1
THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF
REGULATION S-T.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _________.
COMMISSION FILE NUMBER 0-26146
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HNC SOFTWARE INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 33-0248788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5930 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(619) 546-8877
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
--- ---
AS OF OCTOBER 31, 1996 THERE WERE 17,629,716 SHARES OF $0.001 PAR VALUE COMMON
STOCK OUTSTANDING.
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INDEX LISTING
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Page
Number
PART I FINANCIAL INFORMATION ------
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheet at September 30, 1996 (unaudited) 3
and December 31, 1995
Consolidated Statement Of Income (unaudited) for the 4
three month and nine month periods ended
September 30, 1996 and 1995
Consolidated Statement Of Cash Flows (unaudited) for 5
the nine month periods ended September 30, 1996
1995
Notes To Consolidated Financial Statements (unaudited) 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 17
PART III EXHIBITS
Agreement and Plan of Reorganization dated as of July 19, 1996
by and among the Company, HNC Merger Corp. and Risk Data
Corporation, as amended.
Agreement of Merger dated as of August 30, 1996 by and
between HNC Merger Corp. and Risk Data Corporation.
Registration Rights Agreement dated as of August 30, 1996 by
and among the Company and the former shareholders of
Risk Data Corporation.
Amended Loan and Security Agreement dated as of July 10, 1996,
between the Company and Silicon Valley Bank.
STATEMENT REGARDING COMPUTATION OF PER SHARE
EARNINGS
FINANCIAL DATA SCHEDULE
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PART I - FINANCIAL INFORMATION
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Item 1: FINANCIAL STATEMENTS
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
ASSETS
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,243 $ 20,195
Short-term investments 8,564 14,590
Billed trade accounts receivable, net 6,655 3,859
Unbilled accounts receivable, net 6,006 2,950
Current portion of deferred income taxes 2,154 1,702
Other current assets 2,130 1,561
---------- ----------
Total current assets 28,752 44,857
Property and equipment, net 5,349 3,942
Deferred income taxes, less current portion 3,515 346
Other assets 1,147 843
Long-term investments 25,031 8,336
---------- ----------
$ 63,794 $ 58,324
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,202 $ 796
Current portion of long term debt - 2,195
Accrued liabilities 2,456 2,730
Deferred revenue 2,755 2,101
Other current liabilities 479 548
---------- ----------
Total current liabilities 6,892 8,370
Subordinated notes payable to stockholders - 1,000
Other non-current liabilities 586 659
---------- ----------
Common stock, $0.001 par value - 50,000 and 40,000 shares authorized:
17,547 and 16,514 shares issued and outstanding, respectively 18 17
Paid-in capital 62,485 55,336
Unrealized (loss) gain on investments (12) 92
Accumulated deficit (6,175) (7,150)
---------- ----------
Total stockholders' equity 56,316 48,295
---------- ----------
$ 63,794 $ 58,324
========== ==========
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
Revenues:
Software license and installation $ 9,561 $ 5,926 $ 22,609 $ 15,152
Contracts and other 2,784 2,347 8,814 6,547
--------- --------- --------- ----------
Total revenues 12,345 8,273 31,423 21,699
--------- --------- --------- ----------
Operating expenses:
Software license and installation 2,412 1,379 6,711 3,893
Contracts and other 1,860 1,797 5,869 4,877
Research and development 2,573 1,683 6,892 4,485
Sales and marketing 2,365 1,633 6,488 4,421
General and administrative 1,611 998 4,000 2,560
--------- --------- --------- ----------
Total operating expenses 10,821 7,490 29,960 20,236
--------- --------- --------- ----------
Operating income 1,524 783 1,463 1,463
Other income, net 371 209 1,203 143
--------- --------- --------- ----------
Income before income tax
provision (benefit) 1,895 992 2,666 1,606
Income tax provision (benefit) 516 (1,545) 1,691 (1,145)
--------- --------- --------- ----------
Net income $ 1,379 $ 2,537 $ 975 $ 2,751
========= ========= ========= ==========
Net income per share
$ 0.07 $ 0.15 $ 0.05
========= ========= =========
Pro forma net income per share $ 0.18
==========
Shares used in computing
net income per share 18,932 17,239 18,904
========= ========= =========
Shares used in computing pro forma
net income per share 15,590
==========
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
-----------------------------------------------
