<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
HNC SOFTWARE INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7372 33-0248788
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
incorporation or organization) Classification Code Number) identification no.)
----------------------
</TABLE>
5930 CORNERSTONE COURT WEST
SAN DIEGO, CALIFORNIA 92121-3728
(619) 546-8877
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------
RAYMOND V. THOMAS
CHIEF FINANCIAL OFFICER
HNC SOFTWARE INC.
5930 CORNERSTONE COURT WEST
SAN DIEGO, CALIFORNIA 92121-3728
(619) 546-8877
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
Copies to:
GORDON K. DAVIDSON, ESQ. MARK G. BORDEN, ESQ.
KENNETH A. LINHARES, ESQ. PHILIP P. ROSSETTI, ESQ.
KATHERINE TALLMAN SCHUDA, ESQ. HALE AND DORR LLP
AUSTIN M. CHOI, ESQ. 60 STATE STREET
FENWICK & WEST LLP BOSTON, MASSACHUSETTS 02109
TWO PALO ALTO SQUARE (617) 526-6000
PALO ALTO, CALIFORNIA 94306
(650) 494-0600
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES
TO THE PUBLIC: Upon consummation of the Merger described herein.
--------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] _____________
---------------------
<PAGE> 2
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CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE OFFERING PRICE AMOUNT OF REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(2) (2)(3) FEE(4)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 2,956,618 $0.01 $272,669 $100
===================================================================================================================================
</TABLE>
(1) Represents the maximum number of shares of Common Stock of the
Registrant that may be issued pursuant to the merger described herein
(the "Merger").
(2) The maximum offering price per unit and the maximum aggregate offering
price are calculated pursuant to Rule 457(f)(2). As there is no market
for the securities of Open Solutions Inc. ("OSI") to be received by the
Registrant or cancelled in the Merger, and OSI has an accumulated
capital deficit, one-third of the par value of such securities has been
used.
(3) Represents one-third of the aggregate par value of the securities of OSI
to be received by the Registrant or cancelled in the Merger. These
securities are 2,236,013 shares of Common Stock, par value $0.01 per
share, and 5,944,583 shares of Preferred Stock, par value $0.01 per
share. The total aggregate par value of such shares is $818,006.
(4) As the registration fee calculated pursuant to Rule 457(f)(2) would be
less than $100, the Registrant is paying the minimum registration fee of
$100.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE> 3
OPEN SOLUTIONS INC.
300 WINDING BROOK DRIVE
GLASTONBURY, CONNECTICUT 06033
__________, 1998
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders
of Open Solutions Inc., a Delaware corporation ("OSI"), which will be held on
_____________, 1998 at __ _.m., local time, at the offices of Hale and Dorr LLP,
60 State Street, 26th Floor, Boston, Massachusetts (the "Special Meeting").
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt (i) an Agreement and Plan of Reorganization, dated
September 16, 1998 (the "Merger Agreement"), among OSI, HNC Software Inc., a
Delaware corporation ("HNC") and Oahu Transaction Corp. ("Merger Sub"), a
Delaware corporation that is a newly formed, wholly-owned subsidiary of HNC,
pursuant to which Merger Sub will merge with and into OSI, with OSI surviving
the merger (the "Merger") and (ii) the Merger. Upon consummation of the proposed
Merger, each outstanding share of OSI capital stock will be converted into the
right to receive HNC Common Stock and each option to purchase OSI Common Stock
will be assumed by HNC and be converted into an option to purchase HNC Common
Stock. Based on the capitalization of OSI on September 16, 1998, and assuming
that OSI grants options to purchase 200,000 shares of OSI Common Stock before
consummation of the Merger, and that all warrants to purchase OSI stock that
were outstanding on September 16, 1998, are exercised in full prior to
consummation of the Merger, upon effectiveness of the Merger, (i) each
outstanding share of OSI Common Stock, OSI Series A-1 Preferred Stock, OSI
Series A-2 Preferred Stock, OSI Series B Preferred Stock, OSI Series C Preferred
Stock and OSI Series D Preferred Stock would be converted into 0.23794, 0.27594,
0.31394, 0.31394, 0.35194 and 0.38993 shares of HNC Common Stock, respectively
(subject to the elimination of fractional shares), and (ii) each outstanding
option to purchase shares of OSI Common Stock will be assumed by HNC and
converted into an option to purchase a number of shares of HNC Common Stock
equal to the number of shares of OSI Common Stock subject to such OSI option
multiplied by 0.23794 (subject to the elimination of fractional options) at an
exercise price equal to the exercise price of such OSI option divided by
0.23794. For accounting purposes, the Merger is intended to be treated as a
"pooling of interests," and for U.S. federal income tax purposes, the Merger is
intended to be a tax-free reorganization.
If the requisite approval of the Merger Agreement and the Merger by
the stockholders of OSI is received and other conditions to the Merger are
satisfied or waived, the Merger is expected to be completed on or promptly after
November 30, 1998.
In the material accompanying this letter, you will find a Notice of
Special Meeting of Stockholders and a Proxy Statement/Prospectus relating to the
actions to be taken by OSI stockholders at the Special Meeting. In addition,
information about OSI and HNC is included in the Proxy Statement/Prospectus. I
urge you to read the Proxy Statement/Prospectus carefully.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE PROPOSED MERGER WITH HNC AND HAS CONCLUDED
THAT THE MERGER IS IN THE BEST INTERESTS OF OSI AND ITS STOCKHOLDERS.
Approval of the Merger requires the affirmative vote of (i) the
holders of a majority of the outstanding shares of OSI Common Stock and (ii) the
affirmative vote of the holders of a majority of the outstanding shares of OSI
Preferred Stock, including a majority of the outstanding shares of OSI Series B
Preferred Stock and a majority of the outstanding shares of OSI Series C
Preferred Stock. Your participation in the Special Meeting, in person or by
proxy, is therefore especially important. WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE
ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED. YOUR BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
We look forward to the successful combination of OSI and HNC and your
continuing support as a stockholder.
Sincerely,
Douglas K. Anderson
Chairman of the Board and Chief Executive Officer
<PAGE> 4
OPEN SOLUTIONS INC.
300 WINDING BROOK DRIVE
GLASTONBURY, CONNECTICUT 06033
----------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of Open Solutions Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Open Solutions Inc., a Delaware corporation ("OSI"), will
be held at the offices of Hale and Dorr LLP, 60 State Street, 26th Floor,
Boston, Massachusetts 02109 on _________________, 1998 at ______ __.m., local
time, for the following purposes:
1. To consider and vote upon the approval and adoption of an Agreement
and Plan of Reorganization, dated as of September 16, 1998 (the
"Merger Agreement"), by and among OSI, HNC Software Inc., a Delaware
corporation ("HNC") and Oahu Transaction Corp., a Delaware
corporation and a wholly-owned subsidiary of HNC ("Merger Sub"), and
the merger of Merger Sub with and into OSI pursuant to the Merger
Agreement (the "Merger").
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The Merger Agreement contemplates, among other things, that: (i)
Merger Sub will be merged with and into OSI, with the result that OSI will
become a wholly-owned subsidiary of HNC; and (ii) each outstanding share of OSI
capital stock will be converted into the right to receive HNC Common Stock and
each outstanding option to purchase OSI Common Stock will be assumed by HNC and
be converted into an option to purchase HNC Common Stock. The number of shares
of HNC Common Stock that will be issued in the Merger, plus the number of shares
of HNC Common Stock potentially issuable upon exercise of HNC Options that are
issued in the Merger, will not exceed a total of 2,956,618 shares of HNC Common
Stock. Based on the capitalization of OSI on September 16, 1998, and assuming
the issuance of options to purchase 200,000 shares of OSI Common Stock before
consummation of the Merger, and that all warrants to purchase OSI stock that
were outstanding on September 16, 1998 are exercised in full prior to
consummation of the Merger upon effectiveness of the Merger, each outstanding
share of OSI Common Stock, OSI Series A-1 Preferred Stock, OSI Series A-2
Preferred Stock, OSI Series B Preferred Stock, OSI Series C Preferred Stock and
OSI Series D Preferred Stock would be converted into 0.23794, 0.27594, 0.31394,
0.31394, 0.35194 and 0.38993 shares of HNC Common Stock, respectively (subject
to the elimination of fractional shares). In addition, upon consummation of the
Merger, based on the capitalization of OSI on September 16, 1998, and assuming
the issuance of options to purchase 200,000 shares of OSI Common Stock before
consummation of the Merger, each option to purchase shares of OSI Common Stock
that is outstanding immediately prior to consummation of the Merger will be
assumed by HNC and converted into an option to purchase a number of shares of
HNC Common Stock equal to the number of shares of OSI Common Stock subject to
such OSI option multiplied by 0.23794 (subject to the elimination of fractional
options), at an exercise price equal to the exercise price of such OSI option
divided by 0.23794.
The OSI Board of Directors recommends that the OSI stockholders vote
FOR approval of the Merger Agreement and the Merger.
The Merger Agreement is attached as Appendix A to the accompanying
Proxy Statement/Prospectus. The Proxy Statement/Prospectus and the Appendices
thereto form a part of this Notice.
The foregoing items of business are more fully described in the Proxy
Statement/Prospectus accompanying this Notice. To ensure that your vote will be
counted, please complete, date and sign the enclosed proxy card and return it
promptly in the enclosed postage-paid envelope, whether or not you plan to
attend the Special Meeting. You may revoke your proxy in the manner described in
the accompanying Proxy Statement/Prospectus at any time before it is voted at
the Special Meeting.
Holders of OSI Common Stock and OSI Preferred Stock may, by complying
with Section 262 of the Delaware General Corporation Law, be entitled to
appraisal rights with respect to the Merger. SECTION 262 OF THE DELAWARE
<PAGE> 5
GENERAL CORPORATION LAW, WHICH GOVERNS THE RIGHTS OF DISSENTING STOCKHOLDERS, IS
SUMMARIZED IN THE PROXY STATEMENT/PROSPECTUS UNDER "APPROVAL OF THE
MERGER-APPRAISAL RIGHTS" AND REPRODUCED AT APPENDIX B TO THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS.
Only OSI stockholders of record at the close of business on
___________, 1998 are entitled to notice of and to vote at the Special Meeting
or at any adjournment or postponement thereof.
By Order of the Board of Directors,
Douglas K. Anderson
Chairman of the Board and Chief Executive Officer
Glastonbury, Connecticut
________________, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING.
<PAGE> 6
OPEN SOLUTIONS INC. HNC SOFTWARE INC.
PROXY STATEMENT PROSPECTUS
_____________________, 1998
This Proxy Statement/Prospectus is being furnished to the stockholders of
Open Solutions Inc., a Delaware corporation ("OSI"), in connection with the
solicitation of proxies by the OSI Board of Directors (the "OSI Board") for use
at a Special Meeting of OSI Stockholders (the "Special Meeting") to be held at
______ __.m., local time, on ____________, 1998, at the offices of Hale and Dorr
LLP, 60 State Street, 26th Floor, Boston, Massachusetts 02109, and at any
adjournments or postponements of the Special Meeting.
The Special Meeting has been called to (i) approve and adopt the
Agreement and Plan of Reorganization, dated as of September 16, 1998 (the
"Merger Agreement"), by and among OSI, HNC Software Inc., a Delaware corporation
("HNC"), and Oahu Transaction Corp., a Delaware corporation and a wholly-owned
subsidiary of HNC ("Merger Sub"), whereby Merger Sub will merge with and into
OSI (the "Merger") and (ii) to approve the Merger.
This Proxy Statement/Prospectus constitutes the Prospectus of HNC for use
in connection with the offer and issuance of shares of Common Stock, $0.001 par
value, of HNC ("HNC Common Stock"), to be issued to the stockholders of OSI upon
completion of the Merger. Pursuant to the Merger: (i) each share of Common
Stock, $0.01 par value, of OSI ("OSI Common Stock"); (ii) each share of Series
A-1 Preferred Stock of OSI, $0.01 par value ("OSI Series A-1 Preferred Stock");
(iii) each share of Series A-2 Preferred Stock of OSI, $0.01 par value ("OSI
Series A-2 Preferred Stock"); (iv) each share of Series B Preferred Stock of
OSI, $0.01 par value ("OSI Series B Preferred Stock"); (v) each share of Series
C Preferred Stock of OSI, $0.01 par value ("OSI Series C Preferred Stock"); and
(vi) each share of Series D Preferred Stock of OSI, $0.01 par value ("OSI Series
D Preferred Stock") that is issued and outstanding immediately prior to
consummation of the Merger will be converted into HNC Common Stock. In addition,
each option to purchase OSI Common Stock ("OSI Option") that is outstanding
immediately prior to consummation of the Merger will be converted into an option
to purchase a number of shares of HNC Common Stock (an "HNC Option") equal to
the number of shares of OSI Common Stock subject to such OSI Option, multiplied
by the number of shares of HNC Common Stock into which one share of OSI Common
Stock will be converted in the Merger (the "Participation Number"), at an
exercise price equal to the exercise price of such OSI Option at the Effective
Time divided by the Participation Number. The number of shares of HNC Common
Stock to be issued to the holders of OSI capital stock will vary depending upon
the number of shares of OSI capital stock and the number of OSI Options that are
outstanding immediately prior to consummation of the Merger. See "Terms of the
Merger--Manner and Basis of Converting OSI Shares."
Assuming that, immediately prior to the effectiveness of the Merger,
2,236,013 shares of OSI Common Stock, 1,000,000 shares of OSI Series A-1
Preferred Stock, 583,333 shares of OSI Series A-2 Preferred Stock, 1,736,250
shares of OSI Series B Preferred Stock, 1,375,000 shares of OSI Series C
Preferred Stock and 1,250,000 shares of OSI Series D Preferred Stock are then
outstanding, and options to purchase an aggregate of 1,887,500 shares are then
outstanding, then based on the Merger conversion formula (which takes into
account the merger preferences of each series of OSI Preferred Stock under OSI's
Certificate of incorporation), (i) each then outstanding share of OSI Common
Stock, OSI Series A-1 Preferred Stock, OSI Series A-2 Preferred Stock, OSI
Series B Preferred Stock, OSI Series C Preferred Stock and OSI Series D
Preferred Stock would be converted into 0.23794, 0.27594, 0.31394, 0.31394,
0.35194 and 0.38993 shares of HNC Common Stock, respectively (subject to the
elimination of fractional shares) and (ii) each OSI Option that is outstanding
immediately prior to consummation of the Merger would be converted into an
option to purchase 0.23794 shares of HNC Common Stock (subject to the
elimination of fractional options). This would result in the issuance by HNC of
a total of 2,507,507 shares of HNC Common Stock (subject to the elimination of
fractional shares) and HNC Options to purchase up to approximately 449,111
shares of HNC Common Stock (subject to the elimination of fractional options).
The above example is based on OSI's capitalization as of September 16, 1998, and
assuming that after September 16, 1998 and prior to consummation of the Merger,
(1) all warrants to purchase shares of OSI stock that were outstanding on
September 16, 1998 are exercised in full, and (2) OSI grants OSI Options to
purchase an additional 200,000 shares of OSI Common Stock.
Because the sum of the number of shares of HNC Common Stock issued in the
Merger, plus the number of shares of HNC Common Stock issuable upon exercise of
HNC Options issued in the Merger is fixed, changes in the market price of HNC
Common Stock will affect the dollar value of HNC Common Stock to be received by
stockholders of OSI in the Merger. As a result, the exact value of the shares of
HNC Common Stock to be received by OSI stockholders in the Merger will not be
known at the time of the Special Meeting. OSI stockholders are encouraged to
obtain current market
<PAGE> 7
quotations for HNC Common Stock prior to the Special Meeting. The current market
quotations for the HNC Common Stock may be obtained on the Internet at
http://www.nasdaq.com. On __________, 1998, the closing sale price on the Nasdaq
National Market of HNC Common Stock was $______________ per share.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of OSI on or about ____________, 1998.
Holders of OSI Common Stock and OSI Preferred Stock may, by complying
with Section 262 of the Delaware General Corporation Law, be entitled to
appraisal rights with respect to the Merger. See "Approval of the
Merger--Appraisal Rights."
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS
ARE URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN ITS
ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS" COMMENCING
ON PAGE _____.
-----------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
The date of this Proxy Statement/Prospectus is _________________, 1998.
<PAGE> 8
TABLE OF CONTENTS
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AVAILABLE INFORMATION.................................................................... 1
TRADEMARKS............................................................................... 1
FORWARD-LOOKING STATEMENTS............................................................... 2
SUMMARY.................................................................................. 3
The Companies...................................................................... 3
The OSI Special Meeting............................................................ 3
Recommendation of the OSI Board.................................................... 4
Risk Factors .................................................................... 4
Reasons for the Merger............................................................. 5
Certain Federal Income Tax Consequences............................................ 6
Accounting Treatment............................................................... 6
Government and Regulatory Approvals................................................ 6
Appraisal Rights................................................................... 6
Interests of Certain Persons in the Merger......................................... 6
Terms of the Merger................................................................ 7
Liquidated Damages................................................................. 10
Indemnification and Escrow......................................................... 10
Related Agreements................................................................. 11
Market Prices and Dividends........................................................ 12
Market Prices................................................................. 12
Dividends .................................................................... 13
Comparative Per Share Data......................................................... 14
RISK FACTORS............................................................................. 15
Risks Relating to the Merger ...................................................... 15
Risks Relating to HNC ............................................................. 17
Risks Relating to OSI ............................................................. 25
THE OSI SPECIAL MEETING.................................................................. 31
Date, Time, Place and Purpose...................................................... 31
Record Date and Outstanding Shares................................................. 31
Voting of Proxies.................................................................. 31
Vote Required; Quorum.............................................................. 31
Solicitation of Proxies and Expenses............................................... 32
Appraisal Rights................................................................... 32
Recommendation of the OSI Board.................................................... 32
APPROVAL OF THE MERGER................................................................... 33
HNC's Reasons for the Merger....................................................... 33
OSI's Reasons for the Merger....................................................... 34
Background of the Merger .......................................................... 36
Certain Federal Income Tax Consequences of the Merger.............................. 38
Accounting Treatment............................................................... 39
Government and Regulatory Approvals................................................ 39
Appraisal Rights................................................................... 40
Interests of Certain Persons in the Merger......................................... 42
TERMS OF THE MERGER...................................................................... 44
Effective Time..................................................................... 44
Manner and Basis of Converting OSI Shares.......................................... 44
Assumption and Conversion of OSI Stock Options..................................... 47
Stock Ownership Following the Merger............................................... 48
Effects of the Merger.............................................................. 48
Representations and Warranties..................................................... 48
Conduct of Business Pending the Merger............................................. 49
</TABLE>
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Non-Solicitation................................................................... 50
Conditions to the Merger........................................................... 50
Termination, Amendment and Waiver.................................................. 52
Liquidated Damages................................................................. 53
Indemnification and Escrow......................................................... 53
Related Agreements................................................................. 54
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION....................................... 56
HNC SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA...................................... 64
HNC SELECTED HISTORICAL CONSOLIDATED QUARTERLY OPERATING RESULTS......................... 65
HNC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................................................................... 66
Overview........................................................................... 66
Potential Fluctuations in Operating Results........................................ 67
Results of Operations.............................................................. 67
Liquidity and Capital Resources.................................................... 72
Year 2000 Compliance............................................................... 72
New Accounting Pronouncements...................................................... 73
BUSINESS OF HNC.......................................................................... 74
Industry Background................................................................ 74
The HNC Solution................................................................... 75
HNC's Strategy..................................................................... 75
Markets and Products............................................................... 76
Emerging Market Opportunities...................................................... 79
Customer Service and Support....................................................... 80
Pricing............................................................................ 80
Sales and Marketing................................................................ 80
Technology......................................................................... 81
Research and Development........................................................... 82
Intellectual Property and Other Proprietary Rights................................. 83
Competition........................................................................ 84
Employees.......................................................................... 85
Properties......................................................................... 85
SELECTED HISTORICAL FINANCIAL DATA OF OSI................................................ 86
OSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................................................................... 87
Overview........................................................................... 87
Results of Operations.............................................................. 88
Selected Quarterly Results of Operations........................................... 93
Liquidity and Capital Resources.................................................... 94
BUSINESS OF OSI.......................................................................... 95
Industry Background................................................................ 95
The OSI Solution................................................................... 96
Strategy........................................................................... 96
Technology......................................................................... 97
Products........................................................................... 98
Sales and Marketing................................................................ 100
Customers.......................................................................... 100
Services........................................................................... 101
Product Development................................................................ 101
Competition........................................................................ 101
</TABLE>
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Intellectual Property and Other Proprietary Rights................................. 102
Employees.......................................................................... 102
Facilities......................................................................... 102
MANAGEMENT OF HNC........................................................................ 103
Executive Officers and Directors................................................... 103
Committees of the Board of Directors............................................... 104
Compensation Committee Interlocks and Insider Participation........................ 104
Director Compensation.............................................................. 105
Executive Compensation............................................................. 105
SECURITY OWNERSHIP OF HNC................................................................ 107
CERTAIN TRANSACTIONS OF HNC.............................................................. 109
MANAGEMENT OF OSI........................................................................ 110
Executive Officers, Directors and Key Employees.................................... 110
Committees of the Board of Directors............................................... 112
Director Compensation.............................................................. 112
Executive Compensation............................................................. 112
Employment Agreements.............................................................. 114
Compensation Committee Interlocks and Insider Participation........................ 115
SECURITY OWNERSHIP OF OSI................................................................ 116
CERTAIN TRANSACTIONS OF OSI.............................................................. 119
DESCRIPTION OF HNC CAPITAL STOCK......................................................... 121
HNC Common Stock................................................................... 121
Preferred Stock.................................................................... 121
Delaware General Corporation Law Section 203....................................... 121
Existing Shelf Registrations....................................................... 121
Transfer Agent and Registrar....................................................... 122
DESCRIPTION OF OSI CAPITAL STOCK......................................................... 123
Common Stock....................................................................... 123
Preferred Stock.................................................................... 123
Warrants........................................................................... 124
COMPARISON OF RIGHTS OF OSI STOCKHOLDERS AND HNC STOCKHOLDERS............................ 125
Size of the Board of Directors..................................................... 125
"Blank Check" Preferred Stock and Common Stock Rights.............................. 125
Percentage of Voting Stock; Influence Over Affairs................................. 125
Transactions With Interested Stockholders.......................................... 125
OTHER BUSINESS .......................................................................... 126
LEGAL MATTERS............................................................................ 126
INDEX TO FINANCIAL STATEMENTS............................................................ F-1
APPENDICES
Appendix A Agreement and Plan of Reorganization
Appendix B Section 262 of the Delaware General Corporation Law
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION
WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY
THIS PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
----------------------------
AVAILABLE INFORMATION
HNC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The materials filed by
HNC can be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of these materials can also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World
Wide Web site at the address http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission. HNC Common Stock is quoted on the Nasdaq National Market
under the symbol "HNCS," and such reports, proxy statements and other
information can also be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
HNC has filed with the Commission a Registration Statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"). This Proxy
Statement/Prospectus constitutes the prospectus of HNC that is filed as part of
the Registration Statement. Other parts of the Registration Statement are
omitted from this Proxy Statement/Prospectus in accordance with the rules and
regulations of the Commission. Copies of the Registration Statement, including
the exhibits and other material that is not included herein, may be inspected,
without charge, at the regional offices of the Commission referred to above,
obtained at the Commission's World Wide Web site set forth above or obtained at
prescribed rates from the Public Reference Section of the Commission at the
address set forth above.
Statements made in this Proxy Statement/Prospectus concerning the
contents of any contract or other document are not necessarily complete. With
respect to each contract or other document filed as an exhibit to, or
incorporated by reference in, the Registration Statement, reference is hereby
made to that exhibit for a more complete description of the matter involved, and
each such statement is hereby qualified in its entirety by such reference.
All information contained in this Proxy Statement/Prospectus relating to
HNC has been supplied by HNC, and all information relating to OSI has been
supplied by OSI.
TRADEMARKS
This Proxy Statement/Prospectus contains trademarks of HNC and OSI,
and may contain trademarks of others, in the U.S. and other countries.
ProfitMax(R) is a registered trademark of HNC. CRLink(TM), CompCompare(TM),
ProviderCompare(TM), PMAdvisor(TM), AUTOADVISOR(TM), COMPADVISOR(TM),
VeriComp(TM), MIRA(TM), FALCON(TM), Falcon Export(TM), Falcon Select(TM), Falcon
Debit(TM), Falcon Retail(TM), Falcon Sentry(TM), Eagle(TM), Capstone(TM),
Capstone for Payment Cards(TM), Capstone for Consumer Lending(TM), Capstone for
Mortgage Lending(TM), ProfitMax Bankruptcy(TM), AREAS(TM), Retek MerchandIXIng
System(TM), Retek Data Warehouse(TM), Active Retail Intelligence(TM), Retek
Demand
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Forecasting(TM), Falcon Retail(TM), Retek Trade Management(TM), RETEk Warehouse
Management(TM), Retek Collaborative Supply(TM), Retek Sales Audit(TM), Retek
Invoice Matching(TM), Retek Store Systems-RF(TM), MatchPlus(TM), SelectCast(TM),
SelectProfile(TM), SelectResponse(TM) and SelectResource(TM) are trademarks of
HNC. Open Solutions Inc.(R) is a registered trademark oF OSI. The Complete
Banking Solution(TM) and The Complete Credit Union Solution(TM) are trademarks
of OSI.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act regarding HNC and OSI. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Proxy Statement/Prospectus. Additionally, statements concerning future
matters are forward-looking statements.
Although forward-looking statements in this Proxy
Statement/Prospectus reflect the good faith judgment of the management of HNC
and OSI, as appropriate, such statements can only be based on facts and factors
currently known by HNC and OSI, respectively. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed in "Risk Factors" as well as those discussed
elsewhere in this Proxy Statement/Prospectus. Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Proxy Statement/Prospectus. Neither HNC nor OSI undertakes any
obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Proxy
Statement/Prospectus. Readers are urged to carefully review and consider the
various disclosures made in this Proxy Statement/Prospectus, which attempt to
advise interested parties of the risks and factors that may affect HNC's and
OSI's respective business, financial condition, results of operations and
prospects.
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SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. The summary does not contain a
complete description of the terms of the Merger and is qualified in its entirety
by reference to the full text of this Proxy Statement/Prospectus and the
Appendices hereto. Stockholders of OSI are urged to read this Proxy
Statement/Prospectus and the Appendices hereto in their entirety.
THE COMPANIES
HNC Software Inc. HNC develops, markets and supports predictive
software solutions for leading service industries. These predictive software
solutions employ proprietary neural-network predictive decision engines,
profiles, traditional statistical modeling, business models, expert rules and
context vectors to convert existing data and business experiences into
meaningful recommendations and actions. HNC was founded in 1986 under the laws
of California and was reincorporated in June 1995 under the laws of Delaware.
HNC's principal executive offices are located at 5930 Cornerstone Court West,
San Diego, California 92121-3728, and its telephone number is (619) 546-8877.
See "Business of HNC."
Open Solutions Inc. OSI provides client/server core processing
software and related services to small to mid-size banks and credit unions. OSI
has developed The Complete Banking Solution and The Complete Credit Union
Solution (the "OSI System"), which are fully-integrated suites of banking and
credit union applications that operate in a Microsoft Windows NT environment
with an Oracle relational database. OSI's software supports all of an
institution's core processing requirements, including deposits and loans, teller
functions, home/Internet banking and platform automation. The OSI System
interfaces to third-party applications that are commonly used in banks and
credit unions, including check processing, ATMs and general ledger applications.
OSI was organized as a Delaware corporation in 1992. OSI's principal offices are
located at 300 Winding Brook Drive, Glastonbury, Connecticut 06033 and its
telephone number is (860) 652-3155. See "Business of OSI."
Oahu Transaction Corp. Merger Sub, a Delaware corporation, was
incorporated in September 1998 for the sole purpose of effecting the Merger. It
has no material assets and has not engaged in any activities except in
connection with the proposed Merger. Merger Sub's principal executive offices
are located at 5930 Cornerstone Court West, San Diego, California 92121-3728,
and its telephone number is (619) 546-8877.
THE OSI SPECIAL MEETING
Date, Time, Place and Purpose. The Special Meeting will be held at
the offices of Hale and Dorr LLP, 60 State Street, 26th Floor, Boston,
Massachusetts 02109 on __________________, 1998 at _________ ___.m., local time.
At the Special Meeting, stockholders of OSI will be asked to approve and adopt
the Merger Agreement and the transactions contemplated thereby and to approve
the Merger. The Merger Agreement is attached hereto as Appendix A. See "Terms of
the Merger."
Record Date and Outstanding Shares. Holders of record of OSI Common
Stock and OSI Preferred Stock at the close of business on ___________, 1998 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting. As
of the close of business on the Record Date, there were _______________ shares
of OSI Common Stock, __________ shares of Series A-1 Preferred Stock, __________
shares of Series A-2 Preferred Stock, __________ shares of Series B Preferred
Stock, __________ shares of Series C Preferred Stock and __________ shares of
Series D Preferred Stock, outstanding and entitled to vote, held of record by a
total of ____ stockholders. Each holder of OSI Common Stock is entitled to one
vote for each share of OSI Common Stock held as of the Record Date and each
holder of OSI Preferred Stock is entitled to one vote for each share of OSI
Preferred Stock held as of the Record Date. See "The OSI Special Meeting--Record
Date and Outstanding Shares."
Vote Required; Quorum. The affirmative vote of the holders of a
majority of the outstanding shares of OSI Common Stock is required to approve
and adopt the Merger Agreement and to approve the Merger. In addition, the
affirmative vote of the holders of a majority of the outstanding shares of OSI
Preferred Stock, including a majority of the outstanding shares of OSI Series B
Preferred Stock and of OSI Series C Preferred Stock, is required to approve and
adopt the Merger Agreement and to approve the Merger. Abstentions will thus have
the effect of a vote against the Merger
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Agreement and the Merger. The required quorum for the transaction of business at
the Special Meeting is a majority of the shares of OSI Common Stock and OSI
Preferred Stock outstanding on the Record Date. Abstentions will be considered
present at the Special Meeting for the purpose of determining a quorum.
Certain stockholders of OSI, beneficially owning __________ shares of
OSI Common Stock and __________ shares of OSI Preferred Stock, or approximately
__________% and __________% of the outstanding shares of OSI Common Stock and
OSI Preferred Stock, respectively, have executed voting agreements pursuant to
which they have agreed to vote such shares in favor of the adoption and approval
of the Merger Agreement and approval of the Merger. The vote by these affiliates
in accordance with their voting agreements will be sufficient to approve the
Merger.
On the Record Date, directors and executive officers of OSI, and
their affiliated entities, as a group beneficially owned ____ shares of OSI
Common Stock and _____ shares of OSI Preferred Stock, or approximately ____% and
____% of the outstanding shares of OSI Common Stock and OSI Preferred Stock,
respectively on such date. See "The OSI Special Meeting--Vote Required; Quorum."
RECOMMENDATION OF THE OSI BOARD
The OSI Board, by unanimous vote, has adopted and approved the Merger
Agreement and the transactions contemplated thereby, and has determined that the
Merger is in the best interests of OSI and its stockholders. After careful
consideration, the OSI Board unanimously recommends a vote FOR adoption and
approval of the Merger Agreement and the Merger.
RISK FACTORS
The following Risk Factors, among other set forth under "Risk
Factors" below and elsewhere in this Proxy Statement/Prospectus,
should be considered by OSI stockholders in evaluating the matters to be voted
on at the Special Meeting and the acquisition of the shares of HNC Common Stock
offered hereby.
Risks related to the Merger include the following: (i) that the
anticipated long-term strategic benefits of the Merger depend upon the
successful integration of OSI into HNC's business; (ii) that HNC will depend on
the continued service of the current management of OSI after the Merger; (iii)
that the price of HNC Common Stock would be significantly and adversely affected
if the beneficial synergies that the Merger is intended to generate are not
achieved or do not occur as rapidly or to the extent anticipated; (iv) that the
Merger is expected to result in substantial Merger-related expenses, and that
the integration of OSI into HNC's business may involve substantial additional
costs; (v) that the inherent risks of the Merger may be compounded by ongoing
efforts associated with the integration of other recent acquisitions by HNC and
by the geographically dispersed operations of HNC and OSI; (vi) that the Merger
Agreement does not provide for any adjustment of the number of shares of HNC
Common Stock and the number of shares covered by HNC Options to be issued in the
Merger to account for changes in the price of HNC Common Stock; (vii) that the
Merger will reduce the respective interests of the HNC and OSI stockholders
after the Merger, compared to their ownership interests in their respective
companies before the Merger; and (viii) that if certain restrictions are not
observed by each company and its respective affiliates, the Merger may fail to
qualify as a pooling of interests for financial reporting purposes. See "Risk
Factors--Risks Relating to the Merger."
Risks relating to HNC include the following: (i) that HNC has
experienced, and expects to continue to experience, significant fluctuations in
its results of operations on a quarterly and on an annual basis; (ii) that the
sales cycle associated with HNC's products is typically lengthy and orders are
therefore subject to a number of significant risks; (iii) that HNC has recently
completed a number of acquisitions and may pursue acquisitions in the future;
(iv) that HNC faces risks in managing any growth in its business; (v) that the
markets for HNC's products are still emerging and are subject to rapid
technological change, competing technologies, evolving industry standards and
frequent new product introductions; (vi) that HNC has one product or product
line in each of its three target markets that accounts for a majority of its
total revenues from that market; (vii) that HNC depends upon the availability of
data for the development, installation and support of certain of its products;
(viii) that the markets in which HNC competes are intensely competitive and many
competitors of HNC are substantially larger and have greater financial,
technical, marketing and other resources than HNC and broader integrated product
lines; (ix) that HNC depends on its ability to hire and retain qualified
personnel; (x) that HNC is subject to the risks inherent in international
sales; (xi) that HNC's customers are subject to a number of government
regulations and other industry standards with which many of HNC's products must
comply; (xii) that HNC
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depends on proprietary technology, which it may not be able to protect fully or
which may be subject to litigation; (xiii) that products as complex as those
offered by HNC frequently contain undetected error or failures that could result
in product returns and other losses to HNC or its customers, including problems
relating to Year 2000 compliance; and (xiv) that the market price of HNC Common
Stock is volatile and subject to fluctuations in response to a variety of
factors. See Risk Factors--Risks Relating to HNC."
Risks relating to OSI include the following: (i) that OSI has a
limited operating history, has not been profitable and has an accumulated
deficit; (ii) that OSI has experienced, and expects to continue to experience,
significant fluctuations in its results of operations on a quarterly and on an
annual basis; (iii) that OSI depends on the OSI System for substantially all of
its revenue; (iv) that the markets for OSI's products are subject to rapid
technological change, evolving industry standards and frequent new product
introductions and that OSI depends on its ability to timely release new and
upgraded version of its products; (v) that the market in which OSI competes is
intensely competitive and many competitors of OSI are substantially larger and
have greater financial, engineering, technical, marketing and other resources
than OSI; (vi) that OSI faces risks in managing any growth in its business;
(vii) that OSI relies on license fees from new customers for a substantial
portion of its revenues, including new credit union customers; (viii) that OSI
is subject to the risks faced by small to mid-size banks and credit unions and
there is a trend toward consolidation in that industry; (ix) that the sales
cycle associated with OSI's products is typically lengthy and orders are
therefore subject to a number of significant risks; (x) that OSI must expand its
sales force and its third-party outsourcing agreements to achieve future revenue
growth; (xi) that OSI depends on its ability to hire and retain qualified
personnel; (xii) that OSI depends on certain third-party technology; (xiii) that
a limited number of customers account for a significant percentage of OSI's
revenues; (xiv) that OSI may be subject to service warranty costs or claims for
damages by customers as a result of failure in a customer's system or Year 2000
compliance problems; (xv) that OSI's customers are subject to a number of
government regulations and other industry standards with which many of OSI's
products must comply; and (xvi) that OSI depends on proprietary technology,
which it may not be able to protect fully or which may be subject to litigation.
See Risk Factors--Risks Relating to OSI."
REASONS FOR THE MERGER
HNC's Reasons for the Merger. The HNC Board approved the Merger
because it believes that: (i) the Merger will give HNC the opportunity to
diversify its market focus to include small to mid-size banks and credit unions,
which HNC views as a strategic market; (ii) HNC's existing intelligent decision
products (many of which are designed to serve the needs of banks or similar
financial institutions) are well positioned to serve OSI's current customer
base; (iii) by acquiring OSI, HNC will acquire the ability to market an
integrated range of core products to banks and credit unions, with the strategy
of providing these customers a single source for all their core applications
software needs; (iv) the Merger will provide the opportunity for HNC to create
an integrated infrastructure solution that emphasizes predictive customer
relationship management by combining FTI's core products (as well as other HNC
financial solution products) with the OSI System; (v) the Merger will provide
FTI and OSI with the ability to integrate their sales and marketing activities
and consulting services, and with advantageous cross-selling opportunities; and
(vi) the Merger will afford HNC the opportunity (subject to permission from
appropriate parties) to obtain additional consumer financial data, primarily
from the small to mid-size financial services companies that use OSI's products.
See "Approval of the Merger--HNC's Reasons for the Merger."
OSI's Reasons for the Merger. The OSI Board identified a number of
potential benefits from the proposed Merger, including: (i) enhanced ability of
OSI to market and sell mission critical, core processing banking systems to
potential customers; (ii) potential to add functionality to the OSI System based
on HNC's predictive software solutions that would uniquely leverage the OSI
System's real time processing capability and significantly differentiate the OSI
System from other competitive core processing products; (iii) ability to
leverage HNC's distribution channels to augment OSI's current marketing and
sales activities both in the United States and abroad; (iv) opportunities to
leverage research and development capabilities by sharing technology and
combining product development efforts; (v) the ability to cross--sell various of
HNC's banking products to OSI's installed customer base; (vi) the complementary,
and not functionally redundant, nature of OSI's technologies and products to
those of HNC; and (vii) increased liquidity for OSI's stockholders with respect
to their investment in OSI. See "Approval of the Merger--OSI's Reasons for the
Merger."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a tax-free reorganization for federal
income tax purposes, so that no gain or loss would generally be recognized by
HNC or OSI and no gain or loss would generally be recognized by an OSI
stockholder, except with respect to cash received in lieu of fractional shares
or an OSI stockholder who exercises his, her or its Appraisal Rights. OSI
stockholders are urged to consult their own tax advisors as to the specific tax
consequences of the Merger to the individual stockholder. For a further
discussion of the federal income tax consequences of the Merger, see "Approval
of the Merger--Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling of interests for
financial reporting 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 will have been advised in writing, as of the
Effective Time, by PricewaterhouseCoopers LLP that, subject to customary
qualifications, they concur with management's conclusion that no conditions
exist that would preclude HNC from accounting for the Merger as a "pooling of
interests," and OSI will have been advised in writing, as of the Effective Time,
by PricewaterhouseCoopers LLP that, subject to customary qualifications, they
concur with management's conclusion that no conditions exist that would preclude
OSI from being a party to a business combination for which the pooling of
interests method of accounting would be available. See "Approval of the
Merger--Accounting Treatment."
GOVERNMENT AND REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the Merger may not be consummated until 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. HNC and OSI each filed their respective
notification and report forms under the HSR Act on ____________, 1998. See
"Approval of the Merger--Government and Regulatory Approvals."
APPRAISAL RIGHTS
When the Merger is effected, stockholders of OSI who comply with the
procedures prescribed in Section 262 of the Delaware General Corporation Law
(the "DGCL") will be entitled to a judicial determination of the "fair value" of
their shares (exclusive of any element of value arising from the accomplishment
or expectation of the Merger) and to receive from OSI payment of such fair value
in cash. Shares of OSI Common Stock and OSI Preferred Stock which are
outstanding immediately prior to the Effective Time and with respect to which
appraisal shall have been properly demanded in accordance with Section 262 of
the DGCL shall not be converted into the right to receive shares of HNC Common
Stock in the Merger at or after the Effective Time unless and until the holder
of such shares withdraws his, her or its demand for such appraisal or becomes
ineligible for such appraisal.
Holders of HNC Common Stock and holders of OSI Options outstanding at
the Effective Time are not entitled to appraisal rights in connection with the
Merger. See "Approval of the Merger--Appraisal Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of OSI
with respect to the Merger, stockholders of OSI should be aware that certain
members of the management and the Board of Directors of OSI have certain
interests in the Merger in addition to the interests of the OSI stockholders
generally. In connection with the Board of Directors' determination that the
Merger is fair to the stockholders of OSI, the Board was aware of these
potential conflicts and carefully considered conflict of interest issues
relating to the matters described below.
Mr. Anderson and HNC entered into a letter agreement regarding the
terms of his continued employment with OSI which provides that, effective as of
the Closing, (i) Mr. Anderson shall continue to work for OSI as its Chief
Executive Officer for at least three years after the Effective Time, (ii) HNC
shall pay Mr. Anderson his current 1998 cash compensation (including a cash
bonus) for the remainder of the calendar year, and thereafter shall pay Mr.
Anderson
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compensation consistent with that paid by HNC to its comparably situated
executives, but in no event will his salary be reduced below the 1998 level and
(iii) Mr. Anderson agreed that the salary continuation benefits provided for in
his current employment agreement with OSI would not be available in the event of
any triggering event (as defined in the agreement) that occurs after the third
anniversary of the Effective Time.
Mr. Person and HNC entered into a letter agreement regarding the
terms of his continued employment with OSI which provides that, effective as of
the Closing, (i) Mr. Person shall continue to work for OSI as its President and
Chief Operating Officer for at least three years after the Effective Time, (ii)
HNC shall pay Mr. Person his current 1998 cash compensation (including a cash
bonus) for the remainder of the calendar year, and thereafter shall pay Mr.
Person compensation consistent with that paid by HNC to its comparably situated
executives, but in no event will his salary be reduced below the 1998 level and
(iii) Mr. Person agreed that his current salary continuation benefits would not
be available in the event of any triggering event (as defined in the agreement)
that occurs after the third anniversary of the Effective Time.
In accordance with the terms of Mr. Willemin's existing agreement
with OSI, each outstanding OSI Option held by Mr. Willemin will become fully
vested and exercisable immediately prior to the Merger.
Prior to the Effective Time, OSI expects, in accordance with past
practice, to authorize the grant of options to purchase approximately 200,000
shares of OSI Common Stock to certain officers and other employees pursuant to
the Company's 1994 Stock Option Plan. OSI does not expect to grant any of such
options to any of the executive officers of OSI.
OSI expects to enter into a consulting agreement with Richard P.
Yanak, a director of OSI, with a term commencing as of the Effective Time and
extending through 2000. The Company expects to retain, Mr. Yanak on a consulting
basis to assist OSI in electronic commerce product development, sales and
marketing activities and such other services relating to the business of OSI as
Mr. Yanak and OSI shall mutually agree upon, on terms to be determined.
The Merger Agreement provides that, for a period of six years after
the Effective Time, HNC shall, and shall cause the Surviving Corporation to,
indemnify and hold harmless the present and former officers and directors of OSI
and any officers, directors and employees of OSI who are (or were) fiduciaries
of OSI employee benefit plans in respect of acts or omissions of such persons
taken or occurring prior to the Effective Time and in their capacity as an
officer, director or fiduciary, to the fullest extent permitted by applicable
law and by OSI's Certificate of Incorporation and Bylaws as in effect on the
date of the Merger Agreement. See "Approval of the Merger--Interests of Certain
Persons in the Merger."
TERMS OF THE MERGER
Effective Time. The Merger will become effective upon the filing of a
Certificate of Merger with the Delaware Secretary of State (the "Effective
Time"). The Closing of the Merger (the "Closing") will occur as soon as
practicable, and in all events by the second business day after the satisfaction
or waiver of the conditions to the Merger, or on such other day as HNC and OSI
may 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 30, 1998. See "Terms of the
Merger--Effective Time."
Manner and Basis of Converting OSI Shares. Upon the effectiveness of
the Merger, each share of OSI Common Stock and each share of OSI Preferred Stock
that is issued and outstanding immediately prior to the Effective Time (other
than dissenting shares) will be converted into HNC Common Stock, and each OSI
Option that is outstanding immediately prior to the Effective Time will be
converted into an HNC Option. The Merger Agreement uses a conversion formula to
compute the number of shares of HNC Common Stock into which each share of OSI
Common Stock and OSI Preferred Stock will be converted in the Merger and the
number of HNC Options into which each OSI Option will be converted in the
Merger. The results of this conversion formula depend on the number of
outstanding shares of OSI Common Stock and of each series of OSI Preferred
Stock, and on the number of OSI Options, that are outstanding immediately prior
to the Effective Time of the Merger. For a full description of the steps used in
this conversion formula, see "Terms of the Merger--Manner and Basis of
Converting OSI Shares."
The Merger Agreement provides that the number of shares of HNC Common
Stock that will be (i) issued in the Merger upon the conversion of outstanding
shares of OSI Common Stock and OSI Preferred Stock and (ii) subject to all HNC
Options that are issued in the Merger upon the conversion of outstanding OSI
Options, will not exceed an aggregate total of 2,956,618 shares of HNC Common
Stock (the "HNC Merger Shares").
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Illustration of the Merger Conversion Formula. The following
illustration of the Merger conversion formula assumes that, immediately prior to
the Effective Time of the Merger there are outstanding 2,236,013 shares of OSI
Common Stock, 1,000,000 shares of OSI Series A-1 Preferred Stock, 583,333 shares
of OSI Series A-2 Preferred Stock, 1,736,250 shares of OSI Series B Preferred
Stock, 1,375,000 shares of OSI Series C Preferred Stock, 1,250,000 shares of OSI
Series D Preferred and OSI Options to purchase a total of 1,887,500 shares of
OSI Common Stock (and no other OSI securities). The above assumptions are based
on the number of shares and OSI Options that were outstanding on September 15,
1998, and assumes that (a) all outstanding warrants to purchase shares of OSI
stock are exercised in full prior to the Effective Time and (b) that an
additional 200,000 OSI Options are granted prior to the Effective Time. Based on
those assumptions: (a) each such share of OSI Common Stock, OSI Series A-1
Preferred Stock, OSI Series B Preferred Stock, OSI Series C Preferred Stock and
OSI Series D Preferred Stock would be converted in the Merger into approximately
0.23794, 0.27594, 0.31394, 0.31394, 0.35194 and 0.38993 shares of HNC Common
Stock, respectively, and each OSI Option to purchase one share of OSI Common
Stock would be converted in the Merger into an option to purchase 0.23794 shares
of HNC Common Stock (subject to rounding down to eliminate fractional options)
at an exercise price per share of HNC Common Stock equal to the pre-Merger
exercise price per share of OSI Common Stock divided by 0.23794. Any changes to
such assumptions will alter the conversion rates at which shares of OSI Common
Stock, OSI Preferred Stock and OSI Options will be converted in the Merger. See
"Terms of the Merger--Manner and Basis of Converting OSI Shares."
Procedure for Converting OSI Shares. Upon the Closing Date, each
holder of shares of OSI Common Stock and/or OSI Preferred Stock will surrender
the certificate(s) for such shares, duly endorsed to HNC for cancellation as of
the Effective Time, together (if requested by HNC) with each OSI stockholder's
brief agreement to and acknowledgment of the escrow and indemnification
requirements of the Merger Agreement. Promptly after the Effective Time and
receipt of such certificates and (if requested) agreement and acknowledgment,
HNC or its transfer agent will issue to each tendering holder of such an OSI
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 Merger Agreement and Escrow
Agreement, as described below), plus a check for the amount of cash in lieu of
any fractional shares. At or about the Closing Date, HNC will deliver the
certificates representing the Escrow Shares to the Escrow Agent pursuant to the
Escrow Agreement. See "Terms of the Merger--Manner and Basis of Converting OSI
Shares."
Assumption and Conversion of OSI Stock Options. Upon the Effective
Time, each OSI Option that is outstanding immediately prior to the Effective
Time will be assumed by HNC and converted into an HNC Option determined by
multiplying the number of shares of OSI Common Stock that are subject to such
OSI Option immediately prior to the Effective Time by the Participation Number,
at an exercise price per share of HNC Common Stock equal to the exercise price
per share of OSI Common Stock that was in effect for such OSI Option immediately
prior to the Effective Time divided by the Participation Number. The terms,
exercisability, vesting schedule, status as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), (if
applicable) or as a nonqualified stock option, and all other terms and
conditions of each OSI Option (including without limitation the provisions of
the OSI Option Plan that form part of the terms and conditions of such OSI
Option) that is converted into an HNC Option in the Merger will (except as
otherwise provided in the terms of such OSI Options), to the extent permitted by
law and otherwise reasonably practicable, be unchanged and continue in effect
after the Effective Time of the Merger. Pre-Merger employment or other service
with OSI will be credited to each holder of an OSI Option for purposes of
applying any vesting schedule based on the duration of such holder's employment
or other service contained in the HNC Option issued to such holder upon the
conversion of such OSI Option in the Merger in order to determine the number of
shares of HNC Common Stock that are exercisable under such HNC Option at any
point in time. See "Terms of the Merger--Assumption and Conversion of OSI Stock
Options."
Stock Ownership Immediately Following the Merger. Based upon the
capitalization of OSI as of the close of business on September 16, 1998
(including the number of shares of OSI Common Stock and OSI Preferred Stock
outstanding and the number of shares issuable upon exercise of outstanding OSI
Options), and assuming the issuance of options to purchase up to 200,000 shares
of OSI Common Stock before the Effective Time, an aggregate of approximately
2,507,507 shares of HNC Common Stock will be issued in the Merger and HNC will
assume OSI Options to purchase up to approximately 449,111 additional shares of
HNC Common Stock. Since OSI's capitalization is subject to charge prior to the
Effective time, these numbers may vary from the figures that actually result
from the Merger. See "Terms of the Merger--Stock Ownership Immediately Following
the Merger."
8
<PAGE> 19
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 OSI by operation of law, with
OSI continuing in existence as the surviving corporation of the Merger (the
"Surviving Corporation"). Pursuant to the Merger Agreement, the Certificate of
Incorporation of OSI, as amended and restated in the Merger Agreement, will
become the Certificate of Incorporation of the Surviving Corporation and the
Bylaws of OSI, as amended in the Merger Agreement, will become the Bylaws of the
Surviving Corporation. The officers of the Surviving Corporation immediately
after the Effective Time will be the individuals who are the officers of Merger
Sub immediately prior to the Effective Time. The members of the Board of
Directors of the Surviving Corporation immediately after the Effective Time will
be Douglas K. Anderson and three persons nominated by HNC, who are currently
anticipated to be Robert L. North, Raymond V. Thomas and Michael A. Thiemann.
There will be no change in the Board of Directors or officers of HNC as a result
of the Merger. See "Terms of the Merger--Effects of the Merger."
Conduct of Business Pending the Merger. Until the earlier of the
Effective Time or the termination of the Merger Agreement, OSI has agreed to
advise HNC promptly in writing (i) of any event that would render any
representation or warranty of OSI contained in the Merger 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 OSI's business,
results of operations, or financial condition. OSI has also agreed that it 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 Merger 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. In addition, without the prior written
consent of HNC, OSI is not permitted to perform or engage in certain activities.
Until the earlier of the Effective Time or the termination of the Merger
Agreement, HNC has agreed to advise OSI promptly in writing of any event that
would render any representation or warranty of HNC contained in the Merger
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect. See "Terms of the Merger--Conduct
of Business Pending the Merger."
Non-Solicitation. Pursuant to the Merger Agreement, OSI has agreed
that it will not, and will not authorize, encourage or permit any officer,
director, employee, stockholder, affiliate or agent of OSI or any other person
on OSI's or their behalf to, directly or indirectly engage in certain activities
relating to, or that could result in, an Alternative Transaction. The Merger
Agreement defines the term "Alternative Transaction" as (i) any commitment,
agreement or transaction involving or providing for the possible disposition of
all or any substantial portion of OSI's business, assets or capital stock,
whether by way of merger, consolidation, sale of assets, sale of stock, tender
offer and/or any other form of business combination or (ii) any initial public
offering of capital stock or other securities of OSI pursuant to a registration
statement filed under the Securities Act. See "Terms of the
Merger--Non-Solicitation."
Conditions to the Merger. In addition to the requirements that the
requisite approval of the OSI stockholders be received and that all HSR
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 completed and the Merger 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 Merger Agreement, performance by each
party of its covenants in the Merger Agreement, the absence of legal action
threatening, delaying or preventing consummation of the Merger, receipt of all
third party and governmental and regulatory consents and approvals and the
absence of any material adverse change in the business of the parties. In
addition, the obligations of HNC under the Merger Agreement to effect the Merger
are subject to the fulfillment or satisfaction of the conditions that HNC shall
have been advised in writing, as of the Effective Time, by its independent
accountants, PricewaterhouseCoopers LLP, that, subject to customary
qualifications, they concur with management's conclusion that no conditions
exist that would preclude HNC from accounting for the Merger as a pooling of
interests, and OSI will have been advised in writing, as of the Effective Time,
by its independent accountants, PricewaterhouseCoopers LLP, that, subject to
customary qualifications, they concur with management's conclusion that no
conditions exist that would preclude OSI from being a party to a business
combination for which the pooling of interests method of accounting would be
available. The obligations of HNC under the Merger Agreement to effect the
Merger are also subject to the fulfillment or satisfaction of certain other
conditions, including the conditions that HNC shall have received all third
party consents, the number of outstanding shares of OSI Common Stock and OSI
Preferred Stock (if any) that are eligible to exercise appraisal rights under
the DGCL will not exceed 5% of the shares of OSI Common Stock outstanding, HNC
shall have received signed Affiliate Agreements, Non-Competition Agreements and
the Escrow
9
<PAGE> 20
Agreement and resignations from certain OSI directors, certain OSI employees
shall have agreed to remain with OSI after the Effective Time, and that certain
parties with business relationships with OSI shall have waived certain rights
under the agreements governing those relationships. See "Terms of the
Merger--Conditions to the Merger."
Termination, Amendment and Waiver. The Merger Agreement may be
terminated at any time prior to the Effective Time by the mutual written consent
of HNC and OSI. Either HNC or OSI, by giving written notice to the other, may
terminate the Merger Agreement (i) if a court of competent jurisdiction or other
governmental authority shall have issued a nonappealable final order, decree or
ruling or taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger; or (ii) if the
Merger shall not have been consummated by December 31, 1998, subject to
extension for compliance with the HSR Act. Either HNC or OSI may terminate the
Merger Agreement at any time prior to the Closing if the other has committed
(or, in the case of a termination by OSI, Merger Sub has committed) a material
breach of (i) any of its representations and warranties under the Merger
Agreement; or (ii) any of its covenants under the Merger Agreement and has not
cured such material breach within 30 days after the party seeking to terminate
the Merger Agreement has given the other party written notice of the material
breach and its intention to terminate the Merger Agreement. Termination of the
Merger Agreement by a party (the "Terminating Party") in accordance with the
Merger Agreement shall not give rise to any obligation or liability on the part
of the Terminating Party on account of such termination, except to the extent
otherwise expressly provided in the Merger Agreement.
Any term or provision of the Merger Agreement may be amended, and the
observance of any term of the Merger Agreement may be waived only by a writing
signed by the party to be bound thereby. The waiver by a party of any breach of
the Merger Agreement or default in the performance of the Merger Agreement will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. The Merger Agreement may be amended by the parties at any
time before or after approval of the Merger Agreement by the stockholders of
OSI, but, after such approval, no amendment will be made which by applicable law
requires the further approval of the stockholders of OSI without obtaining such
further approval. See "Terms of the Merger--Termination, Amendment and Waiver."
LIQUIDATED DAMAGES
Under the Merger Agreement, if HNC refuses to consummate the Merger
notwithstanding satisfaction or waiver of all conditions precedent in the Merger
Agreement, or if HNC does not consummate the Merger solely due to OSI's failure
to satisfy certain conditions relating to waiver of certain rights of its
investors, HNC will, if requested to do so by OSI within 30 days after such a
termination of the Merger Agreement (i) purchase 625,000 shares of OSI Common
Stock at a price of $8.00 per share for cash on certain terms and (ii) lend OSI
$5.0 million, or such lesser sum as OSI may specify, on certain terms. Such
equity investment and/or loan would constitute OSI's sole and exclusive remedy
for any failure of HNC to consummate the Merger for the reasons described above.
INDEMNIFICATION AND ESCROW
In connection with the Merger, HNC, Douglas K. Anderson, as
representative of the OSI stockholders ("Representative") and State Street Bank
and Trust Company of California, N.A. or a 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 5% of the shares of HNC Common Stock to be issued to OSI
stockholders in the Merger (the "Escrow Shares") and will deliver certificates
representing such Escrow Shares to Escrow Agent, together with related stock
transfer powers, to be held by the Escrow Agent as security for the OSI
stockholders' indemnification obligations under the Merger Agreement and the
Escrow Agreement. Pursuant to these indemnification obligations, the OSI
stockholders will 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 ("Indemnified Persons") 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
("Damages") directly or indirectly incurred, resulting or and arising out of:
(i) any inaccuracy, misrepresentation, breach of, or default in, any of the
representations, warranties or covenants given or made by OSI in the Merger
Agreement or in the related documents and certificates delivered pursuant to the
Merger Agreement; (ii) any failure of any information pertaining to OSI and
contained in the Registration Statement or this Prospectus/Proxy Statement to be
true, correct and complete; or (iii) any OSI expenses incurred with respect to
the Merger Agreement, the Merger and the transactions contemplated thereby in
excess of that agreed to pursuant to the Merger Agreement ("Excess Transaction
Expenses"). Satisfaction of the indemnification obligations of the holders of
OSI Common Stock and OSI Preferred Stock will be effected solely by the
10
<PAGE> 21
forfeiture of the Escrow Shares and any other assets deposited in escrow
pursuant to the Escrow Agreement. However, these limitations do not restrict
HNC's rights against (i) any person with respect to any fraudulent conduct or
any fraudulent misrepresentations or omission by such person or (ii) any OSI
stockholder, with respect to any failure of such OSI stockholder to have good,
valid and marketable title to any issued and outstanding shares of OSI Common
Stock or OSI Preferred Stock held (or asserted to have been held) by such OSI
stockholder, free and clear of all liens, claims and encumbrances, or to have
the full right, capacity and authority to vote such person's shares of stock of
OSI stock in favor of the Merger and any other transaction contemplated by the
Merger Agreement. The Escrow Shares will be held by the Escrow Agent until the
first anniversary of the Effective Time. OSI stockholders may be required to
submit IRS Form W-9 or W-8 backup withholding statement to the Escrow Agent in
order to have their shares of HNC Common Stock released from escrow upon its
expiration. See "Terms of the Merger--Indemnification and Escrow."
RELATED AGREEMENTS
OSI Affiliate Agreement. To help ensure that the Merger will be
treated as a pooling of interests for accounting and financial reporting
purposes, each person determined by OSI to be an affiliate of OSI shall enter
into an Affiliate Agreement (the "Affiliate Agreement"), pursuant to which such
stockholder shall agree not to dispose of, or take any action that would reduce
its risk of ownership or investment in, any securities of HNC (i) during the
30-day period immediately preceding the Effective Time or (ii) until HNC has
publicly released a report including the combined financial results of HNC and
OSI for a period of at least 30-days post-Merger combined operations.
See "Terms of the Merger--Related Agreements--OSI Affiliate Agreement."
Voting Agreement. Pursuant to certain Voting Agreements dated
September 16, 1998 (the "Voting Agreements"), OSI stockholders that beneficially
own an aggregate of ______ shares of OSI Common Stock and ______ shares of OSI
Preferred Stock have agreed to vote all their shares of OSI Common Stock or OSI
Preferred Stock in favor of the Merger and against (i) any action or agreement
that would result in a breach of any representation, warranty, covenant or
obligation of OSI under the Merger Agreement or preclude fulfillment of a
condition precedent under the Merger Agreement, (ii) any Alternative Transaction
or any other action which is intended, or could be reasonably expected to,
impede, interfere with, delay, postpone, discourage or adversely affect the
Merger or any transactions contemplated thereby. Holders of a total of
approximately ___% and ____% of the outstanding shares of OSI Common Stock and
OSI Preferred Stock, respectively, have signed Voting Agreements. The vote of
the holders of these shares in accordance with the Voting Agreements will be
sufficient to approve the Merger. See "Terms of the Merger--Related
Agreements--Voting Agreement."
Non-Competition Agreement. Douglas K. Anderson, Graham H. Gurney,
John L. Person, Clifford I. Waggoner and Richard J. Willemin will enter into
Non-Competition Agreements providing that, for a certain period following the
Effective Time of the Merger, they will not directly or indirectly engage in any
business that is competitive with or substantially similar to the business
engaged in by OSI, or presently proposed to be conducted by OSI. See "Terms of
the Merger--Related Agreements--Non-Competition Agreement."
11
<PAGE> 22
MARKET PRICES AND DIVIDENDS
MARKET PRICES
HNC Common Stock has been traded on the Nasdaq National Market since
June 1995 under the symbol "HNCS." The following table sets forth for the
periods indicated the high and low sales prices of the HNC Common Stock. Before
June 1995, there was no established public trading market for the HNC Common
Stock. All prices have been adjusted to give effect to a two-for-one stock split
effected in the form of a stock dividend in April 1996.
<TABLE>
<CAPTION>
1996 High Low
------- -------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1997 High Low
------- -------
<S> <C> <C>
First Quarter $36 3/4 $23 1/4
Second Quarter $42 3/8 $18 1/4
Third Quarter $43 5/8 $33 3/4
Fourth Quarter $43 1/2 $30
</TABLE>
<TABLE>
<CAPTION>
1998 High Low
------- -------
<S> <C> <C>
First Quarter $43 $30 3/4
Second Quarter $42 3/4 $31 1/2
Third Quarter (through September 17, 1998) $47 1/8 $33 7/8
</TABLE>
There is no established public trading market for the OSI Common
Stock or the OSI Preferred Stock.
The following table sets forth the closing sales price per share of
HNC Common Stock on the Nasdaq National Market on September 15, 1998, the last
trading day before announcement of the proposed Merger, and on ___________,
1998, the latest practicable trading day before the mailing of this Proxy
Statement/Prospectus for which information was obtainable, and the assumed
equivalent per share prices for OSI Common Stock and OSI Preferred Stock. The
"equivalent per share price" for OSI Common Stock, OSI Series A-1 Preferred
Stock, OSI Series A-2 Preferred Stock, OSI Series B Preferred Stock, OSI Series
C Preferred Stock and OSI Series D Preferred Stock as of such dates equals the
closing sale price per share of HNC Common Stock on such dates multiplied by the
assumed Participation Numbers of 0.23794, 0.27594, 0.31394, 0.31394, 0.35194 and
0.38993, respectively. The foregoing numbers represent what the respective
conversion rates of each such class or series of OSI stock would be upon
consummation of the Merger, based on OSI's capitalization as of September 16,
1998, and assuming that after September 16, 1998 and prior to consummation of
the Merger, (1) all warrants to purchase shares of OSI stock that were
outstanding on September 16, 1998 are exercised in full, and (2) OSI grants OSI
Options to purchase an additional 200,000 shares of OSI Common Stock. See "Terms
of the Merger--Manner and Basis of Converting OSI Shares."
<TABLE>
<CAPTION>
September 15, 1998 , 1998
------------------ ------------------
<S> <C> <C>
HNC Common Stock ........... $40.125
OSI Common Equivalent ...... $ 9.547
OSI Series A-1 Equivalent... $11.072
OSI Series A-2 Equivalent... $12.597
OSI Series B Equivalent .... $12.597
OSI Series C Equivalent .... $14.122
OSI Series D Equivalent .... $15.646
</TABLE>
12
<PAGE> 23
OSI stockholders are advised to obtain current market quotations for
the HNC Common Stock. No assurance can be given as to the market prices of HNC
Common Stock at any time before the Effective Time or as to the market price of
HNC Common Stock at any time thereafter. Because the maximum number of shares of
HNC Common Stock to be issued in the Merger plus the number of shares of HNC
Common Stock subject to HNC Options to be issued in the Merger is fixed, OSI
stockholders will not be compensated for decreases in the market price of HNC
Common Stock that could occur before the Merger becomes effective. In the event
the market price of HNC Common Stock increases or decreases prior to the
Effective Time, the value at the Effective Time of the HNC Common Stock to be
received in the Merger in exchange for the OSI Common Stock and OSI Preferred
Stock would correspondingly increase or decrease. See "Terms of the
Merger--Manner and Basis of Converting OSI Shares."
On August 31, 1998, there were 25,784,351 shares of HNC Common Stock
issued and outstanding held by ____ stockholders of record. On September 16,
1998, there were 2,236,013 shares of OSI Common Stock and 5,944,583 shares of
OSI Preferred Stock issued and outstanding, held by a total of 40 stockholders
of record.
DIVIDENDS
HNC has never declared or paid any cash dividends on its capital
stock. 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. HNC's bank credit agreement prohibits HNC from declaring or
paying any cash dividends without the bank's consent.
OSI has never declared or paid any cash dividends on its capital
stock.
13
<PAGE> 24
COMPARATIVE PER SHARE DATA
COMPARISON OF EARNINGS (LOSS) AND BOOK VALUES PER SHARE OF COMMON STOCK*
The following table sets forth certain historical per share data of
HNC and OSI and selected unaudited pro forma financial information after giving
effect to the Merger as a pooling of interests for accounting purposes, and
assuming that (i) each outstanding share of OSI Common Stock will be converted
in the Merger into the right to receive 0.23794 shares of HNC Common Stock; (ii)
each outstanding share of OSI Series A-1 Preferred Stock, OSI Series A-2
Preferred Stock, OSI Series B Preferred Stock, OSI Series C Preferred Stock, and
OSI Series D Preferred Stock will be converted in the Merger into the right to
receive 0.27594, 0.31394, 0.31394, 0.35194 and 0.38993 shares of HNC Common
Stock, respectively; and (iii) each outstanding option to purchase one (1) share
of OSI common stock will be assumed by HNC in the Merger and converted into an
option to purchase 0.23794 shares of HNC Common Stock. The following data should
be read in conjunction with the Unaudited Pro Forma Combined Financial
Information and the separate historical financial statements of HNC and OSI
included elsewhere in this Proxy Statement/Prospectus. 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.
<TABLE>
<CAPTION>
PER HNC PER OSI PRO FORMA EARNINGS (LOSS)
COMMON SHARE COMMON SHARE GIVING EFFECT TO MERGER**
------------ ------------ --------------------------------------
PER 0.29366***
PER HNC HNC
YEAR EARNINGS (LOSS) EARNINGS (LOSS) COMMON SHARE COMMON SHARE
- ---- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
June 30, 1998 (six months)................ $ (0.43) $ (1.01) $ (0.47) $ (0.14)
December 31, 1997......................... $ 0.68 $ (1.42) $ 0.52 $ 0.15
December 31, 1996......................... $ 0.47 $ (1.73) $ 0.31 $ 0.09
December 31, 1995......................... $ 0.28 $ (0.98) $ 0.18 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
PER HNC PER OSI PRO FORMA BOOK VALUES
COMMON SHARE COMMON SHARE GIVING EFFECT TO MERGER**
------------ ------------ --------------------------------------
PER 0.29366***
PER HNC HNC
Book Values at COMMON SHARE COMMON SHARE
- -------------- ------------ ------------
<S> <C> <C> <C> <C>
June 30, 1998.......................... $ 4.77 $ (3.76) $ 4.42 $ 1.30
December 31, 1997...................... $ 4.23 $ (3.61) $ 3.55 $ 1.04
</TABLE>
* This Comparison should be read in conjunction with the Unaudited Pro
Forma Combined Financial Information and the separate financial
statements of HNC and OSI appearing elsewhere in this Proxy
Statement/Prospectus.
** Assumes that (i) each outstanding share of OSI Common Stock, OSI
Series A-1 Preferred Stock, OSI Series A-2 Preferred Stock, OSI
Series B Preferred Stock, OSI Series C Preferred Stock, and OSI
Series D Preferred Stock will be converted into the right to receive
0.23794, 0.27594, 0.31394, 0.31394, 0.35194 and 0.38993 shares of HNC
Common Stock, respectively; and (ii) each outstanding option to
purchase one (1) share of OSI Common Stock will be assumed by HNC and
converted into an option to purchase 0.23794 shares of HNC Common
Stock.
*** Aggregate conversion ratio derived by calculating the ratio of
2,956,618 shares of HNC Common Stock (and option therefor) issued to
OSI stockholders upon the Effective Time of the Merger to an assumed
10,068,096 shares of OSI Common Stock equivalents at the Effective
Time of the Merger.
14
<PAGE> 25
RISK FACTORS
The following factors should be considered carefully in evaluating
the matters to be voted on at the Special Meeting and the acquisition of the HNC
securities offered hereby. This Proxy Statement/Prospectus contains
forward-looking statements that involve risks and uncertainties. The
forward-looking statements contained herein reflect the best judgment of the
management of HNC and OSI based on factors currently known and involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Proxy Statement/Prospectus. See
"Forward-Looking Statements."
RISKS RELATING TO THE MERGER
GENERAL RISKS ASSOCIATED WITH INTEGRATION OF OPERATIONS. HNC and OSI
have entered into the Merger 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 OSI
will require, among other things, integration of the companies' respective
product offerings, the coordination of their respective management, sales and
marketing and research and development efforts and the cooperation and
coordination of HNC's and OSI's business managers. It is possible that this
integration will not be accomplished smoothly or successfully, and that efforts
to achieve integration may require more time, expense and management attention
than anticipated. The diversion of management's attention from day-to-day
operations and any difficulties encountered in the transition process related to
integrating the two companies could have a material adverse effect on HNC's
business, financial condition and results of operations. Disruption of HNC's or
OSI's business might result from employee uncertainty or lack of focus, as well
as from customer or supplier confusion, following announcement of the Merger.
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. In addition, during the pre-Merger and integration phase,
competitors may try to recruit key employees of HNC or OSI and to gain a
competitive advantage with the prospective and existing customers of HNC or OSI.
There can be no assurance that the focus on product integration and extension
efforts will not have an adverse effect on the development, introduction or
delivery of new or enhanced HNC or OSI products. Further, the addition of OSI's
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
operating losses if quarterly revenues fall below budgeted levels due to loss or
delay of such revenues.
DEPENDENCE ON OSI MANAGEMENT. If members of OSI's current management
team were to terminate their employment with OSI, HNC's ability to manage OSI's
business and workforce would be harmed and OSI's operations could be disrupted.
Although Douglas K. Anderson, the Chief Executive Officer of OSI, and John L.
Person, the President of OSI, will be subject to employment agreements with OSI
after the Merger, there can be no assurance that these agreements will result in
the retention of Mr. Anderson and Mr. Person for any significant period of time.
A loss of Mr. Anderson or Mr. Person or any other member of OSI's management
could defer or prevent HNC from realizing the benefits that it anticipates from
the Merger and likely would have a material adverse effect on HNC's business,
financial condition and results of operations.
FINANCIAL IMPACT OF FAILURE TO ACHIEVE SYNERGIES; NON-RECURRING
CHARGE. If the integration of the operations of the two companies is not
successful, if HNC does not achieve business synergies as quickly or in as great
an amount as may be expected by financial analysts, or if the accretive/dilutive
effect of the Merger is not in line with the expectations of financial analysts,
the market price of HNC 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 Common Stock. In
particular, HNC and OSI will incur substantial Merger-related expenses,
currently estimated to be approximately $4.5 million, which will result in a
non-recurring charge to operations primarily in the fourth quarter of 1998, the
quarter in which the Merger is expected to be completed. HNC expects that the
Merger will begin to be accretive beginning in the second half of 1999. However,
this forward-looking statement is subject to risks and uncertainties and actual
results may vary materially due to unforeseen changes, inaccurate or incomplete
assumptions regarding the current business or future prospects of either or both
of OSI or HNC, or other reasons, including without limitation those described in
this "Risk Factors" section or elsewhere in this Proxy Statement/Prospectus.
Actual costs may substantially exceed current estimates, unanticipated expenses
associated with the integration of the two companies may arise or HNC may incur
additional material charges in subsequent quarters to reflect additional costs
associated with the integration of the two companies. Any failure of the Merger
to meet expectations as to potential business synergies or to be accretive in
any quarter could have an immediate and significant adverse effect on the market
price of HNC Common Stock following the Merger.
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INCREASED INTEGRATION DIFFICULTIES ASSOCIATED WITH RECENT
ACQUISITIONS. The challenges of integrating the organizations and operations of
HNC and OSI will be compounded by ongoing efforts associated with the
integration of several recent acquisitions by HNC. Between August 1996 and
August 1998, HNC acquired five businesses and purchased one product line. In
August 1996, HNC acquired Risk Data Corporation ("Risk Data"), a company that
develops, markets and supports proprietary software decision products for use in
the insurance industry. In November 1996, HNC acquired Retek Distribution
Corporation, now named Retek Information Systems, Inc. ("Retek"), a company that
develops, markets and supports management decision software products for
retailers and their vendors. In November 1997, HNC acquired CompReview, Inc.
("CompReview"), a company that develops, markets and supports a 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.
In March 1998, HNC acquired Practical Control Systems Technologies, Inc.
("PCS"), a company that develops, markets and supports fully integrated
distribution center management software products that address the distribution
needs of the retail, manufacturing and wholesale industries. In April 1998, HNC
acquired Financial Technology, Inc. ("FTI"), a company that develops and markets
profitability measurement and decision support software products and related
support services to banks and other similar financial institutions. In June
1998, HNC acquired the Advanced Telecommunications Abuse Control System
("ATACS") product line of Bedford Associates, Inc., which is a wholly owned
subsidiary of British Airways plc. ATACS is a fraud management software solution
for wireline, wireless and Internet telecommunication service providers. The
integration of multiple organizations will require a substantial amount of HNC's
management resources and attention. See "--Risks Relating to HNC--Recent and
Future Acquisitions."
INTEGRATION OF GEOGRAPHICALLY DISPERSED ORGANIZATIONS. The
difficulties of integrating the organizations of HNC and OSI will be compounded
by the fact that HNC is headquartered in California and OSI is headquartered in
Connecticut. It is intended that OSI will maintain its presence in Connecticut
following the Merger, which may complicate coordination and communication among
management, development, marketing and service teams and may require additional
management resources and attention.
RISKS ASSOCIATED WITH RIGHT TO RECEIVE FIXED NUMBER OF SHARES. Under
the terms of the Merger Agreement the outstanding shares of OSI Common Stock and
OSI Preferred Stock and outstanding OSI Options will be converted in the Merger
into the right to receive a fixed number of shares of (and options to purchase)
HNC Common Stock. The Merger Agreement does not provide for adjustment of such
number based on fluctuations in the price of HNC Common Stock. The price of HNC
Common Stock may vary significantly between the date hereof and the date on
which the OSI stockholders vote with respect to the Merger Agreement due to,
among other factors, market perception of the synergies expected to be achieved
by the Merger, changes in the business, operations, results of operations or
prospects of HNC or OSI, market assessments of the likelihood that the Merger
will be completed, the timing of completion of the Merger and general market and
economic conditions. To the extent that the market price for HNC Common Stock
increases or decreases before the Effective Time of the Merger, the market value
at the Effective Time of HNC Common Stock to be received by OSI stockholders in
the Merger would correspondingly increase or decrease. OSI stockholders will not
be compensated for decreases in the market price of HNC Common Stock that could
occur before the Effective Time of the Merger. HNC Common Stock historically has
been subject to substantial price volatility. No assurance can be given as to
the market price of HNC Common Stock. The market prices of HNC Common Stock as
of a recent date are set forth herein under "Market Prices and Dividends."
Stockholders voting on the Merger Agreement and the Merger are urged to obtain
recent market quotations for HNC Common Stock. The current market quotations for
HNC Common Stock may be obtained on the Internet at http://www.nasdaq.com. See
"--Risks Relating to HNC--Volatility of HNC Common Stock Price."
REDUCTION OF OWNERSHIP INTEREST OF CURRENT SHAREHOLDERS. Following
the Merger, and based on the number of shares of OSI Common Stock, OSI Preferred
Stock and OSI Options outstanding as of September __, 1998, and assuming that,
after September 16, 1998 and prior to consummation of the Merger, all warrants
to purchase OSI stock that were outstanding on September 16, 1998 are exercised
in full, and that OSI grants OSI Options to purchase an additional 200,000
shares of OSI Common Stock, the current shareholders of HNC and OSI would own
approximately ____% and ___%, respectively, of the shares of HNC Common Stock
outstanding and ___% and ___%, respectively, of the shares of HNC Common Stock
on a fully diluted basis immediately following the Merger. This represents
substantial reduction of the ownership interest of the current stockholders of
HNC and OSI, in each case compared to their ownership interests in their
respective companies before the Effective Time of the Merger. The issuance of
additional shares of HNC Common Stock pursuant to the OSI Options being assumed
by HNC in the Merger, the future grant of additional HNC stock options pursuant
to the existing employee stock option plans of HNC, the conversion of any of
HNC's 4.75% Convertible Subordinated Notes due 2003 and any issuance of
additional shares to the former shareholders of PCS or FTI, subject to
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achievement of certain financial objectives by PCS and FTI, respectively, set
forth in their acquisition agreements with HNC, will result in further dilution
to the current stockholders of HNC and OSI.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of HNC
Common Stock (including shares issued upon the exercise of outstanding options
and warrants) in the public market could adversely affect the market price of
HNC Common Stock prevailing from time to time and could impair the ability of
HNC to raise capital through the sale of equity or debt securities. At the
Effective Time of the Merger, HNC will issue to the stockholders of OSI an
aggregate of approximately 2,507,507 shares of HNC Common Stock, based on the
number of shares of OSI Common Stock, OSI Preferred Stock and OSI Options
outstanding as of September 16, 1998. Based on the above assumptions,
immediately upon completion of the Merger, approximately _______ of such shares
will be freely tradable, and the remainder can be publicly sold following
publication of financial results covering 30 days of post-Merger combined
operations, subject to volume and other limitations imposed upon affiliates of
OSI under Rule 145 promulgated under the Securities Act. In addition, based on
the number of OSI Options outstanding as of September 16, 1998, following the
Merger approximately 449,111 additional shares of HNC Common Stock will be
reserved for issuance upon exercise of OSI Options converted into HNC Options in
the Merger. Substantially all of the approximately _________ shares of HNC
Common Stock outstanding immediately before the Merger will either be freely
tradable, or tradable within the volume and manner of sale restrictions imposed
under Rule 144 or Rule 145 promulgated under the Securities Act. Any substantial
sales of HNC securities in the public market could have a material adverse
effect on the market price of such securities.
POOLING OF INTERESTS. To qualify the Merger as a pooling of interests
for accounting purposes, HNC, OSI and their respective affiliates must meet the
criteria for pooling of interests accounting established in opinions published
by the Accounting Principles Board and interpreted by the Financial Accounting
Standards Board and the Commission. These opinions are complex and the
interpretation of them is subject to change. Consummation of the Merger is
conditioned, among other things, upon (i) the receipt by OSI of a letter from
its independent accountants that, subject to customary qualifications, they
concur with management's conclusion that no conditions exist that would preclude
OSI from being a party to a business combination for which the pooling of
interests method of accounting would be available and (ii) receipt by HNC of a
letter from its independent accountants that, subject to customary
qualifications, they concur with management's conclusion that no conditions
exist that would preclude HNC from accounting for the Merger as a pooling of
interests. However, the availability of pooling of interests accounting
treatment for the Merger depends, in part, upon circumstances and events
occurring after the Effective Time of the Merger. For example, affiliates of HNC
and OSI must not sell, or otherwise reduce their risk with respect to, any
shares of stock, except for a de minimus number as defined by certain Commission
rules and regulations, of either HNC or OSI during the period beginning 30 days
before the Effective Time and continuing until the day that HNC publicly
announces financial results covering at least 30 days of combined post-Merger
operations of HNC and OSI. If the Merger is completed and the Effective Time
occurs during November 1998, HNC expects that such combined financial results
would be published in January 1999. If affiliates of HNC or OSI sell their
shares of HNC Common Stock prior to that time despite a contractual obligation
not to do so, the Merger may not qualify for accounting as a pooling of
interests for financial reporting purposes. The failure of the Merger to qualify
for pooling of interests accounting treatment for financial reporting purposes
for any reason would materially and adversely affect HNC's reported earnings
and, potentially, the price of the HNC Common Stock. See "Approval of the
Merger--Accounting Treatment."
RISKS RELATING TO HNC
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. HNC's revenues and
operating results have varied significantly in the past and may do so in the
future. Factors affecting HNC's revenues and operating results include: market
acceptance of HNC's products; the relatively large size and small number of
customer orders that may be received during a given period; customer
cancellation of long-term contracts yielding recurring revenues or customers'
ceasing their use of HNC's products for which HNC's fees are usage based; the
length of the sales cycle of many HNC products; HNC's ability to develop,
introduce and market new products and product enhancements; the timing of new
product announcements and introductions by HNC and its competitors; changes in
the mix of HNC's distribution channels; changes in the level of HNC's operating
expenses; HNC's ability to achieve progress on percentage-of-completion
contracts; HNC's success in completing certain pilot installations for
contracted fees; competitive conditions in the industry; domestic and
international economic conditions; and market conditions in HNC's targeted
markets. In addition, license agreements entered into during a quarter may not
meet HNC's revenue recognition criteria. Therefore, even if HNC meets or exceeds
its forecast of aggregate licensing and other contracting activity, it is
possible that HNC's revenues would not meet expectations. Furthermore, HNC's
operating results may be affected by factors unique to certain of its product
lines. For example, HNC derives a substantial and increasing portion of its
revenues from its retail products, which are generally priced as
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"perpetual" license transactions in which HNC receives a one-time license fee.
HNC recognizes these fees as revenue upon delivery of the software and
acceptance by the customer. Thus, failure to complete a perpetual license
transaction during a fiscal quarter would preclude HNC from recognizing revenue
from that transaction in that quarter, and thus could have a disproportionate
adverse impact on HNC's operating results for that quarter.
HNC expects fluctuations in its operating results to continue for the
foreseeable future. Consequently, HNC believes that period-to-period comparisons
of its financial results should not be relied upon as an indication of future
performance. Because HNC's expense levels are based in part on its expectations
regarding future revenues and in the short term are fixed to a large extent, HNC
may be unable to adjust its spending in time to compensate for any unexpected
revenue shortfall. Accordingly, HNC may not be able to maintain profitability on
a quarterly or annual basis in the future. Due to the foregoing factors, it is
possible that in some future quarter HNC's operating results will be below the
expectations of public market analysts and investors. In that event, the price
of HNC Common Stock and, in turn, the price of HNC's 4.75% convertible
subordinated notes due 2003, would likely be materially adversely affected. See
"HNC Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LENGTHY AND UNPREDICTABLE SALES CYCLE. Due in part to the
mission-critical nature of certain of HNC's applications, potential customers
perceive high risk in connection with adoption of HNC's products. As a result,
customers have been cautious in making decisions to acquire HNC's products. In
addition, because the purchase of HNC's products typically involves a
significant commitment of capital and may involve shifts by the customer to a
new software and/or hardware platform, delays in completing sales can arise
while customers complete their internal procedures to approve large capital
expenditures and test and accept new technologies that affect key operations.
For these and other reasons, the sales cycle associated with the purchase of
HNC's products is typically lengthy, unpredictable and subject to a number of
significant risks over which HNC has little or no control, including customers'
budgetary constraints and internal acceptance reviews. The sales cycle
associated with the licensing of HNC's products can typically range from 60 days
to 18 months. As a result of the length of the sales cycle and the typical size
of customers' orders, HNC's ability to forecast the timing and amount of
specific sales is limited. A lost or delayed sale could have a material adverse
effect on HNC's business, financial condition and results of operations. See
"HNC Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of HNC--Sales and Marketing."
RECENT AND FUTURE ACQUISITIONS. Between August 1996 and August 1998,
HNC acquired five businesses and purchased one product line. HNC acquired Risk
Data and Retek in 1996, CompReview in 1997 and PCS and FTI in 1998. Also in
1998, HNC purchased the ATACS product line. HNC believes that its future growth
depends, in part, upon the success of these and possible future acquisitions.
There can be no assurance that HNC will successfully identify, acquire on
favorable terms or integrate such businesses, products, services or
technologies. HNC may in the future face increased competition for acquisition
opportunities, which may inhibit HNC's ability to consummate suitable
acquisitions and increase the costs of completing such acquisitions. The
acquisitions of Risk Data, Retek, CompReview, PCS and FTI, and the ATACS product
line, as well as other potential future acquisitions, will require HNC to
successfully manage and integrate such acquired businesses, which may be located
in diverse geographic locations. Acquiring other businesses also requires HNC to
successfully develop and market products to new industries and markets with
which HNC may not be familiar. It also requires HNC to coordinate (and possibly
change) the diverse operating structures, policies and practices of the acquired
companies and to integrate the employees of the acquired companies into HNC's
organization and culture. Failure of HNC to successfully integrate and manage
acquired businesses, to retain their employees, and to successfully address new
industries and markets associated with such acquired businesses, would have a
material adverse effect on HNC's business, financial condition and results of
operations. The acquisitions of Risk Data, Retek and CompReview have been
accounted for as poolings of interests. The acquisitions of PCS and FTI have
been accounted for as purchases. The acquisition of PCS resulted in an
accounting charge of approximately $4.0 million in the quarter ended March 31,
1998. The acquisitions of FTI and ATACS resulted in an accounting charge of
approximately $19.5 million in the second quarter of 1998. Any other future
acquisitions that may be accounted for as purchases may result in charges that
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. See
"Business of HNC--HNC's Strategy."
