<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
REGISTRATION NO. 333-86841
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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RETEK INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 7372 51-0392671
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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MIDWEST PLAZA, 801 NICOLLET MALL, 11TH FLOOR
MINNEAPOLIS, MN 55402
(612) 630-5700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------------
JOHN BUCHANAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
RETEK INC.
MIDWEST PLAZA, 801 NICOLLET MALL
11TH FLOOR, MINNEAPOLIS, MN 55402
(612) 630-5700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
Copies to:
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CHRISTOPHER D. DILLON JOHN A. FORE
SHEARMAN & STERLING KATHLEEN B. BLOCH
1550 EL CAMINO REAL, SUITE 100 WILSON SONSINI GOODRICH & ROSATI
MENLO PARK, CA 94025 PROFESSIONAL CORPORATION
(650) 330-2200 650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 1, 1999
5,000,000 Shares
RETEKLOGO
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $10.00 and $12.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "RETK."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 8.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS RETEK
----------------- ----------------- -----------------
Per Share........................................... $ $ $
Total............................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 1999.
<PAGE> 3
[Insider Front Cover]
[The following text center justified appears along the top of the page:]
Retail Business-to-Business
[The Retek logo appears in the center of the page. Arranged around the Retek
logo in a circle are seven individual graphics. Each graphic represents a
different sector of the global retail supply chain. A short line points from
each of these graphics to the Retek logo that appears in the center of the page.
Centered below each graphic is a single word that identifies the sector of the
global retail supply chain represented by the graphic. From the top of the
circle, in clockwise order, the following words appear underneath the graphics:]
Retailers, Suppliers, Distributors, Consolidators, Manufacturers, Banks,
Shippers
[The following text center justified appears along the bottom of the page:]
on the Internet
[Gatefold]
[The following text left justified appears at the top of the left side of the
page:]
Retek offers:
- - Web-based business-to-business software solutions for retailers and their
trading partners
- - retail.com (TM) - an electronic commerce network for the global retail supply
chain
- - Web services to support critical business-to-business processes
- - Technologies that predict customer demand and behavior
[The Retek logo appears on the left side near the middle of the page with the
words "Retek ENABLED" directly underneath]
[The Retek logo appears near the center of the page. Arranged around the Retek
logo in a circle are seven individual graphics. Each graphic represents a
different sector of the global retail supply chain. A short arrow points from
the Retek logo near the center of the page to each of the seven graphics.
Centered below each graphic is a single word that identifies the sector of the
global retail supply chain represented by the graphic. From the top of the
circle, in clockwise order, the following words appear underneath the graphics:]
Retailers, Suppliers, Distributors, Consolidators, Manufacturers, Banks,
Shippers
[The following text left justified appears in a vertical column on the middle of
the right side of the page:]
Advantages of Retek:
- - Collaborative: Exploits the real time, collaborative power of the web through
retail.com to reduce supply chain inefficiencies and costs while maximizing
supply chain sensitivity to the changing demands of consumers
- - Predictive: Employs advanced technologies to predict high value patterns in
the vast volume of business-to-business and business-to-consumer transactions
- - Scalable: Able to support the mission-critical operations of some of the
world's largest retailers
- - Web-based: Full web architecture promotes ease of use and rapid deployment
<PAGE> 4
[The following text left justified appears towards the bottom right corner of
the page:]
The retail.com Web-Services Model:
- -Lower cost of ownership: No operations staff, no hardware costs, no maintenance
costs
- -Immediate and global access: Implementation time measured in minutes, rather
than months, accessible from any desktop with web access
- -Immediate communications: Real time, interactive communications across the
entire retail supply chain
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY............... 3
RISK FACTORS..................... 8
SPECIAL NOTE REGARDING
FORWARD-LOOKING INFORMATION.... 19
OUR SEPARATION
FROM HNC....................... 20
USE OF PROCEEDS.................. 22
DIVIDEND POLICY.................. 22
CAPITALIZATION................... 23
DILUTION......................... 25
SELECTED COMBINED FINANCIAL
DATA........................... 26
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... 27
</TABLE>
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PAGE
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BUSINESS......................... 41
MANAGEMENT....................... 52
CERTAIN TRANSACTIONS............. 66
PRINCIPAL STOCKHOLDER............ 74
DESCRIPTION OF CAPITAL STOCK..... 76
SHARES ELIGIBLE FOR FUTURE
SALE........................... 81
MATERIAL UNITED STATES FEDERAL
TAX CONSEQUENCES TO NON-UNITED
STATES HOLDERS................. 83
UNDERWRITING..................... 86
NOTICE TO CANADIAN RESIDENTS..... 88
LEGAL MATTERS.................... 89
EXPERTS.......................... 89
WHERE TO FIND MORE INFORMATION... 90
INDEX TO FINANCIAL STATEMENTS.... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere is this prospectus.
This summary is not complete and does not contain all the information you should
consider before buying shares in this offering. You should carefully read the
entire prospectus and the risk factors beginning on page 8.
Unless otherwise stated, information in this prospectus assumes that the
underwriters' over-allotment option to purchase an additional 750,000 shares of
common stock at the initial offering price is not exercised.
Unless otherwise stated, the terms "we" or "us" used in this prospectus
refer to Retek Inc. Immediately prior to the completion of this offering, our
business, which we formerly conducted as Retek Logistics, Inc., will be combined
with the business activities of Retek Information Systems, Inc. In this
prospectus, except where stated, information is presented as if this combination
has occurred.
RETEK INC.
We provide web-based, business-to-business software solutions for retailers
and their trading partners. Our software solutions enable retailers to use the
Internet to communicate and collaborate efficiently with the suppliers,
distributors, wholesalers, logistics providers, brokers, transportation
companies, consolidators and manufacturers that make up the global retail supply
chain. Our solutions are rapidly deployable, highly scalable, retail industry
focused and incorporate technology that predicts customer demand and behavior.
We seek to enhance the ability of retailers to interact with their supply chain
by introducing Retail.com, which we believe is the first electronic commerce
network providing collaborative business-to-business software solutions to the
retail industry.
We believe that a market opportunity exists to provide retailers with a
business-to-business software solution that is web-based, collaborative and
designed specifically for the retail industry. We believe, based on industry
sources, that worldwide retailer-to-customer sales exceeded $6.5 trillion in
1997. We estimate that the market for business-to-business commerce is even
larger than retailer-to-customers sales, and involves, according to industry
sources, over three million retail, wholesale and supplier organizations
operating in the global marketplace. We believe the Internet is beginning to
change the way this market operates. Not only does the Internet provide a new
distribution channel for conducting commerce with customers, it provides an even
larger opportunity for retail businesses to communicate and transact commerce
with their supply chain. According to Forrester Research, business-to-business
electronic commerce is expected to grow from $43 billion in 1998 to $1.3
trillion in 2003. We believe, based on industry sources, that the market for
software solutions for business-to-business electronic commerce will grow from
$171 million in 1998 to $3.1 billion in 2002.
We intend to be the leading provider of web-based, business-to-business
software solutions for retailers and their trading partners. As the retail
supply chain evolves into an electronic network, we seek to further enable
retailers to better manage, organize and drive efficiencies through this
network. Key elements of our strategy include:
- Extending our web-based, business-to-business collaborative software
solutions, principally through the introduction of our Retail.com
network;
- Introducing our existing customers to a broader offering of our software
solutions;
- Continuing to leverage our expertise in providing solutions to
retailers;
- Expanding our relationships with partners who implement our software or
make our software available to users; and
- Extending our technological and product leadership by enhancing our
software solutions' core functionality and the features that analyze and
predict customer demand and behavior.
3
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We are currently a wholly owned subsidiary of HNC Software Inc., a public
company that develops and markets software solutions for businesses in financial
and other industries. Immediately prior to the completion of this offering, our
business will combine the business activities of Retek Information Systems, Inc.
and Retek Inc., formerly Retek Logistics, Inc. Retek Information Systems
develops and markets web-based business-to-business software solutions for
retailers. Founded in 1995, Retek Information Systems was acquired by HNC in
1996. Retek Logistics, founded in 1985, develops warehouse management software
solutions. HNC acquired Retek Logistics in 1998. On September 9, 1999, Retek
Logistics was reincorporated as a Delaware corporation and renamed "Retek Inc."
In connection with the separation of our business from HNC, HNC will contribute
all of the outstanding capital stock of Retek Information Systems to Retek Inc.
Our principal executive offices are located at Midwest Plaza, 801 Nicollet
Mall, 11th Floor, Minneapolis, Minnesota 55402 and our telephone number is (612)
630-5700. Our web site is http://www.retek.com. The information on the web site
is not part of this prospectus.
"Retek" is a trademark of Retek. All other trademarks or service marks
appearing in this prospectus are trademarks or service marks of the respective
companies that use them.
4
<PAGE> 8
OUR RELATIONSHIP WITH HNC SOFTWARE INC.
After the completion of this offering, HNC will own approximately 88.9% of
the total number of outstanding shares of our common stock, or approximately
87.4% if the underwriters' over-allotment option is exercised in full. HNC has
informed us that, after the completion of this offering, it is HNC's current
intention to distribute pro rata to its stockholders, as a dividend, all of the
shares of our common stock HNC will own after this offering, subject to the
satisfaction and fulfillment of several conditions, including the approval of
the HNC board of directors (this dividend will be referred to as the
distribution in this prospectus). HNC has the sole discretion to determine
whether it will carry out the distribution, and if the distribution is carried
out, the timing, structure and terms of the distribution. HNC is not obligated
to carry out the distribution. We refer you to "Our Separation from HNC"
beginning on page 20 for additional information relating to the conditions to
the distribution and to "Risk Factors -- Risks Related to Our Separation from
HNC" beginning on page 14 for additional information on the risks related to the
distribution.
If HNC has received a written ruling from the Internal Revenue Service that
the distribution qualifies for tax-free treatment under Section 355 of the
Internal Revenue Code, and HNC fails to complete the distribution within 120
days after the first date that HNC is eligible to effect the tax-free
distribution, then John Buchanan, our chairman and chief executive officer, and
three other executive officers to be chosen by Mr. Buchanan, will receive a
12-month credit to the vesting schedule of their Retek stock options. In
addition, if at the time of this accelerated vesting, Mr. Buchanan and the three
other chosen executives execute two-year non-compete agreements with Retek,
their vesting schedules will be credited by an additional 12 months.
We will enter into agreements with HNC that provide for the separation of
our business from HNC. These agreements will generally provide for the transfer
from HNC to us of assets and intellectual property used in our business, and the
assumption by us of liabilities relating to our business. If HNC carries out the
tax-free distribution, these agreements will restrict our ability to take
specified actions that would cause the distribution to be taxable to HNC or its
stockholders. For more information regarding these agreements, see "Certain
Transactions" beginning on page 66.
Our agreements with HNC will also govern various interim and ongoing
relationships. All of the agreements providing for our separation from HNC will
be made in the context of a parent-subsidiary relationship, will be negotiated
in the overall context of our separation from HNC and will not be conditioned on
the distribution. The terms of these agreements may be more or less favorable to
us than if they had been negotiated with unaffiliated third parties.
5
<PAGE> 9
THE OFFERING
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Common stock offered in this offering........ 5,000,000 shares
Common stock outstanding after this
offering:.................................. 45,000,000 shares
Use of proceeds from this offering........... For working capital and general corporate
purposes, including repayment of intercompany
debt to HNC and the payment of the notes
which were issued in connection with the
purchase of all of the outstanding capital
stock of WebTrak Limited. For further
information regarding our use of the proceeds
from this offering see "Use of Proceeds" on
page 22.
Proposed Nasdaq National Market Symbol....... "RETK"
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Common stock outstanding after this offering is based on shares outstanding
as of September 30, 1999:
- assuming the filing of the certificate of amendment to our certificate
of incorporation to increase the number of authorized shares of common
stock to 150,000,000 shares and the number of authorized shares of
preferred stock to 5,000,000 shares;
- excluding the exercise of the underwriters' over-allotment option;
- excluding shares of common stock issuable upon exercise of options
outstanding at an exercise price of $10.00 per share, none of which are
exercisable; and
- excluding shares of common stock issuable upon conversion of a note
which was issued in connection with the purchase of all of the
outstanding capital stock of WebTrak. For further information regarding
the acquisition of WebTrak, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" beginning on page 36.
6
<PAGE> 10
SUMMARY COMBINED FINANCIAL DATA
The summary combined financial data presented below should be read in
conjunction with our combined financial statements and the related notes,
beginning on page F-1, "Capitalization" on page 23, "Selected Combined Financial
Data" beginning on page 26, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 27.
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<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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COMBINED STATEMENT OF INCOME DATA:
Total revenue............................... $13,433 $30,923 $55,033 $39,829 $57,759
Gross profit................................ 9,554 27,278 41,181 29,788 42,038
Operating income............................ 1,418 6,619 8,088 5,194 9,485
Net income.................................. 2,233 3,476 3,878 2,171 5,093
Pro forma unaudited basic and diluted net
income per common share(1)............... $ 0.10 $ 0.13
Shares used in computing pro forma unaudited
basic and diluted net income per common
share(1)................................. 40,000 40,000
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<CAPTION>
SEPTEMBER 30, 1999
----------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
(UNAUDITED)
(IN THOUSANDS)
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COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 499 $35,744
Working capital........................................... 17,800 62,550
Total assets.............................................. 60,066 95,311
Payable to HNC Software Inc............................... 9,505 --
Total stockholder's equity(3)............................. 41,080 85,830
</TABLE>
- -------------------------
(1) For an explanation of the determination of the number of shares used in
computing pro forma unaudited basic and diluted net income per common share, see
Note 1 of the notes to our combined financial statements beginning on page F-7.
(2) The as adjusted amounts reflect the receipt and application of the net
proceeds from the sale of 5,000,000 shares of our common stock at an assumed
initial offering price of $10.00, after deducting the estimated underwriting
discounts and offering expenses payable by us of $5,250,000 and repayment of the
amount payable to HNC of $9,505,000. The as adjusted amounts do not reflect our
acquisition of all the outstanding capital stock of WebTrak Limited on October
29, 1999 for $8.0 million, as we have not yet determined the purchase price
allocation of the assets acquired and the liabilities assumed.
(3) Upon the expected contribution by HNC of all the outstanding stock of
Retek Information Systems, Inc. to us in exchange for 39,999,000 shares of our
common stock issued to HNC, actual total stockholder's equity will remain the
same.
7
<PAGE> 11
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and all other information
contained in this prospectus before purchasing our common stock. Any of the
following risks could materially harm our business, operating results and
financial condition. Additional risks and uncertainties not currently known to
us or that we currently consider immaterial could also harm our business,
operating results and financial condition. You could lose all or part of your
investment as a result of these risks.
RISK RELATED TO OUR BUSINESS AND INDUSTRY
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S RAPID PACE OF CHANGE, SALES OF
OUR PRODUCTS MAY DECLINE.
If we are unable to develop new software solutions or enhancements to our
existing products on a timely and cost-effective basis, or if new products or
enhancements do not achieve market acceptance, our sales may decline. The life
cycles of our products are difficult to predict because the business-to-business
electronic commerce market for our products is new and emerging and is
characterized by rapid technological change and changing customer needs. The
introduction of products employing new technologies could render our existing
products or services obsolete and unmarketable.
In developing new products and services, we may:
- fail to respond to technological changes in a timely or cost-effective
manner;
- encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or that
shorten the life cycles of our existing products and services;
- experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services; or
- fail to achieve market acceptance of our products and services.
THE LENGTHY SALES CYCLE FOR OUR PRODUCTS MAKES OUR REVENUES SUSCEPTIBLE TO
FLUCTUATIONS.
Delay or failure to complete sales in a particular quarter or year would
reduce our quarterly and annual revenue. Implementation of our software is
complex, time consuming and expensive. In many cases, our customers must change
established business practices or conduct business in new ways to accommodate
installation and use of our software. They must also consider a wide range of
other issues before committing to purchase our products, including product
benefits, competitive alternatives, ease of installation, ability to work with
existing computer systems, ability to support a large user base and the scope of
functions our products provide. We believe that the purchase of our products is
often discretionary and generally involves a significant commitment of capital
and other resources by a customer. As a result of these factors, our sales
cycles can be lengthy, typically ranging from four to 12 months. Consequently,
sales of our software solutions that are anticipated to occur in a given quarter
or year may be accelerated or delayed, potentially resulting in significant
variations in expected quarterly or annual revenue.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD LIKELY CAUSE OUR STOCK
PRICE TO DECLINE.
Our quarterly operating results have fluctuated in the past and are
expected to continue to fluctuate in the future. If our quarterly operating
results fail to meet analysts' expectations, the trading price of our common
stock could decline. In addition, significant fluctuations in our quarterly
operating results may harm our business operations by making it difficult to
implement our budget and business plan. The
8
<PAGE> 12
factors, many of which are outside our control, which could cause our operating
results to fluctuate include:
- the size and timing of customer orders, which can be affected by
customer budgeting and purchasing cycles;
- the demand for and market acceptance of our software solutions;
- our competitors' announcements or introductions of new software
solutions, services or technological innovations;
- our ability to develop, introduce and market new products on a timely
basis;
- customer deferral of material orders in anticipation of new releases or
new product introductions;
- our success in expanding our sales and marketing programs;
- increased sales of Oracle Retail(TM) in our second fiscal quarter due to
seasonally greater sales by Oracle near its fiscal year-end in May;
- technological changes or problems in computer systems; and
- general economic conditions which may affect our customers' capital
investment levels.
In addition, we will incur compensation expense in connection with our
grant of options under our 1999 Equity Incentive Plan. This expense will be
amortized over the vesting period of these granted options, which is generally
four years, resulting in lower quarterly income. For a discussion of this
compensation expense, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations"
beginning on page 34.
Our quarterly expense levels are relatively fixed and are based, in part,
on expectations as to future revenue. As a result, if revenue levels fall below
our expectations, our net income will decrease because only a small portion of
our expenses vary with our revenue. For a more detailed description of our
quarterly results, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 27.
AS WE ENTER INTO A NEW TYPE OF LICENSE AGREEMENT, WE WILL RECOGNIZE
REVENUES OVER A PERIOD OF TIME AND WILL HAVE SIGNIFICANTLY LESS REVENUE FOR
SEVERAL QUARTERS.
At this time, we generally license our products to customers on a perpetual
basis, and we recognize revenue upon delivery of the products. Starting in the
fourth quarter of 1999, we intend to enter into software licensing agreements
with revised terms for the majority of our software products sold after this
date. Under these agreements, we will provide technical advisory services after
the delivery of our products to help our customers exploit the full value and
functionality of our products. Revenue from the sale of software licenses and
technical advisory services under these agreements will be recognized as the
services are performed over the contract period, which we expect will generally
be 12 to 24 months, as determined by our customers' objectives. As we begin to
recognize license and service revenues over a period of time, rather than upon
the delivery of our products, we will recognize significantly less revenue and
our associated margins will be lower for several quarters, as compared to
previous quarters, and we will incur operating losses during these periods. For
further information regarding our new software licensing agreements, we refer
you to "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview" beginning on page 27.
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<PAGE> 13
OUR RETAIL.COM NETWORK WAS RECENTLY INTRODUCED AND IS STILL AT AN EARLY STAGE OF
DEVELOPMENT. WE HAVE NOT ESTABLISHED COMPETITIVE AND PROFITABLE PRICING FOR OUR
RETAIL.COM NETWORK.
We began operation of our Retail.com network on September 26, 1999. We
incurred, and may continue to incur, significant infrastructure costs in
establishing this network. Broad and timely acceptance of our Retail.com network
is subject to a number of significant risks. These risks include:
- our need to provide value-enhancing software solutions and services on
our Retail.com network to achieve widespread commercial acceptance of
our network;
- whether our network will be able to support large numbers of retailers
and the members of their supply chain; and
- our need to significantly expand our internal resources and incur
associated expenses to support planned growth of our Retail.com network.
We have established a subscription pricing model for the WebTrak Critical
Path software solutions provided on our Retail.com network, whereby members pay
an annual fee based on the number of the member's employees who will have access
to the network. As additional services are added to the Retail.com network, we
will need to establish a pricing model for these new services. If the pricing
models for the Retail.com network fail to be competitive and profitable or if
they are not acceptable to our customers, our network will not be commercially
successful, which could harm our revenue and business. See "Business -- Retek
Products -- Business-to-Business Collaborative Solution" on page 45 for more
information regarding the Retail.com network.
OUR RELATIONSHIP WITH ORACLE IS IMPORTANT IN GENERATING SALES OF OUR PRODUCTS.
IF OUR RELATIONSHIP WITH ORACLE ENDS OR IF ORACLE DOES NOT DEVOTE ADEQUATE
RESOURCES TO PROMOTE AND SELL ORACLE RETAIL(TM) OR IF SALES OF ORACLE RETAIL(TM)
DECLINE, OUR REVENUES WILL DECLINE.
We have worked with Oracle to establish Oracle Retail(TM), a software
solution which combines our products with Oracle's financial applications. In
addition to Oracle's general sales force, Oracle has dedicated a sales team of
approximately 30 sales professionals who sell and market Oracle Retail(TM)
worldwide. Revenue generated from sales of Oracle Retail(TM) accounted for
approximately 25% of our revenue in the nine months ended September 30, 1999.
Both we and Oracle currently have the right to terminate the agreement governing
the sales and marketing of Oracle Retail. In addition, this agreement is
currently being renegotiated. If Oracle were to exercise its right to terminate,
or if we fail to negotiate a new agreement on acceptable terms, our revenue will
decline and our business will be harmed. In addition, Oracle is not obligated to
sell and market Oracle Retail(TM) and, in the future, may decide to stop selling
Oracle Retail(TM) or promote products that compete with Oracle Retail(TM) or our
other products.
WE EXPECT TO SIGNIFICANTLY INCREASE OUR OPERATING EXPENSES, WHICH WILL IMPACT
OUR ABILITY TO REMAIN PROFITABLE.
We intend to significantly increase our operating expenses as we:
- increase our research and development activities;
- increase our services activities;
- develop and build our Retail.com network;
- expand our distribution channels;
- increase our sales and marketing activities, including expanding our
direct sales force;
- build our internal information technology system; and
- operate as an independent public company.
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We will incur expenses before we generate any revenue from this increase in
spending. If we do not significantly increase revenue from these efforts, our
business and operating results could be seriously harmed.
COMPETITIVE PRESSURES COULD REDUCE OUR MARKET SHARE OR REQUIRE US TO REDUCE OUR
PRICES, WHICH WOULD REDUCE OUR REVENUE AND/OR OPERATING MARGINS.
The market for our software solutions is highly competitive and subject to
rapidly changing technology. Competition could seriously impede our ability to
sell additional products and services on terms favorable to us. Competitive
pressures could reduce our market share or require us to reduce our prices,
which would reduce our revenues and/or operating margins. Many of our
competitors have substantially greater financial, marketing or other resources,
and greater name recognition than we do. See "Business -- Competition" on page
50 for a discussion of our competitive position. In addition, these companies
may adopt aggressive pricing policies that could compel us to reduce the prices
of our products and services in response. Our competitors may also be able to
respond more quickly than we can to new or emerging technologies and changes in
customer requirements. Our current and potential competitors may:
- develop and market new technologies that render our existing or future
products obsolete, unmarketable or less competitive;
- make strategic acquisitions or establish cooperative relationships among
themselves or with other solution providers, which would increase the
ability of their products to address the needs of our customers; and
- establish or strengthen cooperative relationships with our current or
future strategic partners, which would limit our ability to sell
products through these channels.
As a result, we may not be able to maintain a competitive position against
current or future competitors.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR ABILITY TO GROW OUR BUSINESS COULD BE HARMED.
We believe that our future success will depend upon our ability to attract
and retain highly skilled personnel, including John Buchanan, our chairman and
chief executive officer; Gordon Masson, our president; John L. Goedert, our
senior vice president, research and development; and Gregory A. Effertz, our
vice president, finance and administration and chief financial officer. We
currently do not have any key-man life insurance relating to key personnel, who
are employees at-will and, except for Mr. Buchanan, are not subject to
employment contracts. Mr. Buchanan's employment agreement ends on November 29,
1999. The loss of the services of any one or more of these key persons could
harm our ability to grow our business.
We also must attract, integrate and retain skilled sales, research and
development, marketing and management personnel. Competition for these types of
employees is intense, particularly in our industry. Failure to hire and retain
qualified personnel would harm our ability to grow our business.
IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES
WHO IMPLEMENT OUR PRODUCTS, OUR ABILITY TO MEET OUR CUSTOMERS' NEEDS COULD BE
HARMED AND MAY RESULT IN A DECREASE IN OUR REVENUE.
We rely, and expect to continue to rely, on a number of third parties to
implement our software solutions at customer sites. If we are unable to
establish and maintain effective, long-term relationships with these
implementation providers, or if these providers do not meet the needs or
expectations of our customers, our revenue will be reduced and our customer
relationships will be harmed. Our current implementation partners are not
contractually required to continue to help implement our software
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solutions. If the number of our product implementations continues to increase,
we will need to develop new relationships with additional third-party
implementation providers to provide these services.
We may be unable to establish or maintain relationships with third parties
having sufficient qualified personnel resources to provide the necessary
implementation services to support our needs. If third-party services are
unavailable, we will be required to provide these services internally, which
would significantly limit our ability to meet our customers' implementation
needs and would increase our operating expenses and could reduce our gross
margins. A number of our competitors, including IBM and SAP, have significantly
more established relationships with these third parties and, as a result, these
third parties may be more likely to recommend competitors' products and services
rather than our own. In addition, we cannot control the level and quality of
service provided by our current and future implementation partners.
IF WE FAIL TO OBTAIN ACCESS TO THE INTELLECTUAL PROPERTY OF THIRD PARTIES, OUR
BUSINESS AND OPERATING RESULTS COULD BE HARMED.
We must now, and may in the future have to, license or otherwise obtain
access to the intellectual property of third parties and related parties,
including HNC, Lucent, MicroStrategy and Oracle. See "Business -- Technology
Characteristics" beginning on page 48 and "Certain Transactions -- License
Agreement" on page 71 for a discussion of our technology licenses from third
parties. Our business would be seriously harmed if the providers from whom we
license such software cease to deliver and support reliable products or enhance
their current products. In addition, the third-party software may not continue
to be available to us on commercially reasonable terms or prices or at all. Our
inability to maintain or obtain this software could result in shipment delays or
reduced sales of our products. Furthermore, we might be forced to limit the
features available in our current or future product offerings. Either
alternative could seriously harm our business and operating results.
IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, OUR COMPETITORS MAY
GAIN ACCESS TO OUR TECHNOLOGY AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and copyright and trademark laws.
We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. In
addition, we cannot assure you that any of our proprietary rights with respect
to our Retail.com network will be viable or of value in the future because the
validity, enforceability and type of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and expensive, and while we are unable to determine the extent to
which piracy of our software products exists, software piracy may be a problem.
In addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. We intend to
vigorously protect our intellectual property rights through litigation and other
means. However, such litigation can be costly to prosecute and we cannot be
certain that we will be able to enforce our rights or prevent other parties from
developing similar technology, duplicating our products or designing around our
intellectual property.
IF, IN THE FUTURE, THIRD PARTIES CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR
INTELLECTUAL PROPERTY, WE MAY INCUR SIGNIFICANT COSTS.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to
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infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us or at all, which could seriously
harm our business.
OUR BUSINESS IS SUBJECT TO ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH
INTERNATIONAL SALES.
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" beginning
on page 27 for a discussion of our percentage of revenue originating outside of
North America and our percentage of sales not denominated in US dollars. To the
extent that our sales are denominated in foreign currencies, the revenue we
receive could be subject to fluctuations in currency exchange rates. If the
effective price of the products we sell to our customers were to increase due to
fluctuations in foreign currency exchange rates, demand for our technology could
fall, which would, in turn, reduce our revenue. We have not historically
attempted to mitigate the effect that currency fluctuations may have on our
revenue through use of hedging instruments, and we do not currently intend to do
so in the future.
We anticipate that revenue from international operations will continue to
represent a substantial portion of our total revenue. Accordingly, our future
results could be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- greater risk of uncollectible accounts;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- international variations in technology standards;
- differing levels of protection of intellectual property; and
- unexpected changes in regulatory requirements.
IF THE INTERNET FAILS TO BE ACCEPTED AS A VIABLE LONG-TERM COMMUNICATIONS
PROTOCOL, OUR BUSINESS AND OPERATING RESULTS WILL BE SERIOUSLY HARMED.
As our software solutions are web-based, we depend on the acceptance of the
Internet as a communications protocol. However, this acceptance may not
continue. Rapid growth of the Internet is a recent phenomenon. The Internet may
not be accepted as a viable long-term communications protocol for businesses for
a number of reasons. These reasons include:
- potentially inadequate development of the necessary communications and
computer network technology, particularly if rapid growth of the
Internet continues;
- delayed development of enabling technologies and performance
improvements;
- increased security risks in transmitting and storing confidential
information over public networks; and
- potentially increased governmental regulation.
