-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VRN9Vr/V+kNhDRhp5LsCcFDEJfxGfdoscvSBybIC9BtOxkdCO/v+K+UPQ3PfwWg9 2xmbQH+WU8Pwuw4O9zcRBw== 0000936392-97-001663.txt : 19971216 0000936392-97-001663.hdr.sgml : 19971216 ACCESSION NUMBER: 0000936392-97-001663 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971128 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971215 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HNC SOFTWARE INC/DE CENTRAL INDEX KEY: 0000945093 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330248788 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-26146 FILM NUMBER: 97738519 BUSINESS ADDRESS: STREET 1: 5930 CORNERSTONE CT W CITY: SAN DIEGO STATE: CA ZIP: 92121-3728 BUSINESS PHONE: 6195468877 MAIL ADDRESS: STREET 1: 5930 CORNERSTONE CT WEST CITY: SAN DIEGO STATE: CA ZIP: 92121-3728 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): November 28, 1997 HNC SOFTWARE INC. ------------------------------------------------------ (Exact name of Registrant as Specified in its Charter) Delaware ---------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-26146 33-0248788 ------------------------ --------------------------------------- (Commission File Number) (I.R.S. Employer Identification Number) 5930 Cornerstone Court West, San Diego, CA 92121 ------------------------------------------------ (Address of Principal Executive Offices) (619) 546-8877 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) 2 ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS CompReview, Inc. Acquisition On November 28, 1997, HNC Software Inc., a Delaware corporation ("HNC"), acquired all the stock of privately held CompReview, Inc., a California corporation ("CompReview") in exchange for the issuance of 4,885,560 shares of HNC common stock. All outstanding CompReview options were exchanged for options to purchase 195,419 shares of HNC common stock. The acquisition was effected through a statutory merger (the "Merger") in which FW1 Acquisition Corp., a wholly-owned subsidiary of HNC ("Sub"), was merged into CompReview, with CompReview surviving the Merger. As a result of the Merger, CompReview became a wholly-owned subsidiary of HNC. The issuance of the shares of HNC common stock and options to purchase HNC common stock to CompReview's stockholders and option holders in the Merger was approved by HNC's stockholders at a special stockholders' meeting held on November 25, 1997. The Merger was consummated pursuant to an Agreement and Plan of Reorganization dated as of July 14, 1997 (the "Plan") entered into by HNC, Sub, CompReview and by Robert L. Kaaren and Mishel ("Michael") Munayyer, trustee of the Michael Munayyer Trust dated August 11, 1995 (the "Munayyer Trust") and an Agreement of Merger dated as of November 28, 1997 between Sub and CompReview. Mr. Kaaren and Mr. Munayyer were CompReview's founders and directors and Mr. Kaaren and the Munayyer Trust (the "CompReview Stockholders") were CompReview's sole stockholders prior to the Merger. HNC intends to account for the acquisition of CompReview as a "pooling of interests" transaction for financial reporting purposes, and the Merger was structured to be a "tax-free" reorganization for federal income tax purposes. The executive officers of CompReview were not changed as a result of the Merger, except that Raymond V. Thomas, HNC's Chief Financial Officer, has been appointed as CompReview's Chief Financial Officer and Secretary. CompReview, based in Costa Mesa, California, develops, markets and supports CRLink, a software-based system that enables CompReview's customers to manage and contain the medical costs of workers' compensation and automobile accident insurance claims. CompReview's customers primarily consist of insurance companies that provide workers' compensation or automobile accident insurance, large employers who self-insure against workers' compensation claims, third party administrators that administer such claims for insurers and managed care companies that implement cost-containment strategies. To date, the vast majority of CompReview's revenues have been derived from the workers' compensation insurance field. CRLink automates the review and analysis of medical bills related to workers' compensation and automobile accident insurance claims by comparing medical providers' charges against mandatory state workers' compensation fee schedules (which impose limits on the amounts charged for workers' compensation claims), against usual, customary and reasonable ("UCR") charges for the billed services in the relevant geographic area and against preferred provider organization ("PPO") contract fee rates. CRLink then automatically reprices and reduces medical bills to conform them to state fee schedules, UCR rates and PPO rates, as applicable, thus reducing reimbursement amounts. In addition to its bill analysis and repricing functions, CRLink also includes tools that enable insurers to manage the entire claims handling process, to centralize repricing programs with PPO networks, to conduct utilization reviews and to generate reports on a claim's status. Customers can also purchase add-on modules to CRLink to expand its functions, including a module that enables insurance payors to expand their coverage to new preferred provider organizations through a provider organization database. CRLink is offered to customers either as a licensed product used by the client internally, or as an outsourced service provided by CompReview's own service bureau. Under the terms of the Plan, the outstanding shares of CompReview common stock and all options to purchase CompReview common stock that were outstanding under CompReview's 1995 Stock Option Plan prior to the Merger ("CompReview Options") were converted in the Merger into a total number of shares of HNC Common Stock issued and subject to options to purchase HNC Common Stock ("HNC Options") equal to the sum of (a) 5,000,000 shares of HNC common stock plus (b) the number of shares of HNC Common Stock equal to the amount of CompReview's retained 2 3 earnings at October 31, 1997 (the last calendar month end prior to the closing of the Merger) divided by the average of the closing prices per share of HNC common stock for the 20 trading days immediately preceding the closing date of the Merger. Based on this formula, each share of CompReview common stock that was issued and outstanding immediately prior to the Merger was converted into approximately 0.488556154 shares of HNC common stock (subject to rounding to eliminate fractional shares), and each CompReview Option that was outstanding immediately prior to the Merger was assumed by HNC on the terms of CompReview's 1995 Stock Option Plan and converted into an option (an "HNC Option") to purchase 0.488556154 shares of HNC common stock (subject to rounding to eliminate fractional options) at an exercise price per share of HNC Common Stock equal to the exercise price per share that was in effect for such CompReview Option immediately prior to the Merger divided by the 0.488556154 conversion rate. The conversion ratio described above was negotiated and determined on the basis of: (i) the assumed value of CompReview, as determined by HNC's management following its review of CompReview's business and financial position, and its discussions with CompReview's management (ii) other information provided to HNC's management by its investment banking firm; (iii) a comparison of certain financial and stock valuation information for HNC and CompReview with similar types of information for certain other companies in businesses comparable to those of HNC and CompReview. Based on this conversion ratio, the 10,000,000 shares of CompReview common stock that were outstanding immediately prior to the effective time of the Merger were converted into a total of 4,885,560 shares of HNC common stock (which represented approximately 20% of HNC's outstanding common stock immediately after the effectiveness of the Merger) and the 400,000 CompReview Options that were outstanding immediately prior to the Merger were converted into HNC Options to purchase approximately 195,419 shares of HNC common stock. The two CompReview Stockholders each received fifty percent (50%) of the 4,885,560 shares of HNC Common Stock issued in the Merger and the HNC Options issued in the Merger were issued to three officers of CompReview. The issuance of the shares of HNC common stock and the HNC Options in the Merger was not registered under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on the exemption from registration provided by Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. Accordingly, such shares are subject to the resale restrictions imposed by Rule 144 under the 1933 Act. HNC intends to register the issuance of the shares of HNC's common stock that are subject to the HNC Options issued in the Merger on a Form S-8 registration statement in December 1997. Additionally, HNC has agreed with the CompReview Stockholders in a Registration Rights Agreement to use its best efforts to promptly register the resale of the shares of HNC common stock issued to the CompReview Stockholders in the Merger on a "shelf" Form S-3 registration statement that would be kept effective until the first anniversary of the effective date of the Merger. In order to comply with the requirements for pooling accounting treatment, the affiliates of HNC and the former affiliates of CompReview have agreed not to sell or transfer their shares of HNC stock until HNC has publicly released a report including the combined financial results of HNC and CompReview covering a period of at least thirty (30) days of post-Merger combined operations of HNC and CompReview. Pursuant to the terms of the Plan, HNC, CompReview, the stockholders of CompReview and an escrow agent entered into an Escrow Agreement, pursuant to which ten percent (10%) of the shares of HNC common stock that were issued to the CompReview Stockholders in the Merger have been placed in an escrow account to secure and collateralize certain indemnification obligations of the CompReview Stockholders to HNC. Contemporaneously with the Merger, Robert L. Kaaren and Michael E. Munayyer each entered into: (i) an Employment Agreement with CompReview, as the surviving corporation in the Merger, providing for, among other things, certain terms of employment at a specified minimum salary; and (ii) a Non-Competition Agreement with HNC and CompReview providing, among other things, that the employee will not engage in certain activities competitive with CompReview's business for a period of up to three years. More detailed information regarding the CompReview acquisition can be found in HNC's definitive proxy statement for its special meeting of stockholders held on November 25, 1997, which has been filed with the Securities and Exchange Commission. 3 4 ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
Page ---- (a) Financial Statements of Business Acquired. The following financial statements are filed herewith: Unaudited Condensed Balance Sheet at September 30, 1997 6 Unaudited Condensed Statement of Income for the nine months ended September 30, 1997 and 1996 7 Unaudited Condensed Statement of Cash Flows for the nine months ended September 30, 1997 and 1996 8 Notes to Unaudited Condensed Financial Statements 9 Independent Auditor's Report 11 Balance Sheets at December 31, 1996 and 1995 12 Statements of Income for the years ended December 31, 1996, 1995 and 1994 13 Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 14 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 15 Notes to Financial Statements 16 (b) Pro Forma, Historical and Supplemental Financial Information. (1) Unaudited Pro Forma Consolidated Combined Condensed Financial Information of HNC Software Inc. The following pro forma consolidated combined condensed financial information is being filed herewith: Unaudited Pro Forma Consolidated Combined Condensed Balance Sheet at September 30, 1997 21 Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the nine months ended September 30, 1997 22 Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the nine months ended September 30, 1996 23 Unaudited Pro Forma Consolidated Combined Condensed Statement of Income for the years ended December 31, 1996, 1995 and 1994. 24-26 Notes to Unaudited Pro Forma Consolidated Combined Condensed Financial Information 27 (2) Consolidated Financial Statements of HNC Software Inc. The following consolidated financial statements are being filed herewith: Report of Independent Accountants 28 Consolidated Balance Sheet at December 31, 1996 and 1995 29 Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994 30 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 31 Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1995 and 1994 32 Notes to Consolidated Financial Statements 33 (3) Supplemental Consolidated Financial Statements of HNC Software Inc. The following supplemental consolidated financial statements are being filed herewith: Supplemental Consolidated Balance Sheet at December 31, 1996 and 1995 46 Supplemental Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994 47 Supplemental Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 48 Supplemental Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1995 and 1994 49 Notes to Supplemental Consolidated Financial Statements 50
4 5 (4) Financial Statement Schedule. Report of Independent Accountants on Financial Statement Schedule 65 For the three years ended December 31, 1996 - Schedule II - Valuation and Qualifying Accounts and Reserves 66 Signatures 67
(c) Exhibits. The following exhibits are filed herewith: 2.01 Agreement and Plan of Reorganization dated as of July 14, 1997 by and among HNC, FW1 Acquisition Corp., CompReview, Inc., Robert L. Kaaren and Mishel E. Munnayer, a.k.a. Michael Munayyer, Trustee of the Michael Munayyer Trust dated August 11, 1995. (Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Commission upon request). 2.02 Agreement of Merger dated as of November 28, 1997 by and between FW1 Acquisition Corp. and CompReview, Inc. 4.01 Registration Rights Agreement dated as of November 28, 1997 by and among HNC and the former shareholders of CompReview, Inc. 11.01 Statement Regarding Computation of Per Share Earnings (Loss). 23.01 Consent of Price Waterhouse LLP, Independent Accountants. 23.02 Consent of Deloitte & Touche LLP, Independent Auditors. 27.01 Financial Data Schedule 5 6 COMPREVIEW, INC. UNAUDITED CONDENSED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1997 --------------------------- PRO FORMA HISTORICAL (NOTE 4) ---------- --------- ASSETS Current assets: Cash and cash equivalents $ 927 $ 927 Accounts receivable, net 4,164 4,164 Other current assets 35 35 --------- --------- Total current assets 5,126 5,126 Property and equipment, net 915 915 Other assets 128 128 --------- --------- $ 6,169 $ 6,169 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,150 $ 2,150 Accrued liabilities 541 541 Deferred income tax liability 17 607 --------- --------- Total current liabilities 2,708 3,298 --------- --------- Stockholders' equity: Preferred stock, $0.001 par value - 500 shares authorized: none issued and outstanding Common stock, $0.001 par value - 20,000 shares authorized: 10,000 shares issued and outstanding 442 442 Retained earnings 3,019 2,429 --------- --------- 3,461 2,871 --------- --------- Total stockholders' equity $ 6,169 $ 6,169 ========= =========
See accompanying notes to the unaudited condensed financial statements. 6 7 COMPREVIEW, INC. UNAUDITED CONDENSED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1997 1996 ---------- ---------- Revenues: License and maintenance $ 15,069 $ 9,042 Service bureau 3,902 3,589 ---------- ---------- Total revenues 18,971 12,631 ---------- ---------- Operating expenses: License and maintenance 5,599 3,580 Service bureau 2,986 2,628 Research and development 494 367 Sales and marketing 995 912 General and administrative 2,097 1,431 ---------- ---------- Total operating expenses 12,171 8,918 ---------- ---------- Operating income 6,800 3,713 Other income, net 45 39 ---------- ---------- Income before income tax provision 6,845 3,752 Income tax provision 143 73 ---------- ---------- Net income $ 6,702 $ 3,679 ========== ========== Unaudited pro forma data (Note 3): Add: S corporation state income tax provision 143 73 Deduct: Pro forma federal and state income tax provision (2,738) (1,501) ---------- ---------- Pro forma net income $ 4,107 $ 2,251 ========== ========== Pro forma adjusted net income per share $ 0.41 $ 0.23 ========== ========== Shares used in computing pro forma adjusted net income per share 10,000 10,000 ========== ==========
See accompanying notes to the unaudited condensed financial statements. 7 8 COMPREVIEW, INC. UNAUDITED CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1997 1996 ---------- ---------- Cash flows from operating activities: Net income $ 6,702 $ 3,681 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 173 194 Changes in assets and liabilities: Accounts receivable, net (1,141) (725) Other assets (90) (46) Accounts payable and accrued expenses 1,193 (246) ---------- ---------- Net cash provided by operating activities 6,837 2,858 ---------- ---------- Cash flows from investing activities: Acquisitions of property and equipment (714) (160) ---------- ---------- Net cash used in investing activities (714) (160) ---------- ---------- Cash flows from financing activities: Distributions (5,800) (3,762) ---------- ---------- Net cash used in financing activities (5,800) (3,762) ---------- ---------- Net increase (decrease) in cash and cash equivalents 323 (1,064) Cash and cash equivalents at beginning of period 604 1,466 ---------- ---------- Cash and cash equivalents at end of period $ 927 $ 402 ========== ==========
See accompanying notes to the unaudited condensed financial statements. 8 9 COMPREVIEW, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS NOTE 1 - GENERAL In management's opinion, the accompanying unaudited condensed financial statements for CompReview, Inc. ("CompReview" or the "Company") as of September 30, 1997 and for the nine months ended September 30, 1997 and 1996 have been prepared in accordance with generally accepted accounting principles for interim financial statements and include all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of its financial position, results of operations, and cash flows for such periods. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All such financial statements are unaudited. The accompanying unaudited financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 1996 presented elsewhere in this filing. Footnotes and other disclosures as of September 30, 1997 and for the nine months ended September 30, 1997 and 1996, which would substantially duplicate the disclosures in the Company's audited financial statements for the year ended December 31, 1996, have been omitted. The interim financial information herein is not necessarily indicative of the results to be expected for any other interim period or the full year ending December 31, 1997. NOTE 2 - NEW PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("FAS130"), "Reporting Comprehensive Income." The Company will adopt FAS130 as required for all periods beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." The Company is currently evaluating the impact that the adoption of FAS130 will have on its financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("FAS131"), "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt FAS131 as required for all periods beginning after December 15, 1997, commencing with its annual financial statements for the year ending December 31, 1998. This statement requires the disclosure of certain information about operating segments in the financial statements. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is currently evaluating the impact that the adoption of FAS131 will have on its financial statements. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("FAS128"), "Earnings Per Share," which the Company will adopt as required for all periods ending after December 15, 1997. Pursuant to this Statement, companies will replace the reporting of "primary" earnings per share ("EPS") with "basic" EPS. Basic EPS is calculated by dividing the income available to common stockholders by the weighted average number of common shares outstanding for the period, not including potential common stock. "Fully diluted" EPS will be replaced by "diluted" EPS. Diluted EPS is computed similarly to fully diluted EPS under the provisions of APB Opinion No. 15. 9 10 COMPREVIEW, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS The effect of the adoption of FAS128 on earnings per share is as follows:
NINE MONTHS ENDED ------------------------- 9/30/97 9/30/96 -------- -------- Basic earnings per share $ 0.67 $ 0.37 Diluted earnings per share $ 0.67 $ 0.37
The effect of the adoption of FAS128 on pro forma adjusted earnings per share is as follows:
NINE MONTHS ENDED ------------------------- 9/30/97 9/30/96 -------- -------- Basic earnings per share $ 0.41 $ 0.23 Diluted earnings per share $ 0.41 $ 0.23
NOTE 3 - PRO FORMA NET INCOME CompReview is a subchapter S corporation for federal and certain state income tax purposes, and its historical financial statements reflect only certain state taxes on subchapter S corporations. Federal and state income taxes have been provided as if CompReview had filed subchapter C corporation income tax returns for the periods presented. NOTE 4 - PRO FORMA BALANCE SHEET The accompanying pro forma balance sheet reflects the recognition of a net deferred tax liability relating to federal and state income taxes as if CompReview had been taxed as a C corporation rather than a subchapter S corporation. Deferred tax assets (liabilities) at September 30, 1997 are summarized as follows: Accounts receivable ............................. $(1,666) Accounts payable and accrued liabilities ........ 1,076 ------- $ (590) =======
10 11 INDEPENDENT AUDITORS' REPORT Board of Directors CompReview, Inc. Newport Beach, California We have audited the accompanying balance sheets of CompReview, Inc. (the Company) as of December 31, 1996 and 1995, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of CompReview, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Costa Mesa, California January 30, 1997 11 12 COMPREVIEW, INC. BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 603,567 $1,466,109 Accounts receivable, less allowance for doubtful accounts of $86,123 in 1996 and $50,000 in 1995 3,023,798 2,146,156 Other current assets 48,354 11,726 ---------- ---------- Total current assets 3,675,719 3,623,991 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization (Note 2) 373,498 509,515 OTHER ASSETS - deposits 25,146 32,046 ---------- ---------- $4,074,363 $4,165,552 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $1,097,514 $ 865,789 Accrued compensation and benefits 374,646 275,812 Other accrued expenses 18,925 18,286 Income taxes payable (Note 3) 8,000 47,702 Deferred income taxes (Note 3) 17,500 10,000 ---------- ---------- Total current liabilities 1,516,585 1,217,589 COMMITMENTS (Note 5) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; 500,000 shares authorized; none issued and outstanding Common stock, $.001 par value; 20,000,000 shares authorized; 10,000,000 shares issued and outstanding 441,963 441,963 Retained earnings 2,115,815 2,506,000 ---------- ---------- Total stockholders' equity 2,557,778 2,947,963 ---------- ---------- $4,074,363 $4,165,552 ========== ==========
See accompanying notes to financial statements. 12 13 COMPREVIEW, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Revenues: Software license and installation $ 12,875,673 $ 7,683,120 $ 4,105,389 Service bureau 4,729,955 5,348,882 5,058,170 ------------ ------------ ------------ Total revenues 17,605,628 13,032,002 9,163,559 Operating expenses: Software license and installation 5,028,289 3,393,800 2,229,517 Service bureau 3,364,610 3,025,363 2,203,003 Research and development 536,631 416,740 334,567 Sales and marketing 1,218,362 854,347 674,833 General and administrative 1,916,986 1,402,237 1,090,047 ------------ ------------ ------------ Total operating expenses 12,064,878 9,092,487 6,531,967 ------------ ------------ ------------ Operating income 5,540,750 3,939,515 2,631,592 Other income, net 50,505 78,470 16,516 ------------ ------------ ------------ Income before S corporation state income tax provision 5,591,255 4,017,985 2,648,108 S corporation state income tax provision 74,119 63,514 54,320 ------------ ------------ ------------ Net income $ 5,517,136 $ 3,954,471 $ 2,593,788 ============ ============ ============ Add: S corporation state income tax provision 74,119 63,514 54,320 Deduct: Pro forma federal and state income tax provision (unaudited) (2,236,502) (1,607,194) (1,059,243) ------------ ------------ ------------ Pro forma net income (unaudited) $ 3,354,753 $ 2,410,791 $ 1,588,865 ============ ============ ============ Pro forma net income per share (unaudited) $ 0.34 $ 0.24 $ 0.16 ============ ============ ============ Shares used in computing pro forma net income per share 10,000,000 10,000,000 10,000,000 ============ ============ ============
See accompanying notes to financial statements. 13 14 COMPREVIEW, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK TOTAL -------------------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ----------- ----------- ----------- ------------- BALANCE, January 1, 1994 10,000,000 $ 441,963 $ 792,741 $ 1,234,704 Distributions (990,000) (990,000) Net income 2,593,788 2,593,788 ----------- ----------- ----------- ------------- BALANCE, December 31, 1994 10,000,000 441,963 2,396,529 2,838,492 Distributions (3,845,000) (3,845,000) Net income 3,954,471 3,954,471 ----------- ----------- ----------- ------------- BALANCE, December 31, 1995 10,000,000 441,963 2,506,000 2,947,963 Distributions (5,907,321) (5,907,321) Net income 5,517,136 5,517,136 ----------- ----------- ----------- ------------- BALANCE, December 31, 1996 10,000,000 $ 441,963 $ 2,115,815 $ 2,557,778 =========== =========== =========== =============
See accompanying notes to financial statements. 14 15 COMPREVIEW, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,517,136 $ 3,954,471 $ 2,593,788 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 260,734 280,208 159,900 Loss on disposal of property 4,745 Deferred income taxes 7,500 (3,000) 13,000 Changes in assets and liabilities: Accounts receivable (877,642) (265,081) (1,282,480) Other current assets (36,628) (9,686) 16,019 Other assets 6,900 8,968 Accounts payable and accrued expenses 331,198 514,367 416,790 Income taxes payable (39,702) 20,789 17,151 ----------- ----------- ----------- Net cash provided by operating activities 5,169,496 4,496,813 1,943,136 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property 6,000 Payments to acquire property and equipment (124,717) (304,800) (386,094) ----------- ----------- ----------- Net cash used in investing activities (124,717) (298,800) (386,094) CASH FLOWS FROM FINANCING ACTIVITIES: Distributions (5,907,321) (3,845,000) (990,000) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (862,542) 353,013 567,042 CASH AND CASH EQUIVALENTS, beginning of year 1,466,109 1,113,096 546,054 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 603,567 $ 1,466,109 $ 1,113,096 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid for income taxes $ 115,242 $ 45,725 $ 24,169 =========== =========== ===========
See accompanying notes to financial statements. 15 16 COMPREVIEW, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - CompReview, Inc. (the Company) develops cost containment software and services for the healthcare industry, primarily related to billing reviews of workers' compensation and personal injury claims throughout the United States. Corporate headquarters are located in Newport Beach, California, with an additional office located in Irving, Texas. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash and cash equivalents include savings accounts and certificates of deposit. Cash equivalents are deemed to be any short-term, nonequity investment that is readily convertible to cash, is not subject to market fluctuations, and has an original maturity of three months or less. Property and Equipment - Property and equipment are stated at cost. The Company provides for depreciation primarily on accelerated methods over estimated useful lives, ranging from five to seven years. Leasehold improvements are amortized over the lesser of the life of the improvement or the term of the lease. Income Taxes - The Company has elected to be taxed for federal and state purposes under Subchapter S of the Internal Revenue Code and California Revenue and Taxation Code, respectively. Accordingly, current taxable income or loss is allocated to the stockholders who are responsible for payment of taxes or receive credit for taxes thereon. In accordance with provisions of the California Revenue and Taxation Code regarding S corporations, the Company pays California taxes at the rate of 1.5% of taxable income. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred tax assets and liabilities are established for temporary differences in recording such items for financial reporting purposes and for income tax purposes. Stock Split - In February 1996, the Company effected a ten-for-one split of its common stock and increased the number of shares authorized to 20,000,000. All share amounts in the accompanying financial statements and footnotes have been restated to reflect the stock split. Revenue Recognition - The Company licenses its software primarily to insurers, health maintenance organizations, self-insured employers and other businesses that reimburse health care costs. Software licensing agreements generally provide for a guaranteed minimum license fee and transactional fees. The guaranteed minimum license fees are recognized ratably over the respective license periods. Transactional fees are recognized as revenue when fees based on system usage exceed the monthly minimum license fees. The Company offers payors the option of retaining the Company to review and reprice medical bills for them rather that licensing the software. Related service bureau fees are assessed to customers on the basis of volume of bills processed and are recognized as revenue when the processing services are performed. Installation and implementation services fees are billed separately and recognized as revenue on a time and materials basis. 16 17 COMPREVIEW, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Software Costs - Software product development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through December 31, 1996, no significant amounts were expended subsequent to reaching technological feasibility. Long-Lived Assets - The Company investigates potential impairments of long-lived assets, on an exception basis, when events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss is recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairments of long-lived assets existed through December 31, 1996. Stock-Based Compensation - In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. The Company has determined that it will not change to the fair value method and will continue to use Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, for measurement and recognition of employee-based stock transactions. Reclassifications - Certain reclassifications have been made to the fiscal year 1995 and 1994 financial statements to conform to the 1996 presentation. Pro forma net income - Pro forma net income represents the results of operations adjusted to reflect a provision for income tax on historical income before S corporation state income tax provision, which gives effect to the change in the Company's income tax status to a C corporation subsequent to the merger with HNC (Note 8). Pro forma net income per share - Pro forma net income per share has been computed by dividing pro forma net income by the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the period. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31:
1996 1995 ----------- ----------- Computer equipment $ 893,126 $ 806,008 Furniture and fixtures 173,723 166,512 Machinery and equipment 111,370 80,982 Leasehold improvements 40,705 40,705 ----------- ----------- 1,218,924 1,094,207 Less accumulated depreciation and amortization (845,426) (584,692) ----------- ----------- $ 373,498 $ 509,515 =========== ===========
17 18 COMPREVIEW, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 3. INCOME TAXES The provision for state income taxes for the years ended December 31 are as follows:
1996 1995 1994 -------- -------- -------- Current $ 66,619 $ 66,514 $ 41,320 Deferred 7,500 (3,000) 13,000 -------- -------- -------- $ 74,119 $ 63,514 $ 54,320 ======== ======== ========
Deferred state income taxes are primarily attributable to timing differences in the recognition of revenues and expenses on a cash basis for tax purposes. Deferred tax assets (liabilities) at December 31 are summarized as follows:
1996 1995 ---------- ---------- Accounts receivable $ (35,100) $ (22,200) Accounts payable and accrued liabilities 17,600 12,200 ---------- ---------- $ (17,500) $ (10,000) ========== ==========
4. 401(K) SAVINGS PLAN Effective May 1, 1995, the Company established a 401(k) savings plan to which eligible employees can make contributions. The Company may make annual discretionary contributions. The Company made contributions of $3,375 and $0 in 1996 and 1995, respectively. 5. COMMITMENTS Leases - The Company leases office facilities and equipment under operating leases expiring at various dates through 2001. The following is a schedule, by year, of future minimum rental payments required under operating leases that have noncancelable lease terms in excess of one year as of December 31, 1996:
Year ending December 31: 1997 $158,810 1998 4,284 1999 4,284 2000 4,284 2001 1,071 -------- $172,733 ========
Rent expense under operating lease agreements amounted to $283,120, $310,783 and $292,576 for the years ended December 31, 1996, 1995 and 1994, respectively. 18 19 COMPREVIEW, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. MAJOR CUSTOMERS During the years ended December 31, 1996, 1995 and 1994, sales to one customer were approximately 25%, 27% and 26% of net sales, respectively. Another customer accounted for approximately 12%, 11% and 14% of net sales in 1996, 1995 and 1994, respectively. A third customer accounted for approximately 20% of net sales in 1994. The Company generally provides services to customers under contacts with terms of one to five years, which can generally be cancelled by the customer on 90 days' notice. A decision by a significant customer to decrease the amount of services purchased from the Company or to not renew a contract could have a material adverse effect on the Company's financial condition and results of operations. 7. STOCK OPTIONS On October 16, 1995, the Company adopted the 1995 Stock Option Plan (the Plan) which permits the Company to grant stock options to officers, directors, key employees and other qualified persons. The Plan provides that the option price shall be fixed by the Board of Directors or by a committee appointed by the Board of Directors (the Committee), but shall not be less than 85% of the fair market value at date of grant as determined by the Board of Directors or the Committee. An aggregate of 600,000 shares of the Company's common stock may be issued pursuant to the Plan. Options are exercisable at various dates and expire ten years after the date of grant. As of December 31, 1996 and 1995, 400,000 and 350,000 options, respectively, were outstanding with an exercise price equal to the fair market value of the Company's common stock ($1.14) at the date of grant. At December 31, 1996, 200,000 shares were available for future grant under the Plan. Stock option activity for the two years ended December 31, 1996 was as follows:
NUMBER PRICE OF SHARES PER SHARE ----------- ----------- Outstanding January 1, 1995 -- $ -- Options granted 350,000 1.14 ----------- Outstanding December 31, 1995 350,000 1.14 Options granted 110,000 1.14 Options canceled (60,000) 1.14 ----------- Outstanding December 31, 1996 400,000 $1.14 ===========
The weighted average fair value of options granted during 1996 and 1995 was $0.21 and $0.39, respectively. The weighted average remaining contractual life of outstanding options at December 31, 1996 was 8.9 years. No shares were exercisable at December 31, 1996. 19 20 COMPREVIEW, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 As discussed in Note 1, the Company has elected to account for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25 and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life, 10 years; stock volatility, 0%; risk-free interest rate, 6.0%; and no dividends during the expected term. The Company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1996 and 1995 awards had been amortized to expense over the vesting period of the awards, net income would have been reduced to $5,435,324 and $3,924,750 in 1996 and 1995, respectively. 8. SUBSEQUENT EVENT (UNAUDITED) On November 28, 1997, HNC Software Inc.(HNC), acquired all the stock of the Company, in exchange for the issuance of 4,885,560 shares of HNC common stock. All outstanding options to purchase the Company's common stock were exchanged for options to purchase 195,419 shares of HNC common stock. The acquisition was effected through a statutory merger for which HNC intends to account as a "pooling of interests" transaction for financial reporting purposes, and the merger was structured to be a "tax-free" reorganization for income tax purposes. 20 21 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED BALANCE SHEET SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1) ----------------------- ----------------------- HNC CR NOTES ADJUSTMENTS COMBINED --------- ----------- ----- ----------- -------- ASSETS Current assets: Cash and cash equivalents $ 3,974 $ 927 (2) $ (1,400) $ 3,501 Short-term investments 18,430 -- -- 18,430 Accounts receivable, net 25,989 4,164 -- 30,153 Current portion of deferred income taxes 6,668 -- 6,668 Other current assets 3,302 35 -- 3,337 --------- ----------- ---------- -------- Total current assets 58,363 5,126 (1,400) 62,089 Property and equipment, net 9,664 915 -- 10,579 Deferred income taxes, less current portion 19,754 -- -- 19,754 Other assets 2,624 128 -- 2,752 Long-term investments 18,157 -- -- 18,157 --------- ----------- ---------- -------- $ 108,562 $ 6,169 $ (1,400) $113,331 ========= =========== ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,543 $ 2,150 $ -- $ 6,693 Accrued liabilities 6,101 541 -- 6,642 Deferred revenue 2,611 -- -- 2,611 Other current liabilities 226 17 (3) 590 833 --------- ----------- ---------- -------- Total current liabilities 13,481 2,708 590 16,779 --------- ----------- ---------- -------- Other non-current liabilities 360 -- -- 360 --------- ----------- ---------- -------- Stockholders' equity: Common stock, $0.001 par value - 50,000 shares authorized: 19,540 and 19,126 shares issued and outstanding, respectively 20 442 (4) (437) 25 Paid-in capital 88,218 -- (4) 437 89,684 (5) 1,029 Foreign currency translation adjustment 40 -- -- 40 Unrealized gain on investments 1 -- -- 1 Retained earnings 6,442 3,019 (2) (1,400) 6,442 (3) (590) (5) (1,029) (6) --------- ----------- ---------- -------- Total stockholders' equity 94,721 3,461 (1,990) 96,192 --------- ----------- ---------- -------- $ 108,562 $ 6,169 $ (1,400) $113,331 ========= =========== ========== ========