RISKS ASSOCIATED WITH MANAGING GROWTH. In recent years, HNC has
experienced changes in its operations that have placed significant demands on
HNC's administrative, operational and financial resources. The growth in HNC's
customer base and expansion of its product functionality, together with its
acquisition of other businesses and their employees and expansion of its product
line into new markets, have challenged and are expected to continue to challenge
HNC's management and operations, including its sales, marketing, customer
support, research and development and
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finance and administrative operations. HNC's future performance will depend in
part on its ability to successfully manage change, both in its domestic and
international operations, and to adapt its operational and financial control
systems, if necessary, to respond to changes in its business and to facilitate
the integration of acquired businesses with HNC's operations. The failure of
HNC's management to effectively respond to and manage growth could have a
material adverse effect on HNC's business, financial condition and results of
operations.
DEPENDENCE ON EMERGING TECHNOLOGIES AND MARKETS. The market for
predictive software solutions is still emerging. The rate at which businesses
have adopted HNC's products has varied significantly by market and by product
within each market, and HNC expects to continue to experience such variations
with respect to its target markets and products in the future. HNC has
introduced products for the healthcare/insurance, financial services and retail
markets. HNC has recently announced several new products, including PMAdvisor,
VeriComp, SelectCast, SelectResponse, SelectResource and SelectProfile. To date,
none of these products has achieved any significant degree of market acceptance,
and there can be no assurance that such products will ever be widely accepted.
Although many businesses in HNC's target markets have recognized the advantages
of using predictive software solutions to automate the decision-making process,
many have developed decision automation systems internally rather than licensing
them from outside vendors. There can be no assurance that the markets for HNC's
products will continue to develop or that HNC's products will be widely
accepted, if at all. If the markets for HNC's new or existing products fail to
develop, or develop more slowly than anticipated, HNC's sales would be
negatively impacted, which would have a material adverse effect on HNC's
business, financial condition and results of operations. See "Business of
HNC--Emerging Market Opportunities."
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE AND DELAYS IN DEVELOPING
NEW PRODUCTS. The market for HNC's predictive software solutions is
characterized by rapidly changing technology and improvements in computer
hardware, network operating systems, programming tools, programming languages,
operating systems and database technology. HNC's success will depend upon its
ability to continue to develop and maintain competitive technologies, enhance
its current products and develop, in a timely and cost-effective manner, new
products 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 HNC,
which develop software solutions that now may have to be designed to operate in
Internet, intranet and other on-line environments. HNC may not be able to
develop and market, on a timely basis, or at all, product enhancements or new
products that respond to changing technologies. HNC has previously experienced
significant delays in the development and introduction of new products and
product enhancements, primarily due to difficulties with model development,
which has in the past required multiple iterations, as well as difficulties with
acquiring external data needed to enable a product to function and adapting to
particular operating environments. The length of these delays has varied
depending upon the size and scope of the project and the nature of the problems
encountered. 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 on HNC's
business, financial condition and results of operations. Any failure by HNC to
anticipate or to respond adequately to changing technologies, or any significant
delays in product development or introduction, could cause customers to delay or
decide against purchases of HNC's products and would have a material adverse
effect on HNC's business, financial condition and results of operations.
PRODUCT CONCENTRATION. HNC currently has one product or product line
in each of its three target markets that accounts for a majority of HNC's total
revenues from that market. These products in the aggregate accounted for 60.0%,
59.1%, 57.9% and 54.0% of HNC's total revenues in 1995, 1996, 1997 and the first
six months of 1998, respectively. In the healthcare/insurance market, HNC's
revenues from its CRLink product accounted for 29.8%, 24.6%, 23.0% and 21.7% of
HNC's total revenues in 1995, 1996, 1997 and the first six months of 1998,
respectively, and are expected to account for a substantial portion of HNC's
total revenues for the foreseeable future. Continued market acceptance of CRLink
will be affected by future product enhancements and competition. 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, an inability to obtain or use state fee schedule or claims
data, saturation of market demand, industry consolidation or otherwise, could
result in decreased revenues from CRLink, which could have a material adverse
effect on HNC's business, financial condition and results of operations.
Further, revenues from the Retek Merchandising System ("RMS"), a retail
management product, accounted for 2.2%, 13.6%, 18.9% and 16.5% of HNC's total
revenues in 1995, 1996, 1997 and the first six months of 1998, respectively, and
are expected to continue to account for a substantial portion of HNC's revenues
in the foreseeable future. Continued market acceptance of RMS will be affected
by the quality and timely introduction of future product enhancements and
competition. Decline in demand for, or use of, RMS as a result of continued
entry into the retail inventory management market by vendors that may have
significantly greater resources and a broader customer base than HNC could
result in
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decreased revenues from RMS, which could have a material adverse effect on HNC's
business, financial condition and results of operations. In addition, decline in
demand for RMS, as a result of technological change, saturation of market
demand, industry consolidation or otherwise would have a material adverse effect
on HNC's business, financial condition and results of operations. Revenues from
HNC's Falcon product line for credit card fraud detection accounted for 28.0%,
20.9%, 16.0% and 15.8% of HNC's total revenues in 1995, 1996, 1997 and the first
six months of 1998, respectively, and are expected to continue to account for a
substantial portion of HNC's total revenues in the foreseeable future. Continued
market acceptance of the Falcon product line will be affected by the quality and
timely introduction of future product enhancements and competition. In addition,
it is possible that patterns of credit card fraud may change in a manner that
the Falcon product line would not detect and that other methods of credit card
fraud prevention may reduce customers' needs for the Falcon product line. As a
result of increasing saturation of market demand for the Falcon product line,
HNC may also need to rely increasingly on international sales to maintain or
increase Falcon revenue levels. Furthermore, Falcon customers are banks and
related financial institutions. Accordingly, HNC's future success depends upon
the capital expenditure budgets of such customers and the continued demand by
such customers for Falcon products. The financial services industry tends to be
cyclical in nature, which may result in variations in demand for HNC's products.
In addition, there has been and continues to be consolidation in the financial
services industry, which in some cases has led to lost or delayed sales and
reduced HNC's financial services customer base, which may lead to reduced demand
for HNC's products. Industry consolidation also could affect HNC's base of
recurring revenues on transaction based contracts as customers combine their
operations under one contract with HNC that, in some cases, could result in
lower payments or fees than those previously paid by such customers. Decline in
demand for, or use of, Falcon, whether as a result of competition, technological
change, change in fraud patterns, the cyclical nature of the financial service
industry, saturation of market demand, fluctuations in interest rates, industry
consolidation, reduction in capital spending or otherwise, could have a material
adverse effect on HNC's business, financial condition and results of operations.
See "Business of HNC--Markets and Products."
DEPENDENCE ON DATA. The development, installation and support of
HNC's credit card fraud control and profitability management, loan underwriting
and certain healthcare/insurance products require periodic statistical model
updates. HNC must develop or obtain a reliable source of sufficient amounts of
current and statistically relevant data to analyze transactions and update its
models. For example, in the electronic payments market, the data required by HNC
are collected privately and maintained in proprietary databases. As a result,
HNC and its Falcon and ProfitMax customers enter into agreements pursuant to
which customers agree to provide the data HNC requires to analyze transactions,
report results and build new fraud detection and profitability models. Many of
HNC's healthcare/insurance products use historical workers' compensation claims
data obtained from customers. CRLink also uses data from state workers'
compensation fee schedules adopted by state regulatory agencies, and certain
third parties have asserted copyright interests in such data. In most cases,
such data must be periodically updated and refreshed to enable HNC's predictive
software products to continue to work effectively. In addition, the development
of new and enhanced products also depends to a significant extent on the
availability of sufficient amounts of statistically relevant data to enable HNC
to develop models. There can be no assurance that HNC will be able to continue
to obtain adequate amounts of statistically relevant data on a timely basis, in
the required formats or on reasonable terms and conditions, whether from
customers or commercial suppliers. Any such failure by HNC to obtain required
data when it is needed, for a reasonable price and on reasonable terms, could
have a significant negative impact on existing product performance, new product
development and product pricing which could in turn have a material adverse
effect on HNC's business, financial condition and results of operations. See
"Business of HNC--Customer Service and Support."
COMPETITION. The market for predictive software solutions for service
industries is intensely competitive and subject to rapid change. Competitors,
many of which have substantially greater financial resources than HNC, vary in
size and in the scope of the products and services they offer. HNC encounters
competition from a number of sources, including (i) other application software
companies including enterprise software vendors, (ii) management information
systems departments of customers and potential customers, including financial
institutions, insurance companies and retailers, (iii) third-party professional
services organizations, including without limitation, consulting divisions of
public accounting firms, (iv) hardware suppliers that bundle or develop
complementary software, (v) network and service providers that seek to enhance
their value-added services, (vi) neural-network tool suppliers and (vii) managed
care organizations. In the healthcare/insurance market, HNC has experienced
competition primarily from National Council on Compensation Insurance ("NCCI"),
Corporate Systems and CSC Incorporated. In the workers' compensation and medical
cost administration market, HNC has experienced competition from MediCode, Inc.
("MediCode"), Medata, Inc. and Embassy Software with regard to software
licensing, and Intracorp and Corvel Corporation in the service bureau operations
market. Additionally, HNC has faced competition from Automatic Data Processing,
Inc. ("ADP") in the automobile accident medical claims market. In the financial
services market, HNC has experienced competition from Fair, Isaac & Co., Inc.,
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Cogensys (a subsidiary of Policy Management Systems Corporation), Federal
National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage
Corporation ("Freddie Mac"), International Business Machines Corporation
("IBM"), Nestor, Inc., NeuralTech Inc., Neuralware Inc., PMI Mortgage Services
Co., VISA International and others. In the retail market, HNC has experienced
competition from JDA Software Group, Inc., SAP AG, PeopleSoft, Inc., IBM,
Manugistics Group, Inc. and others. HNC expects to experience additional
competition from other established and emerging companies, as well as from other
technologies. For example, HNC's Falcon product competes against other methods
of preventing credit card fraud, such as card activation programs, credit cards
that contain the cardholder's photograph, smart cards and other card
authorization techniques. Increased competition, whether from other products or
new technologies, could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely affect HNC's business, financial condition and results of operations.
HNC believes that most of its products are currently priced at a
premium when compared to its competitors' products. The market for HNC's
products is highly competitive, and HNC expects that it will face increasing
pricing pressures from its 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 HNC's ability to obtain new long-term contracts and renewals of existing
long-term contracts on terms favorable to HNC. Any reduction in the price of
HNC's products could materially adversely affect HNC's business, financial
condition and results of operations.
Some of HNC's current competitors, and many of HNC's potential
competitors, have significantly greater financial, technical, marketing and
other resources than HNC and broader integrated product lines. 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 HNC and may possess marketing
advantages due to their ability to market integrated suites of related products
that are vital to the customer's computing infrastructure. 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 HNC's prospective customers. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly gain significant market share. Also, HNC relies upon its customers
to provide data, expertise and other support for the ongoing updating of HNC's
models. HNC's customers, most of which have significantly greater financial and
marketing resources than HNC, may compete with HNC in the future or otherwise
discontinue their relationships with or support of HNC. There can be no
assurance that HNC will be able to compete successfully against current and
future competitors or that competitive pressures faced by HNC will not
materially adversely affect its business, financial condition and results of
operations. See "Business of HNC--Competition."
RISKS ASSOCIATED WITH RECRUITING AND RETAINING QUALIFIED PERSONNEL.
HNC's success depends to a significant degree upon the continued service of
members of HNC's senior management and other key research, development, sales
and marketing personnel. Accordingly, the loss of any of HNC's senior management
or key research, development, sales or marketing personnel could have a material
adverse effect on HNC's business, financial condition and results of operations.
Only a small number of employees have employment agreements with HNC, and there
can be no assurance that such agreements will result in the retention of these
employees for any significant period of time. In addition, the untimely loss of
a member of the management team or a key employee of a business acquired by HNC
could have a material adverse effect on HNC's business, financial condition and
results of operations, particularly if such loss occurred before HNC has had
adequate time to familiarize itself with the operating details of that business
and provide a suitably experienced replacement for such employee. In the past,
HNC has experienced difficulty in recruiting a sufficient number of qualified
sales and technical employees. In addition, competitors may attempt to recruit
HNC's key employees. There can be no assurance that HNC will be successful in
attracting, assimilating and retaining such personnel. The failure to attract,
assimilate and retain key personnel could have a material adverse effect on
HNC's business, financial condition and results of operations. See "Business of
HNC--Employees" and "Management of HNC."
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 1995, 1996, 1997 and
the first six months of 1998, international operations and export sales
(including sales in Canada) represented 12.6%, 17.7%, 16.8% and 27.0% of HNC's
total revenues, respectively. HNC intends to continue to expand its operations
outside the United States and to enter additional international markets, which
will require significant management attention and financial resources. For
certain more mature products, such as Falcon, HNC may need to increase
international sales in order to continue to expand the product's customer base.
HNC has committed and continues to commit significant time and development
resources to customizing certain of its products for selected international
markets and to developing international sales and support channels. There can be
no assurance that HNC's efforts to develop products, databases and models for
targeted international markets or to
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develop additional international sales and support channels will be successful.
The failure of such efforts, which can entail considerable expense, could have a
material adverse effect on HNC's business, financial condition and results of
operations.
International sales are subject to additional inherent risks,
including longer payment cycles, unexpected changes in regulatory requirements,
import and export restrictions and tariffs, difficulties in staffing and
managing foreign operations, the burdens of complying with a variety of foreign
laws, greater difficulty or delay in accounts receivable collection, potentially
adverse tax consequences and political and economic instability. HNC's
international sales are currently denominated predominately in United States
dollars and a small portion are denominated in British pounds sterling. An
increase in the value of the United States dollar relative to foreign currencies
could make HNC's products more expensive, and therefore potentially less
competitive, in foreign markets. In the future, to the extent that HNC's
international sales are denominated in local currencies, foreign currency
translations may contribute to significant fluctuations in HNC's business,
financial condition and results of operations. If for any reason exchange or
price controls or other restrictions on foreign currencies are imposed, HNC's
business, financial condition and results of operations could be materially
adversely affected. See "Business of HNC--Sales and Marketing."
RISKS ASSOCIATED WITH CHANGING REGULATORY ENVIRONMENT. HNC's
customers are subject to a number of government regulations and certain other
industry standards with which many of HNC's key products must comply. For
example, HNC's financial services products are affected by Regulation B
promulgated under the Equal Credit Opportunity Act, by regulations governing the
extension of credit to consumers and by Regulation E promulgated under the
Electronic Fund Transfers Act governing the transfer of funds from and to
consumer deposit accounts, as well as VISA and MasterCard electronic payment
standards. In the mortgage services market, HNC's products are affected by
regulations such as Fannie Mae and Freddie Mac regulations for conforming loans,
Uniform Standards of Professional Appraisal Practice and appraisal standards for
federally insured institutions under the Financial Institutions Reform, Recovery
and Enforcement Act. In addition, recent regulatory initiatives have restricted
the availability of bank and credit bureau data, reflecting a consumer privacy
trend that could limit HNC's ability to obtain or use certain credit-related
information. It is also possible that insurance-related regulations may in the
future apply to HNC's healthcare/insurance products. In addition, if
state-mandated workers' compensation laws or regulations or state workers'
compensation fee schedules are simplified, such changes would diminish the need
for, and the benefit provided by, the CRLink product. In many states, including
California, there have been periodic legislative efforts to reform workers'
compensation laws in order to reduce the cost of workers' compensation insurance
and to curb abuses of the workers' compensation system. Changes in workers'
compensation laws or regulations could adversely affect HNC's
healthcare/insurance products by making them obsolete, or by requiring extensive
changes in these products to reflect new workers' compensation rules. To the
extent that HNC sells new products targeted to markets that include regulated
industries and businesses, HNC's products will need to comply with these
additional regulations. Any failure of HNC's products to comply with existing or
future regulations and standards could result in legal action against HNC or its
customers by regulatory authorities or by third parties, including actions
seeking civil or criminal penalties, injunctions against HNC's use of data or
civil damages, any of which could have a material adverse effect on HNC's
business, financial condition and results of operations. HNC may also be liable
to its customers for failure of its products to comply with such regulatory
requirements. Furthermore, changes to these regulations and standards or the
adoption of new regulations or standards that affect HNC's products could affect
the performance of such products and have a material adverse effect on HNC's
business, financial condition and results of operations.
PROTECTION OF INTELLECTUAL PROPERTY. HNC relies on a combination of
patent, copyright, trademark and trade secret laws and confidentiality
procedures to protect its proprietary rights. HNC currently owns ten issued
United States patents and has two United States patent applications pending. HNC
has applied for additional patents for its Falcon technology in Canada, Europe
and Japan and for its MIRA product in Australia, Canada and Europe. There can be
no assurance that patents will be issued with respect to pending or future
patent applications or that HNC's patents will be upheld as valid or will
prevent the development of competitive products. HNC also seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. As part of its
confidentiality procedures, HNC 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 and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise to obtain and use HNC's
products 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 HNC's business, HNC places source code for
certain of its products into escrow, which may increase the likelihood of
misappropriation or other misuse of HNC's intellectual
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property. Moreover, effective protection of intellectual property rights may be
unavailable or limited in certain foreign countries in which HNC has done and
may do business. Also, HNC has developed technologies under research projects
conducted under agreements with various United States Government agencies or
subcontractors to such agencies. Although HNC has acquired certain commercial
rights to such technologies, the United States Government typically retains
ownership of certain intellectual property rights and licenses in the
technologies developed by HNC under such contracts, and in some cases can
terminate HNC's rights in such technologies if HNC fails to commercialize them
on a timely basis. In addition, under certain United States Government
contracts, the results of HNC's research may be made public by the government,
which could limit HNC's competitive advantage with respect to future products
based on such research. See "Business of HNC--Intellectual Property and Other
Proprietary Rights."
INFRINGEMENT OF PROPRIETARY RIGHTS. In the past, HNC has received
communications from third parties asserting that HNC trademarks infringe such
other parties' trademarks, or that data used by HNC is copyrighted by such third
party none of which has resulted in litigation or losses to HNC. Given HNC's
ongoing efforts to develop and market new technologies and products, HNC may
receive communications from third parties asserting that HNC's products
infringe, or may infringe, their intellectual property rights. If as a result of
any such claims HNC were precluded from using certain technologies or
intellectual property rights, licenses to such disputed third-party technology
or intellectual property rights might not be available on reasonable commercial
terms, if at all. Furthermore, HNC may initiate claims or litigation against
third parties for infringement of HNC's proprietary rights or to establish the
validity of HNC's proprietary rights. Litigation, either as plaintiff or
defendant, could result in significant expense to HNC and divert the efforts of
HNC's technical and management personnel from productive tasks, whether or not
such litigation is resolved in favor of HNC. In the event of an adverse ruling
in any such litigation, HNC 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 a court might invalidate HNC's patents, trademarks or other
proprietary rights. In the event of a successful claim against HNC and the
failure of HNC to develop or license a substitute technology, HNC'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, HNC 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 HNC's business, financial condition and results
of operations. See "Business of HNC--Intellectual Property and Other Proprietary
Rights."
RISK OF PRODUCT DEFECTS AND PRODUCT LIABILITY. Software products as
complex as those offered by HNC often contain undetected errors or failures when
first introduced or as new versions are released. In addition, to the extent
that HNC may have to develop new products that operate in new environments, such
as the Internet, the possibility for program errors and failures may increase
due to factors such as the use of new technologies or the need for more rapid
product development that is characteristic of the Internet market. Despite
pre-release testing by HNC and by current and potential customers, there still
may be errors in new products, even after commencement of commercial shipments.
The occurrence of such errors could result in delay in, or failure to achieve,
market acceptance of HNC's products, which could have a material adverse effect
on HNC's business, financial condition and results of operations. Although HNC's
license agreements with its customers typically contain provisions designed to
limit HNC's exposure to potential product liability claims, it is possible that
such limitation of liability provisions may not be effective as a result of
existing or future laws or judicial decisions. Because HNC's products are used
in business-critical applications, any errors or failures in such products may
give rise to substantial product liability claims, which could have a material
adverse effect on HNC's business, financial condition and results of operations.
VOLATILITY OF HNC COMMON STOCK PRICE. HNC's Common Stock has
experienced significant price volatility and such volatility may be expected to
recur in the future. Factors such as announcements of the introduction of new
products by HNC or its competitors, acquisitions of businesses or products by
HNC, quarter-to-quarter variations in HNC's operating results and the gain or
loss of significant orders, as well as market conditions in the technology and
emerging growth company sectors, may have a significant impact on the market
price of HNC Common Stock. The trading prices of many technology companies'
stocks, including HNC Common Stock, reflect price/earnings ratios substantially
above historical norms. The trading price of HNC Common Stock may not remain at
or near its current level. Further, the stock market has experienced a recent
downward trend and has historically experienced extreme volatility that has
particularly affected the market prices of securities of many technology
companies and that often has been unrelated or disproportionate to the operating
performance of such companies. These market fluctuations may adversely affect
the price of HNC Common Stock.
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YEAR 2000 COMPLIANCE. It is generally anticipated that many
organizations will experience operational difficulties at the beginning of the
Year 2000 as a result of the fact that many currently installed computer systems
and software products are coded to accept only two digit entries in the date
code field. Significant uncertainty exists in the software and other industries
concerning the scope and magnitude of problems associated with the century
change. Based on HNC's assessment to date, HNC believes that the current version
of each of its material products is Year 2000 compliant. However, there can be
no assurance that all of HNC's customers will install the Year 2000 compliant
version of HNC's products in a timely manner, which could lead to failure of
customer systems and product liability claims against HNC. HNC is assessing the
products it has acquired in its recent acquisitions for Year 2000 compliance.
The inability of HNC to complete its assessment and any necessary modifications
to these recently acquired products could have a material adverse effect on
HNC's business, financial condition and results of operations. Even if HNC's
products are Year 2000 compliant, HNC may in the future be subject to claims
based on Year 2000 issues in the products of other companies, or issues arising
from the integration of multiple products within a system. The costs of
defending and resolving Year 2000-related disputes, and any liability of HNC for
Year 2000-related damages, including consequential damages, could have a
material adverse effect on HNC's business, financial condition and results of
operations. Further, HNC's products are generally used with enterprise systems
involving complex software products developed by other vendors, which may not be
Year 2000 compliant. In particular, many of HNC's customers are financial
institutions, insurance companies and other companies with insurance and
financial services businesses, all of which use legacy computer systems that are
expected to be particularly susceptible to Year 2000 compliance issues. If HNC's
customers are unable to use their information systems because of the failure of
such noncompliant systems or software or for any other reason, there would be a
decrease in the volume of transactions that HNC's customers process using HNC's
products. As a result, HNC's recurring revenue in the form of transactional fees
from customers in the insurance and financial services markets would decline,
which would have a material adverse effect on HNC's business, financial
condition and results of operations. Such failure could also affect the
perceived performance of HNC's products, which could have a negative effect on
HNC's competitive position. In addition, HNC believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by HNC, which could result in a material adverse effect on HNC's business,
financial condition and results of operations.
HNC is also reviewing its major internal corporate systems for Year
2000 compliance and intends to take appropriate action based on the results of
such review. HNC's plan for the Year 2000 calls for compliance verification of
external vendors supplying software and information systems to HNC and
communication with significant suppliers to determine the readiness of third
parties' remediation of their own Year 2000 issues. As part of its assessment,
HNC is evaluating the level of validation it will require of third parties to
ensure their Year 2000 readiness. To date, HNC has not encountered any material
Year 2000 issues concerning its computer systems. HNC plans to complete its Year
2000 research and testing and create any necessary contingency plans by the end
of 1998. All costs associated with carrying out HNC's plan for Year 2000
compliance are being expensed as incurred. The total cost associated with
preparation for the Year 2000 has not been, and is not expected to be, material
to HNC's business, financial condition or results of operations. Nevertheless,
HNC may not timely identify and remediate all significant Year 2000 problems and
remedial efforts may involve significant time and expense. Failure to identify
such problems could, for example, impair HNC's internal product development
efforts and internal management systems. There can be no assurance that any Year
2000 compliance problems of HNC or its customers or suppliers will not have a
material adverse effect on HNC's business, financial condition and results of
operations.
FACTORS INHIBITING TAKEOVER. The HNC Board of Directors is authorized
to issue up to 4,000,000 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 HNC's stockholders. The
rights of the holders of HNC Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any HNC Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of HNC. HNC
has no current plans to issue shares of Preferred Stock. In addition, Section
203 of the Delaware General Corporation Law (the "DGCL") restricts certain
business combinations with any "interested stockholder" as defined by such
statute. The statute may have the effect of delaying, deferring or preventing a
change in control of HNC.
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RISKS RELATING TO OSI
LIMITED OPERATING HISTORY; HISTORY OF LOSSES. OSI was incorporated in
May 1992 and did not sell its first product until the second quarter of 1995.
Accordingly, OSI's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies with limited operating
histories. Although OSI has experienced revenue growth in recent periods,
historical growth rates may not be sustained and are not necessarily indicative
of OSI's future operating results. OSI incurred operating losses of $1.9
million, $3.8 million, $3.3 million and $2.4 million for 1995, 1996, 1997 and
the first six months of 1998, respectively. There can be no assurance that
operating losses will not increase in the future or that OSI will ever achieve
or sustain profitability on a quarterly or annual basis. To the extent that
OSI's revenues do not grow at anticipated rates, increases in OSI's operating
expenses precede or are not subsequently followed by commensurate increases in
its revenues or OSI is unable to adjust its operating expense levels
accordingly, OSI's business, financial condition and results of operations will
be materially adversely affected. As of June 30, 1998, OSI had an accumulated
deficit of $12.8 million.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. OSI's revenues and
operating results have varied substantially from quarter to quarter.
Consequently, OSI believes that period-to-period comparisons of its results of
operations are not necessarily meaningful. OSI's quarterly operating results may
continue to fluctuate due to a number of factors, including the timing, size and
nature of OSI's licensing transactions, lengthy and unpredictable sales cycles,
the timing of introduction and market acceptance of new products or product
enhancements by OSI or its competitors, product and price competition, the
relative proportions of revenues derived from license fees and services, changes
in OSI's operating expenses, the existence of software bugs or other product
quality problems, personnel changes and fluctuations in economic and financial
market conditions.
OSI recognizes software license revenues upon delivery and, if
required by the contract, upon customer acceptance if the acceptance criteria is
other than perfunctory. Delivery and acceptance of an OSI software product
typically does not occur in the same quarter in which the software license
agreement for the system is signed. As a result, OSI is constrained in its
ability to increase its software license revenue in any quarter if there are
unexpected delays in delivery or required acceptance of systems for which
software licenses were signed in previous quarters. Implementation of The
Complete Banking Solution and The Complete Credit Union Solution (either, the
"OSI System") typically occurs over a 14 to 24 week period, and OSI currently
has limited implementation resources. As a result of OSI's limited operating
history and limited experience in the implementation of the OSI System, OSI may
from time to time experience delays and difficulties in implementation of the
OSI System. Delays in the delivery, implementation or any required acceptance of
OSI's products, including delays resulting from constraints upon OSI's limited
installation and implementation resources, could materially adversely affect
OSI's quarterly results of operations. In addition, increased sales and
marketing expenses for any given quarter will negatively impact OSI's operating
results for that quarter if associated revenues are not recognized until a
subsequent quarter.
OSI's expense levels are based, in significant part, on its
expectations as to future revenues and are largely fixed in the short term. As a
result, OSI may be unable to adjust spending in a timely manner to compensate
for any unexpected shortfall in revenues. Accordingly, any significant shortfall
of revenues in relation to OSI's expectations would have an immediate and
materially adverse effect on OSI's business, financial condition and results of
operations. In addition, OSI plans to increase its operating expenses to expand
its installation, product development, sales and marketing and administrative
organizations. The timing of such expansion and the rate at which new personnel
become productive could cause material fluctuations in OSI's quarterly results
of operations.
ACCEPTANCE OF OSI SYSTEM. OSI's revenues are derived primarily from
two sources: (i) license fees for software products and (ii) fees for a full
range of services complementing its products, including implementation, training
and support and maintenance services. Substantially all of these fees are
attributable to licenses of the OSI System. Although the use of client/server
technology has grown in the banking and credit union industry in recent years,
the client/server market is still an emerging market. Moreover, banks and credit
unions historically have been slow to adapt to and accept new technologies,
including client/server systems. OSI's success in penetrating the banking
industry, in particular large banks, may be adversely affected by the
unwillingness of such banks to incur the cost and effort to convert from their
current system to a client/server system and by the fact that client/server core
processing systems have not yet achieved widespread acceptance. OSI's future
financial performance will depend in large part on continued growth in the
number of banks and credit unions utilizing client/server technology.
Accordingly, if the client/server market fails to grow or grows more slowly than
OSI currently anticipates, OSI's business, financial condition and results of
operations could be materially adversely affected. In addition, a significant
portion of all banks and credit unions have traditionally satisfied
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their information technology needs through a service bureau or outsourcing
solution. Upon purchasing the OSI System, these customers will be required to
employ information technology personnel in order to successfully operate and
maintain the OSI System. There can be no assurance that OSI's customers will be
able to hire and retain such personnel or that any inability to do so will not
affect their ability to successfully operate and maintain the OSI System, which
could have a material adverse effect on OSI's business, financial condition and
results of operations. In addition, OSI's future financial performance will
depend in part on the successful development, introduction and customer
acceptance of new and enhanced versions of the OSI System and other products. A
decline in demand for, or failure to achieve broad market acceptance of, the OSI
System or any enhanced version as a result of competition, technological change
or otherwise, will have a material adverse effect on OSI's business, financial
condition and results of operations.
DEPENDENCE ON NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; PRODUCT
DEVELOPMENT RISK. The client/server application software market is characterized
by rapid technological change, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable in short periods of time. OSI expects that third parties will
develop and introduce new products and services and enhancements thereto, which
will compete with the products and services offered by OSI. The life cycles of
OSI's products are difficult to estimate and the return to OSI (in terms of
revenue) on the funds and time expended to develop a new product or enhancement
may ultimately prove to be minimal if the product or enhancement is quickly
superseded by other product or technology developments in the marketplace. OSI's
future success will depend upon the widespread adoption of client/server
application software in the banking and credit union industry, as well as OSI's
ability to enhance its current products and to develop and introduce new
products that keep pace with technological developments, emerging industry
standards and competitors' offerings and to address the increasingly
sophisticated needs of its customers. There can be no assurance that OSI will be
successful in developing and marketing new products or product enhancements that
meet these changing demands, that OSI will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these products or that its new products and product enhancements will adequately
meet the demands of the marketplace and achieve market acceptance.
Delays in the release of new and upgraded versions of OSI's software
products (or in third party products incorporated in the OSI System,
particularly the Oracle relational database management system) could have a
material adverse effect on OSI's revenues and results of operations. Because of
the complexities inherent in developing software products as sophisticated as
those sold by OSI and the lengthy testing periods associated with such products,
no assurance can be given that future product introductions by OSI will not be
delayed. In addition, complex software programs may contain undetected errors or
bugs when they are first introduced or as new versions are released. There can
be no assurance that errors will not be found in OSI's existing or future
products or in third-party products upon which OSI's products are dependent,
such as the Oracle relational database and Microsoft Windows NT, with the
possible result of delays in, or loss of, market acceptance of OSI's products,
diversion of OSI's resources, injury to OSI's reputation and increased service,
warranty expenses and/or payment of damages.
COMPETITION. The market for OSI's products and services is intensely
competitive and subject to rapid technological change. Competitors vary in size
and in the scope and breadth of the products and services they offer. OSI
encounters competition from a number of sources, all of which offer core
software systems to the banking and credit union industry. OSI expects
additional competition from other established and emerging companies as the
client/server application software market continues to develop and expand. OSI
also expects that competition will increase as a result of software industry
consolidation, including particularly the acquisition of any of its competitors.
OSI encounters competition in the United States from a number of sources,
including Fiserv, Inc., NCR Corporation, Electronic Data Systems Corporation,
Marshall & Ilsley Corporation, M&I EastPoint, Phoenix International Ltd., Inc.,
Jack Henry & Associates, Inc., ALLTEL Corporation, Prologic Corporation and
Kirchman Corporation, all of which offer core processing systems or outsourcing
alternatives to banks and credit unions. OSI also competes against a number of
smaller, regional competitors. In addition to these competitors, OSI competes
internationally with Misys plc Banking Division (including Midas-Kapiti
International, Inc., Kindle Banking Systems and ACT Financial Systems), Sanchez
Computer Associates, Inc. and Financial Network Services, among others. Some of
OSI's current, and many of OSI's potential, competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, engineering, technical, marketing and other resources than
OSI. As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer demands or to devote greater resources to
the development, promotion and sale of their products than OSI. 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 OSI's prospective customers. Accordingly,
it is possible that new competitors or alliances
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among competitors may emerge and rapidly acquire significant market share. OSI
expects that the banking and credit union software market will continue to
attract new competitors and new technologies, possibly involving alternative
technologies that are more sophisticated and cost effective than OSI's
technology. There can be no assurance that OSI will be able to compete
successfully against current or future competitors or that competitive pressures
faced by OSI will not materially adversely affect its business, financial
condition and results of operations.
RISKS ASSOCIATED WITH MANAGING GROWTH. OSI is currently experiencing
a period of rapid growth which has placed, and could continue to place, a strain
on its management and other resources. OSI's business has grown in size and
complexity over the past three years. Total revenues increased from $268,141 for
the year ended December 31, 1995 to $6.6 million for the year ended December 31,
1997 and to $5.8 million for the six months ended June 30, 1998. In addition,
the number of OSI's employees increased from 26 as of December 31, 1995 to 130
as of June 30, 1998, and OSI expects to hire additional personnel during the
remainder of 1998 and 1999. OSI's need to manage its growth effectively will
require it to continue to implement and improve its operational, financial and
other internal systems on a timely basis, and to attract, train, motivate,
manage and retain its employees. If OSI's management is unable to manage growth
effectively or new employees are unable to achieve anticipated performance
levels, OSI's business, financial condition and results of operations could be
materially adversely affected.
RELIANCE ON NEW CUSTOMERS. OSI historically has relied upon and
expects to continue to rely upon software license fees from new customers for a
substantial portion of its revenues. Most such licenses involve large dollar
amounts (typically ranging from $250,000 to $750,000), and the sales cycles for
these transactions are often lengthy and unpredictable. Any inability of OSI to
license and deliver the OSI System to a significant number of new customers
would have a material adverse effect on OSI's business, financial condition and
results of operations.
EXPANSION OF CREDIT UNION CUSTOMER BASE. OSI's software for credit
unions, The Complete Credit Union Solution, has been installed to date at only
one credit union. There can be no assurance that The Complete Credit Union
Solution will be installed at additional credit unions or that it will achieve
meaningful acceptance by credit union customers. Any failure of OSI to
successfully penetrate the credit union industry could have a material adverse
effect on OSI's business, financial condition and results of operations.
DEPENDENCE ON THE BANKING AND CREDIT UNION INDUSTRY. Substantially
all of OSI's revenues are derived from customers in the banking and credit union
industry, primarily small to mid-size banks, and OSI expects it will continue to
derive substantially all of its revenues from such customers for the foreseeable
future. Unfavorable economic conditions adversely impacting the banking and
credit union industry would therefore have a material adverse effect on OSI's
business, financial condition and results of operations. For example, the
banking and credit union industry has experienced and may continue to experience
cyclical fluctuations in profitability, which may affect the willingness or
ability of participants in this industry to fund projects such as those for
which OSI may be engaged.
RISKS OF CONSOLIDATION. Merger and acquisition activity among
financial institutions, particularly large banks, has been widespread in recent
years and is expected to continue in future years. As a result, industry
consolidation could have the effect of reducing the number of OSI's current and
potential customers. Any significant increase in the level of such consolidation
among small to mid-size banks and credit unions could adversely affect OSI's
business, financial condition and results of operations.
LENGTHY AND UNPREDICTABLE SALES CYCLE. OSI's software is used for
business-critical purposes, and its implementation involves significant capital
commitments by customers. Potential customers generally commit significant
resources to an evaluation of available software and require OSI to expend
substantial time, effort and money educating them as to the value and operation
of OSI's software. Sales of OSI's software products require an extensive
education and marketing effort throughout a customer's organization because
decisions to license such software generally involve the evaluation of the
software by a significant number of customer personnel in various functional
areas, each having specific and often conflicting requirements. A variety of
factors, including factors over which OSI has little or no control, may cause
potential customers to favor a competing vendor or to delay or forego a
purchase. In addition, the sales cycles associated with these transactions are
subject to a number of uncertainties, including customers' budgetary
constraints, the timing of the expiration of customers' current system license
agreements or outsourced core processing agreements, the timing of customers'
budget cycles and approval processes and customers' willingness to implement a
client/server operating environment. As a result of these or other factors, the
sales cycle for OSI's products is long, typically ranging between six to nine
months. Due to the length of the sales cycle for its software products, OSI's
ability to forecast the
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timing and amount of its sales is limited, and the delay or failure to complete
one or more large license transactions could have a material adverse effect on
OSI's business, financial condition and results of operations.
RELIANCE ON AND EXPANSION OF SALES FORCE AND THIRD-PARTY OUTSOURCING
AGREEMENTS. OSI relies primarily on its direct sales force for sales of the OSI
System. OSI will be required to hire additional sales, customer service and
implementation personnel in 1998 and beyond if OSI is to achieve revenue growth
in the future. Competition for such personnel is intense, and there can be no
assurance that OSI will be able to retain its existing sales, customer service
and implementation personnel or will be able to attract, assimilate or retain
such additional highly qualified personnel in the future. If OSI is unable to
hire such personnel on a timely basis, its business, financial condition and
results of operations could be materially adversely affected.
OSI has entered into exclusive license and marketing arrangements
with two providers of outsourcing services to financial institutions, BISYS,
Inc. ("BISYS"), a subsidiary of The BISYS Group, Inc. ("BISYS Group"), and
Connecticut On-Line Computer Center, Inc. ("COCC"). Accordingly, OSI's success
depends in part on the ultimate success of these license and marketing
arrangements, including the effort and resources expended by such providers to
market outsourcing services using the OSI System.
RISKS ASSOCIATED WITH RECRUITING AND RETAINING QUALIFIED PERSONNEL.
OSI's future success depends to a significant extent on OSI's executive officers
and key employees, including OSI's sales force and software professionals,
particularly project managers, software engineers and other senior technical
personnel. The loss of the services of any of these individuals or group of
individuals could have a material adverse effect on OSI's business, financial
condition and results of operations. OSI does not maintain any key person life
insurance for any of its executive officers or key employees. Competition for
qualified personnel in the software industry is intense and OSI competes for
such personnel with other software companies that have greater financial and
other resources. The future success of OSI will depend in large part on its
ability to attract, retain and motivate highly qualified personnel, and there
can be no assurance that OSI will be able to do so. OSI has from time to time
experienced, and may in the future experience, difficulty in locating and
retaining candidates with appropriate qualifications, particularly project
managers, software engineers and other senior technical personnel. Any
difficulty in hiring needed personnel possessing requisite skills could have a
material adverse effect on OSI's business, financial condition and results of
operations.
DEPENDENCE ON THIRD-PARTY TECHNOLOGY. OSI's proprietary software is
currently designed, and may in the future be designed, to work on or in
conjunction with certain third-party hardware and/or software products,
including the Microsoft Windows NT operating system and an Oracle relational
database. Although OSI believes that there are alternatives for these products,
any significant interruption in the supply of such third-party hardware and/or
software could have a material adverse effect on OSI's sales unless and until
OSI can replace the functionality provided by these products with products of
comparable quality that will be accepted by OSI's customers. In addition, OSI is
to a certain extent dependent upon such third-parties' abilities to enhance
their current products, to develop new products on a timely and cost-effective
basis and to respond to emerging industry standards and other technological
changes, and OSI must be able to continually maintain its products'
compatibility with such third party products. There can be no assurance that OSI
would be able to replace the functionality provided by the third-party hardware
and/or software currently offered in conjunction with OSI's products in the
event that such hardware and/or software becomes obsolete or incompatible with
future versions of OSI's products or is otherwise not adequately maintained or
updated. The absence of, or any significant delay in the replacement of, that
functionality could have a material adverse effect on OSI's business, financial
condition and results of operations.
CONCENTRATION OF CUSTOMERS. Historically, a limited number of
customers have accounted for a significant percentage of OSI's revenues in each
year. For the year ended December 31, 1997, two bank customers accounted for 17%
and 15% of OSI's total revenues. For the year ended December 31, 1996, four bank
customers accounted for 38%, 22%, 20% and 14% of OSI's total revenues. Although
OSI expects that its reliance on any particular customer will decline as its
customer base expands, the failure of OSI to enter into a sufficient number of
licensing agreements during a particular period could have a material adverse
effect on OSI's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE. A portion of the growth in OSI's revenues in
1997 and the first half of 1998 resulted from OSI's ability to provide banking
applications that resolve the Year 2000 problem. As the overall demand for Year
2000 solutions declines, there can be no assurance that the demand for OSI's
products and services will not be materially adversely affected. In addition,
purchasing patterns of potential customers may be affected by Year 2000 issues
as
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financial institutions divert financial and human resources to correct or modify
their current core data processing systems to meet federal and state mandates
for Year 2000 readiness.
Although OSI believes the OSI System complies with Year 2000
requirements, there can be no assurance that customers will not encounter
difficulties with the OSI System arising from Year 2000 issues. In addition,
there can be no assurance that Year 2000 issues will not adversely affect
third-party network or application software that is integrated with the OSI
System.
OSI is assessing its major internal management systems for Year 2000
readiness. This assessment includes identification of all critical information
management systems, testing Year 2000 readiness of such systems and making
corrective fixes to non-compliant systems. OSI's plan also includes obtaining
compliance verification from third party vendors supplying critical software and
information systems to OSI, and communication with significant suppliers to
determine their plans to address their own Year 2000 issues. OSI has not
completed its assessment, but intends to take any corrective action necessary as
a result of such review. All costs associated with OSI's plan for Year 2000
compliance are being expensed as incurred. The total cost associated with
internal Year 2000 issues has not been, and is not expected to be, material to
OSI's business, financial condition or results of operations. OSI expects to
complete its Year 2000 assessment by June 30, 1999. Nevertheless, OSI may not
timely identify and remediate all significant Year 2000 problems and remedial
efforts may involve significant time and expense. There can be no assurance that
any Year 2000 compliance problems of OSI or its customers or suppliers will not
have a material adverse effect on OSI's business, financial condition or results
of operations.
POTENTIAL FOR CONTRACT LIABILITY. Failures in a customer's system
could result in an increase in service and warranty costs or a claim for
substantial damages against OSI. There can be no assurance that the limitations
of liability set forth in OSI's contracts would be enforceable or would
otherwise protect OSI from liability for damages. OSI maintains general
liability insurance coverage, including coverage for errors and omissions in
excess of the applicable deductible amount. There can be no assurance that such
coverage will continue to be available on acceptable terms or at all or will be
available in sufficient amounts to cover one or more large claims, or that the
insurer will not deny coverage as to any future claim. The successful assertion
of one or more large claims against OSI that exceeds available insurance
coverage, or the occurrence of changes in OSI's insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on OSI's business, financial
condition and results of operations. Furthermore, litigation, regardless of its
outcome, could result in substantial cost to OSI and would divert management's
attention from OSI's operations. Any contract liability claim or litigation
against OSI could, therefore, have a material adverse effect on its business,
financial condition and results of operations. Because many of OSI's projects
are business-critical projects for financial institutions, a failure or
inability to meet a customer's expectations could result in a large damage claim
and could seriously damage OSI's reputation and affect its ability to attract
new business.
RISKS ASSOCIATED WITH CHANGING REGULATORY ENVIRONMENT. While OSI's
operations are not directly regulated by banking authorities, OSI's existing and
potential customers are subject to extensive federal, state and foreign
governmental regulations. Such regulations may adversely affect the banking and
credit union industry, limit the number of potential customers for OSI's
products and services or otherwise have a material adverse effect on OSI's
business, financial condition and results of operations. In addition,
governmental regulation in the financial services industry is evolving,
particularly with respect to banking technology. There can be no assurance that
future changes in such laws or regulations or in their interpretation will not
adversely affect the business of OSI or require OSI's products to conform to
such laws or regulations.
PROTECTION OF INTELLECTUAL PROPERTY; INFRINGEMENT OF PROPRIETARY
RIGHTS. OSI relies on a combination of copyright, trademark and trade secret
laws, nondisclosure agreements and other contractual provisions and technical
measures to protect its intellectual property rights. There can be no assurance
that these protections will be adequate to prevent OSI's competitors from
copying or reverse-engineering OSI's products, or that OSI's competitors will
not independently develop technologies that are substantially equivalent or
superior to OSI's technology. OSI does not include in its products any mechanism
to prevent unauthorized copying and any such unauthorized copying could have a
material adverse effect on OSI's business, financial condition and results of
operations. OSI has no patents, and existing copyright laws afford only limited
protection for OSI's intellectual property rights and will not protect such
rights in the event competitors independently develop products similar to those
of OSI. In addition, the laws of certain countries in which OSI's products are
or may be licensed do not protect OSI's products and intellectual property
rights to the same extent as the laws of the United States.
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Although OSI has never been the subject of a material intellectual
property dispute, there can be no assurance that a third party will not assert
that OSI's technology violates its intellectual property rights in the future.
As the number of software products in OSI's target market increases and the
functionality of these products further overlap, OSI believes that software
developers may increasingly become subject to infringement claims. Any such
claims, whether with or without merit, can be time consuming and expensive to
defend. There can be no assurance that third parties will not assert
infringement claims against OSI in the future with respect to its current or
future products or that any such assertion will not require OSI to enter into
royalty arrangements (if available) or litigation that could be costly to OSI.
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THE OSI SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The Special Meeting will be held at the offices of Hale and Dorr LLP,
60 State Street, 26th Floor, Boston, Massachusetts 02109 on __________________,
1998 at _________ ___.m., local time. At the Special Meeting, stockholders of
OSI will be asked to approve and adopt the Merger Agreement and the transactions
contemplated thereby and to approve the Merger. The Merger Agreement is attached
hereto as Appendix A. See "Terms of the Merger."
RECORD DATE AND OUTSTANDING SHARES
Holders of record of OSI Common Stock and OSI Preferred Stock at the
close of business on ___________, 1998 (the "Record Date") are entitled to
notice of and to vote at the Special Meeting. As of the close of business on the
Record Date, there were _______________ shares of OSI Common Stock, __________
shares of Series A-1 Preferred Stock, __________ shares of Series A-2 Preferred
Stock, __________ shares of Series B Preferred Stock, __________ shares of
Series C Preferred Stock and __________ shares of Series D Preferred Stock,
outstanding and entitled to vote, held of record by a total of ____
stockholders. Each holder of OSI Common Stock is entitled to one vote for each
share of OSI Common Stock held as of the Record Date and each holder of OSI
Preferred Stock is entitled to one vote for each share of OSI Preferred Stock
held as of the Record Date.
VOTING OF PROXIES
The proxy accompanying this Proxy Statement/Prospectus is solicited
on behalf of the OSI Board for use at the Special Meeting. OSI stockholders are
requested to complete, date and sign the accompanying proxy and promptly return
it in the enclosed envelope or otherwise mail it to OSI. All properly executed
proxies received by OSI prior to the vote at the Special Meeting that are not
properly revoked will be voted at the Special Meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated on the
proxy, will be voted in favor of approving and adopting the Merger Agreement and
the Merger. An OSI stockholder who has given a proxy may revoke it at any time
before it is exercised at the Special Meeting by: (i) delivering to the
Secretary of OSI (by any means, including facsimile) a written notice, prior to
the vote at the Special Meeting bearing a date later than the date of the proxy,
stating that the proxy is revoked; (ii) signing and delivering to the Secretary
of OSI a proxy relating to the same shares and bearing a later date prior to the
vote at the Special Meeting; or (iii) attending the Special Meeting and voting
in person (although attendance at the Special Meeting will not, by itself,
revoke a proxy).
It is not anticipated that any matter not referred to in this Proxy
Statement/Prospectus will be presented for action at the Special Meeting.
However, if any other matters are properly brought before the Special Meeting,
the persons named in the proxies will have discretion to vote on such matters in
accordance with their best judgment.
VOTE REQUIRED; QUORUM
Approval and adoption of the Merger Agreement and the Merger by OSI's
stockholders requires the affirmative vote of the holders of a majority of the
outstanding shares of OSI Common Stock and the affirmative vote of the holders
of a majority of the outstanding shares of OSI Preferred Stock, including a
majority of the outstanding shares of OSI Series B Preferred Stock and a
majority of the outstanding shares of OSI Series C Preferred Stock. Abstentions
will thus have the effect of a vote against the Merger Agreement and the Merger.
The required quorum for the transaction of business at the Special Meeting is a
majority of the shares of OSI Common Stock and OSI Preferred Stock outstanding
on the Record Date. Abstentions will be considered present at the Special
Meeting for the purpose of determining whether a quorum of OSI's stockholders
are present.
Certain stockholders who are or may be affiliates of OSI,
beneficially owning __________ shares of OSI Common Stock and __________ shares
of OSI Preferred Stock, or approximately __________% and __________% of the
outstanding shares of OSI Common Stock and OSI Preferred Stock, respectively,
have executed voting agreements pursuant to which they have agreed to vote such
OSI shares in favor of the adoption and approval of the Merger Agreement and
approval of the Merger. The vote by these persons in accordance with their
voting agreements will be sufficient to approve the Merger.
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On the Record Date, directors and executive officers of OSI, and
their affiliated entities, as a group beneficially owned ____ shares of OSI
Common Stock and _____ shares of OSI Preferred Stock, or approximately ____% and
____% of the outstanding shares of OSI Common Stock and OSI Preferred Stock,
respectively on such date.
SOLICITATION OF PROXIES AND EXPENSES
OSI will bear the cost of the solicitation of proxies from its
stockholders in the enclosed form. In addition to solicitation by mail, the
directors, officers and employees of OSI may solicit proxies from stockholders
by telephone, facsimile, telegram, letter or in person.
APPRAISAL RIGHTS
If the Merger is approved by the required vote of OSI stockholders
and is not abandoned or terminated, each holder of OSI Common Stock and OSI
Preferred Stock who does not vote in favor of the Merger and also complies with
the procedures set forth in Section 262 of the Delaware Corporation Law, a copy
of which is attached hereto as Appendix B, will be entitled to be paid the fair
value of his, her or its shares pursuant to Section 262 of the DGCL. See
"Approval of the Merger-- Appraisal Rights."
RECOMMENDATION OF THE OSI BOARD OF DIRECTORS
The OSI Board, by unanimous vote, has adopted and approved the Merger
Agreement and the transactions contemplated thereby, and has determined that the
Merger is in the best interests of OSI and its stockholders and approved the
Merger. After careful consideration, the OSI Board unanimously recommends a vote
FOR adoption and approval of the Merger Agreement and the Merger.
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APPROVAL OF THE MERGER
This section 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, but are not the
exclusive means of identifying forward-looking statements in this section. The
forward-looking statements reflect the good faith judgment of the management of
HNC and OSI based on factors currently known and are subject to risks and
uncertainties. Actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including those
set forth in "Risk Factors" and elsewhere in this Proxy Statement/Prospectus.
See "Forward-Looking Statements" above.
HNC'S REASONS FOR THE MERGER
The HNC Board believes that the following are among the primary
reasons for HNC to complete the proposed Merger with OSI:
- OSI provides fully integrated suites of banking and credit union
applications software that support an institution's broad range
of core processing requirements, including deposits and loans,
teller functions, home/Internet banking and platform automation.
OSI's target customers are small to mid-size banks and credit
unions, whereas most of HNC's customers for its financial
solutions products have historically been larger financial
institutions. HNC expects that acquiring OSI will enable HNC to
diversify its market focus to include small to mid-size banks
and credit unions. HNC believes this market segment to be a
strategic one that will give HNC the opportunity to increase its
market share and presence by leveraging its product line over a
larger number of customers. HNC believes that its existing
intelligent decision products (many of which are designed to
serve the needs of banks or similar financial institutions) are
well positioned to serve OSI's current customer base.
- By acquiring OSI, HNC will acquire the ability to market an
integrated range of core products to banks and credit unions,
with the strategy of providing these customers a single source
for all their core applications software needs. HNC believes
that marketing an integrated suite of products will enable it to
compete more effectively with larger software vendors who market
integrated solutions suites and should also eventually enable
HNC to more effectively sell its existing predictive software
solutions as valuable add-ons to OSI's customers' existing
software suites.
- HNC's FTI subsidiary develops and markets general ledger,
profitability measurement and decision support software products
and related support services to the financial services industry.
HNC believes that OSI's products are complementary to those of
FTI. OSI and FTI currently have a joint marketing arrangement
whereby OSI recommends FTI products to its customers and
receives a referral fee from FTI. HNC anticipates that the
Merger will provide the opportunity for HNC to create an
integrated infrastructure solution that emphasizes predictive
customer relationship management by combining FTI's core
products (as well as other HNC financial solution products) with
the OSI System.
- Because FTI and OSI address the same financial institution
market with complementary, but not functionally overlapping
products, it is expected that the Merger will provide FTI and
OSI with the ability to integrate their sales and marketing
activities and consulting services. HNC also believes that the
Merger will provide FTI and OSI with advantageous cross-selling
opportunities.
- HNC believes that the Merger will afford it the opportunity
(subject to permission from appropriate parties) to obtain
additional consumer financial data, primarily from the small to
mid-size financial services companies that use OSI's products.
HNC expects to be able to use this data to develop new
predictive models and to create or enhance products for all of
its target markets, including products developed for large banks
and non-banking markets. HNC also believes that OSI's products,
while currently targeted to small to mid-size banks and credit
unions, are scalable and thus could eventually be marketed to
larger financial customers.
- HNC believes that the Merger will result in business synergies,
including the elimination or sharing of certain administrative
and operational expenses. However, HNC believes that cost
savings arising from the business synergies immediately
following the Merger will be less significant than anticipated
long-term economies of scale.
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In the course of its deliberations, the HNC Board reviewed with HNC's
management a number of factors relevant to the Merger in addition to the
benefits outlined above. The HNC Board considered, among other things: (i) the
terms of the Merger; (ii) information concerning HNC's and OSI's respective
businesses, prospects, financial positions, results of operations, products,
product development and technologies, based in the case of OSI on information
provided by OSI and on HNC management's due diligence investigation; (iii)
information regarding other companies in the banking applications software
industry, including market prices of those companies' stock, market
capitalizations, earnings per share, price earnings ratios, revenues and other
results of operations, based on reported historical information and analysts'
reports and earnings estimates; (iv) information regarding reported acquisitions
of other companies in the application development software industry and other
comparable acquisitions; (v) an analysis of the relative value that OSI might
contribute to the future business and prospects of HNC; (vi) current financial
market conditions and historical market prices, volatility and trading
information with respect to HNC Common Stock; (vii) the compatibility of HNC's
and OSI's businesses, products, technologies, management and administrative,
sales and marketing and technical organizations; (viii) the expectation that the
Merger will qualify for pooling of interests treatment for financial reporting
purposes; and (ix) the expectation that the Merger will be a reorganization for
federal income tax purposes.
The HNC Board also considered a variety of potentially negative
factors concerning the Merger, including: (i) the risk that, despite the
intentions and efforts of the parties, the benefits sought to be achieved in the
Merger might not be achieved, or that integration of the technologies, products,
organizations or other operations of the two companies might not be accomplished
smoothly and might require more time, expense and management attention than
anticipated; (ii) the potential disruption of HNC's business that might result
from employee uncertainty or lack of focus, as well as customer and supplier
confusion, following announcement of the Merger; (iii) the need and expense
associated with adapting certain HNC products for use with OSI's product line;
(iv) risks associated with addressing OSI's customer base, which represents a
new market segment for HNC; (v) the difficulties inherent in integrating a new
business, particularly when the business, as in OSI's case, is geographically
distant from HNC's headquarters; (vi) the uncertainty of the market's acceptance
of HNC's combined product offerings following the Merger; (vii) the estimated
charge of $4.5 million to be incurred due to the Merger, primarily in the
quarter in which the Merger is effective; (viii) the possibility that the
operational efficiencies and other benefits anticipated from the Merger might
not be achieved or might not occur as rapidly or to the extent currently
anticipated and that OSI's operations might have a dilutive effect on HNC's net
earnings for longer periods than anticipated; (ix) the risk that, despite the
efforts of OSI and HNC, OSI might not be able to retain its key technical,
management and sales personnel; (x) the risk that HNC's ability to increase or
maintain revenues might be diminished by intensified competition; (xi) the risk
that the public market price of HNC Common Stock might be adversely affected by
announcement of the Merger; (xii) the risk that the Merger would not be
effected, and the disruption in the business of HNC if the Merger is abandoned;
and (xiii) the other risks described above in "Risk Factors." The HNC Board
believed that these risks were outweighed by the potential benefits of the
Merger.
In view of the wide variety of factors, both positive and negative,
considered by the HNC Board, the HNC Board did not find it practical to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered.
OSI'S REASONS FOR THE MERGER
The OSI Board, in voting to approve the Merger Agreement and the
Merger, identified a number of potential benefits from the proposed Merger.
There can be no assurance that any of these potential benefits will be realized.
The potential benefits include:
- An enhanced ability of OSI to market and sell mission-critical,
core processing banking systems to potential customers. This
will be due in part to the greater financial resources made
available by the combined companies, greater access to the
financial institutions market, and the increased credibility of
being a subsidiary of a publicly traded company.
- The potential to add functionality to the OSI System based on
HNC's predictive software solutions that would uniquely leverage
the OSI System's real time processing capability and
significantly differentiate the OSI System from other
competitive core processing products. Such predictive software
solutions include applications used to detect fraudulent credit
card and bank check transactions and to forecast customer
profitability.
- The ability to leverage HNC's distribution channels to augment
OSI's current marketing and sales activities, both in the United
States and abroad.
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- Opportunities to leverage research and development capabilities
by sharing technology and combining product development efforts.
- The ability to cross--sell various of HNC's banking products to
OSI's installed customer base.
- The complementary, and not functionally redundant, nature of
OSI's technologies and products to those of HNC.
- Increased liquidity for OSI's stockholders with respect to their
investment in OSI.
In making its decision to approve the Merger Agreement, the Merger
and the other transactions contemplated thereby, and its determination that the
Merger is in the best interests of OSI and its stockholders, the OSI Board
consulted with its legal advisors regarding the legal terms of the transaction
and the OSI Board's obligations in its consideration of the proposed
transaction, and with its financial advisors regarding the financial aspects of
the proposed transaction, as well as with management of OSI. Without assigning
any relative or specific weights, the OSI Board considered a number of factors,
both from a short term and long term prospective, including, without limitation,
the following: (i) information concerning the financial performance, condition,
business operations and prospects of each of HNC and OSI, including, without
limitation, the long term growth potential of HNC and the business risks
associated therewith; (ii) the financial strength, global market presence and
greater resources of the combined company and its consequent enhanced ability to
realize the potential of the business contributed by OSI; (iii) the current
financial market conditions and historical market prices, volatility and trading
information with respect to HNC Common Stock; (iv) financial and market
information regarding other companies in OSI's industry; (v) the current and
prospective environment in which OSI operates, including, without limitation,
general economic conditions and the competitive market for OSI's products; (vi)
that the product lines of the two companies are primarily complementary and not
functionally redundant; (vii) HNC's experience integrating several recent
acquired businesses; (viii) HNC's operating philosophy to permit subsidiaries to
operate in a relative autonomous manner; (ix) difficulties in financial markets
experienced recently by publicly-traded small--cap technology companies; (x) the
financial and other significant terms of the proposed Merger, including, without
limitation, the terms and conditions of the Merger Agreement and the related
agreements; and (xi) the fact that, under the DGCL, the OSI stockholders who do
not wish to participate in the Merger may dissent therefrom and receive the
"fair value" of their shares.
The OSI Board also considered negative factors relating to the
Merger, including, without limitation: (i) the risks that the benefits sought in
the Merger would not be fully achieved; (ii) the risk that the Merger would not
be consummated; (iii) the effect of the announcement of the Merger on OSI's
ability to attract and retain key management, sales and technical personnel;
(iv) the possibility that following the announcement of the transaction, some
customers may defer orders or purchasing decisions pending completion of the
Merger or seek to terminate their relations with the combined company; and (v)
the risks associated with the business of HNC and the combined company after the
Merger. See "Risk Factors."
The foregoing discussion of the information and factors considered by
the OSI Board is not intended to be exhaustive, but is believed to include the
material factors the OSI Board considered. In addition, in reaching its
determination to approve and recommend the Merger, given the wide variety of
factors considered in connection with its evaluation of the proposed Merger, the
OSI Board did not find it practical to, and did not, quantify or otherwise
attempt to assign any relative or specific weights to the foregoing factors, and
individual directors may not concur on which factors should have been given
greater weight.
If the stockholders of OSI do not approve and adopt the Merger
Agreement, or if the Merger is not consummated for any other reason, the OSI
Board currently expects to continue to operate OSI as an ongoing business.
AFTER CAREFUL CONSIDERATION, THE OSI BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE
ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND FOR APPROVAL OF THE MERGER.
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BACKGROUND OF THE MERGER
HNC's growth strategy includes the ongoing evaluation of acquisitions
of businesses, products and technologies as a means to expand its product
offerings for existing and new target markets. Among its recent acquisitions is
the acquisition in April 1998 of FTI, a company that develops and markets
profitability measurement and decision support software products and related
support services to the financial services industry. FTI's products are
compatible with and complementary to OSI's products. At approximately the same
time as HNC's acquisition of FTI, Douglas C. Carlisle, a director of OSI and
general partner of a former investor in HNC, brought OSI to the attention of
Robert L. North, President and Chief Executive Officer of HNC.
Commencing in early 1996, OSI has from time to time had discussions
with companies in the software, systems integration and financial services
industries in an effort to explore the future of the industry and the role of
OSI and its products. In the course of such discussions, OSI has considered
possible alliances, combinations and transactions with various industry
participants.
In early 1998, OSI also was considering an underwritten public
offering of its Common Stock to the public, and on May 7, 1998, held an
organizational meeting for the offering with its legal advisors, accountants and
investment bankers.
In mid-April 1998, Douglas K. Anderson, OSI's Chairman of the Board
and Chief Executive Officer, received a telephone call from Drew Hyatt, HNC's
Executive Director, Corporate Business Strategy, expressing HNC's interest in
meeting with OSI's management to explore the possibility of a combination or
alliance.
On May 14, 1998, Mr. North and Mr. Hyatt, and Mr. Anderson, John L.
Person, OSI's President and Chief Operating Officer and Richard J. Willemin,
OSI's Senior Vice President and Chief Financial Officer, met for the first time
at OSI's headquarters. HNC and OSI executed and delivered a Mutual
Confidentiality and Non-Disclosure Agreement pursuant to which the parties
agreed to maintain the confidentiality of materials provided by, as well as
their discussions with, each other. At that meeting they discussed their
respective companies in general terms. In addition, the representatives of OSI
indicated that OSI was contemplating a registered underwritten public offering
of OSI Common Stock in the summer of 1998. As a result of that meeting, HNC
management considered the possibility of further discussions with OSI regarding
a business combination of the two companies and contacted Credit Suisse First
Boston for advice in that regard.
On May 20, 1998, at a regularly scheduled meeting of the HNC Board,
management of HNC made a presentation on a number of possible acquisitions,
including OSI. No specific transactions were approved, and HNC's management was
authorized to continue to investigate the opportunity presented by OSI.
On June 10, 1998, OSI filed a registration statement for an initial
public offering of its capital stock to be underwritten by BT Alex. Brown and
Warburg Dillon Read LLC.
On June 25, 1998, at a regularly scheduled meeting of the OSI Board,
Mr. Anderson advised the OSI Board that he and other members of senior
management had discussions with a third party that had expressed interest in a
business combination with OSI. Mr. Anderson was authorized to continue
discussions regarding a possible business combination while OSI continued to
prepare for the initial public offering.
On July 1, 1998, Michael A. Thiemann, President of HNC's Financial
Solutions Group and Mr. Hyatt from HNC, Messrs. Anderson, Person, Willemin and
Michael D. Nicastro, OSI's Vice President of Marketing, and representatives of
Credit Suisse First Boston and BT Alex. Brown, OSI's financial advisor, met to
discuss the potential synergies between HNC's Financial Solutions business and
OSI's business and product line.
On July 8, 1998, during a telephone conference call, representatives
of Credit Suisse First Boston discussed matters relative to financial due
diligence with Messrs. Anderson and Willemin and representatives of BT Alex.
Brown.
On July 10, 1998, the HNC Board met telephonically to discuss a
proposal of HNC's management to acquire OSI and to determine whether further
discussions with OSI should be pursued. At that meeting, HNC management made a
presentation on OSI's business and status, strategic benefits and opportunities
that might arise from a combination with OSI, its potential synergies with HNC's
business and market factors indicating the desirability of offering an
integrated product suite. In addition, representatives of Credit Suisse First
Boston made a presentation on OSI and the proposed
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Merger, including OSI's operating history, its key business relationships, their
assessment of OSI's pending initial public offering and potential ranges of
valuations of OSI that might be applied to a business combination. The HNC Board
authorized management to continue discussions with OSI, subject to further HNC
Board approval of any definitive agreement.
On July 15, 1998, HNC presented Mr. Anderson with a proposal for the
acquisition of OSI by HNC. HNC proposed that the transaction be a merger of OSI
with and into a subsidiary of HNC pursuant to which OSI stockholders would
receive shares of HNC Common Stock. On July 16, 1998, Mr. Thiemann of HNC met
with Douglas C. Carlisle to discuss a potential business combination and the
strategic benefits and opportunities of such a transaction. Mr. Anderson later
conferred individually with the members of the OSI Board and was instructed not
to pursue the proposed transaction, but rather to pursue an independent strategy
including an initial public offering. During the end of July and early August,
OSI continued to prepare for an underwritten initial public offering of its
Common Stock.
On July 22, 1998, at a regularly scheduled meeting of the HNC Board,
HNC management reported that, after preliminary discussions with OSI, HNC had
received no further response from OSI's representatives. At that time, HNC
management and the HNC Board believed that any potential combination with OSI
would not take place because OSI was pursuing its initial public offering.
On August 5, 1998, due to instability in the public equity markets
(particularly the market for initial public offerings for technology companies),
Mr. Anderson met with Messrs. North, Thiemann and Hyatt at HNC's headquarters to
determine whether HNC was still interested in discussing a potential
transaction.
On August 13, 1998, HNC presented Mr. Anderson with a detailed
proposal for the acquisition of OSI pursuant to the same structure as its
earlier proposal, and after Mr. Anderson conferred individually with members of
the OSI Board, the parties reached an agreement in principle as to the general
structure of a transaction. The agreement also provided that in the event that
the transaction was not consummated, HNC, at OSI's request, would invest
$5,000,000 in OSI stock and would lend OSI $5,000,000.
The HNC Board met on August 14 to discuss the proposed Merger. The
HNC Board approved the agreement in principle and authorized HNC management to
pursue further negotiations and due diligence investigation with OSI. Legal
counsel for HNC and OSI then commenced preparation and negotiation of definitive
documents, and HNC and its counsel, accountants and financial advisor conducted
business, legal, financial and technical due diligence and senior management of
HNC and OSI discussed future organizational, product and marketing plans as a
combined entity.
Between August 18, 1998 and September 15, 1998, HNC, OSI and their
respective legal counsel, financial advisors and independent accountants had
numerous meetings and conversations regarding the terms of the Merger Agreement
and related documents, including without limitation the terms of the escrow and
indemnification agreements of the OSI stockholders after the Merger, the
representations, warranties, covenants and conditions to closing to be set forth
in the Merger Agreement, the availability of pooling of interests accounting
treatment for the proposed Merger, the qualification of the proposed Merger as a
tax-free reorganization pursuant to Section 368(a) of the Code and the ability
of the parties to complete the proposed Merger in compliance with applicable
antitrust laws. Concurrently, HNC continued its legal, business and financial
due diligence reviews of OSI.
On September 2, 1998, at a special meeting of the OSI Board, held via
teleconference, representatives of BT Alex. Brown and OSI's legal counsel
reviewed with the OSI Board the proposed transaction and the terms and structure
that were being negotiated, as well as the remaining unresolved transaction
issues. OSI's legal counsel reviewed the principal terms of the proposed Merger
Agreement and related documents and engaged in a discussion with OSI Board
members concerning the directors' fiduciary duties in considering a business
combination. BT Alex. Brown reviewed with the OSI Board certain financial
analyses relating to the proposed business combination. Representatives of BT
Alex. Brown and OSI's legal counsel answered numerous questions from the OSI
Board concerning the proposed transaction.
At special meetings of the OSI Board, held via teleconference, on
September 4, September 7, September 9 and September 11, Mr. Anderson reviewed
the course of negotiations and OSI's legal counsel summarized the current status
of the Merger Agreement and related documents.
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On September 8, 1998, at a special meeting of the HNC Board,
management reported on the status of the Merger negotiations. Representatives of
Credit Suisse First Boston reported on their due diligence review of OSI's
customers and also provided updated information regarding Credit Suisse First
Boston's valuation analysis of OSI and the preliminary pro forma impact of the
proposed Merger. Legal counsel to HNC also summarized for the HNC Board the
principal terms of the transaction as they had been negotiated to date.
On September 13, 1998, at a special meeting of the OSI Board, held
via teleconference, Mr. Anderson and Mr. Willemin reported on the status of the
negotiations with HNC and representatives of BT Alex. Brown and OSI's legal
counsel reviewed the status of the remaining issues that had been negotiated.
After discussion of these matters, the OSI Board unanimously approved the Merger
and the Merger Agreement, subject to satisfactory resolution of the remaining
issues.
On September 14, 1998, at a special meeting of the HNC Board, HNC
management reported on the status of the negotiations with OSI and counsel to
HNC reported on material transaction points. The HNC Board then authorized
management to sign the Merger Agreement provided that the Merger Agreement were
executed by all parties thereto on September 14, 1998, and directed management
to call another meeting of the HNC Board on September 15 to further discuss the
matter prior to final authorization if the Merger Agreement were not executed by
all parties thereto on September 14. The Merger Agreement was not signed on
September 14, 1998. Accordingly, a special meeting of the HNC Board was held on
September 15, 1998. At the meeting, the HNC Board unanimously approved the
Merger and the Merger Agreement, provided that the maximum number of shares of
HNC Common Stock issued in the proposed Merger and/or issuable upon the exercise
of options to purchase HNC Common Stock that are granted in the Merger did not
exceed a total of 3,000,000 shares of HNC Common Stock.
On September 16, 1998, the parties agreed to the maximum number of
shares of HNC Common Stock issuable in the proposed Merger, including the shares
of HNC Common Stock issuable upon the exercise of options granted in the Merger.
After final approvals by the HNC Board and the OSI Board of the Merger Agreement
and the transactions contemplated by the Merger Agreement, the Merger Agreement
was signed by the parties and HNC and OSI issued a joint press release
announcing the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of OSI
Common Stock and OSI Preferred Stock. This discussion reflects the opinions of
Hale and Dorr LLP and Fenwick & West LLP attached as Exhibits 8.1 and 8.2 to the
Registration Statement of which this Proxy Statement/Prospectus is a part (the
"Exhibit Options"). The Exhibit Opinions each include an opinion to the effect
that the Merger will constitute a "reorganization" (a "Reorganization") within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). The Exhibit Opinions are based on certain assumptions and subject
to certain limitations and qualifications as noted in the opinions. This
discussion does not address all income tax considerations that may be relevant
to particular OSI stockholders in light of their particular circumstances, such
as stockholders who are dealers in securities, stockholders who are foreign
persons, stockholders who acquired their shares in connection with previous
mergers involving OSI or an affiliate of OSI, stockholders who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions, or stockholders who exercise their appraisal rights.
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 OSI Common Stock or OSI Preferred 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,
OSI 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 OF THE MERGER TO THEM.
The following discussion is based on the interpretation by HNC's and
OSI's respective counsel of the Code, applicable Treasury Regulations, judicial
authority and administrative ruling and practice, all as of the date hereof. The
Internal Revenue Service (the "IRS") is not precluded from adopting a contrary
position. In addition, there can be no assurance that future legislative,
judical or administrative changes or interpretations will not adversely affect
the accuracy of the statements and conclusions set forth herein. Any such
changes or interpretations could be applied retroactively and could affect the
tax consequences of the Merger to HNC, OSI and/or their respective stockholders.
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Subject to the limitations and qualifications referred to herein, and
as a result of the Merger's qualifying as a Reorganization, HNC's and OSI's
respective counsel are of the opinion that:
(a) No gain or loss will be recognized by holders of OSI
Common Stock or OSI Preferred Stock 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 an OSI stockholder (including any
fractional share of HNC Common Stock not actually received) will be
the same as the aggregate tax basis of the OSI Common Stock and/or
OSI Preferred Stock surrendered in exchange therefor;
(c) The holding period of the HNC Common Stock received in
the Merger by an OSI stockholder will include the period during which
the stockholder held the OSI Common Stock and/or OSI Preferred Stock
of such OSI stockholder surrendered in exchange therefor, provided
that the OSI Common Stock and/or OSI Preferred Stock is held by such
OSI stockholder as a capital asset at the time of the Merger;
(d) Cash payments received by holders of OSI Common Stock
or OSI Preferred Stock in lieu of a fractional share of HNC Common
Stock will be treated as if such fractional share of HNC Common Stock
had been issued in the Merger and then redeemed by HNC. An OSI
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 OSI will recognize material
amounts of gain or loss solely as a result of the Merger.
The parties are not requesting a ruling from the IRS in connection
with the Merger. The Exhibit Opinions neither bind the IRS nor preclude the IRS
from adopting a position contrary to such opinions. It is not a condition to the
Merger that HNC or OSI receive an opinion from their respective counsel that the
Merger constitutes a Reorganization.
A successful IRS challenge to the "Reorganization" status of the
Merger would result in an OSI stockholder's recognizing gain or loss with
respect to each share of OSI Common Stock or OSI Preferred Stock surrendered
equal to the difference between the stockholder's basis in such share of OSI
stock 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.
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling of interests for
financial reporting purposes in accordance with generally accepted accounting
principles. Under pooling accounting treatment, the recorded assets and
liabilities and the operating results of both HNC and OSI 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. It is a
condition to HNC's obligations to consummate the Merger that, among other
things, HNC will have been advised in writing, as of the Effective Time, by
PricewaterhouseCoopers LLP that, subject to customary qualifications, they
concur with management's conclusion that no conditions exist that would preclude
HNC from accounting for the Merger as a "pooling of interests," and OSI will
have been advised in writing, as of the Effective Time, by
PricewaterhouseCoopers LLP that, subject to customary qualifications, they
concur with management's conclusion that no conditions exist that would preclude
OSI from being a party to a business combination for which the pooling of
interests method of accounting would be available.
GOVERNMENT AND REGULATORY APPROVALS
Transactions such as the Merger are reviewed by the Department of
Justice and the Federal Trade Commission (the "FTC") to determine whether they
comply with applicable antitrust laws. Under the provisions of 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 FTC and the specified
waiting period requirements of the HSR Act have been satisfied. HNC and OSI each
filed their respective notification and report forms under the HSR Act on
September ___, 1998.
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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 OSI. Based on information available to
them, HNC and OSI 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 antitrust grounds will not be made or that, if such a challenge is
made, HNC and OSI 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 Merger Agreement, conditions to both HNC's and OSI's
obligations to consummate the Merger include the absence of any injunction or
other legal, contractual or regulatory restraint which would restrict the Merger
or require divestiture of assets by HNC or OSI.
APPRAISAL RIGHTS
When the Merger is effected, stockholders of OSI who comply with the
procedures prescribed in Section 262 of the DGCL ("Section 262") will be
entitled to a judicial determination of the "fair value" of their shares
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) and to receive from OSI payment of such fair value in
cash. Shares of OSI Common Stock and OSI Preferred Stock which are outstanding
immediately prior to the Effective Time and with respect to which appraisal
shall have been properly demanded in accordance with Section 262 shall not be
converted into the right to receive shares of HNC Common Stock in the Merger
(the "Merger Consideration") at or after the Effective Time unless and until the
holder of such shares withdraws his, her or its demand for such appraisal or
becomes ineligible for such appraisal.
Holders of HNC Common Stock and holders of OSI Options outstanding at
the Effective Time are not entitled to appraisal rights in connection with the
Merger.
The following is a brief summary of the statutory procedures to be
followed by a stockholder of OSI in order to dissent from the Merger and perfect
appraisal rights under the DGCL. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262, THE TEXT OF WHICH IS
INCLUDED AS APPENDIX B TO THIS REGISTRATION STATEMENT. ANY OSI STOCKHOLDER
CONSIDERING DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL COUNSEL.
Written Demand for Appraisal. A written demand for appraisal of
shares of OSI Common Stock or OSI Preferred Stock must be delivered to OSI by a
stockholder seeking appraisal before the taking of the vote on the Merger. This
written demand must be separate from any proxy or vote abstaining from or voting
against approval of the Merger. Voting against approval of the Merger,
abstaining from voting or failing to vote with respect to approval of the Merger
will not constitute a demand for appraisal within the meaning of Section 262.
OSI stockholders electing to exercise their appraisal rights under
Section 262 must not vote for approval of the Merger. A vote by an OSI
stockholder against approval of the Merger is not required in order for that
stockholder to exercise appraisal rights. However, if an OSI stockholder returns
a signed proxy but does not specify a vote against approval of the Merger or a
direction to abstain, the proxy, if not revoked, will be voted for approval of
the Merger, which will have the effect of waiving that stockholder's appraisal
rights.
A written demand for appraisal must reasonably inform OSI of the
identity of the stockholder of record and that such stockholder intends thereby
to demand appraisal. Accordingly, a demand for appraisal should be executed by
or for the OSI stockholder of record, fully and correctly, as such stockholder's
name appears on the stock certificate. If OSI Common Stock or OSI Preferred
Stock is owned of record in a fiduciary capacity, such as by a trustee, guardian
or custodian, such demand must be executed by the fiduciary. If OSI Common Stock
or OSI Preferred Stock is owned of record by more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, he is acting as agent for the record owner.
A record owner who holds OSI Common Stock or OSI Preferred Stock as a
nominee for others may exercise appraisal rights with respect to the OSI Common
Stock and OSI Preferred Stock held for all or less than all beneficial owners of
OSI Common Stock and OSI Preferred Stock as to which the holder is the record
owner. In such case, the written demand must set forth the number of shares of
OSI Common Stock and OSI Preferred Stock covered by such
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demand. Where the number of shares of OSI Common Stock and OSI Preferred Stock
is not expressly stated, the demand will be presumed to cover all shares of OSI
Common Stock and OSI Preferred Stock outstanding in the name of such record
owner. Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly with the
statutory requirements with respect to the delivery of written demand prior to
the taking of the vote on the Merger.
An OSI stockholder who elects to exercise appraisal rights must mail
or deliver the written demand for appraisal to: Secretary, Open Solutions Inc.,
300 Winding Brook Drive, Glastonbury, Connecticut 06033, or deliver such demand
to OSI in person at the Special Meeting. The written demand for appraisal should
specify the stockholder's name and mailing address and the number of shares of
OSI Common Stock and OSI Preferred Stock covered by the demand, and should state
that the stockholder is thereby demanding appraisal in accordance with Section
262.
Other Procedures. Within ten days after the Effective Time, OSI must
provide notice as to the date of effectiveness of the Merger to all OSI
stockholders who have duly and timely delivered demands for appraisal and who
have not voted for approval of the Merger Agreement (a "Dissenting
Stockholder").
Within 120 days after the Effective Time, any Dissenting Stockholder
is entitled, upon written request, to receive from OSI a statement setting forth
the aggregate number of shares not voted in favor of approval of the Merger and
the Merger Agreement and with respect to which demands for appraisal have been
received by OSI, and the number of holders of such shares. Such statement must
be mailed within 10 days after the written request therefor has been received by
OSI.
Within 120 days after the Effective Time, either OSI or any
Dissenting Stockholder may file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of each share of OSI Common Stock
and OSI Preferred Stock of all Dissenting Stockholders. If a petition for an
appraisal is timely filed, after a hearing on such petition, the Delaware Court
of Chancery will determine which of the OSI stockholders are entitled to
appraisal rights and thereafter will appraise the shares of OSI Common Stock and
OSI Preferred Stock owned by such stockholders, determining the fair value of
such shares, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with the fair rate of interest to be
paid, if any, upon the amount determined to be fair value. In determining fair
value, the Delaware Court of Chancery is to take into account all relevant
factors. In Weinberger v. UOP, Inc., et al., the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and the "[f]air price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value the court and the appraiser may consider "all factors and elements
which reasonably might enter into the fixing of value," including "market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which were known or which could be ascertained as of the date of the
merger and which throw any light on future prospects of the merger corporation
...." The Delaware Supreme Court has construed Section 262 to mean that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." However, such court noted that Section 262
provides that fair value is to be determined "exclusive of any element of value
arising from the accomplishment or expectation of the merger."
Stockholders of OSI considering whether to seek appraisal should bear
in mind that the fair value of their OSI Common Stock and OSI Preferred Stock
determined under Section 262 could be more than, the same as, or less than the
value of the Merger Consideration to be exchanged in the Merger, and that
opinions of investment banking firms as to fairness from a financial point of
view are not necessarily opinions as to fair value under Section 262. Moreover,
OSI reserves the right to assert in any appraisal proceeding that, for purposes
thereof, the "fair value" of the OSI Common Stock and OSI Preferred Stock is
less than the value of the Merger Consideration.
The cost of the appraisal proceeding may be determined by the
Delaware Court of Chancery and taxed upon the parties as the court deems
equitable in the circumstances. Upon application of a Dissenting Stockholder,
the court may order that all or a portion of the expenses incurred by any
Dissenting Stockholder in connection with the appraisal proceeding, including,
without limitation, reasonably attorneys' fees, and the fees and expenses of
experts, be charged pro rata against the value of all shares entitled to
appraisal. In the absence of such a determination or assessment, each party
bears its own expenses.
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A Dissenting Stockholder who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote for any purpose the OSI Common Stock and OSI Preferred Stock subject to
such demand or to receive payment of dividends or other distributions on such
OSI Common Stock and OSI Preferred Stock, except for dividends or other
distributions payable to stockholders of record at a date prior to the Effective
Time.
At any time within 60 days after the Effective Time, any Dissenting
Stockholder will have the right to withdraw his, her or its demand for appraisal
and to accept the Merger Consideration. After this period, a Dissenting
Stockholder may withdraw his or her demand for appraisal only with the consent
of OSI. If no petition for appraisal is filed with the Delaware Court of
Chancery within 120 days after the Effective Time, Dissenting Stockholders'
rights to appraisal shall cease and they shall be entitled only to receive the
Merger Consideration. Inasmuch as OSI has no obligation to file such a petition,
any OSI stockholder who desires such a petition to be filed is advised to file
it on a timely basis. However, no petition timely filed in the Delaware Court of
Chancery demanding appraisal shall be dismissed as to any OSI stockholder
without the approval of the Delaware Court of Chancery, and such approval may be
conditioned upon such terms as the Delaware Court of Chancery deems just.
A vote for the Merger will constitute a waiver of appraisal rights. A
failure to vote against the Merger will not, of itself, under Delaware law,
constitute a waiver of appraisal rights. If a stockholder returns a proxy which
does not contain instructions as to how it should be voted, such proxy will be
voted in favor of the Merger and, accordingly, appraisal rights will be waived.
As described above, a vote against the Merger is not sufficient to perfect
appraisal rights. A stockholder's failure to make the written demand prior to
the Special Meeting under Delaware law as described above, will constitute a
waiver of appraisal rights.
ANY HOLDER WHO FAILS TO COMPLY WITH THE REQUIREMENTS OF SECTION 262
OF THE DELAWARE GENERAL CORPORATION LAW (SEE APPENDIX B) WILL FORFEIT HIS, HER
OR ITS RIGHTS TO DISSENT AND WILL RECEIVE THE MERGER CONSIDERATION FOR HIS, HER
OR ITS SHARES.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of OSI
with respect to the Merger, stockholders of OSI should be aware that certain
members of the management and the Board of Directors of OSI have certain
interests in the Merger in addition to the interests of the OSI stockholders
generally. In connection with the Board of Directors' determination that the
Merger is fair to the stockholders of OSI, the OSI Board was aware of these
potential conflicts and carefully considered conflict of interest issues
relating to the matters described below.
Mr. Anderson and HNC entered into a letter agreement regarding the
terms of his continued employment with OSI which provides that, effective as of
the Closing, (i) Mr. Anderson shall continue to work for OSI as its Chief
Executive Officer for at least three years after the Effective Time, (ii) HNC
shall pay Mr. Anderson his current 1998 cash compensation (including a cash
bonus) for the remainder of the calendar year, and thereafter shall pay Mr.
Anderson compensation consistent with that paid by HNC to its comparably
situated executives, but in no event will his salary be reduced below the 1998
level during the three year period described above and (iii) Mr. Anderson agreed
that the salary continuation benefits provided for in his current employment
agreement with OSI would be available in the event of any triggering event (as
defined in that agreement) that occurs through, but not beyond, the third
anniversary of the Effective Time.