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ERRORS AND DEFECTS IN OUR PRODUCTS COULD RESULT IN SIGNIFICANT COSTS TO US AND
COULD IMPAIR OUR ABILITY TO SELL OUR PRODUCTS.
Our products are complex and, accordingly, may contain undetected errors or
failures when we first introduce them or as we release new versions. This may
result in loss of, or delay in, market acceptance of our products and could
cause us to incur significant costs to correct errors or failures or to pay
damages suffered by customers as a result of such errors or failures. In the
past, we have discovered software errors in our new releases and new products
after their introduction. We have incurred costs during the period required to
correct these errors, although to date such costs, including costs incurred on
specific contracts, have not been material. We may in the future discover errors
in new releases or new products after the commencement of commercial shipments.
CHANGES IN ACCOUNTING STANDARDS COULD AFFECT THE CALCULATION OF OUR FUTURE
OPERATING RESULTS.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998 and Statement of Position 98-4 effective March 31,
1998. The American Institute of Certified Public Accountants has also issued
Statement of Position 98-9 -- which will be effective for us for transactions
entered into beginning January 1, 2000. Full implementation guidelines for this
standard and additional standards could be issued in the future. These
guidelines and additional standards could lead to unanticipated changes in our
current revenue recognition policies, which changes could harm our business,
financial condition and operating results. Our revenue recognition policies are
further discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" beginning on page 27.
OUR BUSINESS COULD BE HARMED IF THE SYSTEMS WE, OUR CUSTOMERS OR OUR VENDORS USE
ARE NOT YEAR 2000 COMPLIANT.
The risks posed by Year 2000 issues, which arise because computer systems
and software products may be unable to distinguish between twentieth century
dates and twenty-first century dates, could harm our business in a number of
significant ways. If we experience disruptions as a result of the Year 2000
problem, our revenues could decline and we may incur significant costs to
correct any problems. Additionally, we rely on information technology supplied
by third parties, and our strategic partners also are heavily dependent on
information technology systems and on their own third-party vendor systems. Year
2000 problems experienced by us or any of these third parties could harm our
business. Additionally, the Internet could face serious disruptions arising from
the Year 2000 problem, which would harm our business, and particularly our
Retail.com network.
We cannot guarantee that retailers and members of their supply chains will
be able to utilize our Retail.com network without serious disruptions arising
from the Year 2000 problem. Given the pervasive nature of the Year 2000 problem,
it is also possible that disruptions in industries and market segments, other
than the retail industry, will adversely affect our business.
RISKS RELATED TO OUR SEPARATION FROM HNC
AS LONG AS HNC OWNS A MAJORITY OF OUR CAPITAL STOCK, WE WILL BE CONTROLLED BY
HNC AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING.
After the completion of this offering, HNC will own approximately 88.9% of
our outstanding common stock, or approximately 87.4% if the underwriters
exercise their over-allotment option in full. As long as HNC owns at least 25%
of our outstanding capital stock, HNC will be able to nominate three of the
seven directors on our board of directors. Investors in this offering will not
be able to affect the outcome of any stockholder vote for so long as HNC owns a
majority of our common stock. As a result, HNC will control all matters
affecting us, including:
- the allocation of business opportunities that may be suitable for HNC
and us;
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- any determinations with respect to mergers or other business
combinations involving us;
- the acquisition or disposition of assets or businesses by us;
- our debt or equity financing, including future issuance of our common
stock or other securities;
- incurrence of debt by us;
- changes to the agreements providing for our separation from HNC;
- amendments to our certificate of incorporation or bylaws;
- the payment of dividends on our common stock; and
- determinations with respect to our tax returns.
IF WE NEED ADDITIONAL FINANCING TO MAINTAIN AND EXPAND OUR BUSINESS, HNC WILL BE
UNDER NO OBLIGATION TO PROVIDE FINANCING AND OTHER FINANCING MAY NOT BE
AVAILABLE ON FAVORABLE TERMS.
In the past, our capital needs have been satisfied by HNC. However,
following the separation, HNC will no longer have any obligation to provide
funds to finance our working capital or other cash requirements. We cannot
assure you that financing, if needed, will be available on favorable terms. If
we are unable to obtain financing on favorable terms or at all, our ability to
grow our business will be harmed.
We believe our capital requirements will vary greatly from quarter to
quarter, depending on a number of factors, including timing of capital
expenditures, fluctuations in our operating results and cash flows and our
financing activities. We believe that cash generated by our current operations,
along with the proceeds from this offering, will be sufficient to satisfy our
working capital, capital expenditure and research and development requirements
for at least the next 12 months. However, we may require or choose to obtain
additional debt or equity financing in the future. Future equity financings
would be dilutive to the existing holders of our common stock. Future debt
financings, if available, could have as a condition that we agree to restrictive
covenants and would require the consent of HNC. Finally, pursuant to an
agreement between HNC and us, until two years, and possibly longer, after the
distribution, our ability to issue common stock in connection with acquisitions,
offerings or otherwise will be limited.
WE WILL BE SUBJECT TO CONTRACTUAL LIMITATIONS WHICH COULD LIMIT THE CONDUCT OF
OUR BUSINESS AND OUR ABILITY TO PURSUE OUR BUSINESS OBJECTIVES.
The separation agreement that we will enter into with HNC relating to this
offering and the potential distribution will contain a number of restrictive
covenants relating to the distribution, which will require that until two years
after the completion of the distribution, and possibly longer, we cannot take
specified actions without either the consent of HNC or a supplemental ruling
from the Internal Revenue Service. For further information regarding these
specified actions and the restrictions on our ability to take those actions, see
"Certain Transactions -- Separation Agreement" beginning on page 65.
In addition, under the separation agreement we will agree to indemnify HNC
on an after-tax-basis for any tax liability incurred to HNC as a result of our
taking any of these actions, whether or not HNC consents or a supplemental
ruling is obtained, or taking or failing to take any other action which causes
the distribution to become taxable. For further information regarding the
separation agreement, see "Certain Transactions -- Separation Agreement"
beginning on page 65.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH HNC WITH RESPECT TO
OUR PAST AND ONGOING RELATIONSHIP THAT COULD HARM OUR BUSINESS OPERATIONS.
Conflicts of interest may arise between HNC and us in a number of areas
relating to our past and ongoing relationships, including:
- major business combinations involving us or HNC, including an
acquisition of us by a third party;
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- our efforts to raise capital in debt or equity financing;
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from HNC;
- intellectual property matters;
- employee retention and recruiting;
- sales or distributions by HNC of all or any portion of its ownership
interest in us;
- the nature, quality and pricing of transitional services HNC has agreed
to provide us; and
- business opportunities that may be attractive to both HNC and us.
We may not be able to resolve any potential conflicts and, even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. The agreements we will enter into with HNC may be amended if
the parties agree. While we are controlled by HNC, HNC may be able to require us
to agree to amendments to these agreements that may be less favorable to us than
the original terms of any of these agreements. For a discussion of HNC's rights
to amend these agreements, see "Certain Transactions" beginning on page 66.
BECAUSE HNC IS NOT UNDER ANY OBLIGATION TO DISTRIBUTE OUR COMMON STOCK, IT MAY
BE MORE DIFFICULT FOR US TO RETAIN KEY EMPLOYEES SHOULD HNC NOT PROCEED WITH THE
DISTRIBUTION.
HNC does not have any obligation with respect to the timing or any of the
terms of the distribution of our common stock. We cannot assure you as to
whether or when the distribution will occur, or as to the terms of the
distribution. Under specified conditions, if the distribution does not occur,
the vesting schedule of the Retek stock options granted to four of our key
employees will be credited by 12 months. If these employees enter into
non-compete agreements with us, the vesting schedule will be credited by an
additional 12 months. For information regarding the conditions which will result
in the crediting of these vesting schedules, we refer you to
"Management -- Treatment of Outstanding Stock Options" on page 58. Upon any
acceleration of their vesting schedules, it may be more difficult for us to
retain these key employees. The loss of the services of one or more of these
employees could harm our business.
BECAUSE MANY OF OUR DIRECTORS AND EXECUTIVE OFFICERS OWN HNC COMMON STOCK, THEY
MAY HAVE CONFLICTS OF INTEREST WHEN FACED WITH DECISIONS WHICH COULD HAVE
DIFFERENT IMPLICATIONS FOR HNC AND US.
Many of our directors and executive officers own a substantial amount of
HNC common stock and options to purchase HNC common stock. Ownership of HNC
common stock by our directors and officers after our separation from HNC could
create, or appear to create, potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for HNC
and us. For information regarding directors' and officers' ownership of options
to acquire HNC common stock, see "Management -- Executive Compensation --
Aggregated HNC Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values" on page 58.
THE TRANSITIONAL SERVICES THAT HNC WILL PROVIDE TO US MAY NOT BE SUFFICIENT TO
MEET OUR NEEDS, AND WE MAY NOT BE ABLE TO REPLACE THESE SERVICES AFTER OUR
AGREEMENTS WITH HNC EXPIRE.
HNC will agree to provide specified transitional services to us for a
limited time period, including services related to employee benefits for our
employees. Although HNC will be contractually obligated to provide us with these
services, these services may not be provided at the same level as when we were
part of HNC, and we may not be able to obtain the same benefits. After the
expiration of these various arrangements, we may not be able to replace these
transitional services and employee benefits in a timely manner or on terms and
conditions, including cost, as favorable as those we will receive from HNC. The
prices charged to us under these agreements may be higher or lower than the
prices that we may be required to pay third parties for similar services or the
costs of similar services if we undertake them ourselves. For more information
about these arrangements, see "Certain Transactions -- Services Agreement" on
page 71.
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RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
OUR SECURITIES HAVE NO PRIOR MARKET, AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THIS OFFERING.
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our common stock could be
subject to significant fluctuations after this offering. Among the factors that
could affect our stock price are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- strategic moves by us or our competitors, such as acquisitions or
restructurings or changes in business strategy;
- actions by institutional stockholders or by HNC prior to its
distribution of our stock;
- speculation in the press or investment community;
- general market conditions; and
- domestic and international economic factors unrelated to our
performance.
The stock markets in general, and the markets for technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock. In
particular, we cannot assure you that you will be able to resell your shares at
or above the initial public offering price, which will be determined by
negotiations between the representatives of the underwriters and us. See the
section entitled "Underwriting" beginning on page 86 for a discussion of the
factors to be considered in determining the initial public offering price.
THE PRICE OF OUR COMMON STOCK COULD DECLINE AS A RESULT OF SALES OR
DISTRIBUTIONS OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKET.
HNC has announced that it is HNC's current intention to distribute all of
the shares of our common stock it owns after this offering is completed to HNC
stockholders provided specified conditions are met, including the approval of
the HNC Board of Directors. For further information regarding the distribution
see "Our Separation from HNC" beginning on page 20, and "Certain Transactions"
beginning on page 66. Substantially all of those shares would be eligible for
immediate resale in the public market following a distribution by HNC. We are
unable to predict whether significant amounts of our common stock will be sold
in the open market in anticipation of, or following, this distribution. We are
also unable to predict whether a sufficient number of buyers would be in the
market at that time. Sales by HNC or others of substantial amounts of our common
stock in the public market, or the perception that such sales might occur, could
cause the price of our common stock to decline.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR POTENTIAL STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation, which has
been prevalent with respect to technology companies. Securities litigation could
result in substantial costs, harm our financial condition and would divert
management's attention and resources.
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PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN
ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Our certificate of incorporation and bylaws and Delaware law will contain
provisions that could make it harder for a third party to acquire us without the
consent of our board of directors, although these provisions have little
significance while we are controlled by HNC. These provisions will include a
classified board of directors and limitations on actions by our stockholders by
written consent. In addition, our board of directors will have the right to
issue preferred stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquiror. In addition, once
HNC or its successors own less than 50% of our outstanding voting stock, Section
203 of the Delaware General Corporation Law will apply to us and will impose
some restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. Although we believe these
provisions will provide for an opportunity to receive a higher bid by requiring
potential acquirors to negotiate with our board of directors, these provisions
apply even if the offer may be considered beneficial by some stockholders.
OUR USE OF THE PROCEEDS FROM THIS OFFERING MAY NOT MAXIMIZE RETURNS ON
INVESTMENT.
We have broad discretion in how to use most of the proceeds of this
offering. Stockholders may not agree with the ways management decides to use the
proceeds. Our primary goal with this offering is to increase our working
capital, create a public market for our common stock, increase our visibility in
our markets and facilitate future access to the public finance markets. We
currently plan to use the proceeds of this offering for working capital and
general corporate purposes, including the repayment of intercompany debt to HNC
and the payment of notes issued in connection with the purchase of all the
outstanding shares of WebTrak Limited. Until we need to use the proceeds of this
offering, we intend to invest the proceeds in investment grade, interest bearing
securities.
IF YOU PURCHASE COMMON STOCK IN THIS OFFERING, YOU WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION.
The initial public offering price of our common stock is substantially
higher than the book value per share of the outstanding common stock.
Accordingly, if you purchase common stock in this offering, you will experience
immediate dilution of approximately $8.16 in the book value per share of the
common stock, meaning that the net tangible book value of each share purchased
by you will be less than the purchase price you paid. To the extent that
outstanding options to purchase our common stock are exercised, or options
reserved for issuance are issued and exercised, each stockholder purchasing in
this offering will experience further substantial dilution. For a more detailed
discussion of the dilution you can expect to experience, see "Dilution" on page
25.
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors" beginning on page 8, that may cause our or our industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual future results.
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OUR SEPARATION FROM HNC
Set forth in this section is HNC's current intention as to the possible
distribution of any or all of its shares of our common stock to its
stockholders. HNC is not obligated to complete the distribution. If the
distribution is ultimately completed, HNC does not have any obligation with
respect to the timing or any of the terms of the distribution. We cannot assure
you as to whether or not or when the distribution will occur, or as to the terms
of the distribution.
OVERVIEW
We are currently a wholly owned subsidiary of HNC Software Inc., a public
company that develops and markets predictive software solutions for businesses.
Immediately prior to the completion of this offering, our business will combine
the business activities of Retek Information Systems, Inc. and Retek Inc.,
formerly Retek Logistics, Inc. Retek Information Systems develops and markets
web-based business-to-business software solutions for retailers. Founded in
1995, Retek Information Systems was acquired by HNC in 1996. Retek Logistics,
founded in 1985, develops warehouse management software solutions. HNC acquired
Retek Logistics in 1998. On September 9, 1999, Retek Logistics was
reincorporated as a Delaware corporation and renamed "Retek Inc." In connection
with the separation of our business from HNC, HNC will contribute all of the
outstanding capital stock of Retek Information Systems to Retek Inc.
HNC develops, markets and supports software for businesses in specified
targeted service industries. HNC's software solutions convert existing data into
meaningful recommendations and actions that allow organizations to improve
profitability, competitiveness and customer satisfaction. HNC sells and markets
its software and services in North America and internationally. HNC provides
software for each of the healthcare/insurance, financial services and retail
industries. Substantially all of the revenue HNC earns from the retail industry
is attributable to our software solutions. After this offering, HNC will focus
on its remaining core software markets, namely the healthcare/insurance and
financial services industries. However, HNC is not obligated to refrain from
providing software solutions to the retail industry or from competing with us.
BENEFITS OF THE SEPARATION
We believe that we will realize benefits from our separation from HNC,
including the following:
- Greater Strategic Focus. As a result of having our own management team
and a board with independent outside directors, we expect to have a
sharper focus on our business and strategic opportunities. We will also
have greater ability to modify business processes to better fit the
needs of our customers and employees.
- Better Incentives for Employees and Greater Accountability. The
separation will allow us to offer our employees compensation, including
cash and stock based compensation, directly linked to the performance of
our business. We expect these incentives to enhance our ability to
attract and retain qualified personnel.
- Increased Speed and Responsiveness. We expect to be able to make
decisions more quickly, deploy resources more rapidly and efficiently
and operate with greater flexibility than when we were a part of a
larger organization. In addition, we expect to enhance our
responsiveness to customers and partners.
SEPARATION AND TRANSITIONAL AGREEMENTS
We will enter into agreements with HNC providing for the separation of our
business from HNC, including a separation agreement and a corporate rights
agreement. These agreements will generally
20
<PAGE> 24
provide for the transfer from HNC to us of assets and the assumption by us of
liabilities relating to our business. We will also enter into a license
agreement with HNC regarding the licensing to us of intellectual property
relating to our business, a transitional services agreement pursuant to which
HNC will provide us with specified interim administrative and other services and
a tax sharing agreement pursuant to which we will contribute to the payment of
HNC's income taxes while we are consolidated with HNC for income tax purposes.
If HNC carries out the tax-free distribution, these agreements will
restrict our ability to take specified actions that, if taken, would cause the
distribution to be taxable to HNC or its stockholders, unless we obtain the
consent of HNC or HNC receives a supplemental ruling from the Internal Revenue
Service. In addition, under the separation agreement, we will agree to indemnify
HNC on an after-tax-basis for any tax liability incurred by HNC with respect to
the distribution as a result of our taking any of these specified actions or any
transaction or event occurring after the distribution that involves our stock,
assets or business or that of any of our affiliates, whether or not HNC consents
or a supplemental ruling is obtained.
The agreements relating to our separation from HNC will be made in the
context of a parent-subsidiary relationship, will be negotiated in the overall
context of our separation from HNC and will not be conditioned on HNC's
completion of the distribution. The terms of these agreements may be more or
less favorable to us if they had been negotiated with unaffiliated third
parties. For more information regarding the separation agreements, see "Certain
Transactions" beginning on page 66.
POSSIBLE FUTURE DISTRIBUTION BY HNC OF OUR COMMON STOCK
After the completion of this offering, HNC will own approximately 88.9% of
the total number of outstanding shares of our common stock, or approximately
87.4% if the underwriters' over-allotment option is exercised in full. HNC has
informed us that, following the completion of this offering, it is HNC's current
intention to distribute pro rata to its stockholders, as a dividend, all of the
shares of our common stock HNC will own after this offering, subject to the
satisfaction and fulfillment of several conditions. The conditions to the
distribution include the following:
- HNC's receipt of a written ruling from the Internal Revenue Service that
the distribution qualifies for tax-free treatment under Section 355 of
the Internal Revenue Code, such that HNC and HNC's stockholders will not
recognize income for federal tax purposes as a result of the
distribution;
- HNC's board of directors approval of the distribution, and determining
that the distribution is in the best interest of HNC's stockholders; and
- HNC's ability to effect the distribution in compliance with applicable
law and without violation or acceleration of its contractual
obligations.
HNC has indicated that the distribution will not occur prior to the later
of (1) March 31, 2000, and (2) 180 days after the completion of this offering
(unless the lead underwriter consents to an earlier date).
HNC has the sole discretion to determine whether it will carry out the
distribution, and if the distribution is carried out, the timing, structure and
terms of the distribution. HNC is not obligated to carry out the distribution,
and we cannot assure you as to whether or when the distribution may occur.
Neither HNC nor we have any intention of purchasing or redeeming the shares
issued in this offering if the distribution does not occur. In addition, even if
the distribution is ultimately completed, HNC does not have any obligation with
respect to the timing or any of the terms of the distribution.
21
<PAGE> 25
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,000,000 shares of common
stock in this offering are estimated to be approximately $44,750,000, assuming
an initial public offering price of $10.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses, and assuming no exercise of the underwriters' over-allotment option to
purchase 750,000 shares from us. The primary purposes of this offering are to
increase our working capital, create a public market for our common stock,
increase our visibility in our markets and facilitate future access to the
public finance markets.
We intend to use the net proceeds from this offering for general corporate
purposes, principally working capital, including repayment of intercompany debt
to HNC, which was approximately $9,505,000 as of September 30, 1999, the payment
of notes in the amount of up to $8,000,000 which were issued in connection with
the purchase of all the outstanding shares of WebTrak Limited, capital
expenditures, geographic expansion of our operations, potential acquisitions,
and additional sales and marketing efforts. Although we regularly evaluate, in
the ordinary course of business, potential acquisitions of complementary
business, products or technologies, we have no specific understandings,
commitments or agreements with respect to any acquisition of or investment in
complementary businesses, products or technologies. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" beginning on page 36 for discussion of our strategy as it
relates to acquisitions or investments in complementary businesses or products.
Pending such uses, we will invest the proceeds of this offering in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
22
<PAGE> 26
CAPITALIZATION
The following table sets forth the following information:
- our actual capitalization as of September 30, 1999;
- our capitalization on an as adjusted basis, giving effect to the sale of
5,000,000 shares of common stock in this offering at an assumed initial
public offering price of $10.00 per share:
(1) assuming the filing of the certificate of amendment to our
certificate of incorporation increasing the number of authorized
shares of common stock to 150,000,000 shares and the number of
authorized shares of preferred stock to 5,000,000 shares.
(2) assuming the contribution by HNC of the 100 shares of outstanding
common stock of Retek Information Systems, Inc. to us in exchange for
39,999,000 shares of our common stock;
(3) assuming no exercise of the underwriters' over-allotment option; and
(4) after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
This table excludes the following shares:
- approximately 6,740,000 shares of common stock issuable upon the
exercise of stock options we have granted under our 1999 Equity
Incentive Plan and approximately 2,260,000 shares of common stock
issuable upon the exercise of stock options available for future grants
under this plan;
- approximately 75,000 shares of common stock issuable upon the exercise
of stock options we have granted under our 1999 Directors Stock Option
Plan and approximately 325,000 shares of common stock issuable upon the
exercise of stock options available for future grants under this plan;
- 700,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan; and
- 266,667 shares of our common stock, assuming an initial public offering
price of $10.00 per share, which may be issued upon conversion of a note
which was issued in connection with the purchase of all of the
outstanding capital stock of WebTrak. For further information regarding
the note, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"
beginning on page 36.
23
<PAGE> 27
The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 27 and our financial statements and the related
notes beginning on page F-1.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
--------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Stockholders' equity:
Retek Inc.:
Preferred stock, par value $0.01 per share: 5,000,000
shares authorized; no shares issued and outstanding
actual and no shares issued and outstanding, as
adjusted............................................... $ -- $ --
Common stock, par value $0.01 per share: 150,000,000
shares authorized; 1,000 shares issued and outstanding
actual and 45,000,000 shares issued and outstanding, as
adjusted............................................... -- 450
Additional paid-in capital................................ 6,564 71,344
Retek Information Systems, Inc.:
Common stock, par value $1.00 per share: 1,000 shares
authorized; 100 shares issued and outstanding actual... -- --
Additional paid-in capital................................ 20,480 --
Accumulated other comprehensive loss........................ (407) (407)
Retained earnings........................................... 14,443 14,443
------- -------
Total stockholders' equity................................ 41,080 85,830
------- -------
Total capitalization.............................. $41,080 $85,830
======= =======
</TABLE>
24
<PAGE> 28
DILUTION
Our net tangible book value as of September 30, 1999 was $38,163,000, or
approximately $0.95 per share assuming the contribution by HNC of all the
outstanding common stock of Retek Information Systems, Inc. to us in exchange
for 39,999,000 shares of our common stock. Net tangible book value per share
represents the amount of our total tangible assets less our total liabilities,
divided by the number of shares of common stock outstanding. Dilution in net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately afterwards.
After giving effect to the sale of the 5,000,000 shares of common stock in this
offering at an assumed initial public offering price of $10.00 per share, and
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by us, our pro forma net tangible book value at
September 30, 1999, would have been $82,913,000, or approximately $1.84 per
share. This represents an immediate increase in pro forma net tangible book
value of $0.89 per share to existing shareholders and an immediate dilution in
pro forma net tangible book value of $8.16 per share to new investors purchasing
shares of common stock in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Net tangible book value per share as of September 30,
1999................................................... $ 0.95
Increase attributable to new investors.................... 0.89
-------
Pro forma net tangible book value per share after this
offering.................................................. 1.84
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.16
======
</TABLE>
Investors who are considering participating in this offering should note
that, as a result of the substantial dilution that will occur immediately
following this offering, they could pay an amount that substantially exceeds the
pro forma net tangible book value of our net assets, which is $1.84 per share.
In connection with this offering, we have granted stock options to
executive officers and other employees and independent contractors under our
1999 Equity Incentive Plan. For further information, see "Management -- Employee
Benefit Plans -- Retek 1999 Equity Incentive Plan" beginning on page 59.
Approximately 6,740,000 shares of common stock are issuable upon the exercise of
these options at an exercise price of $10.00 per share. We have also made grants
of stock options to our directors under our 1999 Directors Stock Option Plan.
For further information, see "Management -- Employee Benefit Plans -- Retek 1999
Directors Stock Option Plan" beginning on page 63. Approximately 75,000 shares
of common stock are issuable upon the exercise of these options at an exercise
price of $10.00 per share. The exercise of these or other stock options granted
under our 1999 Equity Incentive Plan, our 1999 Directors Stock Option Plan or
otherwise in the future could result in dilution to you.
The information in this section and the above table assumes:
(1) no exercise of any options;
(2) no exercise of the underwriters' over-allotment option;
(3) the filing of the certificate of amendment to our certificate of
incorporation to increase the number of authorized shares of common
stock to 150,000,000 shares and the number authorized shares of
preferred stock to 5,000,000 shares; and
(4) that the 266,667 shares of our common stock, assuming an initial
offering price of $10.00 per share, which may be issued upon conversion
of a note which was issued in connection with the purchase of all of
the outstanding capital stock of WebTrak, are not issued.
25
<PAGE> 29
SELECTED COMBINED FINANCIAL DATA
The data set forth below should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 27 and the combined financial statements and related notes
beginning on page F-1. The selected combined financial data as of December 31,
1997 and 1998 and for each of the three years in the period ended December 31,
1998 have been derived from our audited combined financial statements included
elsewhere in this prospectus. The selected unaudited combined financial data as
of December 31, 1994, 1995 and 1996 and for each of the two years in the period
ended December 31, 1995 have been derived from our separate unaudited combined
financial statements, not included in this prospectus, and the selected
unaudited combined financial data as of September 30, 1999 and for each of the
nine month periods ended September 30, 1998 and 1999 have been derived from our
separate unaudited combined financial statements included elsewhere in the
prospectus, have been prepared on the same basis as the audited combined
financial statements and, in the opinion of our management, contain all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of our combined operating results and combined financial position
for such periods. The combined operating results for the nine months ended
September 30, 1998 and 1999 are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- --------
) (IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF INCOME DATA:
Total revenue......................... $1,912 $3,836 $13,433 $30,923 $55,033 $39,829 $57,759
Gross profit.......................... 247 698 9,554 27,278 41,181 29,788 42,038
Operating (loss) income............... (328) (536) 1,418 6,619 8,088 5,194 9,485
Net (loss) income..................... (321) (244) 2,233 3,476 3,878 2,171 5,093
Pro forma unaudited basic and diluted
net income per common share(1)...... $ 0.10 $ 0.13
Shares used in computing pro forma
unaudited basic and diluted net
income per common share(1).......... 40,000 40,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
--------------------------------------------- ------------------
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash and cash equivalents........... $ 434 $ 523 $ 1,459 $ 2,469 $ 415 $ 499
Working capital..................... (181) (480) 680 5,016 12,876 17,800
Total assets........................ 753 1,821 30,173 37,896 51,283 60,066
Payable to HNC Software Inc......... 578 883 6,197 6,491 5,944 9,505
Total stockholder's equity(2)....... 7 237 20,469 24,607 36,016 41,080
</TABLE>
- -------------------------
(1) For an explanation of the determination of the number of shares used in
computing pro forma unaudited basic and diluted net income per common share,
see Note 1 of the notes to our combined financial statements beginning on
page F-7.
(2) Upon the expected contribution by HNC of all the outstanding stock of Retek
Information Systems, Inc. to us in exchange for 39,999,000 shares of our
common stock, total stockholder's equity will remain the same.
26
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our combined financial statements
and the related notes, and the other financial information included in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
specified factors, including those set forth under "Risk Factors" beginning on
page 8 and elsewhere in this prospectus.
OVERVIEW
We are currently a wholly owned subsidiary of HNC. Immediately prior to the
completion of this offering, our business will combine the business activities
of Retek Information Systems, Inc. and Retek Inc., formerly Retek Logistics,
Inc. Retek Information Systems develops and markets web-based, business-
to-business software solutions for retailers. Founded in 1995, Retek Information
Systems was acquired by HNC in 1996. Neil Thall Associates, Inc., a wholly owned
subsidiary of HNC since 1991, which develops predictive software solutions for
retailers, was merged into Retek Information Systems in April 1997. Financial
results of Neil Thall Associates are included in all periods presented. Retek
Logistics, founded in 1985, develops warehouse management software solutions.
HNC acquired Retek Logistics in 1998. On September 9, 1999, Retek Logistics was
reincorporated as a Delaware corporation and renamed "Retek Inc." In connection
with the separation of our business from HNC, HNC will contribute all of the
outstanding capital stock of Retek Information Systems to Retek Inc.