See accompanying notes to unaudited pro forma consolidated combined condensed financial information. 21 22 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1) ------------------------ --------- HNC CR NOTES COMBINED --------- --------- -------- Revenues: License and maintenance $ 49,278 $ 15,069 $ 64,347 Installation and implementation 7,203 -- 7,203 Contracts and other 6,202 -- 6,202 Service bureau -- 3,902 3,902 --------- --------- -------- Total revenues 62,683 18,971 81,654 --------- --------- -------- Operating expenses: License and maintenance 8,388 5,599 13,987 Installation and implementation 3,551 -- 3,551 Contracts and other 4,415 -- 4,415 Service bureau -- 2,986 2,986 Research and development 14,882 494 15,376 Sales and marketing 14,482 995 15,477 General and administrative 6,271 2,097 8,368 --------- --------- -------- Total operating expenses 51,989 12,171 64,160 --------- --------- -------- Operating income 10,694 6,800 17,494 Other income, net 1,365 45 1,410 --------- --------- -------- Income before income tax provision 12,059 6,845 18,904 Income tax provision 4,462 143 4,605 --------- --------- -------- Net income $ 7,597 $ 6,702 $ 14,299 ========= ========= ======== Add: S corporation state income tax provision 143 (7) 143 Deduct: Pro forma federal and state income tax provision (2,738) (7) (2,738) --------- -------- Pro forma net income $ 4,107 $ 11,704 ========= ======== Net income per share $ 0.37 ========= Shares used in computing net income per share 20,572 ========= Pro forma net income per share $0.41 (8) $0.46 ========= ======== Shares used in computing pro forma net income per share 10,000 (8) 25,573 ========= ========
See accompanying notes to unaudited pro forma consolidated combined condensed financial information. 22 23 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1) -------------------------- ----------- HNC CR NOTES COMBINED ---------- ---------- ----- ---------- Revenues: License and maintenance $ 24,431 $ 9,042 $ 33,473 Installation and implementation 3,813 3,813 Contracts and other 8,814 -- 8,814 Service bureau -- 3,589 3,589 ---------- ---------- ---------- Total revenues 37,058 12,631 49,689 ---------- ---------- ---------- Operating expenses: License and maintenance 6,409 3,580 9,989 Installation and implementation 1,746 1,746 Contracts and other 5,869 -- 5,869 Service bureau -- 2,628 2,628 Research and development 9,173 367 9,540 Sales and marketing 7,595 912 8,507 General and administrative 4,710 1,431 6,141 ---------- ---------- ---------- Total operating expenses 35,502 8,918 44,420 ---------- ---------- ---------- Operating income 1,556 3,713 5,269 Other income, net 1,203 39 1,242 ---------- ---------- ---------- Income before income tax provision 2,759 3,752 6,511 Income tax provision 1,691 73 1,764 ---------- ---------- ---------- Net income $ 1,068 $ 3,679 $ 4,747 ========== ========== ========== Add: S corporation state income tax provision 73 (7) 73 Deduct: Pro forma federal and state income tax provision (1,501) (7) (1,501) ---------- ---------- Pro forma net income $ 2,251 $ 3,319 ========== ========== Net income per share $ 0.05 ========== Shares used in computing net income per share 20,331 ========== Pro forma net income per share $ 0.23 (8) $ 0.13 ========== ========== Shares used in computing pro forma net income per share 10,000 (8) 25,316 ========== ==========
See accompanying notes to unaudited pro forma consolidated combined condensed financial information. 23 24 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1) --------------------------- ---------- HNC CR NOTES COMBINED ---------- ---------- ----- ---------- Revenues: License and maintenance $ 36,014 $ 12,876 $ 48,890 Installation and implementation 6,691 6,691 Contracts and other 11,128 -- 11,128 Service bureau -- 4,730 4,730 ---------- ---------- ---------- Total revenues 53,833 17,606 71,439 ---------- ---------- ---------- Operating expenses: License and maintenance 8,697 5,028 13,725 Installation and implementation 2,714 2,714 Contracts and other 7,694 -- 7,694 Service bureau -- 3,365 3,365 Research and development 13,271 537 13,808 Sales and marketing 10,705 1,218 11,923 General and administrative 6,634 1,917 8,551 ---------- ---------- ---------- Total operating expenses 49,715 12,065 61,780 ---------- ---------- ---------- Operating income 4,118 5,541 9,659 Other income, net 1,650 50 1,700 ---------- ---------- ---------- Income before income tax (benefit) provision 5,768 5,591 11,359 Income tax (benefit) provision (608) 74 (534) ---------- ---------- ---------- Net income $ 6,376 $ 5,517 $ 11,893 ========== ========== ========== Add: S corporation state income tax provision 74 (7) 74 Deduct: Pro forma federal and state income tax provision (2,236) (7) (2,236) ---------- ---------- Pro forma net income $ 3,355 $ 9,731 ========== ========== Net income per share $ 0.31 ========== Shares used in computing net income per share 20,367 ========== Pro forma net income per share $ 0.34 (8) $ 0.38 ========== ========== Shares used in computing pro forma net income per share 10,000 (8) 25,348 ========== ==========
See accompanying notes to unaudited pro forma consolidated combined condensed financial information. 24 25 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1) --------------------------- ---------- HNC CR NOTES COMBINED ---------- ---------- ----- ---------- Revenues: License and maintenance $ 16,878 $ 7,683 $ 24,561 Installation and implementation 4,648 4,648 Contracts and other 9,146 -- 9,146 Service bureau -- 5,349 5,349 ---------- ---------- ---------- Total revenues 30,672 13,032 43,704 ---------- ---------- ---------- Operating expenses: License and maintenance 4,509 3,394 7,903 Installation and implementation 1,425 1,425 Contracts and other 6,894 -- 6,894 Service bureau -- 3,025 3,025 Research and development 6,581 417 6,998 Sales and marketing 6,422 854 7,276 General and administrative 3,699 1,402 5,101 ---------- ---------- ---------- Total operating expenses 29,530 9,092 38,622 ---------- ---------- ---------- Operating income 1,142 3,940 5,082 Other income, net 406 78 484 ---------- ---------- ---------- Income before income tax (benefit) provision 1,548 4,018 5,566 Income tax (benefit) provision (575) 64 (511) ---------- ---------- ---------- Net income $ 2,123 $ 3,954 $ 6,077 ========== ========== ========== Add: S corporation state income tax provision 64 (7) 64 Deduct: Pro forma federal and state income tax provision (1,607) (7) (1,607) ---------- ---------- Pro forma net income $ 2,411 $ 4,534 ========== ========== Pro forma net income per share $ 0.13 $ 0.24 (8) $ 0.21 ========== ========== ========== Shares used in computing pro forma net income per share 16,901 10,000 (8) 21,804 ========== ========== ==========
See accompanying notes to unaudited pro forma consolidated combined condensed financial information. 25 26 HNC SOFTWARE INC. UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA (1) --------------------------- ---------- HNC CR NOTES COMBINED ---------- ---------- ----- ---------- Revenues: License and maintenance $ 9,266 $ 4,106 $ 13,372 Installation and implementation 3,757 3,757 Contracts and other 7,651 -- 7,651 Service bureau -- 5,058 5,058 ---------- ---------- ---------- Total revenues 20,674 9,164 29,838 ---------- ---------- ---------- Operating expenses: License and maintenance 3,593 2,229 5,822 Installation and implementation 1,254 1,254 Contracts and other 5,040 -- 5,040 Service bureau -- 2,203 2,203 Research and development 4,344 335 4,679 Sales and marketing 3,603 675 4,278 General and administrative 2,591 1,090 3,681 ---------- ---------- ---------- Total operating expenses 20,425 6,532 26,957 ---------- ---------- ---------- Operating income 249 2,632 2,881 Other (expense) income, net (156) 16 (140) ---------- ---------- ---------- Income before income tax (benefit) provision 93 2,648 2,741 Income tax (benefit) provision (455) 54 (401) ---------- ---------- ---------- Net income $ 548 $ 2,594 $ 3,142 ========== ========== ========== Add: S corporation state income tax provision 54 (7) 54 Deduct: Pro forma federal and state income tax provision (1,059) (7) (1,059) ---------- ---------- Pro forma net income $ 1,589 $ 2,137 ========== ========== Pro forma net income per share $ 0.04 $ 0.16 (8) $ 0.11 ========== ========== ========== Shares used in computing pro forma net income per share 13,870 10,000 (8) 18,756 ========== ========== ==========
See accompanying notes to unaudited pro forma consolidated combined condensed financial information. 26 27 HNC SOFTWARE INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED COMBINED CONDENSED FINANCIAL INFORMATION (1) The unaudited pro forma consolidated combined condensed financial statements of HNC and CompReview give retroactive effect to the CompReview acquisition which will be accounted for as a pooling of interests and, as a result, such statements are presented as if the companies had been combined for all periods presented. There were no material differences between the accounting policies of HNC and CompReview. Certain amounts have been reclassified to conform to the pro forma presentation. (2) Transaction costs expected to be incurred to complete the Merger approximate $1.4 million and consist primarily of investment banking, legal and accounting fees, and printing, mailing and registration expenses. Due to the non-recurring nature of these costs, they have not been reflected in the pro forma statement of operations. (3) The pro forma deferred income tax adjustment reflects the recognition of a net deferred tax liability relating to federal and state income taxes as if CompReview had been taxed as a C corporation rather than a subchapter S corporation. (4) The pro forma adjustment reflects the exchange of all outstanding shares of CompReview's capital stock for an aggregate of approximately 4,885,560 shares of HNC Common Stock and the exchange of all outstanding options to purchase CompReview Common Stock for options to purchase HNC Common Stock to effect the CompReview acquisition. No changes will be made to the terms of the CompReview Options in connection with the merger. (5) As CompReview terminated its subchapter S corporation election in connection with the Merger, undistributed earnings of CompReview have been reflected as a contribution to the capital of the combined company. (6) CompReview is a Subchapter S corporation for federal and certain state income tax purposes, and has in the ordinary course of its business historically paid cash distributions to its stockholders to provide them with sufficient cash to meet their tax liabilities arising from CompReview's operations. Consistent with its current dividend practices, CompReview distributed to its stockholders additional cash dividends of $0.05 per share during October 1997 prior to the Effective Time of the Merger. (7) CompReview is a subchapter S corporation for federal and certain state income tax purposes, and its historical financial statements reflect only certain state taxes on subchapter S corporations as such taxable income or loss is allocable to its stockholders, who are responsible for payment of taxes. For purposes of the unaudited pro forma consolidated combined condensed statements of income for the nine month periods ended September 30, 1997 and 1996, and each of the three years in the period ended December 31, 1996, federal and state income taxes have been provided as if CompReview had filed subchapter C corporation income tax returns for the periods presented. (8) Pro forma per share amounts are based on weighted average options, using the treasury stock method, and shares outstanding during each period, assuming each then outstanding share of CompReview Common Stock or CompReview Option is exchanged for 0.4886 shares or options to purchase 0.4886 shares of HNC Common Stock. The 0.4886 Conversion Ratio is based on application of the Merger conversion formula. 27 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HNC Software Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of changes in stockholders' equity (deficit) present fairly, in all material respects, the financial position of HNC Software Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Note 2, on November 28, 1997, HNC Software Inc. merged with CompReview, Inc. in a transaction accounted for as a pooling of interests. The accompanying supplemental consolidated financial statements give retroactive effect to the merger of HNC Software Inc. with CompReview, Inc. In our opinion, the accompanying supplemental consolidated balance sheet and the related supplemental consolidated statements of income, of cash flows and of changes in stockholders' equity (deficit) present fairly, in all material respects, the financial position of HNC Software Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express and opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Diego, California January 21, 1997, except as to the pooling of interests with CompReview, Inc. which is as of November 28, 1997 28 29 HNC SOFTWARE INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ----------------------- 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents ........................................... $ 7,517 $ 20,583 Investments available for sale ...................................... 7,353 14,590 Accounts receivable, net ............................................ 19,468 6,996 Current portion of deferred income taxes ............................ 6,400 1,702 Other current assets ................................................ 1,869 1,561 -------- -------- Total current assets ............................................ 42,607 45,432 Investments available for sale .......................................... 19,375 8,336 Deferred income taxes, less current portion ............................. 22,966 346 Property and equipment, net ............................................. 5,966 3,991 Other assets ............................................................ 3,305 842 -------- -------- $ 94,219 $ 58,947 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................... $ 3,270 $ 1,434 Accrued liabilities ................................................. 4,058 2,818 Deferred revenue .................................................... 3,377 2,101 Bank line of credit ................................................. -- 2,195 Other current liabilities ........................................... 418 827 -------- -------- Total current liabilities ....................................... 11,123 9,375 -------- -------- Notes payable to stockholders ........................................... -- 1,000 -------- -------- Other non-current liabilities ........................................... 683 659 -------- -------- Commitments and contingencies (Notes 6 and 11) Stockholders' equity: Preferred stock, $0.001 par value - 4,000 shares authorized: no shares issued or outstanding ................................. -- -- Common stock, $0.001 par value - 50,000 and 40,000 shares authorized: 19,126 and 17,892 shares issued and outstanding, respectively ... 19 18 Paid-in capital ..................................................... 83,554 55,334 Unrealized (loss) gain on investments available for sale ............ (59) 92 Foreign currency translation adjustment ............................. 54 -- Accumulated deficit ................................................. (1,155) (7,531) -------- -------- Total stockholders' equity ...................................... 82,413 47,913 -------- -------- $ 94,219 $ 58,947 ======== ========
See accompanying notes to consolidated financial statements. 29 30 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 -------- -------- -------- Revenues: License and maintenance ................. $ 36,014 $ 16,878 $ 9,266 Installation and implementation ......... 6,691 4,648 3,757 Contracts and other ..................... 11,128 9,146 7,651 -------- -------- -------- Total revenues ...................... 53,833 30,672 20,674 -------- -------- -------- Operating expenses: License and maintenance ................. 8,697 4,509 3,593 Installation and implementation ......... 2,714 1,425 1,254 Contracts and other ..................... 7,694 6,894 5,040 Research and development ................ 13,271 6,581 4,344 Sales and marketing ..................... 10,705 6,422 3,603 General and administrative .............. 6,634 3,699 2,591 -------- -------- -------- Total operating expenses ............ 49,715 29,530 20,425 -------- -------- -------- Operating income ............................ 4,118 1,142 249 Interest and other income ................... 2,128 834 156 Interest expense ............................ (478) (428) (312) -------- -------- -------- Income before income tax benefit . 5,768 1,548 93 Income tax benefit .......................... (608) (575) (455) -------- -------- -------- Net income ....................... $ 6,376 $ 2,123 $ 548 ======== ======== ======== Pro forma net income per share .............. $ 0.13 $ 0.04 ======== ======== Shares used in computing pro forma net income per share ............................... 16,901 13,870 ======== ======== Net income per share ........................ $ 0.31 ======== Shares used in computing net income per share 20,367 ========
See accompanying notes to consolidated financial statements. 30 31 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
DECEMBER 31, -------------------------------------- 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income ......................................................... $ 6,376 $ 2,123 $ 548 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .................................. 3,344 1,589 629 Changes in assets and liabilities: Accounts receivable, net .................................... (10,100) (1,393) (1,754) Other assets ................................................ (1,178) (664) (1,348) Deferred income taxes ....................................... (1,332) (1,548) -- Accounts payable ............................................ 1,836 658 139 Accrued liabilities ......................................... 625 1,756 390 Deferred revenue ............................................ 1,472 1,337 (92) Other liabilities ........................................... (402) -- 280 -------- -------- -------- Net cash provided by (used in) operating activities ..... 641 3,858 (1,208) -------- -------- -------- Cash flows from investing activities: Purchases of investments ........................................... (26,113) (28,666) (7,134) Maturities of investments .......................................... 18,125 4,182 6,000 Proceeds from sale of investments .................................. 3,707 2,467 -- Acquisitions of property and equipment ............................. (3,853) (1,947) (1,534) -------- -------- -------- Net cash used in investing activities ................... (8,134) (23,964) (2,668) -------- -------- -------- Cash flows from financing activities: Net proceeds from issuances of common stock ........................ 1,935 33,726 10 Net proceeds from issuance of preferred stock ...................... -- -- 4,949 Tax benefit from stock options ..................................... 896 800 -- Proceeds under bank line of credit ................................. 309 1,085 3,255 Repayments under bank line of credit ............................... (2,504) (265) (2,890) Proceeds from issuances of notes payable to stockholders ........... -- 1,000 -- Repayment of notes payable to stockholders ......................... (1,000) -- -- Repayment of debt from asset purchases ............................. (4,710) -- -- Capital lease payments ............................................. (553) (502) (304) Proceeds from issuances of bank notes payable ...................... 1,999 -- 603 Repayments of bank notes payable ................................... (1,999) (687) (348) -------- -------- -------- Net cash (used in) provided by financing activities ..... (5,627) 35,157 5,275 -------- -------- -------- Effect of exchange rate changes on cash ................................ 54 -- -- -------- -------- -------- Net (decrease) increase in cash and cash equivalents ................... (13,066) 15,051 1,399 Cash and cash equivalents at beginning of period ....................... 20,583 5,532 4,133 -------- -------- -------- Cash and cash equivalents at end of period ............................. $ 7,517 $ 20,583 $ 5,532 ======== ======== ======== SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets purchased through issuance of debt .......................... $ 4,710 $ -- $ -- ======== ======== ======== Acquisitions of property and equipment under capital leases ........ $ 344 $ 411 $ 1,128 ======== ======== ======== Conversion of preferred stock ...................................... $ -- $ 13,518 $ -- ======== ======== ======== Accretion of dividends on mandatorily redeemable convertible preferred stock ................................................ $ -- $ 348 $ 717 ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid ...................................................... $ 448 $ 390 $ 305 ======== ======== ======== Income taxes paid .................................................. $ 50 $ 144 $ 30 ======== ======== ========
See accompanying notes to consolidated financial statements. 31 32 HNC SOFTWARE INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK ------------------------------------ SERIES A SERIES E COMMON STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1993 380 $ -- -- $ -- 3,730 $ 4 Common stock options exercised................ 40 Issuance of Series E preferred stock, net of issuance costs...................... 1,282 1 Accretion of dividends........................ Net income.................................... ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1994 380 -- 1,282 1 3,770 4 Common stock options exercised................ 207 Accretion of dividends........................ Issuance of common stock in initial public offering, net of issuance costs........ 2,376 2 Conversion of convertible preferred stock into common stock...................... (380) (1,282) (1) 8,956 9 Issuance of common stock in secondary public offering, net of issuance costs......................... 1,116 2 Issuance of common stock at inception of Retek (Note 2)......................... 1,367 1 Tax benefit from stock option transactions.... Unrealized gain on investments available for sale..................... Stock warrant exercised....................... 100 Net income.................................... ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1995 -- -- -- -- 17,892 18 Common stock options exercised................ 1,140 1 Common stock issued for Employee Stock Purchase Plan........... 94 Tax benefit from stock option transactions.... Tax benefit from Retek taxable pooling (Note 9).................................... Unrealized loss on investments available for sale..................... Foreign currency translation adjustment....... Net income.................................... ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1996 -- $ -- -- $ -- 19,126 $ 19 ====== ====== ====== ====== ====== =======
UNREALIZED GAIN (LOSS) ON FOREIGN TOTAL INVESTMENTS CURRENCY STOCKHOLDERS' PAID-IN AVAILABLE TRANSLATION ACCUMULATED EQUITY CAPITAL FOR SALE ADJUSTMENT (DEFICIT) (DEFICIT) ------ -------------- ----------- ----------- -------------- BALANCE AT DECEMBER 31, 1993 $ 6,302 $ -- $ -- $(13,094) $ (6,788) Common stock options exercised .................. 10 10 Issuance of Series E preferred stock, net of issuance costs ........................ 4,948 4,949 Accretion of dividends .......................... 717 (717) Net income ...................................... 548 548 ------- ------ ----- -------- --------- BALANCE AT DECEMBER 31, 1994 10,543 -- -- (12,546) (1,998) Common stock options exercised .................. 85 85 Accretion of dividends .......................... (348) (348) Issuance of common stock in initial public offering, net of issuance costs .......... 14,329 14,331 Conversion of convertible preferred stock into common stock ........................ 10,618 2,892 13,518 Issuance of common stock in secondary public offering, net of issuance costs ... 19,184 19,186 Issuance of common stock at inception of Retek (Note 2) ........................... (1) -- Tax benefit from stock option transactions ...... 800 800 Unrealized gain on investments available for sale ....................... 92 92 Stock warrant exercised ......................... 124 124 Net income ...................................... 2,123 2,123 ------- ------ ----- -------- --------- BALANCE AT DECEMBER 31, 1995 55,334 92 -- (7,531) 47,913 Common stock options exercised .................. 1,095 1,096 Common stock issued for Employee Stock Purchase Plan ............. 839 839 Tax benefit from stock option transactions ...... 7,889 7,889 Tax benefit from Retek taxable pooling (Note 9) ............................ 18,397 18,397 Unrealized loss on investments available for sale ....................... (151) (151) Foreign currency translation adjustment.......... 54 54 Net income ...................................... 6,376 6,376 ------- ------ ----- -------- --------- BALANCE AT DECEMBER 31, 1996 $83,554 $ (59) $ 54 $ (1,155) $ 82,413 ======= ====== ===== ======== =========
See accompanying notes to consolidated financial statements. 32 33 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES The Company HNC Software Inc. (the "Company") develops, markets and supports intelligent client-server software solutions for mission-critical decision applications in real-time environments. The Company also performs contract research and development using neural networks and other computational intelligence methods. Basis of Presentation The consolidated financial statements and related notes give retroactive effect to the mergers on August 30, 1996 with Risk Data Corporation ("RDC") and on November 29, 1996 with Retek Distribution Corporation ("Retek"), for all periods presented, accounted for as poolings of interests. RDC is an insurance information technology services firm engaged in the business of developing and marketing analytical benchmarking and risk management software products primarily for insurance carriers, state insurance funds and third party administrators. Retek develops, markets and installs inventory management system software primarily for customers in the retail industry. The consolidated balance sheet as of December 31, 1996 and 1995 includes the accounts of RDC and Retek as of December 31, 1996 and 1995. The consolidated statements of income, of cash flows and of changes in stockholders' equity (deficit) for each of the three years in the period ended December 31, 1996 include the results of RDC and Retek for the years then ended. The term "Company" as used in these consolidated financial statements refers to HNC Software Inc. and its subsidiaries, including RDC and Retek. No adjustments to conform accounting methods were required. Certain amounts have been reclassified with regard to presentation of the financial information of the two companies. Revenues and net income (loss) for each of the previously separate companies for the periods prior to their acquisitions are as follows:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SIX MONTHS ENDED ----------------------------- SEPTEMBER 30, 1996 JUNE 30, 1996 1995 1994 ------------------ ----------------- -------- -------- (unaudited) (unaudited) Revenues: HNC .................... $ 31,423 $ 16,478 $ 25,174 $ 16,473 RDC .................... -- 2,600 4,577 4,201 Retek .................. 5,635 3,377 921 -- -------- -------- -------- -------- $ 37,058 $ 22,455 $ 30,672 $ 20,674 ======== ======== ======== ======== Net income (loss): HNC .................... $ 975 $ 1,780 $ 4,457 $ 1,923 RDC .................... -- (2,184) (1,952) (1,375) Retek .................. 93 43 (382) -- -------- -------- -------- -------- $ 1,068 $ (361) $ 2,123 $ 548 ======== ======== ======== ========
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Financial Statement Preparation The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 33 34 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Cash Equivalents Cash equivalents are highly liquid investments and consist of investments in money market accounts and commercial paper purchased with maturities of three months or less. Investments Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. As of and for the year ended December 31, 1994 based upon the Company's intent and ability, the Company classified such securities in the held-to-maturity category and recorded these securities at amortized cost, which approximated market value. As of December 31, 1995, the Company reassessed its intent and ability with respect to these securities. As a result of this reassessment, the Company reclassified all securities as "available for sale" and accounts for them accordingly on a prospective basis. Available for sale securities are carried at fair value with unrealized gains or losses related to these securities included in stockholders' equity in the Company's consolidated balance sheet. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets of three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining terms of the related leases. Repair and maintenance costs are charged to expense as incurred. Software Costs Software costs are recorded at cost and amortized over their estimated useful lives of 36 to 42 months. Software costs are comprised of purchased software and other rights which are recorded at the lower of cost or net realizable value. At December 31, 1996 and 1995, software costs of $2,561 and $0, respectively, are included in other assets in the consolidated balance sheet net of accumulated amortization of $642 and $0, respectively. Software product development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through December 31, 1996, no significant amounts were expended subsequent to reaching technological feasibility. Long-Lived Assets The Company investigates potential impairments of long-lived assets, certain identifiable intangibles and associated goodwill, on an exception basis, when events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss is recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairments of long-lived assets existed through December 31, 1996. Stock-Based Compensation The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense (Note 10). Revenue Recognition Revenue from long-term periodic software license agreements is generally recognized ratably over the respective license periods. Revenue from perpetual licenses of the Company's software for which there are no significant continuing obligations and collection of the related receivables is probable is recognized on delivery of the software and acceptance by the customer. 34 35 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue from software installation and contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Amounts received in advance of performance under contracts are recorded as deferred revenue and are generally recognized within one year from receipt. Contract losses are recorded as a charge to income in the period such losses are first identified. Unbilled receivables are stated at estimated realizable value. Contract costs under government contracts, including indirect costs, are subject to audit and adjustment by negotiations between the Company and government representatives. Through 1990, indirect government contract costs have been agreed upon with government representatives. Revenues from government contracts have been recorded in amounts that are expected to be realized upon final settlement. Revenue from product sales, which is included in contracts and other revenue, is recognized upon shipment to the customer. Income Taxes Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount "more likely than not" to be realized in future tax returns. Tax rate changes are reflected in income during the period such changes are enacted. Foreign Currency Translation The financial statements of the Company's international operations are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and accumulated as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in the consolidated statement of income and are not material. Diversification of Credit Risk The Company's financial instruments that are subject to concentrations of credit risk consist primarily of cash equivalents, investments and trade accounts receivable which are generally not collateralized. The Company's policy is to place its cash, cash equivalents and investments with high credit quality financial institutions and commercial companies and government agencies in order to limit the amount of its credit exposure. The Company's software license and installation agreements and commercial development contracts are primarily with customers in the financial services, insurance and retail industries. The Company maintains reserves for potential credit losses. During 1996, 1995 and 1994, sales under prime and subcontracts with the federal government represented 3.0%, 7.3%, and 11.3%, respectively, of the Company's total revenues. One domestic customer accounted for 11.4%, 12.4% and 11.6% of total revenues in 1996, 1995 and 1994, respectively. Revenues from international operations and export sales, primarily to Western Europe and Canada, represented approximately 23.4%, 17.9%, and 11.4% of total revenues in 1996, 1995 and 1994, respectively. Export sales were $7,310, $4,595 and $2,355 in 1996, 1995 and 1994, respectively. Disclosures about fair value of financial instruments The carrying amounts of cash and cash equivalents, accrued liabilities, the bank line of credit and notes payable to stockholders approximate fair value because of the short term maturities of these financial instruments. The carrying amounts of capital lease obligations approximate their fair values based on interest rates currently available to the Company for borrowings with similar terms and maturities. 35 36 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Reincorporation and stock split In May 1995, the stockholders approved an Agreement and Plan of Merger whereby the Company merged with and into a newly incorporated Delaware corporation ("HNC Delaware"), which is the surviving corporation. In conjunction with the merger, each share of the Company's common stock, preferred stock and options and warrants to purchase the Company's common stock was exchanged for one-half share of HNC Delaware's common stock, preferred stock and options and warrants to purchase HNC Delaware's common stock, at twice the exercise price for options and warrants. All references to share and per share amounts of common and preferred stock and other data in these financial statements have been retroactively restated to reflect the reincorporation. In April 1996, the Company consummated a two-for-one stock split effected in the form of a common stock dividend. All references in these consolidated financial statements to share and per share amounts have been adjusted to give retroactive effect to the stock split. Pro forma net income per share Pro forma net income per share is computed based on the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the respective periods after giving retroactive effect to the conversion, which occurred upon the closing of the Company's initial public offering, of all outstanding shares of preferred stock into 8,957 shares of common stock. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock options granted from May 5, 1994 through June 26, 1995 have been included as outstanding for all periods prior to June 26, 1995 using the treasury stock method and the $7.00 initial public offering price per share. For periods prior to 1996, historical earnings per share are not presented because such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the initial public offering. Net income per share Net income per share is computed based on the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the period. Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. NOTE 2 -- ACQUISITIONS On August 30, 1996, the Company completed an acquisition of Risk Data Corporation ("RDC"). Under the terms of the acquisition, accounted for as a pooling of interests, the Company exchanged 1,891 common shares for all of the then outstanding shares of RDC preferred and common stock. All periods presented have been retroactively restated (Note 1). On November 29, 1996, the Company completed an acquisition of all of the outstanding shares of Retek Distribution Corporation. Under the terms of the acquisition, accounted for as a pooling of interests, the Company exchanged 1,367 common shares for all of Retek's then outstanding shares. All periods presented have been retroactively restated (Note 1). Transaction costs of $563 and $515 were incurred to complete the mergers with RDC and Retek, respectively. Transaction costs were charged to income as incurred and consisted primarily of investment banker, legal and accounting fees, and printing, mailing and registration expenses. 36 37 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31, ----------------------- 1996 1995 -------- -------- Accounts receivable, net: Billed .................................. $ 10,156 $ 4,048 Unbilled ................................ 9,299 2,955 Other ................................... 636 496 -------- -------- 20,091 7,499 Less allowance for doubtful accounts ......... (623) (503) -------- -------- $ 19,468 $ 6,996 ======== ========
Unbilled amounts represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be realized within one year.
