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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 MARCH 31, 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)
(619) 546-8877
(Registrant's telephone number, including area code)
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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) YES X NO AND (2) HAS BEEN SUBJECT TO SUCH
--- ---
FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
--- ---
AS OF APRIL 30, 1996 THERE WERE 15,377,192 SHARES OF $0.001 PAR VALUE COMMON
STOCK OUTSTANDING.
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<TABLE>
<CAPTION>
INDEX LISTING
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Page
Number
------
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Balance Sheet at March 31, 1996 1
and December 31, 1995
Consolidated Statement Of Income for the 2
three month periods ended
March 31, 1996 and 1995
Consolidated Statement Of Cash Flows for the 3
three month periods ended March 31, 1996
and 1995
Notes To Consolidated Financial Statements 4
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6
PART II EXHIBITS
Item 3: STATEMENT REGARDING COMPUTATION OF PRO FORMA
PER SHARE EARNINGS 10
</TABLE>
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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
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,042 $ 19,929
Accounts receivable, net 5,214 4,597
Investments available for sale 13,206 14,590
Other current assets 3,475 2,852
-------- --------
Total current assets 28,937 41,968
Investments available for sale 23,452 8,336
Property and equipment, net 3,140 2,593
Other assets 1,395 533
-------- --------
$ 56,924 $ 53,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,016 $ 669
Accrued liabilities 1,864 2,451
Deferred revenue 2,801 2,041
-------- --------
Total current liabilities 5,681 5,161
-------- --------
Stockholders' Equity:
Common stock, $0.001 par value - 20,000 shares authorized:
15,167 and 14,719 shares issued and outstanding,
respectively 15 15
Paid in capital 51,285 49,124
Accumulated deficit (57) (870)
-------- --------
Total stockholders' equity 51,243 48,269
-------- --------
$ 56,924 $ 53,430
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Revenues:
Software license and installation $ 4,789 $ 2,988
Contracts and other 2,979 2,100
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Total revenues 7,768 5,088
------- -------
Operating expenses:
Software license and installation 964 565
Contracts and other 2,079 1,587
Research and development 1,589 909
Sales and marketing 1,502 1,017
General and administrative 846 503
------- -------
Total operating expenses 6,980 4,581
------- -------
Operating income 788 507
Other income, net 561 34
------- -------
Income before income tax provision 1,349 541
Income tax provision 536 168
------- -------
Net income $ 813 $ 373
======= =======
Net income per share $ 0.05
=======
Pro forma net income per share $ 0.03
=======
Shares used in computing
net income per share 16,747
=======
Shares used in computing pro forma
net income per share 12,666
=======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
March 31, 1996 March 31, 1995
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 813 $ 373
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 432 156
Changes in assets and liabilities:
Accounts receivable, net (617) (204)
Other assets 83 78
Accounts payable 347 (280)
Accrued liabilities (275) 43
Deferred revenue 760 507
-------- -------
Net cash provided by operating
activities 1,543 673
-------- -------
Cash flows from investing activities:
Purchases of investments (18,443) --
Maturities of investments 4,382 1,182
Acquisitions of property and equipment (864) (266)
-------- -------
Net cash (used in) provided by investing
activities (14,925) 916
-------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 495 2
Repayments of bank notes payable -- (66)
-------- -------
Net cash provided by (used in) financing
activities 495 (64)
-------- -------
Net (decrease) increase in cash and cash equivalents (12,887) 1,525
Cash and cash equivalents at beginning of period 19,929 4,786
-------- -------
Cash and cash equivalents at end of period $ 7,042 $ 6,311
======== =======
Supplemental cash flow disclosure:
Unrealized tax benefit from stock option plans 1,584 --
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Accretion of dividends on mandatorily
redeemable convertible preferred stock -- 179
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Interest paid -- 16
======== =======
Income taxes paid 10 51
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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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 ended March 31, 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. All such financial
statements are unaudited except the December 31, 1995 balance sheet. This report
and the accompanying financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto presented in its 1995
Annual Report. Footnotes and other disclosures for the fiscal year ended
December 31, 1995, which would substantially duplicate the disclosures in the
Company's audited financial statements for Fiscal Year 1995 contained in the
1995 Annual Report, 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 PENDING ACQUISITION
On February 19, 1996, the Company announced that it would
acquire Credit & Risk Management Associates, Inc., a consumer credit consulting
firm located in Baltimore, Maryland, subject to the satisfactory resolution of
certain contingencies. This transaction has not yet been consummated and remains
subject to the satisfaction of certain conditions. The consideration to be paid
by the Company will consist of a number of shares of the Company's common stock
equal to the greater of 180,000 shares or the number of shares with an aggregate
value of $4,000,000 as determined by the average closing price of the Company's
common stock for the twenty days preceding the closing of the transaction.
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.
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Note 4 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 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 May 5, 1995 have been included as
outstanding for all periods prior to June 26, 1995 using the treasury stock
method.
Note 5 LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (FAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which the Company adopted as required on January 1, 1996. Pursuant to this
Statement, companies are required to investigate potential impairments of
long-lived assets, certain identifiable intangibles, and associated goodwill, on
an exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. The adoption of FAS 121 did
not have a significant impact on the Company's financial position or results of
operations.
Note 6 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 is not expected to have a material
effect on the Company's financial position or results of operations. The Company
will continue 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.
