COMPANY PROFILE: HNC SOFTWARE INC.

HNC Software Inc. is San Diego's largest software company and develops predictive software solutions for business-to-consumer service companies. These solutions allow companies to make more intelligent and profitable decisions and are marketed to industries- including financial, insurance, retail, telecommunications and the Internet.

Like many San Diego-based software companies, HNC Software Inc. traces its origins to the defense industry. When the company was launched in 1986, it focused on defense-related research and development. But over the years as defense budgets shrank not only in San Diego, but nationwide, HNC quickly realized that in order to succeed and grow, other commercial applications had to be found for its products.

HISTORY

HNC initially offered training in neural network technology, as well as neural network software and hardware tools for users who wished to design and build their own application software. HNC studied the market and determined that there was a need for its predictive software. In 1990, the company changed its business strategy from tools to solutions and began planning for the development and marketing of intelligent, decision-support application software.

Historically, the development of this type of software was restricted by the lack of computing standards and effective computational intelligence techniques. Then in the early 1990s, along came client-server standards, including relational database management systems, the Windows operating system and network communications protocols. All of these advancements helped foster the increased transmission and dissemination of electronically stored data within and among businesses.

HNC initially identified financial services as the industry that would most benefit from the company's software products, finding its market niche in a product that predicted and detected credit card fraud.

The company grew steadily over the years to become a worldwide leader in this market and went public in 1995 with annual revenues of $43.7 million. A year later, the stock split and revenues were $71.4 million. In 1997, revenues jumped to $113.7 million and in 1998 HNC was admitted to Standard & Poor's 'Smallcap 600.' After the initial public offering, HNC continued its aggressive expansion by identifying new markets for its predictive software solutions-retail, insurance/health care, telecommunications, and the Internet - selling products internationally through a direct sales organization with offices throughout the United States, and in Africa, Asia, Australia and Europe.

TECHNOLOGY

HNC's software solutions include a variety of technologies, e.g., neural network predictive decision engines, real time profiling, traditional statistical modeling, and context vector analysis - all of which convert data into real-time recommendations and actions designed to improve profitability, competitiveness and customer satisfaction.

A key to HNC's success has been leveraging these core technologies across a series of product families targeted at specific service industries. In the health care/insurance industry, for example, HNC's products are used to automate workers' compensation bill review; predict loss reserves; detect, predict, and prevent workers' compensation fraud; and increase workers' compensation payer and provider effectiveness. Its software reviews and reprices more than $3 billion in medical charges for property and casualty claims per year. In the financial services industry, the products detect, predict and prevent credit card fraud; manage the profitability of credit card portfolios; and automate selecting and processing new customers. In the retail industry, HNC's enterprise-wide merchandise management and data warehouse solutions include SKU level sales forecasting, inventory management, purchasing/receiving, price/promotion management, and allocation/replenishment.

GROWTH

HNC has also grown by launching subsidiaries to address specific market needs, forming strategic partnerships and through acquisitions. In 1996 the company established Aptex, an Internet solutions subsidiary that develops text analysis applications. A year later, HNC acquired Retek Information Systems, a leading supplier of enterprise-wide retail management solutions. That led to a partnership in 1998 between Retek and Oracle Corp. to provide Oracle(r) Retail(tm), which addresses the specific business processes and information needs of retailers. Another key partnership in 1998 was with Aptex and Genesys Telecommunications Laboratories. Genesys, located in San Francisco, specializes in customer interaction and computer telephony solutions. The companies pooled their technological know how to provide a solution for businesses that manage a large number of customer interactions via e-mail.

Also in 1998, HNC acquired Glastonbury, CT-based Open Solutions in a stock and options deal worth about $124 million. That acquisition provided entrée with small and medium-sized banks. Open Solutions' products support a financial institution's processing for loans, deposits and teller functions. Typical customers are banks and credit unions with 10 branches or fewer. The deal created a significant opportunity for HNC to develop new predictive solutions for a much larger customer base - in 1998, for example, there were over 20,000 banking and depository institutions nationwide with assets exceeding $5 billion.

THE FUTURE

Innovation and extensive research and development have been the hallmarks of HNC since its inception and will continue to be as the company prepares to enter the 21st century. In 1998, for instance, HNC unveiled Autoadvisor(tm), the first integrated medical repricing software with a managed care component for the auto medical claims market. The high-speed, high-volume medical decision processing engine helps carriers, managed care companies and third party administrators reduce the estimated $18 billion in unnecessary claims in the auto industry. But perhaps the most exciting frontier awaiting exploration and commercial development by HNC is in an area that scientists still know very little about: the human brain. HNC is working on a long-term research project launched in 1998 that is jointly funded by HNC and the Defense Advanced Research Projects Agency (DARPA), part of the U.S. Defense Department, to investigate 'cortronic neural networks,' a concept originally proposed by Robert Hecht-Nielsen, HNC's co-founder and chief scientist.

HNC hopes to develop new capabilities in the areas of textual, aural and visual representation, and to actually build three new predictive, neural-net based systems: one that reads, interprets and searches text more effectively; a second recognizing speech and other sounds, enabling users to perform audio searches; and a third that can scan for and interpret images. The ultimate goal is to integrate all three systems. The net result - machines that someday might be able to reason like humans.

"This is the most important scientific challenge of our time, and finding the answer will be the adventure of the millennium," says Hecht-Nielsen.