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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 SEPTEMBER 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 OCTOBER 30, 1998, THERE WERE 25,811,583 SHARES OF REGISTRANT'S COMMON
STOCK, $0.001 PAR VALUE, OUTSTANDING.
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INDEX LISTING
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<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheet at September 30, 1998 (unaudited) 3
and December 31, 1997
Consolidated Statement of Operations (unaudited) for the three 4
and nine months ended September 30, 1998 and 1997
Consolidated Statement of Cash Flows (unaudited) for 5
the nine months ended September 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity and 6
Comprehensive Income (Loss) for the nine months ended
September 30, 1998
Notes to Consolidated Financial Statements (unaudited) 7
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II OTHER INFORMATION
Item 6: EXHIBITS AND REPORT ON FORM 8-K 23
Signatures 24
Exhibit Index 25
</TABLE>
2
<PAGE> 3
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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,746 $ 18,068
Investments available for sale 48,725 24,878
Accounts receivable, net 50,391 32,980
Current portion of deferred income taxes 8,873 11,310
Other current assets 4,711 2,802
--------- ---------
Total current assets 153,446 90,038
Property and equipment, net 14,597 12,102
Deferred income taxes, less current portion 18,180 15,322
Long-term investments available for sale 61,125 --
Other assets 11,226 2,415
--------- ---------
$ 258,574 $ 119,877
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,892 $ 5,728
Accrued liabilities 9,567 5,933
Deferred revenue 7,881 3,883
Other current liabilities 104 191
--------- ---------
Total current liabilities 23,444 15,735
Convertible Subordinated Notes 100,000 --
Other non-current liabilities 30 239
Minority interest in consolidated subsidiary 157 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;
25,809 and 24,538 shares issued and outstanding,
respectively 26 25
Paid-in capital 131,502 95,919
Retained earnings 3,438 8,029
Accumulated other comprehensive income (loss) (23) (113)
--------- ---------
Total stockholders' equity 134,943 103,860
--------- ---------
$ 258,574 $ 119,877
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance $ 36,803 $ 23,705 $ 97,480 $ 64,347
Services and other 10,947 6,284 28,492 17,307
--------- --------- --------- ---------
Total revenues 47,750 29,989 125,972 81,654
--------- --------- --------- ---------
Operating expenses:
License and maintenance 8,021 4,957 22,168 13,987
Services and other 8,521 3,813 20,179 10,952
Research and development 9,000 6,015 23,466 15,376
Sales and marketing 8,797 5,691 25,245 15,477
General and administrative 3,843 3,142 10,847 8,369
In-process research and development -- -- 22,783 --
Acquisition related amortization 465 -- 906 --
--------- --------- --------- ---------
Total operating expenses 38,647 23,618 125,594 64,161
--------- --------- --------- ---------
Operating income 9,103 6,371 378 17,493
Other income, net 2,084 554 4,912 1,511
Interest expense (1,418) (16) (3,205) (63)
Minority interest in income of consolidated subsidiary (54) -- (114) --
--------- --------- --------- ---------
Total other income, net 612 538 1,593 1,448
Income before income tax provision 9,715 6,909 1,971 18,941
Income tax provision 3,605 1,782 6,562 4,643
--------- --------- --------- ---------
Net income (loss) $ 6,110 $ 5,127 $ (4,591) $ 14,298
========= ========= ========= =========
Earnings per share:
Basic net income (loss) per common share $ 0.24 $ 0.21 $ (0.18) $ 0.59
========= ========= ========= =========
Diluted net income (loss) per common share $ 0.24 $ 0.20 $ (0.18) $ 0.56
========= ========= ========= =========
Shares used in computing basic net income (loss) per common share 25,694 24,359 25,217 24,213
========= ========= ========= =========
Shares used in computing diluted net income (loss) per common share 29,428 25,894 25,217 25,574
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,591) $ 14,298
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 5,882 3,478
Purchased research and development 22,783 --
Tax benefit from stock option transactions 6,100 4,165
Changes in assets and liabilities:
Accounts receivable, net (15,252) (8,298)
Other assets (1,753) (927)
Deferred income taxes 5,236 4,146
