May 5, 1994 through
June 26, 1995 have been included as outstanding for all periods prior to June
26, 1995 using the treasury stock method and the $7.00 initial public offering
price per share. For periods prior to 1996, historical earnings per share are
not presented because such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the initial public offering.
Net income per share
Net income per share is computed based on the weighted average number of
common shares and common stock equivalents, using the treasury stock method,
outstanding during the period.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 -- ACQUISITIONS
On August 30, 1996, the Company completed an acquisition of Risk Data
Corporation ("RDC"). Under the terms of the acquisition, accounted for as a
pooling of interests, the Company exchanged 1,891 common shares for all of the
then outstanding shares of RDC preferred and common stock. All periods presented
have been retroactively restated (Note 1).
On November 29, 1996, the Company completed an acquisition of all of the
outstanding shares of Retek Distribution Corporation. Under the terms of the
acquisition, accounted for as a pooling of interests, the Company exchanged
1,367 common shares for all of Retek's then outstanding shares. All periods
presented have been retroactively restated (Note 1).
Transaction costs of $563 and $515 were incurred to complete the mergers with
RDC and Retek, respectively. Transaction costs were charged to income as
incurred and consisted primarily of investment banker, legal and accounting
fees, and printing, mailing and registration expenses.
36
37
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-----------------------
1996 1995
-------- --------
Accounts receivable, net:
Billed .................................. $ 10,156 $ 4,048
Unbilled ................................ 9,299 2,955
Other ................................... 636 496
-------- --------
20,091 7,499
Less allowance for doubtful accounts ......... (623) (503)
-------- --------
$ 19,468 $ 6,996
======== ========
Unbilled amounts represent revenue recorded in excess of amounts billable
pursuant to contract provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled amounts are
expected to be realized within one year.
DECEMBER 31,
-----------------------
1996 1995
-------- --------
Property and equipment, net:
Computer equipment ...................... $ 8,409 $ 4,934
Furniture and fixtures .................. 1,884 1,268
Leasehold improvements .................. 273 167
-------- --------
10,566 6,369
Less accumulated depreciation and amortization (4,600) (2,378)
-------- --------
$ 5,966 $ 3,991
======== ========
Accrued liabilities:
Payroll and related benefits ............ $ 1,457 $ 1,126
Vacation ................................ 673 435
Other ................................... 1,928 1,257
-------- --------
$ 4,058 $ 2,818
======== ========
NOTE 4 -- INVESTMENTS
At December 31, 1996 and 1995, the amortized cost and estimated fair value of
investments available for sale were as follows:
DECEMBER 31, 1996
---------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Current:
U.S. government and federal agencies $ 1,999 $ -- $ (2) $ 1,997
U.S. corporate debt ................ 3,149 -- (6) 3,143
Foreign corporate debt ............. 2,216 -- (3) 2,213
---------- ---------- ---------- ----------
7,364 -- (11) 7,353
---------- ---------- ---------- ----------
Non-current:
U.S. government and federal agencies $ 16,213 $ -- $ (36) $ 16,177
Foreign government debt ............ 1,006 -- (2) 1,004
U.S. corporate debt ................ 1,702 -- (8) 1,694
Foreign corporate debt ............. 502 -- (2) 500
---------- ---------- ---------- ----------
19,423 -- (48) 19,375
---------- ---------- ---------- ----------
$ 26,787 $ -- $ (59) $ 26,728
========== ========== ========== ==========
37
38
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
-------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Current:
U.S. government and federal agencies $ 1,481 $ 9 $ -- $ 1,490
Foreign government debt ............ 1,017 2 -- 1,019
U.S. corporate debt ................ 8,870 45 -- 8,915
Foreign corporate debt ............. 3,164 2 -- 3,166
---------- ---------- ---------- ----------
14,532 58 -- 14,590
---------- ---------- ---------- ----------
Non-current:
Foreign government debt ............ $ 1,019 2 -- 1,021
U.S. corporate debt ................ 7,077 32 -- 7,109
Foreign corporate debt ............. 206 -- -- 206
---------- ---------- ---------- ----------
8,302 34 -- 8,336
---------- ---------- ---------- ----------
$ 22,834 $ 92 $ -- $ 22,926
========== ========== ========== ==========
Maturities for non-current investments in securities range from one to two
years. Included in the Company's 1995 income statement is a realized gain in the
amount of $3 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464. No significant gains or losses
were recognized during the year ended December 31, 1996. The cost of securities
sold is determined by the specific identification method.
NOTE 5 -- NOTES PAYABLE
The Company has a Loan and Security Agreement with a bank which provides for
a $5,000 revolving line of credit through July 10, 1997. The agreement requires
that the Company maintain certain financial ratios and levels of tangible net
worth and also restricts the Company's ability to pay cash dividends and
repurchase stock without the bank's consent. At December 31, 1996 and 1995, the
Company had $0 outstanding under the revolving line of credit. Any borrowings
under the agreement will be collateralized by substantially all of the Company's
assets. Interest is payable monthly at the bank's prime rate, which was 8.25% at
December 31, 1996.
The RDC credit facility was comprised of a revolving line of credit secured
by eligible accounts receivable as well as a bridge loan which was secured by
the guarantees of certain stockholders. The revolving line of credit matured on
January 5, 1997. The bridge loan matured on September 5, 1996. All outstanding
amounts were repaid during 1996 and neither credit facility was renewed.
During 1995, the preferred stockholders of RDC loaned the Company $1,000
under subordinated note agreements (secured by the assets of RDC but
subordinated to borrowings under the RDC line of credit) bearing interest at 9%.
All outstanding amounts were repaid during 1996.
NOTE 6 -- LEASES
At December 31, 1996, the Company is obligated under noncancelable operating
leases for its facilities and certain equipment through 2003 as follows:
38
39
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- --------------
1997 $1,943 $212 $1,731
1998 1,539 192 1,347
1999 1,189 149 1,040
2000 1,211 - 1,211
2001 1,249 - 1,249
thereafter 1,787 - 1,787
The lease for the Company's corporate headquarters provides for scheduled
rent increases and an option to extend the lease for five years with certain
changes to the terms of the lease agreement and a refurbishment allowance. Rent
expense under operating leases for the years ended December 31, 1996, 1995, and
1994 was approximately $1,340, $1,192, and $898, respectively, net of sublease
income of $125, $83 and $40, respectively.
RDC maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are as follows:
1997....................................... $ 475
1998....................................... 232
1999....................................... 66
-----
773
Less amounts representing interest ........ (110)
-----
Capital lease obligations ................. 663
Less current portion ...................... (399)
-----
$ 264
=====
The gross value of assets under capital leases at December 31, 1996 and 1995
was $1,481 and $2,186 and accumulated amortization was $599 and $572,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY
In November 1992, the Company entered into an agreement that granted Mitek a
license to use certain character recognition technology developed by the
Company. The agreement provided for the Company to receive an initial license
and support fee payment of $1,350 and an additional license and support fee
based on a percentage of Mitek's revenue from the sale of character recognition
products through November 1995. The agreement also required that the Company
sell certain proprietary computer boards to Mitek at a substantial discount from
normal sales prices, but in excess of cost, and provide ongoing engineering and
technical support over the agreement period, which ended during November 1995.
As the Company had a significant continuing obligation under this agreement, the
initial license and support fee received thereunder was deferred on receipt and
recognized as revenue over the performance period based on estimated sales of
proprietary computer boards. The additional license and support fees were
recognized as a percentage of actual Mitek revenues pursuant to the agreement.