The acquisition of Retek Information Systems by HNC allowed for the
integration of HNC's patented predictive technology into our software solutions
for retailers. We formalized a marketing relationship with Oracle in September
1998, providing us with an effective partnership with a world leader in
electronic commerce, an international channel to the largest retailers and the
support of Oracle's worldwide sales force.
Our total revenue has grown from $13.4 million in 1996 to $55.0 million in
1998 to $57.8 million through the first nine months of 1999. We have been
profitable for twelve consecutive quarters, resulting in retained earnings of
$14.4 million as of September 30, 1999. We have generated revenue from the sale
of software licenses, maintenance and support contracts, and professional
consulting and contract development services. At this time, we generally license
our products to customers on a perpetual basis and we recognize revenue upon
delivery of the products. Starting in the fourth quarter of 1999, we intend to
enter into software licensing agreements with revised terms for the majority of
our software products sold after this date. Under these agreements, we will
provide technical advisory services after the delivery of our products to help
our customers exploit the full value and functionality of our products. Revenue
from the sale of software licenses and technical advisory services under these
agreements will be recognized as the services are performed over the contract
period, which we expect will generally be 12 to 24 months, as determined by our
customers' objectives. As we begin to recognize license and service revenues
over a period of time, rather than upon the delivery of our products, we will
recognize significantly less revenue and our associated margins will be lower
for several quarters as compared to previous quarters, and we will incur
operating losses during these periods.
Customers who license our software generally purchase maintenance
contracts, typically covering renewable annual periods. In addition, customers
may purchase consulting services, which are customarily billed at a fixed daily
rate plus out-of-pocket expenses. Contract development services, including new
product development services, are typically performed for a fixed fee. We also
offer training services that are billed on a per student or per class session
basis.
Our revenue growth has resulted from a combination of increased market
penetration and an expanding product offering. In 1996 the majority of our
license revenue was attributable to a single
27
<PAGE> 31
client/server software solution, our Retek Merchandising System. Our investments
in research and development, acquisitions and alliances have helped us bring new
software solutions to market. Our investments produced a suite of decision
support solutions in 1997; the retooling of our applications for the web in
1998; and the delivery of web-based, business-to-business collaborative
planning, critical path and product design solutions in 1999. To support our
growth during these periods we also continued to invest in internal
infrastructure by hiring employees throughout various departments of the
organization.
We market our software solutions worldwide through direct and indirect
sales channels. Revenue generated from our direct sales channel accounted for
approximately 100%, 86% and 74% of our total revenue in 1997, 1998 and the nine
months ended September 30, 1999. Our indirect sales channel is driven mainly by
our relationship with Oracle.
Revenue attributable to customers outside of North America accounted for
approximately 40%, 33% and 39% of our total revenue in 1997, 1998 and the nine
months ended September 30, 1999. Approximately 22% and 15% of our sales were
denominated in currencies other than the U.S. dollar for 1998 and the nine
months ended September 30, 1999.
We primarily sell perpetual licenses for which we recognize revenue in
accordance with generally accepted accounting principles, upon meeting each of
the following criteria:
- execution of a written purchase order, license agreement or contract;
- delivery of software authorization keys;
- the license fee is fixed and determinable;
- collectibility of the proceeds is assessed as being probable; and
- vendor-specific objective evidence exists to allocate the total fee to
elements of the arrangement.
Vendor-specific objective evidence is based on the price charged when an
element is sold separately, or if not yet sold separately, is established by
authorized management. All elements of each order are valued at the time of
revenue recognition. We recognize revenue:
- for sales made through our distributors, resellers and original
equipment manufacturers, at the time these partners report to us that
they have sold the software to the end-user and after all revenue
recognition criteria have been met;
- from maintenance agreements related to our software, over the respective
maintenance periods;
- from customer modifications, as the services are performed using the
percentage of completion method; and
- from services, using the percentage of completion method, based on costs
incurred to date compared to total estimated costs at completion.
We record amounts received under contracts in advance of performance as
deferred revenue and recognize these amounts within one year from receipt.
28
<PAGE> 32
RESULTS OF OPERATIONS
The following table presents selected financial data for the periods
indicated as a percentage of our total revenue. Our historical reporting results
are not necessarily indicative of the results to be expected for any future
period.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-----------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License and maintenance................................ 73% 93% 78% 78% 72%
Services and other..................................... 27 7 22 22 28
--- --- ---- ---- ----
Total revenue....................................... 100 100 100 100 100
--- --- ---- ---- ----
Cost of revenue:
License and maintenance................................ 13 9 8 8 7
Services and other..................................... 16 3 17 17 20
--- --- ---- ---- ----
Total cost of revenue............................... 29 12 25 25 27
--- --- ---- ---- ----
Gross margin............................................. 71 88 75 75 73
Operating expenses:
Research and development............................... 36 31 23 23 26
Sales and marketing.................................... 14 27 26 26 22
General and administrative............................. 10 9 7 8 7
Acquired in-process research and development........... -- -- 3 4 --
Acquisition related amortization of intangibles........ -- -- 1 1 1
--- --- ---- ---- ----
Total operating expenses............................ 60 67 60 62 56
--- --- ---- ---- ----
Operating income......................................... 11 21 15 13 17
Other income (expense), net.............................. -- -- -- -- (1)
--- --- ---- ---- ----
Income before income tax (benefit) provision............. 11 21 15 13 16
Income tax (benefit) provision........................... (6) 10 8 8 7
--- --- ---- ---- ----
Net income............................................... 17% 11% 7% 5% 9%
=== === ==== ==== ====
- -------------------------
Cost of license and maintenance revenue, as a percentage
of license and maintenance revenue..................... 18% 10% 10% 10% 10%
Cost of services and other revenue, as a percentage of
services and other revenue............................. 56% 44% 77% 78% 71%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUE
Total revenue. Total revenue is comprised of software license and
maintenance revenue and services and other revenue. Total revenue increased 45%
from $39.8 million in the nine months ended September 30, 1998 to $57.8 million
in the nine months ended September 30, 1999. Increases in total revenue in the
nine months ended September 30, 1998 and 1999 are attributable primarily to
increases in the volume of sales and not to increases in prices.
License and maintenance revenue. License and maintenance revenue increased
34% from $30.9 million in the nine months ended September 30, 1998 to $41.4
million in the nine months ended
29
<PAGE> 33
September 30, 1999. The increase was primarily the result of the addition of new
customers, as well as the introduction of new software solutions.
Services and other revenue. Services and other revenue increased 84% from
$8.9 million in the nine months ended September 30, 1998 to $16.4 million in the
nine months ended September 30, 1999. The increase was driven by increases in
consulting services of $5.1 million and in custom development of $1.5 million,
each as a result of our expanding customer base.
COST OF REVENUE
Cost of license and maintenance revenue. Cost of license and maintenance
revenue consists primarily of fees for third party software products that are
integrated into our products, and salaries and related expenses of our customer
support organization. Cost of license and maintenance revenue increased by 33%
from $3.1 million in the nine months ended September 30, 1998 to $4.1 million in
the nine months ended September 30, 1999. This increase was a result of an
increase in the number of software licenses sold to customers. We believe that
our cost of license and maintenance revenue will continue to increase as we hire
personnel for our customer support organization. As a percentage of license and
maintenance revenue, cost of license and maintenance revenue was 10% for both
the nine months ended September 30, 1998 and 1999.
Cost of services and other revenue. Cost of services and other revenue
includes salaries and related expenses of our consulting organization; cost of
third parties contracted to provide consulting services to our customers; and an
allocation of our facilities and depreciation expenses. Cost of services and
other revenue increased 67% from $7.0 million for the nine months ended
September 30, 1998 to $11.6 million for the nine months ended September 30,
1999. The increase was driven principally by increases in consulting service
costs of $1.9 million and increased custom development costs of $1.0 million, in
each case due to our expanding customer base. We believe that our cost of
services revenue will continue to increase as we hire personnel for our
consulting organization.
OPERATING EXPENSES
Research and development. Research and development expenses, which are
expensed as incurred, consist primarily of salaries and related costs of our
engineering organization; fees paid to third-party consultants; and an
allocation of our facilities and depreciation expenses. We believe that our
success depends on continued enhancement of our current products and our ability
to develop new technologically advanced products that meet the sophisticated
requirements of our customers. We have increased our investment in research and
development in absolute dollars year over year since 1995. Research and
development expenses increased 59% from $9.3 million in the nine months ended
September 30, 1998 to $14.8 million in the nine months ended September 30, 1999.
The increase in these expenses was due to increases in labor costs, including
hired personnel and third party consultants. We expect research and development
expenses to increase in absolute dollars in future periods.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and related costs of our sales and marketing organization: sales
commissions; costs of our marketing programs, including public relations,
advertising, trade shows, collateral sales materials, and our customer user
reference group program; rent and facilities costs associated with our regional
and international sales offices; and an allocation of our facilities and
depreciation expenses. Sales and marketing expenses increased 26% from $10.3
million in the nine months ended September 30, 1998 to $12.9 million in the nine
months ended September 30, 1999. The increases in sales and marketing expenses
were due to growth in our sales and marketing organization, including a $941,000
increase in personnel and related costs, a $575,000 increase in travel and a
$444,000 increase in our marketing programs. Although we have increased our
absolute sales and marketing expenses, the rate of increase is less than the
rate of increase in total revenue. We anticipate that sales and marketing
expenses will increase in absolute dollars to support our intended expansion of
our sales and marketing organization.
30
<PAGE> 34
General and administrative. General and administrative expenses consist
primarily of costs from our finance and human resources organizations; third
party legal and other professional services fees; and an allocation of our
facilities costs and depreciation expenses. General and administrative expenses
increased 36% from $3.0 million in the nine months ended September 30, 1998 to
$4.1 million in the nine months ended September 30, 1999. The increase in
absolute general and administrative expenses is attributable to growth of our
administrative organizations in support of our overall growth. General and
administrative expenses were 8% of total revenue for the nine months ended
September 30, 1998 and 7% of total revenue for the nine months ended September
30, 1999. This decrease in general and administrative as a percentage of revenue
expenses was attributable to the benefits derived from economics of scale. We
expect that becoming an independent public company may create a short-term
increase in general and administrative expenses as a percentage of total
revenues. Our management estimates that non-recurring general and administrative
expenses of approximately $400,000 will be incurred in connection with our
becoming an independent public company. These expenses include additional legal
and accounting fees, public relations costs and costs related to educational
programs regarding our equity incentive plans and updating of internal policies
and procedures. These costs are expected to be non-recurring as they relate
primarily to the establishment of additional functions in connection with
becoming an independent public company.
In-process research and development. In connection with the acquisition of
Retek Logistics in March 1998, in-process research and development of $1.8
million was charged to results of operations on the acquisition date. See our
further discussion of this transaction included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Years Ended
December 31, 1996, 1997 and 1998" beginning on page 31.
Income Tax Provision. The income tax provision was $3.0 million for the
nine months ended September 30, 1998 and $4.1 million for the nine months ended
September 30, 1999. The income tax provisions for the nine months ended
September 30, 1998 and 1999 are based on management's estimates of the effective
tax rates to be incurred by us during those respective full fiscal years. The
income tax provision in 1998 includes the tax effects of non-deductible,
one-time write-offs of in-process research and development related to the
purchase of Retek Logistics, as well as research and development tax credits
generated during the nine months ended September 30, 1998 that we anticipate
using in the future. The income tax provision for 1999 includes the tax effects
of non-deductible amortization related to the purchase of Retek Logistics, as
well as research and development tax credits generated during the nine months
ended September 30, 1999 that we anticipate using in the future.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUE
Total revenue. Total revenue increased 130% from $13.4 million in 1996 to
$30.9 million in 1997 and 78% to $55.0 million in 1998.
License and maintenance revenue. License and maintenance revenue increased
197% from $9.7 million in 1996 to $28.9 million in 1997 and 48% to $42.8 million
in 1998. The increase in both 1997 and 1998 was primarily due to the addition of
new customers as well as the introduction of new software solutions.
Services and other revenue. Services and other revenue decreased 45% from
$3.7 million in 1996 to $2.0 million in 1997 and increased 505% to $12.3 million
in 1998. The decrease from 1996 to 1997 was primarily attributable to a decrease
in commercial development contracts for the Demand Forecasting product, which
shifted to full commercial release under perpetual licensing arrangements in
early 1997. The increase in 1998 was due to a $7.0 million increase in
consulting services projects and a $3.3 million increase in custom development.
These increases were a result of our expanding customer base.
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<PAGE> 35
COST OF REVENUE
Cost of license and maintenance revenue. Cost of license and maintenance
revenue increased 53% from $1.8 million in 1996 to $2.7 million in 1997 and 58%
to $4.3 million in 1998. The increases are attributable to the increases in
license and maintenance revenue. As a percentage of license and maintenance
revenue, cost of license and maintenance revenue was 18% in 1996, 10% in 1997
and 10% in 1998. The decrease from 1996 to 1997 was attributable to a decrease
in royalty fees paid related to an indirect sales channel.
Cost of services and other revenue. Cost of services and other revenue
decreased from $2.1 million in 1996 to $898,000 in 1997 and increased to $9.5
million in 1998. As a percentage of services and other revenue, cost of services
and other revenue was 56% in 1996, 44% in 1997 and 77% in 1998. The decrease in
cost of services and other revenue as a percentage of services and other revenue
from 1996 to 1997 was primarily due to a decrease in the number of commercial
development contracts, which have substantially lower margins than custom
development or service projects. The increase in 1998 was primarily attributable
to an increase in consulting contracts for which we utilized a significant
amount of contract labor, which in turn caused a decrease in services and other
revenue gross margins. During 1997, we started to build our consulting services
business and as a result began to incur recruiting, training and management
support expenses. This build-up contributed to the decline in services and other
gross margins.
OPERATING EXPENSES
Research and development. We have increased our investment in research and
development in absolute dollars each year since 1995. Research and development
expenses increased 96% from $4.8 million in 1996 to $9.5 million in 1997 and 36%
to $12.9 million in 1998. As a percentage of total revenue, research and
development expenses decreased as a result of increasing economies of scale. The
absolute dollar increases in research and development expenses in 1997 and 1998
were due to significant increases in labor costs, which included hired personnel
and third party consultants.
Sales and marketing. Sales and marketing expenses increased 337% from $1.9
million in 1996 to $8.3 million in 1997 and 70% to $14.1 million in 1998. The
increase in sales and marketing expenses during 1997 was due to increases in
personnel and related costs. The increase in 1998 was due to an expansion in our
sales and marketing organization, including a $3.6 million increase in personnel
and related costs, a $910,000 increase in travel and a $203,000 increase in
marketing programs. Although we increased our absolute sales and marketing
expenses in 1998, they decreased as a percentage of total revenue.
General and administrative. General and administrative expenses increased
106% from $1.4 million in 1996 to $2.9 million in 1997 and 35% to $3.9 million
in 1998. The increase in absolute dollars in general and administrative expenses
was attributable to growth of our administrative organization in support of our
overall growth. The decrease in expenses as a percentage of total revenue
reflected increasing economies of scale and operating efficiencies.
In-process research and development. In connection with the acquisition of
Retek Logistics in March 1998, in-process research and development of $1.8
million was charged to results of operations on the acquisition date. Certain
products of Retek Logistics were complete in certain areas and under development
in others. The classification of the technology as complete or under development
was made in accordance with the guidelines of Statement of Financial Accounting
Standards No. 86, Statement of Financial Accounting Standards No. 2 and
Financial Accounting Standards Board Interpretation No. 4. At the time of
acquisition, Retek Logistics had a number of new software products under
development, including Retek Distribution Management Versions 6.0 and 7.0 and
Retek Distribution Management CBT. Retek Distribution Management Version 6.0 and
Retek Distribution Management CBT were both completed during 1998. Retek
Distribution Management 7.0 was in an early state of development as of the
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<PAGE> 36
acquisition date and was completed during the second quarter of 1999, incurring
costs of approximately $900,000 to reach technological feasibility.
We used an independent appraisal firm to assist us with our valuation of
the fair market value of the purchased assets. Fair market value is defined as
the estimated amount at which an asset might be expected to be exchanged between
a willing buyer and willing seller assuming the buyer continues to use the
assets in its current operations. We provided assumptions by product line of
revenue, cost of goods sold and operating expense to the appraiser to assist in
the valuation. The appraisal considered three traditional approaches to
valuation: the cost approach, the market approach and the income approach.
With respect to the forecasted earnings provided to the appraiser, Retek
Logistics forecasted slightly higher revenue growth rates than their historical
rates. These higher growth rates reflect Retek Logistics' expectation of greater
market acceptance with the release of its Oracle-based platform, as well as
improvements incorporated into Retek Distribution Management Versions 6 and 7.
Retek Logistics forecasted that gross margins would remain consistent relative
to prior years. Retek Logistics also forecasted that its current operating
expense levels would increase only moderately in absolute dollars and, as a
result, earnings before interest and taxes were expected to increase in later
years. We believe these growth expectations are reasonable if new product
versions are offered according to schedule. The statements regarding our
expectations are forward looking statements, which are subject to risks and
uncertainties. Actual results may differ materially from those anticipated. The
important factors that could cause actual results to differ include those
discussed elsewhere in this prospectus.
With respect to the discount rates used in the valuation approach, the
incomplete technology represents a mix of near and mid-term prospects for the
business and imparts a level of uncertainty to its prospects. It is the nature
of the business to be constantly developing new software for future product
releases. A reasonable expectation of return on the incomplete technology would
be higher than that of completed technology due to these inherent risks. As a
result, the earnings associated with incomplete technology were discounted at a
rate of 40% based upon the methodologies described in the next paragraph.
Because Retek Logistics did not have short-term or long-term debt as of the
date of acquisition, Moody's seasoned Baa rate for March 31, 1998 was used as
the cost of debt. The Capital Asset Pricing Model was used to determine the cost
of equity. It combines a risk free rate of return with an equity risk premium
multiplied by a factor, referred to as Beta, which is based on the performance
of common stock prices of similar publicly traded companies. Employing these
data, the discount rate attributable to the business was 30%, which was used for
valuing completed technology. Since incomplete technology represents a mix of
near and mid-term prospects for the business and imparts a certain level of
uncertainty and would require a higher return than completed technology, the
valuation report prepared by the appraiser suggests that a rate of 40% be
ascribed to the excess earnings of incomplete technology.
Acquisition related amortization of intangibles. In connection with the
purchase of Retek Logistics, the application of the purchase method for the
acquisition resulted in an excess of cost over net assets acquired of
approximately $6.6 million, of which $4.0 million was allocated to intangibles
and $1.8 million was allocated to in-process research and development. In
conjunction with the purchase, we recorded various intangible assets, which are
being amortized over estimated useful lives ranging from three to five years. In
connection with the acquisition of Retek Logistics, HNC has a contingent
obligation to issue additional shares of HNC common stock upon the achievement
of certain financial objectives during 1999. This consideration will not be
reflected in our financial position in the future.
Income tax (benefit) provision. The income tax benefit of $815,000 in 1996
was primarily attributable to the recognition of a $1.3 million deferred tax
asset based on anticipated future utilization of all of the remaining net
operating loss carryforwards, research and development credit carryforwards and
foreign tax credit carryforwards. A portion of the deferred tax asset had
previously been offset by a valuation allowance in the amount of $121,000. Based
on pre-tax income generated in the third and fourth quarters of fiscal 1996 and
estimates of future taxable income, our assessment was that it was more likely
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<PAGE> 37
than not that we would realize the deferred tax assets in future periods.
Therefore, we released the valuation allowance provided on the deferred tax
assets during the fourth quarter of 1996.
The 1997 income tax provision of $3.2 million includes the effect of the
anticipated future realization of research and development tax credits generated
during the year. The 1998 income tax provision of $4.2 million includes the tax
effects of the non-deductible, one-time write-off of in-process research and
development related to the purchase of Retek Logistics. Other items effecting
the tax provision primarily relate to the anticipated future realization of
research and development tax credits generated during the year.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the seven quarters in the period ended September
30, 1999. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of such information when read in conjunction with
our combined financial statements and related notes beginning on page F-1. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
1998 1999
--------------------------------------- -----------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
-------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License and maintenance........ $ 9,032 $10,815 $11,066 $11,840 $11,658 $15,656 $14,078
Services and other............. 2,109 3,357 3,450 3,364 4,989 5,387 5,991
------- ------- ------- ------- ------- ------- -------
Total revenue............... 11,141 14,172 14,516 15,204 16,647 21,043 20,069
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License and maintenance........ 636 1,179 1,260 1,274 1,404 1,854 821
Services and other............. 1,299 2,598 3,069 2,537 2,885 4,577 4,180
------- ------- ------- ------- ------- ------- -------
Total cost of revenue....... 1,935 3,777 4,329 3,811 4,289 6,431 5,001
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 9,206 10,395 10,187 11,393 12,358 14,612 15,068
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development....... 2,896 3,170 3,235 3,617 4,277 5,460 5,012
Sales and marketing............ 3,355 3,666 3,242 3,812 3,818 4,556 4,574
General and administrative..... 1,014 1,103 877 927 1,188 1,363 1,525
Acquired in-process research
and development............. 1,750 -- -- -- -- -- --
Acquisition related
amortization of
intangibles................. -- 143 143 143 258 258 264
------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 9,015 8,082 7,497 8,499 9,541 11,637 11,375
------- ------- ------- ------- ------- ------- -------
Operating income................. 191 2,313 2,690 2,894 2,817 2,975 3,693
Other income (expense), net...... -- -- 19 (8) 16 (2) (344)
------- ------- ------- ------- ------- ------- -------
Income before income tax
provision...................... 191 2,313 2,709 2,886 2,833 2,973 3,349
Income tax provision............. 777 1,159 1,106 1,179 1,145 1,201 1,716
------- ------- ------- ------- ------- ------- -------
Net (loss) income................ $ (586) $ 1,154 $ 1,603 $ 1,707 $ 1,688 $ 1,772 $ 1,633
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
License and maintenance........ 81% 76% 76% 78% 70% 74% 70%
Services and other............. 19 24 24 22 30 26 30
------- ------- ------- ------- ------- ------- -------
Total revenue............... 100% 100% 100% 100% 100% 100% 100%
------- ------- ------- ------- ------- ------- -------
</TABLE>
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<PAGE> 38
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
1998 1999
--------------------------------------- -----------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
-------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of revenue:
License and maintenance........ 6% 8% 9% 8% 8% 9% 4%
Services and other............. 12 18 21 17 17 22 21
------- ------- ------- ------- ------- ------- -------
Total cost of revenue....... 18 26 30 25 25 31 25
------- ------- ------- ------- ------- ------- -------
Gross margin..................... 82 74 70 75 75 69 75
------- ------- ------- ------- ------- ------- -------
AS A PERCENTAGE OF TOTAL REVENUES
Operating expenses:
Research and development....... 26 22 22 24 26 26 25
Sales and marketing............ 30 27 22 25 23 22 23
General and administrative..... 9 8 6 6 7 6 8
Acquired in-process research
and development............. 15 -- -- -- -- -- --
Acquisition related
amortization of
intangibles................. -- 1 1 1 2 1 1
------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 80 58 51 56 58 55 57
------- ------- ------- ------- ------- ------- -------
Operating income................. 2 16 19 19 17 14 18
Other income (expense), net...... -- -- -- -- -- -- (2)
------- ------- ------- ------- ------- ------- -------
Income before income tax
provision...................... 2 16 19 19 17 14 16
Income tax provision............. 7 8 8 8 7 6 9
------- ------- ------- ------- ------- ------- -------
Net (loss) income................ (5)% 8% 11% 11% 10% 8% 7%
======= ======= ======= ======= ======= ======= =======
</TABLE>
In general, the trends identified and discussed previously in the nine
months and annual comparisons apply to the quarterly results of operation, with
the following exceptions:
- Quarter-over-quarter revenue growth from the first quarter to the second
quarter in each of 1998 and 1999 was significantly greater than the
quarter to quarter growth in each of the other quarters. This was a
result of the Oracle fiscal year-end in May, which results in greater
sales of Oracle Retail(TM) solutions in our second fiscal quarter.
- Cost of license and maintenance revenue as a percentage of total revenue
decreased in the third quarter of 1999. In the second quarter of 1999,
we recorded an expense for the purchase of third party software
licenses. In the third quarter of 1999, we were informed by the third
party licensor that the fees payable for these licenses would be less
than the amount expensed. Accordingly, we reduced our liability to the
amount expected to be paid.
- Cost of services and other revenue as a percentage of total revenue was
higher in the third quarter of 1998, the second quarter of 1999 and the
third quarter of 1999 as a result of additional third party costs
incurred to complete large consulting projects in each of these
quarters.
- Research and development expenses increased in the second quarter of
1999 because we accelerated the completion date on particular
development projects by contracting with third party developers, whose
billing rate is higher than our own internal rate. Because these
projects were completed in the second quarter of 1999, we did not incur
similar costs in the third quarter of 1999.
- Other expenses increased in the third quarter of 1999 due to fees paid
for factoring receivable balances.
- Income before income tax provision increased in each of the quarters
shown on a consecutive basis, except for the decrease from the fourth
quarter of 1998 to the first quarter of 1999. The decrease from the
fourth quarter of 1998 to the first quarter of 1999 was primarily
attributable to
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<PAGE> 39
an increase in research and development expenses resulting from vertical
expansion into the grocery and consumer direct sectors and
acquisition-related amortization expenses.
- Income tax provision in the first quarter of 1998 reflects the
non-deductibility of the acquired in-process research and development
write-off related to the acquisition of Retek Logistics by HNC. The
increase in the income tax provision from the second quarter of 1999 to
the third quarter of 1999 was attributable to an increase in the volume
of foreign sales.
As we begin to enter into software licensing agreements discussed under
"-- Overview" beginning on page 27, we will recognize significantly less revenue
and our associated margins will be lower for several quarters, as compared to
previous quarters and we will incur operating losses during this period.
In October 1999, we granted stock options to our employees, under our 1999
Equity Incentive Plan, to purchase approximately 6,740,000 shares of our common
stock. These options were granted at an exercise price of $10 per share. Based
upon an estimated fair market value of $11 per share for the underlying common
stock, we will recognize compensation expense of approximately $6.7 million over
the option vesting period. Due to the terms of the vesting, compensation will be
accelerated in the early years and is expected to result in the recognition of
approximately $600,000, $3.2 million, $1.7 million, $900,000 and $300,000 of
expense for the years ended December 31, 1999, 2000, 2001, 2002 and 2003,
respectively.
We have been successful in recruiting employees in all functional areas in
order to support the acquisition of new customers and the ongoing care for our
existing customer base. This staffing growth has been the key component of the
quarterly operating expense growth, and will be a significant component of our
future growth potential.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through funding from HNC in
the form of intercompany advances. At September 30, 1999, the cash balance was
$499,000.
Net cash provided by operating activities was $734,000 in 1996, $3.8
million in 1997, $885,000 in 1998 and $183,000 for the nine months ended
September 30, 1999. Sources of cash for each period resulted primarily from net
income generated in those periods. Uses of cash during these periods were
principally from increases in accounts receivable, which were partially offset
by an increase in the bad debt provision in 1998. This increase in bad debt
provision was primarily attributable to the increase in accounts receivable due
to increased sales volume and reserving for specific customer accounts. During
1998, we increased the provision for doubtful accounts by $450,000 for a
customer that declared bankruptcy and $250,000 for a customer that had financial
difficulties due to political unrest in its primary country of operation. During
1999, we increased the provision for doubtful accounts by $1.2 million for a
customer that was unwilling to pay amounts due.
Net cash used in investing activities was $281,000 in 1996, $3.1 million in
1997, $2.4 million in 1998 and $3.7 million for the nine months ended September
30, 1999. The uses of cash during these periods, except for the cash provided
from the Retek Inc. acquisition in 1998, were attributable to the acquisition of
capital assets, primarily computer equipment and leasehold improvements.
Net cash provided by financing activities was $486,000 in 1996 and $294,000
in 1997. Net cash used by financing activities was $547,000 in 1998. Net cash
provided by financing activities was $3.6 million for the nine months ended
September 30, 1999. Net cash provided by financing activities included $1.5
million in debt repayments and $2.0 million in borrowings from HNC in 1996 and
$5.5 million in borrowings from HNC and $5.2 million in payments to HNC in 1997.
Net cash used by financing activities included $41.7 million in borrowings from
HNC and $42.3 million in payments to HNC in 1998. Net cash provided by financing
activities included $46.9 million in borrowings from HNC and $43.3 million in
payments to HNC for the nine months ended September 30, 1999. Beginning in
December 1997, HNC implemented a cash management policy that all cash balances
are transferred daily
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<PAGE> 40
from all of HNC's subsidiaries, including us, into a centralized cash management
account at HNC. The financing activities with HNC include the borrowings and
payments from these cash management activities in 1997, 1998 and the nine months
ended September 30, 1999.
