1
EXHIBIT 99.4
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HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
ASSETS 1996 1995
------------ -----------
Current assets:
Cash and cash equivalents................................... $ 9,059,000 $12,763,000
Accounts receivable, less allowances for returns and
doubtful accounts of $2,077,000 and $537,000
in 1996 and 1995, respectively........................... 11,890,000 7,680,000
Royalty receivable from SSA................................. - 1,382,000
Deferred income taxes....................................... 1,517,000 999,000
Due from joint ventures..................................... 1,827,000 566,000
Other current assets........................................ 1,399,000 722,000
------------ -----------
Total current assets................................... 25,692,000 24,112,000
------------ -----------
Property and equipment, less accumulated depreciation
and amortization............................................ 8,226,000 5,069,000
Investments in joint ventures.................................... 407,000 7,517,000
Intangible assets, less accumulated amortization................. 13,147,000 7,755,000
Deferred income taxes............................................ 1,284,000 1,938,000
Other assets......................................................... 37,000 13,000
------------ -----------
$ 48,793,000 $46,404,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 3,053,000 $ 1,841,000
Accrued expenses............................................. 9,799,000 4,662,000
Deferred revenues............................................ 7,193,000 5,005,000
Current portion of long-term debt............................ 907,000 600,000
Note payable to bank......................................... 1,550,000 -
Note payable to related parties.............................. - 440,000
------------ -----------
Total current liabilities............................... 22,502,000 12,548,000
------------ -----------
Commitments and contingencies
Long-term debt, excluding current portion......................... 1,368,000 1,672,000
Equity in loss in joint venture in excess of investment in
joint venture............................................. 81,000 -
Zero Coupon redeemable preferred stock, no par value; 4,000,000
shares issued and outstanding at December 31, 1996 and 1995.... - -
Puttable common stock, $0.0001 par value; 825,000 shares
issued and outstanding as of December 31, 1995................. - 4,675,000
Shareholders' equity:
Preferred stock, 20,000,000 shares authorized, Series C,
$10.00 par value; 250,000 shares issued and
outstanding as of December 31, 1995...................... - 2,485,000
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 18,690,265 and 16,936,026 shares issued and
outstanding as of December 31, 1996 and 1995, respectively 2,000 2,000
Additional paid-in capital................................... 45,291,000 32,232,000
Accumulated deficit.......................................... (20,451,000) (7,210,000)
------------ -----------
Total shareholders' equity.............................. 24,842,000 27,509,000
------------ -----------
$ 48,793,000 $46,404,000
============ ===========
See accompanying notes to consolidated financial statements.
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HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
------------ ----------- -----------
Revenues:
Services...................................... $ 37,822,000 $24,494,000 $17,481,000
Software (including royalties from HNS and
SSA of $6.9 million and $1.5 million for the
years ending December 31, 1996 and 1995,
respectively)............................... 21,441,000 13,336,000 10,412,000
------------ ----------- -----------
Total revenues......................... 59,263,000 37,830,000 27,893,000
------------ ----------- -----------
Direct costs:
Services...................................... 13,625,000 8,334,000 6,321,000
Software...................................... 2,912,000 1,951,000 1,097,000
------------ ----------- -----------
Total direct costs..................... 16,537,000 10,285,000 7,418,000
------------ ----------- -----------
Gross margin........................ 42,726,000 27,545,000 20,475,000
------------ ----------- -----------
Operating costs:
Selling and marketing......................... 15,057,000 9,791,000 7,995,000
General and administrative.................... 12,664,000 8,647,000 5,884,000
Depreciation and amortization................. 2,966,000 1,361,000 1,046,000
Product development........................... 9,000,000 5,927,000 3,900,000
Charge for purchased in-process product
development, write-off of software develop-
ment costs and acquisition related charges 8,775,000 1,160,000 4,317,000
------------ ----------- -----------
Total operating costs.................. 48,462,000 26,886,000 23,142,000
------------ ----------- -----------
Operating income (loss)............. (5,736,000) 659,000 (2,667,000)
Interest expense (income), net................... (7,000) (68,000) 27,000
Equity in losses of joint ventures............... 7,192,000 1,266,000 227,000
------------ ----------- -----------
Loss before income tax
expense (benefit)................ (12,921,000) (539,000) (2,921,000)
Income tax expense (benefit)..................... 146,000 1,203,000 (1,033,000)
------------ ----------- -----------
Net loss............................ (13,067,000) (1,742,000) (1,888,000)
Preferred stock dividends........................ (28,000) (199,000) (200,000)
------------ ----------- -----------
Net loss applicable to
common shareholders........................... $(13,095,000) $(1,941,000) $(2,088,000)
============ =========== ===========
Net loss per common share........................ $ (0.71) $ (0.13) $ (0.16)
============ =========== ===========
Weighted average common and common
equivalent shares outstanding................. 18,465,000 15,007,000 12,693,000
============ =========== ===========
See accompanying notes to consolidated financial statements.
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HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995
-------------- ---------------
Pro forma net loss data:
Loss before income tax expense (benefit)
as reported....................................... $(12,921,000) $ (539,000)
Pro forma income tax expense........................ 146,000 687,000
------------ -----------
Pro forma net loss.................................. (13,067,000) (1,226,000)
Preferred stock dividends........................... (28,000) (199,000)
------------ -----------
Pro forma net loss applicable to common
shareholders...................................... $(13,095,000) $(1,425,000)
============ ===========
Pro forma net loss per common share................. $ (0.71) $ (0.10)
============ ===========
Weighted average common and common
equivalent shares outstanding..................... 18,465,000 15,007,000
============ ===========
See accompanying notes to consolidated financial statements.
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HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Preferred stock, Series C Common stock Additional Total
------------------------- ---------------------- paid-in Accumulated shareholder's
Shares Amount Shares Amount capital deficit equity
----------- ------------- ----------- --------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1993 ......... -- $ -- 12,521,577 $ 1,000 $ 8,785,000 $ (3,137,000) $ 5,649,000
Exercise of stock options and
warrants ......................... -- -- 504,354 -- 1,193,000 -- 1,193,000
Issuance of common stock in
redemption of Series B
preferred stock ................ -- -- -- -- 5,000 -- 5,000
Amortization of discount on
Series C preferred stock ....... -- -- -- -- -- (21,000) (21,000)
Conversion of debt to
common stock ................... -- -- 470,220 -- 1,996,000 -- 1,996,000
Net loss ......................... -- -- -- -- -- (1,888,000) (1,888,000)
Preferred stock dividends ........ -- -- -- -- -- (200,000) (200,000)
------- ---------- ----------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1994 ......... -- -- 13,496,151 1,000 11,979,000 (5,246,000) 6,734,000
Exercise of stock options and
warrants ....................... -- -- 916,071 -- 1,945,000 -- 1,945,000
Purchase and retirement of
treasury stock ................. -- -- (1,500) -- (5,000) -- (5,000)
Sale of common stock ............. -- -- 2,525,304 1,000 18,283,000 -- 18,284,000
Reclassification of Series C
preferred stock to shareholders'
equity ......................... 250,000 2,485,000 -- -- -- -- 2,485,000
Amortization of discount on
Series C preferred stock ....... -- -- -- -- -- (23,000) (23,000)
Capital contribution by the
members upon formation of
SupplyTech International, LLC .. -- -- -- -- 30,000 -- 30,000
Net income ....................... -- -- -- -- -- (1,742,000) (1,742,000)
Preferred stock dividends ........ -- -- -- -- -- (199,000) (199,000)
------- ---------- ----------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1995 ......... 250,000 2,485,000 16,936,026 2,000 32,232,000 (7,210,000) 27,509,000
Exercise of stock options and
warrants and issuance of
stock under employee stock
purchase plan .................. -- -- 312,166 -- 894,000 -- 894,000
Amortization of discount on
Series C preferred stock ....... -- 4,000 -- -- -- (4,000) --
Preferred stock dividends ........ -- -- -- -- -- (28,000) (28,000)
Conversion of preferred
stock, Series C to common
stock .......................... (250,000) (2,489,000) 211,038 -- 2,489,000 -- --
Issuance of common stock and
options and warrants to acquire
common stock in connection with
acquisitions ................... -- -- 406,035 -- 5,001,000 -- 5,001,000
Reclassification of puttable
common stock to common stock as
a result of forfeiture
of put right ................... -- -- 825,000 -- 4,675,000 -- 4,675,000
Net loss ......................... -- -- -- -- -- (13,067,000) (13,067,000)
Increase in cumulative
currency translation
adjustment ..................... -- -- -- -- -- (142,000) (142,000)
-------- ---------- ----------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996 ......... -- $ -- 18,690,265 $ 2,000 $45,291,000 $(20,451,000) $ 24,842,000
======== ========== =========== ========= =========== ============ ============
See accompanying notes to consolidated financial statements.