DECEMBER 31, ----------------------- 1996 1995 -------- -------- Property and equipment, net: Computer equipment ...................... $ 8,409 $ 4,934 Furniture and fixtures .................. 1,884 1,268 Leasehold improvements .................. 273 167 -------- -------- 10,566 6,369 Less accumulated depreciation and amortization (4,600) (2,378) -------- -------- $ 5,966 $ 3,991 ======== ======== Accrued liabilities: Payroll and related benefits ............ $ 1,457 $ 1,126 Vacation ................................ 673 435 Other ................................... 1,928 1,257 -------- -------- $ 4,058 $ 2,818 ======== ========
NOTE 4 -- INVESTMENTS At December 31, 1996 and 1995, the amortized cost and estimated fair value of investments available for sale were as follows:
DECEMBER 31, 1996 --------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Current: U.S. government and federal agencies $ 1,999 $ -- $ (2) $ 1,997 U.S. corporate debt ................ 3,149 -- (6) 3,143 Foreign corporate debt ............. 2,216 -- (3) 2,213 ---------- ---------- ---------- ---------- 7,364 -- (11) 7,353 ---------- ---------- ---------- ---------- Non-current: U.S. government and federal agencies $ 16,213 $ -- $ (36) $ 16,177 Foreign government debt ............ 1,006 -- (2) 1,004 U.S. corporate debt ................ 1,702 -- (8) 1,694 Foreign corporate debt ............. 502 -- (2) 500 ---------- ---------- ---------- ---------- 19,423 -- (48) 19,375 ---------- ---------- ---------- ---------- $ 26,787 $ -- $ (59) $ 26,728 ========== ========== ========== ==========
37 38 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995 ------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Current: U.S. government and federal agencies $ 1,481 $ 9 $ -- $ 1,490 Foreign government debt ............ 1,017 2 -- 1,019 U.S. corporate debt ................ 8,870 45 -- 8,915 Foreign corporate debt ............. 3,164 2 -- 3,166 ---------- ---------- ---------- ---------- 14,532 58 -- 14,590 ---------- ---------- ---------- ---------- Non-current: Foreign government debt ............ $ 1,019 2 -- 1,021 U.S. corporate debt ................ 7,077 32 -- 7,109 Foreign corporate debt ............. 206 -- -- 206 ---------- ---------- ---------- ---------- 8,302 34 -- 8,336 ---------- ---------- ---------- ---------- $ 22,834 $ 92 $ -- $ 22,926 ========== ========== ========== ==========
Maturities for non-current investments in securities range from one to two years. Included in the Company's 1995 income statement is a realized gain in the amount of $3 related to the sale of held-to-maturity securities with an aggregate amortized cost in the amount of $2,464. No significant gains or losses were recognized during the year ended December 31, 1996. The cost of securities sold is determined by the specific identification method. NOTE 5 -- NOTES PAYABLE The Company has a Loan and Security Agreement with a bank which provides for a $5,000 revolving line of credit through July 10, 1997. The agreement requires that the Company maintain certain financial ratios and levels of tangible net worth and also restricts the Company's ability to pay cash dividends and repurchase stock without the bank's consent. At December 31, 1996 and 1995, the Company had $0 outstanding under the revolving line of credit. Any borrowings under the agreement will be collateralized by substantially all of the Company's assets. Interest is payable monthly at the bank's prime rate, which was 8.25% at December 31, 1996. The RDC credit facility was comprised of a revolving line of credit secured by eligible accounts receivable as well as a bridge loan which was secured by the guarantees of certain stockholders. The revolving line of credit matured on January 5, 1997. The bridge loan matured on September 5, 1996. All outstanding amounts were repaid during 1996 and neither credit facility was renewed. During 1995, the preferred stockholders of RDC loaned the Company $1,000 under subordinated note agreements (secured by the assets of RDC but subordinated to borrowings under the RDC line of credit) bearing interest at 9%. All outstanding amounts were repaid during 1996. NOTE 6 -- LEASES At December 31, 1996, the Company is obligated under noncancelable operating leases for its facilities and certain equipment through 2003 as follows: 38 39 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NET FUTURE FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE LEASE PAYMENTS INCOME PAYMENTS -------------- ------------- -------------- 1997 $1,943 $212 $1,731 1998 1,539 192 1,347 1999 1,189 149 1,040 2000 1,211 - 1,211 2001 1,249 - 1,249 thereafter 1,787 - 1,787
The lease for the Company's corporate headquarters provides for scheduled rent increases and an option to extend the lease for five years with certain changes to the terms of the lease agreement and a refurbishment allowance. Rent expense under operating leases for the years ended December 31, 1996, 1995, and 1994 was approximately $1,340, $1,192, and $898, respectively, net of sublease income of $125, $83 and $40, respectively. RDC maintains a lease line of credit with a leasing company for the acquisition of equipment under capital lease arrangements. Future minimum payments are as follows: 1997....................................... $ 475 1998....................................... 232 1999....................................... 66 ----- 773 Less amounts representing interest ........ (110) ----- Capital lease obligations ................. 663 Less current portion ...................... (399) ----- $ 264 =====
The gross value of assets under capital leases at December 31, 1996 and 1995 was $1,481 and $2,186 and accumulated amortization was $599 and $572, respectively. Amortization expense for assets acquired under capital leases is included in depreciation expense. NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY In November 1992, the Company entered into an agreement that granted Mitek a license to use certain character recognition technology developed by the Company. The agreement provided for the Company to receive an initial license and support fee payment of $1,350 and an additional license and support fee based on a percentage of Mitek's revenue from the sale of character recognition products through November 1995. The agreement also required that the Company sell certain proprietary computer boards to Mitek at a substantial discount from normal sales prices, but in excess of cost, and provide ongoing engineering and technical support over the agreement period, which ended during November 1995. As the Company had a significant continuing obligation under this agreement, the initial license and support fee received thereunder was deferred on receipt and recognized as revenue over the performance period based on estimated sales of proprietary computer boards. The additional license and support fees were recognized as a percentage of actual Mitek revenues pursuant to the agreement. Revenue recognized pursuant to this agreement, which is included in "contracts and other" in the consolidated statement of income, is summarized as follows: 39 40 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 ------ ------ Initial license fee ...................... $ 47 $ 295 Additional license and support fee ....... 314 476 Computer board sales ..................... 527 657 ------ ------ $ 888 $1,428 ====== ======
NOTE 8 -- CAPITAL STOCK During June 1995, the Company completed its initial public offering for sale of 5,175 shares of common stock (of which 2,375 shares were sold by the Company and 2,800 shares were sold by certain selling stockholders) at a price to the public of $7.00 per share, which resulted in net proceeds to the Company of $15,461 after the payment of underwriters' commissions but before the deduction of offering expenses. Upon the closing of the Company's initial public offering, all outstanding shares of Series A, B, C, D, and E convertible preferred stock were automatically converted into shares of common stock at their then effective conversion prices. Upon conversion, the preferred stockholders were no longer entitled to any undeclared cumulative dividends and all class voting rights terminated. During December 1995, the Company completed a secondary public offering for sale of 3,000 shares of common stock (of which 1,116 shares were sold by the Company and 1,884 shares were sold by certain selling stockholders) at a price to the public of $18.50 per share, which resulted in net proceeds to the Company of $19,606 after the payment of underwriters' commissions but before the deduction of offering expenses. The Board of Directors is authorized to issue up to 4,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to the rights of the holders of any Preferred Stock that may be issued in the future. NOTE 9 -- INCOME TAXES Income (loss) before income tax benefit was taxed under the following jurisdictions:
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ------- ------- ------- Domestic .............. $ 3,008 $ 1,746 $ 93 Foreign ............... 2,760 (198) -- ------- ------- ------- $ 5,768 $ 1,548 $ 93 ======= ======= =======
The income tax provision (benefit) is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ------- ------- ------- Current: Federal ............... $ 1,132 $ 97 $ 17 State ................. 137 76 28 Foreign ............... 51 -- -- Deferred: Federal ............... (1,569) (521) (425) State ................. (63) (183) (75) Foreign ............... (296) (44) -- ------- ------- ------- $ (608) $ (575) $ (455) ======= ======= =======
40 41 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Deferred tax assets are summarized as follows:
DECEMBER 31, 1996 1995 ------- ------- Taxable pooling basis difference ..... $18,397 $ - Net operating loss carryforwards ..... 8,587 2,902 Tax credit carryforwards ............. 1,878 1,370 Other ................................ 504 493 ------- ------- Gross deferred tax assets ............ 29,366 4,765 Deferred tax asset valuation allowance - (2,717) ------- ------- Net deferred tax asset ............ $29,366 $ 2,048 ======= =======
At December 31, 1994, the Company provided a deferred tax asset valuation allowance for deferred tax assets which management determined were "more likely than not" unrealizable based on trends in operating results after eliminating the effects of non-recurring revenue (Note 7). During 1995, the Company released the valuation allowance related to HNC's deferred tax assets based on management's assessment that it was more likely than not that the Company would realize a portion of those assets in future periods due to improvements in HNC's operating results. During 1996, the Company released the valuation allowances related to RDC and Retek deferred tax assets based on management's assessment that it was more likely than not that the Company would realize those assets in future periods due to improvements in the operating results of those subsidiaries. During 1996 and 1995, the Company realized certain tax benefits related to stock option plans in the amount of $7,889 and $800, respectively. The benefit from the stock option tax deduction is credited directly to paid-in capital. In connection with the acquisition of Retek, the Company made an Internal Revenue Code Section 338 election for federal and state tax purposes, resulting in the treatment of the acquisition as a taxable transaction, whereby the tax bases of the acquired assets and liabilities were adjusted to their fair values as of the date of the acquisition. As the purchase price exceeded the carrying value of the net assets acquired by approximately $46,000, the Company recorded a deferred tax asset in the amount of $18,397. A reconciliation of the income tax benefit to the amount computed by applying the statutory federal income tax rate to income before income tax provision is summarized as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ------- ------- ------- Amounts computed at statutory federal rate ....... $ 1,961 $ 526 $ 32 Release of valuation allowance ................... (2,717) (2,223) (1,008) Tax credit carryforwards generated ............... (334) (68) (51) Losses without tax benefit ....................... - 794 468 Separate return impact of acquired businesses .... (154) - - Acquisition expenses not tax deductible .......... 367 - - State income tax expense ......................... 480 401 28 Foreign net operating loss carryforwards generated (296) (44) - Other ............................................ 85 39 76 ------- ------- ------- Income tax benefit ............................ $ (608) $ (575) $ (455) ======= ======= =======
41 42 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) At December 31, 1996, the Company had federal, state and foreign net operating loss carryforwards of approximately $22,300, $10,800 and $800, respectively. The Company's net operating loss carryforwards expire as follows: 1997 .......... $ 278 1998 .......... 240 1999 .......... 2 2001 .......... 9,148 2003 .......... 833 2004 .......... 1,240 2005 .......... 1,216 2006 .......... 1,670 2007 .......... 17 2008 .......... 1,692 2009 .......... 1,370 2010 .......... 1,840 2011 .......... 14,086 No expiration . 268
The Company also has approximately $1,400 of federal research and development credit carryforwards, which expire from 2000 to 2011, $400 of state research and development credit carryforwards, which have no expiration date, and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000. Certain of these net operating loss and research and development credit carryforwards generated by RDC and Retek prior to their acquisitions by HNC are subject to annual limitations on their utilization and also are limited to utilization solely by the Company which generated them. Should a substantial change in HNC's ownership occur, as defined by the Tax Reform Act of 1986, there will be an annual limitation on the utilization of net operating loss and research and development credit carryforwards. NOTE 10 -- EMPLOYEE BENEFIT PLANS During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500 shares of the Company's common stock were reserved for issuance pursuant to nonqualified and incentive stock options to its officers, directors, key employees and consultants. The plan, as amended, is administered by the Board of Directors or its designees and provides generally that, for incentive stock options and nonqualified stock options, the exercise price must not be less than the fair market value of the shares as determined by the Board of Directors at the date of grant. The options expire no later than ten years from the date of grant and may be exercised in installments based upon stipulated timetables (not in excess of seven years). At December 31, 1996, options to purchase 545 shares were exercisable. During 1995, the Company adopted the 1995 Directors Stock Option Plan (the "Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the discussion contained in the three paragraphs below, "fair market value" means the closing price of the Company's Common Stock on the Nasdaq National Market on the grant date. The Directors Plan provides for the issuance of up to 300 nonqualified stock options to the Company's outside directors. Under the provisions of the Directors Plan, options to purchase 25 shares of the Company's common stock are granted to outside directors upon their respective dates of becoming members of the Board of Directors and 10 additional options will be granted on each anniversary of such dates. Options under the Directors Plan are granted at the fair market value of the stock at the grant date and vest at specific times over a four-year period. At December 31, 1996, options to purchase 40 shares were exercisable. The Incentive Plan provides for the issuance of up to 2,800 shares of the Company's common stock in the form of nonqualified or incentive stock options, restricted stock or stock bonuses. In addition, any shares remaining unissued under the 1987 Stock Option Plan on the effective date of the Incentive Plan, and any shares issuable upon exercise of options granted pursuant to the 1987 Stock Option Plan that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for 42 43 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) issuance under the 1987 Stock Option Plan but will be available for issuance under the Incentive Plan. Nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award, or 110% of fair market value for awards to more than 10% stockholders. Options granted under the Incentive Plan may have a term of up to 10 years. The Company has the discretion to provide for restrictions and the lapse thereof in respect of restricted stock awards, and options typically vest at the rate of 25% of the total grant per year over a four-year period. However, the Company may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 1996, 58 shares were exercisable under the Incentive Plan. The Purchase Plan provides for the issuance of a maximum of 400 shares of common stock. Each purchase period, eligible employees may designate between 2% and 10% of their cash compensation, subject to certain limitations, to be deducted from their pay for the purchase of common stock under the Purchase Plan. The purchase price of the shares under the Purchase Plan is equal to 85% of the lesser of the fair market value per share, as defined by the Purchase Plan, on the first day of the twelve-month offering period or the last day of each six-month purchase period. Approximately 65% of eligible employees have participated in the Plan in the last two years. Under the Purchase Plan, the Company sold 94 shares to employees in 1996. RDC's stock option plan is administered by HNC's Board of Directors. All outstanding RDC options were converted into options to purchase HNC common stock and adjusted to give effect to the exchange ratio (Note 2). No changes were made to the terms of the RDC options in connection with the exchange. Options granted under the RDC stock option plan generally vest at the rate of 25% of the total grant per year over a four-year period and expire 10 years after the date of grant. At December 31, 1996, 63 shares were exercisable under the RDC plan. Retek's stock options are administered by HNC's Board of Directors. All outstanding Retek options were converted into options to purchase the Company's common stock and adjusted to give effect to the exchange ratio (Note 2). No changes were made to the terms of the Retek options in connection with the exchange. Options granted vest ratably over periods from one to four years and have a term of up to 10 years. At December 31, 1996, options to purchase 28 shares were exercisable. Transactions under the Company's stock option and purchase plans during the years ended December 31, 1996 and 1995, including options under the RDC stock option plan and options under the Retek stock option plan but excluding options to purchase stock of a subsidiary of the Company, Aptex Software Inc. ("Aptex"), are summarized as follows:
YEAR ENDED DECEMBER 31, 1996 1995 -------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ ---------------- ------ ---------------- Outstanding at beginning of year ............. 2,722 $ 2.87 2,081 $ 0.49 Options granted .............................. 1,591 28.84 1,101 6.67 Options exercised ............................ (1,140) .96 (207) 0.41 Options canceled ............................. (150) 17.77 (253) 1.75 ------ ------ Outstanding at end of year ................... 3,023 16.53 2,722 2.87 ====== ====== Options exercisable at end of year ........... 734 1,427 Weighted average fair value of options granted during the year .............................. $ 16.94 $ 4.64
43 44 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes information about employee stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- --------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE --------------- ----------------- ---------------- -------------- ----------------- -------------- $ 0.02 to $ 0.92 554 4.66 years $ 0.35 475 $ 0.30 1.00 to 3.00 607 8.10 2.67 157 2.67 4.50 to 21.38 505 8.73 13.06 92 10.91 21.50 to 30.25 510 9.38 26.64 1 22.55 30.50 to 30.75 568 9.73 30.68 9 30.75 30.81 to 49.50 279 9.47 37.81 - - ------ ------ $ 0.02 to $49.50 3,023 8.23 16.53 734 2.55 ====== ======
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex Plan") whereby 2,000 shares of Aptex common stock were reserved for issuance pursuant to nonqualified and incentive stock options and restricted stock awards. The plan is administered by the Board of Directors of Aptex or its designees and provides generally that nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award, or 110% of fair market value for awards to more than 10% stockholders. Options granted under the Incentive Plan may have a term of up to 10 years. The Company has the discretion to provide for restrictions and the lapse thereof in respect of restricted stock awards, and options typically vest at the rate of 25% of the total grant per year over a four-year period. However, the Company may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. During 1996, Aptex issued 1,000 shares of common stock under the Aptex Plan at an issuance price of $0.03 per share. No options granted under the Aptex Plan were exercisable at December 31, 1996. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock-based compensation. No compensation expense has been recognized for its employee stock option grants, which are fixed in nature, as the options have been granted at fair market value. No compensation expense has been recognized for the Purchase Plan. Had compensation cost for the Company's stock-based compensation awards issued during 1996 and 1995 been determined based on the fair value at the grant dates of awards consistent with the method of Financial Accounting Standards Board Statement No. 123, the Company's net income and pro forma net income per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- Net income: As reported .................................. $ 6,376 $ 2,123 Pro forma .................................... 2,137 1,549 Net income per share: As reported .................................. $ .31 $ .13 Pro forma .................................... .11 .09
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the years ended December 31, 1996 and 1995, respectively: dividend yield of 0.0% for both years, risk-free interest rates of 6.03% and 6.29%, expected volatility of 70% and 75%, and expected lives of 3.5 years for both years. The fair value of the employees' purchase rights pursuant to the Purchase Plan is estimated using the Black-Scholes model with the following assumptions: dividend yield of 0.0% for both years, risk-free interest rates of 5.36% and 5.66%, expected volatility of 70% and 75%; and an expected life of 6 months for both years. The weighted-average fair value of those purchase rights granted in 1996 and 1995 was $9.61 and $2.75, respectively. 44 45 HNC SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) The fair value of each option granted under the Aptex Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the year ended December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%, expected volatility of 90%, and an expected life of 9.25 years. Options to purchase 704 shares were granted during 1996 at a weighted average exercise price of $0.03 per share. The weighted average fair value of options granted during the year was $0.03 per share. At December 31, 1996, there were 704 options outstanding under the Aptex Plan with a weighted average exercise price of $0.03 per share and a weighted average remaining contractual life of 9.74 years. NOTE 11 -- CONTINGENCIES Various claims arising in the course of business, seeking monetary damages and other relief, are pending. The amount of the liability, if any, from such claims, cannot be determined with certainty; however, in the opinion of management, the ultimate liability for such claims will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 12 -- SUBSEQUENT EVENT On November 28, 1997, the Company acquired all of the outstanding stock of CompReview, Inc., ("CompReview"), an insurance information technology product and services company located in Costa Mesa, California, in exchange for the issuance of 4,885,560 shares of HNC common stock. All outstanding options of CompReview were exchanged for options to purchase 195,419 shares of HNC common stock. The acquisition was effected through a statutory merger for which the Company intends to account as a "pooling of interests" transaction for financial reporting purposes, and the merger was structured to be a "tax-free" reorganization for income tax purposes. 45 46 HNC SOFTWARE INC. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ----------------------- 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents ............................................. $ 8,121 $ 22,049 Investments available for sale ........................................ 7,353 14,590 Accounts receivable, net .............................................. 22,492 9,142 Current portion of deferred income taxes .............................. 6,383 1,692 Other current assets .................................................. 1,917 1,573 -------- -------- Total current assets ............................................... 46,266 49,046 Investments available for sale .......................................... 19,375 8,336 Deferred income taxes, less current portion ............................. 22,966 346 Property and equipment, net ............................................. 6,339 4,501 Other assets ............................................................ 3,330 874 -------- -------- $ 98,276 $ 63,103 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................................... $ 4,368 $ 2,300 Accrued liabilities ................................................... 4,433 3,094 Deferred revenue ...................................................... 3,377 2,101 Bank line of credit ................................................... -- 2,195 Other current liabilities ............................................. 445 893 -------- -------- Total current liabilities ........................................... 12,623 10,583 -------- -------- Notes payable to stockholders ........................................... -- 1,000 -------- -------- Other non-current liabilities ........................................... 683 659 -------- -------- Commitments and contingencies (Notes 6 and 11) Stockholders' equity: Preferred stock, $0.001 par value - 4,000 shares authorized: no shares issued and outstanding .................................... -- -- Common stock, $0.001 par value - 50,000 and 40,000 shares authorized: 24,012 and 22,778 shares issued and outstanding, respectively ....... 24 23 Paid-in capital ....................................................... 83,991 55,771 Unrealized (loss) gain on investments available for sale .............. (59) 92 Foreign currency translation adjustment ............................... 54 -- Retained earnings (accumulated deficit) ............................... 960 (5,025) -------- -------- Total stockholders' equity .......................................... 84,970 50,861 -------- -------- $ 98,276 $ 63,103 ======== ========
See accompanying notes to supplemental consolidated financial statements. 46 47 HNC SOFTWARE INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 -------- -------- -------- Revenues: License and maintenance .................................... $ 48,890 $ 24,561 $ 13,372 Installation and implementation ............................ 6,691 4,648 3,757 Contracts and other ........................................ 11,128 9,146 7,651 Service bureau ............................................. 4,730 5,349 5,058 -------- -------- -------- Total revenues ........................................ 71,439 43,704 29,838 -------- -------- -------- Operating expenses: License and maintenance .................................... 13,725 7,903 5,822 Installation and implementation ............................ 2,714 1,425 1,254 Contracts and other ........................................ 7,694 6,894 5,040 Service bureau ............................................. 3,365 3,025 2,203 Research and development ................................... 13,808 6,998 4,679 Sales and marketing ........................................ 11,923 7,276 4,278 General and administrative ................................. 8,551 5,101 3,681 -------- -------- -------- Total operating expenses ............................... 61,780 38,622 26,957 -------- -------- -------- Operating income ............................................... 9,659 5,082 2,881 Interest and other income ...................................... 2,178 912 172 Interest expense ............................................... (478) (428) (312) -------- -------- -------- Income before income tax benefit ....................... 11,359 5,566 2,741 Income tax benefit ............................................. (534) (511) (401) -------- -------- -------- Net income ............................................. $ 11,893 $ 6,077 $ 3,142 ======== ======== ======== Pro forma net income per share ................................. $ 0.28 $ 0.17 ======== ======== Net income per share ........................................... $ 0.47 ======== Shares used in computing pro forma net income and net income per share (Note 1) ......................................... 25,348 21,804 18,756 ======== ======== ======== Unaudited pro forma adjusted data (Note 1): Income before income tax provision ......................... $ 11,359 $ 5,566 $ 2,741 Income tax provision ....................................... 1,628 1,032 604 -------- -------- -------- Net income ............................................... $ 9,731 $ 4,534 $ 2,137 ======== ======== ======== Net income per share ....................................... $ 0.38 $ 0.21 $ 0.11 ======== ======== ======== Shares used in computing pro forma adjusted net income per share (unaudited) (Note 1) ............................... 25,348 21,804 18,756 ======== ======== ========
See accompanying notes to supplemental consolidated financial statements. 47 48 HNC SOFTWARE INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
DECEMBER 31, -------------------------------------- 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income ................................................................. $ 11,893 $ 6,077 $ 3,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................................... 3,605 1,874 789 Changes in assets and liabilities: Accounts receivable, net ............................................ (10,978) (1,658) (3,037) Other assets ........................................................ (1,207) (674) (1,323) Deferred income taxes ............................................... (1,324) (1,551) 13 Accounts payable .................................................... 2,167 1,172 556 Accrued liabilities ................................................. 1,521 2,556 390 Deferred revenue .................................................... 1,472 1,337 (92) Other liabilities ................................................... (441) 22 297 -------- -------- -------- Net cash provided by operating activities ....................... 6,708 9,155 735 -------- -------- -------- Cash flows from investing activities: Purchases of investments ................................................... (26,113) (28,666) (7,134) Maturities of investments .................................................. 18,125 4,182 6,000 Proceeds from sale of investments .......................................... 3,707 2,467 -- Acquisitions of property and equipment ..................................... (3,978) (2,246) (1,920) -------- -------- -------- Net cash used in investing activities ........................... (8,259) (24,263) (3,054) -------- -------- -------- Cash flows from financing activities: Net proceeds from issuances of common stock ................................ 1,935 33,726 10 Net proceeds from issuances of preferred stock ............................. -- -- 4,949 Proceeds from issuances of notes payable to stockholders ................... -- 1,000 -- Repayment of notes payable to stockholders ................................. (1,000) -- -- Proceeds under bank line of credit ......................................... 309 1,085 3,255 Repayments under bank line of credit ....................................... (2,504) (265) (2,890) Repayment of debt from asset purchases ..................................... (4,710) -- -- Capital lease payments ..................................................... (553) (502) (304) Proceeds from issuances of bank notes payable .............................. 1,999 -- 603 Repayments of bank notes payable ........................................... (1,999) (687) (348) Distributions to CompReview Stockholders ................................... (5,908) (3,845) (990) -------- -------- -------- Net cash (used in) provided by financing activities ............. (12,431) 30,512 4,285 -------- -------- -------- Effect of exchange rate changes on cash ........................................ 54 -- -- -------- -------- -------- Net (decrease) increase in cash and cash equivalents ........................... (13,928) 15,404 1,966 Cash and cash equivalents at beginning of period ............................... 22,049 6,645 4,679 -------- -------- -------- Cash and cash equivalents at end of period ..................................... $ 8,121 $ 22,049 $ 6,645 ======== ======== ======== SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets purchased through issuance of debt .................................. $ 4,710 $ -- $ -- ======== ======== ======== Acquisitions of property and equipment under capital leases ................ $ 344 $ 411 $ 1,128 ======== ======== ======== Conversion of preferred stock .............................................. $ -- $ 13,518 $ -- ======== ======== ======== Accretion of dividends on mandatorily redeemable convertible preferred stock ........................................................ $ -- $ 348 $ 717 ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid .............................................................. $ 448 $ 390 $ 305 ======== ======== ======== Income taxes paid .......................................................... $ 165 $ 190 $ 54 ======== ======== ========
See accompanying notes to supplemental consolidated financial statements. 48 49 HNC SOFTWARE INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK ------------------------------------------ SERIES A SERIES E COMMON STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------ BALANCE AT DECEMBER 31, 1993 380 $ -- -- $ -- 8,616 $ 9 Common stock options exercised 40 Issuance of Series E preferred stock, net of issuance costs 1,282 1 Accretion of dividends Distributions to CompReview stockholders Net income ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1994 380 -- 1,282 1 8,656 9 Common stock options exercised 207 Accretion of dividends Issuance of common stock in initial public offering, net of issuance costs 2,376 2 Conversion of convertible preferred stock into common stock (380) (1,282) (1) 8,956 9 Issuance of common stock in secondary public offering, net of issuance costs 1,116 2 Issuance of common stock at inception of Retek (Note 2) 1,367 1 Tax benefit from stock option transactions Unrealized gain on investments available for sale Stock warrant exercised 100 Distributions to CompReview stockholders Net income ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1995 -- -- -- -- 22,778 23 Common stock options exercised 1,140 1 Common stock issued for Employee Stock Purchase Plan 94 Tax benefit from stock option transactions Tax benefit from Retek taxable pooling (Note 9) Unrealized loss on investments available for sale Foreign currency translation adjustment Distributions to CompReview stockholders Net income ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1996 -- $ -- -- $ -- 24,012 $ 24 ====== ====== ====== ====== ====== =======
UNREALIZED GAIN (LOSS) ON FOREIGN RETAINED TOTAL INVESTMENTS CURRENCY EARNINGS STOCKHOLDERS' PAID-IN AVAILABLE TRANSLATION (ACCUMULATED EQUITY CAPITAL FOR SALE ADJUSTMENT DEFICIT) (DEFICIT) ------- -------------- ---------- ----------- ------------- BALANCE AT DECEMBER 31, 1993 $6,739 $ -- $ -- $(12,301) $ (5,553) Common stock options exercised 10 10 Issuance of Series E preferred stock, net of issuance costs 4,948 4,949 Accretion of dividends (717) (717) Distributions to CompReview stockholders (990) (990) Net income 3,142 3,142 ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1994 10,980 -- -- (10,149) 841 Common stock options exercised 85 85 Accretion of dividends (348) (348) Issuance of common stock in initial public offering, net of issuance costs 14,329 14,331 Conversion of convertible preferred stock into common stock 10,618 2,892 13,518 Issuance of common stock in secondary public offering, net of issuance costs 19,184 19,186 Issuance of common stock at inception of Retek (Note 2) (1) -- Tax benefit from stock option transactions 800 800 Unrealized gain on investments available for sale 92 92 Stock warrant exercised 124 124 Distributions to CompReview stockholders (3,845) (3,845) Net income 6,077 6,077 ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1995 55,771 92 -- (5,025) 50,861 Common stock options exercised 1,095 1,096 Common stock issued for Employee Stock Purchase Plan 839 839 Tax benefit from stock option transactions 7,889 7,889 Tax benefit from Retek taxable pooling (Note 9) 18,397 18,397 Unrealized loss on investments available for sale (151) (151) Foreign currency translation adjustment 54 54 Distributions to CompReview stockholders (5,908) (5,908) Net income 11,893 11,893 ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1996 $83,991 $ (59) $ 54 $ 960 $84,970 ======= ====== ====== ======= =======
See accompanying notes to supplemental consolidated financial statements. 49 50 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES The Company HNC Software Inc. (the "Company") develops, markets and supports intelligent client-server software solutions for mission-critical decision applications in real-time environments. The Company also performs contract research and development using neural networks and other computational intelligence methods. Basis of Presentation The consolidated financial statements and related notes give retroactive effect to the mergers on August 30, 1996 with Risk Data Corporation ("RDC"), on November 29, 1996 with Retek Distribution Corporation ("Retek") and on November 28, 1997 with CompReview, Inc. ("CR"), for all periods presented, accounted for as poolings of interests. RDC is an insurance information technology services firm engaged in the business of developing and marketing analytical benchmarking and risk management software products primarily for insurance carriers, state insurance funds and third party administrators. Retek develops, markets and installs inventory management system software primarily for customers in the retail industry. CR develops, markets and installs cost containment software for worker's compensation insurance carriers and for insurers that handle automobile accident personal injury claims. The consolidated balance sheet as of December 31, 1996 and 1995 includes the accounts of RDC, Retek and CR as of December 31, 1996 and 1995. The consolidated statements of income, of cash flows and of changes in stockholders' equity (deficit) for each of the three years in the period ended December 31, 1996 include the results of RDC, Retek and CR for the years then ended. The term "Company" as used in these consolidated financial statements refers to HNC Software Inc. and its subsidiaries, including RDC, Retek and CR. No adjustments to conform accounting methods were required. Certain amounts have been reclassified with regard to presentation of the financial information of the three companies. Revenues and net income (loss) for each of the previously separate companies for the periods prior to their acquisitions are as follows:
NINE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30, ------------------------------------- ---------------------- ---------------- 1996 1995 1994 1997 1996 1996 -------- -------- -------- -------- -------- -------- (unaudited) (unaudited) Revenues: HNC .......... $ 53,833 $ 25,174 $ 16,473 $ 62,683 $ 31,423 $ 16,478 RDC .......... -- 4,577 4,201 -- -- 2,600 Retek ........ -- 921 -- -- 5,635 3,377 CR ........... 17,606 13,032 9,164 18,971 12,631 8,119 -------- -------- -------- -------- -------- -------- $ 71,439 $ 43,704 $ 29,838 $ 81,654 $ 49,689 $ 30,574 ======== ======== ======== ======== ======== ======== Net income (loss): HNC .......... $ 6,376 $ 4,457 $ 1,923 $ 7,597 $ 975 $ 1,780 RDC .......... -- (1,952) (1,375) -- -- (2,184) Retek ........ -- (382) -- -- 93 43 CR ........... 5,517 3,954 2,594 6,702 3,679 2,123 -------- -------- -------- -------- -------- -------- $ 11,893 $ 6,077 $ 3,142 $ 14,299 $ 4,747 $ 1,762 ======== ======== ======== ======== ======== ========
50 51 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Principles of Consolidation The supplemental consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Financial Statement Preparation The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are highly liquid investments and consist of investments in money market accounts and commercial paper purchased with maturities of three months or less. Investments Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. As of and for the year ended December 31, 1994 based upon the Company's intent and ability, the Company classified such securities in the held-to-maturity category and recorded these securities at amortized cost, which approximated market value. As of December 31, 1995, the Company reassessed its intent and ability with respect to these securities. As a result of this reassessment, the Company reclassified all securities as "available for sale" and accounts for them accordingly on a prospective basis. Available for sale securities are carried at fair value with unrealized gains or losses related to these securities included in stockholders' equity in the Company's consolidated balance sheet. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using both the straight-line method over the estimated useful lives of the assets of three to seven years and an accelerated method over the estimated useful lives of the assets of five to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Repair and maintenance costs are charged to expense as incurred. Software Costs Software costs are recorded at cost and amortized over their estimated useful lives of 36 to 42 months. Software costs are comprised of purchased software and other rights which are recorded at the lower of cost or net realizable value. At December 31, 1996 and 1995, Company software costs of $2,561 and $0, respectively, are included in other assets in the consolidated balance sheet net of accumulated amortization of $642 and $0, respectively. Software product development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through December 31, 1996, no significant amounts were expended subsequent to reaching technological feasibility. 51 52 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Long-Lived Assets The Company investigates potential impairments of long-lived assets, certain identifiable intangibles and associated goodwill, on an exception basis, when events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss is recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairments of long-lived assets existed through December 31, 1996. Stock-Based Compensation The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense (Note 10). Revenue Recognition The Company's revenue from long-term periodic software license agreements is generally recognized ratably over the respective license periods. Revenue from perpetual licenses of the Company's software for which there are no significant continuing obligations and collection of the related receivables is probable is recognized on delivery of the software and acceptance by the customer. Revenue from product sales, which is included in contracts and other revenue, is recognized upon shipment to the customer. The Company's revenue from software installation and contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Amounts received in advance of performance under contracts are recorded as deferred revenue and are generally recognized within one year from receipt. Contract losses are recorded as a charge to income in the period such losses are first identified. Unbilled receivables are stated at estimated realizable value. Contract costs under government contracts, including indirect costs, are subject to audit and adjustment by negotiations between the Company and government representatives. Through 1990, indirect government contract costs have been agreed upon with government representatives. Revenues from government contracts have been recorded in amounts that are expected to be realized upon final settlement. CR licenses its software primarily to insurers, health maintenance organizations, self-insured employers and other businesses that reimburse health care costs. Software licensing agreements generally provide for a guaranteed minimum license fee and transactional fees. The guaranteed minimum licensee fees are recognized ratably over the respective license periods. Transactional fees are recognized as revenue when fees based on system usage exceed the monthly minimum license fees. CR offers payors the option of retaining CR to review and reprice medical bills for them rather than licensing the software. Related service bureau fees are assessed to customers on the basis of volume of bills processed and are recognized as revenue when the processing services are performed. Installation and implementation services fees are billed separately and recognized as revenue on a time and materials basis. 52 53 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Income Taxes The Company's current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount "more likely than not" to be realized in future tax returns. Tax rate changes are reflected in income during the period such changes are enacted. Unaudited Pro Forma Adjusted Data Prior to the acquisition of CR by HNC on November 28, 1997, CR elected subchapter S corporation status for income tax purposes; therefore, its income was included in the tax returns of its stockholders, and no income tax provision has been recorded for CR other than certain minimum state taxes on subchapter S corporations. As a result of the acquisition, beginning November 29, 1997, CR will be subject to corporate income taxes on its taxable income. For comparative purposes, the consolidated statement of income includes unaudited pro forma adjusted data with respect to the merged companies' income tax provision as if CR had been subject to corporate income taxes on its taxable income for all periods presented. Foreign Currency Translation The financial statements of the Company's international operations are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and accumulated as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in the consolidated statement of income and are not material. Diversification of Credit Risk The Company's financial instruments that are subject to concentrations of credit risk consist primarily of cash equivalents, investments and trade accounts receivable which are generally not collateralized. The Company's policy is to place its cash, cash equivalents and investments with high credit quality financial institutions and commercial companies and government agencies in order to limit the amount of its credit exposure. The Company's software license and installation agreements and commercial development contracts are primarily with customers in the financial services, insurance and retail industries. The Company maintains reserves for potential credit losses. During 1996, 1995 and 1994, sales under prime and subcontracts with the federal government represented 2.2%, 5.1%, and 7.8%, respectively, of the Company's total revenues. Revenues from international operations and export sales, primarily to Western Europe and Canada, represented approximately 17.7%, 12.6%, and 7.9% of total revenues in 1996, 1995 and 1994, respectively. Export sales were $7,310, $4,595 and $2,355 in 1996, 1995 and 1994, respectively. Disclosures about fair value of financial instruments The carrying amounts of cash and cash equivalents, accrued liabilities, the bank line of credit and notes payable to stockholders approximate fair value because of the short term maturities of these financial instruments. The carrying amounts of capital lease obligations approximate their fair values based on interest rates currently available to the Company for borrowings with similar terms and maturities. 53 54 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Reincorporation and stock split In May 1995, the stockholders approved an Agreement and Plan of Merger whereby the Company merged with and into a newly incorporated Delaware corporation ("HNC Delaware"), which is the surviving corporation. In conjunction with the merger, each share of the Company's common stock, preferred stock and options and warrants to purchase the Company's common stock was exchanged for one-half share of HNC Delaware's common stock, preferred stock and options and warrants to purchase HNC Delaware's common stock, at twice the exercise price for options and warrants. All references to share and per share amounts of common and preferred stock and other data in these financial statements have been retroactively restated to reflect the reincorporation. In April 1996, the Company consummated a two-for-one stock split effected in the form of a common stock dividend. In February 1996, CR effected a ten-for-one split of its common stock and increased the number of shares authorized to 20,000. All share amounts in the accompanying financial statements and footnotes have been restated to reflect the stock splits. Pro forma net income per share Pro forma net income per share is computed based on the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the respective periods after giving retroactive effect to the conversion, which occurred upon the closing of the Company's initial public offering, of all outstanding shares of preferred stock into 8,957 shares of common stock. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock options granted from May 5, 1994 through June 26, 1995 have been included as outstanding for all periods prior to June 26, 1995 using the treasury stock method and the $7.00 initial public offering price per share. For periods prior to 1996, historical earnings per share are not presented because such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the initial public offering. Net income per share Net income per share is computed based on the weighted average number of common shares and common stock equivalents, using the treasury stock method, outstanding during the period. Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. NOTE 2 -- ACQUISITIONS On August 30, 1996, the Company completed an acquisition of RDC. Under the terms of the acquisition, accounted for as a pooling of interests, the Company exchanged 1,891 common shares for all of the then outstanding shares of RDC preferred and common stock. All periods presented have been retroactively restated (Note 1). On November 29, 1996, the Company completed an acquisition of all of the outstanding shares of Retek. Under the terms of the acquisition, accounted for as a pooling of interests, the Company exchanged 1,367 common shares for all of Retek's then outstanding shares. All periods presented have been retroactively restated (Note 1). 54 55 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) On November 28, 1997, the Company completed an acquisition of all of the outstanding shares of CR. Under the terms of the acquisition, accounted for as a pooling of interests, the Company exchanged 4,886 common shares for all of CR's then outstanding shares. All periods presented have been retroactively restated (Note 1). Transaction costs of $563 and $515 were incurred to complete the mergers with RDC and Retek, respectively. Transaction costs to complete the merger with CR are estimated to be $1,400. Transaction costs are deferred and charged to income when the related transaction is consummated. Transaction costs consist primarily of investment banker, legal and accounting fees, and printing, mailing and registration expenses. NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31, ----------------------- 1996 1995 -------- -------- Accounts receivable, net: Billed .......................................... $ 13,266 $ 6,244 Unbilled ........................................ 9,299 2,955 Other ........................................... 636 496 -------- -------- 23,201 9,695 Less allowance for doubtful accounts and sales returns (709) (553) -------- -------- $ 22,492 $ 9,142 ======== ========
Unbilled amounts represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be realized within one year.