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows:
39
40
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
------ ------
Initial license fee ...................... $ 47 $ 295
Additional license and support fee ....... 314 476
Computer board sales ..................... 527 657
------ ------
$ 888 $1,428
====== ======
NOTE 8 -- CAPITAL STOCK
During June 1995, the Company completed its initial public offering for sale
of 5,175 shares of common stock (of which 2,375 shares were sold by the Company
and 2,800 shares were sold by certain selling stockholders) at a price to the
public of $7.00 per share, which resulted in net proceeds to the Company of
$15,461 after the payment of underwriters' commissions but before the deduction
of offering expenses. Upon the closing of the Company's initial public offering,
all outstanding shares of Series A, B, C, D, and E convertible preferred stock
were automatically converted into shares of common stock at their then effective
conversion prices. Upon conversion, the preferred stockholders were no longer
entitled to any undeclared cumulative dividends and all class voting rights
terminated.
During December 1995, the Company completed a secondary public offering for
sale of 3,000 shares of common stock (of which 1,116 shares were sold by the
Company and 1,884 shares were sold by certain selling stockholders) at a price
to the public of $18.50 per share, which resulted in net proceeds to the Company
of $19,606 after the payment of underwriters' commissions but before the
deduction of offering expenses.
The Board of Directors is authorized to issue up to 4,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to the rights of the holders of any Preferred Stock that may be issued
in the future.
NOTE 9 -- INCOME TAXES
Income (loss) before income tax benefit was taxed under the following
jurisdictions:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------- ------- -------
Domestic .............. $ 3,008 $ 1,746 $ 93
Foreign ............... 2,760 (198) --
------- ------- -------
$ 5,768 $ 1,548 $ 93
======= ======= =======
The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------- ------- -------
Current:
Federal ............... $ 1,132 $ 97 $ 17
State ................. 137 76 28
Foreign ............... 51 -- --
Deferred:
Federal ............... (1,569) (521) (425)
State ................. (63) (183) (75)
Foreign ............... (296) (44) --
------- ------- -------
$ (608) $ (575) $ (455)
======= ======= =======
40
41
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Deferred tax assets are summarized as follows:
DECEMBER 31,
1996 1995
------- -------
Taxable pooling basis difference ..... $18,397 $ -
Net operating loss carryforwards ..... 8,587 2,902
Tax credit carryforwards ............. 1,878 1,370
Other ................................ 504 493
------- -------
Gross deferred tax assets ............ 29,366 4,765
Deferred tax asset valuation allowance - (2,717)
------- -------
Net deferred tax asset ............ $29,366 $ 2,048
======= =======
At December 31, 1994, the Company provided a deferred tax asset valuation
allowance for deferred tax assets which management determined were "more likely
than not" unrealizable based on trends in operating results after eliminating
the effects of non-recurring revenue (Note 7). During 1995, the Company released
the valuation allowance related to HNC's deferred tax assets based on
management's assessment that it was more likely than not that the Company would
realize a portion of those assets in future periods due to improvements in HNC's
operating results. During 1996, the Company released the valuation allowances
related to RDC and Retek deferred tax assets based on management's assessment
that it was more likely than not that the Company would realize those assets in
future periods due to improvements in the operating results of those
subsidiaries.
During 1996 and 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $7,889 and $800, respectively. The benefit
from the stock option tax deduction is credited directly to paid-in capital.
In connection with the acquisition of Retek, the Company made an Internal
Revenue Code Section 338 election for federal and state tax purposes, resulting
in the treatment of the acquisition as a taxable transaction, whereby the tax
bases of the acquired assets and liabilities were adjusted to their fair values
as of the date of the acquisition. As the purchase price exceeded the carrying
value of the net assets acquired by approximately $46,000, the Company recorded
a deferred tax asset in the amount of $18,397.
A reconciliation of the income tax benefit to the amount computed by
applying the statutory federal income tax rate to income before income tax
provision is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Amounts computed at statutory federal rate ....... $ 1,961 $ 526 $ 32
Release of valuation allowance ................... (2,717) (2,223) (1,008)
Tax credit carryforwards generated ............... (334) (68) (51)
Losses without tax benefit ....................... - 794 468
Separate return impact of acquired businesses .... (154) - -
Acquisition expenses not tax deductible .......... 367 - -
State income tax expense ......................... 480 401 28
Foreign net operating loss carryforwards generated (296) (44) -
Other ............................................ 85 39 76
------- ------- -------
Income tax benefit ............................ $ (608) $ (575) $ (455)
======= ======= =======
41
42
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
At December 31, 1996, the Company had federal, state and foreign net
operating loss carryforwards of approximately $22,300, $10,800 and $800,
respectively. The Company's net operating loss carryforwards expire as follows:
1997 .......... $ 278
1998 .......... 240
1999 .......... 2
2001 .......... 9,148
2003 .......... 833
2004 .......... 1,240
2005 .......... 1,216
2006 .......... 1,670
2007 .......... 17
2008 .......... 1,692
2009 .......... 1,370
2010 .......... 1,840
2011 .......... 14,086
No expiration . 268
The Company also has approximately $1,400 of federal research and
development credit carryforwards, which expire from 2000 to 2011, $400 of state
research and development credit carryforwards, which have no expiration date,
and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000.
Certain of these net operating loss and research and development credit
carryforwards generated by RDC and Retek prior to their acquisitions by HNC are
subject to annual limitations on their utilization and also are limited to
utilization solely by the Company which generated them. Should a substantial
change in HNC's ownership occur, as defined by the Tax Reform Act of 1986, there
will be an annual limitation on the utilization of net operating loss and
research and development credit carryforwards.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500
shares of the Company's common stock were reserved for issuance pursuant to
nonqualified and incentive stock options to its officers, directors, key
employees and consultants. The plan, as amended, is administered by the Board of
Directors or its designees and provides generally that, for incentive stock
options and nonqualified stock options, the exercise price must not be less than
the fair market value of the shares as determined by the Board of Directors at
the date of grant. The options expire no later than ten years from the date of
grant and may be exercised in installments based upon stipulated timetables (not
in excess of seven years). At December 31, 1996, options to purchase 545 shares
were exercisable.
During 1995, the Company adopted the 1995 Directors Stock Option Plan (the
"Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the
discussion contained in the three paragraphs below, "fair market value" means
the closing price of the Company's Common Stock on the Nasdaq National Market on
the grant date.
The Directors Plan provides for the issuance of up to 300 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25 shares of the Company's common stock are
granted to outside directors upon their respective dates of becoming members of
the Board of Directors and 10 additional options will be granted on each
anniversary of such dates. Options under the Directors Plan are granted at the
fair market value of the stock at the grant date and vest at specific times over
a four-year period. At December 31, 1996, options to purchase 40 shares were
exercisable.
The Incentive Plan provides for the issuance of up to 2,800 shares of the
Company's common stock in the form of nonqualified or incentive stock options,
restricted stock or stock bonuses. In addition, any shares remaining unissued
under the 1987 Stock Option Plan on the effective date of the Incentive Plan,
and any shares issuable upon exercise of options granted pursuant to the 1987
Stock Option Plan that expire or become unexercisable for any reason without
having been exercised in full, will no longer be available for
42
43
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
issuance under the 1987 Stock Option Plan but will be available for issuance
under the Incentive Plan. Nonqualified stock options and restricted stock may be
awarded at a price not less than 85% of the fair market value of the stock at
the date of the award. Incentive stock options must be awarded at a price not
less than 100% of the fair market value of the stock at the date of the award,
or 110% of fair market value for awards to more than 10% stockholders. Options
granted under the Incentive Plan may have a term of up to 10 years. The Company
has the discretion to provide for restrictions and the lapse thereof in respect
of restricted stock awards, and options typically vest at the rate of 25% of the
total grant per year over a four-year period. However, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1996, 58 shares were exercisable under the
Incentive Plan.
The Purchase Plan provides for the issuance of a maximum of 400 shares of
common stock. Each purchase period, eligible employees may designate between 2%
and 10% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the twelve-month offering period or the last day of
each six-month purchase period. Approximately 65% of eligible employees have
participated in the Plan in the last two years. Under the Purchase Plan, the
Company sold 94 shares to employees in 1996.