September 30, 1996 September 30, 1995
-------------------- ---------------------
Cash flows from operating activities:
Net Income $ 975 $ 2,751
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,679 856
Changes in assets and liabilities:
Billed accounts receivable, net (2,796) (997)
Unbilled accounts receivable (3,056) (64)
Other assets (1,002) (560)
Deferred tax assets 1,656 (1,246)
Accounts payable 406 69
Accrued liabilities (274) 916
Deferred revenue 654 1,149
Other liabilities (86) 28
-------- --------
Net cash (used in) provided by operating
activities (1,844) 2,902
-------- --------
Cash flows from investing activities:
Purchases of investments (21,437) (13,352)
Maturities of investments 6,904 1,182
Proceeds from sale of investments 3,707 --
Acquisitions of property and equipment (2,592) (1,319)
-------- --------
Net cash used in investing activities (13,418) (13,489)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,924 15,123
Charges against issuance of common stock -- (476)
Proceeds from notes payable to stockholders -- 750
Proceeds under revolving line of credit agreement 309 840
Proceeds from bank notes payable 1,999 --
Repayment of notes payable to stockholders (1,000) --
Repayment under revolving line of credit agreement (2,504) (255)
Repayments of bank notes payable (1,999) (687)
Repayment of capital lease obligations (419) (353)
-------- --------
Net cash (used in) provided by financing activities (1,690) 14,942
-------- --------
Net (decrease) increase in cash and cash equivalents (16,952) 4,355
Cash and cash equivalents at beginning of period 20,195 5,532
-------- --------
Cash and cash equivalents at end of period $ 3,243 $ 9,887
======== ========
Supplemental cash flow disclosure:
Unrealized tax benefit from stock option plans $ 5,277 $ --
======== ========
Capital lease purchases $ 363 $ 356
======== ========
Interest paid $ 409 $ 393
======== ========
Income taxes paid $ 50 $ 112
======== ========
Accretion of dividends on mandatorily redeemable convertible
preferred stock $ -- $ 348
======== ========
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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Note I GENERAL
In management's opinion, the accompanying unaudited
consolidated financial statements for HNC Software Inc. (the "Company") for the
three months and nine months ended September 30, 1996 and 1995 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. However, 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 except the December 31,
1995 balance sheet. This report and the accompanying unaudited and audited
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto presented in its 1995 Annual Report for
fiscal year ended December 31, 1995 and the Form 8-K filed on October 14, 1996.
Footnotes which would substantially duplicate the disclosures in the Company's
audited financial statements for Fiscal Year 1995 contained in the 1995 Annual
Report for fiscal year ended December 31, 1995 and the Form 8-K filed on October
14, have been omitted. The interim financial information herein is not
necessarily indicative of the results to be expected for the full fiscal year
ending December 31, 1996.
Note 2 BASIS OF PRESENTATION
The consolidated financial statements and related notes give
retroactive effect to the August 30, 1996 merger pursuant to which the Company
acquired Risk Data Corporation ("RDC"), for all periods presented. The Company's
acquisition of RDC was accounted for as a pooling of interests. Accordingly, the
consolidated balance sheet as of September 30, 1996 and December 31, 1995
include the accounts of RDC as of September 30, 1996 and December 31, 1995,
respectively, and the consolidated statement of income for the three and nine
month periods ended September 30, 1996 and 1995 and the statement of cash flows
for each of the nine month periods ended September 30, 1996 and 1995 include the
results of RDC for the periods then ended.
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.
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Note 3 STOCK SPLIT
On March 5, 1996, the Company announced that its Board of
Directors approved a two-for-one stock split effected in the form of a common
stock dividend. This stock dividend was paid to the corporation's stockholders
of record as of the close of business on March 18, 1996. Such stockholders of
record received stock certificates representing one additional share of HNC
Software Inc. common stock for each outstanding share of common stock then held.
Distribution of shares issued pursuant to the stock dividend occurred on April
3, 1996. All references in the accompanying interim financial information to
share and per share amounts have been adjusted to give retroactive effect to the
stock split.