Deferred revenue consists principally of the unrecognized portion of
revenue received under maintenance service agreements. This revenue is
recognized ratably over the term of the service agreement. Deferred revenue was
$2.6 million at September 30, 1999. Starting in the fourth quarter 1999, we
intend to enter into software licensing agreements with revised terms which will
result in increases in deferred revenue for sales of software products with
technical advisory services.
We believe that the net proceeds from this offering, less the payment of
intercompany debt to HNC, which was approximately $9.5 million as of September
30, 1999, together with our current cash and cash equivalents and net cash
provided by operating activities, will be sufficient to meet our working capital
and capital expenditure requirements for at least the next 12 months. As a
result, HNC will no longer be a source of funding for operating activities.
Management intends to invest our cash in excess of current operating
requirements in short-term, interest-bearing, investment-grade securities.
A portion of our cash could also be used to acquire or invest in
complementary businesses or products or otherwise to obtain the right to use
complementary technologies or data. We regularly evaluate, in the ordinary
course of business, potential acquisitions of such businesses, products,
technologies or data. On October 29, 1999, Retek Information Systems completed
the purchase of all the outstanding capital stock of WebTrak Limited. WebTrak
owns the WebTrak Critical Path and Portfolio Private Label products that we
currently distribute. In connection with the purchase of WebTrak, Retek
Information Systems issued to the former WebTrak shareholders notes, due on
November 26, 1999, in the principal amount of $5.33 million and a note, due on
November 26, 1999, in the principal amount of $2.67 million, which may at the
option of the holder of the note be converted at the time of payment into the
number of shares of our common stock equal to the principal amount of the note
divided by the initial public offering price of our common stock in this
offering. The option to convert this note into shares of our common stock is
conditioned on the completion of the offering and the ability to issue the
shares under applicable securities laws. None of these notes bear interest.
We have no other current plans, agreements or commitments relating to
potential acquisitions, and are not currently engaged in any negotiations with
respect to any other transaction. In addition, our ability to enter into any
acquisition of a business or assets may be limited if the distribution is
completed by HNC and under the terms of the corporate rights agreement. For
further information regarding these limitations, see "Certain
Transactions -- Separation Agreement -- Covenants and indemnification regarding
the distribution" beginning on page 67 and "-- Corporate Rights
Agreement -- Corporate governance" beginning on page 69.
Pursuant to an agreement between HNC and us, until two years, and possibly
longer, after the distribution, our ability to issue common stock in connection
with acquisitions, offerings or otherwise will be limited.
YEAR 2000 COMPLIANCE
Background of Year 2000 Issues
Many currently installed computer and communications systems and software
products are unable to distinguish 21st century dates from 20th century dates.
This situation could result in system failures or miscalculations causing
disruptions in the operations of any business. As a result, many companies'
software and computer and communications systems may need to be upgraded or
replaced to comply with these Year 2000 requirements.
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<PAGE> 41
Customer Representations and Warranties
Since September 1997, we have generally represented and warranted to our
customers in our software license agreements that the occurrence of the date
January 1, 2000 and any related leap-year issues will not cause our products to
fail to operate properly. In some cases, this warranty includes representations
regarding the ability of our product to store, display, calculate, compute and
otherwise process date-related data. Our warranty generally applies only to our
products and excludes failures resulting from the combination of our products
with other software or hardware or from the use of our software in a manner not
in accordance with the related documentation. If we breach this warranty,
remedies in most cases may include commercially reasonable efforts to replace
the software and to advise the customer how to achieve substantially the same
functionality through different procedures, as well as payment of monetary
damages.
Our Product Testing and Licensing
We have tested all of our software for Year 2000 compliance. We derived our
testing method from our review and analysis of the Year 2000 testing practices
of other software vendors, relevant industry Year 2000 compliance standards and
the specific functionality and operating environment of our products. The tests
are run on all supported platforms for each release and include testing for date
calculation and internal storage of date information with test numbers starting
in 1999 and going over the Year 2000 boundary. Based on these tests, we believe
our products to be Year 2000 compliant with respect to date calculations and
internal storage of date information.
Interaction of our Products with Third-Party Software
Our products contain, operate with and depend on third party code that we
may not be able to independently verify is Year 2000 compliant. The majority of
our products interface with and depend on Oracle's development tools. Oracle has
indicated that the version of their products on which current versions of our
software solutions depend is Year 2000 compliant, but Oracle has made no similar
statement regarding earlier versions of its products. Our software solutions
also contain and depend on software licensed to us by Lucent, MicroStrategy and
HNC. Each of these companies has made, either orally to us or to the public
generally, representations that its licensed code is Year 2000 compliant. We
have been able to verify, in connection with Year 2000 compliance testing of our
products, the validity of these representations. We will not purchase software
from third parties who do not provide adequate assurances regarding their Year
2000 compliance. Finally, our products also interact with external sources,
including other software programs and operating systems, which may not be Year
2000 compliant or which may not provide date data to our products in a manner
that is Year 2000 compliant. Any interaction with third-party software that is
not Year 2000 compliant could cause our products to fail to properly operate or
to properly process date information.
Our Internal Systems
Although we do not have a formal contingency plan to address Year 2000
issues, we have assessed our internal risks associated with the Year 2000 issue
and concluded that these are minimal. We have inventoried our internal software
and hardware systems, as well as products and services provided by third-party
vendors. These systems include those related to product delivery, customer
service, internal and external communications, accounting and payroll, which we
consider critical areas of our business. We have obtained vendor certification
for the majority of our third-party systems and have developed a detailed risk
assessment and action plan that includes testing of both critical systems and
systems for which no certification has been obtained.
Costs of Addressing Year 2000 Compliance
To date, our costs to address Year 2000 compliance have not been
significant. Based on our preliminary evaluations, we do not believe we will
incur significant operating expenses or be required to
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<PAGE> 42
invest heavily in computer system improvements to be Year 2000 compliant. We
estimate that the total costs will be less than $100,000. However, significant
uncertainty exists concerning the potential costs and effects associated with
Year 2000 compliance. Any Year 2000 compliance problem experienced by us or our
customers could decrease demand for our products, which could seriously harm our
business and operating results.
Risks of Year 2000 Issues
We are considering potential worst case Year 2000 scenarios that address
issues arising from noncompliance by our customers, suppliers or internal
operating systems. Although our Year 2000 compliance project will strive to
uncover significant noncompliance issues, in the worst case not all Year 2000
problems may be uncovered by the Year 2000, which would harm our business.
However, we believe that our most probable worst case scenario is more likely to
arise from our customers' and vendors' inability to become Year 2000 compliant
than from our failure to bring our products into compliance. As a result, our
supply chain and revenue could be harmed.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement establishes a new
model for accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date to
all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption
of FAS 133 is not expected to have a significant impact on our combined
financial position or results of operations.
In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." This SOP
retains the limitations of SOP 97-2 on what constitutes vendor-specific
objective evidence of fair value. SOP 98-9 will be effective for transactions
entered into in fiscal years beginning after March 15, 1999. The adoption of SOP
98-9 is not expected to have a significant impact on our combined financial
position or results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices.
Interest Rate Risk
At September 30, 1999, we had $499,000 in cash and cash equivalents, which
consisted entirely of cash operating accounts. A decrease in market rates of
interest would have no material effect on the value of these assets. We have no
short- or long-term debt, therefore, an increase in market rates would not
directly affect our financial results.
Foreign Currency Exchange Rate Risk
We develop products in the United States and sell in North America, Asia
and Europe. As a result, our financial results could be affected by various
factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Our foreign currency risks are mitigated
principally by contracting primarily in US dollars and maintaining only nominal
foreign currency cash balances. Working funds necessary to facilitate the
short-term operations of our subsidiaries are kept in local currencies in which
they do business, with excess funds transferred to our offices in the United
States.
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Approximately 22% and 15% of our total sales were denominated in currencies
other than the US dollar for the year ended December 31, 1998 and the nine
months ended September 30, 1999.
Equity Price Risk
We do not own any equity investments. Therefore, we are not currently
exposed to any direct equity price risk.
Impact of European Monetary Conversion
We are aware of the issues associated with the changes in Europe resulting
from the formation of a European economic and monetary union, or EMU. One change
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the euro, as of January 1, 1999, at
which date the euro became a functional legal currency of these countries.
Through December 31, 2002, business in the EMU member states will be conducted
in both the existing national currency, such as the French franc or the Deutsche
mark, and the euro. As a result, companies operating or conducting business in
EMU member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling these
currencies, including the euro. We are still assessing the impact that
conversion to the euro will have on our internal systems, the sale of our
solutions and the European and global economies. We will take appropriate
corrective actions based on the results of our assessment. We have not yet
determined the cost related to addressing this issue although we do not expect
these costs to be significant.
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BUSINESS
RETEK OVERVIEW
We provide web-based, business-to-business software solutions for retailers
and their trading partners. Our software offers a retail focused solution that
incorporates technology that can predict customer demand and behavior, which we
refer to as predictive technology. Our software solutions enable retailers to
use the Internet to communicate and collaborate efficiently with their
suppliers, distributors, wholesalers, logistics providers, brokers,
transportation companies, consolidators and manufacturers. We seek to enhance
the ability of retailers to interact with their supply chain by introducing
Retail.com, which we believe will be the first electronic commerce network
providing collaborative business-to-business software solutions to the retail
industry.
We market our software solutions through our direct and indirect sales
channels primarily to retailers who sell to their customers via traditional
retail stores, catalogs and/or web store fronts. To date we have licensed our
solutions across a variety of retail industry sectors to over 100 retailers,
including AnnTaylor, Brooks Brothers, Disney Stores, Eckerd, Hallmark, Internet
Shopping Network and Lancome USA. These listed customers represent a cross
section of our customers that have agreed to purchase at least $100,000 of our
software solutions, but they should not be considered to be actively endorsing
or promoting our solutions. We expect our Retail.com network offering to extend
our target market by making our solutions available to small and mid-sized
retailers and their trading partners.
INDUSTRY BACKGROUND
We believe, based on industry sources, that worldwide retailer-to-consumer
sales exceeded $6.5 trillion in 1997. We estimate that the market for
business-to-business commerce is even larger than retailer-to-customer sales,
and involves, according to industry sources, over 3 million retail, wholesale
and supplier organizations operating in the global marketplace, with sales,
distribution and manufacturing typically involving multiple organizations in
many countries.
We believe the Internet is beginning to change the way this market
operates. Not only does the Internet provide a new distribution channel for
conducting commerce with customers, it provides an even larger opportunity for
retail businesses to communicate and transact commerce with their supply chain.
According to Forrester Research, business-to-business electronic commerce is
expected to grow from $43 billion in 1998 to $1.3 trillion in 2003, accounting
for more than 90% of the dollar value of electronic commerce in the United
States. We believe, based on industry sources, that the market for software
solutions for business-to-business electronic commerce will grow from $171
million in 1998 to $3.1 billion in 2002, a market that we believe, based on
industry sources, will be more than five times the size of the
business-to-consumer electronic commerce software market.
By providing a means for streamlining and making more efficient the process
of collaboration between trading partners, the Internet can facilitate better
decision-making and help reduce the transaction costs of business-to-business
commerce. For example, the Internet enables:
- Real-time collaboration among organizations on production
priorities. This means that retailers can identify today's sale trends
at the point-of-sale and use this information to direct production
priorities in the manufacturing facility. Retailers can use this
information to reduce production of products that are in lesser demand
and eliminate the cost of manufacturing, moving, holding and eventually
marking down the price of these products.
- Collaboration on the design of new products in "virtual design
studios." By giving all parties involved in the design process
real-time input and access to information, the Internet can reduce the
time-to-market for new product offerings and help increase the
likelihood of developing a product offering that is responsive to
specific customer needs.
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- Real-time communication among all members of the supply chain. This
means that new information from one part of the supply chain can be
easily communicated throughout the chain. A delay in a scheduled
delivery can, for instance, be quickly announced and broadly
disseminated. Actions to address the delay can then be quickly
implemented. This real-time communication helps reduce the disruption
and costs that arise when new information must be incorporated among a
diverse and disparate supply chain.
Most large and mid-sized retailers have historically relied upon
custom-built systems, typically developed internally, to manage their
interactions with trading partners. Many of these systems use 1970s mainframe
technology, are not web-based, and do not permit collaboration among members of
the supply chain. More recently, retailers have begun to purchase packaged
solutions with a specific retail industry focus. These products typically lack
the scalability required by larger retailers and are not web-based. Enterprise
resource planning systems have also been adopted on a limited scale. These
complex systems are expensive to implement and maintain, typically lack the
scalability required by retailers, and do not have a specific retail industry
focus. Recently introduced business-to-business electronic commerce products do
not offer specific retail industry focus and typically lack the scalability
required by retailers.
We believe that a market opportunity exists to provide retailers with a
business-to-business software solution that is web-based, collaborative and
designed specifically for the retail industry. This solution should be
easy-to-use, leverage a retailer's existing investments in information
technology and be flexible enough to meet the specific needs of a particular
retail sector, such as fashion, mass merchandise, grocery and drug stores. In
addition, the solution should be highly scalable to process and analyze vast
amounts of customer sales and supplier performance data unique to the retail
industry.
RETEK SOLUTION
We have developed and deployed web-based, business-to-business software
solutions that enable retailers to manage the entire retail supply chain. The
key features of our software solutions are:
- Collaborative retail supply chain. Our solutions electronically link
retailers with their trading partners to facilitate collaboration across
all aspects of the supply chain, from the initial prediction of customer
demand through product design and manufacturing to inventory management.
We believe that by facilitating this collaboration, we will enable
retailers to reduce unnecessary costs and time-to-market, while
increasing product quality and improving margins.
- Robust, predictive and analytic technologies. Our solutions provide
advanced predictive tools to process and analyze the vast amounts of
data available to retailers. Our unique, proprietary technologies enable
retailers to identify patterns in data that may not otherwise be
visible. This information helps our customers reduce inventories,
increase marketing effectiveness and improve customer satisfaction.
- Web-based, easy-to-use and rapidly deployable solutions. Our web-based
software solutions are easy to use and rapidly deployable. Retailers and
their trading partners can access our software from any desktop with a
web interface, and our software can be made available to all employees.
Furthermore, because our software solutions are web-based, their
deployment can reduce capital infrastructure and maintenance costs.
- Highly scalable and retail sector focused. Our web-based solutions are
built specifically to address the unique scalability requirements of the
retail industry. In addition, we have developed solutions that meet the
specific requirements of particular retail sectors, including fashion,
mass merchandise, grocery and drug stores.
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STRATEGY
Our objective is to be the leading provider of web-based,
business-to-business software solutions for retailers and their trading
partners. As the retail supply chain evolves into an electronic network, we seek
to further enable our customers to better manage, organize and drive
efficiencies through this network. Key elements of our strategy include:
- Extending our web-based, business-to-business collaborative software
solution, principally through the introduction of our Retail.com
network. By leveraging our technological advantages, customer base and
retail expertise, we intend to make Retail.com the electronic commerce
network for business-to-business commerce among retailers and their
trading partners. Retail.com is designed to provide a single point of
access for all members of the retail supply chain and offer a broad range
of software solutions that enable a rich and collaborative information
exchange between retailers and their trading partners. This web-based,
retail focused, business-to-business software solution permits
interactive collaboration on the wide range of supply and demand chain
issues that retailers encounter.
- Introducing existing customers to a broader offering of our software
solutions. We intend to expand the use of our products within existing
client accounts. We have sold our software solutions products to more
than 100 retailers, primarily large companies, across a range of retail
sectors. We intend to further penetrate these accounts by cross-selling
our other software solutions or suites of software solutions, all of
which are independently deployable, and by introducing clients to the new
collaborative software solution offering at Retail.com.
- Leveraging our experience in retail. We will continue to leverage our
expertise in providing solutions to retailers. We have developed and
deployed software solutions designed specifically for retailers since our
formation. Our solutions address the need of retailers to process and
track the millions of transactions they complete with their consumers and
to communicate and transact business with their large, geographically
diverse supply chain members. This focus on the retail industry permits
us to constantly update and expand our offerings and to effectively
develop new technologies to address the specific needs of the retail
industry.
- Expanding our relationship with implementation and hosting partners. We
have established relationships with large, international system
integrators and consulting firms, such as Andersen Consulting and KPMG.
These firms provide sales leads, implementation expertise and valuable
third party endorsement of our software solutions. We plan to expand
these relationships to increase our capacity to sell and implement our
solutions. Systems integrators and consulting firms have a strong
influence on software purchasing decisions within large companies, and
they are increasingly seeking web-based collaborative software solutions
that allow them to satisfy their clients' needs more rapidly than they
can through customized product development. In addition, we intend to
continue to offer our software solutions through web-based applications
service providers for retailers that want a third party to host their
solutions. We believe that the application service provider option will
be particularly attractive to pure electronic commerce retail companies,
as well as to small and mid-sized retailers that typically have limited
internal information technology resources.
- Extending our technological leadership. We intend to increase our
technological and product leadership by enhancing our products' core
functionality and high performance analytic features. We believe that our
software solutions, derived from the proprietary analytic and predictive
technology of HNC and enhanced by our research scientists, provide us
with a first mover advantage and an essential basis for the comprehensive
Internet solution of Retail.com. We intend to continue to devote
substantial resources to the development of new and innovative web-based
products for business-to-business retail solutions and to continue to
incorporate emerging web technologies. In addition, by implementing and
actively promoting new industry standards, we intend to facilitate
widespread adoption of our solutions by retailers.
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RETEK PRODUCTS
We have developed and deployed web-based, business-to-business software
solutions that address the entire retail operation. Our software solutions allow
retailers to effectively manage their demand and supply chain processes, getting
the right product in the right place at the right time at the right price. Our
principal software solutions consist of four integrated, but independently
deployable, components, which are accessed via a web browser and can be hosted
by an individual organization or applications service provider.
TRANSACTION SOLUTION
Our Transaction Solution is a core suite of retail business applications
providing comprehensive operational management tools. This suite of software
solutions provides the foundation of operational support and process execution
across the retail enterprise, with the scalability needed to support the
mission-critical operations of many of the world's large retailers. The
web-based design of these solutions helps reduce the cost of supporting store
employees, while improving customer service. In addition, our Transaction
Solution is designed to ensure the integrity of the data used by our decision
support and predictive solutions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS FEATURES
<S> <C>
- ----------------------------------------------------------------------------------------------
Retek Merchandising System - Provides the core inventory control and merchandise
management functions that support the retail process
Retek Trade Management - Enables retailers to manage the global import process
Retek Distribution Management - Automates the entire warehousing process
Retek Store Operations - Electronically links store employees to corporate data
through radio-frequency hand-held devices and high-speed
intranets
- ----------------------------------------------------------------------------------------------
</TABLE>
DECISION SUPPORT SOLUTION
Our Decision Support Solution is a suite of job-specific data analysis and
exception management tools. This suite of software solutions supports flexible,
multidimensional access to built-in, retail-specific performance measures.
Retailers can analyze large volumes of customer sales and supplier performance
data by using the packaged data warehouse software, which allows rapid
deployment and return on investment. This suite of solutions generates
rule-based reports that highlight unusual or novel information, permitting
retailers to develop business solutions quickly.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS FEATURES
<S> <C>
- ----------------------------------------------------------------------------------------------
Retek Data Warehouse - Provides flexible, job-specific tools to assist retailers
in utilizing and analyzing their data to effectively
manage their business and share key information with
suppliers
Active Retail Intelligence - Generates and distributes rule-based exception reports
and enables responses, including automated responses, to
the exceptions to produce rapid resolution of performance
problems
- ----------------------------------------------------------------------------------------------
</TABLE>
PREDICTIVE SOLUTION
Our Predictive Solution is a suite of predictive technologies designed to
analyze the huge volume of customer sales and supplier performance data,
optimizing the demand and supply chains to minimize inventory costs and maximize
sales. By applying advanced algorithms to the mass of data processed by
retailers each day, our Predictive Solution is able to identify high value
information which supports one-to-one customer marketing, helps manage customer
relationships and optimize supply chain management.
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Analysis of the combinations of products bought in each retail customer
transaction can assist retailers in identifying opportunities for increasing
sales and the effectiveness of promotions and reducing the cost of mark-downs
and unnecessary inventory.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS FEATURES
<S> <C>
- ----------------------------------------------------------------------------------------------
Retek Behavior Profiler - Enables retailers to cluster and segment their customer
and market basket data, uncovering meaningful and
valuable relationships between products and customers
Retek Demand Forecasting - Moves beyond traditional time-series techniques to tie
events and causal factors, such as promotions, to daily
forecasts of individual product demand at each store or
selling channel
Retek Replenishment - Uses optimization and simulation techniques to set up and
Optimization maintain efficient inventory replenishment systems
- ----------------------------------------------------------------------------------------------
</TABLE>
BUSINESS-TO-BUSINESS COLLABORATIVE SOLUTION
Our Business-to-Business Collaborative Solution is a suite of software
solutions that supports specific retail business processes and that will be
provided on Retail.com, a business-to-business electronic commerce network that
we began operating on September 26, 1999. We believe that Retail.com will be the
first electronic commerce network for the retail trading community. The network
is designed to provide a single point of access for all members of the retail
supply chain and offer a broad range of software solutions that enable a rich
and collaborative information exchange between retailers and their trading
partners.
Our Retail.com solution is designed to allow organizations to increase the
speed and effectiveness of complex processes by providing a new collaborative
approach to traditional retail challenges. We currently offer critical path and
event tracking software solutions to all members of our Retail.com network. We
intend to launch additional software solutions and new services on our
Retail.com network, including retail specific news services and communication
forums to facilitate the exchange of information among retailers and their
trading partners. These additional software solutions and services are designed
to increase revenue as well as the utility and attractiveness to retailers of
the Retail.com network. Using this solution, which is available for immediate
use with no implementation, support or hardware costs, retailers can quickly
improve performance and reduce costs.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS FEATURES
<S> <C>
- ----------------------------------------------------------------------------------------------
WebTrak Critical Path - Enables users to publish and share a critical path on the
Internet, effectively shortening time scales and reducing
costs
Portfolio Private Label - Allows web-based collaboration to improve the new product
design and development process
- ----------------------------------------------------------------------------------------------
</TABLE>
RETEK SERVICES
We provide our customers with consulting and technical support or
maintenance services.
- Consulting services consist primarily of technical and implementation
services, customer sponsored research and development and customization
of our products for a customer's specific needs. These services are
customarily billed at a fixed daily rate plus out-of-pocket expenses. We
have vendor-specific objective evidence of fair values for these
consulting services and recognize revenue as these services are
performed.
- Technical support or maintenance services consist primarily of customer
support services after implementation of our solutions. Revenue from
technical support or maintenance services is recognized on a
straight-line basis over the contract period.
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Starting in the fourth quarter of 1999, we will also provide strategic technical
advisory services after the delivery of the product. By providing project
management level support to our customers in their dealings with third party
integrators, these strategic technical advisory services are designed to help
our customers exploit the full value and functionality of our products. Under
licenses where these strategic technical advisory services are provided, license
fee and services revenues will be recognized as these services are performed
over the contract period.
Our services range from technical and implementation support to business
benefit realization consulting, which assists retailers in utilizing our
software solutions to optimize their potential benefits. We offer high-quality,
timely, technical support to customers via phone, e-mail and the Internet.
Additionally, we publish online versions or manuals, release notes and updates
to existing documentation. We provide a number of training programs in the
United States. Courses cover topics such as technical architecture, business use
of the merchandizing functionality and development standards and methodology.
CUSTOMERS
We market our software solutions primarily to retailers who sell to their
customers via traditional retail stores, catalogs and/or web store fronts.
Historically, we have focused on organizations with gross sales in excess of
$500 million a year. We market across all formats of retailing, including
fashion, department stores, catalog and consumer direct, specialty retailers,
mass merchandise retailers and grocery, drug and convenience stores. We expect
the recent launch of our Retail.com network to extend our target market,
allowing small and mid-sized retailers and suppliers of all sizes to take
advantage of our solutions.
The following is a representative list of companies that have agreed to
purchase at least $100,000 of our products and services. We do not intend the
identification of these customers to imply that these customers are actively
endorsing or promoting our products.
<TABLE>
<S> <C>
FASHION RETAILERS SPECIALTY RETAILERS
AnnTaylor Chapters
BHS Container Store
Brooks Brothers Cracker Barrel
Mothercare Disney Stores
Reitmans Hallmark
Stage Stores Lancome USA
Zale Corporation
DEPARTMENT STORES MASS MERCHANDISE RETAILERS
El Palacio Family Dollar
Hudson's Bay Company Pamida
Selfridges ShopKo
GROCERY, DRUG & CONVENIENCE STORES CATALOG AND CONSUMER DIRECT
Circle K, USA Home Shopping Network
Eckerd Internet Shopping Network
Matahari Littlewoods
The Northwest Company
NTUC Fairprice
RiteAid
</TABLE>
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SELECTED CUSTOMER APPLICATIONS
The following examples span the full range of our software solutions and
illustrate how organizations are relying on us to provide high-value retail
solutions for their businesses.
<TABLE>
<CAPTION>
CUSTOMER APPLICATIONS
<S> <C>
Lancome USA Lancome USA, a leader in prestige perfume, skin care and
cosmetics, has been using Retek Demand Forecasting to
optimize the allocation of its 800 stock keeping units,
commonly known as SKUs, in the stores on its Vendor Managed
Inventory program. Since the deployment of this application,
Lancome estimates that it has been able to drastically
decrease out-of-stock items from levels as high as 12% down
to 2.5% (some key products have been reduced to below 1%),
driving up sales and customer service, without increasing
overall inventory cost.
Home Shopping Network Home Shopping Network pioneered the electronic retailing
industry in 1977. Its live 24-hour programming reaches 70
million U.S. households through broadcast, cable and
satellite dishes. HSN continued its tradition of innovation
in 1998 with the launch of Short Shopping, a division which
produces direct selling commercials for various broadcasting
partners. HSN holds interests in shopping channels in
Germany and Japan; and produces Home Shopping en Espanol, a
joint venture with Univision. HSN has been designated the
official electronic retailer for Times Square 2000. HSN has
annual revenues in excess of $1 billion. With the
implementation of the Retek Merchandising System, HSN
expects to attain tangible benefits by standardizing the
streamlining business processes across divisions and by
reducing lead times in their supply chain.
Reitmans Canada-based women's wear retailer Reitmans (Canada), Ltd.
watched its profits increase after undergoing a major
systems overhaul, including implementing the Retek
Merchandising System. In the first six months of 1999,
Reitmans saw a profit of $17.5 million, as opposed to profit
of $9.7 million for the same period the year before.
Comparable store sales have increased as well. According to
President Jeremy Reitman, "significant increases in
comparable store sales, gross margin and operating profit
were achieved in each operating division."
Chapters Chapters, Inc., Canada's largest book retailer, began using
the Retek Merchandising System in 1997. Chapters now has 250
traditional Coles and SmithBooks mall stores, 63 Chapters
superstores and also manages several campus bookstores. With
the implementation of our solutions, Chapters moved from two
platforms to one integrated system. In addition to the
benefits of one point of data entry for all stores,
according to Chapters, it has also attained improved
in-stock position and greater efficiencies in inventory
management with our solution.
</TABLE>
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<TABLE>
<CAPTION>
CUSTOMER APPLICATIONS
<S> <C>
Ann Taylor Ann Taylor, a U.S. fashion retailer with annual revenues of
$780 million and 360 stores, licensed the Retek
Merchandising System, Retek Demand Forecasting, Retek Active
Retail Intelligence, Retek Trade Management and Retek
Distribution Management. "We chose Retek because we wanted
an integrated core merchandising solution," says Wollaston
Morin, Ann Taylor's Senior Vice President of Information
Services. "We currently have several systems patched
together so we really wanted a solution where all the pieces
fit together seamlessly. Retek will give us this smooth
integration, we looked at a number of vendors, and felt that
Retek was the best fit."
</TABLE>
TECHNOLOGY CHARACTERISTICS
We seek to develop innovative software solutions by combining our retail
industry and application knowledge and our strategy of partnering with
technology market leaders. Although we make extensive use of a broad range of
technologies, we take advantage of two key technologies:
Web Architecture. The Oracle toolset provides us with a web-based,
scalable foundation for our software solutions. By leveraging our
applications framework into a unified architecture, we are able to focus on
creating additional business functionality in our solutions, rather than
building and maintaining complex infrastructure code. As a global alliance
partner of Oracle, our core development team works very closely with the
Oracle technology group to take advantage of the latest features of the 8i
database, the developer toolset, and the advances being driven by the
Oracle mobile computing group. In addition, our use of Sun Microsystems'
Java programming language allows us to deliver software that is portable
and efficient, as well as easy to internationalize and reconfigure.