DECEMBER 31, ----------------------- 1996 1995 -------- -------- Property and equipment, net: Computer equipment ...................... $ 9,302 $ 5,740 Furniture and fixtures .................. 2,058 1,435 Machinery & Equipment ................... 111 81 Leasehold improvements .................. 314 208 -------- -------- 11,785 7,464 Less accumulated depreciation and amortization (5,446) (2,963) -------- -------- $ 6,339 $ 4,501 ======== ======== Accrued liabilities: Payroll and related benefits ............ $ 1,645 $ 1,320 Vacation ................................ 860 517 Other ................................... 1,928 1,257 -------- -------- $ 4,433 $ 3,094 ======== ========
55 56 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 4 -- INVESTMENTS At December 31, 1996 and 1995, the amortized cost and estimated fair value of investments available for sale were as follows:
DECEMBER 31, 1996 ------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED FAIR Current: COST GAINS LOSSES VALUE ---------- ---------- ---------- -------- U.S. government and federal agencies $ 1,999 $ -- $ (2) $ 1,997 U.S. corporate debt ................. 3,149 -- (6) 3,143 Foreign corporate debt .............. 2,216 -- (3) 2,213 -------- -------- -------- -------- 7,364 -- (11) 7,353 -------- -------- -------- -------- Non-current: U.S. government and federal agencies 16,213 -- (36) 16,177 Foreign government debt ............. 1,006 -- (2) 1,004 U.S. corporate debt ................. 1,702 -- (8) 1,694 Foreign corporate debt .............. 502 -- (2) 500 -------- -------- -------- -------- 19,423 -- (48) 19,375 -------- -------- -------- -------- $ 26,787 $ -- $ (59) $ 26,728 ======== ======== ======== ========
DECEMBER 31, 1995 ----------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR Current: COST GAINS LOSSES VALUE ---------- ---------- ---------- -------- U.S. government and federal agencies $ 1,481 $ 9 $ -- $ 1,490 Foreign government debt ............ 1,017 2 -- 1,019 U.S. corporate debt ................ 8,870 45 -- 8,915 Foreign corporate debt ............. 3,164 2 -- 3,166 ------- ------- ------- ------- 14,532 58 -- 14,590 ------- ------- ------- ------- Non-current: Foreign government debt ............ 1,019 2 -- 1,021 U.S. corporate debt ................ 7,077 32 -- 7,109 Foreign corporate debt ............. 206 -- -- 206 ------- ------- ------- ------- 8,302 34 -- 8,336 ------- ------- ------- ------- $22,834 $ 92 $ -- $22,926 ======= ======= ======= =======
Maturities for non-current investments in securities range from one to two years. Included in the Company's 1995 income statement is a realized gain in the amount of $3 related to the sale of held-to-maturity securities with an aggregate amortized cost in the amount of $2,464. No significant gains or losses were recognized during the year ended December 31, 1996. The cost of securities sold is determined by the specific identification method. NOTE 5 -- NOTES PAYABLE The Company has a Loan and Security Agreement with a bank which provides for a $5,000 revolving line of credit through July 10, 1997. The agreement requires that the Company maintain certain financial ratios and levels of tangible net worth and also restricts the Company's ability to pay cash dividends and repurchase stock without the bank's consent. At December 31, 1996 and 1995, the Company had $0 outstanding under the revolving line of credit. Any borrowings under the agreement will be collateralized by substantially all of the Company's assets. Interest is payable monthly at the bank's prime rate, which was 8.25% at December 31, 1996. 56 57 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) The RDC credit facility was comprised of a revolving line of credit secured by eligible accounts receivable as well as a bridge loan which was secured by the guarantees of certain stockholders. The revolving line of credit matured on January 5, 1997. The bridge loan matured on September 5, 1996. All outstanding amounts were repaid during 1996 and neither credit facility was renewed. During 1995, the preferred stockholders of RDC loaned the Company $1,000 under subordinated note agreements (secured by the assets of RDC but subordinated to borrowings under the RDC line of credit) bearing interest at 9%. All outstanding amounts were repaid during 1996. NOTE 6 -- LEASES At December 31, 1996, the Company is obligated under noncancelable operating leases for its facilities and certain equipment through 2003 as follows:
NET FUTURE FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE LEASE PAYMENTS INCOME PAYMENTS -------------- ------------- ------------- 1997 $2,102 $212 $1,890 1998 1,543 192 1,351 1999 1,193 149 1,044 2000 1,215 -- 1,215 2001 1,250 -- 1,250 thereafter 1,787 -- 1,787
The lease for the Company's corporate headquarters provides for scheduled rent increases and an option to extend the lease for five years with certain changes to the terms of the lease agreement and a refurbishment allowance. Rent expense under operating leases for the years ended December 31, 1996, 1995 and 1994 was approximately $1,623, $1,503 and $1,191, respectively, net of sublease income of $125, $83 and $40, respectively. RDC maintains a lease line of credit with a leasing company for the acquisition of equipment under capital lease arrangements. Future minimum payments are as follows: 1997 ............................. $ 475 1998 ............................. 232 1999 ............................. 66 ----- 773 Less amounts representing interest (110) ----- Capital lease obligations ........ 663 Less current portion ............. (399) ----- $ 264 =====
The gross value of assets under capital leases at December 31, 1996 and 1995 was $1,481 and $2,186 and accumulated amortization was $599 and $572, respectively. Amortization expense for assets acquired under capital leases is included in depreciation expense. 57 58 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7 -- LICENSE OF CHARACTER RECOGNITION TECHNOLOGY In November 1992, the Company entered into an agreement that granted Mitek a license to use certain character recognition technology developed by the Company. The agreement provided for the Company to receive an initial license and support fee payment of $1,350 and an additional license and support fee based on a percentage of Mitek's revenue from the sale of character recognition products through November 1995. The agreement also required that the Company sell certain proprietary computer boards to Mitek at a substantial discount from normal sales prices, but in excess of cost, and provide ongoing engineering and technical support over the agreement period, which ended during November 1995. As the Company had a significant continuing obligation under this agreement, the initial license and support fee received thereunder was deferred on receipt and recognized as revenue over the performance period based on estimated sales of proprietary computer boards. The additional license and support fees were recognized as a percentage of actual Mitek revenues pursuant to the agreement. Revenue recognized pursuant to this agreement, which is included in "contracts and other" in the consolidated statement of income, is summarized as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 ------ ------ Initial license fee ......... $ 47 $ 295 Additional license and support fee 314 476 Computer board sales ........ 527 657 ------ ------ $ 888 $1,428 ====== ======
NOTE 8 -- CAPITAL STOCK During June 1995, the Company completed its initial public offering for sale of 5,175 shares of common stock (of which 2,375 shares were sold by the Company and 2,800 shares were sold by certain selling stockholders) at a price to the public of $7.00 per share, which resulted in net proceeds to the Company of $15,461 after the payment of underwriters' commissions but before the deduction of offering expenses. Upon the closing of the Company's initial public offering, all outstanding shares of Series A, B, C, D, and E convertible preferred stock were automatically converted into shares of common stock at their then effective conversion prices. Upon conversion, the preferred stockholders were no longer entitled to any undeclared cumulative dividends and all class voting rights terminated. During December 1995, the Company completed a secondary public offering for sale of 3,000 shares of common stock (of which 1,116 shares were sold by the Company and 1,884 shares were sold by certain selling stockholders) at a price to the public of $18.50 per share, which resulted in net proceeds to the Company of $19,606 after the payment of underwriters' commissions but before the deduction of offering expenses. The Board of Directors is authorized to issue up to 4,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to the rights of the holders of any Preferred Stock that may be issued in the future. 58 59 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9 -- INCOME TAXES Income (loss) before income tax benefit was taxed under the following jurisdictions:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ------- ------- ------- Domestic $ 8,599 $ 5,764 $ 2,741 Foreign 2,760 (198) -- ------- ------- ------- $11,359 $ 5,566 $ 2,741 ======= ======= =======
The income tax provision (benefit) is summarized as follows: YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ------- ------- ------- Current: Federal $ 1,132 $ 97 $ 17 State 204 143 69 Foreign 51 -- -- Deferred: Federal (1,569) (521) (425) State (56) (186) (62) Foreign (296) (44) -- ------- ------- ------- $ (534) $ (511) $ (401) ======= ======= ======= Deferred tax assets are summarized as follows:
DECEMBER 31, -------------------- 1996 1995 ------- ------- Taxable pooling basis difference ..... $18,397 $ -- Net operating loss carryforwards ..... 8,587 2,902 Tax credit carryforwards ............. 1,878 1,370 Other ................................ 487 483 ------- ------- Gross deferred tax assets ............ 29,349 4,755 Deferred tax asset valuation allowance -- (2,717) ------- ------- Net deferred tax asset ............ $29,349 $ 2,038 ======= =======
At December 31, 1994, the Company provided a deferred tax asset valuation allowance for deferred tax assets which management determined were "more likely than not" unrealizable based on trends in operating results after eliminating the effects of non-recurring revenue (Note 7). During 1995, the Company released the valuation allowance related to HNC's deferred tax assets based on management's assessment that it was more likely than not that the Company would realize a portion of those assets in future periods due to improvements in HNC's operating results. During 1996, the Company released the valuation allowances related to RDC and Retek deferred tax assets based on management's assessment that it was more likely than not that the Company would realize those assets in future periods due to improvements in the operating results of those subsidiaries. During 1996 and 1995, the Company realized certain tax benefits related to stock option plans in the amount of $7,889 and $800, respectively. The benefit from the stock option tax deduction is credited directly to paid-in capital. In connection with the acquisition of Retek, the Company made an Internal Revenue Code Section 338 election for federal and state tax purposes, resulting in the treatment of the acquisition as a taxable transaction, whereby the tax bases of the acquired assets and liabilities were adjusted to their fair values as of the date of the acquisition. As the purchase price exceeded the carrying value of the net assets acquired by approximately $46,000, the Company recorded a deferred tax asset in the amount of $18,397. 59 60 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) A reconciliation of the income tax benefit to the amount computed by applying the statutory federal income tax rate to income before income tax provision is summarized as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ------- ------- ------- Amounts computed at statutory federal rate ....... $ 3,862 $ 1,892 $ 932 Release of valuation allowance ................... (2,717) (2,223) (1,008) Subchapter S corporation earnings ................ (1,901) (1,366) (900) Tax credit carryforwards generated ............... (334) (68) (51) Losses without tax benefit ....................... -- 794 468 Separate return impact of acquired businesses .... (154) -- -- Acquisition expenses not tax deductible .......... 367 -- -- State income tax expense ......................... 554 465 82 Foreign net operating loss carryforwards generated (296) (44) -- Other ............................................ 85 39 76 ------- ------- ------- Income tax benefit ............................ $ (534) $ (511) $ (401) ======= ======= =======
Prior to the acquisition of CR by HNC on November 28, 1997, CR elected subchapter S corporation status for income tax purposes; therefore, its income was included in the tax returns of its stockholders, and no income tax provision has been recorded for CR other than certain minimum state taxes on subchapter S corporations. At December 31, 1996, the Company had federal, state and foreign net operating loss carryforwards of approximately $22,300, $10,800 and $800, respectively. The net operating loss carryforwards expire as follows: 1997 .......... $ 278 1998 .......... 240 1999 .......... 2 2001 .......... 9,148 2003 .......... 833 2004 .......... 1,240 2005 .......... 1,216 2006 .......... 1,670 2007 .......... 17 2008 .......... 1,692 2009 .......... 1,370 2010 .......... 1,840 2011 .......... 14,086 No expiration . 268
The Company also has approximately $1,400 of federal research and development credit carryforwards, which expire from 2000 to 2011, $400 of state research and development credit carryforwards, which have no expiration date, and $100 of foreign tax credit carryforwards, which expire from 1999 to 2000. Certain of these net operating loss and research and development credit carryforwards generated by RDC and Retek prior to their acquisitions by HNC are subject to annual limitations on their utilization and also are limited to utilization solely by the Company which generated them. Should a substantial change in HNC's ownership occur, as defined by the Tax Reform Act of 1986, there will be an annual limitation on the utilization of net operating loss and research and development credit carryforwards. 60 61 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- EMPLOYEE BENEFIT PLANS During 1987, the Company adopted the 1987 Stock Option Plan whereby 2,500 shares of the Company's common stock were reserved for issuance pursuant to nonqualified and incentive stock options to its officers, directors, key employees and consultants. The plan, as amended, is administered by the Board of Directors or its designees and provides generally that, for incentive stock options and nonqualified stock options, the exercise price must not be less than the fair market value of the shares as determined by the Board of Directors at the date of grant. The options expire no later than ten years from the date of grant and may be exercised in installments based upon stipulated timetables (not in excess of seven years). At December 31, 1996, options to purchase 545 shares were exercisable. During 1995, the Company adopted the 1995 Directors Stock Option Plan (the "Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the discussion contained in the three paragraphs below, "fair market value" means the closing price of the Company's Common Stock on the Nasdaq National Market on the grant date. The Directors Plan provides for the issuance of up to 300 nonqualified stock options to the Company's outside directors. Under the provisions of the Directors Plan, options to purchase 25 shares of the Company's common stock are granted to outside directors upon their respective dates of becoming members of the Board of Directors and 10 additional options will be granted on each anniversary of such dates. Options under the Directors Plan are granted at the fair market value of the stock at the grant date and vest at specific times over a four-year period. At December 31, 1996, options to purchase 40 shares were exercisable. The Incentive Plan provides for the issuance of up to 2,800 shares of the Company's common stock in the form of nonqualified or incentive stock options, restricted stock or stock bonuses. In addition, any shares remaining unissued under the 1987 Stock Option Plan on the effective date of the Incentive Plan, and any shares issuable upon exercise of options granted pursuant to the 1987 Stock Option Plan that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for issuance under the 1987 Stock Option Plan but will be available for issuance under the Incentive Plan. Nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award, or 110% of fair market value for awards to more than 10% stockholders. Options granted under the Incentive Plan may have a term of up to 10 years. The Company has the discretion to provide for restrictions and the lapse thereof in respect of restricted stock awards, and options typically vest at the rate of 25% of the total grant per year over a four-year period. However, the Company may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 1996, 58 shares were exercisable under the Incentive Plan. The Purchase Plan provides for the issuance of a maximum of 400 shares of common stock. Each purchase period, eligible employees may designate between 2% and 10% of their cash compensation, subject to certain limitations, to be deducted from their pay for the purchase of common stock under the Purchase Plan. The purchase price of the shares under the Purchase Plan is equal to 85% of the lesser of the fair market value per share, as defined by the Purchase Plan, on the first day of the twelve-month offering period or the last day of each six-month purchase period. Approximately 65% of eligible employees have participated in the Plan in the last two years. Under the Purchase Plan, the Company sold 94 shares to employees in 1996. 61 62 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) RDC's stock option plan is administered by HNC's Board of Directors. All outstanding RDC options were converted into options to purchase HNC common stock and adjusted to give effect to the exchange ratio (Note 2). No changes were made to the terms of the RDC options in connection with the exchange. Options granted under the RDC stock option plan generally vest at the rate of 25% of the total grant per year over a four-year period and expire 10 years after the date of grant. At December 31, 1996, 63 shares were exercisable under the RDC plan. Retek's stock options are administered by HNC's Board of Directors. All outstanding Retek options were converted into options to purchase the Company's common stock and adjusted to give effect to the exchange ratio (Note 2). No changes were made to the terms of the Retek options in connection with the exchange. Options granted vest ratably over periods from one to four years and have a term of up to 10 years. At December 31, 1996, options to purchase 28 shares were exercisable. The CR 1995 Stock Option Plan is administered by HNC's Board of Directors. All outstanding CR stock options were converted into options to purchase HNC common stock and adjusted to give effect to the exchange ratio (Note 2). No changes were made to the terms of the CR options in connection with the exchange. Options granted under the CR Stock Option Plan generally vest ratably over periods from two to four years and expire 10 years after the date of grant. At December 31, 1996, options to purchase 400 shares were exercisable. Transactions under the Company's stock option and purchase plans during the years ended December 31, 1996 and 1995, including options under the RDC stock option plan, options under the Retek stock option plan and options under the CR Stock Option Plan, but excluding options to purchase stock of a subsidiary of the Company, Aptex Software Inc. ("Aptex"), are summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 ------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ ---------------- ------ ---------------- Outstanding at beginning of year ....... 2,868 $ 2.84 2,080 $ 0.49 Options granted ................... 1,645 27.98 1,272 6.08 Options exercised ................. (1,140) .96 (207) 0.52 Options canceled .................. (158) 17.62 (277) 1.80 ------ ------ Outstanding at end of year ............. 3,215 15.65 2,868 2.84 ====== ====== Options exercisable at end of year ..... 841 1,437 Weighted average fair value of options granted during the year ........... $14.50 $3.10
62 63 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes information about employee stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------- --------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL AVERAGE OUTSTANDING AT AVERAGE EXERCISE PRICES DECEMBER 31, 1996 LIFE (IN YEARS) EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE - ----------------- ----------------- --------------------- -------------- ------------------ -------------- $ 0.02 to $ 0.92 554 4.66 $ 0.35 475 $ 0.30 1.00 to 3.00 803 7.69 2.58 245 2.55 4.50 to 21.38 505 8.73 13.06 92 10.91 21.50 to 30.50 661 9.51 27.52 20 25.20 30.75 to 30.75 413 9.66 30.75 9 30.75 30.81 to 49.50 279 9.47 37.81 - - ----- ---- $ 0.02 to $49.50 3,215 8.11 15.65 841 3.04 ===== ====
During 1996, Aptex adopted the 1996 Equity Incentive Plan (the "Aptex Plan") whereby 2,000 shares of Aptex common stock were reserved for issuance pursuant to nonqualified and incentive stock options and restricted stock awards. The plan is administered by the Board of Directors of Aptex or its designees and provides generally that nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award, or 110% of fair market value for awards to more than 10% stockholders. Options granted under the Incentive Plan may have a term of up to 10 years. The Company has the discretion to provide for restrictions and the lapse thereof in respect of restricted stock awards, and options typically vest at the rate of 25% of the total grant per year over a four-year period. However, the Company may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. During 1996, Aptex issued 1,000 shares of common stock under the Aptex Plan at an issuance price of $0.03 per share. No options granted under the Aptex Plan were exercisable at December 31, 1996. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock-based compensation. No compensation expense has been recognized for its employee stock option grants, which are fixed in nature, as the options have been granted at fair market value. No compensation expense has been recognized for the Purchase Plan. Had compensation cost for the Company's stock-based compensation awards issued during 1996 and 1995 been determined based on the fair value at the grant dates of awards consistent with the method of Financial Accounting Standards Board Statement No. 123, the Company's net income and pro forma net income per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 -------- -------- Net income: As reported .................................. $ 11,893 $ 6,077 Pro forma .................................... 6,122 5,126 As reported pro forma adjusted (Note 1) ...... 9,731 4,534 Pro forma .................................... 3,960 3,583 Net income per share: As reported .................................. $ 0.47 $ 0.28 Pro forma .................................... 0.24 0.24 As reported pro forma adjusted (Note 1) ...... $ 0.38 $ 0.21 Pro forma .................................... 0.16 0.17
63 64 HNC SOFTWARE INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the years ended December 31, 1996 and 1995, respectively: dividend yield of 0.0% for both years, risk-free interest rates of 6.03% and 6.29%, expected volatility of 70% and 75% (0% for both years for options granted by RDC, Retek and CR prior to their acquisition by HNC), and expected lives of 3.5 years for both years. The fair value of the employees' purchase rights pursuant to the Purchase Plan is estimated using the Black-Scholes model with the following assumptions: dividend yield of 0.0% for both years, risk-free interest rates of 5.36% and 5.66%, expected volatility of 70% and 75%; and an expected life of 6 months for both years. The weighted average fair value of those purchase rights granted in 1996 and 1995 was $9.61 and $2.75, respectively. The fair value of each option granted under the Aptex Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the year ended December 31, 1996: dividend yield of 0.0%, risk-free interest rate of 6.42%, expected volatility of 90%, and an expected life of 9.25 years. Options to purchase 704 shares were granted during 1996 at a weighted average exercise price of $0.03 per share. The weighted average fair value of options granted during the year was $0.03 per share. At December 31, 1996, there were 704 options outstanding under the Aptex Plan with a weighted average exercise price of $0.03 per share and a weighted average remaining contractual life of 9.74 years. NOTE 11 -- CONTINGENCIES Various claims arising in the course of business, seeking monetary damages and other relief, are pending. The amount of the liability, if any, from such claims, cannot be determined with certainty; however, in the opinion of management, the ultimate liability for such claims will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 64 65 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of HNC Software Inc. Our audits of the consolidated financial statements referred to in our report dated January 21, 1997, except as to the pooling of interests with CompReview, Inc. which is as of November 28, 1997, appearing on page 28 of this Current Report on Form 8-K also included an audit of the Financial Statement Schedule listed in Item 7(b)(4) of this Form 8-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Diego, California January 21, 1997, except as to the pooling of interests with CompReview, Inc. which is as of November 28, 1997 65 66 SCHEDULE II HNC SOFTWARE INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1996
ALLOWANCE FOR DEFERRED TAX DOUBTFUL ACCOUNTS ASSET VALUATION & SALES RETURNS ALLOWANCE ----------------- --------------- Balance at December 31, 1993 $292,000 $4,658,000 Provision 529,000 972,000 Write-off (307,000) - Recovery - (1,392,000) -------- ------------ Balance at December 31, 1994 514,000 4,238,000 Provision 529,000 702,000 Write-off (472,000) - Recovery (18,000) (2,223,000) --------- ---------- Balance at December 31, 1995 553,000 2,717,000 Provision 279,000 - Write-off (94,000) - Recovery (29,000) (2,717,000) -------- ---------- Balance at December 31, 1996 $709,000 $ -0- ======== ==========
66 67 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: December 12, 1997 HNC SOFTWARE INC. By: /s/ Raymond V. Thomas ---------------------- Raymond V. Thomas Chief Financial Officer 67 68 INDEX TO EXHIBITS
Exhibit Number Description of Exhibit ------- ---------------------- 2.01 Agreement and Plan of Reorganization dated as of July 14, 1997 by and among HNC, FW1 Acquisition Corp., CompReview, Inc., Robert L. Kaaren and Mishel E. Munnayer, a.k.a. Michael Munayyer, Trustee of the Michael Munayyer Trust dated August 11, 1995. 2.02 Agreement of Merger dated as of November 28, 1997 by and between FW1 Acquisition Corp. and CompReview, Inc. 4.01 Registration Rights Agreement dated as of November 28, 1997 by and among HNC and the former shareholders of CompReview, Inc. 11.01 Statement Regarding Computation of Per Share Earnings (Loss) 23.01 Consent of Price Waterhouse LLP, Independent Accountants 23.02 Consent of Deloitte & Touche LLP, Independent Auditors 27.01 Financial Data Schedule
68 EX-2.01 2 EXHIBIT 2.01 1 EXHIBIT 2.01 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and entered into as of July 14, 1997 (the "AGREEMENT DATE") by and among HNC SOFTWARE INC., a Delaware corporation ("HNC"), FW1 ACQUISITION CORP., a Delaware corporation that is a wholly-owned subsidiary of HNC ("SUB"), CompReview, Inc., a California corporation (the "COMPANY") and Robert L. Kaaren, M.D. and Mishel E. Munnayer a.k.a Michael E. Munayyer, Trustee of the Michael Munayyer Trust dated August 11, 1995, who are the only stockholders of the Company (each being hereinafter individually referred to as a "CR STOCKHOLDER" and collectively referred to as the "CR STOCKHOLDERS"). RECITALS A. The parties intend that, subject to the terms and conditions of this Agreement, Sub will be merged with and into the Company in a reverse triangular merger, with the Company to be the surviving corporation of such merger, all pursuant to the terms and conditions of this Agreement and applicable law. The parties also intend for such merger to qualify as a "pooling of interests" transaction for accounting and financial reporting purposes and to be treated as a "reorganization" under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended, by virtue of the provisions of Section 368(a)(2)(E) of such Code. B. Upon the effectiveness of such merger, the capital stock of the Company that is outstanding immediately prior to the effectiveness of the merger will be converted into shares of the common stock of HNC (plus cash for any eliminated fractional shares), the employee stock options to purchase shares of the Company's common stock granted under the Company's 1995 Stock Option Plan that are outstanding immediately prior to the effectiveness of the Merger will be assumed by HNC and converted into options to purchase shares of HNC common stock and Sub will be merged with and into the Company, all as provided in this Agreement. NOW, THEREFORE, in consideration of the above-recited facts and the mutual promises, covenants and conditions contained herein, the parties hereby agree as follows: ARTICLE 1 CERTAIN DEFINITIONS As used in this Agreement, the following terms will have the meanings set forth below: 1.1 The "MERGER" means the statutory merger of Sub with and into the Company to be effected pursuant to the terms and conditions of this Agreement. 1.2 The "EFFECTIVE TIME" means the time and date on which the Merger first becomes legally effective under the laws of the States of California and Delaware as a result of: (i) the filing with the California Secretary of State of an Agreement of Merger between Sub and the Company in substantially the form of Exhibit A (the "AGREEMENT OF MERGER") and any required officers' certificates; and (ii) the filing with the Delaware Secretary of State of the Agreement of Merger and any required officers' certificates or, in lieu thereof at HNC's option, a Certificate of 2 Merger (the "CERTIFICATE OF MERGER"), conforming to the requirements of Section 252 of the Delaware General Corporation Law. 1.3 "HNC COMMON STOCK" means HNC's Common Stock, $0.001 par value per share. 1.4 "HNC CLOSING AVERAGE PRICE PER SHARE" means the average of the closing prices per share of HNC Common Stock as quoted on the Nasdaq National Market (or the New York Stock Exchange or the American Stock Exchange if HNC Common Stock is then traded or quoted on either such exchange) and reported in The Wall Street Journal for the twenty (20) trading days immediately preceding (but not including) the Closing Date (as defined in Section 7.1). 1.5 "COMPANY COMMON STOCK" means the Company's Common Stock. 1.6 "COMPANY OPTIONS" means, collectively, options to purchase shares of Company Common Stock granted by the Company to Company employees under the Company's 1995 Stock Option Plan (the "COMPANY OPTION PLAN"). 1.7 "COMPANY DERIVATIVE SECURITIES" means, collectively: (a) any warrant, option, right or other security that entitles the holder thereof to purchase or otherwise acquire any shares of the capital stock of the Company (collectively, "COMPANY STOCK RIGHTS"); (b) any note, evidence of indebtedness, stock or other security of the Company that is convertible into or exchangeable for any shares of the capital stock of the Company or any Company Stock Rights ("COMPANY CONVERTIBLE SECURITY"); and (c) any warrant, option, right, note, evidence of indebtedness, stock or other security that entitles the holder thereof to purchase or otherwise acquire any Company Stock Rights or any Company Convertible Security; provided, however, that the term "Company Derivative Securities" does not include any of the Company Options. 1.8 "NUMBER OF COMPANY FULLY DILUTED SHARES" means that number of shares of Company Common Stock that is equal to the sum of: (a) the total number of shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time; plus (b) the total number of shares of Company Common Stock subject to or issuable under all Company Options that are issued and outstanding immediately prior to the Effective Time; plus (c) the total number of shares of Company Common Stock that, immediately prior to the Effective Time, are, directly or indirectly, ultimately or potentially issuable by the Company upon the exercise, conversion or exchange of all Company Derivative Securities (if any) that are issued and outstanding immediately prior to the Effective Time. 1.9 "COMPANY STOCKHOLDERS" means those persons (each being individually referred to herein as a "COMPANY STOCKHOLDER") who, immediately prior to the Effective Time, hold the shares of the Company Stock that are outstanding immediately prior to the Effective Time; provided, however, that for purposes of Section 2.4 and Section 11 of this Agreement, the term "Company Stockholders" means only those Company Stockholders (as defined above in this Section) who are issued shares of HNC Common Stock in the Merger. 1.10 "COMPANY DISSENTING SHARES" means any shares of any capital stock of the Company that (i) are outstanding immediately prior to the Effective Time and qualify fully as "dissenting shares" within the meaning of Section 1300(b) of the California Corporations Code and (ii) with respect to which dissenter's rights to require the purchase of such dissenting shares for -2- 3 cash at their fair market value in accordance with Chapter 13 of the California Corporations Code have been duly and properly exercised and perfected in connection with the Merger. 1.11 "HNC MERGER SHARES" means a number of shares of HNC Common Stock equal to the sum of (i) Five Million (5,000,000) shares of HNC Common Stock, as presently constituted, plus (ii) the Additional Shares. 1.12 "ADDITIONAL SHARES" means that number of shares of HNC Common Stock (as constituted immediately prior to the Effective Time) obtained by dividing (i) the Retained Earnings (as defined below) by (ii) the HNC Closing Average Price Per Share. As used herein, the "RETAINED EARNINGS" means the retained earnings of the Company as of the last day of the last full calendar month ended prior to the Closing Date, computed in accordance with generally accepted accounting principles, consistently applied. 1.13 "CONVERSION RATIO" means the quotient obtained by (a) dividing the number of shares of HNC Common Stock constituting the HNC Merger Shares by (b) the Number of Company Fully Diluted Shares. 1.14 "HNC ANCILLARY AGREEMENTS" means, collectively, each agreement, certificate or document (other than this Agreement) to which HNC is to enter into as a party thereto, or otherwise is to execute and deliver, pursuant to or in connection with this Agreement. "SUB ANCILLARY AGREEMENTS" means, collectively, the Agreement of Merger and each other agreement, certificate or document (other than this Agreement) to which Sub is to enter into as a party thereto, or otherwise is to execute and deliver, pursuant to or in connection with this Agreement. "COMPANY ANCILLARY AGREEMENTS" means, collectively, the Agreement of Merger and each other agreement, certificate or document (other than this Agreement) to which the Company is to enter into as a party thereto, or otherwise is to execute and deliver, pursuant to or in connection with this Agreement. "CR STOCKHOLDER ANCILLARY AGREEMENTS" means, collectively, each agreement, certificate or document (other than this Agreement) that a CR Stockholder is to enter into as a party thereto, or otherwise is to execute and deliver, pursuant to or in connection with this Agreement, and includes, without limitation, each of the following agreements to be entered into and executed by each CR Stockholder hereunder: the Escrow Agreement, the Investment Representation Letter, the Registration Rights Agreement, the Company Stockholder Agreement, the Company Affiliate Agreement, the Non-Competition Agreement and the Employment Agreement (each as hereafter defined). 1.15 "KNOWLEDGE," when used with reference to the Company or the CR Stockholders, means the collective actual knowledge of the CR Stockholders, the President and/or Chief Executive Officer of the Company, the Chief Financial Officer of the Company and/or any Vice President of the Company. 1.16 "PROXY STATEMENT" means the proxy statement that HNC distributes and sends to its stockholders in connection with the special meeting of HNC's stockholders to be called and held by HNC in order to seek HNC's stockholders' approval of the issuance of shares of HNC Common Stock and HNC Options to securityholders of the Company pursuant to the Merger, this Agreement and the Agreement of Merger. -3- 4 Other capitalized terms defined elsewhere in this Agreement and not defined in this Article I will have the meanings assigned to such terms in this Agreement. ARTICLE 2 PLAN OF REORGANIZATION 2.1 Conversion of Shares. 2.1.1 Conversion of Sub Stock. At the Effective Time, each share of the Common Stock of Sub that is issued and outstanding immediately prior to the Effective Time will, by virtue of the Merger and without the need for any further action on the part of the holder thereof, be converted into and become one (1) share of Company Common Stock that is issued and outstanding immediately after the Effective Time, and the shares of Company Common Stock into which the shares of Sub Common Stock are so converted in the Merger will be the only shares of capital stock of the Company that are issued and outstanding immediately after the Effective Time. 2.1.2 Conversion of Company Stock. At the Effective Time, each share of Company Common Stock that is issued and outstanding immediately prior to the Effective Time (other than any Company Dissenting Shares as provided in Section 2.1.3) will, by virtue of the Merger, and without the need for any further action on the part of the holder thereof, be converted into a number of shares of HNC Common Stock that is equal to the Conversion Ratio, subject to the provisions of Section 2.1.4 regarding the elimination of fractional shares. 2.1.3 Company Dissenting Shares. Holders of Company Dissenting Shares (if any) will be entitled to their appraisal rights under Chapter 13 of the California Corporations Code with respect to such Company Dissenting Shares and such Company Dissenting Shares will not be converted into shares of HNC Common Stock in the Merger; provided, however, that nothing in this Section 2.1.3 is intended to remove, release, waive, alter or affect any of the conditions to HNC's and Sub's obligations to consummate the Merger set forth in Section 9.8 and Section 9.9, or any other provision of this Agreement relating to the Company Dissenting Shares. Shares of the capital stock of the Company that are outstanding immediately prior to the Effective Time of the Merger and with respect to which dissenting shareholders' rights of appraisal under the California Corporations Code have not been properly perfected will, when such dissenting shareholders' rights can no longer be legally exercised under the California Corporations Code, be converted into HNC Common Stock as provided in Section 2.1.2. 2.1.4 Fractional Shares. No fractional shares of HNC Common Stock will be issued in connection with the Merger. In lieu thereof, each holder of Company Common Stock who would otherwise be entitled to receive a fraction of a share of HNC Common Stock pursuant to Section 2.1.2, after aggregating all shares of HNC Common Stock to be received by such holder pursuant to Section 2.1.2, will instead receive from HNC, within three (3) business days after the Effective Time, an amount of cash equal to product obtained by multiplying (i) the HNC Closing Average Price Per Share (as adjusted to reflect any Capital Change (as defined below) of HNC) by (ii) the fraction of a share of HNC Common Stock that such holder would otherwise be entitled to receive. -4- 5 2.2 Assumption and Conversion of Company Options. 2.2.1 Assumption by HNC. Each Company Option that is outstanding immediately prior to the Effective Time will, by virtue of the Merger and at the Effective Time and without the need for any further action on the part of any holder thereof, be assumed by HNC and converted into an option (an "HNC OPTION") to purchase that number of shares of HNC Common Stock determined by multiplying the number of shares of Company Common Stock subject to such Company Option immediately prior to the Effective Time by the Conversion Ratio, at an exercise price per share of HNC Common Stock equal to the exercise price per share of Company Common Stock that was in effect for such Company Option immediately prior to the Effective Time divided by the Conversion Ratio; provided, however, that if the foregoing calculation would result in an assumed and converted Company Option being converted into an HNC Option that, after aggregating all the shares of HNC Common Stock issuable upon the exercise of such HNC Option, would be exercisable for a fraction of a share of HNC Common Stock, then the number of shares of HNC Common Stock subject to such HNC Option will be rounded down to the nearest whole number of shares of HNC Common Stock. The terms, exercisability, vesting schedule, status as an "incentive stock option" under Section 422 of the Code (if applicable) or as a nonqualified stock option, and all other terms and conditions of each Company Option (including but not limited to the provisions of the Company Option Plan that form part of the terms and conditions of such Company Option) that is converted into an HNC Option in the Merger will (except as otherwise provided in the terms of such Company Options), to the extent permitted by law and otherwise reasonably practicable, be unchanged and continue in effect after the Merger. Pre-Merger employment service with the Company will be credited to each holder of a Company Option for purposes of applying any vesting schedule contained in a Company Option to determine the number of shares of HNC Common Stock that are exercisable under the HNC Option into which such Company Option is converted in the Merger. 2.2.2 Registration. HNC will use its best efforts (with the cooperation and assistance of the Company) to cause the shares of HNC Common Stock that are subject to the HNC Options that are issued upon the conversion of the Company Options under Section 2.2.1 to be registered on a registration statement (or to be issued pursuant to a then-effective registration statement) on Form S-8 (or successor form) promulgated by the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "1933 ACT"), as soon as reasonably practicable after the Effective Time, and will use its best efforts to maintain the effectiveness of such Form S-8 registration statement or registration statements for so long as such HNC Options remain outstanding and HNC Common Stock is registered under the Securities Exchange Act of 1934, as amended (the "1934 ACT"). HNC will use its best efforts to file a Form S-8 registration statement covering the shares of HNC Common Stock that are subject to the HNC Options referred to above within five (5) business days after the Effective Time. 2.3 Adjustments for Capital Changes. Notwithstanding the provisions of Section 2.1 or Section 2.2, if at any time after the Agreement Date and prior to the Effective Time, HNC recapitalizes, either through a subdivision (or stock split) of any of its outstanding shares into a greater number of shares, or a combination (or reverse stock split) of any of its outstanding shares into a lesser number of shares, or reorganizes, reclassifies or otherwise changes its outstanding shares into the same or a different number of shares of other classes (other than through a subdivision or combination of shares provided for in the previous clause), or declares a dividend -5- 6 on its outstanding shares payable in shares of HNC Common Stock or in shares or securities convertible into shares of HNC Common Stock (each, a "CAPITAL CHANGE"), then the HNC Closing Average Price Per Share, the number of shares of HNC Common Stock constituting the HNC Merger Shares and the Conversion Ratio will each be appropriately adjusted so as to maintain the proportionate interests of the stockholders and optionholders of HNC and the Company in the outstanding equity of HNC immediately following the Merger as contemplated by this Agreement. 