<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] CONFIDENTIAL, FOR USE OF THE
[_]Preliminary Proxy Statement COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HNC SOFTWARE INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, $0.001 PAR VALUE
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(2) Aggregate number of securities to which transaction applies:
5,088,956(1)
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$34.8125(2)
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(4) Proposed maximum aggregate value of transaction:
$177,159,281
--------------------------------------------------------------------------
(5) Total fee paid:
$35,431.86(3)
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[X]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
(1) The conversion ratio and the actual number of shares to be issued pursuant
to the proposed merger that is the subject of this Proxy Statement will be
determined at the effective time of the merger. For purposes of
calculating the filing fee, the aggregate number of securities to be
issued has been estimated using the applicable merger conversion formula
applied to information as of July 31, 1997.
(2) Pursuant to Exchange Act Rule 0-11(a), the per share price has been
calculated as the average of the high and low prices reported on the
Nasdaq National Market on August 22, 1997.
(3) Pursuant to Exchange Act Rule 0-11(c), the filing fee is equal to the 1/50
of 1% of the value of the HNC Common Stock to be transferred to security
holders of CompReview, Inc. in the proposed transaction.
<PAGE>
[LOGO OF HNC]
October 20, 1997
To Our Stockholders:
As you may be aware, HNC Software Inc., a Delaware corporation ("HNC"),
CompReview, Inc., a California corporation ("CompReview"), the current
stockholders of CompReview and FW1 Acquisition Corp., a Delaware corporation
that is a wholly-owned subsidiary of HNC ("Merger Sub"), have entered into an
Agreement and Plan of Reorganization dated as of July 14, 1997 (the
"Agreement") pursuant to which HNC proposes to acquire CompReview through a
merger of Merger Sub into CompReview (the "Merger"). If the Merger becomes
effective, HNC will issue shares of HNC Common Stock and options to purchase
HNC Common Stock ("HNC Options") to the stockholders and optionholders of
CompReview, respectively, and CompReview will become a wholly-owned subsidiary
of HNC.
You are cordially invited to attend a Special Meeting of Stockholders of HNC
(the "Meeting") to be held at the Embassy Suites Hotel located at 4550 La
Jolla Village Drive, San Diego, California, on Tuesday, November 25, 1997 at
10:00 a.m., Pacific Time, at which you will be asked to consider and vote upon
a proposal to approve the issuance of shares of HNC Common Stock and HNC
Options to the stockholders and optionholders, respectively, of CompReview
pursuant to the Agreement and the Merger.
The total number of shares of HNC Common Stock that will be issued in the
Merger or issuable upon the exercise of HNC Options issued in the Merger
(collectively, the "HNC Merger Shares") will be equal to the sum of (i)
5,000,000 shares of HNC Common Stock plus (ii) the number of shares of HNC
Common Stock obtained by dividing (A) the retained earnings of CompReview as
of the close of the last full calendar month preceding the closing of the
Merger by (B) the average of the closing prices per share of HNC Common Stock
as quoted on the Nasdaq National Market for the 20 trading days immediately
preceding (but not including) the closing date of the Merger (the "HNC Closing
Average Price Per Share"). Upon effectiveness of the Merger, each outstanding
share of CompReview Common Stock will be converted into a number of shares of
HNC Common Stock equal to the Conversion Ratio (as defined below) and each
outstanding option to purchase CompReview Common Stock (a "CompReview Option")
will be assumed by HNC and converted into an HNC Option to purchase the number
of shares of HNC Common Stock obtained by multiplying the number of shares of
CompReview Common Stock subject to such CompReview Option immediately prior to
the Merger by the Conversion Ratio. The exercise price of each HNC Option
issued in the Merger will be equal to the exercise price (as of immediately
prior to the Merger) of the CompReview Option that was converted into such HNC
Option divided by the Conversion Ratio.
The "Conversion Ratio" is the number obtained by dividing (i) the number of
the HNC Merger Shares by (ii) the sum of the number of shares of CompReview
Common Stock that are (A) outstanding immediately prior to the Merger, (B)
issuable under all CompReview Options that are outstanding immediately prior
to the Merger and (C) issuable by CompReview upon exercise of any other
outstanding derivative securities of CompReview. Based on the foregoing, if
the Merger had occurred on July 31, 1997 when the HNC Closing Average Price
Per Share would have been $37.0969 (the average closing price per share of HNC
Common Stock for the 20 trading days prior to July 31, 1997), then based on
the capitalization and retained earnings of CompReview as of July 31, 1997,
the Conversion Ratio would have been 0.4893, the current security holders of
CompReview would have received a total of 4,893,227 shares of HNC Common Stock
and HNC Options to purchase a total of 195,729 shares of HNC Common Stock in
the Merger and the former stockholders of CompReview would have owned
approximately 20.1% of HNC's outstanding Common Stock immediately following
the Merger. This estimate is an example only and is subject to change if the
retained earnings of CompReview, the capitalization of CompReview or the HNC
Closing Average Price Per Share changes after July 31, 1997 and before the
Effective Time of the Merger. Specifically, if there is a substantial increase
in CompReview's retained earnings or a substantial decrease in the market
price of HNC Common Stock before the Effective Time, the number of shares of
HNC Common Stock and HNC Options issued in the Merger would increase
substantially.
<PAGE>
At the Meeting you will also be asked to consider and vote upon a proposal
to amend HNC's 1995 Equity Incentive Plan (the "Incentive Plan") to increase
the number of shares of HNC Common Stock reserved for issuance thereunder by
750,000 shares, as described in greater detail in the accompanying Notice of
Special Meeting of Stockholders and Proxy Statement. The Board of Directors of
HNC believes that the availability of additional stock options will facilitate
HNC's expansion of its employee base. In particular, HNC's proposed
acquisition of CompReview will substantially increase the number of employees
without stock options who are eligible to receive options under the Incentive
Plan. Management believes that this amendment to the Incentive Plan is in the
best interests of HNC because of the continuing need to provide options in
order to attract and retain highly qualified employees and remain competitive
in the software industry, which is currently providing employees with
significant opportunities for employment with HNC's competitors and other
software companies.
After careful consideration, the Board of Directors of HNC has approved the
Agreement, the Merger, the related issuance of HNC Common Stock and HNC
Options thereunder and the transactions and agreements related thereto and has
concluded that they are in the best interests of HNC and its stockholders.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF HNC APPROVE THE ISSUANCE OF SHARES OF HNC COMMON STOCK AND HNC
OPTIONS IN THE MERGER. HNC's Board of Directors has also unanimously approved
the above-mentioned amendment of the Incentive Plan to increase the number of
shares of HNC Common Stock reserved thereunder by 750,000 shares. THE BOARD OF
DIRECTORS ALSO UNANIMOUSLY RECOMMENDS APPROVAL OF THIS PROPOSED AMENDMENT TO
THE INCENTIVE PLAN.
Please use this opportunity to take part in HNC's affairs by voting on the
business to come before the Meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PRIOR TO THE MEETING SO
THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING. Returning the Proxy does
not deprive you of your right to attend the Meeting and to vote your shares in
person.
We hope to see you at the Meeting.
Sincerely,
/s/ Robert L. North
Robert L. North
President and Chief Executive
Officer
2
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HNC SOFTWARE INC.
5930 CORNERSTONE COURT WEST
SAN DIEGO, CALIFORNIA 92121-3728
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Our Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of HNC Software Inc., a Delaware corporation ("HNC"), will be held
at the Embassy Suites Hotel located at 4550 La Jolla Village Drive, San Diego,
California, on Tuesday, November 25, 1997, at 10:00 a.m., Pacific Time.
At the Meeting, you will be asked to consider and vote upon the following
matters:
1. A proposal to approve the issuance by HNC of shares of HNC Common
Stock and options to purchase HNC Common Stock to the stockholders and
optionholders, respectively, of CompReview, Inc., a California corporation
("CompReview"), pursuant to an Agreement and Plan of Reorganization (the
"Agreement") dated as of July 14, 1997 by and among HNC, FW1 Acquisition
Corp., a wholly-owned subsidiary of HNC ("Merger Sub"), CompReview and the
current stockholders of CompReview, and the merger (the "Merger") of Merger
Sub with and into CompReview.
2. A proposal to approve an amendment to the Company's 1995 Equity
Incentive Plan increasing the number of shares of the Company's Common
Stock reserved for issuance thereunder by 750,000 shares.
3. Such other matters as may properly come before the Meeting or any
postponements or adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on September 29, 1997
are entitled to notice of and to vote at the Meeting or any adjournment
thereof. A complete list of stockholders entitled to vote at the Meeting will
be open to the examination of any stockholder, for any purpose relevant to the
Meeting, at the Company's offices at 5930 Cornerstone Court West, San Diego,
California, during the Company's ordinary business hours for 10 days prior to
the Meeting.
By Order of the Board of Directors
/s/ Raymond V. Thomas
Raymond V. Thomas
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
San Diego, California
October 20, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE
PRIOR TO THE MEETING SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 1
TRADEMARKS................................................................. 1
FORWARD-LOOKING STATEMENTS................................................. 1
SUMMARY.................................................................... 2
THE MEETING.............................................................. 2
Date, Time and Place................................................... 2
Record Date; Shares Entitled to Vote................................... 2
Quorum................................................................. 3
Vote Required.......................................................... 3
Recommendation of the HNC Board........................................ 3
PROPOSAL NO. 1: APPROVAL OF THE ISSUANCE OF SHARES OF HNC COMMON STOCK
AND OPTIONS TO PURCHASE HNC COMMON STOCK IN THE MERGER.................. 4
The Companies.......................................................... 4
Risk Factors........................................................... 4
Reasons for the Merger................................................. 5
Opinion of HNC's Financial Advisor..................................... 6
Certain Federal Income Tax Considerations.............................. 6
Regulatory Matters..................................................... 6
Accounting Treatment................................................... 6
Terms of the Merger; Conversion of CompReview Shares; Conversion Ratio. 7
Procedure for Converting CompReview Shares............................. 7
Effective Time......................................................... 8
Assumption and Conversion of CompReview Stock Options.................. 8
Form S-8 and Form S-3 Registration Statements.......................... 8
Stock Ownership Immediately Following the Merger....................... 8
Effects of the Merger.................................................. 9
Conduct of the Business of CompReview Prior to the Merger.............. 9
Non-Solicitation....................................................... 10
Conditions to the Merger............................................... 10
Termination; Amendment................................................. 10
Indemnification and Escrow............................................. 11
Related Agreements..................................................... 12
PROPOSAL NO. 2: AMENDMENT TO THE 1995 EQUITY INCENTIVE PLAN.............. 13
OTHER BUSINESS........................................................... 13
MARKET PRICE AND DIVIDENDS............................................... 14
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA...... 16
HNC Selected Consolidated Historical Financial Data.................... 17
CompReview Selected Historical Financial Data.......................... 18
HNC and CompReview Selected Unaudited Pro Forma Consolidated Combined
Financial Data........................................................ 18
CompReview Selected Quarterly Operating Results........................ 19
ADDITIONAL INFORMATION REGARDING THE CONVERSION RATIO.................... 19
COMPARATIVE PER SHARE DATA............................................... 20
THE MEETING................................................................ 21
Date, Time and Place of Meeting........................................ 21
Purpose of Meeting..................................................... 21
Record Date; Quorum; Outstanding Shares................................ 21
Voting Rights; Required Vote........................................... 21
Voting of Proxies...................................................... 22
Revocability of Proxies................................................ 22
Recommendation of the HNC Board........................................ 23
</TABLE>
i
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<TABLE>
<S> <C>
PROPOSAL NO. 1: APPROVAL OF THE ISSUANCE OF SHARES OF HNC COMMON STOCK AND
OPTIONS TO PURCHASE HNC COMMON STOCK IN THE MERGER........................ 24
RISK FACTORS............................................................. 24
Risks Related to the Merger............................................ 24
Risks Related to CompReview............................................ 27
THE MERGER............................................................... 32
Joint Reasons for the Merger........................................... 32
HNC's Reasons for the Merger........................................... 32
CompReview's Reasons for the Merger.................................... 33
Background of the Merger............................................... 33
Opinion of HNC's Financial Advisor..................................... 34
Certain Federal Income Tax Considerations.............................. 37
Governmental and Regulatory Approvals.................................. 38
Accounting Treatment................................................... 39
TERMS OF THE MERGER...................................................... 40
Effective Time......................................................... 40
Manner and Basis of Converting CompReview Shares....................... 40
Assumption and Conversion of CompReview Stock Options.................. 41
Stock Ownership Immediately Following the Merger....................... 41
Effects of the Merger.................................................. 42
Representations and Warranties......................................... 42
Conduct of the Business of CompReview Prior to the Merger.............. 43
Non-Solicitation....................................................... 44
Conditions to the Merger............................................... 44
Termination, Amendment and Waiver...................................... 46
Indemnification and Escrow............................................. 47
Related Agreements..................................................... 48
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED FINANCIAL
INFORMATION............................................................. 50
Unaudited Pro Forma Consolidated Combined Condensed Balance Sheet at
June 30, 1997......................................................... 51
Unaudited Pro Forma Consolidated Combined Condensed Statement of
Operations for the Six Months ended June 30, 1997..................... 52
Unaudited Pro Forma Consolidated Combined Condensed Statement of
Operations for the Six Months ended June 30, 1996..................... 53
Unaudited Pro Forma Consolidated Combined Condensed Statement of
Operations for the Year ended December 31, 1996....................... 54
Unaudited Pro Forma Consolidated Combined Condensed Statement of
Operations for the Year ended December 31, 1995....................... 55
Unaudited Pro Forma Consolidated Combined Condensed Statement of
Operations for the Year ended December 31, 1994....................... 56
Notes to Unaudited Pro Forma Consolidated Combined Condensed Financial
Information........................................................... 57
COMPREVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 58
BUSINESS OF COMPREVIEW................................................... 63
PROPOSAL NO. 2: APPROVAL OF AMENDMENT TO THE 1995 EQUITY INCENTIVE PLAN.... 69
SUMMARY OF THE 1995 EQUITY INCENTIVE PLAN................................ 69
NEW PLAN BENEFITS........................................................ 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 73
EXECUTIVE COMPENSATION..................................................... 75
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION................ 77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 77
INDEPENDENT ACCOUNTANTS.................................................... 77
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
STOCKHOLDER PROPOSALS...................................................... 77
OTHER BUSINESS............................................................. 78
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 78
COMPREVIEW, INC. INDEX TO FINANCIAL STATEMENTS............................. F-1
APPENDIX A--Agreement and Plan of Reorganization, dated as of July 14, 1997
by and among HNC Software Inc., FWI Acquisition Corp., CompReview, Inc.,
and Robert L. Kaaren, M.D. and Mishel E. Munayyer a.k.a. Michael E.
Munayyer, Trustee of the Michael Munayyer Trust dated August 11, 1995..... A-1
APPENDIX B--Opinion of Robertson, Stephens & Company LLC................... B-1
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
HNC is subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601-
2511. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC also maintains an
Internet Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC
at the address "http://www.sec.gov." HNC Common Stock is quoted on the Nasdaq
National Market, and publicly-filed reports, proxy statements and other
information regarding HNC can also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
No person has been authorized to give any information or to make any
representation in connection with the matters set forth herein other than as
contained herein, and, if given or made, such information or representation
must not be relied upon as having been authorized by HNC or CompReview. Under
no circumstances shall the delivery of this Proxy Statement create an
implication that there has been no change in facts herein set forth since the
date hereof.
TRADEMARKS
CompCompare(TM), MIRA(TM), ProviderCompare(TM), Retek(TM) and Risk Data(TM)
are trademarks of HNC. CRLink(R) and CRV8(R) are registered trademarks of
CompReview and CompReview(TM) is a trademark of CompReview.
FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act") and Section 21E of the Exchange Act. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and
similar expressions or variations of such words are intended to identify these
forward-looking statements. Additionally, statements concerning future matters
such as the development of new products, enhancements or technologies,
possible changes in legislation and other statements regarding matters that
are not historical fact are forward-looking statements. The forward-looking
statements reflect the best judgment of the management of HNC and CompReview,
as appropriate, based on factors currently known and involve risks and
uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. The matters
set forth under the caption "Risk Factors" in this Proxy Statement, as well as
those discussed elsewhere in this Proxy Statement or in documents that are
incorporated herein by reference, constitute cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results or outcomes
to differ materially from those in such forward-looking statements.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which reflect the analysis of the management of
HNC and CompReview, as appropriate, only as of the date hereof. Neither HNC
nor CompReview undertakes any obligation to revise or update these forward-
looking statements to reflect any events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
1
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. This summary does not contain a complete statement of all
material elements of the proposals to be voted on and is qualified in its
entirety by the more detailed information appearing elsewhere in this Proxy
Statement and in the documents annexed hereto.
This Proxy Statement contains forward-looking statements that involve risks
and uncertainties. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions or variations of such
words are intended to identify these forward-looking statements. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, possible changes in legislation and other
statements regarding matters that are not historical fact are forward-looking
statements. The forward-looking statements reflect the best judgment of the
management of HNC and CompReview, as appropriate, based on factors currently
known and involve risks and uncertainties. Actual results and outcomes may
differ materially from the results and outcomes discussed in the forward-
looking statements. The matters set forth under the caption "Risk Factors" in
this Proxy Statement, as well as those discussed elsewhere in this Proxy
Statement or in documents that are incorporated herein by reference, constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results or outcomes to differ materially from those in such
forward-looking statements.
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of HNC (the "HNC Board") of proxies from holders of HNC
Common Stock for use at the Meeting. At the Meeting, the holders of HNC Common
Stock will be asked to approve the issuance by HNC of shares of HNC Common
Stock and options to purchase HNC Common Stock ("HNC Options") to the
stockholders and optionholders of CompReview, respectively, pursuant to the
Merger and the Agreement by and among HNC, CompReview, the current stockholders
of CompReview and Merger Sub. As a result of the Merger, CompReview will become
a wholly-owned subsidiary of HNC. A copy of the Agreement is attached as
Appendix A to this Proxy Statement. At the Meeting, the holders of HNC Common
Stock will also be asked to approve an amendment to HNC's 1995 Equity Incentive
Plan (the "Incentive Plan") that will increase the number of shares of HNC
Common Stock authorized for issuance thereunder by 750,000 shares.
THE MEETING
DATE, TIME AND PLACE
The Meeting will be held at the Embassy Suites Hotel located at 4550 La Jolla
Village Drive, San Diego, California, on Tuesday, November 25, 1997, at 10:00
a.m., Pacific Time. At the Meeting, stockholders of record of HNC as of the
close of business on September 29, 1997 (the "Record Date") will be asked to
consider and vote upon the following: (i) a proposal to approve the issuance by
HNC of shares of HNC Common Stock and HNC Options pursuant to the Agreement and
the Merger; and (ii) a proposal to approve an amendment to the Incentive Plan
that will increase the number of shares of HNC Common Stock reserved for
issuance thereunder by 750,000 shares.
RECORD DATE; SHARES ENTITLED TO VOTE
Holders of record of HNC Common Stock at the close of business on the Record
Date are entitled to notice of and to vote at the Meeting. At the close of
business on the Record Date, there were a total of 19,539,604 shares of HNC
Common Stock issued and outstanding, each of which will be entitled to one vote
on each matter to be acted upon at the Meeting. See "The Meeting -- Record
Date; Quorum; Outstanding Shares."
2
<PAGE>
Because the number of shares of HNC Common Stock to be issued or reserved for
issuance in connection with the Merger will exceed 20% of the number of shares
of HNC Common Stock outstanding prior to the Merger, approval by holders of HNC
Common Stock of the issuance of HNC Common Stock and HNC Options in the Merger
is required under the rules of the Nasdaq National Market. IF HOLDERS OF HNC
COMMON STOCK DO NOT VOTE TO APPROVE SUCH ISSUANCE OF HNC COMMON STOCK AND HNC
OPTIONS, THE MERGER WILL NOT BE CONSUMMATED. HNC is not a constituent
corporation to the Merger, and, therefore, specific approval of the Agreement
by the HNC stockholders is not required under the Delaware General Corporation
Law or HNC's Certificate of Incorporation or Bylaws. See "The Meeting -- Voting
Rights; Required Vote."
As a group, all executive officers and directors of HNC and their affiliates
beneficially owned 1,196,931 shares, or approximately 6.1%, of the HNC Common
Stock outstanding on the Record Date. See "Security Ownership of Certain
Beneficial Owners and Management."
QUORUM
The required quorum for the transaction of business at the Meeting is a
majority of the shares of HNC Common Stock outstanding on the Record Date.
Abstentions and broker non-votes will each be included in determining the
number of shares present at the Meeting for purposes of determining the
presence of a quorum.
VOTE REQUIRED
Approval of the issuance of shares of HNC Common Stock and HNC Options
pursuant to the Agreement and the Merger requires the affirmative vote of at
least a majority of the shares of HNC Common Stock that are present in person
or represented by proxy at the Meeting and are voted for or against the
proposal. Abstentions and broker non-votes will not affect the outcome of the
vote with respect to approval of the issuance of shares of HNC Common Stock and
HNC Options pursuant to the Agreement and the Merger.
Approval of the amendment to the Incentive Plan requires the affirmative vote
of at least a majority of the shares of HNC Common Stock that are present in
person or represented by proxy at the Meeting and are voted for or against the
proposal. Abstentions and broker non-votes will not affect the outcome of the
vote with respect to approval of the amendment to the Incentive Plan. See "The
Meeting -- Voting Rights; Required Vote."
RECOMMENDATION OF THE HNC BOARD
The HNC Board, by unanimous vote, has adopted and approved the Agreement, the
Merger and the transactions contemplated thereby, and has determined that the
Merger is in the best interests of HNC and its stockholders. The HNC Board has
also unanimously approved the amendment of the Incentive Plan to increase the
number of shares of HNC Common Stock reserved for issuance thereunder by
750,000 shares. After careful consideration, the HNC Board unanimously
recommends a vote FOR approval of the proposal to issue shares of HNC Common
Stock and HNC Options pursuant to the Agreement and the Merger and a vote FOR
the amendment of HNC's Incentive Plan. See "The Meeting -- Recommendation of
the HNC Board," "Proposal No. 1: Approval of the Issuance of Shares of HNC
Common Stock and Options to Purchase HNC Common Stock in the Merger -- The
Merger -- HNC's Reasons for the Merger" and "-- Background of the Merger."
3
<PAGE>
PROPOSAL NO. 1: APPROVAL OF THE ISSUANCE OF SHARES OF HNC COMMON STOCK AND
OPTIONS TO PURCHASE HNC COMMON STOCK IN THE MERGER
THE COMPANIES
HNC. HNC and its subsidiaries develop, market and support intelligent client-
server software solutions for mission-critical business decision applications
in real-time environments. HNC employs proprietary neural-network predictive
models in many of its products to convert existing data and business
experiences into meaningful recommendations and actions. HNC has leveraged its
client-server software architecture and experience in statistical modeling to
address several business markets.
On August 30, 1996, HNC completed its acquisition of Risk Data Corporation
("Risk Data"), in a transaction accounted for as a pooling of interests. Risk
Data is based in Irvine, California and develops and markets proprietary
software decision products for use in the workers' compensation insurance
industry. On November 29, 1996, HNC completed its acquisition of Retek
Distribution Corporation, now named Retek Information Systems, Inc. ("Retek"),
in a transaction accounted for as a pooling of interests. Retek develops and
markets software products that provide merchandise management and other
management tools to retailers and their vendors. In 1996, HNC formed Aptex
Software Inc. ("Aptex"), a partially owned subsidiary located in San Diego,
California that exploits electronic text analysis technology in products
designed for the Internet and other environments. HNC and its subsidiaries also
have sales subsidiaries in the United Kingdom, Canada and Australia. HNC was
incorporated in California in 1986 and reincorporated in Delaware in 1995. Its
principal executive offices are located at 5930 Cornerstone Court West, San
Diego, California 92121-3728, and its telephone number is (619) 546-8877. As
used in this Proxy Statement, the term "HNC" refers to HNC Software Inc., a
Delaware corporation, its California predecessor and its subsidiaries, Retek,
Risk Data, Aptex and the other direct and indirect subsidiaries of HNC
described above.
Merger Sub. Merger Sub is a Delaware corporation recently organized by HNC
solely for the purpose of effecting the Merger. It is a wholly-owned subsidiary
of HNC that has no material assets and has not engaged in any activities except
in connection with the proposed Merger. Merger Sub's executive offices are
located at 5930 Cornerstone Court West, San Diego, California 92121-3728 and
its telephone number is (619) 546-8877.
CompReview. CompReview develops, markets and supports a computer software
product and related services designed to assist in the management and
containment of the medical costs of workers' compensation and automobile
accident medical claims. CompReview provides its product and services primarily
to insurance companies, managed care organizations, third party administrators
and large, self-insured employers. Through its product, CRLink, CompReview
provides its customers with a coherent set of cost containment tools with
application throughout the workers' compensation and automobile accident
medical claims process. See "Proposal No. 1: Approval of the Issuance of Shares
of HNC Common Stock and Options to Purchase HNC Common Stock in the Merger --
Business of CompReview."
CompReview was formed as a partnership in 1988 and was incorporated in
California in 1991. Its principal executive offices are located at 3200 Park
Center Drive, 5th Floor, Costa Mesa, California 92626, and its telephone number
at that location is (714) 481-5200. As used in this Proxy Statement, the term
"CompReview" refers to CompReview, Inc., a California corporation.
RISK FACTORS
Holders of HNC Common Stock should carefully consider a variety of risks in
evaluating the issuance of HNC Common Stock and HNC Options in the Merger to be
voted on at the Meeting, including the risks related to the Merger and risks
related specifically to CompReview. See "Proposal No. 1: Approval of the
Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common Stock
in the Merger--Risk Factors."
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Risks related to the Merger include the following: (i) that the anticipated
long-term strategic benefits of the Merger depend on the successful integration
of CompReview into HNC's business; (ii) that HNC will depend on the continued
service of the current management of CompReview after the Merger; (iii) that
the price of HNC Common Stock will be significantly and adversely affected
after the Merger if HNC fails to achieve business synergies after the Merger or
if the Merger has a dilutive effect; (iv) that the inherent risks of the Merger
may be compounded by ongoing efforts associated with the integration of other
recent acquisitions by HNC; (v) that the Merger is expected to result in
substantial direct transaction costs and that the integration of CompReview
into HNC's business may involve substantial additional costs; (vi) that the
aggregate number of shares of HNC Common Stock and HNC Options issuable in the
Merger would increase over the estimate provided in this Proxy Statement if the
retained earnings of CompReview were to increase or the HNC Closing Average
Price Per Share were to decrease after July 31, 1997 and before the Effective
Time of the Merger; (vii) that the Merger will dilute HNC stockholders'
ownership interests and result in the ownership of a substantial block of HNC
Common Stock by the former stockholders of CompReview; and (viii) that future
sales of HNC Common Stock after the Merger could adversely affect or cause
substantial variations in the price of such stock.
Risks related to CompReview include the following: (i) that CompReview
depends on its CRLink product for substantially all of its revenues; (ii) that
CompReview depends on certain key customers; (iii) that a number of factors may
result in fluctuations in the operating results of CompReview, and that such
fluctuations may in turn affect the price of HNC Common Stock after the Merger;
(iv) that CompReview's sales cycle is unpredictable, which may contribute to
fluctuations in CompReview's results of operations; (v) that the market for
CompReview's cost containment software system is extremely competitive and
rapidly changing and that the success of CompReview depends on its ability to
compete successfully with numerous competitors for its product and anticipate
and respond to changing technologies and market conditions; (vi) that
CompReview's future success depends on its ability to enter new markets by
developing new products and to adapt its existing product to additional
hardware platforms and operating systems, each on a timely and cost-effective
basis; (vii) the risk of defects in the software product of CompReview; (viii)
the risks inherent in managing growth; (ix) that CompReview depends on the
hiring and retention of qualified personnel; (x) that there are a number of
government regulations and industry standards with which CompReview and its
product must comply; (xi) the dependence of CompReview on proprietary
technology, which it may not be able to protect fully or which may be subject
to litigation; (xii) allegations of infringement of proprietary rights of third
parties, which could lead to the need to pay license fees or to litigation; and
(xiii) that CompReview expects to expend substantial resources to convert its
product to properly process dates beyond December 31, 1999.
REASONS FOR THE MERGER
The HNC Board and the CompReview Board have authorized the execution and
delivery of the Agreement with the expectation that the proposed Merger will
contribute to the success of both companies by providing them with the ability
to use each other's technologies to improve their existing product offerings
and develop enhanced new products, the opportunity to market their products and
services more effectively and the opportunity to develop greater presence in
the insurance market.
In addition, the HNC Board approved the proposed Merger because it believes
that the Merger will: (i) give HNC the opportunity to increase its presence in
the insurance industry, which HNC views as a strategic market for intelligent
decision products; (ii) give HNC the opportunity to leverage CompReview's
existing business by using HNC's technology to develop new value-added
analytical tools that would use insurance claims data derived from CompReview's
transaction processing business; and (iii) provide CompReview and HNC's Risk
Data subsidiary with advantageous cross-selling and marketing opportunities.
The CompReview Board approved the proposed Merger because it believes that:
(i) the Merger will provide the opportunity for CompReview to enhance the
capability and functionality of its software product by using
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HNC's proprietary neural network technology; (ii) the Merger will afford
CompReview with additional credibility and marketing visibility; (iii) HNC's
Risk Data subsidiary will provide CompReview with joint marketing and sales
opportunities; (iv) the Merger will provide CompReview with increased ability
to use stock options and other incentives and benefits to attract and retain
talented personnel; and (v) the Merger will provide the stockholders of
CompReview with increased liquidity.
OPINION OF HNC'S FINANCIAL ADVISOR
Robertson, Stephens & Company LLC, predecessor-in-interest to BancAmerica
Robertson Stephens ("BRS"), delivered its written opinion, dated July 9, 1997,
to the HNC Board, that, as of such date and subject to certain matters stated
therein, the price to be paid by HNC for the outstanding securities of
CompReview (the "Purchase Price") under the Agreement was fair to HNC from a
financial point of view. The full text of BRS's opinion, which describes the
procedures followed, the factors considered, the assumptions made and the scope
of review undertaken, as well as the limitations on the review undertaken, by
BRS in rendering its opinion, is attached to this Proxy Statement as Appendix B
and is incorporated herein by reference. Stockholders of HNC are urged to read
such opinion carefully and in its entirety. See "Proposal No. 1: Approval of
the Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common
Stock in the Merger -- The Merger -- Opinion of HNC's Financial Advisor."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Merger is intended to qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
in which case no gain or loss should generally be recognized by the holders of
shares of CompReview Common Stock on the exchange of their shares of CompReview
Common Stock solely for the shares of HNC Common Stock (other than cash
received for fractional shares). It is a condition to the obligations of
CompReview under the Agreement to effect the Merger that, on and as of the
closing of the Merger, CompReview shall not have been advised in writing by its
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. The holders of CompReview Common Stock are
urged to consult their own tax advisors. See "Proposal No. 1: Approval of the
Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common Stock
in the Merger -- The Merger -- Certain Federal Income Tax Considerations."
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), the Merger may not be consummated until such time as certain
information has been furnished to the Department of Justice and the Federal
Trade Commission (the "FTC") and the specified waiting period requirements of
the HSR Act have been satisfied. On September 5, 1997, the FTC notified the
parties that their request for early termination of the waiting period had been
granted. In addition, in connection with the consummation of the Merger, the
applicable securities laws must be complied with. See "Proposal No. 1: Approval
of the Issuance of Shares of HNC Common Stock and Options to Purchase HNC
Common Stock in the Merger -- The Merger -- Governmental and Regulatory
Approvals."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
purposes in accordance with generally accepted accounting principles. It is a
condition to HNC's obligations to consummate the Merger that, among other
things, HNC receives the written advice of Price Waterhouse LLP, as of the
Effective Time, that, in accordance with generally accepted accounting
principles, the Merger qualifies as a pooling of interests for
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accounting purposes and that CompReview receives the written advice of its
accountants, as of the Effective Time, that, in accordance with generally
accepted accounting principles, CompReview is eligible to participate in a
transaction that qualifies as a pooling of interests for accounting purposes.
See "Proposal No. 1: Approval of the Issuance of Shares of HNC Common Stock and
Options to Purchase HNC Common Stock in the Merger-- The Merger -- Accounting
Treatment."
TERMS OF THE MERGER; CONVERSION OF COMPREVIEW SHARES; CONVERSION RATIO
At the Effective Time (as defined below) of the Merger, Merger Sub will merge
with and into CompReview and HNC will acquire all of the capital stock of
CompReview. As a result of the Merger, each share of CompReview Common Stock,
other than dissenting shares, that is outstanding immediately before the
Effective Time of the Merger will be converted into the number of shares of HNC
Common Stock that is equal to the Conversion Ratio (as defined below), and each
option to purchase CompReview Common Stock (a "CompReview Option") that is
outstanding immediately before the Effective Time of the Merger will be assumed
by HNC and will become an HNC Option, with appropriate adjustments to be made
to the number of shares of HNC Common Stock issuable thereunder and the
exercise price thereof in proportion to the Conversion Ratio.
