HNC Software, Inc.

10-Q 1 a81090e10-q.htm FORM 10-Q FOR PERIOD ENDING 03-31-2002 HNC Software, Inc.

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2002

[ ]	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 incorporation or organization)		(I.R.S. Employer Identification No.)

5935 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(858) 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 APRIL 30, 2002 THERE WERE 35,668,068 SHARES OF REGISTRANT’S COMMON STOCK, $0.001 PAR VALUE, OUTSTANDING.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEET
		CONSOLIDATED STATEMENT OF OPERATIONS
		CONSOLIDATED STATEMENT OF CASH FLOWS
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6

TABLE OF CONTENTS

Page

PART I

FINANCIAL INFORMATION
3

ITEM 1:

FINANCIAL STATEMENTS

Consolidated Balance Sheet as of March 31, 2002 (unaudited) and December 31, 2001
3

Consolidated Statement of Operations (unaudited) for the quarters ended March 31, 2002 and 2001
4

Consolidated Statement of Cash Flows (unaudited) for the quarters ended March 31, 2002 and 2001
5

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss for the quarter ended March 31, 2002 (unaudited)
6

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
30

ITEM 1:

LEGAL PROCEEDINGS
30

ITEM 2:

CHANGES IN SECURITIES AND USE OF PROCEEDS
30

ITEM 5:

OTHER INFORMATION
30

ITEM 6:

EXHIBITS AND REPORTS ON FORM 8-K
31

Signatures
32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(In thousands)


			March 31,			December 31,
			2002			2001

			(Unaudited)
ASSETS




Current assets:
	Cash and cash equivalents		$	137,149		$	104,679
	Marketable securities available for sale			119,739			113,231
	Trade accounts receivable, net			41,746			38,969
	Deferred income taxes			19,279			22,279
	Other current assets			10,206			10,656

		Total current assets		328,119			289,814
Marketable securities available for sale				51,459			95,815
Equity investments				9,219			9,219
Property and equipment, net				21,578			23,785
Goodwill, net				83,954			75,720
Intangible assets, net				36,597			42,942
Deferred income taxes				40,072			34,761
Other assets				6,241			5,970

			$	577,239		$	578,026





LIABILITIES AND STOCKHOLDERS’ EQUITY




Current liabilities:
	Accounts payable and accrued liabilities		$	30,099		$	29,716
	Deferred revenue			8,542			8,807

		Total current liabilities		38,641			38,523
Non-current liabilities				2,298			1,684
Convertible subordinated notes				150,000			150,000

		Total liabilities		190,939			190,207

Contingencies (Note 9)
Stockholders’ equity:
	Preferred stock, $0.001 par value - 4,000 shares authorized; no shares issued or outstanding			—			—
	Common stock, $0.001 par value -120,000 shares authorized; 35,655 and 35,432 shares issued and outstanding, respectively			36			35
	Common stock in treasury, at cost — 0 and 49 shares, respectively			—			(3,251	)
	Paid-in capital			531,574			531,667
	Accumulated deficit			(144,772	)		(140,661	)
	Unearned stock-based compensation			(176	)		(238	)
	Accumulated other comprehensive income (loss)			(362	)		267

		Total stockholders’ equity		386,300			387,819

			$	577,239		$	578,026

See accompanying notes to consolidated financial statements.

HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


				Quarter Ended March 31,

				2002			2001

Revenues:
	License and maintenance			$	41,002		$	39,455
	Services and other				14,295			14,515

		Total revenues			55,297			53,970

Operating expenses:
	License and maintenance(1)				12,340			11,458
	Services and other				10,036			10,286
	Research and development(2)				13,157			10,874
	Sales and marketing(3)				11,765			10,621
	General and administrative(4)				7,262			7,227
	Transaction-related amortization and costs				4,485			13,690
	Restructuring and impairment charges				1,221			—

		Total operating expenses			60,266			64,156

			Operating loss		(4,969	)		(10,186	)
Interest income					2,205			2,635
Interest expense					(2,187	)		(144	)
Other expense, net					(377	)		(20	)

			Loss before income tax provision (benefit)		(5,328	)		(7,715	)
Income tax provision (benefit)					(1,217	)		8,223

			Net loss	$	(4,111	)	$	(15,938	)

Earnings per share:
	Basic and diluted net loss per share			$	(0.12	)	$	(0.48	)

	Shares used in computing basic and diluted net loss per share				35,549			33,084

(1)		Includes non-cash stock-based compensation expense of $18 and $7 in 2002 and 2001, respectively.




(2)		Includes non-cash stock-based compensation expense of $6 and $36 in 2002 and 2001, respectively.




(3)		Includes non-cash stock-based compensation expense of $6 and $15 in 2002 and 2001, respectively.




(4)		Includes non-cash stock-based compensation expense of $145 and $128 in 2002 and 2001, respectively.

See accompanying notes to consolidated financial statements.

HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands)


					Quarter Ended
					March 31,

					2002			2001

Cash flows from operating activities:
	Net loss				$	(4,111	)	$	(15,938	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Provision for doubtful accounts				475			1,214
		Depreciation and amortization				7,423			16,146
		Loss on sale of assets				306			—
		Non-cash stock-based compensation expense				175			186
		Deferred income tax provision (benefit)				(1,698	)		8,135
		Changes in assets and liabilities:
			Trade accounts receivable			(3,251	)		422
			Other assets			855			1,553
			Accounts payable and accrued liabilities			614			(11,861	)
			Deferred revenue			291			(1,263	)

				Net cash provided by (used in) operating activities		1,079			(1,406	)

Cash flows from investing activities:
	Net sales (purchases) of marketable securities					4,068			(22,412	)
	Acquisitions of property and equipment					(1,113	)		(2,607	)
	Cash paid in asset acquisitions					(7,346	)		—

				Net cash used in investing activities		(4,391	)		(25,019	)

Cash flows from financing activities:
	Net proceeds from issuances of common stock					2,728			6,947
	Payment of debt issuance costs					(142	)		—
	Proceeds from repayments of stockholder notes					—			4,008
	Payment of Retek spin-off costs					—			(6,863	)

				Net cash provided by financing activities		2,586			4,092

Effect of exchange rate changes on cash						(204	)		(80	)

Net increase (decrease) in cash and cash equivalents						(903	)		(22,413	)
Cash and cash equivalents at beginning of the period						104,679			69,271

Cash and cash equivalents at end of the period					$	103,749		$	46,858

See accompanying notes to consolidated financial statements.

HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
(Unaudited and in thousands)


	COMMON STOCK				TREASURY STOCK
											PAID-IN			ACCUMULATED
	SHARES		AMOUNT		SHARES			AMOUNT			CAPITAL			DEFICIT

BALANCE AT DECEMBER 31, 2001		35,432	$	35		49		$	(3,251	)	$	531,667		$	(140,661	)
Common stock options exercised		70		—		(49	)		3,251			(2,648	)
Common stock issued under Employee Stock Purchase Plan		153		1								2,124
Tax benefit from stock option transactions												318
Stock-based compensation expense												113
Unrealized loss on marketable securities, net of tax
Foreign currency translation adjustment, net of tax
Net loss															(4,111	)

BALANCE AT MARCH 31, 2002		35,655	$	36		—		$	—		$	531,574		$	(144,772	)

[Additional columns below]

[Continued from above table, first column(s) repeated]

ACCUMULATED

UNEARNED OTHER TOTAL

STOCK-BASED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE

COMPENSATION INCOME (LOSS) EQUITY LOSS

BALANCE AT DECEMBER 31, 2001
$ (238 ) $ 267 $ 387,819

Common stock options exercised
603

Common stock issued under Employee Stock Purchase Plan
2,125

Tax benefit from stock option transactions
318

Stock-based compensation expense
62 175

Unrealized loss on marketable securities, net of tax
(425 ) (425 ) (425 )

Foreign currency translation adjustment, net of tax
(204 ) (204 ) (204 )

Net loss
(4,111 ) (4,111 )

BALANCE AT MARCH 31, 2002
$ (176 ) $ (362 ) $ 386,300 $ (4,740 )

See accompanying notes to consolidated financial statements.

HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(Unaudited)

NOTE 1—GENERAL

HNC Software Inc.

HNC is a provider of high-end analytics, decision management software and tools that enable global companies to manage customer interactions by converting data and business experiences into real-time recommendations. In this report, HNC Software Inc. is referred to as “we,” “our,” and “HNC”.

Basis of Presentation

Our consolidated financial statements include our assets, liabilities, and results of operations, as well as those of our wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

We have prepared the accompanying unaudited interim consolidated financial statements in accordance with the instructions to Form 10-Q. Consequently, we have not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim consolidated financial statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial position and results of operations. These consolidated financial statements and notes thereto should be read in conjunction with our audited financial statements and notes thereto presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 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 any entire fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to the current presentation.

NOTE 2 — SALE OF PRODUCT LINE ASSETS

In March 2002, we sold to Open Solutions Inc. (“OSI”) substantially all assets associated with our Financial Accounting Manager product line, including all related software and intellectual property and certain property and equipment, for consideration consisting of a $500 promissory note payable to HNC. The note bears interest at the rate of 6.0% and is payable in full as to all principal and interest in March 2004. The note is secured by the assets sold to OSI in this transaction. In connection with this asset sale, we recorded a loss of $306, which is included in other expense, net in our consolidated statement of operations. At March 31, 2002, we maintained a $7,469 equity investment in OSI, resulting from prior investments in 1999 and 2000. This investment represents an approximate 4.8% ownership interest in OSI and is being accounted for using the cost method.

NOTE 3 — RESTRUCTURING AND IMPAIRMENT CHARGES


	Accrual at
	December 31,		Quarter Ended					Accrual at
	2001		March 31, 2002					March 31, 2002

			Expense		Used

Employee separation	$	—	$	435	$	(435	)	$	—
Facilities charges		1,751		786		(30	)		2,507

	$	1,751	$	1,221	$	(465	)	$	2,507

HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(Unaudited)

As of March 31, 2002, the remaining accrual for restructuring and impairment is $2,507, which primarily represents future facility lease cash obligations, net of estimated sublease income. Such facility lease commitments end in 2004.

NOTE 4 — ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS

We adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), on January 1, 2002. Under the provisions of FAS 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if impairment indicators arise. In addition, all goodwill must be assigned to reporting units for purposes of impairment testing. In connection with our adoption of FAS 142 on January 1, 2002, we reclassified $3,711 and $5,758 in net book values associated with our assembled workforce and customer base intangible assets, respectively, to goodwill.

As required by FAS 142, we have determined that our reporting units are the same as our reportable segments. We are in the process of assessing whether goodwill within our reporting units was impaired at the date of adoption of this pronouncement using a two-step transitional impairment test. The first step, which we must complete by June 30, 2002, is our identification of any impairment of goodwill as of January 1, 2002. If any impairment is identified in step one, we will be required to complete a second step to measure the actual amount of the impairment loss, if any, prior to December 31, 2002. We expect to complete both steps of the test prior to June 30, 2002. Any impairment loss resulting from the transitional impairment test will be reflected as the cumulative effect of a change in accounting principle as of January 1, 2002. As we have not yet completed the impairment test, we have not yet determined the impact, if any, that it will have on our financial position or results of operations.