Predictive Algorithms. Our team of research scientists has expanded and
tailored HNC's predictive technologies to fit the retail world. These
technologies are able to analyze vast amounts of retail data, recognize and
model complicated and sometimes subtle patterns, and apply these models to
predicting and understanding the retail environment. Though the mathematics
behind the predictive algorithms may be quite complex, software solutions
that use them are carefully crafted to fit seamlessly into the retailers'
business processes. These solutions enable retailers to optimize their
supply chain, target store assortments, maximize advertising payback,
minimize mark-downs and raise customer loyalty and satisfaction. The
predictive algorithms we rely on to achieve these results include:
- Hybrid Forecasting Models. The solution to many retail problems relies
on good forecasting. Forecasting enhances such functions as store and
warehouse replenishment, promotional planning, supplier collaboration,
mark-down reduction, merchandise and assortment planning and labor
scheduling. Our hybrid forecasting models were designed specifically for
retail problems, and use hybrids of standard techniques, as well as
internally developed methods. The models use hierarchical time series
techniques, filtering techniques, regression-based causal forecasting,
and exception management to provide a platform that may be applied to
all of the previous functions.
- Context Vectors. Context vectors can automatically categorize
unstructured information, providing insight from a previously
inaccessible data source. This allows our solutions to extract different
dimensions from a retailer's data, allowing actionable information to be
unlocked in the key areas of store profiling, single-customer
transaction analysis and customer segmentation.
- Simulation. Simulations are used to model systems that are too complex
for basic mathematical algorithms. We use simulation to optimize store
and warehouse replenishment. Unlike textbook generalizations and
assumptions, the modeling provided by our solutions simulates the entire
replenishment process, enabling us to optimize the variables that affect
the replenishment process.
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In addition, we license the ACUMATE component software from Lucent to serve
as a foundation for Retek Demand Forecasting and the DSS Web software from
MicroStrategy to serve as a user-interface for Retek Data Warehouse. In each
case, this third party software was selected by us because it has properties
that are particularly appropriate to the function of the specific solution into
which we have integrated it. Each of these licenses is non-exclusive, world-wide
and royalty-based. Each license has a term of one year and renews automatically
unless notice of termination is given by either party. The royalty we paid
Lucent and MicroStrategy under these licenses was less than 1% of our total
revenue in each of the 1998 fiscal year and the nine months ended September 30,
1999.
STRATEGIC ALLIANCES
We have worked with Oracle to establish Oracle Retail(TM), which provides a
single source of technology products, implementation services and support to
target the world's largest retailers. Oracle Retail(TM) combines our solutions
with Oracle's financial applications to provide customers with a scalable
web-based solution for the retail industry worldwide. Oracle has established a
dedicated sales team of approximately 30 employees to sell and market these
products worldwide, in addition to the thousands of general sales
representatives at Oracle who are knowledgeable about Oracle Retail(TM).
We have developed strategic relationships with various system integrators
who assist us with sales lead generation by recommending that their clients
purchase our software solutions. Additionally, these system integrators provide
a range of services to our customers, including project implementation services
and first-line technical support. We have certified and trained approximately
650 consultants from our system integrators for the implementation and operation
of our solutions. Some of our systems integration partners include Andersen
Consulting, Deloitte & Touche, IBM, and KPMG.
In addition to providing implementation and support services for our
software solutions, Andersen Consulting has dedicated approximately 150
full-time consultants to help us in research and development and custom
modifications. This allows us to rapidly expand our research and development
efforts without the costs associated with internally hiring additional staff.
SALES, MARKETING AND DISTRIBUTION
We market and sell our software solutions worldwide through a combination
of a direct sales force, resellers and distributors. Our worldwide direct sales,
marketing and business development organizations consisted of 74 individuals as
of September 30, 1999.
Our sales, marketing and distribution approaches are designed to help
customers understand both the business and technical benefits of our software
solutions. We conduct a variety of marketing programs worldwide to educate our
target market, create awareness and generate leads for our solutions. To achieve
these goals, we have engaged in marketing activities including e-business
seminars, direct mailings, print and online advertising campaigns and trade
shows. These programs are targeted at key information technology executives and
business users, as well as chief information officers and other senior
executives.
Markets outside the United States are currently served by our direct sales
offices in the United Kingdom, France, Germany, Australia, Japan and South
Africa. In addition, we have established distribution relationships with CTC and
KPMG, which distribute our software solutions in Japan and Australia,
respectively.
RESEARCH AND DEVELOPMENT
Our research and development group has been a critical component of our
overall success. We believe that we have built a reputation for delivering on
our solution commitments in a timely manner. As of September 30, 1999, the
research and development group was comprised of 184 individuals in Cincinnati,
Atlanta, and Minneapolis. In addition, we have developed close alliances with a
number of consulting
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companies to provide additional staffing. These relationships allow us to
increase our development capacity as quickly as necessary to address new market
and product demand.
The majority of our research and development group is organized around
product offerings. Each of these groups is responsible for the product
management processes, strategy and release path, delivery, and support of their
respective applications. In addition to these groups, a centralized enterprise
team within research and development is responsible for maintaining consistency
across these products teams with respect to quality assurance and testing
processes, documentation, application architecture, and methodology.
The success of the research and development group is based on a consistent
and well-defined development methodology. This methodology enables the delivery
of high-quality products in a timely and predictable manner. It involves the
traditional checkpoints of development processes such as business requirements,
functional and technical specifications, unit, string and integration test
plans, and regression analysis. In addition, we use a highly interactive review
process to engage future users of the product in the product release cycle
through iterative prototypes to ensure the application design goal is met.
In addition to the predictable delivery cycles, speed to market is critical
to our success. We believe that we have effectively used build, buy, and partner
strategies over the past several years to expand our solution offering. The key
in using each of these strategies is the consistency in the underlying
technologies and an overall application architecture that allows modular design
and development.
Research and development expenses were $9.5 million in 1997, $12.9 million
in 1998 and $14.7 million in the nine months ended September 30, 1999. We
believe that significant investments in research and development are required to
remain competitive. As a consequence, we intend to continue to increase the
absolute amount of our research and development expenses.
COMPETITION
The market for business-to-business software solutions is new, intensely
competitive and rapidly evolving. We expect competition to continue to increase
both from existing competitors and new market entrants. We encounter current
competition from a number of different sources, including such providers of
supply chain software products as SAP, IBM, Manhattan and JDA Software Group,
and, as we develop our global business-to-business electronic commerce network,
we expect to face potential competition from business-to-business electronic
commerce companies, including Ariba, Broadvision, Commerce One and i2
Technologies. We believe that our ability to compete depends on many factors
both within and beyond our control, including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service; and
- the effectiveness of our sales and marketing efforts.
We believe that we currently compete favorably with respect to these
factors. In particular, we believe that our products are better than those of
our competitors in their ease of use, performance, features and reliability. In
addition, we have in the past introduced new solutions and enhancements to our
existing solutions in a more timely manner than our competitors. Our prices are
generally higher than our competitors reflecting, we believe, the added value of
our software solutions. Because the market for business-to-business software
solutions is new, intensely competitive and rapidly evolving, we cannot assure
you that we will maintain our competitive position against current and potential
competitors, especially those with greater name recognition and greater
financial, marketing and other resources.
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<PAGE> 54
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete are dependent in part on our ability to
develop and maintain the proprietary aspects of our technology. We rely on a
combination of trademark, trade secret, and copyright law and contractual
restrictions to protect the proprietary aspects of our technology. We seek to
protect our source code for our software, documentation and other written
materials under trade secret and copyright laws. We license our software under
signed license agreements, which impose restrictions on the licensee's ability
to utilize the software. Finally, we seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
line of products to perform key functions. For example, we license the ACUMATE
component software from Lucent and the DSS Web from MicroStrategy. In addition,
we will enter into a technology license agreement with HNC, giving us a license
to specified HNC predictive technology. If we are unable to continue to license
any of this software, we will face delays in releases of our software until
equivalent technology can be identified, licensed or developed, and integrated
into our current product. These delays, if they occur, could seriously harm our
business.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that we or our current or potential future
software solutions infringe on their intellectual property. We expect that
software product developers and providers of electronic commerce products will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business.
LEGAL PROCEEDINGS
From time to time we have been subject to legal proceedings and claims in
the ordinary course of business, although we are not currently involved in any
material legal proceedings.
EMPLOYEES
At September 30, 1999, we had a total of 369 employees, 337 of whom were
based in North America and 32 of whom were based in Europe, Asia, Australia and
other countries. Of the total, 184 were in research and development, 74 were
engaged in sales, marketing and business development, 76 were engaged in
consulting services, customer support and training, and 35 were in
administration and finance. None of our employees are subject to a collective
bargaining agreement, and we believe that our relations with our employees are
good.
FACILITIES
Our principal administrative, sales, marketing, and research and
development facility occupies approximately 69,971 square feet in Minneapolis,
Minnesota under a lease that expires on August 31, 2004. We recently entered
into a lease for approximately 130,665 square feet of additional space in
Minneapolis, Minnesota. This lease will begin on October 1, 2001 and expires on
March 31, 2014. This lease also grants to us two options to lease approximately
87,110 square feet of additional space, should we require it, over the term of
the lease. We also have regional offices located in Atlanta, Georgia, Chicago,
Illinois, Cincinnati, Ohio, Australia, France and the United Kingdom. We believe
that our existing facilities are adequate for our current needs and that the new
lease that we recently entered into will ensure that we have sufficient
additional space to meet our future requirements.
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<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of September 30,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John Buchanan........................ 42 Chairman, Chief Executive Officer and Director
Gordon Masson........................ 44 President
Jeremy P.M. Thomas................... 57 President, Retail.com
John L. Goedert...................... 34 Senior Vice President, Research & Development
Gregory A. Effertz................... 37 Vice President, Finance & Administration, Chief
Financial Officer, Treasurer, Secretary and Director
David A. J. Bagley................... 34 Vice President, Product Strategy & Marketing
Victor Holysh........................ 40 Vice President, Services
Duncan B. Angove..................... 33 Vice President, E-Business
Ward Carey........................... 34 Director
Charles H. Gaylord................... 54 Director
Alex Way Hart........................ 59 Director
N. Ross Buckenham.................... 42 Director
Glen A. Terbeek...................... 57 Director
Stephen A. Watson.................... 54 Director
</TABLE>
John Buchanan joined us in May 1995 and is currently our chairman and chief
executive officer. From October 1991 to May 1995, he served as president of
Transpacific Information Systems Inc., a technology investment company
principally involved in introducing internationally developed software products
into North America. Mr. Buchanan also serves on the board of directors of
Mediconsult.com, Inc., a company that provides patient oriented healthcare
information and services on the Internet. Mr. Buchanan holds a Bachelor of
Commerce degree in Accounting and Computer Systems from the University of Otago,
New Zealand.
Gordon Masson has been our president since July 1999. He served as our
senior vice president, sales since August 1995. Prior to joining Retek from 1983
to 1995, he was with Comshare, Inc., a decision support software company,
serving most recently as vice president. Mr. Masson holds a BACC degree in
Accounting and Law from Glasgow University and he is a certified chartered
accountant.
Jeremy P.M. Thomas joined us in October 1999 as president, Retail.com. From
August 1997 to October 1999, Mr. Thomas served as managing director and a
director of WebTrak Limited, a company that specializes in developing Internet
solutions for retailers and which we acquired in October 1999. Mr. Thomas served
as a director of TSL Limited, a company that specializes in software testing
from October 1997 to October 1998, and as TSL's chairman from January 1998 to
October 1998. From January 1994 to January 1998, Mr. Thomas served as a director
of Drawitem Limited, a company that specializes in software products and
services. During the period from January 1994 to July 1997, Mr. Thomas also
served as chief executive officer and a director of Workspace Corporation, a
corporation that develops collaborative software. Mr. Thomas holds a Bachelor of
Science degree in Physics from the University of Southampton.
John L. Goedert joined us in June 1996 as our senior vice president,
research and development. From 1987 to 1996, Mr. Goedert was with Andersen
Consulting's Consumer Products Practice, specifically in retail and
distribution, serving most recently as senior manager. Mr. Goedert holds a
Bachelor of Business Administration in Finance from Iowa State University.
Gregory A. Effertz joined us in March 1997 as our vice president, finance
and administration and chief financial officer. From 1988 to 1997, Mr. Effertz
was with American Paging, Inc., a paging service provider, serving most recently
as executive director, sales and marketing, corporate controller and
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<PAGE> 56
treasurer. Mr. Effertz is a certified public accountant certificate holder and
holds a Bachelor of Business Administration in Accounting and Management
Information Systems from the University of Wisconsin -- Eau Claire.
David A. J. Bagley joined us in May 1997 as vice president, services and is
currently vice president, product strategy and marketing. From 1989 to 1997, Mr.
Bagley was with Andersen Consulting's Consumer Products Practice, serving most
recently as senior manager. Mr. Bagley holds a Master of Arts in Classics from
St. Anne's College, Oxford University.
Victor Holysh joined us in June 1998 as our vice president, services. Prior
to joining us, Mr. Holysh was a partner at Sierra Systems Consultants, Inc. in
Toronto, Canada, a systems integration and implementation firm. From 1988 to
1996, Mr. Holysh was with SFG Technologies Inc., a software and related services
company for local government applications, where he served in several
capacities, including chief financial officer and managing director of SFG New
Zealand. Mr. Holysh holds a Bachelor of Science in Computer Science and a
Masters of Business Administration from the University of Toronto. He is a
member of the Canadian Institute of Chartered Accountants and is a Certified
Management Consultant.
Duncan B. Angove joined us in September 1997 and is currently vice
president, e-business. Prior to joining Retek from 1994 to 1997, he served as a
consultant with Andersen Consulting's Consumer Products Practice, specifically
in retail and distribution, and from 1991 to 1994 as information technology
manager of TaiTai Retail Import Export, a furniture import/export company. Mr.
Angove holds a BSC Economics degree from the University College London.
Ward Carey, age 34. Mr. Carey has served as vice president of corporate
marketing of HNC since March 1999. Prior to joining HNC, from July 1998 to March
1999, Mr. Carey was with Credit Suisse First Boston Corporation, a global
investment banking firm, where he served as a charter member of the Technology
Group. From May 1996 and July 1998, Mr. Carey was with Deutsche Bank Securities,
a global investment banking firm, where he served as a charter member of the
Technology Group. From January 1991 to May 1996, Mr. Carey was with BT Alex.
Brown, a financial services company, where he served in several management
positions. Mr. Carey holds a Bachelor of Arts degree in Political Science from
Columbia University, New York.
Charles H. Gaylord, age 54. Mr. Gaylord has served as a director of HNC
since May 1995. Mr. Gaylord is a retired private technology investor. From
December 1993 to September 1994, Mr. Gaylord served as executive vice president
of Intuit Inc., a publicly-held personal and small business finance software
company. From July 1990 to December 1993, he served first as president and chief
executive officer and a director of ChipSoft, Inc., a publisher of tax
preparation software programs, and then as ChipSoft's chairman of the board of
directors and chief executive officer. Prior to July 1990, Mr. Gaylord served as
president of Transworld Oil America, Inc., a petroleum marketing and trading
company. Mr. Gaylord held various senior management positions with the
Transworld Oil International group of companies over a 17-year period and was a
member of the senior management committee and the trading executive committee.
He holds a Bachelor of Science and Master of Science degrees in Aerospace
Engineering from Georgia Institute of Technology and a Masters degree in
Business Administration from Harvard University.
Alex Way Hart, age 59. Mr. Hart has served as a director of HNC since
October 1998. Since February 1998, he has been an independent consultant to the
financial services industry. From August 1996 to February 1998, Mr. Hart served
as chief executive officer of Advanta Corporation, a diversified financial
services company. From March 1994 to August 1996, Mr. Hart served as executive
vice chairman of Advanta. From November 1988 to March 1994, he served as
president and chief executive officer of MasterCard International. Mr. Hart also
serves as a director of Sanchez Computer Associates, Inc., a provider of core
processing and electronic banking software solutions. He holds a Bachelor of
Arts degree in Social Relations from Harvard University and has completed
studies at the Graduate School of Bank
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<PAGE> 57
Marketing at the University of Colorado and the Graduate Program for Data
Processing Management at Harvard Business School.
N. Ross Buckenham, age 42. Mr. Buckenham has served as president of
PageMart Wireless Inc., a wireless messaging company, since November 1997. From
January 1996 to November 1997, Mr. Buckenham served with PageMart in a number of
management positions. Prior to joining PageMart, from 1992 to 1996, Mr.
Buckenham served as president of Touchtone Solutions, Inc., a telecommunications
and interactive voice response software and services company. From 1984 to 1991,
Mr. Buckenham served with Aquanautics Corporation, a developer of oxygen
technologies for applications in the food and defense industries, initially as
vice president of development and then as its president. From 1981 to 1984, Mr.
Buckenham was with Bain & Co., a management consulting company, as senior
consultant to companies in the voice processing, technology, finance and health
care industries. Mr. Buckenham holds a Masters degree in Business Administration
from Harvard University and a Bachelor of Science degree in Chemical Engineering
from Canterbury University, New Zealand.
Glen A. Terbeek, age 57. Mr. Terbeek is currently a consultant with
Breakaway Strategies, Inc., an independent consulting company he founded in
January 1999. From 1965 to December 1998, Mr. Terbeek was with Andersen
Consulting, a management consulting company, where he was most recently a
managing partner of Andersen's Food and Packaged Goods Industry Practice. Mr.
Terbeek holds a Masters degree in Business Administration in quantitative
methods from the University of Michigan and a Bachelor of Arts degree in
Mathematics and Physics from Hope College.
Stephen E. Watson, age 54. Mr. Watson has served as chief executive officer
of Gander Mountain LLC, a specialty retailer of outdoor recreational equipment
and clothing, since November 1997. From March 1994 to November 1997, Mr. Watson
was retired. From 1990 to 1994, Mr. Watson served as a president of Dayton
Hudson Corporation, a general merchandise retailer. Mr. Watson has also served
as a director of Shopko Stores Inc., a chain of retail stores specializing in
discount merchandise, since 1996. Mr. Watson holds a Bachelor of Arts degree in
American History and Literature from Williams College and a Masters degree in
Business Administration from Harvard University.
BOARD OF DIRECTORS
Currently, our board of directors has seven members. These members include
our chairman and chief executive officer, Mr. Buchanan, three individuals who
are currently officers or directors of HNC, Messrs. Carey, Gaylord and Hart, and
three independent directors, Messrs. Buckenham, Terbeek and Watson.
Our amended and restated certificate of incorporation will be filed
immediately before the completion of this offering and will provide for a
classified board of directors consisting of three classes of directors.
Directors in each class will be elected to serve for three year terms and until
their successors are elected or qualified. Each year, the directors of one class
will stand for election as their terms of office expire. To implement the
classified structure, two of our current directors have been elected to one-year
terms, two have been elected to two-year terms and three have been elected to
three-year terms. The terms of office will expire as follows: Messrs. Terbeek
and Watson at the annual meeting of stockholders in 2000, Messrs. Buchanan and
Buckenham at the annual meeting of stockholders in 2001 and Messrs. Carey,
Gaylord and Hart at the annual meeting of stockholders in 2002.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
Our audit committee consists of Messrs. Hart, Terbeek and Watson. The
responsibilities of the audit committee include recommending to the board of
directors the independent public accountants to be selected to conduct the
annual audit of our accounts; reviewing the proposed scope of such audit and
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<PAGE> 58
approving the audit fees to be paid; and reviewing the adequacy and
effectiveness of our internal auditing, accounting and financial controls with
the independent public accountants and our financial and accounting staff.
Compensation Committee
Our compensation committee consists of Messrs. Gaylord and Buckenham. The
compensation committee is responsible for establishing compensation policies
consistent with corporate objectives and stockholder interests. The compensation
committee has responsibility for approving and/or recommending to the board of
directors levels of compensation for our senior executives. The compensation
committee also administers grants under the Company's stock-based and other
performance-based incentive compensation plans and adopts and/or recommends to
the board of directors new plans or changes in compensation programs. The
compensation committee may not include any employee of Retek, HNC or any Retek
subsidiary.
The board of directors may establish other committees to facilitate the
management of Retek.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our common stock is currently owned by HNC, and thus none of our
officers or directors owns any of our common stock. To the extent our directors
and officers own shares of HNC common stock at the time of the distribution,
they will participate in the distribution on the same terms as other holders of
HNC common stock.
The following table sets forth the number of shares of HNC common stock
beneficially owned on September 30, 1999 by each director, each of the executive
officers named in the Summary Compensation Table in the "-- Executive
Compensation" section below, and all of our directors and executive officers as
a group. Except as otherwise noted, the individual director or executive officer
or their family members had sole voting and investment power with respect to
such securities. The address for each listed stockholder is: c/o Retek Inc.,
Midwest Plaza, 801 Nicollet Mall, 11th Floor, Minneapolis, Minnesota 55402. The
total number of shares of HNC common stock outstanding as of September 30, 1999
was 24,406,864.
<TABLE>
<CAPTION>
SHARES OF HNC
BENEFICIALLY OWNED
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
------------------------ ------ ----------
<S> <C> <C>
John Buchanan(1)............................................ 63,404 *
Gordon Masson(2)............................................ 32,054 *
John L. Goedert(3).......................................... 36,604 *
David A. J. Bagley(4)....................................... 16,225 *
Gregory A. Effertz(5)....................................... 15,312 *
Ward Carey.................................................. 54,700 *
Charles H. Gaylord(6)....................................... 71,500 *
Alex Way Hart(7)............................................ 10,400 *
N. Ross Buckenham........................................... -- *
Glen A. Terbeek............................................. -- *
Stephen E. Watson........................................... -- *
All directors and executive officers as a group (14
persons)(8)............................................... 314,387 *
</TABLE>
- -------------------------
* Represents holdings of less than one percent.
(1) Includes 62,500 shares issuable upon exercise of stock options exercisable
within 60 days of September 30, 1999.
(2) Includes 30,625 shares issuable to Mr. Masson upon exercise of stock options
exercisable within 60 days of September 30, 1999, 221 shares beneficially
owned by Michele Hunt Masson, Mr. Masson's
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<PAGE> 59
wife, and 250 shares issuable to Mrs. Hunt Masson upon the exercise of stock
options exercisable within 60 days of September 30, 1999.
(3) Includes 36,022 shares issuable upon exercise of stock options exercisable
within 60 days of September 30, 1999.
(4) Includes 14,500 shares issuable upon exercise of stock options exercisable
within 60 days of September 30, 1999.
(5) Includes 14,500 shares issuable upon exercise of stock options exercisable
within 60 days of September 30, 1999.
(6) Represents 21,500 shares of HNC common stock held of record by the Gaylord
Family Trust UTD 12/31/93, Charles H. Gaylord, Jr. and Lynn M. Gaylord
trustees, and 50,000 shares of HNC common stock subject to options
exercisable within 60 days of September 30, 1999.
(7) Includes 10,000 shares of HNC common stock subject to options exercisable
within 60 days of September 30, 1999.
(8) See notes 1 through 7. Includes 4,000 shares issuable to Mr. Angove upon
exercise of stock options held by Duncan B. Angove within 60 days of
September 30, 1999 and 3,938 shares issuable to his wife, Ms. Jill French,
upon exercise of stock options held by her within 60 days of September 30,
1999. Also includes 6,250 shares issuable upon exercise of stock options
held by Victor Holysh exercisable within 60 days of September 30, 1999.
It is not currently possible to state the expected number of shares of our
common stock that our directors and officers may receive if the distribution
were to occur. As the distribution will occur in the future, we are unable to
predict the number of shares of our common stock that will be outstanding at
that time. In addition, our directors and executive officers may hold a
materially different number of shares of HNC common stock at the time of the
distribution than they currently hold. Each of these values is necessary to
determine the number of shares of our common stock that will be distributed to
our directors and executive officers.
COMPENSATION COMMITTEE
In the fiscal year ended December 31, 1998, we did not have a compensation
committee or any other committee serving a similar function. Decisions as to the
compensation of our executive officers were made by the compensation committee
or the board of directors of HNC.
DIRECTOR COMPENSATION
Directors who are not employed by us or by HNC and who are not directors of
HNC are referred to as independent directors and will be reimbursed for
reasonable expenses incurred in attending our board of director or committee
meetings. In addition, each of our independent directors was granted options to
purchase 25,000 shares of our common stock pursuant to our 1999 Directors Stock
Option Plan (described below) upon their initial election to our board of
directors. Our independent directors will also be granted options to purchase
7,500 shares of our common stock annually so long as they remain on our board.
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<PAGE> 60
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation for the
fiscal year ended December 31, 1998 paid for services rendered by our chairman
and chief executive officer and our four other highest-paid executive officers
who earned more than $100,000 during the fiscal year ended December 31, 1998. We
collectively refer to these individuals as the named executive officers.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------
NUMBER OF
SECURITIES
SALARY BONUS UNDERLYING
NAME AND PRINCIPAL POSITIONS ($) ($) OPTIONS(1)
- ---------------------------- ---------- --------- ------------
<S> <C> <C> <C>
John Buchanan
Chairman and Chief Executive Officer........................ 200,000 97,500 30,000
Gordon Masson
President................................................. 150,000 170,035 37,500
John L. Goedert
Senior Vice President, Research & Development............. 150,000 90,000 35,000
David A. J. Bagley
Vice President, Product Strategy & Marketing.............. 130,000 85,000 8,000
Gregory A. Effertz
Vice President, Finance & Administration, Chief Financial
Officer, Treasurer and Secretary.......................... 120,000 60,000 8,000
</TABLE>
- -------------------------
(1) This reflects options to acquire shares of HNC common stock. We will offer
our employees the opportunity either to cancel their HNC options which will
be unvested as of March 31, 2000 and receive grants of options to purchase
our common stock or to retain their HNC options. Under the current HNC
option plan, unvested HNC options held by our employees will be canceled at
the date of the distribution or at any other time that HNC owns less than
50% of our common stock. The table below sets forth the number of shares of
HNC common stock issuable upon the exercise of HNC stock options that each
named executive officer has been offered the opportunity to cancel.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING OPTIONS
NAMED EXECUTIVE OFFICER THAT MAY BE CANCELED
----------------------- --------------------
<S> <C>
John Buchanan............................................... 66,500
Gordon Masson............................................... 52,500
John L. Goedert............................................. 48,750
David A.J. Bagley........................................... 37,750
Gregory A. Effertz.......................................... 30,250
</TABLE>
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<PAGE> 61
HNC STOCK OPTION GRANTS IN FISCAL 1998
The following table sets forth information regarding stock options covering
HNC common stock granted to the named executive officers during the fiscal year
ended December 31, 1998. The dollar amounts under these columns are the result
of calculations at the 5% and 10% rates required by the Securities and Exchange
Commission for the option term and therefore are not intended to and may not
accurately forecast possible future appreciation, if any, of HNC's common stock
price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE ($ PER EXPIRATION -----------------------
NAME GRANTED YEAR SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ---------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
John Buchanan..................... 30,000(2) .90 32.00 2/23/08 603,840 1,530,240
Gordon Masson..................... 37,500(2) 1.13 32.00 2/23/08 754,800 1,912,800
John L. Goedert................... 35,000(2) 1.05 32.00 2/23/08 704,480 1,785,280
David A. J. Bagley................ 8,000(2) .24 32.00 2/23/08 161,024 408,064
Gregory A. Effertz................ 8,000(2) .24 32.00 2/23/08 161,024 408,064
</TABLE>
- -------------------------
(1) We will offer our employees the opportunity either to cancel their HNC
options which will be unvested as of March 31, 2000 and receive grants of
options to purchase our common stock or to retain their HNC options. Under
the current HNC option plan, unvested HNC options held by our employees will
be canceled at the date of the distribution or at any other time that HNC
owns less than 50% of our common stock.
(2) The options became exercisable with respect to one-fourth of the shares
covered thereby on February 23, 1999 and will become exercisable with
respect to one-fourth of the shares covered thereby on each of February 23,
2000, 2001 and 2002.
AGGREGATED HNC OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the named
executive officers concerning option exercises in 1998 and unexercised stock
options to purchase HNC common stock held as of December 31, 1998. The "value
realized" figures are based on the fair market value of HNC stock at the
exercise date, minus the per share exercise price, multiplied by the number of
shares exercised. The "value of unexercised in-the-money options at December 31,
1998" figures in the right-hand column are based on the market value of HNC
stock at December 31, 1998 of $40.438 per share, minus the per share exercise
price, multiplied by the number of shares issuable upon exercise of the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ACQUIRED ON EXERCISE OPTIONS AT THE-MONEY OPTIONS AT
---------------------------- DECEMBER 31, 1998 DECEMBER 31, 1998($)
VALUE --------------------------- ---------------------------
NAME EXERCISED (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John Buchanan................. 0 0 55,000 85,000 546,590 799,730
Gordon Masson................. 27,344 1,120,512 12,500 60,000 157,975 630,030
John L. Goedert............... 12,000 432,000 14,261 59,261 359,344 810,304
David A. J. Bagley............ 0 0 6,250 26,750 61,331 251,498
Gregory A. Effertz............ 0 0 6,250 26,750 92,581 345,248
</TABLE>
TREATMENT OF OUTSTANDING STOCK OPTIONS
In connection with our separation from HNC, our executive officers and
other employees will be given the opportunity to receive options to purchase our
common stock in exchange for their agreeing to
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<PAGE> 62
cancel their outstanding options to purchase HNC common stock which are
scheduled to be unvested as of March 31, 2000. If the distribution occurs, then
options to purchase HNC common stock then held by our employees, to the extent
they are unvested at the time of the distribution, will immediately terminate
upon the distribution, and to the extent they are vested at the time of the
distribution, will remain exercisable for 90 days after the distribution at
which time they will terminate. Options to purchase our common stock which are
granted in exchange for the cancellation of options to purchase HNC common stock
will be granted at an exercise price of $10.00 per share under our 1999 Equity
Incentive Plan. These new options to purchase Retek common stock will vest 25%
on the first anniversary of the date of grant and thereafter at the rate of 1/48
of the amount of the original grant on a monthly basis for 36 months.
