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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 JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _______ .
COMMISSION FILE NUMBER 0-26146
HNC SOFTWARE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0248788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 JULY 31, 1998, THERE WERE 25,673,082 SHARES OF REGISTRANT'S COMMON STOCK,
$0.001 PAR VALUE, OUTSTANDING.
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INDEX LISTING
Page
Number
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PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheet at June 30, 1998 (unaudited) 3
and December 31, 1997
Consolidated Statement of Operations and Comprehensive Income (unaudited) 4
for the three and six months ended June 30, 1998 and 1997
Consolidated Statement of Cash Flows (unaudited) for 5
the six months ended June 30, 1998 and 1997
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 2: CHANGES IN SECURITIES 17
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 5: OTHER INFORMATION 18
Item 6: EXHIBITS AND REPORT ON FORM 8-K 19
Signatures 20
Exhibit Index 21
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PART I - FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(unaudited)
Current assets:
Cash and cash equivalents $ 45,450 $ 18,068
Investments available for sale 50,137 24,878
Accounts receivable, net 43,712 32,980
Current portion of deferred income taxes 8,873 11,310
Other current assets 5,062 2,802
--------- ---------
Total current assets 153,234 90,038
Property and equipment, net 13,183 12,102
Deferred income taxes, less current portion 19,476 15,322
Long-term investments available for sale 52,316 --
Debt issuance costs, net 2,885 --
Other assets 8,066 2,415
--------- ---------
$ 249,160 $ 119,877
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,848 $ 5,728
Accrued liabilities 12,767 5,933
Deferred revenue 8,606 3,883
Other current liabilities 150 191
--------- ---------
Total current liabilities 27,371 15,735
Convertible Subordinated Notes 100,000 --
Other non-current liabilities 94 239
Minority interest in consolidated subsidiary 103 43
Stockholders' equity:
Preferred stock, $0.001 par value - 4,000 shares authorized:
No shares issued or outstanding --
--------- ---------
Common stock, $0.001 par value - 50,000 shares authorized:
25,515 and 24,538 shares issued and outstanding, respectively 26 25
Paid-in capital 124,362 95,919
Retained earnings (2,672) 8,029
Accumulated other comprehensive income (124) (113)
--------- ---------
Total stockholders' equity 121,592 103,860
--------- ---------
$ 249,160 $ 119,877
========= =========
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
License and maintenance $ 33,796 $ 22,311 $ 60,678 $ 40,643
Installation and implementation 3,623 2,188 6,819 4,134
Contracts and other 3,584 1,805 6,476 4,531
Service bureau 2,138 1,289 4,249 2,357
-------- -------- -------- --------
Total revenues 43,141 27,593 78,222 51,665
-------- -------- -------- --------
Operating expenses:
License and maintenance 8,333 5,036 14,305 9,030
Installation and implementation 2,756 1,251 4,619 2,052
Contracts and other 2,829 1,454 4,705 3,304
Service bureau 1,327 919 2,360 1,783
Research and development 7,803 4,930 14,664 9,361
In-process research and development 19,083 -- 22,783 --
Sales and marketing 8,846 5,233 16,487 9,786
General and administrative 3,693 2,768 7,024 5,227
-------- -------- -------- --------
Total operating expenses 54,670 21,591 86,947 40,543
Operating (loss) income (11,529) 6,002 (8,725) 11,122
Other income, net 2,037 503 2,829 957
Interest expense (1,396) (22) (1,787) (47)
Minority interest in income of consolidated subsidiary (38) -- (60) --
-------- -------- -------- --------
Total other income, net 603 481 982 910
(Loss) income before income tax provision (10,926) 6,483 (7,743) 12,032
Income tax provision 1,790 1,524 2,958 2,861
-------- -------- -------- --------
Net(loss)income $(12,716) $ 4,959 $(10,701) $ 9,171
======== ======== ======== ========
Other comprehensive income, net of tax:
Foreign currency translation adjustments (124) 107 (3) (9)
Unrealized (losses) gains on securities available for sale (1) 48 (8) 81
-------- -------- -------- --------
Total other comprehensive income (125) 155 (11) 72
-------- -------- -------- --------
Comprehensive income (12,841) 5,114 (10,712) 9,243
-------- -------- -------- --------
Earnings per share:
Basic net (loss) income per common share $ (0.50) $ 0.20 $ (0.43) $ 0.38
======== ======== ======== ========
Diluted net (loss) income per common share $ (0.50) $ 0.19 $ (0.43) $ 0.36
======== ======== ======== ========
Shares used in computing basic net (loss) income per common share share 25,290 24,207 24,987 24,143
======== ======== ======== ========