RDC's stock option plan is administered by HNC's Board of Directors. All
outstanding RDC options were converted into options to purchase HNC common stock
and adjusted to give effect to the exchange ratio (Note 2). No changes were made
to the terms of the RDC options in connection with the exchange. Options granted
under the RDC stock option plan generally vest at the rate of 25% of the total
grant per year over a four-year period and expire 10 years after the date of
grant. At December 31, 1996, 63 shares were exercisable under the RDC plan.
Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase the Company's
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the Retek options in connection with the
exchange. Options granted vest ratably over periods from one to four years and
have a term of up to 10 years. At December 31, 1996, options to purchase 28
shares were exercisable.
Transactions under the Company's stock option and purchase plans during
the years ended December 31, 1996 and 1995, including options under the RDC
stock option plan and options under the Retek stock option plan but excluding
options to purchase stock of a subsidiary of the Company, Aptex Software Inc.
("Aptex"), are summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995
-------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
Outstanding at beginning of year ............. 2,722 $ 2.87 2,081 $ 0.49
Options granted .............................. 1,591 28.84 1,101 6.67
Options exercised ............................ (1,140) .96 (207) 0.41
Options canceled ............................. (150) 17.77 (253) 1.75
------ ------
Outstanding at end of year ................... 3,023 16.53 2,722 2.87
====== ======
Options exercisable at end of year ........... 734 1,427
Weighted average fair value of options granted
during the year .............................. $ 16.94 $ 4.64
43
44
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- ----------------- --------------
$ 0.02 to $ 0.92 554 4.66 years $ 0.35 475 $ 0.30
1.00 to 3.00 607 8.10 2.67 157 2.67
4.50 to 21.38 505 8.73 13.06 92 10.91
21.50 to 30.25 510 9.38 26.64 1 22.55
30.50 to 30.75 568 9.73 30.68 9 30.75
30.81 to 49.50 279 9.47 37.81 - -
------ ------
$ 0.02 to $49.50 3,023 8.23 16.53 734 2.55
====== ======
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex
Plan") whereby 2,000 shares of Aptex common stock were reserved for issuance
pursuant to nonqualified and incentive stock options and restricted stock
awards. The plan is administered by the Board of Directors of Aptex or its
designees and provides generally that nonqualified stock options and restricted
stock may be awarded at a price not less than 85% of the fair market value of
the stock at the date of the award. Incentive stock options must be awarded at a
price not less than 100% of the fair market value of the stock at the date of
the award, or 110% of fair market value for awards to more than 10%
stockholders. Options granted under the Incentive Plan may have a term of up to
10 years. The Company has the discretion to provide for restrictions and the
lapse thereof in respect of restricted stock awards, and options typically vest
at the rate of 25% of the total grant per year over a four-year period. However,
the Company may, at its discretion, implement a different vesting schedule with
respect to any new stock option grant. During 1996, Aptex issued 1,000 shares of
common stock under the Aptex Plan at an issuance price of $0.03 per share. No
options granted under the Aptex Plan were exercisable at December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1996 and
1995 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards Board Statement No.
123, the Company's net income and pro forma net income per share would have been
reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
Net income:
As reported .................................. $ 6,376 $ 2,123
Pro forma .................................... 2,137 1,549
Net income per share:
As reported .................................. $ .31 $ .13
Pro forma .................................... .11 .09
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1996 and 1995,
respectively: dividend yield of 0.0% for both years, risk-free interest rates of
6.03% and 6.29%, expected volatility of 70% and 75%, and expected lives of 3.5
years for both years. The fair value of the employees' purchase rights pursuant
to the Purchase Plan is estimated using the Black-Scholes model with the
following assumptions: dividend yield of 0.0% for both years, risk-free interest
rates of 5.36% and 5.66%, expected volatility of 70% and 75%; and an expected
life of 6 months for both years. The weighted-average fair value of those
purchase rights granted in 1996 and 1995 was $9.61 and $2.75, respectively.
44
45
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The fair value of each option granted under the Aptex Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%,
expected volatility of 90%, and an expected life of 9.25 years. Options to
purchase 704 shares were granted during 1996 at a weighted average exercise
price of $0.03 per share. The weighted average fair value of options granted
during the year was $0.03 per share. At December 31, 1996, there were 704
options outstanding under the Aptex Plan with a weighted average exercise price
of $0.03 per share and a weighted average remaining contractual life of 9.74
years.
NOTE 11 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 12 -- SUBSEQUENT EVENT
On November 28, 1997, the Company acquired all of the outstanding stock of
CompReview, Inc., ("CompReview"), an insurance information technology product
and services company located in Costa Mesa, California, in exchange for the
issuance of 4,885,560 shares of HNC common stock. All outstanding options of
CompReview were exchanged for options to purchase 195,419 shares of HNC common
stock. The acquisition was effected through a statutory merger for which the
Company intends to account as a "pooling of interests" transaction for financial
reporting purposes, and the merger was structured to be a "tax-free"
reorganization for income tax purposes.
45
46
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-----------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 8,121 $ 22,049
Investments available for sale ........................................ 7,353 14,590
Accounts receivable, net .............................................. 22,492 9,142
Current portion of deferred income taxes .............................. 6,383 1,692
Other current assets .................................................. 1,917 1,573
-------- --------
Total current assets ............................................... 46,266 49,046
Investments available for sale .......................................... 19,375 8,336
Deferred income taxes, less current portion ............................. 22,966 346
Property and equipment, net ............................................. 6,339 4,501
Other assets ............................................................ 3,330 874
-------- --------
$ 98,276 $ 63,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 4,368 $ 2,300
Accrued liabilities ................................................... 4,433 3,094
Deferred revenue ...................................................... 3,377 2,101
Bank line of credit ................................................... -- 2,195
Other current liabilities ............................................. 445 893
-------- --------
Total current liabilities ........................................... 12,623 10,583
-------- --------
Notes payable to stockholders ........................................... -- 1,000
-------- --------
Other non-current liabilities ........................................... 683 659
-------- --------
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred stock, $0.001 par value - 4,000 shares authorized:
no shares issued and outstanding .................................... -- --
Common stock, $0.001 par value - 50,000 and 40,000 shares authorized:
24,012 and 22,778 shares issued and outstanding, respectively ....... 24 23
Paid-in capital ....................................................... 83,991 55,771
Unrealized (loss) gain on investments available for sale .............. (59) 92
Foreign currency translation adjustment ............................... 54 --
Retained earnings (accumulated deficit) ............................... 960 (5,025)
-------- --------
Total stockholders' equity .......................................... 84,970 50,861
-------- --------
$ 98,276 $ 63,103
======== ========
See accompanying notes to supplemental consolidated financial statements.
46
47
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
License and maintenance .................................... $ 48,890 $ 24,561 $ 13,372
Installation and implementation ............................ 6,691 4,648 3,757
Contracts and other ........................................ 11,128 9,146 7,651
Service bureau ............................................. 4,730 5,349 5,058
-------- -------- --------
Total revenues ........................................ 71,439 43,704 29,838
-------- -------- --------
Operating expenses:
License and maintenance .................................... 13,725 7,903 5,822
Installation and implementation ............................ 2,714 1,425 1,254
Contracts and other ........................................ 7,694 6,894 5,040
Service bureau ............................................. 3,365 3,025 2,203
Research and development ................................... 13,808 6,998 4,679
Sales and marketing ........................................ 11,923 7,276 4,278
General and administrative ................................. 8,551 5,101 3,681
-------- -------- --------
Total operating expenses ............................... 61,780 38,622 26,957
-------- -------- --------
Operating income ............................................... 9,659 5,082 2,881
Interest and other income ...................................... 2,178 912 172
Interest expense ............................................... (478) (428) (312)
-------- -------- --------
Income before income tax benefit ....................... 11,359 5,566 2,741
Income tax benefit ............................................. (534) (511) (401)
-------- -------- --------
Net income ............................................. $ 11,893 $ 6,077 $ 3,142
======== ======== ========
Pro forma net income per share ................................. $ 0.28 $ 0.17
======== ========
Net income per share ........................................... $ 0.47
========
Shares used in computing pro forma net income and net income
per share (Note 1) ......................................... 25,348 21,804 18,756
======== ======== ========
Unaudited pro forma adjusted data (Note 1):
Income before income tax provision ......................... $ 11,359 $ 5,566 $ 2,741
Income tax provision ....................................... 1,628 1,032 604
-------- -------- --------
Net income ............................................... $ 9,731 $ 4,534 $ 2,137
======== ======== ========
Net income per share ....................................... $ 0.38 $ 0.21 $ 0.11
======== ======== ========
Shares used in computing pro forma adjusted net income
per share (unaudited) (Note 1) ............................... 25,348 21,804 18,756
======== ======== ========
See accompanying notes to supplemental consolidated financial statements.