The total number of shares of HNC Common Stock that will be issued in the
Merger or issuable upon the exercise of HNC Options issued in the Merger
(collectively, the "HNC Merger Shares") will be equal to the sum of (i)
5,000,000 shares of HNC Common Stock, plus (ii) the number of shares of HNC
Common Stock obtained by dividing (A) the retained earnings of CompReview as of
the close of the last full calendar month ended prior to the closing date of
the Merger, by (B) the average of the closing prices per share of HNC Common
Stock as quoted on the Nasdaq National Market for the 20 trading days
immediately preceding (but not including) the closing date of the Merger (the
"HNC Closing Average Price Per Share"). The "Conversion Ratio" is the number
obtained by dividing (i) the number of the HNC Merger Shares by (ii) the sum of
the number of shares of CompReview Common Stock that are (A) outstanding
immediately prior to the Merger, (B) issuable under all CompReview Options that
are outstanding immediately prior to the Merger and (C) issuable by CompReview
upon exercise of any other outstanding derivative securities of CompReview.
No fractional shares will be issued by HNC in the Merger. In lieu thereof,
each holder of CompReview Common Stock who would otherwise be entitled to a
fraction of a share of HNC Common Stock (after aggregating all fractional
shares to be received by such holder) will instead receive from HNC an amount
of cash (rounded to the nearest whole cent) equal to the HNC Closing Average
Price Per Share multiplied by such fraction. See "Proposal No. 1: Approval of
the Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common
Stock in the Merger -- Terms of the Merger -- Manner and Basis of Converting
CompReview Shares."
PROCEDURE FOR CONVERTING COMPREVIEW SHARES
Upon the closing date of the Merger, each holder of shares of CompReview
Common Stock will surrender the certificate(s) for such shares, duly endorsed
to HNC for cancellation as of the Effective Time. Promptly after the Effective
Time and receipt of such certificates, HNC or its transfer agent will issue to
each tendering holder of such a CompReview stock certificate a certificate for
the number of shares of HNC Common Stock to which such holder is entitled
pursuant to the Merger (less the shares of HNC Common Stock to be placed in
escrow under the Agreement and an Escrow Agreement, as described below), 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. See "Proposal
No. 1: Approval of the Issuance of Shares of HNC Common Stock and Options to
Purchase HNC Common Stock in the Merger -- Terms of the Merger -- Manner and
Basis of Converting CompReview Shares."
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EFFECTIVE TIME
The Merger will become effective upon the filing of an Agreement of Merger
between CompReview and Merger Sub with the California Secretary of State and
the filing of an Agreement of Merger or a Certificate of Merger with the
Delaware Secretary of State (the "Effective Time"). The Closing of the Merger
(the "Closing") will occur on the first business day after the satisfaction or
waiver of the conditions to the Merger, or at such later time as HNC and
CompReview mutually agree (the "Closing Date"). Assuming all conditions to the
Merger are met or waived prior thereto, it is anticipated that the Closing Date
and Effective Time will occur on or about November 28, 1997. See "Proposal No.
1: Approval of the Issuance of Shares of HNC Common Stock and Options to
Purchase HNC Common Stock in the Merger -- Terms of the Merger -- Effective
Time."
ASSUMPTION AND CONVERSION OF COMPREVIEW STOCK OPTIONS
Upon the Effective Time, each CompReview Option granted by CompReview to
CompReview employees under CompReview's 1995 Stock Option Plan (the "CompReview
Option Plan") that is outstanding immediately prior to the Effective Time will
be assumed by HNC and converted into an HNC Option to purchase that number of
shares of HNC Common Stock determined by multiplying the number of shares of
CompReview Common Stock subject to such CompReview 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 CompReview Common
Stock that was in effect for such CompReview Option immediately prior to the
Effective Time divided by the Conversion Ratio. The number of shares of HNC
Common Stock subject to each HNC Option (after aggregating all the shares of
HNC Common Stock issuable upon the exercise of such HNC Option) will be rounded
down to the nearest whole number of shares of HNC Common Stock. The terms and
conditions of each CompReview Option will, to the extent permitted by law and
otherwise reasonably practicable, be unchanged and continue in effect after the
Merger. Pre-Merger employment service with CompReview will be credited to each
holder of a CompReview Option for purposes of applying any vesting schedule
contained in a CompReview Option to determine the number of shares of HNC
Common Stock that are exercisable under the HNC Option into which such
CompReview Option is converted in the Merger. See "Proposal No. 1: Approval of
the Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common
Stock in the Merger -- Terms of the Merger -- Assumption and Conversion of
CompReview Stock Options."
FORM S-8 AND FORM S-3 REGISTRATION STATEMENTS
HNC will use its best efforts to file a registration statement on Form S-8
under the Securities Act covering the shares of HNC Common Stock issuable upon
exercise of the HNC Options issued in the Merger within five business days
after the Effective Time. In addition, as soon as practicable after the
Effective Time, HNC has agreed to file with the SEC a registration statement on
Form S-3 under the Securities Act for an offering to be made on a continuous
basis (the "Shelf Registration"), covering the shares of HNC Common Stock
issued to the holders of CompReview Common Stock in the Merger. HNC will use
its best efforts to have the Shelf Registration declared effective as soon as
practicable after the Effective Time and to keep the Shelf Registration
continuously effective until the first anniversary of the Effective Time. See
"Proposal No. 1: Approval of the Issuance of Shares of HNC Common Stock and
Options to Purchase HNC Common Stock in the Merger -- Terms of the Merger --
Assumption and Conversion of CompReview Stock Options" and "-- Related
Agreements -- Registration Rights Agreement."
STOCK OWNERSHIP IMMEDIATELY FOLLOWING THE MERGER
Assuming that (i) the retained earnings of CompReview of $3.3 million as of
July 31, 1997 were the retained earnings of CompReview at the close of the last
calendar month prior to the Effective Time; (ii) the capitalization of
CompReview as of July 31, 1997 (including 10,000,000 shares of CompReview
Common Stock outstanding and 400,000 shares issuable upon exercise of
outstanding CompReview Options) was the capitalization of CompReview
immediately prior to the Effective Time; and (iii) the HNC Closing Average
Price
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Per Share was $37.0969 (the average closing price per share of HNC Common Stock
for the 20 trading days prior to July 31, 1997), then HNC would issue an
aggregate of approximately 4,893,227 shares of HNC Common Stock to holders of
CompReview Common Stock in the Merger and HNC Options to purchase approximately
195,729 additional shares of HNC Common Stock. Based on the foregoing
assumptions, the former stockholders of CompReview would be issued shares of
HNC Common Stock in the Merger representing approximately 20.1% of HNC's
outstanding voting power. These numbers of shares and percentages are examples
only and are subject to change if the retained earnings of CompReview, the
capitalization of CompReview or the HNC Closing Average Price Per Share changes
after July 31, 1997 and before the Effective Time of the Merger. Specifically,
the number of shares of HNC Common Stock and HNC Options issuable in the Merger
would exceed the above estimate if the retained earnings of CompReview were to
increase or the HNC Closing Average Price Per Share were to decrease before the
Effective Time of the Merger. CompReview has the right, but not the obligation,
to terminate the Agreement if the HNC Closing Average Price Per Share is less
than $26.00. The Agreement provides that the minimum number of shares of HNC
Common Stock and HNC Options issuable in the Merger is 5,000,000 shares. The
Agreement does not permit HNC to terminate the Agreement if the HNC Closing
Average Price Per Share decreases and also does not limit the maximum number of
shares of HNC Common Stock and HNC Options issuable in the Merger. Therefore,
if there is a substantial increase in CompReview's retained earnings or a
substantial decrease in the market price of HNC Common Stock before the
Effective Time, the number of shares of HNC Common Stock and HNC Options issued
in the Merger would increase substantially. HNC will not seek further approval
of the HNC stockholders if the number of shares of HNC Common Stock and/or HNC
Options to be issued in the Merger differs materially from the estimate shown
above. See "--Additional Information Regarding the Conversion Ratio" and
"Proposal No. 1: Approval of the Issuance of Shares of HNC Common Stock and
Options to Purchase HNC Common Stock in the Merger -- Risk Factors -- Risks
Related to the Merger -- Risks Associated with Conversion Ratio" and "-- Terms
of the Merger -- Stock Ownership Immediately Following the Merger."
EFFECTS OF THE MERGER
When the Merger is completed, Merger Sub will cease to exist, and all of the
business, assets, liabilities and obligations of Merger Sub will be transferred
to and assumed by CompReview by operation of law, with CompReview continuing in
existence as the surviving corporation of the Merger (the "Surviving
Corporation"). Pursuant to the Agreement, the Articles of Incorporation of
CompReview, as amended, will become the Articles of Incorporation of the
Surviving Corporation and the Bylaws of CompReview, as amended, will become the
Bylaws of the Surviving Corporation. Immediately following the Effective Time,
the Board of Directors of the Surviving Corporation will consist of the
following five directors: Robert L. North, Raymond V. Thomas, Mark S. Hammond,
Robert L. Kaaren, M.D. and Michael E. Munayyer. Immediately following the
Effective Time, 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. There will be no change in the Board of
Directors or officers of HNC as a result of the Merger. See "Proposal No. 1:
Approval of the Issuance of Shares of HNC Common Stock and Options to Purchase
HNC Common Stock in the Merger -- Terms of the Merger -- Effects of the
Merger."
CONDUCT OF THE BUSINESS OF COMPREVIEW PRIOR TO THE MERGER
Prior to the earlier of the Effective Time or the termination of the
Agreement, CompReview and Robert L. Kaaren, M.D. and Michael E. Munayyer, who
were the sole stockholders of CompReview on the date the Agreement was signed
(the "CR Stockholders"), have agreed to carry on the business of CompReview in
the usual and ordinary course, in substantially the same manner as conducted
prior to execution of the Agreement, to pay CompReview's debts or perform its
other obligations when due and preserve intact its present business
organization, to keep available the services of its present officers and
employees and to preserve its business
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relationships. In addition, without the prior consent of HNC, CompReview is not
permitted to perform or engage in certain activities. CompReview has also
agreed to deliver to HNC, within 15 days after the end of each month ending
before the Closing Date, its unaudited balance sheet and statement of
operations, which will be prepared in the ordinary course of its business,
consistent with its past practice. See "Proposal No. 1: Approval of the
Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common Stock
in the Merger -- Terms of the Merger -- Conduct of the Business of CompReview
Prior to the Merger."
NON-SOLICITATION
Under the terms of the Agreement, CompReview and the CR Stockholders have
agreed that none of them will engage in certain activities relating to, or that
could result in, a proposal by a third party for the acquisition of CompReview,
its stock, its assets or its business. See "Proposal No. 1: Approval of the
Issuance of Shares of HNC Common Stock and Options to Purchase HNC Common Stock
in the Merger -- Terms of the Merger -- Non-Solicitation."
CONDITIONS TO THE MERGER
In addition to the requirements that the requisite approvals of stockholders
of HNC and CompReview be received and that all HSR Act requirements be
satisfied, consummation of the Merger is subject to a number of other
conditions that, if not satisfied or waived, may cause the Merger not to be
consummated and the Agreement to be terminated. Consummation of the Merger is
conditioned on, among other things, the accuracy of each party's
representations and warranties in the Agreement, performance by each party of
its covenants in the Agreement and the absence of legal action preventing
consummation of the Merger. In addition, the obligations of CompReview under
the Agreement to effect the Merger are subject to the fulfillment or
satisfaction of certain other conditions, including the condition that
CompReview shall not have been advised in writing by its 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. The obligations of HNC under the Agreement to effect the Merger are
subject to the fulfillment or satisfaction, on and as of the Closing, of
certain other conditions, including the absence of a material adverse change in
the financial condition, properties, assets, liabilities, business, results of
operations or operations of CompReview, and the condition that HNC shall have
been advised in writing by Price Waterhouse LLP, as of the Effective Time,
that, in accordance with generally accepted accounting principles, the Merger
qualifies to be treated as a pooling of interests for accounting purposes, and
CompReview shall have been advised in writing by its accountants, as of the
Effective Time, that, in accordance with generally accepted accounting
principles, CompReview is eligible to participate in a transaction that
qualifies as a pooling of interests for accounting purposes. Either party may
waive its rights to require compliance by the other party or parties with any
of the provisions of the Agreement or any of the conditions to its obligations
under the Agreement. See "Proposal No. 1: Approval of the Issuance of Shares of
HNC Common Stock and Options to Purchase HNC Common Stock in the Merger --
Terms of the Merger -- Conditions to the Merger."
TERMINATION; AMENDMENT
The Agreement may be terminated at any time prior to the Effective Time by
the mutual written consent of HNC and CompReview. Unless otherwise agreed by
HNC and CompReview, the Agreement will automatically terminate at any time
prior to the Effective Time if all conditions to the parties' obligation to
effect the Closing have not been satisfied or waived by the appropriate party
on or before December 31, 1997 (the "Termination Date"). In addition, either
party may terminate the Agreement at any time prior to the Closing if the other
party has committed a material breach of (i) any of its representations and
warranties under the Agreement or (ii) any of its covenants under the
Agreement, and has not cured such material breach prior to the earlier of the
Closing or 30 days after the party seeking termination has given the other
party written notice of its intention to terminate the Agreement on account of
such breach.
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At the Closing, the Agreement may be terminated and abandoned (i) by HNC, if
any of the conditions to HNC's obligations set forth in the Agreement have not
been fulfilled or waived by HNC on or prior to the Termination Date; (ii) by
CompReview, if any of the conditions to CompReview's obligations set forth in
the Agreement have not been fulfilled or waived by CompReview on or prior to
the Termination Date; or (iii) by CompReview, if the HNC Closing Average Price
Per Share is less than $26.00 per share, as presently constituted, provided
that if CompReview does not affirmatively exercise this right of termination at
the Closing, then the Agreement will remain in effect.
Any term or provision of the Agreement may be amended, and the observance of
any term of the Agreement may be waived only by a writing signed by the party
to be bound thereby. The Agreement may be amended by the parties at any time
before or after approval of the stockholders of CompReview, but, after such
approval, no amendment will be made which by applicable law requires the
further approval of the stockholders of CompReview without obtaining such
further approval. See "Proposal No. 1: Approval of the Issuance of Shares of
HNC Common Stock and Options to Purchase HNC Common Stock in the Merger --
Terms of the Merger-- Termination, Amendment and Waiver."
INDEMNIFICATION AND ESCROW
In connection with the Merger, HNC, each of the CR Stockholders and State
Street Bank and Trust Company (or another similar institution) as escrow agent
(the "Escrow Agent") will enter into an Escrow Agreement (the "Escrow
Agreement"). Pursuant to the Escrow Agreement, upon the Closing of the Merger,
HNC will withhold 10% of the shares of HNC Common Stock to be issued to the
holders of CompReview Common Stock in the Merger (the "Escrow Shares") and will
deliver certificates representing the Escrow Shares to the Escrow Agent,
together with related stock transfer powers, to be held by the Escrow Agent as
security for the indemnification obligations of the holders of CompReview
Common Stock under the Agreement and pursuant to the Escrow Agreement. Pursuant
to these indemnification obligations, the holders of CompReview Common Stock
will indemnify and hold harmless HNC, its officers, directors, agents,
stockholders and employees from and against all claims, demands, suits,
actions, causes of action, losses, costs, demonstrable damages, liabilities and
expenses ("Damages") incurred and arising out of any inaccuracy,
misrepresentation, breach of, or default in, any of the representations,
warranties or covenants of CompReview in the Agreement or the related
certificates and documents delivered pursuant to the Agreement. These
indemnification obligations will not apply unless and until the Damages exceed
$250,000, in which event the holders of CompReview Common Stock will indemnify
HNC for all Damages incurred, including the first $250,000 of Damages.
Satisfaction of the indemnification obligations of the holders of CompReview
Common Stock shall be effected solely by the forfeiture of the Escrow Shares,
except that such limitation will not apply in the case of Damages arising from
intentional fraudulent conduct or other willful misconduct or a breach of any
provision of the Affiliate Agreement or the Investment Representation Letters
entered into by each CompReview stockholder. The Escrow Agent will hold the
Escrow Shares during that time period commencing on the Closing Date of the
Merger and ending on the first anniversary of the Closing Date. However, the
indemnification obligations regarding those representations and warranties of
CompReview concerning matters addressed by the first audited financial
statements of the post-Merger combined company (meaning HNC and its
consolidated subsidiaries, including CompReview) together with a report thereon
from HNC's independent accountants, will expire upon the earlier of (i) the
date on which such financial statements are first released to the public or
(ii) the first anniversary of the Closing Date. So long as the Escrow Shares
are held in escrow, stockholders who receive shares of HNC Common Stock in the
Merger will have the right to vote their Escrow Shares for their own accounts
and will retain all incidents of ownership of the Escrow Shares that are not
inconsistent with the terms of the Agreement. Stockholders are entitled to
receive any cash dividends or other distributions made in respect of the Escrow
Shares, except for dividends paid in shares of HNC Common Stock, which will be
placed in escrow as additional security under the Escrow Agreement. See
"Proposal No. 1: Approval of the Issuance of Shares of HNC Common Stock and
Options to Purchase HNC Common Stock in the Merger -- Terms of the Merger --
Indemnification and Escrow."
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<PAGE>
RELATED AGREEMENTS
Investment Representation Letters. The shares of HNC Common Stock to be
issued to the holders of CompReview Common Stock in the Merger will be issued
in a private placement pursuant to an exemption from the registration
requirements of the Securities Act. Accordingly, to perfect such exemption, the
holders of CompReview Common Stock and CompReview Options will execute
Investment Representation Letters in favor of HNC pursuant to which they will,
among other things, acknowledge that they are acquiring restricted securities
within the meaning of Rule 144 under the Securities Act and that they have no
intention of making any unlawful distribution of the shares of HNC Common Stock
issued in the Merger (or issuable upon exercise of HNC Options issued in the
Merger).
Registration Rights Agreement. As a condition of the consummation of the
Merger, HNC and each holder of CompReview Common Stock will enter into a
Registration Rights Agreement (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, HNC will agree to prepare and file with the SEC,
as promptly as reasonably practicable after the Effective Time, a Shelf
Registration statement on Form S-3 under the Securities Act, covering the
shares of HNC Common Stock issued to all of the holders of CompReview Common
Stock in the Merger (the "Registrable Securities"). HNC will use its best
efforts to have the Shelf Registration declared effective as soon as
practicable after the Effective Time of the Merger and to keep the Shelf
Registration continuously effective until the first anniversary of the
Effective Time of the Merger. No former CompReview stockholder may sell any
Registrable Securities until after HNC has publicly released a report including
financial statements that include at least 30 days of post-Merger combined
operating results of HNC and CompReview.
After a total of 1,250,000 shares of Registrable Securities has been sold
under the Shelf Registration, additional shares of HNC Common Stock may be sold
under the Shelf Registration only during certain 20-day open window periods
following notice by the seller of an intent to sell and certification by HNC
that the prospectus included in the Shelf Registration is current. HNC is
required to maintain a maximum of three such open window periods for the sale
of Registrable Securities by the former holders of CompReview Common Stock,
and, unless waived by HNC, there will be at least a 60-day interval between any
two open window periods. HNC will not be obligated to effect or keep effective
any Shelf Registration (i) with respect to the Registrable Securities held by a
stockholder if all the Registrable Securities then held by such stockholder may
lawfully be resold in any three-month period without registration under the
Securities Act or (ii) after the first anniversary of the Effective Time of the
Merger. See "Proposal No. 1: Approval of the Issuance of Shares of HNC Common
Stock and Options to Purchase HNC Common Stock in the Merger -- Terms of the
Merger -- Related Agreements -- Registration Rights Agreement."
Stockholder Agreements. Pursuant to certain Stockholder Agreements dated July
14, 1997 (the "Stockholder Agreements"), each CR Stockholder agreed (i) not to
sell, transfer or dispose of or encumber any shares of his CompReview Common
Stock until the Effective Time of the Merger or the termination of the
Agreement; and (ii) to vote all shares of his CompReview Common Stock in favor
of the Merger and the transactions contemplated thereby and against any
opposing or competing proposal for a merger or reorganization with any other
party. Each CR Stockholder also agreed not to revoke such agreement prior to
the Merger. In addition, as security for each CR Stockholder's obligation to
vote his shares of CompReview Common Stock as specified in the Stockholder
Agreement, each CR Stockholder delivered an irrevocable proxy to HNC covering
the total number of CompReview shares beneficially owned by such CR
Stockholder. See "Proposal No. 1: Approval of the Issuance of Shares of HNC
Common Stock and Options to Purchase HNC Common Stock in the Merger -- Terms of
the Merger -- Related Agreements -- Stockholder Agreements."
Affiliate Agreements. To help ensure that the Merger will be treated as a
pooling of interests for accounting and financial reporting purposes, each of
the CR Stockholders has entered into an Affiliate Agreement dated July 14, 1997
(the "Affiliate Agreements"), pursuant to which he has agreed not to dispose
of, or take any action
12
<PAGE>
that would reduce his risk of ownership or investment in, any securities of
CompReview or HNC (i) during the 30-day period immediately preceding the
Effective Time or (ii) until such time after the Effective Time as HNC has
publicly released a report including the combined financial results of HNC and
CompReview for a period of at least 30 days of post-Merger combined operations.
Pursuant to the Affiliate Agreements, the CR Stockholders have also made
representations related to the "continuity of interests" requirements for a
reorganization under the Code. The executive officers and directors of HNC have
entered into similar agreements. See "Proposal No. 1: Approval of the Issuance
of Shares of HNC Common Stock and Options to Purchase HNC Common Stock in the
Merger -- Terms of the Merger -- Related Agreements -- Affiliate Agreements."
Employment and Non-Competition Agreements. Robert L. Kaaren, M.D. and Michael
E. Munayyer, directors and executive officers of CompReview and the only
stockholders of CompReview, will enter into Employment Agreements with
CompReview whereby they will agree to continue to serve full-time as officers
of CompReview for a period of three years following the consummation of the
Merger. Following such three-year period, their employment will be terminable
at-will by either the officer or CompReview. Under these Employment Agreements,
Dr. Kaaren and Mr. Munayyer will be compensated at an annual base salary rate
of $150,000 per year and will have the opportunity to earn target bonuses of
50% or more of base salary for meeting or exceeding certain target goals.
During the term of the Employment Agreements, Dr. Kaaren and Mr. Munayyer each
will agree not to engage in any business that is directly or indirectly
competitive with CompReview, HNC or any of HNC's subsidiaries, and during the
term of employment and for one year thereafter, each of them will agree not to
solicit business on behalf of anyone (other than CompReview and HNC) from any
customer of HNC or CompReview, and not to solicit any employee or consultant of
HNC or CompReview to terminate their employment or services with HNC or
CompReview. If the employment of either individual is terminated without cause
during the term of his Employment Agreement, he will continue to receive his
base salary during the scheduled term of the Employment Agreement plus a
portion of the bonus that would have been payable at the end of the year in
which his employment is terminated. If employment is terminated for cause, then
only base salary earned through the termination date will be paid to the
individual.
Dr. Kaaren and Mr. Munayyer will also enter into Non-Competition Agreements
providing that, for a period of three years following the Effective Time of the
Merger, they will not engage in any business that is directly or indirectly
competitive with or substantially similar to the business engaged in by
CompReview, or presently proposed to be conducted by CompReview. See "Proposal
No. 1: Approval of the Issuance of Shares of HNC Common Stock and Options to
Purchase HNC Common Stock in the Merger -- Terms of the Merger -- Related
Agreements -- Employment and Non-Competition Agreements."
PROPOSAL NO. 2: AMENDMENT TO THE 1995 EQUITY INCENTIVE PLAN
In addition to the proposal to approve the issuance of HNC Common Stock and
options to purchase HNC Common Stock pursuant to the Agreement and the Merger,
at the Meeting the HNC stockholders will be asked to consider and vote upon a
proposal to amend the Incentive Plan to increase the number of shares of HNC
Common Stock reserved for issuance thereunder by 750,000 shares. The HNC Board
recommends a vote FOR the amendment to the Incentive Plan. See "Proposal No. 2:
Approval of Amendment to the 1995 Equity Incentive Plan."
OTHER BUSINESS
The HNC Board does not presently intend to bring any other business before
the Meeting, and, so far as is known to the HNC Board, no matters are to be
brought before the Meeting except as specified in the notice of the Meeting. As
to any business that may properly come before the Meeting, however, it is
intended that proxies, in the form enclosed, will be voted in respect thereof
in accordance with the judgment of the persons voting such proxies.
13
<PAGE>
MARKET PRICE AND DIVIDENDS
MARKET PRICE DATA
HNC Common Stock is traded on the Nasdaq National Market under the symbol
"HNCS." The following table sets forth the quarterly high and low sales prices
for HNC Common Stock as reported by the Nasdaq National Market since HNC Common
Stock began trading on the Nasdaq National Market on June 20, 1995. Prior to
such date, there was no established public trading market for HNC Common Stock.
All prices have been adjusted to give retroactive effect to a two-for-one stock
split effected in the form of a stock dividend paid in April 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995:
Second Quarter (from June 20, 1995)............................. 12 1/2 10
Third Quarter................................................... 13 5/8 9 7/8
Fourth Quarter.................................................. 24 1/2 10 1/2
1996:
First Quarter................................................... 38 3/4 18 1/4
Second Quarter.................................................. 51 31 1/4
Third Quarter................................................... 47 1/2 20 3/4
Fourth Quarter.................................................. 45 1/4 26 1/4
1997:
First Quarter................................................... 36 3/4 23 1/4
Second Quarter.................................................. 42 3/8 18 1/4
Third Quarter (through September 29, 1997)...................... 43 5/8 33 3/4
</TABLE>
The following table sets forth the closing sales price per share of HNC
Common Stock on the Nasdaq National Market on July 14, 1997, the last trading
day before announcement of the proposed Merger, and on October 17, 1997, the
latest practicable trading day before the mailing of this Proxy Statement for
which information was obtainable, and the equivalent per share prices for
CompReview Common Stock. The "equivalent per share price" for CompReview Common
Stock as of such dates equals the closing sale prices per share of HNC Common
Stock on such dates multiplied by the estimated Conversion Ratio of 0.4893. See
"Proposal No. 1: Approval of the Issuance of Shares of HNC Common Stock and
Options to Purchase HNC Common Stock in the Merger -- Terms of the Merger --
Manner and Basis of Converting CompReview Shares."
<TABLE>
<CAPTION>
COMPREVIEW
HNC COMMON STOCK EQUIVALENT
---------------- ----------
<S> <C> <C>
July 14, 1997....................................... $37.875 $18.532
October 17, 1997.................................... $38.125 $18.654
</TABLE>
As of the Record Date, there were 19,539,604 shares of HNC Common Stock
issued and outstanding, held by 170 stockholders of record. HNC estimates that
there are approximately 4,425 beneficial stockholders. As of the Record Date,
there were 10,000,000 shares of CompReview Common Stock issued and outstanding,
held by two stockholders.
DIVIDENDS
HNC has never paid cash dividends on its stock and has no present intention
to do so. HNC currently anticipates that it will retain all future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, HNC's bank credit agreement currently
prohibits HNC from paying or declaring any cash dividends without the bank's
consent.
14
<PAGE>
CompReview is an "S" corporation within the meaning of the Code and, as such,
most of CompReview's income (for tax purposes) and associated income tax
liability is passed through to and recognized by CompReview's stockholders,
rather than by CompReview. Accordingly, CompReview has in the ordinary course
of its business historically declared and paid cash dividends to its
stockholders, in part to provide them with sufficient cash to meet their tax
liabilities arising from CompReview's operations. During the years ending
December 31, 1996, 1995 and 1994, CompReview declared and paid cash dividends
to its stockholders in the amount of $5,907,321, $3,845,000 and $990,000,
respectively. During the six months ended June 30, 1997, CompReview distributed
cash dividends in the amount of $3,600,000 to its stockholders. Consistent with
its current dividend practices, CompReview expects to distribute to its
stockholders additional cash dividends of approximately $0.06 to $0.08 per
share for each full calendar month ended prior to the Effective Time of the
Merger. Following the Merger, CompReview will become a wholly-owned subsidiary
of HNC and will cease to be an "S" corporation for tax purposes.
15
<PAGE>
SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth certain selected historical financial data for
HNC and CompReview and selected unaudited pro forma consolidated combined
financial data after giving effect to the Merger as a pooling of interests for
accounting purposes, assuming the Merger had occurred at the beginning of the
periods presented.
The following selected consolidated historical financial data of HNC for each
of the three years in the period ended December 31, 1996 and as of December 31,
1996 and 1995 have been derived from the HNC historical consolidated financial
statements, as audited by Price Waterhouse LLP, independent accountants, and
should be read in conjunction with such financial statements and the notes
thereto incorporated herein by reference. The selected consolidated historical
financial data of HNC for the years ended December 31, 1993 and 1992 and as of
December 31, 1994, 1993 and 1992 have been derived from audited HNC historical
consolidated financial statements and should be read in conjunction with such
consolidated financial statements and the notes thereto, which are on file with
the SEC. The consolidated statement of operations data of HNC for the six-month
periods ended June 30, 1997 and 1996 and the consolidated balance sheet data of
HNC at June 30, 1997 are unaudited but have been prepared on the same basis as
the audited consolidated financial statements of HNC and, in the opinion of
management of HNC, contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. The results of operations for the six-month periods ended June
30, 1997 and 1996 are not necessarily indicative of results to be expected for
any future period.
The following selected historical financial data of CompReview for each of
the three years in the period ended December 31, 1996 and as of December 31,
1996 and 1995 have been derived from the CompReview historical financial
statements as audited by Deloitte & Touche LLP, independent accountants, and
should be read in conjunction with such financial statements and the notes
thereto included elsewhere in this Proxy Statement. The selected historical
financial data of CompReview for the years ended December 31, 1993 and 1992 and
as of December 31, 1994, 1993 and 1992 have been derived from unaudited
CompReview historical financial statements. The statement of operations data of
CompReview for the six-month periods ended June 30, 1997 and 1996 and the
balance sheet data of CompReview at June 30, 1997 are unaudited but have been
prepared on the same basis as the audited financial statements of CompReview
and, in the opinion of management of CompReview, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. The results of
operations for the six-month periods ended June 30, 1997 and 1996 are not
necessarily indicative of results to be expected for any future period.
The selected unaudited pro forma consolidated combined financial data of HNC
and CompReview is derived from the unaudited pro forma consolidated combined
condensed financial statements included in this Proxy Statement, which give
effect to the Merger as a pooling of interests, and should be read in
conjunction with such unaudited pro forma statements and the notes thereto.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
nor is it necessarily indicative of future operating results or financial
position.
16
<PAGE>
HNC SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- --------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Total revenues.......... $39,470 $22,455 $53,833 $30,672 $20,674 $12,829 $9,447
Operating income (loss). 6,525 (18) 4,118 1,142 249 411 24
Net income (loss)....... 4,641 (361) 6,376 2,123 548 263 (10)
Net income (loss) per
share.................. $ 0.23 $ (0.02) $ 0.31
Shares used in computing
net income (loss) per
share.................. 20,448 18,407 20,367
Pro forma net income per
share(2)............... $ 0.13 $ 0.04
Shares used in computing
pro forma net income
per share(2)........... 16,901 13,870
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ---------------------------------------
1997 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash, cash equivalents and in-
vestments.................... $ 42,325 $34,245 $43,509 $ 6,714 $ 4,133 $ 1,715
Total assets.................. 103,439 94,219 58,947 17,139 9,471 5,542
Long-term obligations, less
current portion.............. 151 264 1,373 931 367 957
Mandatorily redeemable con-
vertible preferred stock..... -- -- -- 13,169 12,452 11,735
</TABLE>
- --------
(1) The HNC Selected Consolidated Historical Financial Data gives retroactive
effect, in all periods presented, to the mergers on August 30, 1996 with
Risk Data and on November 29, 1996 with Retek, which were each accounted
for as a pooling of interests.
(2) For an explanation of the determination of the number of shares used in
computing pro forma net income per share, see Note 1 of Notes to
Consolidated Financial Statements incorporated herein by reference. These
amounts give effect to the common stock dividend declared on March 5, 1996
and paid on April 3, 1996.
