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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A - AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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)
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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) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
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AS OF APRIL 30, 1997 THERE WERE 19,282,520 SHARES OF COMMON STOCK, $0.001 PAR
VALUE, OUTSTANDING.
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The Registrant hereby amends Items 1 and 2 of its quarterly report on Form 10-Q
for the quarterly period ended March 31, 1997.
INDEX LISTING
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Page
Number
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PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheet at March 31, 1997 (unaudited)
and December 31, 1996. 3
Consolidated Statement of Operations (unaudited) for the
three month periods ended March 31, 1997 and 1996 4
Consolidated Statement of Cash Flows (unaudited) for
the three month periods ended March 31, 1997
and 1996 5
Notes To Consolidated Financial Statements (unaudited) 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
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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,
1997 1996
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,379 $ 7,517
Short-term investments 10,075 7,353
Accounts receivable, net 18,830 18,832
Current portion of deferred income taxes 6,668 6,400
Other current assets 2,299 2,505
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Total current assets 44,251 42,607
Property and equipment, net 6,744 5,966
Deferred income taxes, less current portion 21,848 22,966
Other assets 3,236 3,305
Long-term investments 21,392 19,375
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97,471 94,219
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,932 $ 3,270
Accrued liabilities 3,408 4,058
Deferred revenue 4,527 3,377
Other current liabilities 340 418
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Total current liabilities 11,207 11,123
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Other non-current liabilities 593 683
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Common stock, $0.001 par value - 50,000 shares authorized:
19,262 and 19,126 shares issued and outstanding,
respectively 19 19
Paid-in capital 84,711 83,554
Foreign currency translation adjustment (25) 54
Unrealized loss on investments (62) (59)
Retained earnings (accumulated deficit) 1,028 (1,155)
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Total stockholders' equity 85,671 82,413
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$ 97,471 $ 94,219
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</TABLE>
See accompanying notes to consolidated financial statements.
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, 1997 March 31, 1996
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<S> <C> <C>
Revenues:
License and maintenance $13,809 $ 5,720
Installation and implementation 1,946 1,200
Contracts and other 2,726 2,979
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Total revenues 18,481 9,899
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Operating expenses:
License and maintenance 2,390 1,981
Installation and implementation 801 589
Contracts and other 1,850 2,071
Research and development 4,277 2,336
Sales and marketing 4,232 2,207
General and administrative 1,870 1,342
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Total operating expenses 15,420 10,526
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Operating income (loss) 3,061 (627)
Other income, net 404 437
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Income (loss) before income tax provision 3,465 (190)
Income tax provision 1,282 537
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Net income (loss) $ 2,183 $ (727)
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Net income (loss) per share $ 0.11 $ (0.04)
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Shares used in computing
net income (loss) per share 20,397 18,198
======= ========
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, 1997 March 31, 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,183 $ (727)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,063 679
Changes in assets and liabilities:
Accounts receivable, net 2 989
Other assets 30 (1,404)
Deferred income taxes -- 520
Accounts payable (338) 339
Accrued liabilities (650) (115)
Deferred revenue 1,150 1,640
Other liabilities (44) (300)
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Net cash provided by operating activities 3,396 1,621
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Cash flows from investing activities:
Purchases of investments (9,723) (18,443)
Maturities of investments 1,904 4,382
Proceeds from sale of investments 3,001 --
Acquisitions of property and equipment (1,520) (898)
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Net cash used in investing activities (6,338) (14,959)
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Cash flows from financing activities:
Net proceeds from issuance of common stock 725 521
Tax benefit from stock options 1,282 --
Proceeds under bank line of credit -- 764
Repayments under bank line of credit -- (435)
Repayment of debt from asset purchases -- (328)
Repayment of capital lease obligations (124) (127)
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Net cash provided by financing activities 1,883 395
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Effect of exchange rate changes on cash (79) --
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Net decrease in cash and cash equivalents (1,138) (12,943)
Cash and cash equivalents at the beginning of the period 7,517 20,583
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Cash and cash equivalents at the end of the period $ 6,379 $ 7,640
======= ========
</TABLE>
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
ended March 31, 1997 and 1996 have been prepared in accordance with generally
accepted accounting principles for interim financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of its financial position, results
of operations, and cash flows for such periods. 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,
1996 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 1996 Annual Report for
the fiscal year ended December 31, 1996. Footnotes which would substantially
duplicate the disclosures in the Company's audited financial statements for the
fiscal year ended December 31, 1996 contained in the 1996 Annual Report have
been omitted. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending December 31, 1997.