Shares used in computing diluted net (loss) income per common share 25,290 25,521 24,987 25,464
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
SIX MONTHS ENDED JUNE 30,
------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net (loss) income $ (10,701) $ 9,171
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization 3,672 2,141
Purchased research and development 22,782 --
Tax benefit from stock option transactions 2,958 2,427
Changes in assets and liabilities:
Accounts receivable, net (8,573) (2,933)
Other assets (993) (443)
Deferred income taxes 1,571 2,410
Accounts payable (317) (303)
Accrued liabilities 2,502 (802)
Deferred revenue 203 1,089
Other liabilities (217) (73)
--------- ---------
Net cash provided by operating activities 12,887 12,684
--------- ---------
Cash flows from investing activities:
Purchases of investments (99,030) (21,546)
Maturities of investments 17,504 6,350
Proceeds from sale of investments 4,000 5,038
Cash purchased in business acquisition 648 --
Acquisitions, net of cash acquired (6,249)
Acquisitions of property and equipment (3,399) (2,786)
--------- ---------
Net cash used in investing activities (86,526) (12,944)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuances of common stock 4,900 1,698
Proceeds from issuances of Convertible Subordinated Notes 100,000 --
Debt issuance costs (2,933) --
Repayment of bank line of credit (770)
Repayment of capital lease obligations (105) (252)
Distributions to CompReview Stockholders -- (3,599)
--------- ---------
Net cash provided by (used in) financing activities 101,092 (2,153)
--------- ---------
Effect of exchange rate changes on cash (71) (9)
--------- ---------
Net increase (decrease) in cash and cash equivalents 27,382 (2,422)
Cash and cash equivalents at the beginning of the period 18,068 8,121
--------- ---------
Cash and cash equivalents at the end of the period $ 45,450 $ 5,699
========= =========
Significant non-cash investing activities:
Assets assumed in acquisitions of PCS, FTI, and ATACS $ 9,929 $-
========= =========
Liabilities assumed in acquisitions of PCS, FTI, and ATACS $ 7,297 $-
========= =========
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 GENERAL
In management's opinion, the accompanying unaudited consolidated
financial statements for HNC Software Inc. (the "Company") for the three months
and six months ended June 30, 1998 and 1997 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, the
accompanying financial statements 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, 1997 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 Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997 (the "1997 Annual
Report"). Footnotes that would substantially duplicate the disclosures in the
Company's audited financial statements for the fiscal year ended December 31,
1997 contained in the 1997 Annual Report have been omitted. The interim
financial information contained in this Report is not necessarily indicative of
the results to be expected for any other interim period or for the full fiscal
year ending December 31, 1998.
NOTE 2 BASIS OF PRESENTATION
The consolidated financial statements and related notes contained in
this Report give retroactive effect to the Company's November 28, 1997
acquisition of CompReview, Inc., accounted for as a pooling of interests, for
all periods presented. The acquisitions of Practical Control Systems
Technologies, Inc. ("PCS") and Financial Technology, Inc. ("FTI") were completed
on March 31, 1998 and April 7, 1998, respectively, and accounted for as
purchases as of the respective acquisition dates. In addition, the acquisition
of the Advanced Telecommunications Abuse Control System ("ATACS") product line
of Bedford Associates, Inc., which is a wholly owned subsidiary of British
Airways plc, was completed on June 11, 1998 and accounted for as a purchase as
of that date. In connection with these acquisitions, acquired in-process
research and development in the aggregate amount of $22.8 million was charged to
operations at the respective acquisition dates.
NOTE 3 ACQUISITIONS
On March 31, 1998, the Company acquired PCS, based in Cincinnati,
Ohio. PCS, founded in 1985, is a supplier of fully integrated distribution
center management software that addresses the distribution business needs of the
retail, manufacturing and wholesale industries. HNC acquired PCS in exchange for
142,868 shares of HNC common stock, 14,286 of which are subject to an escrow to
secure certain indemnification obligations of the former PCS stockholders plus
the contingent right, subject to PCS' achievement of certain financial
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objectives during calendar 1998 and 1999, to receive certain additional shares
of HNC common stock.