17
<PAGE>
COMPREVIEW SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- ------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues............. $12,195 $8,119 $17,606 $13,032 $9,164 $3,338 $2,386
Operating income........... 4,598 2,170 5,541 3,940 2,632 623 226
Net income................. 4,527 2,123 5,517 3,954 2,594 612 218
Dividends per share........ $ 0.36 $ 0.24 $ 0.59 $ 0.38 $ 0.10 $ 0.01 $ 0.02
<CAPTION>
AS OF DECEMBER 31,
AS OF JUNE 30, ------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . 332 604 1,466 1,113 $ 546 $ 218
Total assets............... 5,409 4,074 4,166 3,524 1,473 430
Long-term obligations, less
current portion........... -- -- -- -- -- --
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- ------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF
INCOME DATA:
Pro forma net income(1).... 2,775 1,317 3,355 2,411 1,589 378 135
Pro forma net income per
share(1).................. $ 0.28 $ 0.13 $ 0.34 $ 0.24 $ 0.16 $ 0.04 $ 0.01
Shares used in computing
pro forma net income per
share..................... 10,000 10,000 10,000 10,000 10,000 10,000 10,000
</TABLE>
- --------
(1) Pro forma CompReview net income and net income per share gives retroactive
effect to federal and state income taxes as if CompReview had filed
subchapter C corporation income tax returns for the periods presented.
HNC AND COMPREVIEW
SELECTED UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ---------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Total revenues.......... $51,665 $30,574 $71,439 $43,704 $29,838 $16,167 $11,833
Operating income........ 11,123 2,152 9,659 5,082 2,881 1,034 250
Net income(1)........... 7,416 956 9,731 4,534 2,137 641 125
Net income per share(1). $ 0.29 $ 0.04 $ 0.38 $ 0.21 $ 0.11 -- --
Shares used in computing
net income per share... 25,449 23,403 25,367 21,810 18,763
<CAPTION>
AS OF DECEMBER 31,
AS OF JUNE 30, ---------------------------------------
1997 1996 1995 1994 1993 1992
--------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and investments........ 41,257 34,849 44,975 7,827 4,679 1,933
Total assets............ 107,448 98,293 63,113 20,663 10,944 5,972
Long-term obligations,
less current portion .. 151 264 1,373 931 367 957
Mandatorily redeemable
convertible preferred
stock.................. -- -- -- 13,169 12,452 11,735
</TABLE>
- --------
(1) Pro forma combined HNC and CompReview net income and net income per share
gives retroactive effect to federal and state income taxes as if CompReview
had filed subchapter C corporation income tax returns for the periods
presented.
18
<PAGE>
COMPREVIEW SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1997 YEAR ENDED DECEMBER 31, 1996
--------------- ---------------------------------------
FIRST SECOND FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $5,591 $6,604 $3,978 $4,141 $ 4,512 $4,975 $17,606
Operating income........ 2,059 2,539 1,011 1,193 1,589 1,748 5,541
Pro forma net income.... 1,224 1,531 595 722 936 1,102 3,355
Pro forma net income per
share.................. $ 0.12 $ 0.15 $ 0.06 $ 0.07 $ 0.09 $ 0.11 $ 0.34
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues................ $2,923 $3,087 $3,335 $3,687 $13,032
Operating income........ 740 949 1,095 1,156 3,940
Pro forma net income.... 453 581 673 704 2,411
Pro forma net income per
share.................. $ 0.05 $ 0.06 $ 0.07 $ 0.07 $ 0.24
</TABLE>
ADDITIONAL INFORMATION REGARDING THE CONVERSION RATIO
Several portions of this Proxy Statement contain an example of the
computation of the Merger conversion formula that yields an estimated
Conversion Ratio of 0.4893 (the "Estimated Conversion Ratio"). See "Proposal
No. 1: Approval of the Issuance of Shares of HNC Common Stock and Options to
Purchase HNC Common Stock in the Merger -- Risk Factors -- Risks Related to the
Merger -- Risks Associated with Conversion Ratio" and "-- Shares Eligible for
Future Sale" and "-- Terms of the Merger -- Stock Ownership Immediately
Following the Merger." The Estimated Conversion Ratio was determined by
applying the Merger conversion formula to information as of July 31, 1997.
However, assuming the Effective Time of the Merger occurs on or about November
28, 1997, the actual Conversion Ratio will not be based on that July 31, 1997
information but will instead be determined based on: (i) the number of shares
of CompReview Common Stock and the number of CompReview Options that are
outstanding just before the Effective Time; (ii) the retained earnings of
CompReview at October 31, 1997; and (iii) the HNC Closing Average Price Per
Share for the 20 trading days beginning on or about October 30, 1997.
Consequently, although CompReview's current capitalization of 10,000,000
outstanding shares of CompReview Common Stock and 400,000 CompReview Options
(which has not changed since July 31, 1997) is not expected to change before
the Effective Time, the actual Conversion Ratio computed at the Effective Time
may nevertheless exceed the Estimated Conversion Ratio if (i) CompReview's
retained earnings at month end prior to the Effective Time exceed CompReview's
July 31, 1997 retained earnings of $3.3 million and/or (ii) the actual HNC
Closing Average Price Per Share computed at the Effective Time is less than
$37.0969 (the assumed HNC Closing Average Price Per Share used to compute the
Estimated Conversion Ratio).
Although the actual Conversion Ratio cannot now be determined, because the
Agreement provides that the number of HNC Merger Shares (i.e., the number of
shares of HNC Common Stock to be issued in the Merger or subject to HNC Options
issued in the Merger) cannot be less than a minimum of 5,000,000 shares, the
Conversion Ratio will in no event be less than 0.4808 (5,000,000 HNC Merger
Shares divided by 10,400,000 CompReview shares and options). However, the
Agreement imposes no maximum limit on the amount of the Conversion Ratio or on
the number of HNC Merger Shares and therefore it is possible that the number of
shares of HNC Common Stock and HNC Options issued in the Merger could
substantially exceed the 4,893,227 shares of HNC Common Stock and 195,729 HNC
Options that would be issued at the Estimated Conversion Ratio of 0.4893. HNC
will not seek further approval of the HNC stockholders if the actual Conversion
Ratio materially exceeds the Estimated Conversion Ratio. However, based on
currently available information regarding CompReview's retained earnings and
recent trading prices of HNC's Common Stock, HNC does not expect that the
actual Conversion Ratio will materially exceed the Estimated Conversion Ratio
of 0.4893. For example, if the July 31, 1997 information used to compute the
Estimated Conversion Ratio were changed by reducing the assumed HNC Closing
Average Price Per Share from $37.0969 to $26.00 (the price below which
CompReview has the right to terminate the Agreement), then the Conversion Ratio
would increase to 0.4930 and HNC would be required to issue an aggregate of
4,930,000 shares of HNC Common Stock and 197,200 HNC Options in the Merger.
19
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of HNC and
CompReview and selected unaudited pro forma financial information after giving
effect to the Merger as a pooling of interests for accounting purposes,
assuming the issuance of 0.4893 of a share of HNC Common Stock for each
outstanding share of CompReview Common Stock in the Merger and assuming the
Merger had occurred at the beginning of the periods presented. The actual
number of shares of HNC Common Stock to be exchanged for all of the outstanding
shares of CompReview Common Stock will be determined at the Effective Time
based on the Conversion Ratio at the Effective Time. The following data should
be read in conjunction with the Selected Historical and Unaudited Pro Forma
Combined Financial Data, the Unaudited Pro Forma Consolidated Combined
Condensed Financial Information and the separate historical financial
statements of HNC incorporated by reference herein and of CompReview included
elsewhere in this Proxy Statement. The unaudited pro forma combined per share
data are not necessarily indicative of the operating results that would have
been achieved had the Merger been consummated as of the beginning of the
earliest period presented and should not be construed as representative of the
future operations or financial position of HNC. No cash dividends have ever
been declared or paid on HNC Common Stock. CompReview distributed cash
dividends of $5,907,321, $3,845,000 and $990,000 to its stockholders during the
years ended December 31, 1996, 1995 and 1994, respectively. During the six
months ended June 30, 1997, CompReview distributed cash dividends of $3,600,000
to its stockholders. Consistent with its current dividend practices, CompReview
expects to distribute to its stockholders additional cash dividends of
approximately $0.06 to $0.08 per share for each full calendar month ended prior
to the Effective Time of the Merger.
COMPARISON OF EARNINGS AND BOOK VALUES PER SHARE OF COMMON STOCK*
<TABLE>
<CAPTION>
PRO FORMA**
PER HNC PER COMPREVIEW PER COMPREVIEW PRO FORMA EARNINGS
COMMON SHARE COMMON SHARE COMMON SHARE GIVING EFFECT TO MERGER***
------------ -------------- -------------- -----------------------------
PER 0.4893
PER HNC
YEAR EARNINGS EARNINGS EARNINGS HNC COMMON SHARE COMMON SHARE
- ---- -------- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
June 30, 1997 (six
months)................ $0.23 $0.45 $0.28 $0.29 $0.14
December 31, 1996....... $0.31 $0.55 $0.34 $0.38 $0.19
December 31, 1995....... $0.13 $0.40 $0.24 $0.21 $0.10
December 31, 1994....... $0.04 $0.26 $0.16 $0.11 $0.05
</TABLE>
<TABLE>
<CAPTION>
PER HNC PER COMPREVIEW PRO FORMA BOOK VALUES
COMMON SHARE COMMON SHARE GIVING EFFECT TO MERGER***
------------ -------------- -------------------------------
PER 0.4893
PER HNC HNC
COMMON SHARE COMMON SHARE
------------- -------------
<S> <C> <C> <C> <C>
Book Values at
June 30, 1997.......... $4.63 $0.35 $3.84 $1.88
December 31, 1996...... $4.05 $0.26 $3.35 $1.64
</TABLE>
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* This Comparison should be read in conjunction with the unaudited pro forma
combined financial statements and the separate financial statements of the
respective companies and the notes thereto incorporated by reference herein
or appearing elsewhere in this Proxy Statement.
** Pro Forma CompReview earnings per share gives retroactive effect to federal
and state income taxes as if CompReview had filed Subchapter C corporation
income tax returns for the periods presented.
*** Assumes that each share of CompReview Common Stock at the Effective Time of
the Merger will be exchanged for 0.4893 shares of HNC Common Stock. The pro
forma amounts give effect to the proposed Merger on a pooling of interests
basis and to federal and state income taxes as if CompReview had filed
Subchapter C corporation income tax returns for the periods presented.
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THE MEETING
The accompanying proxy is solicited on behalf of the Board of Directors of
HNC Software Inc., a Delaware corporation ("HNC"), for use at the Meeting.
DATE, TIME AND PLACE OF MEETING
The Meeting will be held at the Embassy Suites Hotel located at 4550 La
Jolla Village Drive, San Diego, California, on Tuesday, November 25, 1997, at
10:00 a.m., Pacific Time.
PURPOSE OF MEETING
The purpose of the Meeting is to consider and vote upon (i) a proposal to
approve the issuance by HNC of shares of HNC Common Stock and options to
purchase HNC Common Stock ("HNC Options") in the Merger to the stockholders
and optionholders, respectively, of CompReview pursuant to the Agreement and
the Merger; and (ii) a proposal to approve an amendment to HNC's 1995 Equity
Incentive Plan (the "Incentive Plan") increasing the number of shares of HNC
Common Stock reserved for issuance thereunder by 750,000 shares.
RECORD DATE; QUORUM; OUTSTANDING SHARES
Only holders of record of HNC Common Stock at the close of business on
September 29, 1997 (the "Record Date") are entitled to notice of and to vote
at the Meeting. A majority of the shares of HNC Common Stock outstanding on
the Record Date will constitute a quorum for the transaction of business at
the Meeting.
At the close of business on the Record Date, there were a total of
19,539,604 shares of HNC Common Stock outstanding and entitled to vote held of
record by approximately 170 stockholders (though HNC has been informed that
there are in excess of 4,425 beneficial owners).
On or about October 23, 1997, a notice of the Meeting and a copy of this
Proxy Statement were mailed to all of HNC's stockholders of record as of the
Record Date.
VOTING RIGHTS; REQUIRED VOTE
Holders of HNC Common Stock are entitled to one vote for each share held as
of the Record Date. In the event that a broker, bank, custodian, nominee or
other record holder of HNC Common Stock indicates on a proxy that it does not
have discretionary authority to vote certain shares of HNC Common Stock on a
particular matter (a "broker non-vote"), then those shares will not be
considered present and entitled to vote with respect to that matter, although
they will be counted in determining whether or not a quorum is present at the
Meeting.
Proposal No. 1 (a proposal to approve the issuance by HNC of shares of HNC
Common Stock and HNC Options in the Merger to the stockholders and
optionholders, respectively, of CompReview pursuant to the Agreement and the
Merger) requires for approval the affirmative vote of at least a majority of
the shares of HNC Common Stock that are present in person or represented by
proxy at the Meeting and are voted for or against the proposal. Abstentions
and broker non-votes will not affect the outcome of the vote with respect to
approval of the issuance of shares of HNC Common Stock and HNC Options
pursuant to the Agreement and the Merger.
Because the number of shares of HNC Common Stock to be issued or reserved
for issuance in connection with the Merger will exceed 20% of the number of
shares of HNC Common Stock outstanding prior to the Merger, approval by
holders of HNC Common Stock of the issuance of HNC Common Stock and HNC
Options in the Merger is required under the rules of the Nasdaq National
Market. IF HOLDERS OF HNC COMMON STOCK DO NOT VOTE TO APPROVE SUCH ISSUANCE OF
HNC COMMON STOCK AND HNC OPTIONS, THE MERGER WILL NOT BE CONSUMMATED. HNC is
not a constituent corporation to the Merger, and, therefore, specific approval
of the Agreement by the HNC stockholders is not required under the Delaware
General Corporation Law or HNC's Certificate of Incorporation or Bylaws.
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Proposal No. 2 (a proposal to amend HNC's Incentive Plan to increase the
number of shares of HNC Common Stock reserved for issuance thereunder by
750,000 shares) requires for approval the affirmative vote of at least a
majority of the shares of HNC Common Stock that are present in person or
represented by proxy at the Meeting and are voted for or against the proposal.
Abstentions and broker non-votes will not affect the outcome of the vote with
respect to approval of the amendment to the Incentive Plan.
All votes will be tabulated by the inspector of elections appointed for the
Meeting who will separately tabulate, for each proposal, affirmative and
negative votes, abstentions and broker non-votes.
VOTING OF PROXIES
The proxy accompanying this Proxy Statement is solicited on behalf of the
Board of Directors of HNC (the "HNC Board") for use at the Meeting. HNC
stockholders are requested to complete, date and sign the accompanying proxy
card and promptly return it in the enclosed envelope or otherwise mail it to
HNC. All executed, returned proxies that are not revoked prior to the vote
will be voted in accordance with the instructions contained therein; however,
returned signed proxies that give no instructions as to how they should be
voted on a particular proposal at the Meeting will be counted as votes "for"
such proposal. So far as is known to the HNC Board, no matters are to be
brought before the Meeting except as specified in the notice of the Meeting.
However, as to any business that may properly come before the Meeting, it is
intended that proxies in the form enclosed will be voted in accordance with
the judgment of the persons holding such proxies.
In the event that sufficient votes in favor of any proposal properly brought
before the Meeting are not received by the date of the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting to permit
further solicitations of proxies. Any such adjournment would require the
affirmative vote of the majority of the outstanding shares present in person
or represented by proxy at the Meeting.
The expenses of soliciting proxies to be voted at the Meeting will be paid
by HNC. Following the original mailing of the proxies and other soliciting
materials, HNC and/or its agents may also solicit proxies by mail, telephone,
telegraph or in person. Following the original mailing of the proxies and
other soliciting materials, HNC will request that brokers, custodians,
nominees and other record holders of HNC Common Stock forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of
HNC Common Stock and request authority for the exercise of proxies. In such
cases, HNC, upon the request of the record holders, will reimburse such
holders for their reasonable expenses incurred in connection therewith. HNC
has retained Corporate Investors Communications, an independent proxy
solicitation firm, to assist in soliciting proxies at an estimated fee of
$5,000 plus reimbursement of reasonable expenses.
REVOCABILITY OF PROXIES
Any person signing a proxy in the form accompanying this Proxy Statement has
the power to revoke it prior to the Meeting or at the Meeting prior to the
vote pursuant to the proxy. A proxy may be revoked by a writing delivered to
HNC stating that the proxy is revoked, by a subsequent proxy that is signed by
the person who signed the earlier proxy and is presented at the Meeting or by
attendance at the Meeting and voting in person. Please note, however, that if
a beneficial stockholder's shares are held of record by a broker, bank or
other nominee and that beneficial stockholder wishes to vote at the Meeting,
the beneficial stockholder must bring to the Meeting a letter from the broker,
bank or other nominee confirming that stockholder's beneficial ownership of
the shares and that such broker, bank or other nominee is not voting such
shares.
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RECOMMENDATION OF THE HNC BOARD
THE HNC BOARD, BY UNANIMOUS VOTE, HAS ADOPTED AND APPROVED THE AGREEMENT,
THE MERGER, THE ISSUANCE OF HNC COMMON STOCK AND HNC OPTIONS PURSUANT TO THE
AGREEMENT AND THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND HAS
DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF HNC AND ITS
STOCKHOLDERS. THE HNC BOARD HAS ALSO UNANIMOUSLY APPROVED THE AMENDMENT OF THE
INCENTIVE PLAN TO INCREASE THE NUMBER OF SHARES OF HNC COMMON STOCK RESERVED
FOR ISSUANCE THEREUNDER BY 750,000 SHARES. After careful consideration, the
HNC Board unanimously recommends a vote FOR approval of the issuance of shares
of HNC Common Stock and HNC Options pursuant to the Agreement and the Merger
and a vote FOR the amendment of HNC's Incentive Plan.
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PROPOSAL NO. 1: APPROVAL OF THE ISSUANCE OF SHARES OF HNC COMMON STOCK AND
OPTIONS TO PURCHASE HNC COMMON STOCK IN THE MERGER
RISK FACTORS
The following factors should be considered carefully in evaluating the
Merger to be voted on at the Meeting, in addition to the other information
presented in this Proxy Statement. This Proxy Statement contains forward-
looking statements that involve risks and uncertainties. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
these forward-looking statements. Additionally, statements concerning future
matters such as the development of new products, enhancements or technologies,
possible changes in legislation and other statements regarding matters that
are not historical fact are forward-looking statements. The forward-looking
statements reflect the best judgment of the management of HNC and CompReview,
as appropriate, based on factors currently known and involve risks and
uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors," as well as those discussed elsewhere in this Proxy
Statement or in documents that are incorporated herein by reference.
RISKS RELATED TO THE MERGER
General Risks Associated with Integration of Operations. HNC and CompReview
have entered into the Agreement with the expectation that the proposed Merger
will result in long-term strategic benefits. Realization of these anticipated
benefits will depend in part on whether the operations of the companies can be
integrated in an efficient and effective manner. There can be no assurance
that this will occur. The successful integration of HNC and CompReview will
require, among other things, integration of the companies' respective product
offerings, the coordination of the companies' sales and marketing efforts and
research and development efforts, and the cooperation and coordination of
HNC's and CompReview's business managers. It is possible that this integration
will not be accomplished smoothly or successfully. The diversion of
management's attention from day-to-day operations and any difficulties
encountered in the transition process could have a material adverse effect on
HNC's business, financial condition and results of operations. The process of
combining the operations of the two organizations could cause the interruption
of, or a loss of momentum in, the activities of either or both of their
businesses, which could have a material adverse effect on their combined
operations. Further, the addition of CompReview's substantial employee base to
HNC's workforce will substantially increase HNC's operating expenses that are
fixed in the near term, making HNC more vulnerable to experiencing operating
losses if quarterly revenues fall below budgeted levels due to loss or delay
of such revenues.
Dependence on CompReview Management. If members of CompReview's current
management team were to terminate their employment with CompReview, the
ability of HNC to manage CompReview's business and workforce would be harmed
and CompReview's operations could be disrupted. Although Robert L. Kaaren,
M.D., the Chief Executive Officer of CompReview, and Michael E. Munayyer, the
Chief Technical Officer of CompReview, will be subject to employment
agreements with CompReview after the Merger, there can be no assurance that
these agreements will result in the retention of Dr. Kaaren and Mr. Munayyer
for any significant period of time. A loss of Dr. Kaaren, Mr. Munayyer or any
other member of CompReview's management could defer or prevent HNC from
realizing the benefits that it anticipates from the Merger and could have a
material adverse effect on HNC's business, financial condition and results of
operations.
Financial Impact of Failure to Achieve Synergies. If the integration of
HNC's and CompReview's operations is not successful, if HNC does not
experience business synergies as quickly or in as great an amount as may be
expected by securities analysts, or if the accretive/dilutive effect of the
Merger is not in line with the expectations of securities analysts, the market
price of HNC's Common Stock will be significantly and adversely affected.
Any shortfall in anticipated operating results could have an immediate and
significant adverse effect on the market price of HNC's Common Stock. In
particular, HNC will incur substantial Merger-related expenses,
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<PAGE>
currently estimated to be approximately $1.4 million, primarily in the quarter
in which the Merger is consummated. HNC expects that the Merger will be
accretive. However, this forward-looking statement is subject to risks and
uncertainties and actual results may vary due to unforeseen changes,
inaccurate or incomplete assumptions regarding the current business or future
prospects of either or both of CompReview or HNC, or other reasons, including
without limitation those described in this "Risk Factors" section or elsewhere
in this Proxy Statement or in documents that are incorporated herein by
reference. Any failure of the Merger to meet expectations as to potential
business synergies or any failure of the Merger to be accretive in any quarter
could have an immediate and significant adverse effect on the market price of
HNC's Common Stock after the Merger.
Increased Integration Difficulties Associated with Recent Acquisitions. The
challenges of integrating HNC's and CompReview's organizations will be
compounded by ongoing efforts associated with the continuing integration of
other recent acquisitions by HNC. On August 30, 1996, HNC completed its
acquisition of Risk Data Corporation ("Risk Data"), in a transaction accounted
for as a pooling of interests. Risk Data is based in Irvine, California and
develops and markets proprietary software decision products for use in the
workers' compensation insurance industry. In addition, on November 29, 1996,
HNC completed its acquisition of Retek Distribution Corporation, now named
Retek Information Systems, Inc. ("Retek"), in a transaction accounted for as a
pooling of interests. Retek develops and markets software products that
provide merchandise management and other management tools to retailers and
their vendors. HNC anticipates that in the future it will continue to consider
other acquisitions of businesses in order to expand the markets served by HNC
and to acquire complementary technologies, products and personnel. The
integration of multiple organizations will require a substantial amount of
management resources and attention. The acquisitions of Risk Data and Retek,
as well as other potential future acquisitions, will require HNC to manage and
integrate such acquired businesses and their personnel, which may be located
in diverse geographic locations, and will also require HNC to develop and
market products to new industries and markets with which HNC may not be
familiar. Failure of HNC to integrate and manage acquired businesses
successfully and to retain their employees, and to address new industries and
markets associated with such acquired businesses successfully, would have a
material adverse effect on HNC's business, financial condition and results of
operations. In addition, although the acquisitions of Risk Data and Retek have
been accounted for as poolings of interests, there can be no assurance that
future acquisitions will not be accounted for as purchases, resulting in
potential charges that may adversely affect HNC's earnings. Additional
acquisitions may also involve the issuance of shares of HNC's stock to owners
of acquired businesses, resulting in dilution in the percentage of HNC's stock
owned by other stockholders.
Risks Associated with Conversion Ratio. Based on application of the Merger
conversion formula to information as of July 31, 1997, if the Merger is
consummated, it is estimated that HNC would issue (i) an aggregate of
approximately 4,893,227 shares of HNC Common Stock to the holders of
CompReview Common Stock and (ii) HNC Options to purchase an aggregate of
approximately 195,729 additional shares of HNC Common Stock to the holders of
CompReview Options. This estimate results in a total of 5,088,956 shares of
HNC Common Stock and a Conversion Ratio equal to 0.4893 shares of HNC Common
Stock per share of CompReview Common Stock. This estimate is based on
application of the Merger conversion formula to information as of July 31,
1997 and on the following assumptions: (i) the retained earnings of CompReview
of $3.3 million as of July 31, 1997 were the retained earnings of CompReview
at the close of the last calendar month prior to the Effective Time; (ii) the
capitalization of CompReview as of July 31, 1997 (including 10,000,000 shares
of CompReview Common Stock outstanding and 400,000 shares issuable upon
exercise of outstanding CompReview Options) was the capitalization of
CompReview immediately prior to the Effective Time; and (iii) the HNC Closing
Average Price Per Share was $37.0969 (the average closing price per share of
HNC Common Stock for the 20 trading days prior to July 31, 1997). This
estimate is an example only and is subject to change if the retained earnings
of CompReview, the capitalization of CompReview or the HNC Closing Average
Price Per Share changes after July 31, 1997 and before the Effective Time of
the Merger. Specifically, the number of shares of HNC Common Stock and HNC
Options issuable in the Merger would exceed the above estimate if the retained
earnings of CompReview were to increase or the HNC Closing Average Price Per
Share were to decrease before the Effective Time of the Merger. CompReview has
the right, but not the obligation, to terminate the Agreement if the HNC
Closing Average Price Per Share is less than $26.00. The
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<PAGE>
Agreement provides that the minimum number of shares of HNC Common Stock and
HNC Options issuable in the Merger is 5,000,000 shares. The Agreement does not
permit HNC to terminate the Agreement if the HNC Closing Average Price Per
Share decreases and also does not limit the maximum number of shares of HNC
Common Stock and HNC Options issuable in the Merger. Therefore, if there is a
substantial increase in CompReview's retained earnings or a substantial
decrease in the market price of HNC Common Stock before the Effective Time,
the number of shares of HNC Common Stock and HNC Options issued in the Merger
would increase substantially. HNC will not seek further approval of the HNC
stockholders if the number of shares of HNC Common Stock and/or HNC Options to
be issued in the Merger differs materially from the estimate shown above. See
"Summary -- Additional Information Regarding the Conversion Ratio." The market
price of HNC Common Stock has increased somewhat since the date of execution
of the Agreement, and may vary significantly between the date of this Proxy
Statement and the date on which the HNC stockholders vote with respect to the
issuance of HNC securities in the Merger. The market price of HNC Common Stock
as of a recent date is set forth under "Summary -- Market Price and
Dividends." Stockholders are urged to obtain recent market quotations for HNC
Common Stock before voting.
Dilution of Ownership Interests of Current Stockholders. Following the
Merger, and based upon the retained earnings and capitalization as of July 31,
1997 and an assumed HNC Closing Average Price Per Share of $37.0969, it is
estimated that, immediately following the Merger, the former stockholders of
CompReview will own approximately 20.1% of the outstanding shares of HNC
Common Stock. This represents substantial dilution of the ownership interests
of the current stockholders of HNC compared to their ownership interests in
HNC prior to the Effective Time. The issuance of additional shares of HNC
Common Stock pursuant to the stock options being assumed by HNC in the Merger,
and stock options that are expected to be granted to wider segments of
CompReview's workforce after the Merger, will result in further dilution to
the current stockholders of HNC.
Shares Eligible for Future Sale. If the Merger is consummated, it is
estimated that HNC would issue to the holders of CompReview Common Stock an
aggregate of approximately 4,893,227 shares of HNC Common Stock, assuming (i)
that the retained earnings of CompReview of $3.3 million as of July 31, 1997
were the retained earnings of CompReview at the close of the last calendar
month prior to the Effective Time; (ii) that the capitalization of CompReview
as of July 31, 1997 (including 10,000,000 shares of CompReview Common Stock
outstanding and 400,000 shares issuable upon exercise of outstanding
CompReview Options) was the capitalization of CompReview immediately prior to
the Effective Time; and (iii) that the HNC Closing Average Price Per Share was
$37.0969, the average closing price per share of HNC Common Stock for the 20
trading days prior to July 31, 1997. This estimate is an example only and is
subject to change if the retained earnings of CompReview, the capitalization
of CompReview or the HNC Closing Average Price Per Share changes after
July 31, 1997 and before the Effective Time of the Merger. Specifically, if
there is a substantial increase in CompReview's retained earnings or a
substantial decrease in the market price of HNC Common Stock before the
Effective Time, the number of shares of HNC Common Stock and HNC Options
issued in the Merger would increase substantially. All of such shares will be
issued to the CompReview stockholders in a private offering and therefore will
be restricted shares under the Securities Act. HNC has agreed to prepare and
file with the SEC, as promptly as reasonably practicable after the Effective
Time, a shelf registration statement on Form S-3 under the Securities Act
covering all of such shares and to use its best efforts to have such
registration statement declared effective as soon as practicable after the
Effective Time of the Merger. No former CompReview stockholder may sell any
such shares until after HNC has published financial results covering at least
30 days of post-Merger combined operating results of HNC and CompReview.
Assuming that the Merger is completed and the Effective Time occurs on or
about November 28, 1997, it is expected that such combined financial results
would be published in the latter part of January 1998. At such time,
substantial sales of HNC Common Stock could occur. In addition, based on the
number of CompReview Options outstanding and the other assumptions set forth
above, it is estimated that HNC would issue HNC Options to purchase
approximately 195,729 additional shares of HNC Common Stock to the holders of
CompReview Options following the Merger. Future sale of a substantial number
of shares of HNC Common Stock could adversely affect or cause substantial
fluctuations in the market price of HNC Common Stock.
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RISKS RELATED TO COMPREVIEW
Dependence on a Single Product. Licenses and installation of CompReview's
CRLink product have accounted for 80.6%, 73.1%, 59.0% and 44.8% of
CompReview's total revenues in the first six months of 1997 and the years
ended December 31, 1996, 1995 and 1994, respectively, and are expected to
account for a majority of CompReview's total revenues for the foreseeable
future. Substantially all of the balance of CompReview's total revenues is
derived from service bureau operations of its CRLink software for customers
that do not wish to obtain a license. Continued market acceptance of CRLink
will be affected by future product enhancements and future competition.
Accordingly, CompReview's future success depends on the capital expenditure
budgets of its customers and the continued demand by its customers for CRLink.
Decline in demand for, or use of, CRLink, whether as a result of competition,
simplification of state workers' compensation fee schedules, changes in the
overall payment system or regulatory structure for workers' compensation
claims, technological change, saturation of market demand, industry
consolidation or otherwise, would have a material adverse effect on
CompReview's business, financial condition and results of operations.
Customer Concentration. Concentra Managed Care, Inc. ("Concentra") accounted
for approximately 22.1%, 24.4%, 27.0% and 25.9% of CompReview's total revenues
during the first six months of 1997 and the years ended December 31, 1996,
1995 and 1994, respectively. Zenith Insurance Company ("Zenith") accounted for
approximately 12.3% and 10.6% of CompReview's total revenues in 1996 and 1995,
respectively, and Liberty Mutual and Zenith accounted for approximately 19.6%
and 14.3% of CompReview's total revenues, respectively, in 1994. The loss of
Concentra or Zenith as a customer for any reason could have a material adverse
effect on CompReview's business, financial condition and results of
operations.
Potential Fluctuations in Quarterly Operating Results. HNC's quarterly
revenues and operating results after the Merger will be affected by risks and
uncertainties associated with CompReview's business. To date, a significant
portion of CompReview's total revenues has been generated from monthly usage
fees under license agreements with its customers. CompReview's customer
license agreements are typically cancelable by the customer upon 90 days'
advance written notice. Thus, there can be no assurance that CompReview will
continue to realize such recurring revenues or that its customers will not
seek to cancel such contracts if CompReview's products do not remain
competitive or do not achieve effective results. A significant portion of
CompReview's business is derived from substantial orders placed by large
organizations, and the timing of such orders could cause material fluctuations
in its quarterly operating results. CompReview's expense levels are based in
part on its expectations regarding future revenues and in the short term are
fixed to a large extent. Therefore, CompReview may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue
shortfall. As a result, if anticipated revenues in any quarter do not occur or
are delayed, CompReview's operating results for that quarter would be
disproportionately affected. Operating results also may fluctuate due to
factors such as the demand for CompReview's products, product life cycles, the
introduction and acceptance of new products and product enhancements by
CompReview or its competitors, changes in the mix of distribution channels
through which CompReview's products are offered, changes in the level of
operating expenses, customer order deferrals in anticipation of new products,
competitive conditions in the industry and economic conditions generally or in
various industry segments.
CompReview expects quarterly fluctuations in its operating results to occur
in the future. Accordingly, CompReview believes that period-to-period
comparisons of CompReview's financial results should not be relied upon as an
indication of future performance of CompReview after the Merger. No assurance
can be given that CompReview will be able to maintain profitability on a
quarterly or annual basis in the future. Due to all of the foregoing factors,
it is possible that in some future quarter CompReview's operating results will
have a negative effect on HNC's operating results and that, as a result, HNC's
operating results will be below the expectations of securities analysts and
investors. In such event, the price of HNC's Common Stock would likely be
materially adversely affected.
