<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 28, 1997
HNC SOFTWARE INC.
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(Exact name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-26146 33-0248788
------------------------ ---------------------------------------
(Commission File Number) (I.R.S. Employer Identification Number)
5930 Cornerstone Court West, San Diego, CA 92121
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(Address of Principal Executive Offices)
(619) 546-8877
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
CompReview, Inc. Acquisition
On November 28, 1997, HNC Software Inc., a Delaware corporation ("HNC"),
acquired all the stock of privately held CompReview, Inc., a California
corporation ("CompReview") in exchange for the issuance of 4,885,560 shares of
HNC common stock. All outstanding CompReview options were exchanged for options
to purchase 195,419 shares of HNC common stock. The acquisition was effected
through a statutory merger (the "Merger") in which FW1 Acquisition Corp., a
wholly-owned subsidiary of HNC ("Sub"), was merged into CompReview, with
CompReview surviving the Merger. As a result of the Merger, CompReview became a
wholly-owned subsidiary of HNC. The issuance of the shares of HNC common stock
and options to purchase HNC common stock to CompReview's stockholders and option
holders in the Merger was approved by HNC's stockholders at a special
stockholders' meeting held on November 25, 1997.
The Merger was consummated pursuant to an Agreement and Plan of
Reorganization dated as of July 14, 1997 (the "Plan") entered into by HNC, Sub,
CompReview and by Robert L. Kaaren and Mishel ("Michael") Munayyer, trustee of
the Michael Munayyer Trust dated August 11, 1995 (the "Munayyer Trust") and an
Agreement of Merger dated as of November 28, 1997 between Sub and CompReview.
Mr. Kaaren and Mr. Munayyer were CompReview's founders and directors and Mr.
Kaaren and the Munayyer Trust (the "CompReview Stockholders") were CompReview's
sole stockholders prior to the Merger. HNC intends to account for the
acquisition of CompReview as a "pooling of interests" transaction for financial
reporting purposes, and the Merger was structured to be a "tax-free"
reorganization for federal income tax purposes. The executive officers of
CompReview were not changed as a result of the Merger, except that Raymond V.
Thomas, HNC's Chief Financial Officer, has been appointed as CompReview's Chief
Financial Officer and Secretary.
CompReview, based in Costa Mesa, California, develops, markets and
supports CRLink, a software-based system that enables CompReview's customers to
manage and contain the medical costs of workers' compensation and automobile
accident insurance claims. CompReview's customers primarily consist of insurance
companies that provide workers' compensation or automobile accident insurance,
large employers who self-insure against workers' compensation claims, third
party administrators that administer such claims for insurers and managed care
companies that implement cost-containment strategies. To date, the vast majority
of CompReview's revenues have been derived from the workers' compensation
insurance field.
CRLink automates the review and analysis of medical bills related to
workers' compensation and automobile accident insurance claims by comparing
medical providers' charges against mandatory state workers' compensation fee
schedules (which impose limits on the amounts charged for workers' compensation
claims), against usual, customary and reasonable ("UCR") charges for the billed
services in the relevant geographic area and against preferred provider
organization ("PPO") contract fee rates. CRLink then automatically reprices and
reduces medical bills to conform them to state fee schedules, UCR rates and PPO
rates, as applicable, thus reducing reimbursement amounts. In addition to its
bill analysis and repricing functions, CRLink also includes tools that enable
insurers to manage the entire claims handling process, to centralize repricing
programs with PPO networks, to conduct utilization reviews and to generate
reports on a claim's status. Customers can also purchase add-on modules to
CRLink to expand its functions, including a module that enables insurance payors
to expand their coverage to new preferred provider organizations through a
provider organization database. CRLink is offered to customers either as a
licensed product used by the client internally, or as an outsourced service
provided by CompReview's own service bureau.
Under the terms of the Plan, the outstanding shares of CompReview common
stock and all options to purchase CompReview common stock that were outstanding
under CompReview's 1995 Stock Option Plan prior to the Merger ("CompReview
Options") were converted in the Merger into a total number of shares of HNC
Common Stock issued and subject to options to purchase HNC Common Stock ("HNC
Options") equal to the sum of (a) 5,000,000 shares of HNC common stock plus (b)
the number of shares of HNC Common Stock equal to the amount of CompReview's
retained
2
<PAGE> 3
earnings at October 31, 1997 (the last calendar month end prior to the closing
of the Merger) divided by the average of the closing prices per share of HNC
common stock for the 20 trading days immediately preceding the closing date of
the Merger. Based on this formula, each share of CompReview common stock that
was issued and outstanding immediately prior to the Merger was converted into
approximately 0.488556154 shares of HNC common stock (subject to rounding to
eliminate fractional shares), and each CompReview Option that was outstanding
immediately prior to the Merger was assumed by HNC on the terms of CompReview's
1995 Stock Option Plan and converted into an option (an "HNC Option") to
purchase 0.488556154 shares of HNC common stock (subject to rounding to
eliminate fractional options) at an exercise price per share of HNC Common Stock
equal to the exercise price per share that was in effect for such CompReview
Option immediately prior to the Merger divided by the 0.488556154 conversion
rate. The conversion ratio described above was negotiated and determined on the
basis of: (i) the assumed value of CompReview, as determined by HNC's management
following its review of CompReview's business and financial position, and its
discussions with CompReview's management (ii) other information provided to
HNC's management by its investment banking firm; (iii) a comparison of certain
financial and stock valuation information for HNC and CompReview with similar
types of information for certain other companies in businesses comparable to
those of HNC and CompReview.
Based on this conversion ratio, the 10,000,000 shares of CompReview
common stock that were outstanding immediately prior to the effective time of
the Merger were converted into a total of 4,885,560 shares of HNC common stock
(which represented approximately 20% of HNC's outstanding common stock
immediately after the effectiveness of the Merger) and the 400,000 CompReview
Options that were outstanding immediately prior to the Merger were converted
into HNC Options to purchase approximately 195,419 shares of HNC common stock.
The two CompReview Stockholders each received fifty percent (50%) of the
4,885,560 shares of HNC Common Stock issued in the Merger and the HNC Options
issued in the Merger were issued to three officers of CompReview.
The issuance of the shares of HNC common stock and the HNC Options in
the Merger was not registered under the Securities Act of 1933, as amended (the
"1933 Act"), in reliance on the exemption from registration provided by Section
4(2) thereof and Rule 506 of Regulation D promulgated thereunder. Accordingly,
such shares are subject to the resale restrictions imposed by Rule 144 under the
1933 Act. HNC intends to register the issuance of the shares of HNC's common
stock that are subject to the HNC Options issued in the Merger on a Form S-8
registration statement in December 1997. Additionally, HNC has agreed with the
CompReview Stockholders in a Registration Rights Agreement to use its best
efforts to promptly register the resale of the shares of HNC common stock issued
to the CompReview Stockholders in the Merger on a "shelf" Form S-3 registration
statement that would be kept effective until the first anniversary of the
effective date of the Merger.
In order to comply with the requirements for pooling accounting
treatment, the affiliates of HNC and the former affiliates of CompReview have
agreed not to sell or transfer their shares of HNC stock until HNC has publicly
released a report including the combined financial results of HNC and CompReview
covering a period of at least thirty (30) days of post-Merger combined
operations of HNC and CompReview.
Pursuant to the terms of the Plan, HNC, CompReview, the stockholders of
CompReview and an escrow agent entered into an Escrow Agreement, pursuant to
which ten percent (10%) of the shares of HNC common stock that were issued to
the CompReview Stockholders in the Merger have been placed in an escrow account
to secure and collateralize certain indemnification obligations of the
CompReview Stockholders to HNC.
Contemporaneously with the Merger, Robert L. Kaaren and Michael E.
Munayyer each entered into: (i) an Employment Agreement with CompReview, as the
surviving corporation in the Merger, providing for, among other things, certain
terms of employment at a specified minimum salary; and (ii) a Non-Competition
Agreement with HNC and CompReview providing, among other things, that the
employee will not engage in certain activities competitive with CompReview's
business for a period of up to three years.
More detailed information regarding the CompReview acquisition can be
found in HNC's definitive proxy statement for its special meeting of
stockholders held on November 25, 1997, which has been filed with the Securities
and Exchange Commission.
3
<PAGE> 4
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
(a) Financial Statements of Business Acquired.
The following financial statements are filed herewith:
Unaudited Condensed Balance Sheet at September 30, 1997 6
Unaudited Condensed Statement of Income for the nine months ended
September 30, 1997 and 1996 7
Unaudited Condensed Statement of Cash Flows for the nine months ended
September 30, 1997 and 1996 8
Notes to Unaudited Condensed Financial Statements 9
Independent Auditor's Report 11
Balance Sheets at December 31, 1996 and 1995 12
Statements of Income for the years ended December 31, 1996, 1995 and 1994 13
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 14
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 15
Notes to Financial Statements 16
(b) Pro Forma, Historical and Supplemental Financial Information.
(1) Unaudited Pro Forma Consolidated Combined Condensed Financial
Information of HNC Software Inc.
The following pro forma consolidated combined condensed financial information
is being filed herewith:
Unaudited Pro Forma Consolidated Combined Condensed Balance Sheet at
September 30, 1997 21
Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the
nine months ended September 30, 1997 22
Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the
nine months ended September 30, 1996 23
Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the
years ended December 31, 1996, 1995 and 1994. 24-26
Notes to Unaudited Pro Forma Consolidated Combined Condensed Financial
Information 27
(2) Consolidated Financial Statements of HNC Software Inc.
The following consolidated financial statements are being filed herewith:
Report of Independent Accountants 28
Consolidated Balance Sheet at December 31, 1996 and 1995 29
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994 30
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994 31
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994 32
Notes to Consolidated Financial Statements 33
(3) Supplemental Consolidated Financial Statements of HNC Software Inc.
The following supplemental consolidated financial statements are being
filed herewith:
Supplemental Consolidated Balance Sheet at December 31, 1996 and 1995 46
Supplemental Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994 47
Supplemental Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994 48
Supplemental Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994 49
Notes to Supplemental Consolidated Financial Statements 50
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C>
(4) Financial Statement Schedule.
Report of Independent Accountants on Financial Statement Schedule 65
For the three years ended December 31, 1996 -
Schedule II - Valuation and Qualifying Accounts and Reserves 66
Signatures 67
</TABLE>
(c) Exhibits.
The following exhibits are filed herewith:
2.01 Agreement and Plan of Reorganization dated as of July 14, 1997 by
and among HNC, FW1 Acquisition Corp., CompReview, Inc., Robert L.
Kaaren and Mishel E. Munnayer, a.k.a. Michael Munayyer, Trustee
of the Michael Munayyer Trust dated August 11, 1995. (Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the Commission
upon request).
2.02 Agreement of Merger dated as of November 28, 1997 by and between
FW1 Acquisition Corp. and CompReview, Inc.
4.01 Registration Rights Agreement dated as of November 28, 1997 by
and among HNC and the former shareholders of CompReview, Inc.
11.01 Statement Regarding Computation of Per Share Earnings (Loss).
23.01 Consent of Price Waterhouse LLP, Independent Accountants.
23.02 Consent of Deloitte & Touche LLP, Independent Auditors.
27.01 Financial Data Schedule
5
<PAGE> 6
COMPREVIEW, INC.
UNAUDITED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
PRO FORMA
HISTORICAL (NOTE 4)
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 927 $ 927
Accounts receivable, net 4,164 4,164
Other current assets 35 35
--------- ---------
Total current assets 5,126 5,126
Property and equipment, net 915 915
Other assets 128 128
--------- ---------
$ 6,169 $ 6,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,150 $ 2,150
Accrued liabilities 541 541
Deferred income tax liability 17 607
--------- ---------
Total current liabilities 2,708 3,298
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value - 500 shares authorized:
none issued and outstanding
Common stock, $0.001 par value - 20,000 shares authorized:
10,000 shares issued and outstanding 442 442
Retained earnings 3,019 2,429
--------- ---------
3,461 2,871
--------- ---------
Total stockholders' equity $ 6,169 $ 6,169
========= =========
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
6
<PAGE> 7
COMPREVIEW, INC.
UNAUDITED CONDENSED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
License and maintenance $ 15,069 $ 9,042
Service bureau 3,902 3,589
---------- ----------
Total revenues 18,971 12,631
---------- ----------
Operating expenses:
License and maintenance 5,599 3,580
Service bureau 2,986 2,628
Research and development 494 367
Sales and marketing 995 912
General and administrative 2,097 1,431
---------- ----------
Total operating expenses 12,171 8,918
---------- ----------
Operating income 6,800 3,713
Other income, net 45 39
---------- ----------
Income before income tax provision 6,845 3,752
Income tax provision 143 73
---------- ----------
Net income $ 6,702 $ 3,679
========== ==========
Unaudited pro forma data (Note 3):
Add:
S corporation state income tax provision 143 73
Deduct:
Pro forma federal and state income tax provision (2,738) (1,501)
---------- ----------
Pro forma net income $ 4,107 $ 2,251
========== ==========
Pro forma adjusted net income per share $ 0.41 $ 0.23
========== ==========
Shares used in computing pro forma adjusted net income per share 10,000 10,000
========== ==========
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
7
<PAGE> 8
COMPREVIEW, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,702 $ 3,681
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 173 194
Changes in assets and liabilities:
Accounts receivable, net (1,141) (725)
Other assets (90) (46)
Accounts payable and accrued expenses 1,193 (246)
---------- ----------
Net cash provided by operating activities 6,837 2,858
---------- ----------
Cash flows from investing activities:
Acquisitions of property and equipment (714) (160)
---------- ----------
Net cash used in investing activities (714) (160)
---------- ----------
Cash flows from financing activities:
Distributions (5,800) (3,762)
---------- ----------
Net cash used in financing activities (5,800) (3,762)
---------- ----------
Net increase (decrease) in cash and cash equivalents 323 (1,064)
Cash and cash equivalents at beginning of period 604 1,466
---------- ----------
Cash and cash equivalents at end of period $ 927 $ 402
========== ==========
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
8
<PAGE> 9
COMPREVIEW, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
In management's opinion, the accompanying unaudited condensed financial
statements for CompReview, Inc. ("CompReview" or the "Company") as of September
30, 1997 and for the nine months ended September 30, 1997 and 1996 have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustments (consisting only of normal
recurring accruals) that the Company considers necessary for a fair presentation
of its financial position, results of operations, and cash flows for such
periods. Accordingly, 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. The accompanying
unaudited financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
1996 presented elsewhere in this filing. Footnotes and other disclosures as of
September 30, 1997 and for the nine months ended September 30, 1997 and 1996,
which would substantially duplicate the disclosures in the Company's audited
financial statements for the year ended December 31, 1996, have been omitted.
The interim financial information herein is not necessarily indicative of the
results to be expected for any other interim period or the full year ending
December 31, 1997.
NOTE 2 - NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("FAS130"), "Reporting Comprehensive
Income." The Company will adopt FAS130 as required for all periods beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income is defined as "the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners." The Company is currently evaluating the impact that the adoption of
FAS130 will have on its financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("FAS131"), "Disclosures about
Segments of an Enterprise and Related Information." The Company will adopt
FAS131 as required for all periods beginning after December 15, 1997, commencing
with its annual financial statements for the year ending December 31, 1998. This
statement requires the disclosure of certain information about operating
segments in the financial statements. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
is currently evaluating the impact that the adoption of FAS131 will have on its
financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("FAS128"), "Earnings Per
Share," which the Company will adopt as required for all periods ending after
December 15, 1997. Pursuant to this Statement, companies will replace the
reporting of "primary" earnings per share ("EPS") with "basic" EPS. Basic EPS is
calculated by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period, not
including potential common stock. "Fully diluted" EPS will be replaced by
"diluted" EPS. Diluted EPS is computed similarly to fully diluted EPS under the
provisions of APB Opinion No. 15.
9
<PAGE> 10
COMPREVIEW, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The effect of the adoption of FAS128 on earnings per share is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
9/30/97 9/30/96
-------- --------
<S> <C> <C>
Basic earnings per share $ 0.67 $ 0.37
Diluted earnings per share $ 0.67 $ 0.37
</TABLE>
The effect of the adoption of FAS128 on pro forma adjusted earnings per
share is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
9/30/97 9/30/96
-------- --------
<S> <C> <C>
Basic earnings per share $ 0.41 $ 0.23
Diluted earnings per share $ 0.41 $ 0.23
</TABLE>
NOTE 3 - PRO FORMA NET INCOME
CompReview is a subchapter S corporation for federal and certain state income
tax purposes, and its historical financial statements reflect only certain state
taxes on subchapter S corporations. Federal and state income taxes have been
provided as if CompReview had filed subchapter C corporation income tax returns
for the periods presented.
NOTE 4 - PRO FORMA BALANCE SHEET
The accompanying pro forma balance sheet reflects the recognition of a net
deferred tax liability relating to federal and state income taxes as if
CompReview had been taxed as a C corporation rather than a subchapter S
corporation.
Deferred tax assets (liabilities) at September 30, 1997 are summarized as
follows:
<TABLE>
<S> <C>
Accounts receivable ............................. $(1,666)
Accounts payable and accrued liabilities ........ 1,076
-------
$ (590)
=======
</TABLE>
10
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
Board of Directors
CompReview, Inc.
Newport Beach, California
We have audited the accompanying balance sheets of CompReview, Inc. (the
Company) as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of CompReview, Inc. as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
January 30, 1997
11
<PAGE> 12
COMPREVIEW, INC.
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 603,567 $1,466,109
Accounts receivable, less allowance for doubtful
accounts of $86,123 in 1996 and $50,000 in 1995 3,023,798 2,146,156
Other current assets 48,354 11,726
---------- ----------
Total current assets 3,675,719 3,623,991
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization (Note 2) 373,498 509,515
OTHER ASSETS - deposits 25,146 32,046
---------- ----------
$4,074,363 $4,165,552
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,097,514 $ 865,789
Accrued compensation and benefits 374,646 275,812
Other accrued expenses 18,925 18,286
Income taxes payable (Note 3) 8,000 47,702
Deferred income taxes (Note 3) 17,500 10,000
---------- ----------
Total current liabilities 1,516,585 1,217,589
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 500,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 20,000,000 shares
authorized; 10,000,000 shares issued and outstanding 441,963 441,963
Retained earnings 2,115,815 2,506,000
---------- ----------
Total stockholders' equity 2,557,778 2,947,963
---------- ----------
$4,074,363 $4,165,552
========== ==========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 13
COMPREVIEW, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Software license and installation $ 12,875,673 $ 7,683,120 $ 4,105,389
Service bureau 4,729,955 5,348,882 5,058,170
------------ ------------ ------------
Total revenues 17,605,628 13,032,002 9,163,559
Operating expenses:
Software license and installation 5,028,289 3,393,800 2,229,517
Service bureau 3,364,610 3,025,363 2,203,003
Research and development 536,631 416,740 334,567
Sales and marketing 1,218,362 854,347 674,833
General and administrative 1,916,986 1,402,237 1,090,047
------------ ------------ ------------
Total operating expenses 12,064,878 9,092,487 6,531,967
------------ ------------ ------------
Operating income 5,540,750 3,939,515 2,631,592
Other income, net 50,505 78,470 16,516
------------ ------------ ------------
Income before S corporation state income tax provision 5,591,255 4,017,985 2,648,108
S corporation state income tax provision 74,119 63,514 54,320
------------ ------------ ------------
Net income $ 5,517,136 $ 3,954,471 $ 2,593,788
============ ============ ============
Add:
S corporation state income tax provision 74,119 63,514 54,320
Deduct:
Pro forma federal and state income tax provision
(unaudited) (2,236,502) (1,607,194) (1,059,243)
------------ ------------ ------------
Pro forma net income (unaudited) $ 3,354,753 $ 2,410,791 $ 1,588,865
============ ============ ============
Pro forma net income per share (unaudited) $ 0.34 $ 0.24 $ 0.16
============ ============ ============
Shares used in computing pro forma
net income per share 10,000,000 10,000,000 10,000,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 14
COMPREVIEW, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994 10,000,000 $ 441,963 $ 792,741 $ 1,234,704
Distributions (990,000) (990,000)
Net income 2,593,788 2,593,788
----------- ----------- ----------- -------------
BALANCE, December 31, 1994 10,000,000 441,963 2,396,529 2,838,492
Distributions (3,845,000) (3,845,000)
Net income 3,954,471 3,954,471
----------- ----------- ----------- -------------
BALANCE, December 31, 1995 10,000,000 441,963 2,506,000 2,947,963
Distributions (5,907,321) (5,907,321)
Net income 5,517,136 5,517,136
----------- ----------- ----------- -------------
BALANCE, December 31, 1996 10,000,000 $ 441,963 $ 2,115,815 $ 2,557,778
=========== =========== =========== =============
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 15
COMPREVIEW, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,517,136 $ 3,954,471 $ 2,593,788
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 260,734 280,208 159,900
Loss on disposal of property 4,745
Deferred income taxes 7,500 (3,000) 13,000
Changes in assets and liabilities:
Accounts receivable (877,642) (265,081) (1,282,480)
Other current assets (36,628) (9,686) 16,019
Other assets 6,900 8,968
Accounts payable and accrued expenses 331,198 514,367 416,790
Income taxes payable (39,702) 20,789 17,151
----------- ----------- -----------
Net cash provided by operating activities 5,169,496 4,496,813 1,943,136
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 6,000
Payments to acquire property and equipment (124,717) (304,800) (386,094)
----------- ----------- -----------
Net cash used in investing activities (124,717) (298,800) (386,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (5,907,321) (3,845,000) (990,000)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (862,542) 353,013 567,042
CASH AND CASH EQUIVALENTS, beginning of year 1,466,109 1,113,096 546,054
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 603,567 $ 1,466,109 $ 1,113,096
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid for income taxes $ 115,242 $ 45,725 $ 24,169
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE> 16
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - CompReview, Inc. (the Company) develops cost containment
software and services for the healthcare industry, primarily related to
billing reviews of workers' compensation and personal injury claims
throughout the United States. Corporate headquarters are located in
Newport Beach, California, with an additional office located in Irving,
Texas. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting years. Actual results could differ from
those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include savings
accounts and certificates of deposit. Cash equivalents are deemed to be
any short-term, nonequity investment that is readily convertible to cash,
is not subject to market fluctuations, and has an original maturity of
three months or less.
Property and Equipment - Property and equipment are stated at cost. The
Company provides for depreciation primarily on accelerated methods over
estimated useful lives, ranging from five to seven years. Leasehold
improvements are amortized over the lesser of the life of the improvement
or the term of the lease.
Income Taxes - The Company has elected to be taxed for federal and state
purposes under Subchapter S of the Internal Revenue Code and California
Revenue and Taxation Code, respectively. Accordingly, current taxable
income or loss is allocated to the stockholders who are responsible for
payment of taxes or receive credit for taxes thereon. In accordance with
provisions of the California Revenue and Taxation Code regarding S
corporations, the Company pays California taxes at the rate of 1.5% of
taxable income.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109,
deferred tax assets and liabilities are established for temporary
differences in recording such items for financial reporting purposes and
for income tax purposes.
Stock Split - In February 1996, the Company effected a ten-for-one split
of its common stock and increased the number of shares authorized to
20,000,000. All share amounts in the accompanying financial statements and
footnotes have been restated to reflect the stock split.
Revenue Recognition - The Company licenses its software primarily to
insurers, health maintenance organizations, self-insured employers and
other businesses that reimburse health care costs. Software licensing
agreements generally provide for a guaranteed minimum license fee and
transactional fees. The guaranteed minimum license fees are recognized
ratably over the respective license periods. Transactional fees are
recognized as revenue when fees based on system usage exceed the monthly
minimum license fees.
The Company offers payors the option of retaining the Company to review
and reprice medical bills for them rather that licensing the software.
Related service bureau fees are assessed to customers on the basis of
volume of bills processed and are recognized as revenue when the
processing services are performed.
Installation and implementation services fees are billed separately and
recognized as revenue on a time and materials basis.
16
<PAGE> 17
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Software Costs - Software product development costs incurred from the time
technological feasibility is reached until the product is available for
general release to customers are capitalized and reported at the lower of
cost or net realizable value. Through December 31, 1996, no significant
amounts were expended subsequent to reaching technological feasibility.
Long-Lived Assets - The Company investigates potential impairments of
long-lived assets, on an exception basis, when events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss is recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. No such impairments
of long-lived assets existed through December 31, 1996.
Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has determined that it will not change to the
fair value method and will continue to use Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, for
measurement and recognition of employee-based stock transactions.
Reclassifications - Certain reclassifications have been made to the fiscal
year 1995 and 1994 financial statements to conform to the 1996
presentation.
Pro forma net income - Pro forma net income represents the results of
operations adjusted to reflect a provision for income tax on historical
income before S corporation state income tax provision, which gives effect
to the change in the Company's income tax status to a C corporation
subsequent to the merger with HNC (Note 8).
Pro forma net income per share - Pro forma net income per share has been
computed by dividing pro forma net income by the weighted average number
of common shares and common stock equivalents, using the treasury stock
method, outstanding during the period.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computer equipment $ 893,126 $ 806,008
Furniture and fixtures 173,723 166,512
Machinery and equipment 111,370 80,982
Leasehold improvements 40,705 40,705
----------- -----------
1,218,924 1,094,207
Less accumulated depreciation and amortization (845,426) (584,692)
----------- -----------
$ 373,498 $ 509,515
=========== ===========
</TABLE>
17
<PAGE> 18
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. INCOME TAXES
The provision for state income taxes for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current $ 66,619 $ 66,514 $ 41,320
Deferred 7,500 (3,000) 13,000
-------- -------- --------
$ 74,119 $ 63,514 $ 54,320
======== ======== ========
</TABLE>
Deferred state income taxes are primarily attributable to timing
differences in the recognition of revenues and expenses on a cash basis
for tax purposes.
Deferred tax assets (liabilities) at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accounts receivable $ (35,100) $ (22,200)
Accounts payable and accrued liabilities 17,600 12,200
---------- ----------
$ (17,500) $ (10,000)
========== ==========
</TABLE>
4. 401(K) SAVINGS PLAN
Effective May 1, 1995, the Company established a 401(k) savings plan to
which eligible employees can make contributions. The Company may make
annual discretionary contributions. The Company made contributions of
$3,375 and $0 in 1996 and 1995, respectively.
5. COMMITMENTS
Leases - The Company leases office facilities and equipment under
operating leases expiring at various dates through 2001. The following is
a schedule, by year, of future minimum rental payments required under
operating leases that have noncancelable lease terms in excess of one year
as of December 31, 1996:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $158,810
1998 4,284
1999 4,284
2000 4,284
2001 1,071
--------
$172,733
========
</TABLE>
Rent expense under operating lease agreements amounted to $283,120,
$310,783 and $292,576 for the years ended December 31, 1996, 1995 and
1994, respectively.
18
<PAGE> 19
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. MAJOR CUSTOMERS
During the years ended December 31, 1996, 1995 and 1994, sales to one
customer were approximately 25%, 27% and 26% of net sales, respectively.
Another customer accounted for approximately 12%, 11% and 14% of net sales
in 1996, 1995 and 1994, respectively. A third customer accounted for
approximately 20% of net sales in 1994. The Company generally provides
services to customers under contacts with terms of one to five years,
which can generally be cancelled by the customer on 90 days' notice. A
decision by a significant customer to decrease the amount of services
purchased from the Company or to not renew a contract could have a
material adverse effect on the Company's financial condition and results
of operations.
7. STOCK OPTIONS
On October 16, 1995, the Company adopted the 1995 Stock Option Plan (the
Plan) which permits the Company to grant stock options to officers,
directors, key employees and other qualified persons. The Plan provides
that the option price shall be fixed by the Board of Directors or by a
committee appointed by the Board of Directors (the Committee), but shall
not be less than 85% of the fair market value at date of grant as
determined by the Board of Directors or the Committee. An aggregate of
600,000 shares of the Company's common stock may be issued pursuant to the
Plan. Options are exercisable at various dates and expire ten years after
the date of grant. As of December 31, 1996 and 1995, 400,000 and 350,000
options, respectively, were outstanding with an exercise price equal to
the fair market value of the Company's common stock ($1.14) at the date of
grant.
At December 31, 1996, 200,000 shares were available for future grant under
the Plan. Stock option activity for the two years ended December 31, 1996
was as follows:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
----------- -----------
<S> <C> <C>
Outstanding January 1, 1995 -- $ --
Options granted 350,000 1.14
-----------
Outstanding December 31, 1995 350,000 1.14
Options granted 110,000 1.14
Options canceled (60,000) 1.14
-----------
Outstanding December 31, 1996 400,000 $1.14
===========
</TABLE>
The weighted average fair value of options granted during 1996 and 1995
was $0.21 and $0.39, respectively. The weighted average remaining
contractual life of outstanding options at December 31, 1996 was 8.9
years. No shares were exercisable at December 31, 1996.
19
<PAGE> 20
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
As discussed in Note 1, the Company has elected to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25 and its related interpretations. No compensation expense
has been recognized in the financial statements for employee stock
arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income had the Company adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of
option-pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected life, 10 years; stock volatility, 0%; risk-free
interest rate, 6.0%; and no dividends during the expected term. The
Company's calculations are based on a single-option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of
the 1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, net income would have been reduced to $5,435,324 and
$3,924,750 in 1996 and 1995, respectively.
8. SUBSEQUENT EVENT (UNAUDITED)
On November 28, 1997, HNC Software Inc.(HNC), acquired all the stock of
the Company, in exchange for the issuance of 4,885,560 shares of HNC
common stock. All outstanding options to purchase the Company's common
stock were exchanged for options to purchase 195,419 shares of HNC common
stock. The acquisition was effected through a statutory merger for which
HNC intends to account as a "pooling of interests" transaction for
financial reporting purposes, and the merger was structured to be a
"tax-free" reorganization for income tax purposes.
20
<PAGE> 21
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
----------------------- -----------------------
HNC CR NOTES ADJUSTMENTS COMBINED
--------- ----------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,974 $ 927 (2) $ (1,400) $ 3,501
Short-term investments 18,430 -- -- 18,430
Accounts receivable, net 25,989 4,164 -- 30,153
Current portion of deferred
income taxes 6,668 -- 6,668
Other current assets 3,302 35 -- 3,337
--------- ----------- ---------- --------
Total current assets 58,363 5,126 (1,400) 62,089
Property and equipment, net 9,664 915 -- 10,579
Deferred income taxes, less current
portion 19,754 -- -- 19,754
Other assets 2,624 128 -- 2,752
Long-term investments 18,157 -- -- 18,157
--------- ----------- ---------- --------
$ 108,562 $ 6,169 $ (1,400) $113,331
========= =========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,543 $ 2,150 $ -- $ 6,693
Accrued liabilities 6,101 541 -- 6,642
Deferred revenue 2,611 -- -- 2,611
Other current liabilities 226 17 (3) 590 833
--------- ----------- ---------- --------
Total current liabilities 13,481 2,708 590 16,779
--------- ----------- ---------- --------
Other non-current liabilities 360 -- -- 360
--------- ----------- ---------- --------
Stockholders' equity:
Common stock, $0.001 par value - 50,000
shares authorized: 19,540 and 19,126
shares issued and outstanding,
respectively 20 442 (4) (437) 25
Paid-in capital 88,218 -- (4) 437 89,684
(5) 1,029
Foreign currency translation adjustment 40 -- -- 40
Unrealized gain on investments 1 -- -- 1
Retained earnings 6,442 3,019 (2) (1,400) 6,442
(3) (590)
(5) (1,029)
(6)
--------- ----------- ---------- --------
Total stockholders' equity 94,721 3,461 (1,990) 96,192
--------- ----------- ---------- --------
$ 108,562 $ 6,169 $ (1,400) $113,331
========= =========== ========== ========
</TABLE>
See accompanying notes to unaudited pro forma
consolidated combined condensed financial information.
21
<PAGE> 22
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
------------------------ ---------
HNC CR NOTES COMBINED
--------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance $ 49,278 $ 15,069 $ 64,347
Installation and implementation 7,203 -- 7,203
Contracts and other 6,202 -- 6,202
Service bureau -- 3,902 3,902
--------- --------- --------
Total revenues 62,683 18,971 81,654
--------- --------- --------
Operating expenses:
License and maintenance 8,388 5,599 13,987
Installation and implementation 3,551 -- 3,551
Contracts and other 4,415 -- 4,415
Service bureau -- 2,986 2,986
Research and development 14,882 494 15,376
Sales and marketing 14,482 995 15,477
General and administrative 6,271 2,097 8,368
--------- --------- --------
Total operating expenses 51,989 12,171 64,160
--------- --------- --------
Operating income 10,694 6,800 17,494
Other income, net 1,365 45 1,410
--------- --------- --------
Income before income tax provision 12,059 6,845 18,904
Income tax provision 4,462 143 4,605
--------- --------- --------
Net income $ 7,597 $ 6,702 $ 14,299
========= ========= ========
Add:
S corporation state income tax provision 143 (7) 143
Deduct:
Pro forma federal and state income tax provision (2,738) (7) (2,738)
--------- --------
Pro forma net income $ 4,107 $ 11,704
========= ========
Net income per share $ 0.37
=========
Shares used in computing net income per share 20,572
=========
Pro forma net income per share $0.41 (8) $0.46
========= ========
Shares used in computing pro forma net income per share 10,000 (8) 25,573
========= ========
</TABLE>
See accompanying notes to unaudited pro forma
consolidated combined condensed financial information.
22
<PAGE> 23
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
-------------------------- -----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance $ 24,431 $ 9,042 $ 33,473
Installation and implementation 3,813 3,813
Contracts and other 8,814 -- 8,814
Service bureau -- 3,589 3,589
---------- ---------- ----------
Total revenues 37,058 12,631 49,689
---------- ---------- ----------
Operating expenses:
License and maintenance 6,409 3,580 9,989
Installation and implementation 1,746 1,746
Contracts and other 5,869 -- 5,869
Service bureau -- 2,628 2,628
Research and development 9,173 367 9,540
Sales and marketing 7,595 912 8,507
General and administrative 4,710 1,431 6,141
---------- ---------- ----------
Total operating expenses 35,502 8,918 44,420
---------- ---------- ----------
Operating income 1,556 3,713 5,269
Other income, net 1,203 39 1,242
---------- ---------- ----------
Income before income tax provision 2,759 3,752 6,511
Income tax provision 1,691 73 1,764
---------- ---------- ----------
Net income $ 1,068 $ 3,679 $ 4,747
========== ========== ==========
Add:
S corporation state income tax provision 73 (7) 73
Deduct:
Pro forma federal and state income tax provision (1,501) (7) (1,501)
---------- ----------
Pro forma net income $ 2,251 $ 3,319
========== ==========
Net income per share $ 0.05
==========
Shares used in computing net income per share 20,331
==========
Pro forma net income per share $ 0.23 (8) $ 0.13
========== ==========
Shares used in computing pro forma net income per share 10,000 (8) 25,316
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma
consolidated combined condensed financial information.
23
<PAGE> 24
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
--------------------------- ----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
<S> <C> <C> <C>
Revenues:
License and maintenance $ 36,014 $ 12,876 $ 48,890
Installation and implementation 6,691 6,691
Contracts and other 11,128 -- 11,128
Service bureau -- 4,730 4,730
---------- ---------- ----------
Total revenues 53,833 17,606 71,439
---------- ---------- ----------
Operating expenses:
License and maintenance 8,697 5,028 13,725
Installation and implementation 2,714 2,714
Contracts and other 7,694 -- 7,694
Service bureau -- 3,365 3,365
Research and development 13,271 537 13,808
Sales and marketing 10,705 1,218 11,923
General and administrative 6,634 1,917 8,551
---------- ---------- ----------
Total operating expenses 49,715 12,065 61,780
---------- ---------- ----------
Operating income 4,118 5,541 9,659
Other income, net 1,650 50 1,700
---------- ---------- ----------
Income before income tax (benefit) provision 5,768 5,591 11,359
Income tax (benefit) provision (608) 74 (534)
---------- ---------- ----------
Net income $ 6,376 $ 5,517 $ 11,893
========== ========== ==========
Add:
S corporation state income tax provision 74 (7) 74
Deduct:
Pro forma federal and state income tax provision (2,236) (7) (2,236)
---------- ----------
Pro forma net income $ 3,355 $ 9,731
========== ==========
Net income per share $ 0.31
==========
Shares used in computing net income per share 20,367
==========
Pro forma net income per share $ 0.34 (8) $ 0.38
========== ==========
Shares used in computing pro forma net income per share 10,000 (8) 25,348
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated
combined condensed financial information.