Accounts payable (273) 2,325
Accrued liabilities (3,840) (1,956)
Deferred revenue (522) (848)
Other liabilities (227) (110)
--------- ---------
Net cash provided by operating activities 13,543 16,273
--------- ---------
Cash flows from investing activities:
Purchases of investments (126,960) (27,712)
Maturities of investments 38,284 12,100
Proceeds from sale of investments 4,000 5,689
Cash purchased in business acquisition 649 --
Acquisitions, net of cash acquired (6,250) --
Acquisitions of property and equipment (6,472) (6,873)
--------- ---------
Net cash used in investing activities (96,749) (16,796)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuances of common stock 9,671 3,447
Proceeds from issuances of Convertible Subordinated Notes 100,000 --
Debt issuance costs (2,779) --
Repayment of bank line of credit (770) --
Repayment of capital lease obligations (151) (332)
Distributions to CompReview Stockholders -- (5,798)
--------- ---------
Net cash provided by (used in) financing activities 105,971 (2,683)
--------- ---------
Effect of exchange rate changes on cash (87) (14)
--------- ---------
Net increase (decrease) in cash and cash equivalents 22,678 (3,220)
Cash and cash equivalents at the beginning of the period 18,068 8,121
--------- ---------
Cash and cash equivalents at the end of the period $ 40,746 $ 4,901
========= =========
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 $ --
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS EQUITY INCOME (LOSS)
--------- ------ --------- ------------ -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 24,538 $ 25 $ 95,919 $ (113) $ 8,029 $ 103,860 $
Common stock options exercised 663 1 7,737 7,738
Common stock issued under Employee
Stock Purchase Plan 68 1,933 1,933
Tax benefit from stock option transactions 6,100 6,100
Common stock issued for acquisition of PCS 143 5,088 5,088
Common stock issued for acquisition of FTI 397 14,725 14,725
Unrealized gain on investments 109 109 109
Foreign currency translation adjustment (19) (19) (19)
Net loss (4,591) (4,591) (4,591)
--------- ------ --------- ------ -------- --------- ---------
BALANCE AT SEPTEMBER 30, 1998 25,809 $ 26 $ 131,502 $ (23) $ 3,438 $ 134,943 $ (4,501)
========= ====== ========= ====== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HNC SOFTWARE INC.
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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 nine months ended September 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
In March 1998, the Company acquired PCS, a company that develops,
markets and supports fully integrated distribution center management software
products that address the distribution 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 objectives during
calendar 1998 and 1999, to receive certain additional shares of HNC common
stock.
7
<PAGE> 8
In April 1998, the Company acquired FTI, a company that develops and
markets profitability measurement and decision support software products and
related support services to banks and other similar financial institutions. 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 certain additional shares of HNC
common stock.
In June 1998, the Company acquired the ATACS product line. ATACS 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 PENDING ACQUISITION
On September 16, 1998, the Company announced that it had signed a
definitive agreement to acquire Open Solutions Inc. ("OSI"). OSI provides
credit/server core processing software and related professional services to
small to mid-size banks and credit unions. This transaction has not yet been
consummated and remains subject to the satisfaction of certain conditions,
including qualification of the transaction for "pooling of interests" accounting
treatment. Under the current terms of the pending transaction, the consideration
payable by HNC to acquire all of OSI's outstanding stock and stock options would
consist of approximately 2,507,507 shares and 449,111 options.
NOTE 5 REVENUE RECOGNITION
During the first quarter of 1998, the Company adopted Statement of
Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition," as amended by
Statement of Position No. 98-4 "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition". SOP 97-2 provides guidance for software
revenue recognition. The adoption of SOP 97-2 did not have a significant impact
on the Company's financial position or results of operations.