47
48
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income ................................................................. $ 11,893 $ 6,077 $ 3,142
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 3,605 1,874 789
Changes in assets and liabilities:
Accounts receivable, net ............................................ (10,978) (1,658) (3,037)
Other assets ........................................................ (1,207) (674) (1,323)
Deferred income taxes ............................................... (1,324) (1,551) 13
Accounts payable .................................................... 2,167 1,172 556
Accrued liabilities ................................................. 1,521 2,556 390
Deferred revenue .................................................... 1,472 1,337 (92)
Other liabilities ................................................... (441) 22 297
-------- -------- --------
Net cash provided by operating activities ....................... 6,708 9,155 735
-------- -------- --------
Cash flows from investing activities:
Purchases of investments ................................................... (26,113) (28,666) (7,134)
Maturities of investments .................................................. 18,125 4,182 6,000
Proceeds from sale of investments .......................................... 3,707 2,467 --
Acquisitions of property and equipment ..................................... (3,978) (2,246) (1,920)
-------- -------- --------
Net cash used in investing activities ........................... (8,259) (24,263) (3,054)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuances of common stock ................................ 1,935 33,726 10
Net proceeds from issuances of preferred stock ............................. -- -- 4,949
Proceeds from issuances of notes payable to stockholders ................... -- 1,000 --
Repayment of notes payable to stockholders ................................. (1,000) -- --
Proceeds under bank line of credit ......................................... 309 1,085 3,255
Repayments under bank line of credit ....................................... (2,504) (265) (2,890)
Repayment of debt from asset purchases ..................................... (4,710) -- --
Capital lease payments ..................................................... (553) (502) (304)
Proceeds from issuances of bank notes payable .............................. 1,999 -- 603
Repayments of bank notes payable ........................................... (1,999) (687) (348)
Distributions to CompReview Stockholders ................................... (5,908) (3,845) (990)
-------- -------- --------
Net cash (used in) provided by financing activities ............. (12,431) 30,512 4,285
-------- -------- --------
Effect of exchange rate changes on cash ........................................ 54 -- --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ........................... (13,928) 15,404 1,966
Cash and cash equivalents at beginning of period ............................... 22,049 6,645 4,679
-------- -------- --------
Cash and cash equivalents at end of period ..................................... $ 8,121 $ 22,049 $ 6,645
======== ======== ========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets purchased through issuance of debt .................................. $ 4,710 $ -- $ --
======== ======== ========
Acquisitions of property and equipment under capital leases ................ $ 344 $ 411 $ 1,128
======== ======== ========
Conversion of preferred stock .............................................. $ -- $ 13,518 $ --
======== ======== ========
Accretion of dividends on mandatorily redeemable convertible
preferred stock ........................................................ $ -- $ 348 $ 717
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid .............................................................. $ 448 $ 390 $ 305
======== ======== ========
Income taxes paid .......................................................... $ 165 $ 190 $ 54
======== ======== ========
See accompanying notes to supplemental consolidated financial statements.
48
49
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK
------------------------------------------
SERIES A SERIES E COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1993 380 $ -- -- $ -- 8,616 $ 9
Common stock options exercised 40
Issuance of Series E preferred
stock, net of issuance costs 1,282 1
Accretion of dividends
Distributions to CompReview stockholders
Net income
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1994 380 -- 1,282 1 8,656 9
Common stock options exercised 207
Accretion of dividends
Issuance of common stock in initial
public offering, net of issuance costs 2,376 2
Conversion of convertible
preferred stock into common stock (380) (1,282) (1) 8,956 9
Issuance of common stock in
secondary public offering, net of
issuance costs 1,116 2
Issuance of common stock at
inception of Retek (Note 2) 1,367 1
Tax benefit from stock option transactions
Unrealized gain on investments
available for sale
Stock warrant exercised 100
Distributions to CompReview stockholders
Net income
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1995 -- -- -- -- 22,778 23
Common stock options exercised 1,140 1
Common stock issued for
Employee Stock Purchase Plan 94
Tax benefit from stock option transactions
Tax benefit from Retek taxable pooling (Note 9)
Unrealized loss on investments available for sale
Foreign currency translation adjustment
Distributions to CompReview stockholders
Net income
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1996 -- $ -- -- $ -- 24,012 $ 24
====== ====== ====== ====== ====== =======
UNREALIZED
GAIN (LOSS) ON FOREIGN RETAINED TOTAL
INVESTMENTS CURRENCY EARNINGS STOCKHOLDERS'
PAID-IN AVAILABLE TRANSLATION (ACCUMULATED EQUITY
CAPITAL FOR SALE ADJUSTMENT DEFICIT) (DEFICIT)
------- -------------- ---------- ----------- -------------
BALANCE AT DECEMBER 31, 1993 $6,739 $ -- $ -- $(12,301) $ (5,553)
Common stock options exercised 10 10
Issuance of Series E preferred
stock, net of issuance costs 4,948 4,949
Accretion of dividends (717) (717)
Distributions to CompReview stockholders (990) (990)
Net income 3,142 3,142
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1994 10,980 -- -- (10,149) 841
Common stock options exercised 85 85
Accretion of dividends (348) (348)
Issuance of common stock in initial
public offering, net of issuance costs 14,329 14,331
Conversion of convertible
preferred stock into common stock 10,618 2,892 13,518
Issuance of common stock in
secondary public offering, net of
issuance costs 19,184 19,186
Issuance of common stock at
inception of Retek (Note 2) (1) --
Tax benefit from stock option transactions 800 800
Unrealized gain on investments
available for sale 92 92
Stock warrant exercised 124 124
Distributions to CompReview stockholders (3,845) (3,845)
Net income 6,077 6,077
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1995 55,771 92 -- (5,025) 50,861
Common stock options exercised 1,095 1,096
Common stock issued for
Employee Stock Purchase Plan 839 839
Tax benefit from stock option transactions 7,889 7,889
Tax benefit from Retek
taxable pooling (Note 9) 18,397 18,397
Unrealized loss on investments
available for sale (151) (151)
Foreign currency translation adjustment 54 54
Distributions to CompReview stockholders (5,908) (5,908)
Net income 11,893 11,893
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1996 $83,991 $ (59) $ 54 $ 960 $84,970
======= ====== ====== ======= =======
See accompanying notes to supplemental consolidated financial statements.
49
50
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
HNC Software Inc. (the "Company") develops, markets and supports
intelligent client-server software solutions for mission-critical decision
applications in real-time environments. The Company also performs contract
research and development using neural networks and other computational
intelligence methods.
Basis of Presentation
The consolidated financial statements and related notes give retroactive
effect to the mergers on August 30, 1996 with Risk Data Corporation ("RDC"), on
November 29, 1996 with Retek Distribution Corporation ("Retek") and on November
28, 1997 with CompReview, Inc. ("CR"), for all periods presented, accounted for
as poolings of interests. RDC is an insurance information technology services
firm engaged in the business of developing and marketing analytical benchmarking
and risk management software products primarily for insurance carriers, state
insurance funds and third party administrators. Retek develops, markets and
installs inventory management system software primarily for customers in the
retail industry. CR develops, markets and installs cost containment software for
worker's compensation insurance carriers and for insurers that handle automobile
accident personal injury claims.