For comparative purposes, the following table summarizes reported results for the quarter ended March 31, 2001, adjusted to exclude amortization of goodwill, assembled workforce and customer base intangible assets:


	Quarter Ended
	March 31, 2001

Net income (loss):
As reported	$	(15,938	)
Amortization of goodwill, assembled workforce and customer base, net of tax impact		17,580

As adjusted	$	1,642

Basic and diluted net income (loss) per share:
As reported	$	(0.48	)
Amortization of goodwill, assembled workforce and customer base, net of tax impact		.53

As adjusted	$	.05

NOTE 5 — EARNINGS PER SHARE DATA

For the quarters ended March 31, 2002 and 2001, weighted average options and warrants to purchase 813 and 2,225 shares of common stock, respectively, and Employee Stock Purchase Plan common stock equivalents of 61 and 108 shares of common stock, respectively, were not included in the computation of diluted net loss per common share as their effect in these periods would have been anti-dilutive. Additionally, the assumed conversion of our convertible subordinated notes outstanding during the quarters ended March 31, 2002 and 2001 into 5,208 and 2,230 shares of common stock, respectively, was excluded from the calculation of diluted net loss per common share during these periods, as the effect of such note conversion would have been anti-dilutive.

NOTE 6 — SEGMENT DATA

Our reportable segments reflect the method in which management primarily organizes and evaluates internal financial information to make operating decisions and assess performance, based upon the product suites of our Critical Action Platform. Segment information for the quarter ended March 31, 2001 has been restated to conform to our current segment presentation.

HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(Unaudited)

Our Critical Action Platform consists of our Efficiency, Risk and Opportunity Suites. Our Efficiency Suite enables companies to make instant, automated decisions regarding customer applications for loans, credit or services, including the ability to identify and determine customer creditworthiness. This allows companies to simultaneously reduce costs and increase the speed of the customer acquisition process. In addition, our Efficiency Suite allows companies to process large quantities of applications and claims in real time through multiple acquisition and delivery channels. Our Risk Suite enables companies to analyze the risks associated with acquiring, managing and retaining customers by analyzing patterns in customer transactions, and includes analysis of fraud, churn and bad debt. Our Opportunity Suite enables companies to analyze the opportunities associated with acquiring, managing and retaining customers by analyzing patterns in customer transactions. The Opportunity Suite can maximize customer profitability by providing cross-sell and up-sell activities and focusing marketing efforts on more profitable customers. Additionally, our “Other” segment category includes our Advanced Technology Solutions group, which primarily conducts research and development for the United States Government and other internally funded projects, as well as other miscellaneous products.

The accounting policies of our operating segments are the same as those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. We do not identify or allocate our assets by operating segment. Accordingly, segment asset information is not disclosed.

Segment revenues and segment contribution margins for the periods indicated are as follows (unaudited):


	Quarter Ended
	March 31,

	2002			2001

Efficiency Suite
Total revenues		29,999			26,558
Direct segment operating expenses(1)		(16,923	)		(14,488	)

Segment contribution margin	$	13,076		$	12,070

Risk Suite
Total revenues		17,417			18,555
Direct segment operating expenses(1)		(5,973	)		(5,749	)

Segment contribution margin	$	11,444		$	12,806

Opportunity Suite
Total revenues		7,025			7,720
Direct segment operating expenses(1)		(4,507	)		(3,408	)

Segment contribution margin	$	2,518		$	4,312

Other
Total revenues		856			1,137
Direct segment operating expenses(1)		(821	)		(1,864	)

Segment contribution margin	$	35		$	(727	)

Total segment contribution margin	$	27,073		$	28,461

Reconciliation to operating loss:
Total segment margin	$	27,073		$	28,461
Indirect operating expenses(2)		(26,161	)		(24,771	)
Stock-based compensation expense		(175	)		(186	)
Transaction-related amortization and costs		(4,485	)		(13,690	)
Restructuring and impairment charges		(1,221	)		—

Total operating loss	$	(4,969	)	$	(10,186	)

(1)

Direct segment operating expenses generally include direct costs such as direct labor costs related to product research and development, sales and marketing activities, direct support and installation costs, and other product-specific costs of sales. Direct segment operating expenses generally reflect only direct controllable expenses associated with each segment’s line of business.

HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(Unaudited)

(2) Indirect operating expenses generally consist of costs not directly attributable to a segment, such as general and administrative expenses, corporate marketing expenses, depreciation and amortization, facilities expenses, information technology overhead costs, and other indirect, non-product specific costs.

NOTE 7 — ACQUISITIONS AND PRO FORMA RESULTS OF OPERATIONS

In March 2002, we executed an asset purchase agreement with ieWild, Inc. (“ieWild”) pursuant to which we purchased all of ieWild’s right, title and interest associated with its ieTarget software product and all related documentation and intellectual property rights for a cash purchase price of $1,000. ieTarget is a software platform that enables businesses to allocate large volumes of consumer financial products, as well as consumer merchandise, to retail consumers for the purpose of executing cross sell campaigns through telemarketing or direct mail. We accounted for this transaction as an asset purchase and applied the purchase method of accounting. Including acquisition and related costs, a total purchase price of $1,346 resulted, all of which was allocated to software development costs.

In January 2002, we acquired the Virdix software product line from Trajecta, Inc., a wholly owned subsidiary of Pavilion Technologies Inc., for a cash purchase price of $6,000 plus additional contingent cash consideration if certain financial performance criteria are met with respect to this product during the twelve-month period following the acquisition. Virdix is an integrated analytics framework for data visualization and optimization modeling that enables businesses to develop the optimal actions to take to maximize lifetime customer value. We accounted for this transaction as an asset purchase and applied the purchase method of accounting, which resulted in a total purchase price of $6,141. The excess of this amount over net tangible assets assumed was $6,099, of which we allocated $5,557 to software development costs and $542 to covenants not to compete.

During the year ended December 31, 2001, we acquired the following businesses in transactions that were accounted for in accordance with the purchase method of accounting: ClaimPort, Inc. and the workers’ compensation products and customer base from ecDataFlow.com Inc. were acquired in the second quarter of 2001; and certain assets of the Blaze Advisor business unit of Brokat Technologies and the UK-based Marketing Services Provider business unit of Chordiant Software Inc. were acquired in the third quarter of 2001. The following table summarizes the unaudited pro forma results of our operations for the quarter ended March 31, 2001 as if each of these business acquisitions had occurred on January 1, 2001, instead of their respective later acquisition dates:


	Quarter Ended
	March 31, 2001

	Historical			Pro Forma
				Combined
	(Unaudited)			(Unaudited)

Total revenues	$	53,970		$	62,828
Net loss		(15,938	)		(27,603	)
Basic and diluted net loss per share	$	(0.48	)	$	(0.83	)

NOTE 8 — STOCK-BASED COMPENSATION

Stock-based compensation expense totaled $175 and $186 during the quarters ended March 31, 2002 and 2001, respectively. This expense consisted of the amortization of unearned stock-based compensation totaling $39 and $67 and one-time charges associated with option award modifications totaling $136 and $119 during the quarters ended March 31, 2002 and 2001, respectively.

NOTE 9 — CONTINGENCIES

Various claims arising in the course of business, seeking monetary damages and other relief, are pending. We believe that these claims will not result in a material negative impact on our results of operations, liquidity, or financial condition. However, the amount of the liability associated with these claims, if any, cannot be determined with certainty.

HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(Unaudited)

NOTE 10 — SUBSEQUENT EVENTS

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section contains forward-looking statements about anticipated future events or results that are not historical facts but rather express our current expectations, estimates and projections about the future of our business and industry, and are based upon our beliefs and assumptions. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These forward-looking statements also include, among other things, statements about our anticipated future costs and operating expenses and our future capital needs. These statements are not guarantees or assurances of our future performance and are subject to numerous risks and uncertainties, many of which are beyond our control, are difficult to predict and could cause our actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described under the heading “Risk Factors” and elsewhere in this report. Forward-looking statements may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. Except as may be required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

OVERVIEW

We are a provider of high-end analytic and decision management software applications and tools that enable our customers to manage their customer interactions with their customers and make other important business choices. Our products analyze large bodies of data, such as customer transaction histories, and convert this information into real-time business recommendations. Our products empower our customers to make millions of mission-critical customer decisions and respond in real time, which can improve their financial performance, reduce their costs and decrease their risk. Our customers include both domestic and global companies in the financial services, insurance, telecommunications, healthcare and other industries, as well as government clients.

HNC’s offerings consist of the HNC Critical Action Platform and three suites of Critical Action Software — our Opportunity Suite, Risk Suite and Efficiency Suite. The Critical Action Platform is a new software platform technology we are developing in order to enable our customers to swiftly deploy and install multiple HNC products while significantly reducing their product implementation costs. The Critical Action Platform will incorporate common infrastructure tools and technologies that can be shared across our Efficiency, Risk and Opportunity Suite analytic products. These shared technologies will allow us to reduce our costs to develop and install new applications, thus permitting us to offer more competitive pricing for our solutions. By reducing the time, effort and cost associated with implementation of our analytic products, the Critical Action Platform is being designed to encourage customers to purchase multiple products that they can easily deploy on a common pre-existing platform. The first two products to be released under the Critical Action Platform architecture, an Opportunity Suite product and a Falcon Risk Suite product, are currently scheduled for release in the third quarter of 2002. We anticipate that additional products and solutions will be released spanning into 2003. Our Critical Action Software applications utilize our proprietary core technologies — decision management technology, free text analysis, neural networks and decision support tools — to help businesses make the right decisions at the right time through the right channels. Our Critical Action Software consists of the following three suites, along which our reportable segments are organized internally:

• The HNC Efficiency Suite. The products in this suite help our customers reduce their costs and improve the quality of their business decisions by automating complex, previously labor-intensive decision processes, such as new account application and medical claims processing. HNC Efficiency Suite applications can improve the efficiency of a company’s personnel, particularly its executives and managers, by automating business policies and streamlining workflows. Our software sorts intelligently, makes sophisticated decisions based on complex data and all facets of the business, automatically takes the critical action needed, or routes information to appropriate persons for further review. The products in the Efficiency Suite handle insurance claims, process new account applications and process relationship management actions for financial services and telecommunications companies

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

• The HNC Risk Suite. The products in this suite help improve our customers’ profitability by intelligently predicting the accuracy and validity of transactions to protect them and their customers from fraud and similar losses. HNC Risk Suite applications can analyze millions of customer transactions in milliseconds and generate a recommendation for immediate action critical to stopping fraud and abuse. These applications also detect organized fraud schemes that are too complex and well hidden to be identified by other methods. This suite is designed to detect and prevent credit and debit payment card fraud, identity fraud, telecommunications subscription fraud, healthcare fraud, Medicaid and Medicare fraud, and workers’ compensation fraud. It protects merchants, financial institutions, insurance companies, telecommunications carriers, government agencies and employers. The HNC Risk Suite includes applications for predicting bankruptcy, identifying money laundering and reducing bad debt.

• The HNC Opportunity Suite. The products in this suite provide our customers opportunities to derive incremental revenue by optimizing their marketing decisions and improving their interactions with their customers. Our products are designed to help our customers with customer acquisition, customer retention, product pricing and cross-selling. This suite is unique in its ability to use both structured and free form data to intelligently direct actions to the right targets for maximum return, based on predicted revenue or profitability, including the likelihood of response and retention.