Note 4 ACQUISITION
On August 30, 1996, the Company completed its acquisition of
Risk Data Corporation ("RDC") pursuant to a merger that resulted in RDC becoming
a wholly-owned subsidiary of the Company (the "Merger"). The Merger has been
accounted for as a pooling of interests. Pursuant to the Merger, the outstanding
shares of RDC's Common and Preferred Stock were converted into a total of
approximately 1,891,456 shares of the Company's Common Stock, and RDC's
outstanding stock options were converted into options to purchase an aggregate
of 248,504 shares of the Company's Common Stock. Pursuant to the terms of the
Plan, the Company, RDC, the shareholders of RDC and an escrow agent entered into
an escrow agreement, pursuant to which 8.75% of the shares of HNC Common Stock
that were issued in the Merger to the RDC shareholders were placed in an escrow
account to secure and collateralize certain indemnification obligations of RDC
to HNC. In addition, the Company and RDC's former shareholders have entered into
a Registration Rights Agreement, pursuant to which HNC granted certain
registration rights on Form S-3 in connection with the resale of shares of the
Company's Common Stock issued in the Merger.
Note 5 PENDING ACQUISITION
On October 25, 1996, the Company announced that it had signed
a definitive agreement to acquire Retek Distribution Corporation ("Retek")
including its Minneapolis-based subsidiary, Retek Information Systems, Inc.
Retek develops and sells merchandise management software to the retail industry
worldwide. This transaction has not yet been consummated and remains subject to
the satisfaction of certain conditions, including qualification of the
transaction for `pooling of interests' accounting treatment. Under the currently
proposed terms of this pending transaction, the consideration payable by the
Company to acquire all Retek's stock and stock options would consist of an
aggregate total of approximately 1,523,058 shares of the Company's Common Stock
to be either issued outright for the exchange of Retek stock and/or upon the
exercise of stock options to be issued in exchange for outstanding Retek stock
options.
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Note 6 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 respective periods.
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 of all outstanding shares of the Company's
preferred stock into 4,478,332 shares of common stock which occurred upon the
closing of the Company's initial public offering on June 26, 1995. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock
options granted since May 5, 1994 and through June 20, 1995 have been included
as outstanding for all periods prior to June 20, 1995 using the treasury stock
method.
Note 7 STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (FAS) No. 123, "Accounting
for Stock-Based Compensation." FAS 123 was adopted by the Company as required
for its fiscal 1996 financial statements and did not have a material effect on
the Company's financial position or results of operations. The Company continues
to measure compensation expense for its stock-based employee compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and will provide pro forma disclosures of net
income and earnings per share in its annual financial statements as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Note 8 LINE OF CREDIT
In July 1996, the Company renewed it's Loan and Security
Agreement to provide for a $5 million revolving line of credit through July 10,
1997. The line bears interest at the bank's prime rate or the LIBOR rate
equivalent. The agreement requires that the Company maintain certain financial
ratios and levels of working capital, tangible net worth and profitability and
also restricts the Company's ability to pay cash dividends without the bank's
consent.
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HNC SOFTWARE INC.
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Item 2 contains certain forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may affect such forward-looking statements include,
without limitation: the Company's ability to successfully develop new products
for new markets; the Company's loss of a large customer or key personnel; the
Company's ability to manage growth and to successfully integrate acquired
businesses; the Company's inability to secure new government contracts for
technology development; the impact of competition on the Company's revenues,
market share or ability to maintain its premium usage-based pricing terms and to
generate recurring revenue; the availability to the Company, at reasonable cost,
of data required to operate or update its intelligent decision software
products; changes in law or regulatory requirements that adversely affect or
preclude customers from using the Company's products for certain applications;
delays in the Company's introduction of new products; and failure by the Company
to keep pace with emerging technologies. Accordingly, no assurances can be given
that events or results mentioned in any such forward-looking statements will in
fact occur.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
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THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES. Revenues for the three months ended September 30,
1996 were $12.3 million, an increase of 49% over revenues of $8.3 million for
the same period in the prior year. This increase was primarily due to greater
software license and installation revenues which were $9.6 million for the
quarter ended September 30, 1996, an increase of 61% from $5.9 million for the
comparable quarter in 1995. This increase in software license and installation
revenues resulted primarily from an increase in revenues from the Company's MIRA
worker's compensation reserves loss product (which was acquired in the
acquisition of RDC), the Falcon credit card fraud detection product and to a
lesser extent from the SkuPLAN, the demand forecasting product for the retail
market, the Colleague automated mortgage underwriting product and the AREAS
property valuation product. The Company's software license and installation
revenues are derived from monthly license fees, annual license fees, perpetual
license fees, annual maintenance fees and installation fees. The Company
typically licenses its products for a monthly or annual usage fee under
long-term contracts that include software licenses, decision model updates,
application consulting, on-line or on-site support and maintenance.