On April 7, 1998, the Company acquired FTI. Incorporated in 1982, FTI
is a provider of profitability measurement and decision-support software to the
financial services industry and serves a substantial user base in the United
States, Canada, and Europe. HNC acquired FTI in exchange for the issuance of
396,617 shares of HNC common stock, 97,390 of which are subject to an escrow to
secure certain indemnification obligations of the former FTI stockholders; a
cash payment of $1.5 million; and the contingent right, subject to FTI's
achievement of certain financial objectives during calendar 1998, to receive up
to $5,590,000 of HNC common stock.
On June 11, 1998, the Company acquired the ATACS product line. ATACS,
a subsidiary of Bedford Associates, Inc., which is a wholly owned subsidiary of
British Airways plc, is a fraud-management software solution for wireline,
wireless and Internet telecommunication service providers. HNC acquired the
ATACS product line for a cash payment of $4.75 million.
NOTE 4 COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS
130"). FAS 130 requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. 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."
NOTE 5 RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to
the current period presentation.
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NOTE 6 RECONCILIATION OF NET (LOSS) INCOME AND SHARES USED IN PER SHARE
COMPUTATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
NET (LOSS) INCOME USED:
Net (loss) income used in computing
basic and diluted net (loss) income
per common share $(12,716) $ 4,959 $(10,701) $ 9,171
======== ======== ======== ========
SHARES USED:
Shares used in computing basic net
(loss) income per common share 25,290 24,207 24,987 24,143
Weighted average options to purchase
common stock as determined by
application of the treasury stock
method -- 1,297 -- 1,304
Purchase Plan common stock
equivalents -- 17 -- 17
-------- -------- -------- --------
Shares used in computing diluted net
(loss) income per common share 25,290 25,521 24,987 25,464
======== ======== ======== ========
For the three and six month periods ended June 30, 1998, common stock
equivalents of approximately 1,385,000 and 1,449,000 shares, respectively, were
not used to calculate diluted net (loss) income per share because of their
anti-dilutive effect. The conversion of the Company's 4.75% convertible
subordinated notes for the three and six month periods ended June 30, 1998 of
2,230,000 and 1,319,000 shares, respectively, were not used to calculate diluted
net (loss) income per share as their effect would be anti-dilutive.
NOTE 7 NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133") which the Company will be required to adopt
for its 2000 annual financial statements. This statement establishes a new model
for accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company had not determined the impact of the adoption of this new
accounting standard on its consolidated financial position or results of
operations.
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HNC SOFTWARE INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Report (including without limitation the following section
regarding Management's Discussion and Analysis of Financial Condition and
Results of Operations) contains certain forward-looking statements (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks" and
"estimates," and similar expressions or variations of such words, are intended
to identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Report. Additionally, statements
concerning future matters such as the development of new products, enhancements
or technologies, possible changes in legislation and other statements regarding
matters that are not historical are forward-looking statements.
Although forward-looking statements in this Report reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed in "Potential Fluctuations in Operating Results" as
well as those discussed elsewhere in this Report. Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Report. The Company undertakes no obligation to revise or update
any forward-looking statements in order to reflect any event or circumstance
that may arise after the date of this Report. Readers are urged to carefully
review and consider the various disclosures made by the Company in this Report,
which attempt to advise interested parties of the risks and factors that may
affect the Company's business, financial condition, results of operations and
prospects.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues and operating results have varied
significantly in the past and may do so in the future. Factors affecting the
Company's revenues and operating results include, but are not limited to: the
degree of acceptance of the Company's products; by the markets and industries
served by the Company; the historical tendency of the Company to receive, during
a given fiscal period, a small number of relatively large customer orders, such
that failure to recognize revenue from any such order in that fiscal period may
disproportionately and adversely affect the Company's revenues and operating
results for that fiscal period; customer cancellation of long-term contracts
that yield recurring revenues or customers' ceasing their use of Company
products for which the Company receives recurring, usage-based fees and disputes
with customers regarding fees payable to the Company; the lengthy sales cycle of
most of the Company's products; the Company's ability to successfully and timely
develop, introduce and market new products and product enhancements; the timing
of new product announcements and
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introductions by the Company and its competitors; changes in the mix of
distribution channels; changes in the level of operating expenses; the Company's
ability to timely achieve progress and fulfill its obligations under contracts
on which revenue is recognized in the percentage-of-completion basis; the
Company's success in completing certain pilot installations within contracted
fee budgets; competitive conditions in the enterprise software industry;
domestic and international economic conditions; and market conditions in the
Company's targeted markets. In addition, as a result of recently issued guidance
on software revenue recognition, license agreements entered into during a
quarter may not meet the Company's revenue recognition criteria, with the result
that, even if the Company meets or exceeds its forecast of aggregate licensing
and other contracting activity for a given fiscal period, it is possible that
the Company's revenues for that fiscal period would not meet expectations.
