-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RADrE6o4MaNZjTWPPX/vrvoulvf8WTviKMl45ECJAC4fRAID7d9jBYnwe6MuU2hm HgY2Kri/N1C/kjXXkbRUsg== 0000936392-96-001058.txt : 19961118 0000936392-96-001058.hdr.sgml : 19961118 ACCESSION NUMBER: 0000936392-96-001058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HNC SOFTWARE INC/DE CENTRAL INDEX KEY: 0000945093 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330248788 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26146 FILM NUMBER: 96664712 BUSINESS ADDRESS: STREET 1: 5930 CORNERSTONE CT WEST CITY: SAN DIEGO STATE: CA ZIP: 92121-3728 BUSINESS PHONE: 6195468877 MAIL ADDRESS: STREET 1: 5930 CORNERSTONE CT WEST CITY: SAN DIEGO STATE: CA ZIP: 92121-3728 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPT. 30, 1996 1 THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF REGULATION S-T. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _________. COMMISSION FILE NUMBER 0-26146 - -------------------------------------------------------------------------------- HNC SOFTWARE INC. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- DELAWARE 33-0248788 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5930 CORNERSTONE COURT WEST SAN DIEGO, CA 92121 (Address of principal executive offices, including zip code) (619) 546-8877 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO --- --- AS OF OCTOBER 31, 1996 THERE WERE 17,629,716 SHARES OF $0.001 PAR VALUE COMMON STOCK OUTSTANDING. 1 2 INDEX LISTING - --------------------------------------------------------------------------------
Page Number PART I FINANCIAL INFORMATION ------ Item 1: FINANCIAL STATEMENTS Consolidated Balance Sheet at September 30, 1996 (unaudited) 3 and December 31, 1995 Consolidated Statement Of Income (unaudited) for the 4 three month and nine month periods ended September 30, 1996 and 1995 Consolidated Statement Of Cash Flows (unaudited) for 5 the nine month periods ended September 30, 1996 1995 Notes To Consolidated Financial Statements (unaudited) 6 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II OTHER INFORMATION Item 6: EXHIBITS AND REPORTS ON FORM 8-K 17 PART III EXHIBITS Agreement and Plan of Reorganization dated as of July 19, 1996 by and among the Company, HNC Merger Corp. and Risk Data Corporation, as amended. Agreement of Merger dated as of August 30, 1996 by and between HNC Merger Corp. and Risk Data Corporation. Registration Rights Agreement dated as of August 30, 1996 by and among the Company and the former shareholders of Risk Data Corporation. Amended Loan and Security Agreement dated as of July 10, 1996, between the Company and Silicon Valley Bank. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS FINANCIAL DATA SCHEDULE
2 3 PART I - FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Item 1: FINANCIAL STATEMENTS HNC SOFTWARE INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share data)
ASSETS September 30, December 31, 1996 1995 ------------- ------------ (Unaudited) Current assets: Cash and cash equivalents $ 3,243 $ 20,195 Short-term investments 8,564 14,590 Billed trade accounts receivable, net 6,655 3,859 Unbilled accounts receivable, net 6,006 2,950 Current portion of deferred income taxes 2,154 1,702 Other current assets 2,130 1,561 ---------- ---------- Total current assets 28,752 44,857 Property and equipment, net 5,349 3,942 Deferred income taxes, less current portion 3,515 346 Other assets 1,147 843 Long-term investments 25,031 8,336 ---------- ---------- $ 63,794 $ 58,324 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,202 $ 796 Current portion of long term debt - 2,195 Accrued liabilities 2,456 2,730 Deferred revenue 2,755 2,101 Other current liabilities 479 548 ---------- ---------- Total current liabilities 6,892 8,370 Subordinated notes payable to stockholders - 1,000 Other non-current liabilities 586 659 ---------- ---------- Common stock, $0.001 par value - 50,000 and 40,000 shares authorized: 17,547 and 16,514 shares issued and outstanding, respectively 18 17 Paid-in capital 62,485 55,336 Unrealized (loss) gain on investments (12) 92 Accumulated deficit (6,175) (7,150) ---------- ---------- Total stockholders' equity 56,316 48,295 ---------- ---------- $ 63,794 $ 58,324 ========== ==========
See accompanying notes to consolidated financial statements. 3 4 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended -------------------------------------- -------------------------------------- September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995 ------------------ ------------------ ------------------ ------------------ Revenues: Software license and installation $ 9,561 $ 5,926 $ 22,609 $ 15,152 Contracts and other 2,784 2,347 8,814 6,547 --------- --------- --------- ---------- Total revenues 12,345 8,273 31,423 21,699 --------- --------- --------- ---------- Operating expenses: Software license and installation 2,412 1,379 6,711 3,893 Contracts and other 1,860 1,797 5,869 4,877 Research and development 2,573 1,683 6,892 4,485 Sales and marketing 2,365 1,633 6,488 4,421 General and administrative 1,611 998 4,000 2,560 --------- --------- --------- ---------- Total operating expenses 10,821 7,490 29,960 20,236 --------- --------- --------- ---------- Operating income 1,524 783 1,463 1,463 Other income, net 371 209 1,203 143 --------- --------- --------- ---------- Income before income tax provision (benefit) 1,895 992 2,666 1,606 Income tax provision (benefit) 516 (1,545) 1,691 (1,145) --------- --------- --------- ---------- Net income $ 1,379 $ 2,537 $ 975 $ 2,751 ========= ========= ========= ========== Net income per share $ 0.07 $ 0.15 $ 0.05 ========= ========= ========= Pro forma net income per share $ 0.18 ========== Shares used in computing net income per share 18,932 17,239 18,904 ========= ========= ========= Shares used in computing pro forma net income per share 15,590 ==========
See accompanying notes to consolidated financial statements. 4 5 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended ----------------------------------------------- September 30, 1996 September 30, 1995 -------------------- --------------------- Cash flows from operating activities: Net Income $ 975 $ 2,751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,679 856 Changes in assets and liabilities: Billed accounts receivable, net (2,796) (997) Unbilled accounts receivable (3,056) (64) Other assets (1,002) (560) Deferred tax assets 1,656 (1,246) Accounts payable 406 69 Accrued liabilities (274) 916 Deferred revenue 654 1,149 Other liabilities (86) 28 -------- -------- Net cash (used in) provided by operating activities (1,844) 2,902 -------- -------- Cash flows from investing activities: Purchases of investments (21,437) (13,352) Maturities of investments 6,904 1,182 Proceeds from sale of investments 3,707 -- Acquisitions of property and equipment (2,592) (1,319) -------- -------- Net cash used in investing activities (13,418) (13,489) -------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock 1,924 15,123 Charges against issuance of common stock -- (476) Proceeds from notes payable to stockholders -- 750 Proceeds under revolving line of credit agreement 309 840 Proceeds from bank notes payable 1,999 -- Repayment of notes payable to stockholders (1,000) -- Repayment under revolving line of credit agreement (2,504) (255) Repayments of bank notes payable (1,999) (687) Repayment of capital lease obligations (419) (353) -------- -------- Net cash (used in) provided by financing activities (1,690) 14,942 -------- -------- Net (decrease) increase in cash and cash equivalents (16,952) 4,355 Cash and cash equivalents at beginning of period 20,195 5,532 -------- -------- Cash and cash equivalents at end of period $ 3,243 $ 9,887 ======== ======== Supplemental cash flow disclosure: Unrealized tax benefit from stock option plans $ 5,277 $ -- ======== ======== Capital lease purchases $ 363 $ 356 ======== ======== Interest paid $ 409 $ 393 ======== ======== Income taxes paid $ 50 $ 112 ======== ======== Accretion of dividends on mandatorily redeemable convertible preferred stock $ -- $ 348 ======== ========
See accompanying notes to consolidated financial statements. 5 6 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- Note I GENERAL In management's opinion, the accompanying unaudited consolidated financial statements for HNC Software Inc. (the "Company") for the three months and nine months ended September 30, 1996 and 1995 have been prepared in accordance with generally accepted accounting principles for interim financial statements and include all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of its financial position, results of operations, and cash flows for such periods. However, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All such financial statements are unaudited except the December 31, 1995 balance sheet. This report and the accompanying unaudited and audited financial statements should be read in conjunction with the Company's audited financial statements and notes thereto presented in its 1995 Annual Report for fiscal year ended December 31, 1995 and the Form 8-K filed on October 14, 1996. Footnotes which would substantially duplicate the disclosures in the Company's audited financial statements for Fiscal Year 1995 contained in the 1995 Annual Report for fiscal year ended December 31, 1995 and the Form 8-K filed on October 14, have been omitted. The interim financial information herein is not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 1996. Note 2 BASIS OF PRESENTATION The consolidated financial statements and related notes give retroactive effect to the August 30, 1996 merger pursuant to which the Company acquired Risk Data Corporation ("RDC"), for all periods presented. The Company's acquisition of RDC was accounted for as a pooling of interests. Accordingly, the consolidated balance sheet as of September 30, 1996 and December 31, 1995 include the accounts of RDC as of September 30, 1996 and December 31, 1995, respectively, and the consolidated statement of income for the three and nine month periods ended September 30, 1996 and 1995 and the statement of cash flows for each of the nine month periods ended September 30, 1996 and 1995 include the results of RDC for the periods then ended. No adjustments to conform accounting methods were required. Certain amounts have been reclassified with regard to presentation of the financial information of the two companies. 6 7 Note 3 STOCK SPLIT On March 5, 1996, the Company announced that its Board of Directors approved a two-for-one stock split effected in the form of a common stock dividend. This stock dividend was paid to the corporation's stockholders of record as of the close of business on March 18, 1996. Such stockholders of record received stock certificates representing one additional share of HNC Software Inc. common stock for each outstanding share of common stock then held. Distribution of shares issued pursuant to the stock dividend occurred on April 3, 1996. All references in the accompanying interim financial information to share and per share amounts have been adjusted to give retroactive effect to the stock split. Note 4 ACQUISITION On August 30, 1996, the Company completed its acquisition of Risk Data Corporation ("RDC") pursuant to a merger that resulted in RDC becoming a wholly-owned subsidiary of the Company (the "Merger"). The Merger has been accounted for as a pooling of interests. Pursuant to the Merger, the outstanding shares of RDC's Common and Preferred Stock were converted into a total of approximately 1,891,456 shares of the Company's Common Stock, and RDC's outstanding stock options were converted into options to purchase an aggregate of 248,504 shares of the Company's Common Stock. Pursuant to the terms of the Plan, the Company, RDC, the shareholders of RDC and an escrow agent entered into an escrow agreement, pursuant to which 8.75% of the shares of HNC Common Stock that were issued in the Merger to the RDC shareholders were placed in an escrow account to secure and collateralize certain indemnification obligations of RDC to HNC. In addition, the Company and RDC's former shareholders have entered into a Registration Rights Agreement, pursuant to which HNC granted certain registration rights on Form S-3 in connection with the resale of shares of the Company's Common Stock issued in the Merger. Note 5 PENDING ACQUISITION On October 25, 1996, the Company announced that it had signed a definitive agreement to acquire Retek Distribution Corporation ("Retek") including its Minneapolis-based subsidiary, Retek Information Systems, Inc. Retek develops and sells merchandise management software to the retail industry worldwide. This transaction has not yet been consummated and remains subject to the satisfaction of certain conditions, including qualification of the transaction for `pooling of interests' accounting treatment. Under the currently proposed terms of this pending transaction, the consideration payable by the Company to acquire all Retek's stock and stock options would consist of an aggregate total of approximately 1,523,058 shares of the Company's Common Stock to be either issued outright for the exchange of Retek stock and/or upon the exercise of stock options to be issued in exchange for outstanding Retek stock options. 7 8 Note 6 NET INCOME PER SHARE Net income per share is computed based on the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the respective periods. Pro forma net income per share is computed based on the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the respective periods after giving retroactive effect to the conversion of all outstanding shares of the Company's preferred stock into 4,478,332 shares of common stock which occurred upon the closing of the Company's initial public offering on June 26, 1995. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock options granted since May 5, 1994 and through June 20, 1995 have been included as outstanding for all periods prior to June 20, 1995 using the treasury stock method. Note 7 STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based Compensation." FAS 123 was adopted by the Company as required for its fiscal 1996 financial statements and did not have a material effect on the Company's financial position or results of operations. The Company continues to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures of net income and earnings per share in its annual financial statements as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense. Note 8 LINE OF CREDIT In July 1996, the Company renewed it's Loan and Security Agreement to provide for a $5 million revolving line of credit through July 10, 1997. The line bears interest at the bank's prime rate or the LIBOR rate equivalent. The agreement requires that the Company maintain certain financial ratios and levels of working capital, tangible net worth and profitability and also restricts the Company's ability to pay cash dividends without the bank's consent. 8 9 HNC SOFTWARE INC. - -------------------------------------------------------------------------------- Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED This Item 2 contains certain forward-looking statements regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitation: the Company's ability to successfully develop new products for new markets; the Company's loss of a large customer or key personnel; the Company's ability to manage growth and to successfully integrate acquired businesses; the Company's inability to secure new government contracts for technology development; the impact of competition on the Company's revenues, market share or ability to maintain its premium usage-based pricing terms and to generate recurring revenue; the availability to the Company, at reasonable cost, of data required to operate or update its intelligent decision software products; changes in law or regulatory requirements that adversely affect or preclude customers from using the Company's products for certain applications; delays in the Company's introduction of new products; and failure by the Company to keep pace with emerging technologies. Accordingly, no assurances can be given that events or results mentioned in any such forward-looking statements will in fact occur. When used in this discussion, words such as "believes", "anticipates", "expects", "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. 9 10 THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 REVENUES. Revenues for the three months ended September 30, 1996 were $12.3 million, an increase of 49% over revenues of $8.3 million for the same period in the prior year. This increase was primarily due to greater software license and installation revenues which were $9.6 million for the quarter ended September 30, 1996, an increase of 61% from $5.9 million for the comparable quarter in 1995. This increase in software license and installation revenues resulted primarily from an increase in revenues from the Company's MIRA worker's compensation reserves loss product (which was acquired in the acquisition of RDC), the Falcon credit card fraud detection product and to a lesser extent from the SkuPLAN, the demand forecasting product for the retail market, the Colleague automated mortgage underwriting product and the AREAS property valuation product. The Company's software license and installation revenues are derived from monthly license fees, annual license fees, perpetual license fees, annual maintenance fees and installation fees. The Company typically licenses its products for a monthly or annual usage fee under long-term contracts that include software licenses, decision model updates, application consulting, on-line or on-site support and maintenance. Contracts and other revenues for the three months ended September 30, 1996 were $2.8 million, an increase of 19% as compared to $2.3 million for the same period in the prior year. The increase in contracts and other revenues was due primarily to increased commercial contract revenues for new product pilots including Eagle (a merchant risk management system), ProfitMax (a credit card profitability management system), Capstone (a credit card application processing system) and Falcon Sentry (an application fraud detection product). Contracts and other revenues are derived primarily from development and consulting contracts with commercial customers and research contracts with the United States Government. Revenues from contract services are generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. All revenues for new product pilots (i.e., the first production installation of a product) are reported as contract revenues. In 1996 the Company has a significant number of new product development projects and new product pilot installations in process which it expects to begin shipping in production versions primarily in 1997. However, there can be no assurance that any of these product development projects or pilot installations will be successful or be completed within anticipated time schedules or that the customers who serve as pilot installation sites for these new products will be satisfied with these products or agree to license them. If the Company's new product development efforts are unsuccessful, are not completed on a timely basis, or are not well received by pilot customers, the Company may be compelled to delay or entirely discontinue the release of production versions of these products, which would have a material adverse effect on the Company's results of operations. 10 11 The Company's success depends upon its ability to enter new markets by developing new products on a timely and cost-effective basis. The Company's products often require customer data for decision model development and system installation. As a result, completion of new products may be delayed while the Company extracts sufficient amounts of statistically relevant data and develops the models. During this development process, the Company relies on its potential customers in the new market to provide data and to help train Company personnel in the use, relevance and meaning of the data in the specific industry. These relationships also assist the Company in establishing presence and credibility in the new market. There can be no assurance that these potential customers and other companies, most of which have significantly greater financial and marketing resources than the Company, will not compete with the Company in the future or will not otherwise discontinue their relationships with or support of the Company, either during development of the Company's products or thereafter. The Company's success will depend upon its ability to maintain competitive technologies, enhance its current products and develop new products in a timely and cost-effective manner that meet changing market conditions, including evolving customer needs, new competitive product offerings, emerging industry standards and changing technology. The sales cycle associated with the purchase of the Company's products is typically lengthy and subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, over