Contracts and other revenues for the three months ended
September 30, 1996 were $2.8 million, an increase of 19% as compared to $2.3
million for the same period in the prior year. The increase in contracts and
other revenues was due primarily to increased commercial contract revenues for
new product pilots including Eagle (a merchant risk management system),
ProfitMax (a credit card profitability management system), Capstone (a credit
card application processing system) and Falcon Sentry (an application fraud
detection product). Contracts and other revenues are derived primarily from
development and consulting contracts with commercial customers and research
contracts with the United States Government. Revenues from contract services are
generally recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to total estimated
costs at completion. All revenues for new product pilots (i.e., the first
production installation of a product) are reported as contract revenues.
In 1996 the Company has a significant number of new product
development projects and new product pilot installations in process which it
expects to begin shipping in production versions primarily in 1997. However,
there can be no assurance that any of these product development projects or
pilot installations will be successful or be completed within anticipated time
schedules or that the customers who serve as pilot installation sites for these
new products will be satisfied with these products or agree to license them. If
the Company's new product development efforts are unsuccessful, are not
completed on a timely basis, or are not well received by pilot customers, the
Company may be compelled to delay or entirely discontinue the release of
production versions of these products, which would have a material adverse
effect on the Company's results of operations.
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The Company's success depends upon its ability to enter new markets by
developing new products on a timely and cost-effective basis. The Company's
products often require customer data for decision model development and system
installation. As a result, completion of new products may be delayed while the
Company extracts sufficient amounts of statistically relevant data and develops
the models. During this development process, the Company relies on its potential
customers in the new market to provide data and to help train Company personnel
in the use, relevance and meaning of the data in the specific industry. These
relationships also assist the Company in establishing presence and credibility
in the new market. There can be no assurance that these potential customers and
other companies, most of which have significantly greater financial and
marketing resources than the Company, will not compete with the Company in the
future or will not otherwise discontinue their relationships with or support of
the Company, either during development of the Company's products or thereafter.
The Company's success will depend upon its ability to maintain
competitive technologies, enhance its current products and develop new products
in a timely and cost-effective manner that meet changing market conditions,
including evolving customer needs, new competitive product offerings, emerging
industry standards and changing technology.
The sales cycle associated with the purchase of the Company's products
is typically lengthy and subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which the
Company has little or no control.
SOFTWARE LICENSE AND INSTALLATION EXPENSES. Software license and
installation expense primarily consists of the Company's expenses for personnel
engaged in installation and support and related costs. Software license and
installation expenses for the third quarter of 1996 were $2.4 million and
constituted 25% of software and installation revenues for the quarter, whereas
such expenses were $1.4 million and represented 23% of software and installation
revenues in the third quarter of 1995. The primary reason for the increase in
these expenses was increased staffing and associated costs in client services to
support the increased volume of business.