24
<PAGE> 25
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
--------------------------- ----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance $ 16,878 $ 7,683 $ 24,561
Installation and implementation 4,648 4,648
Contracts and other 9,146 -- 9,146
Service bureau -- 5,349 5,349
---------- ---------- ----------
Total revenues 30,672 13,032 43,704
---------- ---------- ----------
Operating expenses:
License and maintenance 4,509 3,394 7,903
Installation and implementation 1,425 1,425
Contracts and other 6,894 -- 6,894
Service bureau -- 3,025 3,025
Research and development 6,581 417 6,998
Sales and marketing 6,422 854 7,276
General and administrative 3,699 1,402 5,101
---------- ---------- ----------
Total operating expenses 29,530 9,092 38,622
---------- ---------- ----------
Operating income 1,142 3,940 5,082
Other income, net 406 78 484
---------- ---------- ----------
Income before income tax (benefit) provision 1,548 4,018 5,566
Income tax (benefit) provision (575) 64 (511)
---------- ---------- ----------
Net income $ 2,123 $ 3,954 $ 6,077
========== ========== ==========
Add:
S corporation state income tax provision 64 (7) 64
Deduct:
Pro forma federal and state income tax provision (1,607) (7) (1,607)
---------- ----------
Pro forma net income $ 2,411 $ 4,534
========== ==========
Pro forma net income per share $ 0.13 $ 0.24 (8) $ 0.21
========== ========== ==========
Shares used in computing pro forma net income per share 16,901 10,000 (8) 21,804
========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated
combined condensed financial information.
25
<PAGE> 26
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
--------------------------- ----------
HNC CR NOTES COMBINED
---------- ---------- ----- ----------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance $ 9,266 $ 4,106 $ 13,372
Installation and implementation 3,757 3,757
Contracts and other 7,651 -- 7,651
Service bureau -- 5,058 5,058
---------- ---------- ----------
Total revenues 20,674 9,164 29,838
---------- ---------- ----------
Operating expenses:
License and maintenance 3,593 2,229 5,822
Installation and implementation 1,254 1,254
Contracts and other 5,040 -- 5,040
Service bureau -- 2,203 2,203
Research and development 4,344 335 4,679
Sales and marketing 3,603 675 4,278
General and administrative 2,591 1,090 3,681
---------- ---------- ----------
Total operating expenses 20,425 6,532 26,957
---------- ---------- ----------
Operating income 249 2,632 2,881
Other (expense) income, net (156) 16 (140)
---------- ---------- ----------
Income before income tax (benefit) provision 93 2,648 2,741
Income tax (benefit) provision (455) 54 (401)
---------- ---------- ----------
Net income $ 548 $ 2,594 $ 3,142
========== ========== ==========
Add:
S corporation state income tax provision 54 (7) 54
Deduct:
Pro forma federal and state income tax provision (1,059) (7) (1,059)
---------- ----------
Pro forma net income $ 1,589 $ 2,137
========== ==========
Pro forma net income per share $ 0.04 $ 0.16 (8) $ 0.11
========== ========== ==========
Shares used in computing pro forma net income per share 13,870 10,000 (8) 18,756
========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated
combined condensed financial information.
26
<PAGE> 27
HNC SOFTWARE INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
FINANCIAL INFORMATION
(1) The unaudited pro forma consolidated combined condensed financial statements
of HNC and CompReview give retroactive effect to the CompReview acquisition
which will be accounted for as a pooling of interests and, as a result, such
statements are presented as if the companies had been combined for all
periods presented.
There were no material differences between the accounting policies of HNC
and CompReview. Certain amounts have been reclassified to conform to the pro
forma presentation.
(2) Transaction costs expected to be incurred to complete the Merger approximate
$1.4 million and consist primarily of investment banking, legal and
accounting fees, and printing, mailing and registration expenses. Due to the
non-recurring nature of these costs, they have not been reflected in the pro
forma statement of operations.
(3) The pro forma deferred income tax adjustment reflects the recognition of a
net deferred tax liability relating to federal and state income taxes as if
CompReview had been taxed as a C corporation rather than a subchapter S
corporation.
(4) The pro forma adjustment reflects the exchange of all outstanding shares of
CompReview's capital stock for an aggregate of approximately 4,885,560
shares of HNC Common Stock and the exchange of all outstanding options to
purchase CompReview Common Stock for options to purchase HNC Common Stock to
effect the CompReview acquisition. No changes will be made to the terms of
the CompReview Options in connection with the merger.
(5) As CompReview terminated its subchapter S corporation election in connection
with the Merger, undistributed earnings of CompReview have been reflected as
a contribution to the capital of the combined company.
(6) CompReview is a Subchapter S corporation for federal and certain state
income tax purposes, and has in the ordinary course of its business
historically paid cash distributions to its stockholders to provide them
with sufficient cash to meet their tax liabilities arising from CompReview's
operations. Consistent with its current dividend practices, CompReview
distributed to its stockholders additional cash dividends of $0.05 per share
during October 1997 prior to the Effective Time of the Merger.
(7) CompReview is a subchapter S corporation for federal and certain state
income tax purposes, and its historical financial statements reflect only
certain state taxes on subchapter S corporations as such taxable income or
loss is allocable to its stockholders, who are responsible for payment of
taxes.
For purposes of the unaudited pro forma consolidated combined condensed
statements of income for the nine month periods ended September 30, 1997 and
1996, and each of the three years in the period ended December 31, 1996,
federal and state income taxes have been provided as if CompReview had filed
subchapter C corporation income tax returns for the periods presented.
(8) Pro forma per share amounts are based on weighted average options, using the
treasury stock method, and shares outstanding during each period, assuming
each then outstanding share of CompReview Common Stock or CompReview Option
is exchanged for 0.4886 shares or options to purchase 0.4886 shares of HNC
Common Stock. The 0.4886 Conversion Ratio is based on application of the
Merger conversion formula.
27
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HNC Software Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity (deficit) present fairly, in all material respects, the financial
position of HNC Software Inc. and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 2, on November 28, 1997, HNC Software Inc. merged with
CompReview, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplemental consolidated financial statements give retroactive
effect to the merger of HNC Software Inc. with CompReview, Inc.
In our opinion, the accompanying supplemental consolidated balance sheet and the
related supplemental consolidated statements of income, of cash flows and of
changes in stockholders' equity (deficit) present fairly, in all material
respects, the financial position of HNC Software Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express and opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
January 21, 1997,
except as to the pooling of interests with CompReview, Inc.
which is as of November 28, 1997
28
<PAGE> 29
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 7,517 $ 20,583
Investments available for sale ...................................... 7,353 14,590
Accounts receivable, net ............................................ 19,468 6,996
Current portion of deferred income taxes ............................ 6,400 1,702
Other current assets ................................................ 1,869 1,561
-------- --------
Total current assets ............................................ 42,607 45,432
Investments available for sale .......................................... 19,375 8,336
Deferred income taxes, less current portion ............................. 22,966 346
Property and equipment, net ............................................. 5,966 3,991
Other assets ............................................................ 3,305 842
-------- --------
$ 94,219 $ 58,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 3,270 $ 1,434
Accrued liabilities ................................................. 4,058 2,818
Deferred revenue .................................................... 3,377 2,101
Bank line of credit ................................................. -- 2,195
Other current liabilities ........................................... 418 827
-------- --------
Total current liabilities ....................................... 11,123 9,375
-------- --------
Notes payable to stockholders ........................................... -- 1,000
-------- --------
Other non-current liabilities ........................................... 683 659
-------- --------
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred stock, $0.001 par value - 4,000 shares authorized:
no shares issued or outstanding ................................. -- --
Common stock, $0.001 par value - 50,000 and 40,000 shares authorized:
19,126 and 17,892 shares issued and outstanding, respectively ... 19 18
Paid-in capital ..................................................... 83,554 55,334
Unrealized (loss) gain on investments available for sale ............ (59) 92
Foreign currency translation adjustment ............................. 54 --
Accumulated deficit ................................................. (1,155) (7,531)
-------- --------
Total stockholders' equity ...................................... 82,413 47,913
-------- --------
$ 94,219 $ 58,947
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License and maintenance ................. $ 36,014 $ 16,878 $ 9,266
Installation and implementation ......... 6,691 4,648 3,757
Contracts and other ..................... 11,128 9,146 7,651
-------- -------- --------
Total revenues ...................... 53,833 30,672 20,674
-------- -------- --------
Operating expenses:
License and maintenance ................. 8,697 4,509 3,593
Installation and implementation ......... 2,714 1,425 1,254
Contracts and other ..................... 7,694 6,894 5,040
Research and development ................ 13,271 6,581 4,344
Sales and marketing ..................... 10,705 6,422 3,603
General and administrative .............. 6,634 3,699 2,591
-------- -------- --------
Total operating expenses ............ 49,715 29,530 20,425
-------- -------- --------
Operating income ............................ 4,118 1,142 249
Interest and other income ................... 2,128 834 156
Interest expense ............................ (478) (428) (312)
-------- -------- --------
Income before income tax benefit . 5,768 1,548 93
Income tax benefit .......................... (608) (575) (455)
-------- -------- --------
Net income ....................... $ 6,376 $ 2,123 $ 548
======== ======== ========
Pro forma net income per share .............. $ 0.13 $ 0.04
======== ========
Shares used in computing pro forma net income
per share ............................... 16,901 13,870
======== ========
Net income per share ........................ $ 0.31
========
Shares used in computing net income per share 20,367
========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 6,376 $ 2,123 $ 548
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................. 3,344 1,589 629
Changes in assets and liabilities:
Accounts receivable, net .................................... (10,100) (1,393) (1,754)
Other assets ................................................ (1,178) (664) (1,348)
Deferred income taxes ....................................... (1,332) (1,548) --
Accounts payable ............................................ 1,836 658 139
Accrued liabilities ......................................... 625 1,756 390
Deferred revenue ............................................ 1,472 1,337 (92)
Other liabilities ........................................... (402) -- 280
-------- -------- --------
Net cash provided by (used in) operating activities ..... 641 3,858 (1,208)
-------- -------- --------
Cash flows from investing activities:
Purchases of investments ........................................... (26,113) (28,666) (7,134)
Maturities of investments .......................................... 18,125 4,182 6,000
Proceeds from sale of investments .................................. 3,707 2,467 --
Acquisitions of property and equipment ............................. (3,853) (1,947) (1,534)
-------- -------- --------
Net cash used in investing activities ................... (8,134) (23,964) (2,668)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuances of common stock ........................ 1,935 33,726 10
Net proceeds from issuance of preferred stock ...................... -- -- 4,949
Tax benefit from stock options ..................................... 896 800 --
Proceeds under bank line of credit ................................. 309 1,085 3,255
Repayments under bank line of credit ............................... (2,504) (265) (2,890)
Proceeds from issuances of notes payable to stockholders ........... -- 1,000 --
Repayment of notes payable to stockholders ......................... (1,000) -- --
Repayment of debt from asset purchases ............................. (4,710) -- --
Capital lease payments ............................................. (553) (502) (304)
Proceeds from issuances of bank notes payable ...................... 1,999 -- 603
Repayments of bank notes payable ................................... (1,999) (687) (348)
-------- -------- --------
Net cash (used in) provided by financing activities ..... (5,627) 35,157 5,275
-------- -------- --------
Effect of exchange rate changes on cash ................................ 54 -- --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................... (13,066) 15,051 1,399
Cash and cash equivalents at beginning of period ....................... 20,583 5,532 4,133
-------- -------- --------
Cash and cash equivalents at end of period ............................. $ 7,517 $ 20,583 $ 5,532
======== ======== ========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets purchased through issuance of debt .......................... $ 4,710 $ -- $ --
======== ======== ========
Acquisitions of property and equipment under capital leases ........ $ 344 $ 411 $ 1,128
======== ======== ========
Conversion of preferred stock ...................................... $ -- $ 13,518 $ --
======== ======== ========
Accretion of dividends on mandatorily redeemable convertible
preferred stock ................................................ $ -- $ 348 $ 717
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid ...................................................... $ 448 $ 390 $ 305
======== ======== ========
Income taxes paid .................................................. $ 50 $ 144 $ 30
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------
SERIES A SERIES E COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 380 $ -- -- $ -- 3,730 $ 4
Common stock options exercised................ 40
Issuance of Series E preferred stock, net
of issuance costs...................... 1,282 1
Accretion of dividends........................
Net income....................................
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1994 380 -- 1,282 1 3,770 4
Common stock options exercised................ 207
Accretion of dividends........................
Issuance of common stock in initial public
offering, net of issuance costs........ 2,376 2
Conversion of convertible preferred stock
into common stock...................... (380) (1,282) (1) 8,956 9
Issuance of common stock in secondary
public offering, net of
issuance costs......................... 1,116 2
Issuance of common stock at inception of
Retek (Note 2)......................... 1,367 1
Tax benefit from stock option transactions....
Unrealized gain on investments
available for sale.....................
Stock warrant exercised....................... 100
Net income....................................
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1995 -- -- -- -- 17,892 18
Common stock options exercised................ 1,140 1
Common stock issued for
Employee Stock Purchase Plan........... 94
Tax benefit from stock option transactions....
Tax benefit from Retek taxable pooling
(Note 9)....................................
Unrealized loss on investments
available for sale.....................
Foreign currency translation adjustment.......
Net income....................................
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1996 -- $ -- -- $ -- 19,126 $ 19
====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON FOREIGN TOTAL
INVESTMENTS CURRENCY STOCKHOLDERS'
PAID-IN AVAILABLE TRANSLATION ACCUMULATED EQUITY
CAPITAL FOR SALE ADJUSTMENT (DEFICIT) (DEFICIT)
------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 6,302 $ -- $ -- $(13,094) $ (6,788)
Common stock options exercised .................. 10 10
Issuance of Series E preferred stock, net
of issuance costs ........................ 4,948 4,949
Accretion of dividends .......................... 717 (717)
Net income ...................................... 548 548
------- ------ ----- -------- ---------
BALANCE AT DECEMBER 31, 1994 10,543 -- -- (12,546) (1,998)
Common stock options exercised .................. 85 85
Accretion of dividends .......................... (348) (348)
Issuance of common stock in initial public
offering, net of issuance costs .......... 14,329 14,331
Conversion of convertible preferred stock
into common stock ........................ 10,618 2,892 13,518
Issuance of common stock in secondary
public offering, net of issuance costs ... 19,184 19,186
Issuance of common stock at inception of
Retek (Note 2) ........................... (1) --
Tax benefit from stock option transactions ...... 800 800
Unrealized gain on investments
available for sale ....................... 92 92
Stock warrant exercised ......................... 124 124
Net income ...................................... 2,123 2,123
------- ------ ----- -------- ---------
BALANCE AT DECEMBER 31, 1995 55,334 92 -- (7,531) 47,913
Common stock options exercised .................. 1,095 1,096
Common stock issued for
Employee Stock Purchase Plan ............. 839 839
Tax benefit from stock option transactions ...... 7,889 7,889
Tax benefit from Retek taxable
pooling (Note 9) ............................ 18,397 18,397
Unrealized loss on investments
available for sale ....................... (151) (151)
Foreign currency translation adjustment.......... 54 54
Net income ...................................... 6,376 6,376
------- ------ ----- -------- ---------
BALANCE AT DECEMBER 31, 1996 $83,554 $ (59) $ 54 $ (1,155) $ 82,413
======= ====== ===== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
HNC Software Inc. (the "Company") develops, markets and supports intelligent
client-server software solutions for mission-critical decision applications in
real-time environments. The Company also performs contract research and
development using neural networks and other computational intelligence methods.
Basis of Presentation
The consolidated financial statements and related notes give retroactive
effect to the mergers on August 30, 1996 with Risk Data Corporation ("RDC") and
on November 29, 1996 with Retek Distribution Corporation ("Retek"), for all
periods presented, accounted for as poolings of interests. RDC is an insurance
information technology services firm engaged in the business of developing and
marketing analytical benchmarking and risk management software products
primarily for insurance carriers, state insurance funds and third party
administrators. Retek develops, markets and installs inventory management system
software primarily for customers in the retail industry.
The consolidated balance sheet as of December 31, 1996 and 1995 includes the
accounts of RDC and Retek as of December 31, 1996 and 1995. The consolidated
statements of income, of cash flows and of changes in stockholders' equity
(deficit) for each of the three years in the period ended December 31, 1996
include the results of RDC and Retek for the years then ended. The term
"Company" as used in these consolidated financial statements refers to HNC
Software Inc. and its subsidiaries, including RDC and Retek.
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. Revenues and net income (loss) for each of the previously
separate companies for the periods prior to their acquisitions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED SIX MONTHS ENDED -----------------------------
SEPTEMBER 30, 1996 JUNE 30, 1996 1995 1994
------------------ ----------------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
HNC .................... $ 31,423 $ 16,478 $ 25,174 $ 16,473
RDC .................... -- 2,600 4,577 4,201
Retek .................. 5,635 3,377 921 --
-------- -------- -------- --------
$ 37,058 $ 22,455 $ 30,672 $ 20,674
======== ======== ======== ========
Net income (loss):
HNC .................... $ 975 $ 1,780 $ 4,457 $ 1,923
RDC .................... -- (2,184) (1,952) (1,375)
Retek .................. 93 43 (382) --
-------- -------- -------- --------
$ 1,068 $ (361) $ 2,123 $ 548
======== ======== ======== ========
</TABLE>
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Financial Statement Preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
33
<PAGE> 34
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments in
money market accounts and commercial paper purchased with maturities of three
months or less.
Investments
Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. As of and for the year ended
December 31, 1994 based upon the Company's intent and ability, the Company
classified such securities in the held-to-maturity category and recorded these
securities at amortized cost, which approximated market value. As of December
31, 1995, the Company reassessed its intent and ability with respect to these
securities. As a result of this reassessment, the Company reclassified all
securities as "available for sale" and accounts for them accordingly on a
prospective basis. Available for sale securities are carried at fair value with
unrealized gains or losses related to these securities included in stockholders'
equity in the Company's consolidated balance sheet.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets of three to seven years. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the remaining terms of the
related leases. Repair and maintenance costs are charged to expense as incurred.
Software Costs
Software costs are recorded at cost and amortized over their estimated useful
lives of 36 to 42 months. Software costs are comprised of purchased software and
other rights which are recorded at the lower of cost or net realizable value. At
December 31, 1996 and 1995, software costs of $2,561 and $0, respectively, are
included in other assets in the consolidated balance sheet net of accumulated
amortization of $642 and $0, respectively.
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Through December 31, 1996, no significant amounts were expended
subsequent to reaching technological feasibility.
Long-Lived Assets
The Company investigates potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill, on an exception basis, when
events or changes in circumstances have made recovery of an asset's carrying
value unlikely. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairments of long-lived assets existed through December 31, 1996.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense (Note 10).
Revenue Recognition
Revenue from long-term periodic software license agreements is generally
recognized ratably over the respective license periods. Revenue from perpetual
licenses of the Company's software for which there are no significant continuing
obligations and collection of the related receivables is probable is recognized
on delivery of the software and acceptance by the customer.
34
<PAGE> 35
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue from software installation and 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 in advance of performance under contracts are
recorded as deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period such
losses are first identified. Unbilled receivables are stated at estimated
realizable value. Contract costs under government contracts, including indirect
costs, are subject to audit and adjustment by negotiations between the Company
and government representatives. Through 1990, indirect government contract costs
have been agreed upon with government representatives. Revenues from government
contracts have been recorded in amounts that are expected to be realized upon
final settlement.
Revenue from product sales, which is included in contracts and other revenue,
is recognized upon shipment to the customer.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
computed for the expected future impact of differences between the financial
reporting and tax bases of assets and liabilities as well as the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount "more likely than not" to be realized in future tax returns. Tax rate
changes are reflected in income during the period such changes are enacted.
Foreign Currency Translation
The financial statements of the Company's international operations are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation gains and losses are excluded from results of
operations and accumulated as a separate component of stockholders' equity.
Gains and losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments and trade
accounts receivable which are generally not collateralized. The Company's policy
is to place its cash, cash equivalents and investments with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of its credit exposure. The Company's software license and
installation agreements and commercial development contracts are primarily with
customers in the financial services, insurance and retail industries. The
Company maintains reserves for potential credit losses.
During 1996, 1995 and 1994, sales under prime and subcontracts with the
federal government represented 3.0%, 7.3%, and 11.3%, respectively, of the
Company's total revenues. One domestic customer accounted for 11.4%, 12.4% and
11.6% of total revenues in 1996, 1995 and 1994, respectively. Revenues from
international operations and export sales, primarily to Western Europe and
Canada, represented approximately 23.4%, 17.9%, and 11.4% of total revenues in
1996, 1995 and 1994, respectively. Export sales were $7,310, $4,595 and $2,355
in 1996, 1995 and 1994, respectively.
Disclosures about fair value of financial instruments
The carrying amounts of cash and cash equivalents, accrued liabilities, the
bank line of credit and notes payable to stockholders approximate fair value
because of the short term maturities of these financial instruments. The
carrying amounts of capital lease obligations approximate their fair values
based on interest rates currently available to the Company for borrowings with
similar terms and maturities.
35
<PAGE> 36
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reincorporation and stock split
In May 1995, the stockholders approved an Agreement and Plan of Merger
whereby the Company merged with and into a newly incorporated Delaware
corporation ("HNC Delaware"), which is the surviving corporation. In conjunction
with the merger, each share of the Company's common stock, preferred stock and
options and warrants to purchase the Company's common stock was exchanged for
one-half share of HNC Delaware's common stock, preferred stock and options and
warrants to purchase HNC Delaware's common stock, at twice the exercise price
for options and warrants. All references to share and per share amounts of
common and preferred stock and other data in these financial statements have
been retroactively restated to reflect the reincorporation.
In April 1996, the Company consummated a two-for-one stock split effected in
the form of a common stock dividend. All references in these consolidated
financial statements to share and per share amounts have been adjusted to give
retroactive effect to the stock split.
Pro forma net income per share
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, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into 8,957
shares of common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all stock options granted from May 5, 1994 through
June 26, 1995 have been included as outstanding for all periods prior to June
26, 1995 using the treasury stock method and the $7.00 initial public offering
price per share. For periods prior to 1996, historical earnings per share are
not presented because such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the initial public offering.
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 period.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 -- ACQUISITIONS
On August 30, 1996, the Company completed an acquisition of Risk Data
Corporation ("RDC"). Under the terms of the acquisition, accounted for as a
pooling of interests, the Company exchanged 1,891 common shares for all of the
then outstanding shares of RDC preferred and common stock. All periods presented
have been retroactively restated (Note 1).
On November 29, 1996, the Company completed an acquisition of all of the
outstanding shares of Retek Distribution Corporation. Under the terms of the
acquisition, accounted for as a pooling of interests, the Company exchanged
1,367 common shares for all of Retek's then outstanding shares. All periods
presented have been retroactively restated (Note 1).
Transaction costs of $563 and $515 were incurred to complete the mergers with
RDC and Retek, respectively. Transaction costs were charged to income as
incurred and consisted primarily of investment banker, legal and accounting
fees, and printing, mailing and registration expenses.
36
<PAGE> 37
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Accounts receivable, net:
Billed .................................. $ 10,156 $ 4,048
Unbilled ................................ 9,299 2,955
Other ................................... 636 496
-------- --------
20,091 7,499
Less allowance for doubtful accounts ......... (623) (503)
-------- --------
$ 19,468 $ 6,996
======== ========
</TABLE>
Unbilled amounts represent revenue recorded in excess of amounts billable
pursuant to contract provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled amounts are
expected to be realized within one year.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Property and equipment, net:
Computer equipment ...................... $ 8,409 $ 4,934
Furniture and fixtures .................. 1,884 1,268
Leasehold improvements .................. 273 167
-------- --------
10,566 6,369
Less accumulated depreciation and amortization (4,600) (2,378)
-------- --------
$ 5,966 $ 3,991
======== ========
Accrued liabilities:
Payroll and related benefits ............ $ 1,457 $ 1,126
Vacation ................................ 673 435
Other ................................... 1,928 1,257
-------- --------
$ 4,058 $ 2,818
======== ========
</TABLE>
NOTE 4 -- INVESTMENTS
At December 31, 1996 and 1995, the amortized cost and estimated fair value of
investments available for sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
U.S. government and federal agencies $ 1,999 $ -- $ (2) $ 1,997
U.S. corporate debt ................ 3,149 -- (6) 3,143
Foreign corporate debt ............. 2,216 -- (3) 2,213
---------- ---------- ---------- ----------
7,364 -- (11) 7,353
---------- ---------- ---------- ----------
Non-current:
U.S. government and federal agencies $ 16,213 $ -- $ (36) $ 16,177
Foreign government debt ............ 1,006 -- (2) 1,004
U.S. corporate debt ................ 1,702 -- (8) 1,694
Foreign corporate debt ............. 502 -- (2) 500
---------- ---------- ---------- ----------
19,423 -- (48) 19,375
---------- ---------- ---------- ----------
$ 26,787 $ -- $ (59) $ 26,728
========== ========== ========== ==========
</TABLE>
37
<PAGE> 38
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
U.S. government and federal agencies $ 1,481 $ 9 $ -- $ 1,490
Foreign government debt ............ 1,017 2 -- 1,019
U.S. corporate debt ................ 8,870 45 -- 8,915
Foreign corporate debt ............. 3,164 2 -- 3,166
---------- ---------- ---------- ----------
14,532 58 -- 14,590
---------- ---------- ---------- ----------
Non-current:
Foreign government debt ............ $ 1,019 2 -- 1,021
U.S. corporate debt ................ 7,077 32 -- 7,109
Foreign corporate debt ............. 206 -- -- 206
---------- ---------- ---------- ----------
8,302 34 -- 8,336
---------- ---------- ---------- ----------
$ 22,834 $ 92 $ -- $ 22,926
========== ========== ========== ==========
</TABLE>
Maturities for non-current investments in securities range from one to two
years. Included in the Company's 1995 income statement is a realized gain in the
amount of $3 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464. No significant gains or losses
were recognized during the year ended December 31, 1996. The cost of securities
sold is determined by the specific identification method.
NOTE 5 -- NOTES PAYABLE
The Company has a Loan and Security Agreement with a bank which provides for
a $5,000 revolving line of credit through July 10, 1997. The agreement requires
that the Company maintain certain financial ratios and levels of tangible net
worth and also restricts the Company's ability to pay cash dividends and
repurchase stock without the bank's consent. At December 31, 1996 and 1995, the
Company had $0 outstanding under the revolving line of credit. Any borrowings
under the agreement will be collateralized by substantially all of the Company's
assets. Interest is payable monthly at the bank's prime rate, which was 8.25% at
December 31, 1996.
The RDC credit facility was comprised of a revolving line of credit secured
by eligible accounts receivable as well as a bridge loan which was secured by
the guarantees of certain stockholders. The revolving line of credit matured on
January 5, 1997. The bridge loan matured on September 5, 1996. All outstanding
amounts were repaid during 1996 and neither credit facility was renewed.
During 1995, the preferred stockholders of RDC loaned the Company $1,000
under subordinated note agreements (secured by the assets of RDC but
subordinated to borrowings under the RDC line of credit) bearing interest at 9%.
All outstanding amounts were repaid during 1996.
NOTE 6 -- LEASES
At December 31, 1996, the Company is obligated under noncancelable operating
leases for its facilities and certain equipment through 2003 as follows:
38
<PAGE> 39
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- --------------
<S> <C> <C> <C>
1997 $1,943 $212 $1,731
1998 1,539 192 1,347
1999 1,189 149 1,040
2000 1,211 - 1,211
2001 1,249 - 1,249
thereafter 1,787 - 1,787
</TABLE>
The lease for the Company's corporate headquarters provides for scheduled
rent increases and an option to extend the lease for five years with certain
changes to the terms of the lease agreement and a refurbishment allowance. Rent
expense under operating leases for the years ended December 31, 1996, 1995, and
1994 was approximately $1,340, $1,192, and $898, respectively, net of sublease
income of $125, $83 and $40, respectively.
RDC maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are as follows:
<TABLE>
<S> <C>
1997....................................... $ 475
1998....................................... 232
1999....................................... 66
-----
773
Less amounts representing interest ........ (110)
-----
Capital lease obligations ................. 663
Less current portion ...................... (399)
-----
$ 264
=====
</TABLE>
The gross value of assets under capital leases at December 31, 1996 and 1995
was $1,481 and $2,186 and accumulated amortization was $599 and $572,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY
In November 1992, the Company entered into an agreement that granted Mitek a
license to use certain character recognition technology developed by the
Company. The agreement provided for the Company to receive an initial license
and support fee payment of $1,350 and an additional license and support fee
based on a percentage of Mitek's revenue from the sale of character recognition
products through November 1995. The agreement also required that the Company
sell certain proprietary computer boards to Mitek at a substantial discount from
normal sales prices, but in excess of cost, and provide ongoing engineering and
technical support over the agreement period, which ended during November 1995.
As the Company had a significant continuing obligation under this agreement, the
initial license and support fee received thereunder was deferred on receipt and
recognized as revenue over the performance period based on estimated sales of
proprietary computer boards. The additional license and support fees were
recognized as a percentage of actual Mitek revenues pursuant to the agreement.
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows:
39
<PAGE> 40
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
------ ------
<S> <C> <C>
Initial license fee ...................... $ 47 $ 295
Additional license and support fee ....... 314 476
Computer board sales ..................... 527 657
------ ------
$ 888 $1,428
====== ======
</TABLE>
NOTE 8 -- CAPITAL STOCK
During June 1995, the Company completed its initial public offering for sale
of 5,175 shares of common stock (of which 2,375 shares were sold by the Company
and 2,800 shares were sold by certain selling stockholders) at a price to the
public of $7.00 per share, which resulted in net proceeds to the Company of
$15,461 after the payment of underwriters' commissions but before the deduction
of offering expenses. Upon the closing of the Company's initial public offering,
all outstanding shares of Series A, B, C, D, and E convertible preferred stock
were automatically converted into shares of common stock at their then effective
conversion prices. Upon conversion, the preferred stockholders were no longer
entitled to any undeclared cumulative dividends and all class voting rights
terminated.
During December 1995, the Company completed a secondary public offering for
sale of 3,000 shares of common stock (of which 1,116 shares were sold by the
Company and 1,884 shares were sold by certain selling stockholders) at a price
to the public of $18.50 per share, which resulted in net proceeds to the Company
of $19,606 after the payment of underwriters' commissions but before the
deduction of offering expenses.
The Board of Directors is authorized to issue up to 4,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to the rights of the holders of any Preferred Stock that may be issued
in the future.
NOTE 9 -- INCOME TAXES
Income (loss) before income tax benefit was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic .............. $ 3,008 $ 1,746 $ 93
Foreign ............... 2,760 (198) --
------- ------- -------
$ 5,768 $ 1,548 $ 93
======= ======= =======
</TABLE>
The income tax provision (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ............... $ 1,132 $ 97 $ 17
State ................. 137 76 28
Foreign ............... 51 -- --
Deferred:
Federal ............... (1,569) (521) (425)
State ................. (63) (183) (75)
Foreign ............... (296) (44) --
------- ------- -------
$ (608) $ (575) $ (455)
======= ======= =======
</TABLE>
40
<PAGE> 41
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------- -------
<S> <C> <C>
Taxable pooling basis difference ..... $18,397 $ -
Net operating loss carryforwards ..... 8,587 2,902
Tax credit carryforwards ............. 1,878 1,370
Other ................................ 504 493
------- -------
Gross deferred tax assets ............ 29,366 4,765
Deferred tax asset valuation allowance - (2,717)
------- -------
Net deferred tax asset ............ $29,366 $ 2,048
======= =======
</TABLE>
At December 31, 1994, the Company provided a deferred tax asset valuation
allowance for deferred tax assets which management determined were "more likely
than not" unrealizable based on trends in operating results after eliminating
the effects of non-recurring revenue (Note 7). During 1995, the Company released
the valuation allowance related to HNC's deferred tax assets based on
management's assessment that it was more likely than not that the Company would
realize a portion of those assets in future periods due to improvements in HNC's
operating results. During 1996, the Company released the valuation allowances
related to RDC and Retek deferred tax assets based on management's assessment
that it was more likely than not that the Company would realize those assets in
future periods due to improvements in the operating results of those
subsidiaries.
During 1996 and 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $7,889 and $800, respectively. The benefit
from the stock option tax deduction is credited directly to paid-in capital.
In connection with the acquisition of Retek, the Company made an Internal
Revenue Code Section 338 election for federal and state tax purposes, resulting
in the treatment of the acquisition as a taxable transaction, whereby the tax
bases of the acquired assets and liabilities were adjusted to their fair values
as of the date of the acquisition. As the purchase price exceeded the carrying
value of the net assets acquired by approximately $46,000, the Company recorded
a deferred tax asset in the amount of $18,397.
A reconciliation of the income tax benefit to the amount computed by
applying the statutory federal income tax rate to income before income tax
provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Amounts computed at statutory federal rate ....... $ 1,961 $ 526 $ 32
Release of valuation allowance ................... (2,717) (2,223) (1,008)
Tax credit carryforwards generated ............... (334) (68) (51)
Losses without tax benefit ....................... - 794 468
Separate return impact of acquired businesses .... (154) - -
Acquisition expenses not tax deductible .......... 367 - -
State income tax expense ......................... 480 401 28
Foreign net operating loss carryforwards generated (296) (44) -
Other ............................................ 85 39 76
------- ------- -------
Income tax benefit ............................ $ (608) $ (575) $ (455)
======= ======= =======
</TABLE>
41
<PAGE> 42
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
At December 31, 1996, the Company had federal, state and foreign net
operating loss carryforwards of approximately $22,300, $10,800 and $800,
respectively. The Company's net operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
1997 .......... $ 278
1998 .......... 240
1999 .......... 2
2001 .......... 9,148
2003 .......... 833
2004 .......... 1,240
2005 .......... 1,216
2006 .......... 1,670
2007 .......... 17
2008 .......... 1,692
2009 .......... 1,370
2010 .......... 1,840
2011 .......... 14,086
No expiration . 268
</TABLE>
The Company also has approximately $1,400 of federal research and
development credit carryforwards, which expire from 2000 to 2011, $400 of state
research and development credit carryforwards, which have no expiration date,
and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000.
Certain of these net operating loss and research and development credit
carryforwards generated by RDC and Retek prior to their acquisitions by HNC are
subject to annual limitations on their utilization and also are limited to
utilization solely by the Company which generated them. Should a substantial
change in HNC's ownership occur, as defined by the Tax Reform Act of 1986, there
will be an annual limitation on the utilization of net operating loss and
research and development credit carryforwards.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500
shares of the Company's common stock were reserved for issuance pursuant to
nonqualified and incentive stock options to its officers, directors, key
employees and consultants. The plan, as amended, is administered by the Board of
Directors or its designees and provides generally that, for incentive stock
options and nonqualified stock options, the exercise price must not be less than
the fair market value of the shares as determined by the Board of Directors at
the date of grant. The options expire no later than ten years from the date of
grant and may be exercised in installments based upon stipulated timetables (not
in excess of seven years). At December 31, 1996, options to purchase 545 shares
were exercisable.
During 1995, the Company adopted the 1995 Directors Stock Option Plan (the
"Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the
discussion contained in the three paragraphs below, "fair market value" means
the closing price of the Company's Common Stock on the Nasdaq National Market on
the grant date.
The Directors Plan provides for the issuance of up to 300 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25 shares of the Company's common stock are
granted to outside directors upon their respective dates of becoming members of
the Board of Directors and 10 additional options will be granted on each
anniversary of such dates. Options under the Directors Plan are granted at the
fair market value of the stock at the grant date and vest at specific times over
a four-year period. At December 31, 1996, options to purchase 40 shares were
exercisable.