Furthermore, the Company's operating results may be affected by factors unique
to certain of its product lines. For example, although in the past a large
portion of the Company's revenues were derived from contracts providing for
periodic, recurring fees, the Company now derives a substantial and increasing
portion of its revenues from products (particularly products for the retail
industry) priced as "perpetual" license transactions in which the Company
receives a one-time license fee that is recognized upon delivery of the software
and acceptance by the customer. Thus, failure to complete a perpetual license
transaction during a fiscal quarter would have a disproportionate adverse impact
on the Company's operating results for that quarter.
The Company expects that fluctuations in its operating results will
continue for the foreseeable future. Consequently, the Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of future performance. Because the Company's expense levels are
based in part on its expectations regarding future revenues and are fixed to a
large extent in the short term, in the event of an unexpected revenue shortfall
during a fiscal period, the Company may be unable to adjust spending in time to
maintain anticipated operating results for that fiscal period. Accordingly, the
Company may not be able to maintain profitability on a quarterly or annual basis
in the future. Due to some or all of the foregoing factors, or other factors, it
is possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In that event,
the market price of the Company's common stock and, in turn, the market price of
the Company's 4.75% convertible subordinated notes due 2003 (the "Notes"), would
likely be materially adversely affected.
YEAR 2000 COMPLIANCE
It is generally anticipated that many organizations will experience
operational difficulties at the beginning of the Year 2000 as a result of the
fact that many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Significant
uncertainty exists in the software and other industries concerning the scope and
magnitude of problems associated with the century change. Based on the Company's
assessment to date, the Company believes that the current version of each of its
material products is Year 2000 compliant. However, there can be no assurance
that all of the Company's customers will install the Year 2000 compliant version
of the Company's products in a timely manner, which could lead to failure of
customer systems and product liability claims against the Company. The Company
is assessing the products it has acquired in its recent acquisitions for Year
2000 compliance. The inability of the Company to complete its assessment and any
necessary modifications to these recently acquired products could
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have a material adverse effect on the Company's business, financial condition
and results of operations. Even if the Company's products are Year 2000
compliant, the Company may in the future be subject to claims based on Year 2000
issues in the products of other companies, or issues arising from the
integration of multiple products within a system. The costs of defending and
resolving Year 2000-related disputes, and any liability of the Company for Year
2000-related damages, including consequential damages, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, the Company's products are generally used with enterprise
systems involving complicated software products developed by other vendors,
which may not be Year 2000 compliant. In particular, many of the Company's
customers are financial institutions, insurance companies and other companies
with insurance and financial services businesses, all of which use legacy
computer systems that are expected to be particularly susceptible to Year 2000
compliance issues. If the Company's customers are unable to use their
information systems because of the failure of such noncompliant systems or
software or for any other reason, there would be a decrease in the volume of
transactions that the Company's customers process using the Company's products.
As a result, the Company's recurring revenue in the form of transactional fees
from customers in the insurance and financial services markets would decline,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. Such failure could also affect the
perceived performance of the Company's products, which could have a negative
effect on the Company's competitive position. In addition, the Company believes
that the purchasing patterns of customers and potential customers may be
affected by Year 2000 issues as companies expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company, which could result in a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is reviewing its major internal corporate systems for
Year 2000 compliance and intends to take appropriate action based on the results
of such review. The Company's plan for the Year 2000 calls for compliance
verification of external vendors supplying software and information systems to
the Company and communication with significant suppliers to determine the
readiness of third parties' remediation of their own Year 2000 issues. As part
of its assessment, the Company is evaluating the level of validation it will
require of third parties to ensure their Year 2000 readiness. To date, the
Company has not encountered any material Year 2000 issues concerning its
computer systems. The Company plans to complete its Year 2000 research and
testing by the end of 1998. All costs associated with carrying out the Company'
plan for the Year 2000 compliance are being expensed as incurred. The total cost
associated with preparation for the Year 2000 has not been, and is not expected
to be, material to the Company's business, financial condition or results of
operations. Nevertheless, the Company may not timely identify and remediate all
significant Year 2000 problems and remedial efforts may involve significant time
and expense. There can be no assurance that any Year 2000 compliance problems of
the Company or its customers or suppliers will not have a material adverse
effect on the Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
HNC develops, markets and supports predictive software solutions for
several leading service industries. These predictive software solutions may
employ proprietary neural-network predictive decision engines, profiles,
traditional statistical modeling, business models, expert
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rules and context vectors to convert existing data and business experiences into
meaningful recommendations and actions. HNC has developed a growing family of
predictive software products that provide specific solutions for each of the
healthcare/insurance, financial services and retail markets. The Company's
healthcare/insurance products, which are developed and marketed by its Insurance
Solutions subsidiary, emphasize the workmen's compensation field and provide a
variety of solutions to insurers, parties who administer insurance claims and
health care administrators. HNC's products for the financial services market
include products targeted at bank and private label payment card issuers and
payment processors and products that allow lenders to automate the loan approval
decision process. For the retail industry, HNC has developed a group of products
that address inventory control, merchandise management and financial control
management.