CONTRACTS AND OTHER EXPENSES. Contracts and other expenses consist
primarily of personnel-related expenses associated with the Company's
performance of such contracts. Contracts and other expenses in the third quarter
of 1996 were $1.9 million or 67% of contracts and other revenues as compared to
$1.8 million or 77% of such revenues in the third quarter of 1995. The reduction
in these expenses as a percent of revenues is due to higher pricing on pilot
contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the third quarter of 1996 were $2.6 million and 21% of total revenues compared
to $1.7 million and 22% of total revenues in the third quarter of the prior
year. The increase in these expenses was due primarily to increases in staffing
and related costs to support
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increased new product development activities, including the expenses for the
Company's new text analysis products, which the Company began commercial
development of in January 1996.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.4
million or 19% of total revenues in the third quarter of 1996 compared to $1.6
million and 20% of total revenues in the third quarter of 1995. The increase in
sales and marketing expenses was due primarily to increased staffing and product
promotion activities to support higher sales volumes and new product
introductions, including the Company's new text analysis products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $1.6 million and 13% of total revenues in the third quarter of
1996, compared to $998,000 and 12% of total revenues in the prior year. General
and administrative expenses in the third quarter of 1996 included $544,000 of
costs associated with the acquisition of Risk Data Corporation. Additionally,
the increase in these costs was due to increased staffing and related expenses
to support higher levels of sales and development activity of the Company.
OPERATING INCOME. The above factors resulted in operating income of
$1.5 million and 12% of total revenues for the third quarter of 1996, compared
to operating income of $783,000 and 9% of total revenues in the same quarter of
the prior year. During the third quarter of 1996, RDC moved to a profitability
position due primarily to increased revenue performance.
The Company's quarterly revenues and operating results have varied
significantly in the past and may do so in the future. Although to date a
significant portion of the Company's revenues has come from monthly usage fees
under long-term contracts, there can be no assurance that the Company will
continue to realize such recurring revenues or that customers under such
contracts would not seek to cancel such contracts if the Company's products were
not competitive or did not achieve cost effective results. A significant portion
of the Company's business has been derived from substantial orders placed by
large organizations, and the timing of such orders has caused material
fluctuations in the Company's operating results. The Company's expense levels
are based in part on its expectations regarding future revenues and in the short
term are fixed to a large extent. Operating results also may fluctuate due to
factors such as the demand for the Company's products, product life cycles, the
introduction and acceptance of new products and product enhancements by the
Company or its competitors, changes in the mix of distribution channels through
which the Company's products are offered, changes in the level of operating
expenses, customer order deferrals in anticipation of new products, competitive
conditions in the industry and economic conditions generally or in various
industry segments. The Company has continued to invest in research and
development and sales and marketing in an effort to better service its customers
and markets. The Company expects to continue to increase absolute dollar
spending on both research and development and sales and marketing in the future.
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OTHER INCOME, NET. Other income for the third quarter of 1996 was
$371,000 compared to $209,000 in the third quarter of the prior year. The
increase was due to increased interest income in 1996 from higher cash and
investment balances, which consisted primarily of the proceeds from the
Company's initial public offering in June, 1995 and secondary public offering in
December, 1995.
INCOME BEFORE INCOME TAX PROVISION. The resulting income before
income tax provision for the third quarter of 1996 was $1.9 million or 15% of
total revenues, compared to income before tax provision of $992,000 or 12% of
total revenues for the comparable quarter of 1995.
INCOME TAX PROVISION (BENEFIT). The income tax provision of $516,000 in
the third quarter of 1996 is based on the income of the Company excluding RDC as
they had unutilized net operating loss carryforwards at September 30, 1996 and
as a result recorded no tax provision. The income tax benefit of $1.5 million in
the third quarter of 1995 was attributable to the recognition of a $1.7 million
deferred tax asset based on anticipated future utilization of the Company's net
operating loss carryforwards and research and development credit carryforwards.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES. Revenues for the nine months ended September 30, 1996 were
$31.4 million, an increase of 45% over revenues of $21.7 million for the same
period in the prior year. This increase was primarily due to greater software
license and installation revenues which were $22.6 million for the nine months
ended September 30, 1996, an increase of 49% from $15.2 million for the
comparable period in 1995. This increase in software license and installation
revenues resulted primarily from an increase in revenues from the Company's MIRA
workers' compensation loss reserves product (which was acquired in the
acquisition of RDC), and the Falcon credit card fraud detection product, and to
a lesser extent from SkuPLAN, the demand forecasting product for the retail
market, the Colleague automated mortgage underwriting product and the AREAS
property valuation product.