Unpredictable Sales Cycle. The sales cycle associated with the licensing of
CompReview's product typically ranges from 60 days to 18 months. CompReview
believes that its sales cycle varies from customer to customer depending upon
the difference between customers' internal procedures for testing and
accepting new
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technologies and software products that affect key operations. In addition,
the sales cycle varies from customer to customer depending upon whether or not
the customer is moving to a new software platform, which can involve a
significant commitment of capital and result in a longer sales cycle.
CompReview has little or no control over these factors, but believes that as
it focuses its sales efforts on larger orders its sales cycle will generally
lengthen. As the size of customer orders increases, a lost or delayed sale
could have an increased material adverse effect on CompReview's quarterly
operating results.
Risks Associated with Technological Change and Delays in Developing New
Products. The market for CompReview's cost containment software system is
characterized by rapidly changing technology and improvements in computer
hardware, network operating systems, software environments, programming tools,
operating systems and database technology. CompReview's success will depend
upon its ability to maintain competitive technologies, enhance its current
product and develop new products in a timely and cost-effective manner that
meet changing market conditions, including evolving customer needs, new
competitive product offerings, emerging industry standards and changing
technology. For example, the rapid growth of the Internet environment creates
new opportunities, risks and uncertainties for businesses such as CompReview
that develop software solutions that now may have to be designed to operate in
Internet, intranet and other on-line environments. There can be no assurance
that CompReview will be able to develop and market, on a timely basis, if at
all, product enhancements or new products that respond to changing market
conditions or that will be accepted by customers. CompReview has previously
experienced significant delays in the development and introduction of new
products and product enhancements. Such delays have typically been associated
with difficulties in adapting to particular operating environments. Any
significant delay in the completion of new products, or the failure of such
products, if and when installed, to achieve any significant degree of market
acceptance, would have a material adverse effect upon CompReview's business,
financial condition and results of operations. Any failure by CompReview to
anticipate or to respond adequately to changing technologies or market
conditions, or any significant delays in product development or introduction,
could cause customers to delay or decide against purchases of CompReview's
product and would have a material adverse effect on CompReview's business,
financial condition and results of operations. The future success of
CompReview will depend upon its ability to enter new markets by developing new
products and to adapt its existing product to additional hardware platforms
and operating systems, each on a timely and cost-effective basis. Any
significant delays in product development or release could result in a loss of
competitiveness and revenues and have a material adverse effect on the
business of CompReview.
Software products as complex as those offered by CompReview often contain
undetected errors or failures when first introduced or as new versions are
released. In addition, to the extent that new products of CompReview may have
to be developed to operate in new environments, such as the Internet, the
possibility for program errors and failures may increase. There can be no
assurance that, despite pre-release testing by CompReview and by current and
potential customers, errors will not be found in new products after
commencement of commercial shipments. The occurrence of such errors could
result in loss of or delay in market acceptance of CompReview products, which
could have a material adverse effect on CompReview's business, financial
condition and results of operations.
Competition. The software and service provider segments of the workers'
compensation medical bill processing industry are highly competitive.
CompReview faces competition from a number of sources, including (i) other
application software companies, (ii) management information systems
departments of customers and potential customers and (iii) managed care
organizations. CompReview has experienced competition from MediCode, Inc.
("MediCode"), Medata, Inc. and Embassy in software licensing, and Intercorp
and Corvel Corporation in service bureau operations. It has also faced
competition from ADP in the automobile accident medical claims area.
CompReview believes that the barriers to entry in the workers' compensation
medical bill processing industry are relatively low and accordingly expects to
experience additional competition from other established and emerging
companies.
CompReview believes that its product is currently priced at a premium when
compared to competing products and when compared to costs typically incurred
in in-house development of systems with similar
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functionality to CRLink. The market for CompReview's product is highly
competitive, and CompReview expects to face increasing pricing pressures from
current competitors and new market entrants. In particular, increased
competition could reduce or eliminate such premiums and cause further price
reductions. In addition, such competition could adversely affect CompReview's
ability to obtain recurring fees or new long-term contracts and renewals of
existing long-term contracts on terms favorable to CompReview. Any reduction
in the price of CompReview's product could materially adversely affect
CompReview's business, financial condition and results of operations.
Some of CompReview's current, and many of its potential, competitors have
significantly greater financial, technical, marketing and other resources than
CompReview, and may have greater knowledge and expertise of specific markets
and industries. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their products
than CompReview. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of CompReview's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly gain
significant market share. There can be no assurance that CompReview will be
able to compete successfully against current and future competitors or that
competitive pressures faced by CompReview will not materially adversely affect
CompReview's business, financial condition and results of operations.
Dependence on Data. The development and support of CompReview's CRLink
system requires periodic updating of its database of medical fees applicable
to workers' compensation and automobile accident related injuries. These
updates include state mandated workers' compensation fee schedules, usual,
customary and reasonable ("UCR") charges and preferred provider organization
("PPO") contract rates. UCR and PPO rates must be obtained from third party
providers. Moreover, some state mandated fee schedules are not readily
available through the states themselves. One third party provider of this
information, MediCode, has claimed that CompReview is infringing its alleged
proprietary rights in certain state workers' compensation fee schedules by
using these schedules without paying a licensing fee to MediCode. CompReview
has disputed MediCode's claim of copyright in the state fee schedules and
continues to use the schedules. There can be no assurance that CompReview will
be able to continue to use MediCode's state workers' compensation fee
schedules without the payment of a licensing fee or that CompReview will
otherwise be able to obtain fee schedule updates on a timely basis on
reasonable terms and conditions. Payment of a license fee for use of such
information would reduce CompReview's margins and earnings. MediCode has not
filed a lawsuit or stated a specific claim for damages and therefore
CompReview has no basis upon which to quantify MediCode's claim. However,
based on the scope of MediCode's fee schedules, the nature and extent of
MediCode's current assertions and the status of CompReview's recent
discussions with MediCode, at this time CompReview does not believe that
MediCode's infringement claims will result in a material adverse effect on
CompReview's business, financial condition or results of operations. The
inability of CompReview to obtain such information or to obtain it on terms
favorable to CompReview could have a significant negative impact on existing
product performance and new product development, which would have a material
adverse effect on CompReview's business, financial condition and results of
operations.
The state workers' compensation fee schedules utilized by CompReview contain
the American Medical Association's ("AMA") Current Procedural Technology
("CPT") codes. Neither CompReview nor, to its knowledge, any of its
competitors pays the AMA for use of the CPT codes. The AMA claims a copyright
in the CPT codes. This claim was recently upheld by the United States Court of
Appeals. There can be no assurance that in the future the AMA will not seek to
obtain a licensing fee from CompReview for use of the CPT codes.
Risks Associated with Managing Growth. In recent years, CompReview has
experienced changes in its operations that have placed significant demands on
its administrative, operational and financial resources. The growth in
CompReview's customer base and expansion of its product line functionality, as
well as the increase in its workforce, have challenged, and are expected to
continue to challenge, CompReview's management and operations, including its
sales, marketing, customer support, research and development and finance and
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administrative operations. CompReview's future performance will depend in part
on its ability to manage change, to adapt its operational and financial
control systems if necessary, to respond to changes in its business and to
coordinate strategies and product development and marketing efforts. The
failure of CompReview's management to respond to and manage changing business
conditions effectively could have a material adverse effect on CompReview's
business, financial condition and results of operations.
Risks Associated with Recruiting and Retaining Qualified
Personnel. CompReview's success depends to a significant degree upon the
continued service of members of its senior management and other key research,
development, sales and marketing personnel. Accordingly, the loss of any of
CompReview's senior management or key research, development, sales or
marketing personnel could have a material adverse effect on its business,
financial condition and results of operations. Robert L. Kaaren, M.D., Chief
Executive Officer of CompReview, and Michael E. Munayyer, Chief Technical
Officer of CompReview, will be subject to employment agreements with
CompReview after the Merger; however, there can be no assurance that such
agreements will result in the retention of these employees for any significant
period of time. CompReview believes that its future success will depend upon
its ability to attract and retain highly skilled managerial, research,
development, sales and marketing personnel, for whom competition is intense.
In particular, in the past, CompReview has experienced difficulty in
recruiting a sufficient number of qualified sales and technical employees,
although CompReview believes that such difficulties have not had a material
adverse effect on its historical operating results. In addition, competitors
may attempt to recruit key employees. There can be no assurance that
CompReview will be successful in attracting, assimilating and retaining such
personnel, and the failure to do so could have a material adverse effect on
the business, financial condition and results of operations of CompReview.
Risks Associated With Changing Regulatory Environment. CompReview's CRLink
product is a software system that stores and accesses state workers'
compensation fee schedules, UCR rates and PPO rates for use in analyzing,
reviewing and repricing medical bills on an automated basis. Workers'
compensation reimbursement is regulated on a state-by-state basis, and such
regulation is constantly evolving. CompReview is unable to predict what
changes may occur in any state or states in the workers' compensation
regulatory structure in general or in the workers' compensation medical
reimbursement policies in particular. Any failure of CompReview's product to
comply with new regulations could render such product obsolete. In addition,
any reforms in workers' compensation regulations that simplify the payment
system could diminish the need for, or benefit provided by, CompReview's
product. Regulatory changes that affect the need or competitiveness of
CompReview's product would have a material adverse effect on CompReview's
business, financial condition and results of operations.
Protection of Intellectual Property. CompReview relies on a combination of
copyright, trademark and trade secret laws and confidentiality procedures to
protect its proprietary rights. As of June 30, 1997, CompReview had one United
States patent application pending. There can be no assurance that patents will
be issued with respect to pending or future patent applications or that any
patents will be upheld as valid or will prevent the development of competitive
products. CompReview also seeks to protect its software, documentation, and
other written materials under copyright and trade secret laws, which afford
only limited protection. As part of its confidentiality procedures, CompReview
generally enters into invention assignment and proprietary information
agreements with its employees and independent contractors and nondisclosure
agreements with its distributors, corporate partners and licensees, and limits
access to and distribution of its software, documentation, databases and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise to obtain and use CompReview's product or
technology without authorization, or to develop similar technology
independently. In addition, to ensure that customers will not be adversely
affected by an interruption in CompReview's business, CompReview from time to
time places source code for its product into escrow, which may increase the
likelihood of misappropriation or other misuse of CompReview's key
intellectual property. There can be no assurance that CompReview's means of
protecting its proprietary rights will be adequate or that CompReview's
competitors will not develop similar technology independently.
Infringement of Proprietary Rights. CompReview has received communication
from MediCode asserting that CompReview is infringing MediCode's alleged
proprietary rights in certain state workers' compensation fee
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schedules by using these schedules without paying a licensing fee to MediCode.
CompReview has disputed MediCode's claim of copyright in the state fee
schedules and continues to use the schedules. There can be no assurance that
CompReview will be able to continue to use MediCode's state workers'
compensation fee schedules without the payment of a licensing fee or that
CompReview will otherwise be able to obtain fee schedule updates on a timely
basis on reasonable terms and conditions. Payment of a license fee for use of
such information would reduce CompReview's margins and earnings. MediCode has
not filed a lawsuit or stated a specific claim for damages and therefore
CompReview has no basis upon which to quantify MediCode's claim. However,
based on the scope of MediCode's fee schedules, the nature and extent of
MediCode's current assertions and the status of CompReview's recent
discussions with MediCode, at this time CompReview does not believe that
MediCode's infringement claims will result in a material adverse effect on
CompReview's business, financial condition or results of operations. The
inability of CompReview to obtain such information or to obtain it on terms
favorable to CompReview could have a significant negative impact on existing
product performance and new product development, which would have a material
adverse effect on CompReview's business, financial condition and results of
operations. There can be no assurance that in the future CompReview will not
receive communications from third parties asserting that CompReview's product
or future products infringe, or may infringe, their intellectual property
rights, including but not limited to patents. If as a result of such claims
CompReview were precluded from using certain technologies or intellectual
property rights, there can be no assurance that licenses to such disputed
third party technology or intellectual property rights would be available on
reasonable commercial terms, if at all. Furthermore, CompReview may initiate
claims or litigation against third parties for infringement of CompReview's
proprietary rights or to establish the validity of CompReview's proprietary
rights. Litigation, either as plaintiff or defendant, could result in
significant expense to CompReview and divert the efforts of CompReview's
technical and management personnel from productive tasks, whether or not such
litigation is resolved in favor of CompReview. In the event of an adverse
ruling in any such litigation, CompReview might be required to pay substantial
damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
to infringing technology, and the court might invalidate CompReview's patents,
trademarks or other proprietary rights. In the event of a successful claim
against CompReview and the failure of CompReview to develop or license a
substitute technology, CompReview's business, financial condition and results
of operations would be materially and adversely affected. As the number of
software products increases and the functionality of these products further
overlaps, CompReview believes that software developers may become increasingly
subject to infringement claims. Any such claims, with or without merit, can be
time consuming and expensive to defend and could materially and adversely
affect CompReview's business, financial condition and results of operations.
Year 2000 Conversion. CompReview anticipates that it will need to devote
substantial resources in the next two years to modify its CRLink product to
properly process dates beyond December 31, 1999. CompReview expects that the
cost of making these modifications and distributing the modified product to
existing customers will be approximately $500,000. These modifications and the
resources that CompReview expects to devote to such modifications may divert
management and engineering attention from, or delay the development and
introduction of, new products and enhancements to its existing product. The
inability of CompReview to complete such modifications successfully and on a
timely basis, or the inability of CompReview to devote sufficient resources to
continuing updates and enhancements to its product could have a material
adverse effect on CompReview's business, financial condition and results of
operations.
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THE MERGER
JOINT REASONS FOR THE MERGER
HNC develops and markets software solutions that are designed to assist its
customers in making key decisions specific to their business. Many HNC
products use advanced computational intelligence techniques involving neural
network technology and statistical modeling to analyze large bodies of data in
order to identify patterns and relationships that can improve and automate the
decision-making process. CompReview develops and markets a software product
and related services that use data concerning insurance claims, state worker's
compensation fee schedules and medical preferred provider networks to improve
and automate the insurance claims handling process, to analyze and reprice
worker's compensation medical bills and to enable insurers and others to
assess and establish affiliations with preferred health services provider
networks.
HNC and CompReview believe that the combination of their businesses will
provide them with several mutual advantages, including the ability to use each
other's technologies to improve their existing product offerings and develop
enhanced new products, the opportunity to market their products and services
more effectively and the opportunity to develop a greater presence in the
insurance market.
HNC'S REASONS FOR THE MERGER
HNC's Board of Directors believes that the following are among the primary
reasons for HNC to consummate the proposed Merger with CompReview:
. HNC entered the insurance market in 1996 through its acquisition of Risk
Data Corporation, an HNC subsidiary that develops and markets
proprietary software decision products for the worker's compensation
insurance market. HNC believes that CompReview's product and customer
base are complementary to those of Risk Data. By acquiring CompReview,
HNC expects that it will gain the opportunity to increase its market
presence in the insurance industry, which HNC views as a strategic
market for intelligent decision products. In addition, HNC believes that
the acquisition of CompReview will enable HNC to acquire stronger domain
expertise regarding the medical and workers' compensation insurance
industries.
. While HNC's current insurance product offerings do not process insurance
claims transactions, CompReview's CRLink product is directly involved in
the processing of workers' compensation insurance claims. HNC
anticipates that the Merger will provide HNC with the opportunity to
leverage CompReview's existing business by using HNC's technology to
develop new value-added analytical tools that would use insurance claims
data derived from CompReview's transaction processing business.
. Because CompReview and Risk Data Corporation address the worker's
compensation market with complementary (but not functionally
overlapping) products to the same customer base, it is expected that the
Merger will provide these companies with advantageous cross-selling and
marketing opportunities.
. CompReview's business model is similar to HNC's core business in that
CompReview uses third party data to develop automated decision solutions
for which it obtains recurring revenue. HNC believes that the synergies
in the businesses of HNC and CompReview will assist in the integration
of the two companies.
. CompReview's principal offices are located near the offices of HNC's
Risk Data subsidiary, and it is anticipated that this will facilitate
cooperation and coordination between CompReview and Risk Data.
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COMPREVIEW'S REASONS FOR THE MERGER
In addition to the reasons for the Merger noted above, CompReview's
stockholders and Board of Directors approved the Merger in anticipation of
realizing several potential benefits, including the following:
. A combination with HNC will enable CompReview to enhance the capability
and functionality of its software product by using HNC's proprietary
neural network technology to create various data profiles, including
health care provider profiles, for its customers.
. CompReview believes that its association with HNC, a publicly held
company, will afford CompReview with additional credibility and
marketing visibility to potential customers, particularly larger
insurance companies and health maintenance organizations.
. CompReview believes that a combination with HNC will provide CompReview
with synergistic joint marketing and sales opportunities with HNC's Risk
Data subsidiary and access to the Internet technology expertise of HNC's
Aptex subsidiary.
. CompReview believes that the Merger will enable it to realize certain
economies of scale and will provide it with the ability to provide
greater financial incentives and benefits, including options to purchase
stock of a publicly traded company, in its efforts to recruit and retain
employees.
. The issuance of HNC Common Stock to CompReview's stockholders in the
Merger will provide them with diversification and liquidity for their
investment in CompReview.
BACKGROUND OF THE MERGER
Prior to HNC's acquisition of Risk Data Corporation, Mark S. Hammond, Risk
Data's President, had been a business acquaintance of Robert L. Kaaren, M.D.,
the Chief Executive Officer of CompReview. Periodically, Mr. Hammond would
speak with Dr. Kaaren about the potential for marketing Risk Data's products
to CompReview's customers. Shortly after HNC's August 1996 acquisition of Risk
Data was publicly announced, Mr. Hammond and Dr. Kaaren discussed Risk Data's
reasons for being acquired by HNC. Following HNC's acquisition of Risk Data,
Dr. Kaaren and Mr. Hammond continued to meet periodically to discuss the
marketing of Risk Data's products to CompReview's customers.
In mid-April 1997, Dr. Kaaren had a chance meeting with Patricia Brown of
HNC at the Risk Insurance Managers Society convention in Atlanta. They had a
brief discussion about general business issues and the potential benefit of a
business combination of their respective companies. Following this meeting,
HNC and CompReview representatives began preliminary discussions regarding a
business combination. These discussions continued on a periodic basis during
May 1997 and began to be more serious and specific in June 1997.
In mid-June 1997, the parties reached a preliminary consensus on the
transaction structure and the approximate amount of consideration to be issued
to CompReview's securityholders in a combination, subject to verification by
HNC based on further due diligence review and the advice of HNC's investment
banking firm. At this time the parties' attorneys were instructed to begin
drafting and negotiating agreements to govern the proposed transaction. On
June 18, 1997, the HNC Board held a special meeting to review the current
status of negotiations with CompReview. On June 19, 1997, representatives of
CompReview's and HNC's managements and representatives of Robertson, Stephens
& Company LLC, predecessor-in-interest to BancAmerica Robertson Stephens
("BRS"), HNC's investment banking firm, met at CompReview to further discuss
terms of a potential merger and to initiate HNC's and BRS's due diligence
review of CompReview. This was followed by a meeting at CompReview on June 23,
1997 between Dr. Kaaren of CompReview and Raymond V. Thomas of HNC, at which
the parties reviewed potential terms and conditions of a merger agreement. On
June 24, 1997, the HNC Board held a meeting to discuss further CompReview's
business and the status of negotiations and to receive a preliminary report
from BRS regarding its evaluation of CompReview and the fairness of the
proposed transaction.
Negotiations between the parties continued through early July. On July 9,
1997, the HNC Board approved the principal terms and conditions of the
Agreement and the Merger at a special telephonic meeting after
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receiving oral confirmation from BRS that BRS would be able to deliver a
fairness opinion with respect to the Merger on the terms approved by the HNC
Board. On that same day, Dr. Kaaren and Michael Munayyer of CompReview,
Raymond V. Thomas of HNC and the attorneys for CompReview and HNC met to
negotiate certain detailed terms of the Agreement. Further negotiation of
these terms continued until July 14, 1997, when CompReview's Board of
Directors and stockholders unanimously approved the Agreement and the Merger
and the Agreement was signed by the parties after the close of business. The
signing of the Agreement was publicly announced before the opening of the
securities markets on July 15, 1997.
The number of HNC Merger Shares to be issued or subject to stock options
issued in the Merger and the other terms and conditions of the Agreement were
determined as a result of arms'-length negotiations between the Boards of
Directors and management teams of HNC and CompReview with advice from their
legal counsel and, in the case of HNC, from its financial advisor BRS. The
number of HNC Merger Shares was determined by HNC after evaluation of
CompReview's historical revenue and earnings, its customer base, its
management team and its anticipated business prospects. See "-- Opinion of
HNC's Financial Advisor."
OPINION OF HNC'S FINANCIAL ADVISOR
HNC retained BRS to act as its financial advisor in connection with the
Merger and to render an opinion as to the fairness to HNC, from a financial
point of view, of the Purchase Price to be paid by HNC in the Merger for the
outstanding securities of CompReview. The full text of BRS's opinion dated
July 9, 1997 is attached to this Proxy Statement as Appendix B and is
incorporated herein by reference, and the summary of the opinion set forth
below is qualified in its entirety by reference to the full text of such
opinion. Stockholders of HNC are urged to read such opinion carefully and in
its entirety for a description of the procedures followed, the factors
considered, the assumptions made and the scope of review undertaken, as well
as the limitations on the review undertaken, by BRS in rendering its opinion.
At the July 9, 1997 special meeting of the HNC Board, BRS delivered its oral
opinion, which subsequently was confirmed in writing, that as of such date and
based on the matters described therein, the Purchase Price was fair to HNC,
from a financial point of view. BRS did not recommend to the HNC Board that
any specific purchase price should constitute the Purchase Price. No
limitations were imposed by the HNC Board on BRS with respect to the
investigations made or procedures followed by it in furnishing its opinion.
BRS's opinion to the HNC Board addresses only the fairness of the Purchase
Price to HNC, from a financial point of view, and did not constitute a
recommendation to any holder of HNC Common Stock as to how such holder should
vote at the Meeting. In furnishing this opinion, BRS was not engaged as an
agent or fiduciary of HNC or any other third party.
In connection with the preparation of its opinion dated July 9, 1997, BRS,
among other things: (i) reviewed financial information concerning CompReview
furnished to BRS by CompReview, including certain internal financial analyses
prepared by the management of CompReview; (ii) reviewed publicly available
information; (iii) held discussions with the managements of CompReview and HNC
concerning the businesses, past and current business operations, financial
condition and future prospects of both companies, independently and combined;
(iv) reviewed the Agreement; (v) prepared a relative contribution analysis for
CompReview and HNC; (vi) reviewed the valuations of publicly traded companies
that were deemed comparable to CompReview; (vii) prepared discounted cash flow
analyses of CompReview; (viii) compared the financial terms of the Merger with
other transactions that were deemed relevant; (ix) reviewed the stock price
and trading history of HNC; (x) prepared a pro forma merger analysis for the
combination of CompReview and HNC; and (xi) made such other studies and
inquiries, and reviewed such other data, as were deemed relevant.
The following paragraphs summarize the analyses performed by BRS in arriving
at its opinion and reviewed with the HNC Board but do not purport to be a
complete description of the analyses performed by BRS.
Contribution Analysis. BRS compared the contribution of HNC and CompReview
to the pro forma combined revenue, operating income and net income estimates
for the combined company, based on publicly
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available BRS research forecasts for HNC, and the forecasts of CompReview's
management of CompReview's financial performance for the calendar years ended
December 31, 1997 and 1998. For such periods, BRS noted that CompReview would
contribute 25.4% and 26.0% of pro forma combined revenue, 40.2% and 38.3% of
pro forma combined operating income and 38.2% and 37.0% of pro forma combined
net income, respectively. Giving consideration to HNC's and CompReview's net
cash amounts in the case of revenue and operating income contributions, BRS
noted CompReview's implied purchase price for the calendar years ended
December 1997 and 1998 (in millions of shares of HNC Common Stock), based on
its contribution to pro forma combined revenue, operating income and net
income, was 7.123 and 7.368, 14.076 and 12.959, and 12.938 and 12.302,
respectively, for the calendar years ended December 31, 1997 and 1998.
Comparable Company Analysis. BRS compared certain financial data and
multiples of income statement parameters accorded to HCIA, Inc., Healthcare
Recoveries, Inc. and HPR Inc. (collectively the "Comparable Companies") for
the calendar years ended December 31, 1997 and 1998 and the trailing 12-month
period. Financial data compared included: total capitalization (i.e., market
capitalization less cash and cash equivalents, plus total debt), revenue,
operating income and net income as reported by BRS and third party sources.
Multiples compared included: total capitalization to revenue, total
capitalization to operating income and market capitalization to net income.
Based on total capitalization to revenue multiples of approximately 3.3 to
6.3x with an average of 4.7x for estimated calendar 1997 and approximately 2.6
to 4.3x with an average of 3.5x for projected calendar year ending December
31, 1998 for the Comparable Companies, and after adjusting for CompReview's
net cash, defined as cash and cash equivalents less total debt, CompReview's
public market implied equity valuation ranged from $93 million to $178 million
with an average of $131 million, and $112 million to $181 million with an
average of $148 million, respectively. Based on total capitalization to
operating income multiples of approximately 14.9 to 22.1x for estimated
calendar 1997 with an average of 17.7x and approximately 10.1 to 15.0x with an
average of 12.8x for projected calendar year ending December 31, 1998 for the
Comparable Companies, and after adjusting for CompReview's net cash,
CompReview's public market implied equity valuation ranged from $153 million
to $226 million with an average of $181 million, and $152 million to
$225 million with an average of $192 million, respectively. Based on market
capitalization to net income multiples of approximately 25.2 to 36.0x with an
average of 30.8x for estimated calendar 1997 and approximately 17.6 to 25.6x
with an average of 22.6x for projected calendar year ending December 31, 1998
for the Comparable Companies, CompReview's public market implied equity
valuation ranged from $162 million to $232 million with an average of $199
million, and $167 million to $242 million with an average of $213 million,
respectively.
Comparable Transaction Analysis. BRS analyzed publicly available information
for selected pending or completed mergers and acquisitions involving small cap
(less than $300 million) companies in the general software industry. In
examining these transactions, BRS analyzed certain financial parameters of the
acquired company relative to the consideration offered. Financial indicators
compared included consideration offered plus net debt assumed ("total
consideration") to the latest 12 months' revenue and total consideration
offered to the latest 12 months' net income. The acquisitions reviewed and
their respective announcement dates were: Risk Management Technologies/Fair,
Isaac and Company, Inc. (April 23, 1997), Enterprise Systems, Inc./HBO &
Company (March 14, 1997), AMISYS Managed Care/HBO & Company (February 11,
1997), Equifax (Health Analytical Services Division)/HCIA, Inc. (November 21,
1996), Prompt Associates, Inc./CRA Managed Care, Inc. (October 28, 1996),
Retek Distribution Corp./HNC Software Inc. (October 25, 1996), GMIS, Inc./ HBO
& Company (September 24, 1996), Risk Data Corp./HNC Software Inc. (July 23,
1996), Healthcare Recoveries/ Medaphis (June 14, 1995), Automation
Atwork/Medaphis (January 28, 1995) and Serving Software, Inc./HBO & Company
(May 5, 1995).
Based on total consideration to the latest 12 months' revenue multiples of
the precedent transactions, CompReview's implied equity value ranged from
$41.4 million to $263.8 million, with an average of $111.9
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million. Based on total consideration to the latest 12 months' net income
multiples of the precedent transactions, CompReview's implied equity value
ranged from $68.2 million to $275.5 million, with an average of
$178.2 million.
Discounted Cash Flow Analysis. BRS performed certain discounted cash flow
analyses to estimate the present value of CompReview's stand-alone,
unleveraged after-tax cash flows based on financial projections prepared by
management of CompReview for 1997 and by BRS for 1998 through 2002. BRS first
discounted the projected, unleveraged after-tax cash flows through December
31, 2002, using a range of discount rates from 18% to 22%. BRS then added to
the present value of the cash flows the terminal value of CompReview in the
year ending December 31, 2002, discounted back at the same discount rates. The
terminal value was computed by multiplying CompReview's projected operating
income in the year ending December 31, 2002 by terminal multiples ranging from
12.0x to 16.0x. The discounted cash flow valuation indicated implied equity
valuations from $206.0 million to $306.6 million.
Pro Forma Earnings Analysis. BRS analyzed the pro forma earnings per share
of the combined company based on the Purchase Price and publicly available BRS
analyst forecasts in the case of HNC, and projections prepared by management
of CompReview and BRS for 1997 and 1998, respectively, in the case of
CompReview. Such analysis indicated that, in the absence of synergies and
based on HNC's then current stock price and BRS's review of the provisions in
the Agreement relating to CompReview's ability to pay cash dividends and BRS's
discussions with the management of CompReview regarding the scope of
CompReview's past practice, ordinary course cash dividends, pro forma earnings
per share of the combined company, compared to HNC as a stand-alone entity,
would be increased by 29.4% (before transaction costs) and 27.5% for HNC's
fiscal years ending December 31, 1997 and 1998, respectively.
Stock Price and Trading Analysis. BRS reviewed the trading activity,
including price and volume, of HNC Common Stock since January 2, 1996. Since
this date, the daily closing sale prices of HNC Common Stock ranged from a
high of $50.63 on May 15, 1996 to a low of $18.75 on April 21, 1997, and an
average of $32.02. Based on the closing sale price of HNC Common Stock as of
July 2, 1997, the 30-day average was $35.89, the 3-month average was $30.86
and the 12-month average was $30.57. In addition, BRS compared the performance
of HNC Common Stock since January 2, 1996 to the Nasdaq Composite Index, the
S&P 400 and a composite index of companies deemed comparable by BRS to HNC.
The composite index of companies BRS deemed comparable to HNC included: Aspect
Development, Inc., Edify Corporation, PegaSystems, Inc., Siebel Systems, Inc.,
Transaction Systems Architects, Inc. and Vantive Corporation. This information
was presented to provide the HNC Board with background information regarding
the per share price of HNC Common Stock over the indicated period.
The preparation of fairness opinions involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances; therefore, such opinions are not readily susceptible to summary
description. In arriving at its opinion, BRS did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, BRS believes its analyses must be considered as a whole and that
considering any portion of such analyses and current factors could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, BRS made numerous assumptions with respect to industry performance,
general business and other conditions and matters, many of which are beyond
the control of CompReview and HNC. Any estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than as
set forth therein. In addition, analyses relating to the value of businesses
do not purport to be appraisals or to reflect the prices at which businesses
actually may be sold.
In connection with rendering its opinion, BRS did not independently verify
any of the information set forth in the third paragraph of this section and
has assumed that all such information is complete and accurate in all material
respects. Furthermore, BRS did not obtain any independent appraisal of the
properties or assets and
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liabilities of CompReview, nor was it furnished with any such evaluations or
appraisals. With respect to the financial and operating forecasts (and the
assumptions and bases therefor) of CompReview that BRS reviewed, it has
assumed that such forecasts have been reasonably prepared and reflect the best
available estimates and judgments of CompReview's management and that such
projections and forecasts will be realized in the amounts and in the time
periods currently estimated by the management of CompReview. In addition, BRS
has relied upon estimates and judgments of CompReview's management as to the
future financial performance of CompReview. BRS has also assumed, with the
consent of the HNC Board, that the Merger will be accounted for as a pooling
of interests under generally accepted accounting principles. While BRS
believes that its review, as described herein, is an adequate basis for the
opinion, this opinion is necessarily based upon market, economic, and other
conditions that exist and can be evaluated as of the date of July 9, 1997, and
on information available to it as of the date hereof. Finally, BRS expresses
no opinion as to the value of any employee agreements or arrangements entered
into in connection with the Agreement or the Merger.
While BRS selected the Comparable Companies based on the similarities in
markets served and businesses conducted, no company used in the analysis of
other publicly traded companies, nor any transactions used in the comparable
transaction analysis, is identical to CompReview or to the Merger.
BRS was retained based on BRS's experience as a financial advisor in
connection with mergers and acquisitions and in securities valuations
generally, as well as BRS's investment banking relationship and familiarity
with HNC. BRS has provided certain investment banking services to HNC from
time to time, including acting as its financial advisor in the acquisition of
Risk Data in August 1996, as an underwriter for the initial public offering of
shares of HNC Common Stock in June 1995 and a follow-on public offering of
shares of HNC Common Stock in December 1995 and maintaining a market in shares
of HNC Common Stock. In the ordinary course of business, BRS may trade HNC
securities for its own account and the account of its customers and,
accordingly, may at any time hold a long or short position in HNC securities.