NOTE 6 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 7 RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
8
<PAGE> 9
NOTE 8 RECONCILIATION OF NET INCOME (LOSS) AND SHARES USED IN PER SHARE
COMPUTATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) USED:
Net income (loss) used in computing
Basic net income (loss) per common
Share $ 6,110 $ 5,127 $ (4,591) $ 14,298
Add back interest expense related to
Convertible subordinated notes 861 -- -- --
-------- -------- -------- --------
Net income (loss) used in computing
Diluted net income (loss) per
Common share $ 6,971 $ 5,127 $ (4,491) $ 14,298
======== ======== ======== ========
SHARES USED:
Shares used in computing basic net
Income (loss) per common share 25,694 24,359 25,217 24,213
Weighted average conversion of
Convertible subordinated notes 2,230 -- -- --
Weighted average options to purchase
Common stock as determined by
Application of the treasury stock
Method 1,488 1,533 -- 1,359
Purchase Plan common stock
Equivalents 16 2 -- 2
-------- -------- -------- --------
Shares used in computing diluted net
Income (loss) per common share 29,428 25,894 25,217 25,574
======== ======== ======== ========
</TABLE>
For the nine month period ended September 30, 1998, common stock equivalents
of approximately 1,387,000 shares were not used to calculate diluted net loss
per share because of their anti-dilutive effect. The conversion of the Company's
4.75% convertible subordinated notes for the nine month period ended September
30, 1998 of 1,700,000 shares were not used to calculate diluted net loss per
share as their effect would be anti-dilutive.
9
<PAGE> 10
NOTE 9 NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which HNC is required to adopt for its 1998 annual financial
statements. This statement establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under FAS 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. HNC has not determined the impact of the
adoption of this new accounting standard on its consolidated financial statement
disclosures.
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
during the first quarter of 2000. 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 has not determined the impact of the adoption of this new
accounting standard on its financial position or results of operations.
NOTE 10 CONVERTIBLE SUBORDINATED NOTES
In March 1998, the Company issued $100,000,000 of 4.75% Convertible
Subordinated Notes (the "Notes") due 2003. The Notes will be convertible into
common stock at any time prior to the close of business on the maturity date,
unless previously redeemed or repurchased, at a conversion price of $44.85 per
share (equivalent to a conversion rate of approximately 22.30 shares per $1,000
principal amount of Notes), subject to adjustment.
NOTE 11 INVESTMENTS
At September 30, 1998 and December 31, 1997, the amortized cost and
estimated fair value of investments available for sale were as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. government and federal agencies ... $ 75,686 $ 75 $ -- $ 75,761
U.S. corporate debt .................... 26,951 60 -- 27,010
Foreign corporate debt ................. 7,043 36 -- 7,079
-------- -------- -------- --------
$109,680 $ 171 $ -- $109,850
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. government and federal agencies ... $ 20,682 $ -- $ (1) $ 20,681
U.S. corporate debt .................... 1,894 -- (1) 1,893
Foreign corporate debt ................. 2,304 -- -- 2,304
-------- -------- -------- --------
$ 24,880 $ -- $ (2) $ 24,878
======== ======== ======== ========
</TABLE>
At September 30, 1998 and December 31, 1997, all foreign corporate debt
investments were denominated in U.S. dollars.
The objectives of the Company's investment policy are the safety and
preservation of invested funds and liquidity of investments that is sufficient
to meet cash flow requirements. The Company's policy is to place its cash, cash
equivalents and investments available for sale with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of credit exposure. It is also the Company's policy to
maintain certain concentration limits, to only invest in certain "allowable
securities" as determined by the Company's management and must be denominated in
U.S. dollars. The Company's investment portfolio shall not have an average
portfolio maturity of beyond one year and shall maintain certain liquidity
positions. Investments are prohibited in certain industries and speculative
activities.
10
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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 Report (including without limitation the following section
regarding Management's Discussion and Analysis of Financial Condition and
Results of Operations) contains 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," "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. Accordingly,
actual results and outcomes may differ materially from the results and outcomes
discussed in 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" or
"Year 2000 Compliance" 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: the degree of acceptance of the
Company's products; 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; 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 introductions by the
11
<PAGE> 12
Company and its competitors; changes in the mix of distribution channels;
changes in the level of operating expenses; the Company's ability to achieve
progress and fulfill its obligations under percentage-of-completion contracts;
the Company's success in completing certain pilot installations within
contracted fee budgets; competitive conditions in the industry; domestic and
international economic conditions; and market conditions in the Company's
targeted markets. In addition, 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, the Company may be unable to adjust spending in
time to compensate for any revenue shortfall. 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 price
of the Company's common stock and, in turn, the price of the Company's 4.75%
convertible subordinated notes due 2003 (the "Notes"), would likely be
materially adversely affected.