CERTAIN ARRANGEMENTS INVOLVING STOCK OPTIONS
If HNC has received a written ruling from the Internal Revenue Service that
the distribution qualifies for tax-free treatment under Section 355 of the
Internal Revenue Code, and HNC fails to complete the distribution within 120
days after the first date that HNC is eligible to effect the tax-free
distribution, John Buchanan and three other executive officers to be chosen by
Mr. Buchanan will receive a 12-month credit to the vesting schedule of their
Retek stock options. In addition, if at the time of this accelerated vesting,
these executives execute two-year non-compete agreements with Retek, their
vesting schedules will be credited by an additional 12 months. Furthermore, Mr.
Buchanan and the three other executive officers chosen by Mr. Buchanan will
receive the same option vesting credit in the event that Mr. Buchanan's
employment with us is terminated without cause prior to the distribution. For
purposes of this arrangement, "cause" is defined as intentional gross misconduct
by Mr. Buchanan in the performance of his duties that results in material injury
to us.
EMPLOYMENT AGREEMENT
We have an employment agreement with Mr. Buchanan that expires on November
29, 1999. The employment agreement provides that Mr. Buchanan serves as chief
executive officer at an initial annual salary of $120,000 plus a possible annual
bonus. Pursuant to his employment agreement, Mr. Buchanan was granted an option
to purchase up to 110,000 shares of HNC common stock at an exercise price equal
to fair market value on the date of grant. The options vest over a four-year
period at the rate of 25% per year. Mr. Buchanan is also eligible to participate
in HNC's employee benefit plans.
If Mr. Buchanan's employment is terminated by us without cause or due to
his death or disability, he is entitled:
- to continue to be paid his then-current base salary for the lesser of six
months or the remainder of the term of the employment agreement; and
- to be paid any unpaid bonus that is both due and payable to him and which
is not subject to any unsatisfied conditions or contingencies.
Mr. Buchanan also is subject to an employee invention assignment and
confidentiality agreement.
EMPLOYEE BENEFIT PLANS
RETEK 1999 EQUITY INCENTIVE PLAN
Our board of directors has adopted, and HNC, our sole stockholder, has
approved, the 1999 Equity Incentive Plan in order to provide grants of stock
options, stock appreciation rights, restricted stock and stock bonuses to
employees, officers, directors, consultants, independent contractors and
advisors of Retek or any parent, subsidiary or affiliate of Retek. A total of
9,000,000 shares of our common stock have been
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reserved for issuance under the equity incentive plan, with an annual increase
to be added on January 1 of each year, beginning January 2001, equal to the
least of:
- 4% of the total outstanding shares as of that January 1;
- 2,000,000 shares; or
- an amount of shares determined by the board of directors.
Administration of the Equity Incentive Plan
The compensation committee of the board of directors or the board of
directors acting as the compensation committee will administer the equity
incentive plan. The compensation committee will have the power to:
- construe, interpret and correct any defects in the equity incentive plan
or any related document;
- prescribe, amend and rescind rules and regulations relating to the equity
incentive plan;
- determine the form and terms of the awards made under the equity
incentive plan, including persons eligible to receive such awards,
whether awards have been earned and the number of shares or other
consideration subject to awards; and
- grant waivers of any plan or award conditions and vary the terms of the
award.
The compensation committee may delegate to one or more of our officers some
or all of its authority under the equity incentive plan. However, the
compensation committee may not delegate its authority to grant stock options or
other awards under the equity incentive plan to our officers who are required to
file reports of their beneficial ownership of our stock under Section 16 of the
Securities Exchange Act of 1934.
Options
The compensation committee will determine the exercise price of each option
when the option is granted. The exercise price may not be less than 85% of the
fair market value of our common stock on the date of grant. With respect to
options intended to qualify as "incentive stock options" within the meaning of
section 422 of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the date of grant. The
term of the options may not be more than ten years.
Options granted under the equity incentive plan are forfeited within three
months (or a shorter or longer period as determined by the compensation
committee) of the optionee's termination as an employee of our company and any
affiliates for reasons other than death or disability. If termination of
employment is due to death or disability, the options will be forfeited within
12 months of termination. In no event will the options be exercisable later than
their expiration date. If an option holder's employment is terminated for
"cause," all of that individual's options will expire.
The aggregate fair market value of shares with respect to which incentive
stock options are exercisable for the first time by an optionee during a
calendar year may not exceed $100,000.
Stock Appreciation Rights
Stock appreciation rights may be granted alone, in addition to other awards
or in tandem with stock options. The compensation committee will fix the
exercise price per share covered by stock appreciation rights at the time of
grant in accordance with the method it specifies at the time of grant. The
exercise price may not be less than 85% of the fair market value of our common
stock on the date of the grant. If granted in tandem with a stock option, stock
appreciation rights will cover an equal or lesser number of shares as covered by
the stock option, will be exercisable at the same time or times and to the
extent as the related stock option will be exercisable and will have the same
term and exercise price as the related stock option. Upon exercise of a stock
appreciation right granted in tandem with an option, the related option will be
canceled automatically to the extent of the number of shares covered by the
exercise.
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Likewise, upon exercise of a stock option, the tandem stock appreciation right
associated with that option will be canceled.
Restricted Stock
Restricted stock will be offered to participants in consideration for past
services at a purchase price to be determined by and subject to the terms and
conditions established by the compensation committee. The shares will be subject
to restrictions on transfer and other incidents of ownership for the periods of
time, and to the vesting conditions, as determined by the compensation committee
and provided in the award agreement. The share certificates representing the
shares granted to the participant will be registered in the name of the
participant but held by us. We may take any actions we deem necessary to
restrict the transfer of unvested restricted stock. Other than these
restrictions on transfer and other restrictions as determined by the
compensation committee and provided in the award agreement, a participant will
have the rights of a stockholder, including the right to receive dividends and
to vote.
Stock Bonuses
Stock bonuses are awards of shares conditioned on the achievement of
specified performance criteria. The compensation committee will have the
discretion to determine the number of shares to be awarded, whether the award
should be in the form of restricted stock, the nature, length and starting date
of the relevant performance periods, the performance criteria and the number of
shares to be granted to a participant. The earned portion of a stock bonus may
be paid currently or on a deferred basis with an interest or dividend equivalent
as determined by the compensation committee. A participant whose employment is
terminated during a performance period for any reason will be entitled to
payment of the stock bonus only to the extent earned as of the date of
termination in accordance with the relevant performance stock bonus agreement,
unless the compensation committee determines otherwise.
Non-Transferability of Awards
Awards granted under the equity plan are generally not transferable by the
participant and each award is exercisable during the lifetime of the participant
only by the participant. Any elections regarding the awards may be made only by
the participant.
Adjustments upon Merger or Change in Control
The equity incentive plan provides that in the event of a change in
control, we may provide for the assumption, substitution, conversion or
replacement of awards under the equity incentive plan. The plan defines change
in control to include:
- the dissolution or liquidation of our company;
- a merger or consolidation in which our company is not the surviving
corporation;
- a merger in which our company is the surviving corporation but after
which our stockholders cease to own their shares or other equity
interests in us;
- the sale of all or substantially all the assets of our company; and
- the acquisition, sale or transfer of more than 50% of the outstanding
shares of our common stock by tender offer or similar transaction.
In the event that a successor corporation refuses to assume or substitute
awards pursuant to a change in control transaction, the awards granted under the
equity incentive plan will expire upon the closing of the transaction. However,
the compensation committee may accelerate the vesting of any and all awards
before the change in control and any options not exercised before the change in
control will expire. If a
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participant's employment by our company and our affiliates is terminated by us
other than for cause within 24 months after a change in control, all the
participant's options and stock appreciation rights will become immediately
exercisable, all restrictions and conditions of awards of restricted stock and
stock bonuses held by the participant will lapse and all performance criteria
applicable to any award will be deemed to be fully achieved.
Amendment and Termination of the 1999 Equity Incentive Plan
Unless terminated sooner, the equity incentive plan will terminate
automatically on October 25, 2009. The board of directors may at any time
terminate or amend the plan or any related document, except that the board of
directors may not make any amendments that would require stockholder approval
without obtaining it.
RETEK 1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors has adopted, and HNC, our sole stockholder, has
approved, the 1999 Employee Stock Purchase Plan in order to provide an
additional incentive for our employees to invest in our common stock. A total of
700,000 shares of our common stock has been reserved for issuance under the
purchase plan, with an annual increase to be added on January 1 of each year
beginning January 1, 2001, equal to the least of:
- 1.0% of the total outstanding shares as of that January 1;
- 600,000 shares; or
- an amount of shares determined by the board of directors.
Administration of the Purchase Plan
A committee of the board of directors will administer the purchase plan.
All questions of interpretation and application of the purchase plan will be
determined by the administrator.
Eligibility to Participate
All employees of our company and participating subsidiaries will be
eligible to participate, except that the following individuals may not
participate in the plan:
- employees who are not employed by our company or a participating
subsidiary 15 days before the beginning of an offering period, which is a
24 month period that starts on November 1 and May 1 of each year and ends
on October 31 and April 30, except those employees who are employed on
the effective date of this registration statement;
- employees who are customarily employed for less than 20 hours per week;
- employees who are customarily employed for less than five months in a
calendar year; and
- employees who own stock or options to purchase stock possessing 5% or
more of the total combined voting power or value of all classes of stock
of our company or any of its participating subsidiaries.
Purchases
Enrollment by an eligible employee in the purchase plan with respect to a
particular two-year offering period will constitute a grant to the eligible
employee of the right to purchase shares of our common stock
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on each of the four purchase dates during the offering period. The purchase
price of the stock will be the lower of:
- 85% of the fair market value of a share of our common stock on the first
business day of the two-year offering period; or
- 85% of the fair market value of a share of our common stock on the
purchase date.
The purchase price will generally be paid through payroll deductions.
During the first offering period, employees will be permitted to contribute
additional amounts in cash to the purchase plan.
Restrictions
For any particular calendar year, no employee may purchase stock under the
purchase plan at a rate which, when added to the employee's right to purchase
stock under all other purchase plans of our company or our parent or
subsidiaries, exceeds $25,000 in fair market value as of the first business day
of any offering period. No employee may purchase more than a maximum number of
shares fixed by the committee on a single purchase date.
End of Participation
If an employee's employment terminates for any reason, including retirement
or death, or the employee fails to remain an eligible employee, that employee
may no longer participate in the purchase plan. If an employee's participation
in the purchase plan ends, we will promptly distribute to the employee all
accrued employee contributions without interest. A withdrawing employee will not
be able to participate in the purchase plan until the next offering period.
Adjustments upon Merger or Change in Control
The purchase plan provides that if we are liquidated or dissolved, the
committee may terminate the plan immediately. The purchase plan will provide
that, in the event of any of the following transactions:
- a merger or consolidation in which our company is not the surviving
corporation;
- a merger in which our company is the surviving corporation but after
which our stockholders cease to own their shares or other equity
interests in our company;
- the sale of all or substantially all the assets of our company; or
- the acquisition, sale or transfer of more than 50% of the outstanding
shares of our common stock by tender offer or similar transaction,
the purchase plan will continue with regard to the offering periods that began
before the closing of the transaction and shares will be purchased based on the
fair market value of the surviving corporation's stock.
Non-Assignability of Rights
An employee may not transfer rights granted under the purchase plan other
than by will or the laws of descent and distribution.
Amendment and Termination of the Purchase Plan
Unless terminated sooner, the purchase plan will terminate automatically on
October 25, 2009. The board of directors has the authority to amend or terminate
the purchase plan at any time.
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RETEK 1999 DIRECTORS STOCK OPTION PLAN
Our board of directors has adopted, and HNC, our sole stockholder, has
approved, the 1999 Directors Stock Option Plan to provide grants of
non-qualified stock options to our directors who are not our employees or
employees or directors of HNC, its subsidiaries or affiliates. A maximum of
400,000 shares of our common stock may be issued under the directors stock
option plan.
Administration of the 1999 Directors Stock Option Plan
A committee of our board of directors, or the board of directors acting as
the committee, will administer the directors stock option plan. The committee
has the authority to interpret and construe the provisions of the directors
stock option plan.
Terms and Conditions of Options
The exercise price of the options will equal the fair market value of our
common stock on the date of grant. The term of the options may not be more than
ten years. The directors stock option plan provides for an initial grant of
25,000 options to be made on the later of:
- the effective date of the plan; and
- the date a director first becomes a member of our board of directors.
Succeeding grants of options to buy 7,500 shares of our common stock will be
made on each anniversary date of the initial grant. The option holders have the
ability to defer the receipt of shares otherwise deliverable upon the exercise
of an option. Options vest entirely at the end of a period of one year from the
date of grant.
All unvested options held by a director will be forfeited upon the
director's termination of service. In the event of termination of service due to
reasons other than death or disability, all vested options must be exercised
within seven months of termination. In the event of termination of service due
to death or disability, all vested options must be exercised within 12 months of
termination. In no event will the options be exercisable later than their
expiration date.
Non-Transferability of Options
Options granted under the directors stock option plan are generally not
transferable by the optionee and each award is exercisable during the life time
of the option holder only by the option holder or by the option holder's
guardian or legal representative, unless otherwise determined by the committee.
Adjustments upon Merger or Change in Control
The directors stock option plan provides that in the event of:
- our dissolution or liquidation;
- a merger or consolidation in which we are not the surviving corporation;
- a merger in which we are the surviving corporation, but after which our
stockholders cease to own shares of stock or other equity interests in
us;
- the sale of all or substantially all of our assets; or
- an acquisition, sale or transfer of more than 50% of the outstanding
shares of our common stock by tender offer or similar transaction,
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the vesting of all options granted pursuant to the directors stock option plan
will accelerate and the options will become exercisable in full prior to the
consummation of the transaction, at the time and on the conditions as the
committee determines.
Amendment and Termination of the 1999 Directors Stock Option Plan
Unless terminated sooner, the directors stock option plan will terminate
automatically ten years from its effective date. Our board of directors may at
any time terminate or amend the plan.
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CERTAIN TRANSACTIONS
This section summarizes the separation agreement and the key related
agreements that we expect to enter into with HNC before this offering. You
should read the full text of these agreements, which we filed with the
Securities and Exchange Commission as exhibits to the registration statement of
which this prospectus is a part. This section also summarizes other transactions
between us and our directors and officers. This summary is of the material terms
of these agreements and transactions.
We intend to enter into agreements with HNC that provide for the separation
of our business from HNC. In particular, we intend to enter into a separation
agreement, a corporate rights agreement, a services agreement, a technology
license agreement and a tax sharing agreement with HNC necessary to effect the
separation. These agreements will not be conditioned upon the completion of the
distribution. They will govern our respective rights and duties with respect to
specified offerings of our common stock and other securities, including this
offering, and other matters relating to the distribution. These agreements will
also contain agreements that will continue in effect for various periods
following this offering. Although HNC has announced that, subject to the
satisfaction of specified conditions, including approval of its board of
directors, it currently plans to complete the distribution, and although we
intend to agree to cooperate with HNC to complete the distribution if HNC elects
to do so, HNC will not be obligated to carry out the distribution. Thus, we
cannot assure you as to whether or not the distribution will occur, when it
would occur or what the terms of the distribution will be if it occurs.
SEPARATION AGREEMENT
The separation agreement will cover the principal corporate transactions
required to effect the transfer to us of assets and the assumptions of
liabilities by us necessary to separate our company from HNC and other
agreements governing our relationship after the separation.
Transfer of assets and assumption of liabilities. HNC will transfer, or
agree to transfer, all of the shares of the outstanding common stock of Retek
Information Systems and other assets to us in exchange for 39,999,000 shares of
our common stock and we will assume or agree to assume, and will agree to pay,
perform, satisfy and discharge on a timely basis specified liabilities in
accordance with their terms. Except as expressly stated in the separation
agreement or in any related agreement, HNC will not make any representation or
warranty to us with respect to any asset it transfers to us and HNC is
transferring the assets to us on an "as is, where is" basis.
We have agreed with HNC to set-off and settle all accounts payable and
receivable and all other intercompany debt payable by us or HNC at the closing
of the separation. We will repay our intercompany debt to HNC, which was
approximately $9,505,000 as of September 30, 1999, from the net proceeds of this
offering. For additional information regarding the intercompany accounts between
us and HNC, see "Management's Discussion and Analysis of Financial Condition and
Operating Results -- Liquidity and Capital Resources" beginning on page 36.
The Distribution. HNC has stated that it currently intends, following the
completion of this offering, to complete the distribution, subject to the
satisfaction and fulfillment of specified conditions, including:
- HNC's receipt of a written ruling from the Internal Revenue Service that
the distribution qualifies for tax-free treatment such that HNC, its
stockholders and its affiliates will not recognize income for federal
tax purposes as a result of the distribution;
- the approval and declaration of the distribution by HNC's board of
directors;
- the absence of any change in economic or market conditions or other
circumstances that would cause HNC's board of directors to conclude that
the distribution was not in the best interest of HNC and its
stockholders; and
- HNC being able to effect the distribution in compliance with applicable
law and HNC's contractual obligations.
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HNC will have the sole discretion to decide whether or not to proceed with
the distribution and to determine all terms of the distribution, including the
form, structure and terms of any transaction and/or offering to effect the
distribution and the timing of and conditions to the completion of the
distribution. We will also agree that, at HNC's direction, we will promptly take
all actions necessary or desirable to effect these transactions.
Covenants and indemnification regarding the distribution. We will agree
that if the distribution is completed and qualifies for tax-free treatment, we
will not take any action that would be inconsistent with any representation or
covenant in any ruling, or any supplement to any ruling, issued by the Internal
Revenue Service in connection with the distribution. In particular, under the
separation agreement, we will agree that, during the two-year period immediately
following completion of the distribution, we and our affiliates will not:
- sell a substantial portion of our assets;
- voluntarily dissolve or liquidate;
- enter into any merger, consolidation or reorganization transaction;
- solicit any person to make a tender offer for any of our equity
securities;
- participate in or support any unsolicited tender offer for our equity
securities;
- approve any proposed business combination or any transaction which would
result in any person or persons acquiring in the aggregate, directly or
indirectly, a 50% or greater interest (within the meaning of Section
355(e) of the Internal Revenue Code) in us;
- fail to maintain the active conduct of our business;
- issue any equity securities (except pursuant to the exercise of employee
stock options) or redeem any equity securities that, including the
shares of common stock sold in this offering would result in the
acquisition in the aggregate, directly or indirectly, by any person or
persons of a 50% or greater interest (within the meaning of Section
355(e) of the Internal Revenue Code) in us;
- enter into any agreement for the sale of our stock or equity interests;
- take any action that violates or is inconsistent with the information,
representations or covenants contained in the initial ruling submission
or any supplemental ruling submission filed with the Internal Revenue
Service regarding the distribution; or
- engage in any agreement, understanding, arrangement or negotiation,
directly or indirectly with any person or persons with respect to any of
the actions described above;
unless (1) HNC expressly consents in writing to the action, which consent may be
withheld by HNC in its sole discretion taking into account solely the
preservation of the tax-free treatment of the distribution or (2) HNC obtains a
supplemental ruling from the Internal Revenue Service that the action will not
affect the tax-free nature of the distribution. HNC, however, does not have an
obligation to seek a supplemental ruling.
Under the terms of the separation agreement, we will agree to indemnify
HNC, on an after-tax basis, for any tax liability incurred by HNC with respect
to the distribution as a result of our taking any of the above actions, or any
transaction or event occurring after the distribution that involves our stock,
assets or business or any of our affiliates, whether or not HNC consents to, or
obtains a supplemental ruling from the Internal Revenue Service with respect to,
the action, transaction or event.
The limitations on the issuance of shares of our capital stock and other
restrictions discussed above could have a negative impact on our financial
flexibility following a tax-free distribution.
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Indemnification. We intend to agree to indemnify and hold harmless HNC and
its affiliates and their respective officers, directors, employees, and other
related parties against any liabilities, damages, claims and expenses arising
out of or relating to:
- the failure to perform or otherwise discharge any liability or contract
we assumed from HNC under the separation agreement;
- our business and any liability or contract we assumed from HNC under the
separation agreement;
- any breach of the separation agreement or the other agreements between
us and HNC related to our separation from HNC;
- any material untrue or alleged untrue statement and any material
omission in any prospectus or the registration statement filed with the
Securities and Exchange Commission relating to this offering; and
- any violation of any federal, state or other law or rule regarding
securities in connection with this offering or any subsequent offering
or transaction involving our securities.
However, our indemnification of HNC will not apply to any liability arising from
information relating to HNC provided to us by HNC.
HNC will similarly agree to indemnify us and our affiliates and our
officers, directors, employees and other related parties against any
liabilities, damages, claims and expenses arising out of or relating to:
- HNC's failure to perform or otherwise discharge any of HNC's
liabilities, other than the liabilities assumed by us;
- any liability of HNC, other than the liabilities assumed by us; and
- any breach of the separation agreement or the other agreements between
us and HNC related to our separation from HNC;
In addition, the corporate rights agreement and the tax sharing agreement
referred to below will provide for indemnification between us and HNC relating
to the substance of those agreements.
Release relating to actions by HNC related to HNC's and our assets,
businesses and operations. Except for the rights and obligations of HNC and us
arising from the agreements between us relating to this offering or the
distribution, we will release HNC and its subsidiaries and affiliates and their
respective officers, directors, employees and other related parties for all
losses for any and all past actions and failures to take actions relating to
HNC's and our assets, businesses and operations and this offering. HNC will
similarly release us.
Expenses. In general, unless otherwise provided for in the separation
agreement or any other agreement, we will pay the costs and expenses incurred in
connection with any offering of our securities before the distribution or other
similar transaction, including this offering, and the distribution.
Access to information. Generally, we and HNC will agree, for a specified
time period and on a confidential basis to provide each other, upon request and
subject to specified conditions, with access to information relating to our
respective assets, business and operations. We and HNC will also agree to keep
our books and records for a specified period of time. Also, we and HNC will
agree to cooperate with each other with respect to any claims brought against
the other relating to the conduct of our business before completion of the
distribution.
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CORPORATE RIGHTS AGREEMENT
We intend to enter into a corporate rights agreement with HNC that will
contain agreements that will continue for various time periods following this
offering and will provide HNC with registration rights relating to the shares of
our common stock it holds.
HNC options to purchase additional shares. We will grant to HNC a
continuing option, assignable to any of its subsidiaries and some of its
affiliates, to purchase additional shares of our capital stock under specified
circumstances. These options may be exercised immediately before the issuance of
any of our equity securities, other than in this offering or upon the exercise
of the underwriters' over-allotment option, and only to the extent necessary for
HNC and its affiliates to maintain:
- control of us (within the meaning of Section 368(c) of the Internal
Revenue Code of 1986);
- our status as a member of the affiliated group of corporations (within
the meaning of Section 1504 of the Internal Revenue Code) of which HNC
is the common parent, provided such status has previously been
maintained;
- HNC's then-existing ownership percentage of our equity value; and
- ownership of shares of our non-voting capital stock (if any) to the
extent, and only to the extent, necessary to own 80% of each outstanding
class of our stock.
The purchase price of the shares of common stock purchased upon any
exercise of the options will be based on the then current market price of our
common stock. These options will terminate when HNC owns less than 50% of our
equity value.
Registration rights. We intend to grant HNC registration rights that will
require us, upon HNC's request, to use our best efforts to register under the
applicable federal and state securities laws any shares of our common stock or
other equity securities owned by HNC for sale in accordance with HNC's intended
method of disposition and to take other actions as necessary to permit the sale
of that stock in other jurisdictions, subject to specified limitations. HNC will
also have the right to include the shares of our stock or other equity
securities it beneficially owns in other registrations of these equity
securities that we initiate under the Securities Act and state securities laws.
Subject to specified limitations, these registration rights will be assignable
by HNC and its assigns. The corporate rights agreement will also contain
indemnification and contribution provisions under which we and HNC will agree to
indemnify each other and their related parties for specified liabilities arising
from registrations of our securities that HNC or its assigns participate in (or,
if such indemnity is unavailable, to contribute to each other's liability).
Corporate governance. We have agreed to be governed by a board of
directors consisting of seven members including our chief executive officer,
three individuals designated by HNC and three independent directors, each of
whom will have retail industry experience and will be designated by our chief
executive officer. However, HNC's right to designate three directors will
terminate once HNC and its affiliates own less than 25% of our outstanding
common stock. For so long as HNC has the right to designate three directors, HNC
will have the right to fill any vacancy caused by the death, resignation or
removal of its designees.
In addition, under the terms of the corporate rights agreement, we will
agree that the following corporate actions, including those taken by our
subsidiary Retek Information Systems, will require the approval of at least two
of the HNC board designees and HNC:
- any acquisition or merger by us with or into another entity;
- any material change in the scope of our business;
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- any issuance of capital stock by us, other than in connection with this
offering or employee stock option and purchase plans previously approved
by HNC;
- any incurrence of debt by us in excess of $10,000,000;
- the sale, purchase or lease of any business or asset having a value of
more than $3,000,000;
- the appointment or termination of our chief executive officer or chief
financial officer;
- the amendment or adoption by us of any employee benefit or stock option
plan, other than those previously approved by HNC;
- any material change in the annual plan and budget we submit to HNC;
- any amendment to our certificate of incorporation or bylaws that would
authorize any new class or series of our capital stock or any preferred
stock, or adversely affect HNC's rights as our majority stockholder; and
- any adoption or amendment of a stockholders' rights plan or other
anti-takeover defense.
In addition, the following actions will require the approval of at least
two of the HNC board designees:
- the sale, lease, exchange or other disposition of all or a substantial
portion of our assets;
- our liquidation or dissolution;
- any transaction that would decrease HNC's equity ownership in us;
- the incurrence of annual capital expenditures or investments in excess
of $5,000,000 above budgeted amounts approved by HNC;
- the formation and structure of the committees of our board; and
- the commencement or settlement by us of any litigation, except where
potential liabilities and expenses are not expected to exceed $500,000.
The approval of the HNC board designees and HNC will no longer be required
when HNC owns less than 50% of the outstanding shares of our capital stock.
Furthermore, HNC has agreed that it will not vote in favor of, or take any
other action that would result in, the removal without cause of any of our
directors, except the HNC board designees or our chief executive officer if, for
any reason, he ceases to be our chief executive officer. In addition, John
Buchanan has agreed to enter into an agreement that if, for any reason, he
ceases to be our chief executive officer he will resign from our board of
directors if so requested by HNC or a majority of the members of our board of
directors.
Covenants. We will agree that, for so long as HNC maintains beneficial
ownership of at least 50% of the total number of our outstanding shares of
capital stock, we will:
- provide HNC with financial information regarding our company and our
subsidiaries;
- provide HNC copies of all quarterly and annual financial information and
other reports and documents we intend to file with the SEC prior to the
filing, as well as final copies upon filing; and
- cooperate with HNC and provide it with financial and other information
about us to enable HNC to timely prepare and file reports and filings it
is required to make under applicable securities laws that require HNC to
incorporate financial and other information about us.
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Other covenants. The corporate rights agreement will also provide that for
so long as HNC maintains beneficial ownership of at least 50% of the total
number of our outstanding shares of capital stock, we may not take any action or
enter into any commitment or agreement that may reasonably be anticipated to
result in a breach by HNC of, or a default by HNC under:
- any provision of HNC's certificate of incorporation or bylaws;
- any credit agreement or other material instrument binding upon HNC; or
- any judgment, order or decree of any governmental body, agency or court
having jurisdiction over HNC or any of its assets.
SERVICES AGREEMENT
We also intend to enter into a services agreement with HNC under which HNC
will agree to provide to us specified accounting, financial and tax services and
employee benefit plan and insurance administration. These services may be
changed upon agreement between HNC and us. We will pay HNC a fee for these
services equal to HNC's cost in providing these services. The fee will be
payable monthly in arrears, 30 days after the close of each month. No other fees
are payable in connection with this agreement. The services agreement will
expire one year after its effective date and any and all services can be earlier
terminated by us upon 30 days' advance notice or upon other specified
conditions. We cannot assure you that we will be able to provide these services
internally or find a third party provider on acceptable terms, if at all, after
the expiration of the services agreement.