Our revenues and operating results have varied significantly in the past and we have experienced net losses. We expect fluctuations in our operating results to continue for the foreseeable future. As a result, we believe that investors should not rely on period-to-period comparisons of our financial results as an indication of our future performance. Further, we derive a substantial portion of our revenues from our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services. Our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services in the aggregate accounted for 41.2% of our total revenues in the first quarter of 2002. Falcon Fraud Manager revenues accounted for 21.5% of total revenues in this quarter and our combined Decision Manager for Medical Bill Review products and Outsourced Bill Review services accounted for 19.7% of total revenues in this quarter. We expect these products and services will continue to account for a substantial portion of our total revenues for the foreseeable future. Our revenue will decline if the market does not continue to accept these products and services.

Because our expense levels are based in part on our expectations regarding future revenues and in the short term are fixed to a large extent, we may be unable to adjust our spending in time to compensate for any unexpected revenue shortfall. We may not be able to achieve or maintain profitability on a quarterly or annual basis in the future. In addition, in the past we have acquired several companies and may continue to do so in the future. Such transactions typically affect the comparability of our historical financial results. Acquisitions also typically generate significant charges that decrease our net income, including possible charges in future fiscal periods. For the third and fourth quarters of 2001, our operating results were below the expectations of public market analysts and investors. It is possible that this could occur in some future quarter, which could cause a decline in the price of our common stock.

On April 28, 2002, we entered into an Agreement and Plan of Merger, or the “merger agreement”, with Fair, Isaac and Company, Incorporated, or “FICO”, and a wholly owned subsidiary of FICO. The merger agreement provides for FICO’s acquisition of HNC pursuant to a merger in which FICO’s subsidiary, Northstar Acquisition Inc., will be merged into HNC and HNC would survive the merger and become a wholly owned subsidiary of FICO. The consummation of the merger is subject to the approval of the stockholders of HNC and FICO, receipt of necessary regulatory approvals under United States and applicable foreign antitrust laws, SEC clearance and other customary closing conditions. The merger agreement provide that, upon consummation of the Merger, FICO will exchange shares of its common stock for HNC common stock at the rate, or the “exchange ratio” of 0.346 shares of FICO common stock for each share of HNC common stock that is outstanding immediately before the Merger becomes effective. In addition, upon the closing of the Merger, HNC’s outstanding 5.25% convertible subordinated notes due September 1, 2008 will become convertible into FICO Common Stock. Following the Merger, assuming no significant changes in FICO’s outstanding shares, current HNC stockholders will own approximately 34.7%, and current FICO stockholders will own approximately 65.3%, of FICO’s outstanding shares. On April 23, 2002, FICO announced a 3-for-2 stock dividend which, if issued, would cause the exchange ratio of 0.346 shares of FICO common stock for each outstanding HNC common share to be adjusted to approximately 0.519 shares of FICO common stock for each outstanding share of HNC common stock. The Merger is intended to qualify as a tax-free reorganization. Upon the close of the Merger, FICO has agreed to appoint two HNC designees to FICO’s board of directors. The foregoing description is not a description of all of the material terms of the transaction. For further information regarding the merger agreement, the merger and related transaction please read our report on Form 8-K that we filed with the Securities and Exchange Commission on April 30, 2002 and the exhibits thereto.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

Revenues

Our revenues are comprised of license and maintenance revenues and services and other revenues. Our total revenues for the first quarter of 2002 were $55.3 million, an increase of $1.3 million, or 2.5%, over revenues of $54.0 million for the first quarter of 2001.

License and Maintenance Revenues

We recognize license and maintenance revenues in several different ways, depending on the terms on which the software and maintenance are provided. We typically license our software under both recurring and one-time license pricing models. Recurring sources of license and maintenance revenues generally include transactionally-based software license fees, license fees that recur annually under long-term software license arrangements and transactional fees derived under network service or internal hosted software arrangements. Recurring revenues also include all software maintenance fees. One-time sources of license and maintenance revenues are typically perpetual or time-based licenses with upfront, nonrecurring payment terms. To the extent that our customers license our software products under recurring or one-time pricing models, our license and maintenance revenues and gross margins may differ materially from period to period.

Revenue from perpetual and short-term periodic licenses of our software is generally recognized upon delivery. Transactional fees under software license arrangements are recognized as revenue based on system usage or, as applicable, when fees based on system usage exceed the monthly minimum license fees. Software maintenance fees are recognized as revenue ratably over the maintenance periods. Transactional fees under network service or internal hosted software arrangements are recognized as revenue based on system usage or, as applicable, when fees based on system usage exceed the monthly minimum license fees. Amounts received under contracts in advance of delivery or performance are recorded as deferred revenue and are generally recognized within one year from receipt.

License and maintenance revenues were $41.0 million for the first quarter of 2002, an increase of $1.5 million, or 3.9%, as compared to license and maintenance revenues of $39.5 million for the first quarter of 2001. The increase in license and maintenance revenues was attributable primarily to a $3.9 million increase in Efficiency segment revenues and a $0.1 million increase in Risk segment revenues, and was partially offset by a $2.1 million decrease in Opportunity segment revenues and a $0.4 million decrease in revenues associated with other products. The increase in our Efficiency segment revenues of $3.9 million was attributable primarily to $5.3 million of incremental revenues resulting from our acquisition of the assets of the Blaze Advisor business unit in the third quarter of 2001, and was partially offset by a $1.7 million decrease in Decision Manager-Medical Bill Review transactionally based revenues. The increase in our Risk segment revenues of $0.1 million was attributable primarily to a $1.4 million increase in Falcon Fraud Manager revenues, and was partially offset by a net decrease in various other Risk segment product revenues. The decrease in our Opportunity segment revenues of $2.1 million was attributable primarily to a $4.2 million decrease in revenues associated with our Profitability Predictor product, and was partially offset by a $2.1 million increase in Profit Manager revenues. The $0.4 million decrease in our Other segment product revenues was attributable primarily to a decrease in revenues associated with our former Intelligent Response product line.

Services and Other Revenues

Services and other revenues are comprised of installation and implementation revenues, remote hosted service operation 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. Revenue from software installation and implementation and from contract services is 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. Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year from receipt. Contract losses are recorded as a charge to operations in the period any losses are first identified. Installation or setup fees associated with network service and internally hosted software agreements are recognized ratably over the longer of the customer contract period or estimated life of the customer relationship. Remote hosted service fees derived from the review and repricing of customers’ medical bills are recognized as revenue when the processing services are performed.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

Services and other revenues were $14.3 million for the first quarter of 2002, a decrease of $0.2 million, or 1.5%, as compared to services and other revenues of $14.5 million for the first quarter of 2001. This $0.2 decrease in services and other revenues was attributable primarily to a $0.7 million decrease in Efficiency segment revenues and a $1.1 million decrease in Risk segment revenues, and was partially offset by a $1.5 million increase in Opportunity segment revenues. The $0.7 million decrease in our Efficiency segment was attributable primarily to a decrease of $0.8 million resulting from a lower volume of Decision Manager for Financial Applications implementations along with a decrease of $0.8 million related to a reduction in customer bill review volumes associated with our Outsourced Bill Review Services, and was partially offset by a $0.9 million increase in Blaze Advisor consulting revenues resulting from our acquisition of the assets of the Blaze Advisor business unit in the third quarter of 2001. The decrease in our Risk segment of $1.1 million was attributable primarily to a $0.7 million decrease in Falcon Fraud Manager implementation revenues. The $1.5 million increase in our Opportunity segment was attributable primarily to $0.8 million in incremental Marketing Service Provider (MSP) revenues, resulting from our acquisition of the MSP business from Chordiant Software in the third quarter of 2001, and a $0.7 million increase in Cross-Sell Optimizer service revenues.

Cost of Revenues

License and Maintenance Cost of Revenues

License and maintenance costs primarily represent our expenses for personnel engaged in customer support, travel to customer sites and documentation materials. In absolute dollars, license and maintenance costs of revenues increased by $0.8 million, from $11.5 million in the first quarter of 2001 to $12.3 million in the first quarter of 2002, due primarily to the increase in license and maintenance revenues of $1.5 million quarter over quarter, as discussed above. License and maintenance cost of revenues, as a percentage of license and maintenance revenues, increased slightly from 29.0% in the first quarter of 2001 to 30.1% in the first quarter of 2002, or 1.1%. This percentage increase was attributable primarily to a decrease in lower-cost revenues associated with Profitability Predictor products in the first quarter of 2002 and to increased customer support costs associated with Decision Manager for Medical Bill Review transactionally-based product revenues. This increase was partially offset by an increase in license fee revenues related to our Blaze Advisor and Profit Manager products, which had minimal associated costs, and to an increase in recurring Falcon Fraud Manager product revenues with lower associated costs.

Services and Other Cost of Revenues

Services and other expenses consist of personnel and other expenses associated with providing installation and implementation services and performing development, consulting, and research development contracts, and the costs associated with hosted service operations. In absolute dollars, services and other costs of revenues decreased by $0.3 million, from $10.3 million in the first quarter of 2001 to $10.0 million in the first quarter of 2002. Services and other cost of revenues, as a percentage of services and other revenues, decreased by 0.7% from 70.9% to 70.2%. This percentage decrease was attributable primarily to increased Marketing Service Provider revenues and Decision Manager for Financial Applications product implementation revenues, each with lower associated costs. This decrease was partially offset by the addition of Blaze consulting revenues having a higher cost percentage component, increased costs associated with certain Falcon Fraud Manager implementation projects and reduced cost efficiencies due to a decrease in customer bill review volumes associated with our Outsourced Bill Review Services.

Research and Development Expense

Research and development expenses consist primarily of salaries and other personnel-related expenses, subcontracted development services, depreciation of development equipment and supplies. Research and development expenses increased by $2.3 million, or 21.0%, from $10.9 million during the first quarter of 2001 to $13.2 million during the first quarter of 2002. This increase was attributable primarily to an increase in staffing and related costs to support new product development activities, including primarily Blaze Advisor product development initiatives, resulting from our acquisition of the assets of the Blaze Advisor business unit in the third quarter of 2001, and initiatives related to the development of our Critical Action Platform. We anticipate that research and development expenses will increase in dollar amount and could increase as a percentage of total revenues for the foreseeable future.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

Sales and Marketing Expense

Sales and marketing expenses consist primarily of salaries and benefits, commissions, travel, entertainment, trade shows and promotional expenses. Sales and marketing expenses increased by $1.2 million, or 10.8%, from $10.6 million during the first quarter of 2001 to $11.8 million during the first quarter of 2002. This increase was attributable primarily to increases in staffing related to the expansion of direct sales and marketing personnel, including that resulting from of our acquisition of the assets of the Blaze Advisor business unit in the third quarter of 2001. Also contributing to the increase were incremental costs related to trade shows, which were partially offset by reduced expenditures associated with marketing-related outside services. We expect sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future. These expenses could also increase as a percentage of total revenues as we continue to develop a direct sales force in international markets and expand our domestic sales and marketing organization and increase the breadth of our product lines.

General and Administrative Expense

General and administrative expenses consist primarily of personnel costs for finance, contract administration, human resources and general management, as well as insurance and professional services expenses. General and administrative expenses increased by $0.1 million, or 0.5%, from $7.2 million during the first quarter of 2001 to $7.3 million during the first quarter of 2002. This increase was attributable primarily to additional staffing and related expenses to support a higher volume of business, including growth resulting in part from our acquisitions in 2001, and to an increase in legal and other professional service fees, and was offset by a decrease in charges associated with our provision for doubtful accounts quarter over quarter.