The Incentive Plan provides for the issuance of up to 2,800 shares of the
Company's common stock in the form of nonqualified or incentive stock options,
restricted stock or stock bonuses. In addition, any shares remaining unissued
under the 1987 Stock Option Plan on the effective date of the Incentive Plan,
and any shares issuable upon exercise of options granted pursuant to the 1987
Stock Option Plan that expire or become unexercisable for any reason without
having been exercised in full, will no longer be available for
42
<PAGE> 43
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
issuance under the 1987 Stock Option Plan but will be available for issuance
under the Incentive Plan. Nonqualified stock options and restricted stock may be
awarded at a price not less than 85% of the fair market value of the stock at
the date of the award. Incentive stock options must be awarded at a price not
less than 100% of the fair market value of the stock at the date of the award,
or 110% of fair market value for awards to more than 10% stockholders. Options
granted under the Incentive Plan may have a term of up to 10 years. The Company
has the discretion to provide for restrictions and the lapse thereof in respect
of restricted stock awards, and options typically vest at the rate of 25% of the
total grant per year over a four-year period. However, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1996, 58 shares were exercisable under the
Incentive Plan.
The Purchase Plan provides for the issuance of a maximum of 400 shares of
common stock. Each purchase period, eligible employees may designate between 2%
and 10% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the twelve-month offering period or the last day of
each six-month purchase period. Approximately 65% of eligible employees have
participated in the Plan in the last two years. Under the Purchase Plan, the
Company sold 94 shares to employees in 1996.
RDC's stock option plan is administered by HNC's Board of Directors. All
outstanding RDC options were converted into options to purchase HNC common stock
and adjusted to give effect to the exchange ratio (Note 2). No changes were made
to the terms of the RDC options in connection with the exchange. Options granted
under the RDC stock option plan generally vest at the rate of 25% of the total
grant per year over a four-year period and expire 10 years after the date of
grant. At December 31, 1996, 63 shares were exercisable under the RDC plan.
Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase the Company's
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the Retek options in connection with the
exchange. Options granted vest ratably over periods from one to four years and
have a term of up to 10 years. At December 31, 1996, options to purchase 28
shares were exercisable.
Transactions under the Company's stock option and purchase plans during
the years ended December 31, 1996 and 1995, including options under the RDC
stock option plan and options under the Retek stock option plan but excluding
options to purchase stock of a subsidiary of the Company, Aptex Software Inc.
("Aptex"), are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
-------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ............. 2,722 $ 2.87 2,081 $ 0.49
Options granted .............................. 1,591 28.84 1,101 6.67
Options exercised ............................ (1,140) .96 (207) 0.41
Options canceled ............................. (150) 17.77 (253) 1.75
------ ------
Outstanding at end of year ................... 3,023 16.53 2,722 2.87
====== ======
Options exercisable at end of year ........... 734 1,427
Weighted average fair value of options granted
during the year .............................. $ 16.94 $ 4.64
</TABLE>
43
<PAGE> 44
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.02 to $ 0.92 554 4.66 years $ 0.35 475 $ 0.30
1.00 to 3.00 607 8.10 2.67 157 2.67
4.50 to 21.38 505 8.73 13.06 92 10.91
21.50 to 30.25 510 9.38 26.64 1 22.55
30.50 to 30.75 568 9.73 30.68 9 30.75
30.81 to 49.50 279 9.47 37.81 - -
------ ------
$ 0.02 to $49.50 3,023 8.23 16.53 734 2.55
====== ======
</TABLE>
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex
Plan") whereby 2,000 shares of Aptex common stock were reserved for issuance
pursuant to nonqualified and incentive stock options and restricted stock
awards. The plan is administered by the Board of Directors of Aptex or its
designees and provides generally that nonqualified stock options and restricted
stock may be awarded at a price not less than 85% of the fair market value of
the stock at the date of the award. Incentive stock options must be awarded at a
price not less than 100% of the fair market value of the stock at the date of
the award, or 110% of fair market value for awards to more than 10%
stockholders. Options granted under the Incentive Plan may have a term of up to
10 years. The Company has the discretion to provide for restrictions and the
lapse thereof in respect of restricted stock awards, and options typically vest
at the rate of 25% of the total grant per year over a four-year period. However,
the Company may, at its discretion, implement a different vesting schedule with
respect to any new stock option grant. During 1996, Aptex issued 1,000 shares of
common stock under the Aptex Plan at an issuance price of $0.03 per share. No
options granted under the Aptex Plan were exercisable at December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1996 and
1995 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards Board Statement No.
123, the Company's net income and pro forma net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net income:
As reported .................................. $ 6,376 $ 2,123
Pro forma .................................... 2,137 1,549
Net income per share:
As reported .................................. $ .31 $ .13
Pro forma .................................... .11 .09
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1996 and 1995,
respectively: dividend yield of 0.0% for both years, risk-free interest rates of
6.03% and 6.29%, expected volatility of 70% and 75%, and expected lives of 3.5
years for both years. The fair value of the employees' purchase rights pursuant
to the Purchase Plan is estimated using the Black-Scholes model with the
following assumptions: dividend yield of 0.0% for both years, risk-free interest
rates of 5.36% and 5.66%, expected volatility of 70% and 75%; and an expected
life of 6 months for both years. The weighted-average fair value of those
purchase rights granted in 1996 and 1995 was $9.61 and $2.75, respectively.
44
<PAGE> 45
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The fair value of each option granted under the Aptex Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%,
expected volatility of 90%, and an expected life of 9.25 years. Options to
purchase 704 shares were granted during 1996 at a weighted average exercise
price of $0.03 per share. The weighted average fair value of options granted
during the year was $0.03 per share. At December 31, 1996, there were 704
options outstanding under the Aptex Plan with a weighted average exercise price
of $0.03 per share and a weighted average remaining contractual life of 9.74
years.
NOTE 11 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 12 -- SUBSEQUENT EVENT
On November 28, 1997, the Company acquired all of the outstanding stock of
CompReview, Inc., ("CompReview"), an insurance information technology product
and services company located in Costa Mesa, California, in exchange for the
issuance of 4,885,560 shares of HNC common stock. All outstanding options of
CompReview were exchanged for options to purchase 195,419 shares of HNC common
stock. The acquisition was effected through a statutory merger for which the
Company intends to account as a "pooling of interests" transaction for financial
reporting purposes, and the merger was structured to be a "tax-free"
reorganization for income tax purposes.
45
<PAGE> 46
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 8,121 $ 22,049
Investments available for sale ........................................ 7,353 14,590
Accounts receivable, net .............................................. 22,492 9,142
Current portion of deferred income taxes .............................. 6,383 1,692
Other current assets .................................................. 1,917 1,573
-------- --------
Total current assets ............................................... 46,266 49,046
Investments available for sale .......................................... 19,375 8,336
Deferred income taxes, less current portion ............................. 22,966 346
Property and equipment, net ............................................. 6,339 4,501
Other assets ............................................................ 3,330 874
-------- --------
$ 98,276 $ 63,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 4,368 $ 2,300
Accrued liabilities ................................................... 4,433 3,094
Deferred revenue ...................................................... 3,377 2,101
Bank line of credit ................................................... -- 2,195
Other current liabilities ............................................. 445 893
-------- --------
Total current liabilities ........................................... 12,623 10,583
-------- --------
Notes payable to stockholders ........................................... -- 1,000
-------- --------
Other non-current liabilities ........................................... 683 659
-------- --------
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred stock, $0.001 par value - 4,000 shares authorized:
no shares issued and outstanding .................................... -- --
Common stock, $0.001 par value - 50,000 and 40,000 shares authorized:
24,012 and 22,778 shares issued and outstanding, respectively ....... 24 23
Paid-in capital ....................................................... 83,991 55,771
Unrealized (loss) gain on investments available for sale .............. (59) 92
Foreign currency translation adjustment ............................... 54 --
Retained earnings (accumulated deficit) ............................... 960 (5,025)
-------- --------
Total stockholders' equity .......................................... 84,970 50,861
-------- --------
$ 98,276 $ 63,103
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
46
<PAGE> 47
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License and maintenance .................................... $ 48,890 $ 24,561 $ 13,372
Installation and implementation ............................ 6,691 4,648 3,757
Contracts and other ........................................ 11,128 9,146 7,651
Service bureau ............................................. 4,730 5,349 5,058
-------- -------- --------
Total revenues ........................................ 71,439 43,704 29,838
-------- -------- --------
Operating expenses:
License and maintenance .................................... 13,725 7,903 5,822
Installation and implementation ............................ 2,714 1,425 1,254
Contracts and other ........................................ 7,694 6,894 5,040
Service bureau ............................................. 3,365 3,025 2,203
Research and development ................................... 13,808 6,998 4,679
Sales and marketing ........................................ 11,923 7,276 4,278
General and administrative ................................. 8,551 5,101 3,681
-------- -------- --------
Total operating expenses ............................... 61,780 38,622 26,957
-------- -------- --------
Operating income ............................................... 9,659 5,082 2,881
Interest and other income ...................................... 2,178 912 172
Interest expense ............................................... (478) (428) (312)
-------- -------- --------
Income before income tax benefit ....................... 11,359 5,566 2,741
Income tax benefit ............................................. (534) (511) (401)
-------- -------- --------
Net income ............................................. $ 11,893 $ 6,077 $ 3,142
======== ======== ========
Pro forma net income per share ................................. $ 0.28 $ 0.17
======== ========
Net income per share ........................................... $ 0.47
========
Shares used in computing pro forma net income and net income
per share (Note 1) ......................................... 25,348 21,804 18,756
======== ======== ========
Unaudited pro forma adjusted data (Note 1):
Income before income tax provision ......................... $ 11,359 $ 5,566 $ 2,741
Income tax provision ....................................... 1,628 1,032 604
-------- -------- --------
Net income ............................................... $ 9,731 $ 4,534 $ 2,137
======== ======== ========
Net income per share ....................................... $ 0.38 $ 0.21 $ 0.11
======== ======== ========
Shares used in computing pro forma adjusted net income
per share (unaudited) (Note 1) ............................... 25,348 21,804 18,756
======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
47
<PAGE> 48
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 11,893 $ 6,077 $ 3,142
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 3,605 1,874 789
Changes in assets and liabilities:
Accounts receivable, net ............................................ (10,978) (1,658) (3,037)
Other assets ........................................................ (1,207) (674) (1,323)
Deferred income taxes ............................................... (1,324) (1,551) 13
Accounts payable .................................................... 2,167 1,172 556
Accrued liabilities ................................................. 1,521 2,556 390
Deferred revenue .................................................... 1,472 1,337 (92)
Other liabilities ................................................... (441) 22 297
-------- -------- --------
Net cash provided by operating activities ....................... 6,708 9,155 735
-------- -------- --------
Cash flows from investing activities:
Purchases of investments ................................................... (26,113) (28,666) (7,134)
Maturities of investments .................................................. 18,125 4,182 6,000
Proceeds from sale of investments .......................................... 3,707 2,467 --
Acquisitions of property and equipment ..................................... (3,978) (2,246) (1,920)
-------- -------- --------
Net cash used in investing activities ........................... (8,259) (24,263) (3,054)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuances of common stock ................................ 1,935 33,726 10
Net proceeds from issuances of preferred stock ............................. -- -- 4,949
Proceeds from issuances of notes payable to stockholders ................... -- 1,000 --
Repayment of notes payable to stockholders ................................. (1,000) -- --
Proceeds under bank line of credit ......................................... 309 1,085 3,255
Repayments under bank line of credit ....................................... (2,504) (265) (2,890)
Repayment of debt from asset purchases ..................................... (4,710) -- --
Capital lease payments ..................................................... (553) (502) (304)
Proceeds from issuances of bank notes payable .............................. 1,999 -- 603
Repayments of bank notes payable ........................................... (1,999) (687) (348)
Distributions to CompReview Stockholders ................................... (5,908) (3,845) (990)
-------- -------- --------
Net cash (used in) provided by financing activities ............. (12,431) 30,512 4,285
-------- -------- --------
Effect of exchange rate changes on cash ........................................ 54 -- --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ........................... (13,928) 15,404 1,966
Cash and cash equivalents at beginning of period ............................... 22,049 6,645 4,679
-------- -------- --------
Cash and cash equivalents at end of period ..................................... $ 8,121 $ 22,049 $ 6,645
======== ======== ========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets purchased through issuance of debt .................................. $ 4,710 $ -- $ --
======== ======== ========
Acquisitions of property and equipment under capital leases ................ $ 344 $ 411 $ 1,128
======== ======== ========
Conversion of preferred stock .............................................. $ -- $ 13,518 $ --
======== ======== ========
Accretion of dividends on mandatorily redeemable convertible
preferred stock ........................................................ $ -- $ 348 $ 717
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid .............................................................. $ 448 $ 390 $ 305
======== ======== ========
Income taxes paid .......................................................... $ 165 $ 190 $ 54
======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
48
<PAGE> 49
HNC SOFTWARE INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------
SERIES A SERIES E COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 380 $ -- -- $ -- 8,616 $ 9
Common stock options exercised 40
Issuance of Series E preferred
stock, net of issuance costs 1,282 1
Accretion of dividends
Distributions to CompReview stockholders
Net income
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1994 380 -- 1,282 1 8,656 9
Common stock options exercised 207
Accretion of dividends
Issuance of common stock in initial
public offering, net of issuance costs 2,376 2
Conversion of convertible
preferred stock into common stock (380) (1,282) (1) 8,956 9
Issuance of common stock in
secondary public offering, net of
issuance costs 1,116 2
Issuance of common stock at
inception of Retek (Note 2) 1,367 1
Tax benefit from stock option transactions
Unrealized gain on investments
available for sale
Stock warrant exercised 100
Distributions to CompReview stockholders
Net income
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1995 -- -- -- -- 22,778 23
Common stock options exercised 1,140 1
Common stock issued for
Employee Stock Purchase Plan 94
Tax benefit from stock option transactions
Tax benefit from Retek taxable pooling (Note 9)
Unrealized loss on investments available for sale
Foreign currency translation adjustment
Distributions to CompReview stockholders
Net income
------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1996 -- $ -- -- $ -- 24,012 $ 24
====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON FOREIGN RETAINED TOTAL
INVESTMENTS CURRENCY EARNINGS STOCKHOLDERS'
PAID-IN AVAILABLE TRANSLATION (ACCUMULATED EQUITY
CAPITAL FOR SALE ADJUSTMENT DEFICIT) (DEFICIT)
------- -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $6,739 $ -- $ -- $(12,301) $ (5,553)
Common stock options exercised 10 10
Issuance of Series E preferred
stock, net of issuance costs 4,948 4,949
Accretion of dividends (717) (717)
Distributions to CompReview stockholders (990) (990)
Net income 3,142 3,142
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1994 10,980 -- -- (10,149) 841
Common stock options exercised 85 85
Accretion of dividends (348) (348)
Issuance of common stock in initial
public offering, net of issuance costs 14,329 14,331
Conversion of convertible
preferred stock into common stock 10,618 2,892 13,518
Issuance of common stock in
secondary public offering, net of
issuance costs 19,184 19,186
Issuance of common stock at
inception of Retek (Note 2) (1) --
Tax benefit from stock option transactions 800 800
Unrealized gain on investments
available for sale 92 92
Stock warrant exercised 124 124
Distributions to CompReview stockholders (3,845) (3,845)
Net income 6,077 6,077
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1995 55,771 92 -- (5,025) 50,861
Common stock options exercised 1,095 1,096
Common stock issued for
Employee Stock Purchase Plan 839 839
Tax benefit from stock option transactions 7,889 7,889
Tax benefit from Retek
taxable pooling (Note 9) 18,397 18,397
Unrealized loss on investments
available for sale (151) (151)
Foreign currency translation adjustment 54 54
Distributions to CompReview stockholders (5,908) (5,908)
Net income 11,893 11,893
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1996 $83,991 $ (59) $ 54 $ 960 $84,970
======= ====== ====== ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
49
<PAGE> 50
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
HNC Software Inc. (the "Company") develops, markets and supports
intelligent client-server software solutions for mission-critical decision
applications in real-time environments. The Company also performs contract
research and development using neural networks and other computational
intelligence methods.
Basis of Presentation
The consolidated financial statements and related notes give retroactive
effect to the mergers on August 30, 1996 with Risk Data Corporation ("RDC"), on
November 29, 1996 with Retek Distribution Corporation ("Retek") and on November
28, 1997 with CompReview, Inc. ("CR"), for all periods presented, accounted for
as poolings of interests. RDC is an insurance information technology services
firm engaged in the business of developing and marketing analytical benchmarking
and risk management software products primarily for insurance carriers, state
insurance funds and third party administrators. Retek develops, markets and
installs inventory management system software primarily for customers in the
retail industry. CR develops, markets and installs cost containment software for
worker's compensation insurance carriers and for insurers that handle automobile
accident personal injury claims.
The consolidated balance sheet as of December 31, 1996 and 1995 includes
the accounts of RDC, Retek and CR as of December 31, 1996 and 1995. The
consolidated statements of income, of cash flows and of changes in stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1996 include the results of RDC, Retek and CR for the years then ended. The term
"Company" as used in these consolidated financial statements refers to HNC
Software Inc. and its subsidiaries, including RDC, Retek and CR.
No adjustments to conform accounting methods were required. Certain
amounts have been reclassified with regard to presentation of the financial
information of the three companies. Revenues and net income (loss) for each of
the previously separate companies for the periods prior to their acquisitions
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30,
------------------------------------- ---------------------- ----------------
1996 1995 1994 1997 1996 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Revenues:
HNC .......... $ 53,833 $ 25,174 $ 16,473 $ 62,683 $ 31,423 $ 16,478
RDC .......... -- 4,577 4,201 -- -- 2,600
Retek ........ -- 921 -- -- 5,635 3,377
CR ........... 17,606 13,032 9,164 18,971 12,631 8,119
-------- -------- -------- -------- -------- --------
$ 71,439 $ 43,704 $ 29,838 $ 81,654 $ 49,689 $ 30,574
======== ======== ======== ======== ======== ========
Net income (loss):
HNC .......... $ 6,376 $ 4,457 $ 1,923 $ 7,597 $ 975 $ 1,780
RDC .......... -- (1,952) (1,375) -- -- (2,184)
Retek ........ -- (382) -- -- 93 43
CR ........... 5,517 3,954 2,594 6,702 3,679 2,123
-------- -------- -------- -------- -------- --------
$ 11,893 $ 6,077 $ 3,142 $ 14,299 $ 4,747 $ 1,762
======== ======== ======== ======== ======== ========
</TABLE>
50
<PAGE> 51
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Financial Statement Preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments
in money market accounts and commercial paper purchased with maturities of three
months or less.
Investments
Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. As of and for the year ended
December 31, 1994 based upon the Company's intent and ability, the Company
classified such securities in the held-to-maturity category and recorded these
securities at amortized cost, which approximated market value. As of December
31, 1995, the Company reassessed its intent and ability with respect to these
securities. As a result of this reassessment, the Company reclassified all
securities as "available for sale" and accounts for them accordingly on a
prospective basis. Available for sale securities are carried at fair value with
unrealized gains or losses related to these securities included in stockholders'
equity in the Company's consolidated balance sheet.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using both the straight-line method over the estimated useful lives
of the assets of three to seven years and an accelerated method over the
estimated useful lives of the assets of five to seven years. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the remaining term of the related lease. Repair and maintenance costs are
charged to expense as incurred.
Software Costs
Software costs are recorded at cost and amortized over their estimated
useful lives of 36 to 42 months. Software costs are comprised of purchased
software and other rights which are recorded at the lower of cost or net
realizable value. At December 31, 1996 and 1995, Company software costs of
$2,561 and $0, respectively, are included in other assets in the consolidated
balance sheet net of accumulated amortization of $642 and $0, respectively.
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Through December 31, 1996, no significant amounts were expended
subsequent to reaching technological feasibility.
51
<PAGE> 52
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
certain identifiable intangibles and associated goodwill, on an exception basis,
when events or changes in circumstances have made recovery of an asset's
carrying value unlikely. An impairment loss is recognized when the sum of the
expected future net cash flows is less than the carrying amount of the asset. No
such impairments of long-lived assets existed through December 31, 1996.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense (Note 10).
Revenue Recognition
The Company's revenue from long-term periodic software license agreements
is generally recognized ratably over the respective license periods. Revenue
from perpetual licenses of the Company's software for which there are no
significant continuing obligations and collection of the related receivables is
probable is recognized on delivery of the software and acceptance by the
customer. Revenue from product sales, which is included in contracts and other
revenue, is recognized upon shipment to the customer.
The Company's revenue from software installation and 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 in advance of performance under contracts
are recorded as deferred revenue and are generally recognized within one year
from receipt. Contract losses are recorded as a charge to income in the period
such losses are first identified. Unbilled receivables are stated at estimated
realizable value. Contract costs under government contracts, including indirect
costs, are subject to audit and adjustment by negotiations between the Company
and government representatives. Through 1990, indirect government contract costs
have been agreed upon with government representatives. Revenues from government
contracts have been recorded in amounts that are expected to be realized upon
final settlement.
CR licenses its software primarily to insurers, health maintenance
organizations, self-insured employers and other businesses that reimburse health
care costs. Software licensing agreements generally provide for a guaranteed
minimum license fee and transactional fees. The guaranteed minimum licensee fees
are recognized ratably over the respective license periods. Transactional fees
are recognized as revenue when fees based on system usage exceed the monthly
minimum license fees.
CR offers payors the option of retaining CR to review and reprice medical
bills for them rather than licensing the software. Related service bureau fees
are assessed to customers on the basis of volume of bills processed and are
recognized as revenue when the processing services are performed.
Installation and implementation services fees are billed separately and
recognized as revenue on a time and materials basis.
52
<PAGE> 53
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Taxes
The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount "more likely than not" to be realized in
future tax returns. Tax rate changes are reflected in income during the period
such changes are enacted.
Unaudited Pro Forma Adjusted Data
Prior to the acquisition of CR by HNC on November 28, 1997, CR elected
subchapter S corporation status for income tax purposes; therefore, its income
was included in the tax returns of its stockholders, and no income tax provision
has been recorded for CR other than certain minimum state taxes on subchapter S
corporations. As a result of the acquisition, beginning November 29, 1997, CR
will be subject to corporate income taxes on its taxable income. For comparative
purposes, the consolidated statement of income includes unaudited pro forma
adjusted data with respect to the merged companies' income tax provision as if
CR had been subject to corporate income taxes on its taxable income for all
periods presented.
Foreign Currency Translation
The financial statements of the Company's international operations are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation gains and losses are excluded from results of
operations and accumulated as a separate component of stockholders' equity.
Gains and losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments and trade
accounts receivable which are generally not collateralized. The Company's policy
is to place its cash, cash equivalents and investments with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of its credit exposure. The Company's software license and
installation agreements and commercial development contracts are primarily with
customers in the financial services, insurance and retail industries. The
Company maintains reserves for potential credit losses.
During 1996, 1995 and 1994, sales under prime and subcontracts with the
federal government represented 2.2%, 5.1%, and 7.8%, respectively, of the
Company's total revenues. Revenues from international operations and export
sales, primarily to Western Europe and Canada, represented approximately 17.7%,
12.6%, and 7.9% of total revenues in 1996, 1995 and 1994, respectively. Export
sales were $7,310, $4,595 and $2,355 in 1996, 1995 and 1994, respectively.
Disclosures about fair value of financial instruments
The carrying amounts of cash and cash equivalents, accrued liabilities,
the bank line of credit and notes payable to stockholders approximate fair value
because of the short term maturities of these financial instruments. The
carrying amounts of capital lease obligations approximate their fair values
based on interest rates currently available to the Company for borrowings with
similar terms and maturities.
53
<PAGE> 54
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reincorporation and stock split
In May 1995, the stockholders approved an Agreement and Plan of Merger
whereby the Company merged with and into a newly incorporated Delaware
corporation ("HNC Delaware"), which is the surviving corporation. In conjunction
with the merger, each share of the Company's common stock, preferred stock and
options and warrants to purchase the Company's common stock was exchanged for
one-half share of HNC Delaware's common stock, preferred stock and options and
warrants to purchase HNC Delaware's common stock, at twice the exercise price
for options and warrants. All references to share and per share amounts of
common and preferred stock and other data in these financial statements have
been retroactively restated to reflect the reincorporation.
In April 1996, the Company consummated a two-for-one stock split effected
in the form of a common stock dividend. In February 1996, CR effected a
ten-for-one split of its common stock and increased the number of shares
authorized to 20,000. All share amounts in the accompanying financial statements
and footnotes have been restated to reflect the stock splits.
Pro forma net income per share
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, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into 8,957
shares of common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all stock options granted from May 5, 1994 through
June 26, 1995 have been included as outstanding for all periods prior to June
26, 1995 using the treasury stock method and the $7.00 initial public offering
price per share. For periods prior to 1996, historical earnings per share are
not presented because such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the initial public offering.
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 period.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
NOTE 2 -- ACQUISITIONS
On August 30, 1996, the Company completed an acquisition of RDC. Under the
terms of the acquisition, accounted for as a pooling of interests, the Company
exchanged 1,891 common shares for all of the then outstanding shares of RDC
preferred and common stock. All periods presented have been retroactively
restated (Note 1).
On November 29, 1996, the Company completed an acquisition of all of the
outstanding shares of Retek. Under the terms of the acquisition, accounted for
as a pooling of interests, the Company exchanged 1,367 common shares for all of
Retek's then outstanding shares. All periods presented have been retroactively
restated (Note 1).
54
<PAGE> 55
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
On November 28, 1997, the Company completed an acquisition of all of the
outstanding shares of CR. Under the terms of the acquisition, accounted for as a
pooling of interests, the Company exchanged 4,886 common shares for all of CR's
then outstanding shares. All periods presented have been retroactively restated
(Note 1).
Transaction costs of $563 and $515 were incurred to complete the mergers
with RDC and Retek, respectively. Transaction costs to complete the merger with
CR are estimated to be $1,400. Transaction costs are deferred and charged to
income when the related transaction is consummated. Transaction costs consist
primarily of investment banker, legal and accounting fees, and printing, mailing
and registration expenses.
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Accounts receivable, net:
Billed .......................................... $ 13,266 $ 6,244
Unbilled ........................................ 9,299 2,955
Other ........................................... 636 496
-------- --------
23,201 9,695
Less allowance for doubtful accounts and sales returns (709) (553)
-------- --------
$ 22,492 $ 9,142
======== ========
</TABLE>
Unbilled amounts represent revenue recorded in excess of amounts billable
pursuant to contract provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled amounts are
expected to be realized within one year.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Property and equipment, net:
Computer equipment ...................... $ 9,302 $ 5,740
Furniture and fixtures .................. 2,058 1,435
Machinery & Equipment ................... 111 81
Leasehold improvements .................. 314 208
-------- --------
11,785 7,464
Less accumulated depreciation and amortization (5,446) (2,963)
-------- --------
$ 6,339 $ 4,501
======== ========
Accrued liabilities:
Payroll and related benefits ............ $ 1,645 $ 1,320
Vacation ................................ 860 517
Other ................................... 1,928 1,257
-------- --------
$ 4,433 $ 3,094
======== ========
</TABLE>
55
<PAGE> 56
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- INVESTMENTS
At December 31, 1996 and 1995, the amortized cost and estimated fair value
of investments available for sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
Current: COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. government and federal agencies $ 1,999 $ -- $ (2) $ 1,997
U.S. corporate debt ................. 3,149 -- (6) 3,143
Foreign corporate debt .............. 2,216 -- (3) 2,213
-------- -------- -------- --------
7,364 -- (11) 7,353
-------- -------- -------- --------
Non-current:
U.S. government and federal agencies 16,213 -- (36) 16,177
Foreign government debt ............. 1,006 -- (2) 1,004
U.S. corporate debt ................. 1,702 -- (8) 1,694
Foreign corporate debt .............. 502 -- (2) 500
-------- -------- -------- --------
19,423 -- (48) 19,375
-------- -------- -------- --------
$ 26,787 $ -- $ (59) $ 26,728
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
Current: COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. government and federal agencies $ 1,481 $ 9 $ -- $ 1,490
Foreign government debt ............ 1,017 2 -- 1,019
U.S. corporate debt ................ 8,870 45 -- 8,915
Foreign corporate debt ............. 3,164 2 -- 3,166
------- ------- ------- -------
14,532 58 -- 14,590
------- ------- ------- -------
Non-current:
Foreign government debt ............ 1,019 2 -- 1,021
U.S. corporate debt ................ 7,077 32 -- 7,109
Foreign corporate debt ............. 206 -- -- 206
------- ------- ------- -------
8,302 34 -- 8,336
------- ------- ------- -------
$22,834 $ 92 $ -- $22,926
======= ======= ======= =======
</TABLE>
Maturities for non-current investments in securities range from one to two
years. Included in the Company's 1995 income statement is a realized gain in the
amount of $3 related to the sale of held-to-maturity securities with an
aggregate amortized cost in the amount of $2,464. No significant gains or losses
were recognized during the year ended December 31, 1996. The cost of securities
sold is determined by the specific identification method.
NOTE 5 -- NOTES PAYABLE
The Company has a Loan and Security Agreement with a bank which provides
for a $5,000 revolving line of credit through July 10, 1997. The agreement
requires that the Company maintain certain financial ratios and levels of
tangible net worth and also restricts the Company's ability to pay cash
dividends and repurchase stock without the bank's consent. At December 31, 1996
and 1995, the Company had $0 outstanding under the revolving line of credit. Any
borrowings under the agreement will be collateralized by substantially all of
the Company's assets. Interest is payable monthly at the bank's prime rate,
which was 8.25% at December 31, 1996.
56
<PAGE> 57
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The RDC credit facility was comprised of a revolving line of credit
secured by eligible accounts receivable as well as a bridge loan which was
secured by the guarantees of certain stockholders. The revolving line of credit
matured on January 5, 1997. The bridge loan matured on September 5, 1996. All
outstanding amounts were repaid during 1996 and neither credit facility was
renewed.
During 1995, the preferred stockholders of RDC loaned the Company $1,000
under subordinated note agreements (secured by the assets of RDC but
subordinated to borrowings under the RDC line of credit) bearing interest at 9%.
All outstanding amounts were repaid during 1996.
NOTE 6 -- LEASES
At December 31, 1996, the Company is obligated under noncancelable
operating leases for its facilities and certain equipment through 2003 as
follows:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
<S> <C> <C> <C>
1997 $2,102 $212 $1,890
1998 1,543 192 1,351
1999 1,193 149 1,044
2000 1,215 -- 1,215
2001 1,250 -- 1,250
thereafter 1,787 -- 1,787
</TABLE>
The lease for the Company's corporate headquarters provides for scheduled
rent increases and an option to extend the lease for five years with certain
changes to the terms of the lease agreement and a refurbishment allowance. Rent
expense under operating leases for the years ended December 31, 1996, 1995 and
1994 was approximately $1,623, $1,503 and $1,191, respectively, net of sublease
income of $125, $83 and $40, respectively.
RDC maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are as follows:
<TABLE>
<S> <C>
1997 ............................. $ 475
1998 ............................. 232
1999 ............................. 66
-----
773
Less amounts representing interest (110)
-----
Capital lease obligations ........ 663
Less current portion ............. (399)
-----
$ 264
=====
</TABLE>
The gross value of assets under capital leases at December 31, 1996 and
1995 was $1,481 and $2,186 and accumulated amortization was $599 and $572,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
57
<PAGE> 58
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY
In November 1992, the Company entered into an agreement that granted Mitek
a license to use certain character recognition technology developed by the
Company. The agreement provided for the Company to receive an initial license
and support fee payment of $1,350 and an additional license and support fee
based on a percentage of Mitek's revenue from the sale of character recognition
products through November 1995. The agreement also required that the Company
sell certain proprietary computer boards to Mitek at a substantial discount from
normal sales prices, but in excess of cost, and provide ongoing engineering and
technical support over the agreement period, which ended during November 1995.
As the Company had a significant continuing obligation under this agreement, the
initial license and support fee received thereunder was deferred on receipt and
recognized as revenue over the performance period based on estimated sales of
proprietary computer boards. The additional license and support fees were
recognized as a percentage of actual Mitek revenues pursuant to the agreement.
Revenue recognized pursuant to this agreement, which is included in
"contracts and other" in the consolidated statement of income, is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------ ------
<S> <C> <C>
Initial license fee ......... $ 47 $ 295
Additional license and support fee 314 476
Computer board sales ........ 527 657
------ ------
$ 888 $1,428
====== ======
</TABLE>
NOTE 8 -- CAPITAL STOCK
During June 1995, the Company completed its initial public offering for
sale of 5,175 shares of common stock (of which 2,375 shares were sold by the
Company and 2,800 shares were sold by certain selling stockholders) at a price
to the public of $7.00 per share, which resulted in net proceeds to the Company
of $15,461 after the payment of underwriters' commissions but before the
deduction of offering expenses. Upon the closing of the Company's initial public
offering, all outstanding shares of Series A, B, C, D, and E convertible
preferred stock were automatically converted into shares of common stock at
their then effective conversion prices. Upon conversion, the preferred
stockholders were no longer entitled to any undeclared cumulative dividends and
all class voting rights terminated.
During December 1995, the Company completed a secondary public offering
for sale of 3,000 shares of common stock (of which 1,116 shares were sold by the
Company and 1,884 shares were sold by certain selling stockholders) at a price
to the public of $18.50 per share, which resulted in net proceeds to the Company
of $19,606 after the payment of underwriters' commissions but before the
deduction of offering expenses.
The Board of Directors is authorized to issue up to 4,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to the rights of the holders of any Preferred Stock that may be issued
in the future.
58
<PAGE> 59
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 -- INCOME TAXES
Income (loss) before income tax benefit was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic $ 8,599 $ 5,764 $ 2,741
Foreign 2,760 (198) --
------- ------- -------
$11,359 $ 5,566 $ 2,741
======= ======= =======
</TABLE>
The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Current:
Federal $ 1,132 $ 97 $ 17
State 204 143 69
Foreign 51 -- --
Deferred:
Federal (1,569) (521) (425)
State (56) (186) (62)
Foreign (296) (44) --
------- ------- -------
$ (534) $ (511) $ (401)
======= ======= =======
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- -------
<S> <C> <C>
Taxable pooling basis difference ..... $18,397 $ --
Net operating loss carryforwards ..... 8,587 2,902
Tax credit carryforwards ............. 1,878 1,370
Other ................................ 487 483
------- -------
Gross deferred tax assets ............ 29,349 4,755
Deferred tax asset valuation allowance -- (2,717)
------- -------
Net deferred tax asset ............ $29,349 $ 2,038
======= =======
</TABLE>
At December 31, 1994, the Company provided a deferred tax asset valuation
allowance for deferred tax assets which management determined were "more likely
than not" unrealizable based on trends in operating results after eliminating
the effects of non-recurring revenue (Note 7). During 1995, the Company released
the valuation allowance related to HNC's deferred tax assets based on
management's assessment that it was more likely than not that the Company would
realize a portion of those assets in future periods due to improvements in HNC's
operating results. During 1996, the Company released the valuation allowances
related to RDC and Retek deferred tax assets based on management's assessment
that it was more likely than not that the Company would realize those assets in
future periods due to improvements in the operating results of those
subsidiaries.
During 1996 and 1995, the Company realized certain tax benefits related to
stock option plans in the amount of $7,889 and $800, respectively. The benefit
from the stock option tax deduction is credited directly to paid-in capital.
In connection with the acquisition of Retek, the Company made an Internal
Revenue Code Section 338 election for federal and state tax purposes, resulting
in the treatment of the acquisition as a taxable transaction, whereby the tax
bases of the acquired assets and liabilities were adjusted to their fair values
as of the date of the acquisition. As the purchase price exceeded the carrying
value of the net assets acquired by approximately $46,000, the Company recorded
a deferred tax asset in the amount of $18,397.
59
<PAGE> 60
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
A reconciliation of the income tax benefit to the amount computed by
applying the statutory federal income tax rate to income before income tax
provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Amounts computed at statutory federal rate ....... $ 3,862 $ 1,892 $ 932
Release of valuation allowance ................... (2,717) (2,223) (1,008)
Subchapter S corporation earnings ................ (1,901) (1,366) (900)
Tax credit carryforwards generated ............... (334) (68) (51)
Losses without tax benefit ....................... -- 794 468
Separate return impact of acquired businesses .... (154) -- --
Acquisition expenses not tax deductible .......... 367 -- --
State income tax expense ......................... 554 465 82
Foreign net operating loss carryforwards generated (296) (44) --
Other ............................................ 85 39 76
------- ------- -------
Income tax benefit ............................ $ (534) $ (511) $ (401)
======= ======= =======
</TABLE>
Prior to the acquisition of CR by HNC on November 28, 1997, CR elected
subchapter S corporation status for income tax purposes; therefore, its income
was included in the tax returns of its stockholders, and no income tax provision
has been recorded for CR other than certain minimum state taxes on subchapter S
corporations.