which the Company has little or no control. SOFTWARE LICENSE AND INSTALLATION EXPENSES. Software license and installation expense primarily consists of the Company's expenses for personnel engaged in installation and support and related costs. Software license and installation expenses for the third quarter of 1996 were $2.4 million and constituted 25% of software and installation revenues for the quarter, whereas such expenses were $1.4 million and represented 23% of software and installation revenues in the third quarter of 1995. The primary reason for the increase in these expenses was increased staffing and associated costs in client services to support the increased volume of business. CONTRACTS AND OTHER EXPENSES. Contracts and other expenses consist primarily of personnel-related expenses associated with the Company's performance of such contracts. Contracts and other expenses in the third quarter of 1996 were $1.9 million or 67% of contracts and other revenues as compared to $1.8 million or 77% of such revenues in the third quarter of 1995. The reduction in these expenses as a percent of revenues is due to higher pricing on pilot contracts. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the third quarter of 1996 were $2.6 million and 21% of total revenues compared to $1.7 million and 22% of total revenues in the third quarter of the prior year. The increase in these expenses was due primarily to increases in staffing and related costs to support 11 12 increased new product development activities, including the expenses for the Company's new text analysis products, which the Company began commercial development of in January 1996. SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.4 million or 19% of total revenues in the third quarter of 1996 compared to $1.6 million and 20% of total revenues in the third quarter of 1995. The increase in sales and marketing expenses was due primarily to increased staffing and product promotion activities to support higher sales volumes and new product introductions, including the Company's new text analysis products. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $1.6 million and 13% of total revenues in the third quarter of 1996, compared to $998,000 and 12% of total revenues in the prior year. General and administrative expenses in the third quarter of 1996 included $544,000 of costs associated with the acquisition of Risk Data Corporation. Additionally, the increase in these costs was due to increased staffing and related expenses to support higher levels of sales and development activity of the Company. OPERATING INCOME. The above factors resulted in operating income of $1.5 million and 12% of total revenues for the third quarter of 1996, compared to operating income of $783,000 and 9% of total revenues in the same quarter of the prior year. During the third quarter of 1996, RDC moved to a profitability position due primarily to increased revenue performance. The Company's quarterly revenues and operating results have varied significantly in the past and may do so in the future. Although to date a significant portion of the Company's revenues has come from monthly usage fees under long-term contracts, there can be no assurance that the Company will continue to realize such recurring revenues or that customers under such contracts would not seek to cancel such contracts if the Company's products were not competitive or did not achieve cost effective results. A significant portion of the Company's business has been derived from substantial orders placed by large organizations, and the timing of such orders has caused material fluctuations in the Company's operating results. The Company's expense levels are based in part on its expectations regarding future revenues and in the short term are fixed to a large extent. Operating results also may fluctuate due to factors such as the demand for the Company's products, product life cycles, the introduction and acceptance of new products and product enhancements by the Company or its competitors, changes in the mix of distribution channels through which the Company's products are offered, changes in the level of operating expenses, customer order deferrals in anticipation of new products, competitive conditions in the industry and economic conditions generally or in various industry segments. The Company has continued to invest in research and development and sales and marketing in an effort to better service its customers and markets. The Company expects to continue to increase absolute dollar spending on both research and development and sales and marketing in the future. 12 13 OTHER INCOME, NET. Other income for the third quarter of 1996 was $371,000 compared to $209,000 in the third quarter of the prior year. The increase was due to increased interest income in 1996 from higher cash and investment balances, which consisted primarily of the proceeds from the Company's initial public offering in June, 1995 and secondary public offering in December, 1995. INCOME BEFORE INCOME TAX PROVISION. The resulting income before income tax provision for the third quarter of 1996 was $1.9 million or 15% of total revenues, compared to income before tax provision of $992,000 or 12% of total revenues for the comparable quarter of 1995. INCOME TAX PROVISION (BENEFIT). The income tax provision of $516,000 in the third quarter of 1996 is based on the income of the Company excluding RDC as they had unutilized net operating loss carryforwards at September 30, 1996 and as a result recorded no tax provision. The income tax benefit of $1.5 million in the third quarter of 1995 was attributable to the recognition of a $1.7 million deferred tax asset based on anticipated future utilization of the Company's net operating loss carryforwards and research and development credit carryforwards. NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 REVENUES. Revenues for the nine months ended September 30, 1996 were $31.4 million, an increase of 45% over revenues of $21.7 million for the same period in the prior year. This increase was primarily due to greater software license and installation revenues which were $22.6 million for the nine months ended September 30, 1996, an increase of 49% from $15.2 million for the comparable period in 1995. This increase in software license and installation revenues resulted primarily from an increase in revenues from the Company's MIRA workers' compensation loss reserves product (which was acquired in the acquisition of RDC), and the Falcon credit card fraud detection product, and to a lesser extent from SkuPLAN, the demand forecasting product for the retail market, the Colleague automated mortgage underwriting product and the AREAS property valuation product. Contracts and other revenues for the nine months ended September 30, 1996 were $8.8 million, compared to $6.5 million for the same period in the prior year, a 35% increase. The increase in contracts and other revenues was due primarily to increased commercial contract revenues