HNC engaged BRS pursuant to a letter agreement dated June 17, 1997. The
agreement provides that, for its services, BRS is entitled to receive a fee of
$425,000 which became due and payable as follows: $212,500 upon execution of
the letter agreement and the remaining $212,500 upon delivery of BRS's opinion
dated July 9, 1997. HNC also agreed to indemnify BRS for certain liabilities
relating to or arising out of services provided by BRS as financial advisor to
HNC.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
CompReview Common Stock. This discussion does not deal with all income tax
considerations that may be relevant to particular CompReview stockholders in
light of their particular circumstances, such as stockholders who are dealers
in securities, foreign persons, stockholders who acquired their shares in
connection with previous mergers involving CompReview or an affiliate, or
stockholders who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions. In addition, the
following discussion does not address the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger), including without limitation transactions in
which shares of CompReview Common Stock were or are acquired or shares of HNC
Common Stock were or are disposed of. Furthermore, no foreign, state or local
tax considerations are addressed herein. ACCORDINGLY, COMPREVIEW STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The Merger is intended to qualify as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), with each of HNC, Merger Sub and CompReview intended to qualify as a
"party to the reorganization" under Section 368(b) of the Code, in which case
the
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following federal income tax consequences will result (subject to the
limitations and qualifications referred to herein):
(a) No gain or loss will be recognized by holders of Common Stock of
CompReview who hold such stock as a capital asset solely upon their receipt
of HNC Common Stock in exchange therefor in the Merger (except to the
extent of cash received in lieu of a fractional share thereof);
(b) The aggregate tax basis of the HNC Common Stock received in the
Merger by a CompReview stockholder will be the same as the aggregate tax
basis of the CompReview Common Stock surrendered in exchange therefor;
(c) The holding period of the HNC Common Stock received in the Merger by
a CompReview stockholder will include the period during which the
stockholder held the CompReview Common Stock surrendered in exchange
therefor, provided that the CompReview Common Stock is held as a capital
asset at the time of the Merger;
(d) Cash payments received by holders of CompReview Common Stock in lieu
of a fractional share will be treated as if such fractional share of HNC
Common Stock had been issued in the Merger and then redeemed by HNC. A
CompReview stockholder receiving such cash generally will recognize gain or
loss, upon such payment, measured by the difference (if any) between the
amount of cash received and the stockholder's basis in such fractional
share; and
(e) Neither HNC, Merger Sub nor CompReview will recognize material
amounts of gain or loss solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. The obligations of CompReview under the
Agreement to effect the Merger are subject to the condition that CompReview
shall not have been advised in writing by its 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.
Neither HNC nor CompReview will receive any opinion that, for federal income
tax purposes, the Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code.
A successful IRS challenge to the "reorganization" status of the Merger
would result in a CompReview stockholders' recognizing gain or loss with
respect to each share of CompReview Common Stock surrendered equal to the
difference between the stockholder's basis in such share and the fair market
value, as of the Effective Time of the Merger, of the HNC Common Stock
received in exchange therefor. In such event, a stockholder's aggregate basis
in the HNC Common Stock so received would equal its fair market value and such
stockholder's holding period of the HNC Common Stock so received would begin
the day after the Merger.
GOVERNMENTAL AND REGULATORY APPROVALS
Transactions such as the Merger are reviewed by the Department of Justice
and the FTC to determine whether they comply with applicable antitrust laws.
Under the provisions of the HSR Act, the Merger may not be consummated until
such time as certain information has been furnished to the Department of
Justice and the FTC and the specified waiting period requirements of the HSR
Act have been satisfied. HNC and CompReview's stockholders each filed their
respective notification and report forms under the HSR Act on August 25, 1997.
On September 5, 1997, the FTC notified the parties that their request for
early termination of the waiting period had been granted.
At any time before or after the Effective Time, state attorneys general,
foreign regulatory agencies or a private person or entity could challenge the
Merger under the antitrust laws and seek, among other things, to enjoin the
Merger or to cause HNC to divest itself, in whole or in part, of assets or
businesses of HNC and/or of CompReview. Based on information available to
them, HNC and CompReview believe that the Merger will not violate federal or
state antitrust laws. However, there can be no assurance that a challenge to
the Merger on
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antitrust grounds will not be made or that, if such a challenge is made, HNC
and CompReview will prevail or will not be required to accept certain
conditions, possibly including divestitures or hold-separate agreements, or
certain mandatory licensing, in order to consummate the Merger.
Under the Agreement, conditions to both HNC's and CompReview's obligations
to consummate the Merger include the absence of any injunction or other legal,
contractual or regulatory restraint which would restrict the parties from
consummating the Merger.
In addition, in connection with the consummation of the Merger, the
applicable securities laws must be complied with.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
purposes in accordance with generally accepted accounting principles. Under
this accounting treatment, the recorded assets and liabilities and the
operating results of both HNC and CompReview are combined as if the two
companies were combined for all periods presented and no recognition of
goodwill in the combination is required of either party to the Merger.
To support the treatment of the Merger as a pooling of interests, the
stockholders of CompReview and the executive officers and directors of HNC
have entered into agreements imposing certain resale limitations on their
stock as specified for pooling of interests treatment. See "--Terms of the
Merger -- Related Agreements -- Affiliate Agreements." It is a condition to
HNC's obligations to consummate the Merger that, among other things, HNC
receives the written advice of Price Waterhouse LLP, as of the Effective Time,
that, in accordance with generally accepted accounting principles, the Merger
qualifies as a pooling of interests for accounting purposes and that
CompReview receives the written advice of its accountants, as of the Effective
Time, that, in accordance with generally accepted accounting principles,
CompReview is eligible to participate in a transaction that qualifies as a
pooling of interests for accounting purposes.
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TERMS OF THE MERGER
The following discussion summarizes the definitive terms of the Agreement,
including the other agreements and transactions contemplated thereby. The
following is not a complete statement of all provisions of the Agreement and
related agreements. The detailed terms and conditions of the Merger and
certain related transactions are contained in the Agreement, a copy of which
is attached to this Proxy Statement as Appendix A. Statements made in this
Proxy Statement with respect to the terms of the Merger and such related
transactions are qualified by reference to the more detailed information set
forth in Appendix A hereto.
EFFECTIVE TIME
The Merger will become effective upon the filing of an Agreement of Merger
between CompReview and Merger Sub with the California Secretary of State and
the filing of an Agreement of Merger or a Certificate of Merger with the
Delaware Secretary of State (the "Effective Time"). The Closing of the Merger
(the "Closing") will occur on the first business day after the satisfaction or
waiver of the conditions to the Merger, or at such later time as HNC and
CompReview mutually agree (the "Closing Date"). Assuming all conditions to the
Merger are met or waived prior thereto, it is anticipated that the Closing
Date and the Effective Time will occur on or about November 28, 1997.
MANNER AND BASIS OF CONVERTING COMPREVIEW SHARES
At the Effective Time of the Merger, Merger Sub will merge with and into
CompReview, with CompReview to be the surviving corporation of the Merger. As
a result of the Merger, the separate corporate existence of Merger Sub will
cease, and HNC will acquire all of the capital stock of CompReview. At the
Effective Time of the Merger, each then outstanding share of CompReview Common
Stock, other than dissenting shares, will be converted into the number of
shares of HNC Common Stock that is equal to the Conversion Ratio, and each
then outstanding option to purchase CompReview Common Stock (a "CompReview
Option") granted under CompReview's 1995 Stock Option Plan (the "CompReview
Option Plan") will be assumed by HNC and become an HNC Option, with
appropriate adjustments to be made to the number of shares of HNC Common Stock
issuable thereunder and the exercise price thereof in proportion to the
Conversion Ratio.
The total number of shares of HNC Common Stock that will be issued in the
Merger or issuable upon the exercise of HNC Options issued in the Merger
(collectively, the "HNC Merger Shares") will be equal to the sum of (i)
5,000,000 shares of HNC Common Stock, plus (ii) the number of shares of HNC
Common Stock obtained by dividing (A) the retained earnings of CompReview as
of the close of the last full calendar month ended prior to the Closing Date,
by (B) the average of the closing prices per share of HNC Common Stock as
quoted on the Nasdaq National Market for the 20 trading days immediately
preceding (but not including) the Closing Date (the "HNC Closing Average price
Per Share"). The "Conversion Ratio" is the number obtained by dividing (i) the
number of the HNC Merger Shares by (ii) the sum of the number of shares of
CompReview Common Stock that are (A) outstanding immediately prior to the
Merger, (B) issuable under all CompReview Options that are outstanding
immediately prior to the Merger and (C) issuable by CompReview upon exercise
of any other outstanding derivative securities of CompReview.
No fractional shares will be issued by HNC in the Merger. In lieu thereof,
each holder of CompReview Common Stock who would otherwise be entitled to a
fraction of a share of HNC Common Stock (after aggregating all fractional
shares to be received by such holder) will instead receive from HNC, within
three business days after the Effective Time, an amount of cash (rounded to
the nearest whole cent) equal to the HNC Closing Average Price Per Share
multiplied by such fraction.
Upon the Closing Date, each holder of shares of CompReview Common Stock will
surrender the certificate(s) for such shares, duly endorsed to HNC for
cancellation as of the Effective Time. Promptly after the Effective Time and
receipt of such certificates, HNC or its transfer agent will issue to each
tendering holder of such a CompReview stock certificate a certificate for the
number of shares of HNC Common Stock to which
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such holder is entitled pursuant to the Merger (less the shares of HNC Common
Stock to be placed in escrow under the Agreement and an Escrow Agreement, as
described below), 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. See "--Indemnification and Escrow."
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 CompReview stock certificate
until such holder surrenders such certificate to HNC. Subject to the effect,
if any, of applicable escheat and other laws, following surrender of any
CompReview stock certificate, there will be delivered to the person entitled
thereto, without interest, the amount of any dividends and distributions paid
with respect to the shares of HNC Common Stock so withheld as of any date
subsequent to the Effective Time and prior to such date of delivery.
After the Effective Time there will be no further registration of transfers
on the stock transfer books of CompReview or its transfer agent of the
CompReview Common Stock that was outstanding immediately prior to the
Effective Time. After the Effective Time, any CompReview stock certificates
presented to HNC or its transfer agent for any reason will be canceled and
exchanged as provided in the Agreement. Until certificates representing shares
of CompReview Common Stock outstanding immediately prior to the Effective Time
are surrendered pursuant to the Agreement, such certificates will be deemed,
for all purposes, to evidence ownership of the number of shares of HNC Common
Stock into which such shares of CompReview Common Stock will have been
converted pursuant to the Merger.
ASSUMPTION AND CONVERSION OF COMPREVIEW STOCK OPTIONS
Upon the Effective Time, each CompReview Option granted by CompReview to
CompReview employees under the CompReview Option Plan that is outstanding
immediately prior to the Effective Time will be assumed by HNC and converted
into an HNC Option to purchase that number of shares of HNC Common Stock
determined by multiplying the number of shares of CompReview Common Stock
subject to such CompReview 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 CompReview Common Stock that was in effect
for such CompReview Option immediately prior to the Effective Time divided by
the Conversion Ratio. The number of shares of HNC Common Stock subject to each
HNC Option (after aggregating all the shares of HNC Common Stock issuable upon
the exercise of such HNC Option) will be rounded down to the nearest whole
number of shares of HNC Common Stock. The terms and conditions of each
CompReview Option, including its exercisability, vesting schedule, status as
an "incentive stock option" under Section 422 of the Code (if applicable) or
as a nonqualified stock option and the provisions of the CompReview Option
Plan that form part of the terms and conditions of such CompReview Option that
is converted into an HNC Option in the Merger will, to the extent permitted by
law and otherwise reasonably practicable, be unchanged and continue in effect
after the Merger. Pre-Merger employment service with CompReview will be
credited to each holder of a CompReview Option for purposes of applying any
vesting schedule contained in a CompReview Option to determine the number of
shares of HNC Common Stock that are exercisable under the HNC Option into
which such CompReview Option is converted in the Merger.
HNC will use its best efforts to file a registration statement on Form S-8
under the Securities Act covering the shares of HNC Common Stock issuable upon
exercise of the HNC Options issued in the Merger within five business days
after the Effective Time.
STOCK OWNERSHIP IMMEDIATELY FOLLOWING THE MERGER
Assuming that (i) the retained earnings of CompReview of $3.3 million as of
July 31, 1997 were the retained earnings of CompReview at the close of the
last calendar month prior to the Effective Time; (ii) the capitalization of
CompReview as of July 31, 1997 (including 10,000,000 shares of CompReview
Common Stock outstanding and 400,000 shares issuable upon exercise of
outstanding CompReview Options) was the
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capitalization of CompReview immediately prior to the Effective Time; and
(iii) the HNC Closing Average Price Per Share was $37.0969 (the average
closing price per share of HNC Common Stock for the 20 trading days prior to
July 31, 1997), then HNC would issue an aggregate of approximately 4,893,227
shares of HNC Common Stock to holders of CompReview Common Stock in the Merger
and HNC Options to purchase approximately 195,729 additional shares of HNC
Common Stock. Based on the foregoing assumptions, the former stockholders of
CompReview would be issued shares of HNC Common Stock in the Merger
representing approximately 20.1% of HNC's outstanding voting power. These
numbers of shares and percentages are examples only and are subject to change
if the retained earnings of CompReview, the capitalization of CompReview or
the HNC Closing Average Price Per Share changes after July 31, 1997 and before
the Effective Time of the Merger. Specifically, the number of shares of HNC
Common Stock and HNC Options issuable in the Merger would exceed the above
estimate if the retained earnings of CompReview were to increase or the HNC
Closing Average Price Per Share were to decrease before the Effective Time of
the Merger. CompReview has the right, but not the obligation, to terminate the
Agreement if the HNC Closing Average Price Per Share is less than $26.00. The
Agreement provides that the minimum number of shares of HNC Common Stock and
HNC Options issuable in the Merger is 5,000,000 shares. The Agreement does not
permit HNC to terminate the Agreement if the HNC Closing Average Price Per
Share decreases and also does not limit the maximum number of shares of HNC
Common Stock and HNC Options issuable in the Merger. Therefore, if there is a
substantial increase in CompReview's retained earnings or a substantial
decrease in the market price of HNC Common Stock before the Effective Time,
the number of shares of HNC Common Stock and HNC Options issued in the Merger
would increase substantially. HNC will not seek further approval of the HNC
stockholders if the number of shares of HNC Common Stock and/or HNC Options to
be issued in the Merger differs materially from the estimate shown above. See
"Summary -- Additional Information Regarding the Conversion Ratio."
Under the terms of the CompReview Option Plan and the agreements issued
thereunder and based on the number of shares of CompReview Common Stock
subject to vested options issued and outstanding on July 31, 1997, options to
purchase up to 280,000 shares of CompReview Common Stock granted to employees
of CompReview will become exercisable in full at the Effective Time.
EFFECTS OF THE MERGER
When the Merger is completed, Merger Sub will cease to exist, and all of the
business, assets, liabilities and obligations of Merger Sub will be
transferred to and assumed by CompReview by operation of law, with CompReview
continuing in existence as the surviving corporation of the Merger (the
"Surviving Corporation"). Pursuant to the Agreement, the Articles of
Incorporation of CompReview, as amended, will become the Articles of
Incorporation of the Surviving Corporation and the Bylaws of CompReview, as
amended, will become the Bylaws of the Surviving Corporation. Immediately
following the Effective Time, the Board of Directors of the Surviving
Corporation will consist of the following five directors: Robert L. North,
Raymond V. Thomas, Mark S. Hammond, Robert L. Kaaren, M.D. and Michael E.
Munayyer. Dr. Kaaren and Mr. Munayyer are currently the directors of
CompReview and own all of the outstanding shares of CompReview Common Stock.
Immediately following the Effective Time, 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. Dr.
Kaaren, Messrs. Munayyer, Acosta and Schults and Ms. DeLizio are the current
officers of CompReview. There will be no change in the Board of Directors or
officers of HNC as a result of the Merger.
REPRESENTATIONS AND WARRANTIES
Under the Agreement, HNC, on the one hand, and CompReview and Robert L.
Kaaren, M.D. and Michael E. Munayyer, who were the sole stockholders of
CompReview on the date the Agreement was signed (the "CR Stockholders"), on
the other hand, have made various representations and warranties to each other
regarding the respective businesses of HNC and CompReview, including without
limitation representations and warranties regarding (i) their corporate good
standing; (ii) their due authorization of the Agreement and transactions
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contemplated thereby; (iii) the accuracy of certain financial information;
(iv) their capitalization, including outstanding stock and stock options; (v)
the absence of certain material changes to their business or financial
condition; and (vi) litigation. CompReview and the CR Stockholders have made
additional representations to HNC concerning (i) CompReview's material
contracts; (ii) the ownership and status of CompReview's intellectual property
rights and other assets; (iii) CompReview's compliance with laws, including
laws relating to employee safety and benefits; (iv) compliance of CompReview's
facilities with environmental laws; (v) the status of CompReview's insurance
coverage; and (vi) CompReview's compliance with tax laws.
CONDUCT OF THE BUSINESS OF COMPREVIEW PRIOR TO THE MERGER
Prior to the earlier of the Effective Time or the termination of the
Agreement, CompReview and the CR Stockholders have agreed to advise HNC
promptly in writing (i) of any event that would render any representation or
warranty of CompReview contained in the Agreement, if made on or as of the
date of such event or the Closing Date, untrue or inaccurate in any material
respect and (ii) of any material adverse change in CompReview's business,
results of operations or financial condition. Prior to the earlier of the
Effective Time or the termination of the Agreement, HNC has agreed to advise
CompReview promptly in writing (i) of any event that would render any
representation or warranty of HNC or Merger Sub contained in the Agreement, if
made on or as of the date of such event or the Closing Date, untrue or
inaccurate in any material respect and (ii) of any material adverse change in
HNC's business, results of operations or financial condition.
CompReview has also agreed to deliver to HNC, within 15 days after the end
of each month ending before the Closing Date, its unaudited balance sheet and
statement of operations, which will be prepared in the ordinary course of its
business, consistent with its past practice. CompReview and the CR
Stockholders have also agreed that CompReview 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 of the Agreement
and will promptly bring to the attention of HNC in writing any material
deterioration in its relationship with any key customer, key supplier or key
employee of which it becomes aware and, if requested by HNC, will exert
reasonable commercial efforts to promptly restore the relationship.
Further, CompReview and the CR Stockholders agreed that CompReview 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 of the President or Chief Financial Officer of HNC, take certain
actions, including without limitation the following: (i) borrow or lend any
money (other than to make advances to employees for travel and expenses that
are incurred in the ordinary course of CompReview's business consistent with
CompReview's past practice); (ii) enter into any transaction or agreement not
in the ordinary course of CompReview's business consistent with CompReview's
past practice; (iii) encumber, sell, transfer or dispose of any of
CompReview's assets except in the ordinary course of its business consistent
with its past practice; (iv) enter into any material lease or contract for the
purchase or sale of any property, whether real or personal, tangible or
intangible, subject to a limited exception; (v) pay any bonus, increased
salary or special remuneration to any officer, employee or consultant (subject
to certain exceptions for normal salary increases consistent with CompReview's
past practices and for existing arrangements previously disclosed to and
approved in writing by HNC) or enter into any new employment or consulting
agreement with any such person; (vi) change any accounting methods; (vii)
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 securities, pay or distribute any cash or property to any CompReview
securityholder or make any other cash payment to any securityholders of
CompReview that is not made in the ordinary course of CompReview's business
consistent with its past practice; (viii) amend or terminate any contract,
agreement or license to which CompReview is a party except those amended or
terminated in the ordinary course of CompReview's business, consistent with
its past practice, and which are not material in amount or effect; (ix)
guarantee or act as a surety for any obligation of any third party; (x) issue,
sell, create or authorize any CompReview securities, except for the issuance
of shares of CompReview Common Stock upon the exercise of CompReview Options
that were outstanding on the date of the Agreement in accordance with their
terms; (xi) split or reverse split the outstanding shares of CompReview's
capital stock
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or enter into any recapitalization affecting the number of outstanding shares
of its capital stock or affecting any other of its securities; (xii) 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; (xiii) amend its Articles of
Incorporation or Bylaws; (xiv) license any of its technology or intellectual
property except in the ordinary course of its business consistent with its
past practice; (xv) modify or change the exercise or conversion rights or
exercise or purchase prices of any CompReview security, including any
CompReview Option, or accelerate or otherwise modify the right to exercise any
CompReview Option or other security of CompReview or the vesting or release of
any securities of CompReview from any repurchase options or rights of refusal
held by CompReview or any other party or any other restrictions unless such
accelerations/modifications are expressly required by the terms of a formal
written agreement or plan that was entered into prior to the execution of the
Agreement; (xvi) purchase or otherwise acquire, or sell or otherwise dispose
of, any shares of HNC Common Stock or other HNC securities or 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; or (xvii) agree to do
any of the things prohibited by the Agreement.
CompReview's stockholders have, by unanimous written consent (the
"CompReview Stockholder Vote"), approved the Agreement, the Merger and related
documents and matters and the transactions contemplated thereby. CompReview's
Board of Directors and the CR Stockholders have agreed that they will not take
any action whatsoever to revoke, modify, invalidate, or withdraw the
CompReview Stockholder Vote. CompReview has agreed to 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. Each of CompReview, HNC and each
CR Stockholder has agreed to use its or his best efforts to satisfy or cause
to be satisfied all the conditions precedent to the consummation of the Merger
that are set forth in the Agreement, and to use its or his best efforts to
cause the transactions contemplated by the Agreement to be consummated.
CompReview has agreed that it 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.
NON-SOLICITATION
CompReview and the CR Stockholders have agreed that, prior to the earlier of
the Effective Time or the termination of the Agreement, neither CompReview nor
any CR Stockholder will, nor will CompReview or any CR Stockholder authorize,
encourage or permit any officer, director, employee, stockholder or affiliate
of CompReview 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
CompReview'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"). CompReview has agreed to notify HNC
promptly orally and in writing of any such inquiries or proposals. In
addition, neither CompReview nor any CR Stockholder will execute, enter into
or become bound by (i) any letter of intent or agreement or commitment between
CompReview and any third party that is related to an Alternative Transaction
or (ii) any agreement or commitment between CompReview and a third party
providing for an Alternative Transaction.
CONDITIONS TO THE MERGER
The obligations of CompReview under the Agreement to effect the Merger are
subject to the fulfillment or satisfaction, on and as of the Closing, of a
number of conditions, including but not limited to the following: (i) the
representations and warranties of HNC set forth in the Agreement shall 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; (ii) HNC shall have
performed and complied in all material respects with all of its covenants
contained in the Agreement; (iii) the principal terms of the Agreement and the
Merger shall have been duly and validly approved
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and adopted by the HNC Board and the issuance of shares of HNC Common Stock in
the Merger and the grant of HNC Options upon conversion of CompReview Options
in the Merger shall have been duly and validly approved and adopted by HNC's
stockholders; (iv) the principal terms of the Merger shall have been approved
and adopted by Merger Sub's Board of Directors and sole stockholder; (v) no
litigation or proceeding shall 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 the
Agreement, or which could be reasonably expected to have a material adverse
effect on the present or future operations or financial condition of HNC, and
there shall be no outstanding or threatened, or enacted or adopted, 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, renders illegal
or imposes limitations on the Merger or any other material transaction
contemplated by the Agreement; (vi) all permits or authorizations shall have
been obtained and all such other actions by any regulatory authority having
jurisdiction over the parties and the proposed transactions shall have been
taken, as may be required to lawfully consummate the Merger; (vii) 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 FTC
and the Department of Justice without any condition or requirement requiring
or calling for the disposition or divestiture by HNC or CompReview of any
product or other asset of CompReview; (viii) CompReview shall have received a
written opinion from HNC's legal counsel as to certain legal matters; (ix) the
shares of HNC Common Stock issuable to the CompReview stockholders in the
Merger, and the shares of HNC Common Stock issuable upon the exercise of HNC
Options issued in the Merger, shall be authorized for listing on the Nasdaq
National Market, subject to official notice of issuance; and (x) CompReview
shall not have been advised in writing by its 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.
The obligations of HNC under the Agreement to effect the Merger are subject
to the fulfillment or satisfaction, on and as of the Closing, of a number of
conditions, including but not limited to the following: (i) the
representations and warranties of CompReview set forth in the Agreement shall
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; (ii)
CompReview shall have performed and complied in all material respects with all
of its covenants contained in the Agreement; (iii) there shall not have been
any material adverse change in the financial condition, properties, assets,
liabilities, business, results of operations or operations of CompReview; (iv)
there shall not be any outstanding or threatened, or enacted or adopted 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: (A) the Merger or any other material
transaction contemplated by the Agreement or any related agreement; (B) HNC's
payment for, or acquisition or purchase of, some or all of the shares of
CompReview Common Stock or any material part of the assets of CompReview; (C)
HNC's direct or indirect ownership or operation of all or any material portion
of the business or assets of CompReview; or (D) HNC's ability to exercise full
rights of ownership with respect to the Surviving Corporation or its shares;
(v) no litigation or proceeding shall 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 the Agreement, or which could be
reasonably expected to have a material adverse effect on the present or future
operations or financial condition of CompReview or which asserts that
CompReview's or HNC's negotiations regarding the Agreement, HNC's or
CompReview's entering into the Agreement or CompReview's or HNC's consummation
of the Merger or any other material transaction contemplated by the Agreement
or any related agreement, breaches or violates any agreement or commitment of
CompReview or constitutes tortious conduct on the part of HNC or CompReview;
(vi) all permits or authorizations shall have been obtained and all such other
actions by any regulatory authority having jurisdiction over the parties and
the proposed transactions shall have been taken, as may be required to
lawfully consummate the Merger; (vii) all applicable waiting periods under the
HSR Act shall have expired or
45
<PAGE>
early termination of such waiting periods shall have been granted by both the
FTC and the Department of Justice without any condition or requirement
requiring or calling for the disposition or divestiture by HNC or CompReview
of any product or other asset of CompReview; (viii) HNC shall have received
duly executed copies of all material third party consents, approvals,
assignments, waivers, authorizations or other certificates contemplated by the
Agreement to provide for the continuation in full force and effect of any and
all material contracts, agreements and leases of CompReview after the Merger
and the preservation of CompReview's intellectual property rights and other
assets and properties after the Merger and for HNC to consummate the Merger
and the other transactions contemplated by the Agreement and related
agreements; (ix) HNC shall have received a written opinion from CompReview's
legal counsel as to certain legal matters; (x) the principal terms of the
Agreement, the Merger and the related agreements shall have been duly and
validly approved and adopted by CompReview's Board of Directors and the valid
and affirmative vote of the outstanding shares of CompReview securities
representing not less than 100% of the voting power of all issued and
outstanding CompReview Common Stock and all other CompReview voting securities
(if any); (xi) the issuance of the shares of HNC Common Stock to be issued in
the Merger and the issuance of HNC Options upon conversion of CompReview
Options in the Merger shall have been duly and validly approved and adopted by
HNC's stockholders; (xii) no shares of the capital stock of CompReview shall
be eligible to exercise or perfect any statutory appraisal rights of
dissenting shareholders under applicable law; (xiii) HNC shall have received
from each CR Stockholder and each affiliate of CompReview (each a "CompReview
Affiliate") who is to receive HNC Common Stock in the Merger a fully executed
CompReview Affiliate Agreement; (xiv) HNC shall have received from each CR
Stockholder a fully executed copy of a Non-Competition Agreement and an
Employment Agreement; (xv) HNC shall have received a fully executed copy of
the Escrow Agreement; (xvi) the directors of CompReview in office immediately
prior to the Effective Time of the Merger (other than Robert L. Kaaren, M.D.
and Michael E. Munayyer) shall have resigned as directors of the Surviving
Corporation effective as of the Effective Time; (xvii) HNC shall have been
advised in writing by Price Waterhouse LLP, as of the Effective Time, that, in
accordance with generally accepted accounting principles, the Merger qualifies
to be treated as a pooling of interests for accounting purposes, and
CompReview shall have been advised in writing by its accountants, as of the
Effective Time, that, in accordance with generally accepted accounting
principles, CompReview is eligible to participate in a transaction that
qualifies as a pooling of interests for accounting purposes; and (xviii) each
CR Stockholder and each holder of an outstanding CompReview Option shall have
executed and delivered to HNC an Investment Representation Letter that
contains representations designed to ensure that the issuance of HNC Common
Stock and HNC Options in the Merger is exempt from registration under the
Securities Act.
TERMINATION, AMENDMENT AND WAIVER
The Agreement may be terminated at any time prior to the Effective Time by
the mutual written consent of HNC and CompReview. Unless otherwise agreed by
HNC and CompReview, the Agreement will automatically terminate at any time
prior to the Effective Time if all conditions to the parties' obligations to
effect the Closing have not been satisfied or waived by the appropriate party
on or before December 31, 1997 (the "Termination Date"). In addition, either
party may terminate the Agreement at any time prior to the Closing if the
other party has committed a material breach of (i) any of its representations
and warranties under the Agreement; or (ii) any of its covenants under the
Agreement, and has not cured such material breach prior to the earlier of the
Closing or 30 days after the party seeking termination has given the other
party written notice of its intention to terminate the Agreement on account of
such breach.
At the Closing, the Agreement may be terminated and abandoned (i) by HNC, if
any of the conditions to HNC's obligations set forth in the Agreement have not
been fulfilled or waived by HNC on or prior to the Termination Date; (ii) by
CompReview, if any of the conditions precedent to CompReview's obligations set
forth in the Agreement have not been fulfilled or waived by CompReview on or
prior to the Termination Date; or (iii) by CompReview, if the HNC Closing
Average Price Per Share is less than $26.00, as presently constituted,
provided that if CompReview does not affirmatively exercise this right of
termination at the Closing, then the Agreement will remain in effect.
46
<PAGE>
Any term or provision of the Agreement may also be amended, and the
observance of any term of the 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 Agreement may be amended
by the parties at any time before or after approval of the stockholders of
CompReview, but, after such approval, no amendment will be made which by
applicable law requires the further approval of the stockholders of CompReview
without obtaining such further approval. At any time prior to the Effective
Time, each of CompReview 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 by the other in the Agreement
or in any document delivered pursuant thereto; and (iii) waive compliance with
any of the agreements or conditions for its benefit contained in the
Agreement. No such waiver or extension will be effective unless signed in
writing by the party against whom such waiver or extension is asserted.
INDEMNIFICATION AND ESCROW
In connection with the Merger, HNC, each of the CR Stockholders and State
Street Bank and Trust Company (or another similar institution) as escrow agent
(the "Escrow Agent") will enter into an Escrow Agreement (the "Escrow
Agreement"). Pursuant to the Escrow Agreement, upon the Closing of the Merger,
HNC will withhold 10% of the shares of HNC Common Stock to be issued to the
holders of CompReview Common Stock in the Merger (the "Escrow Shares") and
will deliver certificates representing the Escrow Shares to the Escrow Agent,
together with related stock transfer powers, to be held by the Escrow Agent as
security for the indemnification obligations of the holders of CompReview
Common Stock under the Agreement and pursuant to the Escrow Agreement.
Pursuant to these indemnification obligations, the holders of CompReview
Common Stock will indemnify and hold harmless HNC, its officers, directors,
agents, stockholders and employees from and against all claims, demands,
suits, actions, causes of action, losses, costs, demonstrable damages,
liabilities and expenses ("Damages") incurred and arising out of any
inaccuracy, misrepresentation, breach of, or default in, any of the
representations, warranties or covenants of CompReview in the Agreement or the
related certificates and documents delivered pursuant to the Agreement. These
indemnification obligations will not apply unless and until the Damages exceed
$250,000, in which event the holders of CompReview Common Stock will indemnify
HNC for all Damages incurred, including the first $250,000 of Damages.
Satisfaction of the indemnification obligations of the holders of CompReview
Common Stock shall be effected solely by the forfeiture of the Escrow Shares,
except that such limitation will not apply in the case of Damages arising from
intentional fraudulent conduct or other willful misconduct or a breach of any
provision of the Affiliate Agreement or the Investment Representation Letters
entered into by each CompReview stockholder. The number of Escrow Shares to be
forfeited pursuant to a successful HNC claim for indemnification will be equal
to the dollar amount that HNC is entitled to receive indemnification for under
such claim, divided by the HNC Closing Average Price Per Share. In the event
that the CR Stockholders dispute a claim for indemnification under the Escrow
Agreement, the parties have agreed to a binding arbitration procedure that
will utilize the services of a third party dispute resolution service.
The Escrow Agent will hold the Escrow Shares during that time period
commencing on the Closing Date of the Merger and ending on the first
anniversary of the Closing Date. However, the indemnification obligations
regarding those representations and warranties of CompReview concerning
matters addressed by the first audited financial statements of the post-Merger
combined company (meaning HNC and its consolidated subsidiaries, including
CompReview) together with a report thereon from HNC's independent accountants,
will expire upon the earlier of (i) the date on which such financial
statements are first released to the public or (ii) the first anniversary of
the Closing Date. So long as the Escrow Shares are held in escrow,
stockholders who receive shares of HNC Common Stock in the Merger will have
the right to vote their Escrow Shares for their own accounts and will retain
all incidents of ownership of the Escrow Shares that are not inconsistent with
the terms of the Agreement. Stockholders are entitled to receive any cash
dividends or other distributions made in respect of the Escrow Shares, except
for dividends paid in shares of HNC Common Stock, which will be placed in
escrow as additional security under the Escrow Agreement.