The consolidated balance sheet as of December 31, 1996 and 1995 includes
the accounts of RDC, Retek and CR as of December 31, 1996 and 1995. The
consolidated statements of income, of cash flows and of changes in stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1996 include the results of RDC, Retek and CR for the years then ended. The term
"Company" as used in these consolidated financial statements refers to HNC
Software Inc. and its subsidiaries, including RDC, Retek and CR.
No adjustments to conform accounting methods were required. Certain
amounts have been reclassified with regard to presentation of the financial
information of the three companies. Revenues and net income (loss) for each of
the previously separate companies for the periods prior to their acquisitions
are as follows:
NINE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30,
------------------------------------- ---------------------- ----------------
1996 1995 1994 1997 1996 1996
-------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
Revenues:
HNC .......... $ 53,833 $ 25,174 $ 16,473 $ 62,683 $ 31,423 $ 16,478
RDC .......... -- 4,577 4,201 -- -- 2,600
Retek ........ -- 921 -- -- 5,635 3,377
CR ........... 17,606 13,032 9,164 18,971 12,631 8,119
-------- -------- -------- -------- -------- --------
$ 71,439 $ 43,704 $ 29,838 $ 81,654 $ 49,689 $ 30,574
======== ======== ======== ======== ======== ========
Net income (loss):
HNC .......... $ 6,376 $ 4,457 $ 1,923 $ 7,597 $ 975 $ 1,780
RDC .......... -- (1,952) (1,375) -- -- (2,184)
Retek ........ -- (382) -- -- 93 43
CR ........... 5,517 3,954 2,594 6,702 3,679 2,123
-------- -------- -------- -------- -------- --------
$ 11,893 $ 6,077 $ 3,142 $ 14,299 $ 4,747 $ 1,762
======== ======== ======== ======== ======== ========
50
51
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Financial Statement Preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments
in money market accounts and commercial paper purchased with maturities of three
months or less.
Investments
Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. As of and for the year ended
December 31, 1994 based upon the Company's intent and ability, the Company
classified such securities in the held-to-maturity category and recorded these
securities at amortized cost, which approximated market value. As of December
31, 1995, the Company reassessed its intent and ability with respect to these
securities. As a result of this reassessment, the Company reclassified all
securities as "available for sale" and accounts for them accordingly on a
prospective basis. Available for sale securities are carried at fair value with
unrealized gains or losses related to these securities included in stockholders'
equity in the Company's consolidated balance sheet.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using both the straight-line method over the estimated useful lives
of the assets of three to seven years and an accelerated method over the
estimated useful lives of the assets of five to seven years. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the remaining term of the related lease. Repair and maintenance costs are
charged to expense as incurred.
Software Costs
Software costs are recorded at cost and amortized over their estimated
useful lives of 36 to 42 months. Software costs are comprised of purchased
software and other rights which are recorded at the lower of cost or net
realizable value. At December 31, 1996 and 1995, Company software costs of
$2,561 and $0, respectively, are included in other assets in the consolidated
balance sheet net of accumulated amortization of $642 and $0, respectively.
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Through December 31, 1996, no significant amounts were expended
subsequent to reaching technological feasibility.
51
52
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
certain identifiable intangibles and associated goodwill, on an exception basis,
when events or changes in circumstances have made recovery of an asset's
carrying value unlikely. An impairment loss is recognized when the sum of the
expected future net cash flows is less than the carrying amount of the asset. No
such impairments of long-lived assets existed through December 31, 1996.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense (Note 10).
Revenue Recognition
The Company's revenue from long-term periodic software license agreements
is generally recognized ratably over the respective license periods. 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 product sales, which is included in contracts and other
revenue, is recognized upon shipment to the customer.
The Company's revenue from software installation and contract services is
generally recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to total estimated
costs at completion. Amounts received in advance of performance under contracts
are recorded as deferred revenue and are generally recognized within one year
from receipt. Contract losses are recorded as a charge to income in the period
such losses are first identified. Unbilled receivables are stated at estimated
realizable value. Contract costs under government contracts, including indirect
costs, are subject to audit and adjustment by negotiations between the Company
and government representatives. Through 1990, indirect government contract costs
have been agreed upon with government representatives. Revenues from government
contracts have been recorded in amounts that are expected to be realized upon
final settlement.
CR licenses its software primarily to insurers, health maintenance
organizations, self-insured employers and other businesses that reimburse health
care costs. Software licensing agreements generally provide for a guaranteed
minimum license fee and transactional fees. The guaranteed minimum licensee fees
are recognized ratably over the respective license periods. Transactional fees
are recognized as revenue when fees based on system usage exceed the monthly
minimum license fees.
CR offers payors the option of retaining CR to review and reprice medical
bills for them rather than licensing the software. Related service bureau fees
are assessed to customers on the basis of volume of bills processed and are
recognized as revenue when the processing services are performed.
Installation and implementation services fees are billed separately and
recognized as revenue on a time and materials basis.
52
53
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Taxes
The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount "more likely than not" to be realized in
future tax returns. Tax rate changes are reflected in income during the period
such changes are enacted.
Unaudited Pro Forma Adjusted Data
Prior to the acquisition of CR by HNC on November 28, 1997, CR elected
subchapter S corporation status for income tax purposes; therefore, its income
was included in the tax returns of its stockholders, and no income tax provision
has been recorded for CR other than certain minimum state taxes on subchapter S
corporations. As a result of the acquisition, beginning November 29, 1997, CR
will be subject to corporate income taxes on its taxable income. For comparative
purposes, the consolidated statement of income includes unaudited pro forma
adjusted data with respect to the merged companies' income tax provision as if
CR had been subject to corporate income taxes on its taxable income for all
periods presented.
Foreign Currency Translation
The financial statements of the Company's international operations are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation gains and losses are excluded from results of
operations and accumulated as a separate component of stockholders' equity.
Gains and losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments and trade
accounts receivable which are generally not collateralized. The Company's policy
is to place its cash, cash equivalents and investments with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of its credit exposure. The Company's software license and
installation agreements and commercial development contracts are primarily with
customers in the financial services, insurance and retail industries. The
Company maintains reserves for potential credit losses.
During 1996, 1995 and 1994, sales under prime and subcontracts with the
federal government represented 2.2%, 5.1%, and 7.8%, respectively, of the
Company's total revenues. Revenues from international operations and export
sales, primarily to Western Europe and Canada, represented approximately 17.7%,
12.6%, and 7.9% of total revenues in 1996, 1995 and 1994, respectively. Export
sales were $7,310, $4,595 and $2,355 in 1996, 1995 and 1994, respectively.
Disclosures about fair value of financial instruments
The carrying amounts of cash and cash equivalents, accrued liabilities,
the bank line of credit and notes payable to stockholders approximate fair value
because of the short term maturities of these financial instruments. The
carrying amounts of capital lease obligations approximate their fair values
based on interest rates currently available to the Company for borrowings with
similar terms and maturities.
53
54
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reincorporation and stock split
In May 1995, the stockholders approved an Agreement and Plan of Merger
whereby the Company merged with and into a newly incorporated Delaware
corporation ("HNC Delaware"), which is the surviving corporation. In conjunction
with the merger, each share of the Company's common stock, preferred stock and
options and warrants to purchase the Company's common stock was exchanged for
one-half share of HNC Delaware's common stock, preferred stock and options and
warrants to purchase HNC Delaware's common stock, at twice the exercise price
for options and warrants. All references to share and per share amounts of
common and preferred stock and other data in these financial statements have
been retroactively restated to reflect the reincorporation.
In April 1996, the Company consummated a two-for-one stock split effected
in the form of a common stock dividend. In February 1996, CR effected a
ten-for-one split of its common stock and increased the number of shares
authorized to 20,000. All share amounts in the accompanying financial statements
and footnotes have been restated to reflect the stock splits.