for new product pilots for Eagle (a merchant risk management system), ProfitMax (a credit card profitability management system) and Capstone (a credit card application processing system) and Falcon Sentry (an application fraud detection product). SOFTWARE LICENSE AND INSTALLATION EXPENSES. Software license and installation expense primarily consists of the Company's expenses for personnel engaged in installation and support and related costs. Software license and installation expenses for the first nine months of 1996 were $6.7 million and constituted 30% of software and installation revenues for the period, whereas such expenses were $3.9 million and 13 14 represented 26% of software and installation revenues in the first nine months of 1995. The primary reason for the increase in these expenses was increased staffing and associated costs in client services to support the increased volume of business. Contributing to the increase in the current period was the increased volume of new products, which generally have lower margins as compared to the Falcon product. In 1996 the Company has a significant number of new product development projects in process which it expects to begin installing in a production phase primarily in 1997. However, there can be no assurance that any of these product development projects or pilot installations will be successful, or be completed within anticipated time schedules, or that the customers who serve as pilot installation sites for these new products will be satisfied with these products or agree to license them. If the Company's new product development efforts are unsuccessful, are not completed on a timely basis, or are not well received by pilot customers, the Company may be compelled to delay or entirely discontinue the release of production versions of these products, which would have a material adverse effect on the Company's results of operations. CONTRACTS AND OTHER EXPENSES. Contracts and other expenses consist primarily of personnel-related expenses. Contracts and other expenses during the first nine months of 1996 were $5.9 million or 67% of contracts and other revenues as compared to $4.9 million or 74% of such revenues in the first nine months of 1995. The reduction in expenses as a percent of revenues is due to higher pricing on pilot contracts. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the first nine months of 1996 were $6.9 million and 22% of total revenues compared to $4.4 million and 21% of total revenues in the first nine months of 1995. The increase in expenses was due primarily to increases in staffing and related costs to support increased new product development activities, including the Company's new text analysis products. SALES AND MARKETING EXPENSES. Sales and marketing expenses were $6.5 million or 21% of total revenues in the first nine months of 1996 compared to $4.4 million and 20% of total revenues in the first nine months of 1995. The increase in sales and marketing expenses was due primarily to increased staffing and product promotion activities to support higher sales volumes and new product introductions, including the Company's new text analysis products. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $4.0 million and 13% of total revenues in the first nine months of 1996, compared to $2.6 million and 12% of total revenues in the prior year. The primary reason for the increase in these costs was increased staffing and related expenses to support higher levels of activity of the Company and includes costs of $99,000 associated with the terminated acquisition of CRMA and costs of $544,000 incurred with the acquisition of Risk Data Corporation. 14 15 OPERATING INCOME. The above factors resulted in operating income of $1.5 million that was 5% of total revenues for the first nine months of 1996, compared to an operating income of $1.5 million representing 7% of total revenues in the same period of the prior year. OTHER INCOME, NET. Other income for the first nine months of 1996 was $1.2 million compared to $143,000 in the first nine months of the prior year. The increase was due to increased interest income in 1996 from higher cash and investment balances which consisted primarily of the proceeds from the Company's initial public offering in June, 1995 and secondary public offering in December, 1995. INCOME BEFORE INCOME TAX PROVISION. The resulting income before income tax provision for the first nine months of 1996 was $2.7 million or 8% of total revenues, compared to income before tax provision of $1.6 million or 7% of total revenues for the comparable quarter of 1995. INCOME TAX PROVISION (BENEFIT). The income tax provision of $1.7 million for the nine months ended September 30, 1996 is based on the income of the Company excluding RDC as they had unutilized net operating loss carryforwards at September 30, 1996 and as a result recorded no tax provision. The income tax benefit of $1.1 million for the nine months ended September 30, 1995 was attributable to the recognition of a $1.7 million deferred tax asset on September 30, 1995 for the Company's remaining net operating loss carryforwards and research and development credit carryforwards. LIQUIDITY AND CAPITAL RESOURCES FINANCING ACTIVITIES During the nine months ended September 30, 1996 the Company used $1.7 million in cash from financing activities primarily as a result of the repayment of all the outstanding debt of Risk Data Corporation. At September 30, 1996 the Company had $36.8 million in cash, cash equivalents and investments as compared to $41.9 million at June 30, 1996. The decrease is primarily attributable to the repayment of RDC's debt of approximately $4.9 million. During July 1996, the Company renewed it's revolving line of credit to provide for maximum borrowings of up to $5 million. See Note 8 to the Notes to Consolidated Financial Statements included in this report. Management believes that the Company's cash and investments and cash generated from operations will be adequate for the Company's cash requirements for the next twelve months. 15 16 OPERATING ACTIVITIES Cash used by operating activities for the nine months ended September 30, 1996 was $1.8 million as compared to cash provided by operations of $2.9 million for the first nine months of the prior year. The increase in cash used by operating activities was due primarily to increased billed accounts receivable balances due to increased revenues and an increase in the average days outstanding of these higher receivable balances. The days outstanding have increased largely because of the increase in new product pilot contracts for which customers generally pay more slowly. The increase in unbilled receivables is attributable to a significant increase in the number of license renewals and new licenses relating to the MIRA product. The minimum license fee is recognized as revenue on the date of renewal or installation and billed at contractually specified dates over the minimum noncancelable term, not to exceed one year. INVESTING ACTIVITIES Cash used in investing activities was $13.4 million for nine months ended September 30, 1996. This was due to net purchases of short and long term investments of $10.8 million and acquisitions of property and equipment, primarily computer equipment of approximately $2.1 million. 