Mr. Person and HNC entered into a letter agreement regarding the
terms of his continued employment with OSI which provides that, effective as of
the Closing, (i) Mr. Person shall continue to work for OSI as its President and
Chief Operating Officer for at least three years after the Effective Time, (ii)
HNC shall pay Mr. Person his current 1998 cash compensation (including a cash
bonus) for the remainder of the calendar year, and thereafter shall pay Mr.
Person compensation consistent with that paid by HNC to its comparably situated
executives, but in no event will his salary be reduced below the 1998 level
during the three year period described above and (iii) Mr. Person agreed that
his current salary continuation benefits would be available in the event of any
triggering event (as defined in that agreement) that occurs through, but not
beyond, the third anniversary of the Effective Time.
In accordance with the terms of Mr. Willemin's existing agreement
with OSI, each outstanding OSI Option held by Mr. Willemin (currently a total of
_____ OSI Options) will become fully vested and exercisable immediately prior to
consummation of the Merger.
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Prior to the Effective Time, OSI expects, in accordance with past
practice, to authorize the grant of options to purchase approximately 200,000
shares of OSI Common Stock to certain officers and other employees pursuant to
OSI's 1994 Stock Option Plan. OSI does not expect to grant any of such options
to any of the executive officers of OSI.
OSI expects to enter into a consulting agreement with Richard P.
Yanak, a director of OSI, with a term commencing as of the Effective Time and
extending through 2000. OSI expects to retain Mr. Yanak on a consulting basis to
assist OSI in electronic commerce product development, sales and marketing
activities and such other services relating to the business of OSI as Mr. Yanak
and OSI shall mutually agree upon, on terms to be determined.
The Merger Agreement provides that, for a period of six years after
the Effective Time, HNC shall, and shall cause the Surviving Corporation to,
indemnify and hold harmless the present and former officers and directors of OSI
and any officers, directors and employees of OSI who are (or were) fiduciaries
of OSI employee benefit plans in respect of certain acts or omissions of such
persons taken or occurring prior to the Effective Time and in their capacity as
an officer, director or fiduciary, and to provide officers' and directors'
liability insurance covering OSI's officers and directors for a period of five
years after effectiveness of the Merger, subject to a maximum annual insurance
premium.
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TERMS OF THE MERGER
The following discussion summarizes the terms of the Merger
Agreement, the Merger and the transactions contemplated thereby. The following
is not, however, a complete statement of all provisions of the Merger Agreement
and related agreements. The following description of the Merger, the Merger
Agreement and related transactions is qualified in all respects by reference to
the complete text of the Merger Agreement which is attached to this Proxy
Statement/Prospectus as Appendix A.
EFFECTIVE TIME
The Merger will become effective upon the filing by OSI of a
Certificate of Merger with the Delaware Secretary of State (the "Effective
Time"). The Closing of the Merger (the "Closing") will occur as soon as
practicable, and in all events by the second business day after the satisfaction
or waiver of the conditions to the Merger, or on such other day as HNC and OSI
may 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 30, 1998.
MANNER AND BASIS OF CONVERTING OSI SHARES
Upon the effectiveness of the Merger, each share of OSI Common Stock
and each share of OSI Preferred Stock that is issued and outstanding immediately
prior to the Effective Time (other than dissenting shares as to which Appraisal
Rights have been exercised) will be converted into HNC Common Stock, and each
OSI Option that is outstanding immediately prior to the Effective Time will be
converted into an HNC Option. The Merger Agreement uses a conversion formula to
compute the number of shares of HNC Common Stock into which each share of OSI
Common Stock and OSI Preferred Stock will be converted in the Merger and to
compute the number of HNC Options into which each OSI Option will be converted
in the Merger. The results of this conversion formula depend on the number of
outstanding shares of OSI Common Stock and of each series of OSI Preferred
Stock, and on the number of OSI Options, that are outstanding immediately prior
to the Effective Time of the Merger. The steps used in this conversion formula
are summarized in more detail below.
Conversion of OSI Stock
The Merger Agreement provides that (i) the number of shares of HNC
Common Stock that will be issued in the Merger upon the conversion of
outstanding shares of OSI Common Stock and OSI Preferred Stock plus (ii) the
number of shares of HNC Common Stock that will be subject to all HNC Options
that are issued in the Merger upon the conversion of outstanding OSI Options,
will not exceed an aggregate total of 2,956,618 shares of HNC Common Stock (such
number of shares of HNC Common Stock to be issued in the Merger and issuable
upon exercise of HNC Options issued in the Merger is hereinafter referred to as
the "HNC Merger Shares").
The terms of OSI's Certificate of Incorporation provide that, before
any Merger consideration is paid to the holders of OSI Common Stock: (a) each
outstanding share of OSI Series A-1 Preferred Stock is entitled to receive in
the Merger a preferential payment of $1.50 per share plus any declared but
unpaid dividends thereon (the "OSI Series A-1 Preference"); (b) each outstanding
share of OSI Series A-2 Preferred Stock is entitled to receive in the Merger a
preferential payment of $3.00 per share plus any declared but unpaid dividends
thereon (the "OSI Series A-2 Preference"); (c) each outstanding share of OSI
Series B Preferred Stock is entitled to receive in the Merger a preferential
payment of $3.00 per share plus any accrued but unpaid dividends thereon (the
"OSI Series B Preference"); (d) each outstanding share of OSI Series C Preferred
Stock is entitled to receive in the Merger a preferential payment of $4.50 per
share plus any accrued but unpaid dividends thereon (the "OSI Series C
Preference"); and (e) each outstanding share of OSI Series D Preferred Stock is
entitled to receive in the Merger a preferential payment of $6.00 per share plus
any accrued but unpaid dividends thereon (the "OSI Series D Preference"). Each
of the above preferential payments is individually referred to herein as an "OSI
Series Preference." There are currently no declared or accrued but unpaid
dividends on the shares of any series of OSI Preferred Stock and none are
expected to be declared or accrued prior to consummation of the Merger.
After receiving such preferential payments of Merger consideration,
each series of OSI Preferred Stock is also entitled to participate pro rata with
the holders of the outstanding OSI Common Stock in receiving all remaining
Merger consideration that is payable to OSI's stockholders, and, for purposes of
this participation right, each share of OSI Preferred Stock is deemed to be the
number of shares of OSI Common Stock into which it is convertible under the
terms of
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OSI's Certificate of Incorporation. Currently, each share of each series of OSI
Preferred Stock is convertible into one share of OSI Common Stock.
The conversion formula used in the Merger Agreement implements the
above principles in determining the number of shares of HNC Common Stock into
which each outstanding share of OSI Common Stock and OSI Preferred Stock will be
converted in the Merger and operates as follows:
- Determine the Aggregate Series Preference Amount for each Series
of OSI Preferred Stock. First, the total dollar value of the
aggregate amount of preferential merger payments payable to all
of the shares of each series of OSI Preferred Stock is computed.
To compute this aggregate dollar amount for each series of OSI
Preferred Stock, the OSI Series Preference applicable to that
series of OSI Preferred Stock is multiplied by the number of
shares of such series that are issued and outstanding
immediately prior to the consummation of the Merger. This
resulting product is the "Aggregate Preference Amount" for that
series of OSI Preferred Stock and represents the dollar value of
the aggregate merger preference for that series of OSI Preferred
Stock. The "Aggregate Preference Amount" for each of OSI's
Series A-1, A-2, B, C and D Preferred Stock is hereinafter
referred to as the "Aggregate Series A-1 Preference Amount",
"Aggregate Series A-2 Preference Amount", "Aggregate Series B
Preference Amount", "Aggregate Series C Preference Amount" and
"Aggregate Series D Preference Amount", respectively.
- Compute the Series Merger Shares for each Series of OSI
Preferred Stock. Next, the Aggregate Preference Amount for each
series of OSI Preferred Stock is divided by $39.475 (the "HNC
Average Price Per Share") and the resulting quotient (rounded
down to the nearest whole number of shares of HNC Common Stock)
is hereinafter called the "Series Merger Shares" for that series
of OSI Preferred Stock. The "Series Merger Shares" of a series
of OSI Preferred Stock means the total number of shares of HNC
Common Stock that will be issued to all the holders of such
series of OSI Preferred Stock in order to satisfy their
aggregate merger preference rights. The number of "Series Merger
Shares" for each of the OSI Series A-1, A-2, B, C and D
Preferred Stock is hereinafter referred to as the "Series A-1
Merger Shares," "Series A-2 Merger Shares," "Series B Merger
Shares," "Series C Merger Shares," and "Series D Merger Shares,"
respectively. The "HNC Average Price Per Share" of $39.475 is
the average of the closing prices per share of HNC Common Stock
as quoted on the Nasdaq Stock Market for the five (5) trading
days ending on September 15, 1998, the date before the Merger
Agreement was signed.
- Compute the Series Conversion Number for each Series of OSI
Preferred Stock. Next, the number of Series Merger Shares for
each series of OSI Preferred Stock is divided by the number of
shares of that series of OSI Preferred Stock that are issued and
outstanding immediately prior to the consummation of the Merger,
and the resulting quotient is the "Series Conversion Number" for
that series of OSI Preferred Stock. The Series Conversion Number
for each series of OSI Preferred Stock is the number of shares
of HNC Common Stock into which each outstanding share of that
series of OSI Preferred Stock will be converted in order to
satisfy the merger preference rights of that series of OSI
Preferred Stock. The "Series Conversion Number" for each of
OSI's Series A-1, A-2, B, C and D Preferred Stock is hereinafter
referred to as the "Series A-1 Conversion Number", "Series A-2
Conversion Number", "Series B Conversion Number", "Series C
Conversion Number" and "Series D Conversion Number",
respectively.
- Compute the Preference Shares. Next, the number of shares of HNC
Common Stock equal to the sum of the Series A-1 Merger Shares,
the Series A-2 Merger Shares, the Series B Merger Shares, the
Series C Merger Shares and the Series D Merger Shares is
computed and this aggregate number of shares of HNC Common Stock
is referred to as the "Preference Shares." The "Preference
Shares" is the total number of shares of HNC Common Stock that
will be issued to all holders of OSI Preferred Stock in the
Merger in satisfaction of their aggregate merger preference
rights.
- Compute the Participation Shares. Next, the number of Preference
Shares is subtracted from the number of HNC Merger Shares, and
the remaining number of shares of HNC Common Stock is the
"Participation Shares". The Participation Shares represents the
total number of the HNC Merger Shares that will be (1) issued
upon the conversion of shares of OSI Common Stock in the Merger,
(2) issued upon the conversion of shares of OSI Preferred Stock
in the Merger (after payment of the full merger preference
payments applicable to such shares of OSI Preferred Stock as
described above) and (3) issuable upon the exercise of all HNC
Options granted upon the conversion of OSI Options in the Merger
(see below).
- Compute the Participation Number. Next, the number of the
Participation Shares is divided by the "Fully Diluted OSI
Shares" (as defined below), and this resulting quotient is the
"Participation Number." The "Fully Diluted OSI Shares" is the
number of shares of OSI Common Stock that is equal to the sum
of: (i) the total number of shares of OSI
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Common Stock that are issued and outstanding immediately prior
to the consummation of the Merger, plus (ii) the total number of
shares of OSI Common Stock that are issuable upon the conversion
in full of all shares of OSI Preferred Stock that are issued and
outstanding immediately prior to the consummation of the Merger
plus (iii) the total number of shares of OSI Common Stock
potentially issuable upon exercise in full of all OSI Options
that are outstanding immediately prior to the consummation of
the Merger (computed without regard to vesting restrictions),
plus (iv) the total number of all shares of OSI Common Stock
that are potentially issuable upon the conversion, exercise or
exchange of any warrants, options (other than OSI Options),
convertible securities (other than OSI's Preferred Stock) or
other securities of OSI that are outstanding immediately prior
to the consummation of the Merger (computed without regard to
vesting restrictions).
- Compute Conversion Rates for OSI Common Stock and OSI Preferred
Stock. The above computations determine the number of shares of
HNC Common Stock into which each share of OSI Common Stock and
each share of OSI Preferred Stock (other than any such shares as
to which dissenters' Appraisal Rights are exercised) will be
converted in the Merger (subject to the elimination of
fractional shares of HNC Common Stock as described below), as
follows:
OSI Common Stock: Each share of OSI Common Stock that is
issued and outstanding immediately prior to the consummation of the Merger will
be converted into a number of shares of HNC Common Stock equal to the
PARTICIPATION NUMBER;
OSI Series A-1 Preferred Stock: Each share of OSI Series A-1
Preferred Stock that is issued and outstanding immediately prior to the
consummation of the Merger will be converted into a number of shares of HNC
Common Stock equal to the sum of (i) THE SERIES A-1 Conversion NUMBER PLUS (ii)
THE PRODUCT OBTAINED BY MULTIPLYING THE PARTICIPATION NUMBER BY THE NUMBER OF
SHARES OF OSI COMMON STOCK INTO WHICH SUCH SHARE OF SERIES A-1 PREFERRED STOCK
IS THEN CONVERTIBLE;
OSI Series A-2 Preferred Stock: Each share of OSI Series A-2
Preferred Stock that is issued and outstanding immediately prior to the
consummation of the Merger will be converted into a number of shares of HNC
Common Stock equal to the sum of the (i) THE SERIES A-2 Conversion NUMBER PLUS
(ii) THE PRODUCT OBTAINED BY MULTIPLYING THE PARTICIPATION NUMBER BY THE NUMBER
OF SHARES OF OSI COMMON STOCK INTO WHICH SUCH SHARE OF SERIES A-2 PREFERRED
STOCK IS THEN CONVERTIBLE;
OSI Series B Preferred Stock: Each share of OSI Series B
Preferred Stock that is issued and outstanding immediately prior to the
consummation of the Merger will be converted into a number of shares of HNC
Common Stock equal to the sum of (i) THE SERIES B Conversion NUMBER PLUS (ii)
THE PRODUCT OBTAINED BY MULTIPLYING THE PARTICIPATION NUMBER BY THE NUMBER OF
SHARES OF OSI COMMON STOCK INTO WHICH SUCH SHARE OF SERIES B PREFERRED STOCK IS
THEN CONVERTIBLE;
OSI Series C Preferred Stock: Each share of OSI Series C
Preferred Stock that is issued and outstanding immediately prior to the
consummation of the Merger will be converted into a number of shares of HNC
Common Stock equal to the sum of (i) THE SERIES C Conversion NUMBER PLUS (ii)
THE PRODUCT OBTAINED BY MULTIPLYING THE PARTICIPATION NUMBER BY THE NUMBER OF
SHARES OF OSI COMMON STOCK INTO WHICH SUCH SHARE OF SERIES C PREFERRED STOCK IS
THEN CONVERTIBLE; and
OSI Series D Preferred Stock: Each share of OSI Series D
Preferred Stock that is issued and outstanding immediately prior to the
consummation of the Merger will be converted into a number of shares of HNC
Common Stock equal to the sum of (i) THE SERIES D Conversion NUMBER PLUS (ii)
THE PRODUCT OBTAINED BY MULTIPLYING THE PARTICIPATION NUMBER BY THE NUMBER OF
SHARES OF OSI COMMON STOCK INTO WHICH SUCH SHARE OF SERIES D PREFERRED STOCK IS
THEN CONVERTIBLE.
Hypothetical Illustration of Merger Conversion Formula
This paragraph is intended to illustrate the Merger conversion
formula described above. The following illustration of the Merger conversion
formula assumes that, immediately prior to the consummation of the Merger,
2,236,013 shares of OSI Common Stock, 1,000,000 shares of OSI Series A-1
Preferred Stock, 583,333 shares of OSI Series A-2 Preferred Stock, 1,736,250
shares of OSI Series B Preferred Stock, 1,375,000 shares of OSI Series C
Preferred Stock, 1,250,000 shares of OSI Series D Preferred and OSI Options to
purchase a total of 1,887,500 shares of OSI Common Stock (and no other OSI
securities) will be issued and outstanding. The above assumptions were based on
the number of shares and OSI Options that were outstanding on September 16,
1998, and assumes that after September 16, 1998 and prior to the
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consummation of the Merger (a) all outstanding warrants to purchase shares of
OSI stock are exercised in full and (b) an additional 200,000 OSI Options are
granted. Based on those assumptions: (a) the Participation Number would be
0.23794, and each such share of OSI Common Stock, OSI Series A-1 Preferred
Stock, OSI Series A-2 Preferred Stock, OSI Series B Preferred Stock, OSI Series
C Preferred Stock and OSI Series D Preferred Stock would be converted in the
Merger into 0.23794, 0.27594, 0.31394, 0.31394, 0.35194 and 0.38993 shares of
HNC Common Stock, respectively (subject to the elimination of fractional
shares), and each OSI Option to purchase one share of OSI Common Stock that is
outstanding immediately prior to the consummation of the Merger will be
converted into an option to purchase 0.23794 shares of HNC Common Stock (subject
to rounding down to eliminate fractional options) at an exercise price per share
of HNC Common Stock equal to the pre-Merger exercise price per share of OSI
Common Stock of such OSI Option divided by 0.23794.
THE ABOVE ILLUSTRATION IS BASED ON THE ASSUMPTIONS DESCRIBED ABOVE.
ANY CHANGES TO SUCH ASSUMPTIONS WILL ALTER THE CONVERSION RATES AT WHICH SHARES
OF OSI COMMON STOCK, OSI PREFERRED STOCK AND OSI OPTIONS WILL BE CONVERTED IN
THE MERGER.
No fractional shares of HNC Common Stock will be issued in connection
with the Merger. Each holder of OSI Common Stock and each holder of OSI
Preferred Stock who would otherwise be entitled to receive a fraction of a share
of HNC Common Stock will receive, in lieu of such fractional share, an amount of
cash computed based upon the average of the closing prices per share of HNC
Common Stock on the Nasdaq National Market as reported in The Wall Street
Journal for the five trading days ended immediately before September 16, 1998.
Upon the Closing Date, each holder of shares of OSI Common Stock
and/or OSI Preferred Stock will be required to surrender the certificate(s) for
such shares, duly endorsed to HNC for cancellation as of the Effective Time,
together (if requested by HNC) with each OSI stockholder's brief agreement to
and acknowledgment of the escrow and indemnification requirements of the Merger
Agreement. Promptly after the Effective Time and receipt of such certificates
and (if requested) such agreement and acknowledgment, HNC or its transfer agent
will issue to each tendering holder of such an OSI 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 Merger Agreement and Escrow Agreement, as described
below), plus a check for the amount of cash in lieu of any fractional shares.
See "--Indemnification and Escrow." At or about the Closing Date, HNC will
deliver the certificates representing the Escrow Shares to the Escrow Agent
pursuant to the Escrow Agreement.
No certificates representing shares of HNC Common Stock will be
issued to any holder of OSI Common Stock or OSI Preferred Stock who fails to
surrender his, her or its OSI stock certificates. 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 OSI
stock certificate unless and until such holder surrenders such OSI stock
certificate to HNC. Subject to the effect, if any, of applicable escheat and
other laws, following surrender of any OSI stock certificate, any dividends or
distributions on HNC Common Stock will be delivered to the person entitled
thereto, without interest.
After the Effective Time, there will be no further registration of
transfers on the stock transfer books of OSI of any shares of capital stock of
OSI that were outstanding immediately prior to the Effective Time of the Merger.
If, after the Effective Time of the Merger, OSI stock certificates are presented
for any reason, they will be canceled and exchanged as provided in the Merger
Agreement. Until certificates representing shares of OSI Common Stock and/or OSI
Preferred Stock that are outstanding immediately prior to the Effective Time of
the Merger are surrendered pursuant to the Merger 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 OSI Common Stock and/or OSI
Preferred Stock will have been converted pursuant to the Merger.
ASSUMPTION AND CONVERSION OF OSI STOCK OPTIONS
Upon the Effective Time of the Merger, each OSI Option that is
outstanding immediately prior to the Effective Time will be assumed by HNC and
converted into an option to purchase a number of shares of HNC Common Stock (an
"HNC Option") determined by multiplying the number of shares of OSI Common Stock
that are subject to such OSI Option immediately prior to the Effective Time by
the Participation Number, at an exercise price per share of HNC Common Stock
equal to the exercise price per share of OSI Common Stock that was in effect for
such OSI Option immediately prior to the Effective Time divided by the
Participation Number. 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 OSI Option
(including without limitation the provisions of the OSI Option Plan that form
part of the
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terms and conditions of such OSI Option) that is converted into an HNC Option
in the Merger will (except as otherwise provided in the terms of such OSI
Options), to the extent permitted by law and otherwise reasonably practicable,
be unchanged and continue in effect after the Effective Time of the Merger.
Pre-Merger employment or other service with OSI will be credited to each holder
of an OSI Option for purposes of applying any vesting schedule based on the
duration of such holder's employment or other service that is contained in the
OSI Option issued to such holder that is converted into an HNC Option in the
Merger in order to determine the number of shares of HNC Common Stock that are
exercisable under such HNC Option at any point in time.
STOCK OWNERSHIP IMMEDIATELY FOLLOWING THE MERGER
Based upon the capitalization of OSI as of the close of business on
September 16, 1998 (including the number of shares of OSI Common Stock and
Preferred Stock outstanding and the number of shares issuable upon exercise of
outstanding OSI Options), and assuming that after September 16, 1998 and prior
to consummation of the Merger (i) all warrants to purchase OSI stock that were
outstanding on September 16, 1998 are exercised in full and (ii) options to
purchase 200,000 shares of OSI Common Stock are granted by OSI, then upon
consummation of the Merger (assuming no OSI stockholders exercise Appraisal
Rights), an aggregate of approximately 2,507,507 shares of HNC Common Stock will
be issued in the Merger and HNC will assume OSI Options to purchase up to
approximately 449,111 additional shares of HNC Common Stock (in each case
subject to rounding to eliminate fractional shares and options). Since OSI's
capitalization is subject to change prior to the Effective Time, these numbers
may vary from the figures that actually result from 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 OSI by operation of law, with OSI continuing in
existence as the surviving corporation of the Merger (the "Surviving
Corporation"). Pursuant to the Merger Agreement, the Certificate of
Incorporation of OSI, as amended and restated in the Merger Agreement, will
become the Certificate of Incorporation of the Surviving Corporation and the
Bylaws of OSI, as amended in the Merger Agreement, will become the Bylaws of the
Surviving Corporation. The officers of the Surviving Corporation immediately
after the Effective Time will be the individuals who are the officers of Merger
Sub immediately prior to the Effective Time. The members of the Board of
Directors of the Surviving Corporation immediately after the Effective Time will
be Douglas K. Anderson and three persons nominated by HNC, who are currently
anticipated to be Robert L. North, Raymond V. Thomas and Michael A. Thiemann.
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 Merger Agreement, OSI has made various representations and
warranties to HNC regarding its business, including representations and
warranties regarding: (i) its corporate good standing; (ii) its subsidiaries;
(iii) its due authorization of the Merger Agreement and transactions
contemplated thereby; (iv) its capitalization, including outstanding stock and
stock options; (v) voting arrangements and registration rights; (vi) no conflict
with charter documents, corporate documents and other agreements; (vii) absence
of litigation; (viii) taxes; (ix) the accuracy of certain financial information
regarding OSI; (x) its title to property; (xi) the absence of certain changes to
OSI's business or financial condition; (xii) certain contracts and commitments;
(xiii) the absence of default, consent requirements or restrictions with respect
to material agreements; (xiv) intellectual property rights; (xv) its compliance
with laws; (xvi) related party transactions and agreements; (xvii) employees,
labor matters and employee benefit plans; (xviii) documents and information made
available; (xix) brokers or finders; (xx) books and records; (xxi) insurance;
(xxii) environmental matters; (xxiii) voting agreements and proxies; (xxiv) the
vote required of OSI's stockholders to approve the Merger Agreement and the
Merger; (xxv) board approval of the Merger; (xxvi) accounting matters; (xxvii)
actions that would affect qualification of the Merger as a tax-free
reorganization; and (xxviii) the accuracy of the Merger Agreement, its exhibits
and schedules, an OSI letter containing additional disclosure, certificates to
be delivered by OSI to HNC, and the information supplied or to be supplied by or
on behalf of OSI for inclusion or incorporation by reference in the Registration
Statement and/or this Proxy Statement/Prospectus.
Under the Merger Agreement, HNC and Merger Sub have also made various
representations and warranties to OSI regarding their businesses, including
representations and warranties regarding: (i) their corporate good standing;
(ii) due authorization of the Merger Agreement and transactions contemplated
thereby; (iii) capitalization, including outstanding stock and stock options;
(iv) no conflict with charter documents, corporate documents and certain other
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agreements; (v) brokers or finders; (vi) absence of litigation; (vii) actions
that would effect qualification of the Merger as a tax-free reorganization; and
(viii) no material adverse change. Under the Merger Agreement, HNC has also made
representations and warranties to OSI regarding: (i) filings with the Commission
and (ii) validity of shares to be issued in the Merger.
CONDUCT OF BUSINESS PENDING THE MERGER
Until the earlier of the consummation of the Merger or the
termination of the Merger Agreement in accordance with its terms, OSI has agreed
to advise HNC promptly in writing (i) of any event that would render any
representation or warranty of OSI contained in the Merger 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 OSI's business,
results of operations, or financial condition. OSI has also agreed that it 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 Merger 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. Until the earlier of the Effective Time
or the termination of the Merger Agreement, HNC has agreed to advise OSI
promptly in writing of any event that would render any representation or
warranty of HNC contained in the Merger Agreement, if made on or as of the date
of such event or the Closing Date, untrue or inaccurate in any material respect.
Further, OSI has agreed it will continue to conduct its business and
maintain its business relationships in the ordinary and usual course and that
neither OSI nor any of its subsidiaries will, without the prior written consent
of the President or Chief Financial Officer of HNC, take certain actions,
including but not limited to the following: (i) borrow or lend any money, other
than certain reasonable and ordinary employee expense advances; (ii) enter into
any transaction or agreement not in the ordinary course of OSI's business; (iii)
grant any lien or other encumbrance on any of OSI's assets; (iv) sell, transfer
or dispose of any of OSI's assets except in the ordinary course of OSI's
business; (v) enter into any material lease or contract for the purchase or sale
of any property, whether real or personal, tangible or intangible; (vi) pay any
bonus, increased salary or special remuneration to any officer, director,
employee or consultant (except for certain normal salary increases and bonus
payments consistent with OSI's past practices), enter into any new employment or
consulting agreement with any such person, or enter into any indemnification
agreement or agreements to advance expenses of defending any claim, suit or
proceeding with any such person; (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 capital stock or other securities,
pay or distribute any cash or property to any stockholder or securityholder of
OSI or make any other cash payment to any stockholder or securityholder of OSI
that is unusual, or not made in the ordinary course of OSI's business consistent
with its past practices; (viii) amend or terminate any contract, agreement or
license to which OSI or any of its subsidiaries is a party except for certain
contracts amended or terminated in the ordinary course of OSI's business or
contracts that would not, if so amended or terminated, have any material impact
on OSI's business or financial condition; (ix) guarantee or act as a surety for
any obligation of any third party; (x) issue, sell, create or authorize any
shares of its capital stock of any class or series or any other of its
securities, any warrants, obligations, subscriptions, options, convertible
securities, or other commitments to issue shares of its capital stock or
securities exchangeable for, or convertible into, shares of its capital stock,
except that OSI may issue shares of OSI Common Stock issuable upon the exercise
of OSI Options that were outstanding on September 16, 1998 (the date of the
Merger Agreement), in accordance with their terms as now in effect and may grant
stock options under the OSI 1994 Option Plan (but not under the OSI 1998 Stock
Incentive Plan) in the ordinary course of OSI's business to OSI employees and
consultants in amounts, at exercise prices and on such terms and to such
persons, as are consistent with OSI's past practices; (xi) split or reverse
split the outstanding shares of its capital stock of any class or series or
enter into any recapitalization affecting the number of outstanding shares of
its capital stock of any class or series or affecting any other of its
securities; (xii) merge, consolidate or reorganize with, or acquire, or enter
into any other business combination with, any corporation, partnership, limited
liability company or any other entity or enter into any negotiations,
discussions or agreement for such purpose; (xiii) amend its Certificate of
Incorporation or Bylaws; (xiv) license any of its technology or intellectual
property rights except for licenses of products made in the ordinary course of
OSI's business, or acquire any intellectual property rights (or any license
thereto) from any third party except for any such license obtained in the
ordinary course of OSI's business; (xv) modify or change the exercise or
conversion rights or exercise or purchase prices of any capital stock of OSI,
any OSI stock options, warrants or other OSI securities, or accelerate or
otherwise modify the right to exercise any option, warrant or other right to
purchase any capital stock or other securities of OSI or accelerate or otherwise
modify the vesting or release of, any shares of capital stock or other
securities of OSI from any repurchase options or rights of refusal held by OSI
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 Merger
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Agreement and not in contemplation of the Merger or other transactions
contemplated by the Merger Agreement; (xvi) purchase or otherwise acquire, or
sell or otherwise dispose of any shares of HNC Common Stock, 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 Common Stock or other HNC
securities; and (xvii) agree to do any of the above.
OSI has made additional covenants, including covenants relating to:
(i) the submission of the Merger and related agreements or transactions for
approval by the OSI stockholders; (ii) the preparation of this Proxy
Statement/Prospectus and other necessary documents and securities and regulatory
filings; (iii) obtaining third party consents; (iv) giving HNC notice of
litigation; (v) providing HNC with access to OSI's business and financial
information; (vi) taking efforts to cause satisfaction of conditions precedent
to the Merger; (vii) identifying of OSI's affiliates; (viii) accounting for the
Merger as a pooling of interests; (ix) certain HNC-related investments and
agreements; (x) identifying holders of OSI dissenting shares; (xi) termination
of registration and voting rights; (xii) securing invention assignment and
confidentiality agreements; (xiii) OSI employee option and benefit plans; (xiv)
encouraging the exercise of warrants; (xv) closing of the Merger; and (xvi)
actions that would affect qualification of the Merger as a tax-free
reorganization.
NON-SOLICITATION
Pursuant to the Merger Agreement, OSI has agreed that, until the
earlier of the consummation of the Merger or the termination of the Merger
Agreement in accordance with its terms, OSI will not, and will not authorize,
encourage or permit any officer, director, employee, stockholder, affiliate or
agent of OSI or any other person on OSI's or their behalf to, directly or
indirectly: (i) solicit, initiate, encourage or induce the making, submission or
announcement of, any offer or proposal from any party concerning any Alternative
Transaction (as defined below) or take any other action that could reasonably be
expected to lead to an Alternative Transaction or a proposal therefor; (ii)
consider any inquiry, offer or proposal received from any party concerning any
Alternative Transaction; (iii) furnish any information regarding OSI to any
person or entity in connection with or in response to any inquiry, offer or
proposal for or regarding any Alternative Transaction; (iv) participate in any
discussions or negotiations with any person or entity with respect to any
Alternative Transaction; (v) otherwise cooperate with, facilitate or encourage
any effort or attempt by any person or entity (other than HNC) to effect any
Alternative Transaction; or (vi) execute, enter into or become bound by any
letter of intent, agreement, commitment or understanding between OSI and any
third party that is related to, provides for or concerns any Alternative
Transaction. Until the earlier of the Effective Time or the termination of the
Merger Agreement, OSI will promptly disclose to HNC any inquiries or proposals
for Alternative Transactions received by OSI from any third parties, which
disclosure shall include the identity of the party making the inquiry or
proposal and the terms of the proposal. The term "Alternative Transaction" means
(i) any commitment, agreement or transaction involving or providing for the
possible disposition of all or any substantial portion of OSI's business, assets
or capital stock, whether by way of merger, consolidation, sale of assets, sale
of stock, tender offer and/or any other form of business combination or (ii) any
initial public offering of capital stock or other securities of OSI pursuant to
a registration statement filed under the Securities Act.
CONDITIONS TO THE MERGER
The obligations of OSI under the Merger Agreement to effect the
Merger are subject to the fulfillment or satisfaction, on and as of the Closing,
of a number of conditions, including the following: (i) the representations and
warranties of HNC and Merger Sub in the Merger Agreement (as qualified in a
separate disclosure letter from HNC to OSI) being true and accurate on and as of
the Closing with the same force and effect as if they had been made at the
Closing Date (except for representations or warranties made as of a specified
date, which need be true and accurate only as of such date); (ii) HNC shall have
performed and complied in all material respects with all of its covenants
contained in Article 6 of the Merger Agreement; (iii) the principal terms of the
Merger Agreement and the Merger shall have been duly and validly approved and
adopted by OSI's stockholders and the HNC Board; (iv) the principal terms of the
Merger shall have been approved and adopted by Merger Sub's Board of Directors
and HNC, as Merger Sub's 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 Merger or any of the other material transactions
contemplated by the Merger Agreement, and there shall not be issued, enacted or
adopted, or threatened in writing by any governmental authority, any order,
decree, temporary, preliminary or permanent injunction, legislative enactment,
statute, regulation, action or proceeding, or any judgment or ruling by any
court, arbitrator, governmental authority 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 involves 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 the
Merger Agreement; (vi) there shall have been obtained at or prior to the Closing
Date such permits or authorizations, and there shall have been taken all such
other actions by any
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<PAGE> 61
regulatory authority having jurisdiction, 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; (viii) the Registration Statement shall have been declared effective by
the Commission and no stop order affecting the issuance of the shares of HNC
Common Stock or HNC Options in the Merger shall be in effect; (ix) OSI shall
have received an opinion from HNC's counsel as to certain matters; (x) the
shares of HNC Common Stock issuable 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 Stock Market, subject to official notice of
issuance; and (xi) there shall not have been any material adverse change in the
financial condition, properties, assets, liabilities, business, results of
operations or operations of HNC and its subsidiaries, taken as a whole, except
that (A) a change arising or resulting, directly or indirectly, from general
industry, economic or stock market conditions, (B) a change that is proximately
caused by the public announcement of, and the response or reaction of customers,
vendors, licensors, investors, employees of HNC to, the Merger Agreement, the
Merger or any of the transactions contemplated by the Merger Agreement and (C) a
decrease in the market price of HNC Common Stock, of itself, will not be
considered such a material adverse change.
The obligations of HNC under the Merger Agreement to effect the
Merger are subject to the fulfillment or satisfaction, on and as of the Closing,
of a number of conditions, including the following: (i) the representations and
warranties of OSI in the Merger Agreement (as qualified in a separate disclosure
letter from OSI to HNC) that are qualified as to materiality shall be true and
correct, and those that are not qualified as to materiality shall be true and
correct in all material respects, in each case, on and as of the Closing) with
the same force and effect as if they had been made at the Closing Date (except
for any such representations or warranties made as of a specified date, which
need be true and accurate only as of such date); (ii) OSI shall have performed
and complied in all material respects with all of its covenants contained in
Article 5 of the Merger 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 OSI and its subsidiaries, taken
as a whole, except that (A) a change arising or resulting, directly or
indirectly, from general industry, economic or stock market conditions or (B) a
change that is proximately caused by the public announcement of, and the
response or reaction of customers, vendors, licensors, investors, employees of
OSI to, the Merger Agreement, the Merger or any of the transactions contemplated
by the Merger Agreement, will not be considered such a material adverse change;
(iv) there shall 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 the Merger Agreement or any related agreement; (v) no litigation or
proceeding shall be threatened or pending for the purpose or with the probable
effect of enjoining or preventing any of the transactions contemplated by the
Merger Agreement, or which could be reasonably expected to have a material
adverse effect on OSI; (vi) there shall have been obtained at or prior to the
Closing Date such permits or authorizations, and there shall have been taken all
such other actions by any regulatory authority having jurisdiction, 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; (viii) HNC shall have received an opinion from
OSI's counsel as to certain matters; (ix) HNC shall have received duly executed
copies of all material third-party consents, approvals, assignments, waivers,
authorizations or other certificates contemplated by the Merger Agreement to
provide for the continuation in full force and effect of any and all material
contracts, agreements and leases of OSI and its subsidiaries after the Merger
and the preservation of OSI'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 Merger Agreement and related agreements; (x)
the principal terms of the Merger Agreement, the Merger and the related
agreements shall have been duly and validly approved and adopted by OSI's Board
of Directors and the valid and affirmative vote of OSI's stockholders, as
described in the Merger Agreement and required by the DGCL and OSI's Certificate
of Incorporation and Bylaws; (xi) the number of the outstanding shares of OSI
Common Stock and OSI Preferred Stock (if any) that have not affirmatively voted
in favor of the Merger and are eligible to exercise or perfect any statutory
appraisal rights of dissenting stockholders under applicable law will not exceed
5% of the shares of OSI Common Stock outstanding on the Record Date (computed
assuming full conversion of the OSI Preferred Stock into OSI Common Stock on
such Record Date); (xii) each director, executive officer and 10% or greater
stockholder of OSI and each affiliate of OSI who is to receive HNC Common Stock
in the Merger will have executed and delivered to HNC an OSI Affiliate Agreement
agreeing to certain covenants regarding the disposition of OSI and HNC
Securities; (xiii) HNC shall have received from each of Douglas K. Anderson,
Graham H. Gurney, John L. Person, Clifford I. Waggoner and Richard J. Willemin
fully executed Non-Competition Agreements; (xiv) HNC shall have received a fully
executed Escrow Agreement; (xv) the Registration Statement shall have been
declared effective by the Commission and no stop order
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affecting the issuance of the shares of HNC Common Stock or HNC Options in the
Merger shall be in effect; (xvi) each of Douglas K. Anderson and John L. Person
shall have continued to be full-time employees of OSI prior to and through the
Effective Time and shall have accepted offers of continued at will employment
with OSI following the Effective Time, pursuant to written offer letters in
which such persons commit to continue to be full-time employees for two years
after the Effective Time; (xvii) the directors of OSI in office immediately
prior to the Effective Time of the Merger (other than such director designated
in the Merger Agreement to be a director of OSI immediately after the Effective
Time) shall have resigned as directors of the Surviving Corporation in writing
effective as of the Effective Time; (xviii) HNC shall have been advised in
writing, as of the Effective Time, by its independent accountants,
PricewaterhouseCoopers LLP, that, subject to customary qualifications, they
concur with OSI management's conclusion that no conditions exist that would
preclude HNC from accounting for the Merger as a pooling of interests, and OSI
will have been advised in writing, as of the Effective Time, by its independent
accountants, PricewaterhouseCoopers LLP, that, subject to customary
qualifications, they concur with management's conclusion that no conditions
exist that would preclude OSI from being a party to a business combination for
which the pooling of interests method of accounting would be available; (xix)
OSI's warrants and other securities (other than the OSI Options or Preferred
Stock), will have been exercised in full in accordance with their current terms
and conditions, so that no OSI securities, other than OSI Options, OSI Common
Stock and OSI Preferred Stock, will be outstanding immediately prior to the
Effective Time of the Merger; (xx) each of BISYS Group and COCC shall have
executed and delivered to OSI a written release and waiver agreement, waiving
and terminating certain rights; and (xxi) certain investors of OSI shall have
executed and delivered to OSI written agreements confirming the waiver and/or
termination of certain of their rights upon consummation of the Merger under
their agreements with OSI.
TERMINATION, AMENDMENT AND WAIVER
The Merger Agreement may be terminated at any time prior to the
Effective Time by the mutual written consent of HNC and OSI. In addition, either
HNC or OSI, by giving written notice to the other, may terminate the Merger
Agreement (i) if a court of competent jurisdiction or other governmental
authority shall have issued a nonappealable final order, decree or ruling or
taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger; or (ii) if the
Merger shall not have been consummated by midnight Pacific time on the
Termination Date (defined below), provided that the right to terminate the
Merger Agreement pursuant to the provision described in this clause (ii) will
not be available to any party whose failure to perform in any material respect
any of its obligations under the Merger Agreement results in the failure of any
condition set forth in the Merger Agreement or if the failure of such condition
results from facts or circumstances that constitute a material breach of a
representation or warranty made under the Merger Agreement by such party, if the
other party has performed in all material respects its obligations under the
Merger Agreement and the representations and warranties of such other party to
the Merger Agreement are true and correct in all material respects as of the
Termination Date. Further, either HNC or OSI may terminate the Merger Agreement
at any time prior to the Closing if the other has committed (or, in the case of
a termination by OSI, Merger Sub has committed) a material breach of (i) any of
its representations and warranties under the Merger Agreement; or (ii) any of
its covenants under the Merger Agreement, and has not cured such material breach
within 30 days after the party seeking to terminate the Merger Agreement has
given the other party written notice of the material breach and its intention to
terminate the Merger Agreement. Termination of the Merger Agreement by a party
(the "Terminating Party") in accordance with the Merger Agreement shall not give
rise to any obligation or liability on the part of the Terminating Party on
account of such termination, except to the extent otherwise expressly provided
in the Merger Agreement.
The term "Termination Date" is defined in the Merger Agreement to
mean December 31, 1998, except that if, following the filing by HNC and OSI of
pre-merger notification and report forms under the HSR Act, HNC or OSI receives
a formal request from the U.S. Department of Justice or Federal Trade Commission
for additional information (i.e., a "second request") under the HSR Act, then
the Termination Date means the earlier of (i) January 31, 1999 and (ii) the date
30 days after HNC and OSI each deliver a response that substantially complies
with any such second request. Further, if the Registration Statement has not
been declared effective by the Commission by December 15, 1998, despite HNC's
compliance with its obligations regarding the Registration Statement under the
Merger Agreement, then the Termination Date will be March 31, 1999.
Any term or provision of the Merger Agreement may be amended, and the
observance of any term of the Merger Agreement may be waived, only by a writing
signed by the party to be bound thereby. The waiver by a party of any breach of
the Merger Agreement or default in the performance of the Merger Agreement will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. The Merger Agreement may be amended by the parties at any
time before or after approval of the Merger Agreement by the stockholders of
OSI, but, after such approval, no amendment
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will be made which by applicable law requires the further approval of the
stockholders of OSI without obtaining such further approval. At any time prior
to the Effective Time, each of OSI 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 in the Merger
Agreement or any document delivered pursuant thereto; and (iii) waive compliance
with any of the agreements or conditions for its benefit in the Merger
Agreement. 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 of the Merger Agreement
will not be construed to be a waiver of the right of such party thereafter to
enforce such provisions.
LIQUIDATED DAMAGES
Under the Merger Agreement, both HNC and OSI have agreed to
consummate the Merger if all the conditions precedent to such party's
obligations to consummate the Merger under the Merger Agreement have been
satisfied or waived prior to the Termination Date and the other party elects to
consummate the Merger. Under the Merger Agreement, HNC has agreed with OSI that
if (a) HNC breaches the above-mentioned covenant and refuses to consummate the
Merger, or (b) HNC does not consummate the Merger and terminates the Merger
Agreement solely due to OSI's failure to satisfy, by the Termination Date,
certain closing conditions related to obtaining certain confirmations, releases
and waivers from several OSI stockholders of certain rights under investors'
rights agreements OSI entered into with such stockholders in connection with
their investments in OSI stock, then HNC will: (a) if requested to do so by OSI
within 30 days after such a termination of the Merger Agreement by HNC, purchase
625,000 shares of OSI Common Stock at a price of $8.00 per share for cash on
certain terms (which include giving HNC the right to elect one representative of
OSI's Board of Directors and granting HNC certain registration rights), and (b)
if requested to do so by OSI within 30 days after such a termination of the
Merger Agreement by HNC, lend OSI the principal sum of $5 million, or such
lesser sum as OSI may request (which loan would mature no later than one year
after it was advanced, would be secured by OSI's assets and would bear interest
at 2% above the prime rate charged by a designated national bank). The
above-described equity investment in and/or loan to OSI by HNC would constitute
liquidated damages and OSI's sole and exclusive right and remedy for any breach
by HNC of its obligations under the above-mentioned covenant of the Merger
Agreement or any failure by HNC to consummate the Merger for any of the reasons
described above in this paragraph.
INDEMNIFICATION AND ESCROW
In connection with the Merger, HNC, Douglas K. Anderson, as
representative of the OSI stockholders ("Representative") and State Street Bank
and Trust Company of California, N.A. or a 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 5% of the shares of HNC Common Stock to be issued to OSI
stockholders in the Merger (the "Escrow Shares") and will deliver certificates
representing such Escrow Shares to the Escrow Agent, together with related stock
transfer powers, to be held by the Escrow Agent as security for the OSI
stockholders' indemnification obligations under the Merger Agreement and the
Escrow Agreement. Pursuant to these indemnification obligations, the OSI
stockholders will 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 ("Indemnified Persons") 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
("Damages") directly or indirectly incurred, resulting or and arising out of:
(i) any inaccuracy, misrepresentation, breach of, or default in, any of the
representations, warranties or covenants given or made by OSI in the Merger
Agreement or in the related documents and certificates delivered pursuant to the
Merger Agreement; (ii) any failure of any information pertaining to OSI and
contained in the Registration Statement or this Prospectus/Proxy Statement to be
true, correct and complete; or (iii) any legal, auditors', investment bankers'
and financial advisors' fees and other expenses incurred by OSI with respect to
the Merger Agreement, the Merger and the transactions contemplated thereby in
excess of up to $2,200,000 of such fess and expenses ("Excess Transaction
Expenses"). Such Damages do not include any overhead costs of HNC personnel not
involving out-of-pocket expense and the amount of Damages incurred by an
Indemnified Person will be reduced dollar for dollar by the amount of any
insurance proceeds actually received by HNC (or any subsidiary of HNC) on
account of such Damages and the amount of U.S. federal or state tax savings that
have been demonstrated to be actually recognized or recognizable by HNC for tax
periods beginning on or after the Effective Time of the Merger and that are
directly attributable to Damages otherwise recoverable under the Merger
Agreement. With the exception of OSI's obligations for Excess Transaction
Expenses, the indemnification obligations will not apply unless and until the
aggregate Damages exceeds a cumulative aggregate of $250,000, in which event OSI
stockholders will be liable to indemnify for all Damages
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(inclusive of the first $250,000 of Damages). Satisfaction of the
indemnification obligations of the holders of OSI Common Stock and OSI Preferred
Stock will be effected solely by the forfeiture of the Escrow Shares and any
other assets deposited in escrow pursuant to the Escrow Agreement. However,
these limitations do not restrict HNC's rights against (i) any person (including
any OSI stockholder) with respect to any fraudulent conduct or any fraudulent
misrepresentations or omission by such person or (ii) any OSI stockholder, with
respect to any failure of such OSI stockholder to have good, valid and
marketable title to any issued and outstanding shares of OSI Common Stock or OSI
Preferred Stock held (or asserted to have been held) by such OSI stockholder,
free and clear of all liens, claims and encumbrances, or to have the full right,
capacity and authority to vote such person's shares of stock of OSI stock in
favor of the Merger and any other transaction contemplated by the Merger
Agreement. The Escrow Shares will be held by the Escrow Agent until the first
anniversary of the Effective Time. OSI stockholders may be required to submit on
IRS Form W-9 or W-8 backup withholding statement to the Escrow Agent in order to
have their shares of HNC Common Stock released from escrow upon its expiration.
RELATED AGREEMENTS
OSI Affiliate Agreement. To help ensure that the Merger will be
treated as a pooling of interests for accounting and financial reporting
purposes, each person determined by OSI to be an affiliate of OSI shall enter
into an Affiliate Agreement (the "Affiliate Agreement"), pursuant to which such
stockholder shall agree not to dispose of, or take any action that would reduce
its risk of ownership or investment in, any securities of HNC (i) during the
30-day period immediately preceding the Effective Time of the Merger or (ii)
until such time after the Effective Time of the Merger as HNC has publicly
released a report including the combined financial results of HNC and OSI for a
period of at least 30-days post-Merger combined operations of HNC and OSI. OSI
will use its diligent efforts to cause each person or entity who may become an
affiliate of OSI to execute and deliver an Affiliate Agreement to HNC promptly
after such person or entity becomes an affiliate of OSI.
Voting Agreement. Pursuant to certain Voting Agreements dated
September 16, 1998 (the "Voting Agreements"), OSI stockholders that beneficially
own an aggregate of ______ shares of OSI Common Stock and ______ shares of OSI
Preferred Stock have agreed (i) not to offer, sell, transfer or dispose of or
encumber any shares of their OSI Common Stock or OSI Preferred Stock until the
Effective Time of the Merger or the valid termination of the Merger Agreement in
accordance with its terms; (ii) to vote all their shares of OSI Common Stock or
OSI Preferred Stock in favor of the Merger, the Merger Agreement and the actions
contemplated thereby and the actions required in furtherance thereof, (iii) to
vote all their shares of OSI Common Stock or OSI Preferred Stock against any
action or agreement that would result in a breach of any representation,
warranty, covenant or obligation of OSI under the Merger Agreement or would
preclude fulfillment of a condition precedent under the Merger Agreement to
OSI's or HNC's or Merger Sub's obligation to consummate the Merger, (iv) to vote
all their shares of OSI Common Stock or OSI Preferred Stock against the
following actions (other than the Merger and the transactions contemplated
thereby): (A) any Alternative Transaction, (B) any extraordinary corporate
transaction involving OSI or any subsidiary of OSI (such as a merger,
consolidation or other business combination), (C) any sale, lease or transfer of
a material amount of assets of the OSI or any subsidiary of OSI, other than in
the ordinary course of business, (D) any reorganization, recapitalization,
dissolution or liquidation of OSI or any subsidiary of OSI, (E) any change in a
majority of the board of directors of OSI, (F) any amendment to OSI's
Certificate of Incorporation, (G) any material change in the capitalization of
OSI or its corporate structure, (H) a registered public offering of OSI's
capital stock pursuant to a registration statement filed under the Securities
Act, or (I) any other action which is intended, or could be reasonably expected
to, impede interfere with, delay, postpone, discourage or adversely affect the
Merger or any transactions contemplated thereby; (iv) to vote all their shares
of OSI Common Stock or OSI Preferred Stock in favor of the termination,
effective immediately prior to the effectiveness of the Merger, of any rights of
first refusal, rights of notice, rights of co-sale, information rights,
registration rights, preemptive rights or similar rights held by such OSI
stockholders under any agreement, arrangement or understanding with respect to
such OSI stockholder's holdings of OSI Common Stock or OSI Preferred Stock; (v)
not to enter into any agreement or understanding to vote or give instructions in
any manner inconsistent with the terms of the Voting Agreement; (vi) to deliver
irrevocable proxies with respect to those stockholders' holdings of OSI Common
Stock and OSI Preferred Stock; (vii) to take such actions to waive and terminate
all appraisal rights, rights of first refusal, registration rights, and other
similar rights, as well as terminate all agreements under which such rights were
granted; and (viii) not to, nor allow any agent or representative of such
stockholders to, solicit, approve, initiate discussions or take any other action
in opposition to or in competition with the Merger. Holders of a total of
approximately ___% and ____% of the outstanding shares of OSI Common Stock and
OSI Preferred Stock, respectively, who are affiliates of OSI, have signed Voting
Agreements. The vote of the holders of these shares in accordance with the
Voting Agreements will be sufficient to approve the Merger.
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Non-Competition Agreement. Douglas K. Anderson, Graham H. Gurney,
John L. Person, Clifford I. Waggoner and Richard J. Willemin will enter into
Non-Competition Agreements providing that, for three years following the
Effective Time of the Merger, they will not directly or indirectly engage in any
business that is competitive with or substantially similar to the business
engaged in by OSI, or presently proposed to be conducted by OSI.
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UNAUDITED PRO FORMA CONSOLIDATED COMBINED
FINANCIAL INFORMATION
The following unaudited pro forma consolidated combined financial
information assumes a business combination between HNC and OSI 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 balance sheet gives effect to the acquisition of OSI as if
it had occurred on June 30, 1998. The unaudited pro forma consolidated combined
statements of operations give effect to the acquisition of OSI 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 1998 and each of the
three years in the period ended December 31, 1997 with the corresponding
historical OSI 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 acquisition of OSI 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 financial information
is based on, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of HNC and the historical
financial statements and the related notes thereto of OSI included elsewhere in
this Proxy Statement/Prospectus.
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HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED
BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
------------------------ -------------------------
HNC OSI NOTES ADJUSTMENTS COMBINED
-------- ------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $45,450 $6,333 (2) $(5,500) $46,283
Investments available for sale............................. 50,137 -- -- 50,137
Accounts receivable, net................................... 43,712 3,110 -- 46,822
Current portion of deferred income taxes................... 8,873 -- -- 8,873
Other current assets....................................... 5,062 951 (2) (444) 5,569
-------- ------- ------- --------
Total current assets.................................... 153,234 10,394 (5,944) 157,684
Property and equipment, net................................... 13,183 1,373 -- 14,556
Deferred income taxes, less current portion................... 19,476 -- -- 19,476
Long-term investments available for sale...................... 52,316 -- -- 52,316
Debt issuance costs, net...................................... 2,885 -- -- 2,885
Other assets.................................................. 8,066 646 -- 8,712
-------- ------- ------- --------
$249,160 $12,413 $(5,944) $255,629
======== ======= ======= ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, MINORITY INTEREST AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $5,848 $369 $ -- $6,217
Accrued liabilities........................................ 12,767 1,295 (2) (444) 13,618
Deferred revenue........................................... 8,606 2,912 -- 11,518
Other current liabilities.................................. 150 -- -- 150
------- ------ ------- -------
Total current liabilities............................... 27,371 4,576 (444) 31,503
Convertible Subordinated Notes............................. 100,000 -- -- 100,000
Other non-current liabilities.............................. 94 109 -- 203
------- ------ ------- -------
Total liabilities....................................... 127,465 4,685 (444) 131,706
------- ------ ------- -------
Mandatorily redeemable convertible preferred stock and
warrants................................................... -- 16,140 (3) (16,140) --
Minority interest in consolidated subsidiary.................. 103 -- -- 103
------- ------- ------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value - 1,417 shares
authorized: 1,417 and 0 shares issued and
outstanding............................................. -- 14 (3) (14) --
Common stock, $0.01 par value - 19,055 shares
authorized: 2,236 and 0 shares issued and
outstanding............................................. -- 22 (3) (22) --
Preferred stock, $0.001 par value - 4,000 shares
authorized: no shares issued and outstanding........... -- -- -- --
Common stock, $0.001 par value - 50,000 shares
authorized: 25,515 and 28,022 shares issued and
outstanding............................................. 26 -- (3) 2 28
Paid-in capital............................................ 124,362 4,312 (3) 16,174 144,848
Accumulated other comprehensive income..................... (124) -- -- (124)
Accumulated deficit........................................ (2,672) (12,760) (2) (5,500) (20,932)
-------- ------- ------- --------
Total stockholders' equity (deficit).......................... 121,592 (8,412) 10,640 123,820
-------- ------- ------- --------
$249,160 $12,413 $(5,944) $255,629
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined financial
information.
57
<PAGE> 68
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
---------------------------
HNC OSI NOTES COMBINED
------- ------ ----- --------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance.................................. $60,678 $3,351 $64,029
Installation and implementation.......................... 6,819 2,028 8,847
Contracts and other...................................... 6,476 390 6,866
Service bureau........................................... 4,249 -- 4,249
-------- ------- --------
Total revenues........................................ 78,222 5,769 83,991
-------- ------- --------
Operating expenses:
License and maintenance.................................. 14,305 1,022 15,327
Installation and implementation.......................... 4,619 1,559 6,178
Contracts and other...................................... 4,705 493 5,198
Service bureau........................................... 2,360 -- 2,360
Research and development................................. 14,664 919 15,583
In-process research and development...................... 22,783 -- 22,783
Sales and marketing...................................... 16,487 1,562 18,049
Contract termination..................................... -- 1,265 1,265
General and administrative............................... 7,024 1,346 8,370
-------- ------- --------
Total operating expenses.............................. 86,947 8,166 95,113
-------- ------- --------
Operating loss.............................................. (8,725) (2,397) (11,122)
Interest and other income................................... 2,829 185 3,014
Interest expense............................................ (1,787) (4) (1,791)
Minority interest in income of consolidated subsidiary...... (60) -- (60)
-------- ------- --------
Loss before income tax provision.................... (7,743) (2,216) (9,959)
Income tax provision........................................ 2,958 -- 2,958
-------- ------- --------
Net loss......................................... $(10,701) $(2,216) $(12,917)
========= ======= ========
Earnings per share:
Basic net loss per common share....................... $(0.43) $(1.01) (4) $(0.47)
====== ====== ======
Diluted net loss per common share..................... $(0.43) $(1.01) (4) $(0.47)
====== ====== ======
Shares used in computing basic net loss per common share.... 24,987 2,192 (4) 27,234
====== ===== ======
Shares used in computing diluted net loss per common share.. 24,987 2,192 (4) 27,234
====== ===== ======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined financial
information.
58
<PAGE> 69
HNC SOFTWARE, INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
--------------------------
HNC OSI NOTES COMBINED
------- ------ ----- --------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance................................... $40,643 $1,304 $41,947
Installation and implementation........................... 4,134 633 4,767
Contracts and other....................................... 4,531 32 4,563
Service bureau............................................ 2,357 -- 2,357
----- -- -----
Total revenues......................................... 51,665 1,969 53,634
------ ----- ------
Operating expenses:
License and maintenance................................... 9,030 647 9,677
Installation and implementation........................... 2,052 1,098 3,150
Contracts and other....................................... 3,304 14 3,318
Service bureau............................................ 1,783 -- 1,783
Research and development.................................. 9,361 995 10,356
Sales and marketing....................................... 9,786 955 10,741
General and administrative................................ 5,227 740 5,967
----- --- -----
Total operating expenses............................... 40,543 4,449 44,992
------ ----- ------
Operating income (loss)...................................... 11,122 (2,480) 8,642
Interest and other income.................................... 957 79 1,036
Interest expense............................................. (47) (4) (51)
---- --- ----
Income (loss) before income tax provision............ 12,032 (2,405) 9,627
Income tax provision......................................... 2,861 -- 2,861
----- -- -----
Net income (loss)................................. $9,171 $(2,405) $6,766
====== ======= ======
Earnings per share:
Basic net income (loss) per common share............... $0.38 $(1.12) (4) $0.26
===== ====== =====
Diluted net income (loss) per common share............. $0.36 $(1.12) (4) $0.25
===== ====== =====
Shares used in computing basic net income (loss)
per common share.......................................... 24,143 2,146 (4) 26,028
====== ===== ======
Shares used in computing diluted net income (loss)
per common share.......................................... 25,464 2,146 (4) 27,521
====== ===== ======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined financial
information.
59
<PAGE> 70
HNC SOFTWARE, INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
---------------------------
HNC OSI NOTES COMBINED
------- ------ ----- --------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance................................... $89,643 $4,505 $94,148
Installation and implementation........................... 10,702 1,959 12,661
Contracts and other....................................... 7,772 185 7,957
Service bureau............................................ 5,618 -- 5,618
----- -- -----
Total revenues......................................... 113,735 6,649 120,384
------- ----- -------
Operating expenses:
License and maintenance................................... 19,937 1,801 21,738
Installation and implementation........................... 5,174 2,416 7,590
Contracts and other....................................... 5,438 93 5,531
Service bureau............................................ 4,320 -- 4,320
Research and development.................................. 21,151 1,902 23,053
Sales and marketing....................................... 22,049 2,132 24,181
General and administrative................................ 12,626 1,569 14,195
------ ----- ------
Total operating expenses............................... 90,695 9,913 100,608
------ ----- -------
Operating income (loss)...................................... 23,040 (3,264) 19,776
Interest and other income.................................... 2,003 218 2,221
Interest expense............................................. (81) (9) (90)
Minority interest in income of consolidated subsidiary....... (43) -- (43)
--- -- ---
Income (loss) before income tax provision............ 24,919 (3,055) 21,864
Income tax provision......................................... 7,354 -- 7,354
----- -- -----
Net income (loss)................................. $17,565 $(3,055) $14,510
======= ======= =======
Earnings per share:
Basic net income (loss) per common share............... $0.72 $(1.42) (4) $0.55
===== ====== =====
Diluted net income (loss) per common share............. $0.68 $(1.42) (4) $0.52
===== ====== =====
Shares used in computing basic net income (loss)
per common share.......................................... 24,275 2,155 (4) 26,278
====== ===== ======
Shares used in computing diluted net income (loss)
per common share.......................................... 25,681 2,155 (4) 27,939
====== ===== ======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined financial
information.
60
<PAGE> 71
HNC SOFTWARE, INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
---------------------------
HNC OSI NOTES COMBINED
------- ----- ----- --------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance.............................. $48,890 $879 $49,769
Installation and implementation...................... 6,691 140 6,831
Contracts and other.................................. 11,128 -- 11,128
Service bureau....................................... 4,730 -- 4,730
----- -- -----
Total revenues.................................... 71,439 1,019 72,458
------ ----- ------
Operating expenses:
License and maintenance.............................. 13,725 1,100 14,825
Installation and implementation...................... 2,714 937 3,651
Contracts and other.................................. 7,694 -- 7,694
Service bureau....................................... 3,365 -- 3,365
Research and development............................. 13,808 1,060 14,868
Sales and marketing.................................. 11,923 1,051 12,974
General and administrative........................... 8,551 645 9,196
----- --- -----
Total operating expenses.......................... 61,780 4,793 66,573
------ ----- ------
Operating income (loss)................................. 9,659 (3,774) 5,885
Interest and other income............................... 2,178 139 2,317
Interest expense........................................ (478) (3) (481)
----- --- -----
Income (loss) before income tax benefit......... 11,359 (3,638) 7,721
Income tax benefit...................................... (534) -- (534)
---- -- ----
Net income (loss)............................ $11,893 $(3,638) $8,255
======= ======= ======
Earnings per share:
Basic net income (loss) per common share.......... $0.50 $(1.73) (4) $0.33
===== ====== =====
Diluted net income (loss) per common share........ $0.47 $(1.73) (4) $0.31
===== ====== =====
Shares used in computing basic net income (loss)
per common share..................................... 23,552 2,103 (4) 25,077
====== ===== ======
Shares used in computing diluted net income (loss)
per common share..................................... 25,363 2,103 (4) 26,943
====== ===== ======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined financial
information.
61
<PAGE> 72
HNC SOFTWARE INC.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1)
---------------------------
HNC OSI NOTES COMBINED
------- ----- ----- --------
<S> <C> <C> <C> <C>
Revenues:
License and maintenance.......................... $24,561 $220 $24,781
Installation and implementation.................. 4,648 48 4,696
Contracts and other.............................. 9,146 -- 9,146
Service bureau................................... 5,349 -- 5,349
----- -- -----
Total revenues................................ 43,704 268 43,972
------ --- ------
Operating expenses:
License and maintenance.......................... 7,903 381 8,284
Installation and implementation.................. 1,425 319 1,744
Contracts and other.............................. 6,894 -- 6,894
Service bureau................................... 3,025 -- 3,025
Research and development......................... 6,998 661 7,659
Sales and marketing.............................. 7,276 398 7,674
General and administrative....................... 5,101 399 5,500
----- --- -----
Total operating expenses...................... 38,622 2,158 40,780
------ ----- ------
Operating income (loss)............................. 5,082 (1,890) 3,192
Interest and other income........................... 912 17 929
Interest expense.................................... (428) (22) (450)
----- ---- ----
Income (loss) before income tax benefit..... 5,566 (1,895) 3,671
Income tax benefit.................................. (511) -- (511)
---- -- ----
Net income (loss)........................ $6,077 $(1,895) $4,182
====== ======= ======
Earnings per share:
Basic net income (loss) per common share...... $0.38 $(0.98) (4) $0.24
===== ====== =====
Diluted net income (loss) per common share.... $0.28 $(0.98) (4) $0.18
===== ====== =====
Shares used in computing basic net income (loss)
per common share................................. 15,195 1,936 (4) 16,100
====== ===== ======
Shares used in computing diluted net income (loss)
per common share................................. 21,510 1,936 (4) 22,667
====== ===== ======
</TABLE>
See accompanying notes to unaudited pro forma consolidated combined financial
information.
62
<PAGE> 73
HNC SOFTWARE INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED COMBINED
FINANCIAL INFORMATION
(1) The unaudited pro forma consolidated combined financial statements of
HNC and OSI give retroactive effect to the proposed OSI 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 OSI. Certain amounts have been reclassified to conform to the
pro forma presentation.
(2) Transaction costs expected to be incurred to complete the Merger
approximate $4.5 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. As a
result of the Merger, OSI will write-off approximately $1,000,000 of
initial public offering costs, of which $444,000 had been deferred
at June 30, 1998.
(3) These pro forma adjustments reflect the assumed exchange of all
outstanding shares of OSI Preferred Stock and OSI Common Stock for an
aggregate of approximately 2,507,507 shares of HNC Common Stock to
effect the OSI acquisition.
(4) Pro forma share and per share amounts are based upon weighted average
options and warrants, using the treasury stock method, and shares
outstanding during each period. As a result of the Merger, each
outstanding share of OSI Common Stock will be converted into the
right to receive 0.23794 shares of HNC Common Stock. Each outstanding
share of OSI Series A-1 Preferred Stock, OSI Series A-2 Preferred
Stock, OSI Series B Preferred Stock, OSI Series C Preferred Stock and
OSI Series D Preferred Stock will be converted into the right to
receive 0.27594, 0.31394, 0.31394, 0.35194 and 0.38993 shares of HNC
Common Stock, respectively. In addition, each outstanding option to
purchase OSI Common Stock will be assumed by HNC and the number of
shares underlying such options will be converted into an option to
purchase 0.23794 shares of HNC Common Stock.
63
<PAGE> 74
HNC SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated historical financial data of HNC
for each of the three years in the period ended December 31, 1997 and as of
December 31, 1996 and 1997 have been derived from the audited HNC historical
consolidated financial statements, and should be read in conjunction with such
financial statements and the notes thereto included elsewhere in this
Registration Statement. The selected consolidated historical financial data for
HNC for the years ended December 31, 1993 and 1994 and as of December 31, 1993,
1994 and 1995 have been derived from audited HNC historical consolidated
financial statements and should be read in conjunction with such financial
statements and the notes thereto, which are on file with the Commission. The
consolidated statement of operations data of HNC for the six-month periods ended
June 30, 1997 and 1998 and the consolidated balance sheet data of HNC at June
30, 1998 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 1998
are not necessarily indicative of results to be expected for any future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA: (1)
Total revenues $ 16,167 $ 29,838 $ 43,704 $ 71,439 $113,735 $ 51,665 $ 78,222
Operating income (loss) 1,034 2,881 5,082 9,659 23,040 11,122 (8,725)
Net income (loss) 875 3,142 6,077 11,893 17,565 9,171 (10,701)
Basic net income (loss) per common
share(2)(3) 0.02 0.28 0.38 0.50 0.72 0.38 (0.43)
Diluted net income (loss) per common
share(2)(3) 0.02 0.17 0.28 0.47 0.68 0.36 (0.43)
Shares used in computing basic net
income (loss) per common share 8,591 8,642 15,195 23,552 24,275 24,143 24,987
Shares used in computing diluted net
income (loss) per common share(4) 9,289 18,142 21,510 25,363 25,681 25,464 24,987
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, JUNE 30,
------------------------------------------------- --------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments available for sale $ 4,679 $ 7,827 $ 44,975 $ 34,849 $ 42,946 $147,903
Total assets 10,944 20,663 63,113 98,293 119,877 249,160
Long-term obligations, less current 367 917 1,373 264 63 100,006
portion
Total stockholders' (deficit) equity (5,553) 841 50,861 84,970 103,860 121,592
</TABLE>
(1) The selected consolidated financial data gives retroactive effect to the
acquisitions of Risk Data, Retek and CompReview for all periods presented,
accounted for as poolings of interests.
(2) The computations for basic net income per common share for 1993, 1994 and
1995 include reductions of consolidated net income in the amounts of $717,
$717 and $348, respectively, related to the accretion of dividends on
mandatorily redeemable convertible Preferred Stock, which converted into
Common Stock upon the closing of HNC's initial public offering on June 26,
1995. The computation of diluted net income per common share for 1993 does
not include the assumed conversion of all outstanding shares of
mandatorily redeemable convertible Preferred Stock into 7,675 shares of
Common Stock or an increase to net income per common share related to the
elimination of dividend accretion on such Preferred Stock as the impact
would be antidilutive.
(3) Prior to the acquisition of CompReview by HNC on November 28, 1997,
CompReview had elected subchapter S corporation status for income tax
purposes; therefore, its income was included in the tax returns of its
stockholders, and no income tax provision was recorded for CompReview
other than certain minimum state taxes on subchapter S corporations. As a
result of the acquisition, beginning November 29, 1997, CompReview became
subject to corporate income taxes on its taxable income.
(4) For the six month period ended June 30, 1998, common stock equivalents of
approximately 1,449 shares were not used to calculate diluted net loss per
share because of their anti-dilutive effect. The conversion of HNC's 4.75%
Convertible Subordinated Notes for the six month period ended June 30,
1998 of 1,319 shares was not used to calculate diluted net loss per share
as its effect would be anti-dilutive.
64
<PAGE> 75
HNC SELECTED HISTORICAL CONSOLIDATED QUARTERLY OPERATING RESULTS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 1997 (1) JUNE 30, 1998(1)
------------------------------------------------------------------- -----------------------
FIRST SECOND THIRD FOURTH TOTAL FIRST SECOND
QUARTER QUARTER QUARTER QUARTER YEAR QUARTER QUARTER
----------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 24,072 $ 27,593 $ 29,989 $ 32,081 $ 113,735 $35,081 $43,141
Operating Income (Loss) ... 5,120 6,002 6,371 5,547 23,040 2,804 (11,529)
Net Income (Loss) ......... 4,212 4,959 5,127 3,267 17,565 2,015 (12,716)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (1)
------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 13,877 $ 16,697 $ 19,115 $ 21,750 $ 71,439
Operating Income..................... 351 1,801 3,117 4,390 9,659
Net Income........................... 258 1,504 2,984 7,147 11,893
</TABLE>
- -------------
(1) The unaudited selected consolidated quarterly operating results give
retroactive effect to the acquisitions of Risk Data, Retek and CompReview
for all periods presented, accounted for as poolings of interests.
65
<PAGE> 76
HNC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This Proxy Statement/Prospectus (including without limitation the
following section regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations) contains forward-looking statements (within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act) regarding HNC and its business, financial condition, results of operations
and prospects. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this Proxy
Statement/Prospectus. Additionally, statements concerning future matters such as
the development of new products, enhancements or technologies, possible changes
in legislation and other statements regarding matters that are not historical
are forward-looking statements.
Although forward-looking statements in this Proxy
Statement/Prospectus reflect the good faith judgment of HNC's management, such
statements can only be based on facts and factors currently known by HNC.
Consequently, forward-looking statements are inherently subject to risks and
uncertainties and actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Factors that
could cause or contribute to such differences in results and outcomes include
without limitation those discussed in "Risk Factors" above as well as those
discussed elsewhere in this Proxy Statement/Prospectus. Readers are urged not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this Proxy Statement/Prospectus. HNC undertakes no obligation to
revise or update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Proxy Statement/Prospectus.
Readers are urged to carefully review and consider the various disclosures made
by HNC in this Proxy Statement/Prospectus, which attempt to advise interested
parties of the risks and factors that may affect HNC's business, financial
condition, results of operations and prospects.
OVERVIEW
HNC develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ
proprietary neural-network predictive decision engines, profiles, traditional
statistical modeling, business models, expert rules and context vectors to
convert existing data and business experiences into meaningful recommendations
and actions. HNC was founded in 1986 to provide software tools and contracted
technology services using neural-network technology.
In August 1996, HNC completed its acquisition of Risk Data in a
transaction accounted for as a pooling of interests. Risk Data is based in
Irvine, California and develops, markets and supports proprietary software
decision products for use in the insurance industry. In 1996, HNC formed Aptex
Software Inc. ("Aptex"), a majority-owned subsidiary located in San Diego,
California that develops, markets and supports electronic text analysis
technology in products designed for the Internet and other environments. In
November 1996, HNC completed its acquisition of Retek in a transaction accounted
for as a pooling of interests. Retek is based in Minneapolis, Minnesota and
develops, markets and supports software products that provide merchandise
management and other management tools to retailers and their vendors. In
November 1997, HNC completed its acquisition of CompReview, in a transaction
accounted for as a pooling of interests. CompReview is located in Costa Mesa,
California and develops, markets and supports a 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. In March 1998, HNC acquired PCS, a company that develops, markets and
supports fully integrated distribution center management software products that
address the distribution business needs of the retail, manufacturing and
wholesale industries. In April 1998, HNC acquired FTI, which develops and
markets profitability measurement and decision support software products and
related support services to the financial services industry. In June 1998, HNC
acquired the ATACS product line of Bedford Associates, Inc., which is a
wholly-owned subsidiary of British Airways plc. ATACS is a fraud management
software solution for wireline, wireless and Internet telecommunication service
providers. In June 1998, Risk Data merged with and into CompReview to form HNC
Insurance Solutions. HNC anticipates that from time to time it will consider
acquisitions of other businesses in order to expand the markets served by HNC
and to acquire complementary technologies, products and personnel. See "Risk
Factors--Risks Relating to HNC--Recent and Future Acquisitions" and "Business of
HNC--HNC's Strategy."
66
<PAGE> 77
After giving retroactive effect to HNC's acquisitions of Risk Data,
Retek and CompReview, HNC experienced compound annual growth in total revenues
of 63% from 1993 through 1997. See "Risk Factors--Risks Relating to HNC--Risks
Associated with Managing Growth." This revenue growth resulted primarily from
increased license fees for the Retek Merchandising System, CRLink, Falcon, MIRA
and ProfitMax products and, to a lesser extent, from increased license fees for
the Active Retail Intelligence, Retek Data Warehouse, PMAdvisor, CompCompare,
Capstone and AREAS products. Because of the long sales and development cycle
associated with HNC's products, HNC has not received significant revenues to
date from the SelectCast, SelectProfile, SelectResponse, SelectResource,
VeriComp or PMAdvisor products. See "Risk Factors--Risks Relating to
HNC--Lengthy and Unpredictable Sales Cycle."
HNC markets most of its predictive software solutions as an ongoing
service that includes software licenses, decision model updates, application
consulting and on-line or on-site support and maintenance. HNC's pricing for the
CRLink, Falcon, MIRA, ProfitMax, AREAS, PMAdvisor, CompCompare and
ProviderCompare products typically includes an annual or monthly usage fee and a
one to seven year contract commitment. In 1995, 1996 and 1997, annual license
and maintenance revenues from these contracts represented 61.2%, 56.1% and 55.2%
of HNC's total revenues, respectively. In the first six months of 1997 and 1998,
annual license and maintenance revenues from these contracts represented 56.7%
and 52.3% of HNC's total revenues, respectively.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
HNC's revenues and operating results have varied significantly in the
past and may do so in the future. Factors affecting HNC's revenues and operating
results include: the degree of acceptance of HNC's products by the markets and
industries served by HNC; the historical tendency of HNC to receive, during a
given fiscal period, a small number of relatively large customer orders, such
that failure to recognize revenue from any such order in that fiscal period may
disproportionately and adversely affect HNC's revenues and operating results for
that fiscal period; customer cancellation of long-term contracts that yield
recurring revenues or customers' ceasing their use of HNC products for which HNC
receives recurring, usage-based fees and disputes with customers regarding fees
payable to HNC; the lengthy sales cycle of most of HNC's products; HNC's ability
to successfully and timely develop, introduce and market new products and
product enhancements; the timing of new product announcements and introductions
by HNC and its competitors; changes in the mix of distribution channels; changes
in the level of operating expenses; HNC's ability to achieve progress and
fulfill its obligations under percentage-of-completion contracts; HNC's success
in completing certain pilot installations within contracted fee budgets;
competitive conditions in the industry; domestic and international economic
conditions; and market conditions in HNC's targeted markets. In addition,
license agreements entered into during a quarter may not meet HNC's revenue
recognition criteria, with the result that, even if HNC meets or exceeds its
forecast of aggregate licensing and other contracting activity for a given
fiscal period, it is possible that HNC's revenues for that fiscal period would
not meet expectations. Furthermore, HNC's operating results may be affected by
factors unique to certain of its product lines. For example, although in the
past a large portion of HNC's revenues were derived from contracts providing for
periodic, recurring fees, HNC now derives a substantial and increasing portion
of its revenues from products (particularly products for the retail industry)
priced as "perpetual" license transactions in which HNC receives a one-time
license fee that is recognized upon delivery of the software and acceptance by
the customer. Thus, failure to complete a perpetual license transaction during a
fiscal quarter would have a disproportionate adverse impact on HNC's operating
results for that quarter.
HNC expects that fluctuations in its operating results will continue
for the foreseeable future. Consequently, HNC believes that period-to-period
comparisons of its financial results should not be relied upon as an indication
of future performance. Because HNC's expense levels are based in part on its
expectations regarding future revenues and are fixed to a large extent in the
short term, HNC may be unable to adjust its spending in time to compensate for
any unexpected revenue shortfall. Accordingly, HNC may not be able to maintain
profitability on a quarterly or annual basis in the future. Due to the foregoing
factors, it is possible that in some future quarter HNC's operating results will
be below the expectations of public market analysts and investors. In that
event, the price of HNC Common Stock and, in turn, the price of HNC's 4.75%
convertible subordinated notes due 2003, would likely be materially adversely
affected.
RESULTS OF OPERATIONS
Total Revenues. HNC's revenues are comprised of license and
maintenance revenues, installation and implementation revenues, contracts and
other revenues and service bureau revenues. Total revenues increased by 51% from
$51.7 million in the six months ended June 30, 1997, compared to total revenues
of $78.2 million in the same period in 1998. Total revenues increased by 63.5%
to $71.4 million in 1996 and by 59.2% to $113.7 million in 1997.
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International operations and export sales represented 12.6%, 17.7% and 16.8% of
total revenues in 1995, 1996 and 1997, respectively, and 16.4% and 27.0% of
total revenues in the first six months of 1997 and 1998, respectively. The
retail product line currently has more sales in international markets than the
healthcare/insurance and financial services product lines combined. HNC believes
that international sales represent a significant opportunity for revenue growth
and expects international sales to increase as a percent of total revenue.
License and Maintenance Revenues. HNC's license and maintenance
revenues are derived from annual license fees, monthly license fees, perpetual
license fees and annual maintenance fees. HNC typically licenses many of its
products for an annual or monthly usage fee under long-term contracts that
include software licenses, decision model updates, application consulting, and
on-line or on-site support and maintenance. HNC's revenue from periodic software
license and maintenance agreements is generally recognized ratably over the
respective license or agreement periods. Revenue from certain short-term
periodic software license and maintenance agreements with guaranteed minimum
license fees is recognized as related services are performed. Transactional fees
are recognized as revenue based on system usage or when fees based on system
usage exceed the monthly minimum license fees. Revenue from perpetual licenses
of HNC'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.
License and maintenance revenues increased by 49% from $40.6 million
in the six months ended June 30, 1997, compared to $60.7 million in the
comparable period in 1998. The increase in license and maintenance revenues in
the retail industry was primarily due to an increase in sales of the Retek suite
of products and sales related to the recently acquired company, PCS. The
increase in the financial services industry is attributable to an increase in
sales of the Falcon and Capstone product lines and sales of the ProfitMax
product. Sales generated by the recently acquired company, FTI, also contributed
to this increase.
License and maintenance revenues increased by 99.1% to $48.9 million
in 1996 and by 83.4% to $89.6 million in 1997. The increase from 1995 to 1996
was due primarily to the growth of license fees in all markets, particularly
from the Retek Merchandising System, CRLink and Falcon, and, to a lesser extent,
MIRA and CompCompare. The increase from 1996 to 1997 was due primarily to the
growth of license fee revenues from the Retek Merchandising System and CRLink.
Also contributing to the increase were increased license fees from other retail
products, such as ARI and Retek Data Warehouse, financial services products such
as Falcon, ProfitMax and Capstone, and other healthcare/insurance products, such
as PMAdvisor and MIRA.
Installation and Implementation Revenues. Revenues from software
installations and implementations are generally recognized as the services are
performed using the percentage of completion method based on costs incurred to
date compared to total estimated costs at completion. Amounts received in
advance of performance under the contracts are recorded as deferred revenue and
are generally recognized within one year from receipt.
Installation and implementation revenues increased by 65% from $4.1
million in the six months ended June 30, 1997 compared to $6.8 million in the
six months ended June 30, 1998. These increases were primarily due to new
installations within the financial services industry, primarily related to the
ProfitMax and Capstone product lines. Installation and implementation revenues
increased by 44.0% to $6.7 million in 1996 and by 59.9% to $10.7 million in
1997. Substantially all of the increase from 1995 to 1996 was due primarily to
growth in the installations of Retek Data Forecasting as this product moved from
development into production. The increase from 1996 to 1997 was due primarily to
growth in the installations of Capstone and ProfitMax.
Contracts and Other Revenues. Contracts and other revenues are
derived primarily from new product development contracts with commercial
customers and research contracts with the United States Government. HNC
typically contracts with one or two commercial partners for pilot development
and installation of its new products and with the United States Government for
additional research funds. Revenues from contract services are generally
recognized as the services are performed using the percentage of completion
method based on costs incurred to date compared to total estimated costs at
completion. Revenue from hardware product sales, which is included in contracts
and other revenues, is recognized upon shipment to the customer.
Contracts and other revenues increased by 43% from $4.5 million in
the six months ended June 30, 1997, compared to $6.5 million for the same period
in 1998. These increases were attributable to increases in consulting contracts
with commercial customers primarily in the retail industry segment. Contracts
and other revenues increased by 21.7% to $11.1 million in 1996 and decreased by
30.2% to $7.8 million in 1997. The increase in 1996 was primarily the result of
greater revenues from commercial new product pilot installation contracts with
customers in support of HNC's development of ProfitMax, SelectCast, Falcon
Sentry and Capstone. The decrease in 1997 was primarily the result of products
such as ProfitMax, Retek Data Forecasting and Capstone moving from development
into production.
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During 1997, HNC had fewer new product development projects and new
product pilot installations than during 1996. There can be no assurance that any
of these product development projects or pilot installations will be successful
or be completed within anticipated time schedules or that the customers who
serve as pilot installation sites will be satisfied with these products or agree
to license them. If HNC's new product development efforts are unsuccessful, are
not completed on a timely basis or are not well received by pilot customers, HNC
may be compelled to delay or discontinue the release of production versions of
these products or bear increased expense to bring these pilot products to
market, either of which would have a material adverse effect on HNC's business,
financial condition and results of operations.
Service Bureau Revenues. Service bureau revenues are derived from
HNC's service bureau operations, which provide CRLink's functionality to
customers that do not wish to obtain a license, that use this service until they
can implement their own internal CRLink operation or that use this service when
their volumes peak to high levels. Service bureau customers typically subscribe
for services under month-to-month agreements. Service bureau fees are recognized
as revenue when the processing services are performed.
Service bureau revenues increased by 80% from $2.4 million in the six
months ended June 30, 1997, compared to $4.2 million in the same period in 1998.
This increase was attributable to an increase in the number of customers
utilizing HNC's CRLink service bureau operations. Service bureau revenues
decreased by 11.6% to $4.7 million in 1996 and increased by 18.8% to $5.6
million in 1997. The decrease in 1996 was primarily a result of the significant
increase in license revenues as HNC's sales efforts were focused on licensing
CRLink to customers rather than marketing service bureau services. The increase
in 1997 was primarily due to an increase in the number of customers utilizing
service bureau operations.
Gross Margin. The following table sets forth the gross margin for
each of HNC's revenue categories for each of the comparison periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
License and maintenance........... 67.8% 71.9% 77.8% 77.8% 76.4%
Installation and implementation... 69.3 59.4 51.7 50.4 32.3
Contracts and other............... 24.6 30.9 30.0 27.1 27.3
Service bureau.................... 43.4 28.9 23.1 24.4 44.5
</TABLE>
License and Maintenance Gross Margin. License and maintenance costs
primarily represent HNC's expenses for personnel engaged in customer support,
travel to customer sites and documentation materials. Gross margins for the six
months ended June 30, 1997 and 1998 were 77.8% and 76.4%, respectively. The
primary reason for the decrease in gross margins was increased staffing and
associated costs in client services to support an increased volume of business.
HNC's gross margin on license and maintenance revenues was 67.8%, 71.9% and
77.8% in 1995, 1996 and 1997, respectively. In 1996, the improvement in gross
margin was the result of HNC's ability to move from price discounts for early
adopters of its products to full pricing for products sold to subsequent
customers as well as a higher volume of international licenses, which generate
relatively higher margins than domestic operations due, in part, to lower
overhead expenses as a result of less corporate infrastructure. Gross margin
improved in 1997 due primarily to license fees increasing at a higher rate than
the costs associated with providing these licenses. This increase was primarily
attributable to increased pricing producing higher margins in the retail and
healthcare/insurance markets.
Installation and Implementation Gross Margin. Installation and
implementation costs consist primarily of personnel-related costs, travel and
equipment. Installation and implementation gross margins for the first six
months of 1997 and 1998 were 50.4% and 32.3%, respectively. The decrease in
gross margins was a result of a shift in the mix of implementations within the
financial services segment due primarily to an increase in Capstone
implementations, which have substantially lower margins than implementations of
the Falcon products. HNC's gross margin on installation and implementation
revenues was 69.3%, 59.4% and 51.7% in 1995, 1996 and 1997, respectively. In
1996, the decrease in the gross margin was due primarily to new installations of
Retek Data Forecasting, which have substantially lower margins than
installations of Falcon products, which represented a majority of installations
in 1995. Gross margin decreased in
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1997 due primarily to an increase in Capstone implementations, which have
substantially lower margins than implementations of Falcon products.