Note 2 NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 ("FAS128"), "Earnings Per
Share," which the Company will adopt as required for all periods ending after
December 15, 1997. Pursuant to this Statement, companies will replace the
reporting of "primary" earnings per share ("EPS") with "basic" EPS. Basic EPS is
calculated by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period, without
consideration for common stock equivalents. "Fully diluted" EPS will be replaced
by "diluted" EPS. Diluted EPS is computed similarly to fully diluted EPS under
the provisions of APB Opinion No. 15.
The pro forma effect of the adoption of FAS128 is as follows:
<TABLE>
<CAPTION>
3/31/97 3/31/96
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<S> <C> <C>
Basic earnings (loss) per share $0.11 $(0.04)
Diluted earnings (loss) per share $0.11 $(0.04)
</TABLE>
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Note 3 RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
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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; customer acceptance of new products; the Company's loss of a
large customer or key personnel; the Company's acquisition of other businesses;
the Company's ability to manage growth and to successfully integrate acquired
businesses; 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 from certain products; 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; the Company's inability to secure new government contracts for
technology development; 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.
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THREE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUES. Revenues for the three months ended March 31, 1997 were
$18.5 million, an increase of 87% over revenues of $9.9 million for the same
period in the prior year. This increase was primarily due to greater license
and maintenance revenues, which were $13.8 million for the quarter ended March
31, 1997, an increase of 141% from $5.7 million for the comparable quarter in
1996. The Company's license and maintenance revenues are derived from periodic
license fees, perpetual license fees and maintenance fees. This increase in
license and maintenance revenues was due primarily to the growth of license fee
revenues from products of recently acquired companies, including the Retek
Merchandising System, which provides management solutions for retailers,
CompCompare, which permits insurers to compare historical costs of workers'
compensation insurance claims, and MIRA, the worker's compensation loss
reserves prediction product. Also contributing to the increase in license and
maintenance revenues was growth in revenue from Falcon license fees and, to a
lesser extent, revenue from ProviderCompare, which enables insurers to compare
the relative costs of health care providers' treatment of workers' compensation
injuries.
Installation and implementation revenues increased to $1.9 million
during the first quarter of 1997 from $1.2 million during the first quarter of
1996. This increase is primarily attributable to increases in the installation
of both SkuPlan and Colleague.
Contracts and other revenues for the three months ended March 31, 1997
were $2.7 million, a decrease of 8% as compared to $3.0 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 research
and development contracts with the United States Government. All revenues for
new product pilots (i.e., the first production installation of a product) are
also reported as contract and other revenues. The Company had a greater number
of new product pilot installations in process during the first quarter of fiscal
1996 than during the quarter ended March 31, 1997, which accounted in part for
the decrease in contracts and other revenues during that quarter. 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.
During 1996, the Company had a significant number of new product
development projects in process consisting of new product pilot installations,
most of which the Company expects to begin shipping in production versions in
1997. Any significant delay in the completion of these or other new products, or
the failure of such products, if and when installed, to achieve any significant
market acceptance, would have a material adverse effect upon the Company's
business.