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HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------
1996 1995 1994
--------------- ------------- -----------
Cash flows from operating activities:
Net loss........................................ $(13,067,000) $ (1,742,000) $(1,888,000)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Charge for purchased in-process product
development, write-off of software
development costs and acquisition
related charges.......................... 8,350,000 1,160,000 4,317,000
Depreciation and amortization.............. 4,922,000 2,271,000 1,433,000
Loss on sale of property and equipment..... 54,000 65,000 11,000
Discount amortization on subordinated
debt..................................... - - 19,000
Equity in losses of joint ventures......... 7,192,000 1,266,000 227,000
Deferred income tax expense (benefit)...... 136,000 1,203,000 (1,001,000)
(Increase) decrease in:
Accounts receivable...................... (2,983,000) (2,193,000) (550,000)
Royalty receivable from SSA.............. 1,382,000 (1,382,000) -
Due from joint ventures.................. (1,294,000) (516,000) 195,000
Other current assets..................... (483,000) (189,000) 341,000
Increase (decrease) in:
Accounts payable and accrued expenses.... 2,172,000 2,306,000 739,000
Deferred revenues........................ 1,644,000 887,000 890,000
------------ ------------ -----------
Net cash provided by operating
activities........................ 8,025,000 3,136,000 4,733,000
------------ ------------ -----------
See accompanying notes to consolidated financial statements.
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HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------- ------------ -----------
Cash flows from investing activities:
Short-term investment ................................ -- -- 1,000,000
Purchases of property and equipment .................. (4,770,000) (2,946,000) (1,438,000)
Additions to software development costs .............. (2,086,000) (962,000) (394,000)
Organizational expenditures .......................... -- (11,000) --
Purchased technology ................................. -- (150,000) (218,000)
Investment in acquisitions ........................... (4,738,000) (300,000) --
Investment in joint ventures ......................... -- (8,551,000) --
Proceeds from disposal of property and equipment ..... 57,000 21,000 5,000
------------ ------------ -----------
Net cash used in investing activities ......... (11,537,000) (12,899,000) (1,045,000)
------------ ------------ -----------
Cash flows from financing activities:
Dividends paid on preferred stock .................... (28,000) (199,000) (167,000)
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ...................................... 894,000 1,945,000 1,149,000
Principal payments under capital lease
obligations ........................................ (28,000) (49,000) (47,000)
Repayment of notes payable ........................... (2,905,000) (2,855,000) (54,000)
Proceeds from issuance of common stock ............... -- 18,284,000 --
Purchase of treasury stock ........................... -- (5,000) --
Redemption of Series B preferred stock ............... -- (480,000) --
Increase in note payable to bank, net ................ 1,550,000 -- --
------------ ------------ -----------
Net cash provided by (used in)
financing activities ....................... (517,000) 16,641,000 881,000
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents ..................................... (4,029,000) 6,878,000 4,569,000
Cash and cash equivalents at beginning of year .......... 12,763,000 5,885,000 1,316,000
Effect of exchange rates on cash held in
foreign currencies ................................... (49,000) -- --
Cash received from acquisitions ......................... 374,000 -- --
------------ ------------ -----------
Cash and cash equivalents at end of year ................ $ 9,059,000 $ 12,763,000 $ 5,885,000
============ ============ ===========
Supplemental disclosure of cash paid for
interest ............................................. $ 260,000 $ 128,000 $ 156,000
============ ============ ===========
Supplemental disclosures of noncash investing activities:
Acquisition of technology and distribution
agreement in exchange for common stock ............... $ -- $ 4,675,000 $ --
============ ============ ===========
Long-term debt assumed in acquisition of a business... $ 670,000 $ -- $ --
============ ============ ===========
Long-term debt assumed in acquisition of product
line ................................................ $ -- $ 2,200,000 $ --
============ ============ ===========
Acquisition of businesses in exchange for
assumption of liabilities and issuance
of common stock and options and
warrants to acquire common stock ................... $ 11,294,000 $ -- $ 3,826,000
============ ============ ===========
See accompanying notes to consolidated financial statements.
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HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND PRESENTATION
Harbinger Corporation and subsidiaries (the "Company") develops, markets,
and supports software products and provides computer communications network and
consulting services to enable businesses to engage in electronic commerce. The
Company's products and services are used by more than 34,000 customers in
targeted industries, including the petroleum, automotive, retail, chemicals,
utilities, financial services, electronics, distribution, aerospace,
textile/apparel, governmental and healthcare industries both in the United
States and certain international markets including Europe, Mexico and South
America.
The accompanying consolidated financial statements of Harbinger Corporation
include the accounts of the Company and its wholly owned subsidiaries,
SupplyTech, Inc. and SupplyTech International, LLC (collectively, "STI"), NTEX
Holding B.V. ("NTEX"), INOVIS GmbH & Co. ("INOVIS"), Comtech Management Systems,
Inc. ("Comtech") and Harbinger NV ("HNV"). Significant intercompany accounts and
transactions have been eliminated in consolidation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Software
Revenues derived from software license fees are recognized upon
shipment, net of estimated returns. Royalty revenues from System Software
Associates, Inc. ("SSA") and Harbinger Net Services, LLC ("HNS") are
recognized based upon sales to end users by SSA (see Note 3) and HNS (see
Note 5).
Services
Revenues derived from services includes subscription fees, maintenance
and implementation fees, and consulting and training fees. Subscription
fees include both fixed and usage based fees for use of the Company's value
added network and are recognized over the service period and as
transactions are processed. Maintenance and implementation fees are
generally billed annually in advance, include fixed fees for customer
support and product updates, and are recognized ratably over the service
period. Consulting and training fees are billed under both time and
materials and fixed fee arrangements and are recognized as services are
performed.
Deferred Revenue
Deferred revenues represent payments received from customers or
billings invoiced to customers for software and services billed in advance.
DIRECT COSTS
Direct costs for services include telecommunications charges, the costs of
personnel to conduct network operations and customer support, consulting and
other personnel-related expenses. Direct costs for software include duplication,
packaging and amortization of purchased technology and software development
costs.
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HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets as follows:
Computer and communications equipment 3 - 5 years
Furniture, fixture and leasehold
improvements 5 - 10 years
Transportation equipment 3 years
Building 10 years
INVESTMENTS IN JOINT VENTURES
The Company's 91% investment in HNS, its 20% investment in HNV through
March 31, 1996 (see Note 2) and its 50% investment in SupplyTech Australia, Pty.
(collectively, the "Joint Ventures") are accounted for using the equity method
of accounting. The Company applies the equity method of accounting for its
investment in HNS because of a shareholders agreement among all HNS shareholders
which provides for all significant operating and management decisions for HNS to
be vested in the HNS Board of Managers through December 31, 1996. The HNS' Board
of Managers is not controlled by the Company (see Note 5 and Note 14).
INTANGIBLE ASSETS
Purchased Technology, Goodwill, and Other Intangible Assets
Purchased technology, goodwill and other intangible assets are being
amortized over periods of three to ten years. The Company evaluates the
recoverability of these intangible assets at each period end using the
undiscounted estimated future net operating cash flows expected to be derived
from such assets. If such evaluation indicates a potential impairment, the
Company uses fair value in determining the amount of these intangible assets
that should be written off.
Software Development Costs
The Company capitalizes certain software development costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
Costs incurred internally to create a computer software product or to develop an
enhancement to an existing product are charged to expense when incurred as
research and development until technological feasibility has been established
for the product or enhancement. Thereafter, all software production costs are
capitalized and reported at the lower of unamortized cost or net realizable
value. Capitalization ceases when the product or enhancement is available for
general release to customers. Software development costs are amortized on a
product-by-product basis at the greater of the amounts computed using (a) the
ratio of current gross revenues for a product or enhancement to the total
current and anticipated future gross revenues for that product or enhancement or
(b) the straight-line method over the remaining estimated economic life of the
product or enhancement, not to exceed five years. The Company evaluates the net
realizable value of its software development costs at each period end using
undiscounted estimated future net operating cash flows expected to be derived
from the respective software product or enhancement. If such evaluation
indicates that the unamortized software development costs exceed the net
realizable value, the Company writes off the amount by which the unamortized
software development costs exceed net realizable value.
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HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes ("SFAS No. 109")". Under SFAS No. 109, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Effective January 1, 1995, SupplyTech, Inc. elected to be taxed as an S
Corporation under the Internal Revenue Code. SupplyTech International, LLC was
incorporated under the laws of the state of Michigan as a Limited Liability
Corporation ("LLC"). As a LLC, SupplyTech International, LLC is taxed in a
manner similar to a partnership under the Internal Revenue Code. As a result of
these elections, STI has been taxed in a manner similar to a partnership for
1995 and 1996 and has not provided for any Federal or state income taxes as the
results of operations were passed through to, and the related income taxes
became the individual responsibility of the Company's shareholders.
The pro forma income tax expense for 1996 and 1995 reflects the income tax
expense that would have been reported if SupplyTech, Inc. (a S corporation for
income tax reporting purposes) and SupplyTech International, LLC (a limited
liability corporation for income tax reporting purposes) had been C corporations
during these periods.