Transaction-Related Amortization and Costs

Transaction-related amortization and costs primarily include acquisition-related amortization associated with our intangible assets, as well as the amortization of goodwill prior to our adoption of FAS 142 on January 1, 2002. Transaction-related amortization and costs decreased by $9.2 million, or 67.2%, from $13.7 million in the first quarter of 2001 to $4.5 million in the first quarter of 2002, principally because of our adoption of FAS 142. As a result of such adoption, we discontinued the amortization of goodwill on January 1, 2002, including goodwill resulting from the reclassification of net book values associated with our assembled workforce and customer base intangible assets upon our adoption of FAS 142. The decrease in transaction-related amortization and costs resulting from our adoption of FAS 142 was offset in part by incremental intangible asset amortization in the first quarter of 2002 resulting from our business and asset acquisitions in the second and third quarters of 2001 and the first quarter of 2002. For further information regarding our adoption of FAS 142, see Note 4 of Notes to Consolidated Financial Statements in this report.

Restructuring and Impairment Charges

During the quarter ended March 31, 2002, we committed to the closure of an office facility and recorded estimated lease exit charges of $786, consisting of future facility lease cash obligations, net of estimated sublease income. Additionally during the quarter, we recorded $435 in charges related to the payment of cash severance benefits to 74 employees in connection with our closure of another office facility. These actions were consummated in a short period of time and did not have any adverse impact on our business while they were ongoing. The office closure charges were determined based upon future facility lease cash obligations, net of estimated sublease income as determined through consultation with independent lease brokers, plus estimated lease brokerage fees. The contractual future lease commitments represent our future cash obligations.

Interest Income

Interest income decreased to $2.2 million during the first quarter of 2002 from $2.6 million during the first quarter of 2001. The period over period decline in interest income is attributable primarily to lower interest and investment income yields due to market conditions, offset in part by higher average cash and investment balances during the quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001.

Interest Expense

Interest expense increased to $2.2 million during the first quarter of 2002 from $0.1 million during the first quarter of 2001. The increase in interest expense is attributable primarily to interest associated with our 5.25% convertible subordinated notes aggregating $150.0 million, which we issued in the third quarter of 2001.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

Other Expense, Net

Other expense, net increased to $0.4 million during the first quarter of 2002 from less than $0.1 million during the first quarter of 2001. This period over period increase is attributable primarily to our recognition of a $0.3 million loss in connection with the sale of product line assets to Open Solutions, Inc. For further information, see Note 2 of Notes to Consolidated Financial Statements in this report.

Income Taxes

There was an income tax benefit of $1.2 million for the first quarter of 2002 compared to an income tax provision of $8.2 million for the first quarter of 2001. The benefit for the first quarter of 2002, as compared to the provision for the first quarter of 2001, is attributable primarily to relatively higher estimated tax benefits from research and development tax credits in relation to estimated pre-tax net income. The provision (benefit) for income taxes during interim periods is based on our estimates of the effective tax rates for the respective full fiscal years.

Stock-Based Compensation Expense

Within our statement of operations, stock-based compensation charges have been classified as follows:


	Quarters Ended
	March 31,

	2002		2001

	(in thousands)
License and maintenance	$	18	$	7
Services and other		—		—
Research and development		6		36
Sales and marketing		6		15
General and administrative		145		128

	$	175	$	186

Stock-based compensation expense totaled $175 during the quarter ended March 31, 2002. This expense included the amortization of unearned stock-based compensation totaling $39, along with one-time charges associated with option award modifications totaling $136. Stock-based compensation expense totaled $186 during the quarter ended March 31, 2001. This expense included the amortization of unearned stock-based compensation totaling $67, along with one-time charges associated with option award modifications totaling $119.

Segment Contribution Margin

Segment contribution margin for the quarters ended March 31, 2002 and 2001 is reported in Note 6 of Notes to Consolidated Financial Statements in this report.

Segment contribution margin for our Efficiency segment increased from $12.1 million for the quarter ended March 31, 2001 to $13.1 million for the quarter ended March 31, 2002, and as a percentage of segment revenues decreased from 45.4% to 43.6%. The absolute dollar increase was attributable to an increase in segment revenues, offset by an increase in direct segment operating expenses. The segment contribution margin percentage decrease was attributable primarily to reduced cost efficiencies due to a decrease in customer bill review volumes associated with our Outsourced Bill Review Service operations and increased customer support costs associated with recurring Decision Manager for Medical Bill Review product license revenues and to lower contribution margins associated with our Blaze Advisor business unit as a whole, resulting from our acquisition of this business unit in the third quarter of 2001, partially offset by increased cost efficiencies associated with Decision Manager for Financial Applications product implementations.

Segment contribution margin for our Risk segment decreased from $12.8 million for the quarter ended March 31, 2001 to $11.4 million for the quarter ended March 31, 2002, and as a percentage of segment revenues decreased from 69.0% to 65.7%. The absolute dollar decrease was attributable to a decrease in segment revenues and to a slight increase in direct segment operating expenses. The segment contribution margin percentage decrease was attributable primarily to increased direct segment costs associated with Falcon Fraud Manager implementation projects. Also contributing to the decrease was an increase in research and development spending on Risk segment products. We expect that direct segment research and development costs in the Risk segment will increase in absolute dollars and could increase as a percentage of Risk segment revenues for the foreseeable future.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

Segment contribution margin for our Opportunity segment decreased from $4.3 million for the quarter ended March 31, 2001 to $2.5 million for the quarter ended March 31, 2002, and as a percentage of segment revenues decreased from 55.9% to 35.8%. The absolute dollar decrease was attributable to a decrease in segment revenues and to an increase in direct segment operating expenses. The segment contribution margin percentage decrease was attributable primarily to a decrease in Profitability Predictor revenues, which had lower associated costs, and to an increase in research and development spending on Opportunity segment products. This decrease was partially offset by an increase in license fees related to our Profit Manager products, which had minimal associated costs, and to an increase in Marketing Service Provider revenues with lower associated costs. We expect that direct segment research and development costs in the Opportunity segment will increase in absolute dollars and could increase as a percentage of Opportunity segment revenues for the foreseeable future.

Segment contribution margin for our Other segment increased from negative $0.7 million for the quarter ended March 31, 2001 to approximately break-even for the quarter ended March 31, 2002, and as a percentage of segment revenues increased from a negative 63.9% to a positive 4.1%. The absolute dollar and percentage increases were attributable primarily to a decrease in our former Intelligent Response product line revenues, offset by a more significant decrease in related direct product costs.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $1.1 million for the quarter ended March 31, 2002, compared to net cash used in operating activities of $1.4 million for the quarter ended March 31, 2001. Cash provided by operations during the quarter ended March 31, 2002 reflects our net loss of $4.1 million, reduced by non-cash aspects of our net loss totaling $5.2 million.

Net cash used in investing activities totaled $4.4 million for the quarter ended March 31, 2002, compared to net cash used in investing activities of $25.0 million for the quarter ended March 31, 2001. Cash used in investing activities for the quarter ended March 31, 2002 consisted of $7.3 million in cash paid in asset acquisitions and $1.1 million in property and equipment purchases, offset by $4.1 million in net sales of marketable securities.

Net cash provided by financing activities totaled $2.6 million for the quarter ended March 31, 2002, compared to net cash provided by financing activities of $4.1 million for the quarter ended March 31, 2001. Cash provided by financing activities for the quarter ended March 31, 2002 included $2.7 million in net proceeds resulting from stock option exercises and employee stock purchases under HNC plans, offset by the payment of $0.2 million in debt issuance costs.

As of March 31, 2002, we had $308.3 million in cash, cash equivalents, and marketable securities. We believe that these balances, including interest to be earned thereon, and borrowings available under our credit facility will be sufficient to fund our working and other capital requirements, including potential investments in other companies and other assets to support the strategic growth of our business, over the next twelve months. In the ordinary course of business, we evaluate opportunities to acquire businesses, products and technologies. We expect to use our cash to fund these types of activities in the future. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all, particularly in light of the recent decline in the capital markets. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.

In August and September 2001, we issued $150.0 million of 5.25% convertible subordinated notes (“the notes”) that mature on September 1, 2008. Interest on the notes is payable on March 1 and September 1 of each year, which began March 1, 2002. The notes are convertible by the holders into shares of our common stock at any time prior to maturity at a conversion price of $28.80 per share (subject to certain adjustments), and are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture that governs the notes. We may redeem the notes on or after September 5, 2004, or earlier if the price of our common stock reaches certain levels. If we redeem the notes prior to September 1, 2007, we will also be required to pay a redemption premium as prescribed by the indenture.

We have a $15.0 million revolving line of credit with a bank through July 11, 2003. As of March 31, 2002, we have no amounts outstanding under this line of credit. Our agreement with the bank contains covenants that restrict our ability to pay cash dividends and make loans, advances or investments without the bank’s consent. As of March 31, 2002, we were in compliance with all covenants under this agreement. Borrowings under this line of credit bear interest at the rate of LIBOR plus 0.5%, payable monthly.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

Beginning in the first quarter of 2002, we adopted an executive home equity loan program under this line of credit. Under the program, and at our discretion, the bank will make loans directly to our employees and we will guarantee the loans. The outstanding balance of qualified employee home equity loans that we guarantee will reduce our maximum allowable borrowings under this line of credit. The maximum amount of employee home equity loans that we may guarantee at one time is $4.0 million. At March 31, 2002 we were guarantor to one employee loan balance in the amount of $200,000.

From time to time, we enter into agreements to sell an undivided interest in specifically identified trade accounts receivable to a financial institution for a fee, based principally upon defined short-term market rates. During the quarter ended March 31, 2002, we did not sell any accounts to this institution.

We are a limited partner in Azure Capital Partners L.P., a venture capital investment management fund, and have invested an aggregate of $2.5 million into this fund through March 31, 2002. We have committed to invest an additional $2.5 million into this fund, which we expect to make in 2002.

In May 2002, we acquired substantially all of the assets and assumed certain liabilities of Indemni-Med Management, LLC (“Indemni-Med”) for a cash purchase price of approximately $5.3 million. Indemni-Med is a provider of insurance bill review and case management services. The purchase price paid in connection with this acquisition will be reflected as a cash outflow from investing activities in the second quarter of 2002.

RISK FACTORS

Our future operating results may vary substantially from period to period. The price of our common stock will fluctuate in the future, and an investment in our common stock is subject to a high degree of risk, including the specific risks identified below. Inevitably, some investors in our securities will experience gains while others will experience losses depending on the prices at which they purchase and sell securities. Investors are urged to carefully consider the various cautionary statements and risks in the report and our other public filings. In particular, this “Risk Factors” section contains cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements in this report.

Risks Related to the Proposed Merger with FICO

Our business could suffer in response to the announcement of our proposed merger with FICO.

The announcement of our proposed merger with FICO may have a negative impact on our ability to sell our products and services, attract and retain key management, development or other personnel, maintain and attract new customers, and maintain strategic relationships with third parties. For example, we may experience cancellations or a decline in the rate of orders for our products or services or a deterioration in the relationships with our customers pending consummation of the merger. In addition, our employees may experience uncertainty about their future role with FICO. If the merger is not completed, we could be harmed by these adverse changes in our business or the expectation of these changes, and restoring our business to its pre-announcement value could take a long time and be costly, and may not occur.