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The Company's success depends upon its ability to successfully enter new
markets by developing new products for those markets 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 statistical models that form a
product's core. During this development process, the Company relies on its
potential customers in the new market to provide relevant industry 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 the Company will succeed in developing products that satisfy customers
in new markets or that 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
for varied markets in a timely and cost-effective manner that meets 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.
LICENSE AND MAINTENANCE EXPENSES. License and maintenance expenses
primarily consist of the Company's expenses for personnel engaged in customer
support, costs of travel to customer sites and the costs of documentation
materials. License and maintenance expenses for the first quarter of 1997 were
$2.4 million and constituted 17% of license and maintenance revenues for the
quarter, whereas such expenses were $2.0 million and represented 35% of license
and maintenance revenues in the first quarter of 1996. 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. License and
maintenance expenses represented a lower percentage of license and maintenance
revenues in the quarter ended March 31, 1997 than in the comparable quarter in
the prior year. This increase in gross margins was due to increased shipments of
new products, including the Retek Merchandising System, CompCompare and MIRA,
outpacing growths in costs.
INSTALLATION AND IMPLEMENTATION EXPENSES. Installation and
implementation expenses were $801,000 or 41% of installation and implementation
revenues during the
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first quarter of 1997 and $589,000 or 49% of installation and implementation
revenues during the first quarter of 1996. 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. This increase in gross margins was
due in part to the fact that fewer pilot product installations (particularly for
insurance and retail products) were in progress during the quarter ended March
31, 1997 than in the same quarter in 1996. Pilot product installations typically
yield lower margins due to price discounts given to early adopter customers of
new pilot products. When a pilot product is later sold to other non-pilot
customers, the Company normally transitions to full pricing, and hence higher
margins, for that product. A larger percentage of the revenue for the quarter
ended March 31, 1997 was derived from full priced transactions. The Company also
had a higher volume of full priced transactions for the quarter ended March 31,
1997 as compared to the same period of the prior year. Consequently, the
Company's margins may vary from quarter to quarter depending upon, among other
things, the relative mix of pilot product versus full priced product revenues
for the quarter.
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 first quarter
of 1997 were $1.9 million or 68% of contracts and other revenues as compared to
$2.1 million or 70% of such revenues in the first quarter of 1996. The slight
reduction in these expenses as a percent of revenues is due to higher pricing on
commercial new product pilot contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the first quarter of 1997 were $4.3 million or 23% of total revenues compared to
$2.3 million or 24% of total revenues in the first quarter of the prior year.
The increase in these expenses was due primarily to increases in staffing and
related costs to support increased product development activities, primarily
related to enhancements to the Falcon product, Retek Merchandising 7.0,
Capstone, Retek's ARI product and Retek Data Warehouse, and to a lesser extent,
Falcon Sentry, Colleague, AREAS, CompCompare, and ProviderCompare.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $4.2
million or 23% of total revenues in the first quarter of 1997 compared to $2.2
million and 22% of total revenues in the first quarter of 1996. The increase in
sales and marketing expenses was due primarily to increased staffing related to
the Company's expansion of its direct sales and marketing staff, including
opening sales offices in the United Kingdom, Japan, South Africa and France, and
increased expenses for trade shows, advertising and other marketing programs to
support the roll-out of new products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1.9 million and 10% of total revenues in the first quarter of 1997,
compared to
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$1.3 million and 14% of total revenues in the prior year. 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 resulting in part from
the fiscal 1996 acquisitions of Risk Data Corporation and Retek Distribution
Corporation. The decrease in general and administrative expenses as a percent of
total revenues is due to relatively higher increases in revenues as compared to
the increase in general and administrative expenses.
OPERATING INCOME (LOSS). The above factors resulted in operating income
of $3.1 million, constituting 17% of total revenues for the first quarter of
1997, compared to an operating loss of $627,000 or 6% of total revenues in the
same quarter of the prior year.