Contracts and Other Gross Margin. Contracts and other costs consist
primarily of personnel-related costs. Gross margins for the six months ended
June 30, 1997 and 1998 were 27.1% and 27.3%, respectively. HNC's gross margin on
contracts and other revenues was 24.6%, 30.9% and 30.0% in 1995, 1996 and 1997,
respectively. The improvement in gross margin during 1996 was due primarily to
HNC's increased ability to better price its new pilot projects. The slight
decrease in gross margin for 1997 was due to the decrease in new product
development contracts, while government projects with substantially lower
margins remained relatively constant in absolute dollars.
Service Bureau Gross Margin. Service bureau costs consist primarily
of the personnel and facilities costs of operating the service bureaus. Gross
margins for the first six months of 1997 and 1998 were 24.4% and 44.5%,
respectively. The increase in gross margin was the result of increases in the
number of "complex" bills processed, which typically yield higher margins than
normal bills. HNC's gross margin on service bureau revenues was 43.4%, 28.9% and
23.1% in 1995, 1996 and 1997, respectively. The decrease in 1996 was a result of
the loss of a customer in early 1996 for which HNC was able to recognize higher
than usual margins during 1995. The decrease in 1997 was attributable to an
increase in fixed costs and in labor costs required to support the service
bureau business that outpaced the increase in revenue. This was the result of a
more static customer base and higher fixed costs associated with the
infrastructure necessary to run the service bureau operation.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and other personnel-related expenses,
subcontracted development services, depreciation for development equipment and
supplies. Research and development expenses for the first six months of 1997
were $9.4 million or 18% of total revenues compared to $14.7 million or 19% of
total revenues for the first six months of 1998. The increase in these expenses
in absolute dollars was due primarily to increases in staffing and related costs
to support increased product development activities, primarily related to
enhancements to the healthcare/insurance and retail segment products and, to a
lesser extent, the financial services segment products. Research and development
expenses increased from $7.0 million in 1995 to $13.8 million in 1996 and to
$21.2 million in 1997, representing 16.0%, 19.3% and 18.6% of total revenues in
1995, 1996 and 1997, respectively. Research and development expenses increased
in absolute dollars due to the development costs associated with new releases of
several products in the retail and financial services product lines. The
increased research and development expenses in absolute dollars and as a
percentage of revenues in 1996 was primarily the result of greater staffing to
support more new product development programs, primarily for ProfitMax,
Capstone, CompCompare, ProviderCompare and the Retek Merchandising System. The
1996 costs also included the initial product development costs of HNC's Aptex
business unit, which did not have a significant impact on revenues. Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based on HNC's product development process,
technological feasibility is not established until completion of a working
model. Costs incurred by HNC between completion of the working model and the
point at which a product is ready for general release have been insignificant.
As a result, no significant software development costs were capitalized through
June 30, 1998. HNC anticipates that research and development expenses will
increase in dollar amount and could increase as a percentage of total revenues
for the foreseeable future.
In-process Research and Development Expenses. In-process research and
development expenses were $22.8 million for the six month period ended June 30,
1998. This one-time write-off was related to the acquisitions of PCS and FTI and
the asset purchase of ATACS during the first six months of 1998. These amounts
were expensed as non-recurring charges on the respective acquisition dates.
These write-offs were necessary because the acquired technology had not yet
reached technological feasibility and had no future alternative uses. HNC is
using the acquired in-process research and development to add additional
functionality to existing products in each of the vertical markets. The value of
the purchased in-process research and development was determined through the use
of the discounted cash flow analysis taking into account costs to complete the
in-process technology, anticipated future cash flows once the technology is
completed and commercially available and the risk factors associated with
achieving the cash flows. The process took into account costs incurred through
the date of acquisition, efforts necessary to complete the technology and
assessment of technological feasibility. It also took into account the fact that
other tangible and intangible assets were employed in generating the
aforementioned cash flows, and therefore, took into account as an expense a
reasonable return on the other assets employed. The resulting projected net cash
flows were based on management's estimates of revenues and operating profits.
Management's estimates included an assessment of historical performance with
other products, general market conditions for the type of product, and competing
technologies.
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Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and benefits, commissions, travel, entertainment and
promotional expenses. Sales and marketing expenses were $9.8 million or 19% of
total revenues in the first six months of 1997 compared to $16.5 million or 21%
of total revenues in the first six months of 1998. The increases in sales and
marketing expenses were due primarily to increases in staffing related to HNC's
expansion of its direct sales and marketing staff, including opening sales
offices in Canada, Germany, South Africa, France and Japan. Sales and marketing
expenses increased from $7.3 million in 1995 to $11.9 million in 1996 and to
$22.0 million in 1997, representing 16.6%, 16.7% and 19.4% of total revenues in
1995, 1996 and 1997, respectively. The increases were primarily a result of
increased staffing as HNC built its direct sales and marketing staff, opened
sales offices in Japan and in several locations in Europe, and increased
expenses for trade shows, advertising and other marketing programs. HNC expects
sales and marketing expenses to continue to increase for the foreseeable future.
Such expenses could also increase as a percentage of total revenues as HNC
continues to develop a direct sales force in Europe and other international
markets, expand its domestic sales and marketing organization and increase the
breadth of its product lines.
General and Administrative Expenses. General and administrative
expenses consist primarily of personnel costs for finance, contract
administration, human resources and general management, as well as acquisition,
insurance and professional services expenses. General and administrative
expenses were $5.2 million or 10% of total revenues in the first six months of
1997, compared to $7.0 million or 9% of total revenues in the first six months
of 1998. General and administrative expenses were $5.2 million or 10% of total
revenues in the first six months of 1997, compared to $6.4 million or 8% of
total revenues, excluding acquisition related costs of $673,000, in the first
six months of 1998. The increase in absolute dollars was due primarily to
increased staffing and related expenses, including recruiting costs, to support
higher levels of sales and development activity of HNC resulting in part from
HNC's recent acquisitions. General and administrative expenses increased from
$5.1 million in 1995 to $8.6 million in 1996 and to $12.6 million in 1997,
representing 11.7%, 10.3% and 9.8% of total revenues, respectively. General and
administrative expenses included $1.2 million of acquisition expenses related to
the acquisitions of Risk Data and Retek in 1996 and $1.4 million of acquisition
expenses primarily related to the acquisition of CompReview in 1997. Excluding
acquisition expenses, general and administrative expenses were $5.1 million,
$7.4 million and $11.2 million in 1995, 1996 and 1997, respectively. The primary
reason for these increases in absolute dollars was increased staffing to support
HNC's growth and additional expenses associated with being a public company.
Operating Income. The above factors resulted in operating income of
$11.1 million, constituting 21.5% of total revenues in the first six months of
1997 and an operating loss of $8.7 million, constituting 11.2% of total revenues
in the first six months of 1998. Operating income was $5.1 million, constituting
11.6% of total revenues in 1995, $9.7 million, constituting 13.5% of total
revenues in 1996, and $23.0 million, constituting 20.3% of total revenues in
1997. HNC does not expect that operating income will continue to increase
significantly as a percentage of total revenues.
Other Income (Expense) Net. Other income for the first six months of
1997 was $910,000 compared to $982,000 in the first six months of 1998. Other
income is comprised primarily of interest income earned on cash and investment
balances, net of interest expense related to the 4.75% convertible subordinated
notes due 2003. The increase is the result of increased interest income related
to the increase in investments, partially offset by the interest expense related
to the notes. Interest and other income, net of interest expense, increased from
$484,000 in 1995 to $1.7 million in 1996 and to $1.9 million in 1997. The
increase in 1996 was primarily attributable to increased interest income in 1996
from higher cash and investment balances, which consisted primarily of the
proceeds from HNC's initial public offering in June 1995 and secondary public
offering in December 1995. The increase in 1997 was primarily due to a decrease
in interest expense of approximately $397,000 primarily related to the repayment
of Risk Data's bank notes payable during the third quarter of 1996, offset by a
decrease in interest income of approximately $165,000.
Income Tax (Benefit) Provision. The income tax provisions of $2.9
million and $3.0 million during the first six months of 1997 and 1998,
respectively, are based on management's estimates of the effective tax rates to
be incurred by HNC during those respective full fiscal years. The income tax
provision of $2.9 million during the first six months of 1997 was lower than
1997 taxes at statutory rates primarily as a result of CompReview's subchapter S
corporation status prior to the acquisition, which resulted in CompReview's tax
liability being borne by its former stockholders. As of the date of the
acquisition, CompReview's tax status was changed to C corporation. In the
future, HNC expects that the effective tax rate will be reflective of the tax
rate of other California-based companies. The income tax provision of $3.0
million for the six month period ended June 30, 1998 includes the tax effects
for the permanent differences generated by the one-time write-offs of in-process
research and development related to the purchases of both PCS and FTI during the
six months ended June 30, 1998.
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The income tax benefit of $511,000 in 1995 was primarily attributable
to the recognition of a $2.2 million deferred tax asset based on anticipated
future utilization of all of HNC's remaining net operating loss carryforwards
and research and development credit carryforwards. The income tax benefit of
$534,000 in 1996 was primarily attributable to the recognition of a $2.7 million
deferred tax asset based on anticipated future utilization of all of the
remaining net operating loss carryforwards and research and development credit
carryforwards relating to Risk Data and Retek. That deferred tax asset had
previously been offset by a valuation allowance. HNC released the valuation
allowance during the fourth quarter of 1996, based upon management's assessment
that it was more likely than not that HNC would realize the asset in future
periods. The 1997 income tax provision of $7.4 million, or 29.5% of pre-tax
income, was lower than 1997 taxes at statutory rates primarily as a result of
CompReview's subchapter S corporation status prior to the acquisition, which
resulted in most of CompReview's tax liability being borne by its former
stockholders.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the first six months
of 1998 was $12.9 million, which primarily represented net income before
non-cash charges for purchased research and development and depreciation and
amortization of approximately $15.8 million, offset in part by an increase in
accounts receivable. Net cash used in investing activities was $86.5 million
during the first six months of 1998, primarily due to net purchases of
investments of $81.5 million. Net cash provided by financing activities of
$101.1 million during the first six months of 1998 was primarily related to
proceeds from the issuance of HNC's 4.75% convertible subordinated notes due
2003 of $100.0 million issued in conjunction with HNC's debt offering in March
1998 and net proceeds of $4.9 million from the issuance of common stock. This
was partially offset by costs of approximately $2.9 million related to the
issuance of the above-mentioned convertible subordinated notes.
The $21.0 million of net cash provided by operating activities in
1997 represented net income before depreciation and amortization of
approximately $22.4 million, further increased by a decrease in deferred income
taxes of $6.9 million and offset by an increase in accounts receivable of $11.1
million. Net cash used in investing activities was $7.7 million in 1997
primarily due to $9.6 million expended for property and equipment during 1997,
including $6.0 million for computer equipment to support the increased staffing
across HNC, and $1.9 million for furniture and fixtures primarily related to the
relocation of HNC's Minneapolis facility, offset by approximately $1.9 million
of proceeds from sales and maturities of investments available for sale net of
purchases of such investments. Net cash used in financing activities was $3.2
million in 1997 primarily due to $6.8 million in distributions to the former
CompReview stockholders offset by $4.0 million in net proceeds from issuances of
common stock.
As of June 30, 1998, HNC had $147.9 million in cash, cash equivalents
and investments available for sale. As of December 31, 1997, HNC had $42.9
million in cash, cash equivalents and investments. HNC believes that its current
cash, cash equivalents and investments available for sale balances, borrowings
under its credit facility and net cash provided by operating activities, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next 12 months. Management intends to invest HNC's cash in excess
of current operating requirements in short-term, interest-bearing,
investment-grade securities. A portion of HNC's cash could also be used to
acquire or invest in complementary businesses or products or otherwise to obtain
the right to use complementary technologies or data. From time to time, in the
ordinary course of business, HNC evaluates potential acquisitions of such
businesses, products, technologies or data. HNC has no present understandings,
commitments or agreements with respect to any material acquisition of
businesses, products, technologies or data, other than the Merger.
YEAR 2000 COMPLIANCE
It is generally anticipated that many organizations will experience
operational difficulties at the beginning of the Year 2000 as a result of the
fact that many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Significant
uncertainty exists in the software and other industries concerning the scope and
magnitude of problems associated with the century change. Based on HNC's
assessment to date, HNC believes that the current version of each of its
material products is Year 2000 compliant. However, there can be no assurance
that all of HNC's customers will install the Year 2000 compliant version of
HNC's products in a timely manner, which could lead to failure of customer
systems and product liability claims against HNC. HNC is assessing the products
it has acquired in its recent acquisitions for Year 2000 compliance. The
inability of HNC to complete its assessment and any necessary modifications to
these recently acquired products could have a material adverse effect on HNC's
business, financial condition and results of operations. Even if HNC's products
are Year 2000 compliant, HNC may in the future be subject to claims based on
Year 2000 issues in the products of other companies, or issues arising from the
integration of
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multiple products within a system. The costs of defending and resolving Year
2000-related disputes, and any liability of HNC for Year 2000-related damages,
including consequential damages, could have a material adverse effect on HNC's
business, financial condition and results of operations. Further, HNC's products
are generally used with enterprise systems involving complicated software
products developed by other vendors, which may not be Year 2000 compliant. In
particular, many of HNC's customers are financial institutions, insurance
companies and other companies with insurance and financial services businesses,
all of which use legacy computer systems that are expected to be particularly
susceptible to Year 2000 compliance issues. If HNC's customers are unable to use
their information systems because of the failure of such noncompliant systems or
software or for any other reason, there would be a decrease in the volume of
transactions that HNC's customers process using HNC's products. As a result,
HNC's recurring revenue in the form of transactional fees from customers in the
insurance and financial services markets would decline, which would have a
material adverse effect on HNC's business, financial condition and results of
operations. Such failure could also affect the perceived performance of HNC's
products, which could have a negative effect on HNC's competitive position. In
addition, HNC believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those offered by HNC, which could result in a material
adverse effect on HNC's business, financial condition and results of operations.
HNC is reviewing its major internal corporate systems for Year 2000
compliance and intends to take appropriate action based on the results of such
review. HNC's plan for the Year 2000 calls for compliance verification of
external vendors supplying software and information systems to HNC and
communication with significant suppliers to determine the readiness of third
parties' remediation of their own Year 2000 issues. As part of its assessment,
HNC is evaluating the level of validation it will require of third parties to
ensure their Year 2000 readiness. To date, HNC has not encountered any material
Year 2000 issues concerning its computer systems. HNC plans to complete its Year
2000 research and testing and create any necessary contingency plans by the end
of 1998. All costs associated with carrying out HNC's plan for Year 2000
compliance are being expensed as incurred. The total cost associated with
preparation for the Year 2000 has not been, and is not expected to be, material
to HNC's business, financial condition or results of operations. Nevertheless,
HNC may not timely identify and remediate all significant Year 2000 problems and
remedial efforts may involve significant time and expense. There can be no
assurance that any Year 2000 compliance problems of HNC or its customers or
suppliers will not have a material adverse effect on HNC's business, financial
condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which HNC is required to adopt for its 1998 annual
financial statements. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Under FAS
131, operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. HNC has not determined the impact
of the adoption of this new accounting standard on its consolidated financial
statement disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133") which HNC will be required to adopt for its
2000 annual financial statements. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. HNC has not determined the impact of the adoption of this new accounting
standard on its consolidated financial position or results of operations.
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BUSINESS OF HNC
HNC develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ
proprietary neural-network predictive decision engines, profiles, traditional
statistical modeling, business models, expert rules and context vectors to
convert existing data and business experiences into meaningful recommendations
and actions. Just as manufacturing organizations have implemented manufacturing
resource planning ("MRP") software to automate routine transactions, leading
service industries such as the health-care/insurance, financial services and
retail industries are using predictive software solutions to improve
profitability, competitiveness and customer satisfaction.
INDUSTRY BACKGROUND
Today's competitive business environment has forced many service
companies to increase business efficiency while improving their flexibility and
responsiveness to changing market conditions. Businesses continually seek new
ways to make better decisions by collecting and analyzing data. Consequently,
service companies have made, and continue to make, significant investments in
computer systems designed to gather and electronically store ever increasing
amounts of data. In most cases, these computerized systems automate manual tasks
and activities, resulting in the conversion of significant amounts of corporate
data from paper to electronic form. However, these systems generally do not
synthesize data in ways that help businesses make better real-time decisions.
Historically, the development of predictive software solutions was
inhibited by the lack of computing standards and effective computational
intelligence techniques. The emergence of client-server standards, including
relational database management systems, the Windows operating system and network
communications protocols, has fostered the increased transmission and
dissemination of electronically stored data within and among businesses. MRP
software systems were developed to automate production, accounting, human
resources and distribution transactions for primarily manufacturing
organizations. These systems manage and store large amounts of diverse business
information, providing continuous and simultaneous availability of information
to geographically dispersed employees, customers and suppliers. However, MRP
systems generally do not provide businesses with the functionality and
flexibility needed to utilize this data to simulate operations and make
real-time decisions and recommendations in diverse and rapidly changing business
environments.
Several service industries have a particular need to leverage large
volumes of real-time transactional and operational data in order to address
systemic issues that have historically affected profitability, competitiveness
and customer satisfaction. These industries and issues include:
- HEALTHCARE/INSURANCE INDUSTRY. Workers' compensation fraud and
abuse is currently receiving widespread attention in the
healthcare/insurance industry. Conning & Co. recently estimated
that 10%-25% of the dollar amount of filed workers' compensation
claims in the United States are fraudulent. This translates to
more than $5 billion lost each year to workers' compensation
fraud.
- FINANCIAL SERVICES INDUSTRY. Based on reports from Visa and
Mastercard, Faulkner & Gray estimates that United States credit
card credit losses and chargeoffs were $18 billion in 1996.
- RETAIL INDUSTRY. Rapid changes in consumer buying patterns have
caused merchants to place increased emphasis on predicting
consumer demand and managing retail inventories. The change from
mass to individual retail marketing has multiplied the number of
promotional offers and stock-keeping units ("SKUs") required to
address market opportunities. The U.S. Department of Commerce
estimates that the inventory carrying costs for retail
inventories nationwide were $316 billion at the end of March
1997.
Historically, many companies in the healthcare/insurance, financial
services and retail industries have developed specialized in-house applications
to address these issues. Such applications are generally designed to access
large volumes of operational and transactional data stored on mainframe
computers. However, such systems are expensive, costly to support and maintain,
and do not offer flexible and enterprise-wide access to data. Furthermore, most
of these systems are not designed to meet the need for real-time recommendations
and actions. The widespread adoption of distributed client-server computing has
provided organizations with a much greater ability to access and manipulate
stored information but also has created the need for third-party vendors of
packaged applications software solutions that provide the same degree of
functionality and reliability as traditional in-house applications. These
vendors are able to provide a higher degree of
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functionality and reliability than traditional in-house applications by
combining the domain knowledge from their customers and partners with expertise
in computational intelligence and client-server technologies.
THE HNC SOLUTION
HNC's predictive software solutions enable leading service
industries, such as the healthcare/insurance, financial services and retail
industries, to analyze and act upon operational and transactional data in real
time. HNC's products provide the following benefits:
Core predictive software technology. HNC's software includes a
variety of computational intelligence technologies such as proprietary
neural-network predictive decision engines, profiles, traditional statistical
modeling, business models, expert rules and context vectors, that can be
customized to specific business applications. Neural networks can be adapted to
changing environments and applications quickly and have proven to be accurate
and effective in real-time operating environments. HNC's decision engine also
includes a user-defined rule-based technology. The neural networks and rulebases
are delivered through software that allows HNC's products to adapt to many
customer-specific business needs without extensive custom programming. Adaptable
functions include workflow queuing management, policy and procedure guidelines,
input data modification, flexible graphical user interface ("GUI") display,
decision criteria and report formats.
Quick payback for customers. HNC's software solutions are designed
for quick customer payback. HNC typically installs its products in two to six
months, and customer payback periods for installation and first year usage fees
are typically less than one year. Payback is rapid because the software products
address applications that have a significant profit impact. HNC personnel focus
not only on the technical integration, but also on delivering direct benefits to
the customer throughout the service contract period.
Transaction-based, real-time decision capability. HNC's software can
operate in real time, providing an immediate, situation-specific response to
each customer transaction. For example, the Falcon system for credit/debit card
fraud detection can monitor millions of transactions each day, identify
fraudulent transactions in progress and permit the card issuing bank to withhold
an authorization before the perpetrator completes a purchase. The Falcon system
differs from traditional modeling implementations, which operate in a batch or
off-line mode on a collection of historical transactions.
Flexible client-server solutions. HNC's solutions can be integrated
into a customer's existing environment or architecture. HNC's products are
available on industry-standard, client-server platforms, including Windows and
UNIX clients, NetWare, Windows NT, UNIX and CICS servers and IBM, Oracle, Sybase
and Informix databases. HNC's application products represent a complete software
solution, including decision models, deployment software, communications
interfaces and GUIs. HNC also supplies systems integration, ongoing performance
analysis, model rebuilding and application consulting services to help ensure
ongoing success for the customer. HNC believes that this flexible combination of
products, services and deployment platforms represents an advance that enables
successful predictive software system deployment in many mission-critical
applications.
Turnkey, customized and user-developed model options. The choice of
data source is important to customers because data are the fundamental building
blocks used to create accurate predictive models. HNC provides various models
built on industry-specific or customer-specific data to meet individual
application requirements. Customers and data suppliers provide HNC with
historical transaction data for turnkey models, trend analyses and product
updates. This combination of proprietary turnkey (from data and individual
consumer profiles), customized and user-developed models allows HNC to offer
products that solve a broad range of predictive application problems.
HNC'S STRATEGY
HNC's objective is to be the leading supplier of predictive software
solutions by leveraging its core computational intelligence technology across a
series of product families targeted at specific service industries. HNC's
strategy for achieving this objective contains the following key elements:
Maintain and strengthen HNC's position at the core of its customers'
applications infrastructure. Customers rely heavily on HNC's predictive software
solutions to anticipate and react to rapidly changing business conditions. HNC's
core computational intelligence technology serves as a platform upon which
service businesses can deploy and combine HNC's
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products to manage and respond to operational and transactional data in real
time. Therefore, HNC attempts to establish a strong position within the
applications infrastructure of its customers. For example, HNC's first
predictive solution product, Falcon, is a credit/debit card fraud detection
system for monitoring individual credit card accounts. By adapting the core
technology developed for Falcon, HNC later introduced ProfitMax, a
transaction-based, real-time credit authorization system that manages the
profitability of credit card portfolios. HNC believes that the opportunity
exists for similar penetration within each of its core vertical markets,
including opportunities such as retail banking within the financial services
industry. As another example, HNC's context vectoring technology could profile
visitors to a financial institution's Web site and send proactive direct e-mails
regarding financial products.
Leverage core predictive technologies to enter new market segments.
Historically, HNC has applied its core predictive technology to the domain
knowledge of companies it has acquired to introduce new products. For example,
in August 1996, HNC acquired Risk Data, a developer of decision systems in the
workers' compensation industry. By combining Risk Data's industry expertise with
HNC's fraud detection technology, HNC is developing a VeriComp module that
applies predictive technology to employer fraud in the workers' compensation
industry. In addition, HNC is evaluating opportunities in other data-intensive
industries, such as telecommunications, where predictive software may have the
ability to improve business performance and profitability.
Earn recurring revenues through long-term contracts. HNC markets most
of its predictive software solutions as an ongoing service that includes
software licenses, decision model updates, application consulting and on-line or
on-site support and maintenance. Since many of HNC's applications are enhanced
by periodic model updates, customers derive significant value from HNC's ongoing
services. In addition, the mission-critical nature of many of HNC's predictive
software solutions creates customer demand for long-term support commitments.
Accordingly, HNC's customers typically pay for this package of software and
service with a monthly usage fee and a three to seven year contract commitment.
Use strategic relationships to support direct distribution. In each
of its primary markets, HNC uses strategic relationships with system integrators
and third-party service providers to support its direct distribution efforts.
These partners provide varying levels of distribution support, from lead
generation to resale of HNC's products. HNC maintains such strategic
relationships with Electronic Data Systems Corporation ("EDS"), Intracorp and
Marsh McLennan, Inc. in healthcare/insurance, First Data Corporation and EDS in
financial services, and Andersen Consulting and KPMG Peat Marwick LLP in retail.
Growth through acquisitions. HNC acquired Risk Data, Retek and
CompReview in 1996 and 1997, thereby significantly expanding its product
offerings in its target markets. In 1998, HNC acquired PCS, FTI and the ATACS
product line and entered into the Merger Agreement with OSI. HNC expects to
continue to review acquisitions of businesses, products and technologies as a
means to expand its product offerings for existing and new target markets.
MARKETS AND PRODUCTS
HNC has a broad family of predictive software products that provide
specific solutions for each of the healthcare/insurance, financial services and
retail markets. Revenues from each of HNC's three target markets accounted for
more than one-quarter of HNC's total revenues in 1997. Revenues from three
products, CRLink, Retek Merchandising System and Falcon, accounted for 57.9% and
54.0% of HNC's total revenues in 1997 and the first six months of 1998,
respectively. See "Risk Factors--Risks Relating to HNC--Product Concentration."
Healthcare/Insurance
HNC offers and is developing products in the healthcare/insurance
market. These products are targeted to insurance carriers, insurance providers,
managed care organizations, state insurance funds, third-party administrators
and large, self-insured employers. HNC has developed predictive software
solutions that address the containment of the medical costs of workers'
compensation and automobile accident insurance claims, workers' compensation
loss reserving, workers' compensation fraud, managed care effectiveness and
provider effectiveness. These solutions, CRLink, MIRA, CompCompare,
ProviderCompare, PMAdvisor, VeriComp and AUTOADVISOR allow users the ability to
reduce fraud losses and streamline operations.
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HNC HEALTHCARE/INSURANCE INDUSTRY PRODUCTS
<TABLE>
<CAPTION>
PRODUCT PRODUCT DESCRIPTION
------- -------------------
<S> <C>
CRLink CRLink operates as the bill review engine that
links all of the critical components of an
effective cost containment program to help clients
control the cost of workers' compensation,
personal injury and other casualty risks.
MIRA MIRA uses statistical predictive methods to
automatically determine workers' compensation loss
reserves based on historical data gathered from
insurance carriers, third-party administrators and
state insurance funds throughout the United
States.
CompCompare CompCompare enables clients to compare claims
costs or the effectiveness of managed care
programs by using benchmarking data from HNC's
proprietary workers' compensation database.
ProviderCompare ProviderCompare is a physician profiling product that
provides on-line access to HNC's proprietary workers'
compensation database. ProviderCompare enables clients
to generate a detailed comparative analysis, such as treatment
costs, among providers within the same specialty.
PMAdvisor PMAdvisor enables claim payors to verify that the
number of visits and type of treatment for claims
involving physical medicine (primarily
chiropractic and physical therapy) are appropriate
for the diagnosis and severity of the injury and
to identify chiropractic and physical therapy
claims that exceed appropriate treatment
guidelines.
VeriComp VeriComp is a workers' compensation claimant
system designed to assist in identifying claimant
behavior that is likely to indicate the presence
of fraud or abuse.
AUTOADVISOR AUTOADVISOR integrates the medical repricing
software with a managed care component for the
auto medical claims market.
</TABLE>
Financial Services
The increasing volume of electronic financial transactions requires
mission-critical decision-making in real time for applications such as credit
card charge authorization, that carry a substantial risk of consumer and
merchant fraud. HNC's Falcon and ProfitMax product lines are targeted at bank
and private label card issuers and payment processors. Falcon employs a
client/server architecture that consists of an interface into the customer's
legacy system, a decision engine, a cardholder profile database, a case
management database and a fraud workstation.
HNC estimates that loan underwriting costs in the United States
currently exceed $2.5 billion each year. Competitive pressures including cost
reduction, rapid loan approval and the growth of on-line banking have compelled
lenders to turn to software solutions that can automate loan origination in
order to lower costs, improve customer service and provide remote access to
lending services. HNC's predictive software solutions for the loan origination
markets, Capstone and AREAS, allow lenders such as banks and private label card
issuers, home equity lenders, auto lenders and mortgage lenders to automate the
loan approval decision process.
HNC FINANCIAL SERVICES INDUSTRY PRODUCTS
<TABLE>
<CAPTION>
PRODUCT PRODUCT DESCRIPTION
------- -------------------
<S> <C>
Falcon Product Line Falcon products are neural network-based solutions that examine transaction,
Falcon cardholder and merchant data to detect a wide range of credit and debit card fraud.
Falcon Expert Using predictive software techniques, Falcon captures relationships and patterns
Falcon Select that often are missed by traditional methods of detecting suspicious transactions.
Falcon Debit
Falcon Retail
Falcon Sentry
Eagle
Capstone Product Line Capstone is an intelligent, high-performance new account decision processing
Capstone for Payment solution. Based on expert rules, Capstone allows users to automate lending
Cards decisions and design, test, implement and track lending policies.
Capstone for
Consumer Lending
Capstone for Mortgage
Lending
</TABLE>
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<TABLE>
<S> <C>
ProfitMax Product Line ProfitMax provides transaction-based, real-time authorization and action decisions
ProfitMax from within a complete infrastructure for managing the profitability of credit card
ProfitMax Bankruptcy portfolios. ProfitMax uses neural networks, expert rules and HNC's cardholder
behavior profiling technology to analyze the expected profitability of each account
in an issuer's portfolio using the issuer's definition of financial profit.
ProfitMax Bankruptcy uses the basic ProfitMax structure to predict the
likelihood of cardholder bankruptcy even before the cardholder is delinquent.
AREAS AREAS automated property valuation software uses neural networks and other
computational intelligence to provide an objective prediction of the current market
value of residential property.
SelectProfile SelectProfile is a predictive customer relationship management service that uses
transaction data to automatically segment cardholders for targeted marketing
programs.
</TABLE>
Retail
Although retailers have made significant investments in customer
information, point-of-sale and quick-response ordering systems, these
applications often do not include the forecasting ability required to maximize
profitability and respond to competition through timely "in-store"
replenishment, electronic networking and quick response initiatives. HNC has
developed a group of products that effectively addresses inventory control,
merchandise management and financial control management. These software
solutions allow retailers to build forecasting and marketing models to carry out
day-to-day buying and selling activities, thereby reducing carrying costs for
inventories and improving purchasing, promotion and logistics efficiencies. The
target markets for HNC's retail products are department stores, mass
merchandisers and specialty retail chains in multi-store and multi-warehouse
environments with gross sales in excess of $200 million.
HNC RETAIL INDUSTRY PRODUCTS
<TABLE>
<CAPTION>
PRODUCT PRODUCT DESCRIPTION
------- -------------------
<S> <C>
Retek Merchandising The Retek Merchandising System provides inventory control, merchandise management and
System financial control and addresses the definition and management of merchandise at the
SKU level and reporting and financial control through stock ledgers.
Retek Data Warehouse Retek Data Warehouse provides the transaction infrastructure needed for
retailers to plan, buy, move, sell and pay for their merchandise.
Active Retail Active Retail Intelligence identifies performance exceptions and recommends the
Intelligence appropriate corrective action.
Retek Demand Retek Demand Forecasting provides forecasts to retailers' supply chain planning
Forecasting allocation and replenishment functions and uses predictive causal techniques with
automated forecasting and multi-dimensional on-line analysis.
Falcon Retail Falcon Retail provides proactive detection of private label card application
and transaction fraud.
Retek Trade Management Retek's trade and import system manages the global procurement process with landed
costing, letter of credit, transportation tracking, customs clearance, payment
tracking and expense allocation. Retek Trade Management provides status updates and
alerts as product moves through the supply
chain, and automates the routine tasks and
paper-intensive nature of the import
process.
Retek Warehouse This distribution management system is scaled to handle distribution arrangements from
Management the single distribution center to multiple-facility management. Retek Warehouse
Management manages appointments, trailers/yards, receiving, inventory control,
distribution planning, picking, shipping, and manifest mailing systems. Designed as a
flexible, table-driven system, it allows retailers to configure system parameters to
optimize their operating environment.
</TABLE>
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<TABLE>
<S> <C>
Retek Collaborative Retek's collaborative supply chain management system enables the retailer to integrate
Supply with their supply chain via the Internet to share a common plan and forecast and to
manage the profitability of that plan in-season. This delivers improved product
availability and reduced lost sales, without increasing stock levels and associated
markdown.
Retek Sales Audit Retek Sales Audit provides retailers the capability to balance sales and tenders at
stores to match cash to bank deposits. Sales Audit accepts transaction data from
popular Point-of-Sale applications and moves the data through a series of processes
that culminate in clean data that can be accepted into a number of systems, including
financial, loss prevention, data warehouse and merchandising applications. Data that
is found to be inaccurate is brought to the attention of the retailer's sales auditors
who use the intuitive features of the Retek Sales Audit system to correct the
problems. ReSA provides Flash Sales reporting capability that captures the daily
sales snapshot regardless of whether all transactions have passed validation. In
addition, ReSA also supports multiple currencies. Retek Sales Audit lets retailers
easily clean their POS data to balance sales and tenders, and cash to bank deposits.
Retek Invoice Matching Retek Invoice Matching streamlines the invoice matching process by automatically
confirming receipt of merchandise and alerting the retailer to unmatched or
partially-matched invoices using a cross-reference number.
Retek Store Systems--RF Store Systems--RF improves store performance by linking employees in real time with
corporate head office applications and information, using easy to maintain,
pre-integrated turnkey solutions. Retek Store Systems provides back-office
functionality to store employees through handheld RF (radio frequency) devices linked
to corporate databases through a high speed intranet.
</TABLE>
EMERGING MARKET OPPORTUNITIES
HNC's experience and technology capabilities in the
healthcare/insurance, financial services and retail markets often lead to new
product ideas and concepts. HNC also evaluates new market opportunities that
arise through its commercial and government contract work. As contracts are
completed, the end products are evaluated for commercialization. For example,
contracts for the Advanced Research Projects Agency, United States Army Research
Laboratory, United States Air Force, Office of Naval Research, DataTimes
Corporation and Tracor Applied Sciences, Inc. generated a context-based text
analysis technology called MatchPlus. This core text analysis technology has
been under development at HNC for the last four years for Department of Defense
applications. During 1996, HNC formed Aptex to commercialize HNC's MatchPlus
text analysis technology for emerging markets. Aptex has developed a strategic
partnership with InfoSeek Corporation, an Internet search and navigation
service, to deliver products using this text analysis technology to the Internet
market. To date, three new Internet products have been launched: SelectCast,
SelectResponse and SelectResource.
Substantially all of HNC's revenues in recent years have been
attributable to sales of predictive software solutions and services, and these
products and services are currently expected to continue to account for a
substantial amount of HNC's future revenues. The market for predictive software
solutions is still emerging. The rate at which businesses have adopted HNC's
products has varied significantly by market and by product within each market,
and HNC expects to continue to experience such variations with respect to its
target markets and products in the future. HNC has introduced products for the
healthcare/insurance, financial services and retail markets. HNC has recently
announced several new products, including PMAdvisor, VeriComp, SelectCast,
SelectResponse, SelectResource and SelectProfile. To date, none of these
products has achieved any significant degree of market acceptance, and there can
be no assurance that such products will ever be widely accepted. Although
businesses in HNC's target markets have recognized the advantages of using
predictive software solutions to automate the decision-making process, many have
developed decision automation systems internally rather than licensing them from
outside vendors. There can be no assurance that the markets for HNC's products
will continue to develop or that HNC's products will be widely accepted, if at
all. If the markets for HNC's new or existing products fail to develop, or
develop more slowly than anticipated, HNC's sales would be negatively impacted,
which would have a material adverse effect on HNC's business, financial
condition and results of operations.
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CUSTOMER SERVICE AND SUPPORT
A high level of continuing maintenance, service and support is
critical to maintaining the performance of HNC's predictive software solutions.
Service and support are also essential to HNC's objective of developing
long-term relationships with, and obtaining recurring revenues from, customers.
HNC's service and support activities are related to system installation,
performance validation and ongoing consultation on the optimal use of HNC
products.
Model and Rule Updates. Most HNC product license agreements include
periodic data, model and/or rule updates to maintain system performance. HNC
technical personnel generally assist the customer with installation of updates.
HNC makes commitments to update models and rules at varying intervals, from
fixed times (such as quarterly and annually) to unscheduled times, provided the
customer has met its commitments to provide data to HNC.
Education. HNC offers comprehensive education and training programs
to its customers. HNC provides on-site training services associated with many of
its products. Fees for education and training services are generally included in
usage-priced products, but may be charged separately in other cases.
Consulting. HNC's consultants are available to work with customers'
user application groups and information systems organizations. Customers that
buy consulting services are usually planning large implementations or want to
optimize performance of HNC's products in their operating environments. Fees for
consulting are generally included in usage-priced products, but may be charged
separately in other cases.
PRICING
HNC generally establishes prices in one of two ways: usage-based fees
and fixed-fee licenses with maintenance. HNC generally employs usage-based
pricing for its healthcare/insurance products, Falcon, ProfitMax and AREAS.
Under the usage-based pricing structure, HNC generally provides a fixed-term
software license, software maintenance, model updates (in the case of
HNC-supplied models) and ongoing consulting services in exchange for recurring
revenue based on usage. Usage-based term contracts typically include annual
price index adjustments. In 1995, 1996, 1997 and the first six months of 1998,
annual license and maintenance revenues from these contracts represented 61.2%,
56.1%, 55.2% and 52.3% of HNC's total revenues, respectively. HNC generally
employs fixed-fee license pricing for Capstone and all of HNC's retail products
except Falcon Retail. Under the fixed-fee license pricing structure, HNC
generally licenses the product for the customer's internal use on a perpetual
basis. In most cases, the user can separately contract for maintenance services
on an annual basis. HNC typically offers early adopter pricing for its
usage-based products to customers that agree to be part of pilot or other early
product life cycle installations. Early adopter pricing might include
reduced-fee perpetual licenses, reduced-fee services or both.
HNC often contracts for installation services associated with its
predictive software solutions. HNC provides user-specific proposals priced at
either fixed-fee levels or on a time and materials basis. In nearly all cases,
travel expenses are billed separately at cost.
HNC offers contract consulting services. Because of the complexity
associated with predictive software solutions, users often request that HNC help
them to develop models or analyze problems. Also, from time to time HNC accepts
engagements not associated with current product offerings in order to become
more familiar with a new application area and determine the potential for new
product development. Although consulting services are included with many of
HNC's usage-based products, customers may request additional consulting, often
associated with custom modeling.
SALES AND MARKETING
HNC sells and markets its software and services in North America and
internationally through its direct sales organization, joint marketing and
distribution agreements. HNC's worldwide sales and marketing organization
consisted of 131 employees as of June 30, 1998. The domestic sales staff is
based at HNC's corporate headquarters in San Diego and in United States field
offices in California, Colorado, Connecticut, Georgia, Minnesota, New York,
Pennsylvania, Texas and Virginia. Internationally, HNC has field sales offices
in Australia, Canada, France, Germany, Japan, Singapore, South Africa and the
United Kingdom. To support its sales force, HNC conducts comprehensive marketing
programs, which include direct mail, public relations, advertising, seminars,
trade shows and ongoing customer communication programs. The sales staff is
generally product-based, and each representative is assigned a geographic
territory.
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HNC has licensed First Data Resources, Inc. ("First Data") and EDS to
act as service bureaus to provide an alternate channel of distribution for
end-users to utilize the Falcon product. First Data also licenses ProfitMax as a
service bureau. HNC generally assists its service bureau partners in the sales
effort, often employing HNC's direct sales force in the process. HNC sales
representatives earn a commission for service bureau sales in their territory.
These service bureaus pay HNC monthly usage fees based on the volume of
transactions processed.
HNC also uses representative agents for certain products in certain
territories outside of North America. HNC has agents covering Australia,
Austria, France, Germany, Italy, New Zealand, Spain and Switzerland. In 1995,
1996, 1997 and the first six months of 1998, international operations and export
sales (including sales in Canada) represented 12.6%, 17.7%, 16.8% and 27.0% of
HNC's total revenues, respectively. International sales result primarily from
Falcon product sales and sales of retail products. HNC intends to continue to
expand its operations outside the United States and to enter additional
international markets, including by adding sales and support offices in Europe
and Japan, which will require significant management attention and financial
resources. HNC has committed and continues to commit significant time and
development resources to customizing certain of its products for selected
international markets and to developing international sales and support
channels. There can be no assurance that HNC's efforts to develop products,
databases and models for targeted international markets or to develop additional
international sales and support channels will be successful. The failure of such
efforts, which can entail considerable expense, could have a material adverse
effect on HNC's business, financial condition and results of operations.
International sales are subject to additional inherent risks,
including longer payment cycles, unexpected changes in regulatory requirements,
import and export restrictions and tariffs, difficulties in staffing and
managing foreign operations, the burdens of complying with a variety of foreign
laws, greater difficulty or delay in accounts receivable collection, potentially
adverse tax consequences and political and economic instability. HNC's
international sales are currently denominated predominantly in United States
dollars and a small portion are denominated in British pounds sterling. An
increase in the value of the United States dollar relative to foreign currencies
could make HNC's products more expensive, and therefore potentially less
competitive, in foreign markets. In the future, to the extent HNC's
international sales are denominated in local currencies, foreign currency
translations may contribute to significant fluctuations in HNC's business,
financial condition and results of operations. If for any reason exchange or
price controls or other restrictions on foreign currencies are imposed, HNC's
business, financial condition and results of operations could be materially
adversely affected.
Due in part to the mission-critical nature of certain of HNC's
applications, potential customers perceive high risk in connection with adoption
of HNC's products. As a result, customers have been cautious in making decisions
to acquire HNC's products. In addition, because the purchase of HNC's products
typically involves a significant commitment of capital and may involve shifts by
the customer to a new software and/or hardware platform, delays in completing
sales can arise while customers complete their internal procedures to approve
large capital expenditures and test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
purchase of HNC's products is typically lengthy, unpredictable and subject to a
number of significant risks over which HNC has little or no control, including
customers' budgetary constraints and internal acceptance reviews. The sales
cycle associated with the licensing of HNC's products can typically range from
60 days to 18 months. As a result of the length of the sales cycle and the
typical size of customers' orders, HNC's ability to forecast the timing and
amount of specific sales is limited. A lost or delayed sale could have a
material adverse effect on HNC's business, financial condition and results of
operations.
TECHNOLOGY
HNC seeks to develop innovative products by combining industry and
application knowledge with its core neural-network technology to address
specific market needs. HNC's systems also employ rule-based technology to
implement customer strategy, policy and procedures. These technologies are
incorporated in computer software and hardware architectures, including
client-server hardware, relational databases and object-oriented programming.
HNC intends to continue to develop state-of-the-art technologies to enhance its
current products and broaden development opportunities.
Neural-Network Technology. Neural networks have predictive power that
can be improved with experience as the historical database increases in size.
The term "neural network" refers to a family of nonlinear, statistical modeling
techniques, sometimes called "computational intelligence." These techniques
distinguish themselves through a process of automated "learning" or "training"
that replaces the time-consuming manual techniques of traditional nonlinear,
statistical modeling. The neural-network architecture itself consists of groups
of "processing elements," or equations with several inputs and a single output.
The output of each element becomes either the input to another element or part
of the
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dependent output. Each input receives a "weight" or value, in the equation,
which is adjusted during the training process. The actual result from each
training record is compared with the answer from the neural network, and the
weights are adjusted to reduce the error between the two. This process can
become computationally intensive, as millions of training data records must be
processed hundreds or thousands of times. HNC has developed proprietary
high-speed and parallel-processor boards to accelerate training and execution of
its neural-network software. HNC believes that the rapid model development
afforded by its technology provides a competitive advantage in the development
of predictive software solutions.
Rule-Based Technology. HNC's systems also employ rule-based
technology to implement customer strategy, policy and procedures. The rules are
implemented as part of predictive processes. HNC believes that its combination
of neural networks and rule bases in a single decision engine represents a
significant competitive advantage over more traditional approaches to decision
automation.
Context Vector Technology. Context vector technology that originated
at HNC and is being commercialized at Aptex is a way to explore, analyze and
model unstructured textual data. Context vector technology automatically
discovers the underlying structure of free form symbolic data. This structure
enables modeling from data elements previously considered impossible to include
in predictive software applications. Context vector technology also models
behavior. Just as relationships are discovered in unstructured data, observing
electronic transaction behavior identifies patterns. Compatibility predictions
can be made between information, behavior, people and products. When combined
with other HNC technologies, such as neural networks and rule-based systems, HNC
believes that context vectors can improve the performance of existing
applications while opening new market opportunities. Context vector technology
has been demonstrated to increase banner advertising click rates on the
Internet, automate e-mail responses and discover unknown relationships in credit
card transaction data.
HNC's success depends upon its ability to enter new markets by
successfully developing new products for such markets on a timely and
cost-effective basis. HNC's products often require customer data for decision
model development and system installation. As a result, completion of new
products (particularly new products for markets not previously served by HNC)
may be delayed while HNC extracts sufficient amounts of statistically relevant
data and develops the models. During this development process, HNC relies on its
potential customers in the new market to provide data and to help train HNC
personnel in the use and meaning of the data in the specific industry. These
relationships also assist HNC in establishing a market presence and credibility
in the new market. These potential customers, most of which have significantly
greater financial and marketing resources than HNC, may compete with HNC in the
future or otherwise discontinue their relationships with or support of HNC,
either during development of HNC's products or thereafter. The failure by HNC to
obtain adequate third-party support for new product development would have a
material adverse effect on HNC's ability to enter new markets and, consequently,
on HNC's business, financial condition and results of operations. See "Risk
Factors--Risks Relating to HNC--Risks Associated with Technological Change and
Delays in Developing New Products."
RESEARCH AND DEVELOPMENT
HNC believes that its future success depends in part on its ability
to maintain and improve its core technologies, enhance its existing products and
develop new products that meet an expanding range of markets and customer
requirements. HNC intends to expand its existing product offerings and to
introduce new predictive software solutions. In the development of new products
and enhancements to existing products, HNC uses its own tools extensively. Until
1996, HNC relied primarily on internal development of its products. Based on
timing and cost considerations, however, HNC has acquired, and in the future may
consider acquiring, technology or products from third parties. For example, HNC
acquired technology and products in connection with its acquisitions of Risk
Data and Retek in 1996, CompReview in 1997 and PCS, FT1 and ATACS in 1998.
HNC performs all quality assurance and develops documentation
internally. HNC intends to continue to support industry standard operating
environments, client-server architectures and network protocols. HNC's
specialists in neural network model development, software engineering, user
interface design, product documentation and quality improvement are responsible
for maintaining and enhancing the performance, quality and usability of all HNC
predictive software solutions. The marketing services organization is
responsible for authoring and updating all user documentation and other
publications. See "Risk Factors--Risks Relating to HNC--Risks Associated with
Technological Change and Delays in Developing New Products."
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HNC strategically targets its long-term research projects. In
addition to funds allocated by HNC for research, HNC receives research contracts
from a range of commercial sources and the United States Government. Government
and commercial contract customers have included the Advanced Research Projects
Agency, United States Air Force, Office of Naval Research and Tracor Applied
Sciences, Inc. HNC believes that these contracts augment its ability to maintain
existing technologies and investigate new technologies that may or may not
become part of its products. The United States Government typically retains
certain intellectual property rights and licenses in the technologies HNC
develops under research contracts directly or indirectly sponsored by the
government, and in some cases can terminate HNC's rights in such technologies if
HNC fails to commercialize them on a timely basis. Historically, these contracts
have not resulted in development of products contributing to HNC's revenues in
the fiscal year in which the research contract is performed, or in the
subsequent fiscal year.
The market for HNC's predictive software solutions for service
industries is characterized by rapidly changing technology and improvements in
computer hardware, network operating systems, programming tools, programming
languages, operating systems and database technology. HNC's success will depend
upon its ability to continue to develop and maintain competitive technologies,
enhance its current products and develop, in a timely and cost-effective manner,
new products 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 HNC,
which develop software solutions that now may have to be designed to operate in
Internet, intranet and other on-line environments. HNC may not be able to
develop and market, on a timely basis, or at all, product enhancements or new
products that respond to changing technologies. HNC has previously experienced
significant delays in the development and introduction of new products and
product enhancements, primarily due to difficulties with model development,
which has in the past required multiple iterations, as well as difficulties with
acquiring data and adapting to particular operating environments. The length of
these delays has varied depending upon the size and scope of the project and the
nature of the problems encountered. 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 on HNC's business, financial condition and results of operations. Any
failure by HNC to anticipate or to respond adequately to changing technologies,
or any significant delays in product development or introduction, could cause
customers to delay or decide against purchases of HNC's products and would have
a material adverse effect on HNC's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
HNC relies on a combination of patent, copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
HNC currently owns ten issued United States patents and has two United States
patent applications pending. HNC has applied for additional patents for its
Falcon technology in Canada, Europe and Japan and for its MIRA product in
Australia, Canada and Europe. There can be no assurance that patents will be
issued with respect to pending or future patent applications or that HNC's
patents will be upheld as valid or will prevent the development of competitive
products. HNC seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. As part of its confidentiality procedures, HNC 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 and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to obtain
and use HNC's products 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 HNC's business, HNC places source
code for certain of its products into escrow, which may increase the likelihood
of misappropriation or other misuse of HNC's intellectual property. Moreover,
effective protection of intellectual property rights may be unavailable or
limited in certain foreign countries in which HNC has done and may do business.
Also, HNC has developed technologies under research projects conducted under
agreements with various United States Government agencies or subcontractors to
such agencies. Although HNC has acquired certain commercial rights to such
technologies, the United States Government typically retains ownership of
certain intellectual property rights and licenses in the technologies developed
by HNC under such contracts, and in some cases can terminate HNC's rights in
such technologies if HNC fails to commercialize them on a timely basis. In
addition, under certain United States Government contracts, the results of HNC's
research may be made public by the government, which could limit HNC's
competitive advantage with respect to future products based on such research.
In the past, HNC has received communications from third parties
asserting that HNC trademarks infringe such other parties' trademarks, none of
which has resulted in litigation or losses to HNC. Given HNC's ongoing efforts
to
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develop and market new technologies and products, HNC may receive communications
from third parties asserting that HNC's products infringe, or may infringe,
their intellectual property rights. If as a result of any such claims HNC were
precluded from using certain technologies or intellectual property rights,
licenses to such disputed third-party technology or intellectual property rights
might not be available on reasonable commercial terms, if at all. Furthermore,
HNC may initiate claims or litigation against third parties for infringement of
HNC's proprietary rights or to establish the validity of HNC's proprietary
rights. Litigation, either as plaintiff or defendant, could result in
significant expense to HNC and divert the efforts of HNC's technical and
management personnel from productive tasks, whether or not such litigation is
resolved in favor of HNC. In the event of an adverse ruling in any such
litigation, HNC 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 HNC's patents, trademarks or other proprietary rights. In
the event of a successful claim against HNC and the failure of HNC to develop or
license a substitute technology, HNC'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, HNC 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 HNC's business, financial condition and results
of operations.
COMPETITION
The market for predictive software solutions for service industries
is intensely competitive and subject to rapid change. Competitors, many of which
have substantially greater financial resources than HNC, vary in size and in the
scope of the products and services they offer. HNC encounters competition from a
number of sources, including (i) other application software companies, (ii)
management information systems departments of customers and potential customers,
including financial institutions, insurance companies and retailers, (iii) third
party professional services organizations, including without limitation,
consulting divisions of public accounting firms, (iv) hardware suppliers that
bundle or develop complementary software, (v) network and service providers that
seek to enhance their value-added services, (vi) neural-network tool suppliers
and (vii) managed care organizations. In the healthcare/insurance market, HNC
has experienced competition primarily from National Council on Compensation
Insurance ("NCCI"), Corporate Systems, Inc. and CSC Incorporated. In the
workers' compensation and medical cost administration market, HNC has
experienced competition from MediCode, Inc., Medata, Inc. and Embassy Software
with regard to software licensing, and Intracorp and Corvel Corporation in the
service bureau operations market. Additionally, HNC has faced competition from
ADP in the automobile accident medical claims market. In the financial services
market, HNC has experienced competition from Fair, Isaac & Co., Inc., Cogensys
(a subsidiary of Policy Management Systems Corporation), Fannie Mae, Freddie
Mac, IBM, Nestor, Inc., NeuralTech Inc., Neuralware Inc., PMI Mortgage Services
Co., VISA International and others. In the retail market, HNC has experienced
competition from JDA Software Group, Inc., SAP AG, PeopleSoft, Inc., IBM,
Manugistics Group, Inc. and others. HNC expects to experience additional
competition from other established and emerging companies, as well as other
technologies. For example, HNC's Falcon product competes against other methods
of preventing credit card fraud, such as card activation programs, credit cards
that contain the cardholder's photograph, smart cards and other card
authorization techniques. Increased competition, whether from other products or
new technologies, could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely affect HNC's business, financial condition and results of operations.
HNC believes that most of its products are currently priced at a
premium when compared to its competitors' products. The market for HNC's
products is highly competitive, and HNC expects that it will face increasing
pricing pressures from its 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 HNC's ability to obtain new long-term contracts and renewals of existing
long-term contracts on terms favorable to HNC. Any reduction in the price of
HNC's products could materially adversely affect HNC's business, financial
condition and results of operations.
HNC believes that the principal competitive factors affecting its
market include technical performance (for example, accuracy in detecting credit
card fraud or evaluating workers' compensation claims), access to unique
proprietary databases and product attributes such as adaptability, scalability,
ability to integrate with products produced by other vendors, functionality,
ease-of-use, product reputation, quality, performance, price, customer service
and support, the effectiveness of sales and marketing efforts and HNC
reputation. Although HNC believes that its products currently compete favorably
with respect to such factors, there can be no assurance that HNC can maintain
its competitive position
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against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Some of HNC's current, and many of HNC's potential, competitors have
significantly greater financial, technical, marketing and other resources than
HNC. 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 HNC. 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 HNC's prospective customers. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly gain significant market share. Also, HNC relies upon its customers
to provide data, expertise and other support for the ongoing updating of HNC's
models. HNC's customers, most of which have significantly greater financial and
marketing resources than HNC, may compete with HNC in the future or otherwise
discontinue their relationships with or support of HNC. There can be no
assurance that HNC will be able to compete successfully against current and
future competitors or that competitive pressures faced by HNC will not
materially adversely affect its business, financial condition and results of
operations.
EMPLOYEES
As of June 30, 1998, HNC had 890 employees, including 425 in product
development and support, 204 in customer service, 131 in sales and marketing and
130 in finance, administration and MIS. Most of these employees are located in
the United States. None of HNC's employees are represented by a labor union. HNC
has experienced no work stoppages and believes that its employee relationships
are generally good.
HNC's success depends to a significant degree upon the continued
service of members of HNC's senior management and other key research,
development, sales and marketing personnel. Accordingly, the loss of any of
HNC's senior management or key research, development, sales or marketing
personnel could have a material adverse effect on HNC's business, financial
condition and results of operations. Only a small number of employees have
employment agreements with HNC, and there can be no assurance that such
agreements will result in the retention of these employees for any significant
period of time. In addition, the untimely loss of a member of the management
team or a key employee of a business acquired by HNC could have a material
adverse effect on HNC's business, financial condition and results of operations,
particularly if such loss occurred before HNC has had adequate time to
familiarize itself with the operating details of that business. In the past, HNC
has experienced difficulty in recruiting a sufficient number of qualified sales
and technical employees. In addition, competitors may attempt to recruit HNC's
key employees. There can be no assurance that HNC will be successful in
attracting, assimilating and retaining such personnel. The failure to attract,
assimilate and retain key personnel could have a material adverse effect on
HNC's business, financial condition and results of operations.
PROPERTIES
HNC's principal administrative, sales, marketing, support, research
and development facilities are located in approximately 63,000 square feet of
space in San Diego, California. HNC and its subsidiaries also lease an aggregate
of approximately 117,000 square feet of additional office space in Minneapolis,
Minnesota; Costa Mesa, California; Irvine, California; Cincinnati, Ohio; and
Atlanta, Georgia. HNC and its subsidiaries also maintain numerous field offices
in the United States and in foreign countries. HNC believes that its current
facilities are adequate to meet its needs for the foreseeable future. HNC
believes that suitable additional or alternative space will be available in the
future on commercially reasonable terms as needed.
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SELECTED HISTORICAL FINANCIAL DATA OF OSI
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below as of December 31, 1996 and
1997, and for the three years ended December 31, 1997 are derived from OSI's
audited financial statements, which appear elsewhere in this Proxy
Statement/Prospectus. The selected financial data set forth below as of December
31, 1994 and 1995, and for the year ended December 31, 1994 are derived from
OSI's audited financial statements which are not included in this Proxy
Statement/Prospectus. The selected financial data set forth below as of and for
the year ended December 31, 1993 are derived from OSI's unaudited financial
statements which are not included in this Proxy Statement/Prospectus. The
selected financial data set forth below as of June 30, 1998, and for the six
months ended June 30, 1997 and 1998 are derived from OSI's unaudited financial
statements, which appear elsewhere in this Proxy Statement/Prospectus. In the
opinion of OSI management, the unaudited financial statements have been prepared
on a basis consistent with the financial statements which appear elsewhere in
this Proxy Statement/Prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the financial
position and results of operations for these unaudited periods. The operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results to be expected for the full year ending December 31, 1998. The data
set forth below should be read in conjunction with "OSI Management's Discussion
and Analysis of Financial Condition and Results of Operations" and OSI's
financial statements, including the notes thereto, included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License and maintenance ........... $ -- $ -- $ 220 $ 879 $ 4,505 $ 1,304 $ 3,351
Installation and implementation ... -- -- 48 140 1,959 633 2,028
Hardware and other ................ 95 -- -- -- 185 32 390
------- ------- ------- ------- ------- ------- -------
Total revenues ................. 95 -- 268 1,019 6,649 1,969 5,769
Operating expenses:
License and maintenance .......... -- -- 381 1,100 1,801 647 1,022
Installation and implementation .. -- -- 319 937 2,416 1,098 1,559
Hardware and other ............... 25 -- -- -- 93 14 493
Sales and marketing .............. 60 136 398 1,051 2,132 955 1,562
Product development .............. 436 985 661 1,060 1,902 995 919
General and administrative ....... 50 84 399 645 1,569 740 1,346
Contract termination ............. -- -- -- -- -- -- 1,265
------- ------- ------- ------- ------- ------- -------
Total operating expenses ....... 571 1,205 2,158 4,793 9,913 4,449 8,166
------- ------- ------- ------- ------- ------- -------
Loss from operations ............... (476) (1,205) (1,890) (3,774) (3,264) (2,480) (2,397)
Interest income (expense), net ..... (37) 14 (5) 136 209 75 181
------- ------- ------- ------- ------- ------- -------
Net loss ........................... $ (513) $(1,191) $(1,895) $(3,638) $(3,055) $(2,405) $(2,216)
======= ======= ======= ======= ======= ======= =======
Net loss per common share (basic and
diluted) ......................... $ (0.25) $ (0.61) $ (0.98) $ (1.73) $ (1.42) $ (1.12) $ (1.01)
Weighted average common shares used
to compute net loss per share .... 2,079 1,955 1,936 2,103 2,155 2,146 2,192
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ....................................... $ 2 $ 652 $ 3,914 $ 4,438 $ 7,596 $ 6,333
Working capital (deficit) ....................................... (100) 660 3,570 4,901 6,198 5,818
Total assets .................................................... 67 771 4,354 7,546 11,302 12,413
Long-term debt, less current portion ............................ 730 250 -- -- 58 --
Mandatorily redeemable convertible preferred stock and warrants.. -- -- 5,092 10,573 15,551 16,140
Stockholders' equity (deficit) .................................. (764) 521 (1,253) (4,779) (7,826) (8,412)
</TABLE>
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OSI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
OSI is a leading provider of client/server core processing software
and related services to small to mid-size banks and credit unions. OSI
established operations in May 1992, and released its first major product, The
Complete Banking Solution, in the second quarter of 1995. OSI released a second
major product, The Complete Credit Union Solution, in the first quarter of 1998.
These two products (the "OSI System") are fully-integrated suites of banking and
credit union applications that operate in a Windows NT environment using an
Oracle relational database. The OSI System supports an institution's entire core
processing requirements, including deposits and loans, teller functions,
home/Internet banking and platform automation.
As of June 30, 1998, 31 banks and one credit union utilized the OSI
System. An additional 38 banks were in various stages of implementation,
including 13 banks owned by three bank holding companies and nine banks
utilizing outsourcing services provided by OSI's outsourcing partners.
OSI currently markets its products in the United States directly and,
through an alliance with Unisys PAAG ("Unisys"), in Asia (except Japan), South
Africa and certain other countries. OSI has established software license and
marketing agreements with BISYS and COCC under which these third parties use the
OSI System to provide core processing services to banks and credit unions on an
outsourced basis. Under the agreement with BISYS, software license fees are paid
to OSI over a three-year period following BISYS' implementation of each OSI
System. OSI recognized $115,658 under the BISYS agreement through June 30, 1998,
comprised primarily of consulting related revenue. Under the agreement with
COCC, software license fees are paid, and revenues are recognized, upon
implementation of each OSI System. Under this agreement, once cumulative
software license fees total a stipulated amount, COCC is released from any
further obligation to pay license fees. This release is subject to a one-time
payment in December 2002 if the asset base of COCC's customers has exceeded a
specified amount. Under both the BISYS and COCC agreements, OSI is also entitled
to annual support and maintenance payments on each installed OSI System. OSI
recognized revenue of $308,278 under the COCC agreement in the six months ended
June 30, 1998. Of this amount OSI recognized $250,000 for the delivery of the
OSI System source code to COCC. OSI will earn an additional $250,000 for
implementation assistance on the first three COCC customers. Apart from these
fees, OSI does not expect to recognize significant revenues from its agreements
with Unisys and COCC until 1999 at the earliest.
OSI's revenues are primarily derived from two sources: (i) license
and maintenance revenues and (ii) installation and implementation fees. OSI
derives other revenues from computer hardware product sales, consulting revenues
and marketing referral commissions. License and maintenance revenues primarily
include revenues from software licenses for the OSI System and customer support
and maintenance fees for providing on-going support and product updates.
Customer support and maintenance fees are established as a percentage of the
list price for the software license and are paid annually. Support and
maintenance agreements generally have a term of 12 months and are renewable
annually. As of June 30, 1998, all users of the OSI System were covered by
support and maintenance agreements. OSI also derives software license revenues
from the sale of third-party software sublicensed by OSI. Software license fees
are generally based on the bank's asset size and the number of accounts and
typically are payable upon delivery of the software. OSI derives installation
and implementation revenues from implementation planning, system installation,
data conversion and training of customer personnel, fees for which are based on
customer size and the magnitude and complexity of the project.
Effective January 1, 1997 OSI adopted AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). Under SOP 97-2, OSI
recognizes software license revenue when a noncancelable license agreement has
been executed, fees are fixed and determinable, the software has been delivered,
and accepted by the customer if acceptance is required by the contract and other
than perfunctory, and collection is considered probable. Prior to 1997, OSI
recognized software license revenue in accordance with AICPA Statement of
Position 91-1, "Software Revenue Recognition" ("SOP 91-1"). Under SOP 91-1, OSI
recognized software license revenue when the software was delivered,
collectibility was probable and no other significant post-delivery obligations
remained.
In December 1997, OSI revised its standard end user license agreement
to eliminate certain customer acceptance provisions that required the deferral
of software license revenue recognition until after implementation was
completed, which generally lagged software delivery by three to four months. The
anticipated impact of the revised end user license agreement on future results
will be to eliminate the deferral of software license revenue pending completion
of
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implementation. OSI expects that its future licensing arrangements will
generally be governed by the revised license agreement, although licenses sold
under the previous agreement will continue to affect revenue recognition through
1998 and certain new agreements may contain acceptance or other provisions that
have the effect of deferring software license revenue recognition. Such
differences in the timing of revenue recognition will impact the comparability
of OSI's historical revenues and operating results to future results of
operations.
OSI is assessing its major internal management systems for Year 2000
readiness. This assessment includes identification of all critical information
management systems, testing the Year 2000 readiness of such systems and making
corrective fixes to non-compliant systems. OSI's plan also includes obtaining
compliance verification from third party vendors supplying critical software and
information systems to OSI, and communication with significant suppliers to
determine their plans to address their own Year 2000 issues. OSI has not
completed its assessment, but intends to take any corrective action necessary as
a result of such review. All costs associated with OSI's plan for Year 2000
compliance are being expensed as incurred. The total cost associated with
internal Year 2000 issues has not been, and is not expected to be, material to
OSI's business, financial condition or results of operations. OSI expects to
complete its Year 2000 assessment by June 30, 1999. Nevertheless, OSI may not
timely identify and remediate all significant Year 2000 problems and remedial
efforts may involve significant time and expense. Although OSI believes the OSI
System complies with Year 2000 requirements, there can be no assurance that
customers will not encounter difficulties with the OSI System arising from Year
2000 issues. In addition, there can be no assurance that Year 2000 issues will
not adversely affect third-party network or application software that is
integrated with the OSI System. Finally, there can be no assurance that any Year
2000 compliance problems of OSI or its customers or suppliers will not have a
material adverse effect on OSI's business, financial condition or results of
operations.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ --------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
License and maintenance ......... 81.9% 86.2% 67.8% 66.2% 58.1%
Installation and implementation.. 18.1 13.8 29.4 32.2 35.1
Hardware and other .............. -- -- 2.8 1.6 6.8
------ ------ ------ ------ ------
Total revenues ............... 100.0 100.0 100.0 100.0 100.0
Operating Expenses:
License and maintenance ......... 142.0 107.9 27.1 32.9 17.7
Installation and implementation.. 119.1 92.0 36.3 55.7 27.0
Hardware and other .............. -- -- 1.4 0.7 8.6
Sales and marketing ............. 148.6 103.0 32.1 48.5 27.1
Product development ............. 246.3 104.0 28.6 50.6 15.9
General and administrative ...... 149.0 63.3 23.6 37.6 23.3
Contract termination ............ -- -- -- -- 21.9
------ ------ ------ ------ ------
Total operating expenses ..... 805.0 470.2 149.1 226.0 141.5
Loss from operations .............. (705.0) (370.2) (49.1) (126.0) (41.5)
Interest income (expense), net .... (1.7) 13.3 3.2 3.8 3.1
------ ------ ------ ------ ------
Net loss .......................... (706.7)% (356.9)% (45.9)% (122.2)% (38.4)%
====== ====== ====== ====== ======
</TABLE>
Six Months Ended June 30, 1998 and June 30, 1997
Revenues. Revenues increased 193.0% to $5.8 million for the six
months ended June 30, 1998 from $2.0 million for the six months ended June 30,
1997. License and maintenance revenues increased 157.1% to $3.4 million for the
six months ended June 30, 1998 from $1.3 million for the six months ended June
30, 1997. This increase was primarily due to increased software license revenue
from increased sales of the OSI System and, to a lesser extent, an increase in
the installed base of customers under support and maintenance agreements. OSI's
installed customer base was 31 at June 30, 1998 compared with 15 at June 30,
1997. In addition, during the six months ended June 30, 1998, OSI recognized
revenues of $250,000 upon delivery of source code to COCC for the OSI System
pursuant to the agreement with COCC. For the six months ended June 30, 1998 and
1997, software license revenues included $534,887 and $269,500,
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respectively, related to third-party software products, primarily Oracle's
relational database management software, which were sold by OSI with the OSI
System under various sublicense agreements.
Installation and implementation revenues increased 220.4% to $2.0
million for the six months ended June 30, 1998 from $632,850 for the six months
ended June 30, 1997. This increase in revenues was primarily due to
implementation fees on a larger number of completed or in-process installations.
Hardware and other revenue increased 1,111.6% to $389,836 for the six months
ended June 30, 1998 from $32,174 for the six months ended June 30, 1997. This
increase in other revenue was primarily due to increased hardware product sales,
commission and consulting revenues.
OSI's backlog at June 30, 1998 was approximately $9.6 million, which
represented the unrecognized portion of contractually committed software license
and implementation fees.
Cost of revenues. Cost of license and maintenance revenues consists
primarily of sublicense fees paid on third-party software products that are sold
with the OSI System, including Oracle's relational database product,
amortization of capitalized software development costs, personnel and other
costs to produce media and documentation, and personnel and facility expenses
associated with customer support and product maintenance activities. OSI
amortizes capitalized software development costs over a three-year period.
Through March 1998, cost of revenues also included royalties paid to Banking
Spectrum Services, Inc., a shareholder of OSI ("Spectrum"), and Banking
Spectrum, Inc. (together with Spectrum, "Banking Spectrum") to license certain
software products and for consulting and support services. In March 1998, OSI
entered into an agreement with Banking Spectrum that released it from paying
future royalties to Banking Spectrum. (See Note 13 of Notes to OSI's Financial
Statements). Cost of installation and implementation fees primarily consists of
personnel and related facility expenses associated with implementation, data
conversion and training activities. Cost of other revenue consists primarily of
computer hardware and consulting personnel costs.
Cost of license and maintenance. Cost of license and maintenance
revenues increased 57.9% to $1.0 million for the six months ended June 30, 1998
from $647,241 for the six months ended June 30, 1997. This increase was
primarily due to an increase in the number of Oracle relational database
licenses required to support a greater number of new installations, increased
amortization of capitalized software development costs and the hiring of
additional personnel in the customer support department. Cost of license and
maintenance revenues as a percent of license and maintenance revenues decreased
to 30.5% for the six months ended June 30, 1998 from 49.6% for the six months
ended June 30, 1997. This decline was primarily due to a larger license and
maintenance fee revenue base over which to spread costs.
Cost of installation and implementation. Cost of installation and
implementation revenues increased 42.1% to $1.6 million for the six months ended
June 30, 1998 from $1.1 million for the six months ended June 30, 1997. This
increase is primarily due to the hiring of additional personnel in the
implementation, data conversion and training departments. Cost of installation
and implementation revenues as a percentage of installation and implementation
revenues decreased to 76.9% for the six months ended June 30, 1998 from 173.4%
for the six months ended June 30, 1997. This decrease was primarily due to a
larger installation and implementation revenue base and productivity gains
achieved in the implementation and training functions. OSI anticipates that the
dollar amount of installation and implementation costs will increase in future
periods as OSI expands its implementation and training staff to accommodate
future growth.
Sales and marketing. Sales and marketing expenses primarily include
personnel costs associated with OSI's sales and marketing activities, including
sales commissions, travel and related overhead, and expenses incurred in
connection with trade shows, advertising, product literature and other
promotional activities. Sales and marketing expenses increased 63.7% to $1.6
million for the six months ended June 30, 1998 from $954,373 for the six months
ended June 30, 1997. This increase was primarily due to an increase in sales
department personnel, increase in advertising and promotion, increase in travel
and entertainment expenses and increased sales commissions paid on higher
revenues. Sales and marketing expenses as a percentage of total revenues
decreased to 27.1% for the six months ended June 30, 1998 from 48.5% for the six
months ended June 30, 1997. This decrease was primarily due to a larger revenue
base over which to spread costs. OSI anticipates that the dollar amount of its
sales and marketing expenses will increase in future periods as OSI expands its
sales force and increases advertising and promotional expenditures.
Product development. Product development expenses consist of
personnel and related overhead expenses for programmers and outside consultants
involved in developing and maintaining new and existing software products. OSI
accounts for software development costs under Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("SFAS 86"). Product development expenses are
charged to expenses as incurred until technological feasibility is established.
Thereafter, costs are capitalized until the
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product is released to the market. OSI defines technological feasibility as the
point in time at which OSI has a working model of the related product.
Capitalized software costs are amortized over three years. Product development
expenses decreased 7.7% to $918,356 for the six months ended June 30, 1998 from
$995,216 for the six months ended June 30, 1997. This decrease was primarily due
to increases in capitalized software that more than offset increases in expenses
associated with additional staffing. OSI capitalized software development costs
of $235,442 and $34,977 for the six months ended June 30, 1998 and 1997,
respectively, in accordance with SFAS 86. Product development expenses as a
percentage of total revenues decreased to 15.9% for the six months ended June
30, 1998 from 50.6% for the six months ended June 30, 1997. This decrease was
primarily due to a larger revenue base over which to spread costs. OSI
anticipates that product development costs will increase in absolute terms in
future periods as OSI continues its development work on future releases of the
OSI System.
General and administrative. General and administrative expenses
primarily include personnel costs associated with the executive, administrative
and finance staff, as well as outside professional fees and other administrative
costs. General and administrative costs increased 81.9% to $1.3 million for the
six months ended June 30, 1998 from $739,708 for the six months ended June 30,
1997. This increase was primarily due to the addition of personnel to support
OSI's growth, increased professional services and increased computer supplies.
OSI believes that the dollar amount of its general and administrative costs will
continue to increase in future periods to accommodate anticipated growth and
expenses associated with its responsibilities as a public company. General and
administrative expenses as a percentage of total revenues decreased to 23.3% for
the six months ended June 30, 1998 from 37.6% for the six months ended June 30,
1997. This decrease was primarily due to a larger revenue base over which to
spread costs.
Contract termination. In January 1994, OSI entered into an agreement
with Banking Spectrum to license certain software products and for consulting
and support services. Pursuant to the agreement OSI agreed to pay Banking
Spectrum a royalty based on the licensing of software products and related
services, ranging from three percent to 17% of net revenues, based on Banking
Spectrum's involvement in the sale of such products and services.
In March 1998, OSI and Banking Spectrum entered into an agreement
that terminated their previous agreement. The agreement released OSI from any
future royalty payments to Banking Spectrum in exchange for a cash payment of
$100,000 to Banking Spectrum and fully vested options to shareholders of
Spectrum to purchase 275,000 shares of Common Stock at an exercise price of
$0.45 per share. The stock options were estimated by management to have a fair
value of approximately $1.6 million. Net of amounts previously accrued, OSI
recorded a contract termination expense of approximately $1.3 million for the
six months ended June 30, 1998.
Interest income (expense), net. For the six months ended June 30,
1998, OSI's cash balance was higher than in 1997 resulting in higher interest
income, which was partially offset by interest expense relating to an equipment
loan.
Years Ended December 31, 1997 and 1996
Revenues. Total revenues increased 552.3% to $6.6 million in 1997
from $1.0 million in 1996. License and maintenance revenues increased 412.5% to
$4.5 million in 1997 from $879,138 in 1996. This increase was primarily due to
increased sales of the OSI System and, to a lesser extent, an increase in the
installed base of customers under support and maintenance agreements. For the
years ended December 31, 1997 and 1996, license revenue included $1.0 million
and $187,940, respectively, related to third party software products, primarily
Oracle's relational database. Installation and implementation revenues increased
1,296.8% to $2.0 million in 1997 from $140,255 in 1996. This increase in
installation and implementation revenues was primarily due to a larger number of
completed or in-process installations.
Cost of license and maintenance. Cost of license and maintenance
revenues increased 63.7% to $1.8 million in 1997 from $1.1 million in 1996. This
increase was primarily due to an increase in the number of Oracle relational
database software licenses required for the increased number of new
installations, increased royalties paid to Banking Spectrum and increased
staffing in the customer support department. Cost of license and maintenance
revenues as a percent of license and maintenance revenues decreased to 40.0% in
1997 from 125.1% in 1996. This decrease was primarily due to a larger revenue
base over which to spread costs, including larger software license fees and
support and maintenance revenue.
Cost of installation and implementation. Cost of installation and
implementation revenues increased 157.8% to $2.4 million in 1997 from $937,541
in 1996. This increase was primarily attributable to increased staffing in the
implementation, data conversion, and training departments to support OSI's
growth. Cost of installation and implementation revenues as a percentage of
installation and implementation revenues decreased to 123.4% in 1997 from
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668.5% in 1996. This decrease was primarily due to a larger installation and
implementation revenue base and productivity gains achieved in the
implementation and training functions as a result of a larger number of
installations.
Sales and marketing. Sales and marketing expenses increased 102.9% to
$2.1 million in 1997 from $1.1 million in 1996. This increase was primarily due
to an increase in sales and marketing personnel, increased sales commissions
paid on higher revenues and increased advertising and promotion expenses and
increased travel and entertainment expenses. Sales and marketing expenses as a
percentage of total revenues decreased to 32.1% in 1997 from 103.1% in 1996.
This decrease was primarily due to a larger revenue base over which to spread
costs.
Product development. Product development expenses increased 79.4% to
$1.9 million in 1997 from $1.1 million in 1996. This increase was primarily due
to increased staffing and consulting fees incurred in connection with continued
development of OSI's software products. During 1997 and 1996, OSI capitalized
software development costs of $455,078 and $153,209, respectively, in accordance
with SFAS 86. Amounts capitalized in 1997 included $240,000 related to the
acquisition of automated teller machine ("ATM") management software from a third
party. Product development expenses as a percentage of total revenues decreased
to 28.6% in 1997 from 104.0% in 1996. This decrease was primarily due to a
larger revenue base over which to spread costs.
General and administrative. General and administrative expenses
increased 143.2% to $1.6 million in 1997 from $645,334 in 1996. This increase
was primarily due to the hiring of additional accounting and executive personnel
required to support OSI's growth. General and administrative expenses as a
percentage of total revenues decreased to 23.6% in 1997 from 63.3% in 1996. This
decrease was primarily due to a larger revenue base over which to spread costs.
Interest income (expense), net. During 1997, OSI's average cash
balance was higher than in 1996, resulting in higher interest income, which was
partially offset by interest, expense relating to an equipment loan.
Years Ended December 31, 1996 and 1995
Revenues. Total revenues increased 280.2% to $1.0 million in 1996
from $268,141 in 1995. License and maintenance revenues increased 300.3% to
$879,138 in 1996 from $219,620 in 1995. This increase was primarily due to
increased sales of the OSI System and, to a lesser extent, an increase in the
installed base of customers under support and maintenance agreements. For the
years ended December 31, 1996 and 1995, license revenue included $187,940 and
$91,632, respectively, related to third-party software products, primarily
Oracle's relational database. Installation and implementation revenues increased
189.1% to $140,255 in 1996 from $48,521 in 1995. This increase in service fees
was primarily due to the increase in the number of installations in 1996.
Cost of revenues. Cost of license and maintenance revenues increased
188.9% to $1.1 million in 1996 from $380,793 in 1995. This increase was due to
increased license fees paid to third-party software providers, primarily Oracle,
increased royalties paid to Banking Spectrum and increased system documentation
personnel. Cost of installation and implementation revenues increased 193.7% to
$937,541 in 1996 from $319,213 in 1995. This increase was primarily attributable
to increased staffing in the implementation, data conversion and training
functions required to support the growth in customer installations as noted
above.
Sales and marketing. Sales and marketing expenses increased 163.7% to
$1.1 million in 1996 from $398,496 in 1995. This increase was primarily due to
an increase in the number of sales personnel, increased travel and entertainment
expenses and increased advertising and promotions. Sales and marketing expenses
as a percentage of total revenues decreased to 103.1% in 1996 from 148.6% in
1995. This decrease was primarily due to a larger revenue base over which to
spread costs.
Product development. Product development expenses increased 60.5% to
$1.1 million in 1996 from $660,510 in 1995. Product development expense
increased primarily due to increased staffing and consulting fees required to
support continued development of OSI's software products. During 1996 and 1995,
OSI capitalized software development costs of $153,209 and $119,514,
respectively, in accordance with SFAS 86. Product development expenses as a
percentage of total revenues decreased to 104.0% in 1996 from 246.3% in 1995.
This decrease was primarily due to a larger revenue base over which to spread
costs.
General and administrative. General and administrative expenses
increased 61.5% to $645,334 in 1996 from $399,576 in 1995. The increase in
expenses was primarily due to an increase in OSI's telephone and communication
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expenses increased computer and office supplies and increased travel and
entertainment expenses. General and administrative expenses as a percentage of
total revenues decreased to 63.3% in 1996 from 149.0% in 1995. This decrease was
primarily due to a larger revenue case over which to spread costs.
Interest income (expense), net. During 1995, OSI was funding
operations with bridge loans from existing investors until a December 1995
preferred stock sale. The interest on the bridge loans exceeded the interest
income earned on the operating account balance during 1995.
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SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of
operations of OSI for each of the quarters in the year ended December 31, 1997
and the six months ended June 30, 1998. In management's opinion, this unaudited
information has been prepared on the same basis as the audited Financial
Statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with OSI's Financial Statements and
Notes thereto included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License and maintenance ......... $ 732 $ 571 $ 742 $ 2,460 $ 1,413 $ 1,938
Installation and implementation.. 244 389 526 800 891 1,137
Hardware and other .............. 6 26 73 80 30 360
------- ------- ------- ------- ------- -------
Total revenues ............... 982 986 1,341 3,340 2,334 3,435
Operating expenses:
License and maintenance ......... 345 302 408 747 523 499
Installation and implementation.. 600 498 551 768 688 871
Hardware and other .............. 6 8 40 38 109 384
------- ------- ------- ------- ------- -------
Sales and marketing ............. 458 496 500 678 784 778
Product development ............. 472 523 517 390 444 475
General and administrative ...... 324 416 381 447 643 703
Contract termination ............ -- -- -- -- 1,265 --
------- ------- ------- ------- ------- -------
Total operating expenses ..... 2,205 2,243 2,397 3,068 4,456 3,710
Income (loss) from operations ..... (1,223) (1,257) (1,056) 272 (2,122) (275)
Interest income, net .............. 44 31 46 88 95 86
------- ------- ------- ------- ------- -------
Net income (loss) ................. $(1,179) $(1,226) $(1,010) $ 360 $(2,027) $ (189)
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth unaudited quarterly results of
operations as a percentage of revenues for each of the quarters in the year
ended December 31, 1997 and the six months ended June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License and maintenance ......... 74.5% 57.9% 55.3% 73.6% 60.5% 56.4%
Installation and Implementation.. 24.9 39.5 39.2 24.0 38.2 33.1
Hardware and other .............. 0.6 2.6 5.5 2.4 1.3 10.5
------ ------ ------ ------ ------ ------
Total revenues .................. 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses:
License and maintenance ......... 35.2 30.6 30.4 22.4 22.4 14.5
Installation and Implementation.. 61.0 50.5 41.1 23.0 29.5 25.4
Hardware and other .............. 0.6 0.8 3.0 1.1 4.7 11.1
Sales and marketing ............. 46.7 50.3 37.3 20.3 33.6 22.7
Product development ............. 48.0 53.1 38.5 11.7 19.0 13.8
General and administrative ...... 32.9 42.1 28.4 13.3 27.5 20.5
Contract termination ............ -- -- -- -- 54.2 --
------ ------ ------ ------ ------ ------
Total operating expenses ..... 224.4 227.4 178.7 91.8 190.9 108.0
Income (loss) from operations ..... (124.4) (127.4) (78.7) 8.2 (90.9) (8.0)
Interest income, net .............. 4.4 3.1 3.4 2.6 4.1 2.5
------ ------ ------ ------ ------ ------
Net income (loss) ................. (120.0)% (124.3)% (75.3)% 10.8% (86.8)% (5.5)%
====== ====== ====== ====== ====== ======
</TABLE>
OSI's revenues and operating results have varied substantially from
quarter to quarter. OSI's quarterly operating results may continue to fluctuate
due to a number of factors, including the timing, size and nature of OSI's
licensing transactions, lengthy and unpredictable sales cycles, the timing of
introduction and market acceptance of new products or product enhancements by
OSI or its competitors, product and price competition, the relative proportions
of revenues derived from license fees and services, changes in OSI's operating
expenses, software bugs or other product quality
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problems, personnel changes and fluctuations in economic and financial market
conditions. Accordingly, OSI believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and the results of
operations for any quarter are not necessarily indicative of future results of
operations.
Revenues of $3.3 million for the three months ended December 31, 1997
included software license and implementation revenues of $1.6 million associated
with two larger banks (assets greater than $1 billion) that were implemented in
that quarter.
LIQUIDITY AND CAPITAL RESOURCES
OSI has financed its operations primarily from the sale of preferred
stock and from a credit line for equipment purchases. OSI had net working
capital of $5.8 million at June 30, 1998, including cash and cash equivalents
totaling $6.3 million.
Cash used in operating activities was $995,822, $1.0 million, $3.9
million and $1.7 million for the six months ended June 30, 1998 and for the
years ended December 31, 1997, 1996 and 1995, respectively. Cash used in
operations during each of these periods was primarily due to net losses and an
increase in accounts receivable partially offset in each period by increases in
short-term liabilities, including deferred revenues. In 1996, the cash used in
operating activities was also attributable to expenditures for deferred project
costs. In 1997, cash flow from operations was favorably impacted by a reduction
in deferred project costs.
Cash used in investing activities was $609,864, $812,334, $850,083
and $212,037 for the six months ended June 30, 1998, and for the years ended
December 31, 1997, 1996 and 1995, respectively. Cash used during such periods
was to acquire property and equipment and for capitalized software development
costs. OSI currently has no significant capital spending or purchase
commitments, except for furniture for additional office space in the amount of
approximately $200,000, but expects to continue to engage in capital spending in
the ordinary course of business.
Cash provided by financing activities was $342,119, $5.0 million,
$5.3 million and $5.2 million for the six months ended June 30, 1998, and for
the years ended December 31, 1997, 1996 and 1995, respectively. During 1997,
1996 and 1995, OSI received $5.0 million, $5.5 million, and $5.1 million,
respectively, of net proceeds from the sale of preferred stock. In addition, OSI
received $60,000 and $120,000 in proceeds during 1996 and 1995, respectively,
from a subscription note receivable.