5
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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
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; 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.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUES. Revenues for the three months ended March 31, 1996 were $7.8
million, an increase of 53% over revenues of $5.1 million for the same period in
the prior year. This increase was primarily due to greater software license and
installation revenues which were $4.8 million for the quarter ended March 31,
1996, an increase of 60% from $3.0 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 Falcon credit card fraud
detection product and to a lesser extent from the Colleague automated mortgage
underwriting product, SkuPLAN, the demand forecasting product for the retail
market and the AREAS property valuation product.
Contracts and other revenues for the three months ended March 31, 1996
were $3.0 million, compared to $2.1 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.
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 the costs of documentation materials.
Software license and installation expenses for the first quarter of 1996 were
$964,000 and constituted 20% of software and installation revenues for the
quarter, whereas such expenses were
6
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$565,000 and represented 19% of software and installation revenues in the first
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. Contracts and other expenses in the
first quarter of 1996 were $2.1 million or 70% of contracts and other revenues
as compared to $1.6 million or 76% of such revenues in the first quarter of
1995. The reduction in expenses as a percent of revenues is due to improved
pricing on certain contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the first quarter of 1996 were $1.6 million and 20% of total revenues compared
to $909,000 and 18% of total revenues in the first quarter of the prior year.
The increase in expenses was due primarily to increases in staffing and related
costs to support increased new product development activities including the
initial quarter of expenses for the Company's new text analysis products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $1.5
million or 19% of total revenues in the first quarter of 1996 compared to $1.0
million and 20% of total revenues in the first 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 $846,000 and 11% of total revenues in the first quarter of 1996,
compared to $503,000 and 10% 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.
OPERATING INCOME. The above factors resulted in operating income of
$788,000 and 10% of total revenues for the first quarter of 1996, compared to an
operating income of $507,000 and 10% of total revenues in the same quarter of
the prior year.
The Company has experienced fluctuations in quarterly operating profits
and margins due to variations in expense growth and some revenue seasonality.
The Company has continued to invest in research and development and sales and
marketing 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.
7
<PAGE> 10
OTHER INCOME, NET. Other income (expense) for the first quarter of 1996
was $561,000 compared to $34,000 in the first 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 tax
provision for the first quarter of 1996 was $1.3 million or 17% of total
revenues, compared to income before tax provision of $541,000 or 11% of total
revenues for the comparable quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
During the three months ended March 31, 1996 the Company obtained
$495,000 of cash from financing activities. These funds came primarily from the
exercise of stock options and the purchase of shares under the Company's
employee stock purchase plan. As of March 31, 1996 the Company had $43.7 million
in cash, cash equivalents and investments. Management believes that the
Company's cash and investments and cash generated from operations are expected
to be adequate for the Company's cash requirements for the next twelve months.
OPERATING ACTIVITIES
Cash provided by operating activities for the three months ended March
31, 1996 was $1.5 million compared to cash provided by operations of $673,000
for the first three months of the prior year. The increase in cash provided
compared to the same period in the prior year was due primarily to increased
profitability and increased deferred revenues due to customer prepayments.
INVESTING ACTIVITIES
Cash used in investing activities was $14.9 million for the three
months ended March 31, 1996 compared to cash provided by investing activities of
$916,000 for the first three months of the prior year. This was due to net
purchases of short and long term investments of $14.1 million and acquisitions
of property and equipment, primarily computer equipment of $864,000.
8
<PAGE> 11
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: May 7, 1996 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 and Accounting
Officer)
9
<PAGE> 1
PART II - EXHIBITS
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EXHIBIT 11.01
HNC SOFTWARE INC.
STATEMENT REGARDING
COMPUTATION OF PRO FORMA PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1996 1995
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<S> <C> <C>
NET INCOME $ 813 $ 373
=========== =======
SHARES(1)
Weighted average common shares outstanding 14,970 1,976
Weighted average common stock options 1,777 1,734
and warrants as determined by application
of the treasury stock method (2)
Weighted average preferred shares outstanding
assuming conversion to common stock -- 8,956
=========== =======
Weighted average common and
common equivalent shares outstanding 16,747 --
=========== =======
Pro forma weighted average common and
common equivalent shares outstanding -- 12,666
=========== =======
NET INCOME PER SHARE OF COMMON STOCK $ 0.05 $ --
=========== =======
PRO FORMA NET INCOME PER SHARE OF COMMON STOCK $ -- $ 0.03
=========== =======
</TABLE>
-----------------
(1) All share and per share amounts have been adjusted to give
retroactive effect to the stock split.
(2) Includes an adjustment for options pursuant to SAB No. 83 using the
treasury stock method at the initial public offering price of $14.00
per share for 1995 shares.
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,042
<SECURITIES> 36,658
<RECEIVABLES> 5,669
<ALLOWANCES> 455
<INVENTORY> 411
<CURRENT-ASSETS> 28,937
<PP&E> 4,851
<DEPRECIATION> 1,711
<TOTAL-ASSETS> 56,924
<CURRENT-LIABILITIES> 5,681
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 51,285
<TOTAL-LIABILITY-AND-EQUITY> 51,243
<SALES> 7,768
<TOTAL-REVENUES> 7,768
<CGS> 3,043
<TOTAL-COSTS> 6,980
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,349
<INCOME-TAX> 536
<INCOME-CONTINUING> 813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 813
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