The Company's revenues are comprised of license and maintenance
revenues, installation and implementation revenues, contracts and other revenues
and service bureau revenues. The Company's revenues for the three months ended
June 30, 1998 were $43.1 million, an increase of 56% over revenues of $27.6
million for the same period in the prior year. The Company's revenues for the
six months ended June 30, 1998 were $78.2 million, an increase of 51% over
revenues of $51.7 million for the same period in the prior year.
LICENSE AND MAINTENANCE REVENUES. License and maintenance revenues
were $33.8 million for the quarter ended June 30, 1998, an increase of 51% from
$22.3 million for the comparable quarter in 1997. License and maintenance
revenues were $60.7 million for the six months ended June 30, 1998, an increase
of 49% from $40.6 million for the comparable period in 1997. The Company's
license and maintenance revenues are derived from periodic recurring license and
maintenance fees and perpetual license fees. These increases in license and
maintenance revenues were due primarily to the growth of license fee revenues
from the retail and financial services industry segments. The increase in
license and maintenance revenues in the retail industry was primarily due to an
increase in sales of the Retek suite of products and sales related to the
recently acquired company, PCS. The increase in the financial services industry
is attributable to an increase in sales of the Falcon and Capstone product lines
and sales of the ProfitMax product. Sales generated by the recently acquired
company, FTI, also contributed to this increase.
INSTALLATION AND IMPLEMENTATION REVENUES. Installation and
implementation revenues for the quarter ended June 30, 1998 were $3.6 million,
an increase of 66% from $2.2 million for the quarter ended June 30, 1997.
Additionally, installation and implementation revenues for the six months ended
June 30, 1998 were $6.8 million, an increase of 65% from $4.1 million for the
six months ended June 30, 1997. These increases were primarily due to new
installations within the financial services industry, primarily related to the
ProfitMax and Capstone product lines. Revenues from installation and
implementation 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.
CONTRACTS AND OTHER REVENUES. Contracts and other revenues for the
three months ended June 30, 1998 were $3.6 million, an increase of 99% from $1.8
million for the same period in the prior year. Likewise, contracts and other
revenues for the six months ended June 30, 1998 were $6.5 million, an increase
of 43% from $4.5 million for the same period in the prior year. Contracts and
other revenues are derived primarily from development and consulting contracts
with commercial customers and, to a lesser extent, research and development
contracts with the
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United States Government. Revenues for new product pilots (i.e., the first
production installation of a new product) are also reported as contract and
other revenues. 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. These
increases were attributable to increases in consulting contracts with commercial
customers primarily in the retail industry segment.
SERVICE BUREAU REVENUES. Service bureau revenues for the three months
ended June 30, 1998 were $2.1 million, an increase of 66% from $1.3 million for
the same period in the prior year. Service bureau revenues for the six months
ended June 30, 1998 were $4.2 million, an increase of 80% from $2.4 million for
the same period in the prior year. This increase was attributable to an increase
in the number of customers utilizing the Company's CRLink service bureau
operations.
LICENSE AND MAINTENANCE EXPENSES. License and maintenance expenses
primarily consist of the Company's expenses for personnel engaged in customer
support activities, costs of travel to customer sites and the costs of
documentation materials. License and maintenance expenses for the second quarter
of 1998 were $8.3 million and constituted 25% of license and maintenance
revenues for the quarter, whereas such expenses were $5.0 million and
represented 23% of license and maintenance revenues in the second quarter of
1997. Additionally, license and maintenance expenses for the six months ended
June 30, 1998 were $14.3 million and represented 24% of license and maintenance
revenues for that six-month period, whereas such expenses were $9.0 million and
represented 22% of license and maintenance revenues for the six months ended
June 30, 1997. The primary reason for the increase in these expenses, in
absolute dollars and as a percent of revenues, was increased staffing and
associated costs in client services to support an increased volume of business.