In 1995, OSI received and repaid $1.0 million in bridge loans from
existing investors. In September 1996, OSI entered into a $250,000 equipment
line of credit with a bank. The equipment line allowed for draw downs through
September 1997 with the outstanding borrowings on the equipment line converting
to a $104,002, nine percent term loan payable in 36 months beginning in October
1997. As of June 30, 1998, OSI had no outstanding balance under this term loan.
OSI believes that cash and cash equivalents on hand will, in light of
anticipated future cash flows, be sufficient to meet OSI's working capital
requirements for the next twelve months.
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BUSINESS OF OSI
OSI is a leading provider of client/server core processing software
and related services to small to mid-size banks and credit unions. OSI has
developed The Complete Banking Solution and The Complete Credit Union Solution
(the "OSI System"), which are fully-integrated suites of banking and credit
union applications that operate in a Microsoft Windows NT environment with an
Oracle relational database. OSI's software supports all of an institution's core
processing requirements, including deposits and loans, teller functions, home/
Internet banking and platform automation. OSI's open and flexible client/server
architecture is designed to enable its customers to reduce their core processing
and operational costs and leverage customer information to improve retention and
identify potential cross-selling opportunities. The OSI System interfaces to
third-party applications that are commonly used in banks and credit unions,
including check processing, ATMs and general ledger applications. The OSI System
enables banks and credit unions to enhance customer satisfaction and compete
more effectively in the financial services industry.
INDUSTRY BACKGROUND
Currently, there are over 20,000 banking and depository institutions
in the United States with assets of up to $3 billion, including small to
mid-size commercial banks, thrifts and credit unions. OSI believes that these
institutions, which have traditionally competed on personalized service, are
facing increasing competitive pressures to improve their efficiencies in the
areas of customer service, operations and marketing. In addition, the evolving
requirements of the electronic marketplace demand that banks expand their
traditional services to include ATMs, telephone banking and home banking through
personal computers and the Internet. Banks and depository institutions of all
sizes are also experiencing increased competitive pressures from non-bank
competitors which, as a result of the deregulation of the financial services
industry, can offer products and services traditionally marketed by banks.
In responding to these trends, small to mid-size banks and credit
unions are increasingly seeking to implement information technology systems that
will enable them to increase the efficiency of their operations, offer a broader
array of services and provide enhanced levels of customer service. These
institutions have traditionally fulfilled their information technology needs
through legacy computer systems, operated either by the institution or a service
bureau on an outsourced basis. These systems, which operate in large mainframe
or minicomputer environments, are designed primarily to batch process a large
number of transactions and create centralized financial records. Nightly batch
sessions are typically required to update each customer's account with the
business day's transactions. As a result, banks utilizing legacy systems
typically do not offer their customers real-time processing of transactions, a
feature that is becoming an increasingly important operating requirement.
Moreover, legacy systems typically store data in non-relational, sequentially
indexed files. In this environment, retrieval of customer or other information
can be burdensome and time consuming and limits an institution's flexibility in
meeting changing customer service requirements. The centralized processing and
proprietary architecture of these systems is not designed to easily support
analysis for decision-making or integrate with other business applications used
throughout the enterprise. Financial institutions relying on legacy systems
often find it difficult to conform their business processes and reporting to the
architecture of the system and are not able to easily adapt the system to their
evolving needs.
The need to improve customer service levels, enhance operating
efficiencies and lower costs has contributed to the growing acceptance of the
client/server model of computing based on open, industry-standard operating
environments and relational databases. In a client/server environment, servers
provide shared access to data and applications, while client devices such as
personal computers and workstations provide the user interface and local
processing functions. Client/server systems can improve information sharing by
providing access at each desktop to critical customer and transaction data and
business applications, which had historically been restricted or difficult to
access in legacy environments. Client/server applications enable organizations
to streamline core business practices and reporting and to make faster, more
informed decisions. The client/server model is also scalable as capacity can be
increased by upgrading the server or linking multiple servers. In addition, the
client/server model offers flexibility in that additional functionality can
easily be provided through third-party applications.
OSI believes that, until recently, the adoption of client/server
systems in many banks and credit unions has lagged other industries due to the
limited number of suppliers of open client/server systems designed specifically
to address the core processing requirements of such institutions. In part, this
has been attributable to the industry's long-standing reliance on legacy systems
and the high-volume processing requirements of larger banks. Among smaller
banking institutions, which OSI believes are best positioned to benefit from the
implementation of client/server systems, the adoption of such systems has been
hampered by the absence of cost effective client/server systems designed
specifically for use by such
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institutions. OSI believes that fewer than 200 small to mid-size banks and
credit unions in the United States have implemented open client/server core
processing systems.
OSI believes that banks and credit unions today are seeking
information technology solutions that combine the performance, reliability and
security associated with legacy-based systems with the flexibility, ease-of-use,
scalability and reduced cost of ownership associated with client/server systems.
Banks and credit unions require systems that can be easily integrated with other
applications used in the enterprise, provide real-time transaction processing
and comply with applicable regulatory requirements. Banks and credit unions also
require core processing systems that are able to accommodate new and emerging
technologies, such as ATMs, telephone banking and home banking via personal
computers and the Internet. In addition, these institutions require systems that
are Year 2000 compliant. Banks and credit unions are also seeking information
technology solutions that offer quick and effective access to customer and
account data in order to offer better, more customized services, monitor trends
and performance and cross-sell services and products. A client/server core
processing solution must be able to meet all of these requirements to enable
banks and credit unions to achieve a competitive advantage in their markets
through improved customer service, lower costs and enhanced access to customer
information.
THE OSI SOLUTION
The OSI System enables financial institutions to process transactions
and access critical customer and account data through a suite of open,
distributed application modules that operate in a Microsoft Windows NT
environment with an Oracle relational database. OSI's solutions are designed to
provide its customers with the following benefits:
- Fully-Integrated Solution. The OSI System supports all of an
institution's core processing requirements, including those of its
branch offices. The OSI System accommodates telephone banking and
home banking via personal computers and the Internet, and provides
ATM management capabilities. All components of the OSI System utilize
a common relational database and operating system. This architecture
allows a bank to provide its customers with real-time information
concerning their accounts and to create real-time management reports.
The OSI System also eliminates potential errors arising from the
maintenance of multiple databases and enables institutions to change
their business processes without requiring the modification of the
underlying data model.
- Enhanced Customer Service Through Real-Time Processing. The OSI
System allows a bank's customers and employees to access and process
information on a real-time basis, which enables a bank's customers to
receive up to the minute account and transaction information from any
branch, telephone, home or Internet location. The OSI System also
enables bank employees to quickly identify customers and gather
accurate and current information about the entire customer
relationship. Availability of this information enables institutions
to improve their level of customer service and provide them with
incremental opportunities for marketing additional products and
services.
- Open Architecture. The OSI System operates in an open environment
using the Microsoft Windows NT operating system and the Oracle
relational database management system, which are installed on
non-proprietary hardware. The flexible, open architecture of the OSI
System facilitates the use of popular, off-the-shelf third-party
software and the addition of more processing capability as the
institution's requirements increase.
- Reduced Cost of Ownership. The OSI System can reduce the overall cost
of ownership of a financial institution's core system. By integrating
core banking functions, which have historically run on separate
systems, into one seamless environment, the OSI System enables its
customers to achieve operational efficiencies. The OSI System can
also reduce the costs that would otherwise be associated with the
ongoing maintenance of legacy systems. In addition, the time and
expense required to adapt the OSI System to accommodate changing
business processes and regulatory requirements is less than that
required with a typical legacy system. The ability of the OSI System
to operate across a broad range of popular hardware provides
customers with increased flexibility and the ability to select the
most cost-effective system.
STRATEGY
OSI's objective is to be the leading supplier of enterprise-wide
client/server software for small to mid-size banks and credit unions. OSI's
strategy for achieving this objective includes the following:
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- Focus on Small to Mid-Size Banks and Credit Unions. OSI will continue
to focus on providing core processing solutions to small to mid-size
banks and credit unions, which OSI defines as institutions with
assets up to $3 billion. OSI believes that the client/server model of
computing is particularly well-suited for institutions in this
market. These institutions, unlike larger banks, typically do not
require extensive customization in connection with the implementation
of a banking system which makes it easier for them to realize the
benefits of client/server core processing systems in a cost-effective
manner. OSI believes that the demand for client/server systems in
this market is increasing as a result of these factors.
- Expand Distribution Through Outsourcing Solutions. A number of small
to mid-size banks and credit unions outsource their core processing
systems to third-party service providers. These third-party service
providers typically choose one or more significant banking solutions
on which they base their outsourcing services. OSI has established
strategic relationships with BISYS, a major national outsourcing
provider, and COCC, a major regional outsourcing provider, under
which these third parties provide outsourced processing services to
the financial services industry using the OSI System. OSI plans to
continue to jointly market the OSI System with its outsourcing
partners to expand its installed customer base.
- Leverage Customer Base. OSI intends to continue to leverage its
installed customer base by expanding the range of complementary
products and services available to its customers. OSI generates
recurring revenues by entering into maintenance arrangements with its
customers that provide for annual service fees. As the asset size or
number of accounts of a financial institution increases, or as
additional application modules or services are provided, customers
typically pay incremental license and maintenance fees. OSI plans to
continue to expand its professional services offerings to its
installed base of customers as they implement additional application
modules.
- Maintain Product Leadership. OSI believes that the open client/server
architecture of the OSI System provides it with competitive
advantages over other core processing systems. For example, the OSI
System offers on-line, real-time transaction processing capabilities
that are not available in many competitive systems, and OSI recently
announced the introduction of a home/Internet banking module
supporting the Open Financial Exchange ("OFX") standard, which
enables customers to access bank services using personal computers
and the Internet. OSI's open architecture enables it to utilize
leading, non-proprietary software and hardware to provide
comprehensive functionality. OSI intends to extend its technological
leadership by continuing to add new applications, integrate new
technologies and expand the functionality of its system.
TECHNOLOGY
OSI developed the OSI System to enable customers to realize the
advantages of client/server architectures. The OSI System is designed to offer
the following benefits: (i) flexible functionality, scalability, and high
performance, (ii) lower total cost of ownership, (iii) the ability to operate
either in real-time or batch processing mode and (iv) integration with
third-party applications and emerging technologies. OSI believes that the OSI
System achieves these objectives through an open architecture that is based on
leading technologies in the areas of operating systems, relational databases,
graphical user interfaces and report generation tools.
The foundation of the OSI System is an enterprise-wide relational
database. The OSI System uses relational database software from the industry's
leading supplier, Oracle Corporation. The OSI System's functionality is
implemented through application modules, each of which performs a specific core
processing function, that share the data in the relational database. This
approach allows for database normalization and business modeling. Through
database normalization, data is organized in tables that are easily accessible
through a variety of query tools as well as the application modules. The OSI
System's data model consists of over 600 tables, which OSI believes is
substantially greater than the number of tables in the data models of competing
solutions. As a result, a higher degree of independence between a customer's
business processes and underlying data is achieved and the OSI System is more
scalable and adaptable to changing business needs. New application modules may
be developed or existing modules may be altered as required without having to
change the underlying data model.
The OSI System is based on a single, enterprise-wide database as
opposed to a distributed database in which the database is spread among two or
more components, typically resident on different computers. The principal
benefit of an architecture using a single enterprise-wide database is that it
permits real-time processing so that, for example, transactions are immediately
reflected in a bank or credit union customer's account. This contrasts with a
batch processing approach in which all accounts are updated only at scheduled
intervals, typically at the end of the business day. The OSI System may
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be configured to operate in either batch mode or a hybrid batch/real-time mode
for those banks or credit unions that do not require or desire real-time
processing.
The OSI System is a 32-bit Microsoft Windows NT application that
operates in an open systems environment. The system does not require any
proprietary hardware components and is currently deployed on a wide range of
client and server platforms. The system features multi-level security that takes
advantage of the features of the underlying operating system and relational
database as well as offers some that are indigenous to the system. The OSI
System also interfaces to a broad range of third-party applications and
peripherals that are commonly used in banks and credit unions.
PRODUCTS
The OSI System is an enterprise-wide solution that addresses the core
processing requirements of small to mid-size banks and credit unions and other
financial institutions. The OSI System consists of software application modules
that operate on a fully-integrated basis and is designed to be Year
2000-compliant. OSI recently released its OSI/ATM Server, the OSI home/Internet
banking module and a 32-bit version of the OSI System. In addition, OSI markets
third-party applications that are commonly used in banks and credit unions.
Current prices for the base OSI System software license range from approximately
$140,000 to $1.5 million, depending on asset size and number of customer
accounts.
Application Modules
The following table describes certain application modules of the OSI
System:
<TABLE>
<CAPTION>
APPLICATION DESCRIPTION
- ----------- -----------
<S> <C>
Customer Service......................................... Provides a quick and comprehensive view of each customer
relationship; maintains customer's picture and signature
for recognition; supports opening and maintenance of all
types of accounts and provides a measure of an individual
customer's profitability; enables tellers to complete an
entire transaction on-line in the presence of the
customer.
Comprehensive Lending.................................... Provides comprehensive management of all loans, whether
mortgage, consumer or commercial, including establishment
of escrow, insurance and tax accounts; can provide
loan-loss reserve calculations based on risk ratings and
loan classifications; includes "what if" loan calculator
and amortization schedule.
Depository System........................................ Supports all forms of deposit instruments, including
passbook and statement savings, club accounts and
checking accounts, share drafts (credit unions),
certificates of deposit and time deposits and repurchase
agreements.
Teller Application....................................... Provides a teller with real-time access to the bank's
database and a complete profile of the bank's clients
(including a customer's picture and signature); easily
navigated by the teller and does not require transaction
codes.
General Ledger Interface................................. Easy-to-use module designed to manage interfaces to
popular general ledger systems.
</TABLE>
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<TABLE>
<S> <C>
Bank and Branch Operations............................... A comprehensive and secure administrative management tool
for determining user accessibility, security, hours of
operation, cash boxes and authorization structures.
End of Day Production.................................... Identifies and schedules all end of day processing,
including updating of interest, fees and other charges,
and produces daily production reports and customer
statements.
Executive Information.................................... Enables management to monitor bank's performance through
on-line queries of any product or branch; tools can
generate new reports in graphical or tabular form based
upon ad hoc information requests.
External File Manager.................................... Manages all data that must be entered into the database
from external sources, including check clearings, ACH
(automatic clearing house), loan origination and ATM
transaction files.
Payroll.................................................. Enables updating of all payroll accounts provided through
an ACH format or from outside payroll systems.
Product Manager.......................................... Enables bank to design and promote new loan, checking and
deposit products and to monitor current product
offerings; uses fill-in-the-blank, easy-to-follow
screens with user defined fees and rate schedules that
allow for unlimited tiering.
IRS/Year-End Reporting................................... Supports year-end IRS reporting information for both
standard and specialized forms.
Forms Integration........................................ Integrates generation of forms, includes new account
documents, disclosures, signature cards and passbooks;
eliminates need to inventory pre-printed forms.
</TABLE>
OSI/ATM Server
The OSI/ATM Server is an ATM management system that provides banks
with the capability to directly manage their own ATM network or interface with
regional ATM networks. The OSI/ATM Server enables customers to reduce costs
associated with ATM systems and provides features such as real-time, single
balance update capabilities, support for multiple ATM transactions and
processing and authorization options. In addition, the OSI/ATM Server enables
banks to define their own operating parameters without the need for program
modifications. The system, which operates on Stratus computers, is designed to
provide fault-tolerant reliability. The OSI/ATM Server is fully integrated with
the OSI System. Current list prices for the OSI/ATM Server module range from
approximately $45,000 to $90,000.
Home/Internet Banking Module
OSI's home/Internet banking module enables customers to remotely
access an online banking system through which a customer can transfer funds from
transaction accounts, make balance inquiries, generate instant statements and
monitor account activity. OSI's system supports the OFX standard, which enables
the system to interface to bank services that use a variety of devices to
originate customer transactions. Through the OFX standard, the OSI System can
also be integrated with commonly-used personal financial management products,
such as Microsoft's Money 98 and Intuit's Quicken. Current list prices for the
home/Internet banking module range from approximately $50,000 to $100,000.
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Third-Party Applications
The open architecture of the OSI System facilitates the integration
of third-party applications, and OSI offers various third-party applications for
use with the OSI System. Such applications include: asset/liability management,
check and statement imaging, collection management, disaster recovery planning,
general ledger, voice response, loan origination and on-line ATM interface.
SALES AND MARKETING
OSI markets its software and services primarily through its direct
sales force. As of June 30, 1998, OSI employed 22 sales and marketing personnel.
OSI's marketing program includes direct mail, networking,
telemarketing, advertising in industry specific trade journals and periodicals,
seminars and trade shows. OSI maintains an Internet web site from which
prospective customers can retrieve and view product information. OSI has
established an alliance with Unisys PAAG under which Unisys has exclusive rights
to market the OSI System in Asia (except Japan), South Africa and certain other
countries. OSI has established strategic relationships with Oracle Corporation,
Compaq Computer Corporation and Stratus Computer, Inc. providing for joint
marketing efforts.
Historically, a significant portion of all banks and credit unions
have chosen to satisfy their information technology needs through service
bureaus. To address this market, OSI has entered into software license and
marketing agreements with BISYS and COCC under which these third parties provide
outsourced core processing services to the financial services industry using the
OSI System.
Pursuant to a Software License and Marketing and Distribution
Agreement with BISYS, OSI has granted BISYS the exclusive right in the United
States, subject to certain exceptions (including OSI's right to use regional
providers of outsourcing services), to use the OSI System to provide outsourcing
of core processing services to banks and credit unions. The OSI System may not
be sublicensed by BISYS, and all proprietary rights to the OSI System remain
with OSI. This right becomes non-exclusive if BISYS fails to obtain a specified
number of customer contracts, or pay the minimum required license and
maintenance fees in each of these first three years. BISYS has agreed that OSI
shall be its exclusive provider of client/server core processing systems for
BISYS during the term of the Agreement. Royalty payments under the Agreement are
consistent with those paid by other outsourcing providers of the OSI System. OSI
has agreed to provide BISYS with pricing and other terms at least as favorable
as those granted by OSI to other outsourcing providers. Pursuant to the
agreement, the parties engage in joint marketing of each other's products and
services and refer potential customers to each other. As of June 30, 1998, BISYS
had entered into outsourcing agreements with five institutions.
OSI has also entered into a License and Marketing Agreement with COCC
under which OSI has granted COCC certain exclusive rights to use the OSI System
to provide outsourced core processing services to banks and credit unions in the
New England states and New York. COCC must meet certain customer milestones to
maintain its exclusivity. OSI receives license fees with respect to outsourced
data processing agreements entered into by COCC, subject to a cumulative maximum
payment, as stipulated in the agreement. As of June 30, 1998, COCC had entered
into outsourcing agreements with four institutions.
CUSTOMERS
OSI's customers are primarily small to mid-size banks and credit
unions, typically with fewer than ten branches, that serve the banking needs of
their local communities. These banks are often the primary local providers of
savings accounts and consumer, mortgage and commercial loans in the markets they
serve. The majority of OSI's customers are located in the Northeast region,
although OSI is expanding its presence in other regions. As of June 30, 1998, 30
banks and one credit union utilized the OSI System. An additional 39 banks were
in various stages of implementation, including 13 banks owned by three bank
holding companies and nine banks utilizing outsourcing services provided by
OSI's outsourcing partners. The average asset size of OSI's current customer
base is approximately $245 million.
Sales to the Hawthorne Savings and Loan Association accounted for
approximately 11% of total revenues in the six months ended June 30, 1998. Sales
to The Savings Bank of Manchester and The Savings Bank of Utica accounted for
approximately 17% and 15% of total revenues, respectively, in the year ended
December 31, 1997. Sales to American Federal Bank, Gloversville Federal Savings
and Loan Association, Dean Cooperative Bank and Signet Bank accounted for
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approximately 38%, 22%, 20% and 14% of total revenues, respectively, in the year
ended December 31, 1996. Sales to Seneca Falls Savings Bank and The Simsbury
Savings Bank accounted for approximately 56% and 43% of total revenues,
respectively, in the year ended December 31, 1995. OSI anticipates that no
customer will account for more than 10% of revenues in the year ending December
31, 1998.
SERVICES
OSI provides comprehensive implementation and training services to
customers who purchase the OSI System. An implementation team works with the
customer through all phases of the project, including software installation,
data conversion, education and training. Full implementation of the OSI System
typically occurs over a 14 to 24 week period, depending on the complexity of the
conversion. OSI also provides post-implementation customer support and
maintenance. As of June 30, 1998, OSI had 62 employees dedicated to
implementation, training, support and maintenance.
- Implementation. OSI assigns to each customer a project manager who
coordinates all activities related to the implementation of the OSI
System. OSI also assigns conversion programmers who convert a bank's
current account data to the relational database in the OSI System.
Data conversion activities include data mapping, program development,
testing, data auditing and a complete trial conversion prior to the
final implementation date.
- Training. OSI offers a comprehensive education and training program
to its customers. OSI offers training classes at its headquarters in
Connecticut and hands-on application training at the customer site
prior to installation of the OSI System. In addition, on-site
training for ancillary products is available upon request. OSI also
assists customers desiring to adapt the OSI System to particular
needs, including customer-specific software features, reports or
regulatory requirements.
- Support and Maintenance. Support and maintenance personnel provide
immediate telephone response service during normal working hours,
supplemented by on-call support 24 hours a day, seven days a week.
OSI also provides product support services through the Internet,
electronic mail and facsimile. In addition, OSI offers remote product
support services whereby OSI's support team directly connects to a
customer's server to troubleshoot or perform routine maintenance. OSI
enters into maintenance agreements with its customers pursuant to
which they pay an annual maintenance fee, based on a percentage of
the license fee, over the term of the software license. See "OSI
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
PRODUCT DEVELOPMENT
OSI plans to continue to invest significant resources to maintain and
enhance its current product and service offerings. OSI's principal product
development focus is on: (i) enhanced functionality of the OSI System through
the development of new features and improvements to existing applications
modules, (ii) software updates as new versions of the Windows NT operating
system and Oracle relational database are released and (iii) tools to automate
the process of converting a customer's legacy data to the OSI System.
As of June 30, 1998, OSI employed a staff of 28 employees engaged in
product development. OSI's product development expenditures were approximately
$918,356, $1.9 million, $1.1 million and $660,510 for the six months ended June
30, 1998 and the years ended December 31, 1997, 1996 and 1995, respectively.
COMPETITION
The financial services software market is intensely competitive and
subject to rapid technological change. Competitors vary in size and in the scope
and breadth of products and services offered. OSI encounters competition in the
U.S. from a number of competitors which offer alternative client/server systems
to banks and credit unions, including M&I Eastpoint, Phoenix International Ltd.,
Inc. and Prologic Corporation, and a number of competitors, including Fiserv,
Inc., NCR Corporation, EDS, Marshall & Ilsley Corporation, Jack Henry &
Associates, Inc., ALLTEL Corporation and Kirchman Corporation, all of which
offer legacy core processing systems or outsourcing alternatives to banks and
credit unions. OSI also competes against a number of smaller, regional
competitors. In addition to these competitors, OSI competes internationally with
Misys plc Banking Division (including Midas-Kapiti International, Inc., Kindle
Banking Systems and ACT Financial Systems), Sanchez Computer Associates, Inc.
and Financial Network Services, among others. OSI also competes with other core
processing alternatives, including in-house applications, which were either
developed
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internally or purchased from third-party vendors, and outsourcing, either as a
part of a total outsourcing solution or through a service bureau arrangement.
Furthermore, OSI expects additional competition from other established and
emerging companies as the client/server application software market continues to
expand. There can be no assurance that OSI will be able to compete successfully
against either its existing or future competitors.
In general, OSI competes on the basis of product architecture and
functionality, service and support, including the range and quality of technical
support, training and implementation services, and product pricing in relation
to performance and support.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
OSI relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. OSI seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. OSI's license agreements contain provisions which limit
the number of users, state that title remains with OSI and protect
confidentiality. OSI presently has no patents or patent applications pending.
Despite OSI's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of OSI's products or to obtain and use
information that OSI regards as proprietary. Policing unauthorized use of OSI's
products is difficult, particularly overseas, and while OSI is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect OSI's proprietary rights to the extent of the
laws of the United States. Nevertheless, OSI believes that due to the rapid pace
of technological change in the information technology an software industries,
factors such as the technological and creative skills of its employees, new
product developments, frequent product enhancements and the timeliness and
quality of support services are more important to establishing and maintaining a
competitive advantage in the industry.
OSI does not believe that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by OSI with respect to current or
future products. Any such claim could result in costly litigation, cause product
shipment delays or require OSI to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to OSI or at all, which could have a material adverse effect upon
OSI's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1998, OSI had a total of 130 employees, of which 28
were engaged in product development and system documentation, 62 were engaged in
implementation, training, support and maintenance, 22 were engaged in sales and
marketing and 18 were engaged in finance and administration and other functions.
None of OSI's employees is represented by a labor union. OSI has not experienced
any work stoppages and considers relations with its employees to be good.
FACILITIES
OSI currently leases approximately 22,000 square feet of space in its
headquarters facility in Glastonbury, Connecticut. The lease for 15,000 square
feet expires in 2003 and for 7,000 square feet expires in 2001. OSI plans to
lease approximately 8,000 additional square feet at this facility before the end
of 1998.
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MANAGEMENT OF HNC
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of HNC's executive officers and
directors as of September 21, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert L. North 63 President, Chief Executive Officer and Director
Raymond V. Thomas 55 Vice President, Finance and Administration, Chief Financial Officer and
Secretary
John Mutch 42 President, HNC Insurance Solutions
Michael A. Thiemann 42 President, Financial Solutions Group
John Buchanan 41 President, Retek Information Systems, Inc.
Todd V. Gutschow 37 Vice President, Technology and New Markets
Edward K. Chandler (1) 40 Director
Oliver D. Curme (2) 44 Director
Thomas F. Farb (1) 41 Director
Charles H. Gaylord, Jr. (2) 53 Director
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. North has been President and Chief Executive Officer and a
director of HNC since June 1987. Mr. North is also a director of Peerless
Systems Corporation. Mr. North holds Bachelor of Science and Master of Science
degrees in Electrical Engineering from Stanford University.
Mr. Thomas has been Vice President, Finance and Administration and
Chief Financial Officer of HNC since February 1995 and Secretary of HNC since
May 1995. From May 1993 to February 1995, he served as Executive Vice President
and Chief Financial Officer of Golden Systems, Inc., a power supply
manufacturer, and from September 1994 to February 1995 he also served as Chief
Operating Officer. From April 1991 to May 1993, Mr. Thomas served as Senior Vice
President of Finance and Administration and Chief Financial Officer of Vitesse
Semiconductor Corporation, a semiconductor manufacturer. Mr. Thomas holds a
Bachelor of Science degree in Industrial Management from Purdue University and
attended the Wharton School of Business at the University of Pennsylvania.
Mr. Mutch joined HNC in July 1997 as Vice President, Marketing, and
has served as President of HNC Insurance Solutions since September 1998. He was
a founder of MVenture Holdings, Inc., a private equity fund that invests in
start-up technology companies, and served as a General Partner from June 1994 to
July 1997. From December 1986 to June 1994, Mr. Mutch held a variety of
positions with Microsoft Corporation, including Director of Organization
Marketing. He holds a Bachelor of Science degree in Applied Economics from
Cornell University and a Masters degree in Business Administration from the
University of Chicago.
Mr. Thiemann joined HNC in June 1989. Mr. Thiemann has served as
President of the Financial Solutions Group since April 1998. He ran HNC's Aptex
text analysis division from January 1996 to September 1996 and was President and
Chief Executive Officer of Aptex Software Inc. from September 1996 to April
1998. From May 1993 to January 1996, he served as Executive Vice President,
Sales and Marketing of HNC. He also served as Executive Vice President and
General Manager, Decision Systems of HNC from January 1993 to May 1993, Vice
President and General Manager, Decision Systems of HNC from February 1990 to
January 1993 and Vice President, New Business Development of HNC from June 1989
to February 1990. Mr. Thiemann holds a Bachelor of Arts degree in Art, a
Bachelor of Science degree in Electrical Engineering and a Masters degree in
Electrical Engineering from Stanford University and a Masters degree in Business
Administration from Harvard University.
Mr. Buchanan has been President of Retek since February 1993. In
November 1996, Retek became a wholly-owned subsidiary of HNC. Mr. Buchanan holds
a Bachelor of Commerce degree in Finance and Computer Systems from the
University of Otago.
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Mr. Gutschow is a co-founder of HNC and has been Vice President,
Technology Development of HNC since October 1990. He was also Secretary of HNC
from January 1993 to May 1995. Mr. Gutschow holds a Bachelor of Arts degree in
Physics from Harvard University and attended the University of California at San
Diego.
Mr. Chandler has been a director of HNC since August 1991. Since July
1991, he has been President of Prairie-EKC, Inc., a partner of the general
partner of PCE 1991 Limited Partnership, a venture capital firm. Since November
1996, Mr. Chandler has also been a Managing Director of Graystone Venture
Partners, LLC, a venture capital firm. Mr. Chandler holds a Bachelor of Arts
degree in Economics from Yale University and a Masters degree in Business
Administration from Harvard University.
Mr. Curme has been a director of HNC since June 1987. Since January
1988, he has been a general partner of the general partner of Battery Ventures,
L.P., a national venture capital firm. Mr. Curme also serves as a director of
several privately held technology companies. Mr. Curme is also a director of
InfoSeek Corporation, an Internet search and navigation service company. He
holds a Bachelor of Science degree in Biochemistry from Brown University and a
Masters degree in Business Administration from Harvard University.
Mr. Farb has been a director of HNC since November 1987. Since April
1994, he has been Senior Vice President, Chief Financial Officer and Treasurer
of Interneuron Pharmaceuticals, Inc., a publicly-held diversified pharmaceutical
company, and an officer of several of its subsidiaries. From October 1992 to
March 1994, Mr. Farb served as Vice President of Corporate Development, Chief
Financial Officer and Controller of Cytyc Corporation, a medical device and
diagnostics company. Mr. Farb also serves as a director of Redwood Trust, Inc.,
a California-based publicly-held Real Estate Investment Trust. He holds a
Bachelor of Arts degree in Sociology from Harvard College.
Mr. Gaylord has been a director of HNC since May 1995. He is
currently a private technology investor and a director of Stac Inc., a
publicly-held software company. From December 1993 to September 1994, Mr.
Gaylord served as Executive Vice President of Intuit Inc., a publicly-held
personal and small business finance software company, following Intuit's
acquisition of ChipSoft, Inc., a tax preparation software company. Prior to that
acquisition, from June 1990 to December 1993, he served first as President and
Chief Executive Officer and a director of ChipSoft and then as Chairman of the
Board of Directors and Chief Executive Officer. He holds Bachelor of Science and
Master of Science degrees in Aerospace Engineering from Georgia Institute of
Technology and a Masters degree in Business Administration from Harvard
University.
COMMITTEES OF THE BOARD OF DIRECTORS
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or a
committee performing similar functions.
Messrs. Chandler and Farb are the current members of the Audit
Committee. The Audit Committee met four times during 1997. The Audit Committee
meets with HNC's independent accountants to review the adequacy of HNC's
internal control systems and financial reporting procedures; reviews the general
scope of HNC's annual audit and the fees charged by the independent accountants;
reviews and monitors the performance of non-audit services by HNC's auditors,
reviews the fairness of any proposed transaction between HNC and any officer,
director or other affiliate of HNC (other than transactions subject to the
review of the Compensation Committee), and after such review, makes
recommendations to the full Board; and performs such further functions as may be
required by any stock exchange or over-the-counter market upon which HNC's
Common Stock may be listed.
Messrs. Curme and Gaylord are the current members of the Compensation
Committee. The Compensation Committee met twice during 1997. The Compensation
Committee recommends compensation for officers and employees of HNC, grants (or
delegates authority to grant) options and stock awards under HNC's employee
benefit plans, and reviews and recommends adoption of and amendments to stock
option and employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Curme and Gaylord,
neither of whom has any interlocking relationships as defined by the Commission.
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DIRECTOR COMPENSATION
HNC reimburses its Board members for reasonable expenses associated
with their attendance at Board meetings. With the exception of Thomas F. Farb,
who receives a fee from HNC of $1,000 for each Board meeting he attends, none of
the members of the Board receives a fee for attending Board meetings. Members of
the Board who are not employees, consultants or independent contractors of HNC,
or any parent, subsidiary or affiliate of HNC, are eligible to participate in
HNC's 1995 Directors Stock Option Plan (the "Directors Plan"). During 1997,
Messrs. Chandler, Curme, Farb and Gaylord were each granted an option pursuant
to the Directors Plan to purchase 10,000 shares of HNC's Common Stock at an
exercise price of $39.875 per share.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or
paid for services rendered in all capacities to HNC and its subsidiaries during
each of 1995, 1996 and 1997 to (i) HNC's Chief Executive Officer and (ii) HNC's
four other most highly compensated executive officers who were serving as
executive officers at the end of 1997 (the "HNC Named Executive Officers"). 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
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION (1) YEAR SALARY BONUS COMPENSATION(2) OPTIONS
- ------------------------------- ---- ------ ----- --------------- -------
<S> <C> <C> <C> <C> <C>
Robert L. North 1997 $196,008 $85,700 $4,763 70,000
President and Chief Executive Officer 1996 175,000 85,700 4,472 70,000
1995 174,428 64,100 1,797 100,000
Raymond V. Thomas 1997 129,584 42,400 729 20,000
Vice President, Finance and 1996 125,004 42,400 438 20,000
Administration, Chief Financial Officer 1995 104,389 46,750 87,750(4) 110,000
and Secretary
Todd W. Gutschow 1997 115,415 20,565 1,336 20,000
Vice President, Technology Development 1996 105,415 19,875 1,323 40,000
1995 115,332 20,167 62 --
Michael A. Thiemann 1997 151,591 114,153(3) 1,919 --
President, Aptex Software Inc. 1996 146,667 109,170(3) 1,799 --
1995 111,351 202,823(3) 201 --
Lee E. Martin(5) 1997 79,583 385,739(3) 264 10,000
Vice President, North American Sales 1996 75,000 251,966(3) 205 10,000
1995 74,719 236,026(3) 200 --
</TABLE>
(1) Principal position as of December 31, 1997.
(2) Unless otherwise indicated below, represents premiums for group term
life and disability insurance.
(3) Includes commissions.
(4) 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.
(5) Lee Martin is no longer an executive officer of HNC.
The following table sets forth further information regarding option
grants pursuant to the Incentive Plan during 1997 to each of the HNC Named
Executive Officers. In accordance with the rules of the 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.
105
<PAGE> 116
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE
SECURITIES PERCENTAGE OF TOTAL VALUE AT ASSUMED ANNUAL
UNDERLYING OPTIONS GRANTED TO RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION APPRECIATION FOR OPTION TERM(2)
-------------------------------
NAME GRANTED(1) 1997 PER SHARE DATE 5% 10%
---- ---------- -------------------- ---------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. North........... 70,000 3.3% $31.25 1/24/07 $1,375,707 $3,486,312
Raymond V. Thomas......... 20,000 1.0 31.25 1/24/07 393,059 996,089
Todd W. Gutschow.......... 20,000 1.0 31.25 1/24/07 393,059 996,089
Michael A. Thiemann....... -- -- -- -- -- --
Lee E. Martin............. 10,000 -- 31.25 1/24/07 196,529 498,045
</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 Commission and do not
represent HNC's estimate or projection of future HNC Common Stock
prices or values.
The following table sets forth certain information concerning the
exercise of options by each of the HNC Named Executive Officers during 1997,
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, 1997. Also reported are values of
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and $43.00 per share, which was the
closing price of HNC's Common Stock as reported on the Nasdaq National Market on
December 31, 1997, the last day of trading for 1997.
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT YEAR END (1) OPTIONS AT YEAR END (2)
----------------------------------- -----------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (1) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. North........... 97,834 $2,834,215 280,398 154,602 $11,465,135 $2,919,615
Raymond V. Thomas......... 3,000 72,750 70,916 72,084 2,836,640 1,870,860
Todd W. Gutschow.......... -- -- 23,497 41,667 544,095 616,881
Michael A. Thiemann....... 4,167 103,445 -- -- -- --
Lee E. Martin............. 1,476 49,372 7,741 19,688 258,279 349,188
</TABLE>
- -----------
(1) "Value Realized" represents the fair market value of the shares of
HNC 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, 1997, the last day of trading for 1997.
106
<PAGE> 117
SECURITY OWNERSHIP OF HNC
The following table sets forth certain information with respect to
the beneficial ownership of HNC Common Stock as of August 31, 1998 by: (i) each
stockholder known by HNC to be the beneficial owner of more than 5% of HNC's
Common Stock; (ii) each director and nominee; (iii) each HNC Named Executive
Officer set forth in the Summary Compensation Table below; and (iv) all
directors and executive officers of HNC as a group.
<TABLE>
<CAPTION>
AMOUNT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT (1)
- ------------------------ ------------------------ -----------
<S> <C> <C>
Capital Research and Management Co. (2)................. 2,968,700 11.5%
Robert L. North (3)..................................... 391,253 1.5
Todd W. Gutschow (4).................................... 271,189 1.1
Edward K. Chandler (5).................................. 105,284 *
Raymond V. Thomas (6)................................... 90,833 *
Michael A. Thiemann (7)................................. 40,167 *
Charles H. Gaylord, Jr. (8)............................. 50,000 *
Lee E. Martin (9)....................................... 20,673 *
Oliver D. Curme (10).................................... 12,500 *
Thomas F. Farb (11)..................................... 7,550 *
All executive officers and directors as a group
(10 persons) (12)....................................... 1,026,276 4.0%
</TABLE>
- ---------------
*Less than 1%
(1) Based upon a total of 25,784,351 shares of HNC Common Stock
outstanding as of August 31, 1998. 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 HNC
Common Stock subject to options that are currently exercisable or
exercisable within 60 days of August 31, 1998 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) Based upon a Schedule 13G dated July 10, 1998. Capital Research and
Management Co. reported sole dispositive power with respect to
2,968,700 shares of HNC Common Stock. The address of Capital Research
and Management Co. is 333 South Hope Street, Los Angeles, California
90071.
(3) Includes 77,137 shares of HNC 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 314,116 shares of HNC
Common Stock subject to options exercisable within 60 days of August
31, 1998. Mr. North is the President and Chief Executive Officer and
a director of HNC.
(4) Includes 239,523 shares of HNC Common Stock held by the Todd and Mari
Gutschow Family Trust, of which Mr. Gutschow is a trustee, and 31,666
shares of HNC Common Stock subject to options exercisable within 60
days of August 31, 1998. Mr. Gutschow is Vice President, Technology
Development of HNC.
(5) Includes 30,000 shares of HNC Common Stock subject to options
exercisable within 60 days of August 31, 1998. Mr. Chandler is a
director of HNC.
(6) Represents 90,833 shares of HNC Common Stock subject to options
exercisable within 60 days of August 31, 1998. Mr. Thomas is Vice
President, Finance and Administration, Chief Financial Officer and
Secretary of HNC.
(7) Includes 40,167 shares of HNC Common Stock held by the Thiemann
Family Trust dated July 1, 1996, of which Mr. Thiemann is a trustee.
Mr. Thiemann is the President of the Financial Solutions Group.
107
<PAGE> 118
(Footnotes continued from previous page)
(8) Represents 20,000 shares of HNC Common Stock held of record by the
Gaylord Family Trust UTD 12/31/93, Charles H. Gaylord, Jr. and Lynn
M. Gaylord trustees, and 30,000 shares of HNC Common Stock subject to
options exercisable within 60 days of August 31, 1998. Mr. Gaylord is
a director of HNC.
(9) Includes 9,708 shares of HNC Common Stock subject to options
exercisable within 60 days of August 31, 1998. Mr. Martin was Vice
President until February 1998.
(10) Includes 12,500 shares of HNC Common Stock subject to options
exercisable within 60 days of August 31, 1998. Mr. Curme is a
director of HNC.
(11) Represents 7,500 shares of HNC Common Stock subject to options
exercisable within 60 days of August 31, 1998. Mr. Farb is a director
of HNC.
(12) Includes 574,115 shares of HNC Common Stock subject to options
exercisable within 60 days of August 31, 1998, including the options
described in footnotes (3) through (8), (10) and (11).
108
<PAGE> 119
CERTAIN TRANSACTIONS OF HNC
From January 1, 1995 to the present, there are no currently proposed
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's 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 for: (i) payments set forth under "Executive
Compensation" above; (ii) the transactions described below; and (iii)
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 DGCL 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.
Aptex Software, Inc. ("Aptex") is a partially-owned subsidiary of HNC formed
to exploit HNC's text analysis technology in certain markets. From January 1996
to September 1996, Michael A. Thiemann, formerly HNC's Executive Vice President
and currently President of HNC's Financial Solutions Group, managed the Aptex
business unit. From Aptex's incorporation in September 1996 to July 1998, Mr.
Thiemann was President, Chief Executive Officer and a director of Aptex. During
his employment as an executive officer of Aptex, Mr. Thiemann was compensated
under an employment agreement that provided for at least $150,000 annual base
salary, plus the opportunity to earn a cash bonus of $50,000 each year, based on
certain mutually agreed on financial objectives. In addition, apart from his
compensation from Aptex, Mr. Thiemann received certain sales commissions from
HNC. Mr. Thiemann resigned all of his positions with Aptex as of July 1, 1998.
Upon Mr. Thiemann's resignation from Aptex, Aptex repurchased from Mr.
Thiemann 375,000 shares of Aptex Common Stock for an aggregate of $11,250. Mr.
Thiemann currently holds 625,000 shares of Aptex Common Stock. He purchased a
total of 1,000,000 shares of Aptex Common Stock in September 1996 for $30,000 in
cash, pursuant to a Restricted Stock Purchase Agreement (the "Stock Purchase
Agreement") and Aptex's 1996 Equity Incentive Plan (the "Aptex Plan"). The Stock
Purchase Agreement provided that, upon termination of Mr. Thiemann's employment
with Aptex, Aptex would be entitled to repurchase any unvested shares, at Mr.
Thiemann's purchase price. On January 1, 1997, 25% of the shares vested free of
Aptex's repurchase right and an additional 1/48 of the shares vested monthly
thereafter. At the time of his resignation, there were 350,000 unvested shares,
all of which were repurchased by Aptex.
109
<PAGE> 120
MANAGEMENT OF OSI
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and certain other key employees of
OSI, their respective ages as of September 21, 1998 and their positions with OSI
are as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
-------------------------------- --- --------
<S> <C> <C>
Douglas K. Anderson................... 48 Chairman of the Board and Chief Executive Officer
John L. Person........................ 64 President and Chief Operating Officer
Graham H. Gurney...................... 58 Senior Vice President of Sales and Director
Clifford I. Waggoner.................. 57 Senior Vice President, Chief Technology Officer and
Director
Richard J. Willemin................... 47 Senior Vice President and Chief Financial Officer
Carlos P. Naudon...................... 48 Vice Chairman of the Board
Douglas C. Carlisle................... 41 Director
David M. Clarke....................... 47 Director
Samuel F. McKay....................... 59 Director
William W. Neville.................... 44 Director
Richard P. Yanak...................... 63 Director
KEY EMPLOYEES
Charles J. Beer....................... 40 Vice President of Application Development
John J. DeMita........................ 54 Vice President of Professional Services
John L. Messier....................... 35 Vice President of Conversion Services
Michael D. Nicastro................... 39 Vice President of Marketing
Debra M. Dabrowski.................... 31 Controller
</TABLE>
Mr. Anderson has served as Chairman of the Board and Chief Executive
Officer of OSI since December 1997 and as a director since July 1994. Mr.
Anderson served as President of OSI from October 1995 to December 1997. From
December 1986 to October 1995, Mr. Anderson was employed by the Savings Bank of
Manchester and was responsible for all bank operations and information
technology, most recently as Executive Vice President. Prior to joining the
Savings Bank of Manchester, Mr. Anderson was employed for 14 years by Unisys
Corporation.
Mr. Person has served as President and Chief Operating Officer of OSI
since December 1997, and served as Executive Vice President and Chief Operating
Officer of OSI from May 1997 to December 1997. From August 1996 to May 1997, Mr.
Person was Managing Director of Compression Engines, LLC, a software company.
From October 1994 to May 1997, Mr. Person served as President of Enanti
Corporation, a contact management software company. From July 1992 to October
1994, Mr. Person served as President of HP Films, a film production company. Mr.
Person also served as President of Newtrend MISER Group, a company specializing
in banking software.
Mr. Gurney co-founded OSI in 1992, and has served as Senior Vice
President of Sales of OSI since June 1996 and as a director since 1992. From
September 1984 to October 1987, Mr. Gurney served as regional district manager
for the New York district of Sperry Corporation, a computer hardware and
software company. From October 1987 to June 1992, Mr. Gurney served as the
Eastern regional sales director for Sharebase Corporation, a relational database
company. Mr. Gurney was employed in various positions for 15 years in the
financial services computing industry.
Mr. Waggoner co-founded OSI in 1992, has served as Senior Vice
President and Chief Technology Officer of OSI since October 1995 and as a
director since 1992. Mr. Waggoner served as President of OSI from May 1992 to
October 1995. From June 1987 to May 1992, Mr. Waggoner was Vice President and
Principal of Linc Systems Corporation, a software services company. Prior to
joining Linc Systems Corporation, Mr. Waggoner was employed for 17 years by
Electronic Data Systems Corporation.
110
<PAGE> 121
Mr. Willemin has served as Senior Vice President and Chief Financial
Officer of OSI since April 1998. From March 1997 to April 1998, Mr. Willemin
served as Chief Financial Officer of Summit Medical, Inc., a supplier of
clinical database software. From September 1996 to February 1997, Mr. Willemin
served as Chief Financial Officer of Datalogix International, Inc., a supplier
of manufacturing and logistics software. From June 1994 to August 1996, Mr.
Willemin served as Vice President and Chief Financial Officer of NEIC, a
transaction processing company in the health care industry. From March 1992 to
June 1994, Mr. Willemin served as interim Chief Financial Officer during periods
of transition for several companies, including Saratoga Springs Water Company, a
beverage manufacturer and distributor, and Canyon Ranch Spa Cuisine, a mail
order health food company.
Mr. Naudon has served as Vice Chairman of the Board of OSI since
October 1995 and as a director since September 1994, and served as Managing
Director from March 1995 to October 1995. Since May 1992, Mr. Naudon, has served
as Chairman of the Board of BSI Administrative Services Inc., a benefits plan
administration company. In addition, since January 1984, Mr. Naudon has served
as President, Chief Executive Officer and director of Spectrum and Banking
Spectrum, Inc., each a banking consulting company.
Mr. Carlisle has served as a director of OSI since March 1994. Since
1984, Mr. Carlisle has served as a general partner of Menlo Ventures VI, L.P.
("Menlo Ventures"), a venture capital fund that invests in emerging growth
technology companies. Mr. Carlisle is a director of Carrier Access Corporation.
Mr. Clarke has served as a director of OSI since April 1998. Since
September 1993, Mr. Clarke has served as Vice President, Private Equity, of the
Aetna Investment Management Group of Aetna Life Insurance Company ("Aetna").
From September 1977 to September 1993, Mr. Clarke held various other positions
in the Private Bond Investment Group of Aetna.
Mr. McKay has served as a director of OSI since December 1995. Since
April 1994, Mr. McKay has served as a general partner of Axiom Venture Partners,
L.P. ("Axiom"), a venture capital firm. Previously, Mr. McKay was general
partner of Connecticut Seed Ventures, L.P. Mr. McKay is a director of Anika
Therapeutics, Inc., Sabre Communications Corporation, Costar Corporation and
Nightingale Corp.
Mr. Neville has served as a director of OSI since June 1998. Since
June 1997, Mr. Neville has served as President of BISYS. From June 1995 to June
1997, Mr. Neville served as Senior Vice President and Eastern regional General
Manager of BISYS. From June 1992 to June 1995, Mr. Neville served as Vice
President and General Manager of the New England region of BISYS.
Mr. Yanak has served as a director of OSI since May 1996. Since
October 1996, Mr. Yanak has served as Senior Advisor of NYCE Corporation, an
electronic banking services company. From December 1987 to October 1996, Mr.
Yanak served as President and Chief Executive Officer of NYCE Corporation.
Mr. Beer has served as Vice President of Application Development of
OSI since October 1996, and served as Director of Application Development of OSI
from June 1992 to October 1996. Previously, Mr. Beer served as Assistant Vice
President of Development of American Savings Bank.
Mr. DeMita has served as Vice President of Professional Services of
OSI since September 1996. From December 1995 to September 1996, Mr. DeMita
served as Vice President of Production of NYCE Corporation, an electronic
banking services company. From July 1992 to October 1995, Mr. DeMita served as
President of Hardcopy Media Inc., a printing company and owned and operated
Alpha Graphics, a printing franchise company. Previously, Mr. DeMita served as
President of American Business Information Services, a subsidiary of American
Savings Bank.
Mr. Messier has served as Vice President of Conversion Services of
OSI since December 1997, and served as Manager of Customer Support of OSI from
July 1995 to December 1997. From February 1990 to July 1995, Mr. Messier served
as a Product Support Specialist and Senior Project Manager at Fiserv, Inc., a
financial services technology company.
Mr. Nicastro has served as Vice President of Marketing of OSI since
October 1996, and served as Director of Marketing and Customer Services of OSI
from September 1994 to October 1996. From February 1985 to September 1994, Mr.
Nicastro held various product management positions with the Data Services
Division of NCR Corporation. In addition, Mr. Nicastro served in various
positions at Bristol Savings Bank and Citicorp.
111
<PAGE> 122
Ms. Dabrowski has served as Controller of OSI since May 1997. From
August 1989 to April 1997, Ms. Dabrowski was employed by Price Waterhouse LLP,
an independent public accounting firm, most recently as Audit Manager in its
Technology Industry Group. Ms. Dabrowski is a certified public accountant.
Pursuant to an Amended and Restated Investors' Rights Agreement dated
as of August 22, 1997 among OSI and certain stockholders of OSI, such
stockholders were granted the right (which terminates at the Effective Time) to
designate representatives on OSI's Board of Directors. Under this agreement,
Messrs. Carlisle, McKay, Clarke and Neville were elected the representatives of
Menlo Ventures, Axiom, Aetna and BISYS, respectively.
Pursuant to a Software License and Marketing and Distribution
Agreement dated as of August 20, 1997 between OSI and BISYS, BISYS was granted
the right (which continues until termination of the agreement) to nominate a
candidate to OSI's Board of Directors.
Each officer serves at the discretion of the Board of Directors and
holds office until his or her successor is elected and qualified or until his or
her earlier resignation or removal. There are no family relationships among any
of the directors or executive officers of OSI.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee composed of
Messrs. Carlisle, McKay and Yanak, which makes recommendations concerning
salaries and incentive compensation for employees of and consultants to OSI and
administers and grants stock options pursuant to OSI's stock option plans, and
an Audit Committee composed of Messrs. Clark, McKay and Naudon, which reviews
the results and scope of the audit and other services provided by OSI's
independent public accountants. The Board of Directors does not have a
nominating committee or a committee performing similar functions.
DIRECTOR COMPENSATION
Directors do not currently receive any compensation for their
services on the Board of Directors, other than reimbursement for out-of-pocket
expenses.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
for the year ended December 31, 1997 for OSI's Chief Executive Officer and its
three other most highly compensated executive officers in 1997 who were serving
as executive officers on December 31, 1997 (the Chief Executive Officer and such
other executive officers are hereinafter referred to as the "OSI Named Executive
Officers"):
112
<PAGE> 123
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------
OTHER SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
------------------------ ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Douglas K. Anderson............... $175,000 $30,000 $ -- 195,000(2) $40,000(2)
Chairman of the Board
and Chief Executive
Officer
Graham H. Gurney.................. 100,000 15,400(3) -- -- --
Senior Vice President of
Sales
Clifford I. Waggoner.............. 106,000 3,000 -- -- --
Senior Vice President
and Chief Technology
Officer
John L. Person(4)................. 88,218 15,000 2,800(5) 100,000 4,936(6)
President and Chief
Operating Officer
</TABLE>
- ----------
(1) Represents the number of shares covered by options to purchase shares
of OSI Common Stock granted during the year ended December 31, 1997.
(2) In exchange for the surrender of the right to receive 175,000 shares
of OSI Common Stock originally granted on October 2, 1995, Mr.
Anderson received an option to purchase 175,000 shares of OSI Common
Stock at an exercise price of $0.45 per share and supplemental
compensation of $40,000 in 1997 and $60,000 in 1998.
(3) Represents sales commissions.
(4) Mr. Person joined OSI in May 1997.
(5) Represents automobile allowance.
(6) Represents reimbursement for relocation expenses.
The following table sets forth grants of stock options to each of the OSI
Named Executive Officers during the year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE FAIR MARKET TERM(3)
OPTIONS EMPLOYEES IN PRICE VALUE PER EXPIRATION ------------------------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE SHARE(2) DATE 0% 5% 10%
- ---- ------------ -------------- ------------ ------------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas K. Anderson... 175,000 36.3% $0.45 $1.50 7/21/07 $183,750 $299,309 $476,600
20,000 4.2% 0.45 1.50 7/21/07 21,000 34,207 54,469
Graham H. Gurney...... -- -- -- -- -- -- -- --
Clifford I. Waggoner.. -- -- -- -- -- -- -- --
John L. Person........ 100,000 20.7% 0.45 1.50 5/07/07 105,000 171,034 272,343
</TABLE>
- ----------
(1) Mr. Anderson's option to purchase 175,000 shares vested with respect
to 84,722 shares immediately upon grant and the remaining shares
underlying the option vest in twenty-six equal monthly installments.
Twenty-five percent of Mr. Person's option and Mr. Anderson's option
to purchase 20,000 shares vest on the first anniversary of the date
of grant and the remaining shares underlying the options vest in
thirty-six equal monthly installments.
113
<PAGE> 124
(2) The fair market value of the OSI Common Stock on the grant date was
determined in good faith by the Board of Directors, based upon
factors such as the terms upon which OSI issued securities to third
parties in financing transactions, the illiquid nature of OSI's
securities, and the financial condition, results of operations and
business prospects of OSI at each of the dates of grant. OSI Common
Stock is not publicly traded.
(3) Amounts reported in these columns represent amounts that may be
realized upon exercise of the options immediately prior to the
expiration of their term assuming the specified compound rates of
appreciation (0%, 5% and 10%) on the fair value of the OSI Common
Stock on the date of option grant over the term of the options. These
numbers are calculated based on rules promulgated by the Commission
and do not reflect OSI's estimate of future stock price growth.
Actual gains, if any, on stock option exercises and OSI Common Stock
holdings are dependent on the timing of such exercise and the future
performance of the OSI Common Stock.
The following table sets forth certain information concerning the
number and value of unexercised options held by each of the OSI Named Executive
Officers on December 31, 1997. None of the OSI Named Executive Officers
exercised any stock options during the year ended December 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglas K. Anderson......... 130,555 94,445 $536,248 $384,002
Graham H. Gurney............ 81,272 30,208 342,314 126,874
Clifford I. Waggoner........ 19,792 30,208 83,126 126,874
John L. Person.............. -- 100,000 -- 405,000
</TABLE>
- ----------
(1) Represents the difference between the exercise price and the fair
value of the OSI Common Stock at fiscal year end.
EMPLOYMENT AGREEMENTS
Pursuant to a Key Employee Agreement dated October 2, 1995, as
amended on July 21, 1997, OSI agreed to employ Douglas K. Anderson as President
and Chief Executive Officer. OSI also agreed to maintain a policy on the life of
Mr. Anderson with a death benefit of $300,000 payable to a beneficiary named by
Mr. Anderson. Under the agreement, Mr. Anderson retained 175,000 shares of
Common Stock initially issued to him and surrendered the right to receive
175,000 shares in exchange for the grant of an incentive stock option to
purchase 175,000 shares of Common Stock at an exercise price of $0.45 per share
and supplemental compensation of $40,000 in 1997 and $60,000 in 1998. OSI also
granted to Mr. Anderson an additional option to purchase 20,000 shares of Common
Stock at an exercise price of $0.45 per share. On March 2, 1998, by action of
OSI's Board of Directors, OSI agreed to pay Mr. Anderson an annual base salary
of not less than $225,000 and a bonus of $50,000 in 1998 based on the
achievement of certain performance targets. OSI also agreed to provide, under
certain circumstances, for 24 months of salary continuation and acceleration of
options upon termination of Mr. Anderson's employment. See "Approval of the
Merger--Interests of Certain Persons in the Merger."
Pursuant to employment agreements dated January 2, 1993, as amended
on January 2, 1994, OSI agreed to employ each of Graham H. Gurney and Clifford
I. Waggoner. OSI agreed to pay each of Messrs. Gurney and Waggoner an annual
base salary of $100,000. The agreements also include a covenant by each of
Messrs. Gurney and Waggoner not to compete with the business of OSI, or to
solicit any employee or client of OSI, during the two-year period following his
employment termination, and contain customary confidentiality and invention
assignment provisions.
Pursuant to a letter agreement dated April 10, 1997, OSI agreed to
employ John L. Person as Executive Vice President and Chief Operating Officer
and to grant Mr. Person an incentive stock option to purchase 100,000 shares of
Common Stock at an exercise price of $0.45 per share. On March 2, 1998, by
action of OSI's Board of Directors, OSI agreed to pay Mr. Person an annual base
salary of $190,000 and a bonus of up to $35,000 based on the achievement of
certain performance targets. OSI also agreed to provide, under certain
circumstances, 12 months salary continuation and
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<PAGE> 125
acceleration of options upon termination of Mr. Person's employment. See
"Approval of the Merger--Interests of Certain Persons in the Merger."
Pursuant to a letter agreement dated February 27, 1998, OSI agreed to
employ Richard J. Willemin as Senior Vice President and Chief Financial Officer.
OSI agreed to pay Mr. Willemin an annual base salary of $150,000 and to grant
Mr. Willemin an incentive stock option to purchase 100,000 shares of Common
Stock at an exercise price of $2.75 per share. OSI also agreed that in the event
of a change in control of OSI the vesting of all such options will be
accelerated. See "Approval of the Merger--Interests of Certain Persons in the
Merger."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of
Directors are Messrs. Carlisle, McKay and Yanak. No executive officer of OSI has
served as a director or member of the compensation committee (or other committee
serving an equivalent function) of any other entity, whose executive officers
served as a director of or member of the Compensation Committee of the Board of
Directors.
From January 1997 to June 1998, Mr. Naudon served as a member of the
Compensation Committee of the Board of Directors. Mr. Naudon is President, Chief
Executive Officer, a director and majority shareholder of Spectrum, a
shareholder of OSI. See "Certain Transactions of OSI."
Messrs. Carlisle and McKay were appointed to the Board of Directors
as the designee of Menlo Ventures and Axiom, respectively. See "Certain
Transactions of OSI."
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SECURITY OWNERSHIP OF OSI
The following table sets forth certain information regarding the
beneficial ownership of the OSI Common Stock and OSI Preferred Stock as of
August 31, 1998, by (i) each person or entity known to OSI to own beneficially
more than 5% of the OSI Common Stock or any series of OSI Preferred Stock, (ii)
each of the directors of OSI, (iii) each of the OSI Named Executive Officers,
and (iv) all directors and executive officers of OSI as a group.
SHARES OF OSI COMMON AND PREFERRED STOCK BENEFICIALLY OWNED(1)
<TABLE>
<CAPTION>
COMMON STOCK SERIES A-1 PREFERRED STOCK SERIES A-2 PREFERRED STOCK
------------ -------------------------- --------------------------
PERCENTAGE OF PERCENTAGE OF
NUMBER OF PERCENTAGE NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
SHARES OUTSTANDING SHARES SERIES A-1 SHARES SERIES A-2
BENEFICIALLY COMMON BENEFICIALLY PREFERRED BENEFICIALLY PREFERRED
NAME OF BENEFICIAL OWNER OWNED(1) STOCK OWNED(1) STOCK OWNED(1) STOCK
------------------------ -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
MV Management VI, L.P.(2)......... 2,469,583 52.5% 1,000,000 100.00% 333,333 7.1%
The BISYS Group, Inc.(3).......... 1,250,000 35.9% -- -- -- --
Axiom Venture Partners, L.P.(4)... 875,000 28.1% -- -- -- --
Aetna Life Insurance Company(5)... 750,000 25.1% -- -- -- --
Carlos P. Naudon(6)............... 550,042 22.0% -- -- 30,000 5.1%
Connecticut Innovations,
Incorporated(7).................. 479,167 17.7% -- -- 166,667 28.6%
Graham H. Gurney(8)............... 441,688 19.0% -- -- -- --
Lorraine H. Rothstein............. 440,000 19.7% -- -- -- --
157 Arbour Circle
Basking Ridge, NJ 07920
Ellen A. Dugan.................... 430,000 19.2% -- -- -- --
33 Country Oaks
Lebanon, NJ 08833
Clifford I. Waggoner(9)........... 380,208 16.8% -- -- -- --
Douglas K. Anderson(10)........... 348,055 14.5% -- -- -- --
Mark L. Villamar.................. 39,066 1.7% -- -- 33,333 5.7%
c/o Open Solutions Inc.
300 Winding Brook Drive
Glastonbury, CT 06033
OTHER DIRECTORS AND EXECUTIVE
OFFICERS
Douglas C. Carlisle(2)............ 2,469,583 52.5% 1,000,000 100.00% 333,333 57.1%
David M. Clarke(5)................ 750,000 25.1% -- -- -- --
Samuel F. McKay(4)................ 875,000 28.1% -- -- -- --
William W. Neville................ -- -- -- -- -- --
John L. Person(11)................ 35,416 1.6% -- -- -- --
Richard J. Willemin............... -- -- -- -- -- --
Richard P. Yanak(12).............. 12,083 * -- -- -- --
All executive officers and
directors as a group (11
persons)(13)...................... 5,862,075 84.6% 1,000,000 100.00% 63,333 62.3%
</TABLE>
<TABLE>
<CAPTION>
SERIES B PREFERRED STOCK SERIES C PREFERRED STOCK SERIES D PREFERRED STOCK
------------------------ ------------------------ ------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
SHARES SERIES B SHARES SERIES C SHARES SERIES D
BENEFICIALLY PREFERRED BENEFICIALLY PREFERRED BENEFICIALLY PREFERRED
NAME OF BENEFICIAL OWNER OWNED(1) STOCK OWNED(1) STOCK OWNED(1) STOCK
------------------------ -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
MV Management VI, L.P.(2)......... 761,250 47.8% 375,000 29.7% -- --
The BISYS Group, Inc.(3).......... -- -- -- -- 1,250,000 100.00%
Axiom Venture Partners, L.P.(4)... 750,000 43.8% 125,000 9.8% -- --
Aetna Life Insurance Company(5)... -- -- 750,000 55.7% -- --
Carlos P. Naudon(6)............... -- -- -- -- -- --
Connecticut Innovations,
Incorporated(7).................. 187,500 11.4% 125,000 9.8% -- --
Graham H. Gurney(8)............... -- -- -- -- -- --
Lorraine H. Rothstein............. -- -- -- -- -- --
157 Arbour Circle
Basking Ridge, NJ 07920
Ellen A. Dugan.................... -- -- -- -- -- --
33 Country Oaks
Lebanon, NJ 08833
Clifford I. Waggoner(9)........... -- -- -- -- -- --
Douglas K. Anderson(10)........... -- -- -- -- -- --
Mark L. Villamar.................. -- -- -- -- -- --
c/o Open Solutions Inc.
300 Winding Brook Drive
Glastonbury, CT 06033
OTHER DIRECTORS AND EXECUTIVE
OFFICERS
Douglas C. Carlisle(2)............ 761,250 46.8% 375,000 29.7% -- --
David M. Clarke(5)................ -- -- 750,000 55.7% -- --
Samuel F. McKay(4)................ 750,000 43.8% 125,000 9.8% -- --
William W. Neville................ -- -- -- -- -- --
John L. Person(11)................ -- -- -- -- -- --
Richard J. Willemin............... -- -- -- -- -- --
Richard P. Yanak(12).............. -- -- -- -- -- --
All executive officers and
directors as a group (11
persons)(13)...................... 1,511,250 88.3% 1,250,000 91.8% -- --
</TABLE>
- ----------
* Less than 1%
(Footnotes continued on next page)
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<PAGE> 127
- ----------
(1) 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 OSI Common Stock subject to options,
warrants or convertible securities that are currently exercisable or
exercisable within 60 days of August 31, 1998 are deemed to be
outstanding and to be beneficially owned by the person holding such
options, warrants or convertible securities 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) Consists of (i) 985,221 shares of OSI Common Stock issuable upon
conversion of OSI Series A--1 Preferred Stock held by Menlo Ventures
and 14,779 shares of OSI Common Stock issuable upon conversion of OSI
Series A--1 Preferred Stock held by Menlo Entrepreneurs, (ii) 328,407
shares OSI Common Stock issuable upon conversion of OSI Series A-2
Preferred Stock held by Menlo Ventures and 4,926 shares of OSI Common
Stock issuable upon conversion of OSI Series A--2 Preferred Stock
held by Menlo Entrepreneurs, (iii) 750,000 shares of OSI Common Stock
issuable upon conversion of OSI Series B Preferred Stock held by
Menlo Ventures and 11,250 shares of OSI Common Stock issuable upon
conversion of OSI Series B Preferred Stock held by Menlo
Entrepreneurs and (iv) 369,375 shares of OSI Common Stock issuble
upon conversion of OSI Series C Preferred Stock held by Menlo
Ventures and 5,625 shares of OSI Common Stock issuble upon conversion
of OSI Series C Preferred Stock held by Menlo Entrepreneurs. MVM is a
general partner of Menlo Ventures and Menlo Entrepreneurs. Mr.
Carlisle, a director of OSI, is a general partner of MVM. Mr.
Carlisle disclaims beneficial ownership of the shares held by Menlo
Ventures and Menlo Entrepreneurs, except to the extent of his
pecuniary interests therein. The address of MV Management VI, L.P. is
3000 Sand Hill Road, Building 4, Suite 100, Menlo Park, CA 94025
(3) Consists of (i) 833,333 shares of OSI Common Stock issuable upon
conversion of OSI Series D Preferred Stock, (ii) 416,667 shares of
OSI Series D Preferred Stock issuable upon the exercise of warrants
which are exercisable within 60 days after August 31, 1998 and (iii)
416,667 shares of OSI Common Stock issuble upon conversion of such
preferred stock. The address of The BISYS Group, Inc. is 11 Greenway
Plaza, Houston, TX 77046.
(4) Consists of (i) 666,667 shares of OSI Common Stock issuable upon
conversion of OSI Series B Preferred Stock, (ii) 111,111 shares of
OSI Common Stock issuable upon conversion of OSI Series C Preferred
Stock, (iii) 83,333 shares of OSI Series B Preferred Stock issuable
upon the exercise of warrants which are exercisable within 60 days
after August 31, 1998, (iv) 83,333 shares of OSI Common Stock issuble
upon conversion of OSI Series B Preferred Stock, (v) 13,889 shares of
OSI Series C Preferred Stock issuable upon the exercise of warrants
which are exercisable within 60 days after August 31, 1998 and (vi)
13,889 shares of OSI Common Stock issuable upon the conversion of
such OSI Series C Preferred Stock. Mr. McKay, a director of OSI, is
Chief Executive Officer of Axiom Venture Associates, Inc., the
general partner of Axiom. Mr. McKay shares voting and investment
power with respect to such shares with two other executive officers
of Axiom Associates. Mr. McKay disclaims beneficial ownership of the
shares held by Axiom, except to the extent of his pecuniary interest
therein. The address of Axiom Venture Partners, L.P. is City Place
II, 17th Floor, Hartford, CT 06103.
(5) Consists of (i) 666,667 shares of OSI Common Stock issuable upon
conversion of OSI Series C Preferred Stock, (ii) 13,889 shares of OSI
Series C Preferred Stock issuable upon the exercise of warrants which
are exercisable within 60 days after August 31, 1998 and (iii) 13,889
shares of OSI Common Stock issuable upon the conversion of such OSI
Series C Preferred Stock. Mr. Clarke, a director of OSI, is Vice
President, Private Equity of Aetna. The address of Aetna Life
Insurance Company is 151 Farmington Avenue, Hartford, CT 06106.
(6) Consists of (i) 251,762 shares of OSI Common Stock held by Spectrum,
(ii) 23,520 shares of OSI Common Stock issuable upon the exercise of
options held by Spectrum which are exercisable within 60 days after
August 31, 1998, (iii) 14,375 shares of OSI Common Stock issuable
upon conversion of OSI Series A--2 Preferred Stock, (iv) 205,695
shares of OSI Common Stock issuable upon the exercise of options held
by Mr. Naudon which are exercisable within 60 days after August 31,
1998, (v) 10,000 shares of OSI Common Stock held by The Enrique S.
Naudon Trust, (vi) 10,000 shares of OSI Common Stock held by The
Ignacio S. Naudon Trust, (vii) 10,000 shares of OSI Common Stock held
by The Huguette Rivet Trust, (viii) 9,065 shares held by The Eric P.
Steingass Trust and (ix) 15,625 shares of OSI Common Stock issuable
upon conversion of OSI Series A--2 Preferred Stock held by Allister &
Naudon Profit Sharing Pension Plan. Mr. Naudon, a director of OSI, is
President and Chief Executive Officer, and a director and the
majority shareholder of Spectrum, a trustee of
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<PAGE> 128
the Allister & Naudon Profit Sharing Plan, and Susan Steingass, his
spouse, is a trustee of The Enrique S. Naudon Trust, The Ignacio S.
Naudon Trust, The Huguette Rivet Trust and The Eric P. Steingass
Trust. The address of Carlos P. Naudon is c/o Banking Spectrum
Service, Inc., 57 West 38th Street, New York, NY 10018.
(7) Consists of (i) 166,667 shares of OSI Common Stock issuable upon
conversion of OSI Series A--2 Preferred Stock, (ii) 166,667 shares of
OSI Common Stock issuable upon conversion of OSI Series B Preferred
Stock, (iii) 111,111 shares of OSI Common Stock issuable upon
conversion of OSI Series C Preferred Stock, (iv) 20,883 shares of OSI
Series B Preferred Stock issuable upon the exercise of warrants which
are exercisable within 60 days after August 31, 1998, (v) 20,833
shares of OSI Common Stock issuable upon the conversion of such OSI
Series B Preferred Stock, (vi) 13,889 shares of OSI Series C
Preferred Stock issuble upon the exercise of warrants which are
exercisable within 60 days after Adjust 31,1998 and (vii) 13,889
shares of OSI Common Stock issuable upon the conversion of such OSI
Series C Preferred Stock. CII is the State of Connecticut's
technology development corporation. The address of Connecticut
Innovations, Incorporated is 999 West Street, Rocky Hill, CT 06067.
(8) Includes 91,688 shares of OSI Common Stock subject to options held by
Mr. Gurney which are exercisable within 60 days after August 31,
1998. The address of Graham H. Gurney is c/o Open Solutions Inc., 300
Winding Brook Drive, Glastonbury, CT 06033.
(9) Includes 30,208 shares of OSI Common Stock issuable upon the exercise
of options held by Mr. Waggoner which are exercisable within 60 days
after August 31, 1998. The address of Clifford I. Waggoner is c/o
Open Solutions Inc., 300 Winding Brook Drive, Glastonbury, CT 06033.
(10) Includes 173,055 shares of OSI Common Stock issuable upon the
exercise of options held by Mr. Anderson which are exercisable within
60 days after August 31, 1998. The address of Douglas K. Anderson is
c/o Open Solutions Inc., 300 Winding Brook Drive, Glastonbury, CT
06033.
(11) Consists of OSI Common Stock issuable upon the exercise of options
held by Mr. Person which are exercisable within 60 days after August
31, 1998.
(12) Consists of OSI Common Stock issuable upon the exercise of options
held by Mr. Yanak which are exercisable within 60 days after August
31, 1998.
(13) Includes (i) 1,000,000 shares of OSI Common Stock issuable upon
conversion of OSI Series A--1 Preferred Stock, (ii) 583,333 shares of
OSI Common Stock issuable upon conversion of OSI Series A--2
Preferred Stock, (iii) 1,627,917 shares of OSI Common Stock issuable
upon conversion of OSI Series B Preferred Stock, (iv) 1,263,889
shares of OSI Common Stock issuable upon conversion of OSI Series C
Preferred Stock, (v) 833,333 shares of OSI Common Stock issuable upon
conversion of OSI Series D Preferred Stock, (vi) 108,333 shares of
OSI Series B Preferred Stock issuble upon the exercise of warrants
which are exercisable within 60 days after August 31, 1998, (vii)
108,333 shares of OSI Common Stock issuble upon the conversion of
such OSI Series B Preferred Stock, (viii) 111,111shares of OSI Series
C Preferred Stock issuble upon the exercise of warrants which are
exercisable within 60 days after August 31, 1998, (ix) 111,111 shares
of OSI Common Stock issuable upon the conversion of such OSI Series C
Preferred Stock, (x) 416,667 shares of OSI Series D Preferred Stock
issuable upon the exercise of warrants which are exercisable within
60 days after August 31, 1998, (xi) 416,667 shares of OSI Common
Stock issuable upon the conversion of such OSI Series D Preferred
Stock and (xii) 571,665 shares of OSI Common Stock issuable upon the
conversion of options which are exercisable within 60 days after
August 31, 1998.
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CERTAIN TRANSACTIONS OF OSI
In January 1994, OSI entered into an agreement with Banking Spectrum
to license certain software products and for consulting and support services.
Pursuant to the agreement, OSI agreed to pay Banking Spectrum a royalty based on
the licensing of software products and related services, ranging from three
percent to 17% of net revenues, based on Banking Spectrum's involvement in the
sale of such products and services. In March 1998, OSI and Banking Spectrum
entered into a distribution agreement and a termination agreement. The March
1998 distribution agreement provides that OSI shall have a fully-paid license to
distribute twenty copies of an electronic regulatory reference product developed
by Banking Spectrum. The March 1998 termination agreement releases OSI from any
future royalty payments to Banking Spectrum in exchange for a cash payment of
$100,000 and grants to affiliates of Banking Spectrum fully-vested options to
purchase 275,000 shares of Common Stock at an exercise price of $0.45 per share.
Mr. Naudon, a director of OSI, is President and Chief Executive Officer,
director and the majority shareholder of Spectrum. The stock options were
estimated by management to have a fair value of approximately $1.6 million, and
OSI recorded a contract termination expense of approximately $1.3 million (net
of amounts previously accrued) for the three months ended March 31, 1998.
In July 1992 and January 1994, OSI entered into Professional Services
Agreements (the "Prism Agreements") with Prince-Roth Information Systems
Management, Inc. T/A ("PRISM"). Under the PRISM Agreements, PRISM provided data
processing technical services to OSI, and OSI deferred payment for such services
under the agreements until June 1995 and June 1996, respectively. Pursuant to
the terms of the PRISM Agreements, Messrs. Gurney and Waggoner each received an
aggregate of approximately $132,000. Spouses of the shareholders of PRISM are
shareholders of OSI.
On February 3, 1994, OSI issued an aggregate of 1,000,000 shares of
OSI Series A-1 Preferred Stock at $1.50 per share for an aggregate purchase
price of $1.5 million to Menlo Ventures and Menlo Entrepreneurs Fund VI, L.P.
("Menlo Entrepreneurs"). In addition, OSI issued warrants to purchase 333,333
shares of OSI Series A-2 Preferred Stock with an exercise price of $3.00 per
share. These warrants were exercised on September 13, 1994 for $999,999. Mr.
Carlisle, a director of OSI, is a general partner of MV Management VI, L.P.
("MVM"). MVM is a general partner of Menlo Ventures and Menlo Entrepreneurs.
On September 14, 1994, OSI issued 83,333 shares of OSI Series A-2
Preferred Stock at $3.00 per share for $50,000 cash and a $200,000 promissory
note from Banking Spectrum. Mr. Naudon, a director of OSI, is President and
Chief Executive Officer, and a director and the majority shareholder of Banking
Spectrum.
On May 12, 1995, OSI issued 166,667 shares of OSI Series A-2
Preferred Stock at $3.00 per share for an aggregate purchase price of $500,000
to CII. CII is a holder of more than five percent of the OSI Preferred Stock.
On September 1, 1995, OSI issued demand notes with an interest rate
of 10% per annum to Menlo Ventures and Menlo Entrepreneurs in an aggregate
original principal amount of $500,000. On November 15, 1995, OSI issued demand
notes with an interest rate of 10% per annum to Menlo Ventures and Menlo
Entrepreneurs in an aggregate original principal amount of $500,000. Each of the
notes was repaid on December 27, 1995.
On December 27, 1995, OSI issued an aggregate of 1,543,334 shares of
OSI Series B Preferred Stock at $3.00 per share for an aggregate purchase price
of $4,630,000 to certain investors, including Menlo Ventures, Menlo
Entrepreneurs, Axiom and CII. In addition, OSI issued warrants to purchase
192,916 shares of OSI Series B Preferred Stock at $4.00 per share. Warrants to
purchase 84,583 shares of OSI Series B Preferred Stock were exercised by Menlo
Ventures and Menlo Entrepreneurs on March 6, 1998 for $338,332. OSI granted each
of Axiom and Menlo the right (which terminates at the Effective Time) to
designate one nominee for election to OSI's Board of Directors. Mr. McKay, a
director of OSI, is Chief Executive Officer of Axiom Venture Associates, Inc.
("Axiom Associates"), the general partner of Axiom.
On October 23, 1996, OSI issued 1,222,222 shares of OSI Series C
Preferred Stock at $4.50 per share for an aggregate purchase price of $5,500,000
to Aetna, Menlo Ventures, Menlo Entrepreneurs, Axiom and CII. In addition, OSI
issued warrants to purchase 152,778 shares of OSI Series C Preferred Stock at
$6.00 per share. Warrants to purchase 41,667 shares of OSI Series C Preferred
Stock were exercised by Menlo Ventures and Menlo Entrepreneurs on March 6, 1998
for $250,002. OSI granted Aetna the right (which terminates at the Effective
Time) to designate one nominee for election to OSI's Board of Directors. Mr.
Clarke, a director of OSI, is Vice President, Private Equity, of Aetna.
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<PAGE> 130
On August 22, 1997, OSI issued 833,333 shares of OSI Series D
Preferred Stock at $6.00 per share for an aggregate purchase price of $5,000,000
to the BISYS Group. In addition, OSI issued a warrant to purchase 416,667 shares
of OSI Series D Preferred Stock at $6.00 per share. Concurrent with such
preferred stock offering, OSI entered into a Software License and Marketing and
Distribution Agreement with BISYS. See "Business of OSI--Sales and Marketing."
BISYS is a subsidiary of BISYS Group. As of June 30, 1998, OSI had recognized an
aggregate of $115,658 of revenue under such agreement. Pursuant to such
agreement, BISYS shall pay OSI a license fee for each BISYS customer utilizing
the OSI System pursuant to an outsourcing arrangement equal to 30% of the
license fee OSI would receive if such customer was a direct customer of OSI (the
"OSI License Fee"), and an annual maintenance fee for each BISYS customer
utilizing the OSI System equal to 5% of the OSI License Fee during the first and
second year, 7% of the OSI License Fee during the third year and 10% of the OSI
License Fee for each year thereafter. OSI may also receive fees from BISYS for
rendering additional services under the Software License and Marketing and
Distribution Agreement. The agreement also provides that OSI may engage BISYS to
develop additional software applications for the OSI System at a cost equal to
the lesser of 25% of BISYS's development costs and $250,000. In addition,
pursuant to such agreement, BISYS was granted the right (which continues until
termination of the agreement) to nominate a candidate to OSI's Board of
Directors. Mr. Neville, a director of OSI, is President of BISYS.
OSI has adopted a policy providing that all material transactions
between OSI and its officers, directors and other affiliates must (i) be
approved by a majority of the members of OSI's Board of Directors and by a
majority of the disinterested members of OSI's Board of Directors and (ii) be on
terms no less favorable to OSI than could be obtained from unaffiliated third
parties.
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<PAGE> 131
DESCRIPTION OF HNC CAPITAL STOCK
The authorized capital stock of HNC consists of 50,000,000 shares of
HNC Common Stock and 4,000,000 shares of HNC Preferred Stock. As of August 31,
1998, there were outstanding 25,784,351 shares of HNC Common Stock and options
to purchase 6,074,418 shares of HNC Common Stock.
HNC COMMON STOCK
Subject to preferences that may apply to any HNC Preferred Stock
outstanding at the time, the holders of outstanding shares of HNC Common Stock
are entitled to receive dividends out of assets legally available therefore at
such times and in such amounts as the HNC Board of Directors may from time to
time determine. Each stockholder is entitled to one vote for each share of HNC
Common Stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in HNC's Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The HNC Common Stock
is not entitled to preemptive rights and is not subject to conversion or
redemption. Upon liquidation, dissolution or winding-up of HNC, the assets
legally available for distribution to stockholders are distributable ratably
among the holders of the HNC Common Stock and any participating HNC Preferred
Stock outstanding at that time after payment of liquidation preferences, if any,
on any outstanding HNC Preferred Stock and payment of other claims of creditors.
Each outstanding share of HNC Common Stock is fully paid and nonassessable. HNC
Common Stock is traded on the Nasdaq National Market under the symbol "HNCS."
PREFERRED STOCK
The HNC Board of Directors is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of additional shares of
HNC Preferred Stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the powers,
designations, preferences and rights of the shares of each wholly unissued
series and any qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series (but not below the
number of shares of such series then outstanding), without any further vote or
action by the stockholders. The HNC Board of Directors may authorize the
issuance of HNC Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of HNC Common
Stock. Thus, the issuance of HNC Preferred Stock could have the effect of
delaying, deferring or preventing a change in control of HNC. HNC has no current
plan to issue any shares of HNC Preferred Stock.
DELAWARE GENERAL CORPORATION LAW SECTION 203
As a publicly held corporation organized under the laws of the State
of Delaware, HNC is subject to Section 203 of the DGCL, which restricts certain
business combinations between HNC and an "interested stockholder" (in general, a
stockholder owning 15% or more of HNC's outstanding voting stock) or its
affiliates or associates for a period of three years following the date on which
the stockholder becomes an "interested stockholder." The restrictions do not
apply if (i) prior to an interested stockholder becoming such, the HNC Board of
Directors approves either the business combination or the transaction in which
the stockholder becomes an interested stockholder, (ii) upon consummation of the
transaction in which the stockholder becomes an interested stockholder, such
interested stockholder owns at least 85% of the voting stock of HNC outstanding
at the time the transaction commences (excluding shares owned by certain
employee stock ownership plans and persons who are both directors and officers
of HNC) or (iii) on or subsequent to the date an interested stockholder becomes
such, the business combination is both approved by the HNC Board of Directors
and authorized at an annual or special meeting of HNC's stockholders, not by
written consent, but by the affirmative vote of at least 66-2/3% of the
outstanding voting stock not owned by the interested stockholder.
EXISTING SHELF REGISTRATIONS
Pursuant to registration rights agreements entered into in connection
with the acquisitions of CompReview, Retek, PCS and FTI, HNC has registered the
shares of HNC Common Stock that were issued in these acquisitions on shelf
registration statements on Form S-3 pursuant to Rule 415 under the Securities
Act. An aggregate of 2,975,581 shares of HNC Common Stock are registered on
these shelf registration statements. Sales of these shares of HNC Common Stock
may be made pursuant to such shelf registration statements only during certain
time periods after advance notice to HNC. HNC is not obligated to maintain the
effectiveness of the such shelf registration statements after November 28, 1998
for the
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<PAGE> 132
CompReview shelf registration, November 29, 1998 for the Retek shelf
registration, March 31, 1999 for the PCS shelf registration and April 6, 1999
for the FTI shelf registration. Pursuant to the registration rights agreements,
however, HNC has the right to defer a requested sale of shares, in which case
the time period during which the shelf registration statement must be kept
effective must be extended by a period of time equal to the period of deferral.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for HNC Common Stock is BankBoston,
N.A.
122
<PAGE> 133
DESCRIPTION OF OSI CAPITAL STOCK
The authorized capital stock of OSI consists of 19,055,417 shares of
OSI Common Stock and 5,944,583 shares of OSI Preferred Stock. As of September
16, 1998, there were outstanding (i) 2,236,013shares of OSI Common Stock held by
27 stockholders, (ii) 5,944,983 shares of OSI Preferred Stock held by 13
stockholders, (iii) options to purchase an aggregate of 1,687,500 shares of OSI
Common Stock and (iv) warrants to purchase 108,333 shares of OSI Series B
Preferred Stock, 111,111 shares of OSI Series C Preferred Stock and 416,667
shares of OSI Series D Preferred Stock.
COMMON STOCK
Holders of OSI Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
OSI Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of OSI Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the OSI Board of
Directors out of funds legally available therefor, subject to any preferential
dividend rights of outstanding OSI Preferred Stock. Upon the liquidation,
dissolution or winding up of OSI, the holders of OSI Common Stock are entitled
to receive ratably the net assets of OSI available after the payment of all
debts and other liabilities and subject to the prior rights of any outstanding
OSI Preferred Stock. Holders of OSI Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of OSI
Common Stock are fully paid and nonassessable.