EARNINGS PER SHARE
Net loss per common share has been computed based upon net loss applicable
to common shareholders. The dilutive effect of outstanding stock options and
warrants are excluded from the weighted average common and common equivalent
shares outstanding because their inclusion would be antidilutive.
RECLASSIFICATIONS
Certain amounts in the accompanying 1995 and 1994 financial statements have
been reclassified to conform to the presentation adopted in the 1996
consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its
business. The carrying values of cash equivalents, accounts and royalty
receivable, accounts payable, accrued expenses, and deferred revenues
approximate fair value due to the short-term maturities of these assets and
liabilities. The Company's investments in joint ventures are accounted for using
the equity method and pertain to privately held companies for which fair values
are not readily available. The Company believes the fair values of its joint
venture investments exceed the carrying values. The Company believes the fair
values of its notes payable and long-term debt exceed their respective carrying
values.
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HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION
Foreign currency financial statements of the Company's international
operations and joint ventures are translated into U.S. dollars at current
exchange rates, except for revenues, costs and expenses, and net income (loss)
which are translated at average exchange rates during each reporting period. Net
exchange gains or losses resulting from the translation of assets and
liabilities are accumulated as cumulative foreign currency translation
adjustments and reported as a separate component of shareholders' equity
included in the Company's accumulated deficit. The cumulative foreign currency
translation adjustment at December 31, 1996 was insignificant.
STOCK COMPENSATION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996 the Company adopted Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures under the provisions of
SFAS No. 123 (see Note 10).
2. ACQUISITIONS
STI ACQUISITION
On January 3, 1997, the Company acquired SupplyTech, Inc. a Michigan
corporation, and its affiliate, SupplyTech International, LLC, a Michigan
limited liability company, for 2,400,000 unregistered shares of the Company's
common stock in transactions accounted for using the pooling-of-interests method
of accounting. SupplyTech, Inc. was acquired in a merger transaction pursuant to
the terms of a merger agreement, dated January 3, 1997, by and among the
Company, SupplyTech, Inc. and Harbinger Acquisition Corporation II, a Georgia
corporation and a wholly owned subsidiary of the Company. SupplyTech, Inc.
survived the merger as a wholly owned subsidiary of the Company. SupplyTech
International, LLC was acquired by the Company in a series of related share
purchases, which included the exchange of the Company's common stock for all the
outstanding shares of SupplyTech International, LLC.
In connection with the STI Acquisition, the Company expects to take a
charge of $7.0 million in January 1997 for acquisition related expenses and
asset write downs and expects to incur integration costs of $2.5 million to $3.5
million during the first quarter of 1997. The Company expects to record a net
deferred income tax asset during the first quarter of 1997 of approximately $1.8
million relating to the STI Acquisition and intends to provide a valuation
allowance against such net deferred income tax asset to reduce it to zero.
The financial position and results of operations of the Company have been
restated for all periods prior to the merger to give retroactive effect to the
STI Acquisition.
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HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total revenues and net income (loss) for the individual companies as
previously reported are as follows:
1996 1995 1994
------------ ------------ ------------
Total revenues
Harbinger Corporation ........... $ 41,725,000 $ 23,117,000 $ 13,652,000
STI ............................. 17,538,000 14,713,000 14,241,000
------------ ------------ ------------
$ 59,263,000 $ 37,830,000 $ 27,893,000
============ ============ ============
Net income (loss)
Harbinger Corporation ........... $ (8,277,000) $ 1,048,000 $ (2,111,000)
STI ............................. (4,818,000) (2,989,000) 23,000
------------ ------------ ------------
$(13,095,000) $ (1,941,000) $ (2,088,000)
============ ============ ============
1994 ACQUISITION
Effective December 31, 1994, the Company acquired certain assets and
assumed certain liabilities of the EDI business unit of Texas Instruments,
Incorporated in exchange for a $3.325 million note ("TI Note"), the assumption
of liabilities of $526,000, and an agreement to pay royalties through 1998 based
upon future software license fee revenues derived from certain of the software
products acquired if such revenues exceed certain specified levels. The Company
has accounted for the transaction using the purchase method of accounting and
the results of operations of the business acquired have been included in the
Company's accompanying statement of operations since the acquisition date. The
Company paid the TI Note in January 1995 and has not become obligated to pay any
additional royalties under the terms of the agreement through December 31, 1996.
Of the total purchase price of $3.851 million, $2.66 million was allocated to
in-process product development and charged to the statement of operations at the
acquisition date, $441,000 was allocated to purchased technology, $317,000 was
allocated to tangible assets (primarily working capital and equipment), and
$433,000 was allocated to goodwill.
The unaudited pro forma results of operations of the Company for 1994 as if
the acquisition described above had been effected on January 1, 1994 are
summarized below:
Year Ended
December 31, 1994
-----------------
Revenues $29,979,000
===========
Net loss applicable to common shareholders $(2,871,000)
===========
Net loss per common share $ (0.23)
===========
Weighted average common and common
equivalent shares outstanding 12,693,000
===========
The unaudited pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the date indicated nor
are they necessarily indicative of the results of future operations.
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13
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 ACQUISITIONS
Effective March 31, 1996, the Company acquired all of the common stock of
NTEX Holding, B.V. ("NTEX"), a Dutch corporation based in Rotterdam, The
Netherlands, for $8.0 million, consisting of $3,195,000 in cash, 107,778 shares
of the Company's common stock valued at $1.2 million, warrants to acquire 18,750
shares of the Company's stock at $11.33 per share valued at $100,500 and the
assumption of $3.5 million in liabilities including transaction costs. The
Company recorded the acquisition using the purchase method of accounting with
$4,449,000 of the purchase price allocated to in-process product development and
charged to the consolidated statement of operations on March 31, 1996, $204,000
allocated to purchased technology, $621,000 allocated to tangible assets and
$2.8 million allocated to goodwill.
Effective March 31, 1996, the Company acquired all of the common stock of
INOVIS GmbH & Co. ("INOVIS"), a German corporation based in Karlsruhe, Germany
for $6.1 million, consisting of $1,409,000 in cash, 210,276 shares of the
Company's common stock valued at $2.4 million, warrants to acquire 30,000 shares
of the Company's stock at $10.17 per share valued at $104,000, a note payable of
$557,000 and the assumption of $1.7 million in liabilities including transaction
costs. The Company recorded the acquisition using the purchase method of
accounting with $3.4 million of the purchase price allocated to in-process
product development and charged to the consolidated statement of operations on
March 31, 1996, $600,000 allocated to purchased technology, $1,077,000 allocated
to tangible assets and $1.1 million allocated to goodwill.
Effective March 31, 1996, the Company acquired the remaining outstanding
common stock of Harbinger N.V. ("HNV"), a Dutch corporation based in Hoofddorp,
the Netherlands for $1.2 million, consisting of 58,065 shares of the Company's
common stock valued at $668,000 and the assumption of $554,000 in liabilities.
The Company recorded the acquisition using the purchase method of accounting
with $300,000 of the purchase price allocated to in-process product development
and charged to the consolidated statement of operations on March 31, 1996,
$518,000 allocated to tangible assets and $447,000 allocated to goodwill and
other intangibles (see Note 5).
Effective August 1, 1996, the Company acquired all of the common stock of
Comtech Management Systems, Inc. ("Comtech"), a Texas corporation based in
Amarillo, Texas, for $500,000, consisting of 24,561 shares of the Company's
common stock valued at $422,000 and the assumption of $75,000 in liabilities.
The Company recorded the acquisition using the purchase method of accounting
with $114,000 of the purchase price allocated to tangible assets, $100,000
allocated to purchased technology, and $283,000 allocated to goodwill.
Effective October 15, 1996, the Company acquired all of the common
stock of EDI Integration Services Limited ("EISL"), a company based in
Hampshire, United Kingdom for $804,000 consisting of $134,000 in cash and the
assumption of a $670,000 note payable. The Company recorded the acquisition
using the purchase method of accounting with $250,000 allocated to purchased
technology, $548,000 allocated to goodwill, and $6,000 allocated to tangible
assets.
The balance sheets of the above companies have been included in the
Company's consolidated balance sheet as of December 31, 1996 and the results of
operations of the acquired companies have been included in the Company's
consolidated statements of operations beginning on March 31, 1996, except for
Comtech and EISL, which have been included beginning on August 1, 1996 and
October 15, 1996, respectively.
-31-
14
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma results of operations of the Company for 1996 and
1995 as if the acquisitions described above had been effected on January 1, 1996
and 1995, respectively, are summarized as follows:
Years Ended
December 31,
----------------------------
1996 1995
------------ -----------
Revenues................................... $ 61,043,000 $43,955,000
============ ===========
Net loss applicable to
common shareholders.................... $(13,774,000) $(4,810,000)
============ ===========
Net loss per common share.................. $ (0.74) $ (0.30)
============ ===========
Weighted average common and common
equivalent shares outstanding.......... 18,567,000 16,203,000
============ ===========
The unaudited pro forma results do not necessarily represent results which
would have occurred if the acquisitions had taken place on the dates indicated
nor are they necessarily indicative of the results of future operations.