Failure to complete the proposed merger with FICO could adversely affect our stock price and future business operations.

Consummation of the merger with FICO is subject to the satisfaction of a number of closing conditions, including but not limited to the approval of the merger by our stockholders, the approval of FICO’s issuance of shares of its common stock in the merger by FICO’s stockholders and the approvals of regulatory agencies, and we cannot assure you that the merger will be successfully completed. In the event that the merger is not completed, we may be subject to a number of material risks, including the following:

       •    It may take a substantial amount of time, money and resources to restore aspects of our business that may be adversely affected by announcement of the merger, and we may be unsuccessful in restoring these aspects of our business;

       •    We may be required, under certain circumstances, to pay FICO a termination fee of $25,000,000;

       •    The price of our common stock may decline to the extent that the current market price for our common stock reflects a market assumption that the merger will be completed; and

       •    Costs related to the proposed merger, such as legal, accounting, and some advisory fees, must be paid, even if the merger is not completed.

Further, if the merger is not completed and our board of directors determines to seek another business combination, we may not be able to find a partner willing to pay an equivalent or more attractive price than that which would have been paid in the merger with FICO.

The number of shares of FICO common stock to be issued in the merger on each outstanding share of HNC common stock is fixed; consequently if the market value of FICO’s common stock declines, the value of the FICO stock to be issued to HNC stockholders in the merger will also decline.

The number of shares of FICO common stock to be issued in the merger in exchange for outstanding shares of HNC common stock is fixed at the exchange ratio of 0.346 shares of FICO common stock for one outstanding share of HNC common stock. Except for adjustments to reflect events such as stock splits or stock dividends, this fixed exchange ratio will not be adjusted to reflect changes in the relative market values of HNC’s and FICO’s common stock. Consequently, if the market value of FICO common stock decreases, then the value of the FICO common stock to be issued to HNC stockholders in the merger will likewise decrease.

Other Risk Factors

Fluctuations in our revenues and operating results might lead to substantial declines in the market prices of our common stock and the notes.

Our revenues and operating results have varied significantly in the past and in some quarters we have experienced net losses. We expect fluctuations in our operating results to continue for the foreseeable future. As a result, we believe that you should not rely on period-to-period comparisons of our financial results as an indication of our future performance. If our revenues or operating results fall below the expectations of market analysts and investors, the market price of our common stock and the notes could decline substantially. Factors that are likely to cause our revenues and operating results to fluctuate include those discussed in the risk factors below.

Due to current slowdowns in the economy generally, we believe that many existing and potential customers are reassessing or reducing their planned technology investments and deferring purchasing decisions. As a result, there is increased uncertainty with respect to our expected revenues. Further delays or reductions in business spending for information technology could have a material adverse effect on our revenues and operating results. In addition, to the extent that our customers change from paying license fees on a recurring transactional basis to paying us one-time license fees, our recurring revenues and gross margins for future quarters will decrease, which will reduce our ability to predict total revenues in future periods.

We may not be able to forecast our revenues accurately because our products have a long and variable sales cycle.

We cannot predict the timing of the recognition of our revenues accurately because the length of our sales cycles makes it difficult for us to predict the quarter in which sales to expected customers will occur. The long sales cycle for our products may cause license revenue and operating results to vary significantly from period to period. The sales cycle to license our products can typically range from 60 days to 18 months. Customers are often cautious in making decisions to acquire our products, because purchasing our products typically involves a significant commitment of capital, and may involve shifts by the customer to a new software and/or hardware platform or changes in the customer’s operational procedures. Delays in completing sales can arise while customers complete their internal procedures to approve large capital expenditures and test and accept our applications. Consequently, we face

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

difficulty predicting the quarter in which sales to expected customers will occur. This has contributed, and we expect it to continue to contribute, to fluctuations in our operating results.

Our failure to complete expected sales in any given quarter could harm our operating results because of the large size of typical orders and our inability to compensate for unanticipated revenue shortfalls.

Our sales cycle is subject to a number of significant risks, including customers’ budgetary constraints and internal acceptance reviews, over which we have little or no control. If sales expected from specific customers in a particular quarter are not realized in that quarter, we are unlikely to generate revenue from alternate sources in time to compensate for the shortfall. As a result, and due to the relatively large size of a typical order, a lost or delayed sale could result in revenues that are lower than expected. Moreover, to the extent that significant sales occur earlier than anticipated, revenues for subsequent quarters may be lower than expected. In addition, we may incur substantial sales and marketing expenses and expend significant management effort while potential customers are evaluating our products and before they place an order with us. If the current economic downturn continues, the sales cycle for our products may become longer and we may require more resources to complete sales. If orders for our products are not received as anticipated, our operating results could be harmed.

We derive a substantial portion of our revenues from our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services, and our revenue will decline if the market does not continue to accept these products and services.

Our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services in the aggregate accounted for 41.2% of our total revenues in the first quarter of 2002. Falcon Fraud Manager accounted for 21.5% of total revenues in this quarter and our combined Decision Manager for Medical Bill Review products and Outsourced Bill Review services accounted for 19.7% of total revenues in this quarter. We expect these products and services will continue to account for a substantial portion of our total revenues for the foreseeable future. Our revenue will decline if the market does not continue to accept these products and services. Factors that might affect the market acceptance of Decision Manager for Medical Bill Review products and Outsourced Bill Review services include the following:

       •    simplification of state workers’ compensation fee schedules;

       •    changes in the overall payment system or regulatory structure for workers’ compensation claims;

       •    technological change;

       •    our inability to obtain or use state fee schedule or claims data;

       •    saturation of market demand;

       •    loss of key customers; and

       •    industry consolidation.

Demand for, or use of, Falcon Fraud Manager, could decline as a result of factors that reduce the effectiveness of fraud detection capabilities. For example, patterns of credit card fraud might change in a manner that the Falcon Fraud Manager product line would not detect. In addition, other methods of credit card fraud prevention such as smart cards may reduce customers’ need for the Falcon Fraud Manager product line. To the extent that credit and other payment cards cease to be prevailing payment methods, demand for Falcon Fraud Manager could decrease. Because many Falcon Fraud Manager customers are banks and related financial institutions, sales of our Falcon Fraud Manager products are subject to changes in the financial services industry such as fluctuations in interest rates and the general economic health of financial services companies, which affect their capital expenditure budgets. In addition, the financial services industry tends to be cyclical, which may result in variations in demand for our Falcon Fraud Manager products. There is a continuing trend toward consolidation in the financial services industry, which has reduced our customer base and may lead to lost or delayed sales and reduced demand for our Falcon Fraud Manager products. Industry consolidation also could affect our base of recurring revenues derived from contracts in which we are paid on a per-transaction basis, when consolidated customers combine their operations under one contract with us which, in some cases, could result in lower payments to us than those previously paid by our customers separately.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

We expect to continue to make strategic acquisitions, which could put a strain on our resources, cause dilution to our stockholders and adversely affect our financial results.

During 2001, we acquired four businesses and product lines and to date in 2002 we have acquired three businesses and product lines. We believe that our future growth will depend, in part, upon our ability to successfully complete future acquisitions of businesses and technologies. Integrating newly acquired organizations and technologies into our business could put a strain on our resources and be expensive and time consuming. In addition, we may not succeed in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. Further, our acquisition strategy and future acquisitions could result in any of the following risks:

       •    increased competition for acquisition opportunities could inhibit our growth and our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions, which might result in dilution to the equity interests of our stockholders;

       •    if we are unable to complete acquisitions successfully, we might not be able to successfully develop and market products for new industries or for markets with which we may not be familiar;

       •    we might not be able to coordinate the diverse operating structures, policies and practices of companies we acquire or to successfully integrate the employees of the acquired companies into our organization and culture, which could impair employee morale and productivity;

       •    despite due diligence reviews, acquired businesses may bring with them unanticipated liabilities, business or legal risks or operating costs that could harm our results of operations or business, reduce or eliminate any benefits of the acquisition or require unbudgeted expenses;

       •    to the extent we acquire businesses or products from financially distressed companies, we are subject to additional legal risks associated with transactions in that context, including potential creditors’ claims, business uncertainties and liabilities not discharged by the seller;

       •    to the extent we acquire distressed businesses, we may need to implement stringent budget and cost-cutting measures with these businesses to reduce or avoid losses from these acquired businesses;

       •    if we fail to retain the services of key employees of acquired companies for significant time periods after the acquisition of their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition;

       •    the accounting treatment of acquisitions can result in significant acquisition-related accounting charges and expenses that can reduce our reported results of operations both at the time of the acquisition and in future periods;

       •    additional acquisitions may require us to issue shares of our stock and stock options to owners of the acquired businesses, resulting in dilution to our stockholders; and

       •    in the current economic environment, we may be required to use more cash as consideration for acquisitions, which will reduce our working capital.

If we do not adequately address issues presented by growth through acquisitions, we may not fully realize the intended benefits, including any financial benefits, of these acquisitions and may incur increased costs and expenses.

Our expenses are generally fixed, and if we fail to meet our revenue forecasts, we will not be able to reduce these expenses quickly.

Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if total revenues for a particular quarter are

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

below expectations, we could not proportionately reduce operating expenses for that quarter. Therefore, this revenue shortfall would have a disproportionate effect on our expected operating results for that quarter.

Difficulties in implementing our products could harm our revenues and margins.

Our revenues and margins depend in part upon the timing of implementation of our products and services. In most sales, we are involved in the installation of our products at the customer site. We recognize implementation revenue based on progress achieved toward completion and we recognize implementation costs as implementation services are performed. In addition, we do not begin to recognize maintenance revenue until implementation is complete. However, the timing of the commencement and completion of the installation process is subject to factors that may be beyond our control, as this process requires access to the customer’s facilities and coordination with the customer’s personnel after delivery of the software. In addition, customers could delay product implementations. If a product implementation is not completed or delayed, we might not be able to begin to recognize implementation revenue or maintenance revenue when expected or at all. Further, implementation typically involves working with sophisticated software, computing and communications systems. If we have difficulties with implementation or do not meet project milestones in a timely manner and within contracted fee budgets, we could be obligated to devote more customer support, engineering and other resources to a particular project. If customers have difficulty deploying our products or require significant amounts of support, our costs could increase, causing increased variability in our operating results.

If we fail to effectively respond to changes in our business, our corporate organization will be disrupted and we will be diverted from our business plan.

Our ability to offer our products and services successfully in a rapidly evolving market requires an effective planning and management process. In recent years, we have experienced changes in our operations that have placed significant demands on our administrative, operational and financial resources. These demands, which are expected to continue to challenge our management and operations, include the following:

       •    growth and diversification of our customer base into new industries, most recently telecommunications;

       •    development and marketing of our Critical Action Platform;

       •    expansion of our product lines into new technology mediums such as the delivery of services over the Internet through an ASP channel;

       •    integration of acquired businesses and their workforces into our business;

       •    increase in the number of our employees; and

       •    geographic dispersion of our operations and personnel, most recently the addition of offices in San Jose, California and Brentford, England.

These changes require us to manage an increasing number of relationships with customers and other third parties, as well as a larger workforce. In addition, we will need to adapt our operational and financial control systems, if necessary, to respond to changes in the size and diversification of our business, as well as any future acquisitions. If we fail to manage changes effectively, our employee-related costs and employee turnover could increase and we could face disruptions that negatively affect the quality of our products and our ability to respond to our customers.