47
<PAGE>
RELATED AGREEMENTS
Investment Representation Letters. The shares of HNC Common Stock to be
issued to the holders of CompReview Common Stock in the Merger will be issued
in a private placement pursuant to the exemption from the registration
requirements of the Securities Act provided by Section 4(2) of the Securities
Act or Rule 506 of Regulation D under the Securities Act. Accordingly, to
perfect such exemption, the holders of CompReview Common Stock and CompReview
Options will execute Investment Representation Letters in favor of HNC
pursuant to which they will, among other things, acknowledge that they are
acquiring restricted securities within the meaning of Rule 144 under the
Securities Act and that they have no intention of making any unlawful
distribution of the shares of HNC Common Stock issued in the Merger (or
issuable upon exercise of HNC Options issued in the Merger).
Registration Rights Agreement. As a condition of the consummation of the
Merger, HNC and each holder of CompReview Common Stock will enter into a
Registration Rights Agreement (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, HNC will agree to prepare and file with the
SEC, as promptly as reasonably practicable after the Effective Time, a
registration statement on Form S-3 for an offering to be made on a continuous
basis (the "Shelf Registration") covering the shares of HNC Common Stock
issued to all of the holders of CompReview Common Stock in the Merger (the
"Registrable Securities"). HNC will use its best efforts to have the Shelf
Registration declared effective as soon as practicable after the Effective
Time of the Merger and to keep the Shelf Registration continuously effective
until the first anniversary of the Effective Time of the Merger. If the Shelf
Registration ceases to be effective for any reason prior to the first
anniversary of the Effective Time of the Merger, HNC will use its best efforts
to obtain the prompt withdrawal of any order suspending effectiveness or file
an additional Shelf Registration covering all of the then outstanding
Registrable Securities. No former CompReview stockholder may sell any
Registrable Securities until after HNC has publicly released a report
including financial statements that include at least 30 days of post-Merger
combined operating results of HNC and CompReview.
After a total of 1,250,000 shares of Registrable Securities has been sold
under the Shelf Registration, additional shares of HNC Common Stock may be
sold under the Shelf Registration only during certain 20-day open window
periods following notice by the seller of an intent to sell and certification
by HNC that the prospectus included in the Shelf Registration is current. HNC
is required to maintain a maximum of three such open window periods for the
sale of Registrable Securities by the former holders of CompReview Common
Stock, and, unless waived by HNC, there will be at least a 60-day interval
between any two open window periods. HNC will not be obligated to effect or
keep effective any Shelf Registration (i) with respect to the Registrable
Securities held by a stockholder if all the Registrable Securities then held
by such stockholder may lawfully be resold in any three-month period without
registration under the Securities Act or (ii) after the first anniversary of
the Effective Time of the Merger.
Stockholder Agreements. Pursuant to certain Stockholder Agreements dated
July 14, 1997 (the "Stockholder Agreements"), each CR Stockholder agreed (i)
not to sell, transfer or dispose of or encumber any shares of his CompReview
Common Stock until the Effective Time of the Merger or the termination of the
Agreement; and (ii) to vote all shares of his CompReview Common Stock in favor
of the Merger and the transactions contemplated thereby and against any
opposing or competing proposal for a merger or reorganization with any other
party. Each CR Stockholder also agreed not to revoke such agreement prior to
the Merger. In addition, as security for each CR Stockholder's obligation to
vote his shares of CompReview Common Stock as specified in the Stockholder
Agreement, each CR Stockholder delivered an irrevocable proxy to HNC covering
the total number of CompReview shares beneficially owned by such CR
Stockholder.
Affiliate Agreements. To help ensure that the Merger will be treated as a
pooling of interests for accounting and financial reporting purposes, each of
the CR Stockholders has entered into an Affiliate Agreement dated July 14,
1997 (the "Affiliates Agreements"), pursuant to which he has agreed not to
dispose of, or take any action that would reduce his risk of ownership or
investment in, any securities of CompReview or HNC (i) during the 30-day
period immediately preceding the Effective Time or (ii) until such time after
the Effective Time as HNC
48
<PAGE>
has publicly released a report including the combined financial results of HNC
and CompReview for a period of at least 30 days of post-Merger combined
operations. Pursuant to the Affiliate Agreements, the CR Stockholders have
also made representations related to the "continuity of interests"
requirements for a reorganization under the Code. The executive officers and
directors of HNC have entered into similar agreements.
Employment and Non-Competition Agreements. Robert L. Kaaren, M.D. and
Michael E. Munayyer, directors and executive officers of CompReview and the
only stockholders of CompReview, will enter into Employment Agreements with
CompReview whereby they will agree to continue to serve full-time as officers
of CompReview for a period of three years following the consummation of the
Merger. Following such three-year period, their employment will be terminable
at-will by either the officer or CompReview. Under these Employment
Agreements, Dr. Kaaren and Mr. Munayyer will be compensated at an annual base
salary rate of $150,000 per year and will have the opportunity to earn target
bonuses of 50% or more of base salary for meeting or exceeding certain target
goals. During the term of the Employment Agreements, Dr. Kaaren and
Mr. Munayyer each will agree not to engage in any business that is directly or
indirectly competitive with CompReview, HNC or any of HNC's subsidiaries, and
during the term of employment and for one year thereafter, each of them will
agree not to solicit business on behalf of anyone (other than CompReview and
HNC) from any customer of HNC or CompReview, and not to solicit any employee
or consultant of HNC or CompReview to terminate their employment or services
with HNC or CompReview. If the employment of either individual is terminated
without cause during the term of his Employment Agreement, he will continue to
receive his base salary during the scheduled term of the Employment Agreement
plus a portion of the bonus that would have been payable at the end of the
year in which his employment is terminated. If employment is terminated for
cause, then only base salary earned through the termination date will be paid
to the individual.
Dr. Kaaren and Mr. Munayyer will also enter into Non-Competition Agreements
providing that, for a period of three years following the Effective Time of
the Merger, they will not engage in any business that is directly or
indirectly competitive with or substantially similar to the business engaged
in by CompReview, or presently proposed to be conducted by CompReview.
49
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma consolidated combined condensed financial
information assumes a business combination between HNC and CompReview that is
accounted for as a pooling of interests and is based on the companies'
respective historical financial statements and the notes thereto. The
unaudited pro forma consolidated combined condensed balance sheet gives effect
to the CompReview acquisition as if it had occurred on June 30, 1997,
combining the balance sheets of HNC and CompReview at June 30, 1997. The
unaudited pro forma consolidated combined condensed statements of operations
give effect to the CompReview acquisition as if it had occurred at the
beginning of the periods presented, combining HNC's historical results for the
six month periods ended June 30, 1997 and 1996 and each of the three years in
the period ended December 31, 1996 with the corresponding historical
CompReview results for those respective periods.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the CompReview acquisition had been
consummated at the beginning of the earliest period presented, nor is it
necessarily indicative of future operating results or financial position.
The unaudited pro forma consolidated combined condensed financial
information is based on, and should be read in conjunction with, the
historical consolidated financial statements and the related notes thereto of
HNC incorporated by reference herein and the historical financial statements
and the related notes thereto of CompReview included elsewhere in this Proxy
Statement.
50
<PAGE>
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------- --------------------
HNC COMPREVIEW NOTES ADJUSTMENTS COMBINED
-------- ---------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 5,366 $ 332 (2) $(1,400) $ 4,298
Short-term investments....... 14,301 -- -- 14,301
Accounts receivable, net..... 20,468 4,322 -- 24,790
Other current assets......... 9,297 65 -- 9,362
-------- ------ ------- --------
Total current assets....... 49,432 4,719 (1,400) 52,751
Long-term investments.......... 22,658 -- -- 22,658
Property and equipment, net.... 6,921 562 -- 7,483
Other assets................... 24,428 128 -- 24,556
-------- ------ ------- --------
$103,439 $5,409 $(1,400) $107,448
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............. $ 2,751 $1,317 $ -- $ 4,068
Accrued liabilities.......... 5,469 589 -- 6,058
Deferred revenue............. 4,499 -- -- 4,499
Other current liabilities.... 259 18 (3) 966 1,243
-------- ------ ------- --------
Total current liabilities.. 12,978 1,924 966 15,868
-------- ------ ------- --------
Deferred revenue, less current
portion....................... 163 -- -- 163
-------- ------ ------- --------
Other non-current liabilities.. 330 -- -- 330
-------- ------ ------- --------
Stockholders' equity:
Common stock, $0.001 par
value--50,000 shares
authorized: 19,421 and 24,314
shares issued and outstanding. 19 442 (4) (437) 24
Paid-in capital................ 86,396 -- (4) 2,514 88,910
Foreign currency translation
adjustment.................... 22 -- -- 22
Unrealized gain on investments. 45 -- -- 45
Retained earnings.............. 3,486 3,043 (2) (1,400) 3,486
(3) (966)
(5) (2,077)
(6)
-------- ------ ------- --------
Total stockholders' equity..... 89,968 3,485 (2,366) 91,087
-------- ------ ------- --------
$103,439 $5,409 $(1,400) $107,448
======== ====== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined condensed
financial information.
51
<PAGE>
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------ ------------
HNC COMPREVIEW NOTES COMBINED
------- ---------- ----- ------------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation...... $34,939 $ 9,834 $44,773
Contracts and other.................... 4,531 -- 4,531
Service bureau......................... -- 2,361 2,361
------- ------- -------
Total revenues....................... 39,470 12,195 51,665
------- ------- -------
Operating expenses:
Software license and installation...... 7,445 3,637 11,082
Contracts and other.................... 3,304 -- 3,304
Service bureau......................... -- 1,783 1,783
Research and development............... 9,048 313 9,361
Sales and marketing.................... 9,117 669 9,786
General and administrative............. 4,031 1,195 5,226
------- ------- -------
Total operating expenses............. 32,945 7,597 40,542
------- ------- -------
Operating income......................... 6,525 4,598 11,123
Other income, net........................ 842 27 869
------- ------- -------
Income before income tax provision... 7,367 4,625 11,992
Income tax provision..................... 2,726 98 2,824
------- ------- -------
Net income .......................... $ 4,641 $ 4,527 $ 9,168
======= ======= =======
Add:
S corporation state income tax
provision............................. 98 (7) 98
Deduct:
Pro forma federal and state income tax
provision............................. (1,850) (7) (1,850)
------- -------
Pro forma net income ................ $ 2,775 $ 7,416
======= =======
Net income per share..................... $ 0.23
=======
Shares used in computing net income per
share................................... 20,448
=======
Pro forma net income per share........... $ 0.28 (8) $ 0.29
======= =======
Shares used in computing pro forma net
income per share........................ 10,000 (8) 25,449
======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined condensed
financial information.
52
<PAGE>
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------- ------------
HNC COMPREVIEW NOTES COMBINED
------- ---------- ----- ------------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation..... $16,425 $5,631 $22,056
Contracts and other................... 6,030 -- 6,030
Service bureau........................ -- 2,488 2,488
------- ------ -------
Total revenues...................... 22,455 8,119 30,574
------- ------ -------
Operating expenses:
Software license and installation..... 5,246 2,240 7,486
Contracts and other................... 4,009 -- 4,009
Service bureau........................ -- 1,879 1,879
Research and development.............. 5,559 233 5,792
Sales and marketing................... 4,821 645 5,466
General and administrative............ 2,838 952 3,790
------- ------ -------
Total operating expenses............ 22,473 5,949 28,422
------- ------ -------
Operating (loss) income................. (18) 2,170 2,152
Other income, net....................... 832 25 857
------- ------ -------
Income before income tax provision.. 814 2,195 3,009
Income tax provision.................... 1,175 72 1,247
------- ------ -------
Net (loss) income................... $ (361) $2,123 $ 1,762
======= ====== =======
Add:
S corporation state income tax
provision............................ 72 (7) 72
Deduct:
Pro forma federal and state income tax
provision............................ (878) (7) (878)
------ -------
Pro forma net income ............... $1,317 $ 956
====== =======
Net loss per share...................... $ (0.02)
=======
Shares used in computing net loss per
share.................................. 18,407
=======
Pro forma net income per share.......... $ 0.13 (8) $ 0.04
====== =======
Shares used in computing pro forma net
income per share....................... 10,000 (8) 23,403
====== =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined condensed
financial information.
53
<PAGE>
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------- ------------
HNC COMPREVIEW NOTES COMBINED
------- ---------- ----- ------------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation..... $42,705 $12,876 $55,581
Contracts and other................... 11,128 -- 11,128
Service bureau........................ -- 4,730 4,730
------- ------- -------
Total revenues...................... 53,833 17,606 71,439
------- ------- -------
Operating expenses:
Software license and installation..... 11,411 5,029 16,440
Contracts and other................... 7,694 -- 7,694
Service bureau........................ -- 3,364 3,364
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) 25,367
======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined condensed
financial information.
54
<PAGE>
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------- ------------
HNC COMPREVIEW NOTES COMBINED
------- ---------- ----- ------------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation..... $21,526 $ 7,683 $29,209
Contracts and other................... 9,146 -- 9,146
Service bureau........................ -- 5,349 5,349
------- ------- -------
Total revenues...................... 30,672 13,032 43,704
------- ------- -------
Operating expenses:
Software license and installation..... 5,934 3,780 9,714
Contracts and other................... 6,894 -- 6,894
Service bureau........................ -- 2,584 2,584
Research and development.............. 6,581 423 7,004
Sales and marketing................... 6,422 864 7,286
General and administrative............ 3,699 1,441 5,140
------- ------- -------
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.......... $ .13 $ 0.24 (8) $ 0.21
======= ======= =======
Shares used in computing pro forma net
income per share....................... 16,901 10,000 (8) 21,810
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined condensed
financial information.
55
<PAGE>
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
------------------- --------------
HNC COMPREVIEW NOTES COMBINED
------- ---------- ----- --------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation......... $13,023 $ 4,106 $17,129
Contracts and other....................... 7,651 -- 7,651
Service bureau............................ -- 5,058 5,058
------- ------- -------
Total revenues.......................... 20,674 9,164 29,838
------- ------- -------
Operating expenses:
Software license and installation......... 4,847 2,615 7,462
Contracts and other....................... 5,040 -- 5,040
Service bureau............................ -- 1,812 1,812
Research and development.................. 4,344 308 4,652
Sales and marketing....................... 3,603 681 4,284
General and administrative................ 2,591 1,116 3,707
------- ------- -------
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) 18,763
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined condensed
financial information.
56
<PAGE>
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 proposed
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) These pro forma adjustments reflect the exchange of all outstanding shares
of CompReview's capital stock (including options under CompReview's option
plan) for an aggregate of approximately 5,088,956 shares of HNC Common
Stock (and 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 will terminate 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 expects to distribute to its stockholders additional cash
dividends of approximately $0.06 to $0.08 per share for each full calendar
month ended 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 its taxable income or
loss is allocable to its stockholders, who are responsible for payment of
taxes.
For purposes of the CompReview pro forma statements of income for the six
month periods ended June 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 in the Merger for 0.4893 shares of HNC
Common Stock. The 0.4893 Conversion Ratio assumed for purposes of the
unaudited pro forma consolidated combined condensed financial information
is based on application of the Merger conversion formula to information as
of July 31, 1997. See "--Terms of the Merger--Stock Ownership Immediately
Following the Merger" for a description of the computation of the
Conversion Ratio. Application of the Merger conversion formula to
information as of June 30, 1997 results in an assumed Conversion Ratio of
0.4887. Given the slight difference between the assumed Conversion Ratios
at June 30, 1997 and July 31, 1997, application of the assumed June 30,
1997 Conversion Ratio of 0.4887 would not result in any material
differences from the pro forma financial information presented herein. The
actual Conversion Ratio will not be less than 0.4808 and may possibly be
substantially larger than the assumed Conversion Ratios at June 30, 1997
and July 31, 1997 shown herein. Based on currently available information
regarding CompReview's retained earnings and recent trading prices of
HNC's Common Stock, HNC does not expect that the actual Conversion Ratio
will materially exceed the July 31, 1997 assumed Conversion Ratio of
0.4893. However, HNC will not seek further approval of the HNC
stockholders if the actual Conversion Ratio is materially larger than the
assumed July 31, 1997 Conversion Ratio of 0.4893. See "Summary--Additional
Information Regarding the Conversion Ratio."
57
<PAGE>
COMPREVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
CompReview derives a substantial majority of its total revenues from the
licensing of its CRLink software to insurance companies, managed care
organizations, third party administrators and large, self-insured employers
for use in containing the cost of workers' compensation and automobile
accident personal injury claims. In 1996, such licenses accounted for
approximately 73.1% of CompReview's total revenues, with two customers
accounting for approximately 36.7% of all license and installation revenues.
The amount of license fees payable by customers is determined by the number of
transactions the customer processes with the CRLink system. Installation and
training fees are billed on a time and materials basis. The average license
agreement is three years in length, subject to earlier termination at the
customer's election. The balance of CompReview's revenue is derived from
service bureau operations in which CompReview internally uses its CRLink
software to provide CRLink's functionality to customers that do not wish to
obtain a license. Service bureau customers typically subscribe for services
under month-to-month agreements. Both license and service bureau agreements
are marketed by CompReview primarily through direct sales efforts.
Software license and installation revenues have grown at a faster rate than
service bureau revenues, and increased by 67.6% and 87.1% in 1996 and 1995,
respectively. During the same time period, software license and installation
revenues have comprised an increasingly large portion of CompReview's total
revenues. CompReview expects that this trend will continue and that software
license and installation revenues will eventually represent the vast majority
of CompReview's total revenues, as customers transition from service bureau
services to internal use licenses of CRLink.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Total Revenues. Total revenues include revenues from software licenses and
installation and revenues from service bureau operations. Total revenues
increased by 50.2% from $8.1 million in the first six months of 1996 to $12.2
million in the first six months of 1997. Approximately half of this increase
was generated from revenues derived from CompReview's existing customer base,
with the balance being attributable to revenues derived from new customers.
Software License and Installation Revenues. For the six months ended June
30, 1997, software license and installation revenues were $9.8 million, an
increase of 74.6% over software license and installation revenues for the
comparable period in 1996. Software license and installation revenues
represented 80.6% of total revenues for the six months ended June 30, 1997
compared to 69.4% of total revenues for the same period in 1996, consistent
with a trend in which CompReview's software license and installation revenues
have represented a significantly increasing portion of its total revenues in
recent years. CompReview believes that software license and installation
revenues increased due to customers' perception that internally licensing the
CRLink software provides them with a more cost-effective solution that affords
them quicker processing turnaround times and greater internal control over the
claims handling process.
Service Bureau Revenues. Service bureau revenues were $2.4 million, or 19.4%
of total revenues, for the first six months of 1997 compared to $2.5 million,
or 30.6% of total revenues, for the first six months in 1996. Service bureau
revenues decreased slightly in absolute dollars between these two periods and
represented a declining percentage of total revenues due to the significant
increase in software license and installation revenues in 1997. CompReview
expects that in the future service bureau revenues will constitute a declining
percentage of total revenues and will likely stay relatively flat or decrease
as CompReview continues to focus its sales efforts on licensing customers.
Software License and Installation Expenses. Software license and
installation expenses include salaries of personnel and related costs of
providing licensed software, training and support for CRLink customers, as
well
58
<PAGE>
as database access fees paid to preferred provider organizations ("PPOs") for
access to data utilized in the CRLink system. In the first six months of 1997,
software license and installation expenses increased by 62.4% to $3.6 million
from $2.2 million in the first six months of 1996. This increase reflects
higher support costs and database access fees associated with higher software
license and installation revenues.
Service Bureau Expenses. Service bureau expenses include salaries of
personnel and related costs of providing CompReview's service bureau services
as well as database access fees similar to those described above incurred in
connection with CompReview's service bureau operations. For the six months
ended June 30, 1997, these expenses totaled $1.8 million, a decrease of 5.1%
from service bureau expenses of $1.9 million for the comparable period in
1996. This decrease generally tracked a similar percentage decrease in service
bureau revenues between these same two periods.
Gross Margins. For the first six months of 1997, CompReview's gross profit
was $6.8 million or 55.6% of total revenues, compared to gross profit of $4.0
million or 49.3% of total revenues for the first six months of 1996. Gross
profit for the six months ended June 30, 1997 increased by 69.4% over gross
profit for the comparable period in 1996, primarily due to growth in higher-
margin software license and installation revenues which contributed gross
profit of $6.2 million (representing 91.5% of gross profit) for that six month
period, as compared to a contribution of $3.4 million of gross profit
(representing 84.8% of gross profit) for the six months ended June 30, 1996.
Gross profit for the first six months of 1997 also increased as a result of
the re-negotiation of rates for database access fees paid to PPOs. Gross
profit from service bureau operations was $0.6 million for each of the six
month periods ended June 30, 1997 and 1996, and represented 8.5% and 15.2% of
gross profit in such periods, respectively.
Gross profit from software license and installations represented 63.0% and
60.2% of software license and installation revenues for the first six months
of 1997 and 1996, respectively, while gross profit from service bureau
operations was 24.5% of service bureau revenues for each of the first six
months of 1997 and 1996. Service bureau operations produced lower margins due
to relatively flat service bureau revenues resulting from a more static
customer base and larger fixed costs associated with the infrastructure
necessary to run the service bureau operation.
Research and Development Expenses. Research and development expenses consist
primarily of personnel and outside consultant costs required to conduct
CompReview's product development and enhancement efforts. Research and
development expenses were $0.3 million and $0.2 million for the six month
periods ending June 30, 1997 and 1996, respectively, and represented 2.6% and
2.9% of total revenues for the six month periods ending June 30, 1997 and
1996, respectively. Research and development expenses for the first six months
of 1997 increased in absolute amounts in comparison to the same period in 1996
due to expenses associated with developing new versions and enhancements to
CRLink. These expenses decreased as a percentage of total revenues during the
first six months of 1997 due to higher revenues in that period resulting from
higher customer transaction volumes.
Sales and Marketing Expenses. Sales and marketing expenses include
personnel, advertising, travel, trade shows and other promotional expenses.
Sales and marketing expenses were $0.7 million and $0.6 million for the six
month periods ended June 30, 1997 and 1996, respectively, and were 5.5% and
7.9% of total revenues for such periods, respectively. The decrease in sales
and marketing expense as a percentage of total revenues in the first six
months of 1997 is due to higher total revenues in the period and the
concentration of sales and marketing efforts on larger customers that
typically generate proportionally greater revenues due to higher transaction
volumes.
General and Administrative Expenses. General and administrative expenses are
comprised primarily of clerical, accounting, legal, consulting and insurance
expenses, as well as other items not directly related to the development,
marketing or sale of CompReview's product. General and administrative expenses
were $1.2 million and $1.0 million for the six month periods ended June 30,
1997 and 1996, respectively. This 25.5% increase in the absolute amount of
general and administrative expenses was attributable to an increase in
59
<PAGE>
administrative personnel to accommodate larger operations. As a percentage of
total revenues, general and administrative expenses were 9.8% and 11.7% for
the six month periods ended June 30, 1997 and 1996, respectively. General and
administrative expenses decreased as a percentage of total revenues primarily
due to higher revenues and efficiencies realized by a larger organization.
Operating Income. As a consequence of the above factors, operating income
for the six months ended June 30, 1997 was $4.6 million, constituting an
increase of 111.9% over operating income of $2.2 million for the six month
period ended June 30, 1996. Operating income increased to 37.7% of total
revenues in the six months ended June 30, 1997 from 26.7% of total revenues
for the same period in 1996.
Income Taxes. CompReview has elected to be taxed under subchapter S of the
Code and the California Revenue and Taxation Code. As a result, the net income
of CompReview was taxable to its stockholders for federal and certain state
income tax purposes during the periods ended June 30, 1997 and June 30, 1996.
The S corporation state income tax provision was $98,000 and $72,000 for the
six month periods ended June 30, 1997 and 1996, respectively, and represents
state income tax liabilities to the states of California and Texas.
CompReview's deferred state tax liability as of June 30, 1997 of $17,500 is
primarily attributable to temporary differences in the recognition of revenues
and expenses for financial reporting and state subchapter S tax purposes.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Total Revenues. In 1996, total revenues increased by 35.1% to $17.6 million
from $13.0 million in 1995, and in 1995, total revenues increased 42.2% from
$9.2 million in 1994. The increases in 1996 and 1995 were due primarily to an
increase in software license and installation revenues resulting from the
introduction of an enhanced version of the CRLink software in the second
quarter of 1995. This enhanced version of CRLink enabled customers to reprice
workers' compensation medical bills by accessing multiple PPO networks in the
CRLink database. As a result, CompReview was able to further penetrate the
workers' compensation cost containment software marketplace and attract
customers that would license and use CRLink in higher transaction volumes that
increase CompReview's revenues.
Software License and Installation Revenues. In 1996, 1995 and 1994, software
license and installation revenues were $12.9 million, $7.7 million and $4.1
million, respectively, representing an increase in such revenues of 67.6%
between 1995 and 1996, and an increase of 87.1% between 1995 and 1994. These
revenues accounted for 73.1%, 59.0% and 44.8% of total revenues in 1996, 1995
and 1994, respectively. The continued increases in software license and
installation revenues, both in absolute amounts and as a percentage of total
revenues, reflects the transition of CompReview's business from its original
service bureau operations to a predominantly external licensing model, a trend
that CompReview expects to continue.
Service Bureau Revenues. Revenues from CompReview's service bureau
operations were $4.7 million, $5.3 million and $5.1 million for 1996, 1995 and
1994, respectively, and constituted 26.9%, 41.0% and 55.2% of total revenues
for these respective periods. Service bureau revenue increased by 5.7 %
between 1994 and 1995 and decreased by 11.6% between 1995 and 1996. This
decrease in service bureau revenues resulted from lower prices negotiated with
a high volume customer of services performed on an outsource basis, partially
offset by an increase in the volume of mail-in bill review services.
Software License and Installation Expenses. Software license and
installation expenses were $5.0 million in 1996, $3.8 million in 1995 and $2.6
million in 1994. These expenses increased by 33.0% between 1995 and 1996 and
by 44.6% between 1994 and 1995. Software license and installation expenses
during this three-year period did not increase at as fast a rate as software
license and installation revenues did during the same period, largely due to
leveraged increases in software license revenues that resulted from higher
transaction volumes experienced with larger customers.
Service Bureau Expenses. Service bureau expenses were $3.4 million in 1996,
$2.6 million in 1995 and $1.8 million in 1994. These expenses increased by
30.2% between 1995 and 1996 and by 42.6% between 1994
60
<PAGE>
and 1995. Service bureau expenses increased over this period due primarily to
an increase in labor costs necessary for support of the increased volume of
mail-in bill review services and, to a lesser extent, to use of the service
bureau center as a beta test site for new product versions.
Gross Margins. CompReview's gross profit was $9.2 million or 52.3% of total
revenues in 1996, $6.7 million or 51.2% of total revenues in 1995 and $4.7
million or 51.7% of total revenues in 1994. Gross profit increased by 38.2%
between 1995 and 1996, and increased by 40.7% between 1994 and 1995, although
gross profit as a percentage of total revenues remained relatively constant
during this three-year period. Nearly all the growth in gross profit during
this three-year period resulted from growth in software license and
installation revenues, which have higher margins than service bureau revenues.
Software license and installation revenues contributed $7.8 million, $3.9
million and $1.5 million to gross profit in 1996, 1995 and 1994, respectively,
representing 85.2%, 58.5% and 31.5% of gross profit for such respective years.
Gross profit contributed by service bureau revenues during the same time
period was $1.4 million, $2.8 million and $3.2 million, respectively,
comprising 14.8%, 41.5% and 68.5% of gross profit in 1996, 1995 and 1994,
respectively. The contribution to gross profit from service bureau revenues
thus declined substantially during this time period, particularly in 1996, due
to substantial increases in software license and installation revenues, a
decrease in service bureau revenues and an increase in service bureau
expenses.
Gross profit from software licenses and installations represented 60.9%,
50.8% and 36.3% of software license and installation revenues in 1996, 1995
and 1994, respectively, while gross profit from service bureau operations was
28.9%, 51.7% and 64.2% of service bureau revenues for 1996, 1995 and 1994,
respectively. Service bureau operations declined in profitability during this
three-year period due to a combination of relatively flat or declining service
bureau revenues and significant increases in service bureau expenses over the
same time period.
Research and Development Expenses. Research and development expenses were
$0.5 million, $0.4 million and $0.3 million in 1996, 1995, and 1994,
respectively, representing 3.0%, 3.2%, and 3.4% of total revenues in 1996,
1995, and 1994, respectively. The total amount of these expenses increased by
27.0% between 1995 and 1996 and 37.3% between 1994 and 1995. The increase in
the amount of research and development expenses over these periods was due
primarily to increases in the number of employees and related expenses
necessary to support the continued enhancement of the CRLink software product.
Research and development expenses declined as a percentage of total revenues
due to increased total revenues resulting from significantly higher volumes of
customers' fee-bearing CRLink transactions.
Sales and Marketing Expenses. Sales and marketing expenses were $1.2
million, $0.9 million and $0.7 million in 1996, 1995 and 1994, respectively.
As a percentage of total revenues, sales and marketing expenses were 6.9%,
6.6% and 7.4% in 1996, 1995 and 1994, respectively. Sales and marketing
expenses as a percentage of total revenues increased from 1995 to 1996
principally as a result of the promotion of new add-on functional modules
designed for use with CRLink and new versions of CRLink designed to run on
additional computer platforms. Sales and marketing expenses decreased as a
percentage of total revenues from 1994 to 1995 primarily as a result of
increased efficiencies resulting from increased customer transaction volumes
and an emphasis on more concentrated sales efforts to larger accounts.
General and Administrative Expenses. General and administrative expenses
were $1.9 million, $1.4 million, and $1.1 million in 1996, 1995, and 1994,
respectively. As a percentage of total revenues, general and administrative
expenses declined from 12.2% in 1994 to 11.1% in 1995 and to 10.9% in 1996, as
the increase in total revenues outpaced the growth of such expenses. This
increase in the absolute amount of general and administrative expenses was
attributable to an increase in administrative personnel to accommodate larger
operations. General and administrative expenses decreased as a percentage of
total revenues primarily due to higher revenues and efficiencies realized by a
larger organization.
Operating Income. Operating income was $5.5 million, $3.9 million and $2.6
million in 1996, 1995 and 1994, respectively, increasing by 40.6% between 1995
and 1996 and 49.7% between 1994 and 1995. Operating income as a percentage of
sales increased to 31.5% of total revenues in 1996, from 30.2% in 1995 and
28.7% in 1994.
61
<PAGE>
Income Taxes. As a subchapter S corporation under the Code and the
California Revenue and Taxation Code, the net income of CompReview was taxable
to its stockholders for federal and certain state income tax purposes during
1996, 1995 and 1994. The S corporation state income tax provision was $74,000,
$64,000 and $54,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, and represents state income tax liabilities to the states of
California and Texas. CompReview's deferred state tax liability as of December
31, 1996 of $17,500 is primarily attributable to temporary differences in the
recognition of revenues and expenses for financial reporting purposes and
state subchapter S tax purposes.
LIQUIDITY AND CAPITAL RESOURCES--SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Since inception, CompReview has financed its operations exclusively from
cash provided by operating activities and has not utilized bank debt,
stockholder loans or the sale of equity securities to fund its activities.
Net cash provided by operating activities was $3.6 million and $1.5 million
for the six month periods ended June 30, 1997 and 1996, respectively. Net cash
provided by operating activities for the six months ended June 30, 1997
represented net income before depreciation and amortization of approximately
$4.6 million, further increased by accounts payable of $0.2 million and
accrued liabilities of $0.2 million, offset by increases in accounts
receivable of $1.3 million and other assets of $0.1 million. Net cash provided
by operating activities for the six months ended June 30, 1996 represented net
income before depreciation and amortization of approximately $2.2 million,
further increased by accrued liabilities of $0.1 million and offset by
increases in accounts receivable of $0.7 million and decreases in accounts
payable of $0.1 million.
Cash used in investing activities was $0.3 million in the six months ended
June 30, 1997 as compared to approximately $0.1 million in the same period of
the prior year. This cash was used to purchase new computer network equipment
and to equip a separate production facility.
As an S corporation, CompReview has historically made cash distributions to
its two stockholders. During the six months ended June 30, 1997 and 1996,
pursuant to CompReview's distribution policy, cash distributions were made to
CompReview's stockholders in the amounts of $3.6 million and $2.4 million,
respectively.
Working capital at June 30, 1997 was approximately $2.8 million. CompReview
believes that it has sufficient liquid assets and ongoing operating cash flows
to sustain its operations through at least June 30, 1998. CompReview uses its
working capital to finance ongoing operations, fund the development and
introduction of new product versions and enhancements, and acquire capital
equipment.