At December 31, 1996, the Company had federal, state and foreign net
operating loss carryforwards of approximately $22,300, $10,800 and $800,
respectively. The net operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
1997 .......... $ 278
1998 .......... 240
1999 .......... 2
2001 .......... 9,148
2003 .......... 833
2004 .......... 1,240
2005 .......... 1,216
2006 .......... 1,670
2007 .......... 17
2008 .......... 1,692
2009 .......... 1,370
2010 .......... 1,840
2011 .......... 14,086
No expiration . 268
</TABLE>
The Company also has approximately $1,400 of federal research and
development credit carryforwards, which expire from 2000 to 2011, $400 of state
research and development credit carryforwards, which have no expiration date,
and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000.
Certain of these net operating loss and research and development credit
carryforwards generated by RDC and Retek prior to their acquisitions by HNC are
subject to annual limitations on their utilization and also are limited to
utilization solely by the Company which generated them. Should a substantial
change in HNC's ownership occur, as defined by the Tax Reform Act of 1986, there
will be an annual limitation on the utilization of net operating loss and
research and development credit carryforwards.
60
<PAGE> 61
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- EMPLOYEE BENEFIT PLANS
During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500
shares of the Company's common stock were reserved for issuance pursuant to
nonqualified and incentive stock options to its officers, directors, key
employees and consultants. The plan, as amended, is administered by the Board of
Directors or its designees and provides generally that, for incentive stock
options and nonqualified stock options, the exercise price must not be less than
the fair market value of the shares as determined by the Board of Directors at
the date of grant. The options expire no later than ten years from the date of
grant and may be exercised in installments based upon stipulated timetables (not
in excess of seven years). At December 31, 1996, options to purchase 545 shares
were exercisable.
During 1995, the Company adopted the 1995 Directors Stock Option Plan (the
"Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the
discussion contained in the three paragraphs below, "fair market value" means
the closing price of the Company's Common Stock on the Nasdaq National Market on
the grant date.
The Directors Plan provides for the issuance of up to 300 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25 shares of the Company's common stock are
granted to outside directors upon their respective dates of becoming members of
the Board of Directors and 10 additional options will be granted on each
anniversary of such dates. Options under the Directors Plan are granted at the
fair market value of the stock at the grant date and vest at specific times over
a four-year period. At December 31, 1996, options to purchase 40 shares were
exercisable.
The Incentive Plan provides for the issuance of up to 2,800 shares of the
Company's common stock in the form of nonqualified or incentive stock options,
restricted stock or stock bonuses. In addition, any shares remaining unissued
under the 1987 Stock Option Plan on the effective date of the Incentive Plan,
and any shares issuable upon exercise of options granted pursuant to the 1987
Stock Option Plan that expire or become unexercisable for any reason without
having been exercised in full, will no longer be available for issuance under
the 1987 Stock Option Plan but will be available for issuance under the
Incentive Plan. Nonqualified stock options and restricted stock may be awarded
at a price not less than 85% of the fair market value of the stock at the date
of the award. Incentive stock options must be awarded at a price not less than
100% of the fair market value of the stock at the date of the award, or 110% of
fair market value for awards to more than 10% stockholders. Options granted
under the Incentive Plan may have a term of up to 10 years. The Company has the
discretion to provide for restrictions and the lapse thereof in respect of
restricted stock awards, and options typically vest at the rate of 25% of the
total grant per year over a four-year period. However, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1996, 58 shares were exercisable under the
Incentive Plan.
The Purchase Plan provides for the issuance of a maximum of 400 shares of
common stock. Each purchase period, eligible employees may designate between 2%
and 10% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the twelve-month offering period or the last day of
each six-month purchase period. Approximately 65% of eligible employees have
participated in the Plan in the last two years. Under the Purchase Plan, the
Company sold 94 shares to employees in 1996.
61
<PAGE> 62
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RDC's stock option plan is administered by HNC's Board of Directors. All
outstanding RDC options were converted into options to purchase HNC common stock
and adjusted to give effect to the exchange ratio (Note 2). No changes were made
to the terms of the RDC options in connection with the exchange. Options granted
under the RDC stock option plan generally vest at the rate of 25% of the total
grant per year over a four-year period and expire 10 years after the date of
grant. At December 31, 1996, 63 shares were exercisable under the RDC plan.
Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase the Company's
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the Retek options in connection with the
exchange. Options granted vest ratably over periods from one to four years and
have a term of up to 10 years. At December 31, 1996, options to purchase 28
shares were exercisable.
The CR 1995 Stock Option Plan is administered by HNC's Board of Directors.
All outstanding CR stock options were converted into options to purchase HNC
common stock and adjusted to give effect to the exchange ratio (Note 2). No
changes were made to the terms of the CR options in connection with the
exchange. Options granted under the CR Stock Option Plan generally vest ratably
over periods from two to four years and expire 10 years after the date of grant.
At December 31, 1996, options to purchase 400 shares were exercisable.
Transactions under the Company's stock option and purchase plans during the
years ended December 31, 1996 and 1995, including options under the RDC stock
option plan, options under the Retek stock option plan and options under the CR
Stock Option Plan, but excluding options to purchase stock of a subsidiary of
the Company, Aptex Software Inc. ("Aptex"), are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995
------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ....... 2,868 $ 2.84 2,080 $ 0.49
Options granted ................... 1,645 27.98 1,272 6.08
Options exercised ................. (1,140) .96 (207) 0.52
Options canceled .................. (158) 17.62 (277) 1.80
------ ------
Outstanding at end of year ............. 3,215 15.65 2,868 2.84
====== ======
Options exercisable at end of year ..... 841 1,437
Weighted average fair value of options
granted during the year ........... $14.50 $3.10
</TABLE>
62
<PAGE> 63
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 LIFE (IN YEARS) EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ----------------- ----------------- --------------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.02 to $ 0.92 554 4.66 $ 0.35 475 $ 0.30
1.00 to 3.00 803 7.69 2.58 245 2.55
4.50 to 21.38 505 8.73 13.06 92 10.91
21.50 to 30.50 661 9.51 27.52 20 25.20
30.75 to 30.75 413 9.66 30.75 9 30.75
30.81 to 49.50 279 9.47 37.81 - -
----- ----
$ 0.02 to $49.50 3,215 8.11 15.65 841 3.04
===== ====
</TABLE>
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex Plan")
whereby 2,000 shares of Aptex common stock were reserved for issuance pursuant
to nonqualified and incentive stock options and restricted stock awards. The
plan is administered by the Board of Directors of Aptex or its designees and
provides generally that nonqualified stock options and restricted stock may be
awarded at a price not less than 85% of the fair market value of the stock at
the date of the award. Incentive stock options must be awarded at a price not
less than 100% of the fair market value of the stock at the date of the award,
or 110% of fair market value for awards to more than 10% stockholders. Options
granted under the Incentive Plan may have a term of up to 10 years. The Company
has the discretion to provide for restrictions and the lapse thereof in respect
of restricted stock awards, and options typically vest at the rate of 25% of the
total grant per year over a four-year period. However, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. During 1996, Aptex issued 1,000 shares of common stock under the
Aptex Plan at an issuance price of $0.03 per share. No options granted under the
Aptex Plan were exercisable at December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1996 and
1995 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards Board Statement No.
123, the Company's net income and pro forma net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Net income:
As reported .................................. $ 11,893 $ 6,077
Pro forma .................................... 6,122 5,126
As reported pro forma adjusted (Note 1) ...... 9,731 4,534
Pro forma .................................... 3,960 3,583
Net income per share:
As reported .................................. $ 0.47 $ 0.28
Pro forma .................................... 0.24 0.24
As reported pro forma adjusted (Note 1) ...... $ 0.38 $ 0.21
Pro forma .................................... 0.16 0.17
</TABLE>
63
<PAGE> 64
HNC SOFTWARE INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1996 and 1995,
respectively: dividend yield of 0.0% for both years, risk-free interest rates of
6.03% and 6.29%, expected volatility of 70% and 75% (0% for both years for
options granted by RDC, Retek and CR prior to their acquisition by HNC), and
expected lives of 3.5 years for both years. The fair value of the employees'
purchase rights pursuant to the Purchase Plan is estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0.0% for
both years, risk-free interest rates of 5.36% and 5.66%, expected volatility of
70% and 75%; and an expected life of 6 months for both years. The weighted
average fair value of those purchase rights granted in 1996 and 1995 was $9.61
and $2.75, respectively.
The fair value of each option granted under the Aptex Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%,
expected volatility of 90%, and an expected life of 9.25 years. Options to
purchase 704 shares were granted during 1996 at a weighted average exercise
price of $0.03 per share. The weighted average fair value of options granted
during the year was $0.03 per share. At December 31, 1996, there were 704
options outstanding under the Aptex Plan with a weighted average exercise price
of $0.03 per share and a weighted average remaining contractual life of 9.74
years.
NOTE 11 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
64
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of HNC Software Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 21, 1997, except as to the pooling of interests with CompReview,
Inc. which is as of November 28, 1997, appearing on page 28 of this Current
Report on Form 8-K also included an audit of the Financial Statement Schedule
listed in Item 7(b)(4) of this Form 8-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
San Diego, California
January 21, 1997,
except as to the pooling of interests with CompReview, Inc.
which is as of November 28, 1997
65
<PAGE> 66
SCHEDULE II
HNC SOFTWARE INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ALLOWANCE FOR DEFERRED TAX
DOUBTFUL ACCOUNTS ASSET VALUATION
& SALES RETURNS ALLOWANCE
----------------- ---------------
<S> <C> <C>
Balance at December 31, 1993 $292,000 $4,658,000
Provision 529,000 972,000
Write-off (307,000) -
Recovery - (1,392,000)
-------- ------------
Balance at December 31, 1994 514,000 4,238,000
Provision 529,000 702,000
Write-off (472,000) -
Recovery (18,000) (2,223,000)
--------- ----------
Balance at December 31, 1995 553,000 2,717,000
Provision 279,000 -
Write-off (94,000) -
Recovery (29,000) (2,717,000)
-------- ----------
Balance at December 31, 1996 $709,000 $ -0-
======== ==========
</TABLE>
66
<PAGE> 67
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.
Date: December 12, 1997
HNC SOFTWARE INC.
By: /s/ Raymond V. Thomas
----------------------
Raymond V. Thomas
Chief Financial Officer
67
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
2.01 Agreement and Plan of Reorganization dated as of July 14,
1997 by and among HNC, FW1 Acquisition Corp., CompReview,
Inc., Robert L. Kaaren and Mishel E. Munnayer, a.k.a.
Michael Munayyer, Trustee of the Michael Munayyer Trust
dated August 11, 1995.
2.02 Agreement of Merger dated as of November 28, 1997 by and
between FW1 Acquisition Corp. and CompReview, Inc.
4.01 Registration Rights Agreement dated as of November 28, 1997
by and among HNC and the former shareholders of CompReview,
Inc.
11.01 Statement Regarding Computation of Per Share Earnings
(Loss)
23.01 Consent of Price Waterhouse LLP, Independent Accountants
23.02 Consent of Deloitte & Touche LLP, Independent Auditors
27.01 Financial Data Schedule
</TABLE>
68
<PAGE> 1
EXHIBIT 2.01
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and
entered into as of July 14, 1997 (the "AGREEMENT DATE") by and among HNC
SOFTWARE INC., a Delaware corporation ("HNC"), FW1 ACQUISITION CORP., a Delaware
corporation that is a wholly-owned subsidiary of HNC ("SUB"), CompReview, Inc.,
a California corporation (the "COMPANY") and Robert L. Kaaren, M.D. and Mishel
E. Munnayer a.k.a Michael E. Munayyer, Trustee of the Michael Munayyer Trust
dated August 11, 1995, who are the only stockholders of the Company (each being
hereinafter individually referred to as a "CR STOCKHOLDER" and collectively
referred to as the "CR STOCKHOLDERS").
RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, Sub will be merged with and into the Company in a reverse triangular
merger, with the Company to be the surviving corporation of such merger, all
pursuant to the terms and conditions of this Agreement and applicable law. The
parties also intend for such merger to qualify as a "pooling of interests"
transaction for accounting and financial reporting purposes and to be treated as
a "reorganization" under Section 368(a)(1)(A) of the Internal Revenue Code of
1986, as amended, by virtue of the provisions of Section 368(a)(2)(E) of such
Code.
B. Upon the effectiveness of such merger, the capital stock of the
Company that is outstanding immediately prior to the effectiveness of the merger
will be converted into shares of the common stock of HNC (plus cash for any
eliminated fractional shares), the employee stock options to purchase shares of
the Company's common stock granted under the Company's 1995 Stock Option Plan
that are outstanding immediately prior to the effectiveness of the Merger will
be assumed by HNC and converted into options to purchase shares of HNC common
stock and Sub will be merged with and into the Company, all as provided in this
Agreement.
NOW, THEREFORE, in consideration of the above-recited facts and the
mutual promises, covenants and conditions contained herein, the parties hereby
agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
As used in this Agreement, the following terms will have the meanings
set forth below:
1.1 The "MERGER" means the statutory merger of Sub with and into the
Company to be effected pursuant to the terms and conditions of this Agreement.
1.2 The "EFFECTIVE TIME" means the time and date on which the Merger
first becomes legally effective under the laws of the States of California and
Delaware as a result of: (i) the filing with the California Secretary of State
of an Agreement of Merger between Sub and the Company in substantially the form
of Exhibit A (the "AGREEMENT OF MERGER") and any required officers'
certificates; and (ii) the filing with the Delaware Secretary of State of the
Agreement of Merger and any required officers' certificates or, in lieu thereof
at HNC's option, a Certificate of
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Merger (the "CERTIFICATE OF MERGER"), conforming to the requirements of Section
252 of the Delaware General Corporation Law.
1.3 "HNC COMMON STOCK" means HNC's Common Stock, $0.001 par value per
share.
1.4 "HNC CLOSING AVERAGE PRICE PER SHARE" means the average of the
closing prices per share of HNC Common Stock as quoted on the Nasdaq National
Market (or the New York Stock Exchange or the American Stock Exchange if HNC
Common Stock is then traded or quoted on either such exchange) and reported in
The Wall Street Journal for the twenty (20) trading days immediately preceding
(but not including) the Closing Date (as defined in Section 7.1).
1.5 "COMPANY COMMON STOCK" means the Company's Common Stock.
1.6 "COMPANY OPTIONS" means, collectively, options to purchase shares
of Company Common Stock granted by the Company to Company employees under the
Company's 1995 Stock Option Plan (the "COMPANY OPTION PLAN").
1.7 "COMPANY DERIVATIVE SECURITIES" means, collectively: (a) any
warrant, option, right or other security that entitles the holder thereof to
purchase or otherwise acquire any shares of the capital stock of the Company
(collectively, "COMPANY STOCK RIGHTS"); (b) any note, evidence of indebtedness,
stock or other security of the Company that is convertible into or exchangeable
for any shares of the capital stock of the Company or any Company Stock Rights
("COMPANY CONVERTIBLE SECURITY"); and (c) any warrant, option, right, note,
evidence of indebtedness, stock or other security that entitles the holder
thereof to purchase or otherwise acquire any Company Stock Rights or any Company
Convertible Security; provided, however, that the term "Company Derivative
Securities" does not include any of the Company Options.
1.8 "NUMBER OF COMPANY FULLY DILUTED SHARES" means that number of
shares of Company Common Stock that is equal to the sum of: (a) the total number
of shares of Company Common Stock that are issued and outstanding immediately
prior to the Effective Time; plus (b) the total number of shares of Company
Common Stock subject to or issuable under all Company Options that are issued
and outstanding immediately prior to the Effective Time; plus (c) the total
number of shares of Company Common Stock that, immediately prior to the
Effective Time, are, directly or indirectly, ultimately or potentially issuable
by the Company upon the exercise, conversion or exchange of all Company
Derivative Securities (if any) that are issued and outstanding immediately prior
to the Effective Time.
1.9 "COMPANY STOCKHOLDERS" means those persons (each being
individually referred to herein as a "COMPANY STOCKHOLDER") who, immediately
prior to the Effective Time, hold the shares of the Company Stock that are
outstanding immediately prior to the Effective Time; provided, however, that for
purposes of Section 2.4 and Section 11 of this Agreement, the term "Company
Stockholders" means only those Company Stockholders (as defined above in this
Section) who are issued shares of HNC Common Stock in the Merger.
1.10 "COMPANY DISSENTING SHARES" means any shares of any capital stock
of the Company that (i) are outstanding immediately prior to the Effective Time
and qualify fully as "dissenting shares" within the meaning of Section 1300(b)
of the California Corporations Code and (ii) with respect to which dissenter's
rights to require the purchase of such dissenting shares for
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cash at their fair market value in accordance with Chapter 13 of the California
Corporations Code have been duly and properly exercised and perfected in
connection with the Merger.
1.11 "HNC MERGER SHARES" means a number of shares of HNC Common Stock
equal to the sum of (i) Five Million (5,000,000) shares of HNC Common Stock, as
presently constituted, plus (ii) the Additional Shares.
1.12 "ADDITIONAL SHARES" means that number of shares of HNC Common
Stock (as constituted immediately prior to the Effective Time) obtained by
dividing (i) the Retained Earnings (as defined below) by (ii) the HNC Closing
Average Price Per Share. As used herein, the "RETAINED EARNINGS" means the
retained earnings of the Company as of the last day of the last full calendar
month ended prior to the Closing Date, computed in accordance with generally
accepted accounting principles, consistently applied.
1.13 "CONVERSION RATIO" means the quotient obtained by (a) dividing
the number of shares of HNC Common Stock constituting the HNC Merger Shares by
(b) the Number of Company Fully Diluted Shares.
1.14 "HNC ANCILLARY AGREEMENTS" means, collectively, each agreement,
certificate or document (other than this Agreement) to which HNC is to enter
into as a party thereto, or otherwise is to execute and deliver, pursuant to or
in connection with this Agreement. "SUB ANCILLARY AGREEMENTS" means,
collectively, the Agreement of Merger and each other agreement, certificate or
document (other than this Agreement) to which Sub is to enter into as a party
thereto, or otherwise is to execute and deliver, pursuant to or in connection
with this Agreement. "COMPANY ANCILLARY AGREEMENTS" means, collectively, the
Agreement of Merger and each other agreement, certificate or document (other
than this Agreement) to which the Company is to enter into as a party thereto,
or otherwise is to execute and deliver, pursuant to or in connection with this
Agreement. "CR STOCKHOLDER ANCILLARY AGREEMENTS" means, collectively, each
agreement, certificate or document (other than this Agreement) that a CR
Stockholder is to enter into as a party thereto, or otherwise is to execute and
deliver, pursuant to or in connection with this Agreement, and includes, without
limitation, each of the following agreements to be entered into and executed by
each CR Stockholder hereunder: the Escrow Agreement, the Investment
Representation Letter, the Registration Rights Agreement, the Company
Stockholder Agreement, the Company Affiliate Agreement, the Non-Competition
Agreement and the Employment Agreement (each as hereafter defined).
1.15 "KNOWLEDGE," when used with reference to the Company or the CR
Stockholders, means the collective actual knowledge of the CR Stockholders, the
President and/or Chief Executive Officer of the Company, the Chief Financial
Officer of the Company and/or any Vice President of the Company.
1.16 "PROXY STATEMENT" means the proxy statement that HNC distributes
and sends to its stockholders in connection with the special meeting of HNC's
stockholders to be called and held by HNC in order to seek HNC's stockholders'
approval of the issuance of shares of HNC Common Stock and HNC Options to
securityholders of the Company pursuant to the Merger, this Agreement and the
Agreement of Merger.
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Other capitalized terms defined elsewhere in this Agreement and not
defined in this Article I will have the meanings assigned to such terms in this
Agreement.
ARTICLE 2
PLAN OF REORGANIZATION
2.1 Conversion of Shares.
2.1.1 Conversion of Sub Stock. At the Effective Time, each share
of the Common Stock of Sub that is issued and outstanding immediately prior to
the Effective Time will, by virtue of the Merger and without the need for any
further action on the part of the holder thereof, be converted into and become
one (1) share of Company Common Stock that is issued and outstanding immediately
after the Effective Time, and the shares of Company Common Stock into which the
shares of Sub Common Stock are so converted in the Merger will be the only
shares of capital stock of the Company that are issued and outstanding
immediately after the Effective Time.
2.1.2 Conversion of Company Stock. At the Effective Time, each
share of Company Common Stock that is issued and outstanding immediately prior
to the Effective Time (other than any Company Dissenting Shares as provided in
Section 2.1.3) will, by virtue of the Merger, and without the need for any
further action on the part of the holder thereof, be converted into a number of
shares of HNC Common Stock that is equal to the Conversion Ratio, subject to the
provisions of Section 2.1.4 regarding the elimination of fractional shares.
2.1.3 Company Dissenting Shares. Holders of Company Dissenting
Shares (if any) will be entitled to their appraisal rights under Chapter 13 of
the California Corporations Code with respect to such Company Dissenting Shares
and such Company Dissenting Shares will not be converted into shares of HNC
Common Stock in the Merger; provided, however, that nothing in this Section
2.1.3 is intended to remove, release, waive, alter or affect any of the
conditions to HNC's and Sub's obligations to consummate the Merger set forth in
Section 9.8 and Section 9.9, or any other provision of this Agreement relating
to the Company Dissenting Shares. Shares of the capital stock of the Company
that are outstanding immediately prior to the Effective Time of the Merger and
with respect to which dissenting shareholders' rights of appraisal under the
California Corporations Code have not been properly perfected will, when such
dissenting shareholders' rights can no longer be legally exercised under the
California Corporations Code, be converted into HNC Common Stock as provided in
Section 2.1.2.
2.1.4 Fractional Shares. No fractional shares of HNC Common Stock
will be issued in connection with the Merger. In lieu thereof, each holder of
Company Common Stock who would otherwise be entitled to receive a fraction of a
share of HNC Common Stock pursuant to Section 2.1.2, after aggregating all
shares of HNC Common Stock to be received by such holder pursuant to Section
2.1.2, will instead receive from HNC, within three (3) business days after the
Effective Time, an amount of cash equal to product obtained by multiplying (i)
the HNC Closing Average Price Per Share (as adjusted to reflect any Capital
Change (as defined below) of HNC) by (ii) the fraction of a share of HNC Common
Stock that such holder would otherwise be entitled to receive.
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<PAGE> 5
2.2 Assumption and Conversion of Company Options.
2.2.1 Assumption by HNC. Each Company Option that is outstanding
immediately prior to the Effective Time will, by virtue of the Merger and at the
Effective Time and without the need for any further action on the part of any
holder thereof, be assumed by HNC and converted into an option (an "HNC OPTION")
to purchase that number of shares of HNC Common Stock determined by multiplying
the number of shares of Company Common Stock subject to such Company Option
immediately prior to the Effective Time by the Conversion Ratio, at an exercise
price per share of HNC Common Stock equal to the exercise price per share of
Company Common Stock that was in effect for such Company Option immediately
prior to the Effective Time divided by the Conversion Ratio; provided, however,
that if the foregoing calculation would result in an assumed and converted
Company Option being converted into an HNC Option that, after aggregating all
the shares of HNC Common Stock issuable upon the exercise of such HNC Option,
would be exercisable for a fraction of a share of HNC Common Stock, then the
number of shares of HNC Common Stock subject to such HNC Option will be rounded
down to the nearest whole number of shares of HNC Common Stock. The terms,
exercisability, vesting schedule, status as an "incentive stock option" under
Section 422 of the Code (if applicable) or as a nonqualified stock option, and
all other terms and conditions of each Company Option (including but not limited
to the provisions of the Company Option Plan that form part of the terms and
conditions of such Company Option) that is converted into an HNC Option in the
Merger will (except as otherwise provided in the terms of such Company Options),
to the extent permitted by law and otherwise reasonably practicable, be
unchanged and continue in effect after the Merger. Pre-Merger employment service
with the Company will be credited to each holder of a Company Option for
purposes of applying any vesting schedule contained in a Company Option to
determine the number of shares of HNC Common Stock that are exercisable under
the HNC Option into which such Company Option is converted in the Merger.
2.2.2 Registration. HNC will use its best efforts (with the
cooperation and assistance of the Company) to cause the shares of HNC Common
Stock that are subject to the HNC Options that are issued upon the conversion of
the Company Options under Section 2.2.1 to be registered on a registration
statement (or to be issued pursuant to a then-effective registration statement)
on Form S-8 (or successor form) promulgated by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "1933
ACT"), as soon as reasonably practicable after the Effective Time, and will use
its best efforts to maintain the effectiveness of such Form S-8 registration
statement or registration statements for so long as such HNC Options remain
outstanding and HNC Common Stock is registered under the Securities Exchange Act
of 1934, as amended (the "1934 ACT"). HNC will use its best efforts to file a
Form S-8 registration statement covering the shares of HNC Common Stock that are
subject to the HNC Options referred to above within five (5) business days after
the Effective Time.
2.3 Adjustments for Capital Changes. Notwithstanding the provisions of
Section 2.1 or Section 2.2, if at any time after the Agreement Date and prior to
the Effective Time, HNC recapitalizes, either through a subdivision (or stock
split) of any of its outstanding shares into a greater number of shares, or a
combination (or reverse stock split) of any of its outstanding shares into a
lesser number of shares, or reorganizes, reclassifies or otherwise changes its
outstanding shares into the same or a different number of shares of other
classes (other than through a subdivision or combination of shares provided for
in the previous clause), or declares a dividend
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<PAGE> 6
on its outstanding shares payable in shares of HNC Common Stock or in shares or
securities convertible into shares of HNC Common Stock (each, a "CAPITAL
CHANGE"), then the HNC Closing Average Price Per Share, the number of shares of
HNC Common Stock constituting the HNC Merger Shares and the Conversion Ratio
will each be appropriately adjusted so as to maintain the proportionate
interests of the stockholders and optionholders of HNC and the Company in the
outstanding equity of HNC immediately following the Merger as contemplated by
this Agreement.
2.4 Escrow Agreement. At the Closing (as that term is defined in
Section 7.1) of the Merger, HNC will withhold ten percent (10%) of the shares of
HNC Common Stock to be issued to the Company Stockholders in the Merger pursuant
to Section 2.1.2, rounded down to the nearest whole number of shares to be
issued to each Company Stockholder (the "ESCROW SHARES") and will deliver
certificates representing such Escrow Shares to State Street Bank and Trust
Company or a similar institution, as escrow agent (the "ESCROW AGENT"), together
with related stock transfer powers, to be held by the Escrow Agent as security
for the Company Stockholders' indemnification obligations under Section 11 and
pursuant to the provisions of an escrow agreement in substantially the form of
Exhibit B to be entered into at the Closing by HNC, the Escrow Agent, the
Company Stockholders and the Representative (as defined below) (the "ESCROW
AGREEMENT"). The Escrow Shares will be represented by a certificate or
certificates issued in the names of the Company Stockholders in proportion to
their respective interests therein and will be held by the Escrow Agent during
that time period specified in the Escrow Agreement (the "ESCROW PERIOD"). By
their approval of the Merger, the Company Stockholders will be conclusively
deemed to have consented to, approved and agreed to be personally bound by: (i)
the indemnification provisions of Section 11; (ii) the Escrow Agreement; and
(iii) the appointment of Robert L. Kaaren, M.D. and Michael E. Munayyer as the
representatives of the Company Stockholders (together, the "REPRESENTATIVE")
under the Escrow Agreement and as the attorneys-in-fact and agents for and on
behalf of each Company Stockholder as provided in the Escrow Agreement; and (iv)
the taking by the Representative of any and all actions and the making of any
decisions required or permitted to be taken by the Representative under the
Escrow Agreement, including, without limitation, the exercise of the power to:
(a) authorize delivery to HNC of Escrow Shares in satisfaction of indemnity
claims by HNC or any other Indemnified Person (as defined herein) pursuant to
Section 11 hereof and/or the Escrow Agreement; (b) agree to, negotiate, enter
into settlements and compromises of, demand arbitration of, and comply with
orders of courts and awards of arbitrators with respect to, such claims; (c)
arbitrate, resolve, settle or compromise any claim for indemnity made pursuant
to Section 11; and (d) take all actions necessary in the judgment of the
Representative for the accomplishment of the foregoing. The Representative will
have unlimited authority and power to act on behalf of each Company Stockholder
with respect to the Escrow Agreement and the disposition, settlement or other
handling of all claims governed by the Escrow Agreement, and all rights or
obligations arising under the Escrow Agreement so long as all Company
Stockholders are treated in the same manner. The Company Stockholders will be
bound by all actions taken by the Representative in connection with the Escrow
Agreement, and HNC will be entitled to rely on any action or decision of the
Representative. In performing the functions specified in this Agreement and the
Escrow Agreement, the Representative will not be liable to any Company
Stockholder in the absence of gross negligence or willful misconduct. Any
out-of-pocket costs and expenses reasonably incurred by the Representative in
connection with actions taken pursuant to the terms of the Escrow Agreement will
be paid by the Company Stockholders to
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the Representative pro rata in proportion to their respective percentage
interests in the Escrow Shares.
2.5 Effects of the Merger. At and upon the Effective Time of the
Merger:
(a) the separate existence of Sub will cease and Sub will be
merged with and into the Company, and the Company will be the surviving
corporation of the Merger (the "SURVIVING CORPORATION") pursuant to the terms of
this Agreement and the Agreement of Merger;
(b) the Articles of Incorporation of the Company will be amended
to read as set forth in Exhibit C attached hereto and will be the Articles of
Incorporation of the Surviving Corporation;
(c) the Bylaws of the Company attached as Exhibit D hereto will
be the Bylaws of the Surviving Corporation, and such Bylaws shall authorize a
Board of Directors consisting of exactly five (5) directors;
(d) each share of Company Common Stock that is outstanding
immediately prior to the Effective Time and each Company Option that is
outstanding immediately prior to the Effective Time will be converted into HNC
Common Stock or an HNC Option, respectively, as provided in this Article 2 and
the Agreement of Merger;
(e) each share of Sub Common Stock that is outstanding
immediately prior to the Effective Time will be converted into one (1) share of
Company Common Stock as provided in Section 2.1.1 and in the Agreement of
Merger;
(f) the officers of the Surviving Corporation (and their
respective offices) will be: Robert L. Kaaren, M.D. - Chairman and Chief
Executive Officer; Michael E. Munayyer - Chief Technical Officer; Michelle T.
DeLizio - President; Robert M. Acosta - Vice President of Sales and Marketing;
Matthew P. Schults - Vice President of Information Systems; and Raymond V.
Thomas - Chief Financial Officer and Secretary;
(g) the directors of the Surviving Corporation will be Robert L.
North, Raymond V. Thomas, Mark Hammond, Robert L. Kaaren, M.D. and Michael E.
Munayyer; and
(h) the Merger will, from and after the Effective Time, have all
of the effects provided by applicable law.
2.6 Further Assurances. The Company and each of the Company
Stockholders agree that if, at any time before or after the Effective Time, HNC
believes or is advised that any further instruments, deeds, assignments or
assurances are reasonably necessary or desirable to consummate the Merger or to
carry out the purposes and intent of this Agreement at or after the Effective
Time, then HNC, the Surviving Corporation and their respective officers and
directors may, and each the Company Stockholder will, execute and deliver all
such proper deeds, assignments, instruments and assurances and do all other
things necessary or desirable to consummate the Merger and to carry out the
purposes of this Agreement, in the name of the Company or otherwise.
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2.7 Securities Laws Issues. HNC shall issue the shares of HNC Common
Stock to be issued in the Merger pursuant to Section 2.1.2 of this Agreement and
the HNC Options to be issued in the Merger pursuant to an exemption from
registration under Section 4(2) and/or Regulation D promulgated under the 1933
Act and the exemption from qualification under Section 25120 of the California
Corporations Code (the "CCC") provided by Section 25100(o) of the CCC.
Concurrently with execution of this Agreement (or as soon thereafter as
possible): (a) each CR Stockholder shall execute and deliver to HNC an
Investment Representation Letter in the form of Exhibit E hereto (the
"INVESTMENT REPRESENTATION LETTER"); and (b) each holder of an outstanding
Company Option shall execute and deliver to HNC an Optionee Investment
Representation Letter in the form of Exhibit F hereto (the "OPTIONEE INVESTMENT
REPRESENTATION LETTER").
2.8 S-3 Registration Rights. Effective upon the Effective Time, each
Company Stockholder who receives shares of HNC Common Stock in the Merger
pursuant to Section 2.1.2 will be granted the registration rights on Form S-3
under the 1933 Act on the terms, and subject to the conditions and limitations,
of the Registration Rights Agreement attached hereto as Exhibit G upon such
Company Stockholder's execution and delivery of such Registration Rights
Agreement to HNC.
2.9 Tax-Free Reorganization. The parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Internal Revenue
Code of 1986, as amended (the "CODE") by virtue of the provisions of Section
368(a)(2)(E) of the Code. The parties believe that the value of the shares of
HNC Common Stock to be issued to the Company Stockholders in the Merger is equal
to the value of the shares of Company Common Stock to be surrendered in exchange
therefor. Except for cash to be paid in lieu of fractional shares, no
consideration that could constitute "other property" within the meaning of
Section 356 of the Code is being paid by HNC for the outstanding shares of
Company Common Stock in the Merger. In addition, HNC represents now, and as of
the Closing Date, that it presently intends to continue the Company's historic
business or use a significant portion of the Company's business assets in a
business. At the Closing (as that term is defined in Section 7.1), officers of
the Company and HNC will execute and deliver an officers' tax representation
certificate in the form of Exhibit H. The provisions and representations
contained or referred to in this Section 2.9 and Exhibit H will survive until
the expiration of the applicable statute of limitations. Notwithstanding
anything to the contrary set forth herein, HNC makes no representations or
warranty to the Company or to any stockholder of the Company regarding the tax
treatment of the Merger or whether the Merger will qualify as a tax-free plan of
reorganization under the Code.
2.10 Pooling of Interests. The parties acknowledge that, as a material
inducement to HNC to enter into this Agreement and consummate the Merger, the
Merger is intended to qualify as a "pooling of interests" for accounting and
financial reporting purposes. Accordingly, concurrently with the execution of
this Agreement, each CR Stockholder shall execute and deliver to HNC (a) a
Company Affiliate Agreement in the form of Exhibit I hereto (the "COMPANY
AFFILIATE AGREEMENT") and (b) a Stockholder Agreement in the form of Exhibit J
hereto (the "COMPANY STOCKHOLDER AGREEMENT").
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE CR STOCKHOLDERS
The Company and the CR Stockholders hereby jointly and severally
represent and warrant to HNC that, except as set forth in the letter addressed
to HNC from the Company and dated as of the Agreement Date (including all
schedules thereto) which has been delivered to HNC by the Company concurrently
herewith (the "COMPANY DISCLOSURE LETTER"), each of the following
representations, warranties and statements in this Article 3 are true and
correct.
3.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, has the corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted and as proposed to be
conducted, and is qualified to transact business as a foreign corporation in
each jurisdiction in which its failure to be so qualified would have a Material
Adverse Effect. As used in this Agreement, the term "MATERIAL ADVERSE EFFECT"
when used with reference to the Company, means any event, change or effect that
is (or will with the passage of time be) materially adverse to the Company's
condition (financial or otherwise), properties, assets, liabilities, business,
operations, results of operations or prospects.
3.2 Power, Authorization and Validity.
3.2.1 The Company has the right, power, legal capacity, and
authority to enter into, execute, deliver, and perform its obligations under
this Agreement and all the Company Ancillary Agreements, and the Company has all
requisite corporate power and authority to consummate the Merger. This
Agreement, the Agreement of Merger, the Merger, and all of the principal terms
of each of the foregoing have been duly and validly approved by the stockholders
of the Company in compliance with applicable law (including without limitation
the California Corporations Code) and the Articles of Incorporation and Bylaws
of the Company, both as amended. The execution, delivery and performance by the
Company of this Agreement and each of the Company Ancillary Agreements have been
duly and validly approved and authorized by all necessary corporate action on
the part of the Company's Board of Directors. Each of the CR Stockholders has
the right, power, legal capacity and authority to enter into, execute, deliver,
and perform his respective obligations under this Agreement and each of the CR
Stockholder Ancillary Agreements to be executed and delivered by such CR
Stockholder.