16 17 PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as exhibits with this Report: Exhibit 2.01 Agreement and Plan of Reorganization dated as of July 19, 1996 by and among the Company, HNC Merger Corp. and Risk Data Corporation, as amended.(1) Exhibit 2.02 Agreement of Merger dated as of August 30, 1996 by and between HNC Merger Corp. and Risk Data Corporation.(1) Exhibit 4.01 Registration Rights Agreement dated as of August 30, 1996 by and among the Company and the former shareholders of Risk Data Corporation.(1) Exhibit 10.01 Amended Loan and Security Agreement dated as of July 10, 1996, between the Company and Silicon Valley Bank. Exhibit 11.01 Statement Regarding Computation of Pro Forma Per Share Earnings Exhibit 27.01 Financial Data Schedule (b) Reports on Form 8-K Report on Form 8-K filed on September 12, 1996 with respect to an event dated August 30, 1996 (the acquisition of Risk Data Corporation). Report on Form 8-K/A-1 filed on October 14, 1996 with respect to an event dated August 30, 1996 (financial requirements for the acquisition of Risk Data Corporation). (1) Incorporated by reference from the Company's Report on Form 8-K filed on September 12, 1996 with respect to an event dated August 30, 1996 (the acquisition of Risk Data Corporation). 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. HNC SOFTWARE INC. Date: November 13, 1996 By: /s/ Raymond V. Thomas --------------------- Raymond V. Thomas Vice President Finance & Administration and Chief Financial Officer (for Registrant as duly authorized officer and as Principal Financial and Accounting Officer) 18 19 INDEX TO EXHIBITS The following exhibits are filed with this Report: Exhibit 2.01 Agreement and Plan of Reorganization dated as of July 19, 1996 by and among the Company, HNC Merger Corp. and Risk Data Corporation, as amended.(1) Exhibit 2.02 Agreement of Merger dated as of August 30, 1996 by and between HNC Merger Corp. and Risk Data Corporation.(1) Exhibit 4.01 Registration Rights Agreement dated as of August 30, 1996 by and among the Company and the former shareholders of Risk Data Corporation.(1) Exhibit 10.01 Amended Loan and Security Agreement dated as of July 10, 1996, between the Company and Silicon Valley Bank. Exhibit 11.01 Statement Regarding Computation of Per Share Earnings Exhibit 27.01 Financial Data Schedule - --------------- (1) Incorporated by reference from the Company's Report on Form 8-K filed on September 12, 1996 with respect to an event dated August 30, 1996 (the acquisition of Risk Data Corporation). 19 EX-10.01 2 EXHIBIT 10.01 1 Exhibit 10.01 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT BORROWER: HNC SOFTWARE, INC. ADDRESS: 5930 CORNERSTONE COURT WEST SAN DIEGO, CALIFORNIA 92121-1718 DATE: JULY 10, 1996 THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK ("Silicon") and the borrower named above (the "Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated September 23, 1992, as amended by that Amendment to Loan Agreement dated October 28, 1993, and as amended by that Amendment to Loan Agreement dated July 21, 1994, and as amended by that Amendment to Loan Agreement dated May 26, 1995, and as amended by that Amendment to Loan Agreement dated August 31, 1995, and as amended by that Amendment to Loan Agreement dated May 5, 1996 and as otherwise amended (the "Loan Agreement"), as follows, effective as of the date hereof. (Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. AMENDED SECTION 2.2. Section 2.2 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "2.2 COLLATERAL. The term "Collateral" as used in this Agreement shall mean and include the following property of Borrower, whether now owned or hereafter acquired: (a) All accounts, contract rights, chattel paper, letters of credit, documents, securities, money, and instruments, and all other obligations now or in the future owning to the Borrower; (b) All inventory, goods, merchandise, materials, raw materials, work in process, finished goods, farm products, advertising, packaging and shipping materials, supplies, and all other tangible personal property which is held for sale or lease or furnished under contracts of service or consumed in the Borrower's business, and all warehouse receipts and other documents; and (c) All equipment, including without limitation all machinery, fixtures, trade fixtures, vehicles, furnishings, furniture, materials, tools, machine tools, office equipment, computers and peripheral devices, appliances, apparatus, parts, dies and jigs; (d) All general intangibles including, but not limited to, deposit accounts, goodwill, names, trade names, trademarks and 2 the goodwill of the business symbolized thereby, trade secrets, drawings, blueprints, customer lists, patents, patent applications, copyrights, security deposits, loan commitment fees, federal, state and local tax refunds and claims, all rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Silicon, all rights to purchase or sell real or personal property, all rights as a licensor or licensee of any kind, all royalties, licenses, processes, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation credit, liability, property and other insurance), and all other rights, privileges and franchises of every kind; (e) All books and records, whether stored on computers or otherwise maintained; and (f) All substitutions, additions and accessions to any of the foregoing, and all products, proceeds and insurance proceeds of the foregoing, and all guaranties of and security for the foregoing; and all books and records relating to any of the foregoing." 2. NEGATIVE PLEDGE. Borrower covenants and agrees, without limitation of any other term or provision hereof, not to cause or otherwise permit to exist any liens or encumbrances regarding the Collateral, other than Permitted Liens. 3. AMENDED SECTION 3.7. Section 3.7 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now in the future will completely and accurately reflect the financial condition of the Borrower, at the times and for the periods therein stated. Since the last date covered by any such statement, there has been no material adverse change in the financial condition or business of the Borrower. The Borrower is now and will continue to be solvent. The Borrower will provide Silicon: (i) within 30 days after the end of each fiscal quarter, a quarterly financial statement prepared by the Borrower, and a Compliance Certificate in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of the Borrower, certifying that throughout such quarter the Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth on the Schedule and such other information as Silicon shall reasonably request; (ii) within 3 days after the earlier of the date the Borrower's report 10-Q is filed or is required to be filed with the Securities and Exchange Commission, such 10-Q report; (iii) within 120 days following the end of the Borrower's fiscal year, complete annual financial statements, certified by independent certified public accountants acceptable to Silicon; and (iv) within 3 days after the earlier of the date the Borrower's report 10-K is filed or is required to be filed with the Securities Exchange Commission, such 10-K report." 