YEAR 2000 COMPLIANCE
GENERAL
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. As early as 1997, the
Company had begun the process of planning and updating, in some cases, its
earlier versions of existing software products. More recent versions of these
same products as well as new products were developed with Year 2000 date
processing in mind. To track performance of completing any remaining compliance
work as well as to assess the Year 2000 issue more broadly, the Company
developed a Year 2000 project plan.
PROJECT
The Company initiated a company-wide Year 2000 Project (Y2k Project)
during 1998 to more formally monitor compliance of its year 2000 exposure for
each major business unit and has divided the project into three major sections
that address its critical date sensitive
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<PAGE> 13
components: software products, information technology ("IT") infrastructure, and
non-IT systems. The Y2k Project consists of (1) assessing the current state of
readiness for all critical components, (2) developing project plans that track
the status of work performed toward completing planned solutions and (3)
developing contingency plans.
In August 1998, IT directors of all significant business units were
asked to inventory all major components and provide the current state of
readiness as well as an indication as to when readiness would otherwise be
expected. In addition, each major business unit was asked to provide project
plan status reports that indicate how compliance would be achieved, as well as
to quantify the extent and timing of the effort and to identify when testing of
the solution would be completed. Finally, each major business unit was asked to
consider various scenarios that might impact successful implementation of their
Year 2000 solutions and to develop alternative or back-up plans to mitigate the
risk of not being ready on time.
CURRENT STATUS
The Company has completed the initial stage of its Y2k Project by taking
inventory of its more major software products, identifying the state of
readiness for each and developing project plans for completing and implementing
designed solutions. Based on the Company's assessment of its major software
products to date, the Company believes that the current version of each 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 also expected to complete its review of the remaining
major components of its IT infrastructure, such as its applications developed
in-house or purchased from a supplier, by the end of 1998.
The Company is reviewing its major non-IT system components for Year
2000 compliance and intends to take appropriate action based on the results of
such review. Non-IT systems include hardware and other electronic systems,
excluding application systems, used in operations of the Company's business. The
assessment and project plans of non-IT Year 2000 solutions are currently
expected to be available by the end of 1998.
The Company's plan for the Year 2000 calls for compliance verification
of third parties supplying software and information systems to the Company for
both IT and non-IT systems 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.
During the forth quarter of 1998, the Company expects to have
significantly completed its assessment of the most reasonably likely worst case
scenarios as well as identifying potential contingency plans should the
Company's Y2k Project not be fully completed in time.
COSTS
All costs associated with carrying out the Company's plan for the Year
2000 compliance are being expensed as incurred. The total cost associated with
preparation for the Year 2000 has
13
<PAGE> 14
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. Failure to identify such
problems could, for example, impair the Company's internal product development
efforts and internal management systems. 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.
RISKS
The inability of the Company to complete its assessment and any
necessary modifications to recently acquired products could 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 complex
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 non-compliant 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 usage-based transactional fees from customers in the
insurance and financial solutions 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.
14
<PAGE> 15
RESULTS OF OPERATIONS
HNC develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ,
variously, proprietary neural-network predictive decision engines, profiles,
traditional statistical modeling, business models, expert 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 solutions and retail markets. The Company's
healthcare/insurance products, which are developed and marketed by its HNC
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
solutions 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.
For the nine months ended September 30, 1998, approximately 7% of the
Company's sales were denominated in currencies other than the Company's
functional currency, which is the U.S. dollar. These foreign currencies are
primarily those of Western Europe, Canada and Australia.
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
September 30, 1998 were $47.8 million, an increase of 59% over revenues of $30.0
million for the same period in the prior year. The Company's revenues for the
nine months ended September 30, 1998 were $126.0 million, an increase of 54%
over revenues of $81.7 million for the same period in the prior year.
During the first quarter of 1998, the Company adopted Statement of
Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition" and as amended by
Statement of Position No. 98-4 "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition". SOP 97-2 provides guidance for software
revenue recognition. The adoption of SOP 97-2 did not have a significant impact
on the Company's financial position or results of operations.