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 1996 AND 1995
Net cash provided by operating activities was $5.2 million and $4.5 million
for the years ended December 31, 1996 and 1995, respectively. Net cash
provided by operating activities during 1996 represented net income before
depreciation and amortization of approximately $5.8 million, further increased
by accounts payable and accrued expenses of $0.3 million and offset by an
increase in accounts receivable of $0.9 million. Net cash provided by
operating activities during 1995 represented net income before depreciation
and amortization of approximately $4.2 million, further increased by increases
in accounts payable and accrued expenses of $0.5 million and offset by an
increase in accounts receivable of $0.3 million.
Cash of $0.1 million was used in investing activities in 1996 versus $0.3
million in 1995, a decrease of approximately $0.2 million. Cash was invested
in 1995 to acquire property and computer equipment necessary to support a
substantial increase in CompReview's workforce that occurred during 1995. A
comparable investment was not required in 1996 as CompReview's employee base
did not increase significantly in that year.
Net increase in cash was $0.4 million in 1995, followed by a net decrease of
$0.9 million in 1996. In accordance with its distribution policy, CompReview
made cash distributions to its stockholders in the amounts of $5.9 million in
1996 and $3.8 million in 1995. The decrease in cash in 1996 was due primarily
to these distributions.
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<PAGE>
BUSINESS OF COMPREVIEW
GENERAL
CompReview develops, markets and supports a computer software product and
related services designed to assist in the management and containment of the
medical costs of workers' compensation and automobile accident medical claims.
CompReview provides its product and services primarily to insurance companies,
managed care organizations, third party administrators and large, self-insured
employers. Through its core product offering, CRLink, CompReview provides its
customers with a coherent set of cost containment tools with application
throughout the workers' compensation and automobile accident medical claims
processes.
The large numbers of claims and the complex and changing state-by-state
workers' compensation medical reimbursement programs place significant burdens
on employers, insurance companies and other third party medical bill payors in
processing workers' compensation claims and controlling the medical costs
associated with them. CompReview's software enables its customers to automate
the processing of claims and to contain medical reimbursement costs by
reviewing and repricing medical bills in accordance with state workers'
compensation fee schedules or, in lieu of such schedules, either accepted
customary charges or contract rates agreed upon by Preferred Provider
Organizations ("PPOs"), which often are lower than the actual rates billed.
The CRLink software also enables CompReview's clients to maintain personal
claim histories and to profile and analyze trends in cost containment data.
INDUSTRY BACKGROUND
Workers' compensation is a state-mandated insurance program that generally
requires employers to pay an employee's medical costs, lost wages and other
costs resulting from work-related injuries and illnesses. Benefits vary from
state to state and applicable regulations are often complex. Employers usually
provide coverage to their employees through purchase of commercial insurance
from private insurance companies, through participation in state-administered
funds or through self-insurance. Containment of workers' compensation costs
has been a significant issue for many employers and insurance companies.
The methods by which workers' compensation medical bills are paid varies
from state to state. In an effort to control costs, a number of states have
adopted mandatory state workers' compensation fee schedules which set forth
the maximum amounts to be paid for designated medical procedures and
treatments. In states without state fee schedules, reimbursements are based on
the usual, customary and reasonable ("UCR") fee for the applicable procedure
or treatment that is charged within the locale in the state in which the
services were provided. In addition to governmental efforts at controlling
costs through state workers' compensation fee schedules and UCRs, many
employers have attempted to control costs through the utilization of Health
Maintenance Organizations ("HMOs") and PPOs. While a number of states prohibit
employers from directing their employees to HMOs or PPOs for treatment of
workers' compensation related injuries or illnesses, health care providers
chosen by the employees may still be members of these organizations and
subject to the reduced contract rates agreed to by these organizations. As a
result of the various methods of payment, multi-state employers and insurance
companies require a flexible approach in administering and controlling the
cost of their workers' compensation claims.
THE COMPREVIEW SOLUTION
CompReview's product, CRLink, provides CompReview's customers with a
comprehensive cost-containment software system that enables them to reduce the
amount paid for medical bill reimbursement associated with workers'
compensation and automobile accident insurance claims. CRLink is a proprietary
software program that stores and accesses state workers' compensation fee
schedules, UCR rates and PPO rates for use in analyzing, reviewing and
repricing these bills on an automated basis. The CompReview CRLink system is
designed to enable CompReview's customers to analyze medical bills, check for
duplicate billings and verify that the fees charged by health care providers
are in compliance with state-mandated fee schedules, are consistent with UCR
rates or are in compliance with agreed upon PPO contract rates.
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PPOs are groups of physicians and other health care providers that offer
discounted group rates. Employers and insurers may contract directly with PPO
networks in an effort to lower costs or may access them through CompReview's
contracts with various PPO networks. CRLink identifies medical care providers
that are members of one or more PPOs with which a customer has contracts or to
which it has access through CompReview and then analyzes the provider's
charges against the PPO schedules and any applicable state workers'
compensation fee schedule or UCR before determining which rates produce the
lowest allowable fee.
Beyond its medical bill review features, CRLink also provides tools for
insurers to manage the entire claims handling process, maintain a central
location from which to implement repricing programs with PPO networks and
other discounting arrangements, conduct utilization reviews and assess the
results of cost containment efforts. CRLink can also be used to generate
reports on the status of claims and to allow administrators to note special
circumstances of particular claims. These features allow CRLink licensees to
reduce administrative costs associated with workers' compensation claims
processing, as well as reduce actual payments on these claims.
Customers can access the system either by retaining CompReview to perform
medical bill analysis and review through a service bureau agreement, or by
licensing the CRLink product, which is then made available on-line for in-
house bill review.
STRATEGY
CompReview's goal is to be a leading provider of medical cost containment
information and management systems and related support services. Its primary
strategy to achieve this goal is to develop a software system that is the
industry standard and that can be adapted to each customer's hardware
platform, operating system and software applications so that CompReview's
software can integrate seamlessly into the way the customer does business. The
CRLink software system has been developed based upon customer use and input.
When CompReview has developed customer-requested changes to CRLink, it has
attempted to make these changes in a manner that makes the modules or
enhancements available for use by all of its customers. CompReview continually
evaluates the feasibility of integrating its software product with new
technologies as they are developed and gain acceptance in the marketplace.
Because of the flexible nature of its product, CompReview markets its software
both to end-users, such as insurance companies and self-insured employers, as
well as to service providers, such as managed care organizations and third
party administrators.
CompReview has previously concentrated its marketing efforts almost
exclusively in the workers' compensation field, and in 1996 revenues from
software licenses and installations and service bureau operations in this
industry accounted for approximately 95% of CompReview's total revenues.
Capitalizing on its expertise in the workers' compensation arena, in the
second quarter of 1995 CompReview began licensing its software to a managed
care organization for use in handling automobile accident medical claims.
Although medical claims arising out of automobile accidents are not subject to
state fee schedules as are workers' compensation claims, they are usually
subject either to UCR rates or PPO contract rates. CompReview intends to
leverage its experience and knowledge in the workers' compensation arena to
penetrate the market for reimbursement of automobile accident medical claims,
and ultimately to address other areas of medical claims reimbursement.
PRODUCT
CompReview's core product is CRLink, a comprehensive package of CompReview's
own proprietary software and implementation services. CRLink interfaces with
payors' administration systems for analyzing data, generating reports,
electronically updating claims data, printing an explanation of billing
reviews, communicating with special investigation units and processing check
vouchers. It also contains numerous repricing databases, which are generally
updated on a monthly basis. Customers may also use CRLink directly with third
party databases or state-supported workers' compensation fee schedules.
Customers of CompReview generally license CRLink for a term of one to five
years, subject to cancellation by the customer at any time upon 90 days'
notice. License fees are paid monthly based on the volume of transactions
processed using each of CRLink's modules.
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CompReview also markets add-on modules that are integrated with CRLink and
are priced separately based on usage. The Multiple PPO Module contains
databases of preferred medical provider organizations (both regional and
national), allowing payors seeking to expand geographic coverage to identify
and evaluate potential affiliations with preferred provider groups. These
modules also include the Managed Care Module, which evaluates outcomes of
managed care regimes and streamlines interaction between payors and managed
care administrators, and the Integrated Reevaluation Module, which allows
efficient reevaluation of bills that have been returned to the payor by the
provider of the medical services billed.
Licenses and installation of CRLink have accounted for 80.6%, 73.1%, 59.0%
and 44.8% of CompReview's total revenues in the first six months of 1997 and
the years ended December 31, 1996, 1995 and 1994, respectively, and are
expected to account for a majority of CompReview's total revenues for the
foreseeable future. The balance of CompReview's total revenues is derived from
service bureau operations of CRLink for customers that do not wish to obtain a
license. Accordingly, CompReview's future success depends upon the capital
expenditure budgets of its customers and the continued demand by its customers
for CRLink. See "-- Risk Factors -- Risks Related to CompReview -- Dependence
on a Single Product."
SERVICE BUREAU
CompReview offers payors the option of retaining CompReview to review and
reprice medical bills for them rather than licensing CRLink for internal use.
Bill review is conducted at CompReview's service centers in Costa Mesa,
California and Irving, Texas. Service bureau utilization charges are assessed
to customers on the basis of the volume of bills processed. Approximately
19.4%, 26.9%, 41.0% and 55.2% of CompReview's total revenues for the first six
months of 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively, were generated by CompReview's service bureau business.
CUSTOMER TRAINING, SERVICE AND SUPPORT
A high level of service and support is essential for the development of
successful long-term customer relationships. In connection with a typical
software license agreement, CompReview assigns an account manager to respond
to customer requests, schedule training and manage other aspects of
CompReview's customer relationship. CompReview also assists customers in the
installation and integration of the software into their systems and offers
training of the customer's personnel for a fee. CompReview also offers
telephone and dial-in support for the ongoing use of CRLink. In order to
respond quickly to customer requests and update state workers' compensation
fee schedules, CompReview generally provides monthly updates to its software
product on magnetic tape or CD-ROM. CompReview also updates its product for
changes in UCR rates and PPO charges on a periodic basis.
CUSTOMERS
CompReview's customers primarily consist of entities that assume financial
risk for workers' compensation claims and other types of health care claims,
including carriers of workers' compensation insurance, large employers that
insure themselves against workers' compensation claims, third party
administrators that handle claims for insurers or employers, and managed care
companies that implement cost-containment strategies for insurers or
employers. CRLink is licensed by approximately 50 companies, including
Concentra Managed Care, Inc. ("Concentra"), Zenith Insurance Company
("Zenith"), Superior National Insurance Company, United HealthCare Corporation
and Wal-Mart Stores, Inc. Approximately 80 companies use CompReview's service
bureau bill review services on a monthly basis.
Concentra accounted for approximately 22.1%, 24.4%, 27.0% and 25.9% of
CompReview's total revenues during the first six months of 1997 and the years
ended December 31, 1996, 1995 and 1994, respectively. Zenith accounted for
approximately 12.3% and 10.6% of CompReview's total revenues in 1996 and 1995,
respectively, and Liberty Mutual and Zenith accounted for approximately 19.6%
and 14.3% of CompReview's total revenues, respectively, in 1994. The loss of
Concentra or Zenith as a customer for any reason could have a material adverse
effect on CompReview's business, financial condition and results of
operations. See "-- Risk Factors -- Risks Related to CompReview -- Customer
Concentration."
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SALES AND MARKETING
CompReview sells and markets its software and services through a direct
sales force. The sales and marketing organization consisted of 11 employees at
June 30, 1997. The sales staff is based at CompReview's corporate headquarters
in Costa Mesa, California and at a field sales office in Irving, Texas.
CompReview markets its product and services directly to large self-insured
employers, insurance carriers, third party administrators and managed care
organizations. CompReview has also established strategic relationships with
various PPOs whereby they provide CompReview with access to their contract
rates and in return CompReview provides its customers access to the PPO. Leads
are obtained primarily through customer referrals. Pursuit of a lead typically
involves an analysis of the customer need, one or more presentations or
demonstrations to the prospective customer and contract negotiation. Sales
personnel with technical and industry expertise work directly with potential
customers to provide solutions to specific productivity problems. The sales
cycle varies substantially from customer to customer and typically ranges from
60 days to 18 months. To support its sales force, CompReview conducts
marketing programs, which include direct mail, public relations, advertising,
seminars, trade shows and ongoing customer communication programs.
TECHNOLOGY
CompReview strives to develop a comprehensive and accurate cost-containment
software product through the integration of search engine technology with
efficient rule-based decision technology. These technologies were combined
with object-oriented programming techniques in the development of CRV8, the
processing engine which is at the core of CompReview's CRLink product. The
CRV8 processing engine is designed to be platform independent and to integrate
seamlessly with customers' existing software and hardware infrastructures.
CompReview incorporates software productivity tools such as hot keys and
help screens into its products in order to ensure ease of use. Electronic data
interchange and batch processing technologies are also used in order to allow
for maximum productivity gains by users.
CRLink is designed to function either in a stand-alone computer system or as
part of a local area network (LAN) or wide area network (WAN). It is currently
used in OS/2 LAN Manager, Novell, Lantastic, Banyan and Windows NT Server
network environments. CRLink supports implementation on the DOS 5.x, Windows
3.x, Windows 95, Windows NT Workstation, OS/2 WARP and PowerPC/Soft Windows
operating systems.
RESEARCH AND DEVELOPMENT
CompReview believes that its future success depends in part on its ability
to maintain and improve its core technology, enhance its existing product and
develop new products that meet an expanding range of customer requirements.
CompReview's research and development activities include new product
development and the enhancement of its existing product to better meet
customer requirements. Research and development expenses were $0.3 million in
the first six months of 1997 and $0.5 million, $0.4 million and $0.3 million
in 1996, 1995 and 1994, respectively. During the last two years, CompReview
has increased personnel in the area of research and development and developed
its infrastructure and internal information systems. At June 30, 1997,
CompReview's research and development staff consisted of seven employees.
The market for CompReview's product is characterized by rapidly changing
technology and improvements in computer hardware, network operating systems,
software environments, programming tools, operating systems and database
technology. CompReview's success will depend on its ability to maintain
competitive technologies, enhance its current product and develop new products
in a timely and cost-effective manner that meet changing market conditions,
including evolving customer needs, new competitive product offerings, emerging
industry standards and changing technology. See "-- Risk Factors -- Risks
Related to CompReview -- Risks Associated with Technological Change and Delays
in Developing New Products."
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
CompReview relies upon a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
CompReview seeks to protect its software, documentation, and other written
materials under copyright and trade secret laws, which afford only limited
protection. As part of its confidentiality procedures, CompReview generally
enters into invention assignment and proprietary information agreements with
its employees and independent contractors prohibiting disclosure of
confidential information to any third party outside CompReview, requiring
disclosure to CompReview of any new ideas, discoveries or inventions conceived
during employment and requiring assignment to CompReview of proprietary rights
to such matters that are related to CompReview's business. CompReview enters
into written software license agreements that restrict customers from
reproducing, decompiling or otherwise misusing the software. Despite these
precautions, it may be possible for a third party to copy or otherwise to
obtain and use CompReview's product or technology without authorization, or to
develop similar technology independently.
The state workers' compensation fee schedules utilized by CompReview contain
the American Medical Association's ("AMA") Current Procedural Technology
("CPT") codes. Neither CompReview nor, to its knowledge, any of its
competitors pays the AMA for use of the CPT codes. The AMA claims a copyright
in the CPT codes. This claim was recently upheld by the United States Court of
Appeals. There can be no assurance that in the future the AMA will not seek to
obtain a licensing fee from CompReview for use of the CPT codes.
The development and support of CompReview's CRLink system requires periodic
updating of its database of medical fees applicable to workers' compensation
and automobile accident related injuries. These updates include state mandated
workers' compensation fee schedules, UCR charges and PPO contract rates. UCR
and PPO rates must be obtained from third party providers. Moreover, some
state mandated fee schedules are not readily available through the states
themselves. One third party provider of this information, MediCode, has
claimed that CompReview is infringing its alleged proprietary rights in
certain state workers' compensation fee schedules by using these schedules
without paying a licensing fee to MediCode. CompReview has disputed MediCode's
claim of copyright in the state fee schedules and continues to use the
schedules. There can be no assurance that CompReview will be able to continue
to use MediCode's state workers' compensation fee schedules without the
payment of a licensing fee or that CompReview will otherwise be able to obtain
fee schedule updates on a timely basis on reasonable terms and conditions.
Payment of a license fee for use of such information would reduce CompReview's
margins and earnings. MediCode has not filed a lawsuit or stated a specific
claim for damages and therefore CompReview has no basis upon which to quantify
MediCode's claim. However, based on the scope of MediCode's fee schedules, the
nature and extent of MediCode's current assertions and the status of
CompReview's recent discussions with MediCode, at this time CompReview does
not believe that MediCode's infringement claims will result in a material
adverse effect on CompReview's business, financial condition or results of
operations. The inability of CompReview to obtain such information or to
obtain it on terms favorable to CompReview could have a significant negative
impact on existing product performance and new product development, which
would have a material adverse effect on CompReview's business, financial
condition and results of operations. See "-- Risk Factors -- Risks Related to
CompReview -- Dependence on Data" and "-- Risk Factors -- Risks Related to
CompReview -- Infringement of Proprietary Rights."
COMPETITION
The software and service provider segments of the workers' compensation
medical bill processing industry are highly competitive. CompReview faces
competition from a number of sources, including (i) other application software
companies, (ii) management information systems departments of customers and
potential customers and (iii) managed care organizations. CompReview has
experienced competition from MediCode, Medata, Inc. and Embassy in software
licensing, and Intercorp and Corvel Corporation in service bureau operations.
It has also faced competition from ADP in the automobile accident medical
claims area. CompReview believes that the barriers to entry in the workers'
compensation medical bill processing industry are relatively low and
accordingly expects to experience additional competition from other
established and emerging companies.
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CompReview believes that CRLink is currently priced at a premium when
compared to competing products and when compared to costs typically incurred
in in-house development of systems with similar functionality to CRLink.
CompReview believes that its customers accept these premium prices because of
CRLink's productivity-enhancing features, the historical and state-specific
fee databases to which CRLink provides access, the relatively prompt updating
of such databases and the high level of customer service CompReview provides.
See "-- Risk Factors -- Risks Related to CompReview -- Competition."
EMPLOYEES
As of June 30, 1997, CompReview had a total of 140 employees, including
seven in product development, 76 in customer service, 11 in sales and
marketing and 46 in finance and administration. All of CompReview's employees
are based at CompReview's headquarters in Costa Mesa, California, except for
15 employees based in CompReview's service center in Irving, Texas. None of
CompReview's employees is represented by a labor union. CompReview has
experienced no work stoppages and believes that its employee relationships are
good.
CompReview's success depends to a significant degree upon the continued
service of members of CompReview's senior management and other key research,
development, sales and marketing personnel. See "-- Risk Factors -- Risks
Related to CompReview -- Risks Associated with Recruiting and Retaining
Qualified Personnel."
FACILITIES
CompReview maintains its principal administrative, sales and marketing,
customer support and research and development facility in approximately 19,000
square feet of office space in Costa Mesa, California. This facility is leased
to CompReview through April 2001. CompReview also leases a 7,500 square foot
production facility in Costa Mesa and a 6,000 square foot service center in
Irving, Texas.
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PROPOSAL NO. 2: APPROVAL OF AMENDMENT TO THE 1995 EQUITY INCENTIVE PLAN
On September 2, 1997, the HNC Board adopted, subject to stockholder
approval, an amendment to HNC's 1995 Equity Incentive Plan (the "Incentive
Plan") to increase the number of shares of Common Stock reserved for issuance
thereunder by 750,000 shares. The stockholders of HNC are now being asked to
approve such amendment.
The availability of additional stock options will facilitate HNC's expansion
of its employee base. In particular, HNC's proposed acquisition of CompReview
will substantially increase the number of employees without stock options who
are eligible to receive options under the Incentive Plan. Management believes
that this amendment to the Incentive Plan is in the best interests of HNC
because of the continuing need to provide options in order to attract and
retain highly qualified employees and remain competitive in the software
industry, which is currently providing employees with significant
opportunities for employment with HNC's competitors and other software
companies.
Below is a summary of the principal provisions of the Incentive Plan
assuming approval of the amendment, which summary is qualified in its entirety
by reference to the full text of the Incentive Plan.
SUMMARY OF THE 1995 EQUITY INCENTIVE PLAN
Incentive Plan History. The HNC Board adopted the Incentive Plan in May
1995, and it was approved by the stockholders in May 1995. The Incentive Plan
was amended by the HNC Board and stockholders in 1996 to increase the number
of shares available for grant. The purpose of the Incentive Plan is to offer
employees and other eligible persons an opportunity to participate in HNC's
future performance through awards of stock options, restricted stock and stock
bonuses. From the inception of the Incentive Plan through July 31, 1997,
options to purchase an aggregate of 2,820,894 shares of HNC Common Stock were
granted under the Incentive Plan, of which options to purchase 260,769 shares
were cancelled. Options to purchase an aggregate of 2,195,894 shares were
granted to employees other than executive officers. From the inception of the
Incentive Plan, Robert L. North, HNC's President and Chief Executive Officer,
has received options to purchase 140,000 shares, Raymond V. Thomas, HNC's Vice
President, Finance and Administration, Chief Financial Officer and Secretary
has received options to purchase 40,000 shares, Krishna Gopinathan, HNC's Vice
President, Payment Systems has received options to purchase 75,000 shares and
Lee E. Martin, HNC's Vice President, Sales has received options to purchase
20,000 shares. All current executive officers as a group have received options
under the Incentive Plan to purchase an aggregate of 625,000 shares.
Number of Shares Subject to the Incentive Plan. The stock subject to
issuance under the Incentive Plan consists of shares of HNC's authorized but
unissued Common Stock. The number of shares of Common Stock currently reserved
for issuance under the Incentive Plan is the sum of (i) 2,800,000 shares (the
"Base Shares") plus (ii) any shares that were unissued and not subject to then
outstanding options under HNC's 1987 Stock Option Plan (the "Prior Plan") on
the effective date of the Incentive Plan, and any shares issuable upon
exercise of options granted under the Prior Plan that expire or become
unexercisable thereafter for any reason without having been exercised in full
(collectively, "Available Prior Plan Shares"). Available Prior Plan Shares are
no longer available for distribution under the Prior Plan but are available
for distribution under the Incentive Plan. This Proposal No. 2 seeks to
increase the number of Base Shares from 2,800,000 to 3,550,000 shares. If any
option granted pursuant to the Incentive Plan expires or terminates for any
reason without being exercised in whole or in part, then the shares released
from such option will again become available for grant and purchase under the
Incentive Plan. This number of shares is subject to proportional adjustment to
reflect stock splits, stock dividends and other similar events.
Eligibility. Employees, officers, directors, consultants, independent
contractors and advisors of HNC (and of any of its subsidiaries and
affiliates) are eligible to receive awards under the Incentive Plan (the
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"Participants"). No Participant is eligible to receive more than 500,000
shares of Common Stock in any calendar year under the Incentive Plan, other
than new employees of HNC (including directors and officers who are also new
employees) who are eligible to receive up to a maximum of 700,000 shares of
Common Stock in the calendar year in which they commence their employment with
HNC. As of July 31, 1997, approximately 460 persons were in the class of
persons who would be eligible to participate in the Incentive Plan, 85,200
shares had been issued upon exercise of options granted under the Incentive
Plan and 2,474,925 shares were subject to outstanding options. As of that
date, 477,713 shares were available for future option grants, after taking
into account any shares issuable upon exercise of options granted pursuant to
the Prior Plan that have expired or become unexercisable without having been
exercised in full which have become available for distribution under the
Incentive Plan. The closing price of HNC Common Stock on the Nasdaq National
Market was $39.50 per share as of September 29, 1997, the Record Date.
Administration. The Incentive Plan is administered by the Compensation
Committee of the HNC Board (the "Committee"), the members of which are
appointed by the HNC Board. The Committee currently consists of Oliver D.
Curme and Charles H. Gaylord Jr., both of whom are "disinterested persons", as
that term is defined in the Exchange Act, and "outside directors", as that
term is defined pursuant to Section 162(m) of the Code.
Subject to the terms of the Incentive Plan, the Committee determines the
persons who are to receive awards, the number of shares subject to each such
award, and the terms and conditions of such awards. The Committee has
authorized Robert L. North, HNC's President and Chief Executive Officer, to
make grants to non-officer employees of options to purchase specified ranges
of shares based on the position and grade level for the applicable employee
pursuant to guidelines established by the Committee. The Committee also has
the authority to construe and interpret any of the provisions of the Incentive
Plan or any awards granted thereunder.
Stock Options. The Incentive Plan permits the granting of options that are
intended to qualify either as Incentive Stock Options ("ISOs") or Nonqualified
Stock Options ("NQSOs"). ISOs may be granted only to employees (including
officers and directors who are also employees) of HNC or any parent or
subsidiary of HNC. The option exercise price for each option share must be no
less than 100% of the "fair market value" (as defined in the Incentive Plan)
of a share of HNC Common Stock at the time the ISO is granted. In the case of
an ISO granted to a 10% stockholder, the exercise price for each ISO share
must be no less than 110% of the fair market value of a share of Common Stock
at the time the ISO is granted.
The exercise price of options granted under the Incentive Plan may be paid
as approved by the Committee at the time of grant: (1) in cash (by check); (2)
by cancellation of indebtedness of HNC to the Participant; (3) by surrender of
shares of HNC Common Stock owned by the Participant for at least six months
and having a fair market value on the date of surrender equal to the aggregate
exercise price of the option; (4) by tender of a full recourse promissory
note; (5) by waiver of compensation due to or accrued by the Participant for
services rendered; (6) by a "same-day sale" commitment from the Participant
and a National Association of Securities Dealers, Inc. ("NASD") broker; (7) by
a "margin" commitment from the Participant and a NASD broker; or (8) by any
combination of the foregoing.
Restricted Stock Awards. The Committee may grant Participants restricted
stock awards to purchase stock either in addition to, or in tandem with, other
awards under the Incentive Plan, under such terms, conditions and restrictions
as the Committee may determine. The purchase price for such awards must be no
less than 100% of the fair market value of HNC Common Stock on the date of the
award and can be paid for in any of the forms of consideration listed in items
(1) through (5) in "Stock Options" above, as are approved by the Committee at
the time of grant. To date, HNC has not granted any restricted stock awards
under the Incentive Plan.
Stock Bonus Awards. The Committee may grant Participants stock bonus awards
either in addition to, or in tandem with, other awards under the Incentive
Plan, under such terms, conditions and restrictions as the Committee may
determine. To date, HNC has not granted any stock bonus awards under the
Incentive Plan and does not intend to grant stock bonus awards from shares now
reserved or now proposed to be reserved under the Incentive Plan.
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Mergers, Consolidations, Change of Control. In the event of a merger,
consolidation, dissolution or liquidation of HNC, the sale of substantially
all of the assets of HNC or any other similar corporate transaction, the
successor corporation may assume, replace or substitute equivalent awards in
exchange for those granted under the Incentive Plan or provide substantially
similar consideration, shares or other property as was provided to
stockholders of HNC in such transaction (after taking into account provisions
of the awards). In the event that the successor corporation does not assume or
substitute the options awarded, such options will expire upon the closing of
such transaction at such time and upon such conditions as the HNC Board
determines.
Amendment of the Incentive Plan. The HNC Board or the Committee may at any
time terminate or amend the Incentive Plan, including amending any form of
award agreement or instrument to be executed pursuant to the Incentive Plan.
However, the HNC Board and the Committee may not amend the Incentive Plan in
any manner that requires stockholder approval pursuant to the Code or the
regulations promulgated thereunder, or pursuant to the Exchange Act or Rule
16b-3 (or its successor) promulgated thereunder.
Term of the Incentive Plan. Unless terminated earlier as provided in the
Incentive Plan, the Incentive Plan will expire in May 2005, ten years from the
date the Incentive Plan was adopted by the Board.
Federal Income Tax Information.
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF
THE FEDERAL INCOME TAX CONSEQUENCES TO HNC AND PARTICIPANTS UNDER THE
INCENTIVE PLAN. THE FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND
LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER
INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND IS ENCOURAGED TO SEEK
THE ADVICE OF A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF
PARTICIPATION IN THE INCENTIVE PLAN.
Incentive Stock Options. A Participant will recognize no income upon grant
of an ISO and will incur no tax on its exercise (unless the Participant is
subject to the alternative minimum tax ("AMT") as described below). If the
Participant holds shares acquired upon exercise of an ISO (the "ISO Shares")
for more than one year after the date the option was exercised and for more
than two years after the date the option was granted, then the Participant
generally will realize capital gain or loss (rather than ordinary income or
loss) upon disposition of the ISO Shares. This gain or loss will be equal to
the difference between the amount realized upon such disposition and the
amount paid for the ISO Shares.
If the Participant disposes of ISO Shares prior to the expiration of either
of the above-described required holding periods (a "disqualifying
disposition"), then any gain realized upon such disposition, up to the
difference between the fair market value of the ISO Shares on the date of
exercise (or, if less, the amount realized on a sale of such shares) and the
option exercise price, will be treated as ordinary income to the Participant.
Any additional gain will be capital gain, taxed at a rate that depends upon
the amount of time the ISO Shares were held by the Participant.
Alternative Minimum Tax. The difference between the fair market value of the
ISO Shares on the date of exercise and the exercise price is an adjustment to
income for purposes of AMT. The AMT (imposed to the extent it exceeds the
taxpayer's regular income tax) is 26% of the portion of an individual
taxpayer's alternative minimum taxable income that would normally be taxed as
ordinary income (28% of that portion in the case of alternative minimum
taxable income in excess of $175,000). A maximum 20% AMT rate applies to the
portion of alternate minimum taxable income that would normally be taxed as
net capital gain. Alternative minimum taxable income is determined by
adjusting regular taxable income for certain items, increasing that income by
certain tax preference items (including the difference between the fair market
value of the ISO Shares on the date of exercise and the exercise price), and
reducing this amount by the applicable exemption amount ($45,000 in case of a
joint return, subject to reduction under certain circumstances). If a
disqualifying disposition of the ISO Shares occurs in the same calendar year
as exercise of the ISO, there is no AMT adjustment with respect to
71
<PAGE>
those ISO Shares. Also, upon a sale of ISO Shares that is not a disqualifying
disposition, alternative minimum taxable income is reduced in the year of sale
by the excess of the fair market value of the ISO Shares at exercise over the
amount paid for the ISO Shares.
Nonqualified Stock Options. A Participant will not recognize any taxable
income at the time an NQSO is granted. However, upon exercise of an NQSO, the
Participant must include in income as compensation an amount equal to the
difference between the fair market value of the shares on the date of exercise
and the Participant's exercise price. The included amount must be treated as
ordinary income by the Participant and may be subject to withholding by HNC
(either by payment in cash or withholding out of the Participant's salary).
Upon resale of the shares by the Participant, any subsequent appreciation or
depreciation in the value of the shares will be treated as capital gain or
loss.
Restricted Stock and Stock Bonus Awards. Restricted stock and stock bonus
awards will generally be subject to tax at the time of receipt, unless there
are restrictions that enable the Participant to defer tax. At the time the tax
is incurred, the tax treatment will be similar to that discussed above for
NQSOs.
Maximum Tax Rates. The maximum tax rate applicable to ordinary income is
39.6%. Long-term capital gain will be taxed at a maximum of 20%. For this
purpose, in order to receive long-term capital gain treatment, the shares must
be held for more than eighteen months. Mid-term capital gains will be taxed at
a maximum of 28%. For this purpose, in order to receive mid-term capital gains
treatment, the shares must be held between one year and eighteen months.
Capital gains may be offset by capital losses and up to $3,000 of capital
losses may be offset annually against ordinary income.
Tax Treatment of HNC. HNC generally will be entitled to a deduction in
connection with the exercise of an NQSO by a Participant or the receipt of
restricted stock or stock bonuses by a Participant to the extent that the
Participant recognizes ordinary income and HNC withholds tax. HNC will be
entitled to a deduction in connection with the disposition of ISO Shares only
to the extent that the Participant recognizes ordinary income on a
disqualifying disposition of the ISO Shares.
ERISA. The Incentive Plan is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA") and is not qualified
under Section 401(a) of the Code.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT
TO THE 1995 EQUITY INCENTIVE PLAN
NEW PLAN BENEFITS
The amounts of future option grants under the Incentive Plan to (i) HNC's
Chief Executive Officer and HNC's four most highly compensated executive
officers (other than the Chief Executive Officer) who were serving as
executive officers at the end of 1996 (together, the "Named Executive
Officers"); (ii) all current executive officers as a group; (iii) all current
directors who are not executive officers as a group; and (iv) all employees,
including all officers who are not executive officers as a group, are not
determinable because, under the terms of the Incentive Plan, such grants are
made in the discretion of the Committee or its designees. Future option
exercise prices are not determinable because they are based upon the fair
market value of HNC Common Stock on the date of grant.