If our software products do not achieve widespread market acceptance, our business reputation and financial performance would suffer.

The rate at which businesses have adopted our products has varied significantly by market and by product within each market, and we expect to continue to experience variations to the degree to which our products are accepted in our target markets in the future. In particular, the acceptance of our products may be limited by factors such as:

• the failure of prospective customers to perceive value in critical action software solutions;

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

• the reluctance of our prospective customers to replace their existing solutions with our products; and

• the emergence of new technologies that could cause our products to be less competitive or obsolete.

We must grow our customer base and generate repeat and expanded business from our current and future customers. In some cases, our customers initially make a limited purchase of our products and services for pilot programs. These customers may not purchase additional licenses to expand their use of our products. In addition, as we introduce new versions of our products or new products, our current customers might not require the functionality of our new products and might not ultimately license these products. Because the market for critical action software is still in a relatively early stage of development, we cannot accurately assess the size of the market, and we have limited insight into trends that may emerge and affect our business. For example, we may have difficulty in predicting customer needs and new technologies, developing products that could address those needs and technologies, and establishing a distribution strategy for these products. We may also have difficulties in predicting the competitive environment that will develop.

If we fail to keep up with rapidly changing technologies, our products could become less competitive or obsolete.

In our markets, technology changes rapidly, and there are continuous improvements in computer hardware, network operating systems, programming tools, programming languages, operating systems, database technology and the use of the Internet. If we fail to enhance our current products and develop new products in response to changes in technology or industry standards, our products could rapidly become less competitive or obsolete. For example, the rapid growth of the Internet environment creates new opportunities, risks and uncertainties for businesses, such as ours, which develop software that must also be designed to operate in Internet, intranet and other online environments. Our future success will depend, in part, upon our ability to:

       •    internally develop new and competitive technologies;

       •    use leading third-party technologies effectively;

       •    continue to develop our technical expertise;

       •    anticipate and effectively respond to changing customer needs;

       •    time new product introductions in a way that minimizes the impact of customers delaying purchases of existing products in anticipation of new product releases; and

       •    influence and respond to emerging industry standards and other technological changes.

Delays in the development of new products or product enhancements could harm our operating results and our competitive position.

The development of new, technologically advanced products is a complex and uncertain process that requires innovation, highly skilled personnel and accurate anticipation of technological and market trends. We have previously experienced significant delays in the development and introduction of new products and product enhancements, primarily due to difficulties with model development, which has in the past required multiple iterations, as well as difficulties with acquiring data and adapting to particular operating environments. The length of these delays has varied depending upon the size and scope of the project and the nature of the problems encountered. If we are unable to meet the introduction schedules for our new products or product enhancements, customers may switch their allegiance to competitive products or refuse to purchase our software suites, which would harm our competitive position and our operating results.

Our revenue growth could decline if any major customer cancels, reduces or delays a purchase of our products.

Most of our customers are relatively large enterprises, such as banks, insurance carriers and telecommunications carriers. Our future success will depend upon the timing and size of future licenses, if any, from these customers and new customers. Many of our customers and potential customers are significantly larger than we are and have sufficient bargaining power to demand reduced prices and favorable nonstandard terms. The loss of any major customer, or the delay of significant revenue from these customers, could reduce or delay our recognition of revenue.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

We depend on data to update our statistical models, and failure to timely obtain this data could harm the performance of our products.

The development, installation and support of our credit card fraud control and profitability management, loan underwriting and insurance products require periodic updates of our statistical models. To develop these updates, we must develop or obtain a reliable source of sufficient amounts of current and statistically relevant data to analyze transactions and update our models. In most cases, these data must be periodically updated and refreshed to enable our predictive products to continue to work effectively in a changing environment. We do not own or control much of the data that we require, most of which are collected privately and maintained in proprietary databases. Generally, our customers agree to provide us the data we require to analyze transactions, report results and build new predictive models. If we fail to maintain good relationships with these customers, or if they decline to provide such data due to legal privacy concerns, we could lose access to required data and our products might become less effective. In addition, our Decision Manager for Medical Bill Review products use data from state workers’ compensation fee schedules adopted by state regulatory agencies. Third parties have previously asserted copyright interests in this data. These assertions, if successful, could prevent us from using the data. We might not be able to continue to obtain adequate amounts of statistically relevant data on time, in the required formats or on reasonable terms and conditions, whether from customers or commercial suppliers.

If we are unable to compete effectively with existing or new competitors, our resulting loss of competitive position could result in price reductions for our products, fewer customer orders and loss of market share.

The market for predictive software solutions is intensely competitive and is constantly changing. Some of our competitors or potential competitors have substantially greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. In addition, they may have the ability to sell products competitive to ours at lower prices as part of integrated suites of several related products that are vital to the customer’s computing infrastructure. This may cause customers to purchase products of our competitors that directly compete with our products in order to acquire other products of the competitor.

Our competitors vary in size and in the scope of the products and services they offer. We encounter competition from a number of sources, including:

       •    other application software companies, including enterprise software vendors;

       •    management information system departments of customers and potential customers, including financial institutions, insurance companies and telecommunications carriers;

       •    third-party professional services and consulting organizations;

       •    Internet companies;

       •    hardware suppliers that bundle or develop complementary software;

       •    network and telecommunications switch manufacturers, and service providers that seek to enhance their value-added services;

       •    neural network tool suppliers; and

       •    managed care organizations.

We expect to experience additional competition from other established and emerging companies, as well as from other technologies. For example, our Falcon Fraud Manager and Falcon Fraud Manager for Merchants products compete against other methods of preventing credit card fraud, such as credit card activation programs, credit cards that contain the cardholder’s photograph, smart cards and other card authorization techniques.

Increased competition, whether from other products or new technologies, could result in price reductions, fewer customer orders, loss of customers, reduced gross margins and loss of market share, any of which could negatively impact our business. We expect to

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

face increasing pricing pressures from our current competitors and new market entrants. Price reductions could negatively impact our margins and results of operations. Price competition could also harm our ability to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms.

Furthermore, a number of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. As a result, new competitors or alliances among competitors may emerge and rapidly gain significant market share. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage.

If we lose key personnel, we might not be able to manage our business successfully.

Our future success depends to a significant degree upon the continued service of members of our senior management and other key research, development, sales and marketing personnel. We generally do not have employment agreements with our employees, and the few employment agreements we do have with a small number of our employees may not result in the retention of these employees. As a result, we have lost and in the future could lose one or more members of the management team on little or no advance notice. We could also lose the services of a key employee of a business we acquire before we have had adequate time to familiarize ourselves with the operating details of that business and obtain a suitably experienced replacement. Our future performance will also depend, in part, upon the ability of our officers to work together effectively. Our management personnel may not be successful in carrying out their duties or running our company. Any dissent among members of management could impair our ability to make strategic decisions quickly in a rapidly changing market.

If we do not recruit and retain qualified personnel, our ability to execute our business plan would be compromised.

Our future success depends upon our ability to attract, retain and motivate highly skilled employees. Competition for employees in our industry is intense. We have historically experienced difficulty in recruiting a sufficient number of qualified sales and technical employees. In addition, competitors and other businesses may be successful in attempts to recruit our key employees, particularly if they can offer more attractive stock options or other equity compensation packages. Many of our technical employees possess unique skills and are not easily replaceable, and loss of technical personnel could harm our product development efforts. We expect to continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications, and our proposed merger with a subsidiary of Fair, Isaac and Company may exacerbate this difficulty.

Our future results could be harmed by economic, political, regulatory and other risks associated with international sales.

We intend to continue to expand our operations outside the United States and to enter additional international markets, which will require significant management attention and financial resources. For more mature products, like Falcon Fraud Manager, we may need to increase our international sales in order to continue to expand our customer base. We have committed and continue to commit significant time and development resources to customizing and adapting our products for selected international markets, and to developing international sales and support channels. These international marketing efforts require us to incur increased sales, marketing, development and support expenses. If our efforts do not generate additional international sales on a timely basis, our margins and earnings would be harmed.

To the extent that our revenues from international operations represent an increasing portion of our total revenues, we will be subject to increased exposure to international risks. As a result, our future results could be affected by a variety of factors, including:

       •    changes in foreign currency exchange rates;

       •    changes in the political or economic conditions of a country or region, particularly in emerging markets;

       •    trade protection measures, such as tariffs, EU software directives and import or export licensing requirements;

       •    potentially negative consequences from changes in tax laws;

       •    potentially reduced protection for intellectual property rights;

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

• difficulty in managing widespread sales operations; and

• slower payment cycles from international customers.

If our products do not comply with government regulations that apply to us or to our customers, we could be exposed to liability or our products could become obsolete.

Many of our customers must comply with a number of government regulations and other industry standards, and as a result, many of our key products must also be compliant. For example, our financial services products are affected by the Fair Credit Reporting Act, by Regulation B under the Equal Credit Opportunity Act, by regulations governing the extension of credit to consumers and by Regulation E under the Electronic Fund Transfers Act, as well as non-governmental VISA and MasterCard electronic payment standards. Fannie Mae and Freddie Mac regulations, among others, for conforming loans, affect our mortgage services products. Insurance-related regulations may in the future apply to our insurance products. If our products fail to comply with existing or future regulations and standards, our customers or we could be subject to legal action by regulatory authorities or by third parties, including actions seeking civil or criminal penalties, injunctions against our use of data or preventing use of our products or civil damages. In addition, we may also be liable to our customers for failure of our products to comply with regulatory requirements. If state-mandated workers’ compensation laws or regulations or state workers’ compensation fee schedules are simplified, these changes would diminish the need for, and the benefit provided by, Decision Manager for Medical Bill Review products and Outsourced Bill Review services. In many states, including California, there have been periodic legislative efforts to reform workers’ compensation laws in order to reduce the cost of workers’ compensation insurance and to curb abuses of the workers’ compensation system. Changes in workers compensation laws or regulations could adversely affect our insurance products by making them obsolete, or by requiring extensive changes in these products to reflect new workers’ compensation rules. To the extent that we sell new products targeted to markets that include regulated industries and businesses, our products will need to comply with these additional regulations.

If we fail to protect and preserve our intellectual property we could lose an important competitive advantage.

Our success and ability to compete substantially depend upon our internally developed proprietary technologies, which we protect through a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite the measures we take to protect our intellectual property, it may be possible for a third party to copy or otherwise to obtain and use our products or technology without authorization, or to develop similar technology independently. In addition, patents may not be issued with respect to our pending or future patent applications, and our patents may not be upheld as valid or may not prevent the development of competitive products. To ensure that customers will not be harmed by an interruption in our business, we often place software source code for our products into escrow, which may increase the likelihood of misappropriation or other misuse of our intellectual property. Any disclosure, loss, invalidity of, or failure to protect, our intellectual property could negatively impact our competitive position, and ultimately, our business. We have developed technologies under research projects conducted under agreements with various United States Government agencies or subcontractors. Although we have acquired commercial rights to these technologies, the United States Government typically retains ownership of intellectual property rights and licenses in the technologies developed by us under these contracts, and in some cases can terminate our rights in these technologies if we fail to commercialize them on a timely basis. Under our contracts with the United States Government, the results of our research may be made public by the government, which could limit our competitive advantage with respect to future products based on our research.

We could be subject to claims of infringement of third-party intellectual property rights, which could result in significant expense and loss of intellectual property rights.