The terms of the Company's acquisitions of NTEX and INOVIS included earnout
agreements with certain employees/shareholders which provide for the Company to
pay these individuals additional consideration based upon the attainment of
certain performance goals for their respective former companies for the year
ended March 31, 1997. The Company has provided an accrual of $425,000 for the
year ended December 31, 1996 which is included in acquisition related charges in
the accompanying 1996 statement of operations to reflect the Company's estimate
of the employee compensation earned with respect to these agreements.
3. PURCHASED TECHNOLOGY AND RELATED AGREEMENTS
SSA
On July 21, 1995, the Company entered into a distribution agreement and
purchased certain software products from SSA in exchange for the issuance of
825,000 shares of the Company's common stock valued at $4,675,000 at the date of
issuance and the issuance of 4 million shares of the Company's Zero Coupon
Redeemable Preferred Stock. The Company also provided SSA with an option to put
the 825,000 shares of common stock issued back to the Company for cash on
January 31, 1997 exercisable only if the market value of the common stock on
that date is less than $6.00 per share. In September 1996, the Company
registered the 825,000 shares of puttable common stock. SSA sold all of the
shares during 1996. The Zero Coupon Redeemable Preferred Stock issued has no
voting or dividend rights, vests at a rate of one million shares per year only
if SSA attains certain royalty targets for the years 1997 through 2000, and
contains mandatory redemption provisions of $.67 per share payable in cash or
the Company's common stock at the option of the holder thirty days after the end
of each year. The Company will accrete the Zero Coupon Redeemable Preferred
Stock to its redemption price as it becomes probable that it will be earned
through a charge to direct costs of software in the period earned.
The terms of the distribution agreement provide for SSA to pay the Company
royalties through December 2000 based upon future software and service revenues
that SSA derives from the sale of the Company's products including certain
minimum royalties of $1.4 million for 1995 and $5.7 million in 1996. Payments by
SSA to the Company under these minimum royalty provisions in excess of royalties
on
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15
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
actual software and service revenues will be creditable against future SSA
royalty obligations. Royalty revenues are recognized as reported based upon
sales to end users by SSA.
The Company has allocated the consideration associated with these
transactions of $4,797,000 (including transaction costs of $122,000) as follows:
$2.331 million of the fair value to purchased technology and $2.466 million to
the distribution agreement based upon the estimated fair values of the purchased
technology and distribution agreement at the date of the exchange.
GEIS
On December 31, 1995, the Company entered into an agreement to purchase
certain software products and entered into an alliance agreement with General
Electric Information Services, Inc. ("GEIS"). The total purchase price was $2.5
million, consisting of $300,000 in cash and the assumption of a note payable to
GEIS in the amount of $2.2 million. The Company recorded the purchase of the
technology and the alliance agreement based upon fair value with $1,160,000 of
the purchase price allocated to in-process product development and charged to
the consolidated statement of operations on December 31, 1995, $375,000
allocated to purchased technology, $950,000 allocated to the alliance agreement
and $15,000 allocated to tangible assets.
Certain terms of the alliance agreement include the referral of customers
to the Company by GEIS, the performance of certain software maintenance services
by GEIS, and a $1.2 million guaranteed payment by GEIS to the Company for the
two year period ending December 31, 1997 relating to software maintenance
revenues to be paid by GEIS to the Company.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996 and
1995:
1996 1995
----------- -----------
Computer and communications
equipment.............................. $10,988,000 $ 6,349,000
Furniture, fixtures and leasehold
improvements........................... 3,062,000 2,555,000
Transportation equipment.................. 134,000 143,000
Building.................................. 59,000 59,000
----------- -----------
14,243,000 9,106,000
Less accumulated depreciation
and amortization..................... (6,017,000) (4,037,000)
----------- -----------
$ 8,226,000 $ 5,069,000
=========== ===========
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16
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN JOINT VENTURES
INVESTMENT IN HNS
The Company founded HNS to develop products and services to facilitate
electronic commerce using the Internet. In March 1995, HNS was capitalized with
an investment of approximately $360,000 from the Company and approximately
$340,000 from certain other investors, including certain shareholders,
executives, officers, and directors of the Company. In June 1995, the Company
and BellSouth Corporation ("BellSouth") contributed cash of $8.0 million for HNS
common stock and $3.0 million for a HNS convertible debt, respectively. As of
December 31, 1996, the Company owned an equity interest in HNS of approximately
91.4% or 66.1%, assuming the conversion of the BellSouth Debenture and the
exercise of outstanding HNS options. The Company recognized equity in losses of
its HNS joint venture of $7,004,000 and $954,000 for the years ended December
31, 1996 and 1995, respectively.
The Company has several agreements with HNS governing certain transactions
between them, including the use of personnel, the management and operation of
HNS, the use by HNS of the Company's products and services, the Company's right
to license and distribute HNS products, if any, derived from the Company's
products and the payment by HNS and the Company of royalties and other amounts.
Amounts charged to HNS by the Company for services provided were $1,785,000 and
$324,000 for the years ended December 31, 1996 and 1995, respectively. These
amounts primarily consist of employee salaries and related benefits and included
$729,000 and $94,000 in general and administrative expenses, $105,000 and
$36,000 in selling and marketing expenses, and $951,000 and $194,000 in product
development costs for the years ended December 31, 1996 and 1995, respectively.
These amounts have been included in the Company's statements of operations as a
reduction of expense in the categories indicated. Additionally, the Company paid
expenses on behalf of HNS in 1996 and 1995 of $505,000 and $413,000 that have
been reimbursed to the Company by HNS.
The Company recognized royalty revenues from HNS of $1,199,000 for the year
ended December 31, 1996 related to HNS's licensing of products which include the
Company's technology and for referral fees. These royalty revenues and referral
fees from HNS were determined based upon a royalty agreement between the Company
and HNS. At December 31, 1996, the Company had an amount due from HNS of
$1,760,000 for these services and expenses incurred by the Company on behalf of
HNS and for the royalty revenues earned from HNS. Likewise, amounts charged to
the Company by HNS for services provided during the period ended December 31,
1996 were $214,000. This amount includes $191,000 in general and administrative
expenses and $23,000 in selling and marketing expenses which are included in the
Company's accompanying 1996 statement of operations. Additionally, HNS paid
expenses of $50,000 on behalf of the Company that have been reimbursed to HNS by
the Company.
Effective January 1, 1997, the Company purchased the HNS Debenture and
acquired the remaining minority interest in HNS (see Note 14).
-34-
17
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the condensed financial statements of HNS as
of December 31, 1996 and 1995 and for the periods then ended:
Balance sheets:
1996 1995
----------- ------------
Cash and cash equivalents......................... $ 3,322,000 $ 10,645,000
Accounts receivable............................... 1,866,000 -
Property and equipment, net....................... 1,039,000 219,000
Other assets...................................... 277,000 42,000
----------- ------------
$ 6,504,000 $ 10,906,000
=========== ============
Accounts payable and accrued expenses............. $ 990,000 $ 173,000
Due to affiliates, net............................ 2,040,000 180,000
Deferred revenues................................. 196,000 -
Long-term debt.................................... 3,000,000 3,000,000
Shareholders' equity.............................. 278,000 7,553,000
----------- ------------
$ 6,504,000 $ 10,906,000
=========== ============
Statements of operations:
1996 1995
----------- -----------
Revenues:
Services...................................... $ 117,000 $ -
Software...................................... 2,036,000 -
----------- -----------
Total revenues........................... 2,153,000 -
----------- -----------
Direct costs:
Services...................................... 644,000 -
Software...................................... 1,617,000 -
----------- -----------
Total direct costs....................... 2,261,000 -
----------- -----------
Gross margin....................... (108,000) -
----------- -----------
Operating costs:
Selling and marketing......................... 926,000 84,000
General and administrative.................... 1,614,000 133,000
Depreciation and amortization................. 621,000 21,000
Product development........................... 4,303,000 1,077,000
----------- -----------
Total operating costs.................... 7,464,000 1,315,000
----------- -----------
Operating loss..................... (7,572,000) (1,315,000)
Interest expense (income), net.................... (130,000) (165,000)
----------- -----------
Net loss ......................................... $(7,442,000) $(1,150,000)
=========== ===========
-35-
18
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT IN HNV
On November 5, 1993, the Company acquired a 20% interest in HNV, a Dutch
corporation headquartered in Hoofddorp, The Netherlands, which was formed to
offer electronic commerce services in the European marketplace. The initial
capitalization of HNV consisted of an investment of $500,000 from the Company
and $2,000,000 from certain other investors, including shareholders of the
Company. In December 1995, the Company and other HNV investors, including
shareholders of the Company, contributed to HNV additional capital of $150,000
and $600,000, respectively. The Company has a license arrangement with HNV which
allows HNV to use the Company's network and PC technology and provides for the
payment of royalty fees to the Company based on a percentage of software and
network revenues, as defined. The Company did not recognize any royalty revenue
from HNV during 1994, 1995 or 1996. Under a management agreement, the Company
provides certain consulting and management services to HNV. At December 31,
1995, the Company had an amount due from HNV of approximately $472,000 for such
services and expenses incurred by the Company on behalf of HNV, which was paid
in January 1996. Effective March 31, 1996, the Company acquired the remaining
outstanding common stock of HNV (see Note 2).