PREFERRED STOCK
As of June 30, 1998, of the 5,944,583 authorized shares of OSI
Preferred Stock, 1,000,000 shares have been designated Series A-1 Preferred
Stock, of which a total of 1,000,000 shares are outstanding, 583,333 shares have
been designated Series A-2 Preferred Stock, of which a total of 583,333 shares
are outstanding, 1,736,250 shares have been designated Series B Preferred Stock,
of which a total of 1,627,917 shares are issued and outstanding, 1,375,000
shares have been designated Series C Preferred Stock, of which a total of
1,263,889 shares are issued and outstanding, and 1,250,000 shares have been
designated Series D Preferred Stock, of which a total of 833,333 shares are
issued and outstanding.
The holders of OSI Preferred Stock are entitled to non-cumulative
dividends, prior and in preference to any payment of any dividend on the OSI
Common Stock, payable when, as and if declared by the OSI Board of Directors in
their sole discretion. In the event of any liquidation, dissolution or winding
up of OSI, the holders of OSI Preferred Stock are entitled to receive, prior and
in preference to any distribution of any of the assets of this corporation to
the holders of OSI Common Stock, an amount equal to their original purchase
price plus an amount equal to all declared but unpaid dividends thereon (such
total being the "Preference Amount"). If there are insufficient assets to permit
the payment in full of such Preferential Amounts, then the assets of OSI are to
be distributed ratably to the holders of OSI Preferred Stock in the proportion
to the Preferential Amount each holder is otherwise entitled to receive. After
the full Preference Amount has been paid on all outstanding shares of OSI
Preferred Stock, any remaining funds and assets of OSI legally available for
distribution to the stockholders are to be distributed ratably among the holders
of OSI Preferred Stock and OSI Common Stock held by each (assuming conversion of
all such OSI Preferred Stock). The holders of OSI Preferred Stock are entitled
to convert the Preferred Stock at any time into shares of OSI Common Stock, with
automatic conversion occurring upon the closing of an underwritten public
offering meeting certain specified conditions, at specified conversion prices.
Such conversion prices are subject to adjustment in the event of stock splits,
stock dividends, or other issuances of OSI capital stock, with certain
enumerated exceptions.
Each holder of OSI Preferred Stock is entitled to the number of votes
equal to the number of shares of OSI Common Stock issuable upon conversion of
such OSI Preferred Stock, generally voting together with the OSI Common Stock as
a single class. At each election of directors in which there are shares of OSI
Preferred Stock outstanding, the holders of OSI Preferred Stock, voting together
as a class, are entitled to elect four members to the OSI Board of Directors.
Furthermore, the holders of OSI Preferred Stock, together with the holders of
OSI Common Stock, voting together as a separate class, are entitled to elect one
member to the Board of Directors, or such additional number of members approved
by a majority of the holders of OSI Preferred Stock and OSI Common Stock, each
voting as a separate class.
The consent of a simple majority of the outstanding OSI Preferred
Stock, as well as certain simple majority votes of certain series of OSI
Preferred Stock, are required before OSI may: (i) sell, encumber or otherwise
dispose of all or substantially all of OSI's property or business, or merge into
or consolidate with any other corporation (other than a
123
<PAGE> 134
wholly-owned subsidiary corporation) or effect any transaction in which more
than fifty percent (50%) of the voting power of OSI is disposed of; (ii) alter
or change the rights, preferences or privileges of the OSI Preferred Stock;
(iii) increase or decrease (other than by redemption or conversion) the total
number of authorized shares of OSI Preferred Stock; (iv) create shares of any
class or series of stock having preferences superior to, or on a parity with,
the OSI Preferred Stock with respect to voting, dividends or liquidation; (v)
effect a reclassification or recapitalization of the outstanding capital stock
of OSI; (vi) amend the OSI Certificate of Incorporation, to provide limits on
director liability or indemnification other than to the maximum extent permitted
by law; or (vii) change the size of OSI's Board of Directors from nine. So long
as any shares of OSI Series B Preferred Stock or OSI Series C Preferred Stock
are outstanding, OSI cannot cause an automatic conversion of OSI Preferred Stock
upon an underwritten public offering without first obtaining the approval of the
holders of two-thirds of the outstanding shares of each of the OSI Series B
Preferred Stock and OSI Series C Preferred Stock.
WARRANTS
As of June 30, 1998, OSI has outstanding warrants to purchase 108,333
shares of OSI Series B Preferred Stock at an exercise price of $4.00 per share,
warrants to purchase 111,111 shares of OSI Series C Preferred Stock at an
exercise price of $6.00 per share and a warrant to purchase 416,667 shares of
OSI Series D Preferred Stock at an exercise price of $6.00 per share. The
warrants to purchase OSI Series B Preferred Stock expire on December 27, 2000.
The warrants to purchase OSI Series C Preferred Stock expire on October 23,
2001. The warrant to purchase OSI Series D Preferred Stock expires on August 22,
2002. All of these warrants will have been exercised by the Effective Time.
124
<PAGE> 135
COMPARISON OF RIGHTS OF OSI STOCKHOLDERS AND HNC STOCKHOLDERS
After consummation of the Merger, the holders of OSI Common Stock and
OSI Preferred Stock who receive HNC Common Stock under the terms of the Merger
Agreement will become stockholders of HNC. Because OSI and HNC are both Delaware
corporations, OSI stockholders' rights will continue to be governed by the DGCL.
Additionally, as stockholders of OSI, their rights are presently governed by the
OSI Certificate of Incorporation, as amended and restated ("OSI Charter"), and
the OSI Bylaws. As stockholders of HNC, their rights following the consummation
of the Merger will instead by governed by the HNC Certificate of Incorporation,
as amended ("HNC Charter") and the HNC Bylaws. Certain differences between the
rights of HNC stockholders and OSI stockholders under the charters and bylaws of
HNC and OSI, respectively, are summarized below. This summary does not purport
to be complete and is qualified in its entirety by reference to the HNC Charter
and Bylaws, the OSI Charter and Bylaws and the relevant provisions of the DGCL.
SIZE OF THE BOARD OF DIRECTORS
The DGCL permits the board of directors alone to change the
authorized number, or the range, of directors by amendment to the bylaws, unless
the directors are not authorized to amend the bylaws or the number of directors
is fixed in the certificate of incorporation, in which case a change in the
number of directors may be made only by amendment to the certificate of
incorporation following approval of such change by the stockholders. The OSI
Bylaws specify a seven member board, or a board of such greater number as may be
approved by the OSI stockholders pursuant to the OSI Charter and the Amended and
Restated Investors Rights Agreement executed as part of the August 22, 1997 OSI
Series D Preferred Stock financing. The HNC Bylaws provide that the HNC Board of
Directors shall consist of one or more members, and further provides that the
current number of directors shall be six. Such number may be changed by
resolution of the HNC Board of Directors. The HNC Bylaws do not grant HNC
stockholders the right to change the authorized number, or the range, of
directors. Former OSI stockholders would therefore not retain their right to
approve changes in size of the Board of Directors.
"BLANK CHECK" PREFERRED STOCK AND COMMON STOCK RIGHTS
The HNC Charter permits the HNC Board of Directors to issue up to
4,000,000 shares of Preferred Stock and to determine the rights, preferences,
privileges and restrictions, including voting rights, of those authorized but
unissued shares of Preferred Stock, commonly referred to as "blank check"
Preferred Stock, without any further vote or action by the HNC stockholders. The
issuance of HNC Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding HNC voting
stock. Although HNC's Board of Directors has no present intention of issuing
such Preferred Stock, it could do so in the future without stockholder approval.
The OSI Charter does not permit the OSI Board of Directors to issue any "blank
check" Preferred Stock.
PERCENTAGE OF VOTING STOCK; INFLUENCE OVER AFFAIRS
Upon completion of the Merger, the percentage ownership of HNC by
each former OSI stockholder will be substantially less than such stockholder's
current percentage ownership of OSI. Accordingly, former OSI stockholders will
have a significantly smaller voting influence over the affairs of HNC than they
currently enjoy over the affairs of OSI. See "Risk Factors -- Risks Relating to
the Merger --Reduction of Ownership Interest of Current Stockholders."
TRANSACTIONS WITH INTERESTED STOCKHOLDERS
HNC, as a publicly held corporation, is subject to Section 203 of the
DGCL ("Section 203"). Section 203 prevents an "Interested Stockholder" of a
corporation (generally defined to mean any beneficial owner of more than 15% of
the corporation's voting stock) from engaging in any "Business Combination" (as
defined in Section 203) with the constituent corporation for a period of three
years following the date on which such Interested Stockholder became an
Interested Stockholder, unless: (i) before such person became an Interested
Stockholder, the Board of Directors of the corporation approved the transaction
which resulted in the Interested Stockholder becoming an Interested Stockholder;
(ii) upon consummation of the transaction which resulted in the Interested
Stockholder becoming an Interested Stockholder, the Interested Stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding, shares held by directors who are also officers, and employee
stock ownership plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
125
<PAGE> 136
(iii) following the transaction which resulted in the Interested Stockholder
becoming an Interested Stockholder, the Business Combination is (x) approved by
the Board of Directors of the Corporation, and (y) authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of the holders of at least 66-2/3% of the outstanding voting stock of the
corporation not then owned by the Interested Stockholder.
OSI is not publicly held and accordingly is not subject to Section
203 of the DGCL.
OTHER BUSINESS
The OSI Board does not intend to bring any other business before the
Special Meeting, and, so far as is known to the OSI Board, no matters are to be
brought before the Special Meeting except as specified in the notice of the
Special Meeting. As to any business that may properly come before the Special
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.
LEGAL MATTERS
The validity of the shares of HNC Common Stock to be issued in the
Merger and certain other legal matters will be passed upon for HNC by Fenwick &
West LLP, Palo Alto, California. Certain legal matters in connection with the
Merger will be passed upon for OSI by Hale and Dorr LLP, Boston, Massachusetts,
and Shipman & Goodwin LLP, Hartford, Connecticut.
126
<PAGE> 137
HNC SOFTWARE INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HNC SOFTWARE INC.
Report of Independent Accountants.................................................. F-2
Consolidated Balance Sheet as of December 31, 1996 and 1997........................ F-3
Consolidated Statement of Income and Comprehensive Income for the
years ended December 31, 1995, 1996 and 1997..................................... F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1995,
1996 and 1997.................................................................... F-5
Consolidated Statement of Changes in Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997................................................... F-6
Notes to Consolidated Financial Statements......................................... F-7
Consolidated Balance Sheet (unaudited) at June 30, 1998............................ F-21
Consolidated Statement of Operations and Comprehensive Income (unaudited)
for the six months ended June 30, 1997 and 1998.................................. F-22
Consolidated Statement of Cash Flows (unaudited) for the six months ended
June 30, 1997 and 1998........................................................... F-23
Notes to Consolidated Financial Statements (unaudited)............................. F-24
OPEN SOLUTIONS INC.
Report of Independent Accountants.................................................. F-26
Balance Sheet at December 31, 1996, 1997 and June 30, 1998 (unaudited)............. F-27
Statement of Operations for the years ended December 31, 1995, 1996 and
1997 and for the six months ended June 30, 1997 (unaudited) and
June 30, 1998 (unaudited)........................................................ F-28
Statement of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and for the six months ended June 30, 1997 (unaudited) and
June 30, 1998 (unaudited)........................................................ F-29
Statement of Changes in Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and for the six months ended
June 30, 1998 (unaudited)..................................................... F-30
Notes to Financial Statements...................................................... F-31
</TABLE>
F-1
<PAGE> 138
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 and comprehensive income, of cash flows and of
changes in stockholders' equity present fairly, in all material respects, the
financial position of HNC Software Inc. and its subsidiaries at December 31,
1996 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, 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 29, 1998,
except as to Note 11
which is as of February 13, 1998
F-2
<PAGE> 139
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 8,121 $ 18,068
Investments available for sale........................................... 26,728 24,878
Accounts receivable, net................................................. 21,856 32,980
Current portion of deferred income taxes................................. 6,383 11,310
Other current assets..................................................... 2,553 2,802
-------- ----------
Total current assets............................................. 65,641 90,038
Deferred income taxes, less current portion................................ 22,966 15,322
Property and equipment, net................................................ 6,339 12,102
Other assets............................................................... 3,330 2,415
-------- ----------
$ 98,276 $ 119,877
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 4,368 $ 5,728
Accrued liabilities...................................................... 4,433 5,933
Deferred revenue......................................................... 3,377 3,883
Other current liabilities................................................ 445 191
-------- ----------
Total current liabilities........................................ 12,623 15,735
Non-current liabilities.................................................... 683 239
Minority interest in consolidated subsidiary............................... -- 43
Commitments and contingencies (Notes 5 and 10)
Stockholders' equity:
Preferred stock, $0.001 par value -- 4,000 shares authorized:
no shares issued or outstanding....................................... -- --
Common stock, $0.001 par value-- 50,000 shares authorized:
24,012 and 24,538 shares issued and outstanding, respectively......... 24 25
Paid-in capital.......................................................... 83,991 95,919
Accumulated other comprehensive income................................... (5) (113)
Retained earnings........................................................ 960 8,029
-------- ----------
Total stockholders' equity....................................... 84,970 103,860
-------- ----------
$ 98,276 $ 119,877
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 140
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------- ------------- -----------
<S> <C> <C> <C>
Revenues:
License and maintenance........................................ $ 24,561 $ 48,890 $ 89,643
Installation and implementation................................ 4,648 6,691 10,702
Contracts and other............................................ 9,146 11,128 7,772
Service bureau................................................. 5,349 4,730 5,618
--------- --------- ----------
Total revenues......................................... 43,704 71,439 113,735
--------- --------- ----------
Operating expenses:
License and maintenance........................................ 7,903 13,725 19,937
Installation and implementation................................ 1,425 2,714 5,174
Contracts and other............................................ 6,894 7,694 5,438
Service bureau................................................. 3,025 3,365 4,320
Research and development....................................... 6,998 13,808 21,151
Sales and marketing............................................ 7,276 11,923 22,049
General and administrative..................................... 5,101 8,551 12,626
--------- --------- ----------
Total operating expenses............................... 38,622 61,780 90,695
--------- --------- ----------
Operating income................................................. 5,082 9,659 23,040
Interest and other income........................................ 912 2,178 2,003
Interest expense................................................. (428) (478) (81)
Minority interest in income of consolidated subsidiary........... -- -- (43)
--------- --------- ----------
Income before income tax (benefit) provision........... 5,566 11,359 24,919
Income tax (benefit) provision................................... (511) (534) 7,354
--------- --------- ----------
Net income............................................. $ 6,077 $ 11,893 $ 17,565
========= ========= ==========
Other comprehensive income:
Foreign currency translation adjustments....................... -- 54 (165)
Unrealized gain (loss) on securities available for sale........ 92 (151) 57
--------- --------- ----------
Total other comprehensive income............................... 92 (97) (108)
--------- --------- ----------
Comprehensive income............................................. 6,169 11,796 17,457
----- ------ ------
Earnings per share:
Basic net income per common share.............................. $ 0.38 $ 0.50 $ 0.72
========= ========= ==========
Diluted net income per common share............................ $ 0.28 $ 0.47 $ 0.68
========= ========= ==========
Unaudited pro forma data (Note 1):
Income before income tax provision............................. $ 5,566 $ 11,359 $ 24,919
Income tax provision........................................... 1,032 1,628 9,502
--------- --------- ----------
Net income............................................. $ 4,534 $ 9,731 $ 15,417
========= ========= ==========
Basic pro forma net income per common share.................... $ 0.64
==========
Diluted pro forma net income per common share.................. $ 0.60
==========
Shares used in computing basic net income per common share
and unaudited basic pro forma net income per common
share (Notes 1 and 8).......................................... 15,195 23,552 24,275
========= ========= ==========
Shares used in computing diluted net income per common share
and unaudited diluted pro forma net income per common share
(Notes 1 and 8)................................................ 21,510 25,363 25,681
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 141
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 6,077 $ 11,893 $ 17,565
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 1,874 3,605 4,833
Tax benefit from stock option transactions............................ 800 896 3,848
Changes in assets and liabilities:
Accounts receivable, net............................................ (1,658) (10,978) (11,124)
Other assets........................................................ (674) (1,207) (295)
Deferred income taxes............................................... (1,551) (1,324) 6,909
Accounts payable.................................................... 1,172 2,167 1,360
Accrued liabilities................................................. 1,756 625 (2,348)
Deferred revenue.................................................... 1,337 1,472 375
Other liabilities................................................... 22 (441) (116)
---------- ---------- ----------
Net cash provided by operating activities........................ 9,155 6,708 21,007
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments available for sale.............................. (28,666) (26,113) (26,517)
Maturities of investments available for sale............................ 4,182 18,125 24,666
Proceeds from sales of investments available for sale................... 2,467 3,707 3,716
Acquisitions of property and equipment.................................. (2,246) (3,978) (9,593)
---------- ---------- ----------
Net cash used in investing activities............................ (24,263) (8,259) (7,728)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of common stock............................. 33,726 1,935 4,039
Proceeds from issuances of notes payable to stockholders................ 1,000 -- --
Repayments of notes payable to stockholders............................. -- (1,000) --
Proceeds from bank line of credit....................................... 1,085 309 --
Repayments of bank line of credit....................................... (265) (2,504) --
Repayments of debt from asset purchases................................. -- (4,710) --
Capital lease payments.................................................. (502) (553) (408)
Proceeds from issuances of bank notes payable........................... -- 1,999 --
Repayments of bank notes payable........................................ (687) (1,999) --
Distributions to CompReview stockholders................................ (3,845) (5,908) (6,798)
---------- ---------- ----------
Net cash provided by (used in) financing activities.............. 30,512 (12,431) (3,167)
---------- ---------- ----------
Effect of exchange rate changes on cash................................... -- 54 (165)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents...................... 15,404 (13,928) 9,947
Cash and cash equivalents at beginning of period.......................... 6,645 22,049 8,121
---------- ---------- ----------
Cash and cash equivalents at end of period................................ $ 22,049 $ 8,121 $ 18,068
========== ========== ==========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets purchased through issuance of debt............................... $ -- $ 4,710 $ --
========== ========== ==========
Acquisitions of property and equipment under capital leases............. $ 411 $ 344 $ --
========== ========== ==========
Conversion of preferred stock........................................... $ 13,518 $ -- $ --
========== ========== ==========
Accretion of dividends on mandatorily redeemable convertible preferred
stock................................................................. $ 348 $ -- $ --
========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid........................................................... $ 390 $ 448 $ 101
========== ========== ==========
Income taxes paid....................................................... $ 190 $ 165 $ 547
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 142
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------
SERIES A SERIES E COMMON STOCK
------------------------- ------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994..................... 380 $ -- 1,282 $ 1 8,656 $ 9
Common stock options exercised................... 207
Accretion of dividends...........................
Issuance of common stock in initial public
offering, net of issuance costs................. 2,376 2
Conversion of convertible preferred stock into
common stock.................................... (380) -- (1,282) (1) 8,956 9
Issuance of common stock in follow-on public
offering, net of issuance costs................. 1,116 2
Issuance of common stock at inception of Retek
(Note 1)........................................ 1,367 1
Tax benefit from stock option transactions.......
Other comprehensive income.......................
Stock warrant exercised.......................... 100
Distributions to CompReview stockholders.........
Net income.......................................
---- ---- ------ ---- ------ ----
BALANCE AT DECEMBER 31, 1995..................... -- -- -- -- 22,778 23
Common stock options exercised................... 1,140 1
Common stock issued under Employee Stock
Purchase Plan................................... 94
Tax benefit from stock option transactions.......
Tax benefit from Retek taxable pooling (Note
7)..............................................
Other comprehensive income.......................
Distributions to CompReview stockholders.........
Net income.......................................
---- ---- ------ ---- ------ ----
BALANCE AT DECEMBER 31, 1996..................... -- -- -- -- 24,012 24
Common stock options exercised................... 475 1
Common stock issued under Employee Stock
Purchase Plan................................... 51
Tax benefit from stock option transactions.......
Other comprehensive income.......................
Distributions to CompReview stockholders.........
CompReview contribution to capital...............
Net income.......................................
---- ---- ------ ---- ------ ----
BALANCE AT DECEMBER 31, 1997..................... -- $ -- -- $ -- 24,538 $ 25
==== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED (ACCUMULATED
OTHER DEFICIT) TOTAL
PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
CAPITAL INCOME EARNINGS EQUITY
------------ ------ --------------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994..................... $ 10,980 $ -- $ (10,149) $ 841
Common stock options exercised................... 85 85
Accretion of dividends........................... (348) (348)
Issuance of common stock in initial public
offering, net of issuance costs................. 14,329 14,331
Conversion of convertible preferred stock into
common stock.................................... 10,618 2,892 13,518
Issuance of common stock in follow-on public
offering, net of issuance costs................. 19,184 19,186
Issuance of common stock at inception of Retek
(Note 1)........................................ (1) --
Tax benefit from stock option transactions....... 800 800
Other comprehensive income....................... 92 92
Stock warrant exercised.......................... 124 124
Distributions to CompReview stockholders......... (3,845) (3,845)
Net income....................................... 6,077 6,077
-------- ------- --------- ----------
BALANCE AT DECEMBER 31, 1995..................... 55,771 92 (5,025) 50,861
Common stock options exercised................... 1,095 1,096
Common stock issued under Employee Stock
Purchase Plan................................... 839 839
Tax benefit from stock option transactions....... 7,889 7,889
Tax benefit from Retek taxable pooling (Note
7).............................................. 18,397 18,397
Other comprehensive income....................... (97) (97)
Distributions to CompReview stockholders......... (5,908) (5,908)
Net income....................................... 11,893 11,893
-------- ------- --------- ----------
BALANCE AT DECEMBER 31, 1996..................... 83,991 (5) 960 84,970
Common stock options exercised................... 2,845 2,846
Common stock issued under Employee Stock
Purchase Plan................................... 1,193 1,193
Tax benefit from stock option transactions....... 4,192 4,192
Other comprehensive income....................... (108) (108)
Distributions to CompReview stockholders......... (6,798) (6,798)
CompReview contribution to capital............... 3,698 (3,698) --
Net income....................................... 17,565 17,565
-------- ------- --------- ----------
BALANCE AT DECEMBER 31, 1997..................... $ 95,919 $ (113) $ 8,029 $ 103,860
======== ======= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 143
HNC SOFTWARE INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- HNC AND ITS SIGNIFICANT ACCOUNTING POLICIES
Headquartered in San Diego, California, HNC Software Inc. ("HNC") develops,
markets and supports predictive software solutions in client/server
environments. HNC provides innovative predictive software systems in the
healthcare/insurance, financial services and retail markets.
Acquisitions
On August 30, 1996, HNC completed an acquisition of all of the outstanding
shares of Risk Data Corporation ("Risk Data"). Risk Data is an insurance
information technology services firm that develops, markets and supports
analytical benchmarking and risk management software products primarily for
insurance carriers, state insurance funds and third party administrators
primarily in the workers' compensation insurance field. Under the terms of the
acquisition, accounted for as a pooling of interests, HNC exchanged 1,891 shares
of common stock for all of the then outstanding shares of Risk Data preferred
and common stock.
On November 29, 1996, HNC completed an acquisition of all of the
outstanding shares of Retek Distribution Corporation ("Retek"). Retek develops,
markets and supports inventory management system software primarily for
customers in the retail industry. Under the terms of the acquisition, accounted
for as a pooling of interests, HNC exchanged 1,367 shares of common stock for
all of the then outstanding shares of Retek common stock.
On November 28, 1997, HNC completed an acquisition of all of the
outstanding shares of CompReview, Inc. ("CompReview"). CompReview develops,
markets and supports cost containment software for workers' compensation
insurance carriers and for insurers that handle automobile accident personal
injury claims. Under the terms of the acquisition, accounted for as a pooling of
interests, HNC exchanged 4,886 shares of common stock for all of the then
outstanding shares of CompReview common stock.
The consolidated financial statements and related notes give retroactive
effect to all three acquisitions for all of the periods presented. The
consolidated balance sheet as of December 31, 1996 and 1997 includes the
accounts of Risk Data, Retek and CompReview as of December 31, 1996 and 1997.
The consolidated statements of income, of cash flows and of changes in
stockholders' equity for each of the three years in the period ended December
31, 1997 include the results of Risk Data, Retek and CompReview for each of the
years then ended. The term "HNC" as used in these consolidated financial
statements refers to HNC and its subsidiaries, including Risk Data, Retek and
CompReview.
F-7
<PAGE> 144
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
No adjustments to conform the accounting methods of the acquired companies
to the accounting methods of HNC were required. Certain amounts have been
reclassified with regard to presentation of the financial information of the
acquired companies. Revenues and net income (loss) for each of the previously
separate companies for the periods prior to their respective acquisition dates
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
-------------------------------------- ------------------------
1995 1996 1997 1996 1996 1997
--------- --------- ---------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
HNC............... $ 25,174 $ 53,833 $ 113,735 $ 16,478 $ 31,423 $ 62,683
Risk Data......... 4,577 -- -- 2,600 -- --
Retek............. 921 -- -- 3,377 5,635 --
CompReview........ 13,032 17,606 -- 8,119 12,631 18,971
--------- --------- ---------- --------- --------- ---------
$ 43,704 $ 71,439 $ 113,735 $ 30,574 $ 49,689 $ 81,654
========= ========= ========== ========= ========= =========
Net income (loss):
HNC............... $ 4,457 $ 6,376 $ 17,565 $ 1,780 $ 975 $ 7,597
Risk Data......... (1,952) -- -- (2,184) -- --
Retek............. (382) -- -- 43 93 --
CompReview........ 3,954 5,517 -- 2,123 3,679 6,702
--------- --------- ---------- --------- --------- ---------
$ 6,077 $ 11,893 $ 17,565 $ 1,762 $ 4,747 $ 14,299
========= ========= ========== ========= ========= =========
</TABLE>
Transaction costs of $563, $515 and $1,440 were incurred to complete the
acquisitions of Risk Data, Retek and CompReview, respectively. Transaction costs
were deferred and charged to income when the related transactions were
consummated. Transaction costs consisted primarily of investment banker, legal
and accounting fees, and printing, mailing and registration expenses.
Principles of Consolidation
The consolidated financial statements include the accounts of HNC and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
During 1996, HNC established Aptex Software Inc. ("Aptex"), a majority
owned subsidiary, in order to develop, market and support certain text analysis
technology that is being used to develop products for the Internet market. The
minority stockholders' interest in Aptex's financial position and results of
operations is presented as a minority interest in HNC's consolidated financial
statements.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. 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.
F-8
<PAGE> 145
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. HNC classifies all securities as
"available for sale" and carries them at fair value with unrealized gains or
losses related to these securities included in stockholders' equity in HNC's
consolidated balance sheet.
Property and Equipment
Property and equipment are recorded at cost. HNC computes depreciation and
amortization using either the straight-line method over the estimated useful
lives of the assets of three to seven years or an accelerated method over the
estimated useful lives of the assets of five to seven years. HNC amortizes
leasehold improvements over the shorter of their estimated useful lives or the
remaining term of the related lease. Repair and maintenance costs are charged to
expense as incurred.
Software Costs
Software costs are recorded at cost and amortized over their estimated
useful lives of 36 to 42 months. Software costs are comprised of purchased
software and other rights that are stated at the lower of cost or net realizable
value. At December 31, 1996 and 1997, software costs of $2,561 and $2,581,
respectively, were included in other assets in the consolidated balance sheet
net of accumulated amortization of $642 and $1,451, respectively.
Development costs for software to be licensed or sold that are incurred
from the time technological feasibility is established 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, 1997, no significant
amounts were expended subsequent to reaching technological feasibility.
Long-Lived Assets
HNC investigates potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill when events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized if the sum of the expected future net cash
flows were less than the carrying amount of the asset. No such impairments of
long-lived assets existed through December 31, 1997.
Stock-Based Compensation
HNC 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.
Revenue Recognition
HNC's revenue from periodic software license and maintenance agreements is
generally recognized ratably over the respective license periods. Revenue from
certain short-term periodic software license and maintenance agreements with
guaranteed minimum license fees is recognized as related services are performed.
Transactional fees are recognized as revenue based on system usage or when fees
based on system usage exceed the monthly minimum license fees. Revenue from
perpetual licenses of HNC'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 hardware product sales, which is included in contracts and other revenue,
is recognized upon shipment to the customer.
F-9
<PAGE> 146
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HNC's revenue from software installation and implementation and from
contract services is generally recognized as the services are performed using
the percentage of completion method based on costs incurred to date compared to
total estimated costs at completion. Amounts received under contracts in advance
of performance are recorded as deferred revenue and are generally recognized
within one year from receipt. Contract losses are recorded as a charge to income
in the period such losses are first identified. Unbilled accounts receivable are
stated at estimated realizable value.
Service bureau fees are from review and repricing of customers' medical
bills and are assessed to customers on the basis of volume of bills processed
and are recognized as revenue when the processing services are performed.
Income Taxes
HNC's current income tax expense is the amount of income taxes expected to
be payable for the current year. A deferred income tax asset or liability is
computed for the expected future impact of differences between the financial
reporting and tax bases of assets and liabilities as well as the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount "more likely than not" to be realized in future tax returns. Tax rate
changes are reflected in income during the period such changes are enacted.
Net Income Per Common Share
HNC adopted Statement of Financial Accounting Standard No. 128 ("FAS 128"),
"Earnings per Share," for fiscal 1997 and retroactively restated all prior
periods to conform with FAS 128 as required. Basic net income per common share
is computed as net income less accretion of dividends on mandatorily redeemable
convertible preferred stock divided by the weighted average number of common
shares outstanding during the period. Diluted net income per common share is
computed as net income divided by the weighted average number of common shares
and potential common shares, using the treasury stock method, outstanding during
the period and assumes conversion into common stock at the beginning of each
period of all outstanding shares of convertible preferred stock (Note 8).
Unaudited Pro Forma Data
Prior to the acquisition of CompReview by HNC on November 28, 1997,
CompReview had elected subchapter S corporation status for income tax purposes;
therefore, its income was included in the tax returns of its stockholders, and
no income tax provision was recorded for CompReview other than certain minimum
state taxes on subchapter S corporations. As a result of the acquisition,
beginning November 29, 1997, CompReview became subject to corporate income taxes
on its taxable income. For comparative purposes, the consolidated statement of
income includes unaudited pro forma adjusted data with respect to the merged
companies' income tax provision as if CompReview had been subject to corporate
income taxes on its taxable income for all periods presented.
Foreign Currency Translation
The financial statements of HNC'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
recorded 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.
F-10
<PAGE> 147
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Diversification of Credit Risk
HNC's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents, investments available for sale and
accounts receivable, which are generally not collateralized. HNC's policy is to
place its cash, cash equivalents and investments available for sale with high
credit quality financial institutions and commercial companies and government
agencies in order to limit the amount of its credit exposure. HNC's software
license and installation agreements and commercial development contracts are
primarily with large customers in the healthcare/insurance, financial services
and retail industries. HNC maintains reserves for potential credit losses.
HNC has one major product or product line in each of its three target
markets. In the healthcare/insurance market, revenues from one product accounted
for 29.8%, 24.6% and 23.0% of HNC's total revenues for 1995, 1996 and 1997,
respectively. During those same periods, one product in the retail market
accounted for 2.2%, 13.6% and 18.9%, respectively, of HNC's total revenues, and
one product line in the financial services market accounted for 28.0%, 20.9% and
16.0%, respectively, of HNC's total revenues. Revenues from international
operations and export sales, primarily to Western Europe and Canada, represented
approximately 12.6%, 17.7% and 16.8% of total revenues in 1995, 1996 and 1997,
respectively. Export sales were $4,595, $7,310 and $7,896 in 1995, 1996 and
1997, respectively.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and accrued liabilities
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 HNC for borrowings
with similar terms and maturities.
Reincorporation and Stock Split
In May 1995, HNC's stockholders approved an Agreement and Plan of Merger
whereby HNC merged with and into a newly incorporated Delaware corporation ("HNC
Delaware"), which is the surviving corporation. In conjunction with the merger,
each share of HNC's common stock, preferred stock and options and warrants to
purchase HNC'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.
In April 1996, HNC consummated a two-for-one stock split effected in the form of
a common stock dividend. 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 and stock split.
Comprehensive Income
During the first quarter of 1998, HNC adopted Statement of Financial
Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income." FAS
130 requires HNC to report in the financial statements, in addition to net
income, comprehensive income and its components including foreign currency items
and unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income is defined as "the change in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners."
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which HNC is required to adopt for its 1998 annual financial
statements. This statement establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under FAS 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. HNC has not determined the impact of the
adoption of this new accounting standard on its consolidated financial statement
disclosures.
F-11
<PAGE> 148
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") which HNC will be required to adopt for its 2000 annual
financial statements. This statement establishes a new model for accounting for
derivatives and hedging activities. Under FAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value. HNC has not
determined the impact of the adoption of this new accounting standard on its
consolidated financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ----------
Accounts receivable, net:
<S> <C> <C>
Billed............................................. $ 13,266 $ 27,812
Unbilled........................................... 9,299 8,368
--------- ---------
22,565 36,180
Less allowance for doubtful accounts................. (709) (3,200)
--------- ---------
$ 21,856 $ 32,980
========= =========
</TABLE>
Unbilled accounts receivable 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 1997
----------- ----------
<S> <C> <C>
Property and equipment, net:
Computer equipment.................................... $ 9,302 $ 15,611
Furniture and fixtures................................ 2,210 4,632
Leasehold improvements................................ 273 1,012
--------- ---------
11,785 21,255
Less accumulated depreciation and amortization.......... (5,446) (9,153)
--------- ---------
$ 6,339 $ 12,102
========= =========
Accrued liabilities:
Payroll and related benefits............................ $ 1,645 $ 3,456
Vacation.............................................. 860 927
Other................................................. 1,928 1,550
-------- -------
$ 4,433 $ 5,933
======== =========
</TABLE>
F-12
<PAGE> 149
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- INVESTMENTS
At December 31, 1996 and 1997, 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>
U.S. government and federal agencies... $ 18,212 $ -- $ (38) $ 18,174
Foreign government debt................ 1,006 -- (2) 1,004
U.S. corporate debt.................... 4,851 -- (14) 4,837
Foreign corporate debt................. 2,718 -- (5) 2,713
--------- ----- ------ ---------
$ 26,787 $ -- $ (59) $ 26,728
========= ===== ====== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government and federal agencies... $ 20,682 $ -- $ (1) $ 20,681
U.S. corporate debt.................... 1,894 -- (1) 1,893
Foreign corporate debt................. 2,304 -- -- 2,304
--------- ----- ----- ---------
$ 24,880 $ -- $ (2) $ 24,878
========= ===== ===== =========
</TABLE>
No significant gains or losses were realized during the years ended
December 31, 1996 and 1997. The cost of securities sold is determined by the
specific identification method.
NOTE 4 -- NOTES PAYABLE
HNC has a Credit Agreement with a bank which provides for a $15,000
revolving line of credit through July 11, 1999. The agreement requires that HNC
maintain certain financial ratios and levels of working capital, tangible net
worth and profitability, and also restricts HNC's ability to pay cash dividends
and make loans, advances or investments without the bank's consent. At December
31, 1997, HNC had no amounts outstanding under the revolving line of credit.
Interest is payable monthly at the bank's prime rate or LIBOR rate plus 1.5%.
The applicable interest rate was 7.22% at December 31, 1997.
The Risk Data credit facilities were comprised of a revolving line of
credit secured by eligible accounts receivable, as well as a bridge loan that
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 Risk Data loaned HNC $1,000
under subordinated note agreements (secured by the assets of Risk Data but
subordinated to borrowings under the Risk Data line of credit) bearing interest
at 9%. All outstanding amounts were repaid during 1996.
NOTE 5 -- LEASES
At December 31, 1997, HNC Was Obligated Through 2004 Under Noncancelable
Operating Leases For Its Facilities And Certain Equipment As Follows:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
<S> <C> <C> <C>
1998........................... $ 2,984 $ 127 $ 2,857
1999........................... 3,047 -- 3,047
2000........................... 3,043 -- 3,043
2001........................... 2,994 -- 2,994
2002........................... 2,884 -- 2,884
thereafter..................... 1,535 -- 1,535
</TABLE>
F-13
<PAGE> 150
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The lease for HNC'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, 1995, 1996 and 1997 was
approximately $1,503, $1,623 and $2,687, respectively, net of sublease income of
$83, $125 and $477, respectively.
Risk Data maintains a lease line of credit with a leasing company for the
acquisition of equipment under capital lease arrangements. Future minimum
payments are $222 for 1998 and $66 for 1999 with a total of $34 of such amounts
representing interest.
The gross value of assets under capital leases at December 31, 1996 and
1997 was $1,481 and $714, and accumulated amortization was $599 and $556,
respectively. Amortization expense for assets acquired under capital leases is
included in depreciation expense.
NOTE 6 -- CAPITAL STOCK
During June 1995, HNC completed its initial public offering of 5,176 shares
of common stock (of which 2,376 shares were sold by HNC 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 HNC of $15,461 after the payment of
underwriters' commissions but before the deduction of offering expenses. Upon
the closing of HNC'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, HNC completed a follow-on public offering of 3,000
shares of common stock (of which 1,116 shares were sold by HNC 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 HNC of $19,606 after the payment of
underwriters' commissions but before the deduction of offering expenses.
HNC's 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 7 -- INCOME TAXES
Income (loss) before income tax (benefit) provision was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Domestic..................... $ 5,764 $ 8,599 $ 23,907
Foreign...................... (198) 2,760 1,012
-------- --------- ---------
$ 5,566 $ 11,359 $ 24,919
======== ========= =========
</TABLE>
F-14
<PAGE> 151
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The income tax (benefit) provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
CURRENT:
Federal.................... $ 97 $ 1,132 $ 2,257
State...................... 143 204 537
Foreign.................... -- 51 233
DEFERRED:
Federal.................... (521) (1,569) 3,197
State...................... (186) (56) 985
Foreign.................... (44) (296) 145
------ -------- --------
$ (511) $ (534) $ 7,354
====== ======== ========
</TABLE>
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1997
----------- ----------
<S> <C> <C>
Taxable pooling basis difference.............. $ 18,397 $ 16,955
Net operating loss carryforwards.............. 8,587 7,404
Tax credit carryforwards...................... 1,878 2,059
Other......................................... 487 214
--------- ---------
Gross deferred tax assets..................... 29,349 26,632
Deferred tax asset valuation allowance........ -- --
--------- ---------
Net deferred tax asset.............. $ 29,349 $ 26,632
========= =========
</TABLE>
During 1995, HNC released the valuation allowance related to its deferred
tax assets based on management's assessment that it was more likely than not
that HNC would realize a portion of those assets in future periods due to
improvements in HNC's operating results. During 1996, HNC released the valuation
allowances related to Risk Data's and Retek's deferred tax assets based on
management's assessment that it was more likely than not that HNC would realize
those assets in future periods due to improvements in the operating results of
those subsidiaries.
During 1995, 1996 and 1997, HNC realized certain tax benefits related to
stock option transactions in the amount of $800, $7,889 and $4,192,
respectively. The benefit from the stock option tax deduction is credited
directly to paid-in capital.
During 1996, in connection with the acquisition of Retek, HNC 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, HNC recorded
a deferred tax asset in the amount of $18,397.
A reconciliation of the income tax (benefit) provision 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,
----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Amounts computed at statutory federal rate.. $ 1,892 $ 3,862 $ 8,472
State income taxes..................... 465 554 1,407
Subchapter S corporation earnings...... (1,366) (1,901) (2,888)
Change in tax status of S corporation.. -- -- 869
Tax credit carryforwards generated..... (68) (334) (284)
Release of valuation allowance......... (2,223) (2,717) --
Foreign income taxes................... (44) (296) 27
Losses without tax benefit............. 794 -- --
Other.................................. 39 298 (249)
--------- --------- ---------
Income tax (benefit) provision.............. $ (511) $ (534) $ 7,354
========= ========= =========
</TABLE>
F-15
<PAGE> 152
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Prior to the acquisition of CompReview by HNC on November 28, 1997,
CompReview had elected subchapter S corporation status and the cash basis of
accounting for income tax purposes; therefore, its cash basis income was
included in the tax returns of its stockholders, and no income tax provision was
recorded for CompReview other than certain minimum state taxes on subchapter S
corporations. As of the date of CompReview's acquisition, its tax status was
changed to C corporation status with the accrual basis of accounting. As a
result of this change in tax status, HNC recorded a deferred tax liability in
the amount of $869 based on the cumulative income recognition differences as of
the date of acquisition between CompReview's former and prospective tax
accounting methods.
At December 31, 1997, HNC had federal, state and foreign net operating loss
carryforwards of approximately $19,992, $7,785 and $352, respectively. The net
operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
2001............................. $ 6,982
2003............................. 84
2005............................. 123
2006............................. 1,670
2007............................. 17
2008............................. 1,692
2009............................. 1,370
2010............................. 1,840
2011............................. 14,086
</TABLE>
HNC also has approximately $1,295 of federal research and development
credit carryforwards, which expire from 2000 to 2012, $711 of state research and
development credit carryforwards, which have no expiration date, and $53 of
foreign tax credit carryforwards, which expire from 1999 to 2002. Certain of
these net operating loss and research and development credit carryforwards
generated by Risk Data, Retek and CompReview prior to their acquisitions by HNC
are subject to annual limitations on their utilization and also are limited to
utilization solely by HNC that 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 its utilization of net operating loss and research and
development credit carryforwards.
NOTE 8 -- RECONCILIATION OF NET INCOME AND SHARES USED IN PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
NET INCOME USED:
Net income used in computing basic net income per common share............. $ 5,729 $ 11,893 $ 17,565
Add back accretion of dividends on mandatorily redeemable convertible
preferred stock.......................................................... 348 -- --
--------- --------- ---------
Net income used in computing diluted net income per common share........... $ 6,077 $ 11,893 $ 17,565
========= ========= =========
SHARES USED:
Weighted average common shares outstanding used in computing basic net
income per common share.................................................. 15,195 23,552 24,275
Weighted average options and warrants to purchase common stock as
determined by application of the treasury stock method................. 1,995 1,796 1,383
Incremental shares for assumed conversion of convertible preferred
stock.................................................................. 4,265 -- --
Purchase Plan common stock equivalents................................... 55 15 23
--------- --------- ---------
Shares used in computing diluted net income per common share............... 21,510 25,363 25,681
========= ========= =========
</TABLE>
All outstanding shares of HNC's preferred stock automatically converted
into shares of common stock upon the closing of HNC's initial public offering on
June 26, 1995. Shares used in computing diluted net income per common share for
1995 assume conversion of all outstanding shares of convertible preferred stock
were converted at the beginning of that year.
F-16
<PAGE> 153
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9 -- EMPLOYEE BENEFIT PLANS
During 1987, HNC adopted the 1987 Stock Option Plan and reserved 2,500
shares of HNC's common stock 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, 1997, options to purchase 490 shares were exercisable.
During 1995, HNC 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 HNC'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 HNC's outside directors. Under the provisions of the Directors
Plan, options to purchase 25 shares of HNC's common stock are granted to outside
directors upon their respective dates of becoming members of the Board of
Directors and options to purchase ten shares of such stock 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, 1997, options to purchase 72 shares
were exercisable.
The Incentive Plan provides for the issuance of up to 3,550 shares of HNC's
common stock in the form of nonqualified or incentive stock options, restricted
stock or stock bonuses. In addition, all shares that remained unissued under the
1987 Stock Option Plan on the effective date of the Incentive Plan, and all
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 are 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. Options granted under
the Incentive Plan may have a term of up to ten years. HNC has the discretion to
provide for restrictions and the lapse thereof in respect of restricted stock
awards. Options typically vest at the rate of 25% of the total grant per year
over a four-year period; however, HNC may, at its discretion, implement a
different vesting schedule with respect to any new stock option grant. At
December 31, 1997, 316 shares were exercisable.
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 compensation 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 on the first day of the
twelve-month offering period or the last day of each six-month purchase period.
Approximately 60% of eligible employees have participated in the Purchase Plan
in the last two years.
Risk Data's stock option plan is administered by HNC's Board of Directors.
All outstanding Risk Data options were converted into options to purchase HNC
common stock and adjusted to give effect to the acquisition exchange ratio in
the Risk Data acquisition. No changes were made to the terms of the Risk Data
options in connection with the exchange. Options granted under the Risk Data
stock option plan generally vest at the rate of 25% of the total grant per year
and expire ten years after the date of grant. At December 31, 1997, 30 shares
were exercisable under the Risk Data plan.
Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase HNC's common
stock and adjusted to give effect to the acquisition exchange ratio in the Retek
acquisition. 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 ten years. At December 31, 1997, options
to purchase 32 shares were exercisable.
F-17
<PAGE> 154
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The CompReview 1995 Stock Option Plan is administered by HNC's Board of
Directors. All outstanding CompReview stock options were converted into options
to purchase HNC common stock in the CompReview acquisition and adjusted to give
effect to the acquisition exchange ratio. No changes were made to the terms of
the CompReview options in connection with the exchange. Options granted under
the CompReview Stock Option Plan generally vest ratably over periods from two to
four years and expire ten years after the date of grant. At December 31, 1997,
options to purchase 156 shares were exercisable.
Transactions under HNC's stock option and purchase plans during the years
ended December 31, 1995, 1996 and 1997, including options under the Risk Data
stock option plan, options under the Retek stock option plan and options under
the CompReview Stock Option Plan, but excluding options to purchase stock of
Aptex, a subsidiary of HNC, are summarized as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1996 1997
-------------------------- ---------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 2,080 $0.49 2,868 $2.84 3,215 $15.65
Options granted................... 1,272 6.08 1,645 27.98 2,177 32.61
Options exercised................. (207) 0.52 (1,140) 0.96 (475) 6.16
Options canceled.................. (277) 1.80 (158) 17.62 (326) 26.33
-------- ------- --------
Outstanding at end of year.......... 2,868 2.84 3,215 15.65 4,591 23.92
======== ======= ========
Options exercisable at end of
year.............................. 1,437 841 1,096
Weighted average fair value of
options granted during the year... $ 3.10 $14.50 $ 19.79
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ---------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE (IN YEARS) PRICE 1997 PRICE
- --------------------------- --------------- --------------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$0.02 to $ 3.00 1,002 5.90 $1.90 702 $1.60
4.50 25.38 793 8.21 19.22 188 15.69
25.60 30.75 791 8.86 29.39 147 30.33
30.81 31.50 944 9.57 31.40 1 30.94
31.88 39.00 774 9.42 36.03 32 34.24
39.09 49.50 287 9.27 41.42 26 42.64
------ ------
0.02 49.50 4,591 8.37 23.92 1,096 9.82
====== ======
</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, as
determined by the Board of Directors, 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 ten years. HNC 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. However, HNC 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 at fair market value under the Aptex Plan for cash
consideration of $0.03 per share. At December 31, 1997, options to purchase 79
shares were exercisable under the Aptex Plan.
F-18
<PAGE> 155
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HNC 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 HNC's stock-based compensation awards issued during 1997 and 1996 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 ("FAS
123"), HNC's net income and basic and diluted pro forma net income per common
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net income:
As reported........................... $ 6,077 $ 11,893 $ 17,565
Pro forma............................. 5,126 6,122 2,232
Basic net income per common share:
As reported........................... 0.38 0.50 0.72
Pro forma............................. 0.31 0.26 0.09
Diluted net income per common share:
As reported........................... 0.28 0.47 0.68
Pro forma............................. 0.24 0.24 0.09
</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, 1995, 1996 and
1997, respectively: dividend yield of 0.0% for all three years, risk-free
interest rates of 6.29%, 6.03% and 6.10%, expected volatilities of 75%, 70% and
65% (0% for 1995 and 1996 options granted by Risk Data, Retek and CompReview
prior to their acquisition by HNC), and expected lives of 3.5, 3.5 and 3.0
years. The fair value of the employees' purchase rights pursuant to the Purchase
Plan is estimated using the Black-Scholes model with the following assumptions:
dividend yield of 0.0% for all three years, risk-free interest rates of 5.66%,
5.36% and 5.32%, expected volatilities of 75%, 70% and 65%, and an expected life
of 6 months for all three years. The weighted average fair value of those
purchase rights granted in 1995, 1996 and 1997 was $2.75, $9.61 and $14.10,
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 years ended
December 31, 1996 and 1997: dividend yield of 0.0% for both years, risk-free
interest rates of 6.42% and 6.33%, expected volatility of 90% for both years,
and expected lives of 9.25 and 8.0 years. Options to purchase 704 shares and 214
shares were granted during 1996 and 1997, with weighted average exercise prices
per share of $0.03 and $0.08, respectively. During 1997, options to purchase 173
shares with a weighted average exercise price of $0.03 per share were exercised.
During 1997, options to purchase 58 shares with a weighted average exercise
price of $0.03 per share were cancelled. The weighted average fair value per
share of options granted during 1996 and 1997 was $0.03 and $0.07, respectively.
The following table summarizes information about Aptex employee stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE (IN YEARS) PRICE 1997 PRICE
------------------ --------------- --------------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$0.03 to $0.03 497 8.75 $0.03 79 $0.03
0.05 0.05 39 9.40 0.05 -- --
0.10 0.10 151 9.82 0.10 -- --
---- --
0.03 0.10 687 9.03 0.05 79 0.03
==== ==
</TABLE>
F-19
<PAGE> 156
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10 -- 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 HNC's consolidated financial position, results of operations
or cash flows.
NOTE 11 -- SUBSEQUENT EVENTS
On January 30, 1998, HNC signed a definitive agreement to acquire Practical
Control Systems Technologies, Inc. ("PCS"), a distribution center management
software vendor based in Cincinnati, Ohio, subject to the satisfaction of
certain closing conditions and the approval of PCS' shareholders. If
consummated, the acquisition of PCS will be accounted for under the purchase
method and will not be considered a "significant" acquisition pursuant to
regulations set forth by the Securities and Exchange Commission.
On February 13, 1998, HNC adopted the 1998 Stock Option Plan (the "1998
Plan"), under which 1,000,000 shares of HNC Common Stock were reserved for
issuance pursuant to nonqualified stock options. The 1998 Plan is administered
by the Board of Directors of HNC or a committee appointed by the Board and
provides that nonqualified stock options granted under the plan must be awarded
at an exercise price of not less than 100% of the fair market value of the stock
at the date of grant. Options granted under the 1998 Plan may have a term of up
to ten years. No options have been granted under the 1998 Plan to date.
NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED)
On March 31, 1998, HNC acquired PCS, based in Cincinnati, Ohio. PCS,
founded in 1985, is a supplier of fully integrated distribution center
management software that addresses the distribution business needs of the
retail, manufacturing and wholesale industries. HNC acquired PCS in exchange for
142,868 shares of HNC common stock, 14,286 of which are subject to an escrow to
secure certain indemnification obligations of the former PCS stockholders plus
the contingent right, subject to PCS' achievement of certain financial
objectives during calendar 1998 and 1999, to receive certain additional shares
of HNC common stock.
On April 7, 1998, HNC acquired FTI. Incorporated in 1982, FTI is a
provider of profitability measurement and decision-support software to the
financial services industry and serves a substantial user base in the United
States, Canada, and Europe. HNC acquired FTI in exchange for the issuance of
396,617 shares of HNC common stock, 97,390 of which are subject to an escrow to
secure certain indemnification obligations of the former FTI stockholders; a
cash payment of $1.5 million; and the contingent right, subject to FTI's
achievement of certain financial objectives during calendar 1998, to receive up
to $5,590,000 of HNC common stock.
On June 11, 1998, HNC acquired the ATACS product line. ATACS, a
subsidiary of Bedford Associates, Inc., which is a wholly owned subsidiary of
British Airways plc, is a fraud-management software solution for wireline,
wireless and Internet telecommunication service providers. HNC acquired the
ATACS product line for a cash payment of $4.75 million.
On September 16, 1998, HNC announced that it had signed a definitive
agreement to acquire Open Solutions Inc. ("OSI"). OSI is a provider of
credit/server core processing software and related professional services to
small to mid-size banks and credit unions. This transaction has not yet been
consummated and remains subject to the satisfaction of certain conditions,
including qualification of the transaction for "pooling of interests" accounting
treatment. Under the current terms of the pending transaction, the consideration
payable by HNC to acquire all of OSI's outstanding stock and stock options would
consist of approximately 2,956,618 shares of HNC's Common Stock and/or options.
The mix of shares and options is currently expected to be approximately
2,507,507 shares and 449,111 options.
F-20
<PAGE> 157
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1998
---------
<S> <C>
Current assets:
Cash and cash equivalents ....................................... $ 45,450
Investments available for sale .................................. 50,137
Accounts receivable, net ........................................ 43,712
Current portion of deferred income taxes ........................ 8,873
Other current assets ............................................ 5,062
---------
Total current assets ........................................ 153,234
Property and equipment, net ......................................... 13,183
Deferred income taxes, less current portion ......................... 19,476
Long-term investments available for sale ............................ 52,316
Debt issuance costs, net ............................................ 2,885
Other assets ........................................................ 8,066
---------
$ 249,160
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 5,848
Accrued liabilities .............................................. 12,767
Deferred revenue ................................................. 8,606
Other current liabilities ........................................ 150
---------
Total current liabilities ...................................... 27,371
Convertible Subordinated Notes ...................................... 100,000
Other non-current liabilities ....................................... 94
Minority interest in consolidated subsidiary ........................ 103
Stockholders' equity:
Preferred stock, $0.001 par value -- 4,000 shares authorized:
no shares issued or outstanding ................................ --
Common stock, $0.001 par value - 50,000 shares authorized:
25,515 shares issued and outstanding ........................... 26
Paid-in capital ..................................................... 124,362
Accumulated deficit ................................................. (2,672)
Accumulated other comprehensive income .............................. (124)
---------
Total stockholders' equity ..................................... 121,592
---------
$ 249,160
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 158
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues:
License and maintenance .................................................. $ 40,643 $ 60,678
Installation and implementation .......................................... 4,134 6,819
Contracts and other ...................................................... 4,531 6,476
Service bureau ........................................................... 2,357 4,249
-------- --------
Total revenues ......................................................... 51,665 78,222
-------- --------
Operating expenses:
License and maintenance .................................................. 9,030 14,305
Installation and implementation .......................................... 2,052 4,619
Contracts and other ...................................................... 3,304 4,705
Service bureau ........................................................... 1,783 2,360
Research and development ................................................. 9,361 14,664
In-process research and development ...................................... -- 22,783
Sales and marketing ...................................................... 9,786 16,487
General and administrative ............................................... 5,227 7,024
-------- --------
Total operating expenses ............................................... 40,543 86,947
-------- --------
Operating income (loss) ..................................................... 11,122 (8,725)
Other income, net ........................................................... 957 2,829
Interest expense ............................................................ (47) (1,787)
Minority interest in income of consolidated subsidiary ...................... -- (60)
-------- --------
Total other income, net .................................................. 910 982
Income (loss) before income tax provision .............................. 12,032 (7,743)
Income tax provision ........................................................ 2,861 2,958
-------- --------
Net income (loss) ................................................... $ 9,171 $(10,701)
======== ========
Other comprehensive income, net of tax:
Foreign currency translation adjustments ................................. (9) (3)
Unrealized gains (losses) on securities available for sale ............... 81 (8)
-------- --------
Total other comprehensive income ....................................... 72 (11)
--------
--------
Comprehensive income ........................................................ 9,243 (10,712)
-------- --------
Earnings per share:
Basic net income (loss) per common share ................................. $ 0.38 $ (0.43)
======== ========
Diluted net income (loss) per common share ............................... $ 0.36 $ (0.43)
======== ========
Shares used in computing basic net income (loss) per common share ........... 24,143 24,987
======== ========
Shares used in computing diluted net income (loss) per common share ......... 25,464 24,987
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 159
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 9,171 $ (10,701)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization .............................. 2,141 3,672
Purchased research and development ......................... -- 22,782
Tax benefit from stock option transactions ................. 2,427 2,958
Changes in assets and liabilities:
Accounts receivable, net ............................... (2,933) (8,573)
Other assets ........................................... (443) (993)
Deferred income taxes .................................. 2,410 1,571
Accounts payable ....................................... (303) (317)
Accrued liabilities .................................... (802) 2,502
Deferred revenue ....................................... 1,089 203
Other liabilities ...................................... (73) (217)
--------- ---------
Net cash provided by operating activities ............. 12,684 12,887
--------- ---------
Cash flows from investing activities:
Purchases of investments ...................................... (21,546) (99,030)
Maturities of investments ..................................... 6,350 17,504
Proceeds from sale of investments ............................. 5,038 4,000
Cash purchased in business acquisition ........................ -- 648
Acquisitions, net of cash acquired ............................ -- (6,249)
Acquisitions of property and equipment ........................ (2,786) (3,399)
--------- ---------
Net cash used in investing activities ................. (12,944) (86,526)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuances of common stock ................... 1,698 4,900
Proceeds from issuances of Convertible Subordinated Notes ..... -- 100,000
Debt issuance costs ........................................... -- (2,933)
Repayment of bank line of credit .............................. -- (770)
Repayment of capital lease obligations ........................ (252) (105)
Distributions to CompReview Stockholders ...................... (3,599) --
--------- ---------
Net cash (used in) provided by financing activities ... (2,153) 101,092
--------- ---------
Effect of exchange rate changes on cash ......................... (9) (71)
--------- ---------
Net (decrease) increase in cash and cash equivalents ............ (2,422) 27,382
Cash and cash equivalents at the beginning of the period ........ 8,121 18,068
--------- ---------
Cash and cash equivalents at the end of the period .............. $ 5,699 $ 45,450
========= =========
Significant non-cash investing activities:
Assets assumed in acquisitions of PCS, FTI, and ATACS ......... $ -- $ 9,929
========= =========
Liabilities assumed in acquisitions of PCS, FTI, and ATACS .... $ -- $ 7,297
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 160
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- GENERAL
In management's opinion, the accompanying unaudited consolidated
financial statements for HNC Software Inc. ("HNC") for the six months ended June
30, 1997 and 1998 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 HNC considers
necessary for a fair presentation of its financial position, results of
operations, and cash flows for such periods. However, the accompanying financial
statements do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. All
such financial statements are unaudited except the December 31, 1997 balance
sheet. The accompanying unaudited financial statements should be read in
conjunction with HNC's audited financial statements and notes thereto included
elsewhere herein. Footnotes that would substantially duplicate the disclosures
in HNC's audited financial statements for the fiscal year ended December 31,
1997 have been omitted. The interim financial information is not necessarily
indicative of the results to be expected for any other interim period or for the
full fiscal year ending December 31, 1998.
NOTE 2 -- BASIS OF PRESENTATION
The consolidated financial statements and related notes give
retroactive effect to HNC's November 28, 1997 acquisition of CompReview, Inc.,
accounted for as a pooling of interests, for all periods presented. The
acquisitions of Practical Control Systems Technologies, Inc. ("PCS") and
Financial Technology, Inc. ("FTI") were completed on March 31, 1998 and April 7,
1998, respectively, and accounted for as purchases as of the respective
acquisition dates. In addition, the acquisition of the Advanced
Telecommunications Abuse Control System ("ATACS") product line of Bedford
Associates, Inc., which is a wholly owned subsidiary of British Airways plc, was
completed on June 11, 1998 and accounted for as a purchase as of that date. In
connection with these acquisitions, acquired in-process research and development
in the aggregate amount of $22.8 million was charged to operations at the
respective acquisition dates.
NOTE 3 -- ACQUISITIONS
On March 31, 1998, HNC acquired PCS, based in Cincinnati, Ohio. PCS,
founded in 1985, is a supplier of fully integrated distribution center
management software that addresses the distribution business needs of the
retail, manufacturing and wholesale industries. HNC acquired PCS in exchange for
142,868 shares of HNC common stock, 14,286 of which are subject to an escrow to
secure certain indemnification obligations of the former PCS stockholders plus
the contingent right, subject to PCS' achievement of certain financial
objectives during calendar 1998 and 1999, to receive certain additional shares
of HNC common stock.
On April 7, 1998, HNC acquired FTI. Incorporated in 1982, FTI is a
provider of profitability measurement and decision-support software to the
financial services industry and serves a substantial user base in the United
States, Canada, and Europe. HNC acquired FTI in exchange for the issuance of
396,617 shares of HNC common stock, 97,390 of which are subject to an escrow to
secure certain indemnification obligations of the former FTI stockholders; a
cash payment of $1.5 million; and the contingent right, subject to FTI's
achievement of certain financial objectives during calendar 1998, to receive up
to $5,590,000 of HNC common stock.
On June 11, 1998, HNC acquired the ATACS product line. ATACS, a
subsidiary of Bedford Associates, Inc., which is a wholly owned subsidiary of
British Airways plc, is a fraud-management software solution for wireline,
wireless and Internet telecommunication service providers. HNC acquired the
ATACS product line for a cash payment of $4.75 million.
On September 16, 1998, HNC announced that it had signed a definitive
agreement to acquire Open Solutions Inc. ("OSI"). OSI is a provider of
credit/server core processing software and related professional services to
small to mid-size banks and credit unions. This transaction has not yet been
consummated and remains subject to the satisfaction of certain conditions,
including qualification of the transaction for "pooling of interests" accounting
treatment. Under the current terms of the pending transaction, the consideration
payable by HNC to acquire all of OSI's outstanding stock and stock options would
consist of approximately 2,956,618 shares of HNC's Common Stock and/or options.
The mix of shares and options is currently expected to be approximately
2,507,507 shares and 449,111 options.
F-24
<PAGE> 161
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4 -- COMPREHENSIVE INCOME
During the first quarter of 1998, HNC adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS
130 requires HNC to report in the financial statements, in addition to net
income, comprehensive income and its components including foreign currency items
and unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income is defined as "the change in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners."
NOTE 5 -- RECONCILIATION OF NET (LOSS) INCOME AND SHARES USED IN PER SHARE
COMPUTATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
NET (LOSS) INCOME USED:
Net (loss) income used in computing
basic and diluted net (loss) income
per common share .................. $(10,701) $ 9,171
======== ========
SHARES USED:
Shares used in computing basic net
(loss) income per common share .... 24,987 24,143
Weighted average options to purchase
common stock as determined by
application of the treasury stock
method ............................ -- 1,304
Purchase Plan common stock
equivalents ....................... -- 17
-------- --------
Shares used in computing diluted net
(loss) income per common share .... 24,987 25,464
======== ========
</TABLE>
For the six month period ended June 30, 1998, common stock
equivalents of approximately 1,449,000 shares were not used to calculate diluted
net loss per share because of their anti-dilutive effect. The conversion of
HNC's 4.75% Convertible Subordinated Notes for the six month period ended June
30, 1998 of 1,319,000 shares was not used to calculate diluted net loss per
share as their effect would be anti-dilutive.
NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133") which HNC will be required to adopt for its
2000 annual financial statements. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. HNC has not determined the impact of the adoption of this new accounting
standard on its consolidated financial position or results of operations.
F-25
<PAGE> 162
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Open Solutions Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of changes in stockholders' equity (deficit)
present fairly, in all material respects, the financial position of Open
Solutions Inc. at December 31, 1997 and 1996, and the results of its operations,
its cash flows and changes in stockholders' equity (deficit) for each of the
three years in the period ended December 31, 1997, 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
Hartford, Connecticut
April 6, 1998
F-26
<PAGE> 163
OPEN SOLUTIONS INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
-------------------------------- --------------
1996 1997 (UNAUDITED)
------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 4,437,657 $ 7,596,183 $ 6,332,616
Restricted cash (Note 2)............................ 94,241 281,090 --
Accounts receivable (Note 2)........................ 1,448,573 1,505,940 3,109,943
Prepaid expenses and other (Note 2)................. 135,210 232,807 951,427
Deferred project costs (Note 2)..................... 458,675 -- --
----------- ------------ ------------
Total current assets.............................. 6,574,356 9,616,020 10,393,986
Fixed assets, net (Notes 2 and 3)...................... 767,390 1,153,090 1,372,324
Software development costs, net (Note 2)............... 204,035 533,343 646,308
----------- ------------ ------------
Total assets...................................... $ 7,545,781 $ 11,302,453 $ 12,412,618
=========== ============ ============
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ 227,887 $ 104,249 $ 368,514
Royalties payable (Note 13)......................... 68,315 378,981 --
Accrued expenses (Note 4)........................... 372,108 1,081,917 1,294,950
Note payable (Note 5)............................... -- 175,000 --
Current portion of long-term debt (Note 6).......... -- 34,668 --
Deferred revenue (Note 2)........................... 1,005,129 1,643,457 2,912,427
----------- ------------ ------------
Total current liabilities......................... 1,673,439 3,418,272 4,575,891
----------- ------------ ------------
Accrued rent expense (Note 2).......................... 77,731 100,823 108,919
Long-term debt, less current portion (Note 6).......... -- 57,778 --
----------- ------------ ------------
77,731 158,601 108,919
----------- ------------ ------------
Total liabilities...................................... 1,751,170 3,576,873 4,684,810
Commitments and contingencies (Note 10)................
Mandatorily redeemable convertible preferred
stock and warrants (Note 7).......................... 10,573,480 15,551,214 16,139,549
Stockholders' equity (deficit) (Note 8 and 9):
Preferred stock, $0.01 par value;
1,416,666, 1,416,666, and 1,416,666
shares authorized; 1,416,666, 1,416,666,
and 1,416,666 shares issued and outstanding....... 14,167 14,167 14,167
Common stock, $0.01 par value; 8,580,417,
9,830,417, and 19,055,417 shares authorized;
2,115,000, 2,165,325, and 2,236,013 shares
issued and outstanding............................ 21,150 21,653 22,360
Additional paid-in capital.......................... 2,674,465 2,682,569 4,311,842
Accumulated deficit................................. (7,488,651) (10,544,023) (12,760,110)
----------- ------------ ------------
Total stockholders' equity (deficit).............. (4,778,869) (7,825,634) (8,411,741)
----------- ------------ ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit)...................... $ 7,545,781 $ 11,302,453 $ 12,412,618
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 164
OPEN SOLUTIONS INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues (Note 2):
License and maintenance .............. $ 219,620 $ 879,138 $ 4,505,627 $ 1,303,657 $ 3,351,144
Installation and implementation ...... 48,521 140,255 1,959,037 632,850 2,027,613
Hardware and other .................... -- -- 184,948 32,174 389,836
----------- ----------- ----------- ----------- -----------
Total revenues .................... 268,141 1,019,393 6,649,612 1,968,681 5,768,593
Operating expenses:
License and maintenance .............. 380,793 1,100,081 1,801,202 647,241 1,021,772
Installation and implementation ...... 319,213 937,541 2,416,511 1,097,502 1,558,968
Hardware and other ................... -- -- 92,828 14,511 493,096
Sales and marketing .................. 398,496 1,050,831 2,132,410 954,373 1,562,158
Product development .................. 660,510 1,059,879 1,901,892 995,216 918,356
General and administrative ........... 399,576 645,334 1,569,568 739,708 1,345,729
Contract termination (Note 13)........ -- -- -- -- 1,265,292
----------- ----------- ----------- ----------- -----------
Total operating expenses ........... 2,158,588 4,793,666 9,914,411 4,448,551 8,165,371
----------- ----------- ----------- ----------- -----------
Loss from operations ................... (1,890,447) (3,774,273) (3,264,799) (2,479,870) (2,396,778)
Interest income (expense), net .. (4,506) 135,801 209,427 74,834 180,691
----------- ----------- ----------- ----------- -----------
Net loss ............................... $(1,894,953) $(3,638,472) $(3,055,372) $(2,405,036) $(2,216,087)
=========== =========== =========== =========== ===========
Net loss per common share (basic and
diluted) ............................. $ (0.98) $ (1.73) $ (1.42) $ (1.12) $ (1.01)
Weighted average common shares used
to compute net loss per share (Note 2) 1,935,644 2,102,568 2,155,333 2,146,459 2,191,878
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 165
OPEN SOLUTIONS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $(1,894,953) $(3,638,472) $(3,055,372) $(2,405,036) $(2,216,087)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization .............. 53,865 147,790 352,326 126,129 277,665
Compensation expense related to stock and
options granted ............................ -- 52,500 85,526 52,756 68,952
Options granted to Banking Spectrum
(Note 13) .................................. -- -- -- -- 1,608,750
Changes in operating assets and
liabilities:
Restricted cash ............................ -- (94,241) (186,849) (254,734) 281,090
Accounts receivable ........................ (146,240) (1,302,333) (57,367) (830,700) (1,604,003)
Prepaid expenses and other ................. (17,054) (110,005) (97,597) (276,286) (274,620)
Deferred project costs ..................... -- (458,675) 458,675 458,675 --
Accounts payable and accrued expenses ...... 264,158 371,774 500,645 231,981 (35,654)
Royalties payable .......................... -- 68,315 310,666 (68,315) (378,981)
Deferred revenue ........................... -- 968,254 638,328 583,386 1,268,970
Accrued rent expense ....................... -- 77,731 23,092 12,616 8,096
----------- ----------- ----------- ----------- -----------
Net cash used by operating activities ...... (1,740,224) (3,917,362) (1,027,927) (2,369,528) (995,822)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets .................... (92,523) (696,874) (597,256) (348,969) (374,422)
Software development costs ................... (119,514) (153,209) (215,078) (34,977) (235,442)
----------- ----------- ----------- ----------- -----------
Net cash used by investing activities ...... (212,037) (850,083) (812,334) (383,946) (609,864)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from the sale of preferred
stock ...................................... 5,092,000 5,481,480 4,977,734 -- --
Proceeds from exercise of stock options ...... 1,500 -- 8,607 7,936 21,230
Proceeds from exercise of warrants ........... -- -- -- -- 588,335
Proceeds from short-term debt ................ 1,000,000 -- -- -- --
Payments of short-term debt .................. (1,000,000) (250,000) -- -- (209,668)
Proceeds from long-term debt ................. -- -- 104,002 104,002 --
Payments of long-term debt ................... -- -- (91,556) -- (57,778)
Proceeds from subscription note receivable ... 120,000 60,000 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities .. 5,213,500 5,291,480 4,998,787 111,938 342,119
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents ................................ 3,261,239 524,035 3,158,526 (2,641,536) (1,263,567)
Cash and cash equivalents at beginning of
period ..................................... 652,383 3,913,622 4,437,657 4,437,657 7,596,183
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ... $ 3,913,622 $ 4,437,657 $ 7,596,183 $ 1,796,121 $ 6,332,616
=========== =========== =========== =========== ===========
Supplemental disclosure Cash paid for:
Interest ................................... $ 21,781 $ 3,438 $ 9,148 $ 4,235 $ 4,305
Income taxes ............................... 4,156 25,923 19,172 12,300 25,300
See discussion of non-cash transaction in Note 5.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 166
OPEN SOLUTIONS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------- --------- ------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1994 1,416,667 $14,167 1,930,000 $19,300 $2,442,315 $ (1,955,226) $ 520,556
Exercise of stock
options ................ -- -- 10,000 100 1,400 -- 1,500
Proceeds from subscription
note receivable ........ -- -- -- -- 120,000 -- 120,000
Net loss .................. -- -- -- -- -- (1,894,953) (1,894,953)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- December 31, 1995 1,416,667 14,167 1,940,000 19,400 2,563,715 (3,850,179) (1,252,897)
Issuance of common stock
(Note 8) ............... -- -- 175,000 1,750 50,750 -- 52,500
Proceeds from subscription
note receivable ........ -- -- -- -- 60,000 -- 60,000
Net loss .................. -- -- -- -- -- (3,638,472) (3,638,472)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- December 31,1996 .. 1,416,667 14,167 2,115,000 21,150 2,674,465 (7,488,651) (4,778,869)
Exercise of stock
options ................ -- -- 50,325 503 8,104 -- 8,607
Net loss .................. -- -- -- -- -- (3,055,372) (3,055,372)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- December 31,1997 .. 1,416,667 14,167 2,165,325 21,653 2,682,569 (10,544,023) (7,825,634)
Exercise of stock
options ................ -- -- 70,688 707 20,523 -- 21,230
Issuance of stock options
(Note 13) .............. -- -- -- -- 1,608,750 -- 1,608,750
Net loss .................. -- -- -- -- -- (2,216,087) (2,216,087)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- June 30, 1998
(unaudited) ............... 1,416,667 $14,167 2,236,013 $22,360 $4,311,842 $(12,760,110) $(8,411,741)
========= ======= ========= ======= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 167
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- OPEN SOLUTIONS INC.
Open Solutions Inc. ("OSI") is a provider of client/server core processing
software and related professional services to small to mid-size banks and credit
unions. OSI was incorporated in Delaware in May 1992, and was formed to design
and develop enterprise wide banking software. OSI released its first major
product, The Complete Banking Solution, in the second quarter of 1995. OSI's
design and development efforts have principally been funded through the sale of
redeemable and non-redeemable equity securities as more fully described in Notes
7 and 8. OSI's current products operate in a Microsoft Windows NT environment
using an Oracle relational database.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks, as well as
short-term investments with original maturities of 90 days or less.
Restricted Cash
As of December 31, 1996 and 1997, certain cash amounts were restricted by a
customer in an escrow account. In February 1998, the restriction was removed.
Accounts Receivable
Receivables are net of the allowance for doubtful accounts. As of December
31, 1996 and 1997 and June 30, 1998, the allowance for doubtful accounts was
approximately $86,000, $214,000 and $260,000 (unaudited), respectively.
Prepaid Expenses and Other (Unaudited)
At June 30, 1998, offering costs of $444,000 have been accrued and deferred
in anticipation of an initial public offering of common stock.
Fixed Assets
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, ranging from 5 and 7
years. Leasehold improvements are amortized over the shorter of the term of the
lease or the useful life of the asset.
Software Development Costs
Software development costs for new software products and additional modules
for existing software are expensed as incurred until technological feasibility
is established, in accordance with Statement of Financial Accounting Standard
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Technological feasibility is defined as the point in time
at which OSI has a product design and working model of the software product that
has been appropriately tested. Software development costs incurred subsequent to
the establishment of technological feasibility and prior to general release of
the product are capitalized and amortized based on the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated economic life of the
product, generally three years. Capitalized software development costs were
$153,209, $455,078 and $235,442 (unaudited) for years ended December 31, 1996,
1997 and for the six months ended June 30, 1998, respectively. Amortization
expense was $19,919, $48,769,
F-31
<PAGE> 168
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$125,770, $25,376 (unaudited) and $122,477 (unaudited) for the years ended
December 31, 1995, 1996, 1997 and the six months ended June 30, 1997 and 1998,
respectively. Accumulated amortization was $68,688, $194,458, and $316,935
(unaudited) as of December 31, 1996, 1997 and June 30, 1998, respectively.
Accrued Rent Expense
Accrued rent expense results from the recognition of rent expense on a
straight-line basis relating to a seven year lease agreement with escalating
payments expiring April 2003.
Revenue Recognition
OSI generates revenues from licensing the rights to use its software
products and certain third-party software products to end users. OSI also
generates revenues from customer support and maintenance, and from
implementation and training services provided to customers.
Effective January 1, 1997 OSI early adopted AICPA Statement of Position
97-2, "Software Revenue Recognition" (SOP 97-2). Under SOP 97-2, OSI recognizes
software license revenue when a noncancelable license agreement has been
executed, fees are fixed and determinable, the software has been delivered,
accepted by the customer if acceptance is required by the contract and other
than perfunctory, and collection is considered probable. Beginning in December
1997, OSI revised its standard end user license agreements, eliminating certain
customer acceptance provisions. License revenue under the revised agreement will
be recognized upon software delivery, assuming all other revenue recognition
criteria are met. Prior to 1997, OSI recognized software license revenue in
accordance with AICPA Statement of Position 91-1, "Software Revenue Recognition"
(SOP 91-1). Under SOP 91-1, OSI recognized software license revenue when the
software was delivered, collectibility was probable and no other significant
post delivery obligations remained.
Maintenance revenues are recognized ratably over the maintenance period,
generally one year. Revenues from implementation and training services are
recognized as services are performed. OSI enters into contracts which provide
both license and service elements. As such service elements are not essential to
functionality of the software, in accordance with SOP 97-2, the license fees are
generally recognized upon delivery and the service revenues are recognized when
performed.
Deferred revenue is comprised of payments received in advance of product
delivery, maintenance and other services which have been paid by customers prior
to the services being performed. Deferred project costs are comprised of costs
associated with projects in process for which revenue has not yet been
recognized.
OSI receives royalties from several software vendors for marketing
referrals. Royalty income is recognized at the time the software vendor receives
payment from its customer, and such income is included in service and
maintenance revenue.
As described in Note 10, OSI anticipates receiving payments under certain
license and marketing agreements. OSI expects to recognize such license revenue
when the software has been delivered to the reseller's customer. When extended
payment terms exist, generally the software license fee will be recognized as
payments become due, unless a determination is made at the outset of the
arrangement that the fee is fixed and determinable.
Income Taxes
OSI uses the liability method of accounting for income taxes, as set forth
in Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of the assets and
liabilities and the net operating loss carryforwards using presently enacted tax
rates.
F-32
<PAGE> 169
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (EPS) (SFAS 128) which specifies the computation,
presentation and disclosure requirements for earnings per share of entities with
publicly held common stock or potential common stock. SFAS 128 is effective for
financial statements for both interim and annual periods ended after December
15, 1997. The statement defines two earnings per share calculations, basic and
diluted. Basic EPS is computed by dividing income available to common stock by
the weighted average number of common shares outstanding; diluted EPS is
computed by giving effect to all dilutive potential common shares that were
outstanding during the period. The calculation of diluted EPS is similar to
basic EPS except both the numerator and denominator are increased for the
conversion of potential common shares. Dilutive common share equivalents include
stock options, warrants, and convertible preferred stock.
The 1995, 1996, 1997 and June 1997 and 1998 calculations of diluted EPS do
not include the exercise of stock options, conversion of preferred stock or the
exercise of warrants as the effect on diluted earnings per share would have been
antidilutive.
Concentration of Credit Risk
Financial instruments which potentially expose OSI to concentrations of
credit risk are limited to accounts receivable. Sales to one bank accounted for
approximately 11% (unaudited) of total revenues in the six months ending June
30, 1998. Sales to two banks accounted for approximately 17% and 15% of total
revenues, respectively, in the year ended December 31, 1997. Sales to four banks
accounted for approximately 38%, 22%, 20% and 14% of total revenues,
respectively, in the year ended December 31, 1996. Sales to two banks accounted
for approximately 56% and 43% of total revenues, respectively, in the year ended
December 31, 1995. OSI maintains reserves for potential credit risks and
otherwise controls this risk through credit approvals and monitoring procedures.
Stock Based Compensation
OSI applies APB Opinion 25 and related interpretations in accounting for
its stock option plan. Under APB 25, compensation expense is recognized to the
extent that the fair market value of the underlying stock on the date of grant
exceeds the exercise price of the employee stock option. Additional disclosures
required under Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), are included in Note 9,
Stock Option Plan.
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 period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 applies to all
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for the reporting and display of comprehensive
income in a set of financial statements. Comprehensive income is defined as the
change in net assets of a business enterprise during a period from transactions
generated from non-owner sources. It includes all changes in equity during a
period except those resulting from investment by owners and distributions to
owners. OSI has adopted SFAS 130 beginning January 1, 1998. For the years ended
December 31, 1995, 1996, and 1997 and for the six months ended June 30, 1998,
comprehensive loss was the same as net loss.
F-33
<PAGE> 170
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 applies to all public companies and is effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires that business segment
financial information be reported in the financial statements utilizing the
management approach. The management approach is defined as the manner in which
management organizes the segments within the enterprise for making operating
decisions and assessing performance. OSI has adopted SFAS 131 beginning January
1, 1998. OSI's operations are currently managed all within one segment.
Unaudited Interim Financial Statements. The financial statements as of June
30, 1998 and for the six months ended June 30, 1997 and 1998 are unaudited and
include all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the results
for such interim periods. The results of operations for the six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
any future period.
NOTE 3 -- FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -------------
1996 1997 1998
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................... $ 633,664 $ 1,106,892 $ 1,394,467
Office furniture and equipment........................ 112,262 198,200 266,468
Leasehold improvements................................ 186,855 239,945 258,524
----------- ------------ ------------
932,781 1,545,037 1,919,459
Less: accumulated depreciation........................ (165,391) (391,947) (547,135)
----------- ------------ ------------
$ 767,390 $ 1,153,090 $ 1,372,324
=========== ============ ============
</TABLE>
Depreciation expense was $33,946, $99,021 and $226,556, for the years ended
December 31, 1995, 1996 and 1997, respectively, and $100,753 (unaudited) and
$155,188 (unaudited) for the six months ended June 30, 1997 and 1998,
respectively.
NOTE 4 -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ----------
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation ........... $ 146,555 $ 423,833 $ 335,774
Accrued third party license fees 75,275 327,425 192,949
Accrued sales tax .............. 113,102 316,463 297,392
Accrued offering costs ......... -- -- 444,000
Other .......................... 37,176 14,196 24,835
---------- ---------- ----------
$ 372,108 $1,081,917 $1,294,950
========== ========== ==========
</TABLE>
NOTE 5 -- NOTE PAYABLE
In August 1997, OSI entered into an agreement with another software company
for the purchase of certain assets, properties and rights relating to an ATM
software product in exchange for a $255,000 note. The amount due to the vendor
was paid down based on per copy fees of the purchased software products and the
remaining balance was paid in full on June 30, 1998. At December 31, 1997 and
June 30, 1998, the balance due to the software company was $175,000 and $0
(unaudited), respectively.
F-34
<PAGE> 171
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LINES OF CREDIT
In September 1996, OSI entered into a $250,000 equipment line of credit
with a bank. The equipment line allowed for draw downs through September 1997
with the outstanding borrowings on the equipment line converting to a $104,002,
nine percent term loan payable in 36 months beginning October 1997. Borrowings
are secured by a first security interest in the related equipment. At December
31, 1997 and June 30, 1998 the term loan balance was $92,446 and $0 (unaudited),
respectively.
In June 1997, OSI entered into a $1,000,000 working capital line of credit
with the same bank. At December 31, 1997 and June 30, 1998, there was no balance
outstanding under this line of credit. The line of credit was secured with a
first security interest in all assets, exclusive of those financed under the
equipment line, and expired on July 20, 1998. The line of credit was available
up to 75% of domestic accounts receivable less than 90 days outstanding.
Interest was payable monthly at the bank's prime plus 50 basis points.
In conjunction with these credit agreements, OSI must maintain certain
liquidity, tangible capital base and quick ratio financial covenants. OSI was in
compliance with its financial covenants at June 30, 1998 (unaudited). Payment of
dividends is prohibited under the lines of credit.
NOTE 7 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 1995, OSI issued to Connecticut Innovations, Incorporated ("CII")
166,667 shares of Series A-2 Preferred Stock at $3.00 per share for $500,000. As
a requirement of the funding, OSI must maintain its principal place of business
and conduct the majority of its operations in Connecticut. If OSI fails to
maintain its Connecticut presence, CII may require OSI to purchase CII's shares
at the greater of the original purchase price plus a 40% annual compounded rate
of return or the fair market value of the shares. In addition, CII may require
OSI to purchase its shares if OSI is a private company and is acquired by a
third party or if OSI disposes of substantially all of its assets to a third
party. The price of redemption will be the greater of the original purchase
price of the shares plus a 25% annually compounded rate of return or the fair
market value of the shares. Management does not consider any of the events that
would trigger mandatory redemption to be probable events, has determined a
reliable estimate of when the circumstances that would result in the shares
becoming mandatorily redeemable cannot be made, and therefore does not accrue
for accretion.
In December 1995, OSI issued to a group of investors 1,543,334 shares of
Series B Preferred Stock at $3.00 per share for $4,630,000. In conjunction with
the sale, OSI issued 192,916 warrants to purchase additional shares of Series B
Preferred Stock at $4.00 per share of which 84,583 warrants were exercised in
March 1998. The Series B Preferred Stock has similar mandatory redemption
features as the May 1995 Series A-2.
In October 1996, OSI issued to a group of investors 1,222,222 shares of
Series C Preferred Stock at $4.50 per share for $5,500,000. In conjunction with
the sale, OSI issued 152,778 warrants to purchase additional shares of Series C
Preferred Stock at $6.00 per share of which 41,667 warrants were exercised in
March 1998. The Series C Preferred Stock has similar mandatory redemption
features as the May 1995 Series A-2 and Series B.
In August 1997, OSI issued to an investor 833,333 shares of Series D
Preferred Stock at $6.00 per share for $5,000,000. In conjunction with the sale,
OSI issued 416,667 warrants to purchase additional shares of Series D Preferred
Stock at $6.00 per share. The Series D Preferred Stock has similar mandatory
redemption features as the May 1995 Series A-2, Series B and Series C.
Concurrent with the preferred stock offering, the investor in the Series D
Preferred Stock offering also entered into a marketing and distribution
agreement with OSI. For the six months ended June 30, 1998, there were revenues
of $115,658 recognized under this agreement.