In the past, we have received communications from third parties asserting that our trademarks infringe upon their trademarks, or that data we use is copyrighted by them, none of which has resulted in litigation or material losses. We have also been involved in patent litigation. Given our ongoing efforts to develop and market new technologies and products, we may from time to time be served with other claims from third parties asserting that our products or technologies infringe their intellectual property rights. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our customers and other business partners against infringement, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. We cannot be certain we would prevail in this litigation given the complex technical issues and uncertainties inherent in intellectual property litigation. If this litigation resulted in an adverse ruling, we could be required to:

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

       •    pay substantial damages;

       •    cease the use or sale of infringing products;

       •    expend significant resources to develop non-infringing technology;

       •    discontinue the use of certain technology; or

       •    obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available on reasonable terms, or at all. A license, if obtained, might require that we pay substantial royalties or license fees that would reduce our margins.

Our products may have defects, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers and revenue and result in liability to us.

Products as sophisticated as ours are likely to contain errors or failures when first introduced or as new versions are released. To the extent that we develop new products that operate in new environments, such as the Internet, the possibility for program errors and failures may increase due to factors including the use of new technologies or the need for more rapid product development that is characteristic of the Internet market. In the future, we may experience delays in releasing new products or product enhancements as problems are corrected. Errors or defects in our products that are significant, or are perceived to be significant, could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased service and support costs and warranty claims. In addition, because our products are used in business-critical applications, any product errors or failures may give rise to substantial product liability claims.

Risks Related to Our Common Stock

Our common stock price fluctuates and has been volatile.

The market price of our common stock has been, and will likely continue to be, subject to wide fluctuations. Many factors could cause the price of our common stock and our convertible notes to rise and fall, including:

       •    variations in our quarterly results;

       •    announcements of new products by us or our competitors;

       •    acquisitions of businesses or products by us or our competitors;

       •    recruitment or departure of key personnel;

       •    the gain or loss of significant orders;

       •    the gain or loss of significant customers;

       •    changes in the estimates of our operating performance or changes in recommendations by securities analysts;

       •    market conditions in our industry, the industries of our customers and the economy as a whole; and

       •    until our merger agreement with Fair, Isaac and Company, Incorporated is consummated or terminated, the market price of Fair, Isaac’s common stock.

In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. Public announcements by companies in our industry about, among other things, their performance, accounting practices or legal problems could cause the market price of our common stock and our convertible notes to decline regardless of our actual operating performance.

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

In the past, securities class action litigation has often been brought against a company following a period of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

Our certificate of incorporation and Delaware law contain provisions that could discourage or prevent a takeover, even if an acquisition would benefit our stockholders.

Under our certificate of incorporation, our board of directors is authorized to issue up to 4,000,000 shares of preferred stock without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We implemented a stockholder rights plan in the first quarter of 2002 and created 1,000,000 shares of Series A Junior Participating Preferred Stock for issuance upon exercise of the rights. In addition, Section 203 of the Delaware General Corporation Law restricts business combinations with any “interested stockholder” as defined by the statute. The statute could make it more difficult for a third party to acquire us, even if an acquisition would benefit our stockholders. Because HNC’s Board of Directors has approved the acquisition of HNC pursuant to the merger agreement with FICO, Section 203 of the Delaware General Corporation Law will not apply to our proposed business combination with FICO pursuant to the merger agreement.

Risks Related to our Convertible Notes

If we incur additional indebtedness that is senior to the notes, we might not have sufficient assets to pay our obligations under the notes.

The indenture under which we issued the notes does not restrict us or our subsidiaries from incurring additional debt, including senior indebtedness. It also does not restrict our ability to pay dividends or issue or repurchase our securities. If our subsidiaries or we were to incur additional debt or liabilities, we might not be able to pay our obligations under the notes.

If we were required to pay off all senior indebtedness before we pay the notes, we might not have sufficient assets to pay our obligations under the notes.

The notes are general unsecured obligations of HNC and are subordinated in right of payment to all of our existing and future senior indebtedness. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid. The notes are also effectively subordinated to the liabilities, including trade payables, of our subsidiaries. As of March 31, 2002, we had no outstanding senior indebtedness for purposes of the indenture, while our subsidiaries had approximately $10.7 million of outstanding indebtedness or other liabilities (excluding intercompany liabilities and liabilities of the type not required to be reflected on a balance sheet in accordance with generally accepted accounting principles) to which the notes would have been effectively subordinated. As a result, there may not be sufficient assets remaining to pay amounts due on any or all of the outstanding notes. In addition, we will not make any payments on the notes in the event of payment defaults on our senior indebtedness or other specified defaults on our designated senior indebtedness.

Our ability to pay our obligations under the notes depends in part upon the ability to receive funds from our subsidiaries.

We conduct a significant portion of our operations through subsidiaries. Our cash flow and therefore our ability to service our debt, including the notes, depends in part upon the earnings of our subsidiaries and the distribution of those earnings to us, or upon loans or other payments of funds to us by our subsidiaries. These subsidiaries are separate and distinct legal entities, and have no obligation to pay any amounts due under the notes or to make any funds available to meet our obligations under the notes, whether by dividends, distributions, loans or other payments. In addition, any of our subsidiaries may not be able to pay dividends or distributions to us or make loans and advances to us due to legal or contractual restrictions, the earnings of the subsidiary and various other business considerations. Any right we have to receive assets of our subsidiaries upon their liquidation or reorganization, and the right of the note holders to participate in these assets, is effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. If we were recognized as a creditor of one of our subsidiaries, our claims would be subordinate to any security interests in

HNC SOFTWARE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands)

the subsidiary’s assets and any indebtedness of the subsidiary that is senior to ours. As a result, if we do not receive funds from our subsidiaries, we might not have sufficient funds to pay our obligations under the notes.

If we are not able to meet the requirements to purchase notes upon a change in control, note holders might not be repaid.

Upon a change in control, as defined in the indenture under which we issued the notes, note holders may require us to purchase all or a portion of their notes. If a change in control were to occur, we might not have enough funds to pay the purchase price for all tendered notes. Our credit facility provides that a change in control constitutes an event of default. Future credit agreements or other agreements relating to our indebtedness may also provide that a change in control constitutes an event of default and additionally may prohibit the repurchase or redemption of the notes. If a change in control occurs at a time when we are prohibited from purchasing the notes, we could seek the consent of our lenders to purchase the notes or could attempt to refinance this debt. If we do not obtain a consent, we could not purchase the notes. Our failure to purchase tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of our other debt. In such circumstances, or if a change in control would constitute an event of default under our senior indebtedness, the subordination provisions of the indenture would limit or prohibit payments to note holders. The term “change in control” is limited to certain specified transactions and may not include other events that might harm our financial condition. For example, our proposed business combination with FICO pursuant to the merger agreement with FICO will not be a “change of control” because the merger agreement provides that 90% or more of the consideration payable to our stockholders in the Merger (excluding cash payments for fractional shares) will be shares of FICO common stock, which is traded on the New York Stock Exchange. Consequently, consummation of the Merger with FICO will not entitle holders of notes to require us to purchase their notes. Our obligation to offer to purchase the notes upon a change in control would not necessarily protect note holders in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

If a market for the notes is not maintained, the trading price of the notes could decline significantly.

Since the issuance of the notes, the initial purchasers have made a market in the notes. However, the initial purchasers are not obligated to make a market and may discontinue this market-making activity at any time without notice. In addition, market-making activity by the initial purchasers is subject to the limits imposed by the Securities Act and the Exchange Act. As a result, a market for the notes may not be maintained. If an active market for the notes fails to develop or be sustained, the trading price of the notes could decline significantly.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discusses our exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices.

Interest Rate Risk

The fair value of our marketable securities available for sale at March 31, 2002 was $171.2 million. The objectives of our investment policy are the safety and preservation of invested funds, and liquidity of investments that is sufficient to meet cash flow requirements. Our policy is to place our cash, cash equivalents, and investments available for sale with high credit quality financial institutions, commercial companies, and government agencies in order to limit the amount of credit exposure. Except for certain strategic equity investments, it is also our policy to maintain concentration limits and to invest only in allowable securities as determined by our management. Our investment policy also provides that our investment portfolio must not have an average portfolio maturity of beyond one year and that we must maintain liquidity positions. Investments are prohibited in certain industries and speculative activities. Investments must be denominated in U.S. dollars.

Foreign Currency Exchange Rate Risk

We mitigate our foreign currency risks principally by contracting primarily in U.S. dollars and maintaining only nominal foreign currency cash balances. Working funds necessary to facilitate the short term operations of our subsidiaries are kept in the local currencies in which they do business, with excess funds transferred to our offices in the United States for investment. For the quarter ended March 31, 2002, 4.3% of our sales were denominated in currencies other than our functional currency, which is the U.S. dollar.

Equity Price Risk

We have several equity investments we entered into for strategic business purposes, and therefore are exposed to direct equity price risk. We mitigate this risk by monitoring the financial performance of our investments. However, many of our equity investments are in the common stock of privately held, non-public companies and thus we may be unable to sell or achieve liquidity in those investments prior to an adverse change in their values. In addition, the current funding environment for high technology companies may expose our investments in such companies to increased risks.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have received a copy of a complaint naming our current directors as defendants in a lawsuit filed in the Superior Court of the State of California, County of San Diego (Case No. GIC 787645). The named plaintiff in this suit is Douglas Tidwell and he seeks to act on behalf of a class of all holders of HNC’s common stock.

The complaint alleges, among other things, that HNC’s directors breached their fiduciary duties to HNC’s stockholders by approving the Agreement and Plan of Merger that HNC entered into with Fair, Isaac and Company, Incorporated (“Fair, Isaac”) on April 28, 2002 and that the individual defendants engaged in self-dealing in connection with their approval of this merger transaction. The complaint seeks injunctive relief only, including enjoining consummation of the merger transaction with Fair, Isaac. The complaint does not seek an award of monetary damages, but does seek an award of attorneys’ and experts’ fees.

HNC believes the allegations of this lawsuit are without merit, and expects that its directors will vigorously contest this action.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 26, 2002, our Board of Directors adopted a stockholder rights plan designed to protect the long-term value of HNC for its stockholders during any future unsolicited acquisition attempt. Under the rights plan, the Board declared a dividend of one preferred share purchase right for each share of our common stock outstanding on March 21, 2002 and further directed the issuance of one such right with respect to each share of our common stock that is issued after that date, except in certain circumstances. If a person or group acquires 20% or more of our common stock, or announces an intention to make a tender offer for our common stock, the completion of which would result in a person or group exceeding such 20% ownership level, then the rights will become exercisable and will be distributed. After distribution of the rights, each right may be exercised for 1/100 of a share of a newly designated Series A Junior Participating Preferred Stock at an exercise price of $125. The preferred stock has been structured so that the value of 1/100 of a share of preferred stock will approximate the value of one share of common stock. When the rights become exercisable, the holders of the rights (other than any acquiring person) will have the right to acquire shares of HNC common stock at a substantially discounted price. The rights will expire in March 21, 2012. HNC issued the rights in reliance upon the exemption from Section 5 of the Securities Act provided in Section 3(a)(9) of the Securities Act. In the event of a merger or other acquisition of HNC by an acquiring person, holders of the rights (other than any held by an acquiring person) will have the right to receive shares of common stock of the acquiring corporation at a substantially discounted price; however, this provision will not apply to the proposed business combination of HNC with FICO. Pursuant to an amendment to our stockholder rights plan approved by our board of directors, the rights will not become exercisable for shares of HNC common stock in connection with our proposed business combination with FICO and will expire and terminate immediately before that business combination becomes effective.