The Company recognized equity in losses of its HNV joint venture of
$69,000, $313,000 and $227,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Amounts charged to HNV by the Company for services provided during the
years ended December 31, 1996, 1995 and 1994 were:
1996 1995 1994
------- --------- ---------
Services - direct costs................ - $ 63,000 $ 47,000
General and administrative............. $54,000 182,000 187,000
Selling & marketing.................... - - 6,000
Product development.................... - 27,000 40,000
Depreciation and amortization.......... - 4,000 5,000
------- -------- --------
$54,000 $276,000 $285,000
======= ======== ========
These amounts have been included in the statement of operations for the
Company as a reduction of expenses in the categories indicated. Additionally,
the Company paid expenses on behalf of HNV of $18,000, $95,000 and $95,000 for
the years ended December 31, 1996, 1995 and 1994, respectively, that were
reimbursed by HNV.
INVESTMENT IN SUPPLYTECH AUSTRALIA, PTY.
The financial position and results of operations of the Company's Australia
joint venture were not significant. The Company recognized equity in losses of
its Australia joint venture of $119,000 during the year ended December 31, 1996
and had an amount due from the Australia joint venture of $67,000 at December
31, 1996.
-36-
19
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996 and 1995:
1996 1995
----------- -----------
Purchased technology........................... $ 4,451,000 $ 3,297,000
Goodwill....................................... 5,371,000 433,000
GEIS alliance agreement........................ 950,000 950,000
Organization costs............................. 30,000 30,000
SSA distribution agreement..................... 2,466,000 2,466,000
Software development costs..................... 4,461,000 2,435,000
----------- -----------
17,729,000 9,611,000
Less accumulated amortization.................. (4,582,000) (1,856,000)
----------- -----------
$13,147,000 $ 7,755,000
=========== ===========
During 1994, the Company wrote off $1,659,000 in capitalized software
development costs related to products which the Company ceased marketing.
Approximately $1,419,000 of such amount related to a product development effort
that was discontinued as a result of certain technology acquired in connection
with an acquisition described in Note 2.
7. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1995:
1996 1995
------------ ------------
Accrued salaries and wages..................... $3,546,000 $1,808,000
Accrued rent................................... 465,000 607,000
Accrued royalty................................ 308,000 279,000
State income, property, sales and other taxes 1,803,000 1,000,000
Accrued litigation............................. 600,000 -
Other accrued expenses......................... 3,077,000 968,000
--------- ----------
$9,799,000 $4,662,000
========== ==========
-37-
20
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
The provision for income tax expense (benefit) includes income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities and any increase
or decrease in the valuation allowance for deferred income tax assets.
Income (loss) before income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 consists of the following:
1996 1995 1994
------------ ----------- -----------
U.S. operations............................. $ (4,467,000) $ 614,000 $(2,921,000)
Foreign operations.......................... (8,454,000) (1,153,000) -
------------ ----------- -----------
Total income (loss) before income
tax expense (benefit)............. $(12,921,000) $ (539,000) $(2,921,000)
============ =========== ===========
Effective January 1, 1995, SupplyTech, Inc. elected to be taxed as an S
corporation under the Internal Revenue Code. SupplyTech International, LLC was
incorporated under the laws of the state of Michigan as a Limited Liability
Corporation ("LLC"). As a LLC, SupplyTech International, LLC has elected to be
taxed as a limited liability corporation under the Internal Revenue Code. As a
result of these elections, the Company has been taxed in a manner similar to a
partnership for 1995 and 1996 and has not provided for any Federal or state
income taxes as the results of operations are passed through to, and the related
income taxes become the individual responsibility of the Company's shareholders.
In accordance with SFAS No. 109, the STI net deferred income tax asset in
the amount of $516,000 recorded as of December 31, 1994 was charged to income
tax expense in 1995 at the time of its change in tax status.
The pro forma provision for income taxes for 1996 and 1995 reflects the tax
expense that would have been reported if SupplyTech, Inc. (a S corporation for
income tax reporting purposes) and SupplyTech International, LLC (a partnership
for income tax reporting purposes) had been C corporations during these periods.
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994 is summarized as follows:
1996 1995 1994
--------- ---------- -----------
Current:
Federal................................ $ - $ - $ (35,000)
Foreign................................ 10,000 - 7,000
State.................................. - - (4,000)
-------- ---------- -----------
Total current..................... $ 10,000 $ - $ (32,000)
-------- ---------- -----------
Deferred:
Federal................................ $(28,000) $1,077,000 $ (895,000)
Foreign................................ 167,000 - -
State.................................. (3,000) 126,000 (106,000)
-------- ---------- -----------
Total deferred.................... $136,000 $1,203,000 $(1,001,000)
-------- ---------- -----------
Total income tax expense (benefit)......... $146,000 $1,203,000 $(1,033,000)
======== ========== ===========
-38-
21
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma income tax expense (benefit) for the years ended December 31,
1996 and 1995 is summarized as follows:
1996 1995
--------- ----------
Current:
Federal ...................... $ -- $ --
Foreign ...................... 10,000 --
State ........................ -- --
-------- --------
Total current ........... $ 10,000 $ --
-------- --------
Deferred:
Federal ...................... $(28,000) $615,000
Foreign ...................... 167,000 --
State ........................ (3,000) 72,000
-------- --------
Total deferred .......... $136,000 $687,000
-------- --------
Total income tax expense (benefit) $146,000 $687,000
======== ========
Income tax expense (benefit) differs from the amounts computed by
applying the federal statutory income tax rate of 34% to income (loss) before
income taxes as a result of the following:
1996 1995 1994
----------- ----------- -----------
Computed "expected" income tax expense (benefit) ... $(4,393,000) $ (183,000) $ (993,000)
Increase (decrease) in income tax expense (benefit)
resulting from:
State income taxes, net of federal income tax
benefit ................................... (2,000) (84,000) (76,000)
Tax-exempt income .............................. (130,000) (49,000) --
Nondeductible charge for purchased in-process
product development ....................... 1,615,000 -- --
S corporation and LLC expense .................. 1,492,000 1,490,000 --
Increase in the valuation allowance for deferred
income tax assets ......................... 1,494,000 -- --
Other .......................................... (70,000) 29,000 36,000
----------- ----------- -----------
$ 146,000 $ 1,203,000 $(1,033,000)
=========== =========== ===========
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22
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma income tax expense (benefit) differs from the amounts
computed by applying the federal statutory income tax rate of 34% to income
(loss) before income taxes as a result of the following:
1996 1995
----------- -----------
Computed "expected" income tax expense (benefit) ... $(4,393,000) $ (183,000)
Increase (decrease) in income tax expense (benefit)
resulting from:
State income taxes, net of federal income tax
benefit ................................... (2,000) 48,000
Tax-exempt income .............................. (130,000) (49,000)
Nondeductible charge for purchased in-process
product development ....................... 1,845,000 --
Increase in the valuation allowance for deferred
income tax assets ......................... 2,819,000 805,000
Other .......................................... 7,000 66,000
----------- -----------
$ 146,000 $ 687,000
=========== ===========
The significant components of deferred income tax expense (benefit) for
the years ended December 31, 1996, 1995, and 1994 are summarized as follows:
1996 1995 1994
----------- ----------- -----------
Deferred income tax expense (benefit) . $(1,338,000) $1,203,000 $(1,001,000)
Increase in the valuation allowance for
deferred income tax assets ........ 1,494,000 -- --
----------- ---------- -----------
$ 136,000 $1,203,000 $(1,001,000)
=========== ========== ===========
Pro forma significant components of deferred income tax expense
(benefit) for the years ended December 31, 1996 and 1995 are summarized as
follows:
1996 1995
----------- ---------
Deferred income tax expense (benefit) . $(2,683,000) $(118,000)
Increase in the valuation allowance for
deferred income tax assets ........ 2,819,000 805,000
----------- ---------
$ 136,000 $ 687,000
=========== =========
-40-
23
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effects of the temporary differences that give rise to
the Company's deferred income tax assets and liabilities as of December 31, 1996
and 1995 are as follows:
1996 1995
----------- -----------
Deferred income tax assets:
Net operating loss carryforwards ............... $ 3,755,000 $ 894,000
Deferred revenue ............................... 814,000 542,000
Intangible assets .............................. 2,474,000 943,000
Other .......................................... 992,000 825,000
----------- ----------
Gross deferred income tax assets .......... 8,035,000 3,204,000
Valuation allowance ................................ (4,798,000) -
----------- ----------
Deferred income tax assets, net of the valuation
allowance ...................................... 3,237,000 3,204,000
Deferred income tax liabilities - principally due to
depreciation ................................... (436,000) (267,000)
----------- ----------
Net deferred income tax assets ............ 2,801,000 2,937,000
Less current deferred income tax assets ............ 1,517,000 999,000
----------- ----------
Noncurrent deferred income tax assets .............. $ 1,284,000 $1,938,000
=========== ==========
The increase (decrease) in net deferred income tax assets for the years
ended December 31, 1996, 1995, and 1994, was $(136,000), $(1,203,000), and
$1,033,000, respectively. A valuation allowance of $4,798,000 at December 31,
1996 offsets the full amount of the foreign deferred income tax assets related
to foreign net operating loss carryforwards and the deductible temporary
differences related to foreign intangible assets. Under SFAS No. 109, deferred
income tax assets and liabilities are recognized for differences between the
financial statement carrying amounts and the tax bases of assets and liabilities
which will result in future deductible or taxable amounts and for net operating
loss and tax credit carryforwards. A valuation allowance is then established to
reduce the deferred income tax assets to the level at which it is "more likely
than not" that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss and tax credit carryforwards
depends on having sufficient taxable income within the carryback and
carryforward periods. Sources of taxable income that may allow for the
realization of tax benefits include (1) taxable income in the current year or
prior years that is available through carryback, (2) future taxable income that
will result from the reversal of existing taxable temporary differences, and (3)
future taxable income generated by future operations. The Company believes that
realization of the net deferred income tax assets recorded at December 31, 1996
is more likely than not.