The holders of preferred stock are entitled to receive noncumulative cash
dividends when and as declared by the Board of Directors and have similar voting
rights as common stockholders in addition to certain other defined voting
rights. In the event of any voluntary or involuntary liquidation of OSI, the
holders of Series A-1, Series A-2, Series B, Series C and
F-35
<PAGE> 172
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Series D Preferred Stock shall be entitled to all unpaid dividends at the time
of liquidation and $1.50, $3.00, $3.00 or $4.50 and $6.00, respectively, per
share as a liquidating distribution prior to any liquidating distribution to the
common stockholders. At the option of the preferred stockholders, their shares
may be converted to common stock at the rate of one common stock share for one
share of preferred stock. The preferred stock shall automatically convert into
shares of common stock upon the closing of a firm commitment underwritten public
offering (i) with an aggregate offering price of at least $10,000,000, (ii) with
an offering price per share, with respect to the shares of Series A-1, Series
A-2 and Series B Preferred Stock, of $6.00 and, with respect to the shares of
Series C and Series D Preferred Stock, of $7.50, (iii) where the common stock is
listed for trading on the Nasdaq National Market System and (iv) with the
consent of the holders of at least two-thirds of the outstanding shares of
Series B and Series C Preferred Stock.
The mandatory redemption features terminate upon the closing of a public
offering and the expiration of any related lock-up agreements, with the
exception of the Series A-2 Preferred Stock held by CII and the Series B
Preferred Stock. The rights of CII and of the holders of Series B Preferred
Stock to require OSI to purchase their shares of Series A-2 Preferred Stock and
Series B Preferred Stock, respectively, in the event OSI fails to maintain its
Connecticut presence do not terminate. The right of CII to require OSI to
purchase its shares of Series A-2 Preferred Stock in the event of a change of
control terminates upon the closing of a public offering. (See Note 15).
NOTE 8 -- STOCKHOLDERS' EQUITY
Capital Stock Transactions
In December 1995, in conjunction with the issuance of the Series B
Preferred Stock, OSI revised its certificate of incorporation to authorize
11,000,000 shares, of which 7,680,417 were common stock and 3,319,583 were
preferred stock. In October 1996, in conjunction with the issuance of the Series
C Preferred Stock, OSI revised its certificate of incorporation to authorize
13,275,000 shares of which 8,580,417 were common stock and 4,694,583 were
preferred stock. In August 1997, in conjunction with the issuance of the Series
D Preferred Stock, OSI revised its certificate of incorporation to authorize
15,775,000 shares, of which 9,830,417 were common stock and 5,944,583 were
preferred stock. In February 1998, OSI revised its certificate of incorporation
to approve an increase in authorized shares from 15,775,000 to 25,000,000.
In January 1996, OSI issued 175,000 shares of common stock to the Chief
Executive Officer, resulting in compensation expense of $52,500.
OSI has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Conversion of preferred stock ................ 5,182,222 5,308,472
Conversion of preferred stock upon exercise of
warrants ................................. 762,361 636,111
Exercise of options .......................... 1,610,000 3,000,000
--------- ---------
7,554,583 8,944,583
========= =========
</TABLE>
Preferred Stock
In February 1994, OSI issued 1,000,000 shares of preferred stock designated
as Series A-1 Preferred Stock at $1.50 per share. In conjunction with the
issuance of the Series A-1 Preferred Stock, OSI issued a warrant to purchase
333,333 shares of Series A-2 Preferred Stock with an exercise price of $3.00 per
share. The warrant was subsequently converted to 333,333 shares of Series A-2
Preferred Stock in September 1994 for $999,999.
F-36
<PAGE> 173
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In September 1994, OSI issued an additional 83,333 shares of preferred
stock designated as Series A-2 Preferred Stock at $3.00 per share. OSI received
$50,000 in cash and a note for $200,000 payable in monthly installments of
$10,000 plus interest, of which $60,000 and $0 was outstanding at December 31,
1995 and 1996, respectively. The shares were pledged as collateral against the
note.
At the option of the preferred stockholders, their shares may be converted
to common stock at the rate of one common stock share for one share of preferred
stock. The preferred stock shall automatically convert into shares of common
stock upon the closing of a public offering meeting certain criteria.
NOTE 9 -- STOCK OPTION PLAN
OSI has established the 1994 Stock Option Plan (the "1994 Plan") for
employees, officers, directors, and consultants or advisors to OSI under which
the Board of Directors may grant incentive stock options and non-qualified stock
options. Incentive stock options will be granted at the fair value of the Common
Stock at the time of grant, as determined by the Board of Directors. Generally,
incentive stock options vest 25% on the first anniversary of the date of grant
and then ratably on a monthly basis over the subsequent three years. In certain
circumstances, at the discretion of the Board of Directors, options are granted
with a vesting schedule of other than four years. Non-qualified stock options
have a vesting period as determined by the Board of Directors generally vesting
25% on the first anniversary of the date of grant and then ratably on a monthly
basis over the subsequent three years. The stock options are exercisable over a
period of ten years from the date of grant.
In May 1997, the shareholders approved an increase in the maximum number of
shares that may be issued under the 1994 Plan from 1,110,000 to 1,610,000. In
February 1998, the shareholders approved an increase in the maximum number of
shares that may be issued under the 1994 Plan from 1,610,000 to 3,000,000.
A summary of stock option activity under the 1994 Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995 ....... 595,500 $0.20
Granted ............................. 386,500 0.30
---------
Outstanding at December 31, 1996 ....... 982,000 0.24
Granted ............................. 482,250 1.23
Canceled ............................ (47,675) 0.24
Exercised ........................... (50,325) 0.17
---------
Outstanding at December 31, 1997 ....... 1,366,250 0.59
Granted ............................. 404,500 1.32
Canceled ............................ (10,562) 2.11
Exercised ........................... (70,688) 0.30
---------
Outstanding at June 30, 1998 (unaudited) 1,689,500 0.77
========= ====
</TABLE>
Stock options outstanding at June 30, 1998 include 275,000 stock options
granted to affiliates of Banking Spectrum Services, Inc., a shareholder of OSI,
in March 1998. OSI recorded contract termination expense in connection with
these stock options, as described in Note 13, Related Parties.
F-37
<PAGE> 174
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information regarding stock options granted
during 1995, 1996 and 1997, and the six months ended June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SFAS123
WEIGHTED MINIMUM
NUMBER OF AVERAGE VALUE AT
OPTIONS EXERCISE GRANT
GRANTED PRICE DATE
--------- --------- ---------
<S> <C> <C> <C>
1995:
Options granted with an exercise price equal to market value................. 245,500 $0.28 $0.09
1996:
Options granted with an exercise price equal to market value................. 386,500 0.30 0.10
1997:
Options granted with an exercise price equal to market value................. 8,500 0.36 0.12
Options granted with an exercise price less than market value................ 473,750 1.25 1.10
1998:
Options granted with an exercise price less than market value................ 404,500 1.32 5.60
</TABLE>
The weighted average SFAS 123 minimum value at grant date is the amount
attributable to the option that is calculated without considering the expected
volatility of the underlying stock.
The following table summarizes additional information about stock options
outstanding at June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------------------- OPTIONS EXERCISABLE
NUMBER WEIGHTED- -----------------------------------
OUTSTANDING AT AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE JUNE 30, REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICE 1998 CONTRACTUAL LIFE IN YEARS EXERCISE PRICE JUNE 30, 1998 EXERCISE PRICE
----------- ------------------ ---------------------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.15 296,000 5.9 $0.15 291,250 $0.15
0.15 20,000 6.6 0.15 17,083 0.15
0.30 133,000 7.1 0.30 104,759 0.30
0.30 368,000 7.9 0.30 181,510 0.30
0.45 311,000 8.7 0.45 164,261 0.45
0.45 275,000 9.7 0.45 275,000 0.45
2.75 157,500 9.3 2.75 2,292 2.75
2.75 8,500 9.7 2.75 -- --
2.75 100,000 9.8 2.75 -- --
4.50 9,000 9.8 4.50 -- --
6.00 11,500 10.0 6.00 -- --
------------ ------------
1,689,500 1,036,155
============ ============
</TABLE>
Had compensation expense been recognized based on the minimum value of the
employee options at their grant dates, as prescribed in SFAS 123, OSI's pro
forma net loss would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------- JUNE 30,
1995 1996 1997 1998
-------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss:
As reported .................................. $1,894,953 $3,638,472 $3,055,372 $2,216,087
Pro forma .................................... 1,896,688 3,646,337 3,131,847 2,317,576
Pro forma net loss per share (basic and diluted):
As reported .................................. $ (0.98) $ (1.73) $ (1.42) $ (1.01)
Pro forma .................................... (0.98) (1.73) (1.45) (1.06)
</TABLE>
F-38
<PAGE> 175
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for options granted during the applicable period: .
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997 1998
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Risk free interest rate................ 7.24% 6.72% 5.65%-6.66% 5.32%-5.46%
Expected dividend yield................ None None None None
Expected life of option................ 6 years 6 years 6 years 6 years
Expected volatility.................... 0% 0% 0% 0%
</TABLE>
The minimum value method requires the input of subjective assumptions.
Changes in the subjective input assumptions can materially affect the minimum
value estimate.
Compensation of $358,513 and $419,325 (unaudited) has been attributed to
those common stock options granted to employees during 1997 and the six months
ended June 30, 1998, respectively, with an exercise price below estimated fair
value. Compensation expense is recognized over the four year vesting period and
totaled $85,526, $52,756 (unaudited) and $68,952 (unaudited) for the year ended
December 31, 1997 and the six months ended June 30, 1997 and 1998, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
At June 30, 1998, OSI was committed under facility and various other
operating leases with an initial term of more than one year which expire at
various dates through 2003. Terms of the facility lease provide for escalating
rent payments in future years. Minimum lease payments under these noncancelable
leases are approximately as follows:
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
January 1-- June 30, 1998.......................................... $ -- $ 82,000
July 1-- December 31, 1998......................................... 86,000 86,000
1999............................................................... 182,000 182,000
2000............................................................... 191,000 191,000
2001............................................................... 211,000 211,000
2002............................................................... 219,000 219,000
Thereafter......................................................... 72,000 72,000
---------- ------------
Total minimum obligations................................... $ 961,000 $ 1,043,000
========== ============
</TABLE>
Rent expense under operating leases was approximately $36,000, $149,000 and
$194,000 for the years ended December 31, 1995, 1996 and 1997 and $101,000
(unaudited) and $127,000 (unaudited) for the six months ended June 30, 1997 and
1998, respectively.
OSI has license and marketing agreements which provide certain
geographically exclusive rights to use OSI's software product for the
outsourcing of core processing services to banks and credits unions. The
agreements provide defined geographic exclusivity as long as minimum revenue
targets are met.
From time to time in the ordinary course of business, OSI is subject to
legal proceedings. While it is impossible to determine the ultimate outcome of
such matters, it is management's opinion that the resolution of any pending
issues will not have a material adverse effect on the financial position,
results of operations or cash flows of OSI.
NOTE 11 -- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, trade accounts receivable, other current
assets, trade accounts payable, royalties payable, accrued expenses, notes
payable and outstanding lines of credit approximate fair value because of the
short maturity of those instruments.
F-39
<PAGE> 176
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- INCOME TAXES
Significant components of OSI's deferred tax asset at December 31, 1996 and
1997, and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Gross deferred tax assets:
Net operating loss
carryforwards ............ $ 2,853,000 $ 3,967,000 $ 4,105,000
Research & development credit
carryforwards ............ 130,000 332,000 446,000
Stock option expense ........ -- -- 643,000
Other ....................... 32,000 126,000 147,000
----------- ----------- -----------
3,015,000 4,425,000 5,341,000
----------- ----------- -----------
Gross deferred tax liability:
Capitalized software
development costs ........ 84,000 221,000 189,000
Accelerated depreciation .... 14,000 71,000 86,000
----------- ----------- -----------
98,000 292,000 275,000
----------- ----------- -----------
Valuation allowance ............ (2,917,000) (4,133,000) (5,066,000)
----------- ----------- -----------
Net deferred tax asset ......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
OSI has provided a valuation allowance for the full amount of the net
deferred tax asset as of December 31, 1996 and 1997 and June 30, 1998 since
management has not determined realization of these future benefits to be more
likely than not. If OSI achieves profitability, the deferred tax asset would be
available, subject to certain annual limitations, to offset future income taxes.
At June 30, 1998, OSI had approximately $10.1 million (unaudited) of
federal net operating loss carryforwards that begin expiring in 2007 and had
approximately $10.9 million (unaudited) of state net operating loss
carryforwards that begin expiring in 1998. At June 30, 1998, OSI had
approximately $446,000 (unaudited) of research and development credit
carryforwards that begin expiring in 2007.
As defined in the Internal Revenue Code, certain ownership changes limit
the annual utilization of federal net operating loss and tax credit
carryforwards. OSI experienced such an ownership change in December 1995 which
limits approximately $3.2 million of federal net operating loss carryforwards
and $149,000 of research tax credits to a $307,000 annual Section 382
limitation.
NOTE 13 -- RELATED PARTIES
Banking Spectrum
In January 1994, OSI entered into an agreement with Banking Spectrum
Services, Inc., a shareholder of OSI, and Banking Spectrum, Inc. (collectively,
"Banking Spectrum"), to provide and receive certain consulting and support
services. The majority shareholder of Banking Spectrum Services, Inc. is a
director and shareholder of OSI. Pursuant to the agreement, OSI agreed to pay
Banking Spectrum a royalty based on the licensing of software products and
related services, ranging from three percent to 17% of net revenues, based on
Banking Spectrum's involvement in the sale of such products and services. OSI
recognized royalty expense of $9,021, $72,064, $337,945, $75,515 (unaudited) and
$90,403 (unaudited) for the years ended December 31, 1995, 1996, 1997 and for
the six months ended June 30, 1997 and 1998, respectively.
In March 1998, OSI and Banking Spectrum terminated their previous agreement
and entered into a distribution and termination agreement. The new agreement
released OSI from any future royalty payments to Banking Spectrum in exchange
for cash payment of $100,000 to Banking Spectrum and fully vested options to
affiliates of Banking Spectrum Services, Inc. to purchase 275,000 shares of
Common Stock at an exercise price of $0.45 per share. The distribution and
termination agreement expires upon delivery to OSI's customers of a limited
number of modules licensed from Banking
F-40
<PAGE> 177
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Spectrum. As of March 31, 1998, there was no remaining future value attributable
to the termination charge because the maximum number of Banking Spectrum
licenses had been sold, there were no other future services to be provided by
Banking Spectrum under the agreement and there is no embedded Banking Spectrum
technology in OSI's existing products. The stock options were estimated by
management to have a fair value of approximately $1.6 million (unaudited). Net
of amounts previously accrued, OSI recorded a contract termination expense of
approximately $1.3 million (unaudited) for the six months ended June 30, 1998.
PRISM
During 1994, OSI borrowed $250,000 from Prince-Roth Information Systems
Management Inc. ("PRISM"), a related party. Spouses of the shareholders of PRISM
are shareholders of OSI. The note was paid in full during 1996 including
interest due. Interest expense was $0 and $3,000 for the years ended December
31, 1995 and 1996, respectively.
NOTE 14 -- 401(k) PLAN
In 1994 OSI established a voluntary 401(k) plan in which all full time
employees are eligible to participate. Since July 1996 OSI has provided matching
contributions of $30.00 per year plus 25% of the first four percent of the
employee's compensation which is deferred under the plan. Eligible employees who
elect to participate in the 401(k) plan are generally vested in OSI's matching
contributions after three years of service. OSI contributions for the years
ended December 31, 1995, 1996 and 1997 and for the six months ended June 30,
1998, were $0, $9,926, $27,773, and $24,112 (unaudited), respectively.
NOTE 15 -- SUBSEQUENT EVENTS (UNAUDITED)
On September 16, 1998, OSI entered into a merger agreement with HNC
Software Inc. ("HNC") whereby all the outstanding OSI Common Stock and OSI
Preferred Stock will be exchanged for HNC Common Stock. The Merger is expected
to be completed by December 31, 1998. As a result, previously deferred initial
public offering costs of approximately $444,000 will be written off.
F-41
<PAGE> 178
APPENDIX A
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and
entered into as of September 16, 1998 (the "AGREEMENT DATE") by and among HNC
SOFTWARE INC., a Delaware corporation ("HNC"), OAHU TRANSACTION CORP., a
Delaware corporation that is a wholly-owned subsidiary of HNC ("SUB"), and OPEN
SOLUTIONS INC., a Delaware corporation ("OSI").
RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, Sub will be merged with and into OSI in a reverse triangular merger,
with OSI 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) of the Internal Revenue Code of 1986, as
amended (the "CODE").
B. Upon the effectiveness of such merger, (i) the common stock and
preferred stock of OSI that is outstanding immediately prior to the
effectiveness of the merger will be converted into shares of the common stock of
HNC, (ii) the employee stock options to purchase shares of OSI's common stock
granted under the OSI Option Plans (as defined in Article I below) 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
(iii) Sub will be merged with and into OSI, 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 OSI 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 law of the State of Delaware as a result of
the filing with the Delaware Secretary of State of a Certificate of Merger
regarding the Merger, conforming to the requirements of Section 251 of the
Delaware General Corporation Law (the "CERTIFICATE OF MERGER").
1.3 "OSI COMMON STOCK" means OSI's Common Stock, $0.01 par value per
share.
1.4 "OSI PREFERRED STOCK" means OSI's Preferred Stock, $0.01 par value per
share, of any series, including but not limited to the OSI Series A-1 Stock, OSI
Series A-2 Stock, OSI Series B Stock, OSI Series C Stock and OSI Series D Stock.
1.5 "OSI SERIES A-1 STOCK" means OSI's Series A-1 Preferred Stock, $0.01
par value per share.
1.6 "OSI SERIES A-2 STOCK" means OSI's Series A-2 Preferred Stock, $0.01
par value per share.
1.7 "OSI SERIES B STOCK" means OSI's Series B Preferred Stock, $0.01 par
value per share.
1.8 "OSI SERIES C STOCK" means OSI's Series C Preferred Stock, $0.01 par
value per share.
1.9 "OSI SERIES D STOCK" means OSI's Series D Preferred Stock, $0.01 par
value per share.
<PAGE> 179
1.10 "OSI OPTIONS" means options to purchase shares of OSI Common Stock
granted by OSI to OSI employees or to individuals who are consultants of OSI
under OSI's 1994 Stock Option Plan, ("1994 OPTION PLAN") or OSI's 1998 Stock
Incentive Plan (the "1998 OPTION PLAN"). The 1994 Option Plan and the 1998
Option Plan are collectively referred to herein as the "OSI OPTION PLANS" and
each individually as an "OSI OPTION PLAN."
1.11 "OTHER OSI SECURITIES" means, collectively: (a) any warrant, option,
right or other security (other than any OSI Option) that entitles the holder
thereof to purchase or otherwise acquire any shares of the capital stock of OSI
(collectively, "OSI STOCK RIGHTS"); (b) any note, evidence of indebtedness,
stock or other security of OSI (other than OSI Preferred Stock) that is
convertible into or exchangeable for any shares of the capital stock of OSI or
any OSI Stock Rights ("OSI 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 OSI Stock Rights or any OSI
Convertible Security. The term "Other OSI Securities" does not include any OSI
Options or any shares of OSI Preferred Stock.
1.12 "FULLY DILUTED OSI SHARES" means that number of shares of OSI Common
Stock that is equal to the sum of: (a) the total number of shares of OSI Common
Stock that are issued and outstanding immediately prior to the Effective Time;
plus (b) the total number of shares of OSI Common Stock that are issuable upon
the conversion in full of all shares of OSI Preferred Stock that are issued and
outstanding immediately prior to the Effective Time; plus (c) the total number
of shares of OSI Common Stock that are subject to or potentially issuable
(without regard to vesting) under all OSI Options that are issued and
outstanding immediately prior to the Effective Time; plus (d) the total number
of shares of OSI Common Stock that, immediately prior to the Effective Time,
are, directly or indirectly, ultimately or potentially issuable by OSI upon the
exercise, conversion or exchange of all Other OSI Securities (if any) that are
issued and outstanding immediately prior to the Effective Time.
1.13 "OSI STOCKHOLDERS" means, collectively, those persons (each being
individually referred to herein as a "OSI STOCKHOLDER") who, immediately prior
to the Effective Time, hold the shares of OSI Common Stock and OSI Preferred
Stock that are outstanding immediately prior to the Effective Time; provided,
however, that for purposes of Section 2.4 and Article 11 of this Agreement, the
term "OSI Stockholders" means only those OSI Stockholders (as defined above in
this Section) who are issued shares of HNC Common Stock in the Merger pursuant
to Section 2.1.2 of this Agreement.
1.14 "OSI DISSENTING SHARES" means any shares of any capital stock of OSI
that (i) are outstanding immediately prior to the Effective Time and (ii) with
respect to which dissenter's appraisal rights to require the purchase of such
dissenting shares for cash at their fair market value in accordance with Section
262 of the Delaware General Corporation Law have been duly and properly
exercised and perfected in connection with the Merger.
1.15 "HNC COMMON STOCK" means HNC's Common Stock, $0.001 par value per
share.
1.16 "OSI SERIES A-1 AGGREGATE PREFERENCE AMOUNT" means that dollar amount
equal to the sum of (a) $1.50 multiplied by the total number of shares of OSI
Series A-1 Stock that are issued and outstanding immediately prior to the
Effective Time plus (b) the aggregate dollar amount of all declared but unpaid
dividends (if any) on all the outstanding shares of OSI Series A-1 Stock as of
immediately prior to the Effective Time.
1.17 "OSI SERIES A-2 AGGREGATE PREFERENCE AMOUNT" means that dollar amount
equal to the sum of (a) $3.00 multiplied by the total number of shares of OSI
Series A-2 Stock that are issued and outstanding immediately prior to the
Effective Time plus (b) the aggregate dollar amount of all declared but unpaid
dividends (if any) on all the outstanding shares of OSI Series A-2 Stock as of
immediately prior to the Effective Time.
1.18 "OSI SERIES B AGGREGATE PREFERENCE AMOUNT" means that dollar amount
equal to the sum of (a) $3.00 multiplied by the total number of shares of OSI
Series B Stock that are issued and outstanding immediately prior to the
Effective Time plus (b) the aggregate dollar amount of all accrued but unpaid
dividends (if any) on all the outstanding shares of OSI Series B Stock as of
immediately prior to the Effective Time.
1.19 "OSI SERIES C AGGREGATE PREFERENCE AMOUNT" means that dollar amount
equal to the sum of (a) $4.50 multiplied by the total number of shares of OSI
Series C Stock that are issued and outstanding immediately prior to the
Effective Time plus (b) the aggregate dollar amount of all accrued but unpaid
dividends (if any) on all the outstanding shares of OSI Series C Stock as of
immediately prior to the Effective Time.
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1.20 "OSI SERIES D AGGREGATE PREFERENCE AMOUNT" means that dollar amount
equal to the sum of (a) $6.00 multiplied by the total number of shares of OSI
Series D Stock that are issued and outstanding immediately prior to the
Effective Time plus (b) the aggregate dollar amount of all accrued but unpaid
dividends (if any) on all the outstanding shares of OSI Series D Stock as of
immediately prior to the Effective Time.
1.21 "HNC AVERAGE PRICE PER SHARE" means $39.475, which is the average of
the closing prices per share of HNC Common Stock as quoted on the Nasdaq Stock
Market and reported in The Wall Street Journal for the five (5) trading days
immediately preceding (but not including) the Agreement Date (as adjusted to
reflect any Capital Change (as defined in Section 2.3) of HNC that may occur
during such five (5) day period).
1.22 "HNC SERIES A-1 PREFERRED MERGER SHARES" means that number of shares
of HNC Common Stock, as presently constituted, equal to the quotient obtained by
dividing (a) the OSI Series A-1 Aggregate Preference Amount by (b) the HNC
Average Price Per Share, rounded down to the nearest whole number of shares of
HNC Common Stock.
1.23 "HNC SERIES A-2 PREFERRED MERGER SHARES" means that number of shares
of HNC Common Stock, as presently constituted, equal to the quotient obtained by
dividing (a) the OSI Series A-2 Aggregate Preference Amount by (b) the HNC
Average Price Per Share, rounded down to the nearest whole number of shares of
HNC Common Stock.
1.24 "HNC SERIES B PREFERRED MERGER SHARES" means that number of shares of
HNC Common Stock, as presently constituted, equal to the quotient obtained by
dividing (a) the OSI Series B Aggregate Preference Amount by (b) the HNC Average
Price Per Share, rounded down to the nearest whole number of shares of HNC
Common Stock.
1.25 "HNC SERIES C PREFERRED MERGER SHARES" means that number of shares of
HNC Common Stock, as presently constituted, equal to the quotient obtained by
dividing (a) the OSI Series C Aggregate Preference Amount by (b) the HNC Average
Price Per Share, rounded down to the nearest whole number of shares of HNC
Common Stock.
1.26 "HNC SERIES D PREFERRED MERGER SHARES" means that number of shares of
HNC Common Stock, as presently constituted, equal to the quotient obtained by
dividing (a) the OSI Series D Aggregate Preference Amount by (b) the HNC Average
Price Per Share, rounded down to the nearest whole number of shares of HNC
Common Stock.
1.27 "HNC PREFERRED MERGER SHARES" means the number of shares of HNC Common
Stock, as presently constituted, equal to the sum of (i) the HNC Series A-1
Preferred Merger Shares, plus (ii) the HNC Series A-2 Preferred Merger Shares,
plus (iii) the HNC Series B Preferred Merger Shares, plus (iv) the HNC Series C
Preferred Merger Shares plus (v) the HNC Series D Preferred Merger Shares;
provided, however, that in no event shall the number of shares of HNC Common
Stock equal to the HNC Preferred Merger Shares exceed the number of shares of
HNC Common Stock equal to the HNC Merger Shares.
1.28 "HNC MERGER SHARES" means 2,956,618 shares of HNC Common Stock, as
presently constituted.
1.29 "HNC PARTICIPATING MERGER SHARES" means the number of shares of HNC
Common Stock, as presently constituted, equal to the HNC Merger Shares minus the
HNC Preferred Merger Shares.
1.30 "PARTICIPATING STOCK CONVERSION NUMBER" means the quotient obtained by
dividing (a) the number of shares of HNC Common Stock constituting the HNC
Participating Merger Shares by (b) the number of Fully Diluted OSI Shares.
1.31 "SERIES A-1 PREFERRED CONVERSION NUMBER" means the quotient obtained
by dividing (a) the number of shares of HNC Common Stock constituting the HNC
Series A-1 Preferred Merger Shares by (b) the number of shares of OSI Series A-1
Stock that are issued and outstanding immediately prior to the Effective Time.
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1.32 "SERIES A-2 PREFERRED CONVERSION NUMBER" means the quotient obtained
by dividing (a) the number of shares of HNC Common Stock constituting the HNC
Series A-2 Preferred Merger Shares by (b) the number of shares of OSI Series A-2
Stock that are issued and outstanding immediately prior to the Effective Time.
1.33 "SERIES B PREFERRED CONVERSION NUMBER" means the quotient obtained by
dividing (a) the number of shares of HNC Common Stock constituting the HNC
Series B Preferred Merger Shares by (b) the number of shares of OSI Series B
Stock that are issued and outstanding immediately prior to the Effective Time.
1.34 "SERIES C PREFERRED CONVERSION NUMBER" means the quotient obtained by
dividing (a) the number of shares of HNC Common Stock constituting the HNC
Series C Preferred Merger Shares by (b) the number of shares of OSI Series C
Stock that are issued and outstanding immediately prior to the Effective Time.
1.35 "SERIES D PREFERRED CONVERSION NUMBER" means the quotient obtained by
dividing (a) the number of shares of HNC Common Stock constituting the HNC
Series D Preferred Merger Shares by (b) the number of shares of OSI Series D
Stock that are issued and outstanding immediately prior to the Effective Time.
1.36 "OSI ANCILLARY AGREEMENTS" means, collectively, the Certificate of
Merger and each other agreement, certificate or document (other than this
Agreement) which OSI is to enter into as a party thereto, pursuant to or in
connection with this Agreement.
1.37 "HNC ANCILLARY AGREEMENTS" means, collectively, each agreement,
certificate or document (other than this Agreement) which HNC is to enter into
as a party thereto pursuant to or in connection with this Agreement.
1.38 "SUB ANCILLARY AGREEMENTS" means, collectively, each agreement,
certificate or document (other than this Agreement) which Sub is to enter into
as a party thereto pursuant to or in connection with this Agreement.
1.39 "KNOWLEDGE," when used with reference to a party, means the collective
actual knowledge of the executive officers and members of the board of directors
of such party.
1.40 "MATERIAL ADVERSE EFFECT" when used with reference to any entity or
group of entities, means any event, change or effect that is (or will with the
passage of time be) materially adverse to the financial condition, properties,
assets, liabilities, business, operations, or results of operations of such
entity and its subsidiaries, taken as a whole.
1.41 "MATERIAL ADVERSE CHANGE" when used with reference to any entity or
group of entities, means a material adverse change other than (a) a change
arising or resulting, directly or indirectly, from general industry, economic or
stock market conditions or (b) a change that is proximately caused by the public
announcement of, and the response or reaction of customers, vendors, licensors,
investors, employees of such entity or group of entities to, this Agreement, the
Merger or any of the transactions contemplated by this Agreement.
1.42 "OSI STOCKHOLDERS' MEETING" means, as applicable (a) the written
consent of OSI stockholders in lieu of a meeting in accordance with Section 228
of the Delaware General Corporation Law or (b) the special meeting of OSI
stockholders to be called and held by OSI, in order to seek the OSI
stockholders' approval of the Merger, this Agreement and the transactions
contemplated thereby.
1.43 "TERMINATION DATE" means December 31, 1998; provided however, that:
(a) if, following the filing by HNC and OSI of pre-merger notification and
report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations thereunder (the "HSR ACT"), HNC or OSI shall
receive a formal request from the U.S. Department of Justice or Federal Trade
Commission for additional information (i.e., a "SECOND REQUEST") delivered under
the HSR Act, then (subject to any longer extension of the Termination Date
pursuant to the provisions of the following clause (b) of this Section 1.43) the
Termination Date shall mean the earlier of (i) January 31, 1999 or (ii) the date
thirty (30) days after HNC and the Company each deliver a response that
substantially complies with any such second request; and (b) if, notwithstanding
HNC's compliance with its obligations under the provisions of Section 2.6, the
registration under the Form S-4 (as defined in Section 2.6) of the offer and
issuance by HNC of the shares of HNC Common Stock to be issued in the Merger
pursuant to this Agreement has not been declared effective by the SEC (as
defined in Section 2.2.2) under the 1933 Act (as defined in Section 2.2.2) by
December 15, 1998, then the Termination Date shall mean March 31, 1999.
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Other capitalized terms defined elsewhere in this Agreement and not defined
in this Article I will have the meanings assigned to such terms in this
Agreement.
ARTICLE 2
PLAN OF REORGANIZATION
2.1 Conversion of Shares.
2.1.1 Conversion of Sub Stock. At the Effective Time, each share of
the Common Stock of Sub that is issued and outstanding immediately prior to the
Effective Time will, by virtue of the Merger and without the need for any
further action on the part of the holder thereof, be converted into and become
one (1) share of OSI Common Stock that is issued and outstanding immediately
after the Effective Time, and the shares of OSI 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 OSI that are issued and outstanding immediately after
the Effective Time.
2.1.2 Conversion of OSI Stock. At the Effective Time:
(a) each share of OSI Common Stock that is issued and
outstanding immediately prior to the Effective Time (other than any OSI
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
Participating Stock Conversion Number, subject to the provisions of Section
2.1.4 regarding the elimination of fractional shares;
(b) each share of OSI Series A-1 Stock that is issued and
outstanding immediately prior to the Effective Time (other than any OSI
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
sum of (a) the Series A-1 Preferred Conversion Number plus (b) the product
obtained by multiplying (i) the Participating Stock Conversion Number by (ii)
the number of shares of OSI Common Stock into which one (1) share of OSI Series
A-1 Stock is convertible under the terms of OSI's Certificate of Incorporation
immediately prior to the Effective Time of the Merger, subject to the provisions
of Section 2.1.4 regarding the elimination of fractional shares;
(c) each share of OSI Series A-2 Stock that is issued and
outstanding immediately prior to the Effective Time (other than any OSI
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
sum of (a) the Series A-2 Preferred Conversion Number plus (b) the product
obtained by multiplying (i) the Participating Stock Conversion Number by (ii)
the number of shares of OSI Common Stock into which one (1) share of OSI Series
A-2 Stock is convertible under the terms of OSI's Certificate of Incorporation
immediately prior to the Effective Time of the Merger, subject to the provisions
of Section 2.1.4 regarding the elimination of fractional shares;
(d) each share of OSI Series B Stock that is issued and
outstanding immediately prior to the Effective Time (other than any OSI
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
sum of (a) the Series B Preferred Conversion Number plus (b) the product
obtained by multiplying (i) the Participating Stock Conversion Number by (ii)
the number of shares of OSI Common Stock into which one (1) share of OSI Series
B Stock is convertible under the terms of OSI's Certificate of Incorporation
immediately prior to the Effective Time of the Merger, subject to the provisions
of Section 2.1.4 regarding the elimination of fractional shares;
(e) each share of OSI Series C Stock that is issued and
outstanding immediately prior to the Effective Time (other than any OSI
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
sum of (a) the Series C Preferred Conversion Number plus (b) the product
obtained by multiplying (i) the Participating Stock Conversion Number by (ii)
the number of shares of OSI Common Stock into which one (1) share of OSI Series
C Stock is convertible under the terms of OSI's Certificate of
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Incorporation immediately prior to the Effective Time of the Merger, subject to
the provisions of Section 2.1.4 regarding the elimination of fractional shares;
and
(f) each share of OSI Series D Stock that is issued and
outstanding immediately prior to the Effective Time (other than any OSI
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
sum of (a) the Series D Preferred Conversion Number plus (b) the product
obtained by multiplying (i) the Participating Stock Conversion Number by (ii)
the number of shares of OSI Common Stock into which one (1) share of OSI Series
D Stock is convertible under the terms of OSI's Certificate of Incorporation
immediately prior to the Effective Time of the Merger, subject to the provisions
of Section 2.1.4 regarding the elimination of fractional shares.
2.1.3 OSI Dissenting Shares. Holders of OSI Dissenting Shares (if any)
will be entitled to their appraisal rights under Section 262 of the Delaware
General Corporation Law with respect to such OSI Dissenting Shares and such OSI
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 OSI Dissenting Shares.
Shares of the capital stock of OSI that are outstanding immediately prior to the
Effective Time of the Merger and with respect to which dissenting stockholders'
rights of appraisal under the Delaware General Corporation Law have either (a)
not been properly exercised and perfected or (b) with the consent of OSI and
HNC, been withdrawn, will, when such dissenting stockholders' rights can no
longer be legally exercised under the Delaware General Corporation Law, be
converted into HNC Common Stock as provided in Section 2.1.2.
2.1.4 Fractional Shares. No fractional shares of HNC Common Stock will
be issued in connection with the Merger. In lieu thereof, each holder of OSI
Common Stock and each holder of OSI Preferred Stock who would otherwise be
entitled to receive a fraction of a share of HNC Common Stock pursuant to
Section 2.1.2, computed 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 ten (10) business days after the Effective Time, an amount of cash
equal to the product obtained by multiplying (a) the HNC Average Price Per Share
by (b) the fraction of a share of HNC Common Stock that such holder would
otherwise be entitled to receive.
2.1.5 Continuation of Vesting and Repurchase Rights. If any shares of
OSI Common Stock or OSI Preferred Stock that are outstanding immediately prior
to the Effective Time are unvested or are subject to a repurchase option, risk
of forfeiture or other condition providing that such shares may be forfeited or
repurchased by OSI upon any termination of the shareholders' employment,
directorship or other relationship with OSI (and/or any affiliate of OSI) under
the terms of any restricted stock purchase agreement or other agreement with OSI
if that does not by its terms provide that such repurchase option, risk of
forfeiture or other condition lapses upon consummation of the Merger, then the
shares of HNC Common Stock issued upon the conversion of such shares of OSI
Common Stock or OSI Preferred Stock in the Merger will continue to be unvested
and subject to the same repurchase options, risks of forfeiture or other
conditions following the Effective Time, and the certificates representing such
shares of HNC Common Stock may accordingly be marked with appropriate legends
noting such repurchase options, risks of forfeiture or other conditions. OSI
shall take all actions that may be necessary to ensure that, from and after the
Effective Time, HNC is entitled to exercise any such repurchase option or other
right set forth in any such restricted stock purchase agreement or other
agreement.
2.2 Assumption and Conversion of OSI Options.
2.2.1 Assumption by HNC. Each OSI 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 (a "HNC OPTION")
to purchase that number of shares of HNC Common Stock determined by multiplying
the number of shares of OSI Common Stock that are subject to such OSI Option
immediately prior to the Effective Time by the Participating Stock Conversion
Number, at an exercise price per share of HNC Common Stock equal to the exercise
price per share of OSI Common Stock that was in effect for such OSI Option
immediately prior to the Effective Time divided by the Participating Stock
Conversion Number; provided, however, that if the foregoing calculation would
result in an assumed and converted OSI Option being converted into an HNC Option
that, after aggregating all the shares of HNC Common
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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 OSI Option (including without limitation the provisions of
the applicable OSI Option Plan that form part of the terms and conditions of
such OSI Option) that is converted into an HNC Option in the Merger will (except
as otherwise provided in the terms of such OSI Options), to the extent permitted
by law and otherwise reasonably practicable, be unchanged and continue in effect
after the Effective Time of the Merger. The pre-Merger employment or other
service of the holder of each OSI Option shall be credited to such holder for
purposes of applying any vesting schedule based on the duration of such holder's
employment or other service contained in the HNC Option issued to such holder
upon the conversion of such OSI Option in the Merger in order to determine the
number of shares of HNC Common Stock that are exercisable under such HNC Option
at any point in time. This Section 2.2.1 is intended to meet the requirements of
Section 424(a) of the Code and shall be interpreted consistent with such intent.
2.2.2 Registration. Prior to the Effective Time, HNC shall take all
corporate action necessary to reserve for issuance a sufficient number of shares
of HNC Common Stock for delivery upon exercise of the OSI Options assumed in
accordance with Section 2.2.1. HNC will use its best efforts to cause the shares
of HNC Common Stock that are subject to issuance upon exercise of the HNC
Options that are issued upon the conversion of OSI 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"). Notwithstanding the foregoing, HNC shall not be obligated to
register or maintain the registration under the 1933 Act of the issuance of any
shares of HNC Common Stock that are subject to a HNC Option held by a person who
is ineligible to have such person's securities registered on Form S-8 (or
successor form).
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 of HNC Common Stock into a greater
number of such shares, or a combination (or reverse stock split) of any of its
outstanding shares of HNC Common Stock into a lesser number of such shares, or
reorganizes, reclassifies or otherwise changes its outstanding shares of HNC
Common Stock 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
preceding 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 Average Price Per
Share, the number of shares of HNC Common Stock constituting the HNC Merger
Shares, the HNC Participating Merger Shares, the HNC Preferred Merger Shares,
the HNC Series A-1 Merger Shares, the HNC Series A-2 Merger Shares, the HNC
Series B Merger Shares, the HNC Series C Merger Shares, the HNC Series D Merger
Shares, the Series A-1 Preferred Conversion Number, the Series A-2 Preferred
Conversion Number, the Series B Preferred Conversion Number, the Series C
Preferred Conversion Number, the Series D Preferred Conversion Number, and the
Participating Stock Conversion Number, will each be proportionally and equitably
adjusted.
2.4 Escrow.
2.4.1 Escrow of Shares; Escrow Agreement. At the Closing (as that term
is defined in Section 7.1) of the Merger, HNC will withhold from the shares of
HNC Common Stock to be issued to OSI Stockholders in the Merger pursuant to
Section 2.1.2 a number of such shares of HNC Common Stock that is equal to five
percent (5%) of the total number of shares of Hawaii Common Stock issued to the
OSI Stockholders pursuant to Section 2.1.2, rounded up to the nearest whole
number of shares to be issued to each OSI Stockholder (such withheld shares of
HNC Common Stock being hereinafter referred to as the "ESCROW SHARES") and will
deliver certificates representing such Escrow Shares to State Street Bank and
Trust Company, N.A. 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 OSI Stockholders' indemnification obligations under
Article 11 and pursuant to the provisions of an escrow agreement in
substantially the form of Exhibit A (the "ESCROW AGREEMENT") to be entered into
at the Closing by
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HNC, the Escrow Agent, and the Representative (as defined below). The Escrow
Shares will be withheld from each OSI Stockholder pro rata in the same
proportion as the total number of shares of HNC Common Stock issuable to such
OSI Stockholder under Section 2.1.2 bears to the total number of shares of HNC
Common Stock issued to all OSI Stockholders under Section 2.1.2, will be
represented by a certificate or certificates issued in the names of each of the
OSI Stockholders in proportion to their respective interests therein and will be
held by the Escrow Agent during that time period commencing on the Effective
Time and ending on the first (1st) anniversary of the Effective Time or on such
later date as may be provided in the Escrow Agreement (the "ESCROW PERIOD").
2.4.2 Effect of OSI Stockholder Approval; Representative. By their
approval of the Merger, the OSI Stockholders will be conclusively deemed to have
consented to, approved and agreed to be personally bound by: (i) the
indemnification provisions of Article 11; (ii) the Escrow Agreement; and (iii)
the appointment of Douglas K. Anderson as the representative of OSI Stockholders
(the "REPRESENTATIVE") under the Escrow Agreement and as the attorney-in-fact
and agent for and on behalf of each OSI 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 this Agreement and/or 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 Article 11 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 Article 11; and (d) take all
actions necessary in the judgment of the Representative for the accomplishment
of the foregoing. HNC shall, at its sole option and discretion, be entitled to
condition the issuance of any shares of HNC Common Stock to an OSI Stockholder
pursuant to Section 2.1.2 on its receipt of a written instrument executed by
such OSI Stockholder, customary in form and substance and reasonably acceptable
to HNC, acknowledging and agreeing to the foregoing. The Representative will
have authority and power to act on behalf of each OSI Stockholder with respect
to the Escrow Agreement and the disposition, settlement or other handling of all
claims under Article 11 hereof or governed by the Escrow Agreement, and all
rights or obligations arising under the Escrow Agreement so long as all OSI
Stockholders are treated in the same manner. The OSI Stockholders will be bound
by all actions taken and documents executed 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
OSI Stockholder in the absence of gross negligence or willful misconduct on the
part of the Representative. 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 OSI Stockholders to the
Representative out of the Escrow Shares pro rata in proportion to their
respective percentage interests in the Escrow Shares, to the extent that any
Escrow Shares continue to be owned by OSI Stockholders following expiration of
the Escrow Period and satisfaction of all claims made or asserted by HNC or any
Indemnified Person under Article 11 or the Escrow Agreement, in all cases
subject to HNC's rights in and to 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 OSI, and OSI will be the surviving corporation of the Merger
(sometimes hereinafter referred to as the "SURVIVING CORPORATION") pursuant to
the terms of this Agreement and the Certificate of Merger;
(b) the Certificate of Incorporation of OSI will be amended and
restated to read as set forth in Exhibit B attached hereto, which will be the
Certificate of Incorporation of the Surviving Corporation immediately after the
Effective Time;
(c) the Bylaws of OSI will be amended to read as set forth in the
Bylaws attached as Exhibit C hereto, which will be the Bylaws of the Surviving
Corporation immediately after the Effective Time, and such Bylaws shall
authorize a Board of Directors consisting of exactly four (4) directors;
(d) each share of OSI Common Stock and each share of OSI Preferred
Stock that is outstanding immediately prior to the Effective Time, and each OSI
Option that is outstanding immediately prior to the Effective Time, will be
converted into HNC Common Stock or an HNC Option, as applicable, as provided in
this Article 2;
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(e) each share of Sub Common Stock that is outstanding immediately
prior to the Effective Time will be converted into one (1) share of OSI Common
Stock as provided in Section 2.1.1;
(f) the officers of the Surviving Corporation immediately after the
Effective Time will be the individuals who are the officers of Sub immediately
prior to the Effective Time, and each such individual shall, immediately after
the Effective Time, hold the same office or offices of the Surviving Corporation
as the office or offices that such individual held with Sub immediately prior to
the Effective Time;
(g) the members of the Board of Directors of the Surviving
Corporation immediately after the Effective Time will be Douglas K. Anderson and
three (3) persons nominated by HNC, who are currently anticipated to be Robert
L. North, Raymond V. Thomas and Michael A. Thiemann; and
(h) the Merger will, from and after the Effective Time, have all of
the effects provided by applicable law.
2.6 Registration on Form S-4. The shares of HNC Common Stock to be issued
in the Merger shall be registered under the 1933 Act on a Form S-4 registration
statement (the "FORM S-4"). As promptly as practicable after the Agreement Date,
HNC shall prepare and file the Form S-4 with the SEC, together with the
prospectus to be included therein (the "PROSPECTUS/PROXY STATEMENT") and any
other documents required by the 1933 Act or the 1934 Act in connection with the
Merger. HNC and OSI shall each use its commercially reasonable efforts to
respond promptly to any comments of the SEC and to have the Form S-4 declared
effective under the 1933 Act as promptly as practicable after such filing of the
Form S-4. HNC shall also take any action reasonably required to be taken under
any applicable state securities or "blue sky" laws and regulations of the Nasdaq
Stock Market in connection with the issuance of the HNC Common Stock in
connection with the Merger. OSI shall promptly furnish to HNC all information
concerning OSI and OSI's stockholders as may be reasonably required in
connection with the Form S-4 and any action contemplated by this Section 2.6.
HNC and OSI shall notify each other promptly of the receipt of any comments from
the SEC or its staff on the Form S-4 and of any request by the SEC or its staff
for amendments or supplements to the Form S-4 or the Prospectus/Proxy Statement
or for additional information and will supply the other with copies of all
correspondence with the SEC or its staff with respect to the Form S-4 or the
Prospectus/Proxy Statement. Whenever any event occurs which should be set forth
in an amendment or supplement to the Form S-4 or the Prospectus/Proxy Statement,
HNC or OSI, as the case may be, shall promptly inform the other of such
occurrence and cooperate in filing such amendment or supplement with the SEC or
its staff, and/or mailing such amendment or supplement to stockholders of OSI.
2.7 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) of the Code. However, HNC makes no
representations or warranty to OSI or to any stockholder of OSI regarding the
tax treatment of the Merger or whether the Merger will qualify as a tax-free
plan of reorganization under the Code, and OSI acknowledges that it is relying
on its own tax advisors in connection with the Merger and the other transactions
contemplated by this Agreement.
2.8 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 stockholder of OSI who is an "affiliate" of OSI as defined
in Rule 405 promulgated under the 1933 Act shall execute and deliver to HNC an
OSI Affiliate Agreement in the form of Exhibit D hereto (the "OSI AFFILIATE
AGREEMENT").
2.9 Further Assurances. 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 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 OSI or otherwise.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
OSI hereby represents and warrants to HNC that, except as set forth in the
letter addressed to HNC from OSI and dated as of the Agreement Date (including
all schedules thereto) which has been delivered by OSI to HNC concurrently with
the parties' execution of this Agreement (the "OSI DISCLOSURE LETTER"; for all
purposes of this Agreement (including without limitation Articles 9 and 11), the
statements contained in the OSI Disclosure Letter and its schedules shall also
be deemed to be representations and warranties made and given by OSI under
Article 3 of this Agreement), each of the following representations, warranties
and statements in this Article 3 are true and correct as of the Agreement Date
and will be true and correct on and as of the Closing Date:
3.1 Organization and Good Standing. OSI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
OSI has the corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted and as presently
proposed to be conducted as described in that certain registration statement on
Form S-1 originally filed by OSI with the SEC under the 1933 Act on June 10,
1998, as most recently amended by a filing or filings of OSI made with the SEC
(the "OSI FORM S-1"), and is qualified to transact business, and is in good
standing, in each jurisdiction in which its failure to be so qualified would
have a Material Adverse Effect on OSI. OSI has delivered to HNC true and correct
copies of the currently effective Certificate of Incorporation and Bylaws or
other charter documents, as applicable, of OSI and each of its subsidiaries (if
any), each as amended to date. Neither OSI nor any of its subsidiaries is in
violation of its Certificate of Incorporation, Bylaws or other charter
documents.
3.2 Subsidiaries. Except as expressly disclosed in Schedule 3.2 of the OSI
Disclosure Letter, OSI does not have any subsidiary or any equity or ownership
interest, whether direct or indirect, in any corporation, partnership, limited
liability company, joint venture or other business entity. Any subsidiary of OSI
that is disclosed in Schedule 3.2 of OSI Disclosure Letter is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization, 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, and is
in good standing, in each jurisdiction in which its failure to be so qualified
would have a Material Adverse Effect on OSI. OSI is the owner of all of the
issued and outstanding shares of capital stock and other securities of each of
its subsidiaries; all such shares and other securities are duly authorized,
validly issued, fully paid and non-assessable; and all of the outstanding shares
of capital stock and other securities of each such subsidiary are owned by OSI
free and clear of all liens, charges, claims, encumbrances or rights of others.
There are no outstanding subscriptions, options, warrants, calls, rights,
convertible securities or other commitments or agreements of any character under
which any third party has any existing or potential right to purchase or
otherwise acquire any shares of capital stock or other securities of any such
subsidiary, whether from OSI or such subsidiary.
3.3 Power, Authorization and Validity.
3.3.1 Power and Authority. OSI has all requisite corporate power and
authority to enter into, execute, deliver, and perform its obligations under,
this Agreement and all OSI Ancillary Agreements, and (subject to the approval of
this Agreement by OSI's stockholders) to consummate the Merger. The execution,
delivery and performance by OSI of this Agreement and each of the OSI Ancillary
Agreements have been duly and validly approved and authorized by all necessary
corporate action on the part of OSI's Board of Directors in compliance with
applicable law and OSI's Certificate of Incorporation and Bylaws, each as
amended.
3.3.2 No Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency,
commission or other governmental authority (each, a "GOVERNMENTAL AUTHORITY"),
or any other person or entity, governmental or otherwise, is necessary or
required to be made or obtained by OSI to enable OSI to lawfully execute and
deliver, enter into, and to perform its obligations under, this Agreement and
each of the OSI Ancillary Agreements, and to consummate the Merger, except for:
(a) the approval of this Agreement by the stockholders of OSI in compliance with
the requirements of applicable law and OSI's Certificate of Incorporation and
Bylaws, each as amended; (b) the filing of the Certificate of Merger with the
Delaware Secretary of State and (c) such filings and notifications as may be
required to be made by OSI and/or any stockholder of OSI in connection with the
Merger under the HSR Act.
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3.3.3 Enforceability. This Agreement and each of the OSI Ancillary
Agreements are, or when executed by OSI will be, valid and binding obligations
of OSI, enforceable against OSI in accordance with their respective terms,
except as 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.
3.4 Capitalization of OSI.
3.4.1 Outstanding Stock. The authorized capital stock of OSI consists
entirely of: (i) 19,055,417 shares of Common Stock, $0.01 par value, of which a
total of 2,236,013 shares are issued and outstanding as of the Agreement Date
and (ii) 5,944,583 shares of Preferred Stock, $0.01 par value, of which (a)
1,000,000 shares have been designated Series A-1 Preferred Stock, of which a
total of 1,000,000 shares are outstanding as of the Agreement Date, 583,333
shares have been designated Series A-2 Preferred Stock, of which a total of
583,333 shares are outstanding as of the Agreement Date, 1,736,250 shares have
been designated Series B Preferred Stock, of which a total of 1,627,917 shares
are issued and outstanding as of the Agreement Date, 1,375,000 shares have been
designated Series C Preferred Stock, of which a total of 1,263,889 shares are
issued and outstanding as of the Agreement Date, and 1,250,000 shares have been
designated Series D Preferred Stock, of which a total of 833,333 shares are
issued and outstanding as of the Agreement Date; and except as expressly
described above in this Section 3.4.1, no other shares of any capital stock of
OSI are authorized, issued or outstanding. No fractional shares of OSI Common
Stock or OSI Preferred Stock are issued or outstanding and OSI holds no treasury
shares. None of the outstanding shares of OSI's capital stock has been issued
under OSI's 1998 Employee Stock Purchase Plan.
As of the Closing Date, there will have been no change in the authorized
and outstanding capital stock of OSI as represented in the foregoing sentences
of this Section 3.4.1, other than the following changes if made in compliance
with this Agreement: (i) the issuance of shares of OSI Common Stock pursuant to
the exercise of OSI Options or any Warrants represented as being outstanding on
the Agreement Date in Section 3.4.2 or (ii) the conversion into Common Stock of
any shares of OSI Preferred Stock that are either (A) represented as being
issued and outstanding on the Agreement Date in this Section 3.4.1 or (B) issued
after the Agreement Date pursuant to a Warrant represented as being outstanding
on the Agreement Date in Section 3.4.2. All issued and outstanding shares of
OSI'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 OSI 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 OSI's
outstanding capital stock, and the total number of shares of OSI Common Stock
and OSI Preferred Stock (and the number of shares of each series of OSI
Preferred Stock) owned by each such holder is set forth in Schedule 3.4.1 to the
OSI Disclosure Letter. During the two (2) year period immediately prior to the
Agreement Date, OSI has not redeemed, repurchased or otherwise reacquired any
shares of its capital stock from any stockholder of OSI. No Stockholder of OSI
owes OSI any money or other consideration representing any part of the purchase
price of any outstanding shares of OSI's capital stock, including without
limitation any money due under a promissory note payable to OSI. OSI has no
liability to any stockholder for any dividends that have been declared or
accrued.
3.4.2 Options, Warrants or Rights. Except for OSI Options to purchase
an aggregate total of 1,687,500 shares of OSI Common Stock that are outstanding
on the Agreement Date (all of which OSI Options were granted under OSI Option
Plans), and warrants to purchase 108,333 shares of Series B Preferred Stock,
111,111 shares of Series C Preferred Stock and 416,667 shares of Series D
Preferred Stock (collectively hereinafter referred to as the "WARRANTS") 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 OSI's
authorized but unissued capital stock or any securities convertible into or
exchangeable for any shares of OSI's capital stock or obligating OSI 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. A total of
3,000,000 shares of OSI Common Stock are reserved for issuance under the 1994
Option Plan, and a total of up to 2,900,000 shares of OSI Common Stock are
reserved for issuance under the 1998 Option Plan. As of the Agreement Date, a
total of 131,013 shares of OSI Common Stock have been issued under OSI Option
Plans, all of which were issued under the 1994 Option Plan, and no shares have
been issued under the 1998 Option Plan. As of the Agreement Date, a total of
1,687,500 shares of OSI Common Stock are potentially issuable upon the exercise
of all options granted under the 1994 Option Plan that are outstanding on the
Agreement Date and no stock options have
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been granted under the 1998 Option Plan. Attached as Schedule 3.4.2 to the OSI
Disclosure Letter is (i) a true and complete list of all holders of all OSI
Options that are outstanding on the Agreement Date, the number of OSI Options
held by each such holder, the exercise price and vesting schedule of each OSI
Option held by each such person and the name of the OSI Option Plan under which
each such option was granted and (ii) a true and complete list of all holders of
all Warrants that are outstanding on the Agreement Date, the number, class and
series of the shares subject to each such Warrant held by each such holder, the
exercise price and (if applicable) vesting schedule of each Warrant. During the
two (2) year period immediately prior to the Agreement Date, except as may be
expressly required by the terms of OSI Option Plans, OSI has not authorized, or
taken any action to authorize, (i) the release of any vesting condition to the
exercise of any OSI Option or any Warrant or (ii) the acceleration of the time
during which any holder of any option, warrant or other right to purchase or
acquire any share of capital stock of OSI may exercise all or any portion of
such option, warrant or right. The OSI Option Plans and any change in (a) the
number of shares reserved under either such OSI Option Plan or (b) the eligible
participants under such OSI Option Plan have each been duly and validly approved
by OSI's Board of Directors and by OSI's stockholders, and with respect to each
of the OSI Option Plans (or any such change) such stockholder approval was
obtained within one (1) year of the date on which such OSI Option Plan (or such
change) was approved by OSI's Board of Directors.
3.4.3 No Voting Arrangements or Registration Rights. There are no
voting agreements, voting trusts, proxies, 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 OSI's outstanding stock or other securities or to the
conversion of any shares of OSI's capital stock in the Merger pursuant to any
agreement or obligation to which OSI is a party or, to OSI's knowledge, pursuant
to any other agreement or obligation, except for the Voting Agreements (and
related Proxies) referred to in Section 3.22. OSI is not under any obligation to
register under the 1933 Act any of its presently outstanding shares of stock or
other securities or any stock or other securities that may be subsequently
issued.
3.5 No Conflict. Neither the execution and delivery of this Agreement nor
any of the OSI Ancillary Agreements by OSI, 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 or
violation of: (i) any provision of the Certificate of Incorporation or Bylaws or
other charter documents of OSI or any of its subsidiaries (if any) as currently
in effect; (ii) any federal, state, local or foreign judgment, writ, decree,
order, statute, rule or regulation applicable to OSI or any of its subsidiaries
(if any) or any of their respective 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 OSI or any of its subsidiaries (if any) is a party or by which OSI or any
of its subsidiaries (if any) or any of their respective assets or properties are
bound. Neither OSI's entering into this Agreement nor the consummation of the
Merger will give rise to, or trigger the application of, any rights of any third
party which have not been waived by such third party in a writing signed by it.
The consummation of the Merger by OSI will not require the consent, release,
waiver or approval of any third party other than (i) the approval of OSI's
stockholders and (ii) the expiration of any applicable waiting periods regarding
the Merger under the HSR Act.
3.6 Litigation. There is no action, claim, suit, arbitration, mediation,
proceeding, claim or investigation pending against OSI or any of its
subsidiaries (or to OSI's knowledge, against any officer, director, employee or
agent of OSI or any of its subsidiaries in their capacity as such or relating to
their employment, services or relationship with OSI or such subsidiary) before
any court, administrative agency or arbitrator, nor, to OSI's knowledge, has any
such action, suit, proceeding, arbitration, mediation, claim or investigation
been threatened. There is no judgment, decree, injunction, rule or order of any
governmental entity or agency, court or arbitrator outstanding against OSI. To
OSI's knowledge, there is no basis for any person, firm, corporation or other
entity to assert a claim against OSI based upon: (a) OSI's entering into this
Agreement or any OSI Ancillary Agreement or consummating the Merger or any of
the transactions contemplated by this Agreement or any OSI Ancillary Agreement;
(b) a claim of ownership of, or options, warrants or other rights to acquire
ownership of, any shares of the capital stock of OSI; or (c) any rights as a OSI
stockholder, including any option, warrant or preemptive rights or rights to
notice or to vote.
3.7 Taxes.
3.7.1 OSI 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
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the periods covered by the most recent applicable tax returns (which accrual or
reserve as of the Balance Sheet Date (as defined in Section 3.8 below) is fully
reflected on the Balance Sheet (as defined in Section 3.8 below) and in any more
recent balance sheet of OSI provided by OSI to HNC on or before the Agreement
Date), 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. OSI 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 OSI, any of its subsidiaries, or any of the
officers, employees or agents of OSI or any of its subsidiaries in their
capacity as such. OSI 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 OSI or any of its subsidiaries and no tax return of
OSI or any of its subsidiaries 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 OSI or any of its subsidiaries. OSI has not filed
any election under Section 341(f) of the Code. OSI and its subsidiaries have
each withheld with respect to each of its employees all taxes, including but not
limited to federal and state income taxes, FICA, Medicare, FUTA and other taxes,
required to be withheld, and paid such withheld amounts to the appropriate tax
authority within the time prescribed by law.
3.7.2 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 OSI Financial Statements. OSI has delivered to HNC as (i) OSI's
audited consolidated balance sheets as of December 31, 1996 and 1997 and OSI's
audited consolidated statements of operations, statements of cash flows and
statements of changes in stockholders' equity for each of the years ended
December 31, 1995, 1996 and 1997, and (ii) OSI's unaudited consolidated balance
sheet as of June 30, 1998 (the "BALANCE SHEET"), and OSI's unaudited
consolidated statements of operations for the three (3) month period ended March
31, 1998 and for the six (6) month period ended June 30, 1998 (all such
financial statements of OSI and the notes thereto are hereinafter collectively
referred to as the "OSI FINANCIAL STATEMENTS"). The OSI Financial Statements (a)
are derived from and in accordance with the books and records of OSI, (b) fairly
present the financial condition of OSI 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; provided, however, that the unaudited
Financial Statements referred to in clause (ii) above are subject to normal
recurring year-end adjustments and do not include footnotes. OSI 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, (ii) those that may have been incurred after June
30, 1998, the date of the Balance Sheet (the "BALANCE SHEET DATE") in the
ordinary course of OSI's business consistent with its past practices, and that
are not material in amount, either individually or collectively and (iii) those
that are not required to be set forth on or reflected in the Balance Sheet under
generally accepted accounting principles. All reserves established by OSI and
set forth in or reflected 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. OSI and each of its subsidiaries have good and
marketable title to all of their respective 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 (other than liens for current taxes that are not yet
due and payable). All machinery, vehicles, equipment and other tangible personal
property owned or leased by OSI and its subsidiaries 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 OSI or any of its subsidiaries is a party are
fully effective and afford OSI or its subsidiary, as applicable, peaceful and
undisturbed leasehold possession of the real or personal property that is the
subject of the lease. Neither OSI nor any of its subsidiaries is 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 OSI), nor has OSI received
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any notice of violation of law with which it has not complied. Neither OSI nor
any of its subsidiaries owns any real property.
3.10 Absence of Certain Changes. Since the Balance Sheet Date, there has
not been with respect to OSI or any of its subsidiaries any:
(a) Material Adverse Change in the financial condition, properties,
assets, liabilities, businesses, operations, or results of operations of OSI or
any of its subsidiaries;
(b) amendment or change in the Certificate of Incorporation or Bylaws
of OSI;
(c) incurrence, creation or assumption by OSI or any of its
subsidiaries 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 OSI or
any of its subsidiaries; or (ii) any obligation or liability or any indebtedness
for borrowed money;
(d) issuance or sale of any debt or equity securities of OSI or any
of its subsidiaries, or any options, warrants or other rights to acquire from
OSI or any of its subsidiaries, directly or indirectly, any debt or equity
securities of OSI or any of its subsidiaries;
(e) payment or discharge by OSI or any of its subsidiaries of any
security interest, lien, claim, or encumbrance of any kind on any asset or
property of OSI or any of its subsidiaries, or the payment or discharge of any
liability that was not either shown or reflected on the Balance Sheet or
incurred in the ordinary course of OSI's business after the Balance Sheet Date
in an amount not in excess of $50,000 for any single liability to a particular
creditor;
(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 OSI other than a license of any product or products of OSI or any of
its subsidiaries made in the ordinary course of OSI's business;
(g) damage, destruction or loss of any property or asset, whether or
not covered by insurance, having (or likely with the passage of time to have) a
Material Adverse Effect on OSI;
(h) declaration, setting aside or payment of any dividend on, or the
making of any other distribution in respect of, the capital stock of OSI, any
split, combination or recapitalization of the capital stock of OSI or any direct
or indirect redemption, purchase or other acquisition of the capital stock of
OSI or any change in any rights, preferences, privileges or restrictions of any
outstanding security of OSI;
(i) change or increase in the compensation payable or to become
payable to any of the officers, directors, or employees of OSI or any of its
subsidiaries, or any bonus or pension, insurance or other benefit payment or
arrangement (including without limitation stock awards, stock option grants,
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 OSI's business;
(j) obligation or liability incurred by OSI or any of its
subsidiaries to any of its officers, directors or stockholders except for normal
and customary compensation and expense allowances payable to officers in the
ordinary course of OSI's business;
(k) making by OSI or any of its subsidiaries of any loan, advance or
capital contribution to, or any investment in, any officer, director or
stockholder of OSI 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;
(l) entering into, amendment of, relinquishment, termination or
non-renewal by OSI 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 any
material problems with OSI's services or performance under such contract, lease,
transaction, commitment or other right or obligation or of such other party's
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demand to amend, terminate or not renew any such contract, lease, transaction,
commitment or other right or obligation;
(m) material change in the manner in which OSI extends discounts,
credits or warranties to customers or otherwise deals with its customers;
(n) entering into by OSI or any of its subsidiaries of any
transaction, contract or agreement that by its terms requires or contemplates a
current and/or future financial commitment, expense (inclusive of overhead
expense) or obligation on the part of OSI or any of its subsidiaries involving
in excess of $100,000 (provided that the amount of such financial commitments
and expenses for all such transactions, contracts or agreements does not exceed
$350,000 in the aggregate) or that is not entered into in the ordinary course of
OSI's business, or the conduct of any business or operations by OSI that is
other than in the ordinary course of OSI's business;
(o) license, transfer or grant of a right under any OSI IP Rights (as
defined in Section 3.13 below), other than those licensed, transferred or
granted in the ordinary course of OSI's business consistent with its past
practices; or
(p) agreement or arrangement made by OSI to take any action after the
Agreement Date which, if taken prior to the Agreement Date, would have made any
representation or warranty of OSI set forth in Article 3 of this Agreement
untrue or incorrect as of the date when made.
3.11 Contracts and Commitments. Schedule 3.11 to the OSI Disclosure Letter
sets forth a list of each of the following written or oral contracts,
agreements, commitments or other instruments to which OSI is a party or to which
OSI or any of its assets or properties is bound:
(a) any distributor, OEM (Original Equipment Manufacturer), VAR
(Value Added Reseller), sales representative or similar agreement under which
any third party is authorized to sell, sublicense, lease, distribute, market or
take orders for, any product or technology of OSI;
(b) any continuing contract for the future purchase, sale, license,
provision or manufacture of products, material, supplies, equipment or services
requiring payment to or from OSI in an amount in excess of $50,000 per annum
which is not terminable on ninety (90) or fewer days' notice without cost or
other liability to OSI;
(c) any contract or commitment in which OSI has granted or received
manufacturing rights, most favored customer pricing provisions or exclusive
marketing rights relating to any product or service, group of products or
services, market or geographic territory;
(d) any OSI IP Rights Agreement (as defined in Section 3.13) and any
other contract providing for the development of software or other technology or
intellectual property by or for OSI, or the license of any software, other
technology or intellectual property to OSI, which software, other technology or
intellectual property is used or incorporated in any product currently sold,
licensed, leased, distributed or marketed by OSI or to provide any service
currently provided or marketed by OSI or currently contemplated by OSI to be
used or incorporated in any products to be sold, licensed, leased, distributed
or marketed by OSI or services to be provided or marketed by OSI (other than
software products that are generally available for license to the public at a
per copy license fee of less than $10,000 per copy (such software products being
hereinafter referred to as "OFF-THE-SHELF SOFTWARE");
(e) any joint venture or partnership contract or agreement or other
agreement which has involved or is reasonably expected to involve a sharing of
profits, expenses or losses with any other party in an amount of $25,000 or more
per annum;
(f) any contract or commitment for or relating to the employment of
any officer, employee or consultant of OSI, any indemnification agreement for
the benefit of any director, officer or employee of OSI, or any other type of
contract or understanding with any officer, employee or consultant of OSI that
is not immediately terminable by OSI without cost or other liability;
(g) any indenture, mortgage, trust deed, promissory note, loan
agreement, security agreement, guarantee or other agreement or commitment for
the borrowing of money, for a line of credit or for a leasing
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transaction of a type required to be capitalized in accordance with Statement of
Financial Accounting Standards No. 13 of the Financial Accounting Standards
Board;
(h) any lease or other agreement under which OSI is lessee of or
holds or operates any items of (i) tangible personal property owned by any third
party and under which payments to such third party exceed $50,000 per annum
and/or (ii) real property owned by any third party and under which payments to
such third party exceed $10,000 per annum;
(i) any agreement or arrangement for the sale of any assets,
properties, services or rights having a value in excess of $25,000, other than
in the ordinary course of OSI's business;
(j) any agreement that restricts OSI from engaging in any aspect of
its business, from participating or competing in any line of business or that
restricts OSI from engaging in any business in any geographic area;
(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 OSI 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;
(l) consulting or similar agreement under which OSI provides any
advice or services to a customer of OSI for an annual compensation to OSI of
$20,000 per year or more (other than OSI's standard end-user customer
maintenance and support agreements);
(m) any contract with or commitment to any labor union; or
(n) any contract or arrangement under which OSI or any of its
subsidiaries has made any commitment to develop any new technology, to deliver
any software currently under development or to enhance or customize any software
(other than pursuant to OSI's standard end-user customer maintenance and support
agreements); and
(o) any other agreement, contract, commitment or instrument that is
material to the business of OSI or that involves a future commitment by OSI 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 OSI Disclosure Letter (such agreements and documents
being hereinafter collectively referred to as the "OSI MATERIAL AGREEMENTS") has
been delivered to HNC's counsel.
3.12 No Default; No Consent Required; No Restrictions. OSI is not in breach
or default in any material respect under any OSI Material Agreement. OSI 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 OSI. OSI does not
have any material liability for renegotiation of government contracts or
subcontracts, if any. Except as set forth in Schedule 3.12 to the OSI Disclosure
Letter, no consent or approval of any third party is required to ensure that,
following the Effective Time, any OSI 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
OSI Ancillary Agreement. Neither OSI nor any of its subsidiaries is a party to,
and no asset or property of OSI or any of its subsidiaries is bound or affected
by, any judgment, injunction, order, decree, contract, covenant or agreement
(noncompete or otherwise) that restricts or prohibits (or purports to restrict
or prohibit) OSI or any of its subsidiaries from freely engaging in any business
now conducted by any of them or from competing anywhere in the world (including
without limitation any contracts, covenants or agreements restricting the
geographic area in which OSI or any of its subsidiaries may sell, license,
market, distribute or support any products or technology or provide services, or
restricting the markets, customers or industries that OSI or any of its
subsidiaries may address in operating their respective businesses), or includes
any grants by OSI of exclusive licenses. Neither OSI nor any subsidiary of OSI
has received any notice or other communication regarding any actual or possible
violation or breach of, or default under, any OSI Material Agreement.
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3.13 Intellectual Property.
3.13.1 OSI and its subsidiaries own, or have the valid right or
license to use, possess, sell or license, all Intellectual Property Rights (as
defined below) necessary or required for the conduct of the business of OSI and
its subsidiaries as presently conducted and as presently proposed to be
conducted as described in the OSI Form S-1 (such Intellectual Property Rights
being hereinafter collectively referred to as the "OSI IP RIGHTS"), and such
rights to use, possess, sell or license are sufficient for such conduct of such
business. 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, licenses,
inventions, trade secrets, know-how, customer lists, supplier lists, proprietary
processes and formulae, software source and object code, algorithms, net lists,
architectures, structures, screen displays, layouts, inventions, development
tools, designs, blueprints, specifications, technical drawings (or similar
information in electronic format) and all documentation and media constituting,
describing or relating to the above, including, without limitation, manuals,
programmers' notes, memoranda and records.
3.13.2 The execution, delivery and performance of this Agreement, the
Certificate of Merger and the consummation of the Merger and the other
transactions contemplated hereby and/or by OSI Ancillary Agreements will not
constitute a material breach of or default under any instrument, contract,
license or other agreement (other than any end-user license agreement granting
OSI a license to use any Off-the-Shelf Software which OSI does not incorporate
in, or market for use with, any OSI product) governing any OSI IP Right to which
OSI or any of its subsidiaries is a party (collectively, the "OSI IP RIGHTS
AGREEMENTS"), will not cause the forfeiture or termination of, or give rise to a
right of forfeiture or termination of, any OSI IP Right or materially impair the
right of OSI or the Surviving Corporation to use, possess, sell or license any
OSI IP Right or portion thereof. There are no royalties, honoraria, fees or
other payments payable by OSI to any third person by reason of the ownership,
use, possession, license, sale or disposition of any OSI IP Rights by OSI or any
of its subsidiaries.
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 OSI or any of its subsidiaries or currently under
development by OSI or any of its subsidiaries violates any license or agreement
between OSI and any third party or infringes or misappropriates any Intellectual
Property Right of any other party; and there is no pending or, to the knowledge
of OSI, threatened claim or litigation contesting the validity, ownership or
right of OSI or any of its subsidiaries to use, possess, sell, license or
dispose of any OSI IP Right nor, to the knowledge of OSI, is there any basis for
any such claim, nor has OSI received any notice asserting that any OSI 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 OSI, is
there any basis for any such assertion.
3.13.4 To the knowledge of OSI, no employee of OSI is in violation of
any provision of any employment contract, patent disclosure agreement,
non-competition 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 by OSI or any of its subsidiaries, or to use trade
secrets or proprietary information of others, and the employment of such
employees by OSI or any of its subsidiaries does not subject OSI or any of its
subsidiaries to any liability.
3.13.5 OSI has taken all reasonable and practicable steps, consistent
with industry standards, to protect, preserve and maintain the secrecy and
confidentiality of OSI IP Rights and all OSI's proprietary rights therein. All
officers, employees and consultants of OSI and its subsidiaries having access to
proprietary information have executed and delivered to OSI an agreement
regarding the protection of such proprietary information and the assignment of
inventions to OSI; and copies of the form of all such agreements have been
delivered to HNC's counsel. OSI has secured valid written assignments from all
consultants, contractors and employees who were involved in, or who contributed
to, the creation or development of any OSI IP Rights of the rights to such
contributions that OSI does not already own by operation of law. No current or
former employee, officer, director, consultant or independent contractor of OSI
or any subsidiary of OSI has any right, license, claim or interest whatsoever in
or with respect to any OSI IP Rights.
3.13.6 Schedule 3.13.6 to the OSI Disclosure Letter contains a
complete list of (i) all worldwide registrations of any patents, copyrights,
mask works, trademarks and services marks with any governmental authority;
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(ii) all applications, registrations, filings and other formal actions made or
taken pursuant to federal, state and foreign laws by OSI to secure, perfect or
protect its interest in OSI IP Rights, including, without limitation, all patent
applications, copyright applications, and applications for registration of
trademarks and service marks, (iii) all unregistered copyrights, trademarks and
service marks. All patents, and all registered trademarks, service marks and
copyrights held by OSI or its subsidiaries are valid, enforceable and
subsisting.
3.13.7 Schedule 3.13.7 to the OSI Disclosure Letter contains a
complete list of (i) all licenses, sublicenses and other agreements as to which
OSI or any of its subsidiaries is a party and pursuant to which any person is
authorized to use any OSI IP Rights, and (ii) all licenses, sublicenses and
other agreements as to which OSI or any of its subsidiaries is a party and
pursuant to which OSI or any of its subsidiaries is authorized to use any third
party patents, trademarks or copyrights, including but not limited to software
("THIRD PARTY IP RIGHTS") which would be infringed by, or are incorporated in,
or form a part of, any product or service sold, licensed, distributed, provided
or marketed by OSI or any of its subsidiaries.
3.13.8 Neither OSI nor any of its subsidiaries, nor any other party
acting on its or their behalf, has disclosed or delivered to any party, or
permitted the disclosure or delivery to any escrow agent or other party of any
OSI Source Code (as defined below). No event has occurred, and no circumstance
or condition exists, that (with or without notice or lapse of time) will, or
would reasonably be expected to, result in the disclosure or delivery to any
party of any OSI Source Code. Schedule 3.13.8 of the OSI Disclosure Letter
identifies each contract, agreement and instrument (whether written or oral)
pursuant to which OSI has deposited, or is or may be required to deposit, with
an escrowholder or any other party, any OSI Source Code and further describes
whether the execution of this Agreement or the consummation of the Merger or any
of the other transactions contemplated hereby, in and of itself, would
reasonably be expected to result in the release from escrow of any OSI Source
Code. As used in this Section 3.13.8, "OSI SOURCE CODE" means, collectively, any
source code, or any material portion or aspect of the source code, or any
material proprietary information or algorithm contained in or relating to any
source code, of any OSI IP Rights or any other product marketed by OSI.
3.13.9 To OSI's knowledge, all software developed by OSI and licensed
by OSI or any of its subsidiaries to customers and all other products
manufactured, sold, licensed, leased or delivered by OSI or any of its
subsidiaries to customers and all services provided by OSI or any of its
subsidiaries to customers on or prior to the Closing Date conform in all
material respects to applicable contractual commitments, express and implied
warranties, product specifications and product documentation and to any
representations provided to customers and neither OSI nor any of its
subsidiaries has any material liability (and, to OSI's knowledge, there is no
basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against OSI or any of its
subsidiaries giving rise to any liability that could have a Material Adverse
Effect on OSI) for replacement or repair thereof or other damages in connection
therewith in excess of any reserves therefor reflected on the Balance Sheet.
During the six (6) month period ended on June 30, 1998, neither OSI nor any of
its subsidiaries has experienced any product or service warranty claims that
were materially greater than the amount of the same type of claims experienced
for the six (6) month period ended December 31, 1997. Since January 1, 1998,
neither OSI nor any of its subsidiaries has had any of its respective products
returned by a purchaser thereof except for normal warranty returns consistent
with past history and those returns that would not result in a reversal of any
material amount of revenue recognized by OSI on any of its financial statements
from such purchases. Neither OSI nor any of its subsidiaries is under any
liability or obligation, and no such outstanding claim has been made, with
respect to the return of inventory or products in the possession of customers,
licensees, distributors, retailers, or end-users, except such liabilities,
obligations and claims as, in the aggregate, do not exceed $100,000.
3.13.10 All of the software products developed, owned, licensed and/or
marketed or distributed by OSI or any of its subsidiaries are (and, to OSI's
knowledge, any third party software included in any such Products is) Year 2000
Ready (as defined below) "YEAR 2000 READY" means, as applied to a software
product, that: (i) such software product has been tested by OSI; and (ii)
accurately processes date and/or time data (including, but not limited to,
calculating, comparing and sequencing) from, into, throughout and between the
20th and 21st centuries, the years 1999 and 2000, and leap year calculations
(year 2000 is a leap year); and (iii) when used in combination with other
information technology, such software product will accurately process date
and/or time data if the other information technology properly exchanges date
and/or time data with it.
3.14 Compliance with Laws. OSI and each subsidiary of OSI 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,
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ordinances, regulations, and rules, and all orders, writs, injunctions, awards,
judgments, and decrees applicable to it or to its assets, properties, and
business. OSI's products comply with all laws, rules and regulations and, to
OSI's knowledge, the use by OSI's customers of any product or products marketed
by OSI in accordance with such product's or products' documentation will not,
due to the structure, functions or performance of such product or products,
cause any of such customers to be in material violation of any law, rule or
regulation governing banks or credit unions. OSI holds all permits, licenses and
approvals from, and has made all filings with, government agencies and
authorities, that are necessary in connection with its present business
("GOVERNMENTAL PERMITS") and all such Governmental Permits are in full force and
effect. Neither OSI nor any of its subsidiaries has received any notice or other
communication from any Governmental Authority regarding (a) any actual or
possible violation of law or any Governmental Permit or any failure to comply
with any term or requirement of any Governmental Permit, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any Governmental Permit. Neither OSI nor any of its subsidiaries
has made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended.
3.15 Certain Transactions and Agreements. None of the officers, directors,
employees or stockholders of OSI, 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,
OSI (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 a party to, or otherwise directly or indirectly interested in, any contract
or informal arrangement with OSI (including but not limited to any agreement or
arrangement regarding the indemnification of such officer, director, employee or
stockholder or any agreement to advance expenses incurred by such officer,
director, employee or stockholder in connection with the defense of any claim,
suit or proceeding against such officer, director, employee or stockholder),
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 OSI by, or the grant of OSI 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 OSI IP Rights or any other Intellectual
Property Rights) that is used in or that pertains to the business of OSI, except
for the normal rights of a stockholder.
3.16 Employees, ERISA and Other Compliance.
3.16.1 OSI and its subsidiaries are in compliance in all material
respects with all applicable laws, agreements and contracts relating to
employment, employment practices, immigration, 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 OSI and its
subsidiaries and their current title and/or job description and compensation is
set forth on Schedule 3.16.1 to OSI Disclosure Letter. OSI and its subsidiaries
do 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 Neither OSI nor any of its subsidiaries (i) now is, nor has
ever been, subject to a union organizing effort, (ii) is subject to any
collective bargaining agreement with respect to any of its employees, (iii) is
subject to any other contract, written or oral, with any trade or labor union,
employees' association or similar organization or (iv) has any current labor
disputes. OSI and its subsidiaries have good labor relations, and have no
knowledge of any facts indicating that the consummation of the Merger or any of
the other transactions contemplated hereby will have a material adverse effect
on such labor relations, and have no knowledge that any of their key employees
intends to leave their employ. All of the employees of OSI and its subsidiaries
are legally permitted to be employed by OSI or its subsidiaries in the United
States of America in their current job capacities.
3.16.3 Neither OSI nor any of its subsidiaries has any 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 pension plan of OSI or any of its
subsidiaries is subject to Title IV of ERISA.
3.16.4 Schedule 3.16.4 to the OSI Disclosure Letter lists each
material employment, severance or other similar contract, arrangement or policy,
each employment, severance or other similar contract, arrangement or
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policy with any officer or director of OSI, 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 OSI or any
of its subsidiaries and covers any employee or former employee of OSI or any of
its subsidiaries. Such contracts, plans and arrangements as are described in
this Section 3.16.4 are hereinafter collectively referred to as "OSI BENEFIT
ARRANGEMENTS." Each OSI 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 OSI
Benefit Arrangement, and each such OSI Benefit Arrangement that is an "employee
pension benefit plan" as defined in Section 3(2) of ERISA which is intended to
qualify under Section 401(a) of the Code has received a favorable determination
letter that such plan satisfied the requirements of the Tax Reform Act of 1986
(a copy of which letter(s) have been delivered to HNC and its counsel) or is
able to rely on a favorable opinion letter issued by the Internal Revenue
Service to the sponsor of the standardized prototype document on which such plan
is established. No action has been taken or omission has occurred since the most
recent favorable determination letter (or favorable opinion letter) issued with
respect to each such Employee Benefit Arrangement that could affect OSI's (or
such Employee Benefit Arrangement's) continued reliance on such favorable
determination (or opinion letter) or cause the Internal Revenue Service to
revoke such favorable determination. OSI has delivered to HNC or its counsel a
complete and correct copy and description of each OSI Benefit Arrangement. OSI
has timely filed and delivered to HNC and its counsel the three most recent
annual reports (Form 5500) for each OSI Benefit Arrangement that is an "employee
benefit plan" as defined under ERISA that is not exempt from the annual report
filing obligations under ERISA. OSI has never been a participant in any
"prohibited transaction", within the meaning of Section 406 of ERISA with
respect to any employee pension benefit plan (as defined in Section 3(2) of
ERISA) which OSI sponsors as employer or in which OSI participates as an
employer, which was not otherwise exempt pursuant to Section 408 of ERISA
(including any individual exemption granted under Section 408(a) of ERISA), or
which could result in any material excise tax under the Code. All contributions
due from OSI or any of its subsidiaries with respect to any of OSI Benefit
Arrangements have been made or have been accrued on OSI's financial statements,
(including without limitation the OSI Financial Statements) and no further
contributions will be due or will have accrued thereunder as of the Closing
Date. All individuals who, pursuant to the terms of any OSI Benefit Arrangement,
are entitled to participate in any such OSI Benefit Arrangement, are currently
participating in such OSI Benefit Arrangement or have been offered an
opportunity to do so and have declined in writing.
3.16.5 There has been no amendment to, written interpretation or
announcement (whether or not written) by OSI relating to, or change in employee
participation or coverage under, any OSI Benefit Arrangement that would increase
materially the expense of maintaining such OSI Benefit Arrangement above the
level of the expense incurred in respect thereof for OSI's fiscal year ended
December 31, 1997. Each OSI Benefit Arrangement may be terminated and any
benefits distributed thereunder without causing material liquidation, surrender
or any other fees to be imposed on the OSI Benefit Arrangement, OSI or any
participant or beneficiary of such OSI Benefit Arrangement.
3.16.6 The group health plans (as defined in Section 4980B(g) of the
Code) that benefit employees of OSI are in compliance, in all material respects,
with the continuation coverage requirements of Section 4980B of the Code as such
requirements affect OSI 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
OSI Benefit Arrangements, covered employees, or qualified beneficiaries that
could result in a Material Adverse Effect on OSI, or in a Material Adverse
Effect on HNC after the Effective Time.
3.16.7 No benefit payable or which may become payable by OSI pursuant
to any OSI 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. OSI is not a party to any: (a) agreement
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 OSI in the nature of the Merger or any of
the other transactions contemplated by this Agreement, the Agreement of Merger
or any OSI 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
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such termination of employment; or (b) agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of the Merger or any of
the other transactions contemplated by this Agreement, the Certificate of Merger
or any OSI 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 Certificate of Merger or any OSI Ancillary Agreement.
3.16.8 To OSI's knowledge, no employee, consultant or independent
contractor of OSI or any subsidiary of OSI: (a) is in material violation of any
term or covenant of any employment contract, patent disclosure agreement,
noncompetition agreement or any other contract or agreement with any other party
by virtue of such employee's, consultant's, or independent contractor's being
employed by, or performing services for, OSI or such subsidiary or using trade
secrets or proprietary information of others, or that would be likely to have a
Material Adverse Effect on OSI; or (b) has developed any technology, software or
other copyrightable, patentable, or otherwise proprietary work for OSI or any of
its subsidiaries that is subject to any agreement under which such employee,
consultant or independent contractor has assigned or otherwise granted to any
third party any rights (including without limitation Intellectual Property
Rights) in or to such technology, software or other copyrightable, patentable or
otherwise proprietary work or any Intellectual Property Rights related thereto.
To OSI's knowledge, the employment of any employee of OSI or any subsidiary of
OSI does not subject OSI or any such subsidiary to any liability to any third
party.