Pro forma net income per share
Pro forma net income per share is computed based on the weighted average
number of common shares and common stock equivalents, using the treasury stock
method, outstanding during the respective periods after giving retroactive
effect to the conversion, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into 8,957
shares of common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all stock options granted from May 5, 1994 through
June 26, 1995 have been included as outstanding for all periods prior to June
26, 1995 using the treasury stock method and the $7.00 initial public offering
price per share. For periods prior to 1996, historical earnings per share are
not presented because such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the initial public offering.
Net income per share
Net income per share is computed based on the weighted average number of
common shares and common stock equivalents, using the treasury stock method,
outstanding during the period.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
NOTE 2 -- ACQUISITIONS
On August 30, 1996, the Company completed an acquisition of RDC. Under the
terms of the acquisition, accounted for as a pooling of interests, the Company
exchanged 1,891 common shares for all of the then outstanding shares of RDC
preferred and common stock. All periods presented have been retroactively
restated (Note 1).
On November 29, 1996, the Company completed an acquisition of all of the
outstanding shares of Retek. Under the terms of the acquisition, accounted for
as a pooling of interests, the Company exchanged 1,367 common shares for all of
Retek's then outstanding shares. All periods presented have been retroactively
restated (Note 1).
54
55
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
On November 28, 1997, the Company completed an acquisition of all of the
outstanding shares of CR. Under the terms of the acquisition, accounted for as a
pooling of interests, the Company exchanged 4,886 common shares for all of CR's
then outstanding shares. All periods presented have been retroactively restated
(Note 1).
Transaction costs of $563 and $515 were incurred to complete the mergers
with RDC and Retek, respectively. Transaction costs to complete the merger with
CR are estimated to be $1,400. Transaction costs are deferred and charged to
income when the related transaction is consummated. Transaction costs consist
primarily of investment banker, legal and accounting fees, and printing, mailing
and registration expenses.
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-----------------------
1996 1995
-------- --------
Accounts receivable, net:
Billed .......................................... $ 13,266 $ 6,244
Unbilled ........................................ 9,299 2,955
Other ........................................... 636 496
-------- --------
23,201 9,695
Less allowance for doubtful accounts and sales returns (709) (553)
-------- --------
$ 22,492 $ 9,142
======== ========
Unbilled amounts represent revenue recorded in excess of amounts billable
pursuant to contract provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled amounts are
expected to be realized within one year.
DECEMBER 31,
-----------------------
1996 1995
-------- --------
Property and equipment, net:
Computer equipment ...................... $ 9,302 $ 5,740
Furniture and fixtures .................. 2,058 1,435
Machinery & Equipment ................... 111 81
Leasehold improvements .................. 314 208
-------- --------
11,785 7,464
Less accumulated depreciation and amortization (5,446) (2,963)
-------- --------
$ 6,339 $ 4,501
======== ========
Accrued liabilities:
Payroll and related benefits ............ $ 1,645 $ 1,320
Vacation ................................ 860 517
Other ................................... 1,928 1,257
-------- --------
$ 4,433 $ 3,094
======== ========
55
56
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- INVESTMENTS
At December 31, 1996 and 1995, the amortized cost and estimated fair value
of investments available for sale were as follows:
DECEMBER 31, 1996
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
Current: COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
U.S. government and federal agencies $ 1,999 $ -- $ (2) $ 1,997
U.S. corporate debt ................. 3,149 -- (6) 3,143
Foreign corporate debt .............. 2,216 -- (3) 2,213
-------- -------- -------- --------
7,364 -- (11) 7,353
-------- -------- -------- --------
Non-current:
U.S. government and federal agencies 16,213 -- (36) 16,177
Foreign government debt ............. 1,006 -- (2) 1,004
U.S. corporate debt ................. 1,702 -- (8) 1,694
Foreign corporate debt .............. 502 -- (2) 500
-------- -------- -------- --------
19,423 -- (48) 19,375
-------- -------- -------- --------
$ 26,787 $ -- $ (59) $ 26,728
======== ======== ======== ========
DECEMBER 31, 1995
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
Current: COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
U.S. government and federal agencies $ 1,481 $ 9 $ -- $ 1,490
Foreign government debt ............ 1,017 2 -- 1,019
U.S. corporate debt ................ 8,870 45 -- 8,915
Foreign corporate debt ............. 3,164 2 -- 3,166
------- ------- ------- -------
14,532 58 -- 14,590
------- ------- ------- -------
Non-current:
Foreign government debt ............ 1,019 2 -- 1,021
U.S. corporate debt ................ 7,077 32 -- 7,109
Foreign corporate debt ............. 206 -- -- 206
------- ------- ------- -------
8,302 34 -- 8,336
------- ------- ------- -------
$22,834 $ 92 $ -- $22,926
======= ======= ======= =======
Maturities for non-current investments in securities range from one to two
years. Included in the Company's 1995 income statement is a realized gain in the
amount of $3 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464. No significant gains or losses
were recognized during the year ended December 31, 1996. The cost of securities
sold is determined by the specific identification method.
NOTE 5 -- NOTES PAYABLE
The Company has a Loan and Security Agreement with a bank which provides
for a $5,000 revolving line of credit through July 10, 1997. The agreement
requires that the Company maintain certain financial ratios and levels of
tangible net worth and also restricts the Company's ability to pay cash
dividends and repurchase stock without the bank's consent. At December 31, 1996
and 1995, the Company had $0 outstanding under the revolving line of credit. Any
borrowings under the agreement will be collateralized by substantially all of
the Company's assets. Interest is payable monthly at the bank's prime rate,
which was 8.25% at December 31, 1996.
56
57
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The RDC credit facility was comprised of a revolving line of credit
secured by eligible accounts receivable as well as a bridge loan which was
secured by the guarantees of certain stockholders. The revolving line of credit
matured on January 5, 1997. The bridge loan matured on September 5, 1996. All
outstanding amounts were repaid during 1996 and neither credit facility was
renewed.
During 1995, the preferred stockholders of RDC loaned the Company $1,000
under subordinated note agreements (secured by the assets of RDC but
subordinated to borrowings under the RDC line of credit) bearing interest at 9%.
All outstanding amounts were repaid during 1996.
NOTE 6 -- LEASES
At December 31, 1996, the Company is obligated under noncancelable
operating leases for its facilities and certain equipment through 2003 as
follows:
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
1997 $2,102 $212 $1,890
1998 1,543 192 1,351
1999 1,193 149 1,044
2000 1,215 -- 1,215
2001 1,250 -- 1,250
thereafter 1,787 -- 1,787
The lease for the Company's corporate headquarters provides for scheduled
rent increases and an option to extend the lease for five years with certain
changes to the terms of the lease agreement and a refurbishment allowance. Rent
expense under operating leases for the years ended December 31, 1996, 1995 and
1994 was approximately $1,623, $1,503 and $1,191, respectively, net of sublease
income of $125, $83 and $40, respectively.
RDC maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are as follows:
1997 ............................. $ 475
1998 ............................. 232
1999 ............................. 66
-----
773
Less amounts representing interest (110)
-----
Capital lease obligations ........ 663
Less current portion ............. (399)
-----
$ 264
=====
The gross value of assets under capital leases at December 31, 1996 and
1995 was $1,481 and $2,186 and accumulated amortization was $599 and $572,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
57
58
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY
In November 1992, the Company entered into an agreement that granted Mitek
a license to use certain character recognition technology developed by the
Company. The agreement provided for the Company to receive an initial license
and support fee payment of $1,350 and an additional license and support fee
based on a percentage of Mitek's revenue from the sale of character recognition
products through November 1995. The agreement also required that the Company
sell certain proprietary computer boards to Mitek at a substantial discount from
normal sales prices, but in excess of cost, and provide ongoing engineering and
technical support over the agreement period, which ended during November 1995.
As the Company had a significant continuing obligation under this agreement, the
initial license and support fee received thereunder was deferred on receipt and
recognized as revenue over the performance period based on estimated sales of
proprietary computer boards. The additional license and support fees were
recognized as a percentage of actual Mitek revenues pursuant to the agreement.