During 1996, the Company acquired foreign net operating loss
carryforwards in the NTEX and HNV acquisitions (see Note 2) of approximately
$6,528,000 and $3,114,000, respectively. The Company established a valuation
allowance relating to the carryforwards of $2,350,000 and $1,121,000,
respectively, which is included in the valuation allowance at December 31, 1996.
If the benefit from these net operating loss carryforwards are realized, the
Company will reduce the related valuation allowance and will reduce goodwill
recorded in connection with these transactions. For the year ended December 31,
1996, the Company realized a portion of these foreign net operating loss
carryforwards and recognized deferred foreign income tax expense of $93,000 and
$74,000 relating to the reduction in the valuation allowance for these
carryforwards and reduced goodwill associated with these acquisitions by a like
amount. During 1996, the Company also acquired certain intangible assets in the
INOVIS acquisition (see Note 2). The Company's acquisition of these intangible
assets for income tax reporting purposes created a deferred income tax asset of
approximately $1,494,000 for which the Company provided a valuation allowance.
-41-
24
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, the Company has domestic and foreign net
operating loss carryforwards and research and experimentation income tax credit
carryforwards of approximately $7,152,000, $9,177,000 and $301,000,
respectively. The domestic net operating loss carryforwards expire at various
dates through the year 2009 unless utilized, the foreign net operating loss
carryforwards do not expire, and the research and experimentation income tax
credit carryforwards expire beginning in 2007 through 2010. The Company's
domestic net operating loss carryforward at December 31, 1996 includes $6.0
million in income tax deductions related to stock options excluded from the
table of deferred income tax assets above, which will be reflected as a credit
to additional paid-in capital when realized. The Company expects to record a net
deferred income tax asset of approximately $1.8 million relating to the STI
Acquisition and intends to provide a valuation allowance against such net
deferred income tax asset to reduce it to zero.
9. NOTES PAYABLE AND LONG-TERM DEBT
CREDIT FACILITIES
The Company maintains two revolving credit facilities payable to banks
which provide lines of credit to the Company up to $12.0 million in borrowing
availability, subject to the terms of the credit agreements, bearing interest
rates ranging from the bank's prime rate to prime plus 0.625%. The credit
facilities are secured by all of the Company's assets and impose certain
restrictions on the Company such as maintaining certain minimum financial
ratios, making certain investments, incurring additional indebtedness, and
making capital expenditures in excess of certain levels, as defined by the terms
of the facilities. Amounts outstanding under these agreements were $1,550,000 as
of December 31, 1996.
LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 consisted of the
following:
1996 1995
---------- ----------
6% promissory note payable to GEIS, due in equal quarterly
principal installments of $137,500 plus accrued interest
through September 1999
(see Note 3)............................................... $1,650,000 $2,200,000
Non interest bearing note payable to the former
shareholders of EISL, due in equal quarterly
principal installments through September 1998
(see Note 2)............................................... 625,000 -
Capital lease obligations...................................... - 72,000
---------- ----------
Total long-term debt.................................... 2,275,000 2,272,000
Less current portion of long-term debt......................... (907,000) (600,000)
---------- ----------
Long-term debt, excluding current
portion............................................. $1,368,000 $1,672,000
========== ==========
Future minimum annual payments under long-term debt for the next three
years are as follows:
1997.............................. $ 907,000
1998.............................. 818,000
1999.............................. 550,000
----------
$2,275,000
==========
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25
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHAREHOLDERS' EQUITY
AMENDMENT TO THE ARTICLES OF INCORPORATION
Effective June 1995, the Company increased its authorized shares of
common stock and preferred stock to 100,000,000 and 20,000,000, respectively,
and established a par value of $.0001 per share for the Company's authorized but
unissued common stock.
INITIAL PUBLIC OFFERING
In August 1995, the Company completed an initial public offering of its
common stock. The Company sold 2,525,304 shares at $8.00 per share resulting in
net proceeds to the Company, after underwriters commissions and offering
expenses, of $18.3 million.
PREFERRED STOCK, SERIES C
In 1993, the Company sold Series C redeemable preferred stock and
warrants in a private placement resulting in proceeds of $2.5 million. The terms
of the Series C redeemable preferred stock included a 7% cash dividend payable
quarterly and a mandatory redemption on March 1, 1996. The proceeds of the
placement were allocated between the preferred stock and warrants based on their
estimated relative fair values. This resulted in a discount from the face amount
of the stock of approximately $66,000 which was allocated to the warrants. The
warrants were exercised during fiscal 1995.
In June 1995, the Company entered into agreements with holders of its
Series C redeemable preferred stock to provide for the conversion on March 1,
1996 of all Series C redeemable preferred stock to the Company's Common Stock.
The number of shares of common stock issuable upon conversion was determined by
dividing (i) the issue price of $10.00 times the number of shares of the Series
C redeemable preferred stock outstanding by (ii) 95% of the average trading
price of the common stock, as defined. As a result of the June 1995 agreement,
the Company reclassed the preferred stock from redeemable preferred stock to
shareholders' equity. On March 1, 1996, the Company issued 211,038 shares of its
common stock in exchange for all outstanding shares of the Company's Series C
preferred stock.
COMMON STOCK
In April 1996 the Company issued 381,474 shares of the Company's common
stock as partial consideration related to the Company's acquisition of (i) NTEX,
(ii) INOVIS and (iii) HNV. In August 1996 the Company issued 24,561 shares of
the Company's common stock as consideration related to the Company's acquisition
of Comtech.
In September 1996, the Company registered 825,000 shares of puttable
common stock held by SSA. As of December 31, 1996, SSA had sold the shares and
forfeited their rights to put the shares of common stock back to the Company.
Therefore, approximately $4.7 million of puttable common stock has been
reclassified to shareholders' equity during 1996.
WARRANTS
The Company issued warrants in April 1996 related to the acquisition of
NTEX and INVOIS. The warrants enable the holders to acquire 48,750 shares of the
Company's common stock at a range of $11.34 to $11.43 per share, representing
the fair value of the common stock at the date of issuance.
The Company issued warrants in July 1996 to two investors in HNV who
are also shareholders of the Company because certain events did not occur with
respect to the performance of HNV. The warrants enable the holders to acquire
75,000 shares of the Company's common stock at $18.50 per share, representing
the fair value of the common stock at the date of issuance.
-43-
26
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK COMPENSATION PLANS
Stock options
The Company's 1989 Stock Option Plan (the "1989 Plan") and
1996 Stock Option Plan (the "1996 Plan") and with the 1989 Plan (the "Plans")
provide for the grant of options to officers, directors, consultants and key
employees. The maximum number of shares of stock that may be issued under the
1996 Plan shall not exceed in the aggregate the sum of 2,625,000 options plus an
amount equal to the number of all shares that are either not subject to options
granted under the 1989 Plan or were subject to options granted thereunder that
expire without exercise to officers, directors, consultants and key employees.
Options granted under the terms of the 1996 Plan generally vest ratably over
four years and are granted with an exercise price no less than the fair market
value of common stock on the grant date. Options granted prior to July 1994 vest
ratably over three years and options granted since July 1994 vest ratably over
four years. All options granted expire seven years from the date of grant. At
December 31, 1996, there were options outstanding to purchase 2,453,234 shares
of the Company's common stock, of which options to purchase 826,444 shares were
exercisable. There were 1,719,756 options available for grant at December 31,
1996.