2.4 Escrow Agreement. At the Closing (as that term is defined in Section 7.1) of the Merger, HNC will withhold ten percent (10%) of the shares of HNC Common Stock to be issued to the Company Stockholders in the Merger pursuant to Section 2.1.2, rounded down to the nearest whole number of shares to be issued to each Company Stockholder (the "ESCROW SHARES") and will deliver certificates representing such Escrow Shares to State Street Bank and Trust Company or a similar institution, as escrow agent (the "ESCROW AGENT"), together with related stock transfer powers, to be held by the Escrow Agent as security for the Company Stockholders' indemnification obligations under Section 11 and pursuant to the provisions of an escrow agreement in substantially the form of Exhibit B to be entered into at the Closing by HNC, the Escrow Agent, the Company Stockholders and the Representative (as defined below) (the "ESCROW AGREEMENT"). The Escrow Shares will be represented by a certificate or certificates issued in the names of the Company Stockholders in proportion to their respective interests therein and will be held by the Escrow Agent during that time period specified in the Escrow Agreement (the "ESCROW PERIOD"). By their approval of the Merger, the Company Stockholders will be conclusively deemed to have consented to, approved and agreed to be personally bound by: (i) the indemnification provisions of Section 11; (ii) the Escrow Agreement; and (iii) the appointment of Robert L. Kaaren, M.D. and Michael E. Munayyer as the representatives of the Company Stockholders (together, the "REPRESENTATIVE") under the Escrow Agreement and as the attorneys-in-fact and agents for and on behalf of each Company Stockholder as provided in the Escrow Agreement; and (iv) the taking by the Representative of any and all actions and the making of any decisions required or permitted to be taken by the Representative under the Escrow Agreement, including, without limitation, the exercise of the power to: (a) authorize delivery to HNC of Escrow Shares in satisfaction of indemnity claims by HNC or any other Indemnified Person (as defined herein) pursuant to Section 11 hereof and/or the Escrow Agreement; (b) agree to, negotiate, enter into settlements and compromises of, demand arbitration of, and comply with orders of courts and awards of arbitrators with respect to, such claims; (c) arbitrate, resolve, settle or compromise any claim for indemnity made pursuant to Section 11; and (d) take all actions necessary in the judgment of the Representative for the accomplishment of the foregoing. The Representative will have unlimited authority and power to act on behalf of each Company Stockholder with respect to the Escrow Agreement and the disposition, settlement or other handling of all claims governed by the Escrow Agreement, and all rights or obligations arising under the Escrow Agreement so long as all Company Stockholders are treated in the same manner. The Company Stockholders will be bound by all actions taken by the Representative in connection with the Escrow Agreement, and HNC will be entitled to rely on any action or decision of the Representative. In performing the functions specified in this Agreement and the Escrow Agreement, the Representative will not be liable to any Company Stockholder in the absence of gross negligence or willful misconduct. Any out-of-pocket costs and expenses reasonably incurred by the Representative in connection with actions taken pursuant to the terms of the Escrow Agreement will be paid by the Company Stockholders to -6- 7 the Representative pro rata in proportion to their respective percentage interests in the Escrow Shares. 2.5 Effects of the Merger. At and upon the Effective Time of the Merger: (a) the separate existence of Sub will cease and Sub will be merged with and into the Company, and the Company will be the surviving corporation of the Merger (the "SURVIVING CORPORATION") pursuant to the terms of this Agreement and the Agreement of Merger; (b) the Articles of Incorporation of the Company will be amended to read as set forth in Exhibit C attached hereto and will be the Articles of Incorporation of the Surviving Corporation; (c) the Bylaws of the Company attached as Exhibit D hereto will be the Bylaws of the Surviving Corporation, and such Bylaws shall authorize a Board of Directors consisting of exactly five (5) directors; (d) each share of Company Common Stock that is outstanding immediately prior to the Effective Time and each Company Option that is outstanding immediately prior to the Effective Time will be converted into HNC Common Stock or an HNC Option, respectively, as provided in this Article 2 and the Agreement of Merger; (e) each share of Sub Common Stock that is outstanding immediately prior to the Effective Time will be converted into one (1) share of Company Common Stock as provided in Section 2.1.1 and in the Agreement of Merger; (f) the officers of the Surviving Corporation (and their respective offices) will be: Robert L. Kaaren, M.D. - Chairman and Chief Executive Officer; Michael E. Munayyer - Chief Technical Officer; Michelle T. DeLizio - President; Robert M. Acosta - Vice President of Sales and Marketing; Matthew P. Schults - Vice President of Information Systems; and Raymond V. Thomas - Chief Financial Officer and Secretary; (g) the directors of the Surviving Corporation will be Robert L. North, Raymond V. Thomas, Mark Hammond, Robert L. Kaaren, M.D. and Michael E. Munayyer; and (h) the Merger will, from and after the Effective Time, have all of the effects provided by applicable law. 2.6 Further Assurances. The Company and each of the Company Stockholders agree that if, at any time before or after the Effective Time, HNC believes or is advised that any further instruments, deeds, assignments or assurances are reasonably necessary or desirable to consummate the Merger or to carry out the purposes and intent of this Agreement at or after the Effective Time, then HNC, the Surviving Corporation and their respective officers and directors may, and each the Company Stockholder will, execute and deliver all such proper deeds, assignments, instruments and assurances and do all other things necessary or desirable to consummate the Merger and to carry out the purposes of this Agreement, in the name of the Company or otherwise. -7- 8 2.7 Securities Laws Issues. HNC shall issue the shares of HNC Common Stock to be issued in the Merger pursuant to Section 2.1.2 of this Agreement and the HNC Options to be issued in the Merger pursuant to an exemption from registration under Section 4(2) and/or Regulation D promulgated under the 1933 Act and the exemption from qualification under Section 25120 of the California Corporations Code (the "CCC") provided by Section 25100(o) of the CCC. Concurrently with execution of this Agreement (or as soon thereafter as possible): (a) each CR Stockholder shall execute and deliver to HNC an Investment Representation Letter in the form of Exhibit E hereto (the "INVESTMENT REPRESENTATION LETTER"); and (b) each holder of an outstanding Company Option shall execute and deliver to HNC an Optionee Investment Representation Letter in the form of Exhibit F hereto (the "OPTIONEE INVESTMENT REPRESENTATION LETTER"). 2.8 S-3 Registration Rights. Effective upon the Effective Time, each Company Stockholder who receives shares of HNC Common Stock in the Merger pursuant to Section 2.1.2 will be granted the registration rights on Form S-3 under the 1933 Act on the terms, and subject to the conditions and limitations, of the Registration Rights Agreement attached hereto as Exhibit G upon such Company Stockholder's execution and delivery of such Registration Rights Agreement to HNC. 2.9 Tax-Free Reorganization. The parties intend to adopt this Agreement as a tax-free plan of reorganization and to consummate the Merger in accordance with the provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "CODE") by virtue of the provisions of Section 368(a)(2)(E) of the Code. The parties believe that the value of the shares of HNC Common Stock to be issued to the Company Stockholders in the Merger is equal to the value of the shares of Company Common Stock to be surrendered in exchange therefor. Except for cash to be paid in lieu of fractional shares, no consideration that could constitute "other property" within the meaning of Section 356 of the Code is being paid by HNC for the outstanding shares of Company Common Stock in the Merger. In addition, HNC represents now, and as of the Closing Date, that it presently intends to continue the Company's historic business or use a significant portion of the Company's business assets in a business. At the Closing (as that term is defined in Section 7.1), officers of the Company and HNC will execute and deliver an officers' tax representation certificate in the form of Exhibit H. The provisions and representations contained or referred to in this Section 2.9 and Exhibit H will survive until the expiration of the applicable statute of limitations. Notwithstanding anything to the contrary set forth herein, HNC makes no representations or warranty to the Company or to any stockholder of the Company regarding the tax treatment of the Merger or whether the Merger will qualify as a tax-free plan of reorganization under the Code. 2.10 Pooling of Interests. The parties acknowledge that, as a material inducement to HNC to enter into this Agreement and consummate the Merger, the Merger is intended to qualify as a "pooling of interests" for accounting and financial reporting purposes. Accordingly, concurrently with the execution of this Agreement, each CR Stockholder shall execute and deliver to HNC (a) a Company Affiliate Agreement in the form of Exhibit I hereto (the "COMPANY AFFILIATE AGREEMENT") and (b) a Stockholder Agreement in the form of Exhibit J hereto (the "COMPANY STOCKHOLDER AGREEMENT"). -8- 9 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE CR STOCKHOLDERS The Company and the CR Stockholders hereby jointly and severally represent and warrant to HNC that, except as set forth in the letter addressed to HNC from the Company and dated as of the Agreement Date (including all schedules thereto) which has been delivered to HNC by the Company concurrently herewith (the "COMPANY DISCLOSURE LETTER"), each of the following representations, warranties and statements in this Article 3 are true and correct. 3.1 Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has the corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to transact business as a foreign corporation in each jurisdiction in which its failure to be so qualified would have a Material Adverse Effect. As used in this Agreement, the term "MATERIAL ADVERSE EFFECT" when used with reference to the Company, means any event, change or effect that is (or will with the passage of time be) materially adverse to the Company's condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects. 3.2 Power, Authorization and Validity. 3.2.1 The Company has the right, power, legal capacity, and authority to enter into, execute, deliver, and perform its obligations under this Agreement and all the Company Ancillary Agreements, and the Company has all requisite corporate power and authority to consummate the Merger. This Agreement, the Agreement of Merger, the Merger, and all of the principal terms of each of the foregoing have been duly and validly approved by the stockholders of the Company in compliance with applicable law (including without limitation the California Corporations Code) and the Articles of Incorporation and Bylaws of the Company, both as amended. The execution, delivery and performance by the Company of this Agreement and each of the Company Ancillary Agreements have been duly and validly approved and authorized by all necessary corporate action on the part of the Company's Board of Directors. Each of the CR Stockholders has the right, power, legal capacity and authority to enter into, execute, deliver, and perform his respective obligations under this Agreement and each of the CR Stockholder Ancillary Agreements to be executed and delivered by such CR Stockholder. 3.2.2 No filing, authorization, consent, approval or order, governmental or otherwise, is necessary or required to be made or obtained by the Company or any CR Stockholder to enable the Company or such CR Stockholder to lawfully enter into, and to perform its or his obligations under, this Agreement, each of the Company Ancillary Agreements and each of the CR Stockholder Ancillary Agreements, except for (a) the filing of the Agreement of Merger (or the Certificate of Merger) with the Delaware Secretary of State and any such further documents as may be required under the Delaware General Corporation Law to effect the Merger; (b) the filing of the Agreement of Merger (and related officers' certificates) with the California Secretary of State and any such further documents as may be required under the California Corporations Code to effect the Merger; and (c) such filings and notifications as may be required to be made by the Company and/or any CR Stockholder in connection with the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"). -9- 10 3.2.3 This Agreement and each of the Company Ancillary Agreements are, or when executed by the Company will be, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject only to the effect of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies. This Agreement and each of the CR Stockholder Ancillary Agreements are, or when executed by a CR Stockholder will be, a valid and binding obligation of such CR Stockholder, enforceable against such CR Stockholder in accordance with their respective terms, subject only to the effect of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies. 3.3 Capitalization of the Company. 3.3.1 Outstanding Stock. The authorized capital stock of the Company consists entirely of (i) 20,000,000 shares of Common Stock, of which a total of 10,000,000 shares are issued and outstanding and no other shares of any capital stock of the Company are authorized, issued or outstanding. No fractional shares of Common Stock of the Company are issued or outstanding. All issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued, are fully paid and nonassessable, are not subject to any claim, lien, preemptive right, right of first refusal, right of first offer or right of rescission, and have been offered, issued, sold and delivered by the Company in compliance with all registration or qualification requirements (or applicable exemptions therefrom) of all applicable federal and state securities laws. A list of all holders of the Company's outstanding capital stock, and the total number of shares of Company Common Stock owned by each such holder in set forth in Schedule 3.3.1 to the Company Disclosure Letter. The Company has no stockholders other than the CR Stockholders. During the two (2) year period immediately prior to the Agreement Date, the Company has not redeemed, repurchased or otherwise reacquired any shares of its capital stock from any stockholder of the Company. 3.3.2 No Options, Warrants or Rights. Except for Company Options to purchase an aggregate total of 400,000 shares of Company Common Stock that are outstanding on the Agreement Date (all of which Company Options were granted under the Company Option Plan), there are no options, warrants, convertible securities or other securities, calls, commitments, conversion privileges, preemptive rights, rights of first refusal, rights of first offer or other rights or agreements outstanding to purchase or otherwise acquire (whether directly or indirectly) any shares of the Company's authorized but unissued capital stock or any securities convertible into or exchangeable for any shares of the Company's capital stock or obligating the Company to grant, issue, extend, or enter into any such option, warrant, convertible security or other security, call, commitment, conversion privilege, preemptive right, right of first refusal, right of first offer or other right or agreement, and the Company has no liability for any dividends accrued but unpaid. No person or entity holds or has any option, warrant or other right to acquire any issued and outstanding shares of the capital stock of the Company from any holder of shares of the capital stock of the Company. A total of 600,000 shares of Company Common Stock are reserved for issuance under the Company Option Plan, and no shares of Company Common Stock have been issued under the Company Option Plan. A total of 400,000 shares of Company Common Stock are issuable upon the exercise of options granted under the Company Option Plan that are -10- 11 outstanding on the Agreement Date and 200,000 shares of Company Common Stock are reserved for future issuance under the Company Option Plan but have not been issued and are not reserved for issuance upon the exercise of any outstanding options. A list of all holders of the Company Options, the number of the Company Options held by each such person and the exercise price and vesting schedule of each Company Option held by each such person is set forth in Schedule 3.3.2 to the Company Disclosure Letter. During the two (2) year period immediately prior to the Agreement Date, except as may be expressly required by the terms of the Company Option Plan, the Company has not authorized, or taken any action to authorize, the acceleration of the time during which any holder of any option, warrant or other right to purchase or acquire any share of capital stock of the Company may exercise such option, warrant or right. The Company Option Plan has been duly and validly approved by the Company's Board of Directors and stockholders. 3.3.3 No Voting Arrangements or Registration Rights. There are no voting agreements, voting trusts, preemptive rights, rights of first refusal, rights of first offer or other restrictions (other than normal restrictions on transfer under applicable federal and state securities laws) applicable to any of the Company's outstanding securities or to the conversion of any shares of the Company's capital stock in the Merger. The Company is not under any obligation to register under the 1933 Act any of its presently outstanding stock or other securities or any stock or other securities that may be subsequently issued. 3.4 Subsidiaries. The Company does not have any subsidiaries or any interest, direct or indirect, in any corporation, partnership, limited liability company, joint venture or other business entity. 3.5 No Violation of Existing Agreements. Neither the execution and delivery of this Agreement nor any the Company Ancillary Agreement, nor the consummation of the transactions contemplated hereby or thereby, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of: (i) any provision of the Articles of Incorporation or Bylaws of the Company as currently in effect; (ii) any federal, state, local or foreign judgment, writ, decree, order, statute, rule or regulation applicable to the Company or any of its assets or properties; or (iii) any material instrument, agreement, contract, undertaking, understanding, letter of intent, memorandum of understanding or commitment (whether verbal or in writing) to which the Company is a party or by which the Company or any of its assets or properties are bound. The consummation of the Merger by the Company will not require the consent of any third party other than the approval of the Company's stockholders. 3.6 Litigation. There is no action, claim, suit, arbitration, mediation, proceeding, claim or investigation pending against the Company (or against any officer, director, employee or agent of the Company in their capacity as such or relating to their employment, services or relationship with the Company) before any court, administrative agency or arbitrator that, if determined adversely to the Company (or any such officer, director, employee or agent) may have a Material Adverse Effect on the Company, nor, to the Company's knowledge, has any such action, suit, proceeding, arbitration, mediation, claim or investigation been threatened. There is no basis for any person, firm, corporation or other entity, to assert a claim against the Company or HNC based upon: (a) the Company's entering into this Agreement or any Company Ancillary Agreement or consummating the Merger or any of the transactions contemplated by this Agreement or any Company Ancillary Agreement; (b) ownership, rights to ownership, or options, warrants or other -11- 12 rights to acquire ownership, of any shares of the capital stock of the Company; or (c) any rights as a Company stockholder, including any option, warrant or preemptive rights or rights to notice or to vote. There is no judgment, decree, injunction, rule or order of any governmental entity or agency, court or arbitrator outstanding against the Company. 3.7 Taxes. (a) The Company has timely filed all federal, state, local and foreign tax returns required to be filed by it, has timely paid all taxes required to be paid by it in respect of all periods for which returns have been filed, has established an adequate accrual or reserve for the payment of all taxes payable in respect of the periods subsequent to the periods covered by the most recent applicable tax returns, has made all necessary estimated tax payments, and has no material liability for taxes in excess of the amount so paid or accruals or reserves so established. The Company is not delinquent in the payment of any tax or in the filing of any tax returns, and no deficiencies for any tax have been threatened, claimed, proposed or assessed against the Company or any of its officers, employees or agents. The Company has not received any notification that any material issues have been raised by (or are currently pending) before the Internal Revenue Service or any other taxing authority (including but not limited to any sales or use tax authority) regarding the Company and no tax return of the Company has ever been audited by the Internal Revenue Service or any state or local taxing agency or authority. No tax liens have been filed against any assets of the Company. (b) The Company and/or its stockholders have made an effective election (acknowledged by the Internal Revenue Service) to be treated as a subchapter S corporation for the Company's taxable year beginning January 1, 1992 (which was the Company's first taxable year as a subchapter S corporation) pursuant to the provisions of the Code, and have not taken (and, at all times from the Agreement Date until the earlier of (i) the Effective Time or (ii) the termination of this Agreement in accordance with its terms, will not take) any actions inconsistent with the requirements for subchapter S corporations, and such election has not been rescinded, revoked, or terminated (and will not be rescinded, revoked, or terminated at any time prior to the earlier of (i) the Effective Time or (ii) the termination of this Agreement in accordance with its terms). Each of the CR Stockholders is an individual who is a resident citizen of the United States of America, and the Company has never authorized or issued any stock other than Company Common Stock. Neither of the CR Stockholders has taken, caused or permitted, nor will, at any time prior to the earlier of (i) the Effective Time or (ii) the termination of this Agreement in accordance with its terms, take, cause or permit any action inconsistent with the requirements for subchapter S corporations. The Company and/or its stockholders have validly and timely filed all elections and notices with the California Franchise Tax Board and with any other taxing authorities of any other state or jurisdiction having jurisdiction over the Company for income tax purposes that are required by the laws of California or any such other jurisdiction to be filed in order to enable the Company to be taxed as a subchapter S corporation under such tax laws for all tax periods for which the Company has prepared its tax returns on the basis that it was a subchapter S corporation within the meaning of the Code. The Company is not a "personal holding company" within the meaning of Section 542 of the Code. (c) For the purposes of this Section, the terms "TAX" and "TAXES" include all federal, state, local and foreign income, alternative or add-on minimum income, gains, franchise, -12- 13 excise, property, property transfer, sales, use, employment, license, payroll, ad valorem, payroll, documentary, stamp, occupation, recording, value added or transfer taxes, governmental charges, fees, customs duties, levies or assessments (whether payable directly or by withholding), and, with respect to any such taxes, any estimated tax, interest, fines and penalties or additions to tax and interest on such fines, penalties and additions to tax. 3.8 Company Financial Statements. The Company has delivered to HNC as Exhibit K: (i) the Company's audited consolidated balance sheets as of December 31, 1994, 1995 and 1996 and the Company's audited consolidated statements of income, statements of cash flows and statements of stockholders' equity for each of the years ended December 31, 1994, 1995 and 1996, and (ii) the Company's unaudited consolidated balance sheet as of May 31, 1997 (the "BALANCE SHEET"), and the Company's unaudited consolidated statement of operations for the five (5) month period ended May 31, 1997 (all such financial statements of the Company and the notes thereto are hereinafter collectively referred to as the "COMPANY Financial Statements"). The Company Financial Statements (a) are derived from and in accordance with the books and records of the Company, (b) fairly present the financial condition of the Company at the dates therein indicated and the results of operations for the periods therein specified and (c) have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior periods. the Company has no material debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, except for (i) those shown on the Balance Sheet, and (ii) those that may have been incurred after May 31, 1997, the date of the Balance Sheet (the "BALANCE SHEET DATE") in the ordinary course of the Company's business consistent with its past practice, and that are not material in amount, either individually or collectively. All reserves established by the Company and set forth in the Balance Sheet are reasonably adequate. At the Balance Sheet Date, there were no material loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which are not adequately provided for in the Balance Sheet as required by said Statement No. 5. 3.9 Title to Properties. The Company has good and marketable title to all of its assets and properties (including but not limited to those shown on the Balance Sheet), free and clear of all mortgages, deeds of trust, security interests, pledges, liens, title retention devices, collateral assignments, claims, charges, restrictions or other encumbrances of any kind. All machinery, vehicles, equipment and other tangible personal property owned by the Company or used in its business are in good condition and repair, normal wear and tear excepted, and all leases of real or personal property to which the Company is a party are fully effective and afford the Company peaceful and undisturbed leasehold possession of the real or personal property that is the subject of the lease. The Company is not in violation of any zoning, building, safety or environmental ordinance, regulation or requirement or other law or regulation applicable to the operation of its owned or leased properties (the violation of which would result in a Material Adverse Effect on the Company), nor has the Company received any notice of violation of law with which it has not complied. The Company does not own any real property. 3.10 Absence of Certain Changes. Since the Balance Sheet Date, there has not been with respect to the Company any: -13- 14 (a) material adverse change in the condition (financial or otherwise), properties, assets, liabilities, businesses, operations, results of operations or prospects of the Company; (b) amendment or change in the Articles of Incorporation or Bylaws of the Company; (c) incurrence, creation or assumption by the Company of (i) any mortgage, deed of trust, security interest, pledge, lien, title retention device, collateral assignment, claim, charge, restriction or other encumbrance of any kind on any of the assets or properties of the Company; or (ii) any material obligation or liability or any indebtedness for borrowed money; (d) issuance or sale of any debt or equity securities of the Company or any options or other rights to acquire from the Company, directly or indirectly, any debt or equity securities of the Company; (e) payment or discharge of any mortgage, deed of trust, security interest, pledge, lien, title retention device, collateral assignment, claim, charge, restriction or other encumbrance of any kind or any liability, which lien or liability was not either shown on the Balance Sheet or incurred in the ordinary course of the Company's business after the Balance Sheet Date; (f) purchase, license, sale, assignment or other disposition or transfer, or any agreement or other arrangement for the purchase, license, sale, assignment or other disposition or transfer, of any of the assets, properties or goodwill of the Company other than in the ordinary course of the Company's business; (g) damage, destruction or loss, whether or not covered by insurance, having (or likely with the passage of time to have) a Material Adverse Effect on the Company; (h) declaration, setting aside or payment of any dividend on, or the making of any other distribution in respect of, the capital stock of the Company, any split, combination or recapitalization of the capital stock of the Company or any direct or indirect redemption, purchase or other acquisition of the capital stock of the Company or any change in any rights, preferences, privileges or restrictions of any outstanding security of the Company; (i) change or increase in the compensation payable or to become payable to any of the officers or employees of the Company, or any bonus or pension, insurance or other benefit payment or arrangement (including without limitation stock awards, stock appreciation rights or stock option grants) made to or with any of such officers, employees or agents except in connection with normal employee salary or performance reviews or otherwise in the ordinary course of business consistent with the Company's past practice; (j) change with respect to the management, supervisory or other key personnel of the Company; (k) obligation or liability incurred by the Company to any of its officers, directors or stockholders except normal compensation and expense allowances payable to officers in the ordinary course of business consistent with the Company's past practice; -14- 15 (l) making of any loan, advance or capital contribution to, or any investment in, any officer, director or stockholder of the Company or any firm or business enterprise in which any such person had a direct or indirect material interest at the time of such loan, advance, capital contribution or investment; (m) entering into, amendment of, relinquishment, termination or non-renewal by the Company of any contract, lease, transaction, commitment or other right or obligation other than in the ordinary course of its business or any written or oral indication or assertion by the other party thereto of problems with the Company's services or performance under such contract, lease, transaction, commitment or other right or obligation or its desire to so amend, relinquish, terminate or not renew any such contract, lease, transaction, commitment or other right or obligation; (n) material change in the manner in which the Company extends discounts or credits to customers or otherwise deals with its customers; (o) entering into by the Company of any transaction, contract or agreement or the conduct of business or operations other than in the ordinary course of its business consistent with past practices; (p) any transfer or grant of a right under any Company IP Rights (as defined in Section 3.13 below), other than those transferred or granted in the ordinary course of the Company's business consistent with the Company's past practice; or (q) any agreement or arrangement made by the Company to take any action which, if taken prior to the date of this Agreement, would have made any representation or warranty of the Company set forth in this Agreement untrue or incorrect as of the date when made. 3.11 Contracts and Commitments. Schedule 3.11 to the Company Disclosure Letter sets forth a list of each of the following written or oral contracts, agreements, commitments or other instruments to which the Company is a party or to which the Company or any of its assets or properties is bound: (a) consulting or similar agreement under which the Company provides any advice or services to a customer of the Company for an annual compensation to the Company of $5,000 per year or more; (b) continuing contract for the future purchase, sale, license, provision or manufacture of products, material, supplies, equipment or services requiring payment to or from the Company in an amount in excess of $35,000 per annum which is not terminable on ninety (90) days' or less notice without cost or other liability to the Company or in which the Company has granted or received manufacturing rights, most favored customer pricing provisions or exclusive marketing rights relating to any product or services, group of products or services or territory; (c) contract providing for the development of software for the Company, or the license of software to the Company, which software is used or incorporated in any products currently distributed by the Company or to provide any services currently provided by the Company or is contemplated to be used or incorporated in any products to be distributed or -15- 16 services to be provided by the Company (other than software generally available to the public at a per copy license fee of less than $1,000 per copy); (d) joint venture or partnership contract or agreement or other agreement which has involved or is reasonably expected to involve a sharing of profits or losses in excess of $25,000 per annum with any other party; (e) contract or commitment for the employment of any officer, employee or consultant of the Company or any other type of contract or understanding with any officer, employee or consultant of the Company that is not immediately terminable by the Company without cost or other liability; (f) indenture, mortgage, trust deed, promissory note, loan agreement, guarantee or other agreement or commitment for the borrowing of money, for a line of credit or for a leasing transaction of a type required to be capitalized in accordance with Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board; (g) lease or other agreement under which the Company is lessee of or holds or operates any items of tangible personal property or real property owned by any third party and under which payments to such third party exceed $10,000 per annum; (h) agreement or arrangement for the sale of any assets, properties, services or rights having a value in excess of $10,000, other than in the ordinary course of the Company's business consistent with its past practice; (i) agreement that restricts the Company from engaging in any aspect of its business, from participating or competing in any line of business or that restricts the Company from engaging in any business in any geographic area; (j) Company IP Rights Agreement (as defined in Section 3.13); (k) any agreement relating to the sale, issuance, grant, exercise, award, purchase, repurchase or redemption of any shares of capital stock or other securities of the Company or any options, warrants or other rights to purchase or otherwise acquire any such shares of stock, other securities or options, warrants or other rights therefor; or (l) contract with or commitment to any labor union; (m) any other agreement, contract, commitment or instrument that is material to the business of the Company or that involves a commitment by the Company in excess of $50,000. A copy of each agreement or document required by this Section to be listed on Schedule 3.11 to the Company Disclosure Letter (collectively, the "COMPANY MATERIAL AGREEMENTS") has been delivered to HNC's counsel. No consent or approval of any third party is required to ensure that, following the Effective Time, any Company Material Agreement will continue to be in full force and effect without any breach or violation thereof caused by virtue of the Merger or by any other transaction called for by this Agreement or any Company Ancillary Agreement. -16- 17 3.12 No Default. The Company is not in breach or default under any Company Material Agreement. The Company is not a party to any contract, agreement or arrangement which has had, or could reasonably be expected to have, a Material Adverse Effect on the Company. The Company does not have any material liability for renegotiation of government contracts or subcontracts, if any. 3.13 Intellectual Property. 3.13.1 The Company owns, or has the right to use, sell or license all Intellectual Property Rights (as defined below) necessary or required for the conduct of its business as presently conducted and as presently proposed to be conducted (such Intellectual Property Rights being hereinafter collectively referred to as the "COMPANY IP RIGHTS"), and such rights to use, sell or license are sufficient for such conduct of its business. 3.13.2 The execution, delivery and performance of this Agreement, the Agreement of Merger and the consummation of the Merger and the other transactions contemplated hereby and/or by the Company Ancillary Agreements and/or the CR Stockholder Ancillary Agreements will not constitute a material breach of or default under any instrument, contract, license or other agreement governing any Company IP Right (the "COMPANY IP RIGHTS AGREEMENTS"), will not cause the forfeiture or termination or give rise to a right of forfeiture or termination, of any Company IP Right or materially impair the right of the Company or the Surviving Corporation to use, sell or license any Company IP Right or portion thereof (except where such breach, forfeiture or termination would not have a Material Adverse Effect on the Company or the Surviving Corporation). There are no royalties, honoraria, fees or other payments payable by the Company to any person by reason of the ownership, use, license, sale or disposition of the Company IP Rights. 3.13.3 Neither the manufacture, marketing, license, sale, furnishing or intended use of any product or service currently licensed, utilized, sold, provided or furnished by the Company or currently under development by the Company violates any license or agreement between the Company and any third party or infringes any Intellectual Property Right of any other party; and there is no pending or, to the knowledge of the Company, threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any Company IP Right nor, to the knowledge of the Company, is there any basis for any such claim, nor has the Company received any notice asserting that any Company IP Right or the proposed use, sale, license or disposition thereof conflicts or will conflict with the rights of any other party, nor, to the knowledge of the Company, is there any basis for any such assertion. To the knowledge of the Company, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement, noncompetition agreement, non-solicitation agreement or any other contract or agreement, or any restrictive covenant relating to the right of any such employee to be employed thereby, or to use trade secrets or proprietary information of others, and the employment of such employees does not subject the Company to any liability. 3.13.4 The Company has taken reasonable and practicable steps designed to protect, preserve and maintain the secrecy and confidentiality of the Company IP Rights and all the Company's proprietary rights therein. All officers, employees and consultants of the Company having access to proprietary information have executed and delivered to the Company an agreement regarding the protection of such proprietary information and the assignment of -17- 18 inventions to the Company; and copies of the form of all such agreements have been delivered to HNC's counsel. 3.13.5 Schedule 3.13 to the Company Disclosure Letter contains a list of all Company IP Rights and all worldwide applications, registrations, filings and other formal actions made or taken pursuant to federal, state and foreign laws by the Company to secure, perfect or protect its interest in the Company IP Rights, including, without limitation, all patents, patent applications, copyrights (whether or not registered), copyright applications, trademarks and service marks (whether or not registered) and trademark and service mark applications. 3.13.6 As used herein, the term "INTELLECTUAL PROPERTY RIGHTS" means, collectively, all worldwide industrial and intellectual property rights, including, without limitation, patents, patent applications, patent rights, trademarks, trademark registrations and applications therefor, trade dress rights, trade names, service marks, service mark registrations and applications therefor, copyrights, copyright registrations and applications therefor, mask work rights, mask work registrations and applications therefor, franchises, licenses, inventions, trade secrets, know-how, customer lists, supplier lists, proprietary processes and formulae, software source and object code, algorithms, architectures, structures, screen displays, layouts, inventions, development tools, designs, blueprints, specifications, technical drawings and all documentation and media constituting, describing or relating to the above, including, without limitation, manuals, programmers' notes, memoranda and records. 3.13.7 The Company has not agreed to indemnify any person for any infringement of any Intellectual Property Rights of any third party by any product or service that has been sold, licensed, leased, supplied or provided by the Company. 3.14 Compliance with Laws. The Company has complied, and is now and at the Closing Date will be in compliance, in all material respects, with all applicable federal, state, local or foreign laws, ordinances, regulations, and rules, and all orders, writs, injunctions, awards, judgments, and decrees applicable to it or to its assets, properties, and business. The Company holds all permits, licenses and approvals from, and has made all filings with, third parties, including government agencies and authorities, that are necessary in connection with its present business. 3.15 Certain Transactions and Agreements. None of the officers, directors, employees or stockholders of the Company, nor any member of their immediate families, has any direct or indirect ownership interest in any firm or corporation that competes with, or does business with, or has any contractual arrangement with, the Company (except with respect to any interest in less than one percent (1%) of the stock of any corporation whose stock is publicly traded). None of said officers, directors, employees or stockholders or any member of their immediate families, is directly or indirectly interested in any contract or informal arrangement with the Company, except for normal compensation for services as an officer, director or employee thereof that have been disclosed to HNC and except for agreements related to the purchase of the stock of the Company by, or the grant of Company Options to, such persons. None of said officers, directors, employees or stockholders or family members has any interest in any property, real or personal, tangible or intangible (including but not limited to any the Company IP Rights or any other Intellectual Property Rights) that is used in or that pertains to the business of the Company, except for the normal rights of a stockholder. -18- 19 3.16 Employees, ERISA and Other Compliance. 3.16.1 The Company is in compliance in all material respects with all applicable laws, agreements and contracts relating to employment, employment practices, wages, hours, and terms and conditions of employment, including, but not limited to, employee compensation matters. A list of all employees, officers and consultants of the Company and their current compensation is set forth on Schedule 3.16.1 to the Company Disclosure Letter. The Company does not have any employment contracts or consulting agreements currently in effect that are not terminable at will (other than agreements with the sole purpose of providing for the confidentiality of proprietary information or assignment of inventions). 3.16.2 The Company (i) has never been and is not now subject to a union organizing effort, (ii) is not subject to any collective bargaining agreement with respect to any of its employees, (iii) is not subject to any other contract, written or oral, with any trade or labor union, employees' association or similar organization and (iv) does not have any current labor disputes. The Company has good labor relations, and has no knowledge of any facts indicating that the consummation of the transactions contemplated hereby will have a material adverse effect on such labor relations, and has no knowledge that any of its key employees intends to leave its employ. 3.16.3 The Company has no pension plan which constitutes, or has since the enactment of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") constituted, a "multiemployer plan" as defined in Section 3(37) of ERISA. No Company pension plans are subject to Title IV of ERISA. 3.16.4 Schedule 3.16.4 to the Company Disclosure Letter lists each employment, severance or other similar contract, arrangement or policy, each "employee benefit plan" as defined in Section 3(3) of ERISA and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' benefits, vacation benefits, severance benefits, disability benefits, death benefits, hospitalization benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits for employees, consultants or directors which is entered into, maintained or contributed to by the Company and covers any employee or former employee of the Company. Such contracts, plans and arrangements as are described in this Section 3.16.4 are hereinafter collectively referred to as COMPANY BENEFIT Arrangements." Each Company Benefit Arrangement has been maintained in compliance in all material respects with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Company Benefit Arrangement. The Company has delivered to HNC or its counsel a complete and correct copy or description of each Company Benefit Arrangement. 3.16.5 There has been no amendment to, written interpretation or announcement (whether or not written) by the Company relating to, or change in employee participation or coverage under, any Company Benefit Arrangement that would increase materially the expense of maintaining such Company Benefit Arrangement above the level of the expense incurred in respect thereof for the Company's fiscal year ended December 31, 1996. -19- 20 3.16.6 The group health plans (as defined in Section 4980B(g) of the Code) that benefit employees of the Company are in compliance, in all material respects, with the continuation coverage requirements of Section 4980B of the Code as such requirements affect the Company and its employees. As of the Closing Date, there will be no material outstanding, uncorrected violations under the Consolidation Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), with respect to any of the Company Benefit Arrangements, covered employees, or qualified beneficiaries that could result in a Material Adverse Effect on the Company, or in a material adverse effect on the business, operations or financial condition of HNC. 3.16.7 No benefit payable or which may become payable by the Company pursuant to any Company Benefit Arrangement or as a result of or arising under this Agreement or the Agreement of Merger will constitute an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code) which is subject to the imposition of an excise Tax under Section 4999 of the Code or which would not be deductible by reason of Section 280G of the Code. the Company is not a party to any: (a) agreement (other than as described in (b) below) with any executive officer or other key employee thereof (i) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company in the nature of any of the transactions contemplated by this Agreement, the Agreement of Merger or any Company Ancillary Agreement, (ii) providing any term of employment or compensation guarantee, or (iii) providing severance benefits or other benefits after the termination of employment of such employee regardless of the reason for such termination of employment, or (b) agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be materially increased, or the vesting of benefits of which will be materially accelerated, by the occurrence of any of the transactions contemplated by this Agreement, the Agreement of Merger or any Company Ancillary Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement, the Agreement of Merger or any Company Ancillary Agreement. 