REVENUES
LICENSE AND MAINTENANCE REVENUES. The Company's license and maintenance
revenues are derived from annual license fees, monthly license fees, perpetual
license fees and annual maintenance fees. License and maintenance revenues were
$36.8 million for the quarter ended September 30, 1998, an increase of 55% from
$23.7 million for the comparable quarter in 1997. The increase in license and
maintenance revenues was due primarily to the growth of license fee revenues
from the financial solutions segment of approximately $5.3 million and the
retail solutions segment of approximately $3.4 million. The increase in the
financial solutions industry revenue during the quarter ended September 30, 1998
compared to the quarter ended September 30, 1997, is attributable to an increase
in sales of the Falcon and AREAS product lines and sales generated by the
recently acquired company, FTI. On September 30, 1998, the Company entered into
a two year service agreement and a three year sale/license agreement for its
AREAS, Data Mining Workstation, DeployNet/API and SIMD Numerical Array
Processor products with Transamerica Intellitech. The increase in
15
<PAGE> 16
license and maintenance revenues in the retail solutions segment was primarily
attributable to an increase in sales of the Retek suite of products. Products of
the recently acquired company, PCS, were added to the Retek suite of products
during the first quarter of 1998. Contributing to the increase in license and
maintenance revenues in the quarter ended September 30, 1998 compared to the
quarter ended September 30, 1997, were increases in the insurance solutions
segment of approximately $2.7 million due primarily to an increase in the
customer base and in the telecommunications solutions segment of approximately
$1.6 million due to the recently acquired ATACS product line.
License and maintenance revenues were $97.5 million for the nine months
ended September 30, 1998, an increase of 51% from $64.3 million for the
comparable period in 1997. The increase in license and maintenance revenues was
due primarily to the growth of license fee revenues from the financial solutions
segment of approximately $14.3 million and the retail solutions segment of
approximately $11.9 million. The increase in the financial solutions industry
revenue during the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997, is attributable primarily to an increase in
sales of the Falcon, FTI (the recently acquired company), AREAS and ProfitMax.
The increase in license and maintenance revenues in the retail solutions segment
in the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997, was primarily due to an increase in sales of the Retek suite
of products. Contributing to the increase in license and maintenance revenues
were increases in the insurance solutions segment of approximately $4.2 million
and license and maintenance revenues in the telecommunications solutions segment
from the recently acquired ATACS product line of approximately $2.2 million.
SERVICES AND OTHER REVENUES. Services and other revenues are comprised
of installation and implementation revenues, service bureau operations revenues
and revenues which are derived from consulting contracts, new product
development contracts with commercial customers and, to a lesser extent,
research and development contracts with the United States Government. Revenues
from installation and implementation services and 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. Service bureau revenues are derived from the Company's
service bureau operations, which provide CRLink's functionality to customers
that do not wish to obtain a license, that use this service until they can
implement their own internal CRLink operation or that use this service when
their volumes peak to high levels. Service bureau customers typically subscribe
for services under month-to-month agreements and service bureau fees are
recognized as revenue when the processing services are performed.
Services and other revenues for the quarter ended September 30, 1998 were $10.9
million, an increase of 74% from $6.3 million for the quarter ended September
30, 1997. Additionally, services and other revenues for the nine months ended
September 30, 1998 were $28.5 million, an increase of 65% from $17.3 million for
the nine months ended September 30, 1997. The retail solutions segment accounted
for approximately $3.0 million and $8.0 million of the increase during the
quarter and nine months ended September 30, 1998 compared to the quarter and
nine months ended September 30, 1997, respectively. These increases were
attributable to increases in consulting contracts with commercial customers in
the retail industry. The insurance solutions segment accounted for approximately
$600,000 and $2.5 million of the increase during the quarter and nine months
ended September 30, 1998 compared to the quarter and nine months ended September
30,1997, respectively. These increases were attributable to an increase in the
number of customers utilizing the Company's service bureau operations. The
financial solutions segment accounted for approximately $600,000 and $1.2
million of the increase during the quarter and nine months ended September 30,
1998, respectively. This increase was primarily due to new installations of
16
<PAGE> 17
the Capstone product line during the third quarter of 1998, and the Capstone,
Falcon and ProfitMax product lines for the nine months ended September 30, 1998.