Contracts and other revenues for the nine months ended September 30,
1996 were $8.8 million, compared to $6.5 million for the same period in the
prior year, a 35% increase. The increase in contracts and other revenues was due
primarily to increased commercial contract revenues for new product pilots for
Eagle (a merchant risk management system), ProfitMax (a credit card
profitability management system) and Capstone (a credit card application
processing system) and Falcon Sentry (an application fraud detection product).
SOFTWARE LICENSE AND INSTALLATION EXPENSES. Software license and
installation expense primarily consists of the Company's expenses for personnel
engaged in installation and support and related costs. Software license and
installation expenses for the first nine months of 1996 were $6.7 million and
constituted 30% of software and installation revenues for the period, whereas
such expenses were $3.9 million and
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represented 26% of software and installation revenues in the first nine months
of 1995. The primary reason for the increase in these expenses was increased
staffing and associated costs in client services to support the increased volume
of business. Contributing to the increase in the current period was the
increased volume of new products, which generally have lower margins as compared
to the Falcon product.
In 1996 the Company has a significant number of new product development
projects in process which it expects to begin installing in a production phase
primarily in 1997. However, there can be no assurance that any of these product
development projects or pilot installations will be successful, or be completed
within anticipated time schedules, or that the customers who serve as pilot
installation sites for these new products will be satisfied with these products
or agree to license them. If the Company's new product development efforts are
unsuccessful, are not completed on a timely basis, or are not well received by
pilot customers, the Company may be compelled to delay or entirely discontinue
the release of production versions of these products, which would have a
material adverse effect on the Company's results of operations.
CONTRACTS AND OTHER EXPENSES. Contracts and other expenses consist
primarily of personnel-related expenses. Contracts and other expenses during the
first nine months of 1996 were $5.9 million or 67% of contracts and other
revenues as compared to $4.9 million or 74% of such revenues in the first nine
months of 1995. The reduction in expenses as a percent of revenues is due to
higher pricing on pilot contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the first nine months of 1996 were $6.9 million and 22% of total revenues
compared to $4.4 million and 21% of total revenues in the first nine months of
1995. The increase in expenses was due primarily to increases in staffing and
related costs to support increased new product development activities, including
the Company's new text analysis products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $6.5
million or 21% of total revenues in the first nine months of 1996 compared to
$4.4 million and 20% of total revenues in the first nine months of 1995. The
increase in sales and marketing expenses was due primarily to increased staffing
and product promotion activities to support higher sales volumes and new product
introductions, including the Company's new text analysis products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $4.0 million and 13% of total revenues in the first nine months of
1996, compared to $2.6 million and 12% of total revenues in the prior year. The
primary reason for the increase in these costs was increased staffing and
related expenses to support higher levels of activity of the Company and
includes costs of $99,000 associated with the terminated acquisition of CRMA and
costs of $544,000 incurred with the acquisition of Risk Data Corporation.
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OPERATING INCOME. The above factors resulted in operating income of
$1.5 million that was 5% of total revenues for the first nine months of 1996,
compared to an operating income of $1.5 million representing 7% of total
revenues in the same period of the prior year.
OTHER INCOME, NET. Other income for the first nine months of 1996 was
$1.2 million compared to $143,000 in the first nine months of the prior year.
The increase was due to increased interest income in 1996 from higher cash and
investment balances which consisted primarily of the proceeds from the Company's
initial public offering in June, 1995 and secondary public offering in December,
1995.
INCOME BEFORE INCOME TAX PROVISION. The resulting income before income
tax provision for the first nine months of 1996 was $2.7 million or 8% of total
revenues, compared to income before tax provision of $1.6 million or 7% of total
revenues for the comparable quarter of 1995.
INCOME TAX PROVISION (BENEFIT). The income tax provision of $1.7
million for the nine months ended September 30, 1996 is based on the income of
the Company excluding RDC as they had unutilized net operating loss
carryforwards at September 30, 1996 and as a result recorded no tax provision.