4. AMENDED SECTION 4.5. Section 4.5 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times, and upon one business day notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the 3 right to audit and copy the Borrower's accounting books and records and Borrower's books and records relating to the Collateral. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing audits shall be at Silicon's expense. Notwithstanding the foregoing, after the occurrence of an Event of Default all audits shall be at the Borrower's expense." 5. AMENDED SCHEDULE TO LOAN AGREEMENT. The Schedule to Loan Agreement is hereby deleted and replaced with the Schedule to Loan Agreement attached hereto. 6. FACILITY FEE. Borrower shall pay to Silicon concurrently herewith an additional facility fee in the amount of $2,500 which shall be in addition to all interest and all other sums due Silicon and which shall not be refundable. 7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and the Borrower, and the other written documents and agreements between Silicon and the Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties and respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and the Borrower shall continue in full force and effect and the same are hereby ratified and confirmed. BORROWER: HNC SOFTWARE, INC. BY__________________________ TITLE: BY__________________________ TITLE SILICON: SILICON VALLEY BANK BY__________________________ TITLE________________________ 4 SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: HNC SOFTWARE, INC. ADDRESS: 5930 CORNERSTONE COURT WEST SAN DIEGO, CALIFORNIA 92121-1718 DATE: JULY 10, 1996 CREDIT LIMIT (Section 1.1) An amount not to exceed $5,000,000 at any one time outstanding (the"Revolving Loans" and the loan facility is referred to as the "Revolving Loan Facility"). LETTER OF CREDIT SUBLIMIT: Silicon, in its reasonable discretion, will from time to time during the term of this Agreement issue letters of credit for the account of the Borrower ("Letters of Credit"), in an aggregate amount at any one time outstanding not to exceed $1,000,000, upon the request of the Borrower, provided that, on the date the Letters of Credit are to be issued, Borrower has available to it Accounts Loans in an amount equal to or greater than the face amount of the Letters of Credit to be issued. Prior to the issuance of any Letters of Credit, Borrower shall execute and deliver to Silicon Applications for Letters of Credit and such other documentation as Silicon shall specify (the "Letter of Credit Documentation"). Fees for the Letters of Credit shall be as provided in the Letter of Credit Documentation. Letters of Credit may have a maturity date up to twelve months beyond the Maturity Date in effect from time to time, provided that if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding letters of credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to the face amount of all such letters of credit plus all interest, fees and cost due or to become due in connection therewith, to secure all of the Obligations relating to said letters of credit, pursuant to Silicon's then standard form cash pledge agreement. The Credit Limit set forth above regarding the Revolving Loan Facility and the Loans available thereunder at any time shall be reduced by the face amount of Letters of Credit from time to time outstanding. 5 FOREIGN EXCHANGE CONTRACT SUBLIMIT Up to $500,000 (the "Contract Limit") may be utilized for spot and future foreign exchange contracts (the "Exchange contracts"). The Credit Limit regarding the Revolving Loan Facility available at any time shall be reduced by the following amounts (the "Foreign Exchange Reserve") on each day (the "Determination Date"): (i) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed more than two business days from the Determination Date, 10% of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two business days after the Determination Date, 100% of the gross amount of the Exchange Contracts. In lieu of the Foreign Exchange Reserve for 100% of the gross amount of any Exchange Contract, the Borrower may request that Silicon debit the Borrower's bank account with Silicon for such amount, provided Borrower has immediately available funds in such amount in its bank account. Silicon may, in its discretion, terminate the Exchange Contracts at any time (a) that an Event of Default occurs or (b) that there is not sufficient availability under the Credit Limit and Borrower does not have available funds in its bank account to satisfy the Foreign Exchange Reserve. If either Silicon or Borrower terminates the Exchange Contracts, and without limitation of the FX Indemnity Provisions (as referred to below), Borrower agrees to reimburse Silicon for any and all fees, costs and expenses relating thereto or arising in connection therewith. Borrower shall not permit the total gross amount of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two business day period to be more than $250,000 (the "Settlement Limit"), nor shall Borrower permit the total gross amount of all Exchange Contracts to which Borrower is a party, outstanding at any one time, to exceed the Contract Limit. Notwithstanding the above, however, the amount which may be settled in any two (2) business day period may, in Silicon's sole discretion, be increased above the Settlement Limit up to, but in no event to exceed, the amount of the Contract Limit (the "Discretionary Settlement Amount") under either of the following circumstances (the "Discretionary Settlement Circumstances"): (i) if there is sufficient availability under the Credit Limit regarding the Revolving Loan Facility in the amount of the Foreign Exchange Reserve as of each Determination Date, provided that Silicon in advance 6 shall reserve the full amount of the Foreign Exchange Reserve against the Credit Limit regarding the Revolving Loan Facility; or (ii) if there is insufficient availability under the Credit Limit regarding the Revolving Loan Facility as to settlements within any two (2) business day period if Silicon is able to: (A) verify good funds overseas prior to crediting Borrower's deposit account with Silicon (in the case of Borrower's sale of foreign currency); or (B) debit Borrower's deposit account with Silicon prior to delivering foreign currency overseas (in the case of Borrower's purchase of foreign currency); Provided that it is expressly understood that Silicon's willingness to adopt the Discretionary Settlement Amount is a matter of Silicon's sole discretion and the existence of the Discretionary Settlement Circumstances in no way means or implies that