3.2.2 No filing, authorization, consent, approval or order,
governmental or otherwise, is necessary or required to be made or obtained by
the Company or any CR Stockholder to enable the Company or such CR Stockholder
to lawfully enter into, and to perform its or his obligations under, this
Agreement, each of the Company Ancillary Agreements and each of the CR
Stockholder Ancillary Agreements, except for (a) the filing of the Agreement of
Merger (or the Certificate of Merger) with the Delaware Secretary of State and
any such further documents as may be required under the Delaware General
Corporation Law to effect the Merger; (b) the filing of the Agreement of Merger
(and related officers' certificates) with the California Secretary of State and
any such further documents as may be required under the California Corporations
Code to effect the Merger; and (c) such filings and notifications as may be
required to be made by the Company and/or any CR Stockholder in connection with
the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR ACT").
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3.2.3 This Agreement and each of the Company Ancillary Agreements
are, or when executed by the Company will be, valid and binding obligations of
the Company, enforceable against the Company in accordance with their respective
terms, subject only to the effect of (a) applicable bankruptcy and other similar
laws affecting the rights of creditors generally and (b) rules of law and equity
governing specific performance, injunctive relief and other equitable remedies.
This Agreement and each of the CR Stockholder Ancillary Agreements are, or when
executed by a CR Stockholder will be, a valid and binding obligation of such CR
Stockholder, enforceable against such CR Stockholder in accordance with their
respective terms, subject only to the effect of (a) applicable bankruptcy and
other similar laws affecting the rights of creditors generally and (b) rules of
law and equity governing specific performance, injunctive relief and other
equitable remedies.
3.3 Capitalization of the Company.
3.3.1 Outstanding Stock. The authorized capital stock of the
Company consists entirely of (i) 20,000,000 shares of Common Stock, of which a
total of 10,000,000 shares are issued and outstanding and no other shares of any
capital stock of the Company are authorized, issued or outstanding. No
fractional shares of Common Stock of the Company are issued or outstanding. All
issued and outstanding shares of the Company's capital stock have been duly
authorized and validly issued, are fully paid and nonassessable, are not subject
to any claim, lien, preemptive right, right of first refusal, right of first
offer or right of rescission, and have been offered, issued, sold and delivered
by the Company in compliance with all registration or qualification requirements
(or applicable exemptions therefrom) of all applicable federal and state
securities laws. A list of all holders of the Company's outstanding capital
stock, and the total number of shares of Company Common Stock owned by each such
holder in set forth in Schedule 3.3.1 to the Company Disclosure Letter. The
Company has no stockholders other than the CR Stockholders. During the two (2)
year period immediately prior to the Agreement Date, the Company has not
redeemed, repurchased or otherwise reacquired any shares of its capital stock
from any stockholder of the Company.
3.3.2 No Options, Warrants or Rights. Except for Company Options
to purchase an aggregate total of 400,000 shares of Company Common Stock that
are outstanding on the Agreement Date (all of which Company Options were granted
under the Company Option Plan), there are no options, warrants, convertible
securities or other securities, calls, commitments, conversion privileges,
preemptive rights, rights of first refusal, rights of first offer or other
rights or agreements outstanding to purchase or otherwise acquire (whether
directly or indirectly) any shares of the Company's authorized but unissued
capital stock or any securities convertible into or exchangeable for any shares
of the Company's capital stock or obligating the Company to grant, issue,
extend, or enter into any such option, warrant, convertible security or other
security, call, commitment, conversion privilege, preemptive right, right of
first refusal, right of first offer or other right or agreement, and the Company
has no liability for any dividends accrued but unpaid. No person or entity holds
or has any option, warrant or other right to acquire any issued and outstanding
shares of the capital stock of the Company from any holder of shares of the
capital stock of the Company. A total of 600,000 shares of Company Common Stock
are reserved for issuance under the Company Option Plan, and no shares of
Company Common Stock have been issued under the Company Option Plan. A total of
400,000 shares of Company Common Stock are issuable upon the exercise of options
granted under the Company Option Plan that are
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outstanding on the Agreement Date and 200,000 shares of Company Common Stock are
reserved for future issuance under the Company Option Plan but have not been
issued and are not reserved for issuance upon the exercise of any outstanding
options. A list of all holders of the Company Options, the number of the Company
Options held by each such person and the exercise price and vesting schedule of
each Company Option held by each such person is set forth in Schedule 3.3.2 to
the Company Disclosure Letter. During the two (2) year period immediately prior
to the Agreement Date, except as may be expressly required by the terms of the
Company Option Plan, the Company has not authorized, or taken any action to
authorize, the acceleration of the time during which any holder of any option,
warrant or other right to purchase or acquire any share of capital stock of the
Company may exercise such option, warrant or right. The Company Option Plan has
been duly and validly approved by the Company's Board of Directors and
stockholders.
3.3.3 No Voting Arrangements or Registration Rights. There are no
voting agreements, voting trusts, preemptive rights, rights of first refusal,
rights of first offer or other restrictions (other than normal restrictions on
transfer under applicable federal and state securities laws) applicable to any
of the Company's outstanding securities or to the conversion of any shares of
the Company's capital stock in the Merger. The Company is not under any
obligation to register under the 1933 Act any of its presently outstanding stock
or other securities or any stock or other securities that may be subsequently
issued.
3.4 Subsidiaries. The Company does not have any subsidiaries or any
interest, direct or indirect, in any corporation, partnership, limited liability
company, joint venture or other business entity.
3.5 No Violation of Existing Agreements. Neither the execution and
delivery of this Agreement nor any the Company Ancillary Agreement, nor the
consummation of the transactions contemplated hereby or thereby, will conflict
with, or (with or without notice or lapse of time, or both) result in a
termination, breach, impairment or violation of: (i) any provision of the
Articles of Incorporation or Bylaws of the Company as currently in effect; (ii)
any federal, state, local or foreign judgment, writ, decree, order, statute,
rule or regulation applicable to the Company or any of its assets or properties;
or (iii) any material instrument, agreement, contract, undertaking,
understanding, letter of intent, memorandum of understanding or commitment
(whether verbal or in writing) to which the Company is a party or by which the
Company or any of its assets or properties are bound. The consummation of the
Merger by the Company will not require the consent of any third party other than
the approval of the Company's stockholders.
3.6 Litigation. There is no action, claim, suit, arbitration,
mediation, proceeding, claim or investigation pending against the Company (or
against any officer, director, employee or agent of the Company in their
capacity as such or relating to their employment, services or relationship with
the Company) before any court, administrative agency or arbitrator that, if
determined adversely to the Company (or any such officer, director, employee or
agent) may have a Material Adverse Effect on the Company, nor, to the Company's
knowledge, has any such action, suit, proceeding, arbitration, mediation, claim
or investigation been threatened. There is no basis for any person, firm,
corporation or other entity, to assert a claim against the Company or HNC based
upon: (a) the Company's entering into this Agreement or any Company Ancillary
Agreement or consummating the Merger or any of the transactions contemplated by
this Agreement or any Company Ancillary Agreement; (b) ownership, rights to
ownership, or options, warrants or other
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rights to acquire ownership, of any shares of the capital stock of the Company;
or (c) any rights as a Company stockholder, including any option, warrant or
preemptive rights or rights to notice or to vote. There is no judgment, decree,
injunction, rule or order of any governmental entity or agency, court or
arbitrator outstanding against the Company.
3.7 Taxes.
(a) The Company has timely filed all federal, state, local and
foreign tax returns required to be filed by it, has timely paid all taxes
required to be paid by it in respect of all periods for which returns have been
filed, has established an adequate accrual or reserve for the payment of all
taxes payable in respect of the periods subsequent to the periods covered by the
most recent applicable tax returns, has made all necessary estimated tax
payments, and has no material liability for taxes in excess of the amount so
paid or accruals or reserves so established. The Company is not delinquent in
the payment of any tax or in the filing of any tax returns, and no deficiencies
for any tax have been threatened, claimed, proposed or assessed against the
Company or any of its officers, employees or agents. The Company has not
received any notification that any material issues have been raised by (or are
currently pending) before the Internal Revenue Service or any other taxing
authority (including but not limited to any sales or use tax authority)
regarding the Company and no tax return of the Company has ever been audited by
the Internal Revenue Service or any state or local taxing agency or authority.
No tax liens have been filed against any assets of the Company.
(b) The Company and/or its stockholders have made an effective
election (acknowledged by the Internal Revenue Service) to be treated as a
subchapter S corporation for the Company's taxable year beginning January 1,
1992 (which was the Company's first taxable year as a subchapter S corporation)
pursuant to the provisions of the Code, and have not taken (and, at all times
from the Agreement Date until the earlier of (i) the Effective Time or (ii) the
termination of this Agreement in accordance with its terms, will not take) any
actions inconsistent with the requirements for subchapter S corporations, and
such election has not been rescinded, revoked, or terminated (and will not be
rescinded, revoked, or terminated at any time prior to the earlier of (i) the
Effective Time or (ii) the termination of this Agreement in accordance with its
terms). Each of the CR Stockholders is an individual who is a resident citizen
of the United States of America, and the Company has never authorized or issued
any stock other than Company Common Stock. Neither of the CR Stockholders has
taken, caused or permitted, nor will, at any time prior to the earlier of (i)
the Effective Time or (ii) the termination of this Agreement in accordance with
its terms, take, cause or permit any action inconsistent with the requirements
for subchapter S corporations. The Company and/or its stockholders have validly
and timely filed all elections and notices with the California Franchise Tax
Board and with any other taxing authorities of any other state or jurisdiction
having jurisdiction over the Company for income tax purposes that are required
by the laws of California or any such other jurisdiction to be filed in order to
enable the Company to be taxed as a subchapter S corporation under such tax laws
for all tax periods for which the Company has prepared its tax returns on the
basis that it was a subchapter S corporation within the meaning of the Code. The
Company is not a "personal holding company" within the meaning of Section 542 of
the Code.
(c) For the purposes of this Section, the terms "TAX" and "TAXES"
include all federal, state, local and foreign income, alternative or add-on
minimum income, gains, franchise,
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excise, property, property transfer, sales, use, employment, license, payroll,
ad valorem, payroll, documentary, stamp, occupation, recording, value added or
transfer taxes, governmental charges, fees, customs duties, levies or
assessments (whether payable directly or by withholding), and, with respect to
any such taxes, any estimated tax, interest, fines and penalties or additions to
tax and interest on such fines, penalties and additions to tax.
3.8 Company Financial Statements. The Company has delivered to HNC as
Exhibit K: (i) the Company's audited consolidated balance sheets as of December
31, 1994, 1995 and 1996 and the Company's audited consolidated statements of
income, statements of cash flows and statements of stockholders' equity for each
of the years ended December 31, 1994, 1995 and 1996, and (ii) the Company's
unaudited consolidated balance sheet as of May 31, 1997 (the "BALANCE SHEET"),
and the Company's unaudited consolidated statement of operations for the five
(5) month period ended May 31, 1997 (all such financial statements of the
Company and the notes thereto are hereinafter collectively referred to as the
"COMPANY Financial Statements"). The Company Financial Statements (a) are
derived from and in accordance with the books and records of the Company, (b)
fairly present the financial condition of the Company at the dates therein
indicated and the results of operations for the periods therein specified and
(c) have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior periods. the Company has no
material debt, liability or obligation of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, except for (i) those
shown on the Balance Sheet, and (ii) those that may have been incurred after May
31, 1997, the date of the Balance Sheet (the "BALANCE SHEET DATE") in the
ordinary course of the Company's business consistent with its past practice, and
that are not material in amount, either individually or collectively. All
reserves established by the Company and set forth in the Balance Sheet are
reasonably adequate. At the Balance Sheet Date, there were no material loss
contingencies (as such term is used in Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards Board in March
1975) which are not adequately provided for in the Balance Sheet as required by
said Statement No. 5.
3.9 Title to Properties. The Company has good and marketable title to
all of its assets and properties (including but not limited to those shown on
the Balance Sheet), free and clear of all mortgages, deeds of trust, security
interests, pledges, liens, title retention devices, collateral assignments,
claims, charges, restrictions or other encumbrances of any kind. All machinery,
vehicles, equipment and other tangible personal property owned by the Company or
used in its business are in good condition and repair, normal wear and tear
excepted, and all leases of real or personal property to which the Company is a
party are fully effective and afford the Company peaceful and undisturbed
leasehold possession of the real or personal property that is the subject of the
lease. The Company is not in violation of any zoning, building, safety or
environmental ordinance, regulation or requirement or other law or regulation
applicable to the operation of its owned or leased properties (the violation of
which would result in a Material Adverse Effect on the Company), nor has the
Company received any notice of violation of law with which it has not complied.
The Company does not own any real property.
3.10 Absence of Certain Changes. Since the Balance Sheet Date, there
has not been with respect to the Company any:
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<PAGE> 14
(a) material adverse change in the condition (financial or
otherwise), properties, assets, liabilities, businesses, operations, results of
operations or prospects of the Company;
(b) amendment or change in the Articles of Incorporation or
Bylaws of the Company;
(c) incurrence, creation or assumption by the Company of (i) any
mortgage, deed of trust, security interest, pledge, lien, title retention
device, collateral assignment, claim, charge, restriction or other encumbrance
of any kind on any of the assets or properties of the Company; or (ii) any
material obligation or liability or any indebtedness for borrowed money;
(d) issuance or sale of any debt or equity securities of the
Company or any options or other rights to acquire from the Company, directly or
indirectly, any debt or equity securities of the Company;
(e) payment or discharge of any mortgage, deed of trust,
security interest, pledge, lien, title retention device, collateral assignment,
claim, charge, restriction or other encumbrance of any kind or any liability,
which lien or liability was not either shown on the Balance Sheet or incurred in
the ordinary course of the Company's business after the Balance Sheet Date;
(f) purchase, license, sale, assignment or other disposition or
transfer, or any agreement or other arrangement for the purchase, license, sale,
assignment or other disposition or transfer, of any of the assets, properties or
goodwill of the Company other than in the ordinary course of the Company's
business;
(g) damage, destruction or loss, whether or not covered by
insurance, having (or likely with the passage of time to have) a Material
Adverse Effect on the Company;
(h) declaration, setting aside or payment of any dividend on, or
the making of any other distribution in respect of, the capital stock of the
Company, any split, combination or recapitalization of the capital stock of the
Company or any direct or indirect redemption, purchase or other acquisition of
the capital stock of the Company or any change in any rights, preferences,
privileges or restrictions of any outstanding security of the Company;
(i) change or increase in the compensation payable or to become
payable to any of the officers or employees of the Company, or any bonus or
pension, insurance or other benefit payment or arrangement (including without
limitation stock awards, stock appreciation rights or stock option grants) made
to or with any of such officers, employees or agents except in connection with
normal employee salary or performance reviews or otherwise in the ordinary
course of business consistent with the Company's past practice;
(j) change with respect to the management, supervisory or other
key personnel of the Company;
(k) obligation or liability incurred by the Company to any of
its officers, directors or stockholders except normal compensation and expense
allowances payable to officers in the ordinary course of business consistent
with the Company's past practice;
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<PAGE> 15
(l) making of any loan, advance or capital contribution to, or
any investment in, any officer, director or stockholder of the Company or any
firm or business enterprise in which any such person had a direct or indirect
material interest at the time of such loan, advance, capital contribution or
investment;
(m) entering into, amendment of, relinquishment, termination or
non-renewal by the Company of any contract, lease, transaction, commitment or
other right or obligation other than in the ordinary course of its business or
any written or oral indication or assertion by the other party thereto of
problems with the Company's services or performance under such contract, lease,
transaction, commitment or other right or obligation or its desire to so amend,
relinquish, terminate or not renew any such contract, lease, transaction,
commitment or other right or obligation;
(n) material change in the manner in which the Company extends
discounts or credits to customers or otherwise deals with its customers;
(o) entering into by the Company of any transaction, contract or
agreement or the conduct of business or operations other than in the ordinary
course of its business consistent with past practices;
(p) any transfer or grant of a right under any Company IP Rights
(as defined in Section 3.13 below), other than those transferred or granted in
the ordinary course of the Company's business consistent with the Company's past
practice; or
(q) any agreement or arrangement made by the Company to take any
action which, if taken prior to the date of this Agreement, would have made any
representation or warranty of the Company set forth in this Agreement untrue or
incorrect as of the date when made.
3.11 Contracts and Commitments. Schedule 3.11 to the Company
Disclosure Letter sets forth a list of each of the following written or oral
contracts, agreements, commitments or other instruments to which the Company is
a party or to which the Company or any of its assets or properties is bound:
(a) consulting or similar agreement under which the Company
provides any advice or services to a customer of the Company for an annual
compensation to the Company of $5,000 per year or more;
(b) continuing contract for the future purchase, sale, license,
provision or manufacture of products, material, supplies, equipment or services
requiring payment to or from the Company in an amount in excess of $35,000 per
annum which is not terminable on ninety (90) days' or less notice without cost
or other liability to the Company or in which the Company has granted or
received manufacturing rights, most favored customer pricing provisions or
exclusive marketing rights relating to any product or services, group of
products or services or territory;
(c) contract providing for the development of software for the
Company, or the license of software to the Company, which software is used or
incorporated in any products currently distributed by the Company or to provide
any services currently provided by the Company or is contemplated to be used or
incorporated in any products to be distributed or
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<PAGE> 16
services to be provided by the Company (other than software generally available
to the public at a per copy license fee of less than $1,000 per copy);
(d) joint venture or partnership contract or agreement or other
agreement which has involved or is reasonably expected to involve a sharing of
profits or losses in excess of $25,000 per annum with any other party;
(e) contract or commitment for the employment of any officer,
employee or consultant of the Company or any other type of contract or
understanding with any officer, employee or consultant of the Company that is
not immediately terminable by the Company without cost or other liability;
(f) indenture, mortgage, trust deed, promissory note, loan
agreement, guarantee or other agreement or commitment for the borrowing of
money, for a line of credit or for a leasing transaction of a type required to
be capitalized in accordance with Statement of Financial Accounting Standards
No. 13 of the Financial Accounting Standards Board;
(g) lease or other agreement under which the Company is lessee
of or holds or operates any items of tangible personal property or real property
owned by any third party and under which payments to such third party exceed
$10,000 per annum;
(h) agreement or arrangement for the sale of any assets,
properties, services or rights having a value in excess of $10,000, other than
in the ordinary course of the Company's business consistent with its past
practice;
(i) agreement that restricts the Company from engaging in any
aspect of its business, from participating or competing in any line of business
or that restricts the Company from engaging in any business in any geographic
area;
(j) Company IP Rights Agreement (as defined in Section 3.13);
(k) any agreement relating to the sale, issuance, grant,
exercise, award, purchase, repurchase or redemption of any shares of capital
stock or other securities of the Company or any options, warrants or other
rights to purchase or otherwise acquire any such shares of stock, other
securities or options, warrants or other rights therefor; or
(l) contract with or commitment to any labor union;
(m) any other agreement, contract, commitment or instrument that
is material to the business of the Company or that involves a commitment by the
Company in excess of $50,000.
A copy of each agreement or document required by this Section to
be listed on Schedule 3.11 to the Company Disclosure Letter (collectively, the
"COMPANY MATERIAL AGREEMENTS") has been delivered to HNC's counsel. No consent
or approval of any third party is required to ensure that, following the
Effective Time, any Company Material Agreement will continue to be in full force
and effect without any breach or violation thereof caused by virtue of the
Merger or by any other transaction called for by this Agreement or any Company
Ancillary Agreement.
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3.12 No Default. The Company is not in breach or default under any
Company Material Agreement. The Company is not a party to any contract,
agreement or arrangement which has had, or could reasonably be expected to have,
a Material Adverse Effect on the Company. The Company does not have any material
liability for renegotiation of government contracts or subcontracts, if any.
3.13 Intellectual Property.
3.13.1 The Company owns, or has the right to use, sell or license
all Intellectual Property Rights (as defined below) necessary or required for
the conduct of its business as presently conducted and as presently proposed to
be conducted (such Intellectual Property Rights being hereinafter collectively
referred to as the "COMPANY IP RIGHTS"), and such rights to use, sell or license
are sufficient for such conduct of its business.
3.13.2 The execution, delivery and performance of this Agreement,
the Agreement of Merger and the consummation of the Merger and the other
transactions contemplated hereby and/or by the Company Ancillary Agreements
and/or the CR Stockholder Ancillary Agreements will not constitute a material
breach of or default under any instrument, contract, license or other agreement
governing any Company IP Right (the "COMPANY IP RIGHTS AGREEMENTS"), will not
cause the forfeiture or termination or give rise to a right of forfeiture or
termination, of any Company IP Right or materially impair the right of the
Company or the Surviving Corporation to use, sell or license any Company IP
Right or portion thereof (except where such breach, forfeiture or termination
would not have a Material Adverse Effect on the Company or the Surviving
Corporation). There are no royalties, honoraria, fees or other payments payable
by the Company to any person by reason of the ownership, use, license, sale or
disposition of the Company IP Rights.
3.13.3 Neither the manufacture, marketing, license, sale,
furnishing or intended use of any product or service currently licensed,
utilized, sold, provided or furnished by the Company or currently under
development by the Company violates any license or agreement between the Company
and any third party or infringes any Intellectual Property Right of any other
party; and there is no pending or, to the knowledge of the Company, threatened
claim or litigation contesting the validity, ownership or right to use, sell,
license or dispose of any Company IP Right nor, to the knowledge of the Company,
is there any basis for any such claim, nor has the Company received any notice
asserting that any Company IP Right or the proposed use, sale, license or
disposition thereof conflicts or will conflict with the rights of any other
party, nor, to the knowledge of the Company, is there any basis for any such
assertion. To the knowledge of the Company, no employee of the Company is in
violation of any term of any employment contract, patent disclosure agreement,
noncompetition agreement, non-solicitation agreement or any other contract or
agreement, or any restrictive covenant relating to the right of any such
employee to be employed thereby, or to use trade secrets or proprietary
information of others, and the employment of such employees does not subject the
Company to any liability.
3.13.4 The Company has taken reasonable and practicable steps
designed to protect, preserve and maintain the secrecy and confidentiality of
the Company IP Rights and all the Company's proprietary rights therein. All
officers, employees and consultants of the Company having access to proprietary
information have executed and delivered to the Company an agreement regarding
the protection of such proprietary information and the assignment of
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inventions to the Company; and copies of the form of all such agreements have
been delivered to HNC's counsel.
3.13.5 Schedule 3.13 to the Company Disclosure Letter contains a
list of all Company IP Rights and all worldwide applications, registrations,
filings and other formal actions made or taken pursuant to federal, state and
foreign laws by the Company to secure, perfect or protect its interest in the
Company IP Rights, including, without limitation, all patents, patent
applications, copyrights (whether or not registered), copyright applications,
trademarks and service marks (whether or not registered) and trademark and
service mark applications.
3.13.6 As used herein, the term "INTELLECTUAL PROPERTY RIGHTS"
means, collectively, all worldwide industrial and intellectual property rights,
including, without limitation, patents, patent applications, patent rights,
trademarks, trademark registrations and applications therefor, trade dress
rights, trade names, service marks, service mark registrations and applications
therefor, copyrights, copyright registrations and applications therefor, mask
work rights, mask work registrations and applications therefor, franchises,
licenses, inventions, trade secrets, know-how, customer lists, supplier lists,
proprietary processes and formulae, software source and object code, algorithms,
architectures, structures, screen displays, layouts, inventions, development
tools, designs, blueprints, specifications, technical drawings and all
documentation and media constituting, describing or relating to the above,
including, without limitation, manuals, programmers' notes, memoranda and
records.
3.13.7 The Company has not agreed to indemnify any person for any
infringement of any Intellectual Property Rights of any third party by any
product or service that has been sold, licensed, leased, supplied or provided by
the Company.
3.14 Compliance with Laws. The Company has complied, and is now and at
the Closing Date will be in compliance, in all material respects, with all
applicable federal, state, local or foreign laws, ordinances, regulations, and
rules, and all orders, writs, injunctions, awards, judgments, and decrees
applicable to it or to its assets, properties, and business. The Company holds
all permits, licenses and approvals from, and has made all filings with, third
parties, including government agencies and authorities, that are necessary in
connection with its present business.
3.15 Certain Transactions and Agreements. None of the officers,
directors, employees or stockholders of the Company, nor any member of their
immediate families, has any direct or indirect ownership interest in any firm or
corporation that competes with, or does business with, or has any contractual
arrangement with, the Company (except with respect to any interest in less than
one percent (1%) of the stock of any corporation whose stock is publicly
traded). None of said officers, directors, employees or stockholders or any
member of their immediate families, is directly or indirectly interested in any
contract or informal arrangement with the Company, except for normal
compensation for services as an officer, director or employee thereof that have
been disclosed to HNC and except for agreements related to the purchase of the
stock of the Company by, or the grant of Company Options to, such persons. None
of said officers, directors, employees or stockholders or family members has any
interest in any property, real or personal, tangible or intangible (including
but not limited to any the Company IP Rights or any other Intellectual Property
Rights) that is used in or that pertains to the business of the Company, except
for the normal rights of a stockholder.
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3.16 Employees, ERISA and Other Compliance.
3.16.1 The Company is in compliance in all material respects with
all applicable laws, agreements and contracts relating to employment, employment
practices, wages, hours, and terms and conditions of employment, including, but
not limited to, employee compensation matters. A list of all employees, officers
and consultants of the Company and their current compensation is set forth on
Schedule 3.16.1 to the Company Disclosure Letter. The Company does not have any
employment contracts or consulting agreements currently in effect that are not
terminable at will (other than agreements with the sole purpose of providing for
the confidentiality of proprietary information or assignment of inventions).
3.16.2 The Company (i) has never been and is not now subject to a
union organizing effort, (ii) is not subject to any collective bargaining
agreement with respect to any of its employees, (iii) is not subject to any
other contract, written or oral, with any trade or labor union, employees'
association or similar organization and (iv) does not have any current labor
disputes. The Company has good labor relations, and has no knowledge of any
facts indicating that the consummation of the transactions contemplated hereby
will have a material adverse effect on such labor relations, and has no
knowledge that any of its key employees intends to leave its employ.
3.16.3 The Company has no pension plan which constitutes, or has
since the enactment of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") constituted, a "multiemployer plan" as defined in Section
3(37) of ERISA. No Company pension plans are subject to Title IV of ERISA.
3.16.4 Schedule 3.16.4 to the Company Disclosure Letter lists
each employment, severance or other similar contract, arrangement or policy,
each "employee benefit plan" as defined in Section 3(3) of ERISA and each plan
or arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, severance
benefits, disability benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
for employees, consultants or directors which is entered into, maintained or
contributed to by the Company and covers any employee or former employee of the
Company. Such contracts, plans and arrangements as are described in this Section
3.16.4 are hereinafter collectively referred to as COMPANY BENEFIT
Arrangements." Each Company Benefit Arrangement has been maintained in
compliance in all material respects with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations that are
applicable to such Company Benefit Arrangement. The Company has delivered to HNC
or its counsel a complete and correct copy or description of each Company
Benefit Arrangement.
3.16.5 There has been no amendment to, written interpretation or
announcement (whether or not written) by the Company relating to, or change in
employee participation or coverage under, any Company Benefit Arrangement that
would increase materially the expense of maintaining such Company Benefit
Arrangement above the level of the expense incurred in respect thereof for the
Company's fiscal year ended December 31, 1996.
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3.16.6 The group health plans (as defined in Section 4980B(g) of
the Code) that benefit employees of the Company are in compliance, in all
material respects, with the continuation coverage requirements of Section 4980B
of the Code as such requirements affect the Company and its employees. As of the
Closing Date, there will be no material outstanding, uncorrected violations
under the Consolidation Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), with respect to any of the Company Benefit Arrangements, covered
employees, or qualified beneficiaries that could result in a Material Adverse
Effect on the Company, or in a material adverse effect on the business,
operations or financial condition of HNC.
3.16.7 No benefit payable or which may become payable by the
Company pursuant to any Company Benefit Arrangement or as a result of or arising
under this Agreement or the Agreement of Merger will constitute an "excess
parachute payment" (as defined in Section 280G(b)(1) of the Code) which is
subject to the imposition of an excise Tax under Section 4999 of the Code or
which would not be deductible by reason of Section 280G of the Code. the Company
is not a party to any: (a) agreement (other than as described in (b) below) with
any executive officer or other key employee thereof (i) the benefits of which
are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company in the nature of any of the
transactions contemplated by this Agreement, the Agreement of Merger or any
Company Ancillary Agreement, (ii) providing any term of employment or
compensation guarantee, or (iii) providing severance benefits or other benefits
after the termination of employment of such employee regardless of the reason
for such termination of employment, or (b) agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be materially increased, or the
vesting of benefits of which will be materially accelerated, by the occurrence
of any of the transactions contemplated by this Agreement, the Agreement of
Merger or any Company Ancillary Agreement, or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement, the Agreement of Merger or any Company Ancillary Agreement.
3.17 Corporate Documents. The Company has made available to HNC for
examination all documents and information listed in the Company Disclosure
Letter or in any schedule thereto or in any other exhibit or schedule called for
by this Agreement which have been requested by HNC's legal counsel, including,
without limitation, the following: (a) copies of the Company's Articles of
Incorporation and Bylaws as currently in effect; (b) the Company's Minute Book
containing all records of all proceedings, consents, actions, and meetings of
the Company's stockholders, board of directors and any committees thereof; (c)
the Company's stock ledger and journal reflecting all stock issuances and
transfers; (d) all permits, orders, and consents issued by any regulatory agency
with respect to the Company, or any securities of the Company, and all
applications for such permits, orders, and consents; and (e) all agreements of
the Company required to be listed in Schedule 3.11 to the Company Disclosure
Letter.
3.18 No Brokers. Neither the Company nor any affiliate of the Company
is obligated for the payment of any fees or expenses of any investment banker,
broker, finder or similar party in connection with the origin, negotiation or
execution of this Agreement or the Agreement of Merger or in connection with any
transaction contemplated hereby or thereby, and HNC will incur not liability to
any such investment banker, broker, finder or similar party as a result of any
act or
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omission of the Company, any of its employees, officers, directors,
stockholders, agents or affiliates.
3.19 Books and Records.
3.19.1 The books, records and accounts of the Company (a) are in
all material respects true, complete and correct, (b) have been maintained in
accordance with good business practices on a basis consistent with prior years,
(c) are stated in reasonable detail and accurately and fairly reflect the
transactions and dispositions of the assets of the Company, and (d) accurately
and fairly reflect the basis for the Company Financial Statements.
3.19.2 The Company has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that: (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with generally accepted
accounting principles or any other criteria applicable to such statements, and
(ii) to maintain accountability for assets; and (c) the amount recorded for
assets on the books and records of the Company is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
3.20 Insurance. During the prior three years, the Company has
maintained, and the Company now maintains, fire and casualty, general liability,
business interruption, product liability, errors and omissions, and sprinkler
and water damage insurance with respective insurers, and in the respective
amounts, set forth in Schedule 3.20 to the Company Disclosure Letter.
3.21 Environmental Matters.
3.21.1 Definitions. The following capitalized terms shall have
the meanings set forth below:
(a) "ENVIRONMENTAL LAWS" means all federal, state,
local and foreign laws and regulations relating to pollution or protection of
human health or the environment (including without limitation ambient air,
surface water, ground water, land surface or subsurface strata), including
without limitation laws and regulations relating to emissions, discharges,
releases or threatened releases of Hazardous Substances (as defined below), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Substances.
(b) "HAZARDOUS MATERIALS" means (i) any pollutant,
contaminant, chemical, industrial, toxic, hazardous or noxious substance or
waste which is regulated by the laws of any state, local, federal or other
governmental authority or jurisdiction, including but no limited to the State of
California and the United States Government, and includes but is not limited to
(a) any oil or petroleum compounds, flammable substances, explosives,
radioactive materials, or any other materials or pollutants which pose a hazard
to persons or cause any real property to be in violation of any Environmental
Laws, (b) to the extent so regulated, asbestos or any asbestos-containing
material of any kind or character, (c) polychlorinated biphenyls, as regulated
by the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., (d) any
materials or substances designated as "hazardous substances" pursuant to Section
311 of the Clean Water Act, 33 U.S.C.
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section. 1251 et seq., (e) "economic poison," as defined in the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 135 et seq., (f)
"chemical substance," "new chemical substance," or "hazardous chemical substance
or mixture" pursuant to Sections 3, 6 and 7 of the Toxic Substances Control Act,
15 U.S.C. Section 2601 et seq., (g) "hazardous substances" pursuant to Section
101 of the Comprehensive Environmental Response, Compensation, and Liability
Act, 42 U.S.C. Section 9601 et seq., and (h) "hazardous waste" pursuant to
Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901
et seq., and (ii) as of any date of determination, any additional substances or
materials which now or hereafter may be incorporated in or added to the
definition of "economic poison," "chemical substance," "new chemical substance,"
"hazardous chemical substance or mixture," "hazardous waste," "hazardous
substance" or "toxic substance" or similar substance for purposes of any
Environmental Law.
3.21.2 Environmental Obligations. Each facility or site at which
the Company or any of its predecessors-in-interest conducts any business or has
previously conducted any business (each a "FACILITY", collectively, the
"FACILITIES") is not (and with respect to each such previously owned, used or
operated Facility was not, when the Company or its predecessors left such
Facility) in violation of any Environmental Laws, including any laws or
regulations relating to industrial hygiene, disposal of Hazardous Substances or
the environmental conditions on or under such properties or facilities,
including but not limited to, soil and groundwater conditions. During the time
that the Company or any of its predecessors-in-interest have owned, leased or
occupied any Facility, the Company or its predecessors have not used, generated,
manufactured or stored on or under any part of any such Facility, or transported
to or from any part of any Facility, any Hazardous Substances in violation of
any Environmental Laws. There has been no presence, disposal, release or
threatened release of any Hazardous Substances on, from or under any part of the
Facility and no Hazardous Substances are currently present in, on, under or
about any of the Facilities or their groundwater or soil.
3.21.3 Environmental Obligations. The Company is conducting, and
at all times has conducted, its business and operations, and has occupied and
used the Facilities in accordance with and in compliance with all Environmental
Laws so as not to give rise to liability under any Environmental Laws. To the
Company's knowledge (including without limitation the knowledge of any officer
or manager of the Company responsible for environmental compliance issues (as
well as senior management), there is no reasonable basis to believe or suspect
that the Company's business has been conducted or is being conducted in
violation of any Environmental Laws, and the Company does not have any knowledge
of pending or proposed changes to any Environmental Laws which would require any
changes in any of the Company's Facilities, equipment, operations or procedures
or affect such business or the cost to the Company of conducting its business as
now conducted.
3.21.4 Compliance, Disclosure of Environmental Conditions. No
conditions, circumstances or activities have existed or currently exist with
respect to the Facilities or the business or property of the Company, or
property which could reasonably be expected to result in recovery by any
governmental authority or other person of any remedial or removal costs,
response costs, natural resource damages or other costs, expenses or damages
arising from or relating to any alleged injury or threat of injury or harm to
public health, safety or the environment. No conditions, circumstances or
activities have existed or currently exist with respect to the Company's
business or property (including without limitation the Facilities) that could
reasonably
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be expected to subject the Company or HNC to any administrative, civil or
criminal liability, injunctive relief, penalty or obligation, whether under
common law, equitable theory, or pursuant to Environmental Laws, or which in the
future could reasonably be expected to result in or may have in the past
resulted in actual or threatened damage, harm, or impairment of, or a threat to,
public health, safety or the environment.
3.21.5 No Outstanding Orders or Actions. There are no outstanding
orders, injunctions or decrees against the Company, nor are there any pending or
threatened investigations of any kind against the Company, concerning any
environmental, public health, safety or land use matters or other Environmental
Laws, including, but not limited to, the emission, discharge or release of
hazardous or toxic substances or wastes, pollutants, or contaminants into the
environment or work place, or the management of hazardous or toxic substances or
wastes, pollutants or contaminants. There are no actions, suits or
administrative, arbitral or other proceedings alleged, claimed, pending,
affecting or, to the Company's knowledge threatened against the Company at law
or in equity with respect to any environmental, public health, safety or land
use matters or other Environmental Laws, and to the Company's knowledge, there
are no existing grounds on which any such action, suit or proceedings might be
commenced.