In 1993, the Board of Directors authorized the creation of a
stock option plan for nonemployee members of the Company's Board of Directors
(the "Nonemployee Directors Plan"). A total of 225,000 shares of common stock
have been reserved for issuance under the Nonemployee Directors Plan at an
option price no less than the fair market value of the common stock on the
option grant date. Options expire seven years from the date of grant. The
options granted under the Nonemployee Directors Plan vest ratably in the year of
grant based on attendance at regularly scheduled board meetings. Options which
have not vested in the year of grant expire and become available for grant under
the Nonemployee Directors Plan. Options granted under the Nonemployee Directors
Plan for 119,000 shares of common stock were outstanding and exercisable as of
December 31, 1996. There were 89,625 options available for grant under the
Nonemployee Directors Plan at December 31, 1996.
In addition to outstanding options granted under the Company's
existing stock option plans, the Company has granted options to acquire 105,000
shares of common stock to certain existing and former nonemployee directors for
past services. As of December 31, 1996, all of these options were outstanding
and exercisable.
-44-
27
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity in outstanding stock
options for the year ended December 31, 1994:
Stock Options
--------------------------------
Number Price
--------- ---------------
December 31, 1993............................ 1,397,565 $0.78 - $3.25
Granted................................. 364,500 4.25
Exercised............................... (204,354) 0.78 - 4.25
Forfeited/canceled...................... (93,200) 2.33 - 4.25
--------- ---------------
December 31, 1994............................ 1,464,511 0.78 - 4.25
========= ===============
At December 31, 1996 the Company has five stock-based compensation
plans which are described herein. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's five stock-based
compensation plans been determined consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
------------ -----------
Net loss applicable to As reported $(13,095,000) $(1,941,000)
common shareholders
Pro forma $(14,879,000) $(2,443,000)
Net loss per As reported $ (0.71) $ (0.13)
common share
Pro forma $ (0.81) $ (0.16)
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 in 1995 and 1996: dividend yield of
0.5%; expected volatility of 57.8%; risk-free interest rate of 5.9%; and
expected lives of 8 months after vesting for all of the Plan options.
-45-
28
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996 and 1995, and changes during the years ended on those dates is
presented below:
1996 1995
---------------------------- ----------------------------
Weighted- Weighted-
Average Average
Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price
- ---------------------------------------------- ----------- -------------- ----------- --------------
Outstanding at beginning of year 1,711 $ 3.80 1,465 $4.03
Granted 1,160 13.07 733 5.24
Exercised (306) 2.72 (322) 2.16
Forfeited/canceled (112) 5.86 (165) 3.60
------ ------
Outstanding at end of year 2,453 8.22 $1,711 3.80
====== ======
Options exercisable at year-end 826 604
Weighted-average fair value of options
granted during the year $ 8.68 $ 3.38
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
- ---------------------- ----------- ----------- --------- ------------ ---------
$1.17 - 1.67 59,176 1.09 $ 1.54 57,375 $ 1.54
$2.33 - 2.33 360,075 2.36 $ 2.33 360,075 $ 2.33
$2.67 - 3.25 84,675 3.25 $ 2.88 84,675 $ 2.88
$4.25 - 4.67 705,268 4.90 $ 4.27 243,976 $ 4.26
$9.17 - $11.41 277,890 5.29 $10.24 59,343 $ 9.76
$11.67 - $11.67 579,375 6.21 $11.67 - -
$14.50 - $17.83 386,775 6.62 $16.47 21,000 $14.50
--------- -------
$ 1.17 - $17.83 2,453,234 5.01 $ 8.22 826,444 $ 3.75
========= =======
Employee Stock Purchase Plan
Effective January 1, 1996, the Company began offering
employees the right to purchase shares of the Company's common stock at 85% of
the lower of the beginning of period or end of period market price pursuant to
the Employee Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan,
full-time employees, except persons owning 5% or more of the Company's common
stock, are eligible to participate after six months of employment. Employees may
contribute up to 15% of their annual salary, toward the Purchase Plan up to a
maximum of $15,000 per year. A maximum of 225,000 shares of common stock are
reserved for issuance under the Purchase Plan. As of December 31, 1996, 6,639
shares have been issued under the Purchase Plan.
-46-
29
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under FASB Statement 123, compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1996: dividend yield of
0.05%; an expected life of 8 months after vesting for all years; expected
volatility of 57.8%; and risk-free interest rates of 5.9%. The weighted-average
fair value of those purchase rights granted in 1996 was $8.43.
11. RELATED PARTY TRANSACTIONS
The Company has entered into related party transactions in the normal
course of business, including transactions with HNS and HNV as described in Note
5 and the transaction with SSA as described in Note 3 as well as the
transactions described below. The Company believes that the terms of all related
party transactions are comparable to those that could have been obtained in
transactions with unaffiliated parties.
The Company paid fees which are included in the Company's financial
statements as direct costs of services to Westinghouse Communications, Inc.
("Westinghouse") of approximately $1,387,000, $930,000, and $520,000 in 1996,
1995 and 1994, respectively, under telecommunications agreements with
Westinghouse. Westinghouse owned more than 5% of the Company until the sale of
their investment in the Company's common stock in August 1995. During 1996, the
Company received $600,000 in revenue from an affiliated company that is
partially owned by an employee of one of the Company's foreign subsidiaries.
This same affiliated company also billed the Company $350,000 for services that
the affiliated company provided to the Company.
Two officers of the Company made advances to the Company totaling
$440,000 during 1995 payable on demand with interest at 8.5%, payable annually.
These loans were paid in full by the Company during 1996. The Company paid these
officers interest of $4,065 which is included in interest expense during the
year ended December 31, 1996.
12. SEGMENT INFORMATION, INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company operates in a single industry segment: the development,
marketing and supporting of software products and the providing of network and
consulting services to enable businesses to engage in electronic commerce.
INTERNATIONAL OPERATIONS
As a result of the 1996 Acquisitions described in Note 2, the Company
established operations in Europe. A summary of the Company's operations by
geographic area as of and for the year ended December 31, 1996 is presented
below:
United
States Europe Mexico Eliminations Total
------------ ------------ ------------ ------------ ------------
Revenues $ 51,744,000 $ 7,857,000 $ 358,000 $ (696,000) $ 59,263,000
Operating income (loss) $ 2,495,000 $ (8,193,000) $ 5,000 $ (43,000) $ (5,736,000)
Identifiable assets $ 50,460,000 $ 12,138,000 $ 112,000 $(13,917,000) $ 48,793,000
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30
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues and operating income (loss) for the Company's European
operations shown above reflects the results of operations of NTEX, INOVIS, and
HNV beginning on March 31, 1996 and includes a charge for purchased in-process
product development and a related acquisition charge of $8.6 million. Revenues
from foreign operations and identifiable assets of foreign operations were less
than 10% of consolidated revenue and assets in 1995 and 1994.
Revenues generated from export sales included in United States revenues
were less than 10% of consolidated revenues in 1996, 1995, and 1994.
MAJOR CUSTOMERS
No single customer comprised 10% or greater of the Company's
consolidated revenues in 1996, 1995, and 1994.
13. COMMITMENTS
401(K) PROFIT SHARING PLANS
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan")
for the benefit of its domestic employees, which is intended to be a
tax-qualified defined contribution plan under Section 401(k) of the Internal
Revenue Code. Under the 401(k) Plan, employees who have completed one year of
service and at least 1,000 hours of service during that period are eligible to
participate. Subject to certain limitations, the Company may make a
discretionary matching contribution of up to $300 of the salary deferral
contributions of participants at a rate determined by the Board of Directors of
the Company each year. The Board of Directors approved contributions by the
Company to the 401(k) Plan of $35,000, $27,000 and $19,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
STI maintains a 401(k) Profit Sharing Plan (the "STI 401(k) Plan") for
the benefit of all eligible employees, which is intended to be a tax-qualified
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the STI 401(k) Plan, employees who have completed six months of service
and are at least 21 years of age are eligible to participate. Subject to certain
Internal Revenue Code limitations, STI has elected to make a matching
contribution of 25% of the first 6% of employee contributions. The contribution
made by STI to the STI 401(k) Plan was $68,000, $51,000 and $53,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
LEASES
The Company leases office facilities, communications equipment and
automobiles under operating leases which extend through 2001. Rent expense under
all operating leases was approximately $2,139,000, $1,408,000 and $1,243,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum
lease payments under operating leases with noncancelable lease terms in excess
of one year for the next five years and in the aggregate are as follows:
1997.................................... $ 3,067,000
1998.................................... 3,209,000
1999.................................... 3,195,000
2000.................................... 1,938,000
2001.................................... 778,000
-----------
$12,187,000
===========
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31
HARBINGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES
The Company is subject to lawsuits, claims and other complaints arising
out of the ordinary conduct of business. While the ultimate results and outcome
cannot be determined, management does not expect that they will have a material
adverse effect on the Company's results of operations or financial position.