EXPENSES
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 third quarter
of 1998 were $8.0 million and constituted 22% of license and maintenance
revenues for the quarter, whereas such expenses were $5.0 million and
represented 21% of license and maintenance revenues in the third quarter of
1997. Additionally, license and maintenance expenses for the nine months ended
September 30, 1998 were $22.2 million and represented 23% of license and
maintenance revenues for that nine-month period, whereas such expenses were
$14.0 million and represented 22% of license and maintenance revenues for the
nine months ended September 30, 1997.
The financial solutions segment accounted for approximately $1.0 million
and $3.6 million of the increase during the quarter and nine months ended
September 30, 1998 compared to the quarter and nine months ended September 30,
1997, respectively. The insurance solutions segment accounted for approximately
$1.2 million and $2.4 million of the increase during the quarter and nine months
ended September 30, 1998, respectively. The retail solutions segment accounted
for approximately $700,000 and $2.0 million of the increase during the quarter
and nine months ended September 30, 1998, respectively. The primary reason for
the increase in these expenses across all industry segments in the three and
nine month periods ended September 30, 1998 over the comparable periods in 1997
(both 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.
SERVICES AND OTHER EXPENSES. Services and other expenses consist of
personnel and other expenses associated with providing installation and
implementation services, the Company's performance of development, consulting,
and research and development contracts and the costs associated with the service
bureau operations. Service and other expenses for the third quarter of 1998 were
$8.5 million and 78% of services and other revenues, whereas such expenses were
$3.8 million and 61% of service and other revenues during the third quarter of
1997. Services and other expenses for the first nine months of 1998 were $20.2
million and 71% of service and other revenues, whereas such expenses were $11.0
million and 63% of services and other revenues during the first nine months of
1997.
The retail solutions segment accounted for approximately $3.0 million
and $6.1 million of the increase during the quarter and nine months ended
September 30, 1998 compared to the quarter and nine months ended September 30,
1997, respectively. These increases are attributable to an increase in
consulting contracts with commercial customers in the retail industry. Due to
the increase in demand for retail consulting services, the retail solutions
segment utilized a significant amount of contract labor, which in turn caused a
decrease in gross margins. The financial solutions segment accounted for
approximately $900,000 and $1.9 million of the increase during the quarter and
nine months ended September 30, 1998, respectively. This increase (and the
associated decrease in gross margins) was a result of a shift in the mix of
implementations within the financial solutions segment due primarily to an
increase in Capstone implementations, which have substantially lower margins
than implementations of
17
<PAGE> 18
the Falcon line of products. The insurance solutions segment accounted for
approximately $500,000 and $1.2 million of the increase during the quarter and
nine months ended September 30, 1998, respectively. The associated increases in
gross margins were the result of increased volume of service bureau customers
combined with relatively fixed costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and other personnel-related expenses and
subcontracted development services. Research and development expenses in the
third quarter of 1998 were $9.0 million or 19% of total revenues compared to
$6.0 million or 20% of total revenues in the third quarter of the prior year.
Research and development expenses for the first nine months of 1998 were $23.5
million or 19% of total revenues compared to $15.4 million or 19% of total
revenues for the first nine months of the prior year.
The insurance solutions segment accounted for approximately $2.0 million
and $4.4 million of the increase during the quarter and nine months ended
September 30, 1998 compared to the quarter and nine months ended September 30,
1997, respectively. The retail solutions segment accounted for approximately
$400,000 and $2.6 million of the increase during the quarter and nine months
ended September 30, 1998, respectively. The financial solutions segment
accounted for approximately $600,000 and $1.6 million of the increase during the
quarter and nine months ended September 30, 1998, respectively. 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 insurance solutions and retail solutions products
and, to a lesser extent, the financial solutions products. Research and
development expenses also increased in absolute dollars due to increased efforts
required to support the research and development functions of businesses
acquired by the Company in late fiscal 1997 and in fiscal 1998.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of salaries and benefits, commissions, travel, entertainment and
promotional expenses. Sales and marketing expenses were $8.8 million or 18% of
total revenues in the third quarter of 1998 compared to $5.7 million or 19% of
total revenues in the third quarter of 1997. Sales and marketing expenses were
$25.2 million or 20% of total revenues in the first nine months of 1998 compared
to $15.5 million or 19% of total revenues in the first nine months of 1997.