INSTALLATION AND IMPLEMENTATION EXPENSES. Installation and
implementation expenses for the second quarter of 1998 were $2.8 million and 76%
of installation and implementation revenues, whereas such expenses were $1.3
million and 57% of installation and implementation revenues during the second
quarter of 1997. Installation and implementation expenses for the first six
months of 1998 were $4.6 million and 68% of installation and implementation
revenues, whereas such expenses were $2.1 million and 50% of installation and
implementation revenues during the first six months of 1997. The primary reason
for the increase in these expenses in absolute dollars was increased staffing
and associated costs to support an increased volume of business. Installation
and implementation expenses as a percent of installation and implementation
revenues increased during the quarter and six months ended June 30, 1998,
respectively, as compared to the respective periods in 1997. The associated
decrease in gross margins was a result of a shift in the mix of implementations
within the financial services segment due primarily to an increase in Capstone
implementations, which have substantially lower margins than implementations of
the Falcon products.
CONTRACTS AND OTHER EXPENSES. Contracts and other expenses consist
primarily of personnel-related expenses associated with the Company's
performance of such development, consulting, and research and development
contracts. Contracts and other expenses in the second quarter of 1998 were $2.8
million or 79% of contracts and other revenues as compared to $1.5
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million or 81% of such revenues in the second quarter of 1997. Contracts and
other expenses for the first six months of 1998 were $4.7 million or 73% of
contracts and other revenues as compared to $3.3 million or 73% of such revenues
for the first six months of 1997. The decreases in the second quarter expenses
as a percentage of contracts and other revenues were due to the increase in
revenue from commercial consulting contracts in the retail industry out pacing
the increase in costs to support the increased volume in business. The remaining
development contracts were primarily retail consulting contracts, government
contacts and on-going model development projects, which typically yield lower
margins than commercial new product pilot contracts.
SERVICE BUREAU EXPENSES. Service bureau expenses during the second
quarter of 1998 were $1.3 million or 62% of service bureau revenues as compared
to $919,000 or 71% of such revenues during the second quarter of 1997. Service
bureau expenses during the first six months of 1998 were $2.4 million or 56% of
service bureau revenues as compared to $1.8 million or 76% of such revenues
during the first six months of 1997. The associated increases in gross margins
were the result of increases in the number of "complex" bills processed, which
typically yield higher margins than normal bills.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
in the second quarter of 1998 were $7.8 million or 18% of total revenues
compared to $4.9 million or 18% of total revenues in the second quarter of the
prior year. Research and development expenses for the first six months of 1998
were $14.7 million or 19% of total revenues compared to $9.4 million or 18% of
total revenues for the first six months of the prior year. The increase in these
expenses in absolute dollars was due primarily to increases in staffing and
related costs to support increased product development activities, primarily
related to enhancements to the healthcare/insurance and retail segment products
and, to a lesser extent, the financial services segment products.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. In-process research and
development expenses were $19.1 million and $22.8 million for the three and six
month periods ended June 30, 1998, respectively. These one-time write-offs were
related to the acquisitions of PCS and FTI and the asset purchase of ATACS
during the first six months of 1998.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $8.8
million or 21% of total revenues in the second quarter of 1998 compared to $5.2
million or 19% of total revenues in the second quarter of 1997. Sales and
marketing expenses were $16.5 million or 21% of total revenues in the first six
months of 1998 compared to $9.8 million or 19% of total revenues in the first
six months of 1997. The increases in sales and marketing expenses were due
primarily to increases in staffing related to the Company's expansion of its
direct sales and marketing staff, including opening sales offices in Canada,
Germany, South Africa, France and Japan.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $3.7 million or 9% of total revenues in the second quarter of
1998, compared to $2.8 million or 10% of total revenues in the second quarter of
the prior year. General and administrative expenses were $7.0 million or 9% of
total revenues in the first six months of 1998, compared to $5.2 million or 10%
of total revenues in the first six months of the prior year. General and
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administrative expenses, excluding acquisition related costs of $428,000, were
$3.3 million or 8% of total revenues in the second quarter of 1998, compared to
$2.8 million or 10% of total revenues in the second quarter of the prior year.