14. SUBSEQUENT EVENTS (UNAUDITED)
STOCK SPLIT
On January 10, 1997, the Board of Directors declared a three-for-two
stock split in the form of a 150% stock dividend on the Company's common stock
payable on January 31, 1997 to shareholders of record on January 17, 1997. All
share, per share and shareholders' equity amounts included in the Company's
consolidated financial statements have been retroactively restated to reflect
the split for all periods presented.
ACQUISITION OF HNS
On January 1, 1997, because of the expiration of restrictions on the
Company's ability to appoint a majority of the HNS Board of Managers, the
Company exercised its rights as majority shareholder of HNS by appointing a
majority of the members of the HNS Board of Managers. As a result, effective
January 1, 1997, the Company will account for its investment in HNS by
consolidating the statements of financial position and results of operations of
HNS with those of the Company.
Also on January 1, 1997, the Company entered into a debenture purchase
agreement with the holder of the Debenture whereby the Company acquired the
Debenture in exchange for $1.5 million in cash and 242,288 shares of the
Company's common stock valued at $4.2 million. The Company expects to record an
extraordinary loss on debt extinguishment of $2.4 million in the first quarter
of 1997 related to this transaction which represents the amount paid of $5.7
million in excess of the face amount of the Debenture of $3.0 million plus
accrued interest of $280,000.
Immediately after this transaction, the Company acquired the minority
interest in HNS, consisting of 585,335 shares of HNS common stock and stock
options to acquire 564,727 shares of HNS common stock at exercise prices ranging
from $0.70 per share to $1.65 per share, by exchanging cash of $1.6 million and
stock options to acquire 355,317 shares of the Company's common stock at
exercise prices ranging from $15.22 per share to $16.53 per share which were
valued by the Company at $2.2 million. Including transaction and other costs of
$350,000, the Company paid $4.1 million for the acquisition of the HNS minority
interest which will be accounted for using the purchase method of accounting
with $2.7 million of the purchase price allocated to in-process product
development and charged to the consolidated statement of operations on January
1, 1997, and $1.4 million allocated to goodwill and purchased technology.
The Company anticipates that it will incur integration costs related to
these transactions of $1.5 million to $2.5 million during the first quarter of
1997.
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32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Harbinger Corporation:
We have audited the accompanying consolidated balance sheets of Harbinger
Corporation and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the 1995 combined
financial statements of SupplyTech, Inc. and SupplyTech International, LLC,
which statements reflect total assets constituting 13% and total revenues
constituting 39% of the related consolidated totals. The 1995 combined financial
statements of SupplyTech, Inc. and SupplyTech International, LLC, not presented
separately herein, were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for SupplyTech, Inc. and SupplyTech International, LLC for 1995, is based solely
on the report of the other auditors. The financial statements of Harbinger
Corporation and subsidiaries for the year ended December 31, 1994, prior to
their restatement for the 1997 pooling of interests transaction described in
Note 2 to the consolidated financial statements and not presented separately
herein, were audited by other auditors whose report dated March 14, 1995
expressed an unqualified opinion on those statements. Separate combined
financial statements of SupplyTech, Inc. and SupplyTech International, LLC also
included in the 1994 restated consolidated financial statements and not
presented separately herein were audited by other auditors whose report dated
February 19, 1997 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors
with respect to 1995, the 1996 and 1995 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Harbinger Corporation and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
We also audited the combination of the accompanying consolidated financial
statements for the year ended December 31, 1994, after restatement for the 1997
pooling of interests; in our opinion, such consolidated statements have been
properly combined on the basis described in Note 2 of the notes to the
consolidated financial statements.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
May 13, 1997
-50-
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
SupplyTech, Inc. and SupplyTech International, LLC:
We have audited the combined balance sheet of SupplyTech, Inc. and
SupplyTech International, LLC as of December 31, 1995 and the related combined
statements of operations, shareholders' equity (deficit), and cash flows for
each of the years in the two-year period ended December 31, 1995. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of SupplyTech,
Inc. and SupplyTech International, LLC, as of December 31, 1995, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
CIULLA, SMITH & DALE, LLP
Southfield, Michigan
February 19, 1997
-51-
34
HARBINGER CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Amount Charged to
Balance at Charged to Recorded Other Balance at
Beginning of Costs and Due to Accounts-- Deductions-- End of
Description Period Expenses Acquisitions Describe(B) Describe(A) Period
- -------------------------------------------- ------------- ------------- ----------- ------------ ------------- -----------
December 31, 1994
Allowance for returns and doubtful
accounts........................... $282,000 86,000 - 964,000 (1,062,000) $ 270,000
December 31, 1995
Allowance for returns and doubtful
accounts........................... $270,000 99,000 - 1,309,000 (1,141,000) $ 537,000
December 31, 1996
Allowance for returns and doubtful
accounts........................... $537,000 98,000 325,000 2,392,000 (1,275,000) $2,077,000
- --------------
(A) Deductions represent write-offs of doubtful accounts and sales returns
charged against the allowance.
(B) Deductions from revenues for sales returns and allowances.
-52-
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harbinger Corporation:
Under date of May 13, 1997, we reported on the consolidated balance
sheets of Harbinger Corporation and subsidiaries as of December 31, 1996 and
1995 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1996, as contained in this Current Report on Form 8-K filed on or
about June 30, 1997. We did not audit the 1995 combined financial statements of
SupplyTech, Inc. and SupplyTech International, LLC, which statements reflect
total assets constituting 13% and total revenues constituting 39% of the related
consolidated totals. The 1995 combined financial statements of SupplyTech, Inc.
and SupplyTech International, LLC, not presented separately herein, were audited
by other auditors whose report has been furnished to us and our opinion, insofar
as it relates to the amounts included for SupplyTech, Inc. and SupplyTech
International, LLC for 1995, is based solely on the report of the other
auditors. The financial statements and the financial statement schedule of
Harbinger Corporation and subsidiaries for the year ended December 31, 1994,
prior to their restatement for the 1997 pooling of interests transaction
described in Note 2 to the consolidated financial statements and not presented
separately herein, were audited by other auditors whose report dated March 14,
1995 expressed an unqualified opinion on those statements and that schedule.
Separate combined financial statements of SupplyTech, Inc. and SupplyTech
International, LLC also included in the 1994 restated consolidated financial
statements and financial statement schedule and not presented separately herein,
were audited by other auditors whose report dated February 19, 1997 expressed an
unqualified opinion on those statements. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule for each of the years in the two-year period ended
December 31, 1996 included herein. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, based on our audits and the report of the other
auditors with respect to 1995, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein for
each of the years in the two-year period ended December 31, 1996.
We also audited the combination of the accompanying financial statement
schedule for the year ended December 31, 1994, after restatement for the 1997
pooling of interests; in our opinion, such financial statement schedule has been
properly combined on the basis described in Note 2 of the notes to the
consolidated financial statements.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
May 13, 1997
-53-
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Harbinger Corporation:
We have audited the statements of operations, shareholders'
equity and cash flows of HARBINGER CORPORATION, a Georgia corporation
(formerly known as Harbinger EDI Services, Inc.) for the year ended
December 31, 1994. These financial statements and the schedule included
in Harbinger Corporation's Form 10-K for the year ended December 31,
1996 are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of Harbinger Corporation for the year ended December 31,
1994 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule included
in Harbinger Corporation's Form 10-K for the year ended December 31,
1996 is the responsibility of the Company's management and is presented
for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 14, 1995
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37
HARBINGER CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND
FULLY DILUTED PER SHARE EARNINGS
1996 1995 1994
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PRIMARY
Net loss applicable to common
shareholders.................................. $(13,095,000) $(1,941,000) $(2,088,000)
============ =========== ===========
Weighted average common shares
outstanding................................... 18,465,000 15,007,000 12,693,000
Net effect of dilutive stock options and
warrants--using the treasury stock method
computed on a primary basis................... - - -
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Total weighted average common
and common equivalent shares
outstanding........................... 18,465,000 15,007,000 12,693,000
============ =========== ===========
Net loss per common share........................ $ (0.71) $ (0.13) $ (0.16)
============ =========== ===========
FULLY DILUTED
Net loss applicable to common
shareholders.................................. $(13,095,000) $(1,941,000) $(2,088,000)
============ =========== ===========
Weighted average common shares
outstanding................................... 18,465,000 15,007,000 12,693,000
Net effect of dilutive stock options and
warrants--using the treasury stock method
computed on a fully diluted basis............. - - -
------------ ----------- -----------
Total weighted average common and
common equivalent shares
outstanding........................... 18,465,000 15,007,000 12,693,000
============ =========== ===========
Net loss per common share........................ $ (0.71) $ (0.13) $ (0.16)
============ =========== ===========
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