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 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. In addition, because the Company's Retek
subsidiary generally provides its products to customers under perpetual licenses
with no significant continuing obligations for which collection of the related
receivable is probable, it recognizes the majority of its revenue upon the
delivery of the software and acceptance by the customer. Thus, revenues derived
by Retek may be more likely to be recognized in irregular patterns that may
result in quarterly variations in the Company's revenues. 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. Therefore, the Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. As a result, if anticipated revenues in any quarter do not occur or
are delayed, the Company's operating results for the quarter would be
disproportionately affected. The Company's operating results are also affected
by seasonal trends. Such trends may include higher revenues in the third quarter
and lower revenues in the fourth quarter as a result of fewer installations of
the Falcon product scheduled during the fourth quarter when credit card activity
is at peak levels. 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 expects quarterly fluctuations to continue for the
foreseeable future. Accordingly, the Company believes that period-to-period
comparisons of its
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financial results should not be relied upon as an indication of the Company's
future performance. No assurance can be given that the Company will be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
Due to all of the foregoing 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 such event, the price of the Company's Common Stock
would likely be materially adversely affected.
OTHER INCOME, NET. Other income for the first quarter of 1997 was
$404,000 compared to $437,000 in the first quarter of the prior year. The
decrease was due to a reduction in interest income during the first quarter of
1997 as a result of lower cash and investment balances due to the repayment of
the loans and notes payable of Risk Data Corporation and Retek Distribution
Corporation. Lower interest rates also contributed to the reduction in interest
income.
INCOME (LOSS) BEFORE INCOME TAX PROVISION. The resulting income before
income tax provision for the first quarter of 1997 was $3.5 million or 19% of
total revenues, compared to a loss before tax provision of $190,000 or 2% of
total revenues for the comparable quarter of 1996.
INCOME TAX PROVISION. The income tax provisions of $1.3 million and
$537,000 in the first quarters of 1997 and 1996, 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 loss before income tax provision
of $190,000 for the first three months of 1996 includes losses incurred by Risk
Data Corporation and Retek Distribution Corporation for which no tax benefit was
available during that period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the first quarter of
1997 of $3.4 million represented net income before depreciation and amortization
of approximately $3.2 million, further increased by a net increase in deferred
revenue of $1.2 million related to contract and license prepayments, and offset
by decreases in accrued liabilities of $650,000 and accounts payable of
$338,000. Net cash provided by operating activities during the first quarter of
1996 of $1.6 million represented a net loss before depreciation and amortization
of approximately $48,000. This was increased by a net increase in deferred
revenue of $1.6 million related to contract and license prepayments, and
decreases in accounts receivable of $989,000 and deferred tax assets of $520,000
offset by a increase in other assets of $1.4 million.
Net cash used in investing activities was $6.3 million during the first
quarter of 1997, primarily due to net purchases of investments of $4.8 million.
In addition, the
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Company expended $1.5 million for property and equipment during the first
quarter of 1997, including $1.3 million for computer equipment to support the
increased staffing across the Company. Net cash used in investing activities was
$15.0 million during the first quarter of 1996 as a result of net purchases of
investments of $14.1 million. The Company also acquired approximately $898,000
of property and equipment (primarily computer equipment) during the first
quarter of 1996.
Net cash provided by financing activities was $1.9 million during the
first quarter of 1997 primarily due to the tax benefit from stock option
exercises of $1.3 million and the net proceeds from the issuance of common stock
of $725,000, offset by capital lease repayments. Net cash provided by financing
activities was $395,000 during the first quarter of 1996, primarily as a result
of proceeds from Risk Data Corporation's bridge loan of $764,000 and the net
proceeds from the issuance of common stock of $521,000, offset by repayments of
the revolving line of credit, notes payable to stockholders and capital lease
obligations totaling $890,000.
At March 31, 1997, the Company had $37.8 million in cash, cash
equivalents and investments. 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. 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 be used to acquire or invest in complementary businesses or
products or 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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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: October 20, 1997 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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