3.17 Corporate Documents. The Company has made available to HNC for examination all documents and information listed in the Company Disclosure Letter or in any schedule thereto or in any other exhibit or schedule called for by this Agreement which have been requested by HNC's legal counsel, including, without limitation, the following: (a) copies of the Company's Articles of Incorporation and Bylaws as currently in effect; (b) the Company's Minute Book containing all records of all proceedings, consents, actions, and meetings of the Company's stockholders, board of directors and any committees thereof; (c) the Company's stock ledger and journal reflecting all stock issuances and transfers; (d) all permits, orders, and consents issued by any regulatory agency with respect to the Company, or any securities of the Company, and all applications for such permits, orders, and consents; and (e) all agreements of the Company required to be listed in Schedule 3.11 to the Company Disclosure Letter. 3.18 No Brokers. Neither the Company nor any affiliate of the Company is obligated for the payment of any fees or expenses of any investment banker, broker, finder or similar party in connection with the origin, negotiation or execution of this Agreement or the Agreement of Merger or in connection with any transaction contemplated hereby or thereby, and HNC will incur not liability to any such investment banker, broker, finder or similar party as a result of any act or -20- 21 omission of the Company, any of its employees, officers, directors, stockholders, agents or affiliates. 3.19 Books and Records. 3.19.1 The books, records and accounts of the Company (a) are in all material respects true, complete and correct, (b) have been maintained in accordance with good business practices on a basis consistent with prior years, (c) are stated in reasonable detail and accurately and fairly reflect the transactions and dispositions of the assets of the Company, and (d) accurately and fairly reflect the basis for the Company Financial Statements. 3.19.2 The Company has devised and maintains a system of internal accounting controls sufficient to provide reasonable assurances that: (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (ii) to maintain accountability for assets; and (c) the amount recorded for assets on the books and records of the Company is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.20 Insurance. During the prior three years, the Company has maintained, and the Company now maintains, fire and casualty, general liability, business interruption, product liability, errors and omissions, and sprinkler and water damage insurance with respective insurers, and in the respective amounts, set forth in Schedule 3.20 to the Company Disclosure Letter. 3.21 Environmental Matters. 3.21.1 Definitions. The following capitalized terms shall have the meanings set forth below: (a) "ENVIRONMENTAL LAWS" means all federal, state, local and foreign laws and regulations relating to pollution or protection of human health or the environment (including without limitation ambient air, surface water, ground water, land surface or subsurface strata), including without limitation laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Substances (as defined below), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances. (b) "HAZARDOUS MATERIALS" means (i) any pollutant, contaminant, chemical, industrial, toxic, hazardous or noxious substance or waste which is regulated by the laws of any state, local, federal or other governmental authority or jurisdiction, including but no limited to the State of California and the United States Government, and includes but is not limited to (a) any oil or petroleum compounds, flammable substances, explosives, radioactive materials, or any other materials or pollutants which pose a hazard to persons or cause any real property to be in violation of any Environmental Laws, (b) to the extent so regulated, asbestos or any asbestos-containing material of any kind or character, (c) polychlorinated biphenyls, as regulated by the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., (d) any materials or substances designated as "hazardous substances" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. -21- 22 section. 1251 et seq., (e) "economic poison," as defined in the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 135 et seq., (f) "chemical substance," "new chemical substance," or "hazardous chemical substance or mixture" pursuant to Sections 3, 6 and 7 of the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., (g) "hazardous substances" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., and (h) "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq., and (ii) as of any date of determination, any additional substances or materials which now or hereafter may be incorporated in or added to the definition of "economic poison," "chemical substance," "new chemical substance," "hazardous chemical substance or mixture," "hazardous waste," "hazardous substance" or "toxic substance" or similar substance for purposes of any Environmental Law. 3.21.2 Environmental Obligations. Each facility or site at which the Company or any of its predecessors-in-interest conducts any business or has previously conducted any business (each a "FACILITY", collectively, the "FACILITIES") is not (and with respect to each such previously owned, used or operated Facility was not, when the Company or its predecessors left such Facility) in violation of any Environmental Laws, including any laws or regulations relating to industrial hygiene, disposal of Hazardous Substances or the environmental conditions on or under such properties or facilities, including but not limited to, soil and groundwater conditions. During the time that the Company or any of its predecessors-in-interest have owned, leased or occupied any Facility, the Company or its predecessors have not used, generated, manufactured or stored on or under any part of any such Facility, or transported to or from any part of any Facility, any Hazardous Substances in violation of any Environmental Laws. There has been no presence, disposal, release or threatened release of any Hazardous Substances on, from or under any part of the Facility and no Hazardous Substances are currently present in, on, under or about any of the Facilities or their groundwater or soil. 3.21.3 Environmental Obligations. The Company is conducting, and at all times has conducted, its business and operations, and has occupied and used the Facilities in accordance with and in compliance with all Environmental Laws so as not to give rise to liability under any Environmental Laws. To the Company's knowledge (including without limitation the knowledge of any officer or manager of the Company responsible for environmental compliance issues (as well as senior management), there is no reasonable basis to believe or suspect that the Company's business has been conducted or is being conducted in violation of any Environmental Laws, and the Company does not have any knowledge of pending or proposed changes to any Environmental Laws which would require any changes in any of the Company's Facilities, equipment, operations or procedures or affect such business or the cost to the Company of conducting its business as now conducted. 3.21.4 Compliance, Disclosure of Environmental Conditions. No conditions, circumstances or activities have existed or currently exist with respect to the Facilities or the business or property of the Company, or property which could reasonably be expected to result in recovery by any governmental authority or other person of any remedial or removal costs, response costs, natural resource damages or other costs, expenses or damages arising from or relating to any alleged injury or threat of injury or harm to public health, safety or the environment. No conditions, circumstances or activities have existed or currently exist with respect to the Company's business or property (including without limitation the Facilities) that could reasonably -22- 23 be expected to subject the Company or HNC to any administrative, civil or criminal liability, injunctive relief, penalty or obligation, whether under common law, equitable theory, or pursuant to Environmental Laws, or which in the future could reasonably be expected to result in or may have in the past resulted in actual or threatened damage, harm, or impairment of, or a threat to, public health, safety or the environment. 3.21.5 No Outstanding Orders or Actions. There are no outstanding orders, injunctions or decrees against the Company, nor are there any pending or threatened investigations of any kind against the Company, concerning any environmental, public health, safety or land use matters or other Environmental Laws, including, but not limited to, the emission, discharge or release of hazardous or toxic substances or wastes, pollutants, or contaminants into the environment or work place, or the management of hazardous or toxic substances or wastes, pollutants or contaminants. There are no actions, suits or administrative, arbitral or other proceedings alleged, claimed, pending, affecting or, to the Company's knowledge threatened against the Company at law or in equity with respect to any environmental, public health, safety or land use matters or other Environmental Laws, and to the Company's knowledge, there are no existing grounds on which any such action, suit or proceedings might be commenced. 3.21.6 No Waste Disposal. Any chemicals and chemical products that are used for the conduct of Company's business have not been processed, have not been and are not intended to be discarded, and are not waste or waste materials. All Hazardous Substances and waste materials generated, used, transported, treated, stored or disposed of in connection with the Company's business are handled, stored, treated and disposed of in accordance with applicable Environmental Laws. Schedule 3.21 of the Company Disclosure Letter describes all Hazardous Materials present on properties leased or owned by Company or which has been treated, stored or disposed of in connection with the business of the Company on such properties. At no time has any radioactive waste been treated on any properties leased or owned by Company. 3.22 Disclosure. Neither this Agreement, its exhibits and schedules, nor any of the certificates or documents to be delivered by the Company to HNC under this Agreement, or any other documents delivered by the Company to HNC regarding the Company's business (including without limitation any information regarding the Company to be contained in the Proxy Statement, or used to prepare the Proxy Statement), taken together, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which such statements were made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF HNC AND SUB HNC and Sub hereby represent and warrant that, except as set forth in the letter addressed to the Company from HNC and dated as of the Agreement Date which has been delivered by HNC to the Company concurrently herewith (the "HNC DISCLOSURE LETTER"), each of the following representations, warranties and statements in this Article 4 are true and correct: 4.1 Organization and Good Standing. HNC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted -23- 24 and as proposed to be conducted. Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power and authority to own, operate and lease its properties and to carry on its business as proposed to be conducted. 4.2 Power, Authorization and Validity. 4.2.1 HNC has the right, power and authority to enter into, execute and perform its obligations under this Agreement and the HNC Ancillary Agreements. The execution, delivery and performance of this Agreement and the HNC Ancillary Agreements by HNC have been duly and validly approved and authorized by HNC's Board of Directors. The issuance of the shares of HNC Common Stock to be issued in the Merger requires the approval of HNC's stockholders. Sub has the right, power and authority to execute, deliver and perform its obligations under this Agreement, and upon approval of the Merger and the Agreement of Merger by Sub's sole stockholder, Sub will have the right, power and authority to execute, deliver and perform the Agreement of Merger and all other Sub Ancillary Agreements. The execution, delivery and performance of this Agreement, the Agreement of Merger and all other Sub Ancillary Agreements by Sub have been duly and validly approved and authorized by Sub's Board of Directors. 4.2.2 No filing, authorization, consent, approval or order, governmental or otherwise, is necessary or required to enable HNC or Sub to enter into, and to perform its obligations under, this Agreement, the HNC Ancillary Agreements or the Sub Ancillary Agreements, respectively, except for (a) the filing with the SEC of the Proxy Statement relating to the meeting of the stockholders of HNC to be held with respect to the issuance of shares of HNC Common Stock and the HNC Options in connection with the Merger and the SEC's approval of such Proxy Statement (or failure to respond or object to the distribution of such Proxy Statement within the time required by applicable law and regulations), (b) the filing by the Company of such reports and information with the SEC under the 1934 Act and the rules and regulations promulgated by the SEC thereunder, as may be required in connection with this Agreement, the Merger and the transactions contemplated hereby; (c) the filing with the SEC of a Form D, if so elected by HNC; (d) the filing of the Agreement of Merger (or the Certificate of Merger) with the Delaware Secretary of State and any such further documents as may be required under the Delaware General Corporation Law to effect the Merger; (e) the filing of the Agreement of Merger (and related officers' certificates) with the California Secretary of State and any such further documents as may be required under the California Corporations Code to effect the Merger; (f) such filings and notifications as may be necessary under the HSR Act and the expiration of applicable waiting periods under the HSR Act; (g) such other filings as may be required by the Nasdaq National Market System with respect to the HNC Merger Shares to be issued in the Merger and the Company Options to be assumed by HNC in the Merger; (h) the approval of the issuance of shares of HNC Common Stock in the Merger by the stockholders of HNC in accordance with applicable law, HNC's Certificate of Incorporation and Bylaws, and the approval of this Agreement, the Agreement of Merger and the Merger by the stockholder of Sub; and (i) such other filings, if any, as may be required to comply with federal and state securities laws. 4.2.3 This Agreement and the HNC Ancillary Agreements are, or when executed by HNC will be, valid and binding obligations of HNC, enforceable in accordance with their respective terms, except as to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific -24- 25 performance, injunctive relief and other equitable remedies. This Agreement and the Sub Ancillary Agreements are, or when executed by Sub will be, valid and binding obligations of Sub, enforceable in accordance with their respective terms, except as to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies. 4.3 Capital Structure. 4.3.1 Stock. The authorized capital stock of HNC consists of 50,000,000 shares of HNC Common Stock, $0.001 par value per share, and 4,000,000 shares of Preferred Stock, $0.001 par value per share (the "HNC PREFERRED STOCK"). At the close of business on June 30, 1997, 19,420,732 shares of HNC Common Stock were issued and outstanding. No shares of HNC Preferred Stock are issued or outstanding. All outstanding shares of HNC Common Stock are validly issued, fully paid and nonassessable and not subject to preemptive rights. As of the date hereof, the authorized capital stock of Sub consists of 100 shares of Common Stock, $0.001 par value per share, of which 100 shares are validly issued, fully paid and nonassessable, all of which are owned by HNC. 4.3.2 Options. As of the Agreement Date, options to purchase an aggregate of approximately 3,635,131 shares of HNC Common Stock are outstanding under all stock option and equity incentive plans of HNC. 4.3.3 No Other Options, Etc. Except for the HNC stock options described in Section 4.3.2 above, options to be potentially granted to new employees pursuant to outstanding employment offer letters, and rights of HNC employees to subscribe for shares of HNC Common Stock under the HNC 1995 Employee Stock Purchase Plan, as of the Agreement Date, there are no outstanding options, warrants, convertible or other securities of HNC entitling any party to purchase or acquire shares of HNC Common Stock. 4.4 No Violation of Material Agreements. Neither the execution and delivery of this Agreement nor any HNC Ancillary Agreement, nor the consummation of the transactions contemplated by this Agreement or any HNC Ancillary Agreement, will conflict with, or (with or without notice or lapse of time, or both) result in: (a) a termination, breach, impairment or violation of (i) any provision of the Certificate of Incorporation or Bylaws of HNC, as currently in effect or (ii) any federal, state, local or foreign judgment, writ, decree, order, statute, rule or regulation to which HNC or its assets or properties is subject; or (b) a termination, or a material breach, impairment or violation, of any material instrument or contract to which HNC is a party or by which HNC or its properties are bound. 4.5 Disclosure. HNC has made available to the Company a disclosure package consisting of (i) HNC's annual report on Form 10-K (as subsequently amended on Form 10-K/A) for HNC's fiscal year ended December 31, 1996; (ii) all Form 10-Q's that have been filed by HNC with the SEC prior to the Agreement Date with respect to any fiscal quarter of the Company's fiscal year ending December 31, 1997; (iii) the Company's Proxy Statement for its annual meeting of stockholders held on May 22, 1997; and (iv) the Company's Registration Statement on Form S-3 dated March 4, 1997 (collectively, the "HNC DISCLOSURE PACKAGE"). As of their respective filing dates, documents filed by HNC with the SEC and included in the HNC Disclosure Package -25- 26 complied in all material respects with the requirements of the 1933 Act or the 1934 Act, as the case may be. The HNC Disclosure Package, this Agreement, the exhibits and schedules hereto, and any certificates or documents to be delivered to the Company pursuant to this Agreement, when taken together, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which such statements were made, not misleading in any material respect. 4.6 Validity of Shares. The shares of HNC Common Stock to be issued pursuant to the Merger will, when issued: (a) be duly authorized, validly issued, fully paid and nonassessable and free of liens and encumbrances created by HNC, and (b) will be free and clear of any liens and encumbrances except for applicable securities law restrictions on transfer, including those imposed by Regulation D or Section 4(2) of the 1933 Act and Rule 144 promulgated under the 1933 Act, under applicable "blue sky" state securities laws and under any Company Affiliate Agreement to be executed pursuant to this Agreement. 4.7 No Brokers. HNC is not obligated for the payment of any fees or expenses of any investment banker, broker, finder or similar party in connection with the origin, negotiation or execution of this Agreement or the Agreement of Merger or in connection with any transaction contemplated hereby or thereby for which the Company or either of the CR Stockholders will incur any liability. 4.8 No Material Adverse Change. Since the date of HNC's Report on Form 10-Q for its fiscal quarter ended March 31, 1996, there has been no material adverse change in the business, operations or financial condition of HNC and its subsidiaries, taken as a whole. 4.9 No Violation of Existing Agreements. HNC has not received notice from any third party that it is or would, with the passage of time, be (i) in material violation of any provision of the Certificate of Incorporation or Bylaws of HNC; or (ii) in default or violation of any material term, condition or provision of (a) any material judgment, decree, order, injunction or stipulation applicable to HNC or (b) any currently effective material agreement, note, mortgage, indenture, contract, lease or instrument, permit, concession, franchise or license, which default or violation would have a material adverse effect on the business, operations or financial condition of HNC and its subsidiaries, taken as a whole. 4.10 Litigation. There is no action, claim, suit, arbitration, proceeding, claim or investigation pending against HNC before any court, administrative agency or arbitrator that, if determined adversely to HNC, is likely to have a material adverse effect on HNC's financial condition or results of operation, nor, to HNC's knowledge, has any such action, suit, proceeding, arbitration, claim or investigation been threatened. 4.11 Customer Relationship. As of the Agreement Date, HNC has not received notification from any Significant Customer (as defined below) that such Significant Customer intends to terminate any agreement or contract that such Significant Customer has with HNC or any of HNC's subsidiaries, where such termination would have a material adverse effect on the business, operations or financial condition of HNC and its subsidiaries, taken as a whole. As used herein, a "SIGNIFICANT CUSTOMER" means any of the customers of HNC or any of its subsidiaries during HNC's fiscal year ended December 31, 1996 ("FISCAL 1996") who is among the top five -26- 27 customers of HNC and its subsidiaries in Fiscal 1996 in terms of the revenue derived per customer that is reflected on HNC's income statement for Fiscal 1996. ARTICLE 5 PRE-CLOSING COVENANTS OF THE COMPANY AND THE CR STOCKHOLDERS During the period from the Agreement Date until the earlier to occur of (i) the Effective Time or (ii) the termination of this Agreement in accordance with Section 10, the Company and the CR Stockholders covenant and agree with HNC as follows: 5.1 Advice of Changes. The Company will promptly advise HNC in writing (a) of any event occurring subsequent to the Agreement Date that would render any representation or warranty of the Company contained in Section 3 of this Agreement, if made on or as of the date of such event or the Closing Date, untrue or inaccurate in any material respect and (b) of any material adverse change in the Company's business, results of operations or financial condition. The Company will deliver to HNC within fifteen (15) days after the end of each monthly accounting period ending after the Agreement Date and before the Closing Date, an unaudited balance sheet and statement of operations, which financial statements will be prepared in the ordinary course of its business, consistent with its past practice in accordance with the Company's books and records and generally accepted accounting principles and will fairly present the financial position of the Company as of their respective dates and the results of the Company's operations for the periods then ended. 5.2 Maintenance of Business. The Company will carry on and preserve its business and its relationships with customers, suppliers, employees and others in substantially the same manner as it has prior to the date hereof. If the Company becomes aware of a material deterioration in the relationship with any key customer, key supplier or key employee, it will promptly bring such information to the attention of HNC in writing and, if requested by HNC, will exert reasonable commercial efforts to promptly restore the relationship. 5.3 Conduct of Business. The Company will continue to conduct its business and maintain its business relationships in the ordinary and usual course and will not, without the prior written consent and approval (which may be given verbally to be promptly followed by written confirmation) of the President or Chief Financial Officer of HNC: (a) borrow or lend any money other than advances to employees for travel and expenses that are incurred in the ordinary course of the Company's business consistent with the Company's past practice; (b) enter into any transaction or agreement not in the ordinary course of the Company's business consistent with the Company's past practice; (c) encumber or permit to be encumbered any of its assets; (d) sell, transfer or dispose of any of its assets except in the ordinary course of the Company's business consistent with the Company's past practice; -27- 28 (e) enter into any material lease or contract for the purchase or sale of any property, whether real or personal, tangible or intangible except for the lease of offices at the Millennium Center in Irving, Texas for an approximately five (5) year term, a draft of which lease has been previously delivered to HNC; (f) pay any bonus, increased salary or special remuneration to any officer, employee or consultant (except for normal salary increases consistent with the Company's past practices not to exceed 5% of such officer's, employee's or consultant's base annual compensation, and except pursuant to existing arrangements previously disclosed to and approved in writing by HNC) or enter into any new employment or consulting agreement with any such person; (g) change any of its accounting methods; (h) declare, set aside or pay any cash or stock dividend or other distribution in respect of its capital stock, redeem, repurchase or otherwise acquire any of its capital stock or other securities pay or distribute any cash or property to any Company stockholder or securityholder or make any other cash payment to any shareholder or securityholders of the Company that is unusual, extraordinary, or not made in the ordinary course of the Company's business consistent with its past practice; (i) amend or terminate any contract, agreement or license to which it is a party except those amended or terminated in the ordinary course of the Company's business, consistent with its past practice, and which are not material in amount or effect; (j) guarantee or act as a surety for any obligation of any third party; (k) waive or release any material right or claim except in the ordinary course of its any mortgage, deeds of trust, security interest, pledge, lien, title retention device, collateral assignment, claim, charge, restriction or other encumbrance of any kind, consistent with the Company's past practice; (l) issue, sell, create or authorize any shares of its capital stock of any class or series or any other of its securities, or issue, grant or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments to issue shares of its capital stock or securities ultimately exchangeable for, or convertible into, shares of its capital stock; provided, however, that notwithstanding the foregoing, the Company may issue shares of Company Common Stock issuable upon the exercise of the Company Options that are outstanding on the Agreement Date in accordance with their terms as now in effect; (m) subdivide or split or combine or reverse split the outstanding shares of its capital stock of any class or enter into any recapitalization affecting the number of outstanding shares of its capital stock of any class or affecting any other of its securities; (n) merge, consolidate or reorganize with, or acquire, any corporation, partnership, limited liability company or any other entity or enter into any negotiations, discussions or agreement for such purpose; (o) amend its Articles of Incorporation or Bylaws; -28- 29 (p) license any of its technology or intellectual property except in the ordinary course of its business consistent with past practice; (q) change any insurance coverage or issue any certificates of insurance; (r) agree to any audit assessment by any tax authority or file any federal or state income or franchise tax return unless copies of such returns have first been delivered to HNC for its review prior to filing; (s) modify or change the exercise or conversion rights or exercise or purchase prices of any capital stock of the Company, any Company stock options, warrants or other Company securities, or accelerate or otherwise modify (i) the right to exercise any option, warrant or other right to purchase any capital stock or other securities of the Company or (ii) the vesting or release of any shares of capital stock or other securities of the Company from any repurchase options or rights of refusal held by the Company or any other party or any other restrictions unless such accelerations/modifications are expressly required and mandated by the terms of a formal written agreement or plan that was entered into prior to the execution of the Plan by HNC and the Company; or (t) purchase or otherwise acquire, or sell or otherwise dispose of: (i) any shares of HNC Common Stock or other HNC securities or (ii) any securities whose value is derived from or determined with reference to, in whole or in part, the value of HNC stock or other HNC securities. (u) agree to do any of the things described in the preceding clauses 5.3(a) through 5.3(t). 5.4 Company Stockholder Approval; Stockholder Agreements. The Company has obtained the unanimous written consent of its stockholders, in compliance with applicable law and the Company's Articles of Incorporation and Bylaws, both as amended, approving this Agreement, the Agreement of Merger, the Merger, and related matters (such Company stockholders' written consent is hereinafter referred to as the "COMPANY STOCKHOLDER VOTE"). The Company's Board of Directors and the CR Stockholders will not take any action whatsoever to revoke, modify, invalidate, or withdraw the Company Stockholder Vote. Concurrently with the execution of this Agreement, each of the CR Stockholders has executed and delivered to HNC a Company Stockholder Agreement in the form attached hereto as Exhibit I agreeing, among other things, to vote in favor of the Merger and against any competing proposals. 5.5 Letter of the Company's Accountants. The Company will use its best efforts to cause to be delivered to HNC a letter of Deloitte & Touche LLP, the Company's independent accountants, addressed to HNC and dated as of a date within two (2) business days before the date on which (i) HNC's Proxy Statement is filed with the SEC and within two (2) business days before the date on which HNC (or its agent) mails the Proxy Statement to HNC's stockholders, in form and substance reasonably satisfactory to HNC and customary in scope and substance for letters delivered by independent accountants in connection with registration statements. 5.6 Assistance With Proxy Statement. The Company will promptly provide all information relating to its business or operations necessary for inclusion in the Proxy Statement to -29- 30 satisfy all requirement of applicable federal and state securities laws. The Company will be solely responsible for any statement, information or omission in the Proxy Statement relating to the Company or its affiliates that is based upon (and accurately reflects) written information provided by the Company. 5.7 Regulatory Approvals. The Company will promptly execute and file, or join in the execution and filing, of any application, notification (including without limitation any notification or provision of information, if any, that may be required under the HSR Act) or any other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which HNC may reasonably request, in connection with the consummation of the Merger or any other transactions contemplated by this Agreement, any Company Ancillary Agreement or any CR Stockholder Ancillary Agreement. The Company will use its best efforts to obtain, and to cooperate with HNC to promptly obtain, all such authorizations, approvals and consents. 5.8 Necessary Consents. The Company will use its best efforts to obtain such written consents and take such other actions as may be necessary or appropriate in addition to those set forth in the foregoing Sections of this Article 5 to allow the consummation of the transactions contemplated hereby and to allow HNC to carry on the Company's business after the Effective Time. 5.9 Litigation. The Company will notify HNC in writing promptly after learning of any material claim, action, suit, arbitration, mediation, proceeding or investigation by or before any court, arbitrator or arbitration panel, board or governmental agency, initiated by or against it, or known by it to be threatened against it. 5.10 No Other Negotiations. From the Agreement Date until the earlier of termination of this Agreement in accordance with Section 10 or consummation of the Merger, neither the Company nor any CR Stockholder will, nor will the Company or any CR Stockholder authorize, encourage or permit any officer, director, employee, stockholder or affiliate of the Company or any other person, on its or their behalf to, directly or indirectly, solicit or encourage any offer from any party or consider any inquiries or proposals received from any party, participate in any negotiations regarding, or furnish to any person any information with respect to, or otherwise cooperate with, facilitate or encourage any effort or attempt by any person (other than HNC), concerning any agreement or transaction regarding the possible disposition of all or any substantial portion of the Company's business, assets or capital stock by merger, consolidation, sale of assets, sale of stock, tender offer or any other form of business combination ("ALTERNATIVE TRANSACTION"). The Company will promptly notify HNC orally and in writing of any such inquiries or proposals. In addition, neither the Company nor any CR Stockholder will execute, enter into or become bound by (a) any letter of intent or agreement or commitment between the Company and any third party that is related to an Alternative Transaction or (b) any agreement or commitment between the Company and a third party providing for an Alternative Transaction. 5.11 Access to Information. Until the Closing, the Company will allow HNC and its agents reasonable access to the files, books, records and offices of the Company, including, without limitation, any and all information relating to the Company's taxes, commitments, contracts, leases, licenses, and real, personal and intangible property and financial condition, subject to the terms of the Confidentiality Agreement between the Company and HNC dated as of -30- 31 June 15, 1997 (the "CONFIDENTIALITY AGREEMENT"). The Company will cause its accountants to cooperate with HNC and its agents in making available all financial information reasonably requested by HNC, including without limitation the right to examine all working papers pertaining to all financial statements prepared or audited by such accountants. 5.12 Satisfaction of Conditions Precedent. The Company and the CR Stockholders will use their best efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Articles 8 and 9, and the Company and the CR Stockholders will use their best efforts to cause the transactions contemplated by this Agreement to be consummated; and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the Merger and all other transactions contemplated by this Agreement and the Company Ancillary Agreements. In particular, the Company and the CR Stockholders will use their best efforts to cause the Merger to become effective in accordance with this Agreement by December 31, 1997. 5.13 Company Affiliate Agreements. Concurrently with the execution of this Agreement, the Company will deliver to HNC a letter identifying all the Company's directors, executive officers, ten percent (10%) or greater shareholders (and affiliates of such persons who are the Company stockholders) and all persons or entities who are "affiliates" of the Company within the meaning of Rule 144 or Rule 405 under the 1933 Act at the time this Agreement is executed ("COMPANY AFFILIATES"). The Company will use its best efforts to cause each Company Affiliate to execute and deliver to HNC, as promptly as practicable after the Company's signing of this Agreement, an Affiliate Agreement in substantially the form of Exhibit J (the "COMPANY AFFILIATE AGREEMENT") and each CR Stockholder shall execute and deliver a Company Affiliate Agreement to HNC concurrently with the execution of this Agreement. In addition, the Company will use its best efforts to cause each person or entity who may become a Company Affiliate after the Agreement Date and before the Effective Time to execute and deliver a Company Affiliate Agreement to HNC promptly after such person or entity becomes a Company Affiliate. 5.14 Blue Sky Laws. The Company will use its best efforts to assist HNC to the extent necessary to comply with the securities and Blue Sky laws of all jurisdictions which are applicable in connection with the Merger. 5.15 Pooling. The Company will cooperate with HNC to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests for accounting and financial reporting purposes. Following the Agreement Date, the Company will not take any action if, prior to taking such action, the Company has been informed by HNC or its accountants that, in the opinion of HNC's accountants, taking such action may preclude HNC from accounting for the Merger as a "pooling of interests" for accounting and financial reporting purposes and HNC or its accountants promptly give the Company a writing that states in reasonable detail the action(s) that HNC or its accountants request the Company not to take. 5.16 Certain Investments; Agreements. The Company does not own, and will not make any purchase or other acquisition of, or investment in, any shares of HNC Common Stock or other securities of HNC. The Company will not enter into any agreement with any holders of HNC shares calling for either the Company or HNC to retire or reacquire all or part of the HNC shares to be issued pursuant to the Merger. The Company will not enter into any financial arrangements -31- 32 for the benefit of any Company stockholder which, in effect, would negate the exchange of equity securities contemplated under this Agreement and the Merger, including without limitation any loan or other financial arrangement at abnormally low interest rates, or any guarantee of loans secured by HNC shares to be issued pursuant to the Merger. 5.17 Company Dissenting Shares. As promptly as practicable after the date of the Company Stockholder Vote and prior to the Closing Date, the Company will furnish HNC with the name and address of each holder (or potential holder) of any Company Dissenting Shares (if any) and the number of Company Dissenting Shares (or potential Company Dissenting Shares) owned by each such holder. 5.18 Termination of Registration and Voting Rights. All registration rights agreements and voting agreements applicable to or affecting any outstanding shares or other securities of the Company will be duly terminated and canceled by no later immediately prior to the Effective Time. 5.19 Invention Assignment and Confidentiality Agreements. The Company will use its best efforts to obtain from each employee and consultant of the Company who has had access to any software, technology or copyrightable, patentable or other proprietary works owned or developed by the Company, or to any other confidential or proprietary information of the Company or its clients, an invention assignment and confidentiality agreement in a form reasonably acceptable to HNC, duly executed by such employee or consultant and delivered to the Company. 5.20 Non-Competition and Employment Agreements. Each of the CR Stockholders shall execute and deliver to HNC at the Closing a Non-Competition Agreement in the form attached hereto as Exhibit L (the "NON-COMPETITION AGREEMENT") and an Employment Agreement in the form attached hereto as Exhibit M (the "EMPLOYMENT AGREEMENT"), respectively. 5.21 Closing of Merger. Neither the Company nor the CR Stockholders will refuse to effect the Merger if, on or before the Closing Date, all the conditions precedent to the Company's obligations to effect the Merger under Article 8 hereof have been satisfied or waived by the Company. ARTICLE 6 HNC COVENANTS During the period from the Agreement Date until the earlier to occur of (i) the Effective Time or (ii) the termination of this Agreement in accordance with Section 10, HNC covenants and agrees as follows: 6.1 Advice of Changes. HNC will promptly advise the Company in writing (a) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of HNC contained in this Agreement, if made on or as of the date of such event or the Closing Date, to be untrue or inaccurate in any material respect and (b) of any material adverse change in HNC's business, results of operations or financial condition. 6.2 Regulatory Approvals. HNC will execute and file, or join in the execution and filing, of any application, notification (including without limitation any notification or provision of -32- 33 information, if any, that may be required under the HSR Act) or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which the Company may reasonably request, in connection with the consummation of the Merger and the other transactions contemplated by this Agreement and the HNC Ancillary Agreements in accordance with the terms of this Agreement. HNC will use its best efforts to obtain all such authorizations, approvals and consents. 6.3 Satisfaction of Conditions Precedent. HNC will use its best efforts to satisfy or cause to be satisfied all of the conditions precedent which are set forth in Article 8, and HNC will use its best efforts to cause the transactions contemplated by this Agreement to be consummated in accordance with the terms of this Agreement, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. In particular, HNC will use its best efforts to cause the Merger to become effective in accordance with this Agreement by December 31, 1997. 6.4 HNC Stockholder Approval. HNC will call and hold a special meeting of its stockholders as promptly as is reasonably practicable to submit for the vote, consideration and approval of HNC's stockholders a proposal to approve the issuance of shares of HNC Common Stock and the issuance of HNC Options in the Merger (such vote of HNC stockholders is hereinafter referred to as the "HNC STOCKHOLDER VOTE"). Such approval will be recommended by HNC's Board of Directors and management. Such HNC Stockholders' meeting will be called, held and conducted, and any proxies or written consents will be solicited, in compliance with HNC's Certificate of Incorporation and Bylaws and applicable law. In connection with such special stockholders' meeting, HNC will mail to its stockholders (after obtaining necessary approval or clearance from the SEC), for the purpose of soliciting the HNC Stockholder Vote, the Proxy Statement complying with the proxy regulations promulgated under the 1934 Act. HNC will be solely responsible for any statement, information or omission in the Proxy Statement relating to HNC or its affiliates. 6.5 Blue Sky Laws. HNC will take such steps as may be necessary to comply with the securities and Blue Sky laws of all jurisdictions which are applicable in connection with the Merger. 6.6 Listing of Additional Shares. HNC will file with the Nasdaq National Market a Notification Form for Listing of Additional Shares with respect to the shares of HNC Common Stock issuable upon conversion of the Company Common Stock in the Merger and upon exercise of the HNC Options to be issued in the Merger upon the conversion of outstanding Company Options. ARTICLE 7 CLOSING MATTERS 7.1 The Closing. Subject to termination of this Agreement as provided in Section 10 below, the closing of the transactions to consummate the Merger (the "CLOSING") will take place at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306 at 10:00 a.m., Pacific Standard Time on the first business day after all of the conditions to Closing set -33- 34 forth in Sections 8 and 9 hereof have been satisfied and/or waived in accordance with this Agreement, or on such later day as HNC and the Company may mutually agree on (the "CLOSING DATE"). Concurrently with the Closing, the Agreement of Merger (or a Certificate of Merger) will be filed with the Delaware Secretary of State, and the Agreement of Merger (and related officers' certificates) will be filed with the California Secretary of State. 7.2 Exchange of Certificates. 7.2.1 At the Closing, each holder of shares of Company Stock will surrender the certificate(s) for such shares (each a "COMPANY CERTIFICATE"), duly endorsed to HNC for cancellation as of the Effective Time. Promptly after the Effective Time and receipt of such Company Certificates, HNC or its transfer agent will issue to each tendering holder of a Company Certificate a certificate for the number of shares of HNC Common Stock to which such holder is entitled pursuant to Section 2.1.2 (less the Escrow Shares to be placed in escrow pursuant to Section 2.4 and the Escrow Agreement) and HNC or its transfer agent will pay by check to each tendering holder cash in lieu of fractional shares in the amount payable to such holder in accordance with Section 2.1.4. At the Closing, HNC will deliver the certificates representing the Escrow Shares to the Escrow Agent pursuant to the Escrow Agreement. 