LICENSE AGREEMENT
We and HNC will enter into a technology license agreement under which HNC
will provide us with the use of Select Profile, which includes HNC's context
vectors predictive software technology. We are not obligated to pay HNC for
granting us this license. The license will be non-exclusive, perpetual,
world-wide and royalty-free and will limit our use of this HNC technology to
develop and market products and services to retailers and their trading partners
in the supply chain. We believe that this limitation on our ability to develop
and market products and services to retailers and their trading partners will
not adversely affect us because we sell, and intend to sell, our products
exclusively to retailers and their trading partners. Under the terms of the
license agreement, HNC will not be obligated to provide us any updates to their
predictive software technology. The license agreement will contain provisions
prohibiting the transfer or sublicensing to third parties of the technology that
HNC has licensed to us. We believe that the provisions prohibiting transfer or
sublicensing to third parties will not adversely effect us because we intend to
use and develop this technology ourselves to expand our business.
TAX SHARING AGREEMENT
Following this offering, we and our subsidiaries will continue to be
included in the consolidated group of HNC for United States federal income tax
purposes and a combined, consolidated or unitary group of HNC for various state
and local income tax purposes. Prior to the completion of this offering, we and
HNC will enter into a tax sharing agreement. The tax sharing agreement will
require us to make payments to HNC equal to the amount of income taxes which
would be paid by us, subject to some adjustments, as if we and each of our
subsidiaries included in the consolidated group were to file our own separate,
combined, consolidated or unitary, federal, state and local income tax returns
for any taxable year or portion of any taxable year beginning on or after
January 1, 1999 in which we are included in HNC's consolidated group. Subject to
the immediately preceding sentence, HNC will be responsible for filing, and
paying taxes with respect to, all consolidated, combined or unitary returns
which include both HNC and us. We and our subsidiaries will continue to be
directly liable for all taxes that are imposed on a separate return basis or on
a combined, consolidated or unitary basis on a group of companies that includes
only us and our subsidiaries. Generally, liabilities resulting from audit
adjustments to tax returns for periods during
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which we and HNC file consolidated returns will be the responsibility of HNC if
such tax adjustments are attributable to HNC or its subsidiaries. However, we
will be solely responsible, and will indemnify and hold HNC harmless, for tax
adjustments arising out of, or in connection with, the transactions contemplated
by the separation agreement, other than the distribution itself. The tax sharing
agreement provides that the indemnity provisions of the separation agreement
shall govern taxes resulting from the distribution.
TREATMENT OF OUTSTANDING STOCK OPTIONS
In connection with our separation from HNC, our executive officers and
other employees will be given the opportunity to receive options to purchase our
common stock in exchange for their agreeing to cancel their outstanding options
to purchase HNC common stock which are scheduled to be unvested as of March 31,
2000. If the distribution occurs, then options to purchase HNC common stock then
held by our employees, to the extent they are unvested at the time of the
distribution, will immediately terminate upon the distribution, and to the
extent they are vested at the time of the distribution, will remain exercisable
for 90 days after the distribution at which time they will terminate. Options to
purchase our common stock which are granted in exchange for the cancellation of
options to purchase HNC common stock will be granted at an exercise price of
$10.00 per share under our 1999 Equity Incentive Plan. It is anticipated that
these options will vest 25% on the first anniversary of the date of grant and
thereafter at the rate of 1/48 of the amount of the original grant on a monthly
basis for 36 months.
CERTAIN ARRANGEMENTS INVOLVING STOCK OPTIONS
If HNC has received a written ruling from the Internal Revenue Service that
the distribution qualifies for tax-free treatment under Section 355 of the
Internal Revenue Code and HNC fails to complete the distribution within 120 days
after the first date that HNC is eligible to effect the tax-free distribution,
John Buchanan and three other executive officers to be chosen by Mr. Buchanan
will receive a 12-month credit to the vesting schedule of their Retek stock
options. In addition, if at the time of this accelerated vesting, these
executives execute two-year non-compete agreements with Retek, the vesting
schedules will be credited by an additional 12 months. Furthermore, Mr. Buchanan
and the three other executive officers chosen by Mr. Buchanan will receive the
same option vesting credit in the event that Mr. Buchanan's employment with us
is terminated without cause prior to the distribution. For purposes of this
arrangement, "cause" is defined as intentional gross misconduct by Mr. Buchanan
in the performance of his duties that results in material injury to us.
ACQUISITION OF WEBTRAK LIMITED
On October 29, 1999, we acquired all of the outstanding capital stock of
WebTrak Limited. In connection with the acquisition we issued to Jeremy Thomas a
note, due on November 26, 1999, in the principal amount of $4,106,667.
We also entered into an employment agreement with Mr. Thomas. Mr. Thomas'
employment agreement provides for a two-year term of employment, during which he
will serve as president of Retail.com. Mr. Thomas will earn a monthly salary of
$15,833 and will be eligible to participate in our employee benefit programs
made available to executives from time to time. As a long-term incentive, we
have granted Mr. Thomas 250,000 stock options at a per share exercise price of
$10. In the event that we terminate Mr. Thomas' employment other than for cause
or if he resigns for good reason, he will be entitled to receive a lump-sum
severance payment equal to his base salary multiplied by the number of whole and
partial years remaining in the term of his contract, with a minimum severance
payment of one year's base salary.
Mr. Thomas has agreed to refrain from competing with us for a period of up
to five years or, if longer, until two years following his termination of
employment with us. He has also agreed not to solicit
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our customers or employees during this period. In the event that we fail to pay
in full the amounts owed to Mr. Thomas or any other person to whom we have
issued a promissory note in connection with our acquisition of WebTrak within
fifteen business days after the maturity date of the notes, Mr. Thomas'
employment agreement and protective covenants (including the covenants not to
compete and/or solicit customers and employees) will no longer be in force.
SALE OF SOFTWARE SOLUTIONS TO GANDER MOUNTAIN LLC
On May 28, 1999 we sold $1,050,137 worth of our software solutions,
including Retek Data Warehouse and Retek Merchandising System, to Gander
Mountain LLC. Mr. Stephen E. Watson, who currently serves as one of our
directors, is chief executive officer of Gander Mountain and has served in that
capacity since November 1997.
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PRINCIPAL STOCKHOLDER
Before this offering, all of the shares of our common stock issued and
outstanding were beneficially owned by HNC. Immediately after completion of this
offering, HNC will beneficially own 40,000,000 shares of our common stock, which
will represent approximately 88.9% of our then outstanding common stock (87.4%
if the underwriters' over-allotment option is exercised in full). HNC's address
is 5935 Cornerstone Court West, San Diego, California 92121.
Except for HNC, we are not aware of any person or group that will
beneficially own more than 5% of the outstanding shares of our common stock
following this offering.
The following table presents information regarding the beneficial ownership
of the outstanding common stock of HNC as of September 30, 1999 for the
following stockholders:
- each stockholder known by us to be the beneficial owner of more than 5%
of HNC's common stock;
- each of HNC's directors;
- HNC's chief executive officer and the four other most highly-paid
executive officers of HNC in 1998; and
- all of HNC's directors and executive officers as a group.
Percentage ownership calculations are based upon 24,406,864 shares of HNC
common stock outstanding as of September 30, 1999. Shares of HNC common stock
subject to options that are currently exercisable or exercisable within 60 days
of September 30, 1999 are deemed to be outstanding and to be beneficially owned
by the person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other stockholder. To our knowledge,
except as indicated in the footnotes to the table and under applicable community
property laws, the stockholders named in the table have sole voting and
investment power over all shares listed in the table.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER OF HNC OWNED OF HNC OWNED
------------------------ ---------------- ------------------
<S> <C> <C>
Capital Research and Management Company(1).................. 3,409,400 14.0%
The TCW Group, Inc.(2)...................................... 2,454,155 10.1
Franklin Resources, Inc.(3)................................. 2,042,430 8.4
J. & W. Seligman & Co., Incorporated(4)..................... 1,878,295 7.7
Robert L. North(5).......................................... 462,526 1.9
Edward K. Chandler(6)....................................... 126,532 *
Raymond V. Thomas(7)........................................ 125,000 *
John Mutch(8)............................................... 98,056 *
Charles H. Gaylord, Jr.(9).................................. 71,500 *
Michael A. Thiemann(10)..................................... 65,167 *
John Buchanan(11)........................................... 63,404 *
Thomas F. Farb(12).......................................... 25,000 *
Alex W. Hart(13)............................................ 10,400 *
All current executive officers and directors as a group (13
persons)(14).............................................. 1,358,801 5.6%
</TABLE>
- -------------------------
* Less than 1%
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(1) Based upon a Schedule 13G dated February 11, 1999, indicating that Capital
Research and Management Company, or CRMC, has sole dispositive power with
respect to 3,409,400 shares of HNC common stock. Includes 1,668,500 shares
held by SMALLCAP World Fund, Inc. The address of CRMC is 333 South Hope
Street, Los Angeles, California 90071.
(2) Based upon a Schedule 13G dated October 12, 1999, indicating that The TCW
Group, Inc. and Robert Day, an individual who may be deemed to control the
TCW Group, Inc., share voting and dispositive power with respect to these
shares of HNC common stock. The address of The TCW Group, Inc. is 865 South
Figueroa Street, Los Angeles, California 90017.
(3) Based upon a Schedule 13G dated January 28, 1999, indicating that Franklin
Resources, Inc. may be deemed to have beneficial ownership of 2,042,430
shares. Includes 2,025,950 shares held by Franklin Advisors, Inc. The
address of Franklin Resources, Inc. is 777 Mariners Island Boulevard, San
Mateo, California 94404.
(4) Based upon information obtained from the Nasdaq Stock Market. The address
of J. & W. Seligman & Co., Incorporated is 100 Park Avenue, New York, New
York 10017.
(5) Includes 255,037 shares of HNC common stock held of record by the Robert L.
North & Dixie L. North Revocable Inter Vivos Trust, of which Mr. North is a
trustee. Also includes 207,489 shares of HNC common stock subject to
options exercisable within 60 days of September 30, 1999. Mr. North is the
president and chief executive officer and a director of HNC.
(6) Includes 50,000 shares of HNC common stock subject to options exercisable
within 60 days of September 30, 1999. Mr. Chandler is a director of HNC.
(7) These shares of HNC common stock are subject to options exercisable within
60 days of September 30, 1999. Mr. Thomas is vice president, finance and
administration, chief financial officer and secretary of HNC.
(8) Includes 96,250 shares of HNC common stock subject to options exercisable
within 60 days of September 30, 1999. Mr. Mutch is the president and chief
operating officer of HNC.
(9) Represents 21,500 shares of HNC common stock held of record by the Gaylord
Family Trust UTD 12/31/93, Charles H. Gaylord, Jr. and Lynn M. Gaylord
trustees, and 50,000 shares of HNC common stock subject to options
exercisable within 60 days of September 30, 1999. Mr. Gaylord is a director
of HNC.
(10) Includes 34,167 shares of HNC common stock held of record by the Thiemann
Family Trust dated July 1, 1996, of which Mr. Thiemann is a trustee, 6,000
shares held directly by Mr. Thiemann and 25,000 shares subject to options
exercisable within 60 days of September 30, 1999. Mr. Thiemann is the
former president of HNC Financial Solutions.
(11) Includes 62,500 shares of HNC common stock subject to options exercisable
within 60 days of September 30, 1999. Mr. Buchanan is our chairman and
chief executive officer.
(12) Represents shares of HNC common stock subject to options exercisable within
60 days of September 30, 1999. Mr. Farb is a director of HNC.
(13) Includes 10,000 shares of HNC common stock subject to options exercisable
within 60 days of September 30, 1999. Mr. Hart is a director of HNC.
(14) Includes 727,489 shares of HNC common stock subject to options exercisable
within 60 days of September 30, 1999, including the options described in
footnotes (5) through (13).
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DESCRIPTION OF CAPITAL STOCK
We will file our amended and restated certificate of incorporation
immediately before the completion of this offering. The following description of
our capital stock is intended as a summary only and is not complete. You should
read the full text of our amended and restated certificate of incorporation and
our bylaws, which were filed with the registration statement of which this
prospectus is a part.
GENERAL
We are authorized to issue 150,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of undesignated preferred stock, par value
$0.01 per share. After this offering there will be 45,000,000 shares of our
common stock outstanding, and 45,750,000 shares if the underwriters exercise
their over-allotment option in full.
COMMON STOCK
The holders of shares of our common stock will be entitled to one vote for
each share on all matters voted on by stockholders, including elections of
directors and, except as otherwise required by law or provided in any resolution
adopted by our board of directors with respect to any series of preferred stock,
the holders of shares of our common stock will possess all the voting power. Our
certificate of incorporation will not provide for cumulative voting in the
election of directors. Subject to any preferential rights of any outstanding
series of preferred stock created by our board of directors from time to time,
holders of our common stock will be entitled to such dividends as may be
declared from time to time by our board of directors from funds legally
available for the payment of dividends. Upon liquidation, holders of our common
stock will be entitled to receive pro rata all of our assets available for
distribution to holders of our common stock. Holders of our common stock will
have no liability to further calls or assessment by us, and have no conversion,
redemption or preemptive rights to purchase additional shares of any class of
our shares, except that HNC will have specified rights to purchase additional
shares of our common stock as described under "Certain Transactions -- Corporate
Rights Agreement" beginning on page 69.
PREFERRED STOCK
There are no shares of preferred stock outstanding. The preferred stock is
issuable either as a class without series or in one or more series and with the
designations, rights, privileges, restrictions and conditions for each class or
series of preferred stock to be as stated in the resolutions adopted by our
board of directors that provide for the designation of each series. Our board of
directors is authorized to determine the rights of each class or series of
preferred stock, including the voting, dividend, redemption, conversion and
liquidation powers, rights and preferences and the limitations of each class or
series of the preferred stock. We believe that the ability of our board of
directors to issue one or more series of preferred stock will provide us with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that may arise. The authorized shares of preferred
stock will be available for issuance without further action by stockholders,
except as is required by applicable law, contract or the rules of any stock
exchange or automated quotation system on which our securities may be listed or
traded.
Although our board of directors has no present plans to issue any preferred
stock, it has the power to create and issue a series of preferred stock that
could, depending on its terms and rights, impede the completion of a merger,
tender offer or other takeover attempt. Our board of directors will make any
determination to issue preferred stock based on its judgment as to our best
interests and the best interests of our stockholders. Our board of directors
could issue preferred stock with voting and other rights that could adversely
effect the voting power of the holders of our common stock, and that could
discourage an acquisition attempt through which an acquiror may be able to
change the composition of our board of
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directors, including a tender offer or other transaction that some, or a
majority, of our stockholders might believe to be in their best interests or in
which stockholders might receive a premium over the then current market price of
their stock.
CORPORATE OPPORTUNITIES
Our certificate of incorporation will provide that HNC will have no duty to
refrain from engaging in the same or similar activities or lines of business as
we are engaged, and neither HNC nor any officer or director of HNC (except as
described below), will be liable to us or our stockholders for breach of any
fiduciary duty by reason of any such activities of HNC. Under our certificate of
incorporation, if HNC learns of a potential transaction or matter that may be a
corporate opportunity for both HNC and us, HNC will have no duty to communicate
or offer the corporate opportunity to us and will not be liable to us or our
stockholders for breach of any fiduciary duty as one of our stockholders because
it pursues or acquires the corporate opportunity for itself, directs the
corporate opportunity to another person, or does not communicate information
regarding the corporate opportunity to us.
Our certificate of incorporation provides that, if one of our directors or
officers who is also a director or officer of HNC learns of a potential
transaction or matter that may be a corporate opportunity for both us and HNC,
our director or officer will have fully satisfied and fulfilled the director's
or officer's fiduciary duty to us and our stockholders with respect to such
corporate opportunity if director or officer acts in a manner consistent with
the following policy:
- a corporate opportunity offered to any person who is one of our
officers, and who is also a director but not an officer of HNC, will
belong to us;
- a corporate opportunity offered to any person who is a director but not
one of our officers, and who is also a director or officer of HNC, will
belong to us if the opportunity is expressly offered to the person
solely in his or her capacity as one of our directors, and otherwise it
will belong to HNC; and
- a corporate opportunity offered to any person who is both one of our
officers and an officer of HNC will belong to us if the opportunity is
expressly offered to the person solely in his or her capacity as one of
our officers, and otherwise it will belong to HNC.
For purposes of the foregoing:
- any of our directors who is chairman of our board of directors or one of
its committees will not be considered to be one of our officers, unless
the person is one of our full-time employees; and
- the terms "we", "us" and "our" mean Retek Inc. and all corporations,
partnerships, joint ventures, associations and other entities in which
it beneficially owns (directly or indirectly) 50% or more of the
outstanding voting stock, voting power, partnership interest or similar
voting interests; and
- the term "HNC" means HNC Software Inc. and all corporations,
partnerships, joint ventures, associations and other entities (other
than us) in which HNC beneficially owns (directly or indirectly) 50% or
more of the outstanding voting stock, voting power, partnership
interests or similar voting interests.
These provisions will expire on the date that HNC ceases to own
beneficially stock representing at least 20% of the total voting power of all of
our outstanding common stock and no person who is one of our directors or
officers is also a director or officer of HNC or any of its subsidiaries (other
than us).
In addition to any vote of the stockholders required by our certificate of
incorporation, until the time that HNC ceases to own beneficially stock
representing at least 20% of the total voting power of all classes of our
outstanding common stock, the affirmative vote of the holders of more than 80%
of the total voting power of all classes of outstanding common stock is required
to alter, amend or repeal in a manner adverse to the interests of HNC and its
subsidiaries (other than us), or adopt any provision adverse to the interests
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of HNC and its subsidiaries (other than us), or inconsistent with, the corporate
opportunity provisions described above in our certificate of incorporation or
bylaws.
Any person purchasing or otherwise acquiring our common stock will be
deemed to have notice of, and to have consented to, the foregoing provisions
regarding corporate opportunities.
CHARTER PROVISIONS AND DELAWARE LAWS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT
The provisions of our certificate of incorporation and bylaws summarized
below may be deemed to have an anti-takeover effect and may delay, discourage or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in its best interest, including attempts that might result in a premium being
paid over the market price of our common stock.
BOARD OF DIRECTORS
Number of directors. Before the date on which HNC and its affiliates cease
to beneficially own at least a majority of the then outstanding shares of our
common stock, which we refer to as the trigger date, our board of directors will
consist of seven members. After the trigger date, the board of directors may
consist of not less than three and not more than 10 directors, with the exact
number to be determined by the board of directors. Our current board of
directors has seven members. The directors, other than those elected by the
holders of any designated and issued preferred stock with different voting
rights, will be classified, with respect to the time they hold office, into
three classes, each class to consist, as nearly as possible, of one-third of the
total number of the then authorized directors. Messrs. Terbeek's and Watson's
terms of office will expire at the annual meeting of stockholders in 2000,
Messrs. Buchanan's and Buckenham's terms of office will expire at the annual
meeting of stockholders in 2001 and Messrs. Carey's, Gaylord's and Hart's terms
of office will expire at the annual meeting of stockholders in 2002. Each
director will hold office until such person's successor is duly elected and
qualified.
Removal of directors. Before the trigger date, directors may be removed
with or without cause at any time by vote of the recordholders of a majority of
our capital stock then entitled to vote at an election of directors. Prior to
the trigger date, directors may be removed with or without cause. Under the
terms of the corporate rights agreement, HNC will agree that it will not vote,
or take any action, to remove without cause any director, except a HNC board
designee. After the trigger date, directors may be removed only for cause.
Filling vacancies. Our certificate of incorporation and bylaws provide
that, subject to any rights of holders of any designated and issued preferred
stock or the terms of any contract, including the corporate rights agreement, to
which we are bound, any vacancy occurring on the board of directors caused by
death, resignation, increase in the number of directors or any other vacancy
occurring on the board of directors may be filled only by the vote of the
majority of the directors then in office even if less than a quorum, provided
that following the appointment, at least three of the directors are nominees of
HNC. Any director so elected or appointed will hold office for the remainder of
the full term of the class of director in which the new directorship was created
and until his or her successor is elected and qualified. No decrease in the
number of directors will shorten the term of any incumbent director.
The provisions of the corporate documents described above would preclude a
third party from removing incumbent directors and simultaneously gaining control
of our board of directors by filling the vacancies created by removal with its
own nominees. Under the classified board provision described above, it would
take at least two elections of directors for any individual or group to gain
control of our board of directors. Accordingly, these provisions could
discourage a third party from initiating a proxy contest, making a tender offer
or otherwise attempting to gain control of us.
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NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETING
After the trigger date, any action required or permitted to be taken by the
stockholders may be effected only at a duly called annual or special meeting of
stockholders and may not be effected by a written consent of stockholders in
lieu of such a meeting. After the trigger date, except as otherwise required by
law and subject to the rights of the holders of any preferred stock, special
meetings of stockholders for any purpose may be called only by the chairman of
our board of directors, our president or at the request in writing of a majority
of our board of directors and the power of stockholders to call a special
meeting is specifically denied. Before the trigger date, we will call a special
meeting of stockholders promptly upon the request of HNC.
These provisions may have the effect of delaying consideration of a
stockholder proposal until the next annual meeting unless a special meeting is
called by our board of directors or specified officers.
ADVANCE NOTICE PROCEDURES
Stockholders must follow an advance notice procedure for the nomination,
other than by or at the direction of our board of directors, of candidates for
election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, we will have to
receive written notice of intent to nominate a director or raise matters at an
annual meeting not less than 60 nor more than 90 days before the anniversary of
the previous year's annual meeting of stockholders. The notice must contain
information concerning the person to be nominated or the matters to be brought
before the meeting and concerning the stockholder submitting the proposal. If
the chairman of a meeting determines that an individual was not nominated, or
other business was not brought before the meeting, in accordance with the
advance notice procedures, the individual will not be eligible for election as a
director, or the business will not be conducted at the meeting, as the case may
be.
The advance notice procedures do not apply to HNC and its affiliates prior
to the trigger date.
CHARTER AMENDMENTS
Our certificate of incorporation will provide that after the trigger date
the affirmative vote of the holders of at least 80% of the outstanding shares of
our common stock is required to amend, repeal or adopt any provision
inconsistent with the provisions described above. Our certificate of
incorporation further provides that after the trigger date specified provisions
of our bylaws may be altered, amended or repealed by the affirmative vote of
directors constituting not less than a majority of our entire board of directors
(if effected by action of our board of directors) or by the affirmative vote of
the holders of at least 80% of the voting power of all classes of outstanding
capital stock, voting together as a single class (if effected by action of the
stockholders). In addition, under the terms of the corporate rights agreement,
we will agree that until the trigger date, any changes to our certificate of
incorporation or bylaws that would harm HNC's rights must be approved by at
least two of HNC's board designees and by HNC as our majority stockholder.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law provides that, subject
to specified exceptions, an "interested stockholder" of a Delaware corporation
shall not engage in any business combination, including mergers or
consolidations or acquisitions of additional shares of the corporation, with the
corporation for a three-year period following the date that the stockholder
becomes an interested stockholder unless:
- before that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding certain shares), or
- on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders by the affirmative
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vote of at least 66 2/3% of the outstanding voting stock of the
corporation that is not owned by the interested stockholder.
Except as otherwise specified in Section 203, an interested stockholder is
defined to include:
- any person that is the owner of 15% or more of the outstanding voting
securities of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately
before the date of determination, and
- the affiliates and associates of any such person.
Section 203 may make it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. Once HNC or its successors own less than
50% of our outstanding voting stock, Section 203 will apply to us. The
provisions of Section 203 may encourage persons interested in acquiring us to
negotiate in advance with our board of directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves either the business combination or the transaction that results in any
person becoming an interested stockholder. Section 203 also may have the effect
of preventing changes in our management. It is possible that Section 203 could
make it more difficult to accomplish transactions that our stockholders may
otherwise deem to be in their best interests.
LIMITATION OF LIABILITY
Our certificate of incorporation provides that none of our directors will
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by law for liability
- for breach of the director's duty of loyalty to us or our stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- for unlawful payments of dividends, stock purchases or redemptions, or
- for any transaction from which the director derived an improper personal
benefit.
Neither the amendment or repeal of this provision will eliminate or reduce
its application to any matter occurring, or any cause of action, suit or claim
that, but for this provision, would accrue or arise before its amendment or
repeal. While our certificate of incorporation provides directors with
protection from monetary damages for breaches of their duty of care, it does not
eliminate the duty of care. Therefore, our certificate of incorporation will not
affect the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care.
LISTING
We have applied for listing our common stock on The Nasdaq National Market
under the symbol "RETK."
TRANSFER AGENT AND REGISTRANT
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services located at 85 Challenger Rd., Ridgefield Park, New Jersey
07660. Its phone number is (201) 296-4000.
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<PAGE> 84
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no market for our common stock. A
significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of our common stock in
the public market following this offering, including shares issued upon exercise
of outstanding options or options that may be granted after this offering, could
harm market prices and could impair our ability to raise capital through sale of
our equity securities. As described below, less than 11.1% of our shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price of our common stock and our ability
to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 45,000,000
shares of common stock, or 45,750,000 shares if the underwriters exercise their
over-allotment option in full. Of these outstanding shares, 5,000,000 shares, or
5,750,000 shares if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction under the Securities Act,
except for shares purchased by our "affiliates," as that term is defined in Rule
144 under the Securities Act. Any shares purchased by our affiliates generally
may be sold in compliance with Rule 144 as described below.
The 40,000,000 shares of our common stock held by HNC after this offering
are "restricted securities" within the meaning of Rule 144. The shares held by
HNC will be subject to contractual restrictions on resale based on the lock-up
agreements described below. Further, since the shares held by HNC are restricted
securities, HNC may not sell them unless they are registered under the
Securities Act or an exemption from registration is available.
HNC, Retek and our officers and directors have entered into lock-up
agreements or other contractual restrictions providing that the stockholder will
not offer, sell, contract to sell or otherwise dispose of any shares of our
common stock for a period of 180 days after the date of this prospectus, without
the prior written consent of Credit Suisse First Boston Corporation. As a result
of these lock-up agreements and other contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rule 144, none of
these shares will be resellable until 181 days after the date of this
prospectus. Credit Suisse First Boston Corporation may, in its sole discretion
and at any time without notice, release any portion of the securities subject to
lock-up agreements or other contractual restrictions.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate of us, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 450,000 shares immediately after this offering;
or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 in connection with the
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
ours at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Within 90 days following the effectiveness of this offering, we will file a
registration statement on Form S-8 to register shares of our common stock
subject to outstanding options or reserved for future issuance under our stock
plans. As of October 31, 1999, options to purchase approximately 6,740,000
shares of our common stock were outstanding and approximately 2,660,000 shares
of our common stock
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<PAGE> 85
were reserved for future issuance under our stock plans. The common stock issued
upon exercise of outstanding vested options, other than common stock issued to
our affiliates, will be available for immediate resale in the open market.
REGISTRATION RIGHTS
At any time more than six months after the closing of this offering, HNC
and specified affiliates of HNC, who are holders of 40,000,000 shares of our
common stock, will be entitled to rights with respect to the registration of
those shares under the Securities Act. Registration of those shares under the
Securities Act would result in those shares becoming freely tradable without
restriction under the Securities Act, except for shares purchased by affiliates,
immediately upon effectiveness of registration.
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<PAGE> 86
MATERIAL UNITED STATES FEDERAL TAX
CONSEQUENCES TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of common
stock that may be relevant to you if you are a non-United States holder. In
general, a "non-United States Holder" is a person or entity that is, for United
States federal income tax purposes, a foreign corporation, a nonresident alien
individual, a foreign partnership or a foreign estate or trust. This discussion
is based on current law, which is subject to change, possibly with retroactive
effect, or different interpretations. This discussion is limited to non-United
States Holders who hold shares of common stock as capital assets. Moreover, this
discussion is for general information only and does not address all of the tax
consequences that may be relevant to you in light of your personal
circumstances, nor does it discuss special tax provisions that may apply to you
if you relinquished United States citizenship or residence.
If you are an individual, you may, in many cases, be treated as a resident
alien, as opposed to a nonresident alien, by virtue of being present in the
United States for at least 31 days in the calendar year and for a total of at
least 183 days during a three-year period ending in the current calendar year
counting for these purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year. Resident aliens are subject to
United States federal income tax as if they were United States citizens.
EACH PROSPECTIVE PURCHASER OF OUR COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY UNITED STATES STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
DIVIDENDS
If dividends are paid, as a non-United States Holder, you will be subject
to withholding of United States federal income tax at a 30% rate or a lower rate
as may be specified by an applicable income tax treaty. To claim the benefit of
a lower rate under an income tax treaty, you must properly file with the payor
an IRS Form 1001, or successor form, claiming an exemption from or reduction in
withholding under the applicable tax treaty.
If dividends are considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of yours,
those dividends will not be subject to withholding tax, but instead will be
subject to United States federal income tax on a net basis at applicable
graduated individual or corporate rates, provided an IRS Form 4224, or successor
form, is filed with the payor. If you are a foreign corporation, any effectively
connected dividends may, under specified circumstances, be subject to an
additional "branch profits tax" at a 30% rate or a lower rate as may be
specified by an applicable income tax treaty.