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------ ------
Initial license fee ......... $ 47 $ 295
Additional license and support fee 314 476
Computer board sales ........ 527 657
------ ------
$ 888 $1,428
====== ======
NOTE 8 -- CAPITAL STOCK
During June 1995, the Company completed its initial public offering for
sale of 5,175 shares of common stock (of which 2,375 shares were sold by the
Company and 2,800 shares were sold by certain selling stockholders) at a price
to the public of $7.00 per share, which resulted in net proceeds to the Company
of $15,461 after the payment of underwriters' commissions but before the
deduction of offering expenses. Upon the closing of the Company's initial public
offering, all outstanding shares of Series A, B, C, D, and E convertible
preferred stock were automatically converted into shares of common stock at
their then effective conversion prices. Upon conversion, the preferred
stockholders were no longer entitled to any undeclared cumulative dividends and
all class voting rights terminated.
During December 1995, the Company completed a secondary public offering
for sale of 3,000 shares of common stock (of which 1,116 shares were sold by the
Company and 1,884 shares were sold by certain selling stockholders) at a price
to the public of $18.50 per share, which resulted in net proceeds to the Company
of $19,606 after the payment of underwriters' commissions but before the
deduction of offering expenses.
The Board of Directors is authorized to issue up to 4,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to the rights of the holders of any Preferred Stock that may be issued
in the future.
58
59
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 -- INCOME TAXES
Income (loss) before income tax benefit was taxed under the following
jurisdictions:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------- ------- -------
Domestic $ 8,599 $ 5,764 $ 2,741
Foreign 2,760 (198) --
------- ------- -------
$11,359 $ 5,566 $ 2,741
======= ======= =======
The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Current:
Federal $ 1,132 $ 97 $ 17
State 204 143 69
Foreign 51 -- --
Deferred:
Federal (1,569) (521) (425)
State (56) (186) (62)
Foreign (296) (44) --
------- ------- -------
$ (534) $ (511) $ (401)
======= ======= =======
Deferred tax assets are summarized as follows:
DECEMBER 31,
--------------------
1996 1995
------- -------
Taxable pooling basis difference ..... $18,397 $ --
Net operating loss carryforwards ..... 8,587 2,902
Tax credit carryforwards ............. 1,878 1,370
Other ................................ 487 483
------- -------
Gross deferred tax assets ............ 29,349 4,755
Deferred tax asset valuation allowance -- (2,717)
------- -------
Net deferred tax asset ............ $29,349 $ 2,038
======= =======
At December 31, 1994, the Company provided a deferred tax asset valuation
allowance for deferred tax assets which management determined were "more likely
than not" unrealizable based on trends in operating results after eliminating
the effects of non-recurring revenue (Note 7). During 1995, the Company released
the valuation allowance related to HNC's deferred tax assets based on
management's assessment that it was more likely than not that the Company would
realize a portion of those assets in future periods due to improvements in HNC's
operating results. During 1996, the Company released the valuation allowances
related to RDC and Retek deferred tax assets based on management's assessment
that it was more likely than not that the Company would realize those assets in
future periods due to improvements in the operating results of those
subsidiaries.
During 1996 and 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $7,889 and $800, respectively. The benefit
from the stock option tax deduction is credited directly to paid-in capital.
In connection with the acquisition of Retek, the Company made an Internal
Revenue Code Section 338 election for federal and state tax purposes, resulting
in the treatment of the acquisition as a taxable transaction, whereby the tax
bases of the acquired assets and liabilities were adjusted to their fair values
as of the date of the acquisition. As the purchase price exceeded the carrying
value of the net assets acquired by approximately $46,000, the Company recorded
a deferred tax asset in the amount of $18,397.
59
60
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
A reconciliation of the income tax benefit to the amount computed by
applying the statutory federal income tax rate to income before income tax
provision is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Amounts computed at statutory federal rate ....... $ 3,862 $ 1,892 $ 932
Release of valuation allowance ................... (2,717) (2,223) (1,008)
Subchapter S corporation earnings ................ (1,901) (1,366) (900)
Tax credit carryforwards generated ............... (334) (68) (51)
Losses without tax benefit ....................... -- 794 468
Separate return impact of acquired businesses .... (154) -- --
Acquisition expenses not tax deductible .......... 367 -- --
State income tax expense ......................... 554 465 82
Foreign net operating loss carryforwards generated (296) (44) --
Other ............................................ 85 39 76
------- ------- -------
Income tax benefit ............................ $ (534) $ (511) $ (401)
======= ======= =======
Prior to the acquisition of CR by HNC on November 28, 1997, CR elected
subchapter S corporation status for income tax purposes; therefore, its income
was included in the tax returns of its stockholders, and no income tax provision
has been recorded for CR other than certain minimum state taxes on subchapter S
corporations.
At December 31, 1996, the Company had federal, state and foreign net
operating loss carryforwards of approximately $22,300, $10,800 and $800,
respectively. The net operating loss carryforwards expire as follows:
1997 .......... $ 278
1998 .......... 240
1999 .......... 2
2001 .......... 9,148
2003 .......... 833
2004 .......... 1,240
2005 .......... 1,216
2006 .......... 1,670
2007 .......... 17
2008 .......... 1,692
2009 .......... 1,370
2010 .......... 1,840
2011 .......... 14,086
No expiration . 268
The Company also has approximately $1,400 of federal research and
development credit carryforwards, which expire from 2000 to 2011, $400 of state
research and development credit carryforwards, which have no expiration date,
and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000.
Certain of these net operating loss and research and development credit
carryforwards generated by RDC and Retek prior to their acquisitions by HNC are
subject to annual limitations on their utilization and also are limited to
utilization solely by the Company which generated them. Should a substantial
change in HNC's ownership occur, as defined by the Tax Reform Act of 1986, there
will be an annual limitation on the utilization of net operating loss and
research and development credit carryforwards.
60
61
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500
shares of the Company's common stock were reserved for issuance pursuant to
nonqualified and incentive stock options to its officers, directors, key
employees and consultants. The plan, as amended, is administered by the Board of
Directors or its designees and provides generally that, for incentive stock
options and nonqualified stock options, the exercise price must not be less than
the fair market value of the shares as determined by the Board of Directors at
the date of grant. The options expire no later than ten years from the date of
grant and may be exercised in installments based upon stipulated timetables (not
in excess of seven years). At December 31, 1996, options to purchase 545 shares
were exercisable.
During 1995, the Company adopted the 1995 Directors Stock Option Plan (the
"Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the
discussion contained in the three paragraphs below, "fair market value" means
the closing price of the Company's Common Stock on the Nasdaq National Market on
the grant date.
The Directors Plan provides for the issuance of up to 300 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25 shares of the Company's common stock are
granted to outside directors upon their respective dates of becoming members of
the Board of Directors and 10 additional options will be granted on each
anniversary of such dates. Options under the Directors Plan are granted at the
fair market value of the stock at the grant date and vest at specific times over
a four-year period. At December 31, 1996, options to purchase 40 shares were
exercisable.
The Incentive Plan provides for the issuance of up to 2,800 shares of the
Company's common stock in the form of nonqualified or incentive stock options,
restricted stock or stock bonuses. In addition, any shares remaining unissued
under the 1987 Stock Option Plan on the effective date of the Incentive Plan,
and any shares issuable upon exercise of options granted pursuant to the 1987
Stock Option Plan that expire or become unexercisable for any reason without
having been exercised in full, will no longer be available for issuance under
the 1987 Stock Option Plan but will be available for issuance under the
Incentive Plan. Nonqualified stock options and restricted stock may be awarded
at a price not less than 85% of the fair market value of the stock at the date
of the award. Incentive stock options must be awarded at a price not less than
100% of the fair market value of the stock at the date of the award, or 110% of
fair market value for awards to more than 10% stockholders. Options granted
under the Incentive Plan may have a term of up to 10 years. The Company has the
discretion to provide for restrictions and the lapse thereof in respect of
restricted stock awards, and options typically vest at the rate of 25% of the
total grant per year over a four-year period. However, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1996, 58 shares were exercisable under the
Incentive Plan.