3.21.6 No Waste Disposal. Any chemicals and chemical products
that are used for the conduct of Company's business have not been processed,
have not been and are not intended to be discarded, and are not waste or waste
materials. All Hazardous Substances and waste materials generated, used,
transported, treated, stored or disposed of in connection with the Company's
business are handled, stored, treated and disposed of in accordance with
applicable Environmental Laws. Schedule 3.21 of the Company Disclosure Letter
describes all Hazardous Materials present on properties leased or owned by
Company or which has been treated, stored or disposed of in connection with the
business of the Company on such properties. At no time has any radioactive waste
been treated on any properties leased or owned by Company.
3.22 Disclosure. Neither this Agreement, its exhibits and schedules,
nor any of the certificates or documents to be delivered by the Company to HNC
under this Agreement, or any other documents delivered by the Company to HNC
regarding the Company's business (including without limitation any information
regarding the Company to be contained in the Proxy Statement, or used to prepare
the Proxy Statement), taken together, contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements contained herein and therein, in light of the circumstances under
which such statements were made, not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF HNC AND SUB
HNC and Sub hereby represent and warrant that, except as set forth in
the letter addressed to the Company from HNC and dated as of the Agreement Date
which has been delivered by HNC to the Company concurrently herewith (the "HNC
DISCLOSURE LETTER"), each of the following representations, warranties and
statements in this Article 4 are true and correct:
4.1 Organization and Good Standing. HNC is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has the corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted
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and as proposed to be conducted. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the corporate power and authority to own, operate and lease its properties and
to carry on its business as proposed to be conducted.
4.2 Power, Authorization and Validity.
4.2.1 HNC has the right, power and authority to enter into,
execute and perform its obligations under this Agreement and the HNC Ancillary
Agreements. The execution, delivery and performance of this Agreement and the
HNC Ancillary Agreements by HNC have been duly and validly approved and
authorized by HNC's Board of Directors. The issuance of the shares of HNC Common
Stock to be issued in the Merger requires the approval of HNC's stockholders.
Sub has the right, power and authority to execute, deliver and perform its
obligations under this Agreement, and upon approval of the Merger and the
Agreement of Merger by Sub's sole stockholder, Sub will have the right, power
and authority to execute, deliver and perform the Agreement of Merger and all
other Sub Ancillary Agreements. The execution, delivery and performance of this
Agreement, the Agreement of Merger and all other Sub Ancillary Agreements by Sub
have been duly and validly approved and authorized by Sub's Board of Directors.
4.2.2 No filing, authorization, consent, approval or order,
governmental or otherwise, is necessary or required to enable HNC or Sub to
enter into, and to perform its obligations under, this Agreement, the HNC
Ancillary Agreements or the Sub Ancillary Agreements, respectively, except for
(a) the filing with the SEC of the Proxy Statement relating to the meeting of
the stockholders of HNC to be held with respect to the issuance of shares of HNC
Common Stock and the HNC Options in connection with the Merger and the SEC's
approval of such Proxy Statement (or failure to respond or object to the
distribution of such Proxy Statement within the time required by applicable law
and regulations), (b) the filing by the Company of such reports and information
with the SEC under the 1934 Act and the rules and regulations promulgated by the
SEC thereunder, as may be required in connection with this Agreement, the Merger
and the transactions contemplated hereby; (c) the filing with the SEC of a Form
D, if so elected by HNC; (d) the filing of the Agreement of Merger (or the
Certificate of Merger) with the Delaware Secretary of State and any such further
documents as may be required under the Delaware General Corporation Law to
effect the Merger; (e) the filing of the Agreement of Merger (and related
officers' certificates) with the California Secretary of State and any such
further documents as may be required under the California Corporations Code to
effect the Merger; (f) such filings and notifications as may be necessary under
the HSR Act and the expiration of applicable waiting periods under the HSR Act;
(g) such other filings as may be required by the Nasdaq National Market System
with respect to the HNC Merger Shares to be issued in the Merger and the Company
Options to be assumed by HNC in the Merger; (h) the approval of the issuance of
shares of HNC Common Stock in the Merger by the stockholders of HNC in
accordance with applicable law, HNC's Certificate of Incorporation and Bylaws,
and the approval of this Agreement, the Agreement of Merger and the Merger by
the stockholder of Sub; and (i) such other filings, if any, as may be required
to comply with federal and state securities laws.
4.2.3 This Agreement and the HNC Ancillary Agreements are, or
when executed by HNC will be, valid and binding obligations of HNC, enforceable
in accordance with their respective terms, except as to the effect, if any, of
(a) applicable bankruptcy and other similar laws affecting the rights of
creditors generally and (b) rules of law and equity governing specific
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performance, injunctive relief and other equitable remedies. This Agreement and
the Sub Ancillary Agreements are, or when executed by Sub will be, valid and
binding obligations of Sub, enforceable in accordance with their respective
terms, except as to the effect, if any, of (a) applicable bankruptcy and other
similar laws affecting the rights of creditors generally and (b) rules of law
and equity governing specific performance, injunctive relief and other equitable
remedies.
4.3 Capital Structure.
4.3.1 Stock. The authorized capital stock of HNC consists of
50,000,000 shares of HNC Common Stock, $0.001 par value per share, and 4,000,000
shares of Preferred Stock, $0.001 par value per share (the "HNC PREFERRED
STOCK"). At the close of business on June 30, 1997, 19,420,732 shares of HNC
Common Stock were issued and outstanding. No shares of HNC Preferred Stock are
issued or outstanding. All outstanding shares of HNC Common Stock are validly
issued, fully paid and nonassessable and not subject to preemptive rights. As of
the date hereof, the authorized capital stock of Sub consists of 100 shares of
Common Stock, $0.001 par value per share, of which 100 shares are validly
issued, fully paid and nonassessable, all of which are owned by HNC.
4.3.2 Options. As of the Agreement Date, options to purchase an
aggregate of approximately 3,635,131 shares of HNC Common Stock are outstanding
under all stock option and equity incentive plans of HNC.
4.3.3 No Other Options, Etc. Except for the HNC stock options
described in Section 4.3.2 above, options to be potentially granted to new
employees pursuant to outstanding employment offer letters, and rights of HNC
employees to subscribe for shares of HNC Common Stock under the HNC 1995
Employee Stock Purchase Plan, as of the Agreement Date, there are no outstanding
options, warrants, convertible or other securities of HNC entitling any party to
purchase or acquire shares of HNC Common Stock.
4.4 No Violation of Material Agreements. Neither the execution and
delivery of this Agreement nor any HNC Ancillary Agreement, nor the consummation
of the transactions contemplated by this Agreement or any HNC Ancillary
Agreement, will conflict with, or (with or without notice or lapse of time, or
both) result in: (a) a termination, breach, impairment or violation of (i) any
provision of the Certificate of Incorporation or Bylaws of HNC, as currently in
effect or (ii) any federal, state, local or foreign judgment, writ, decree,
order, statute, rule or regulation to which HNC or its assets or properties is
subject; or (b) a termination, or a material breach, impairment or violation, of
any material instrument or contract to which HNC is a party or by which HNC or
its properties are bound.
4.5 Disclosure. HNC has made available to the Company a disclosure
package consisting of (i) HNC's annual report on Form 10-K (as subsequently
amended on Form 10-K/A) for HNC's fiscal year ended December 31, 1996; (ii) all
Form 10-Q's that have been filed by HNC with the SEC prior to the Agreement Date
with respect to any fiscal quarter of the Company's fiscal year ending December
31, 1997; (iii) the Company's Proxy Statement for its annual meeting of
stockholders held on May 22, 1997; and (iv) the Company's Registration Statement
on Form S-3 dated March 4, 1997 (collectively, the "HNC DISCLOSURE PACKAGE"). As
of their respective filing dates, documents filed by HNC with the SEC and
included in the HNC Disclosure Package
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complied in all material respects with the requirements of the 1933 Act or the
1934 Act, as the case may be. The HNC Disclosure Package, this Agreement, the
exhibits and schedules hereto, and any certificates or documents to be delivered
to the Company pursuant to this Agreement, when taken together, do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements contained herein and therein, in light
of the circumstances under which such statements were made, not misleading in
any material respect.
4.6 Validity of Shares. The shares of HNC Common Stock to be issued
pursuant to the Merger will, when issued: (a) be duly authorized, validly
issued, fully paid and nonassessable and free of liens and encumbrances created
by HNC, and (b) will be free and clear of any liens and encumbrances except for
applicable securities law restrictions on transfer, including those imposed by
Regulation D or Section 4(2) of the 1933 Act and Rule 144 promulgated under the
1933 Act, under applicable "blue sky" state securities laws and under any
Company Affiliate Agreement to be executed pursuant to this Agreement.
4.7 No Brokers. HNC is not obligated for the payment of any fees or
expenses of any investment banker, broker, finder or similar party in connection
with the origin, negotiation or execution of this Agreement or the Agreement of
Merger or in connection with any transaction contemplated hereby or thereby for
which the Company or either of the CR Stockholders will incur any liability.
4.8 No Material Adverse Change. Since the date of HNC's Report on
Form 10-Q for its fiscal quarter ended March 31, 1996, there has been no
material adverse change in the business, operations or financial condition of
HNC and its subsidiaries, taken as a whole.
4.9 No Violation of Existing Agreements. HNC has not received notice
from any third party that it is or would, with the passage of time, be (i) in
material violation of any provision of the Certificate of Incorporation or
Bylaws of HNC; or (ii) in default or violation of any material term, condition
or provision of (a) any material judgment, decree, order, injunction or
stipulation applicable to HNC or (b) any currently effective material agreement,
note, mortgage, indenture, contract, lease or instrument, permit, concession,
franchise or license, which default or violation would have a material adverse
effect on the business, operations or financial condition of HNC and its
subsidiaries, taken as a whole.
4.10 Litigation. There is no action, claim, suit, arbitration,
proceeding, claim or investigation pending against HNC before any court,
administrative agency or arbitrator that, if determined adversely to HNC, is
likely to have a material adverse effect on HNC's financial condition or results
of operation, nor, to HNC's knowledge, has any such action, suit, proceeding,
arbitration, claim or investigation been threatened.
4.11 Customer Relationship. As of the Agreement Date, HNC has not
received notification from any Significant Customer (as defined below) that such
Significant Customer intends to terminate any agreement or contract that such
Significant Customer has with HNC or any of HNC's subsidiaries, where such
termination would have a material adverse effect on the business, operations or
financial condition of HNC and its subsidiaries, taken as a whole. As used
herein, a "SIGNIFICANT CUSTOMER" means any of the customers of HNC or any of its
subsidiaries during HNC's fiscal year ended December 31, 1996 ("FISCAL 1996")
who is among the top five
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customers of HNC and its subsidiaries in Fiscal 1996 in terms of the revenue
derived per customer that is reflected on HNC's income statement for Fiscal
1996.
ARTICLE 5
PRE-CLOSING COVENANTS OF THE COMPANY
AND THE CR STOCKHOLDERS
During the period from the Agreement Date until the earlier to occur of
(i) the Effective Time or (ii) the termination of this Agreement in accordance
with Section 10, the Company and the CR Stockholders covenant and agree with HNC
as follows:
5.1 Advice of Changes. The Company will promptly advise HNC in
writing (a) of any event occurring subsequent to the Agreement Date that would
render any representation or warranty of the Company contained in Section 3 of
this Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and (b) of any material adverse
change in the Company's business, results of operations or financial condition.
The Company will deliver to HNC within fifteen (15) days after the end of each
monthly accounting period ending after the Agreement Date and before the Closing
Date, an unaudited balance sheet and statement of operations, which financial
statements will be prepared in the ordinary course of its business, consistent
with its past practice in accordance with the Company's books and records and
generally accepted accounting principles and will fairly present the financial
position of the Company as of their respective dates and the results of the
Company's operations for the periods then ended.
5.2 Maintenance of Business. The Company will carry on and preserve
its business and its relationships with customers, suppliers, employees and
others in substantially the same manner as it has prior to the date hereof. If
the Company becomes aware of a material deterioration in the relationship with
any key customer, key supplier or key employee, it will promptly bring such
information to the attention of HNC in writing and, if requested by HNC, will
exert reasonable commercial efforts to promptly restore the relationship.
5.3 Conduct of Business. The Company will continue to conduct its
business and maintain its business relationships in the ordinary and usual
course and will not, without the prior written consent and approval (which may
be given verbally to be promptly followed by written confirmation) of the
President or Chief Financial Officer of HNC:
(a) borrow or lend any money other than advances to employees for
travel and expenses that are incurred in the ordinary course of the Company's
business consistent with the Company's past practice;
(b) enter into any transaction or agreement not in the ordinary
course of the Company's business consistent with the Company's past practice;
(c) encumber or permit to be encumbered any of its assets;
(d) sell, transfer or dispose of any of its assets except in the
ordinary course of the Company's business consistent with the Company's past
practice;
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(e) enter into any material lease or contract for the purchase or
sale of any property, whether real or personal, tangible or intangible except
for the lease of offices at the Millennium Center in Irving, Texas for an
approximately five (5) year term, a draft of which lease has been previously
delivered to HNC;
(f) pay any bonus, increased salary or special remuneration to
any officer, employee or consultant (except for normal salary increases
consistent with the Company's past practices not to exceed 5% of such officer's,
employee's or consultant's base annual compensation, and except pursuant to
existing arrangements previously disclosed to and approved in writing by HNC) or
enter into any new employment or consulting agreement with any such person;
(g) change any of its accounting methods;
(h) declare, set aside or pay any cash or stock dividend or other
distribution in respect of its capital stock, redeem, repurchase or otherwise
acquire any of its capital stock or other securities pay or distribute any cash
or property to any Company stockholder or securityholder or make any other cash
payment to any shareholder or securityholders of the Company that is unusual,
extraordinary, or not made in the ordinary course of the Company's business
consistent with its past practice;
(i) amend or terminate any contract, agreement or license to
which it is a party except those amended or terminated in the ordinary course of
the Company's business, consistent with its past practice, and which are not
material in amount or effect;
(j) guarantee or act as a surety for any obligation of any third
party;
(k) waive or release any material right or claim except in the
ordinary course of its any mortgage, deeds of trust, security interest, pledge,
lien, title retention device, collateral assignment, claim, charge, restriction
or other encumbrance of any kind, consistent with the Company's past practice;
(l) issue, sell, create or authorize any shares of its capital
stock of any class or series or any other of its securities, or issue, grant or
create any warrants, obligations, subscriptions, options, convertible
securities, or other commitments to issue shares of its capital stock or
securities ultimately exchangeable for, or convertible into, shares of its
capital stock; provided, however, that notwithstanding the foregoing, the
Company may issue shares of Company Common Stock issuable upon the exercise of
the Company Options that are outstanding on the Agreement Date in accordance
with their terms as now in effect;
(m) subdivide or split or combine or reverse split the
outstanding shares of its capital stock of any class or enter into any
recapitalization affecting the number of outstanding shares of its capital stock
of any class or affecting any other of its securities;
(n) merge, consolidate or reorganize with, or acquire, any
corporation, partnership, limited liability company or any other entity or enter
into any negotiations, discussions or agreement for such purpose;
(o) amend its Articles of Incorporation or Bylaws;
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(p) license any of its technology or intellectual property except
in the ordinary course of its business consistent with past practice;
(q) change any insurance coverage or issue any certificates of
insurance;
(r) agree to any audit assessment by any tax authority or file
any federal or state income or franchise tax return unless copies of such
returns have first been delivered to HNC for its review prior to filing;
(s) modify or change the exercise or conversion rights or
exercise or purchase prices of any capital stock of the Company, any Company
stock options, warrants or other Company securities, or accelerate or otherwise
modify (i) the right to exercise any option, warrant or other right to purchase
any capital stock or other securities of the Company or (ii) the vesting or
release of any shares of capital stock or other securities of the Company from
any repurchase options or rights of refusal held by the Company or any other
party or any other restrictions unless such accelerations/modifications are
expressly required and mandated by the terms of a formal written agreement or
plan that was entered into prior to the execution of the Plan by HNC and the
Company; or
(t) purchase or otherwise acquire, or sell or otherwise dispose
of: (i) any shares of HNC Common Stock or other HNC securities or (ii) any
securities whose value is derived from or determined with reference to, in whole
or in part, the value of HNC stock or other HNC securities.
(u) agree to do any of the things described in the preceding
clauses 5.3(a) through 5.3(t).
5.4 Company Stockholder Approval; Stockholder Agreements. The Company
has obtained the unanimous written consent of its stockholders, in compliance
with applicable law and the Company's Articles of Incorporation and Bylaws, both
as amended, approving this Agreement, the Agreement of Merger, the Merger, and
related matters (such Company stockholders' written consent is hereinafter
referred to as the "COMPANY STOCKHOLDER VOTE"). The Company's Board of Directors
and the CR Stockholders will not take any action whatsoever to revoke, modify,
invalidate, or withdraw the Company Stockholder Vote. Concurrently with the
execution of this Agreement, each of the CR Stockholders has executed and
delivered to HNC a Company Stockholder Agreement in the form attached hereto as
Exhibit I agreeing, among other things, to vote in favor of the Merger and
against any competing proposals.
5.5 Letter of the Company's Accountants. The Company will use its
best efforts to cause to be delivered to HNC a letter of Deloitte & Touche LLP,
the Company's independent accountants, addressed to HNC and dated as of a date
within two (2) business days before the date on which (i) HNC's Proxy Statement
is filed with the SEC and within two (2) business days before the date on which
HNC (or its agent) mails the Proxy Statement to HNC's stockholders, in form and
substance reasonably satisfactory to HNC and customary in scope and substance
for letters delivered by independent accountants in connection with registration
statements.
5.6 Assistance With Proxy Statement. The Company will promptly
provide all information relating to its business or operations necessary for
inclusion in the Proxy Statement to
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satisfy all requirement of applicable federal and state securities laws. The
Company will be solely responsible for any statement, information or omission in
the Proxy Statement relating to the Company or its affiliates that is based upon
(and accurately reflects) written information provided by the Company.
5.7 Regulatory Approvals. The Company will promptly execute and file,
or join in the execution and filing, of any application, notification (including
without limitation any notification or provision of information, if any, that
may be required under the HSR Act) or any other document that may be necessary
in order to obtain the authorization, approval or consent of any governmental
body, federal, state, local or foreign, which may be reasonably required, or
which HNC may reasonably request, in connection with the consummation of the
Merger or any other transactions contemplated by this Agreement, any Company
Ancillary Agreement or any CR Stockholder Ancillary Agreement. The Company will
use its best efforts to obtain, and to cooperate with HNC to promptly obtain,
all such authorizations, approvals and consents.
5.8 Necessary Consents. The Company will use its best efforts to
obtain such written consents and take such other actions as may be necessary or
appropriate in addition to those set forth in the foregoing Sections of this
Article 5 to allow the consummation of the transactions contemplated hereby and
to allow HNC to carry on the Company's business after the Effective Time.
5.9 Litigation. The Company will notify HNC in writing promptly after
learning of any material claim, action, suit, arbitration, mediation, proceeding
or investigation by or before any court, arbitrator or arbitration panel, board
or governmental agency, initiated by or against it, or known by it to be
threatened against it.
5.10 No Other Negotiations. From the Agreement Date until the earlier
of termination of this Agreement in accordance with Section 10 or consummation
of the Merger, neither the Company nor any CR Stockholder will, nor will the
Company or any CR Stockholder authorize, encourage or permit any officer,
director, employee, stockholder or affiliate of the Company or any other person,
on its or their behalf to, directly or indirectly, solicit or encourage any
offer from any party or consider any inquiries or proposals received from any
party, participate in any negotiations regarding, or furnish to any person any
information with respect to, or otherwise cooperate with, facilitate or
encourage any effort or attempt by any person (other than HNC), concerning any
agreement or transaction regarding the possible disposition of all or any
substantial portion of the Company's business, assets or capital stock by
merger, consolidation, sale of assets, sale of stock, tender offer or any other
form of business combination ("ALTERNATIVE TRANSACTION"). The Company will
promptly notify HNC orally and in writing of any such inquiries or proposals. In
addition, neither the Company nor any CR Stockholder will execute, enter into or
become bound by (a) any letter of intent or agreement or commitment between the
Company and any third party that is related to an Alternative Transaction or (b)
any agreement or commitment between the Company and a third party providing for
an Alternative Transaction.
5.11 Access to Information. Until the Closing, the Company will allow
HNC and its agents reasonable access to the files, books, records and offices of
the Company, including, without limitation, any and all information relating to
the Company's taxes, commitments, contracts, leases, licenses, and real,
personal and intangible property and financial condition, subject to the terms
of the Confidentiality Agreement between the Company and HNC dated as of
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June 15, 1997 (the "CONFIDENTIALITY AGREEMENT"). The Company will cause its
accountants to cooperate with HNC and its agents in making available all
financial information reasonably requested by HNC, including without limitation
the right to examine all working papers pertaining to all financial statements
prepared or audited by such accountants.
5.12 Satisfaction of Conditions Precedent. The Company and the CR
Stockholders will use their best efforts to satisfy or cause to be satisfied all
the conditions precedent which are set forth in Articles 8 and 9, and the
Company and the CR Stockholders will use their best efforts to cause the
transactions contemplated by this Agreement to be consummated; and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the Merger and all other transactions contemplated by
this Agreement and the Company Ancillary Agreements. In particular, the Company
and the CR Stockholders will use their best efforts to cause the Merger to
become effective in accordance with this Agreement by December 31, 1997.
5.13 Company Affiliate Agreements. Concurrently with the execution of
this Agreement, the Company will deliver to HNC a letter identifying all the
Company's directors, executive officers, ten percent (10%) or greater
shareholders (and affiliates of such persons who are the Company stockholders)
and all persons or entities who are "affiliates" of the Company within the
meaning of Rule 144 or Rule 405 under the 1933 Act at the time this Agreement is
executed ("COMPANY AFFILIATES"). The Company will use its best efforts to cause
each Company Affiliate to execute and deliver to HNC, as promptly as practicable
after the Company's signing of this Agreement, an Affiliate Agreement in
substantially the form of Exhibit J (the "COMPANY AFFILIATE AGREEMENT") and each
CR Stockholder shall execute and deliver a Company Affiliate Agreement to HNC
concurrently with the execution of this Agreement. In addition, the Company will
use its best efforts to cause each person or entity who may become a Company
Affiliate after the Agreement Date and before the Effective Time to execute and
deliver a Company Affiliate Agreement to HNC promptly after such person or
entity becomes a Company Affiliate.
5.14 Blue Sky Laws. The Company will use its best efforts to assist
HNC to the extent necessary to comply with the securities and Blue Sky laws of
all jurisdictions which are applicable in connection with the Merger.
5.15 Pooling. The Company will cooperate with HNC to cause the
business combination to be effected by the Merger to be accounted for as a
pooling of interests for accounting and financial reporting purposes. Following
the Agreement Date, the Company will not take any action if, prior to taking
such action, the Company has been informed by HNC or its accountants that, in
the opinion of HNC's accountants, taking such action may preclude HNC from
accounting for the Merger as a "pooling of interests" for accounting and
financial reporting purposes and HNC or its accountants promptly give the
Company a writing that states in reasonable detail the action(s) that HNC or its
accountants request the Company not to take.
5.16 Certain Investments; Agreements. The Company does not own, and
will not make any purchase or other acquisition of, or investment in, any shares
of HNC Common Stock or other securities of HNC. The Company will not enter into
any agreement with any holders of HNC shares calling for either the Company or
HNC to retire or reacquire all or part of the HNC shares to be issued pursuant
to the Merger. The Company will not enter into any financial arrangements
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for the benefit of any Company stockholder which, in effect, would negate the
exchange of equity securities contemplated under this Agreement and the Merger,
including without limitation any loan or other financial arrangement at
abnormally low interest rates, or any guarantee of loans secured by HNC shares
to be issued pursuant to the Merger.
5.17 Company Dissenting Shares. As promptly as practicable after the
date of the Company Stockholder Vote and prior to the Closing Date, the Company
will furnish HNC with the name and address of each holder (or potential holder)
of any Company Dissenting Shares (if any) and the number of Company Dissenting
Shares (or potential Company Dissenting Shares) owned by each such holder.
5.18 Termination of Registration and Voting Rights. All registration
rights agreements and voting agreements applicable to or affecting any
outstanding shares or other securities of the Company will be duly terminated
and canceled by no later immediately prior to the Effective Time.
5.19 Invention Assignment and Confidentiality Agreements. The Company
will use its best efforts to obtain from each employee and consultant of the
Company who has had access to any software, technology or copyrightable,
patentable or other proprietary works owned or developed by the Company, or to
any other confidential or proprietary information of the Company or its clients,
an invention assignment and confidentiality agreement in a form reasonably
acceptable to HNC, duly executed by such employee or consultant and delivered to
the Company.
5.20 Non-Competition and Employment Agreements. Each of the CR
Stockholders shall execute and deliver to HNC at the Closing a Non-Competition
Agreement in the form attached hereto as Exhibit L (the "NON-COMPETITION
AGREEMENT") and an Employment Agreement in the form attached hereto as Exhibit M
(the "EMPLOYMENT AGREEMENT"), respectively.
5.21 Closing of Merger. Neither the Company nor the CR Stockholders
will refuse to effect the Merger if, on or before the Closing Date, all the
conditions precedent to the Company's obligations to effect the Merger under
Article 8 hereof have been satisfied or waived by the Company.
ARTICLE 6
HNC COVENANTS
During the period from the Agreement Date until the earlier to occur of
(i) the Effective Time or (ii) the termination of this Agreement in accordance
with Section 10, HNC covenants and agrees as follows:
6.1 Advice of Changes. HNC will promptly advise the Company in
writing (a) of any event occurring subsequent to the date of this Agreement that
would render any representation or warranty of HNC contained in this Agreement,
if made on or as of the date of such event or the Closing Date, to be untrue or
inaccurate in any material respect and (b) of any material adverse change in
HNC's business, results of operations or financial condition.
6.2 Regulatory Approvals. HNC will execute and file, or join in the
execution and filing, of any application, notification (including without
limitation any notification or provision of
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information, if any, that may be required under the HSR Act) or other document
that may be necessary in order to obtain the authorization, approval or consent
of any governmental body, federal, state, local or foreign, which may be
reasonably required, or which the Company may reasonably request, in connection
with the consummation of the Merger and the other transactions contemplated by
this Agreement and the HNC Ancillary Agreements in accordance with the terms of
this Agreement. HNC will use its best efforts to obtain all such authorizations,
approvals and consents.
6.3 Satisfaction of Conditions Precedent. HNC will use its best
efforts to satisfy or cause to be satisfied all of the conditions precedent
which are set forth in Article 8, and HNC will use its best efforts to cause the
transactions contemplated by this Agreement to be consummated in accordance with
the terms of this Agreement, and, without limiting the generality of the
foregoing, to obtain all consents and authorizations of third parties and to
make all filings with, and give all notices to, third parties that may be
necessary or reasonably required on its part in order to effect the transactions
contemplated hereby. In particular, HNC will use its best efforts to cause the
Merger to become effective in accordance with this Agreement by December 31,
1997.
6.4 HNC Stockholder Approval. HNC will call and hold a special
meeting of its stockholders as promptly as is reasonably practicable to submit
for the vote, consideration and approval of HNC's stockholders a proposal to
approve the issuance of shares of HNC Common Stock and the issuance of HNC
Options in the Merger (such vote of HNC stockholders is hereinafter referred to
as the "HNC STOCKHOLDER VOTE"). Such approval will be recommended by HNC's Board
of Directors and management. Such HNC Stockholders' meeting will be called, held
and conducted, and any proxies or written consents will be solicited, in
compliance with HNC's Certificate of Incorporation and Bylaws and applicable
law. In connection with such special stockholders' meeting, HNC will mail to its
stockholders (after obtaining necessary approval or clearance from the SEC), for
the purpose of soliciting the HNC Stockholder Vote, the Proxy Statement
complying with the proxy regulations promulgated under the 1934 Act. HNC will be
solely responsible for any statement, information or omission in the Proxy
Statement relating to HNC or its affiliates.
6.5 Blue Sky Laws. HNC will take such steps as may be necessary to
comply with the securities and Blue Sky laws of all jurisdictions which are
applicable in connection with the Merger.
6.6 Listing of Additional Shares. HNC will file with the Nasdaq
National Market a Notification Form for Listing of Additional Shares with
respect to the shares of HNC Common Stock issuable upon conversion of the
Company Common Stock in the Merger and upon exercise of the HNC Options to be
issued in the Merger upon the conversion of outstanding Company Options.
ARTICLE 7
CLOSING MATTERS
7.1 The Closing. Subject to termination of this Agreement as provided
in Section 10 below, the closing of the transactions to consummate the Merger
(the "CLOSING") will take place at the offices of Fenwick & West LLP, Two Palo
Alto Square, Palo Alto, California 94306 at 10:00 a.m., Pacific Standard Time on
the first business day after all of the conditions to Closing set
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forth in Sections 8 and 9 hereof have been satisfied and/or waived in accordance
with this Agreement, or on such later day as HNC and the Company may mutually
agree on (the "CLOSING DATE"). Concurrently with the Closing, the Agreement of
Merger (or a Certificate of Merger) will be filed with the Delaware Secretary of
State, and the Agreement of Merger (and related officers' certificates) will be
filed with the California Secretary of State.
7.2 Exchange of Certificates.
7.2.1 At the Closing, each holder of shares of Company Stock will
surrender the certificate(s) for such shares (each a "COMPANY CERTIFICATE"),
duly endorsed to HNC for cancellation as of the Effective Time. Promptly after
the Effective Time and receipt of such Company Certificates, HNC or its transfer
agent will issue to each tendering holder of a Company Certificate a certificate
for the number of shares of HNC Common Stock to which such holder is entitled
pursuant to Section 2.1.2 (less the Escrow Shares to be placed in escrow
pursuant to Section 2.4 and the Escrow Agreement) and HNC or its transfer agent
will pay by check to each tendering holder cash in lieu of fractional shares in
the amount payable to such holder in accordance with Section 2.1.4. At the
Closing, HNC will deliver the certificates representing the Escrow Shares to the
Escrow Agent pursuant to the Escrow Agreement.
7.2.2 No dividends or distributions payable to holders of record
of HNC Common Stock after the Effective Time, or cash payable in lieu of
fractional shares, will be paid to the holder of any unsurrendered Company
Certificate until the holder of such unsurrendered Company Certificate
surrenders such Company Certificate to HNC as provided above. Subject to the
effect, if any, of applicable escheat and other laws, following surrender of any
Company Certificate, there will be delivered to the person entitled thereto,
without interest, the amount of any dividends and distributions theretofore paid
with respect to HNC Common Stock so withheld as of any date subsequent to the
Effective Time and prior to such date of delivery.
7.2.3 After the Effective Time there will be no further
registration of transfers on the stock transfer books of the Company or its
transfer agent of the Company Stock that was outstanding immediately prior to
the Effective Time. If, after the Effective Time, Company Certificates are
presented for any reason, they will be canceled and exchanged as provided in
this Section 7.2.
7.2.4 Until Company Certificates representing shares of Company
Common Stock outstanding immediately prior to the Effective Time are surrendered
pursuant to Section 7.2.1 above, such Company Certificates will be deemed, for
all purposes, to evidence ownership of the number of shares of HNC Common Stock
into which such shares of Company Common Stock will have been converted pursuant
to Section 2.1.2 and the Agreement of Merger.
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The Company's obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by the Company, but only in a writing signed
by the Company):
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8.1 Accuracy of Representations and Warranties. The representations
and warranties of HNC set forth in Section 4 (as qualified by the HNC Disclosure
Letter) will be true and accurate in every material respect on and as of the
Closing with the same force and effect as if they had been made at the Closing,
and the Company will have received a certificate to such effect executed by
HNC's President or Chief Financial Officer.
8.2 Covenants. HNC will have performed and complied in all material
respects with all of its covenants contained in Section 6 on or before the
Closing, and the Company will have received a certificate to such effect signed
by HNC's President or Chief Financial Officer.
8.3 Requisite Approvals. The principal terms of this Agreement and
the Agreement of Merger will have been duly and validly approved and adopted by
HNC's Board of Directors in accordance with applicable law and HNC's Certificate
of Incorporation and Bylaws and the issuance of shares of HNC Common Stock in
the Merger and the grant of HNC Options upon conversion of Company Options in
the Merger will have been duly and validly approved and adopted by HNC's
stockholders in accordance with applicable law and HNC's Certificate of
Incorporation and Bylaws. The principal terms of the Agreement of Merger will
have been approved and adopted by Sub's Board of Directors and sole stockholder
in accordance with applicable law and Sub's Certificate of Incorporation and
Bylaws.
8.4 Compliance with Law; No Legal Restraints; No Litigation. No
litigation or proceeding will be threatened or pending for the purpose or with
the probable effect of enjoining or preventing the consummation of the Merger or
any of the other material transactions contemplated by this Agreement, or which
could be reasonably expected to have a material adverse effect on the present or
future operations or financial condition of HNC. There will not be any
outstanding or threatened, or enacted or adopted, any order, decree, temporary,
preliminary or permanent injunction, legislative enactment, statute, regulation,
action, proceeding or any judgment or ruling by any court, arbitrator,
governmental agency, authority or entity, or any other fact or circumstance,
that, directly or indirectly, challenges, threatens, prohibits, enjoins,
restrains, suspends, delays, conditions or renders illegal or imposes
limitations on (or is likely to result in a challenge, threat to, or a
prohibition, injunction, restraint, suspension, delay or illegality of, or to
impose limitations on) the Merger or any other material transaction contemplated
by this Agreement.
8.5 Government Consents; HSR Act Compliance. There will have been
obtained at or prior to the Closing Date such permits or authorizations, and
there will have been taken all such other actions by any regulatory authority
having jurisdiction over the parties and the actions herein proposed to be
taken, as may be required to lawfully consummate the Merger, including but not
limited to requirements under applicable federal and state securities laws. All
applicable waiting periods under the HSR Act shall have expired or early
termination of such waiting periods shall have been granted by both the Federal
Trade Commission and the United States Department of Justice without any
condition or requirement requiring or calling for the disposition or divestiture
of any product or other asset of the Company by HNC or the Company.
8.6 Opinion of HNC's Counsel. the Company will have received from
counsel to HNC, an opinion substantially in the form of Exhibit N.
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8.7 Nasdaq National Market Listing. The shares of HNC Common Stock
issuable to the Company Stockholders in the Merger pursuant to Section 2.1.2
hereof, and the shares of HNC Common Stock issuable upon the exercise of HNC
Options issued upon the assumption of Company Options in the Merger pursuant to
Section 2.2 hereof, shall be authorized for listing on the Nasdaq National
Market, subject to official notice of issuance.
8.8 Tax Status. The Company shall not have been advised in writing by
Deloitte & Touche, LLP, the Company's accountants, that, by reason of any act or
omission on the part of HNC, the Merger will not be eligible to be treated as a
"reorganization" within the meaning of Section 368(a)(1)(A) of the Code by
virtue of the provisions of Section 368(a)(2)(E) of the Code.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF HNC
The obligations of HNC hereunder are subject to the fulfillment or
satisfaction on, and as of the Closing, of each of the following conditions (any
one or more of which may be waived by HNC, but only in a writing signed by HNC):
9.1 Accuracy of Representations and Warranties. The representations
and warranties of the Company set forth in Section 3 (as qualified by the
Company Disclosure Letter) will be true and accurate in every material respect
on and as of the Closing with the same force and effect as if they had been made
at the Closing, and HNC will have received a certificate to such effect executed
by the Company's President and Chief Financial Officer.
9.2 Covenants. The Company will have performed and complied in all
material respects with all of its covenants contained in Section 5 on or before
the Closing, and HNC will have received a certificate to such effect signed by
the Company's President and Chief Financial Officer.
9.3 No Material Adverse Change. There will not have been any material
adverse change in the financial condition, properties, assets, liabilities,
business, results of operations or operations of the Company and its
subsidiaries, taken as a whole, and HNC will have received a certificate to such
effect signed by the Company's President and Chief Financial Officer.