General and administrative expenses, excluding acquisition related costs of
$673,000, were $6.4 million or 8% of total revenues in the first six months of
1998, compared to $5.2 million or 10% of total revenues in the first six months
of the prior year. The increase in absolute dollars was due primarily to
increased staffing and related expenses, including recruiting costs, to support
higher levels of sales and development activity of the Company resulting in part
from the Company's recent acquisitions.
TOTAL OTHER INCOME, NET. Other income for the second quarter of 1998
was $603,000 compared to $481,000 in the second quarter of the prior year. Other
income for the first six months of 1998 was $982,000 compared to $910,000 in the
first six months of the prior year. Other income is comprised primarily of
interest income earned on cash and investment balances, net of interest expense
related to the 4.75% convertible subordinated notes due 2003. The increase is
the result of increased interest income related to the increase in investments,
partially offset by the interest expense related to the notes.
INCOME TAX PROVISION. The income tax provisions of $1.8 million and
$1.5 million in the second quarters of 1998 and 1997, respectively, and the
income tax provisions of $3.0 million and $2.9 million during the first six
months of 1998 and 1997, respectively, are based on management's estimates of
the effective tax rates to be incurred by the Company during those respective
full fiscal years. The income tax provisions of $1.8 million and $3.0 million
for the three and six month periods ended June 30, 1998, respectively, include
the tax effects for the permanent differences generated by the one-time
write-offs of in-process research and development related to the purchase of FTI
in the second quarter of 1998 and the purchase of both PCS and FTI during the
six months ended June 30,1998. The income tax provision of $1.5 million in the
second quarter of 1997 and $2.9 million during the first six months of 1997 was
lower than 1997 taxes at statutory rates primarily as a result of CompReview's
subchapter S corporation status prior to the acquisition, which resulted in
CompReview's tax liability being borne by its former stockholders. As of the
date of the acquisition, CompReview's tax status was changed to C corporation.
In the future, the Company expects that the effective tax rate will be
reflective of the tax rate of other California-based companies.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the first six months
of 1998 was $12.9 million, which primarily represented net income before
non-cash charges for purchased research and development and depreciation and
amortization of approximately $15.8 million, offset in part by an increase in
accounts receivable. Net cash used in investing activities was $86.5 million
during the first six months of 1998, primarily due to net purchases of
investments of $81.5 million. Net cash provided by financing activities of
$101.1 million during the first six months of 1998 was primarily related to
proceeds from the issuance of the Company's 4.75% convertible subordinated notes
due 2003 of $100.0 million issued in conjunction with the Company's debt
offering in March 1998 and net proceeds of $4.9 million from the issuance of
common stock. This was partially offset by costs of approximately $2.9 million
related to the issuance of the above-mentioned convertible subordinated notes.
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At June 30, 1998, the Company had $147.9 million in cash, cash
equivalents and investments available for sale. The Company believes that its
current cash, cash equivalents and investments available for sale balances,
borrowings under its credit facility and net cash provided by operating
activities, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. Management intends to
invest the Company's cash in excess of current operating requirements in
short-term, interest-bearing, investment-grade securities. A portion of the
Company's cash could also be used to acquire or invest in complementary
businesses or products or otherwise to obtain the right to use complementary
technologies or data. From time to time, in the ordinary course of business, the
Company evaluates potential acquisitions of such businesses, products,
technologies or data.
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PART II - OTHER INFORMATION
Item 2: CHANGES IN SECURITIES
(c) As disclosed in the Report on Form 10-Q filed by HNC for its
fiscal quarter ended March 31, 1998 and in its report on Form
8-K filed April 22, 1998, on April 7, 1998 HNC issued 396,617
shares of its Common Stock as consideration for HNC's
acquisition of Financial Technology, Inc. ("FTI"), a provider
of profitability measurement and decision support software to
the financial services industry. These shares were issued by
HNC in a merger transaction in which FTI became a wholly-owned
subsidiary of HNC. Of the 396,617 shares of common stock
issued to the former FTI shareholders, 97,390 are subject to
an escrow to secure certain indemnification obligations of
such shareholders to HNC. The FTI shareholders also have the
contingent right, subject to FTI's achievement of certain
financial objectives during calendar 1998, to receive up to an
additional $5,590,000 of HNC common stock based on a formula.