The Purchase Plan provides for the issuance of a maximum of 400 shares of
common stock. Each purchase period, eligible employees may designate between 2%
and 10% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the twelve-month offering period or the last day of
each six-month purchase period. Approximately 65% of eligible employees have
participated in the Plan in the last two years. Under the Purchase Plan, the
Company sold 94 shares to employees in 1996.
61
62
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RDC's stock option plan is administered by HNC's Board of Directors. All
outstanding RDC options were converted into options to purchase HNC common stock
and adjusted to give effect to the exchange ratio (Note 2). No changes were made
to the terms of the RDC options in connection with the exchange. Options granted
under the RDC stock option plan generally vest at the rate of 25% of the total
grant per year over a four-year period and expire 10 years after the date of
grant. At December 31, 1996, 63 shares were exercisable under the RDC plan.
Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase the Company's
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the Retek options in connection with the
exchange. Options granted vest ratably over periods from one to four years and
have a term of up to 10 years. At December 31, 1996, options to purchase 28
shares were exercisable.
The CR 1995 Stock Option Plan is administered by HNC's Board of Directors.
All outstanding CR stock options were converted into options to purchase HNC
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the CR options in connection with the
exchange. Options granted under the CR Stock Option Plan generally vest ratably
over periods from two to four years and expire 10 years after the date of grant.
At December 31, 1996, options to purchase 400 shares were exercisable.
Transactions under the Company's stock option and purchase plans during the
years ended December 31, 1996 and 1995, including options under the RDC stock
option plan, options under the Retek stock option plan and options under the CR
Stock Option Plan, but excluding options to purchase stock of a subsidiary of
the Company, Aptex Software Inc. ("Aptex"), are summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995
------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
Outstanding at beginning of year ....... 2,868 $ 2.84 2,080 $ 0.49
Options granted ................... 1,645 27.98 1,272 6.08
Options exercised ................. (1,140) .96 (207) 0.52
Options canceled .................. (158) 17.62 (277) 1.80
------ ------
Outstanding at end of year ............. 3,215 15.65 2,868 2.84
====== ======
Options exercisable at end of year ..... 841 1,437
Weighted average fair value of options
granted during the year ........... $14.50 $3.10
62
63
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 LIFE (IN YEARS) EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ----------------- ----------------- --------------------- -------------- ------------------ --------------
$ 0.02 to $ 0.92 554 4.66 $ 0.35 475 $ 0.30
1.00 to 3.00 803 7.69 2.58 245 2.55
4.50 to 21.38 505 8.73 13.06 92 10.91
21.50 to 30.50 661 9.51 27.52 20 25.20
30.75 to 30.75 413 9.66 30.75 9 30.75
30.81 to 49.50 279 9.47 37.81 - -
----- ----
$ 0.02 to $49.50 3,215 8.11 15.65 841 3.04
===== ====
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex Plan")
whereby 2,000 shares of Aptex common stock were reserved for issuance pursuant
to nonqualified and incentive stock options and restricted stock awards. The
plan is administered by the Board of Directors of Aptex or its designees and
provides generally that nonqualified stock options and restricted stock may be
awarded at a price not less than 85% of the fair market value of the stock at
the date of the award. Incentive stock options must be awarded at a price not
less than 100% of the fair market value of the stock at the date of the award,
or 110% of fair market value for awards to more than 10% stockholders. Options
granted under the Incentive Plan may have a term of up to 10 years. The Company
has the discretion to provide for restrictions and the lapse thereof in respect
of restricted stock awards, and options typically vest at the rate of 25% of the
total grant per year over a four-year period. However, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. During 1996, Aptex issued 1,000 shares of common stock under the
Aptex Plan at an issuance price of $0.03 per share. No options granted under the
Aptex Plan were exercisable at December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1996 and
1995 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards Board Statement No.
123, the Company's net income and pro forma net income per share would have been
reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
-------- --------
Net income:
As reported .................................. $ 11,893 $ 6,077
Pro forma .................................... 6,122 5,126
As reported pro forma adjusted (Note 1) ...... 9,731 4,534
Pro forma .................................... 3,960 3,583
Net income per share:
As reported .................................. $ 0.47 $ 0.28
Pro forma .................................... 0.24 0.24
As reported pro forma adjusted (Note 1) ...... $ 0.38 $ 0.21
Pro forma .................................... 0.16 0.17
63
64
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1996 and 1995,
respectively: dividend yield of 0.0% for both years, risk-free interest rates of
6.03% and 6.29%, expected volatility of 70% and 75% (0% for both years for
options granted by RDC, Retek and CR prior to their acquisition by HNC), and
expected lives of 3.5 years for both years. The fair value of the employees'
purchase rights pursuant to the Purchase Plan is estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0.0% for
both years, risk-free interest rates of 5.36% and 5.66%, expected volatility of
70% and 75%; and an expected life of 6 months for both years. The weighted
average fair value of those purchase rights granted in 1996 and 1995 was $9.61
and $2.75, respectively.
The fair value of each option granted under the Aptex Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%,
expected volatility of 90%, and an expected life of 9.25 years. Options to
purchase 704 shares were granted during 1996 at a weighted average exercise
price of $0.03 per share. The weighted average fair value of options granted
during the year was $0.03 per share. At December 31, 1996, there were 704
options outstanding under the Aptex Plan with a weighted average exercise price
of $0.03 per share and a weighted average remaining contractual life of 9.74
years.
NOTE 11 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
64
65
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of HNC Software Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 21, 1997, except as to the pooling of interests with CompReview,
Inc. which is as of November 28, 1997, appearing on page 28 of this Current
Report on Form 8-K also included an audit of the Financial Statement Schedule
listed in Item 7(b)(4) of this Form 8-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
San Diego, California
January 21, 1997,
except as to the pooling of interests with CompReview, Inc.
which is as of November 28, 1997
65
66
SCHEDULE II
HNC SOFTWARE INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
ALLOWANCE FOR DEFERRED TAX
DOUBTFUL ACCOUNTS ASSET VALUATION
& SALES RETURNS ALLOWANCE
----------------- ---------------
Balance at December 31, 1993 $292,000 $4,658,000
Provision 529,000 972,000
Write-off (307,000) -
Recovery - (1,392,000)
-------- ------------
Balance at December 31, 1994 514,000 4,238,000
Provision 529,000 702,000
Write-off (472,000) -
Recovery (18,000) (2,223,000)
--------- ----------
Balance at December 31, 1995 553,000 2,717,000
Provision 279,000 -
Write-off (94,000) -
Recovery (29,000) (2,717,000)
-------- ----------
Balance at December 31, 1996 $709,000 $ -0-
======== ==========
66
67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 12, 1997
HNC SOFTWARE INC.
By: /s/ Raymond V. Thomas
----------------------
Raymond V. Thomas
Chief Financial Officer
67
68
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
2.01 Agreement and Plan of Reorganization dated as of July 14,
1997 by and among HNC, FW1 Acquisition Corp., CompReview,
Inc., Robert L. Kaaren and Mishel E. Munnayer, a.k.a.
Michael Munayyer, Trustee of the Michael Munayyer Trust
dated August 11, 1995.
2.02 Agreement of Merger dated as of November 28, 1997 by and
between FW1 Acquisition Corp. and CompReview, Inc.
4.01 Registration Rights Agreement dated as of November 28, 1997
by and among HNC and the former shareholders of CompReview,
Inc.
11.01 Statement Regarding Computation of Per Share Earnings
(Loss)
23.01 Consent of Price Waterhouse LLP, Independent Accountants
23.02 Consent of Deloitte & Touche LLP, Independent Auditors
27.01 Financial Data Schedule
68