7.2.2 No dividends or distributions payable to holders of record of HNC Common Stock after the Effective Time, or cash payable in lieu of fractional shares, will be paid to the holder of any unsurrendered Company Certificate until the holder of such unsurrendered Company Certificate surrenders such Company Certificate to HNC as provided above. Subject to the effect, if any, of applicable escheat and other laws, following surrender of any Company Certificate, there will be delivered to the person entitled thereto, without interest, the amount of any dividends and distributions theretofore paid with respect to HNC Common Stock so withheld as of any date subsequent to the Effective Time and prior to such date of delivery. 7.2.3 After the Effective Time there will be no further registration of transfers on the stock transfer books of the Company or its transfer agent of the Company Stock that was outstanding immediately prior to the Effective Time. If, after the Effective Time, Company Certificates are presented for any reason, they will be canceled and exchanged as provided in this Section 7.2. 7.2.4 Until Company Certificates representing shares of Company Common Stock outstanding immediately prior to the Effective Time are surrendered pursuant to Section 7.2.1 above, such Company Certificates will be deemed, for all purposes, to evidence ownership of the number of shares of HNC Common Stock into which such shares of Company Common Stock will have been converted pursuant to Section 2.1.2 and the Agreement of Merger. ARTICLE 8 CONDITIONS TO OBLIGATIONS OF THE COMPANY The Company's obligations hereunder are subject to the fulfillment or satisfaction, on and as of the Closing, of each of the following conditions (any one or more of which may be waived by the Company, but only in a writing signed by the Company): -34- 35 8.1 Accuracy of Representations and Warranties. The representations and warranties of HNC set forth in Section 4 (as qualified by the HNC Disclosure Letter) will be true and accurate in every material respect on and as of the Closing with the same force and effect as if they had been made at the Closing, and the Company will have received a certificate to such effect executed by HNC's President or Chief Financial Officer. 8.2 Covenants. HNC will have performed and complied in all material respects with all of its covenants contained in Section 6 on or before the Closing, and the Company will have received a certificate to such effect signed by HNC's President or Chief Financial Officer. 8.3 Requisite Approvals. The principal terms of this Agreement and the Agreement of Merger will have been duly and validly approved and adopted by HNC's Board of Directors in accordance with applicable law and HNC's Certificate of Incorporation and Bylaws and the issuance of shares of HNC Common Stock in the Merger and the grant of HNC Options upon conversion of Company Options in the Merger will have been duly and validly approved and adopted by HNC's stockholders in accordance with applicable law and HNC's Certificate of Incorporation and Bylaws. The principal terms of the Agreement of Merger will have been approved and adopted by Sub's Board of Directors and sole stockholder in accordance with applicable law and Sub's Certificate of Incorporation and Bylaws. 8.4 Compliance with Law; No Legal Restraints; No Litigation. No litigation or proceeding will be threatened or pending for the purpose or with the probable effect of enjoining or preventing the consummation of the Merger or any of the other material transactions contemplated by this Agreement, or which could be reasonably expected to have a material adverse effect on the present or future operations or financial condition of HNC. There will not be any outstanding or threatened, or enacted or adopted, any order, decree, temporary, preliminary or permanent injunction, legislative enactment, statute, regulation, action, proceeding or any judgment or ruling by any court, arbitrator, governmental agency, authority or entity, or any other fact or circumstance, that, directly or indirectly, challenges, threatens, prohibits, enjoins, restrains, suspends, delays, conditions or renders illegal or imposes limitations on (or is likely to result in a challenge, threat to, or a prohibition, injunction, restraint, suspension, delay or illegality of, or to impose limitations on) the Merger or any other material transaction contemplated by this Agreement. 8.5 Government Consents; HSR Act Compliance. There will have been obtained at or prior to the Closing Date such permits or authorizations, and there will have been taken all such other actions by any regulatory authority having jurisdiction over the parties and the actions herein proposed to be taken, as may be required to lawfully consummate the Merger, including but not limited to requirements under applicable federal and state securities laws. All applicable waiting periods under the HSR Act shall have expired or early termination of such waiting periods shall have been granted by both the Federal Trade Commission and the United States Department of Justice without any condition or requirement requiring or calling for the disposition or divestiture of any product or other asset of the Company by HNC or the Company. 8.6 Opinion of HNC's Counsel. the Company will have received from counsel to HNC, an opinion substantially in the form of Exhibit N. -35- 36 8.7 Nasdaq National Market Listing. The shares of HNC Common Stock issuable to the Company Stockholders in the Merger pursuant to Section 2.1.2 hereof, and the shares of HNC Common Stock issuable upon the exercise of HNC Options issued upon the assumption of Company Options in the Merger pursuant to Section 2.2 hereof, shall be authorized for listing on the Nasdaq National Market, subject to official notice of issuance. 8.8 Tax Status. The Company shall not have been advised in writing by Deloitte & Touche, LLP, the Company's accountants, that, by reason of any act or omission on the part of HNC, the Merger will not be eligible to be treated as a "reorganization" within the meaning of Section 368(a)(1)(A) of the Code by virtue of the provisions of Section 368(a)(2)(E) of the Code. ARTICLE 9 CONDITIONS TO OBLIGATIONS OF HNC The obligations of HNC hereunder are subject to the fulfillment or satisfaction on, and as of the Closing, of each of the following conditions (any one or more of which may be waived by HNC, but only in a writing signed by HNC): 9.1 Accuracy of Representations and Warranties. The representations and warranties of the Company set forth in Section 3 (as qualified by the Company Disclosure Letter) will be true and accurate in every material respect on and as of the Closing with the same force and effect as if they had been made at the Closing, and HNC will have received a certificate to such effect executed by the Company's President and Chief Financial Officer. 9.2 Covenants. The Company will have performed and complied in all material respects with all of its covenants contained in Section 5 on or before the Closing, and HNC will have received a certificate to such effect signed by the Company's President and Chief Financial Officer. 9.3 No Material Adverse Change. There will not have been any material adverse change in the financial condition, properties, assets, liabilities, business, results of operations or operations of the Company and its subsidiaries, taken as a whole, and HNC will have received a certificate to such effect signed by the Company's President and Chief Financial Officer. 9.4 Compliance with Law; No Legal Restraints; No Litigation. There will not be any outstanding or threatened, or enacted or adopted, any order, decree, temporary, preliminary or permanent injunction, legislative enactment, statute, regulation, action, proceeding or any judgment or ruling by any court, arbitrator, governmental agency, authority or entity, or any other fact or circumstance, that, directly or indirectly, challenges, threatens, prohibits, enjoins, restrains, suspends, delays, conditions, or renders illegal or imposes limitations on (or is likely to result in a challenge, threat to, or a prohibition, injunction, restraint, suspension, delay or illegality of, or to impose limitations on): (i) the Merger or any other material transaction contemplated by this Agreement or any Company Ancillary Agreement; (ii) HNC's payment for, or acquisition or purchase of, some or all of the shares of Company Common Stock or any material part of the assets of the Company; (iii) HNC's direct or indirect ownership or operation of all or any material portion of the business or assets of the Company; or (iv) HNC's ability to exercise full rights of ownership with respect to the Surviving Corporation or its shares, including but not limited to any restrictions on HNC's ability to vote the shares of the Surviving Corporation. No litigation or -36- 37 proceeding will be threatened or pending for the purpose or with the probable effect of enjoining or preventing the consummation of any of the transactions contemplated by this Agreement, or which could be reasonably expected to have a material adverse effect on the present or future operations or financial condition of the Company or which asserts that the Company's or HNC's negotiations regarding this Agreement, HNC's or the Company's entering into this Agreement or the Company's or HNC's consummation of the Merger or any other material transaction contemplated by this Agreement or any Company Ancillary Agreement or any CR Stockholder Ancillary Agreement, breaches or violates any agreement or commitment of the Company or constitutes tortious conduct on the part of HNC or the Company. 9.5 Government Consents; HSR Act Compliance. There will have been obtained at or prior to the Closing Date such permits or authorizations, and there will have been taken all such other actions, as may be required to consummate the Merger by any governmental or regulatory authority having jurisdiction over the parties and the actions herein proposed to be taken, including but not limited to requirements under applicable federal and state securities laws. All applicable waiting periods under the HSR Act shall have expired or early termination of such waiting periods shall have been granted by both the Federal Trade Commission and the United States Department of Justice without any condition or requirement requiring or calling for the disposition or divestiture of any product or other asset of the Company by HNC or the Company. 9.6 Opinion of Company's Counsel. HNC will have received from Phillips & Haddan, counsel to the Company, an opinion substantially in the form of Exhibit O. 9.7 Consents. HNC will have received duly executed copies of all material third-party consents, approvals, assignments, waivers, authorizations or other certificates contemplated by this Agreement or the Company Disclosure Letter or reasonably deemed necessary by HNC's legal counsel to provide for the continuation in full force and effect of any and all material contracts, agreements and leases of the Company after the Merger and the preservation of the Company's IP Rights and other assets and properties after the Merger and for HNC to consummate the Merger and the other transactions contemplated by this Agreement, the Company Ancillary Agreements and the CR Stockholder Ancillary Agreements and in form and substance reasonably satisfactory to HNC. 9.8 Requisite Approvals. The principal terms of this Agreement and the Agreement of Merger, the Merger and the Company Ancillary Agreements will have been duly and validly approved and adopted, as required by applicable law and the Company's Articles of Incorporation and Bylaws, by (a) the Company's Board of Directors and (b) the valid and affirmative vote of outstanding shares of Company Common Stock (and any other Company securities (if any) entitled to vote thereon) representing not less than one hundred percent (100%) of the voting power of all issued and outstanding Company Common Stock and all other Company voting securities (if any). 9.9 HNC Stockholder Approval. The issuance of the shares of HNC Common Stock to be issued in the Merger and the grant of HNC Options upon conversion of Company Options in the Merger will have been duly and validly approved and adopted by HNC's stockholders in accordance with applicable law and HNC's Certificate of Incorporation and Bylaws. -37- 38 9.10 No Dissenting Shares. No shares of the capital stock of the Company will be eligible to exercise or perfect any statutory appraisal rights of dissenting shareholders under applicable law. 9.11 Affiliate Agreements. Each CR Stockholder and each Company Affiliate who is to receive HNC Common Stock in the Merger will have executed and delivered to HNC a Company Affiliate Agreement in the form of Exhibit J. 9.12 Non-Competition Agreement. HNC will have received from each of the CR Stockholders a fully executed copy of a Non-Competition Agreement in the form of Exhibit L. 9.13 Employment Agreement. HNC will have received from each of the CR Stockholders a fully executed copy of an Employment Agreement in the form of Exhibit M. 9.14 Escrow Agreement. HNC will have received a fully executed copy of the Escrow Agreement in the form of Exhibit B executed by the Escrow Agent, the Representative and each of the Company Stockholders. 9.15 Fairness Opinion. HNC's Board of Directors shall have received a written opinion, addressed to HNC's Board of Directors, from Robertson, Stephens & Company, that the Merger is fair to HNC and its stockholders from a financial point of view. 9.16 Resignation of Directors. The directors of the Company in office immediately prior to the Effective Time of the Merger (other than any such director who is designated in Section 2.5(g) to be a director of the Company immediately after the Effective Time) will have resigned as directors of the Surviving Corporation effective as of the Effective Time. 9.17 Pooling Opinions. HNC will have been advised in writing, as of the Effective Time, by Price Waterhouse LLP that, in accordance with generally accepted accounting principles, the Merger qualifies to be treated as a "pooling of interests" for accounting purposes, and the Company will have been advised in writing, as of the Effective Time, by Deloitte & Touche LLP that, in accordance with generally accepted accounting principles, the Company is eligible to participate in a transaction that qualifies as a "pooling of interests" for accounting purposes. 9.18 No Derivative Securities. All Company Derivative Securities, if any will have been exercised in full and thereby converted into shares of Company Common Stock in accordance with their current terms and conditions, so that no the Company Derivative Securities will be outstanding immediately prior to the Effective Time. 9.19 Tax Allocation Agreement. HNC, the Company, and the CR Stockholders shall have entered into a Tax Allocation Agreement in form and substance reasonably satisfactory allocating items of tax significance (such as income, deductions and credits, etc.) between the short tax year of the Company ended at the Effective Time and the remaining tax year of the Company commencing immediately after the Effective Time. 9.20 Bylaw Amendment. The authorized number of directors of the Company shall be a total of exactly five (5) directors, and the Company's Bylaws shall have been duly amended to authorize a total of exactly five (5) directors. -38- 39 9.21 Investment Letters Executed. Each of the CR Stockholders shall have executed and delivered to HNC an Investment Representation Letter and each holder of an outstanding Company Option shall have executed and delivered to HNC an Optionee Investment Representation Letter. 9.22 No Impediment from Buy-Sell Agreement. Nothing in that certain Stock Buy-Sell Agreement dated as of April 30, 1992 among the Company and the CR Stockholders shall adversely affect HNC's ownerhip interest in the shares of the Company immediately following the Effective Time. ARTICLE 10 TERMINATION OF AGREEMENT 10.1 Prior to Closing. 10.1.1 This Agreement may be terminated at any time prior to the Effective Time by the mutual written consent of HNC and the Company. 10.1.2 Unless otherwise agreed by the parties hereto, this Agreement will be automatically terminated at any time prior to the Effective Time without the need for action by any party hereto if all conditions to the parties' obligation to effect the Closing set forth in Sections 8 and 9 have not been satisfied or waived by the appropriate party on or before December 31, 1997 (the "TERMINATION DATE"). 10.1.3 Either party may terminate this Agreement at any time prior to the Closing if the other party has committed a material breach of (a) any of its representations and warranties under Section 3 or 4 of this Agreement, as applicable; or (b) any of its covenants under Sections 5 or 6 of this Agreement, as applicable, and has not cured such material breach prior to the earlier of (i) the Closing or (ii) thirty (30) days after the party seeking to terminate this Agreement has given the other party written notice of its intention to terminate this Agreement pursuant to this Section 10.1.3. 10.2 At the Closing. At the Closing, this Agreement may be terminated and abandoned: 10.2.1 By HNC, if any of the conditions precedent to HNC's obligations set forth in Article 9 above have not been fulfilled or waived on or prior to the Termination Date; 10.2.2 By the Company, if any of the conditions precedent to the Company's obligations set forth in Article 8 above have not been fulfilled or waived on or prior to the Termination Date; 10.2.3 By the Company, if the HNC Closing Average Price Per Share is less than $26.00 per share, as presently constituted; provided that if the Company does not affirmatively exercise this right of termination at the Closing, then this Agreement will remain in effect, and the parties will be obligated to complete the Closing and consummate the Merger. -39- 40 Any termination of this Agreement under this Section 10.2 will be effective by the delivery of notice of the terminating party to the other party hereto. 10.3 No Liability. Any termination of this Agreement in accordance with this Section 10 will be without further obligation or liability upon any party in favor of the other party hereto other than the obligations provided in the Confidentiality Agreement; provided, however, that nothing herein will limit the obligation of the Company, the CR Stockholders and HNC to use their best efforts to cause the Merger to be consummated, as set forth in Sections 5.12 and 6.3 hereof, respectively. ARTICLE 11 SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS 11.1 Survival of Representations. All representations, warranties and covenants of the Company and the Company Stockholders contained in this Agreement will remain operative and in full force and effect, regardless of any investigation made by or on behalf of HNC, until that date (the "ESCROW RELEASE DATE") which is the earlier of (i) the termination of this Agreement or (ii) the first (1st) anniversary of the Closing Date; provided, however, that those representations and warranties respecting matters addressed by the first audited financial statements of the combined corporation, together with a report thereon from HNC's independent auditors, shall not expire later than upon the date on which such financial statements are first released to the public. 11.2 Agreement to Indemnify. The Company Stockholders will jointly and severally indemnify and hold harmless HNC and the Surviving Corporation and their respective officers, directors, agents, stockholders and employees, and each person, if any, who controls or may control HNC or the Surviving Corporation within the meaning of the Securities Act (each hereinafter referred to individually as an "INDEMNIFIED PERSON" and collectively as "INDEMNIFIED PERSONS") from and against any and all claims, demands, suits, actions, causes of actions, losses, costs, demonstrable damages, liabilities and expenses including, without limitation, reasonable attorneys' fees, other professionals' and experts' reasonable fees and court or arbitration costs (hereinafter collectively referred to as "DAMAGES") incurred and arising out of any inaccuracy, misrepresentation, breach of, or default in, any of the representations, warranties or covenants given or made by the Company in this Agreement or in the Company Disclosure Letter or any certificate delivered by or on behalf of the Company pursuant hereto, (if such inaccuracy, misrepresentation, breach or default existed at the Closing Date). Any claim of indemnity made by an Indemnified Person under this Section 11.2 must be raised in a writing delivered to the Escrow Agent by no later than the Escrow Release Date. As used herein, the term "Damages" will not include any overhead costs of HNC personnel and the amount of Damages incurred by any Indemnified Person will be reduced by the amount of any insurance proceeds actually received by such Indemnified Person on account of such Damages and the amount of any direct tax savings actually recognized by such Indemnified Person that are directly attributable to such Damages, but will include any reasonable costs or expenses incurred by such Indemnified Person to recover such insurance proceeds or to obtain such tax savings. The Indemnified Persons will use reasonable efforts to mitigate their Damages. 11.3 Limitation. Notwithstanding anything herein to the contrary, in seeking indemnification for Damages under Section 11.2, the Indemnified Persons will exercise their -40- 41 remedies with respect to the Escrow Shares and any other assets deposited in escrow pursuant to the Escrow Agreement. Except for intentional fraudulent conduct or other willful misconduct: (i) no Company Stockholder will have any liability to an Indemnified Person under Section 11.2 of this Agreement except to the extent of such Company Stockholder's portion of the Escrow Shares and any other assets deposited under the Escrow Agreement and (ii) the remedies set forth in this Section 11.3 will be the exclusive remedies of HNC and the other Indemnified Persons under Section 11.2 of this Agreement against any Company Stockholder for any inaccuracy, misrepresentation, breach of, or default in, any of the representations, warranties or covenants given or made by the Company in this Agreement or in any certificate, document or instrument delivered by or on behalf of the Company pursuant hereto. In addition, the indemnification provided for in Section 11.2 shall not apply unless and until the aggregate Damages for which one or more Indemnified Persons seeks or has sought indemnification hereunder exceeds a cumulative aggregate of Two Hundred Fifty Thousand Dollars ($250,000) (the "BASKET"), in which event the Company Stockholders shall, subject to the foregoing limitations, be liable to indemnify the Indemnified Persons for all Damages. The limitations on the indemnification obligations set forth in this Section 11.3 shall not be applicable to Misconduct Damages (as defined below). As used herein, "MISCONDUCT DAMAGES" means Damages resulting from intentional fraudulent conduct or other willful misconduct or breach of any provisions of the Company Affiliate Agreement or the Investment Representation Letters. 11.4 Notice. Promptly after HNC becomes aware of the existence of any potential claim by an Indemnified Person for indemnity from the Company Stockholders under Section 11.2, HNC will notify the Company Stockholders of such potential claim in accordance with the Escrow Agreement. Failure of HNC to give such notice will not affect any rights or remedies of an Indemnified Party hereunder with respect to indemnification for Damages except to the extent the Company Stockholders are materially prejudiced thereby. Prior to the settlement of any claim for which HNC seeks indemnity from a Company Stockholder, HNC will provide the Company Stockholders with the terms of the proposed settlement and a reasonable opportunity to comment on such terms in accordance with the Escrow Agreement. 11.5 Title Indemnity. In addition to, and separate from, the foregoing agreement to indemnify set forth in Section 11.2, each Company Stockholder agrees, severally and not jointly, to defend and indemnify HNC and each other Indemnified Person from and against any and all claims, demands, suits, actions, causes of actions, losses, costs, damages, liabilities and expenses including, without limitation, reasonable attorneys' fees, other professionals' and experts' reasonable fees and court or arbitration costs incurred and arising out of any failure of such Company Stockholder to have good, valid and marketable title to any issued and outstanding shares of Company Common Stock held (or asserted to have been held) by such Company Stockholder, free and clear of all liens, claims and encumbrances, or to have the full right, capacity and authority to enter into this Agreement (in the case of a CR Stockholder) and to vote such person's shares of Company Stock in favor of the Merger and any other transactions contemplated by this Agreement. A Company Stockholder's liability under the indemnification provided for in this Section 11.5 shall be in addition to any liability of such Company Stockholder under Section 11.2 and shall not be subject to the limitations on such Company Stockholder's liability set forth in Section 11.3 and shall not be limited to such Company Stockholder's Escrow Shares. -41- 42 ARTICLE 12 MISCELLANEOUS 12.1 Governing Law. The internal laws of the State of California (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. 12.2 Assignment; Binding Upon Successors and Assigns. Neither party hereto may assign any of its rights or obligations hereunder without the prior written consent of the other party hereto. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 12.3 Severability. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 12.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of both parties reflected hereon as signatories. 12.5 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy will not preclude the exercise of any other. 12.6 Amendment and Waivers. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. The Agreement may be amended by the parties hereto at any time before or after approval of the stockholders of the Company, but, after such approval, no amendment will be made which by applicable law requires the further approval of the stockholders of the Company without obtaining such further approval. At any time prior to the Effective Time, each of the Company and HNC, by action taken by its Board of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other; (ii) waive any inaccuracies in the representations and warranties made to it contained herein or in any document delivered pursuant hereto; and (iii) waive compliance with any of the agreements or conditions for its benefit contained herein. No such waiver or extension will be effective unless signed in writing by the party against whom such waiver or extension is asserted. The failure of any party to enforce any of the provisions hereof will not be construed to be a waiver of the right of such party thereafter to enforce such provisions. -42- 43 12.7 Expenses. Each party will bear its respective expenses and legal fees incurred with respect to this Agreement, and the transactions contemplated hereby. 12.8 Attorneys' Fees. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party will be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees to be fixed by the court (including without limitation, costs, expenses and fees on any appeal). The prevailing party will be entitled to recover its costs of suit, regardless of whether such suit proceeds to final judgment. 12.9 Notices. All notices and other communications required or permitted under this Agreement will be in writing and will be either hand delivered in person, sent by telecopier, sent by certified or registered first class mail, postage pre-paid, or sent by nationally recognized express courier service. Such notices and other communications will be effective upon receipt if hand delivered or sent by telecopier, five (5) days after mailing if sent by mail, and one (l) day after dispatch if sent by express courier, to the following addresses, or such other addresses as any party may notify the other parties in accordance with this Section: If to HNC: HNC Software Inc. 5930 Cornerstone Court West San Diego, CA 92121 Attention: President Fax Number: (619) 452-3220 with a copy to: Fenwick & West, LLP Two Palo Alto Square, Suite 800 Palo Alto, CA 94306 Attention: Kenneth A. Linhares Fax Number: (415) 857-0361 If to the Company: CompReview, Inc. 4000 MacArthur Boulevard, Suite 800 Newport Beach, CA 92660 Attention: President Fax Number: (714) 833-5947 with a copy to: Phillips & Haddan 4675 MacArthur Court, Suite 710 Newport Beach, CA 92660 Attention: Jon Haddan, Esq. Fax Number (714) 752-6161 -43- 44 or to such other address as a party may have furnished to the other parties in writing pursuant to this Section 12.9. 12.10 Construction of Agreement. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof will not be construed for or against either party. A reference to a Section or an exhibit will mean a Section in, or exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and will not in any manner limit the construction of this Agreement which will be considered as a whole. 12.11 No Joint Venture. Nothing contained in this Agreement will be deemed or construed as creating a joint venture or partnership between any of the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of any other party. No party will have the power to control the activities and operations of any other and their status is, and at all times will continue to be, that of independent contractors with respect to each other. No party will have any power or authority to bind or commit any other. No party will hold itself out as having any authority or relationship in contravention of this Section. 12.12 Further Assurances. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 12.13 Absence of Third Party Beneficiary Rights. No provisions of this Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, partner or any party hereto or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. 12.14 Public Announcement. Upon execution of this Agreement, HNC and the Company will issue a press release approved by both parties announcing the Merger. Thereafter, HNC may issue such press releases, and make such other disclosures regarding the Merger, as it determines are required under applicable securities laws or regulatory rules. Prior to the publication of such press release (unless this Agreement has been terminated, neither party will make any public announcement relating to this Agreement or the transactions contemplated hereby and the Company will use its reasonable efforts to prevent any trading in HNC Common Stock by its officers, directors, employees, stockholders and agents. 12.15 Confidentiality. the Company and HNC each confirm that they have entered into the Confidentiality Agreement and that they are each bound by, and will abide by, the provisions of such Confidentiality Agreement (except that HNC will cease to be bound by the Confidentiality -44- 45 Agreement after the Merger becomes effective). If this Agreement is terminated, all copies of documents containing confidential information of a disclosing party will be returned by the receiving party to the disclosing party or be destroyed, as provided in the Confidentiality Agreement. [The Remainder of This Page Has Intentionally Been Left Blank] -45- 46 12.16 Entire Agreement. This Agreement and the exhibits hereto constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto other than the Confidentiality Agreement. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HNC SOFTWARE INC. COMPREVIEW, INC. By: /s/ Robert L. North By: /s/ Robert L. Kaaren ----------------------------- -------------------------- Robert L. North, President Robert L. Kaaren, M.D., Chief Executive Officer and Chairman FW1 ACQUISITION CORP. CR STOCKHOLDERS By: /s/ Robert L. North /s/ Robert L. Kaaren ----------------------------- -------------------------- Robert L. North, President Robert L. Kaaren, M.D. /s/ Mishel E. Munayyer -------------------------- Mishel E. Munnayer a.k.a Michael E. Munayyer, Trustee of the Michael Munayyer Trust dated August 11, 1995 [Signature Page to Agreement and Plan of Reorganization] -46- 47 LIST OF EXHIBITS Exhibit A Agreement of Merger Exhibit B Escrow Agreement Exhibit C Restated Articles of Incorporation of Surviving Corporation Exhibit D Bylaws of Surviving Corporation Exhibit E Investment Representation Letter Exhibit F Optionee Investment Representation Letter Exhibit G Registration Rights Agreement Exhibit H Tax Representation Certificate of the Company Exhibit I Company Stockholder Agreement Exhibit J Company Affiliate Agreement Exhibit K Company Financial Statements Exhibit L Non-Competition Agreement Exhibit M Employment Agreement Exhibit N Matters to be Covered in the Opinion of Fenwick & West, LLP Exhibit O Matters to be Covered in the Opinion of Phillips & Haddan
EX-2.02 3 EXHIBIT 2.02 1 EXHIBIT 2.02 AGREEMENT OF MERGER OF FW1 ACQUISITION CORP. AND COMPREVIEW, INC. This Agreement of Merger (this "AGREEMENT") is entered into as of November 28, 1997 (the "DATE OF THIS AGREEMENT") by and between FW1 Acquisition Corp., a Delaware corporation ("SUB") that is a wholly-owned subsidiary of HNC Software Inc. a Delaware corporation ("HNC"), and CompReview, Inc. (the "COMPANY"), a California corporation. R E C I T A L S A. HNC, Sub and the Company have entered into an Agreement and Plan of Reorganization, dated as of July 14, 1997 (the "PLAN"), providing for certain representations, warranties and agreements in connection with the transactions contemplated hereby, and for the merger of Sub with and into the Company in accordance with the Delaware General Corporation Law (the "DELAWARE LAW") and the General Corporation Law of California (the "CALIFORNIA LAW"), the Plan and this Agreement, with the Company to be the surviving corporation of the Merger. B. The Boards of Directors of HNC, Sub and the Company, respectively, have determined it to be advisable and in the respective interests of HNC, Sub and the Company and their respective stockholders that Sub be merged with and into the Company in accordance with the Plan (the "MERGER") so that the Company will be the surviving corporation of the Merger. C. The Plan, this Agreement and the Merger have been approved by HNC as the sole stockholder of Sub and by the stockholders of the Company in accordance with applicable law. NOW, THEREFORE, Sub and the Company hereby agree as follows: ARTICLE 1 CERTAIN DEFINITIONS As used in this Agreement, the following terms will have the meanings set forth below: 1.1 The "EFFECTIVE TIME" means the date on which the Merger becomes legally effective under the laws of the States of California and Delaware as a result of the filing with the Delaware Secretary of State of this Agreement or, in lieu thereof, a Certificate of Merger (the "CERTIFICATE OF MERGER"), conforming to the requirements of Section 252 of the Delaware General Corporation Law, and the filing with the California Secretary of State of this Agreement of Merger (and related officers' certificates). 2 1.2 "HNC COMMON STOCK" means HNC's Common Stock, $0.001 par value per share. 1.3 "HNC CLOSING AVERAGE PRICE PER SHARE" means the average of the closing prices per share of HNC Common Stock as quoted on the Nasdaq National Market (or such other exchange or quotation system on which HNC Common Stock is then traded or quoted) and reported in The Wall Street Journal for the twenty (20) trading days immediately preceding (but not including) the date of this Agreement. 1.4 "COMPANY COMMON STOCK" means the Company's Common Stock, no par value per share. 1.5 "COMPANY OPTIONS" means, collectively, options to purchase shares of Company Common Stock granted by the Company to Company employees under the Company's 1995 Stock Option Plan (the "COMPANY OPTION PLAN"). 1.6 "COMPANY DERIVATIVE SECURITIES" means, collectively: (a) any warrant, option, right or other security that entitles the holder thereof to purchase or otherwise acquire any shares of the capital stock of the Company (collectively, "COMPANY STOCK RIGHTS"); (b) any note, evidence of indebtedness, stock or other security of the Company that is convertible into or exchangeable for any shares of the capital stock of the Company or any Company Stock Rights ("COMPANY CONVERTIBLE SECURITY"); and (c) any warrant, option, right, note, evidence of indebtedness, stock or other security that entitles the holder thereof to purchase or otherwise acquire any Company Stock Rights or any Company Convertible Security; provided, however, that the term "Company Derivative Securities" does not include any Company Options. 1.7 "NUMBER OF COMPANY FULLY DILUTED SHARES" means that number of shares of Company Common Stock that is equal to the sum of: (a) the total number of shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time; plus (b) the total number of shares of Company Common Stock subject to or issuable under all Company Options that are issued and outstanding immediately prior to the Effective Time; plus (c) the total number of shares of Company Common Stock that, immediately prior to the Effective Time, are, directly or indirectly, ultimately or potentially issuable by the Company upon the exercise, conversion or exchange of all Company Derivative Securities (if any) that are issued and outstanding immediately prior to the Effective Time. 1.8 "COMPANY STOCKHOLDERS" means those persons who, immediately prior to the Effective Time, hold the shares of Company stock that are outstanding immediately prior to the Effective Time; provided, however, that for purposes of Section 2.4 of this Agreement, the term "Company Stockholders" means only those Company Stockholders (as defined above in this Section) who are issued shares of HNC Common Stock in the Merger. 1.9 "COMPANY DISSENTING SHARES" means any shares of Company Stock that (i) are outstanding immediately prior to the Effective Time and qualify fully as "dissenting shares" within the meaning of Section 1300(b) of the California Corporations Code and (ii) with respect to which dissenter's rights to require the purchase of such dissenting shares for cash at their fair -2- 3 market value in accordance with Chapter 13 of the California Corporations Code have been duly and properly exercised and perfected in connection with the Merger. 1.10 "HNC MERGER SHARES" means that number of shares of HNC Common Stock equal to the sum of (i) Five Million (5,000,000) shares of HNC Common Stock, as presently constituted, plus (ii) the Additional Shares. 1.11 "ADDITIONAL SHARES" means that number of shares of HNC Common Stock (as constituted immediately prior to the Effective Time) obtained by dividing (i) the Retained Earnings (as defined below) by (ii) the HNC Closing Average Price Per Share. As used herein, the "RETAINED EARNINGS" means the retained earnings of the Company as of the last day of the last full calendar month ended prior to the Effective Time, computed in accordance with generally accepted accounting principles consistently applied. 1.12 "CONVERSION RATIO" means the quotient obtained by (a) dividing the number of shares of HNC Common Stock constituting the HNC Merger Shares by (b) the Number of Company Fully Diluted Shares. ARTICLE 2 THE MERGER 2.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time, Sub will be merged with and into the Company pursuant to the Plan and this Agreement and in accordance with applicable provisions of the laws of the State of California and the State of Delaware as follows: 2.1.1 Conversion of Sub Stock. At the Effective Time, each share of Common Stock of Sub that is issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without the need for any further action on the part of the holder thereof, be converted into and become one (1) share of Company Common Stock that is issued and outstanding immediately after the Effective Time, and the shares of Company Common Stock into which the shares of Sub Common Stock are so converted shall be the only shares of Company stock that are issued and outstanding immediately after the Effective Time. 2.1.2 Conversion of Company Stock. At the Effective Time, each share of Company Common Stock that is issued and outstanding immediately prior to the Effective Time (other than any Company Dissenting Shares as provided in Section 2.1.3) will, by virtue of the Merger, and without the need for any further action on the part of the holder thereof, be converted into a number of shares of HNC Common Stock that is equal to the Conversion Ratio, subject to the provisions of Section 2.1.4 regarding the elimination of fractional shares. 2.1.1 Company Dissenting Shares. Holders of Company Dissenting Shares (if any) will be entitled to their appraisal rights under Chapter 13 of the California Corporations Code with respect to such Company Dissenting Shares, and such Company Dissenting Shares will not be converted into shares of HNC Common Stock in the Merger; provided, however, that nothing in this Section 2.1.3 is intended to remove, release, waive, alter or affect any of the -3- 4 conditions to HNC's and Sub's obligations to consummate the Merger set forth in Section 9.8 and Section 9.9 of the Plan, or any other provision of the Plan relating to the Company Dissenting Shares. Shares of the capital stock of the Company that are outstanding immediately prior to the Effective Time of the Merger and with respect to which dissenting shareholders' rights of appraisal under the California Corporations Code have not been properly perfected will, when such dissenting shareholders' rights can no longer be legally exercised under the California Corporations Code, be converted into HNC Common Stock as provided in Section 2.1.2. 2.1.4 Fractional Shares. No fractional shares of HNC Common Stock shall be issued in connection with the Merger. In lieu thereof, each holder of Company Common Stock who would otherwise be entitled to receive a fraction of a share of HNC Common Stock under Section 2.1.2 of this Agreement, after aggregating all shares of HNC Common Stock to be received by such holder, shall instead receive from HNC, within three (3) business days after the Effective Time, an amount of cash equal to the product obtained by multiplying (i) the HNC Closing Average Price Per Share (as adjusted to reflect any Capital Change (as defined below) of HNC) by (ii) the fraction of a share of HNC Common Stock to which such holder would otherwise be entitled to receive. 2.2 Assumption and Conversion of Company Options. Each Company Option that is outstanding immediately prior to the Effective Time shall, by virtue of the Merger and at the Effective Time and without the need for any further action on the part of any holder thereof, be assumed by HNC and converted into an option (an "HNC OPTION") to purchase that number of shares of HNC Common Stock determined by multiplying the number of shares of Company Common Stock subject to such Company Option immediately prior to the Effective Time by the Conversion Ratio, at an exercise price per share of HNC Common Stock equal to the exercise price per share of Company Common Stock that was in effect for such Company Option immediately prior to the Effective Time divided by the Conversion Ratio; provided, however, that if the foregoing calculation would result in an assumed and converted Company Option being converted into an HNC Option that, after aggregating all the shares of HNC Common Stock issuable upon the exercise of such HNC Option, would be exercisable for a fraction of a share of HNC Common Stock, then the number of shares of HNC Common Stock subject to such HNC Option shall be rounded down to the nearest whole number of shares of HNC Common Stock. The terms, exercisability, vesting schedule, status as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (if applicable) or a nonqualified stock option, and all other terms and conditions of each Company Option (including but not limited to the provisions of the Company Option Plan that form part of the terms and conditions of such Company Option) that is converted into an HNC Option in the Merger will (except as otherwise provided in the terms of such Company Option), to the extent permitted by law and otherwise reasonably practicable, be unchanged and continue in effect after the Merger. Pre-Merger employment service with the Company will be credited to each holder of a Company Option for purposes of applying any vesting schedule contained in a Company Option to determine the number of shares of HNC Common Stock that are exercisable under the HNC Option into which such Company Option is converted in the Merger. 2.3 Adjustments for Capital Changes. Notwithstanding the provisions of Section 2.1 or Section 2.2, if at any time prior to the Effective Time, HNC recapitalizes, either through a -4- 5 subdivision (or stock split) of any of its outstanding shares into a greater number of shares, or a combination (or reverse stock split) of any of its outstanding shares into a lesser number of shares, or reorganizes, reclassifies or otherwise changes its outstanding shares into the same or a different number of shares of other classes (other than through a subdivision or combination of shares provided for in the previous clause), or declares a dividend on its outstanding shares payable in shares of HNC Common Stock or in shares or securities convertible into shares of HNC Common Stock (each, a "CAPITAL CHANGE"), then the HNC Closing Average Price Per Share, the number of shares of HNC Common Stock constituting the HNC Merger Shares and the Conversion Ratio will each be appropriately adjusted so as to maintain the proportionate interests of the stockholders and optionholders of HNC and the Company in the outstanding equity of HNC immediately following the Merger as contemplated by this Agreement. 