9.4 Compliance with Law; No Legal Restraints; No Litigation. There
will not be any outstanding or threatened, or enacted or adopted, any order,
decree, temporary, preliminary or permanent injunction, legislative enactment,
statute, regulation, action, proceeding or any judgment or ruling by any court,
arbitrator, governmental agency, authority or entity, or any other fact or
circumstance, that, directly or indirectly, challenges, threatens, prohibits,
enjoins, restrains, suspends, delays, conditions, or renders illegal or imposes
limitations on (or is likely to result in a challenge, threat to, or a
prohibition, injunction, restraint, suspension, delay or illegality of, or to
impose limitations on): (i) the Merger or any other material transaction
contemplated by this Agreement or any Company Ancillary Agreement; (ii) HNC's
payment for, or acquisition or purchase of, some or all of the shares of Company
Common Stock or any material part of the assets of the Company; (iii) HNC's
direct or indirect ownership or operation of all or any material portion of the
business or assets of the Company; or (iv) HNC's ability to exercise full rights
of ownership with respect to the Surviving Corporation or its shares, including
but not limited to any restrictions on HNC's ability to vote the shares of the
Surviving Corporation. No litigation or
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proceeding will be threatened or pending for the purpose or with the probable
effect of enjoining or preventing the consummation of any of the transactions
contemplated by this Agreement, or which could be reasonably expected to have a
material adverse effect on the present or future operations or financial
condition of the Company or which asserts that the Company's or HNC's
negotiations regarding this Agreement, HNC's or the Company's entering into this
Agreement or the Company's or HNC's consummation of the Merger or any other
material transaction contemplated by this Agreement or any Company Ancillary
Agreement or any CR Stockholder Ancillary Agreement, breaches or violates any
agreement or commitment of the Company or constitutes tortious conduct on the
part of HNC or the Company.
9.5 Government Consents; HSR Act Compliance. There will have been
obtained at or prior to the Closing Date such permits or authorizations, and
there will have been taken all such other actions, as may be required to
consummate the Merger by any governmental or regulatory authority having
jurisdiction over the parties and the actions herein proposed to be taken,
including but not limited to requirements under applicable federal and state
securities laws. All applicable waiting periods under the HSR Act shall have
expired or early termination of such waiting periods shall have been granted by
both the Federal Trade Commission and the United States Department of Justice
without any condition or requirement requiring or calling for the disposition or
divestiture of any product or other asset of the Company by HNC or the Company.
9.6 Opinion of Company's Counsel. HNC will have received from
Phillips & Haddan, counsel to the Company, an opinion substantially in the form
of Exhibit O.
9.7 Consents. HNC will have received duly executed copies of all
material third-party consents, approvals, assignments, waivers, authorizations
or other certificates contemplated by this Agreement or the Company Disclosure
Letter or reasonably deemed necessary by HNC's legal counsel to provide for the
continuation in full force and effect of any and all material contracts,
agreements and leases of the Company after the Merger and the preservation of
the Company's IP Rights and other assets and properties after the Merger and for
HNC to consummate the Merger and the other transactions contemplated by this
Agreement, the Company Ancillary Agreements and the CR Stockholder Ancillary
Agreements and in form and substance reasonably satisfactory to HNC.
9.8 Requisite Approvals. The principal terms of this Agreement and
the Agreement of Merger, the Merger and the Company Ancillary Agreements will
have been duly and validly approved and adopted, as required by applicable law
and the Company's Articles of Incorporation and Bylaws, by (a) the Company's
Board of Directors and (b) the valid and affirmative vote of outstanding shares
of Company Common Stock (and any other Company securities (if any) entitled to
vote thereon) representing not less than one hundred percent (100%) of the
voting power of all issued and outstanding Company Common Stock and all other
Company voting securities (if any).
9.9 HNC Stockholder Approval. The issuance of the shares of HNC
Common Stock to be issued in the Merger and the grant of HNC Options upon
conversion of Company Options in the Merger will have been duly and validly
approved and adopted by HNC's stockholders in accordance with applicable law and
HNC's Certificate of Incorporation and Bylaws.
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9.10 No Dissenting Shares. No shares of the capital stock of the
Company will be eligible to exercise or perfect any statutory appraisal rights
of dissenting shareholders under applicable law.
9.11 Affiliate Agreements. Each CR Stockholder and each Company
Affiliate who is to receive HNC Common Stock in the Merger will have executed
and delivered to HNC a Company Affiliate Agreement in the form of Exhibit J.
9.12 Non-Competition Agreement. HNC will have received from each of
the CR Stockholders a fully executed copy of a Non-Competition Agreement in the
form of Exhibit L.
9.13 Employment Agreement. HNC will have received from each of the CR
Stockholders a fully executed copy of an Employment Agreement in the form of
Exhibit M.
9.14 Escrow Agreement. HNC will have received a fully executed copy of
the Escrow Agreement in the form of Exhibit B executed by the Escrow Agent, the
Representative and each of the Company Stockholders.
9.15 Fairness Opinion. HNC's Board of Directors shall have received a
written opinion, addressed to HNC's Board of Directors, from Robertson, Stephens
& Company, that the Merger is fair to HNC and its stockholders from a financial
point of view.
9.16 Resignation of Directors. The directors of the Company in office
immediately prior to the Effective Time of the Merger (other than any such
director who is designated in Section 2.5(g) to be a director of the Company
immediately after the Effective Time) will have resigned as directors of the
Surviving Corporation effective as of the Effective Time.
9.17 Pooling Opinions. HNC will have been advised in writing, as of
the Effective Time, by Price Waterhouse LLP that, in accordance with generally
accepted accounting principles, the Merger qualifies to be treated as a "pooling
of interests" for accounting purposes, and the Company will have been advised in
writing, as of the Effective Time, by Deloitte & Touche LLP that, in accordance
with generally accepted accounting principles, the Company is eligible to
participate in a transaction that qualifies as a "pooling of interests" for
accounting purposes.
9.18 No Derivative Securities. All Company Derivative Securities, if
any will have been exercised in full and thereby converted into shares of
Company Common Stock in accordance with their current terms and conditions, so
that no the Company Derivative Securities will be outstanding immediately prior
to the Effective Time.
9.19 Tax Allocation Agreement. HNC, the Company, and the CR
Stockholders shall have entered into a Tax Allocation Agreement in form and
substance reasonably satisfactory allocating items of tax significance (such as
income, deductions and credits, etc.) between the short tax year of the Company
ended at the Effective Time and the remaining tax year of the Company commencing
immediately after the Effective Time.
9.20 Bylaw Amendment. The authorized number of directors of the
Company shall be a total of exactly five (5) directors, and the Company's Bylaws
shall have been duly amended to authorize a total of exactly five (5) directors.
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9.21 Investment Letters Executed. Each of the CR Stockholders shall
have executed and delivered to HNC an Investment Representation Letter and each
holder of an outstanding Company Option shall have executed and delivered to HNC
an Optionee Investment Representation Letter.
9.22 No Impediment from Buy-Sell Agreement. Nothing in that certain
Stock Buy-Sell Agreement dated as of April 30, 1992 among the Company and the CR
Stockholders shall adversely affect HNC's ownerhip interest in the shares of the
Company immediately following the Effective Time.
ARTICLE 10
TERMINATION OF AGREEMENT
10.1 Prior to Closing.
10.1.1 This Agreement may be terminated at any time prior to the
Effective Time by the mutual written consent of HNC and the Company.
10.1.2 Unless otherwise agreed by the parties hereto, this
Agreement will be automatically terminated at any time prior to the Effective
Time without the need for action by any party hereto if all conditions to the
parties' obligation to effect the Closing set forth in Sections 8 and 9 have not
been satisfied or waived by the appropriate party on or before December 31, 1997
(the "TERMINATION DATE").
10.1.3 Either party may terminate this Agreement at any time
prior to the Closing if the other party has committed a material breach of (a)
any of its representations and warranties under Section 3 or 4 of this
Agreement, as applicable; or (b) any of its covenants under Sections 5 or 6 of
this Agreement, as applicable, and has not cured such material breach prior to
the earlier of (i) the Closing or (ii) thirty (30) days after the party seeking
to terminate this Agreement has given the other party written notice of its
intention to terminate this Agreement pursuant to this Section 10.1.3.
10.2 At the Closing. At the Closing, this Agreement may be terminated
and abandoned:
10.2.1 By HNC, if any of the conditions precedent to HNC's
obligations set forth in Article 9 above have not been fulfilled or waived on or
prior to the Termination Date;
10.2.2 By the Company, if any of the conditions precedent to the
Company's obligations set forth in Article 8 above have not been fulfilled or
waived on or prior to the Termination Date;
10.2.3 By the Company, if the HNC Closing Average Price Per Share
is less than $26.00 per share, as presently constituted; provided that if the
Company does not affirmatively exercise this right of termination at the
Closing, then this Agreement will remain in effect, and the parties will be
obligated to complete the Closing and consummate the Merger.
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Any termination of this Agreement under this Section 10.2 will be
effective by the delivery of notice of the terminating party to the other party
hereto.
10.3 No Liability. Any termination of this Agreement in accordance
with this Section 10 will be without further obligation or liability upon any
party in favor of the other party hereto other than the obligations provided in
the Confidentiality Agreement; provided, however, that nothing herein will limit
the obligation of the Company, the CR Stockholders and HNC to use their best
efforts to cause the Merger to be consummated, as set forth in Sections 5.12 and
6.3 hereof, respectively.
ARTICLE 11
SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION
AND REMEDIES, CONTINUING COVENANTS
11.1 Survival of Representations. All representations, warranties and
covenants of the Company and the Company Stockholders contained in this
Agreement will remain operative and in full force and effect, regardless of any
investigation made by or on behalf of HNC, until that date (the "ESCROW RELEASE
DATE") which is the earlier of (i) the termination of this Agreement or (ii) the
first (1st) anniversary of the Closing Date; provided, however, that those
representations and warranties respecting matters addressed by the first audited
financial statements of the combined corporation, together with a report thereon
from HNC's independent auditors, shall not expire later than upon the date on
which such financial statements are first released to the public.
11.2 Agreement to Indemnify. The Company Stockholders will jointly and
severally indemnify and hold harmless HNC and the Surviving Corporation and
their respective officers, directors, agents, stockholders and employees, and
each person, if any, who controls or may control HNC or the Surviving
Corporation within the meaning of the Securities Act (each hereinafter referred
to individually as an "INDEMNIFIED PERSON" and collectively as "INDEMNIFIED
PERSONS") from and against any and all claims, demands, suits, actions, causes
of actions, losses, costs, demonstrable damages, liabilities and expenses
including, without limitation, reasonable attorneys' fees, other professionals'
and experts' reasonable fees and court or arbitration costs (hereinafter
collectively referred to as "DAMAGES") incurred and arising out of any
inaccuracy, misrepresentation, breach of, or default in, any of the
representations, warranties or covenants given or made by the Company in this
Agreement or in the Company Disclosure Letter or any certificate delivered by or
on behalf of the Company pursuant hereto, (if such inaccuracy,
misrepresentation, breach or default existed at the Closing Date). Any claim of
indemnity made by an Indemnified Person under this Section 11.2 must be raised
in a writing delivered to the Escrow Agent by no later than the Escrow Release
Date. As used herein, the term "Damages" will not include any overhead costs of
HNC personnel and the amount of Damages incurred by any Indemnified Person will
be reduced by the amount of any insurance proceeds actually received by such
Indemnified Person on account of such Damages and the amount of any direct tax
savings actually recognized by such Indemnified Person that are directly
attributable to such Damages, but will include any reasonable costs or expenses
incurred by such Indemnified Person to recover such insurance proceeds or to
obtain such tax savings. The Indemnified Persons will use reasonable efforts to
mitigate their Damages.
11.3 Limitation. Notwithstanding anything herein to the contrary, in
seeking indemnification for Damages under Section 11.2, the Indemnified Persons
will exercise their
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remedies with respect to the Escrow Shares and any other assets deposited in
escrow pursuant to the Escrow Agreement. Except for intentional fraudulent
conduct or other willful misconduct: (i) no Company Stockholder will have any
liability to an Indemnified Person under Section 11.2 of this Agreement except
to the extent of such Company Stockholder's portion of the Escrow Shares and any
other assets deposited under the Escrow Agreement and (ii) the remedies set
forth in this Section 11.3 will be the exclusive remedies of HNC and the other
Indemnified Persons under Section 11.2 of this Agreement against any Company
Stockholder for any inaccuracy, misrepresentation, breach of, or default in, any
of the representations, warranties or covenants given or made by the Company in
this Agreement or in any certificate, document or instrument delivered by or on
behalf of the Company pursuant hereto. In addition, the indemnification provided
for in Section 11.2 shall not apply unless and until the aggregate Damages for
which one or more Indemnified Persons seeks or has sought indemnification
hereunder exceeds a cumulative aggregate of Two Hundred Fifty Thousand Dollars
($250,000) (the "BASKET"), in which event the Company Stockholders shall,
subject to the foregoing limitations, be liable to indemnify the Indemnified
Persons for all Damages. The limitations on the indemnification obligations set
forth in this Section 11.3 shall not be applicable to Misconduct Damages (as
defined below). As used herein, "MISCONDUCT DAMAGES" means Damages resulting
from intentional fraudulent conduct or other willful misconduct or breach of any
provisions of the Company Affiliate Agreement or the Investment Representation
Letters.
11.4 Notice. Promptly after HNC becomes aware of the existence of any
potential claim by an Indemnified Person for indemnity from the Company
Stockholders under Section 11.2, HNC will notify the Company Stockholders of
such potential claim in accordance with the Escrow Agreement. Failure of HNC to
give such notice will not affect any rights or remedies of an Indemnified Party
hereunder with respect to indemnification for Damages except to the extent the
Company Stockholders are materially prejudiced thereby. Prior to the settlement
of any claim for which HNC seeks indemnity from a Company Stockholder, HNC will
provide the Company Stockholders with the terms of the proposed settlement and a
reasonable opportunity to comment on such terms in accordance with the Escrow
Agreement.
11.5 Title Indemnity. In addition to, and separate from, the foregoing
agreement to indemnify set forth in Section 11.2, each Company Stockholder
agrees, severally and not jointly, to defend and indemnify HNC and each other
Indemnified Person from and against any and all claims, demands, suits, actions,
causes of actions, losses, costs, damages, liabilities and expenses including,
without limitation, reasonable attorneys' fees, other professionals' and
experts' reasonable fees and court or arbitration costs incurred and arising out
of any failure of such Company Stockholder to have good, valid and marketable
title to any issued and outstanding shares of Company Common Stock held (or
asserted to have been held) by such Company Stockholder, free and clear of all
liens, claims and encumbrances, or to have the full right, capacity and
authority to enter into this Agreement (in the case of a CR Stockholder) and to
vote such person's shares of Company Stock in favor of the Merger and any other
transactions contemplated by this Agreement. A Company Stockholder's liability
under the indemnification provided for in this Section 11.5 shall be in addition
to any liability of such Company Stockholder under Section 11.2 and shall not be
subject to the limitations on such Company Stockholder's liability set forth in
Section 11.3 and shall not be limited to such Company Stockholder's Escrow
Shares.
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ARTICLE 12
MISCELLANEOUS
12.1 Governing Law. The internal laws of the State of California
(irrespective of its choice of law principles) will govern the validity of this
Agreement, the construction of its terms, and the interpretation and enforcement
of the rights and duties of the parties hereto.
12.2 Assignment; Binding Upon Successors and Assigns. Neither party
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other party hereto. This Agreement will be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
12.3 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
12.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
both parties reflected hereon as signatories.
12.5 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy will not preclude the exercise of any other.
12.6 Amendment and Waivers. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. The Agreement may be amended by the parties hereto at any
time before or after approval of the stockholders of the Company, but, after
such approval, no amendment will be made which by applicable law requires the
further approval of the stockholders of the Company without obtaining such
further approval. At any time prior to the Effective Time, each of the Company
and HNC, by action taken by its Board of Directors, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other; (ii) waive any inaccuracies in the representations and
warranties made to it contained herein or in any document delivered pursuant
hereto; and (iii) waive compliance with any of the agreements or conditions for
its benefit contained herein. No such waiver or extension will be effective
unless signed in writing by the party against whom such waiver or extension is
asserted. The failure of any party to enforce any of the provisions hereof will
not be construed to be a waiver of the right of such party thereafter to enforce
such provisions.
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<PAGE> 43
12.7 Expenses. Each party will bear its respective expenses and legal
fees incurred with respect to this Agreement, and the transactions contemplated
hereby.
12.8 Attorneys' Fees. Should suit be brought to enforce or interpret
any part of this Agreement, the prevailing party will be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys' fees
to be fixed by the court (including without limitation, costs, expenses and fees
on any appeal). The prevailing party will be entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment.
12.9 Notices. All notices and other communications required or
permitted under this Agreement will be in writing and will be either hand
delivered in person, sent by telecopier, sent by certified or registered first
class mail, postage pre-paid, or sent by nationally recognized express courier
service. Such notices and other communications will be effective upon receipt if
hand delivered or sent by telecopier, five (5) days after mailing if sent by
mail, and one (l) day after dispatch if sent by express courier, to the
following addresses, or such other addresses as any party may notify the other
parties in accordance with this Section:
If to HNC:
HNC Software Inc.
5930 Cornerstone Court West
San Diego, CA 92121
Attention: President
Fax Number: (619) 452-3220
with a copy to:
Fenwick & West, LLP
Two Palo Alto Square, Suite 800
Palo Alto, CA 94306
Attention: Kenneth A. Linhares
Fax Number: (415) 857-0361
If to the Company:
CompReview, Inc.
4000 MacArthur Boulevard, Suite 800
Newport Beach, CA 92660
Attention: President
Fax Number: (714) 833-5947
with a copy to:
Phillips & Haddan
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Attention: Jon Haddan, Esq.
Fax Number (714) 752-6161
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<PAGE> 44
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 12.9.
12.10 Construction of Agreement. This Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof will
not be construed for or against either party. A reference to a Section or an
exhibit will mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for reference purposes
only and will not in any manner limit the construction of this Agreement which
will be considered as a whole.
12.11 No Joint Venture. Nothing contained in this Agreement will be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and their status
is, and at all times will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.
12.12 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
12.13 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
12.14 Public Announcement. Upon execution of this Agreement, HNC and
the Company will issue a press release approved by both parties announcing the
Merger. Thereafter, HNC may issue such press releases, and make such other
disclosures regarding the Merger, as it determines are required under applicable
securities laws or regulatory rules. Prior to the publication of such press
release (unless this Agreement has been terminated, neither party will make any
public announcement relating to this Agreement or the transactions contemplated
hereby and the Company will use its reasonable efforts to prevent any trading in
HNC Common Stock by its officers, directors, employees, stockholders and agents.
12.15 Confidentiality. the Company and HNC each confirm that they have
entered into the Confidentiality Agreement and that they are each bound by, and
will abide by, the provisions of such Confidentiality Agreement (except that HNC
will cease to be bound by the Confidentiality
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<PAGE> 45
Agreement after the Merger becomes effective). If this Agreement is terminated,
all copies of documents containing confidential information of a disclosing
party will be returned by the receiving party to the disclosing party or be
destroyed, as provided in the Confidentiality Agreement.
[The Remainder of This Page Has Intentionally Been Left Blank]
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<PAGE> 46
12.16 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto other than the
Confidentiality Agreement. The express terms hereof control and supersede any
course of performance or usage of the trade inconsistent with any of the terms
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
HNC SOFTWARE INC. COMPREVIEW, INC.
By: /s/ Robert L. North By: /s/ Robert L. Kaaren
----------------------------- --------------------------
Robert L. North, President Robert L. Kaaren, M.D.,
Chief Executive Officer
and Chairman
FW1 ACQUISITION CORP. CR STOCKHOLDERS
By: /s/ Robert L. North /s/ Robert L. Kaaren
----------------------------- --------------------------
Robert L. North, President Robert L. Kaaren, M.D.
/s/ Mishel E. Munayyer
--------------------------
Mishel E. Munnayer a.k.a
Michael E. Munayyer, Trustee of
the Michael Munayyer Trust
dated August 11, 1995
[Signature Page to Agreement and Plan of Reorganization]
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<PAGE> 47
LIST OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Agreement of Merger
Exhibit B Escrow Agreement
Exhibit C Restated Articles of Incorporation of Surviving Corporation
Exhibit D Bylaws of Surviving Corporation
Exhibit E Investment Representation Letter
Exhibit F Optionee Investment Representation Letter
Exhibit G Registration Rights Agreement
Exhibit H Tax Representation Certificate of the Company
Exhibit I Company Stockholder Agreement
Exhibit J Company Affiliate Agreement
Exhibit K Company Financial Statements
Exhibit L Non-Competition Agreement
Exhibit M Employment Agreement
Exhibit N Matters to be Covered in the Opinion of Fenwick & West, LLP
Exhibit O Matters to be Covered in the Opinion of Phillips & Haddan
</TABLE>
<PAGE> 1
EXHIBIT 2.02
AGREEMENT OF MERGER
OF
FW1 ACQUISITION CORP.
AND
COMPREVIEW, INC.
This Agreement of Merger (this "AGREEMENT") is entered into as of
November 28, 1997 (the "DATE OF THIS AGREEMENT") by and between FW1 Acquisition
Corp., a Delaware corporation ("SUB") that is a wholly-owned subsidiary of HNC
Software Inc. a Delaware corporation ("HNC"), and CompReview, Inc. (the
"COMPANY"), a California corporation.
R E C I T A L S
A. HNC, Sub and the Company have entered into an Agreement and Plan
of Reorganization, dated as of July 14, 1997 (the "PLAN"), providing for certain
representations, warranties and agreements in connection with the transactions
contemplated hereby, and for the merger of Sub with and into the Company in
accordance with the Delaware General Corporation Law (the "DELAWARE LAW") and
the General Corporation Law of California (the "CALIFORNIA LAW"), the Plan and
this Agreement, with the Company to be the surviving corporation of the Merger.
B. The Boards of Directors of HNC, Sub and the Company,
respectively, have determined it to be advisable and in the respective interests
of HNC, Sub and the Company and their respective stockholders that Sub be merged
with and into the Company in accordance with the Plan (the "MERGER") so that the
Company will be the surviving corporation of the Merger.
C. The Plan, this Agreement and the Merger have been approved by HNC
as the sole stockholder of Sub and by the stockholders of the Company in
accordance with applicable law.
NOW, THEREFORE, Sub and the Company hereby agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
As used in this Agreement, the following terms will have the meanings
set forth below:
1.1 The "EFFECTIVE TIME" means the date on which the Merger becomes
legally effective under the laws of the States of California and Delaware as a
result of the filing with the Delaware Secretary of State of this Agreement or,
in lieu thereof, a Certificate of Merger (the "CERTIFICATE OF MERGER"),
conforming to the requirements of Section 252 of the Delaware General
Corporation Law, and the filing with the California Secretary of State of this
Agreement of Merger (and related officers' certificates).
<PAGE> 2
1.2 "HNC COMMON STOCK" means HNC's Common Stock, $0.001 par value per
share.
1.3 "HNC CLOSING AVERAGE PRICE PER SHARE" means the average of the
closing prices per share of HNC Common Stock as quoted on the Nasdaq National
Market (or such other exchange or quotation system on which HNC Common Stock is
then traded or quoted) and reported in The Wall Street Journal for the twenty
(20) trading days immediately preceding (but not including) the date of this
Agreement.
1.4 "COMPANY COMMON STOCK" means the Company's Common Stock, no par
value per share.
1.5 "COMPANY OPTIONS" means, collectively, options to purchase shares
of Company Common Stock granted by the Company to Company employees under the
Company's 1995 Stock Option Plan (the "COMPANY OPTION PLAN").
1.6 "COMPANY DERIVATIVE SECURITIES" means, collectively: (a) any
warrant, option, right or other security that entitles the holder thereof to
purchase or otherwise acquire any shares of the capital stock of the Company
(collectively, "COMPANY STOCK RIGHTS"); (b) any note, evidence of indebtedness,
stock or other security of the Company that is convertible into or exchangeable
for any shares of the capital stock of the Company or any Company Stock Rights
("COMPANY CONVERTIBLE SECURITY"); and (c) any warrant, option, right, note,
evidence of indebtedness, stock or other security that entitles the holder
thereof to purchase or otherwise acquire any Company Stock Rights or any Company
Convertible Security; provided, however, that the term "Company Derivative
Securities" does not include any Company Options.
1.7 "NUMBER OF COMPANY FULLY DILUTED SHARES" means that number of
shares of Company Common Stock that is equal to the sum of: (a) the total number
of shares of Company Common Stock that are issued and outstanding immediately
prior to the Effective Time; plus (b) the total number of shares of Company
Common Stock subject to or issuable under all Company Options that are issued
and outstanding immediately prior to the Effective Time; plus (c) the total
number of shares of Company Common Stock that, immediately prior to the
Effective Time, are, directly or indirectly, ultimately or potentially issuable
by the Company upon the exercise, conversion or exchange of all Company
Derivative Securities (if any) that are issued and outstanding immediately prior
to the Effective Time.
1.8 "COMPANY STOCKHOLDERS" means those persons who, immediately prior
to the Effective Time, hold the shares of Company stock that are outstanding
immediately prior to the Effective Time; provided, however, that for purposes of
Section 2.4 of this Agreement, the term "Company Stockholders" means only those
Company Stockholders (as defined above in this Section) who are issued shares of
HNC Common Stock in the Merger.
1.9 "COMPANY DISSENTING SHARES" means any shares of Company Stock
that (i) are outstanding immediately prior to the Effective Time and qualify
fully as "dissenting shares" within the meaning of Section 1300(b) of the
California Corporations Code and (ii) with respect to which dissenter's rights
to require the purchase of such dissenting shares for cash at their fair
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<PAGE> 3
market value in accordance with Chapter 13 of the California Corporations Code
have been duly and properly exercised and perfected in connection with the
Merger.
1.10 "HNC MERGER SHARES" means that number of shares of HNC Common
Stock equal to the sum of (i) Five Million (5,000,000) shares of HNC Common
Stock, as presently constituted, plus (ii) the Additional Shares.
1.11 "ADDITIONAL SHARES" means that number of shares of HNC Common
Stock (as constituted immediately prior to the Effective Time) obtained by
dividing (i) the Retained Earnings (as defined below) by (ii) the HNC Closing
Average Price Per Share. As used herein, the "RETAINED EARNINGS" means the
retained earnings of the Company as of the last day of the last full calendar
month ended prior to the Effective Time, computed in accordance with generally
accepted accounting principles consistently applied.
1.12 "CONVERSION RATIO" means the quotient obtained by (a) dividing
the number of shares of HNC Common Stock constituting the HNC Merger Shares by
(b) the Number of Company Fully Diluted Shares.
ARTICLE 2
THE MERGER
2.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, Sub will be merged with and into the Company
pursuant to the Plan and this Agreement and in accordance with applicable
provisions of the laws of the State of California and the State of Delaware as
follows:
2.1.1 Conversion of Sub Stock. At the Effective Time, each share
of Common Stock of Sub that is issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without the need for any
further action on the part of the holder thereof, be converted into and become
one (1) share of Company Common Stock that is issued and outstanding immediately
after the Effective Time, and the shares of Company Common Stock into which the
shares of Sub Common Stock are so converted shall be the only shares of Company
stock that are issued and outstanding immediately after the Effective Time.
2.1.2 Conversion of Company Stock. At the Effective Time, each
share of Company Common Stock that is issued and outstanding immediately prior
to the Effective Time (other than any Company Dissenting Shares as provided in
Section 2.1.3) will, by virtue of the Merger, and without the need for any
further action on the part of the holder thereof, be converted into a number of
shares of HNC Common Stock that is equal to the Conversion Ratio, subject to the
provisions of Section 2.1.4 regarding the elimination of fractional shares.
2.1.1 Company Dissenting Shares. Holders of Company Dissenting
Shares (if any) will be entitled to their appraisal rights under Chapter 13 of
the California Corporations Code with respect to such Company Dissenting Shares,
and such Company Dissenting Shares will not be converted into shares of HNC
Common Stock in the Merger; provided, however, that nothing in this Section
2.1.3 is intended to remove, release, waive, alter or affect any of the
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<PAGE> 4
conditions to HNC's and Sub's obligations to consummate the Merger set forth in
Section 9.8 and Section 9.9 of the Plan, or any other provision of the Plan
relating to the Company Dissenting Shares. Shares of the capital stock of the
Company that are outstanding immediately prior to the Effective Time of the
Merger and with respect to which dissenting shareholders' rights of appraisal
under the California Corporations Code have not been properly perfected will,
when such dissenting shareholders' rights can no longer be legally exercised
under the California Corporations Code, be converted into HNC Common Stock as
provided in Section 2.1.2.
2.1.4 Fractional Shares. No fractional shares of HNC Common Stock
shall be issued in connection with the Merger. In lieu thereof, each holder of
Company Common Stock who would otherwise be entitled to receive a fraction of a
share of HNC Common Stock under Section 2.1.2 of this Agreement, after
aggregating all shares of HNC Common Stock to be received by such holder, shall
instead receive from HNC, within three (3) business days after the Effective
Time, an amount of cash equal to the product obtained by multiplying (i) the HNC
Closing Average Price Per Share (as adjusted to reflect any Capital Change (as
defined below) of HNC) by (ii) the fraction of a share of HNC Common Stock to
which such holder would otherwise be entitled to receive.
2.2 Assumption and Conversion of Company Options. Each Company Option
that is outstanding immediately prior to the Effective Time shall, by virtue of
the Merger and at the Effective Time and without the need for any further action
on the part of any holder thereof, be assumed by HNC and converted into an
option (an "HNC OPTION") to purchase that number of shares of HNC Common Stock
determined by multiplying the number of shares of Company Common Stock subject
to such Company Option immediately prior to the Effective Time by the Conversion
Ratio, at an exercise price per share of HNC Common Stock equal to the exercise
price per share of Company Common Stock that was in effect for such Company
Option immediately prior to the Effective Time divided by the Conversion Ratio;
provided, however, that if the foregoing calculation would result in an assumed
and converted Company Option being converted into an HNC Option that, after
aggregating all the shares of HNC Common Stock issuable upon the exercise of
such HNC Option, would be exercisable for a fraction of a share of HNC Common
Stock, then the number of shares of HNC Common Stock subject to such HNC Option
shall be rounded down to the nearest whole number of shares of HNC Common Stock.
The terms, exercisability, vesting schedule, status as an "incentive stock
option" under Section 422 of the Internal Revenue Code of 1986, as amended (if
applicable) or a nonqualified stock option, and all other terms and conditions
of each Company Option (including but not limited to the provisions of the
Company Option Plan that form part of the terms and conditions of such Company
Option) that is converted into an HNC Option in the Merger will (except as
otherwise provided in the terms of such Company Option), to the extent permitted
by law and otherwise reasonably practicable, be unchanged and continue in effect
after the Merger. Pre-Merger employment service with the Company will be
credited to each holder of a Company Option for purposes of applying any vesting
schedule contained in a Company Option to determine the number of shares of HNC
Common Stock that are exercisable under the HNC Option into which such Company
Option is converted in the Merger.
2.3 Adjustments for Capital Changes. Notwithstanding the provisions
of Section 2.1 or Section 2.2, if at any time prior to the Effective Time, HNC
recapitalizes, either through a
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<PAGE> 5
subdivision (or stock split) of any of its outstanding shares into a greater
number of shares, or a combination (or reverse stock split) of any of its
outstanding shares into a lesser number of shares, or reorganizes, reclassifies
or otherwise changes its outstanding shares into the same or a different number
of shares of other classes (other than through a subdivision or combination of
shares provided for in the previous clause), or declares a dividend on its
outstanding shares payable in shares of HNC Common Stock or in shares or
securities convertible into shares of HNC Common Stock (each, a "CAPITAL
CHANGE"), then the HNC Closing Average Price Per Share, the number of shares of
HNC Common Stock constituting the HNC Merger Shares and the Conversion Ratio
will each be appropriately adjusted so as to maintain the proportionate
interests of the stockholders and optionholders of HNC and the Company in the
outstanding equity of HNC immediately following the Merger as contemplated by
this Agreement.
2.4 Escrow Agreement. HNC will withhold ten percent (10%) of the
shares of HNC Common Stock to be issued to Company Stockholders in the Merger
pursuant to Section 2.1.2, rounded down to the nearest whole number of shares to
be issued to each the Company Stockholder (the "ESCROW SHARES") and will deliver
certificates representing such Escrow Shares to State Street Bank and Trust
Company or a similar institution, as escrow agent (the "ESCROW AGENT"), together
with related stock transfer powers, to be held by the Escrow Agent as security
for the Company Stockholders' indemnification obligations under Section 11 of
the Plan and pursuant to the provisions of an escrow agreement entered into by
HNC, the Escrow Agent, the Company Stockholders and the representatives of the
Company Stockholders pursuant to the Plan (the "ESCROW AGREEMENT"). The Escrow
Shares will be represented by a certificate or certificates issued in the names
of the Company Stockholders in proportion to their respective interests therein
and will be held by the Escrow Agent during that time period specified in the
Escrow Agreement (the "ESCROW PERIOD").
2.5 Effects of the Merger. At and upon the Effective Time: (a) the
separate existence of Sub will cease and Sub will be merged with and into the
Company, and the Company will be the surviving corporation of the Merger (the
"SURVIVING CORPORATION") pursuant to the terms of this Agreement and the Plan;
(b) the Restated Articles of Incorporation of the Company shall be amended to
read as set forth in Exhibit A attached hereto and shall be the Articles of
Incorporation of the Surviving Corporation; (c) each share of Company stock that
is outstanding immediately prior to the Effective Time and each Company Option
that is outstanding immediately prior to the Effective Time shall be converted
into HNC Common Stock or an HNC Option, respectively, as provided in this
Section 2; (d) each share of Sub Common Stock that is outstanding immediately
prior to the Effective Time shall be converted into one (1) share of Company
Common Stock as provided in Section 2.1.1 hereof; and (e) the Merger shall, from
and after the Effective Time, have all of the effects provided by applicable
law.
ARTICLE 3
EXCHANGE OF CERTIFICATES
3.1 At or before the Effective Time, each holder of shares of Company
stock will surrender the certificate(s) for such shares (each a "COMPANY
CERTIFICATE"), duly endorsed to HNC for cancellation. Promptly after the
Effective Time and receipt of such Company Certificates, HNC or its transfer
agent will issue to each tendering holder of a Company
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<PAGE> 6
Certificate a certificate for the number of shares of HNC Common Stock to which
such holder is entitled pursuant to Section 2.1.2 hereof (less the Escrow Shares
to be placed in escrow pursuant to Section 2.4 of the Plan and the Escrow
Agreement), and HNC or its transfer agent will pay by check to each tendering
holder cash in lieu of fractional shares in the amount payable to such holder in
accordance with Section 2.1.4 hereof. At the Closing (as defined in the Plan),
HNC will deliver the certificates representing the Escrow Shares to the Escrow
Agent pursuant to the Escrow Agreement.
3.2 No dividends or distributions payable to holders of record of HNC
Common Stock after the Effective Time, or cash payable in lieu of fractional
shares, will be paid to the holder of any unsurrendered the Company Certificate
until the holder of such unsurrendered the Company Certificate surrenders such
the Company Certificate to HNC as provided above. Subject to the effect, if any,
of applicable escheat and other laws, following surrender of any the Company
Certificate, there will be delivered to the person entitled thereto, without
interest, the amount of any dividends and distributions therefor paid with
respect to HNC Common Stock so withheld as of any date subsequent to the
Effective Time and prior to such date of delivery.
3.3 After the Effective Time, there will be no further registration
of transfers on the stock transfer books of the Company or its transfer agent of
the Company Stock that was outstanding immediately prior to the Effective Time.
If, after the Effective Time, the Company Certificates are presented for any
reason, they will be canceled and exchanged as provided in this Section 3.
3.4 Until the Company Certificates representing the Company stock
outstanding prior to the Merger are surrendered pursuant to Section 3.1 above,
such Company Certificates will be deemed, for all purposes, to evidence
ownership of the number of shares of HNC Common Stock into which the Company
Stock will have been converted pursuant to Section 2.1.2 of this Agreement.
ARTICLE 4
TERMINATION AND AMENDMENT
4.1 Agreement Subject to Termination by Mutual Consent.
Notwithstanding the approval of this Agreement by the stockholders of Sub and
the Company, this Agreement may be terminated at any time prior to the Effective
Time by the mutual written agreement of Sub and the Company.