ITEM 5. OTHER INFORMATION

Kyle Thomas, who most recently served as our Group Vice President, Global Sales, ceased to be employed by HNC as of May 3, 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

The following exhibits are filed herewith:


Number		Description

10.01		Offer Letter dated February 13, 2002 between the Registrant and Charles Nicholls.
10.02		Employment Agreement dated April 1, 2002 between the Registrant and Charles Nicholls.
10.03		Employment Agreement dated April 1, 2002 between the Registrant and Kenneth Saunders.
10.04		Employment Agreement dated April 1, 2002 between the Registrant and Mary Burnside.
10.05		Employment Agreement dated April 1, 2002 between the Registrant and Michael Chiappetta.
10.06		Employment Agreement dated April 1, 2002 between the Registrant and John Mutch.

(b) REPORTS FILED ON FORM 8-K

       •    Report on Form 8-K, dated February 26, 2002 and filed March 7, 2002, reporting under Item 5 that the Board of Directors of HNC implemented a stockholders rights plan.

       •    Report on Form 8-K, dated and filed February 14, 2002, reporting under Item 5 and Item 7 revised business information, segment data and management’s discussion and analysis of financial condition and results of operation data to conform to our new operating segment presentation and HNC’s press release announcing its results of operations for the fourth quarter of 2001 and for the year ended 2001.

       •    Report on Form 8-K, dated and filed April 30, 2002, reporting under Item 5 and Item 7 the Agreement and Plan of Merger between the Registrant, Fair, Isaac and Company, and Northstar Acquisition Inc., entered into on April 28, 2002.

       •    Report on Form 8-K, dated and filed May 8, 2002, reporting under Item 5 the receipt of a copy of a complaint naming its current directors as defendants in a lawsuit filed in the Superior Court of the State of California, County of San Diego (Case No. GIC 787645).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HNC SOFTWARE INC.

Date: May 9, 2002 By: /s/ Kenneth J. Saunders

Kenneth J. Saunders
Chief Financial Officer and Secretary

(for Registrant as duly authorized officer
and as Principal Financial Officer)

/s/ Russell C. Clark

Russell C. Clark
Senior Vice President, Corporate Finance and Assistant
Secretary

(for Registrant as Principal Accounting Officer)

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		Page

PART I	FINANCIAL INFORMATION		3
ITEM 1:	FINANCIAL STATEMENTS
	Consolidated Balance Sheet as of March 31, 2002 (unaudited) and December 31, 2001		3
	Consolidated Statement of Operations (unaudited) for the quarters ended March 31, 2002 and 2001		4
	Consolidated Statement of Cash Flows (unaudited) for the quarters ended March 31, 2002 and 2001		5
	Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss for the quarter ended March 31, 2002 (unaudited)		6
	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		30
ITEM 1:	LEGAL PROCEEDINGS		30
ITEM 2:	CHANGES IN SECURITIES AND USE OF PROCEEDS		30
ITEM 5:	OTHER INFORMATION		30
ITEM 6:	EXHIBITS AND REPORTS ON FORM 8-K		31
Signatures			32


				ACCUMULATED
	UNEARNED			OTHER			TOTAL
	STOCK-BASED			COMPREHENSIVE			STOCKHOLDERS'			COMPREHENSIVE
	COMPENSATION			INCOME (LOSS)			EQUITY			LOSS

BALANCE AT DECEMBER 31, 2001	$	(238	)	$	267		$	387,819
Common stock options exercised								603
Common stock issued under Employee Stock Purchase Plan								2,125
Tax benefit from stock option transactions								318
Stock-based compensation expense		62						175
Unrealized loss on marketable securities, net of tax					(425	)		(425	)		(425	)
Foreign currency translation adjustment, net of tax					(204	)		(204	)		(204	)
Net loss								(4,111	)		(4,111	)

BALANCE AT MARCH 31, 2002	$	(176	)	$	(362	)	$	386,300		$	(4,740	)

•		The HNC Risk Suite. The products in this suite help improve our customers’ profitability by intelligently predicting the accuracy and validity of transactions to protect them and their customers from fraud and similar losses. HNC Risk Suite applications can analyze millions of customer transactions in milliseconds and generate a recommendation for immediate action critical to stopping fraud and abuse. These applications also detect organized fraud schemes that are too complex and well hidden to be identified by other methods. This suite is designed to detect and prevent credit and debit payment card fraud, identity fraud, telecommunications subscription fraud, healthcare fraud, Medicaid and Medicare fraud, and workers’ compensation fraud. It protects merchants, financial institutions, insurance companies, telecommunications carriers, government agencies and employers. The HNC Risk Suite includes applications for predicting bankruptcy, identifying money laundering and reducing bad debt.

•		The HNC Opportunity Suite. The products in this suite provide our customers opportunities to derive incremental revenue by optimizing their marketing decisions and improving their interactions with their customers. Our products are designed to help our customers with customer acquisition, customer retention, product pricing and cross-selling. This suite is unique in its ability to use both structured and free form data to intelligently direct actions to the right targets for maximum return, based on predicted revenue or profitability, including the likelihood of response and retention.

	•		It may take a substantial amount of time, money and resources to restore aspects of our business that may be adversely affected by announcement of the merger, and we may be unsuccessful in restoring these aspects of our business;

	•		We may be required, under certain circumstances, to pay FICO a termination fee of $25,000,000;

	•		The price of our common stock may decline to the extent that the current market price for our common stock reflects a market assumption that the merger will be completed; and

	•		Costs related to the proposed merger, such as legal, accounting, and some advisory fees, must be paid, even if the merger is not completed.

	•		simplification of state workers’ compensation fee schedules;

	•		changes in the overall payment system or regulatory structure for workers’ compensation claims;

	•		technological change;

	•		our inability to obtain or use state fee schedule or claims data;

	•		saturation of market demand;

	•		loss of key customers; and

	•		industry consolidation.

	•		increased competition for acquisition opportunities could inhibit our growth and our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions, which might result in dilution to the equity interests of our stockholders;

	•		if we are unable to complete acquisitions successfully, we might not be able to successfully develop and market products for new industries or for markets with which we may not be familiar;

	•		we might not be able to coordinate the diverse operating structures, policies and practices of companies we acquire or to successfully integrate the employees of the acquired companies into our organization and culture, which could impair employee morale and productivity;

	•		despite due diligence reviews, acquired businesses may bring with them unanticipated liabilities, business or legal risks or operating costs that could harm our results of operations or business, reduce or eliminate any benefits of the acquisition or require unbudgeted expenses;

	•		to the extent we acquire businesses or products from financially distressed companies, we are subject to additional legal risks associated with transactions in that context, including potential creditors’ claims, business uncertainties and liabilities not discharged by the seller;

	•		to the extent we acquire distressed businesses, we may need to implement stringent budget and cost-cutting measures with these businesses to reduce or avoid losses from these acquired businesses;

	•		if we fail to retain the services of key employees of acquired companies for significant time periods after the acquisition of their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition;

	•		the accounting treatment of acquisitions can result in significant acquisition-related accounting charges and expenses that can reduce our reported results of operations both at the time of the acquisition and in future periods;

	•		additional acquisitions may require us to issue shares of our stock and stock options to owners of the acquired businesses, resulting in dilution to our stockholders; and

	•		in the current economic environment, we may be required to use more cash as consideration for acquisitions, which will reduce our working capital.

	•		growth and diversification of our customer base into new industries, most recently telecommunications;

	•		development and marketing of our Critical Action Platform;

	•		expansion of our product lines into new technology mediums such as the delivery of services over the Internet through an ASP channel;

	•		integration of acquired businesses and their workforces into our business;

	•		increase in the number of our employees; and

	•		geographic dispersion of our operations and personnel, most recently the addition of offices in San Jose, California and Brentford, England.

	•		the reluctance of our prospective customers to replace their existing solutions with our products; and

	•		the emergence of new technologies that could cause our products to be less competitive or obsolete.

	•		internally develop new and competitive technologies;

	•		use leading third-party technologies effectively;

	•		continue to develop our technical expertise;

	•		anticipate and effectively respond to changing customer needs;

	•		time new product introductions in a way that minimizes the impact of customers delaying purchases of existing products in anticipation of new product releases; and

	•		influence and respond to emerging industry standards and other technological changes.

	•		other application software companies, including enterprise software vendors;

	•		management information system departments of customers and potential customers, including financial institutions, insurance companies and telecommunications carriers;

	•		third-party professional services and consulting organizations;

	•		Internet companies;

	•		hardware suppliers that bundle or develop complementary software;

	•		network and telecommunications switch manufacturers, and service providers that seek to enhance their value-added services;

	•		neural network tool suppliers; and

	•		managed care organizations.

	•		changes in foreign currency exchange rates;

	•		changes in the political or economic conditions of a country or region, particularly in emerging markets;

	•		trade protection measures, such as tariffs, EU software directives and import or export licensing requirements;

	•		potentially negative consequences from changes in tax laws;

	•		potentially reduced protection for intellectual property rights;

	•		difficulty in managing widespread sales operations; and

	•		slower payment cycles from international customers.

	•		pay substantial damages;

	•		cease the use or sale of infringing products;

	•		expend significant resources to develop non-infringing technology;

	•		discontinue the use of certain technology; or

	•		obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available on reasonable terms, or at all. A license, if obtained, might require that we pay substantial royalties or license fees that would reduce our margins.

	•		variations in our quarterly results;

	•		announcements of new products by us or our competitors;

	•		acquisitions of businesses or products by us or our competitors;

	•		recruitment or departure of key personnel;

	•		the gain or loss of significant orders;

	•		the gain or loss of significant customers;

	•		changes in the estimates of our operating performance or changes in recommendations by securities analysts;

	•		market conditions in our industry, the industries of our customers and the economy as a whole; and

	•		until our merger agreement with Fair, Isaac and Company, Incorporated is consummated or terminated, the market price of Fair, Isaac’s common stock.

	•		Report on Form 8-K, dated February 26, 2002 and filed March 7, 2002, reporting under Item 5 that the Board of Directors of HNC implemented a stockholders rights plan.

	•		Report on Form 8-K, dated and filed February 14, 2002, reporting under Item 5 and Item 7 revised business information, segment data and management’s discussion and analysis of financial condition and results of operation data to conform to our new operating segment presentation and HNC’s press release announcing its results of operations for the fourth quarter of 2001 and for the year ended 2001.

	•		Report on Form 8-K, dated and filed April 30, 2002, reporting under Item 5 and Item 7 the Agreement and Plan of Merger between the Registrant, Fair, Isaac and Company, and Northstar Acquisition Inc., entered into on April 28, 2002.

	•		Report on Form 8-K, dated and filed May 8, 2002, reporting under Item 5 the receipt of a copy of a complaint naming its current directors as defendants in a lawsuit filed in the Superior Court of the State of California, County of San Diego (Case No. GIC 787645).


	HNC SOFTWARE INC.

Date: May 9, 2002	By:	/s/ Kenneth J. Saunders

		Kenneth J. Saunders Chief Financial Officer and Secretary


	/s/ Russell C. Clark

	Russell C. Clark Senior Vice President, Corporate Finance and Assistant Secretary