The shares issued by HNC in this transaction were offered and
sold solely to the shareholders of FTI in exchange for the
transfer of their entire ownership interests in FTI in the
merger. The shares of HNC common stock issued in the FTI
merger were issued without registration under the 1933 Act in
reliance on the exemptions afforded by Section 4(2) of the
1933 Act and Rule 506 of Regulation D promulgated under the
1933 Act. In relying upon the foregoing exemptions, HNC took
into account, among other things, the limited number of FTI's
shareholders (3 shareholders in total), the manner of HNC's
offering to such shareholders, the information regarding FTI,
HNC and the merger furnished to such shareholders, the
representation of FTI by its legal counsel and the
representations and warranties made by FTI and the FTI
shareholders to HNC in connection with the transaction.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1997 Annual Meeting of Stockholders on May 21,
1998 (the "Annual Meeting"). At the Annual Meeting, the Company's stockholders
elected the Company's Board of Directors and approved the proposals described
more fully below. Proxies were solicited by the Company pursuant to Regulation
14A under the Securities and Exchange Act of 1934, as amended.
As of March 27, 1998, the record date for the Annual Meeting, there
were approximately 24,727,776 shares of the Company's Common Stock outstanding
and entitled to vote, of which 21,472,944 shares were present in person or by
proxy at the Annual Meeting. The directors of the Company who were elected at
the Annual Meeting were: Edward K. Chandler, Oliver D. Curme, Thomas F. Farb,
Charles H. Gaylord, Jr. and Robert L. North.
The proposals considered at the Annual Meeting were voted on as
follows:
1. Election of Directors. Proposal to elect five directors of the
Company, each to serve until the next Annual Meeting of Stockholders
and until his successor is duly elected and qualified or until his
earlier resignation or removal.
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VOTES FOR VOTES WITHHELD
--------- --------------
Nominees
Edward K. Chandler 21,240,886 232,058
Oliver D. Curme 21,241,186 231,758
Thomas L. Farb 21,252,766 220,178
Charles H. Gaylord, Jr. 21,254,177 218,767
Robert L. North 21,255,724 217,220
2. Amendment to the 1995 Equity Incentive Plan. Proposal to amend the
Company's 1995 Equity Incentive Plan to increase the number of shares
of the Company's Common Stock reserved for issuance thereunder by
1,000,000.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
13,552,043 7,878,067 42,834
3. Ratification of Auditors. Proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's auditors for the
Company's fiscal year ending December 31, 1998.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
21,344,302 77,895 50,747
Item 5: OTHER INFORMATION
The following statement is provided pursuant to Rule 14a-5
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended: Proxies solicited by the Company for the
Company's 1999 Annual Meeting of Stockholders will be voted in the discretion of
the persons voting such proxies with respect to all proposals presented by
stockholders for consideration at such meeting after March 23, 1999.
QUALIFIED SMALL BUSINESS STOCK
The Company is currently conducting a study to determine if
it was a qualified small business within the meaning of Internal Revenue Code
("IRC") Section 1202 from the period beginning after August 10, 1993 through
December 14, 1995. The Company's preliminary analysis indicates its tax
bases of gross assets exceeded the statutory limit after December 14, 1995 and
therefore does not meet the qualified small business test after that date.
If the Company determines it is a qualified small business, qualified
stockholders who acquired their shares at original issue after August 10, 1993
and before December 14, 1995 and who meet a holding period requirement may be
eligible for special income tax treatment upon the sale (or reimbursement of
sale proceeds) of their shares. Additionally, qualified stockholders who
acquired shares of the Company's stock in connection with the Company's
acquisition of their company may be eligible for special income tax treatment
upon the sale of their shares of the Company's stock if the acquired company was
a qualified small business within the meaning of IRC Section 1202.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i).01 Registrant's Bylaws, as amended.
10.01 Registrant's 1995 Equity Incentive Plan and related
documents, as amended.
10.02 Registrant's 1998 Stock Option Plan, as amended.
27.01 Financial Data Schedule.
(b) Reports on Form 8-K
On April 21, 1998, the Company filed a Report on Form 8-K filed
with respect to an event dated April 7, 1998 (the acquisition
of Financial Technology, Inc. described in Item 2). No other
reports on Form 8-K were filed during the quarter ended June
30, 1998.
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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: August 14, 1998 By: /s/ Raymond V. Thomas
---------------------
Raymond V. Thomas
Vice President, Finance &
Administration and
Chief Financial Officer
(for Registrant as duly authorized
officer and as Principal
Financial Officer and Principal
Accounting Officer)
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EXHIBIT INDEX
Exhibits
- --------
3(i).01 Registrant's Bylaws, as amended.
10.01 Registrant's 1995 Equity Incentive Plan and related documents, as
amended.
10.02 Registrant's 1998 Stock Option Plan, as amended.
27.01 Financial Data Schedule.
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