4.2 Agreement Subject to Termination on Termination of Plan.
Notwithstanding the approval of this Agreement by the stockholders of Sub and
the Company, this Agreement will terminate forthwith in the event that the Plan
is terminated in accordance with its terms prior to the Effective Time.
4.3 Effect of Termination. In the event of the termination of this
Agreement as provided above, this Agreement will forthwith become void and there
will be no liability on the part of either Sub or the Company or their
respective officers and directors, except as otherwise provided in the Plan.
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<PAGE> 7
4.4 Amendment. This Agreement may be amended by the parties hereto at
any time before or after approval by the stockholders of either Sub or the
Company, but, after such approval, no amendment will be made which by applicable
law requires the further approval of stockholders without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of Sub and the Company.
ARTICLE 5
MISCELLANEOUS
5.1 Plan. The Plan and this Agreement are intended to be construed
together in order to effectuate their purposes.
5.2 Assignment; Binding Upon Successors and Assigns. Neither party
hereto may assign or delegate any of its rights or obligations under this
Agreement without the prior written consent of the other party hereto. This
Agreement will be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
5.3 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California (irrespective of
its choice of law principles).
5.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of
Merger to be duly executed as of the date and year first above written.
COMPREVIEW, INC. FW1 ACQUISITION CORP.
By:/s/ Robert L. Kaaren By:
----------------------------- ----------------------------
Robert L. Kaaren, M.D. Robert L. North
Chairman and Chief Executive President and Chief Executive
Officer Officer
By: /s/ Michael E. Munayyer By: /s/ Raymond V. Thomas
----------------------------- ----------------------------
Michael E. Munayyer Raymond V. Thomas
Secretary Chief Financial Officer and
Secretary
By: /s/ Michelle DeLizio
----------------------------
Michelle DeLizio
President
-8-
<PAGE> 9
EXHIBIT A
RESTATED ARTICLES OF INCORPORATION
<PAGE> 10
RESTATED ARTICLES OF INCORPORATION
OF
COMPREVIEW, INC.
ARTICLE I
The name of the corporation is CompReview, Inc.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
Unless applicable law otherwise provides, any amendment, repeal or modification
of this Article III shall not adversely affect any right of any director under
this Article III that existed at or prior to the time of such amendment, repeal
or modification.
ARTICLE IV
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, by agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code. Unless applicable law otherwise provides, any amendment,
repeal or modification of any provision of this Article IV shall not adversely
affect any contract or other right to indemnification of any agent of the
corporation that existed at or prior to the time of such amendment, repeal or
modification.
ARTICLE V
The corporation is authorized to issue only one class of shares of
stock, which shall be designated "Common Stock" and which shall have no par
value. The total number of shares of Common Stock the corporation is authorized
to issue is one hundred (100) shares.
<PAGE> 1
EXHIBIT 4.01
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of November 28, 1997 (the "EFFECTIVE DATE"), by and between HNC
SOFTWARE INC., a Delaware corporation ("HNC"), and the persons and entities
listed on Exhibit A hereto (collectively, the "STOCKHOLDERS" and each
individually, a "STOCKHOLDER") who immediately prior to the Effective Time of
the Merger (as defined below) are all of the stockholders of CompReview, Inc., a
California corporation (the "COMPANY").
R E C I T A L S
A. The Company, HNC, FW1 Acquisition Corp., a Delaware corporation
that is a wholly-owned subsidiary of HNC ("SUB") and the Stockholders have
entered into an Agreement and Plan of Reorganization dated as of July 14, 1997
(the "PLAN"). Pursuant to the Plan, Sub is to be merged with and into the
Company in a statutory merger (the "MERGER"), with the Company to be the
surviving corporation of the Merger and thus to become a wholly-owned subsidiary
of HNC. The date on which the Merger becomes effective shall be the Effective
Date of this Agreement.
B. As a condition precedent to the consummation of the Merger, the
Plan provides that the Stockholders shall be granted certain Form S-3
registration rights with respect to the shares of HNC Common Stock that are
issued to them upon the conversion of their shares of Company Common Stock in
the Merger pursuant to Section 2.1.2 of the Plan, subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. For purposes of this Agreement:
(a) 1933 Act. The term "1933 ACT" means the U.S. Securities Act
of 1933, as amended, or any successor law.
(b) 1934 Act. The term "1934 ACT" means the U.S. Securities
Exchange Act of 1934, as amended, or any successor law.
(c) Registration. The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to the registration effected by preparing and filing a Form
S-3 registration statement in compliance with the 1933 Act, and the declaration
or ordering of effectiveness of such registration statement.
(d) Registrable Securities. The term "REGISTRABLE SECURITIES"
means: (i) the shares of HNC Common Stock that are issued to the Stockholders in
the Merger pursuant to
<PAGE> 2
Section 2.1.2 of the Plan upon the conversion of the outstanding shares of
Company Common Stock that are owned and held by the Stockholders immediately
prior to the Effective Time; and (ii) any shares of HNC Common Stock that may be
issued as a dividend or other distribution (including shares of HNC Common Stock
issued in a subdivision and split of HNC's outstanding Common Stock) with
respect to, or in exchange for or in replacement of, shares of HNC Common Stock
described in clause (i) of this Section 1.1(d) or in this clause (ii); excluding
in all cases, however, any such shares that are: (w) registered under the 1933
Act other than pursuant to a Form S-3 registration statement filed pursuant to
this Agreement; (x) sold by a person in a transaction in which rights under this
Agreement are not assigned in accordance with the terms of this Agreement; (y)
sold pursuant to a registration statement filed pursuant to this Agreement; or
(z) sold pursuant to Rule 144 promulgated under the 1933 Act or otherwise sold
to the public. Only shares of HNC Common Stock shall be Registrable Securities.
Except as provided in clause (ii) of the first sentence of this Section 1.1(d),
without limitation, the term "Registrable Securities" does not include: (i) any
shares of HNC Common Stock that were not issued in the Merger; or (ii) any
shares of HNC Common Stock that are issued or issuable upon the exercise of any
HNC Options that are issued pursuant to Section 2.2 of the Plan upon the
conversion of outstanding Company Options in the Merger.
(e) Holder. The term "HOLDER" means the original holder of any
Registrable Securities or any assignee of record of any Registrable Securities
to whom rights under this Agreement have been duly assigned in accordance with
the provisions of this Agreement.
(f) SEC. The term "SEC" or "COMMISSION" means the U.S. Securities
and Exchange Commission.
(g) Form S-3. The term "FORM S-3" means a Form S-3 registration
statement under the 1933 Act, as such is in effect on the Effective Date, or any
successor registration statement form under the 1933 Act subsequently adopted by
the SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by HNC with the SEC.
(h) Rule 415. The term "RULE 415" means Rule 415 under the 1933
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC.
(i) Terms from Plan. Capitalized terms used in this Agreement but
not defined in this Section 1 or elsewhere in this Agreement shall have the same
meanings given to such terms in the Plan.
1.2. FORM S-3 SHELF REGISTRATION.
(a) Filing and Registration Period. As promptly as reasonably
practicable following the Effective Time of the Merger (but not earlier than
five (5) days after the Effective Time of the Merger), and consistent with the
requirements of applicable law, HNC shall prepare and file with the SEC a
registration statement on Form S-3 for an offering to be made on a continuous
basis pursuant to Rule 415 covering all of the then outstanding Registrable
Securities
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<PAGE> 3
(the "SHELF REGISTRATION"). HNC shall use its best efforts to have such Shelf
Registration declared effective as soon as practicable after the Effective Time
of the Merger and to keep the Shelf Registration continuously effective under
the 1933 Act for a continuous period of time (such period of time being
hereinafter called the "REGISTRATION PERIOD") commencing on the date the Shelf
Registration is declared effective under the 1933 Act by the SEC (the "DATE OF
EFFECTIVENESS") and ending on the first (1st) anniversary of the Effective Time
of the Merger. HNC shall have no duty or obligation to keep the Shelf
Registration (or any Subsequent Registration, as defined below) effective after
the expiration of the Registration Period.
(b) Subsequent Registration. If the Shelf Registration or a
Subsequent Registration (as defined below) ceases to be effective for any reason
at any time during the Registration Period, then HNC shall use its best efforts
to obtain the prompt withdrawal of any order suspending the effectiveness
thereof, and in any event shall, within 45 days of such cessation of
effectiveness, file an amendment to the Shelf Registration seeking to obtain the
withdrawal of the order suspending the effectiveness thereof, or file an
additional "shelf" registration statement pursuant to Rule 415 covering all of
the then outstanding Registrable Securities (a "SUBSEQUENT REGISTRATION"). If a
Subsequent Registration is filed, HNC shall use its best efforts to cause the
Subsequent Registration to be declared effective as soon as practicable after
such filing and to keep such registration statement continuously effective until
the end of the Registration Period.
(c) Supplements and Amendments. Subject to the provisions of
Section 1.2(h), HNC shall supplement and amend the Shelf Registration if, as and
when required by the 1933 Act, the rules and regulations promulgated thereunder
or the rules, regulations or instructions applicable to the registration form
used by HNC for such Shelf Registration.
(d) Timing and Manner of Sales. Except as otherwise provided in
Section 1.2(j), any sale of Registrable Securities pursuant to a registration
hereunder may be made only during a "Permitted Window" (as defined in Section
1.2(h) below). In addition, any sale of Registrable Securities pursuant to a
registration hereunder may only be made in accordance with the method or methods
of distribution of such Registrable Securities as described in the registration
statement for the Shelf Registration (or Subsequent Registration, as
applicable), which methods of distribution will be specified by the Holders in
their Notice of Resale (as defined below). A Holder may also sell Registrable
Securities in a bona fide private offering if the selling Holder provides HNC
with a written opinion of counsel, satisfactory to counsel to HNC, that such
offer and sale is an exempt transaction under the 1933 Act and applicable state
securities laws.
(e) Pooling Restrictions. Notwithstanding anything herein to the
contrary, no Stockholder (or such Stockholder's assigns) will sell any
Registrable Securities (whether pursuant to a registration or otherwise), and no
Permitted Window will commence, until after HNC has publicly released a report
including financial statements of HNC that include at least thirty (30) days of
post-Merger combined operating results of HNC and the Company.
(f) Trading Limits; No Underwritings. Except as otherwise
provided in Section 1.2(j), during any calendar quarter during the Registration
Period, the Stockholders,
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<PAGE> 4
collectively, may not sell an amount of Registrable Securities that, in the
aggregate, exceeds five percent (5%) of the outstanding shares of HNC Common
Stock (as indicated in HNC's then most recent published report) without HNC's
prior written consent. No sale of Registrable Securities under any registration
statement pursuant to this Agreement may be effected pursuant to any
underwritten offering without HNC's prior written consent, which may be withheld
in its sole and absolute discretion.
(g) Notice of Resale. Before a Holder may make any sale,
transfer or other disposition of any Registrable Securities during the
Registration Period, such Holder must first give written notice to HNC (a
"NOTICE OF RESALE") of such Holder's present intention to sell, transfer or
otherwise dispose of some or all of such Holder's Registrable Securities, and
the number of Registrable Securities such Holder proposes to sell, transfer or
otherwise dispose of. In addition, a Notice of Resale shall contain the
information required to be included therein under Section 1.2(d) and Section
1.2(h).
(h) Permitted Window; Sale Procedures.
(i) A "PERMITTED WINDOW" is a period of twenty (20)
consecutive calendar days commencing upon HNC's written notification to the
Stockholders in response to a Notice of Resale that the prospectus contained in
the Form S-3 registration statement filed pursuant to this Agreement is
available to be used for resales of Registrable Securities pursuant to the Shelf
Registration (or a Subsequent Registration, as applicable).
(ii) Before a Holder can make a sale of any Registrable
Securities (including without limitation a sale pursuant to Section 1.2(j) of
any Registrable Securities that are Initial Shares (as defined in Section
1.2(j)), and in order to cause a Permitted Window to commence, a Holder or
Holders of Registrable Securities must first give HNC a Notice of Resale
indicating such Holder's or Holders' intention to sell Registrable Securities
pursuant to the Shelf Registration (or Subsequent Registration, as applicable).
(iii) Upon receipt of such Notice of Resale (unless, with
respect to a sale of Registrable Securities that are not "Initial Shares" as
defined in Section 1.2(j), a certificate of the President or the Chief Financial
Officer of HNC is delivered as provided in Section 1.3(b) below), HNC will give
written notice to the Holder or Holders who gave such Notice of Resale as soon
as practicable, but in no event more than seven (7) business days after HNC's
receipt of such Notice of Resale that either: (A) the prospectus contained in
the registration statement for the Shelf Registration (or Subsequent
Registration, if applicable) is current (it being acknowledged that it may be
necessary for HNC during this period to supplement the prospectus or make an
appropriate filing under the 1934 Act so as to cause the prospectus to become
current) and that (as applicable) (1) the Permitted Window will commence on the
date of such notice by HNC or (2) to the extent that the Notice of Resale covers
a sale of Initial Shares (as defined in Section 1.2(j)) by Stockholders pursuant
to Section 1.2(j), that such sale of Initial Shares may commence; or (B) that
HNC is required under the 1933 Act and the regulations thereunder to amend the
registration statement in order to cause the prospectus to be current. In the
event that HNC determines that an amendment to the registration statement is
necessary as provided above, it will file and cause such amendment to become
effective as soon as
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<PAGE> 5
practicable; whereupon it will notify the Stockholders that (as applicable) (1)
the Permitted Window will then commence, or (2) to the extent that the Notice of
Resale covers a sale of Initial Shares (as defined in Section 1.2(j)) by
Stockholders pursuant to Section 1.2(j), that such sale of Initial Shares may
commence.
(iv) There will be no more than three (3) Permitted Windows
during the Registration Period and there will be at least a 60-day interval
between any two Permitted Windows. HNC shall not be obligated to keep the
registration statement for the Shelf Registration (or any Subsequent
Registration) current during any period other than a Permitted Window or a
period during which sales of Initial Shares (as defined in Section 1.2(j)) are
permitted under this Agreement. The provisions of this Section 1.2(h) are
subject and subordinate to the provisions of Section 1.2(i). If, pursuant to
Section 1.3(b), HNC defers a Permitted Window, and the Holders withdraw their
Notice of Resale, then such withdrawal shall not count as a Permitted Window.
The Holders may elect to withdraw a request for registration pursuant to a
Notice of Resale; provided however, that if HNC has commenced preparation of any
supplement or amendment to the registration statement or any part thereof in
response to such Notice of Resale prior to receiving written notice from the
Holders' of the withdrawal of their request for registration, then the Holders
will promptly reimburse HNC for its actual costs and expenses incurred in
preparing and/or filing such supplement and/or amendment.
(i) Trading Window Compliance. The Stockholders acknowledge that
HNC maintains an Insider Trading Compliance Program and an Insider Trading
Policy, as such may be amended (the "HNC TRADING POLICY") and that the HNC
Trading Policy requires that those directors, officers, employees and other
persons whom HNC determines to be "Access Personnel" or otherwise subject to the
"trading window" and pre-clearance requirements of the HNC Trading Policy (and
members of their immediate families and households) are permitted to effect
trades in HNC securities: (i) only during those specified time periods ("TRADING
WINDOWS") in which such persons are permitted to make sales, purchases or other
trades in HNC's securities under the "trading window" provisions of the HNC
Trading Policy; and (ii) only after pre-clearance of such sales, purchases or
other trades with HNC's Insider Trading Compliance Officer. If a Holder is or
becomes subject to the "trading window" and/or "pre-clearance" provisions of the
HNC Trading Policy described above, then, notwithstanding anything herein to the
contrary (including without limitation the provisions of Section 1.2(h) and
Section 1.2(j)), such Holder may sell, transfer and dispose of Registrable
Securities only during those trading windows during which such HNC Access
Personnel are permitted to effect trades in HNC stock under the HNC Trading
Policy and only after pre-clearing such trades with HNC's Insider Trading
Compliance Officer as provided in the HNC Trading Policy. When and if
applicable, HNC shall notify Holders in writing of the commencement or
expiration of each trading window within at least one (1) trading day prior to
the commencement or expiration of such trading window, as applicable.
(j) Special Provisions. Notwithstanding the provisions of
Section 1.2(d) and Section 1.3(b) hereof (but subject to the provisions of
Section 1.2(i) above regarding trading windows and pre-clearances of trades):
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<PAGE> 6
(i) the Stockholders shall not be required to comply with
(A) the provisions of the first sentence of Section 1.2(d) requiring that any
sale of Registrable Securities pursuant to a registration hereunder be made only
during a "Permitted Window" or (B) the provisions of the first sentence of
Section 1.2(f) regarding limits on the amount of Registrable Securities that may
be sold in a calendar quarter; and
(ii) the Company shall not be entitled to exercise its
rights under Section 1.3(b) to defer or postpone a Stockholder's proposed sale
of Registrable Securities;
until one or both of the Stockholders has (and/or have together) sold an
aggregate combined total of One Million Two Hundred Fifty Thousand (1,250,000)
shares of HNC Common Stock (as presently constituted) that are Registrable
Securities (such first 1,250,000 shares of HNC Common Stock, as presently
constituted, being hereinafter referred to as the "INITIAL Shares"). In the
event that one or both of the Stockholders proposes to effect a sale or other
disposition of Registrable Securities that involves the sale or disposition of
both Initial Shares and Registrable Securities that are not Initial Shares, then
the provisions of the immediately preceding sentence shall only apply to those
Registrable Securities that are Initial Shares.
1.3 LIMITATIONS. Notwithstanding the provisions of Section 1.2 above,
HNC shall not be obligated to effect any such registration, qualification or
compliance of Registrable Securities pursuant to this Agreement, or the Holders
shall not be entitled to sell Registrable Securities pursuant to the
registration statement, as applicable:
(a) if Form S-3 is not then available for such offering by the
Holders;
(b) if HNC shall furnish to the Holders a certificate signed by
the President or Chief Financial Officer of HNC stating that, in the good faith
judgment of the Board of Directors of HNC, it would be seriously detrimental to
HNC and its stockholders for such Permitted Window to be in effect at such time,
due, for example, to the existence of a material development or potential
material development involving HNC which HNC would be obligated to disclose in
the prospectus contained in the Shelf Registration, which disclosure would, in
the good faith judgment of the Board of Directors of HNC, be premature or
otherwise inadvisable at such time or would have a material adverse affect upon
HNC and its stockholders, in which event HNC will have the right to defer a
Permitted Window for a period of not more than thirty (30) days after receipt of
a Notice of Resale from the Holder or Holders pursuant to this Section 1.2;
provided, however, that HNC may so postpone a Permitted Window no more than once
per calendar year during the Registration Period; and provided further, that if
HNC so postpones a Permitted Window, then notwithstanding the last sentence of
Section 1.2(a), the Registration Period of the Shelf Registration shall be
extended by a period of time equal to the period of postponement (subject to the
provisions of Sections 1.4 and 1.10 below). If HNC defers a Permitted Window as
provided herein and the Holders withdraw their Notice of Resale, then such
withdrawal shall not count as a Permitted Window.
(c) if HNC is acquired and its Common Stock ceases to be
publicly traded and in such acquisition of HNC the Holders receive, in exchange
for the Registrable Securities then held by them, cash and/or securities that
are registered under the 1933 Act or that may be traded
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<PAGE> 7
without restriction on transfer imposed by the 1933 Act, other than the
restrictions on transfer under paragraphs (c), (e), (f) and (g) of Rule 144
promulgated under the 1933 Act, as such Rule is in effect on the date of this
Agreement;
(d) in any particular jurisdiction in which HNC would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance, unless HNC
is already subject to service of process in such jurisdiction; or
(e) if the SEC refuses to declare such registration effective
due to the participation of any particular Holder in such registration (unless
such Holder withdraws all such Holder's Registrable Securities from such
registration statement).
1.4 SHARES OTHERWISE ELIGIBLE FOR RESALE. HNC shall not be obligated to
effect or continue to keep effective any such registration, registration
statement, qualification or compliance of Registrable Securities held by any
particular Holder:
(a) if HNC or its legal counsel shall have received a "no-action"
letter or similar written confirmation from the SEC that all the Registrable
Securities then held by such Holder may be resold by such Holder within a three
(3) month period without registration under the 1933 Act pursuant to the
provisions of Rule 144 promulgated under the 1933 Act (or successor provisions),
or otherwise;
(b) if legal counsel to HNC shall deliver a written opinion to HNC,
its transfer agent and the Holders, in form and substance reasonably acceptable
to HNC, to the effect that all the Registrable Securities then held by such
Holder may be resold by such Holder within a three (3) month period without
registration under the 1933 Act pursuant to the provisions of Rule 144
promulgated under the 1933 Act, or otherwise; or
(c) after expiration or termination of the Registration Period.
1.5 EXPENSES. HNC shall pay all expenses incurred in connection with the
Shelf Registration and any Subsequent Registration (excluding brokers' discounts
and commissions), including without limitation all filing, registration and
qualification, printers', legal and accounting fees.
1.6 OBLIGATIONS OF HNC. Subject to Sections 1.2, 1.3 and 1.4 above, when
required to effect the registration of any Registrable Securities under the
terms of this Agreement, HNC will, as expeditiously as reasonably possible:
(a) furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus (and amendments or supplements thereto), in
conformity with the requirements of the 1933 Act, and such other documents as
they may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by them;
(b) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as will
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<PAGE> 8
be reasonably requested by the Holders, provided that HNC will not be required
in connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such state or
jurisdiction unless HNC is already so qualified or subject to service of
process, respectively, in such jurisdiction; and
(c) promptly notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event known
to the Company's Chief Executive Officer as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing.
1.7 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of HNC to take any action pursuant to this Agreement that the
selling Holders will furnish to HNC such information regarding themselves, the
Registrable Securities held by them, and the intended method of disposition of
such Registrable Securities as shall be required to timely effect the
registration of their Registrable Securities.
1.8 DELAY OF REGISTRATION. No Holder will have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
1.9 INDEMNIFICATION.
(a) By HNC. To the extent permitted by law, HNC will indemnify,
defend and hold harmless each Holder against any losses, claims, damages, or
liabilities (joint or several) to which such Holder may become subject under the
1933 Act, the 1934 Act or other U.S. federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in a registration statement filed by HNC pursuant to
this Agreement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto;
(ii) the omission or alleged omission to state in such
registration statement, preliminary prospectus or final prospectus or any
amendments or supplements thereto, a material fact required to be stated
therein, or necessary to make the statements therein not misleading; or
(iii) any violation or alleged violation by HNC of the 1933
Act, the 1934 Act, any U.S. federal or state securities law or any rule or
regulation promulgated under the 1933 Act, the 1934 Act or any U.S. federal or
state securities law in connection with the offering covered by such
registration statement;
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<PAGE> 9
provided however, that the indemnity agreement contained in this subsection
1.9(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of HNC (which consent shall not be unreasonably withheld), nor shall HNC be
liable in any such case for any such loss, claim, damage, liability or action to
the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder.
(b) By Selling Holders. To the extent permitted by law, each
selling Holder will indemnify and hold harmless HNC, each of its directors, each
of its officers who have signed the registration statement, each person, if any,
who controls HNC within the meaning of the 1933 Act, any underwriter and any
other Holder selling securities under such registration statement, against any
losses, claims, damages or liabilities (joint or several) to which HNC or any
such director, officer, controlling person, underwriter or other such Holder may
become subject under the 1933 Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will reimburse
HNC or any such director, officer, controlling person, underwriter or other
Holder for any legal or other expenses reasonably incurred by HNC or any such
director, officer, controlling person, underwriter or other Holder in connection
with investigating or defending any such loss, claim, damage, liability or
action, as incurred; provided, however, that the indemnity agreement contained
in this subsection 1.9(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the indemnifying Holder, which consent shall not be
unreasonably withheld; and provided further that the total amounts payable in
indemnity by a Holder under this subsection 1.9(b) in respect of any Violation
shall not exceed the net proceeds received by such Holder in the registered
offering out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under
this Section 1.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim for
indemnification or contribution in respect thereof is to be made against any
indemnifying party under this Section 1.9, deliver to the indemnifying party a
written notice of the commencement thereof and, if the indemnifying party is
HNC, HNC shall have the right and obligation to control the defense of such
action; provided, however, that: (i) HNC shall also have the right, at its
option, to assume and control the defense of any action with respect to which
HNC or any person entitled to be indemnified by the Selling Holders under
Section 1.9(b) is entitled to indemnification from the Selling Holders; (ii) the
indemnified party or parties shall have the right to participate at its own
expense in, and, to the extent agreed in writing with the indemnifying party and
any other indemnifying party similarly noticed, to assume the defense thereof
with counsel mutually satisfactory to the parties; and (iii) an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
of such counsel to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such
-9-
<PAGE> 10
counsel in such proceeding. The failure of an indemnified party to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to the ability of the
indemnifying party to defend such action, shall relieve such indemnifying party
of any liability to the indemnified party under this Section 1.9, but the
omission so to deliver written notice to the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any indemnified
party otherwise than under this Section 1.9.
(d) Defect Eliminated in Final Prospectus. The foregoing
indemnity agreements of HNC and Holders are subject to the condition that,
insofar as they relate to any Violation made in a preliminary prospectus but
eliminated or remedied in the amended or supplemented prospectus on file with
the SEC and effective at the time the sale of Registrable Securities under such
registration statement occurs (the "AMENDED PROSPECTUS"), such indemnity
agreement shall not inure to the benefit of any person if a copy of the Amended
Prospectus was furnished to the indemnified party and was not furnished to the
person asserting the loss, liability, claim or damage, at or prior to the time
such action is required by the 1933 Act.
(e) Contribution. In order to provide for just and equitable
contribution to joint liability under the 1933 Act in any case in which either
(i) any Holder exercising rights under this Agreement makes a claim for
indemnification pursuant to this Section 1.9 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 1.9 provides for indemnification in such case, or (ii)
contribution under the 1933 Act may be required on the part of any such selling
Holder in circumstances for which indemnification is provided under this Section
1.9; then, and in each such case, HNC and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such Holder is
responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by and sold by such Holder
under the registration statement bears to the public offering price of all
securities offered by and sold under such registration statement, and HNC and
other selling Holders are responsible for the remaining portion; provided,
however, that, in any such case, (A) no such Holder will be required to
contribute any amount in excess of the public offering price of all such
Registrable Securities offered and sold by such Holder pursuant to such
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
(f) Survival. The obligations of HNC and Holders under this
Section 1.9 shall survive the completion of any offering of Registrable
Securities in a registration statement pursuant to this Agreement, and
otherwise.
1.10 DURATION AND TERMINATION OF HNC'S OBLIGATIONS. HNC will have no
obligations pursuant to Section 1.2 of this Agreement with respect to any Notice
of Resale or other request or requests for registration (or inclusion in a
registration) made by any Holder or to maintain or continue to keep effective
any registration or registration statement pursuant hereto:
-10-
<PAGE> 11
(a) after the expiration or termination of the Registration Period; (b) if HNC
has already effected three (3) Permitted Windows pursuant to this Agreement; (c)
if, in the opinion of counsel to HNC, all such Registrable Securities proposed
to be sold by such Holder may be sold in a three (3) month period without
registration under the 1933 Act pursuant to Rule 144 promulgated under the 1933
Act or otherwise; or (d) if all Registrable Securities have been registered and
sold pursuant to registrations effected pursuant to this Agreement and/or have
been transferred in transactions in which registration rights hereunder have not
been assigned in accordance with this Agreement.
1.11 ACKNOWLEDGMENT OF OTHER AGREEMENTS. The Holders acknowledge that
they have been informed by HNC that other stockholders of HNC currently hold
certain S-3 and other registration rights that may enable such other
stockholders to sell shares of HNC during one or more Permitted Windows or at
other times (thus potentially adversely affecting the receptivity of the market
to the sale of the Registrable Securities pursuant to the Shelf Registration)
and that certain stockholders hold "piggyback registration rights" that may
allow them to participate in a registration effected pursuant to this Agreement.
In the event that, after the date of this Agreement and prior to expiration of
the Registration Period, HNC enters into an agreement pursuant to which HNC
grants registration rights to a third party or parties that may be exercised
during the Registration Period, then, within thirty (30) days after it enters
into such agreement, HNC will notify the Company Stockholders of the grant of
such registration rights and their general terms.
2. ASSIGNMENT
Notwithstanding anything herein to the contrary, the rights of a Holder
under this Agreement may be assigned only with HNC's express prior written
consent, which may be withheld in HNC's sole discretion; provided, however, that
the rights of a Holder under this Agreement may be assigned without HNC's
express prior written consent: (a) to a Permitted Assignee (as defined below);
or (b) (if applicable) by will or by the laws of intestacy, descent or
distribution, provided that the assignee agrees in writing to be bound by all
the obligations of the Holders under this Agreement. Any attempt to assign any
rights of a Holder under this Agreement without HNC's express prior written
consent in a situation in which such consent is required by this Section shall
be null and void and without effect. Subject to the foregoing restrictions, all
rights, covenants and agreements in this Agreement by or on behalf of the
parties hereto will bind and inure to the benefit of the respective permitted
successors and assigns of the parties hereto. Each of the following parties are
"PERMITTED ASSIGNEES" for purposes of this Section: (a) a trust whose
beneficiaries consist solely of a Holder and such Holder's immediate family; and
(b) the personal representative, custodian or conservator of a Holder, in the
case of the death, bankruptcy or adjudication of incompetency of that Holder.
3. GENERAL PROVISIONS
3.1 NOTICES. Unless otherwise provided, all notices, instructions and
other communications required or permitted to be given hereunder or necessary or
convenient in connection herewith must be in writing and shall be deemed
delivered (i) when personally served or when delivered by telex or facsimile (to
the telex or facsimile number of the person to whom
-11-
<PAGE> 12
the notice is given), (ii) the first business day following the date of deposit
with an overnight courier service or (iii) on the earlier of actual receipt or
the third business day following the date on which the notice is deposited in
the United States mail, first class certified, postage prepaid, addressed as
follows: (a) if to HNC, at 5930 Cornerstone Court West, San Diego, CA 92121,
Attention: President, Telecopier: (619) 452-3220; and (b) if to a Stockholder,
at such Stockholder's respective address as set forth on Exhibit A hereto. Any
party hereto (and such party's permitted assigns) may by notice so given change
its address for future notices hereunder.
3.2 ENTIRE AGREEMENT. This Agreement and the provisions of Section
2.2.2 of the Plan constitute and contain the entire agreement and understanding
of the parties with respect to the subject matter hereof and supersedes any and
all prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties with respect to the subject matter hereof.
3.3 AMENDMENT OF RIGHTS. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of HNC and Holders of a majority of all Registrable Securities
then outstanding. Any amendment or waiver effected in accordance with this
Section 3.3 shall be binding upon each Holder, each permitted successor or
assignee of such Holder and HNC.
3.4 GOVERNING LAW. This Agreement will be governed by and construed
exclusively in accordance with the internal laws of the State of California,
United States of America, as applied to agreements among California residents
entered into and to be performed entirely within California, excluding that body
of law relating to conflict of laws and choice of law.
3.5 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, then such provision(s) will be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and will be enforceable in
accordance with its terms.
3.6 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, express
or implied, is intended to confer upon any person, other than the parties hereto
and their successors and assigns, any rights or remedies under or by reason of
this Agreement.
3.7 CAPTIONS. The headings and captions to sections of this Agreement
have been inserted for identification and reference purposes only and will not
be used to construe or interpret this Agreement.
3.8 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
3.9 EFFECTIVENESS OF AGREEMENT. Regardless of when signed, this
Agreement will not become effective or binding unless and until the Effective
Time of the Merger.
-12-
<PAGE> 13
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-13-
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the Effective Date.
HNC SOFTWARE INC. THE STOCKHOLDERS
By: /s/ Raymond V. Thomas /s/ Robert L. Kaaren
---------------------------- ---------------------------
Robert L. Kaaren, M.D.
Title: Chief Financial Officer
-------------------------
/s/ Mishel E. Munayyer
---------------------------
Mishel E. Munayyer
a.k.a. Michael E. Munayyer,
Trustee of the Michael Munayyer Trust
dated August 11, 1995
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
-14-
<PAGE> 15
EXHIBIT A
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES OF HNC
NAME AND ADDRESS COMMON STOCK HELD
- ---------------- -----------------
<S> <C>
Robert L. Kaaren, M.D. 2,442,780
c/o CompReview, Inc.
3200 Park Center Drive, Suite 500
Costa Mesa, CA 92626
Mishel E. Munayyer a.k.a. Michael E. Munayyer, 2,442,780
Trustee of the Michael Munayyer Trust dated
August 11, 1995
Post Office Box 200-179
Mission Viejo, CA 92692
</TABLE>
<PAGE> 1
EXHIBIT 11.01
HNC SOFTWARE INC.
STATEMENT REGARDING
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
1997 1996 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
FULLY FULLY FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET INCOME $14,299 $14,299 $ 4,747 $ 4,747 $11,893 $11,893 $ 6,077 $ 6,077 $ 3,142 $ 3,142
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
SHARES(1)
Weighted average common
shares outstanding 24,214 24,214 23,437 23,437 23,552 23,552 15,195 15,195 8,642 8,642
Weighted average common
stock options and warrants
as determined by application
of the treasury stock method(2) 1,359 1,666 1,879 1,957 1,796 1,795 1,958 2,155 1,427 1,504
Weighted average preferred
shares outstanding assuming
conversion to common stock(3) - - - - - - 4,454 4,454 8,552 8,552
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Pro forma weighted average
common and common equivalent
shares outstanding 21,607 21,804 18,621 18,698
======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding 25,573 25,880 25,316 25,394 25,348 25,347
======= ======= ======= ======= ======= =======
PRO FORMA NET INCOME PER
SHARE OF COMMON STOCK $ 0.28 $ 0.28 $ 0.17 $ 0.17
======= ======= ======= =======
NET INCOME PER SHARE OF
COMMON STOCK $ 0.56 $ 0.55 $ 0.19 $ 0.19 $ 0.47 $ 0.47
======= ======= ======= ======= ======= =======
PRO FORMA ADJUSTED
NET INCOME(4) $11,704 $11,704 $ 3,319 $ 3,319 $ 9,731 $9,731 $ 4,534 $ 4,534 $ 2,137 $ 2,137
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
PRO FORMA ADJUSTED
NET INCOME PER SHARE
OF COMMON STOCK (4) $ 0.46 $ 0.45 $ 0.13 $ 0.13 $ 0.38 $ 0.38 $ 0.21 $ 0.21 $ 0.11 $ 0.11
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------------
(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.
(3) All outstanding shares of the Company's preferred stock automatically
converted into shares of common stock upon the consummation of the Company's
initial public offering on June 26, 1995.
(4) Pro forma adjusted net income and net income per share give retroactive
effect to federal and state income taxes as if CompReview had filed
subchapter C corporation income tax returns for the periods presented.
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-22735) and
in the Registration Statements on Form S-8 (No. 33-92902, No. 333-14323 and No.
333-18871) of HNC Software Inc. of our report dated January 21, 1997, except as
to the pooling of interests with CompReview, Inc. which is as of November 28,
1997, appearing on page 28 of this Form 8-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 65 of this Form 8-K.
PRICE WATERHOUSE LLP
San Diego, California
December 11, 1997
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this report on Form 8-K of HNC Software Inc. of our
report dated January 30, 1997.
We also consent to the incorporation by reference in the Registration Statement
Nos. 33-92902, 333-14323 and 333-18871 of HNC Software Inc. on Form S-8 and
Registration Statement No. 333-22735 of HNC Software Inc. on Form S-3 of our
report dated January 30, 1997 appearing in this report on Form 8-K.
DELOITTE & TOUCHE LLP
Costa Mesa, California
December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,121
<SECURITIES> 7,353
<RECEIVABLES> 23,201
<ALLOWANCES> (709)
<INVENTORY> 611
<CURRENT-ASSETS> 46,266
<PP&E> 11,785
<DEPRECIATION> (5,446)
<TOTAL-ASSETS> 98,276
<CURRENT-LIABILITIES> 12,623
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 84,946
<TOTAL-LIABILITY-AND-EQUITY> 84,970
<SALES> 71,439
<TOTAL-REVENUES> 71,439
<CGS> 27,498
<TOTAL-COSTS> 27,498
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 478
<INCOME-PRETAX> 11,359
<INCOME-TAX> (534)
<INCOME-CONTINUING> 11,893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,893
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