The retail solutions segment accounted for approximately $1.0 million
and $4.8 million of the increase during the quarter and nine months ended
September 30, 1998 compared to the quarter and nine months ended September 30,
1997, respectively. The financial solutions segment accounted for approximately
$1.4 million and $3.6 million of the increase during the quarter and nine months
ended September 30, 1998, respectively. The insurance solutions segment
accounted for approximately $200,000 and $800,000 of the increase during the
quarter and nine months ended September 30, 1998, respectively. 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.
Contributing to the increases were increased expenses for trade shows,
advertising, corporate marketing programs and other expenses to support the
recently acquired businesses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3.8 million or 8% of total revenues in the third quarter of 1998, compared
to $3.0 million or 10% of total revenues in the third quarter of the prior year.
General and administrative expenses were
18
<PAGE> 19
$10.8 million or 9% of total revenues in the first nine months of 1998, compared
to $8.4 million or 10% of total revenues in the first nine months of the prior
year. Included in general and administrative expenses were acquisition related
costs of $123,000 for the three month period ended September 30, 1997. These
costs were related to the acquisition of CompReview in November 1997.
Acquisition related costs of $673,000 and $123,000 were included in general and
administrative expenses in the first nine months of 1998 and in the first nine
months of 1997, respectively. These costs related to the acquisition of
CompReview in November 1997 and the acquisition of PCS in first quarter of 1998
and the acquisitions of FTI and ATACS in the second quarter of 1998.
Excluding acquisition costs, the retail solutions segment accounted for
approximately $60,000 and $900,000 of the increase during the quarter and nine
months ended September 30, 1998 compared to the quarter and nine months ended
September 30, 1997, respectively. Excluding acquisition costs, the financial
solutions segment accounted for approximately $300,000 and $600,000 of the
increase during the quarter and nine months ended September 30, 1998,
respectively. 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 across the Company resulting in part
from the Company's recent acquisitions. The decrease of general and
administrative expenses as a percentage of total revenues was the result of
general and administrative expenses increasing at a lower rate than revenues in
the same fiscal periods.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. In-process research and
development expenses were $22.8 million for the nine month period ended
September 30, 1998. These one-time write-offs were related to the acquisitions
of PCS and FTI and the asset purchase of ATACS during the first nine months of
1998. These amounts were expensed as non-recurring charges on the respective
acquisition dates. These write-offs were necessary because the acquired
technology had not yet reached technological feasibility and had no future
alternative uses. The Company is using the acquired in-process research and
development to add additional functionality to existing products in each of the
vertical markets. The value of the purchased in-process research and development
was determined through the use of the discounted cash flow analysis taking into
account costs to complete the in-process technology, anticipated future cash
flows once the technology is completed and commercially available and the risk
factors associated with achieving the cash flows. The process took into account
costs incurred through the date of acquisition, efforts necessary to complete
the technology and assessment of technological feasibility. It also took into
account the fact that other tangible and intangible assets were employed in
generating the aforementioned cash flows, and therefore, took into account as an
expense a reasonable return on the other assets employed. The resulting
projected net cash flows were based on management's estimates of revenues and
operating profits. Management's estimates included an assessment of historical
performance with other products, general market conditions for the type of
product, and competing technologies.
ACQUISITION RELATED AMORTIZATION EXPENSES. Acquisition related
amortization expenses were $465,000 or 1% of total revenues in the third quarter
of 1998 and $906,000 or 1% of total revenues in the first nine months of 1998.
These expenses represent the amortization of intangible assets purchased in
conjunction with the Company's acquisitions of PCS and FTI and the asset
purchase of ATACS during the first nine months of 1998.