3.17 Corporate Documents. OSI has made available to HNC for examination all
documents and information listed in the OSI 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 OSI's Certificate of Incorporation and Bylaws as
currently in effect; (b) OSI's Minute Book containing all records of all
proceedings, consents, actions, and meetings of OSI's stockholders, board of
directors and any committees thereof; (c) OSI'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 OSI, or any securities
of OSI, and all applications for such permits, orders, and consents; and (e) all
the OSI Material Agreements.
3.18 No Brokers. Neither OSI nor any affiliate of OSI 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 the Merger or any
other transaction contemplated by this Agreement, and HNC will not incur any
liability to any such investment banker, broker, finder or similar party as a
result of, this Agreement, the Merger or any act or omission of OSI, any of its
employees, officers, directors, stockholders, agents or affiliates.
3.19 Books and Records.
3.19.1 The books, records and accounts of OSI (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 OSI, and (d) accurately and fairly reflect the
basis for the OSI Financial Statements.
3.19.2 OSI 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 OSI 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 two years, OSI and its subsidiaries have
maintained, and now maintain, policies of insurance and bonds of the type and in
amounts customarily carried by persons conducting businesses or owning assets
similar in type and size to those of OSI and its subsidiaries. There is no
material claim pending under any of such policies or bonds as to which coverage
has been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
timely paid and OSI and its subsidiaries are otherwise in compliance with the
terms of such policies and bonds. OSI has no knowledge of any threatened
termination of any of such policies. All policies of insurance now held by OSI
or any of
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its subsidiaries are set forth in Schedule 3.20 to OSI Disclosure Letter,
together with the name of the insurer under each policy and the policy coverage
amount.
3.21 Environmental Matters.
3.21.1 OSI and its subsidiaries are in compliance with all applicable
Environmental Laws (as defined below), which compliance includes the possession
by OSI and its subsidiaries of all permits and other governmental authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. Neither OSI nor any of its subsidiaries has received any
notice or other communication (in writing or otherwise), whether from a
governmental body, citizens groups, employee or otherwise, that alleges that OSI
or any of its subsidiaries is not in compliance with any Environmental Law, and
there are no circumstances that may prevent or interfere with the compliance by
OSI or any of its subsidiaries with any current Environmental Law in the future.
To OSI's knowledge, no current or prior owner of any property leased or
controlled by OSI or any of its subsidiaries has received any notice or other
communication (in writing or otherwise), whether from a government body,
citizens group, employee or otherwise, that alleges that such current or prior
owner or OSI or any of its subsidiaries is not in compliance with any
Environmental Law. All governmental authorizations currently held by OSI or any
of its subsidiaries pursuant to any Environmental Law (if any) are identified in
Schedule 3.21 of OSI Disclosure Letter.
3.21.2 For purposes of this Section 3.21: (i) "ENVIRONMENTAL LAW"
means any federal, state, local or foreign statute, law regulation or other
legal requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (ii) "MATERIAL OF ENVIRONMENTAL CONCERN" include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is currently regulated by an
Environmental Law or that is otherwise a danger to health, reproduction or the
environment.
3.22 Voting Agreement; Proxies. Those persons and/or entities who are
current holders of issued and outstanding shares of OSI Common Stock and/or OSI
Preferred Stock who are listed in that certain letter from OSI to HNC dated as
of the Agreement Date have executed voting agreements in the form provided by
HNC ("VOTING AGREEMENTS"), and the Irrevocable Proxies attached thereto as
Exhibit A ("PROXIES").
3.23 Vote Required. The affirmative vote of the holders of: (a) a majority
of the shares of OSI Common Stock that are issued and outstanding on the Record
Date (as defined below) voting together as a single class, plus (b) a majority
of the shares of OSI Preferred Stock that are issued and outstanding on the
Record Date voting together as a single class, plus (c) a majority of the shares
of OSI Series B Stock that are issued and outstanding on the Record Date, voting
together as a single series, plus (c) a majority of the shares of OSI Series C
Stock that are issued and outstanding on the Record Date, voting together as a
single series, is the only vote of the holders of any of the shares of OSI's
capital stock necessary to approve this Agreement, the Merger, the Certificate
of Merger and the other transactions contemplated by this Agreement. As used in
this Section 3.23, the term "RECORD DATE" means the record date for determining
those stockholders of OSI who are entitled to vote at OSI Stockholders' Meeting
or at any action take by written consent of OSI's stockholders without a meeting
under applicable law.
3.24 Board Approval. The Board of Directors of OSI has unanimously (i)
approved this Agreement, the Certificate of Merger and the Merger, and (ii)
determined that the Merger is in the best interests of the stockholders of OSI
and is on terms that are fair to such stockholders.
3.25 No Existing Discussions. Neither OSI nor any director, officer,
stockholder, employee or agent of OSI is engaged, directly or indirectly, in any
discussions or negotiations with any third party relating to any Alternative
Transaction (as defined in Section 5.9).
3.26 Accounting Matters. To OSI's knowledge, neither OSI nor any of its
affiliates has taken or agreed to, or plans to, take any action that would
prevent HNC from accounting for the Merger as a "pooling of interests."
3.27 Tax-Free Reorganization. OSI has not taken any action that would cause
the Merger not to qualify as a tax-free reorganization under Section 368(a) of
the Code.
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3.28 Disclosure.
(a) Neither this Agreement, its exhibits and schedules and the OSI
Disclosure Letter, nor any of the certificates to be delivered by OSI to HNC
under this Agreement, 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.
(b) None of the information supplied or to be supplied by or on
behalf of OSI for inclusion or incorporation by reference in the Form S-4 will,
at the time the Form S-4 becomes effective under the 1933 Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. None
of the information supplied or to be supplied by or on behalf of OSI for
inclusion or incorporation by reference in the Prospectus/Proxy Statement to be
filed with the SEC as part of the Form S-4 will, at the time the
Prospectus/Proxy Statement is mailed to the stockholders of OSI, at the time of
OSI Stockholders' Meeting or as of the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF HNC AND SUB
HNC and Sub hereby represent and warrant to OSI that, except as set forth
in the letter addressed to OSI from HNC and dated as of the Agreement Date which
has been delivered by HNC to OSI concurrently herewith (the "HNC DISCLOSURE
LETTER"; for all purposes of this Agreement (including without limitation
Article 8), the statements contained in the HNC Disclosure Letter and its
schedules shall also be deemed to be representations and warranties made and
given by HNC under Article 4 of this Agreement), each of the following
representations, warranties and statements in this Article 4 are true and
correct as of the Agreement Date and will be true and correct on and as of the
Closing Date:
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 and is qualified to transact business, and is in good standing, in
each jurisdiction in which its failure to be so qualified would have a Material
Adverse Effect on HNC. 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 and Sub is qualified to transact business, and is in good standing, in
each jurisdiction in which its failure to be so qualified would have a Material
Adverse Effect on HNC. HNC has delivered to OSI true and correct copies of the
currently effective Certificate of Incorporation and Bylaws of HNC and Sub, each
as amended to date. Neither HNC nor Sub is in violation of its Certificate of
Incorporation or Bylaws. HNC owns all of the issued and outstanding stock of
Sub.
4.2 Power, Authorization and Validity.
4.2.1 Power and Authority. HNC has all requisite corporate power and
authority to enter into, execute, deliver and perform its obligations under,
this Agreement and all the HNC Ancillary Agreements and to issue the shares of
HNC Common Stock and HNC Options in the Merger in accordance with this
Agreement. The execution, delivery and performance of this Agreement and each of
the HNC Ancillary Agreements by HNC have been duly and validly approved and
authorized by all necessary corporate action of HNC's Board of Directors in
compliance with the Delaware General Corporation Law and HNC's Certificate of
Incorporation and Bylaws, each as amended to date. Sub has all requisite
corporate power and authority to execute, deliver and perform its obligations
under, this Agreement and all the Sub Ancillary Agreements. The execution,
delivery and performance of this Agreement and each of the Sub Ancillary
Agreements by Sub have been duly and validly approved and authorized by all
necessary corporate action of Sub's Board of Directors and sole stockholder in
compliance with the Delaware General Corporation Law and Sub's Certificate of
Incorporation and Bylaws, each as amended to date.
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4.2.2 No Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency,
commission or other Governmental Authority is necessary or required to be made
or obtained by HNC or Sub to enable HNC and Sub to enter into, and to perform
their respective obligations under, this Agreement, the HNC Ancillary Agreements
or the Sub Ancillary Agreements, respectively, and for Sub to consummate the
Merger, except for: (a) the filing with the SEC of the Form S-4 and the
Prospectus/Proxy Statement and the SEC's declaring the Form S-4 effective under
the 1933 Act; (b) the filing by HNC 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 other transactions contemplated by this Agreement; (c) the filing of the
Certificate of Merger with the Delaware Secretary of State to effect the Merger;
(d) such filings and notifications as may be necessary under the HSR Act and the
expiration of applicable waiting periods under the HSR Act; (e) such other
filings as may be required by the Nasdaq Stock Market with respect to the Merger
and the other transactions contemplated by this Agreement, and the issuance of
the shares of HNC Common Stock and the HNC Options to be issued by HNC in the
Merger; and (f) such other filings, if any, as may be required in order for HNC
to comply with applicable federal and state securities laws.
4.2.3 Enforceability. 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 Capitalization of HNC.
4.3.1 Stock. The authorized capital stock of HNC consists entirely of
50,000,000 shares of HNC Common Stock, $0.001 par value per share, and 4,000,000
shares of Preferred Stock, $0.01 par value per share (the "HNC PREFERRED
STOCK"). At the close of business on August 21, 1998, 25,773,374 shares of HNC
Common Stock were issued and outstanding and 100 shares of HNC Common Stock were
held as treasury shares. No shares of HNC Preferred Stock are issued or
outstanding. Except as expressly described above in this Section 4.3.1, as of
August 21, 1998 no other shares of HNC Common Stock were outstanding. All of the
outstanding shares of HNC Common Stock have been validly issued and are fully
paid and non-assessable. No fractional shares of HNC Common Stock or HNC
Preferred Stock are outstanding. As of the Agreement Date, the authorized
capital stock of Sub consists of 100 shares of Common Stock, $0.01 par value per
share, of which 100 shares are validly issued and outstanding, all of which
shares have been fully paid and non-assessable and are owned by HNC.
4.3.2 Options. As of September 4, 1998: (i) an aggregate of 6,069,058
shares of HNC Common Stock were reserved for future issuance pursuant to stock
options granted and outstanding under (a) HNC's 1987 Stock Option Plan, as
amended, (b) HNC's 1995 Equity Incentive Plan, as amended, (c) HNC's 1998 Stock
Option Plan, as amended, (d) HNC's 1995 Directors Stock Option Plan, (e) the
1992 Risk Data Corporation Stock Option Plan and non-plan options of Risk Data
Corporation assumed by HNC, (f) the options granted by Retek Distribution
Corporation and assumed by HNC, (g) the CompReview, Inc. 1995 Stock Option Plan
assumed by HNC, and (h) the Practical Control Systems Technologies, Inc. 1998
Stock Option Plan assumed by HNC and (ii) 187,332 shares of HNC Common Stock
were reserved for future issuance (and were unissued) under HNC's 1995 Employee
Stock Purchase Plan (the "HNC STOCK PURCHASE PLAN"); (iii) 681,410 shares of HNC
Common Stock were reserved and available for future issuance under (but were not
subject to issuance under granted and outstanding stock options granted under)
the stock option plans described in clause (i) of this Section 4.3.2.
4.3.3 No Other Options. As of the Agreement Date: (i) there are no
outstanding options or rights to purchase shares of HNC Common Stock, other than
the options, referred to in Section 4.3.2, certain options granted between
September 4, 1998 and the Agreement Date under the stock option plans referred
to in Section 4.3.2 and any rights to purchase shares under the HNC Stock
Purchase Plan; and (ii) HNC is not obligated to issue any shares of HNC Common
Stock or any rights to acquire shares of HNC Common Stock, other than pursuant
to (A) the options and stock purchase plan referred to in Section 4.3.2, certain
options granted between September 4, 1998 and the Agreement Date under the stock
option plans referred to in Section 4.3.2 and shares issued under the HNC Stock
Purchase Plan and (C) the terms of this Agreement or any other agreement
referred to in this Agreement.
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4.3.4 Convertible Notes. As of the Agreement Date, the Company had
outstanding 4.75% Convertible Subordinated Notes due 2003 in the aggregate
principal amount of $100,000,000.
4.4 No Conflict. Neither the execution and delivery of this Agreement nor
any of the HNC Ancillary Agreements or Sub Ancillary Agreements by HNC or Sub,
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
Certificate of Incorporation or Bylaws or other charter documents of HNC or Sub
as currently in effect; (ii) any federal, state, local or foreign judgment,
writ, decree, order, statute, rule or regulation applicable to HNC or Sub or any
of their respective assets or properties; or (iii) any material instrument,
agreement or contract to which HNC or any of its subsidiaries (if any) is a
party or by which HNC or any of its subsidiaries (if any) or any of their
respective assets or properties are bound that has been filed by the SEC as an
exhibit to (a) HNC's annual report on Form 10-K for its fiscal year ended
December 31, 1997, as amended by any subsequent Form 10-K/As filed by HNC (the
"1997 HNC 10-K") or (b) in any other HNC SEC Document (as defined in Section
4.5) filed with the SEC under the 1933 Act or the 1934 Act filed after February
17, 1998, the date on which the 1997 HNC 10-K was first filed with the SEC (the
"HNC 10-K FILING DATE"), and prior to the Agreement Date.
4.5 SEC Filings.
(a) HNC has made available to OSI accurate and complete copies of
each report, registration statement (on a form other than Form S-8) and
definitive proxy statement (excluding copies of exhibits) filed by HNC with the
SEC between the HNC 10-K Filing Date and the Agreement Date pursuant to the 1933
Act or the 1934 Act, including without limitation the HNC 1997 10-K
(collectively, the "HNC SEC DOCUMENTS"). As of the time it was filed with the
SEC (or, if amended or superseded by a subsequent filing prior to the Agreement
Date, then on the date of such subsequent filing): (i) each of the HNC SEC
Documents complied in all material respects with the applicable requirements of
the 1933 Act or the 1934 Act (as the case may be); and (ii) none of the HNC SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) The consolidated financial statements (including any related
notes) contained in the HNC SEC Documents: (i) complied as to form in all
material respects with the published rules and regulations of the SEC applicable
thereto; (ii) were prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods covered (except
as may be indicated in the notes to such financial statements and, in the case
of unaudited statements, as permitted by Form 10-Q of the SEC, and except that
unaudited financial statements may not contain footnotes and are subject to
normal and recurring year-end audit adjustments; and (iii) fairly present the
consolidated financial position of HNC and its subsidiaries as of the respective
dates thereof and the consolidated results of operations and cash flows of HNC
and its subsidiaries for the periods covered thereby.
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 non-assessable, and (b) will be free and clear of any
liens and encumbrances created by HNC except for applicable restrictions on
transfer imposed by Rule 145 promulgated under the 1933 Act, under applicable
"blue sky" state securities laws and under any OSI Affiliate Agreement to be
executed pursuant to this Agreement.
4.7 No Brokers. Neither HNC nor Sub, nor any of their respective
affiliates 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 other transaction contemplated hereby or thereby for
which OSI or its stockholders will incur personal liability.
4.8 Litigation. There is no action, claim, suit, arbitration,
mediation, proceeding, claim or investigation pending against HNC or any of its
subsidiaries (or to HNC's or Sub's knowledge, against any officer, director,
employee or agent of HNC or any of its subsidiaries in their capacity as such or
relating to their employment, services or relationship with HNC or such
subsidiary) before any court, administrative agency or arbitrator that, if
determined adversely to HNC or such subsidiary (or any such officer, director,
employee or agent) would have a Material Adverse Effect on HNC, or that could
prevent, enjoin or materially alter or delay the consummation of the Merger or
any other material transaction contemplated by this Agreement, nor, to HNC's
knowledge, has any such action, suit, proceeding, arbitration, mediation, claim
or investigation been threatened. There is no judgment, decree, injunction,
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rule or order of any governmental entity or agency, court or arbiter outstanding
against HNC or any of its subsidiaries, that would (a) have a Material Adverse
Effect on HNC or any of its subsidiaries, taken as a whole or (b) that would
prevent or enjoin HNC or Sub from consummating the Merger.
4.9 Tax-Free Reorganization. Neither HNC nor Sub has taken any action that
would cause the Merger not to qualify as a tax-free reorganization under Section
368(a) of the Code.
4.10 No Material Adverse Change. Since June 30, 1998 there has not been any
Material Adverse Change (as defined in Article 1) in the financial condition,
properties, assets, liabilities, business, results of operations, operations of
HNC and its subsidiaries, taken as a whole (where, for purposes of this Section
4.10, the parties agree that a decrease in the market price of HNC Common Stock
shall not, of itself, constitute a Material Adverse Change of the type described
in this Section 4.10).
ARTICLE 5
PRE-CLOSING COVENANTS OF OSI
During the time 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 Article 10, OSI covenants and agrees with HNC as follows:
5.1 Advice of Changes. OSI will promptly advise HNC in writing (a) of any
event occurring subsequent to the Agreement Date that would render any
representation or warranty of OSI contained in Article 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
OSI's business, results of operations, or financial condition. OSI 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 OSI's business, consistent with its past
practices in accordance with OSI's books and records and generally accepted
accounting principles.
5.2 Maintenance of Business. OSI 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 Agreement Date. If OSI
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.
5.3 Conduct of Business. OSI will continue to conduct its business and
maintain its business relationships in the ordinary and usual course and neither
OSI nor any of its subsidiaries will, 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 reasonable advances to
employees for bona fide travel and expenses that are incurred in the ordinary
course of OSI's business consistent with OSI's past practices;
(b) enter into any transaction or agreement not in the ordinary
course of OSI's business;
(c) grant any lien, security interest, other encumbrance on any of
its assets;
(d) sell, transfer or dispose of any of its assets except in the
ordinary course of OSI's business consistent with OSI's past practices;
(e) enter into any material lease or contract for the purchase or
sale of any property, whether real or personal, tangible or intangible;
(f) pay any bonus, increased salary or special remuneration to any
officer, director, employee or consultant (except for normal salary increases
and bonus payments that are consistent with OSI's past practices and, in each
case, not to exceed 10% 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), enter into any new
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employment or consulting agreement with any such person or enter into any
indemnification agreement or agreement to advance expenses of defending any
claim, suit or proceeding with any such person;
(g) change any of its accounting methods;
(h) declare, set aside or pay any cash or stock dividend or other
distribution in respect of its capital stock, redeem, repurchase or otherwise
acquire any of its capital stock or other securities, pay or distribute any cash
or property to any stockholder or securityholder of OSI or make any other cash
payment to any stockholder or securityholder of OSI that is unusual,
extraordinary, or not made in the ordinary course of OSI's business consistent
with its past practices;
(i) amend or terminate any contract, agreement or license to which
OSI or any of its subsidiaries is a party except for those amended or terminated
in the ordinary course of OSI's business, consistent with its past practices,
and which (i) were not filed as exhibits to the OSI Form S-1 or (ii) would not,
if so amended or terminated, have any material impact on OSI's business or
financial condition;
(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 OSI's business, consistent with OSI'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, OSI (a) may issue shares of OSI
Common Stock issuable upon the exercise of OSI Options that are outstanding on
the Agreement Date in accordance with their terms as now in effect and (b) may
grant stock options under the OSI 1994 Option Plan in the ordinary course of
OSI's business to OSI employees and consultants in amounts, at exercise prices
and on such terms, and to such persons, as are consistent with OSI's past
practices for granting options to employees; provided further, that OSI will not
grant any stock options under the OSI 1998 Option Plan;
(m) subdivide or split or combine or reverse split the outstanding
shares of its capital stock of any class or series or enter into any
recapitalization affecting the number of outstanding shares of its capital stock
of any class or series or affecting any other of its securities;
(n) merge, consolidate or reorganize with, or acquire, or enter into
any other business combination with, any corporation, partnership, limited
liability company or any other entity or enter into any negotiations,
discussions or agreement for such purpose;
(o) amend its Certificate of Incorporation or Bylaws;
(p) license any of its technology or Intellectual Property Rights
except for licenses of products made in the ordinary course of OSI's business,
or acquire any Intellectual Property Rights (or any license thereto) from any
third party except for any such license obtained in the ordinary course of OSI's
business;
(q) materially 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 OSI, any OSI stock options, warrants or
other OSI 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 OSI or (ii) the vesting or release of any shares of capital
stock or other securities of OSI from any repurchase options or rights of
refusal held by OSI 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
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of this Agreement by HNC and OSI and not in contemplation of the Merger or other
transactions contemplated by this Agreement;
(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; or
(u) agree to do any of the things described in the preceding clauses
5.3(a) through 5.3(t).
5.4 Approval of OSI's Stockholders. OSI shall hold the OSI Stockholders'
Meeting or shall solicit the written consent of its stockholders at the earliest
practicable date (consistent with SEC rules for Form S-4 registration
statements) after the Form S-4 is declared effective by the SEC to submit this
Agreement, the Merger and approval of any related agreements or transactions for
the consideration and approval of the stockholders of OSI, which approval shall
be recommended by OSI's Board of Directors (the vote taken at such OSI
Stockholders' meeting or by the solicitation of such written consent of the
stockholders of OSI is hereinafter referred to as the "OSI STOCKHOLDER VOTE").
Such OSI's Stockholders' Meeting or action by written consent shall be called,
held and conducted, and any proxies or written consents shall be solicited, in
compliance with OSI's Certificate of Incorporation and Bylaws, both as amended,
and in compliance with applicable law. OSI will cause the Prospectus/Proxy
Statement from the Form S-4 to be delivered to each stockholder of OSI at least
ten (10) days prior to the taking of OSI Stockholder Vote. OSI will not put any
proposal up for the vote of its stockholders (as part of the OSI Stockholder
Vote or otherwise) other than the proposal to approve this Agreement and the
Merger, without obtaining HNC's prior written consent to do so, which consent
will not be unreasonably withheld, consistent with the provisions, purposes and
intent of this Agreement.
5.5 Proxy Statement. OSI will be solely responsible for any statement,
information or omission in the Form S-4 and the Prospectus/Proxy Statement
relating to OSI or its affiliates.
5.6 Regulatory Approvals. OSI 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 Authority,
whether 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 or any OSI
Ancillary Agreement. OSI will use its diligent efforts to obtain, and to
cooperate with HNC to promptly obtain, all such authorizations, approvals and
consents. OSI will use its best efforts to cooperate with and assist HNC to
promptly prepare and file the Form S-4 and the Prospectus/Proxy Statement with
the SEC, to promptly respond to any SEC comments regarding the Form S-4 or the
Prospectus/Proxy Statement, to cause the SEC to declare the Form S-4 effective.
5.7 Necessary Consents. OSI will use its diligent efforts to obtain such
consents and authorizations of third parties, give notices to third parties 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 in order to effect the
consummation of the Merger and the other transactions contemplated by this
Agreement and to enable OSI to carry on its business after the Effective Time
substantially as such business was conducted by OSI prior to the Effective Time.
5.8 Litigation. OSI will notify HNC in writing promptly after learning of
any 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 OSI
or any of its subsidiaries or any of their officers, directors, employees or
stockholders in their capacity as such.
5.9 No Other Negotiations. During the time period commencing on the
Agreement Date and ending on the earlier to occur of (a) termination of this
Agreement in accordance with the provisions of Article 10 or (b) consummation of
the Merger, OSI will not, and OSI will not authorize, encourage or permit any
officer, director, employee, stockholder, affiliate or agent of OSI or any other
person on OSI's or their behalf to, directly or indirectly: (i) solicit,
initiate, encourage or induce the making, submission or announcement of, any
offer or proposal from any party concerning any Alternative Transaction (as
defined below) or take any other action that could reasonably be expected to
lead to an Alternative Transaction or a proposal therefor; (ii) consider any
inquiry, offer or proposal received from any party concerning any Alternative
Transaction; (iii) furnish any information regarding OSI to any
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person or entity in connection with or in response to any inquiry, offer or
proposal for or regarding any Alternative Transaction; (iv) participate in any
discussions or negotiations with any person or entity with respect to any
Alternative Transaction; (v) otherwise cooperate with, facilitate or encourage
any effort or attempt by any person or entity (other than HNC) to effect any
Alternative Transaction; or (vi) execute, enter into or become bound by any
letter of intent, agreement, commitment or understanding between OSI and any
third party that is related to, provides for or concerns any Alternative
Transaction. During the foregoing time period identified in the preceding
sentence, OSI will promptly disclose to HNC any inquiries or proposals for
Alternative Transactions received by OSI from any third parties, which
disclosure shall include the identity of the party making the inquiry or
proposal and the terms of any proposal that are received. As used herein, the
term "ALTERNATIVE TRANSACTION" means (i) any commitment, agreement or
transaction involving or providing for the possible disposition of all or any
substantial portion of OSI's business, assets or capital stock, whether by way
of merger, consolidation, sale of assets, sale of stock, tender offer and/or any
other form of business combination or (ii) any initial public offering of
capital stock or other securities of OSI pursuant to a registration statement
filed under the 1933 Act.
5.10 Access to Information. Until the Closing, OSI will allow HNC and its
agents, during normal business hours and on reasonable advance notice (which may
be given orally), access to the files, books, records, personnel and offices of
OSI, including, without limitation, any and all information relating to OSI's
taxes, commitments, contracts, leases, licenses, and real, personal and
intangible property and financial condition, subject to the terms of the Mutual
Confidentiality and Non-Disclosure Agreement between OSI and HNC (the
"CONFIDENTIALITY AGREEMENT"). OSI 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. OSI will also use its diligent efforts to cause its accountants to
assist and cooperate with HNC in the preparation of the Form S-4.
5.11 Satisfaction of Conditions Precedent. OSI will use its best efforts to
satisfy or cause to be satisfied all the conditions precedent which are set
forth in Articles 8 and 9, and OSI will use its best efforts to cause the
transactions contemplated by this Agreement to be consummated in accordance with
this Agreement. In particular, OSI will use its best efforts to cause the Merger
to become effective in accordance with this Agreement by November 30, 1998.
5.12 OSI Affiliate Agreements. Concurrently with the execution of this
Agreement, OSI will deliver to HNC a letter identifying all OSI's directors,
executive officers, ten percent (10%) or greater stockholders (and affiliates of
such persons who are stockholders of OSI) and all persons or entities who in
OSI's good faith judgment are or may be deemed to be "affiliates" of OSI within
the meaning of Rule 144 or Rule 405 promulgated under the 1933 Act at the time
this Agreement is executed ("OSI AFFILIATES"). OSI will use its diligent efforts
to cause each OSI Affiliate to execute and deliver to HNC, as promptly as
practicable after OSI's signing of this Agreement, an Affiliate Agreement in
substantially the form of Exhibit D (the "OSI AFFILIATE AGREEMENT"). In
addition, OSI will use its diligent efforts to cause each person or entity who
may become an OSI Affiliate after the Agreement Date and before the Effective
Time to execute and deliver an OSI Affiliate Agreement to HNC promptly after
such person or entity becomes an OSI Affiliate.
5.13 Blue Sky Laws. OSI 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.
5.14 Pooling. OSI 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, OSI
will not take any action if, prior to taking such action, OSI has been informed
by HNC or its accountants or by OSI's accountants that, in the opinion of HNC's
or OSI's accountants (as applicable), taking such action is reasonably likely to
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 OSI a writing that states in reasonable detail the action(s) that HNC or
its accountants suggest OSI not take.
5.15 Certain Investments; Agreements. OSI 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. OSI will not enter into any agreement with any
holders of HNC shares calling for either OSI or HNC to retire or reacquire all
or part of the HNC shares to be issued pursuant to the Merger. OSI will not
enter into any financial arrangements for the benefit of any OSI stockholder
which, in effect, would negate the exchange of equity securities contemplated
under
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this Agreement and the Merger, including without limitation any loan or other
financial arrangement at abnormally low interest rates, or any guarantee of
loans secured by HNC shares to be issued pursuant to the Merger.
5.16 OSI Dissenting Shares. As promptly as practicable after the date of
OSI Stockholder Vote and prior to the Closing Date, OSI will furnish HNC with
the name and address of each holder (or potential holder) of any OSI Dissenting
Shares (if any) and the number of OSI Dissenting Shares (or potential OSI
Dissenting Shares) owned by each such holder.
5.17 Termination of Registration and Voting Rights. All registration rights
agreements and voting agreements and proxies applicable to or affecting any
outstanding shares or other securities of OSI (other than the Voting Agreements
and the related Proxies referred to in Section 3.22) will be duly terminated and
canceled by no later than immediately prior to the Effective Time.
5.18 Invention Assignment and Confidentiality Agreements. OSI will use its
best efforts to obtain from each employee, contractor and consultant of OSI who
has had access to any software, technology or copyrightable, patentable or other
proprietary works owned or developed by OSI, or to any other confidential or
proprietary information of OSI or its clients, an invention assignment and
confidentiality agreement in a form reasonably acceptable to HNC, duly executed
by such employee, contractor or consultant and delivered to OSI.
5.19 OSI Employee Plans and Benefit Arrangements. OSI shall not issue any
shares of its capital stock under the OSI Employee Stock Purchase Plan and shall
terminate any OSI Benefit Arrangement which is governed by Section 401(k) of the
Code immediately prior to the Effective Time upon the request of HNC. In the
event that the distribution or rollover of assets from the trust of a Code
Section 401(k) plan which is terminated will trigger liquidation, surrender or
other fees which will be imposed on the terminated plan or any participant or
beneficiary of such terminated plan, OSI shall take such actions as are
necessary to reasonably estimate the amount of such fees and provide such
reasonable estimate in writing to HNC prior to the Effective Time. Any OSI
Benefit Arrangement which is governed by Section 401(k) of the Code and relies
on a standardized prototype document shall be amended prior to the Effective
Time so as not to require all corporations which are members of the same
controlled group of corporations as the employer sponsoring such plan to
participate in such plan. OSI shall file any delinquent Form 5500s through the
Department of Labor Delinquent Filer Voluntary Compliance Program prior to the
Effective Time.
5.20 Exercise of Warrants. OSI shall use its best efforts to cause each and
every holder of any Warrant to exercise each such Warrant in full in accordance
with its terms prior to the Effective Time so that no Warrants are outstanding
immediately prior to the Effective Time. For purposes of this Section the term
"Warrants" has the meaning given to such term in Section 3.4.2.
5.21 Closing of Merger. OSI will not refuse to effect the Merger if, on or
before the Closing Date, all the conditions precedent to OSI's obligations to
effect the Merger under Article 8 hereof have been satisfied or waived by OSI
and HNC elects to consummate the Merger.
5.22 Tax-Free Reorganization. OSI will not take any action that would cause
the Merger not to qualify as a tax-free reorganization under Section 368 of the
Code.
ARTICLE 6
HNC COVENANTS
During the time 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 Article 10, HNC covenants and agrees as follows:
6.1 Advice of Changes. HNC will promptly advise OSI in writing of any
event occurring subsequent to the date of this Agreement that would render any
representation or warranty of HNC or Sub 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.
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
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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, in connection with
the consummation of the Merger and the other transactions contemplated by this
Agreement and the HNC Ancillary Agreements and Sub Ancillary Agreements in
accordance with the terms of this Agreement. HNC will use diligent 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. In particular, HNC will use its best efforts to cause the Merger
to become effective in accordance with this Agreement by November 30, 1998.
6.4 Listing of Additional Shares. HNC will use its best efforts to cause
the shares of HNC Common Stock issuable upon conversion of OSI Common Stock and
OSI Preferred Stock in the Merger and upon exercise of the HNC Options to be
issued in the Merger to be approved for listing (subject to notice of issuance)
on the Nasdaq Stock Market.
6.5 Closing of Merger. HNC will not refuse to effect the Merger if, on or
before the Closing Date, all the conditions precedent to HNC's obligations to
effect the Merger under Article 9 hereof have been satisfied or waived by HNC
and OSI elects to consummate the Merger. In the event that HNC (a) breaches the
provisions of the first sentence of this Section 6.5 and refuses to consummate
the Merger, or (b) does not consummate the Merger and terminates this Agreement
pursuant to Section 10.2.2 solely due to OSI's failure to satisfy any of the
closing conditions contained in Sections 9.24 through 9.28 of this Agreement
(either such action described in (i) or (ii) above being hereinafter referred to
as a "REFUSAL ACTION"), then HNC will: (a) if HNC is requested by OSI to do so
pursuant to a written notice delivered by OSI to HNC within thirty (30) days
after HNC notifies OSI that HNC is taking a Refusal Action, purchase from OSI a
total of 625,000 shares of OSI Common Stock, as presently constituted, at a
price of $8.00 per share (for a total purchase price of $5,000,000), payable in
cash, pursuant to a stock purchase agreement with OSI and related agreements
containing the principal terms and conditions summarized in Part A of Exhibit E;
and (b) if HNC is requested by OSI to do so pursuant to a written notice
delivered by OSI to HNC within thirty (30) days after HNC notifies OSI that HNC
is taking a Refusal Action, loan to OSI the principal sum of Five Million
Dollars ($5,000,000) (or such lesser amount as OSI may request) on a secured
basis on the loan terms and conditions summarized on Part B of Exhibit E. As a
material inducement and consideration for HNC to enter into this Agreement, the
parties hereby acknowledge and agree HNC's agreement to the provisions of this
Section 6.5, and HNC's performance of the foregoing obligations of HNC under the
immediately preceding sentence, will constitute liquidated damages and the sole
and exclusive right and remedy of OSI and its securityholders, and the sole and
exclusive liability of HNC, for any breach or violation by HNC of its
obligations under the first sentence of this Section 6.5 and/or any Refusal
Action and that HNC shall not obligated to consummate the Merger and OSI shall
not be entitled to any injunctive relief, the remedy of specific performance or
other remedy due to HNC's failure to consummate the Merger pursuant to a Refusal
Action. OSI further acknowledges and agrees that neither HNC, Sub, nor any of
their respective officers, directors, employees, securityholders, agents or
attorneys, or their successors or assigns, shall have any liability or
obligation whatsoever to OSI or to any of its officers, directors,
securityholders, employees or agents on account of any Refusal Action by or on
the part of HNC, except as expressly provided in this Section 6.5.
6.6 Employee Benefits. As soon as practicable after the Agreement Date,
HNC and OSI shall confer and work together in good faith to agree upon a
mutually acceptable plan that is consistent with the other terms and conditions
of this Agreement, and that has as its primary purpose the transition (to the
extent reasonably practicable and lawful, and to the extent financially
reasonable) of OSI employees to HNC employee benefit plans providing benefits
not less favorable in the aggregate than other similarly situated employees of
HNC and in a manner that results in minimal disruption to the continuing
operations of OSI and that does not result in any material increase in HNC's or
the Surviving Corporation's cost per employee of providing the benefits afforded
under such employee benefit plans; provided, however, that nothing herein will
require HNC (or the Surviving Corporation) to cancel or terminate, or to adopt
or continue to provide benefits under, any OSI Benefit Arrangement or other OSI
employee benefit plan, or to suffer or incur any unusual financial expense, or
any fine or penalty, in connection therewith. In the event that, pursuant to
Section 5.19, OSI terminates the OSI Benefit Arrangement which is governed by
Section 401(k) upon the request of HNC, HNC will take such actions as are
necessary and desirable to permit participants of
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such terminated plan that commence employment with HNC to rollover their
accounts to a Section 401(k) plan sponsored by HNC.
6.7 Indemnification and Insurance
6.7.1 Indemnification. Subject to the provisions of this Section 6.7,
for a period of six (6) years after the Effective Time, HNC shall, and shall
cause the Surviving Corporation to, indemnify and hold harmless the present and
former officers and directors of OSI and any officers, directors and employees
of OSI who are (or were) fiduciaries of OSI "employee benefits plans" (as
defined in Section 3(3) of ERISA) (collectively, the "OSI INDEMNIFIED PARTIES")
in respect of acts or omissions of such persons taken or occurring prior to the
Effective Time and made in their capacity as an officer or director of OSI
(including without limitation any acts or omissions of such persons with respect
to this Agreement and the transactions contemplated hereby) or made in their
capacity as such a fiduciary, to the fullest extent permitted by (i) the
provisions of Sections 145(a), (b) and (c) of the Delaware General Corporation
Law (as if the references to the word "may" in the first sentences of Sections
145(a) and (b) was "shall") and (ii) by OSI's Certificate of Incorporation and
Bylaws as in effect on the Agreement Date; provided, however, that
notwithstanding the foregoing, nothing in this Section 6.7.1 shall require the
Surviving Corporation or HNC to provide the foregoing indemnification to an OSI
Indemnified Party: (a) to any extent that such indemnification is limited or not
permitted by applicable law; or (b) to any extent that such indemnification
involves a claim for indemnification for an act or omission of such OSI
Indemnified Party that (i) constituted a breach of such OSI Indemnified Party's
duty of loyalty to OSI or its stockholders, (ii) a breach of fiduciary duty in
the operation or administration of an "employee benefits plan" (as defined in
Section 3(3) of ERISA), (iii) was not taken in good faith by such OSI
Indemnified Party or involved intentional misconduct or a knowing violation of
law on the part of such OSI Indemnified Party, or (iv) related to any
transaction from which such OSI Indemnified Party derived an improper personal
benefit. In the event that any claim or claims for indemnification under this
Section 6.7.1 is or are asserted against HNC in writing within six (6) years
after the Effective Time, then all rights to indemnification in respect of any
such claim or claims shall continue until final disposition of any and all such
claims.
6.7.2 Advancement of Expenses. Subject to the provisions of this
Section 6.7, without limiting the provisions of Section 6.7.1, in the event
that, within six (6) years of the Effective Time, any OSI Indemnified Party
becomes involved, in such OSI Indemnified Party's capacity as an officer or
director of OSI, as a defendant in any action or proceeding, or the subject of
any investigation, in each case in connection with any matter as to which
indemnification is and can be claimed by such officer or director pursuant to
Section 6.7.1, then, to the fullest extent permitted under applicable law, HNC
shall, or shall cause the Surviving Corporation to, pay as incurred, such OSI
Indemnified Party's reasonable legal and other expenses (including the cost of
any investigation and preparation) incurred in connection with such action,
proceeding or investigation (to the extent that such expenses have been verified
by written invoices from the parties billing such expenses to the OSI
Indemnified Party that have been delivered to HNC), upon receipt of a written
undertaking executed by such OSI Indemnified Party to repay to HNC or the
Surviving Corporation, as applicable, all such legal and other expenses paid by
HNC or the Surviving Corporation under this Section 6.7.2 if it shall ultimately
be determined that such OSI Indemnified Party is not entitled to be indemnified
by the Surviving Corporation or HNC for such expenses under applicable law or
the provisions of Section 6.7.1.
6.7.3 Insurance. After the Effective Time, HNC shall, or shall cause
OSI to, provide officers' and directors' liability insurance having a five (5)
year term (running from the Effective Time), solely in respect of acts or
omissions occurring on or prior to the Effective Time covering each of OSI's
officers and directors who are currently covered by OSI's directors' and
officers' liability insurance policy in effect on the Agreement Date (which
policy is listed in Schedule 3.20 to the OSI Disclosure Letter) on terms
substantially similar to those of such policy in effect on the Agreement Date;
provided, however, that in satisfying its obligation under this Section, HNC
shall not be obligated to expend in excess of a cumulative aggregate maximum of
$120,000 (the "MAXIMUM PREMIUM") for such five (5) year coverage, and if the
Surviving Corporation is unable to obtain the insurance required by this Section
6.7.3, it shall obtain as much comparable insurance as possible for a premium
equal to the Maximum Premium. OSI Indemnified Parties shall look first to the
insurance policies described in this Section 6.7.3 for recovery of any amounts
which they may be entitled to be paid under the foregoing provisions of Sections
6.7.1 and/or 6.7.2. To the extent that any insurance proceeds payable under the
insurance policy or policies described in this Section 6.7.3 are payable to pay
any amounts for which HNC and/or the Surviving Corporation have previously paid
indemnification or advanced expenses pursuant to this Section 6.7, then HNC and
the Surviving Corporation, as applicable, shall be entitled to recover such
insurance proceeds. HNC's and/or the Surviving Corporation's obligations to pay
any
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amounts to an OSI Indemnified Party under this Section 6.7 shall be reduced,
dollar for dollar, by the amount of any insurance proceeds actually received by
such OSI Indemnified Party in respect of such amounts.
6.7.4 Escrow Matters. Notwithstanding the foregoing provisions of
Sections 6.7.1 and 6.7.2, neither HNC nor the Surviving Corporation shall be
obligated to indemnify any person with respect to any amounts paid from the
Escrow Shares in satisfaction of an indemnification claim made by HNC or any
other Indemnified Person pursuant to Article 11 of this Agreement.
6.8 Tax-Free Reorganization. Neither HNC nor Sub will take any action that
would cause the Merger not to qualify as a tax-free reorganization under Section
368(a) of the Code.
ARTICLE 7
CLOSING MATTERS
7.1 The Closing. Subject to termination of this Agreement as provided in
Article 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 as soon
as practicable, and in all events by the second 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 other day as HNC and
OSI may mutually agree on (the "CLOSING DATE"). Concurrently with the Closing,
the Certificate of Merger will be filed with the Delaware Secretary of State.
7.2 Exchange of Certificates.
7.2.1 At the Closing, each holder of shares of OSI Common Stock and/or
OSI Preferred Stock will surrender the certificate(s) for such shares (each a
"OSI CERTIFICATE"), duly endorsed to HNC for cancellation as of the Effective
Time together (if requested by HNC) with the agreement and acknowledgment
contemplated by the second sentence of Section 2.4.2. Promptly after the
Effective Time and receipt of such OSI Certificates and such agreement and
acknowledgment, HNC or its transfer agent will issue to each tendering holder of
a OSI 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
of such holder that are to be withheld and 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 the provisions of Section 2.1.4. At or about the
Closing Date, 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 OSI Certificate unless
and until the holder of such unsurrendered OSI Certificate surrenders such OSI
Certificate to HNC as provided above. Subject to the effect, if any, of
applicable escheat and other laws, following surrender of any OSI Certificate,
there will be delivered to the person entitled thereto, without interest, the
amount of any dividends and distributions theretofore paid with respect to HNC
Common Stock so withheld as of any date subsequent to the Effective Time and
prior to such date of delivery.
7.2.3 After the Effective Time there will be no further registration
of transfers on the stock transfer books of OSI or its transfer agent of any
shares of capital stock of OSI that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, OSI Certificates are presented for
any reason, they will be canceled and exchanged as provided in this Section 7.2.
7.2.4 Until OSI Certificates representing shares of OSI Common Stock
and/or OSI Preferred Stock that are outstanding immediately prior to the
Effective Time are surrendered pursuant to Section 7.2.1 above, such OSI
Certificates will be deemed, for all purposes, to evidence ownership of the
number of shares of HNC Common Stock into which such shares of OSI Common Stock
and/or OSI Preferred Stock will have been converted pursuant to Section 2.1.2.
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ARTICLE 8
CONDITIONS TO OBLIGATIONS OF OSI
OSI'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 OSI, but only in a writing signed by OSI):
8.1 Accuracy of Representations and Warranties. The representations and
warranties of HNC and Sub set forth in Article 4 (as qualified by the HNC
Disclosure Letter) will be true and accurate on and as of the Closing with the
same force and effect as if they had been made at the Closing Date (except for
any such representations or warranties that, by their terms, speak only as of a
specific date or dates, in which case such representations and warranties shall
be true and correct on and as of such specified date or dates), and OSI will
have received a certificate to such effect executed by an executive officer of
HNC.
8.2 Covenants. HNC will have performed and complied in all material
respects with all of its covenants contained in Article 6 on or before the
Closing (to the extent that such covenants require performance by HNC on or
before the Closing), and OSI will have received a certificate to such effect
signed by an executive officer of HNC.
8.3 Requisite Approvals. The Merger and the principal terms of this
Agreement shall have been duly and validly approved and adopted by OSI's
stockholders, in accordance with applicable laws and OSI's Certificate of
Incorporation and Bylaws. The principal terms of this Agreement and the issuance
of shares of HNC Common Stock in the Merger and the grant of HNC Options upon
conversion of OSI Options in the Merger will have been duly and validly approved
and adopted by HNC's Board of Directors in accordance with applicable laws and
HNC's Certificate of Incorporation and Bylaws. The principal terms of this
Agreement 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. There will not be
issued or enacted or adopted, or threatened in writing by any Governmental
Authority, any order, decree, temporary, preliminary or permanent injunction,
legislative enactment, statute, regulation, action or proceeding, or any
judgment or ruling by any court, arbitrator, Governmental Authority 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 involves a challenge, threat to, or a prohibition,
injunction, restraint, suspension, delay or illegality of, or to impose
limitations on) the Merger or any other material transaction contemplated by
this Agreement.
8.5 Government Consents; HSR Act Compliance. There will have been obtained
at or prior to the Closing Date such permits or authorizations, and there will
have been taken all such other actions by any regulatory authority having
jurisdiction over the parties and the actions herein proposed to be taken, as
may be required to lawfully consummate the Merger, including but not limited to
requirements under applicable federal and state securities laws. All applicable
waiting periods under the HSR Act shall have expired or early termination of
such waiting periods shall have been granted.
8.6 Form S-4 Effective. The Form S-4 shall have been declared effective by
the SEC and no stop order of the SEC affecting the issuance of the shares of HNC
Common Stock or HNC Options in the Merger shall be in effect.
8.7 Opinion of HNC's Counsel. OSI will have received from Fenwick & West
LLP, counsel to HNC, a favorable opinion regarding the matters set forth in
Exhibit F.
8.8 Nasdaq Listing. The shares of HNC Common Stock issuable in the Merger
pursuant to Section 2.1.2, and the shares of HNC Common Stock issuable upon the
exercise of HNC Options issued in the Merger pursuant to Section 2.2, shall be
authorized for listing on the Nasdaq Stock Market (subject to notice of
issuance).
8.9 No Material Adverse Change. There will not have been any Material
Adverse Change (as defined in Article 1) in the financial condition, properties,
assets, liabilities, business, results of operations or operations of
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HNC and its subsidiaries, taken as a whole, since June 30, 1998 (where, for
purposes of this Section 8.9, the parties agree that a decrease in the market
price of HNC Common Stock shall not, of itself, constitute a Material Adverse
Change of the type described in this Section 8.9), and OSI will have received a
certificate to such effect signed by OSI's President or Chief Financial Officer.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF HNC AND SUB
The obligations of HNC and Sub 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 OSI set forth in Article 3 (as qualified by OSI Disclosure Letter)
(a) that are qualified as to materiality will be true and correct and (B) that
are not qualified as to materiality shall be true and correct in all material
respects, in each case on and as of the Closing with the same force and effect
as if they had been made at the Closing Date (except for any such
representations or warranties that, by their terms, speak only as of a specific
date or dates, in which case such representations and warranties shall be true
and correct on and as of such specified date or dates), and HNC will have
received a certificate to such effect executed by OSI's President and/or Chief
Financial Officer.
9.2 Covenants. OSI will have performed and complied in all material
respects with all of its covenants contained in Article 5 on or before the
Closing, and HNC will have received a certificate to such effect signed by OSI's
President and/or Chief Financial Officer.
9.3 No Material Adverse Change. There will not have been any Material
Adverse Change (as defined in Article 1) in the financial condition, properties,
assets, liabilities, business, results of operations or operations of OSI and
its subsidiaries, taken as a whole, and HNC will have received a certificate to
such effect signed by OSI's President and Chief Financial Officer.
9.4 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) the Merger or
any other material transaction contemplated by this Agreement or any OSI
Ancillary Agreement. 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 OSI.
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 applicable to the Merger shall have
expired or early termination of such waiting periods shall have been granted
without any condition or requirement requiring or calling for the disposition or
divestiture of any product or other asset of OSI or HNC or any of their
subsidiaries by HNC or OSI or any of their subsidiaries.
9.6 Opinion of OSI's Counsel. HNC will have received from Hale and Dorr
LLP, counsel to OSI, a favorable opinion substantially in the form of Exhibit G,
provided, however that certain of the opinions set forth in Exhibit G may be
provided in an opinion from Shipman & Goodwin, counsel to OSI, subject to the
reasonable satisfaction of Fenwick & West LLP.
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9.7 Consents. HNC will have received duly executed copies of all material
third-party consents, approvals, assignments, waivers, authorizations or other
certificates including without limitation those set forth in Schedule 3.12 to
the OSI Disclosure Letter contemplated by this Agreement or OSI 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 OSI and its subsidiaries after the Merger and the
preservation of OSI'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 HNC Ancillary Agreements and the OSI Ancillary Agreements in
form and substance reasonably satisfactory to HNC.
9.8 Requisite Approvals. The principal terms of this Agreement, the Merger
and OSI Ancillary Agreements will have been duly and validly approved and
adopted, as required by applicable law and OSI's Certificate of Incorporation
and Bylaws, by: (a) OSI's Board of Directors; (b) the valid and affirmative vote
of OSI's stockholders as described in Section 3.23.
9.9 Restriction on Dissenting Shares. The number of the outstanding shares
of OSI Common Stock and OSI Preferred Stock (if any) that have not affirmatively
voted in favor of the Merger and are eligible to exercise or perfect any
statutory appraisal rights of dissenting stockholders under applicable law will
not exceed that number of such shares which represented five percent (5%) of the
shares of OSI Common Stock outstanding on the Record Date (as defined in Section
3.23) where, for this purpose, each share of OSI Preferred Stock will be deemed
to be that number of shares of OSI Common Stock into which it was convertible
under OSI's Certificate of Incorporation on the Record Date.
9.10 OSI Affiliate Agreements. Each director, executive officer and ten
percent (10%) or greater stockholder of OSI and each OSI Affiliate who is to
receive HNC Common Stock in the Merger will have executed and delivered to HNC a
OSI Affiliate Agreement in the form of Exhibit D.
9.11 Non-Competition Agreements. HNC will have received from each of
Douglas K. Anderson, Graham H. Gurney, John L. Person, Clifford I. Waggoner and
Richard J. Willemin, a fully executed copy of a Non-Competition Agreement in the
form of Exhibit H.
9.12 Escrow Agreement. HNC will have received a fully executed copy of the
Escrow Agreement in the form of Exhibit A executed by the Escrow Agent and the
Representative.
9.13 Form S-4 Effective. The Form S-4 shall have been declared effective by
the SEC and no stop order of the SEC affecting the issuance of the shares of HNC
Common Stock or HNC Options in the Merger shall be in effect.
9.14 Continued Employment of Certain Personnel. Each of Douglas K. Anderson
and John L. Person, who are currently employees of OSI, (a) shall have continued
to be employed as full-time employees of OSI at all times from the Agreement
Date through the Effective Time and (b) shall have accepted offers of continued
at will employment with OSI following the Effective Time pursuant to written
employment offer letters reasonably satisfactory to HNC in which such persons
will have agreed to continue to be full-time employees of OSI for a period of
two (2) years after the Effective Time.
9.15 Resignation of Directors. The directors of OSI 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 OSI immediately after the
Effective Time) will have resigned as directors of the Surviving Corporation in
writing effective as of the Effective Time.
9.16 Pooling Opinions. HNC will have been advised in writing, as of
immediately prior to the Effective Time, by its accountants,
PricewaterhouseCoopers LLP, that as of such date, subject to customary
qualifications, PricewaterhouseCoopers LLP concurs with HNC's management's
conclusion that no conditions exist that would preclude HNC from accounting for
the Merger as a pooling of interests in accordance with generally accepted
accounting principles, and OSI will have been advised in writing, as of
immediately prior to the Effective Time, by its accountants,
PricewaterhouseCoopers LLP, that, as of such date, subject to customary
qualifications, no conditions exist that would preclude OSI from being a party
to a business combination for which the pooling of interest method of accounting
would be available in accordance with generally accepted accounting principles.
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9.17 No Other OSI Securities. All Other OSI Securities (including without
limitation all Warrants), if any, will have been exercised in full and thereby
converted into shares of OSI Common Stock or OSI Preferred Stock in accordance
with their current terms and conditions, so that no Other OSI Securities will be
outstanding immediately prior to the Effective Time.
9.18 BISYS Rights Released. The BISYS Group, Inc. ("BISYS") shall have
executed and delivered to OSI a written release and waiver agreement reasonably
satisfactory in form and substance to HNC and its counsel, wherein BISYS shall:
(a) terminate any rights of BISYS under Section 20 of that certain Software
License and Marketing and Distribution Agreement dated August 20, 1997 between
BISYS and OSI (the "BISYS AGREEMENT"); (b) waive, with respect to the Merger,
any rights of BISYS arising from (i) the "Change of Control" (as defined in
Section 1.0 of the BISYS Agreement) provisions of the BISYS Agreement, including
without limitation, those provisions in Sections 13 and 21(b)(iii) of the BISYS
Agreement and (ii) any other provisions of the BISYS Agreement that may be
triggered by the consummation of the Merger or any of the other transactions
contemplated to occur under this Agreement at the Effective Time; and (c) waive
and terminate any rights of BISYS under Section 14 of the BISYS Agreement.
9.19 COCC Rights Released. Connecticut On-Line Computer Center, Inc.
("COCC") shall have executed and delivered to OSI a written release and waiver
agreement reasonably satisfactory in form and substance to HNC and its counsel,
wherein COCC shall waive and terminate any rights of COCC arising from (i) the
"Change of Control" (as defined in Section 1.2 of the COCC Agreement) provisions
of that certain License and Marketing Agreement dated December 9, 1997 between
COCC and OSI (the "COCC AGREEMENT"), including without limitation, those
provisions in Section 16.2(iii) of the COCC Agreement and (ii) any other
provisions of the COCC Agreement that may be triggered by the consummation of
the Merger or any other transactions contemplated to occur under this Agreement
at the Effective Time.
9.20 CII's Series A-2 Rights Confirmed. Connecticut Innovations
Incorporated ("CII") shall have executed and delivered to OSI a written
agreement reasonably satisfactory in form and substance to HNC and its counsel,
wherein CII shall confirm that it is not exercising the rights set forth in
Section 5 of that certain Purchase Agreement dated May 12, 1995 between CII and
OSI (the "CII AGREEMENT") in connection with the Merger and that such rights
terminate by their terms upon the consummation of the Merger.
9.21 Investors' Series B Rights Confirmed. The "Investors" listed in
Schedule A of that certain Series B Preferred Stock and Warrant Purchase
Agreement dated December 27, 1995 between the Investors listed in Schedule A
thereof and OSI (the "SERIES B AGREEMENT") shall have executed and delivered to
OSI a written agreement reasonably satisfactory in form and substance to HNC and
its counsel, wherein such Investors shall confirm that they are not exercising
the rights set forth in Section 6 of the Series B Agreement in connection with
the Merger and that such rights terminate by their terms upon the consummation
of the Merger.
9.22 Investors' Series C Rights Confirmed. The "Investors" listed in
Schedule A of that certain that certain Series C Preferred Stock and Warrant
Purchase Agreement dated October 23, 1996 between the Investors listed in
Schedule A thereof and OSI (the "SERIES C AGREEMENT") shall have executed and
delivered to OSI a written agreement reasonably satisfactory in form and
substance to HNC and its counsel, wherein such Investors shall confirm that they
are not exercising their rights set forth in Section 6 of the Series C Agreement
in connection with the Merger and that such rights terminate by their terms upon
the consummation of the Merger.
9.23 Investors' Series D Rights Confirmed. BISYS shall have executed and
delivered to OSI a written agreement reasonably satisfactory in form and
substance to HNC and its counsel, wherein BISYS shall confirm that it is not
exercising the rights set forth in Section 6 of that certain Series D Preferred
Stock and Warrant Purchase Agreement dated August 22, 1997 between BISYS and OSI
(the "SERIES D AGREEMENT") in connection with the Merger and that such rights
terminate by their terms upon the consummation of the Merger.
9.24 Rights under CII Agreement Confirmed. CII shall have executed and
delivered to OSI a written release and waiver agreement reasonably satisfactory
in form and substance to HNC and its counsel, wherein CII shall confirm that any
rights of CII arising from Sections 7.5 and 7.6 of the CII Agreement terminate
by their terms upon the consummation of the Merger.
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9.25 Rights under 12/27/95 Series B Management Rights Letter Released. The
"Investors" who are listed on Schedule 1 of that certain Management Rights
Letter dated December 27, 1995 between OSI and such Investors (the "12/27/95
LETTER") shall have executed and delivered to OSI a written release and waiver
agreement reasonably satisfactory in form and substance to HNC and its counsel,
wherein such Investors waive and terminate all rights of Investors under the
12/27/95 Letter effective as of the consummation of the Merger; provided,
however, that the confidentiality provisions of the second to the last paragraph
of such letter shall continue in full force and effect.
9.26 Rights under 10/23/96 Series C Management Rights Letter Released. The
"Investors" who are listed on Schedule 1 of that certain Management Rights
Letter dated October 23, 1996 between OSI and such Investors (the "10/23/96
LETTER") shall have executed and delivered to OSI a written release and waiver
agreement reasonably satisfactory in form and substance to HNC and its counsel,
wherein such Investors waive and terminate all rights of Investors under the
10/23/96 Letter effective as of the consummation of the Merger; provided,
however, that the confidentiality provisions of the second to the last paragraph
of such letter shall continue in full force and effect.
9.27 Rights under 8/22/97 Series D Management Rights Letter Released. BISYS
shall have executed and delivered to OSI a written release and waiver agreement
reasonably satisfactory in form and substance to HNC and its counsel, wherein
BISYS waives and terminates all rights of BISYS under that certain Management
Rights Letter dated October 23, 1996 between OSI and BISYS effective as of the
consummation of the Merger (the "8/22/97 LETTER"); provided, however, that the
confidentiality provisions of the second to the last paragraph of such letter
shall continue in full force and effect.
9.28 Rights under Investors' Rights Agreement Confirmed. Those "Investors"
listed in Schedules A, B, C and D of that certain Amended and Restated
Investors' Rights Agreement dated August 22, 1997 between the Investors listed
in Schedules A, B, C and D thereof and OSI (the "INVESTORS' RIGHTS AGREEMENT")
necessary to effect an amendment or waiver of the Investors' Rights Agreement
pursuant to Section 3.7 thereof shall have executed and delivered to OSI a
written agreement reasonably satisfactory in form and substance to HNC and its
counsel, wherein such Investors shall confirm that all rights of the Investors
under the Investors' Rights Agreement terminate by their terms upon the
consummation of the Merger.
ARTICLE 10
TERMINATION OF AGREEMENT
10.1 Termination by Mutual Consent. This Agreement may be terminated at any
time prior to the Effective Time by the mutual written consent of HNC and OSI.
10.2 Unilateral Termination.
10.2.1 Either HNC or OSI, by giving written notice to the other, may
terminate this Agreement if a court of competent jurisdiction or other
Governmental Authority shall have issued a nonappealable final order, decree or
ruling or taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger.
10.2.2 Either HNC or OSI, by giving written notice to the other, may
terminate this Agreement if the Merger shall not have been consummated by
midnight Pacific time on the Termination Date; provided, however, that the right
to terminate this Agreement pursuant to this Section 10.2.2 shall not be
available to any party whose failure to perform in any material respect any of
its obligations under this Agreement results in the failure of any condition set
forth in Article 8 or Article 9 or if the failure of such condition results from
facts or circumstances that constitute a material breach of a representation or
warranty made under this Agreement by such party, if the other party has
performed in all material respects its obligations under this Agreement and if
the representations and warranties of such other party to this Agreement are
true and correct in all material respects as of the Termination Date.
10.2.3 Either HNC or OSI may terminate this Agreement at any time
prior to the Closing if the other has committed (or, in the case of a
termination by OSI, Sub has committed) a material breach of (a) any of its
representations and warranties under Article 3 or Article 4 of this Agreement,
as applicable; or (b) any of its covenants under Article 5 or Article 6 of this
Agreement, as applicable, and has not cured such material breach within
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thirty (30) days after the party seeking to terminate this Agreement has given
the other party written notice of the material breach and its intention to
terminate this Agreement pursuant to this Section 10.2.3.
10.3 No Liability for Termination. Termination of this Agreement by a party
(the "TERMINATING PARTY") in accordance with this Section 10 will not give rise
to any obligation or liability on the part of the Terminating Party on account
of such termination, except to the extent otherwise expressly provided in
Section 6.5.
ARTICLE 11
SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION
AND REMEDIES, CONTINUING COVENANTS
11.1 Survival of Representations. All representations, warranties and
covenants of OSI 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
Effective Time; provided, however, that the representations and warranties
respecting matters addressed by the first audited financial statements of HNC
(on a consolidated combined basis with OSI) together with a report thereon from
HNC's independent auditors, shall not expire later than the date on which such
financial statements are first released to the public.
11.2 Agreement to Indemnify. Subject to the terms and conditions of this
Article 11 and the Escrow Agreement, the OSI Stockholders will 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 1933 Act or the 1934 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,
damages, liabilities and expenses including, without limitation, reasonable
attorneys' fees, other professionals' and experts' reasonable fees and court or
arbitration costs (hereinafter collectively referred to as "DAMAGES") directly
or indirectly incurred, resulting or and arising out of: (a) any inaccuracy,
misrepresentation, breach of, or default in, any of the representations,
warranties or covenants given or made by OSI in this Agreement or in the OSI
Disclosure Letter or in any certificate delivered by or on behalf of OSI or an
officer of OSI pursuant hereto (if such inaccuracy, misrepresentation, breach or
default existed at the Closing Date); (b) any failure of any information
pertaining to OSI and contained in the Form S-4 or the Prospectus/Proxy
Statement to be true, correct and complete; or (c) any Excess Transaction
Expenses (as defined in Section 12.7). 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, and, if raised by
such date, such claim shall survive the Escrow Release Date until final
resolution thereof. As used herein, the term "Damages" will not include any
overhead costs of HNC personnel not involving out-of-pocket expense and the
amount of Damages incurred by any Indemnified Person will be reduced, dollar for
dollar, by the amount of any insurance proceeds actually received by HNC (or any
subsidiary of HNC) on account of such Damages and the amount of U.S. federal or
state tax savings that the Representative demonstrates have been (or will be)
actually recognized by HNC for tax periods occurring during or after the Escrow
Period and that are directly attributable to Damages otherwise recoverable under
this Section (however, HNC shall not be obligated to disclose to OSI any
nonpublic financial information regarding HNC in order to assist OSI in
demonstrating such tax benefits, except that if any such tax benefits have in
fact been recognized by HNC, HNC will accurately describe the amount of such
recognized tax benefits upon requests); but "Damages" will include all
reasonable costs or expenses incurred by HNC to recover such insurance proceeds
or to obtain such direct tax savings. The Indemnified Persons will use
reasonable efforts to mitigate their Damages.
11.3 Limitation. In seeking indemnification for Damages under Section 11.2,
the Indemnified Persons will exercise their remedies solely with respect to the
Escrow Shares and any other assets deposited in escrow pursuant to the Escrow
Agreement and no OSI Stockholder will have any liability whatsoever to an
Indemnified Person under Section 11.2 of this Agreement except to the extent
(and only to the extent) of such OSI Stockholder's portion of the Escrow Shares
and any other assets deposited under the Escrow Agreement. Except as otherwise
provided in the last sentence of this Section 11.3, the remedies set forth in
this Section 11.3 will be the sole and exclusive remedies of HNC and the other
Indemnified Persons under Section 11.2 of this Agreement or otherwise against
any OSI Stockholder for any inaccuracy, misrepresentation, breach of, or default
in, any of the
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representations, warranties or covenants given or made by OSI in this Agreement,
the OSI Disclosure Letter or in any certificate, document or instrument
delivered by or on behalf of OSI or an officer of OSI 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 OSI
Stockholders shall, subject to the foregoing limitations, be liable to indemnify
the Indemnified Persons for all Damages; provided, however, that the Basket and
the foregoing provisions of this sentence shall not apply to any indemnification
claim for Damages for Excess Transaction Expenses. Nothing contained in this
Article 11 (including without limitation any provisions of this Section 11.3)
shall be construed to limit or restrict any rights of HNC against (a) any person
with respect to any fraudulent conduct or any fraudulent misrepresentations or
omission by such person or (b) any OSI Stockholder, with respect to any failure
of such OSI Stockholder to have good title to any issued and outstanding shares
of OSI Common Stock or OSI Preferred Stock held (or asserted to have been held)
by such OSI Stockholder, free and clear of all liens, claims and encumbrances,
or to have the full right, capacity and authority to vote such person's shares
of OSI stock in favor of the Merger and any other transaction contemplated by
this Agreement.
11.4 Notice; Defense of Claims. The Representative shall have the right to
defend suits, actions, and proceedings against an Indemnified Person for which
the OSI Stockholders have indemnification obligations under Section 11.2 to the
extent provided in the Escrow Agreement.
ARTICLE 12
MISCELLANEOUS
12.1 Governing Law. The internal laws of the State of Delaware
(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, then
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.
This Agreement may be amended by the parties hereto at any time before or after
approval of this Agreement by the stockholders of OSI, but, after such approval,
no amendment will be made which by applicable law requires the further approval
of the stockholders of OSI without obtaining such further approval. At any time
prior to the Effective Time, each of OSI 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
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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 legal, auditors' and
investment bankers' and financial advisors' fees and other expenses incurred
with respect to this Agreement, the Merger and the transactions contemplated
hereby ("TRANSACTION EXPENSES"); provided, however, that if the Merger is
successfully consummated, then up to a maximum of $2,200,000 of OSI's verified
Transaction Expenses will be paid by HNC, and HNC shall be entitled to
indemnification from the Escrow Shares in accordance with Section 11.2 for an
amount equal to the amount (if any) by which OSI's Transaction Expenses exceed
$2,200,000 (such excess being hereinafter called the "EXCESS TRANSACTION
EXPENSES"), and such indemnification shall not be subject to the Basket.
12.8 Attorneys' Fees. Should suit be brought to enforce or interpret any
part of this Agreement, the prevailing party will be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees to
be fixed by the court (including without limitation, costs, expenses and fees on
any appeal). The prevailing party will be entitled to recover its costs of suit,
regardless of whether such suit proceeds to final judgment.
12.9 Notices. All notices and other communications required or permitted
under this Agreement will be in writing and will be either hand delivered in
person, sent by telecopier, sent by certified or registered first class mail,
postage pre-paid, or sent by nationally recognized express courier service. Such
notices and other communications will be effective upon receipt if hand
delivered or sent by telecopier (if sent by telecopier prior to 5:00 p.m. local
time at the location of the addressee; otherwise on the next business day), four
(4) days after mailing if sent by mail, and one (l) business 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, Esq.
Fax Number: (650) 494-1417
If to OSI:
Open Solutions Inc.
300 Winding Brook Drive
Glastonbury, CT 06033
Attention: President
Fax Number: (860) 652-7482
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Mark G. Borden, Esq.
Fax Number: (617) 526-5000
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 12.9.
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12.10 Construction of Agreement. This Agreement has been negotiated by the
respective parties hereto and their attorneys and the language hereof will not
be construed for or against either party. A reference to a Section or an exhibit
will mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for reference purposes
only and will not in any manner limit the construction of this Agreement which
will be considered as a whole.
12.11 No Joint Venture. Nothing contained in this Agreement will be deemed
or construed as creating a joint venture or partnership between any of the
parties hereto. No party is by virtue of this Agreement authorized as an agent,
employee or legal representative of any other party. No party will have the
power to control the activities and operations of any other and their status is,
and at all times will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.
12.12 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
12.13 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, 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; provided, however, that the provisions of Section 6.7 of this
Agreement will be for the benefit of, and will be binding upon, any OSI
Indemnified Parties (as defined in Section 6.7.1).
12.14 Public Announcement. Upon execution of this Agreement, HNC and OSI
will issue a press release approved by both parties announcing the Merger (the
"INITIAL PRESS RELEASE"). 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 the Initial Press Release, neither party will make any public announcement
relating to this Agreement or the transactions contemplated hereby (except as
may be required by law) and OSI will use its reasonable efforts to prevent any
trading in HNC Common Stock by its officers, directors and employees of which it
is aware. Neither HNC nor OSI will make any disclosures regarding this Agreement
or the Merger that would jeopardize HNC's ability to timely and lawfully
register the issuance of shares of HNC Common Stock in the Merger on the Form
S-4.
12.15 Disclosure Letter. The OSI Disclosure Letter shall be arranged in
separate parts corresponding to the numbered and lettered sections contained in
Article 3, and the information disclosed in any numbered or lettered part shall
be deemed to relate to and to qualify only the particular representation or
warranty set forth in the corresponding numbered or lettered Section in Article
3, and shall not be deemed to relate to or to qualify any other representation
or warranty unless it is reasonably apparent from the information set forth in
OSI Disclosure Schedule, that such information qualifies another representation
or warranty of OSI in Article 3.
12.16 Confidentiality. OSI 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.
12.17 Entire Agreement. This Agreement and the exhibits hereto, the letter
of OSI referenced in Section 3.22 and that certain letter agreement by and among
the parties hereto dated as of the Agreement Date, 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 (including without limitation any term
sheets and that letter agreement dated August 13, 1998 executed by HNC and OSI)
other than the Confidentiality Agreement. The express terms of this Agreement
control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HNC SOFTWARE INC OPEN SOLUTIONS INC.
By: /s/ Robert L. North By: /s/ Douglas K. Anderson
-------------------------------- --------------------------------
Robert L. North, President Douglas K. Anderson,
Chief Executive Officer
OAHU TRANSACTION CORP.
By: /s/ Raymond V. Thomas
--------------------------------
Raymond V. Thomas, President
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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<PAGE> 221
LIST OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Escrow Agreement
Exhibit B Restated Certificate of Incorporation of Surviving Corporation
Exhibit C Bylaws of Surviving Corporation
Exhibit D OSI Affiliate Agreement
Exhibit E Summary of Principal Terms Described in Section 6.5
Exhibit F Matters to be Covered in the Opinion of Fenwick & West, LLP
Exhibit G Matters to be Covered in the Opinion of Hale and Dorr LLP
(and, in certain cases Shipman & Goodwin)
Exhibit H Non-Competition Agreement
</TABLE>
<PAGE> 222
APPENDIX B
DELAWARE GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
262. APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation' the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class
or series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254 257, Section 258,
Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock any thing except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders.
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder electing
to demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section; provided
that, if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving re resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that is such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's charges in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next preceding
the day on which the notice is given.
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(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair market value exclusive
of any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this Sate or of any
state.
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(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties at the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted has they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS.
As permitted by Section 145 of the Delaware General Corporation Law,
the Registrant's Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the Delaware General Corporation Law; or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and officers, as well as directors and officers of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise when they are serving in such capacities at the request of the
Registrant, to the fullest extent permitted by the Delaware General Corporation
Law; (ii) the Registrant may, in its discretion, indemnify other officers,
employees and agents as set forth in the Delaware General Corporation Law; (iii)
upon receipt of an undertaking to repay such advances if indemnification is
determined to be unavailable, the Registrant is required to advance expenses, as
incurred, to its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law in connection with a proceeding (except that
the Registrant is not required to advance expenses to a person against whom it
brings a claim for breach of the duty of loyalty, failure to act in good faith,
intentional misconduct, knowing violation of law or deriving an improper
personal benefit); (iv) the rights conferred in the Bylaws are not exclusive and
the Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that adversely affects the
indemnification provided thereunder.
The Registrant's policy is to enter into indemnity agreements with
each of its directors and officers. The indemnity agreements provide that
directors and officers will be indemnified and held harmless against all
expenses (including attorneys' fees), judgments, fines, ERISA excise taxes or
penalties and settlement amounts paid or reasonably incurred by them in any
action, suit or proceeding, including any derivative action by or in the right
of the Registrant, on account of their services as a director or officer of the
Registrant or as directors or officers of any other corporation, partnership or
enterprise when they are serving in such capacities at the request of the
Registrant; except that no indemnity is provided in a derivative action in which
such director or officer is finally adjudged by a court to be liable to the
Registrant due to willful misconduct in the performance of his or her duty to
the Registrant, unless the court determines that such director or officer is
entitled to indemnification. The Registrant will not be obligated pursuant to
the agreements to indemnify or advance expenses to an indemnified party with
respect to proceedings or claims (i) initiated voluntarily by the indemnified
party and not by way of defense, except with respect to a proceeding authorized
by the Board of Directors and successful proceedings brought to enforce a right
to indemnification and/or advancement of expenses under the indemnity
agreements; (ii) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement; (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of profits
made from the purchase or sale by the indemnified party of securities of the
Registrant pursuant to the provisions of Section 16(b) of the Exchange Act and
related laws and regulations; (iv) on account of conduct by an indemnified party
that is finally adjudged to have been in bad faith or conduct that the
indemnified party did not reasonably believe to be in, or not opposed to, the
best interests of the Registrant; (v) on account of any criminal action or
proceeding arising out of conduct that the indemnified party had reasonable
cause to believe was unlawful; or (vi) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
The indemnity agreement requires a director or officer to reimburse
the Registrant for expenses advanced only if and to the extent it is ultimately
determined that the director or executive officer is not entitled, under
Delaware law, the Registrant's Certificate of Incorporation, the Registrant's
Bylaws, his or her indemnity agreement or otherwise to be indemnified for such
expenses. The indemnity agreement provides that it is not exclusive of any
rights a director or executive officer may have under the Certificate of
Incorporation, the Bylaws, other agreements, any majority-in-interest vote of
the stockholders or vote of disinterested directors, Delaware law, or otherwise.
The indemnification provision in the Bylaws, and the indemnity
agreements entered into between the Registrant and its directors and officers,
may be sufficiently broad to permit indemnification of the Registrant's
directors and officers for liabilities arising under the Securities Act.
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The indemnity agreements require the Registrant to maintain director
and officer liability insurance to the extent readily available. The Registrant
currently carries a director and officer insurance policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
2.01 Agreement and Plan of Reorganization by and among HNC
Software Inc., Oahu Transaction Corp. and Open Solutions
Inc., dated September 16, 1998 (included as Appendix A to the
Proxy Statement/Prospectus).
2.02 Agreement and Plan of Reorganization dated as of July 19,
1996 by and among the Registrant, HNC Merger Corp. and Risk
Data Corporation, as amended. (Incorporated by reference to
Exhibit Number 2.01 to Registrant's Current Report on Form
8-K filed on September 12, 1996, as amended (the "Risk Data
8-K").)
2.03 Agreement of Merger dated August 30, 1996 by and between HNC
Merger Corp. and Risk Data Corporation. (Incorporated by
reference to Exhibit Number 2.02 to the Risk Data 8-K).
2.04 Exchange Agreement dated as of October 25, 1996 by and among
the Registrant, Retek Distribution Corporation and the
shareholders of Retek Distribution Corporation. (Incorporated
by reference to Exhibit Number 2.01 to Registrant's Current
Report on Form 8-K filed on December 12, 1996 (the "Retek
8-K").)
2.05 Form of Option Exchange Agreement between the Registrant and
each person who held outstanding options to purchase shares
of Retek Distribution Corporation on November 29, 1996.
(Incorporated by reference to Exhibit Number 2.02 to the
Retek 8-K).
2.06 Agreement and Plan of Reorganization dated as of July 14,
1997 by and among the Registrant, FW1 Acquisition Corp.,
CompReview, Inc., Robert L. Kaaren and Mishel E. Munnayer,
a.k.a. Michael Munayyer, Trustee of the Michael Munayyer
Trust dated August 11, 1995. (Pursuant to Item 601(b)(2) of
Regulation S-K, certain schedules have been omitted but will
be furnished supplementally to the Commission upon request.)
(Incorporated by reference to Exhibit Number 2.01 to
Registrant's Current Report on Form 8-K filed on December 15,
1997 (the "CompReview 8-K").)
2.07 Agreement of Merger dated as of November 28, 1997 by and
between FW1 Acquisition Corp. and CompReview, Inc.
(Incorporated by reference to Exhibit Number 2.02 to the
CompReview 8-K.)
3(i).01 Registrant's Restated Certificate of Incorporation filed with
the Secretary of State of Delaware on June 13, 1996.
(Incorporated by reference to Exhibit Number 3(i).04 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 (the "Second Quarter 1996 10-Q").)
3(ii).02 Registrant's Bylaws, as amended. (Incorporated by reference
to Exhibit Number 3(i).01 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (the "Second
Quarter 1998 10-Q").)
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference to Exhibit Number 4.01 to
Registrant's Form S-1 Registration Statement, as amended
(File No. 33-91932) (the "IPO S-1").)
4.02 Registration Rights Agreement dated as of August 30, 1996 by
and among the Registrant and the former shareholders of Risk
Data Corporation. (Incorporated by reference to Exhibit 4.01
to the Risk Data 8-K.)
4.03 Registration Rights Agreement dated as of October 25, 1996 by
and among the Registrant and the former shareholders of Retek
Distribution Corporation. (Incorporated by reference to
Exhibit Number 4.01 to the Retek 8-K.)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
4.04 Amendment No. 1 to the Registration Rights Agreement dated as
of February 24, 1997 by and between the Registrant and the
former shareholders of Retek Distribution Corporation.
(Incorporated by reference to Exhibit Number 4.06 to
Registrant's Annual Report on Form 10-K, as amended, for the
year ended December 31, 1996 (the "1996 10-K").)
4.05 Registration Rights Agreement dated as of November 28, 1997
by and among the Registrant and the former shareholders of
CompReview, Inc. (Incorporated by reference to Exhibit Number
4.01 to the CompReview 8-K.)
*5.01 Opinion of Fenwick & West LLP regarding legality of the
securities being registered.
*8.01 Opinion of Fenwick & West LLP regarding taxation.
*8.02 Opinion of Hale and Dorr LLP regarding taxation.
10.01 Registrant's 1987 Stock Option Plan and related documents.
(Incorporated by reference to Exhibit Number 8-K.)
10.02 Registrant's 1995 Equity Incentive Plan and related
documents, as amended. (Incorporated by reference to Exhibit
Number 10.01 to the Second Quarter 1998 10-Q.) (1)
10.03 Registrant's 1995 Directors Stock Option Plan and related
documents. (Incorporated by reference to Exhibit Number 10.03
to the IPO S-1.) (1)
10.04 Registrant's 1995 Employee Stock Purchase Plan and related
documents. (Incorporated by reference to Exhibit Number 10.04
to the IPO S-1.) (1)
10.05 Registrant's 1998 Stock Option Plan. (Incorporated by
reference to Exhibit Number 10.02 to the Second Quarter 1998
10-Q.) (1)
10.06 Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers. (Incorporated
by reference to Exhibit Number 10.08 to the IPO S-1.) (1)
10.07 Office Building Lease dated as of December 1, 1993, as
amended effective February 1, 1994 and June 1, 1994, between
Registrant and PacCor Partners. (Incorporated by reference to
Exhibit Number 10.09 to the IPO S-1.)
10.08 Loan and Security Agreement dated as of July 11, 1997,
between Registrant and Wells Fargo Bank, National
Association. (Incorporated by reference to Exhibit Number
10.01 to Registrant's Quarterly Report on Form 10-Q, as
amended, for the quarter ended June 30, 1997 (the "Second
Quarter 1997 10-Q").)
10.09 Office Building Lease dated as of May 30, 1997, between Retek
Information Systems, Inc. and Midwest Real Estate Holdings,
Inc. (Incorporated by reference to Exhibit Number 10.02 to
the Second Quarter 1997 10-Q.)
10.10 Office Building Lease dated as of June 17, 1996, between
Registrant and Williams Properties I, LLC & Williams
Properties II, LLC. (Incorporated by reference to Exhibit
Number 10.12 to the 1996 10-K.)
10.11 Employment Agreement dated as of September 10, 1996, by and
between Aptex Software Inc. and Michael A. Thiemann.
(Incorporated by reference to Exhibit Number 10.13 to the
1996 10-K.) (1)
10.12 Investors' Rights Agreement dated as of September 10, 1996,
by and among Aptex Software, Inc., HNC Software Inc. and
Michael A. Thiemann. (Incorporated by reference to Exhibit
Number 10.14 to the 1996 10-K.) (1)
10.13 Restricted Stock Purchase Agreement dated as of September 10,
1996, by and between Aptex Software Inc. and Michael
Thiemann. (Incorporated by reference to Exhibit Number 10.15
to the 1996 10-K.) (1)
</TABLE>
II-3
<PAGE> 229
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
10.14 Aptex Software Inc.'s 1996 Equity Incentive Plan and related
documents. (Incorporated by reference to Exhibit Number 10.16
to the 1996 10-K.) (1)
10.15 Office Building Lease dated June 17, 1993, between
Linsco/Private Ledger Corp. and PacCor Partners and
Assignment of such lease to the Registrant. (Incorporated by
reference to Exhibit Number 10.17 to Registrant's Annual
Report on Form 10-K, as amended, for the year ended December
31, 1997.)
*21.01 List of the Registrant's subsidiaries.
*23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
*23.02 Consent of Fenwick & West LLP (included in Exhibit 8.01).
*23.03 Consent of Hale and Dorr LLP (included in Exhibit 8.02).
23.04 Consent of independent accountants.
23.05 Consent of independent accountants.
24.01 Power of Attorney (see Page II-6).
</TABLE>
- ----------
(1) Management contract or compensatory plan or arrangement.
* To be filed by amendment
(b) Financial Statement Schedules
Schedule II -- HNC Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1995, 1996 and 1997.
All other schedules are omitted because they are not applicable
or not required or because the required information is shown in
the HNC Consolidated Financial Statements or notes thereto.
Schedule II -- OSI Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1995, 1996 and 1997.
All other schedules are omitted because they are not applicable
or not required or because the required information is shown in
the OSI Consolidated Financial Statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
II-4
<PAGE> 230
(b) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) The Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(3) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately proceeding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended (the "Securities Act"), each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(4) The Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Proxy
Statement pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means and (ii) to arrange or provide for a
facility in the U.S. for the purpose of responding to such requests. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(5) The Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(6) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions discussed in Item 6 hereof, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE> 231
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on September 28, 1998.
HNC SOFTWARE INC.
By: /s/ Raymond V. Thomas
-------------------------------------
Raymond V. Thomas
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Robert L. North and Raymond V. Thomas,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by the Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done or by
virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Robert L. North President, Chief Executive Officer and Director September 28, 1998
- ---------------------------------------------
Robert L. North
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Raymond V. Thomas Vice President, Finance and Administration, Chief September 28, 1998
- --------------------------------------------- Financial Officer and Secretary
Raymond V. Thomas
ADDITIONAL DIRECTORS:
Director September __, 1998
- ---------------------------------------------
Edward K. Chandler
/s/ Oliver D. Curme Director September 28, 1998
- ---------------------------------------------
Oliver D. Curme
Director September __, 1998
- ---------------------------------------------
Thomas F. Farb
/s/ Charles H. Gaylord, Jr. Director September 28, 1998
- ---------------------------------------------
Charles H. Gaylord, Jr.
</TABLE>
II-6
<PAGE> 232
HNC SOFTWARE INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ALLOWANCE FOR DEFERRED TAX
DOUBTFUL ACCOUNTS ASSET VALUATION
& SALES RETURNS ALLOWANCE
---------------- -----------
<S> <C> <C>
Balance at December 31, 1994 $ 514,000 $ 4,238,000
Provision 529,000 702,000
Write-off (472,000) --
Recovery (18,000) (2,223,000)
----------- -----------
Balance at December 31, 1995 553,000 2,717,000
Provision 279,000 --
Write-off (94,000) --
Recovery (29,000) (2,717,000)
----------- -----------
Balance at December 31, 1996 709,000 --
Provision 3,171,000 --
Write-off (505,000) --
Recovery (175,000) --
----------- -----------
Balance at December 31, 1997 $ 3,200,000 $ --
=========== ===========
</TABLE>
S-1
<PAGE> 233
OPEN SOLUTIONS INC.
SCHEDULE II
OPEN SOLUTIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------------------------
BALANCE AT CHARGE TO CHARGE TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER NET OF END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------- ------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Years ended
December 31, 1995 ........... $ -- $ -- $ -- $ -- $ --
December 31, 1996 ........... -- 86 -- -- 86
December 31, 1997 ........... 86 239 -- 111 214
Six months ended June 30, 1998
(unaudited) ................. 214 175 -- 129 260
</TABLE>
S-2
<PAGE> 234
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
2.01 Agreement and Plan of Reorganization by and among HNC
Software Inc., Oahu Transaction Corp. and Open Solutions
Inc., dated September 16, 1998 (included as Appendix A to the
Proxy Statement/Prospectus).
23.04 Consent of independent accountants.
23.05 Consent of independent accountants.
24.01 Power of Attorney (see Page II-6).
</TABLE>
<PAGE> 1
EXHIBIT 23.04
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of HNC Software Inc. of our report dated
January 29, 1998, except as to Note 11 which is as of February 13, 1998,
relating to the financial statements of HNC Software Inc., which appears in such
Prospectus. We also consent to the application of such report to the Financial
Statement Schedule for the three years ended December 31, 1997 listed under Item
21(b) of this Registration Statement when such schedule is read in conjunction
with the financial statements referred to in our report. The audits referred to
in such report also included this schedule.
PricewaterhouseCoopers LLP
San Diego, California
September 24, 1998
<PAGE> 1
EXHIBIT 23.05
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of HNC Software Inc. of our report dated
April 6, 1998 relating to the financial statements of Open Solutions Inc., which
appears in such Prospectus. We also consent to the application of such report to
the Financial Statement Schedule for the three years ended December 31, 1997
listed under Item 21(b) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report. The
audits referred to in such report also included this schedule.
PricewaterhouseCoopers LLP
Hartford, Connecticut
September 24, 1998