2.4 Escrow Agreement. HNC will withhold ten percent (10%) of the shares of HNC Common Stock to be issued to Company Stockholders in the Merger pursuant to Section 2.1.2, rounded down to the nearest whole number of shares to be issued to each the Company Stockholder (the "ESCROW SHARES") and will deliver certificates representing such Escrow Shares to State Street Bank and Trust Company or a similar institution, as escrow agent (the "ESCROW AGENT"), together with related stock transfer powers, to be held by the Escrow Agent as security for the Company Stockholders' indemnification obligations under Section 11 of the Plan and pursuant to the provisions of an escrow agreement entered into by HNC, the Escrow Agent, the Company Stockholders and the representatives of the Company Stockholders pursuant to the Plan (the "ESCROW AGREEMENT"). The Escrow Shares will be represented by a certificate or certificates issued in the names of the Company Stockholders in proportion to their respective interests therein and will be held by the Escrow Agent during that time period specified in the Escrow Agreement (the "ESCROW PERIOD"). 2.5 Effects of the Merger. At and upon the Effective Time: (a) the separate existence of Sub will cease and Sub will be merged with and into the Company, and the Company will be the surviving corporation of the Merger (the "SURVIVING CORPORATION") pursuant to the terms of this Agreement and the Plan; (b) the Restated Articles of Incorporation of the Company shall be amended to read as set forth in Exhibit A attached hereto and shall be the Articles of Incorporation of the Surviving Corporation; (c) each share of Company stock that is outstanding immediately prior to the Effective Time and each Company Option that is outstanding immediately prior to the Effective Time shall be converted into HNC Common Stock or an HNC Option, respectively, as provided in this Section 2; (d) each share of Sub Common Stock that is outstanding immediately prior to the Effective Time shall be converted into one (1) share of Company Common Stock as provided in Section 2.1.1 hereof; and (e) the Merger shall, from and after the Effective Time, have all of the effects provided by applicable law. ARTICLE 3 EXCHANGE OF CERTIFICATES 3.1 At or before the Effective Time, each holder of shares of Company stock will surrender the certificate(s) for such shares (each a "COMPANY CERTIFICATE"), duly endorsed to HNC for cancellation. Promptly after the Effective Time and receipt of such Company Certificates, HNC or its transfer agent will issue to each tendering holder of a Company -5- 6 Certificate a certificate for the number of shares of HNC Common Stock to which such holder is entitled pursuant to Section 2.1.2 hereof (less the Escrow Shares to be placed in escrow pursuant to Section 2.4 of the Plan and the Escrow Agreement), and HNC or its transfer agent will pay by check to each tendering holder cash in lieu of fractional shares in the amount payable to such holder in accordance with Section 2.1.4 hereof. At the Closing (as defined in the Plan), HNC will deliver the certificates representing the Escrow Shares to the Escrow Agent pursuant to the Escrow Agreement. 3.2 No dividends or distributions payable to holders of record of HNC Common Stock after the Effective Time, or cash payable in lieu of fractional shares, will be paid to the holder of any unsurrendered the Company Certificate until the holder of such unsurrendered the Company Certificate surrenders such the Company Certificate to HNC as provided above. Subject to the effect, if any, of applicable escheat and other laws, following surrender of any the Company Certificate, there will be delivered to the person entitled thereto, without interest, the amount of any dividends and distributions therefor paid with respect to HNC Common Stock so withheld as of any date subsequent to the Effective Time and prior to such date of delivery. 3.3 After the Effective Time, there will be no further registration of transfers on the stock transfer books of the Company or its transfer agent of the Company Stock that was outstanding immediately prior to the Effective Time. If, after the Effective Time, the Company Certificates are presented for any reason, they will be canceled and exchanged as provided in this Section 3. 3.4 Until the Company Certificates representing the Company stock outstanding prior to the Merger are surrendered pursuant to Section 3.1 above, such Company Certificates will be deemed, for all purposes, to evidence ownership of the number of shares of HNC Common Stock into which the Company Stock will have been converted pursuant to Section 2.1.2 of this Agreement. ARTICLE 4 TERMINATION AND AMENDMENT 4.1 Agreement Subject to Termination by Mutual Consent. Notwithstanding the approval of this Agreement by the stockholders of Sub and the Company, this Agreement may be terminated at any time prior to the Effective Time by the mutual written agreement of Sub and the Company. 4.2 Agreement Subject to Termination on Termination of Plan. Notwithstanding the approval of this Agreement by the stockholders of Sub and the Company, this Agreement will terminate forthwith in the event that the Plan is terminated in accordance with its terms prior to the Effective Time. 4.3 Effect of Termination. In the event of the termination of this Agreement as provided above, this Agreement will forthwith become void and there will be no liability on the part of either Sub or the Company or their respective officers and directors, except as otherwise provided in the Plan. -6- 7 4.4 Amendment. This Agreement may be amended by the parties hereto at any time before or after approval by the stockholders of either Sub or the Company, but, after such approval, no amendment will be made which by applicable law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of Sub and the Company. ARTICLE 5 MISCELLANEOUS 5.1 Plan. The Plan and this Agreement are intended to be construed together in order to effectuate their purposes. 5.2 Assignment; Binding Upon Successors and Assigns. Neither party hereto may assign or delegate any of its rights or obligations under this Agreement without the prior written consent of the other party hereto. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 5.3 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California (irrespective of its choice of law principles). 5.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] -7- 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement of Merger to be duly executed as of the date and year first above written. COMPREVIEW, INC. FW1 ACQUISITION CORP. By:/s/ Robert L. Kaaren By: ----------------------------- ---------------------------- Robert L. Kaaren, M.D. Robert L. North Chairman and Chief Executive President and Chief Executive Officer Officer By: /s/ Michael E. Munayyer By: /s/ Raymond V. Thomas ----------------------------- ---------------------------- Michael E. Munayyer Raymond V. Thomas Secretary Chief Financial Officer and Secretary By: /s/ Michelle DeLizio ---------------------------- Michelle DeLizio President -8- 9 EXHIBIT A RESTATED ARTICLES OF INCORPORATION 10 RESTATED ARTICLES OF INCORPORATION OF COMPREVIEW, INC. ARTICLE I The name of the corporation is CompReview, Inc. ARTICLE II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Unless applicable law otherwise provides, any amendment, repeal or modification of this Article III shall not adversely affect any right of any director under this Article III that existed at or prior to the time of such amendment, repeal or modification. ARTICLE IV The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, by agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits on such excess indemnification set forth in Section 204 of the California Corporations Code. Unless applicable law otherwise provides, any amendment, repeal or modification of any provision of this Article IV shall not adversely affect any contract or other right to indemnification of any agent of the corporation that existed at or prior to the time of such amendment, repeal or modification. ARTICLE V The corporation is authorized to issue only one class of shares of stock, which shall be designated "Common Stock" and which shall have no par value. The total number of shares of Common Stock the corporation is authorized to issue is one hundred (100) shares. EX-4.01 4 EXHIBIT 4.01 1 EXHIBIT 4.01 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of November 28, 1997 (the "EFFECTIVE DATE"), by and between HNC SOFTWARE INC., a Delaware corporation ("HNC"), and the persons and entities listed on Exhibit A hereto (collectively, the "STOCKHOLDERS" and each individually, a "STOCKHOLDER") who immediately prior to the Effective Time of the Merger (as defined below) are all of the stockholders of CompReview, Inc., a California corporation (the "COMPANY"). R E C I T A L S A. The Company, HNC, FW1 Acquisition Corp., a Delaware corporation that is a wholly-owned subsidiary of HNC ("SUB") and the Stockholders have entered into an Agreement and Plan of Reorganization dated as of July 14, 1997 (the "PLAN"). Pursuant to the Plan, Sub is to be merged with and into the Company in a statutory merger (the "MERGER"), with the Company to be the surviving corporation of the Merger and thus to become a wholly-owned subsidiary of HNC. The date on which the Merger becomes effective shall be the Effective Date of this Agreement. B. As a condition precedent to the consummation of the Merger, the Plan provides that the Stockholders shall be granted certain Form S-3 registration rights with respect to the shares of HNC Common Stock that are issued to them upon the conversion of their shares of Company Common Stock in the Merger pursuant to Section 2.1.2 of the Plan, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. REGISTRATION RIGHTS 1.1 CERTAIN DEFINITIONS. For purposes of this Agreement: (a) 1933 Act. The term "1933 ACT" means the U.S. Securities Act of 1933, as amended, or any successor law. (b) 1934 Act. The term "1934 ACT" means the U.S. Securities Exchange Act of 1934, as amended, or any successor law. (c) Registration. The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to the registration effected by preparing and filing a Form S-3 registration statement in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement. (d) Registrable Securities. The term "REGISTRABLE SECURITIES" means: (i) the shares of HNC Common Stock that are issued to the Stockholders in the Merger pursuant to 2 Section 2.1.2 of the Plan upon the conversion of the outstanding shares of Company Common Stock that are owned and held by the Stockholders immediately prior to the Effective Time; and (ii) any shares of HNC Common Stock that may be issued as a dividend or other distribution (including shares of HNC Common Stock issued in a subdivision and split of HNC's outstanding Common Stock) with respect to, or in exchange for or in replacement of, shares of HNC Common Stock described in clause (i) of this Section 1.1(d) or in this clause (ii); excluding in all cases, however, any such shares that are: (w) registered under the 1933 Act other than pursuant to a Form S-3 registration statement filed pursuant to this Agreement; (x) sold by a person in a transaction in which rights under this Agreement are not assigned in accordance with the terms of this Agreement; (y) sold pursuant to a registration statement filed pursuant to this Agreement; or (z) sold pursuant to Rule 144 promulgated under the 1933 Act or otherwise sold to the public. Only shares of HNC Common Stock shall be Registrable Securities. Except as provided in clause (ii) of the first sentence of this Section 1.1(d), without limitation, the term "Registrable Securities" does not include: (i) any shares of HNC Common Stock that were not issued in the Merger; or (ii) any shares of HNC Common Stock that are issued or issuable upon the exercise of any HNC Options that are issued pursuant to Section 2.2 of the Plan upon the conversion of outstanding Company Options in the Merger. (e) Holder. The term "HOLDER" means the original holder of any Registrable Securities or any assignee of record of any Registrable Securities to whom rights under this Agreement have been duly assigned in accordance with the provisions of this Agreement. (f) SEC. The term "SEC" or "COMMISSION" means the U.S. Securities and Exchange Commission. (g) Form S-3. The term "FORM S-3" means a Form S-3 registration statement under the 1933 Act, as such is in effect on the Effective Date, or any successor registration statement form under the 1933 Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by HNC with the SEC. (h) Rule 415. The term "RULE 415" means Rule 415 under the 1933 Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. (i) Terms from Plan. Capitalized terms used in this Agreement but not defined in this Section 1 or elsewhere in this Agreement shall have the same meanings given to such terms in the Plan. 1.2. FORM S-3 SHELF REGISTRATION. (a) Filing and Registration Period. As promptly as reasonably practicable following the Effective Time of the Merger (but not earlier than five (5) days after the Effective Time of the Merger), and consistent with the requirements of applicable law, HNC shall prepare and file with the SEC a registration statement on Form S-3 for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the then outstanding Registrable Securities -2- 3 (the "SHELF REGISTRATION"). HNC shall use its best efforts to have such Shelf Registration declared effective as soon as practicable after the Effective Time of the Merger and to keep the Shelf Registration continuously effective under the 1933 Act for a continuous period of time (such period of time being hereinafter called the "REGISTRATION PERIOD") commencing on the date the Shelf Registration is declared effective under the 1933 Act by the SEC (the "DATE OF EFFECTIVENESS") and ending on the first (1st) anniversary of the Effective Time of the Merger. HNC shall have no duty or obligation to keep the Shelf Registration (or any Subsequent Registration, as defined below) effective after the expiration of the Registration Period. (b) Subsequent Registration. If the Shelf Registration or a Subsequent Registration (as defined below) ceases to be effective for any reason at any time during the Registration Period, then HNC shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall, within 45 days of such cessation of effectiveness, file an amendment to the Shelf Registration seeking to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional "shelf" registration statement pursuant to Rule 415 covering all of the then outstanding Registrable Securities (a "SUBSEQUENT REGISTRATION"). If a Subsequent Registration is filed, HNC shall use its best efforts to cause the Subsequent Registration to be declared effective as soon as practicable after such filing and to keep such registration statement continuously effective until the end of the Registration Period. (c) Supplements and Amendments. Subject to the provisions of Section 1.2(h), HNC shall supplement and amend the Shelf Registration if, as and when required by the 1933 Act, the rules and regulations promulgated thereunder or the rules, regulations or instructions applicable to the registration form used by HNC for such Shelf Registration. (d) Timing and Manner of Sales. Except as otherwise provided in Section 1.2(j), any sale of Registrable Securities pursuant to a registration hereunder may be made only during a "Permitted Window" (as defined in Section 1.2(h) below). In addition, any sale of Registrable Securities pursuant to a registration hereunder may only be made in accordance with the method or methods of distribution of such Registrable Securities as described in the registration statement for the Shelf Registration (or Subsequent Registration, as applicable), which methods of distribution will be specified by the Holders in their Notice of Resale (as defined below). A Holder may also sell Registrable Securities in a bona fide private offering if the selling Holder provides HNC with a written opinion of counsel, satisfactory to counsel to HNC, that such offer and sale is an exempt transaction under the 1933 Act and applicable state securities laws. (e) Pooling Restrictions. Notwithstanding anything herein to the contrary, no Stockholder (or such Stockholder's assigns) will sell any Registrable Securities (whether pursuant to a registration or otherwise), and no Permitted Window will commence, until after HNC has publicly released a report including financial statements of HNC that include at least thirty (30) days of post-Merger combined operating results of HNC and the Company. (f) Trading Limits; No Underwritings. Except as otherwise provided in Section 1.2(j), during any calendar quarter during the Registration Period, the Stockholders, -3- 4 collectively, may not sell an amount of Registrable Securities that, in the aggregate, exceeds five percent (5%) of the outstanding shares of HNC Common Stock (as indicated in HNC's then most recent published report) without HNC's prior written consent. No sale of Registrable Securities under any registration statement pursuant to this Agreement may be effected pursuant to any underwritten offering without HNC's prior written consent, which may be withheld in its sole and absolute discretion. (g) Notice of Resale. Before a Holder may make any sale, transfer or other disposition of any Registrable Securities during the Registration Period, such Holder must first give written notice to HNC (a "NOTICE OF RESALE") of such Holder's present intention to sell, transfer or otherwise dispose of some or all of such Holder's Registrable Securities, and the number of Registrable Securities such Holder proposes to sell, transfer or otherwise dispose of. In addition, a Notice of Resale shall contain the information required to be included therein under Section 1.2(d) and Section 1.2(h). (h) Permitted Window; Sale Procedures. (i) A "PERMITTED WINDOW" is a period of twenty (20) consecutive calendar days commencing upon HNC's written notification to the Stockholders in response to a Notice of Resale that the prospectus contained in the Form S-3 registration statement filed pursuant to this Agreement is available to be used for resales of Registrable Securities pursuant to the Shelf Registration (or a Subsequent Registration, as applicable). (ii) Before a Holder can make a sale of any Registrable Securities (including without limitation a sale pursuant to Section 1.2(j) of any Registrable Securities that are Initial Shares (as defined in Section 1.2(j)), and in order to cause a Permitted Window to commence, a Holder or Holders of Registrable Securities must first give HNC a Notice of Resale indicating such Holder's or Holders' intention to sell Registrable Securities pursuant to the Shelf Registration (or Subsequent Registration, as applicable). (iii) Upon receipt of such Notice of Resale (unless, with respect to a sale of Registrable Securities that are not "Initial Shares" as defined in Section 1.2(j), a certificate of the President or the Chief Financial Officer of HNC is delivered as provided in Section 1.3(b) below), HNC will give written notice to the Holder or Holders who gave such Notice of Resale as soon as practicable, but in no event more than seven (7) business days after HNC's receipt of such Notice of Resale that either: (A) the prospectus contained in the registration statement for the Shelf Registration (or Subsequent Registration, if applicable) is current (it being acknowledged that it may be necessary for HNC during this period to supplement the prospectus or make an appropriate filing under the 1934 Act so as to cause the prospectus to become current) and that (as applicable) (1) the Permitted Window will commence on the date of such notice by HNC or (2) to the extent that the Notice of Resale covers a sale of Initial Shares (as defined in Section 1.2(j)) by Stockholders pursuant to Section 1.2(j), that such sale of Initial Shares may commence; or (B) that HNC is required under the 1933 Act and the regulations thereunder to amend the registration statement in order to cause the prospectus to be current. In the event that HNC determines that an amendment to the registration statement is necessary as provided above, it will file and cause such amendment to become effective as soon as -4- 5 practicable; whereupon it will notify the Stockholders that (as applicable) (1) the Permitted Window will then commence, or (2) to the extent that the Notice of Resale covers a sale of Initial Shares (as defined in Section 1.2(j)) by Stockholders pursuant to Section 1.2(j), that such sale of Initial Shares may commence. (iv) There will be no more than three (3) Permitted Windows during the Registration Period and there will be at least a 60-day interval between any two Permitted Windows. HNC shall not be obligated to keep the registration statement for the Shelf Registration (or any Subsequent Registration) current during any period other than a Permitted Window or a period during which sales of Initial Shares (as defined in Section 1.2(j)) are permitted under this Agreement. The provisions of this Section 1.2(h) are subject and subordinate to the provisions of Section 1.2(i). If, pursuant to Section 1.3(b), HNC defers a Permitted Window, and the Holders withdraw their Notice of Resale, then such withdrawal shall not count as a Permitted Window. The Holders may elect to withdraw a request for registration pursuant to a Notice of Resale; provided however, that if HNC has commenced preparation of any supplement or amendment to the registration statement or any part thereof in response to such Notice of Resale prior to receiving written notice from the Holders' of the withdrawal of their request for registration, then the Holders will promptly reimburse HNC for its actual costs and expenses incurred in preparing and/or filing such supplement and/or amendment. (i) Trading Window Compliance. The Stockholders acknowledge that HNC maintains an Insider Trading Compliance Program and an Insider Trading Policy, as such may be amended (the "HNC TRADING POLICY") and that the HNC Trading Policy requires that those directors, officers, employees and other persons whom HNC determines to be "Access Personnel" or otherwise subject to the "trading window" and pre-clearance requirements of the HNC Trading Policy (and members of their immediate families and households) are permitted to effect trades in HNC securities: (i) only during those specified time periods ("TRADING WINDOWS") in which such persons are permitted to make sales, purchases or other trades in HNC's securities under the "trading window" provisions of the HNC Trading Policy; and (ii) only after pre-clearance of such sales, purchases or other trades with HNC's Insider Trading Compliance Officer. If a Holder is or becomes subject to the "trading window" and/or "pre-clearance" provisions of the HNC Trading Policy described above, then, notwithstanding anything herein to the contrary (including without limitation the provisions of Section 1.2(h) and Section 1.2(j)), such Holder may sell, transfer and dispose of Registrable Securities only during those trading windows during which such HNC Access Personnel are permitted to effect trades in HNC stock under the HNC Trading Policy and only after pre-clearing such trades with HNC's Insider Trading Compliance Officer as provided in the HNC Trading Policy. When and if applicable, HNC shall notify Holders in writing of the commencement or expiration of each trading window within at least one (1) trading day prior to the commencement or expiration of such trading window, as applicable. (j) Special Provisions. Notwithstanding the provisions of Section 1.2(d) and Section 1.3(b) hereof (but subject to the provisions of Section 1.2(i) above regarding trading windows and pre-clearances of trades): -5- 6 (i) the Stockholders shall not be required to comply with (A) the provisions of the first sentence of Section 1.2(d) requiring that any sale of Registrable Securities pursuant to a registration hereunder be made only during a "Permitted Window" or (B) the provisions of the first sentence of Section 1.2(f) regarding limits on the amount of Registrable Securities that may be sold in a calendar quarter; and (ii) the Company shall not be entitled to exercise its rights under Section 1.3(b) to defer or postpone a Stockholder's proposed sale of Registrable Securities; until one or both of the Stockholders has (and/or have together) sold an aggregate combined total of One Million Two Hundred Fifty Thousand (1,250,000) shares of HNC Common Stock (as presently constituted) that are Registrable Securities (such first 1,250,000 shares of HNC Common Stock, as presently constituted, being hereinafter referred to as the "INITIAL Shares"). In the event that one or both of the Stockholders proposes to effect a sale or other disposition of Registrable Securities that involves the sale or disposition of both Initial Shares and Registrable Securities that are not Initial Shares, then the provisions of the immediately preceding sentence shall only apply to those Registrable Securities that are Initial Shares. 1.3 LIMITATIONS. Notwithstanding the provisions of Section 1.2 above, HNC shall not be obligated to effect any such registration, qualification or compliance of Registrable Securities pursuant to this Agreement, or the Holders shall not be entitled to sell Registrable Securities pursuant to the registration statement, as applicable: (a) if Form S-3 is not then available for such offering by the Holders; (b) if HNC shall furnish to the Holders a certificate signed by the President or Chief Financial Officer of HNC stating that, in the good faith judgment of the Board of Directors of HNC, it would be seriously detrimental to HNC and its stockholders for such Permitted Window to be in effect at such time, due, for example, to the existence of a material development or potential material development involving HNC which HNC would be obligated to disclose in the prospectus contained in the Shelf Registration, which disclosure would, in the good faith judgment of the Board of Directors of HNC, be premature or otherwise inadvisable at such time or would have a material adverse affect upon HNC and its stockholders, in which event HNC will have the right to defer a Permitted Window for a period of not more than thirty (30) days after receipt of a Notice of Resale from the Holder or Holders pursuant to this Section 1.2; provided, however, that HNC may so postpone a Permitted Window no more than once per calendar year during the Registration Period; and provided further, that if HNC so postpones a Permitted Window, then notwithstanding the last sentence of Section 1.2(a), the Registration Period of the Shelf Registration shall be extended by a period of time equal to the period of postponement (subject to the provisions of Sections 1.4 and 1.10 below). If HNC defers a Permitted Window as provided herein and the Holders withdraw their Notice of Resale, then such withdrawal shall not count as a Permitted Window. (c) if HNC is acquired and its Common Stock ceases to be publicly traded and in such acquisition of HNC the Holders receive, in exchange for the Registrable Securities then held by them, cash and/or securities that are registered under the 1933 Act or that may be traded -6- 7 without restriction on transfer imposed by the 1933 Act, other than the restrictions on transfer under paragraphs (c), (e), (f) and (g) of Rule 144 promulgated under the 1933 Act, as such Rule is in effect on the date of this Agreement; (d) in any particular jurisdiction in which HNC would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance, unless HNC is already subject to service of process in such jurisdiction; or (e) if the SEC refuses to declare such registration effective due to the participation of any particular Holder in such registration (unless such Holder withdraws all such Holder's Registrable Securities from such registration statement). 1.4 SHARES OTHERWISE ELIGIBLE FOR RESALE. HNC shall not be obligated to effect or continue to keep effective any such registration, registration statement, qualification or compliance of Registrable Securities held by any particular Holder: (a) if HNC or its legal counsel shall have received a "no-action" letter or similar written confirmation from the SEC that all the Registrable Securities then held by such Holder may be resold by such Holder within a three (3) month period without registration under the 1933 Act pursuant to the provisions of Rule 144 promulgated under the 1933 Act (or successor provisions), or otherwise; (b) if legal counsel to HNC shall deliver a written opinion to HNC, its transfer agent and the Holders, in form and substance reasonably acceptable to HNC, to the effect that all the Registrable Securities then held by such Holder may be resold by such Holder within a three (3) month period without registration under the 1933 Act pursuant to the provisions of Rule 144 promulgated under the 1933 Act, or otherwise; or (c) after expiration or termination of the Registration Period. 1.5 EXPENSES. HNC shall pay all expenses incurred in connection with the Shelf Registration and any Subsequent Registration (excluding brokers' discounts and commissions), including without limitation all filing, registration and qualification, printers', legal and accounting fees. 1.6 OBLIGATIONS OF HNC. Subject to Sections 1.2, 1.3 and 1.4 above, when required to effect the registration of any Registrable Securities under the terms of this Agreement, HNC will, as expeditiously as reasonably possible: (a) furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus (and amendments or supplements thereto), in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them; (b) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will -7- 8 be reasonably requested by the Holders, provided that HNC will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such state or jurisdiction unless HNC is already so qualified or subject to service of process, respectively, in such jurisdiction; and (c) promptly notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event known to the Company's Chief Executive Officer as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 1.7 FURNISH INFORMATION. It shall be a condition precedent to the obligations of HNC to take any action pursuant to this Agreement that the selling Holders will furnish to HNC such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such Registrable Securities as shall be required to timely effect the registration of their Registrable Securities. 1.8 DELAY OF REGISTRATION. No Holder will have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 1.9 INDEMNIFICATION. (a) By HNC. To the extent permitted by law, HNC will indemnify, defend and hold harmless each Holder against any losses, claims, damages, or liabilities (joint or several) to which such Holder may become subject under the 1933 Act, the 1934 Act or other U.S. federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in a registration statement filed by HNC pursuant to this Agreement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state in such registration statement, preliminary prospectus or final prospectus or any amendments or supplements thereto, a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by HNC of the 1933 Act, the 1934 Act, any U.S. federal or state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any U.S. federal or state securities law in connection with the offering covered by such registration statement; -8- 9 provided however, that the indemnity agreement contained in this subsection 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of HNC (which consent shall not be unreasonably withheld), nor shall HNC be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder. (b) By Selling Holders. To the extent permitted by law, each selling Holder will indemnify and hold harmless HNC, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls HNC within the meaning of the 1933 Act, any underwriter and any other Holder selling securities under such registration statement, against any losses, claims, damages or liabilities (joint or several) to which HNC or any such director, officer, controlling person, underwriter or other such Holder may become subject under the 1933 Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse HNC or any such director, officer, controlling person, underwriter or other Holder for any legal or other expenses reasonably incurred by HNC or any such director, officer, controlling person, underwriter or other Holder in connection with investigating or defending any such loss, claim, damage, liability or action, as incurred; provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the indemnifying Holder, which consent shall not be unreasonably withheld; and provided further that the total amounts payable in indemnity by a Holder under this subsection 1.9(b) in respect of any Violation shall not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (c) Notice. Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim for indemnification or contribution in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and, if the indemnifying party is HNC, HNC shall have the right and obligation to control the defense of such action; provided, however, that: (i) HNC shall also have the right, at its option, to assume and control the defense of any action with respect to which HNC or any person entitled to be indemnified by the Selling Holders under Section 1.9(b) is entitled to indemnification from the Selling Holders; (ii) the indemnified party or parties shall have the right to participate at its own expense in, and, to the extent agreed in writing with the indemnifying party and any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; and (iii) an indemnified party shall have the right to retain its own counsel, with the fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such -9- 10 counsel in such proceeding. The failure of an indemnified party to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to the ability of the indemnifying party to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than under this Section 1.9. (d) Defect Eliminated in Final Prospectus. The foregoing indemnity agreements of HNC and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended or supplemented prospectus on file with the SEC and effective at the time the sale of Registrable Securities under such registration statement occurs (the "AMENDED PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any person if a copy of the Amended Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage, at or prior to the time such action is required by the 1933 Act. (e) Contribution. In order to provide for just and equitable contribution to joint liability under the 1933 Act in any case in which either (i) any Holder exercising rights under this Agreement makes a claim for indemnification pursuant to this Section 1.9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 1.9 provides for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of any such selling Holder in circumstances for which indemnification is provided under this Section 1.9; then, and in each such case, HNC and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold by such Holder under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and HNC and other selling Holders are responsible for the remaining portion; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (f) Survival. The obligations of HNC and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement pursuant to this Agreement, and otherwise. 1.10 DURATION AND TERMINATION OF HNC'S OBLIGATIONS. HNC will have no obligations pursuant to Section 1.2 of this Agreement with respect to any Notice of Resale or other request or requests for registration (or inclusion in a registration) made by any Holder or to maintain or continue to keep effective any registration or registration statement pursuant hereto: -10- 11 (a) after the expiration or termination of the Registration Period; (b) if HNC has already effected three (3) Permitted Windows pursuant to this Agreement; (c) if, in the opinion of counsel to HNC, all such Registrable Securities proposed to be sold by such Holder may be sold in a three (3) month period without registration under the 1933 Act pursuant to Rule 144 promulgated under the 1933 Act or otherwise; or (d) if all Registrable Securities have been registered and sold pursuant to registrations effected pursuant to this Agreement and/or have been transferred in transactions in which registration rights hereunder have not been assigned in accordance with this Agreement. 1.11 ACKNOWLEDGMENT OF OTHER AGREEMENTS. The Holders acknowledge that they have been informed by HNC that other stockholders of HNC currently hold certain S-3 and other registration rights that may enable such other stockholders to sell shares of HNC during one or more Permitted Windows or at other times (thus potentially adversely affecting the receptivity of the market to the sale of the Registrable Securities pursuant to the Shelf Registration) and that certain stockholders hold "piggyback registration rights" that may allow them to participate in a registration effected pursuant to this Agreement. In the event that, after the date of this Agreement and prior to expiration of the Registration Period, HNC enters into an agreement pursuant to which HNC grants registration rights to a third party or parties that may be exercised during the Registration Period, then, within thirty (30) days after it enters into such agreement, HNC will notify the Company Stockholders of the grant of such registration rights and their general terms. 2. ASSIGNMENT Notwithstanding anything herein to the contrary, the rights of a Holder under this Agreement may be assigned only with HNC's express prior written consent, which may be withheld in HNC's sole discretion; provided, however, that the rights of a Holder under this Agreement may be assigned without HNC's express prior written consent: (a) to a Permitted Assignee (as defined below); or (b) (if applicable) by will or by the laws of intestacy, descent or distribution, provided that the assignee agrees in writing to be bound by all the obligations of the Holders under this Agreement. Any attempt to assign any rights of a Holder under this Agreement without HNC's express prior written consent in a situation in which such consent is required by this Section shall be null and void and without effect. Subject to the foregoing restrictions, all rights, covenants and agreements in this Agreement by or on behalf of the parties hereto will bind and inure to the benefit of the respective permitted successors and assigns of the parties hereto. Each of the following parties are "PERMITTED ASSIGNEES" for purposes of this Section: (a) a trust whose beneficiaries consist solely of a Holder and such Holder's immediate family; and (b) the personal representative, custodian or conservator of a Holder, in the case of the death, bankruptcy or adjudication of incompetency of that Holder. 3. GENERAL PROVISIONS 3.1 NOTICES. Unless otherwise provided, all notices, instructions and other communications required or permitted to be given hereunder or necessary or convenient in connection herewith must be in writing and shall be deemed delivered (i) when personally served or when delivered by telex or facsimile (to the telex or facsimile number of the person to whom -11- 12 the notice is given), (ii) the first business day following the date of deposit with an overnight courier service or (iii) on the earlier of actual receipt or the third business day following the date on which the notice is deposited in the United States mail, first class certified, postage prepaid, addressed as follows: (a) if to HNC, at 5930 Cornerstone Court West, San Diego, CA 92121, Attention: President, Telecopier: (619) 452-3220; and (b) if to a Stockholder, at such Stockholder's respective address as set forth on Exhibit A hereto. Any party hereto (and such party's permitted assigns) may by notice so given change its address for future notices hereunder. 3.2 ENTIRE AGREEMENT. This Agreement and the provisions of Section 2.2.2 of the Plan constitute and contain the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the parties with respect to the subject matter hereof. 3.3 AMENDMENT OF RIGHTS. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of HNC and Holders of a majority of all Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 3.3 shall be binding upon each Holder, each permitted successor or assignee of such Holder and HNC. 3.4 GOVERNING LAW. This Agreement will be governed by and construed exclusively in accordance with the internal laws of the State of California, United States of America, as applied to agreements among California residents entered into and to be performed entirely within California, excluding that body of law relating to conflict of laws and choice of law. 3.5 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, then such provision(s) will be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision(s) were so excluded and will be enforceable in accordance with its terms. 3.6 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement. 3.7 CAPTIONS. The headings and captions to sections of this Agreement have been inserted for identification and reference purposes only and will not be used to construe or interpret this Agreement. 3.8 COUNTERPARTS. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 3.9 EFFECTIVENESS OF AGREEMENT. Regardless of when signed, this Agreement will not become effective or binding unless and until the Effective Time of the Merger. -12- 13 [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -13- 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the Effective Date. HNC SOFTWARE INC. THE STOCKHOLDERS By: /s/ Raymond V. Thomas /s/ Robert L. Kaaren ---------------------------- --------------------------- Robert L. Kaaren, M.D. Title: Chief Financial Officer ------------------------- /s/ Mishel E. Munayyer --------------------------- Mishel E. Munayyer a.k.a. Michael E. Munayyer, Trustee of the Michael Munayyer Trust dated August 11, 1995 [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT] -14- 15 EXHIBIT A LIST OF STOCKHOLDERS
NUMBER OF SHARES OF HNC NAME AND ADDRESS COMMON STOCK HELD - ---------------- ----------------- Robert L. Kaaren, M.D. 2,442,780 c/o CompReview, Inc. 3200 Park Center Drive, Suite 500 Costa Mesa, CA 92626 Mishel E. Munayyer a.k.a. Michael E. Munayyer, 2,442,780 Trustee of the Michael Munayyer Trust dated August 11, 1995 Post Office Box 200-179 Mission Viejo, CA 92692
EX-11.01 5 EXHIBIT 11.01 1 EXHIBIT 11.01 HNC SOFTWARE INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, 1997 1996 1996 1995 1994 ----------------- ---------------- ---------------- ---------------- ---------------- FULLY FULLY FULLY FULLY FULLY PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME $14,299 $14,299 $ 4,747 $ 4,747 $11,893 $11,893 $ 6,077 $ 6,077 $ 3,142 $ 3,142 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= SHARES(1) Weighted average common shares outstanding 24,214 24,214 23,437 23,437 23,552 23,552 15,195 15,195 8,642 8,642 Weighted average common stock options and warrants as determined by application of the treasury stock method(2) 1,359 1,666 1,879 1,957 1,796 1,795 1,958 2,155 1,427 1,504 Weighted average preferred shares outstanding assuming conversion to common stock(3) - - - - - - 4,454 4,454 8,552 8,552 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Pro forma weighted average common and common equivalent shares outstanding 21,607 21,804 18,621 18,698 ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding 25,573 25,880 25,316 25,394 25,348 25,347 ======= ======= ======= ======= ======= ======= PRO FORMA NET INCOME PER SHARE OF COMMON STOCK $ 0.28 $ 0.28 $ 0.17 $ 0.17 ======= ======= ======= ======= NET INCOME PER SHARE OF COMMON STOCK $ 0.56 $ 0.55 $ 0.19 $ 0.19 $ 0.47 $ 0.47 ======= ======= ======= ======= ======= ======= PRO FORMA ADJUSTED NET INCOME(4) $11,704 $11,704 $ 3,319 $ 3,319 $ 9,731 $9,731 $ 4,534 $ 4,534 $ 2,137 $ 2,137 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= PRO FORMA ADJUSTED NET INCOME PER SHARE OF COMMON STOCK (4) $ 0.46 $ 0.45 $ 0.13 $ 0.13 $ 0.38 $ 0.38 $ 0.21 $ 0.21 $ 0.11 $ 0.11 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- --------------------- (1) All share and per share amounts have been adjusted to give retroactive effect to the stock split, which occurred on April 3, 1996. (2) Includes an adjustment for options pursuant to SAB No. 83 using the treasury stock method at the initial public offering price of $7.00 per share for all periods presented prior to or including the Company's public offering date of June 26, 1995. (3) All outstanding shares of the Company's preferred stock automatically converted into shares of common stock upon the consummation of the Company's initial public offering on June 26, 1995. (4) Pro forma adjusted net income and net income per share give retroactive effect to federal and state income taxes as if CompReview had filed subchapter C corporation income tax returns for the periods presented. EX-23.01 6 EXHIBIT 23.01 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-22735) and in the Registration Statements on Form S-8 (No. 33-92902, No. 333-14323 and No. 333-18871) of HNC Software Inc. of our report dated January 21, 1997, except as to the pooling of interests with CompReview, Inc. which is as of November 28, 1997, appearing on page 28 of this Form 8-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 65 of this Form 8-K. PRICE WATERHOUSE LLP San Diego, California December 11, 1997 EX-23.02 7 EXHIBIT 23.02 1 EXHIBIT 23.02 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this report on Form 8-K of HNC Software Inc. of our report dated January 30, 1997. We also consent to the incorporation by reference in the Registration Statement Nos. 33-92902, 333-14323 and 333-18871 of HNC Software Inc. on Form S-8 and Registration Statement No. 333-22735 of HNC Software Inc. on Form S-3 of our report dated January 30, 1997 appearing in this report on Form 8-K. DELOITTE & TOUCHE LLP Costa Mesa, California December 12, 1997 EX-27 8 EXHIBIT 27
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 8,121 7,353 23,201 (709) 611 46,266 11,785 (5,446) 98,276 12,623 0 0 0 24 84,946 84,970 71,439 71,439 27,498 27,498 0 0 478 11,359 (534) 11,893 0 0 0 11,893 .47 .47
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