19
<PAGE> 20
TOTAL OTHER INCOME, NET. Other income for the third quarter of 1998 was
$612,000 compared to $538,000 in the third quarter of the prior year. Other
income for the first nine months of 1998 was $1.6 million compared to $1.4
million in the first nine 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 in the quarter ended September 30, 1998 compared to the quarter
ended September 30, 1997, 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 $3.6 million and $1.8
million in the third quarters of 1998 and 1997, respectively, and the income tax
provisions of $6.6 million and $4.6 million during the first nine 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 provision of $6.6 million for the nine month period ended
September 30, 1998 includes the tax effects for the permanent differences
generated by the one-time write-offs of in-process research and development
related to purchases of both PCS and FTI during the six months ended June 30,
1998. The income tax provision of $1.8 million in the third quarter of 1997 and
$4.6 million during the first nine 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 rather than by CompReview. 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 nine months
of 1998 was $13.5 million, which primarily represented net income before
non-cash charges for purchased research and development and depreciation and
amortization of approximately $24.0 million, offset in part by an increase in
accounts receivable. Net cash used in investing activities was $96.7 million
during the first nine months of 1998, primarily due to net purchases of
investments of $127.0 million. Net cash provided by financing activities of
$106.0 million during the first nine months of 1998 was primarily related to
proceeds from the issuance of the Company's 4.75% Convertible Subordinated Notes
(the "Notes") due 2003 of $100.0 million issued in conjunction with the
Company's debt offering in March 1998 and net proceeds of $9.7 million from the
issuance of common stock. This was partially offset by costs of approximately
$2.8 million related to the issuance of the above-mentioned Notes.
At September 30, 1998, the Company had $150.6 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. The Company expects to
invest approximately $2.0 million in capital assets, including computer
equipment and building improvements throughout the remainder of 1998. 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. The
20
<PAGE> 21
proceeds from the Notes will be used for general corporate purposes, including
working capital or to acquire complementary businesses, products or
technologies. From time to time, in the ordinary course of business, the Company
evaluates potential acquisitions of such businesses, products, technologies or
data.
The objectives of the Company's investment policy are the safety and
preservation of invested funds and liquidity of investments that is sufficient
to meet cash flow requirements. The Company's policy is to place its cash, cash
equivalents and investments available for sale with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of credit exposure. It is also the Company's policy to
maintain certain concentration limits, to only invest in certain "allowable
securities" as determined by the Company's management and must be denominated in
U.S. dollars. The Company's investment portfolio shall not have an average
portfolio maturity of beyond one year and shall maintain certain liquidity
positions. Investments are prohibited in certain industries and speculative
activities.
21
<PAGE> 22
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.01 Agreement and Plan of Reorganization dated as of September
16, 1998 among the Registrant, Open Solutions, Inc. and
Oahu Transaction Corp., a wholly-owned subsidiary of the
Registrant (incorporated by reference to Appendix A to the
Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4 Registration No.
333-64527.).
27.01 Financial Data Schedule.
(b) Reports on Form 8-K
None
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
HNC SOFTWARE INC.
Date: November 16, 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 Chief
Accounting Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
2.02 Agreement and Plan of Reorganization dated as of September
16, 1998 among the Registrant, Open Solutions, Inc. and
Oahu Transaction Corp., a wholly-owned subsidiary of the
Registrant (incorporated by reference to Appendix A to the
Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4 Registration No.
333-64527.).
27.01 Financial Data Schedule.
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 40,746
<SECURITIES> 109,850
<RECEIVABLES> 54,832
<ALLOWANCES> (4,441)
<INVENTORY> 326
<CURRENT-ASSETS> 153,446
<PP&E> 28,039
<DEPRECIATION> (13,442)
<TOTAL-ASSETS> 258,574
<CURRENT-LIABILITIES> 23,444
<BONDS> 100,000
0
0
<COMMON> 26
<OTHER-SE> 134,940
<TOTAL-LIABILITY-AND-EQUITY> 258,574
<SALES> 47,750
<TOTAL-REVENUES> 47,750
<CGS> 16,542
<TOTAL-COSTS> 16,542
<OTHER-EXPENSES> 22,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,418)
<INCOME-PRETAX> 9,715
<INCOME-TAX> 3,605
<INCOME-CONTINUING> 6,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,110
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