72
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of HNC Common Stock as of September 29, 1997 and as
adjusted to reflect the issuance of HNC Common Stock in the Merger by: (i)
each stockholder known by HNC to be the beneficial owner of more than 5% of
HNC Common Stock; (ii) each director; (iii) each Named Executive Officer; and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OUTSTANDING COMMON
OWNERSHIP STOCK
------------------- ---------------------
BEFORE AFTER
MERGER MERGER BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) (2) MERGER (1) MERGER (2)
- ------------------------ --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Robert L. Kaaren (3)................. -- 2,446,613 -- 10.0%
Michael E. Munayyer, Trustee of the
Michael Munayyer Trust dated August
11, 1995 (4)........................ -- 2,446,613 -- 10.0
Putnam Investment Management, Inc.
(5)................................. 1,513,147 1,513,147 7.7% 6.2
Pilgrim, Baxter & Associates (6)..... 1,446,931 1,446,931 7.4 5.9
Robert L. North (7).................. 354,205 354,205 1.8 1.4
Roger L. Evans (8)................... 196,495 196,495 1.0 *
Edward K. Chandler (9)............... 74,774 74,774 * *
Raymond V. Thomas (10)............... 68,625 68,625 * *
Michael A. Thiemann (11)............. 60,167 60,167 * *
Krishna Gopinathan (12).............. 44,531 44,531 * *
Charles H. Gaylord, Jr. (13)......... 40,000 40,000 * *
Oliver D. Curme (14)................. 21,436 21,436 * *
Lee E. Martin (15)................... 16,550 16,550 * *
Thomas F. Farb (16).................. 2,500 2,500 * *
All executive officers and directors
as a group (13 persons) (17)........ 1,196,931 1,196,931 6.1% 4.8%
</TABLE>
- --------
*Less than 1%
(1) Based upon a total of 19,539,604 shares of Common Stock outstanding as of
September 29, 1997. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable. Shares of Common Stock subject to options
that are currently exercisable or exercisable within 60 days of September
29, 1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Assumes that an aggregate of 4,893,226 shares of HNC Common Stock are
issued in the Merger to the holders of CompReview Common Stock.
(3) Dr. Kaaren is the Chief Executive Officer, Chairman and a principal
stockholder of CompReview. The address of Dr. Kaaren is c/o CompReview,
Inc., 3200 Park Center Drive, 5th Floor, Costa Mesa, California 92626.
(4) Mr. Munayyer is the Chief Technical Officer, director and a principal
stockholder of CompReview. The address of Mr. Munayyer and the Michael
Munayyer Trust is c/o CompReview, Inc., 3200 Park Center Drive, 5th
Floor, Costa Mesa, California 92626.
(5) The address of Putnam Investment Management, Inc. is 1 Putnam Place, 859
Willard Street, Quincy, Massachusetts 02169.
(6) The address of Pilgrim, Baxter & Associates is 1255 Drummers Lane, Suite
300, Wayne, Pennsylvania 19087.
(7) Includes 29,303 shares of Common Stock held of record by the Robert L.
North & Dixie L. North Revocable Inter Vivos Trust, of which Mr. North is
a trustee. Also includes 324,902 shares of Common Stock subject to
options exercisable within 60 days of September 29, 1997. Mr. North is
the President and Chief Executive Officer and a director of HNC.
73
<PAGE>
(8) Includes 20,000 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Evans is a director of HNC.
(9) Includes 20,000 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Chandler is a director of HNC.
(10) Represents 68,625 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Thomas is Vice President,
Finance and Administration, Chief Financial Officer and Secretary of HNC.
(11) Mr. Thiemann is the President of Aptex Software Inc., a partially owned
subsidiary of HNC.
(12) Represents 44,531 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Gopinathan is the Vice
President, Payment Systems of HNC.
(13) Represents 20,000 shares held of record by the Gaylord Family Trust UTD
12/31/93, Charles H. Gaylord, Jr. and Lynn M. Gaylord trustees, and
20,000 shares of Common Stock subject to options exercisable within 60
days of September 29, 1997. Mr. Gaylord is a director of HNC.
(14) Includes 10,000 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Curme is a director of HNC.
(15) Includes 9,061 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Martin is Vice President, North
American Sales of HNC.
(16) Represents 2,500 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997. Mr. Farb is a director of HNC.
(17) Includes 572,283 shares of Common Stock subject to options exercisable
within 60 days of September 29, 1997, including the options described in
footnotes (7) through (16).
74
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid to
HNC's Named Executive Officers for services rendered in all capacities to HNC
and its subsidiaries during each of 1994, 1995 and 1996. This information
includes the dollar values of base salaries and bonus awards, the number of
shares subject to stock options granted and certain other compensation, if
any, whether paid or deferred. HNC does not grant stock appreciation rights
and has no long-term compensation benefits other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ------------------ ---- -------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Robert L. North........... 1996 $175,000 $85,700 $ 4,472 70,000
President and Chief
Executive Officer 1995 174,428 64,100 1,797 100,000
1994 155,000 39,000 6,283 --
Raymond V. Thomas......... 1996 125,004 42,400 438 20,000
Vice President, Finance
and Administration, 1995 104,389 46,750 87,750(3) 110,000
Chief Financial Officer
and Secretary 1994 -- -- -- --
Michael A. Thiemann....... 1996 146,667 109,170(2) 1,799 --
President, Aptex Software
Inc. 1995 111,351 202,823(2) 201 --
1994 110,000 228,772(2) 1,872 --
Krishna Gopinathan........ 1996 113,750 31,077 71 50,000
Vice President, Payment
Systems 1995 95,285 48,480 48 40,000
1994 80,000 23,020 29 --
Lee E. Martin............. 1996 75,000 251,966(2) 205 10,000
Vice President, North
American Sales 1995 74,719 236,026(2) 200 --
1994 75,000 260,189(2) 38 10,000
</TABLE>
- --------
(1) Unless otherwise indicated below, represents premiums for group term life
and disability insurance.
(2) Includes commissions.
(3) Represents premiums for group term life insurance and disability insurance
in the amount of $360 and reimbursements for relocation expenses in the
amount of $87,390.
75
<PAGE>
The following table sets forth further information regarding option grants
pursuant to the Incentive Plan during 1996 to each of the Named Executive
Officers. In accordance with the rules of the Securities and Exchange
Commission, the table sets forth the hypothetical gains or "option spreads"
that would exist for the options at the end of their respective ten-year
terms. These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted to the end of
the option term.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED(1) 1996 PER SHARE DATE 5% 10%
- ------------------------ ---------- ------------- -------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. North......... 70,000 4.45% $25.38 02/09/06 $ 1,117,074 $ 2,830,885
Raymond V. Thomas....... 20,000 1.30 25.38 02/09/06 319,164 808,824
Michael A. Thiemann..... -- -- -- -- --
Krishna Gopinathan...... 50,000 3.24 25.38 02/09/06 797,910 2,002,061
Lee E. Martin........... 10,000 0.65 25.38 02/09/06 159,582 404,412
</TABLE>
- --------
(1) The options shown in the table were granted at fair market value, are
incentive stock options (to the extent permitted under the Code) and will
expire ten years from the date of grant, subject to earlier termination
upon termination of the optionee's employment.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and
do not represent HNC's estimate or projection of future Common Stock
prices or values.
The following table sets forth certain information concerning the exercise
of options by each of the Named Executive Officers during 1996, including the
aggregate amount of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of December 31, 1996. Also reported are values of "in-the-
money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and $31.25 per share, which was
the closing price of HNC Common Stock as reported on the Nasdaq National
Market on December 31, 1996, the last day of trading for 1996.
AGGREGATE OPTION EXERCISES IN 1996 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT YEAR-END (1) AT YEAR-END (2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE(1) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. North......... 125,000 $3,683,625 340,751 122,083 $10,428,642 $1,882,604
Raymond V. Thomas....... 4,000 96,500 46,417 79,583 1,311,271 1,800,729
Michael A. Thiemann..... 213,429 6,167,739 4,167 0 128,969 0
Krishna Gopinathan...... 30,000 956,557 11,250 90,000 346,188 1,448,750
Lee E. Martin........... 11,095 378,987 3,905 15,000 120,860 210,000
</TABLE>
- --------
(1) "Value Realized" represents the fair market value of the shares of Common
Stock underlying the option on the date of exercise less the aggregate
exercise price of the option.
(2) These values, unlike the amounts set forth in the column entitled "Value
Realized," have not been, and may never be, realized and are based on the
positive spread between the respective exercise prices of outstanding
options and the closing price of HNC Common Stock on December 31, 1996.
76
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Curme and Gaylord. For a
description of transactions between HNC and members of the Compensation
Committee and entities affiliated with such members, see the discussion under
"Certain Relationships and Related Transactions" below.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions in which the amount involved
exceeds $60,000 to which HNC or any of its subsidiaries was (or is to be) a
party and in which any executive officer, director, 5% beneficial owner of HNC
Common Stock or member of the immediate family of any of the foregoing persons
had (or will have) a direct or indirect material interest, except as set forth
below and except for: (i) payments set forth under "Executive Compensation"
above; and (ii) indemnification agreements entered into by HNC with each of
its directors and executive officers that provide the maximum indemnity
available to directors and executive officers under Section 145 of the
Delaware General Corporation Law and HNC's Bylaws, as well as certain
additional procedural protections. Such indemnity agreements provide generally
that HNC will advance expenses incurred by directors and executive officers in
any action or proceeding as to which they may be indemnified, and require HNC
to indemnify such individuals to the fullest extent permitted by law.
In September 1996, HNC incorporated its Text Analysis division as a
subsidiary named Aptex Software Inc. ("Aptex") and purchased 8,000,000 shares
of Aptex Series A Preferred Stock in exchange for approximately $1.6 million
in cash, a technology license and the assignment of certain contracts.
Pursuant to an Aptex equity incentive plan (the "Aptex Plan") under which up
to 2,000,000 shares of Aptex common stock and/or stock options may be issued
to employees, officers, directors and consultants of Aptex, on September 10,
1996 Aptex issued 1,000,000 shares of its common stock at a purchase price of
$0.03 per share to Michael A. Thiemann, Aptex's President and Chief Executive
Officer. These shares were issued for cash, and are subject to Aptex's right
to repurchase a declining percentage of the shares upon termination of Mr.
Thiemann's employment with Aptex within certain time periods. The agreement
also provides HNC with an option, exercisable during certain time periods, to
repurchase all of Mr. Thiemann's Aptex shares for a price equal to the greater
of 150% of the purchase price of the shares or 125% of their appraised fair
market value. Aptex concurrently entered into an employment agreement with Mr.
Thiemann pursuant to which he serves as the President and Chief Executive
Officer of Aptex for an initial base salary of $150,000 per year, in addition
to potential cash bonuses. Under this agreement Mr. Thiemann may become
entitled to certain severance payments equal to six months of his then current
base salary plus continued benefits if his employment is terminated without
cause.
INDEPENDENT ACCOUNTANTS
Representatives of Price Waterhouse LLP are expected to be present at the
Meeting, will have the opportunity to make a statement at the Meeting if they
desire to do so and are expected to be available to respond to appropriate
questions.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at HNC's 1998 Annual
Meeting of Stockholders must be received by HNC at its principal executive
offices no later than December 22, 1997 in order to be included in HNC's Proxy
Statement and form of proxy relating to that meeting.
77
<PAGE>
OTHER BUSINESS
The HNC Board does not presently intend to bring any other business before
the Meeting, and, so far as is known to the HNC Board, no matters are to be
brought before the Meeting except as specified in the notice of the Meeting.
As to any business that may properly come before the Meeting, however, it is
intended that proxies, in the form enclosed, will be voted in respect thereof
in accordance with the judgment of the persons voting such proxies.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
HNC's Annual Report on Form 10-K for the year ended December 31, 1996, as
amended on Forms 10-K/A dated April 10, 1997 and October 20, 1997, HNC's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, as amended
on Form 10-Q/A dated October 20, 1997, and HNC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 as amended on Form 10-Q/A dated October
20, 1997, previously filed by HNC with the SEC, are hereby incorporated by
reference in this Proxy Statement, except as superseded or modified herein.
All documents filed by HNC with the SEC pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Proxy Statement and prior
to the consummation of the transactions described herein shall be deemed to be
incorporated by reference into this Proxy Statement and to be a part hereof
from the date of filing of such documents. Any statement contained in any
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Proxy
Statement.
THIS PROXY STATEMENT INCORPORATES BY REFERENCE CERTAIN DOCUMENTS WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. HNC WILL PROVIDE WITHOUT CHARGE TO
EACH PERSON, INCLUDING ANY BENEFICIAL OWNER OF HNC COMMON STOCK, TO WHOM THIS
PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A
COPY OF ANY AND ALL OF THE DOCUMENTS THAT HAVE BEEN OR MAY BE INCORPORATED BY
REFERENCE HEREIN (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). SUCH REQUESTS
SHOULD BE DIRECTED TO RAYMOND V. THOMAS AT HNC'S PRINCIPAL EXECUTIVE OFFICES
AT 5930 CORNERSTONE COURT WEST, SAN DIEGO, CALIFORNIA 92121-3728 (TELEPHONE
NUMBER 619-546-8877).
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE PRIOR TO THE MEETING SO THAT YOUR SHARES WILL BE REPRESENTED AT THE
MEETING.
78
<PAGE>
COMPREVIEW, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Condensed Balance Sheet as of June 30, 1997..................... F-2
Unaudited Condensed Statement of Operations for the Six Month Periods
Ended June 30, 1997 and 1996............................................. F-3
Unaudited Condensed Statement of Cash Flows for the Six Month Periods
Ended June 30, 1997 and 1996............................................. F-4
Notes to Unaudited Condensed Financial Statements......................... F-5
Report of Deloitte & Touche LLP, Independent Auditors..................... F-7
Balance Sheets as of December 31, 1996 and 1995........................... F-8
Statements of Income for the Years Ended December 31, 1996, 1995 and 1994. F-9
Statements of Stockholders' Equity for the Years Ended December 31, 1996,
1995 and 1994............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1996, 1995
and 1994................................................................. F-12
</TABLE>
F-1
<PAGE>
COMPREVIEW, INC.
UNAUDITED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997
-------------------
PRO
FORMA
HISTORICAL (NOTE 4)
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. $ 332 $ 332
Accounts receivable, net.. 4,322 4,322
Other current assets...... 65 65
------ ------
Total current assets.... 4,719 4,719
Property and equipment, net. 562 562
Other assets................ 128 128
------ ------
$5,409 $5,409
====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......... $1,317 $1,317
Accrued liabilities....... 589 589
Deferred income tax
liability................ 18 984
------ ------
Total current
liabilities............ 1,924 2,890
------ ------
Stockholders' equity:
Preferred stock, $.001 par
value; 500 shares
authorized;
none issued and
outstanding.............. -- --
Common stock, $.001 par
value; 20,000 shares
authorized;
10,000 shares issued and
outstanding.............. 442 442
Retained earnings......... 3,043 2,077
------ ------
Total stockholders'
equity................. 3,485 2,519
------ ------
$5,409 $5,409
====== ======
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
F-2
<PAGE>
COMPREVIEW, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Software license and installation........................... $ 9,834 $ 5,631
Service bureau.............................................. 2,361 2,488
-------- --------
Total revenues............................................ 12,195 8,119
-------- --------
Operating expenses:
Software license and installation........................... 3,637 2,240
Service bureau.............................................. 1,783 1,879
Research and development.................................... 313 233
Sales and marketing......................................... 669 645
General and administrative.................................. 1,195 952
-------- --------
Total operating expenses.................................. 7,597 5,949
-------- --------
Operating income.............................................. 4,598 2,170
Other income, net............................................. 27 25
-------- --------
Income before S corporation state income tax provision...... 4,625 2,195
S corporation state income tax provision...................... 98 72
-------- --------
Net income.................................................. $ 4,527 $ 2,123
======== ========
Add:
S corporation state income tax provision.................... 98 72
Deduct:
Pro forma federal and state income tax provision............ 1,850 878
-------- --------
Pro forma net income...................................... $ 2,775 $ 1,317
======== ========
Pro forma net income per share................................ $ 0.28 $ 0.13
======== ========
Shares used in computing pro forma net income per share....... 10,000 10,000
======== ========
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
F-3
<PAGE>
COMPREVIEW, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 4,527 $ 2,123
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 101 113
Deferred income taxes.................................... -- (10)
Changes in assets and liabilities:
Accounts receivable, net............................... (1,298) (733)
Other assets........................................... (119) 12
Accounts payable....................................... 219 (71)
Accrued liabilities.................................... 152 127
Deferred income tax liability.......................... 37 (48)
------- -------
Net cash provided by operating activities............ 3,619 1,513
------- -------
Cash flows from investing activities:
Acquisitions of property and equipment..................... (290) (64)
------- -------
Net cash used in investing activities................ (290) (64)
------- -------
Cash flows from financing activities:
Distributions.............................................. (3,600) (2,361)
------- -------
Net cash used in financing activities................ (3,600) (2,361)
------- -------
Net decrease in cash and cash equivalents.................... (271) (912)
Cash and cash equivalents at beginning of period............. 603 1,466
------- -------
Cash and cash equivalents at end of period................... $ 332 $ 554
======= =======
</TABLE>
See accompanying notes to the unaudited condensed financial statements.
F-4
<PAGE>
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 June 30,
1997 and for the six months ended June 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 June
30, 1997 and for the six months ended June 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.
Pro forma earnings per share computed in accordance with FAS128 is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Basic earnings per share...................... $0.45 $0.21
Diluted earnings per share.................... $0.45 $0.21
</TABLE>
F-5
<PAGE>
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 June 30, 1997 are summarized as
follows:
<TABLE>
<S> <C>
Accounts receivable................................................ $(1,728)
Accounts payable and accrued liabilities........................... 762
-------
$ (966)
=======
</TABLE>
F-6
<PAGE>
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
F-7
<PAGE>
COMPREVIEW, INC.
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS ---------- ----------
<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.
F-8
<PAGE>
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 3,780,485 2,614,727
Service bureau........................ 3,364,610 2,584,030 1,811,593
Research and development.............. 536,631 422,680 308,344
Sales and marketing................... 1,218,362 863,851 681,160
General and administrative............ 1,916,986 1,441,441 1,116,143
----------- ----------- -----------
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.
F-9
<PAGE>
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.
F-10
<PAGE>
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.
F-11
<PAGE>
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 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.
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.
F-12
<PAGE>
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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>
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>
F-13
<PAGE>
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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>
<S> <C>
Year ending December 31:
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.
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 contracts 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
F-14
<PAGE>
COMPREVIEW, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 PER
SHARES 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.
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: excepted 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, pro forma net income would have been reduced to
$5,435,324 and $3,924,750 in 1996 and 1995, respectively.
8. SUBSEQUENT EVENT (UNAUDITED)
In July 1997 the Company entered into a merger agreement with HNC Software
Inc. (HNC), which, if consummated, will be accounted for as a pooling of
interests.
F-15
<PAGE>
APPENDIX A
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 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).
A-1
<PAGE>
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 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
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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.
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
2.1Conversion 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.
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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.
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 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,
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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 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;
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(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.
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
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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").
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
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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").
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 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
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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 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.
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(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, 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
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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:
(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;
(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
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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 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;
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(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.
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
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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
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.
3.16Employees, 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
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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.
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
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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 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.
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(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. (S) 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. (S) 1251 et seq., (e) "economic poison," as defined
in the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. (S) 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. (S) 2601 et seq., (g) "hazardous substances"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. (S) 9601 et seq., and (h)
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 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 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.
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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 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
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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
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.
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4.4No 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 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
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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 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:
5.1Advice 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;
(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;
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(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;
(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
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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 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.
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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 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 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.
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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 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.
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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 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.
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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):
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
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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.
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.
9.2Covenants. 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.
9.3No 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
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Corporation. No litigation or 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.
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.
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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.
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.
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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.
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
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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 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
A-32
<PAGE>
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.
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.
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
A-33
<PAGE>
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
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 12.9.
12.10Construction 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
A-34
<PAGE>
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 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.
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.
[The Remainder of This Page Has Intentionally Been Left Blank]
A-35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
<TABLE>
<CAPTION>
<S> <C>
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. Munnayer
--------------------------------------
Mishel E. Munnayer a.k.a Michael E.
Munayyer, Trustee of the Michael
Munayyer Trust dated August 11, 1995
</TABLE>
[Signature Page to Agreement and Plan of Reorganization]
A-36
<PAGE>
LIST OF EXHIBITS
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
A-37
<PAGE>
APPENDIX B
ROBERTSON
STEPHENS &
COMPANY
JULY 9, 1997
PRIVILEGED AND CONFIDENTIAL
Board of Directors
HNC Software Inc.
5930 Cornerstone Court West
San Diego, CA 92121-3728
Members of the Board:
You have asked our opinion with respect to the fairness to HNC Software Inc.
("HNC"), from a financial point of view and as of the date hereof, of the
Purchase Price (as defined below), in the proposed merger of ABC Software Inc.
("Merger Sub"), a subsidiary of HNC, with and into CompReview, Inc.
("CompReview" or the "Company"), pursuant to the Agreement and Plan of Merger,
dated as of July 9, 1997 (the "Agreement"). Under the terms of the Agreement,
Merger Sub shall be merged with and into CompReview (the "Merger"). CompReview
shall be the surviving corporation and the separate existence of Merger Sub
shall cease. In exchange for all outstanding Company Common Stock and Company
Securities exercisable or exchangeable for, or convertible into, Company
Common Stock, HNC will issue, or reserve for issuance, 5.0 million shares of
HNC Common Stock plus the number of shares of HNC Common Stock obtained by
dividing the retained earnings of CompReview as of the close of the last full
calendar month preceding the closing of the Merger by the average of the
closing prices per share of HNC Common Stock as quoted on the Nasdaq National
Market for the twenty trading days immediately preceding (but not including)
the closing date of the Merger (the "Purchase Price"). Any options that are
outstanding immediately prior to the Merger will be assumed by Merger Sub and
converted into options to purchase shares of HNC Common Stock. The Merger is
intended to qualify as a tax-free reorganization and to be accounted for as a
"pooling of interests." The terms and conditions of the Merger are set out
more fully in the Agreement.
For purposes of this opinion we have: (i) reviewed financial information on
CompReview furnished to us by CompReview, including certain internal financial
analyses and forecasts prepared by the management of CompReview; (ii) reviewed
publicly available information; (iii) held discussions with the managements of
CompReview and HNC concerning the businesses, past and current business
operations, financial condition and future prospects of both companies,
independently and combined; (iv) reviewed the Agreement; (v) prepared a
relative contribution analysis for CompReview and HNC; (vi) reviewed the
valuations of publicly traded companies that we deemed comparable to
CompReview; (vii) prepared discounted cash flow analyses of CompReview; (viii)
compared the financial terms of the Merger with other transactions that we
deemed relevant; (ix) reviewed the stock price and trading history of HNC; (x)
prepared a pro-forma merger analysis for the combination of CompReview and
HNC; and (xi) made such other studies and inquiries, and reviewed such other
data, as we deemed relevant.
555 CALIFORNIA STREET SAN FRANCISCO 94104 415-781-9700
INVESTMENT BANKERS MEMBER OF ALL MAJOR EXCHANGES
A LIMITED LIABILITY COMPANY
B-1
<PAGE>
Board of Directors
HNC Software Inc.
July 9, 1997
Page Two
In connection with rendering our opinion, however, we have not independently
verified any of the foregoing information and have assumed that all such
information is complete and accurate in all material respects. Furthermore, we
did not obtain any independent appraisal of the properties or assets and
liabilities of CompReview or of any its subsidiaries, nor were we furnished
with any such evaluations or appraisals. With respect to the financial and
operating forecasts (and the assumptions and bases therefor) of CompReview
that we have reviewed, we have assumed that such forecasts have been
reasonably prepared and reflect the best available estimates and judgments of
CompReview management and that such projections and forecasts will be realized
in the amounts and in the time periods currently estimated by the management
of CompReview. In addition, we have relied upon estimates and judgments of
CompReview management as to the future financial performance of CompReview. We
also have assumed, with your consent, that the Merger will be accounted for as
a pooling of interests under generally accepted accounting principles. While
we believe that our review, as described within, is an adequate basis for the
opinion that we express, this opinion is necessarily based upon market,
economic and other conditions that exist and can be evaluated as of the date
of this letter, and on information available to us as of the date hereof.
Finally, we express no opinion as to the value of any employee agreements or
arrangements entered into in connection with the Agreement or the Merger.
Robertson, Stephens & Company LLC ("RS&Co.") has provided certain investment
banking services to HNC from time to time, including acting as transaction
advisor in the acquisition of Risk Data Corporation in August 1996, as an
underwriter for the initial public offering of shares of the common stock of
HNC in June 1995 and maintaining a market in shares of the common stock of
HNC. In the ordinary course of business, RS&Co. may trade HNC Securities for
our own account and the account of our customers and, accordingly, may at any
time hold a long or short position in HNC Securities.
Our opinion is not intended to be and does not constitute a recommendation to
any stockholder of HNC as to how such stockholder should vote on the proposed
transaction. We do not express any opinion regarding the current or future
value of the shares of HNC common stock to be issued in the transaction. This
opinion is for the Board of Directors of HNC and may not be used, quoted or
referred to except with the express prior written consent of RS&Co.
Based upon and subject to the foregoing considerations, it is our opinion,
that, as of the date hereof, the Purchase Price in the proposed Merger is fair
to HNC from a financial point of view.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY, LLC
By: Robertson, Stephens & Company Group, L.L.C.
/s/ Edwin David Hetz
--------------------------------------
Authorized Signatory
B-2
<PAGE>
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.
PRICE WATERHOUSE LLP
San Diego, California
January 21, 1997
1
<PAGE>
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
----------------
ASSETS
<S> <C> <C>
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
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
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.
2
<PAGE>
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................. $ .13 $ .04
======== ========
Shares used in computing pro forma net income
per share.................................... 16,901 13,870
======== ========
Net income per share........................... $ .31
=======
Shares used in computing net income per share.. 20,367
=======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
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.
4
<PAGE>
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------
Series A Series E Common Stock Paid-in
Shares Amount Shares Amount Shares Amount capital
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993...... 380 $ - - $ - 3,730 $ 4 $ 6,302
Common stock options exercised.... 40 10
Issuance of Series E preferred
stock, net of issuance costs.... 1,282 1 4,948
Accretion of dividends............ (717)
Net income........................
-------- -------- -------- -------- -------- -------- --------
BALANCE OF DECEMBER 31, 1994...... 380 - 1,282 1 3,770 4 10,543
Common stock options exercised.... 207 85
Accretion of dividends............ (348)
Issuance of common stock in
initial public offering,
net of issuance costs........... 2,376 2 14,329
Conversion of convertible preferred
stock into common stock......... (380) (1,282) (1) 8,956 9 10,618
Issuance of common stock in secondary
public offering, net of
issuance costs.................. 1,116 2 19,184
Issuance of common stock at inception
of Retek (Note 2)............... 1,367 1 (1)
Tax benefit from stock option
transactions.................... 800
Unrealized gain on investments available
for sale........................ 100 124
Net income........................
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995...... - - - - 17,892 18 55,334
Common stock options exercised.... 1,140 1 1,095
Common stock issued for Employee
Stock Purchase Plan............. 94 839
Tax benefit from stock option
transactions.................... 7,889
Tax benefit from Retek taxable
pooling(Note 9)................. 18,397
Unrealized loss on investments available
for sale........................
Foreign currency translation
adjustment......................
Net income........................
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996...... - $ - - $ - 19,126 $ 19 $ 83,554
======== ======== ======== ======== ======== ======== ========
</TABLE>
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN ON FOREIGN TOTAL
INVESTMENTS CURRENCY STOCKHOLDERS'
AVAILABLE TRANSLATION ACCUMULATED EQUITY
FOR SALE ADJUSTMENT (DEFICIT) (DEFICIT)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993...... $ - $ - $ (13,094) $ (6,788)
Common stock options exercised.... 10
Issuance of Series E preferred
stock, net of issuance costs.... 4,949
Accretion of dividends............ (717)
Net income........................ 548 548
---------- ---------- ---------- ----------
BALANCE OF DECEMBER 31, 1994...... - - (12,546) (1,998)
Common stock options exercised.... 85
Accretion of dividends............ (348)
Issuance of common stock in
initial public offering,
net of issuance costs........... 14,331
Conversion of convertible preferred
stock into common stock......... 2,892 13,518
Issuance of common stock in secondary
public offering, net of
issuance costs.................. 19,186
Issuance of common stock at inception
of Retek (Note 2)............... -
Tax benefit from stock option
transactions.................... 800
Unrealized gain on investments available
for sale........................ 92 92
Net income........................ 2,123 2,123
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995...... 92 - (7,531) 47,913
Common stock options exercised.... 1,096
Common stock issued for Employee
Stock Purchase Plan............. 839
Tax benefit from stock option
transactions.................... 7,889
Tax benefit from Retek taxable
pooling(Note 9)................. 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...... $ (59) $ 54 $ (1,155) $ 84,413
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
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.
16
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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.
17
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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.
18
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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.
19
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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
======= =======
</TABLE>
20
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
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
======= === ==== =======
DECEMBER 31, 1996
-----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ---------- ----------- -------
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.
21
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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:
<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>
<CAPTION>
<S> <C>
1997................................ $ 475
1998................................ 232
1999................................ 66
-----
773
Less amounts representing interest.. (110)
-----
Capital lease obligations........... 663
Less current portion................ (399)
-----
$ 264
=====
</TABLE>
22
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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:
<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.
23
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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
======= ======= =======
The income tax provision (benefit) is summarized as follows:
Year Ended December 31,
--------------------------
1996 1995 1994
------- ------- -------
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>
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
24
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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>
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>
<CAPTION>
<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>
25
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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.
26
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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>
27
<PAGE>
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 $ 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'
28
<PAGE>
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
NOTE 12 - SUBSEQUENT EVENT (UNAUDITED)
In July 1997, the Company signed a definitive agreement to acquire all of the
outstanding shares and options of CompReview, an insurance information
technology product and services company located in Costa Mesa, California, in
return for the issuance of approximately 5,000,000 shares of HNC common stock
and options to purchase common stock. This transaction has not yet been
consummated and remains subject to certain conditions, including stockholder
approval and qualification of the transaction for `pooling of interests'
accounting treatment.
29
<PAGE>
HNC SOFTWARE INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
November 25, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF HNC SOFTWARE INC.
The undersigned hereby appoints Robert L. North and Raymond V. Thomas,
or either of them, as proxies, each with full power of substitution, and hereby
authorizes them to represent the undersigned at the Special Meeting of
Stockholders of HNC Software Inc. (the "Company") to be held at 10:00 a.m. on
Tuesday, November 25, 1997 at the Embassy Suites Hotel located at 4550 La Jolla
Village Drive, San Diego, California, and at any adjournments or postponements
thereof, and to vote, as designated on the reverse side, the number of shares
the undersigned would be entitled to vote if personally present at the meeting
on the following matters set forth on the reverse side:
(Continued and to be signed and dated on the reverse side.)
- --------------------------------------------------------------------------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. WHEN NO CHOICE IS
INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND FOR PROPOSAL 2. In their
discretion, the proxy holders are authorized to vote upon such other business as
may properly come before the meeting or any adjournments or postponements
thereof to the extent authorized by Rule 14a-4(c) promulgated under the
Securities Exchange Act of 1934, as amended.
The Board of Directors recommends that you vote FOR Proposal 1 and FOR Proposal
2. --- ---
1. ISSUANCE OF SHARES OF HNC COMMON STOCK AND OPTIONS TO PURCHASE
SHARES OF HNC COMMON STOCK TO THE STOCKHOLDERS AND
OPTIONHOLDERS, RESPECTIVELY, OF COMPREVIEW PURSUANT TO THE
AGREEMENT AND THE MERGER.
[_] FOR [_] AGAINST [_] ABSTAIN
2. AMENDMENT TO THE COMPANY'S 1995 EQUITY INCENTIVE PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE THEREUNDER BY 750,000 SHARES.
[_] FOR [_] AGAINST [_] ABSTAIN
<PAGE>
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [_]
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
Please sign exactly as your name(s) appear(s) on your stock certificate.
If shares of stock stand of record in the names of two or more persons or in the
name of husband and wife, whether as joint tenants or otherwise, both or all of
such persons should sign the proxy. If shares of stock are held of record by a
corporation, the proxy should be executed by the president or vice president and
the secretary or assistant secretary. Executors, administrators or other
fiduciaries who execute the above proxy for a deceased stockholder should give
their full title. Please date the proxy.
Signature: ________________ Date: ____ Signature: _________________ Date: ____
2