Silicon shall be obligated to permit the Borrower to exceed the Settlement Limit in any two business day period. In the case of Borrower's purchase of foreign currency. Borrower in advance shall instruct Silicon upon settlement either to treat the settlement amount as an advance under the Credit Limit regarding the Revolving Loan Facility, or to debit Borrower's account for the amount settled. The Borrower shall execute all standard form applications and agreements of Silicon in connection with the Exchange Contracts, and without limiting any of the terms of such applications and agreements, the Borrower will pay all standard fees and charges of Silicon in connection with the Exchange Contracts. Without limiting any of the other terms of this Loan Agreement or any such standard form applications and agreements of Silicon, Borrower agrees to indemnify Silicon and hold it harmless, from and against any and all claims, debts, liabilities, demands, obligations, actions, costs and expenses (including, without limitation, attorneys' fees of counsel of Silicon's choice), of every nature and description, which it may sustain or incur, based upon, arising out of, or in any way relating to any of the Exchange Contracts or any transactions relating thereto or contemplated thereby (collectively referred to as the "FX Indemnity Provisions"). The Exchange Contracts shall have maturity dates no later than the Maturity Date INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in effect from time to time. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from 7 time to time by Silicon as its "prime rate" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. FACILITY FEE (Section 1.3): Per the Amendment to Loan Agreement of even date herewith. MATURITY DATE (Section 5.1): One year from the date hereof. PRIOR NAMES OF BORROWER (Section 3.2): HECHT-NIELSEN NEUROCOMPUTER CORPORATION TRADE NAMES OF BORROWER (Section 3.2): NONE OTHER LOCATIONS AND ADDRESSES (Section 3.3): 7979 LEESBURG PIKE, SUITE 900, FALLS CHURCH, VA 22043; 124 MT. AUBURN ST., SUITE 200, CAMBRIDGE, MA 02138 MATERIAL ADVERSE LITIGATION (Section 3.10): NONE NEGATIVE COVENANTS-EXCEPTIONS (Section 4.6): Without Silicon's prior written consent, Borrower may do the following, provided that, after giving effect thereto, no Event of Default has occurred and no event has occurred which, with notice or passage of time or both, would constitute an Event of Default, and provided that the following are done in compliance with all applicable laws, rules and regulations: (i) repurchase shares of Borrower's stock pursuant to any employee stock purchase or benefit plan, provided that the total amount paid by Borrower for such stock does not exceed $100,000 in any fiscal year. FINANCIAL COVENANTS (Section 4.1): Borrower shall comply with all of the following covenants. Compliance shall be determined as of the end of each quarter, except as otherwise specifically provided below: QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to current liabilities of not less than 2.50 to 1. TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not less than $40,000,000. 8 DEBT TO TANGIBLE NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to tangible net worth of not more than 0.50 to 1. DEFINITIONS: "Current liabilities" shall have the meaning ascribed thereto in accordance with generally accepted accounting principles. "Tangible net worth" means the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, excluding however all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. "Quick Assets" means cash on hand or on deposit in banks, readily marketable securities issued by the United States, readily marketable commercial paper rated "A-1" by Standard & Poor's Corporation (or a similar rating by a similar rating organization), certificates of deposit and banker's acceptances, and accounts receivable (net of allowance for doubtful accounts). SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do not include indebtedness which is subordinated to the indebtedness to Silicon under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon. OTHER COVENANTS (Section 4.1): Borrower shall at all times comply with all of the following additional covenants: 1. Banking Relationship. Borrower shall at all times maintain its primary banking relationship with Silicon. 2. Indebtedness. Without limiting any of the foregoing terms or provisions of this Agreement, Borrower shall not in the future incur indebtedness for borrowed money, except for (i) indebtedness to Silicon, and (ii) indebtedness incurred in the future for the purchase price of or lease of equipment in an aggregate amount not exceeding $250,000 at any time outstanding. 3. Additional Event of Default. Without limitation of the Events of Default as set forth herein, any material adverse change in the assets, business, or prospects of the Borrower as compared to the date hereof, shall constitute an Event of Default under this Loan Agreement. 9 BORROWER: HNC SOFTWARE, INC. BY__________________________ TITLE: BY__________________________ TITLE: SILICON: SILICON VALLEY BANK BY__________________________ TITLE________________________ EX-11.01 3 EXHIBIT 11.01 1 EXHIBIT 11.01 HNC SOFTWARE INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1996 1995 ------------------------ -------- ------------------------ ------- PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED -------- ------------- -------- ------------- NET INCOME (LOSS) $ 1,379 $ 1,379 $ 2,537 $ 975 $ 975 $ 2,751 ======= ======= ======= ======== ======== ======= SHARES (1) Weighted average common shares outstanding 17,478 17,478 15,269 17,184 17,184 4,681 Weighted average common stock options and warrants as determined by application of the treasury stock method (2) 1,454 1,593 1,970 1,720 1,797 1,952 Weighted average preferred shares outstanding assuming conversion to common stock - - - - - 8,957 ------- ------- ------- -------- -------- ------- Weighted average common and common equivalent shares outstanding 18,932 19,071 17,239 18,904 18,981 ======= ====== ======= ======== ======== Pro forma weighted average common and common equivalent shares outstanding 15,590 ======= NET INCOME PER SHARE OF COMMON STOCK $ 0.07 $ 0.07 $ 0.15 $ 0.05 $ 0.05 ======= ======= ======= ======== ======== PRO FORMA NET INCOME PER SHARE OF COMMON STOCK $ 0.18 =======
(1) All share and per share amounts have been adjusted to give retroactive effect to the stock split, which occurred on April 3, 1996. (2) Includes an adjustment for options pursuant to SAB No. 83 using the treasury stock method at the initial public offering price of $7.00 per share for all periods presented prior to or including the Company's public offering date of June 26, 1995. 20 EX-27 4 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1995 JAN-01-1996 SEP-30-1996 3,243 8,564 13,211 (550) 632 29,140 9,249 (3,900) 63,794 6,892 0 0 0 18 56,298 63,794 31,423 31,423 12,580 12,580 0 0 439 2,666 1,691 975 0 0 0 975 .05 .05
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