The income tax benefit of $1.1 million for the nine months ended September 30,
1995 was attributable to the recognition of a $1.7 million deferred tax asset on
September 30, 1995 for the Company's remaining net operating loss carryforwards
and research and development credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
During the nine months ended September 30, 1996 the Company used $1.7
million in cash from financing activities primarily as a result of the repayment
of all the outstanding debt of Risk Data Corporation. At September 30, 1996 the
Company had $36.8 million in cash, cash equivalents and investments as compared
to $41.9 million at June 30, 1996. The decrease is primarily attributable to
the repayment of RDC's debt of approximately $4.9 million.
During July 1996, the Company renewed it's revolving line of credit to
provide for maximum borrowings of up to $5 million. See Note 8 to the Notes to
Consolidated Financial Statements included in this report. Management believes
that the Company's cash and investments and cash generated from operations will
be adequate for the Company's cash requirements for the next twelve months.
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OPERATING ACTIVITIES
Cash used by operating activities for the nine months ended September
30, 1996 was $1.8 million as compared to cash provided by operations of $2.9
million for the first nine months of the prior year. The increase in cash used
by operating activities was due primarily to increased billed accounts
receivable balances due to increased revenues and an increase in the average
days outstanding of these higher receivable balances. The days outstanding have
increased largely because of the increase in new product pilot contracts for
which customers generally pay more slowly. The increase in unbilled receivables
is attributable to a significant increase in the number of license renewals
and new licenses relating to the MIRA product. The minimum license fee is
recognized as revenue on the date of renewal or installation and billed at
contractually specified dates over the minimum noncancelable term, not to exceed
one year.
INVESTING ACTIVITIES
Cash used in investing activities was $13.4 million for nine months
ended September 30, 1996. This was due to net purchases of short and long term
investments of $10.8 million and acquisitions of property and equipment,
primarily computer equipment of approximately $2.1 million.
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PART II - OTHER INFORMATION
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Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits with this
Report:
Exhibit 2.01 Agreement and Plan of Reorganization dated as of July 19,
1996 by and among the Company, HNC Merger Corp. and Risk Data
Corporation, as amended.(1)
Exhibit 2.02 Agreement of Merger dated as of August 30, 1996 by and
between HNC Merger Corp. and Risk Data Corporation.(1)
Exhibit 4.01 Registration Rights Agreement dated as of August 30, 1996 by
and among the Company and the former shareholders of Risk
Data Corporation.(1)
Exhibit 10.01 Amended Loan and Security Agreement dated as of July 10,
1996, between the Company and Silicon Valley Bank.
Exhibit 11.01 Statement Regarding Computation of Pro Forma Per Share
Earnings
Exhibit 27.01 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K filed on September 12, 1996 with respect
to an event dated August 30, 1996 (the acquisition of
Risk Data Corporation).
Report on Form 8-K/A-1 filed on October 14, 1996 with respect
to an event dated August 30, 1996 (financial
requirements for the acquisition of Risk Data
Corporation).
(1) Incorporated by reference from the Company's Report on Form 8-K filed
on September 12, 1996 with respect to an event dated August 30, 1996
(the acquisition of Risk Data Corporation).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
HNC SOFTWARE INC.
Date: November 13, 1996 By: /s/ Raymond V. Thomas
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Raymond V. Thomas
Vice President Finance & Administration and
Chief Financial Officer
(for Registrant as duly authorized officer
and as Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
The following exhibits are filed with this Report:
Exhibit 2.01 Agreement and Plan of Reorganization dated as of July 19,
1996 by and among the Company, HNC Merger Corp. and Risk Data
Corporation, as amended.(1)
Exhibit 2.02 Agreement of Merger dated as of August 30, 1996 by and
between HNC Merger Corp. and Risk Data Corporation.(1)
Exhibit 4.01 Registration Rights Agreement dated as of August 30, 1996 by
and among the Company and the former shareholders of Risk
Data Corporation.(1)
Exhibit 10.01 Amended Loan and Security Agreement dated as of July 10,
1996, between the Company and Silicon Valley Bank.
Exhibit 11.01 Statement Regarding Computation of Per Share Earnings
Exhibit 27.01 Financial Data Schedule
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(1) Incorporated by reference from the Company's Report on Form 8-K filed
on September 12, 1996 with respect to an event dated August 30, 1996
(the acquisition of Risk Data Corporation).
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