Unless the payor has knowledge to the contrary, dividends paid before
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of that country for purposes of the withholding discussed above
and for purposes of determining the applicability of a tax treaty rate. However,
recently finalized Treasury Regulations pertaining to United States federal
withholding tax provide that you must comply with certification procedures, or,
in the case of payments made outside the United States with respect to an
offshore account, documentary evidence procedures, directly or under specified
circumstances through an intermediary, to obtain the benefits of a reduced rate
under an income tax treaty with respect to dividends paid after December 31,
2000. In addition, these regulations will require you, if you provide an IRS
Form 4224 or successor form, as discussed above, to provide your identification
number.
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<PAGE> 87
If you are eligible for a reduced rate of United States withholding tax
under an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
As a non-United States Holder, you generally will not be subject to United
States federal income tax on any gain recognized on the sale or other
disposition of common stock unless:
(1) the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax
treaty applies, is attributable to a United States permanent
establishment of yours (and, in which case, if you are a foreign
corporation, you may be subject to an additional branch profits tax
equal to 30% or a lower rate as may be specified by an applicable
income tax treaty);
(2) you are an individual who holds the common stock as a capital asset
and are present in the United States for 183 or more days in the
taxable year of the sale or other disposition and other conditions are
met; or
(3) we are or have been a "United States real property holding
corporation," or a USRPHC, for United States federal income tax
purposes. We believe that we are not currently, and are likely not to
become, a USRPHC. If we were to become a USRPHC, then gain on the sale
or other disposition of common stock by you generally would not be
subject to United States federal income tax provided:
- the common stock was "regularly traded" on an established securities
market; and
- you do not actually or constructively own more than 5% of the common
stock during the shorter of the five-year period preceding the
disposition or your holding period.
FEDERAL ESTATE TAX
If you are an individual, common stock held at the time of your death will
be included in your gross estate for United States federal estate tax purposes,
and may be subject to United States federal estate tax, unless an applicable
estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the Internal Revenue Service and to each of you
the amount of dividends paid to you and the tax withheld with respect to those
dividends, regardless of whether withholding was required. Copies of the
information returns reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty or other applicable agreements.
Backup withholding is generally imposed at the rate of 31% on payments to
persons that fail to furnish the necessary identifying information to the payor.
Backup withholding generally will not apply to dividends paid before January 1,
2001 to a non-United States Holder at an address outside the United States,
unless the payor has knowledge that the payee is a United States person. In the
case of dividends paid after December 31, 2000, the recently finalized Treasury
Regulations provide that you generally will be subject to withholding tax at a
31% rate unless you certify your non-United States status.
The payment of proceeds of a sale of common stock effected by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless you provide the payor with your name and address
and you certify your non-United States status or you otherwise establish an
exemption. In general, backup withholding and information reporting will not
apply to the payment of the
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<PAGE> 88
proceeds of a sale of common stock by or through a foreign office of a broker.
If, however, the broker is, for United States federal income tax purposes, a
United States person, a controlled foreign corporation, or a foreign person that
derives 50% or more of its gross income from the conduct of a trade or business
in the United States, or, in addition, for periods after December 31, 2000, a
foreign partnership that at any time during its tax year either is engaged in
the conduct of a trade or business in the United States or has as partners one
or more United States persons that hold more than 50% of the income or capital
interest in the partnership, the payments will be subject to information
reporting, but not backup withholding, unless the broker has documentary
evidence in its records that you are a non-United States Holder and other
conditions are met or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against the United States federal income tax
liability, provided the required information is furnished in a timely manner to
the IRS.
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<PAGE> 89
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse FirstBoston Corporation, BancBoston
Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
BancBoston Robertson Stephens Inc...........................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total..................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or this
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions payable by us................... $ $ $ $
Expenses payable by us...................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and our stockholder have agreed that we and
they will not offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our common stock, or
publicly disclose the intention to make any such offer, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in our case for issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.
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<PAGE> 90
The underwriters have reserved for sale, at the initial public offering
price up to 500,000 shares of the common stock for employees, directors and
certain other persons associated with us or HNC who have expressed an interest
in purchasing common stock in this offering. The number of shares available for
sale to the general public in this offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect. In addition, HNC has agreed to indemnify the
underwriters against those liabilities, but only to the extent indemnification
by us is unavailable or insufficient.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "RETK."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors that will be considered
in determining the public offering price include:
- the information set forth in this prospectus and otherwise available to
the underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives on behalf of the underwriters may engage in
overallotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Overallotment involves syndicate sales in excess of this offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
87
<PAGE> 91
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATION OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, that the purchaser is purchasing as principal and not as agent, and (3)
the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer and these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
88
<PAGE> 92
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed upon for Retek by Shearman & Sterling, Menlo Park, California. Other
legal matters will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The combined financial statements of Retek Inc. and Retek Information
Systems, Inc. as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
89
<PAGE> 93
WHERE TO FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission with respect to the common stock offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information in the registration statement
or the exhibits and schedules that are part of the registration statement. For
further information on Retek and the common stock we are offering, reference is
made to the registration statement and the exhibits filed as a part of the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or any other document referred to may be only summaries
of these documents. The exhibits to this registration statement should be
referenced for the complete contents of these contracts and documents. Each
statement is qualified by reference to the exhibit. The registration statement,
including the exhibits, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's regional offices located in New
York, New York and Chicago, Illinois. Copies of all or any part of the
registration statement may be obtained from these offices after payment of fees
prescribed by the Commission. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Commission also maintains
a Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with this law, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the web site of the SEC referred to above.
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<PAGE> 94
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.:
Report of Independent Accountants........................... F-2
Combined Balance Sheet as of December 31, 1997 and 1998, and
September 30, 1999 (unaudited)............................ F-3
Combined Statement of Income for the years ended December
31, 1996, 1997 and 1998 and for the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-4
Combined Statement of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999 (unaudited)............. F-5
Combined Statement of Changes in Stockholder's Equity and
Comprehensive Income for the years ended December 31,
1996, 1997 and 1998, and for the nine months ended
September 30, 1999 (unaudited)............................ F-6
Notes to Combined Financial Statements...................... F-7
RETEK LOGISTICS, INC.:
Report of Independent Accountants........................... F-24
Balance Sheet as of December 31, 1996 and 1997, and March
31, 1998.................................................. F-25
Statement of Operations for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 (unaudited) and for the three months ended March 31,
1998...................................................... F-26
Statement of Cash Flows for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 (unaudited) and for the three months ended March 31,
1998...................................................... F-27
Statement of Changes in Stockholders' Equity and
Comprehensive Income for the years ended December 31, 1996
and 1997 and for the three months ended March 31, 1998.... F-28
Notes to Financial Statements............................... F-29
PRO FORMA COMBINED FINANCIAL INFORMATION OF RETEK INC. AND
RETEK INFORMATION SYSTEMS INC.:
Pro Forma Combined Statement of Income for the year ended
December 31, 1998......................................... F-37
Notes to Pro Forma Combined Statement of Income............. F-38
</TABLE>
F-1
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
In our opinion, the accompanying combined balance sheet and the related combined
statements of income, of cash flows and of changes in stockholder's equity and
comprehensive income present fairly, in all material respects, the combined
financial position of Retek Inc. (formerly Retek Logistics, Inc.) and Retek
Information Systems, Inc. and its subsidiaries (collectively the "Company") at
December 31, 1997 and 1998, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
September 9, 1999
F-2
<PAGE> 96
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
STOCKHOLDER'S EQUITY
DECEMBER 31, --------------------
----------------- UNAUDITED
1997 1998 UNAUDITED (NOTE 1)
------- ------- ------------- --------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 2,469 $ 415 $ 499
Accounts receivable, net.................. 11,972 22,050 30,364
Current portion of deferred income
taxes.................................. 2,706 2,972 3,233
Other current assets...................... 1,158 2,706 2,690
------- ------- -------
Total current assets................... 18,305 28,143 36,786
Deferred income taxes, less current
portion................................... 15,455 13,960 13,381
Property and equipment, net................. 3,006 4,887 6,949
Intangible assets, net...................... 1,130 4,010 2,917
Other assets................................ -- 283 33
------- ------- -------
$37,896 $51,283 $60,066
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................... $ 3,212 $ 3,289 $ 4,369
Accrued liabilities....................... 2,140 2,970 2,487
Deferred revenue.......................... 1,446 3,064 2,625
Payable to HNC Software Inc............... 6,491 5,944 9,505
------- ------- -------
Total current liabilities.............. 13,289 15,267 18,986
Commitments and contingencies (Notes 3 and
7)
Stockholder's equity:
Retek Inc.:
Common stock, $0.01 par value -- 1,000
shares authorized, 150,000,000 pro
forma; 1,000 shares issued and
outstanding actual, 40,000,000 shares
issued and outstanding pro forma..... -- -- -- $ 400
Preferred stock, $0.01 par value -- no
shares authorized, 5,000,000 pro
forma; no shares issued and
outstanding actual and pro forma..... -- -- -- --
Paid-in capital........................ -- 6,564 6,564 26,644
Retek Information Systems, Inc.:
Common stock, $1.00 par value -- 1,000
shares authorized; 100 shares issued
and outstanding actual, no shares
issued and outstanding pro forma..... -- -- -- --
Paid-in capital........................ 19,230 20,290 20,480 --
Accumulated other comprehensive loss...... (95) (188) (407) (407)
Retained earnings......................... 5,472 9,350 14,443 14,443
------- ------- ------- -------
Total stockholder's equity............. 24,607 36,016 41,080 $41,080
------- ------- ------- =======
$37,896 $51,283 $60,066
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE> 97
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License and maintenance....................... $ 9,740 $28,895 $42,753 $30,913 $41,392
Services and other............................ 3,693 2,028 12,280 8,916 16,367
------- ------- ------- ------- -------
Total revenue.............................. 13,433 30,923 55,033 39,829 57,759
------- ------- ------- ------- -------
Cost of revenue:
License and maintenance....................... 1,797 2,747 4,349 3,075 4,079
Services and other............................ 2,082 898 9,503 6,966 11,642
------- ------- ------- ------- -------
Total cost of revenue...................... 3,879 3,645 13,852 10,041 15,721
------- ------- ------- ------- -------
Gross profit............................... 9,554 27,278 41,181 29,788 42,038
Operating expenses:
Research and development...................... 4,829 9,485 12,918 9,301 14,749
Sales and marketing........................... 1,892 8,261 14,075 10,263 12,948
General and administrative.................... 1,415 2,913 3,921 2,994 4,076
Acquired in-process research and
development................................ -- -- 1,750 1,750 --
Acquisition related amortization of
intangibles................................ -- -- 429 286 780
------- ------- ------- ------- -------
Total operating expenses................... 8,136 20,659 33,093 24,594 32,553
------- ------- ------- ------- -------
Operating income................................ 1,418 6,619 8,088 5,194 9,485
Other income (expense), net..................... -- 24 11 19 (330)
------- ------- ------- ------- -------
Income before income tax (benefit)
provision.................................. 1,418 6,643 8,099 5,213 9,155
Income tax (benefit) provision.................. (815) 3,167 4,221 3,042 4,062
------- ------- ------- ------- -------
Net income.................................... $ 2,233 $ 3,476 $ 3,878 $ 2,171 $ 5,093
======= ======= ======= ======= =======
Pro forma unaudited basic and diluted net income
per common share (Note 1)..................... $ 0.10 $ 0.13
======= =======
Shares used in computing pro forma unaudited
basic and diluted net income per common share
(Note 1)...................................... 40,000 40,000
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE> 98
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 2,233 $ 3,476 $ 3,878 $ 2,171 $ 5,093
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............. 309 212 1,652 224 1,899
Depreciation and amortization............... 804 1,266 2,420 1,700 2,782
Acquired in-process research and
development.............................. -- -- 1,750 1,750 --
Deferred income tax expense................. (1,255) 1,971 753 1,714 318
Tax benefit from stock option
transactions............................. 18 815 1,060 530 190
Changes in assets and liabilities:
Accounts receivable...................... (3,632) (5,915) (10,814) (7,028) (10,430)
Other assets............................. (430) (869) (1,736) 404 171
Accounts payable......................... 1,000 1,567 185 582 1,080
Accrued liabilities...................... 1,118 726 532 (71) (483)
Deferred revenue......................... 848 580 1,205 (207) (439)
Other liabilities........................ (279) -- -- -- --
------- ------- -------- -------- --------
Net cash provided by operating
activities.......................... 734 3,829 885 1,769 181
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash purchased in business acquisition...... -- -- 559 559 --
Acquisitions of property and equipment...... (281) (3,101) (2,938) (2,282) (3,656)
------- ------- -------- -------- --------
Net cash used in investing
activities.......................... (281) (3,101) (2,379) (1,723) (3,656)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt........................... (1,464) -- -- -- --
Borrowings from HNC Software Inc. .......... 1,950 5,467 41,747 29,045 46,892
Repayments to HNC Software Inc. ............ -- (5,173) (42,294) (30,259) (43,331)
------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities................ 486 294 (547) (1,214) 3,561
------- ------- -------- -------- --------
Effect of exchange rate changes on cash....... (3) (12) (13) 11 (2)
------- ------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 936 1,010 (2,054) (1,157) 84
Cash and cash equivalents at beginning of
period...................................... 523 1,459 2,469 2,469 415
------- ------- -------- -------- --------
Cash and cash equivalents at end of period.... $ 1,459 $ 2,469 $ 415 $ 1,312 $ 499
======= ======= ======== ======== ========
SIGNIFICANT NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Assets purchased through issuance of debt... $ 4,710 $ -- $ -- $ -- $ --
======= ======= ======== ======== ========
Repayment of debt by HNC Software Inc....... $ 3,246 $ -- $ -- $ -- $ --
======= ======= ======== ======== ========
Net assets acquired through issuance of HNC
Software Inc. stock...................... $ -- $ -- $ 6,564 $ -- $ --
======= ======= ======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid........................... $ -- $ 3 $ 67 $ 45 $ 154
======= ======= ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE> 99
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETEK INFORMATION
RETEK INC. SYSTEMS, INC.
--------------- ------------------------- ACCUMULATED (ACCUMULATED
COMMON STOCK COMMON STOCK OTHER DEFICIT) TOTAL
--------------- --------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS EQUITY
------ ------ ------ ------ ------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995....... -- $ -- -- $ -- $ -- $ -- $ (237) $ (237)
Tax benefit from stock options..... 18 18
Tax benefit from taxable pooling
(Note 4)......................... 18,397 18,397
Foreign currency translation
adjustment....................... 58 58
Net income......................... 2,233 2,233
------ ------ --- ------ ------- ----- ------- -------
BALANCE AT DECEMBER 31, 1996....... -- -- -- -- 18,415 58 1,996 20,469
Tax benefit from stock options..... 815 815
Foreign currency translation
adjustment....................... (153) (153)
Net income......................... 3,476 3,476
------ ------ --- ------ ------- ----- ------- -------
BALANCE AT DECEMBER 31, 1997....... -- -- -- -- 19,230 (95) 5,472 24,607
Acquisition of Retek Inc. by HNC
Software Inc..................... 1 6,564 6,564
Tax benefit from stock options..... 1,060 1,060
Foreign currency translation
adjustment....................... (93) (93)
Net income......................... 3,878 3,878
------ ------ --- ------ ------- ----- ------- -------
BALANCE AT DECEMBER 31, 1998....... 1 6,564 -- -- 20,290 (188) 9,350 36,016
Tax benefit from stock options
(unaudited)...................... 190 190
Foreign currency translation
adjustment (unaudited)........... (219) (219)
Net income (unaudited)............. 5,093 5,093
------ ------ --- ------ ------- ----- ------- -------
BALANCE AT SEPTEMBER 30, 1999
(UNAUDITED)...................... 1 $6,564 -- $ -- $20,480 $(407) $14,443 $41,080
====== ====== === ====== ======= ===== ======= =======
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
BALANCE AT DECEMBER 31, 1995.......
Tax benefit from stock options.....
Tax benefit from taxable pooling
(Note 4).........................
Foreign currency translation
adjustment....................... $ 58
Net income......................... 2,233
-------
BALANCE AT DECEMBER 31, 1996....... $ 2,291
=======
Tax benefit from stock options.....
Foreign currency translation
adjustment....................... $ (153)
Net income......................... 3,476
-------
BALANCE AT DECEMBER 31, 1997....... $ 3,323
=======
Acquisition of Retek Inc. by HNC
Software Inc.....................
Tax benefit from stock options.....
Foreign currency translation
adjustment....................... $ (93)
Net income......................... 3,878
-------
BALANCE AT DECEMBER 31, 1998....... $ 3,785
=======
Tax benefit from stock options
(unaudited)......................
Foreign currency translation
adjustment (unaudited)........... $ (219)
Net income (unaudited)............. 5,093
-------
BALANCE AT SEPTEMBER 30, 1999
(UNAUDITED)...................... $ 4,874
=======
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE> 100
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Retek Inc. (formerly Retek Logistics, Inc.) and Retek Information Systems,
Inc. (collectively referred to as the "Company" or "Retek") are wholly owned
subsidiaries of HNC Software Inc. ("HNC"). Retek Inc. was acquired by HNC in
March 1998 in a transaction that was accounted for under the purchase method of
accounting by HNC. Retek Information Systems, Inc. was acquired by HNC in
November 1996 in a transaction that was accounted for under the
pooling-of-interests method of accounting by HNC. In April 1997, Neil Thall
Associates, Inc. ("NTA"), formerly a wholly owned subsidiary of HNC, which was
formed in 1991, was merged with the business of Retek Information Systems, Inc.
Retek Inc. and Retek Information Systems, Inc. are headquartered in Minneapolis,
Minnesota.
Retek Inc. develops warehouse management software solutions. Retek
Information Systems, Inc., markets and supports management decision software
products for retailers and their vendors. These predictive software solutions
employ proprietary neural-network predictive decision engines, profiles,
traditional statistical modeling, business models, expert rules and context
vectors to convert existing data and business experiences into meaningful
recommendations and actions.
Basis of Presentation
The combined financial statements reflect the combined financial position,
results of operations and cash flows of the companies as if Retek Inc. and Retek
Information Systems, Inc. were combined. The combined financial statements
include the accounts of Retek Inc. for the periods after its acquisition by HNC
in March 1998 and the accounts of Retek Information Systems, Inc. and its wholly
owned subsidiaries for all periods presented. The combined financial statements
also include the financial position, results of operations and cash flows of NTA
for all periods presented. The financial statements have been prepared using
HNC's historical basis in the assets and liabilities and historical results of
operations of each of the entities which comprise the Company's business. All
significant intercompany transactions and balances have been eliminated.
General corporate overhead related to HNC's corporate headquarters and
common support divisions have been allocated to the Company based on the
proportion of the Company's revenues and headcount to HNC's consolidated
revenues and headcount. Management believes these allocations reasonably
approximate the costs incurred by HNC on behalf of the Company's operations and
the costs that would have been incurred if the Company had performed these
functions as a stand-alone entity. Subsequent to the sale of a minority interest
in the Company through a public offering, the Company expects to have its own
staff perform necessary functions using its own resources or purchased services
and will be responsible for the costs and expenses associated with the
management of a separate publicly held corporation.
The Company's financing activities are represented by cash transactions
with HNC and are reflected in the payable to HNC Software Inc. Activity in the
payable to HNC Software Inc. primarily relates to cash activity with HNC as well
as cost allocations and other intercompany charges to the Company from HNC.
The financial information included herein may not necessarily reflect the
combined results of operations, financial position, results of operations and
cash flows of the Company in the future or what it would have been had it been a
stand-alone separate entity from HNC during the periods presented.
F-7
<PAGE> 101
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma information presents the combined results
of operations of the Company as if the acquisition of Retek Inc. by HNC had
occurred on January 1, 1997 and 1998. Total net income for the year ended
December 31, 1998 includes $1,750 of acquired in-process research and
development expense from the acquisition of Retek Inc. by HNC and reduced the
pro forma basic and diluted net income per common share for the year by
approximately $0.04 per share.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Total revenues.............................................. $36,009 $56,264
Total net income............................................ $ 2,555 $ 3,234
Pro forma basic and diluted net income per common share..... $ -- $ 0.08
</TABLE>
The above unaudited pro forma information is not necessarily indicative of
the combined results of operations that would have occurred had the purchase
been made at the beginning of the periods presented or the future results of the
combined operations.
Financial Statement Preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid investments and consist of investments
in money market accounts and commercial paper purchased with maturities of three
months or less.
Property and Equipment
Property and equipment are recorded at cost. The Company recognizes
depreciation and amortization expense using the straight-line method over the
estimated useful lives of the assets of three to seven years. The Company
amortizes leasehold improvements over the shorter of their estimated useful
lives or the remaining term of the related lease. Repair and maintenance costs
are charged to expense as incurred. Depreciation and amortization expense of
property and equipment was $162, $569 and $1,268 for the years ended December
31, 1996, 1997 and 1998, respectively, and $888 and $1,594 for the nine months
ended September 30, 1998 and 1999 (unaudited), respectively.
Capitalized Software
Development costs for software to be licensed or sold that are incurred
from the time technological feasibility is established until the product is
available for general release to customers are capitalized and reported at the
lower of cost or net realizable value. Through September 30, 1999, no
significant amounts were expended subsequent to reaching technological
feasibility.
F-8
<PAGE> 102
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Intangible Assets
Retek Inc. was acquired by HNC in exchange for 143 shares of HNC common
stock, 14 of which are subject to an escrow to secure certain indemnification
obligations of the former stockholders plus the contingent right, subject to the
achievement of certain financial objectives during calendar 1998 and 1999, to
receive certain additional shares of HNC common stock. In April 1999, HNC issued
an additional 45 shares of HNC common stock for the achievement of these
financial objectives during calendar 1998, which was recorded as an addition to
goodwill of $1,476 in the combined financial statements in 1998. However, if
such financial objectives are achieved by Retek Inc. during calendar year 1999
and additional shares of HNC common stock are issued, such issuance will not be
reflected in the financial position or results of operations of the Company in
the future if HNC's share of ownership of the Company at the time of the
issuance is less than 95%. If HNC continues to own 100% of the Company, such
issuance will be reflected as an increase in intangible assets. The application
of the purchase method of accounting for the acquisition resulted in an excess
of cost over net assets acquired of approximately $6,564, of which $4,031 has
been allocated to intangible assets and $1,750 has been allocated to in-process
research and development.
In conjunction with the purchase, the Company recorded various intangible
assets. Intangible assets are comprised of purchased software and other rights
that are stated at lower of cost or net realizable value. Intangible assets are
amortized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE AMORTIZATION METHOD
------------- -------------------
<S> <C> <C>
Purchased software costs.................................. Straight-line 36 to 42 months
Assembled work force...................................... Straight-line 3 years
Customer base............................................. Straight-line 5 years
Trademarks................................................ Straight-line 5 years
Goodwill.................................................. Straight-line 5 years
</TABLE>
Amortization expense of intangible assets was $642, $809, and $1,152 for
the years ended December 31, 1996, 1997 and 1998, respectively, and $812 and
$1,188 for the nine months ended September 30, 1998 and 1999 (unaudited),
respectively.
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
certain identifiable intangibles and associated goodwill when events or changes
in circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized if the sum of the expected future net cash
flows were less than the carrying amount of the asset. No such impairments of
long-lived assets existed through September 30, 1999.
Revenue Recognition
The Company recognizes software license revenue upon meeting each of the
following criteria: execution of a written purchase order, license agreement or
contract; delivery of software and authorization keys; the license fee is fixed
and determinable; collectibility of the proceeds is assessed as being probable;
and vendor specific objective evidence exists to allocate the total fee to
elements of the arrangement. Vendor-specific objective evidence is based on the
price charged when an element is sold separately, or if not yet sold separately,
is established by authorized management. All elements of each order are valued
at
F-9
<PAGE> 103
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the time of revenue recognition. For sales made through distributors, resellers
and original equipment manufacturers, the Company recognizes revenue at the time
these partners report to the Company that they have sold the software to the end
user and all revenue recognition criteria have been met. Service revenue
includes maintenance revenue, which is deferred and recognized ratably over the
maintenance period, and revenue from consulting and training services, which is
recognized as services are performed. Consulting services are customarily billed
at a fixed daily rate plus out-of-pocket expenses.
The Company's revenue from contract development services is generally
recognized as the services are performed using the percentage of completion
method based on costs incurred to date compared to total estimated costs at
completion. Amounts received under contracts in advance of performance are
recorded as deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period such
losses are first identified. Unbilled accounts receivable are stated at
estimated realizable value.
Deferred revenue consists primarily of deferred maintenance revenue.
During the first quarter of 1998, the Company adopted Statement of Position
No. 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 provides
guidance for software revenue recognition. The adoption of SOP 97-2 did not have
a significant impact on the Company's combined financial position or results of
operations. During the second quarter of 1998, the Company adopted Statement of
Position No. 98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition." This SOP defers for one year the
application of several passages in SOP 97-2. The adoption of SOP 98-4 did not
have a significant impact on the Company's combined financial position or
results of operations.
Income Taxes
The taxable income or loss of the Company is included in the consolidated
tax return of HNC. Income taxes are computed on a stand-alone basis under the
provisions of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." In accordance with HNC's policy, the current tax receivable or payable
is included in the amount due to or due from HNC. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount "more likely than not" to be realized in
future tax returns. Tax rate changes are reflected in income during the period
such changes are enacted.
Foreign Currency Translation
The combined financial statements of the Company's international operations
are translated into U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the period for revenues and
expenses. Cumulative translation gains and losses are excluded from the combined
results of operations and are recorded as a separate component of stockholder's
equity. Gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than the entity's local currency)
are included in the combined statement of income and are not material.
F-10
<PAGE> 104
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents and accounts receivable, which
are generally not collateralized. The Company's policy is to place its cash and
cash equivalents with high credit quality financial institutions in order to
limit the amount of its credit exposure. The Company's software license and
installation agreements and commercial development contracts are primarily with
large customers in the retail industries. The Company maintains allowances for
potential credit losses.
Disclosures about Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short-term
maturities of these financial instruments.
Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income." FAS 130 requires the Company to report in the combined financial
statements, in addition to net income, comprehensive income and its components
including foreign currency items and unrealized gains and losses on certain
investments in debt and equity securities. Comprehensive income is defined as
"the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources." It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
Segment Reporting
For the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments
of an Enterprise and Related Information" (see Note 6). This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under FAS 133, all derivatives must be recognized as assets and liabilities and
measured at fair value. In July 1999, the FASB issued Statement of Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" which
defers the effective date to all fiscal quarters of fiscal years beginning after
June 15, 2000. The adoption of FAS 133 is not expected to have a significant
impact on the Company's combined financial position or results of operations.
F-11
<PAGE> 105
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." This SOP
retains the limitations of SOP 97-2 on what constitutes vendor-specific
objective evidence of fair value. SOP 98-9 will be effective for transactions
entered into in fiscal years beginning after March 15, 1999. The adoption of SOP
98-9 is not expected to have a significant impact on the Company's combined
financial position or results of operations.
Net Income Per Share
Historical net income per share is not presented because such amounts are
not determinable due to the presentation of the combined capital structures of
two entities in these financial statements.
Reorganization
In September 1999, Retek Logistics was reincorporated as a Delaware
corporation and renamed Retek Inc. In connection with the reincorporation, each
share of Retek Logistics, Inc.'s common stock was converted to approximately
.000447 shares of Retek Inc.'s common stock. Due to the reorganization, the
outstanding shares have been restated retroactively for all periods since Retek
Inc.'s acquisition by HNC in March 1998.
Pro Forma Financial Data (unaudited)
The unaudited pro forma information presented in the accompanying balance
sheet as of September 30, 1999 reflects the expected contribution of all
outstanding common stock of Retek Information Systems, Inc. to Retek Inc. in
exchange for 39,999,000 common shares of Retek Inc. issued to HNC. In October
1999, the Company amended its certificate of incorporation to authorize the
issuance of 150,000,000 shares of common stock and 5,000,000 shares of preferred
stock.
Pro Forma Net Income Per Share (unaudited)
Pro forma net income per share (unaudited) is calculated based upon the
number of shares of Retek Inc. expected to be outstanding after the issuance of
39,999,000 common shares to HNC for the contribution of all of the outstanding
shares of Retek Information Systems, Inc. The stock options expected to be
issued by Retek Inc. are excluded from the calculation of diluted pro forma net
income per share (unaudited) since their effect would not be dilutive.
Interim Results (unaudited)
The accompanying combined statement of income and the related combined
statement of cash flows for the nine months ended September 30, 1998 and 1999
are unaudited. In the opinion of management, these combined statements have been
prepared on the same basis as the audited combined financial statements included
herein and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair statement of results of the interim periods.
The data disclosed in these notes to combined financial statements for this
period is also unaudited.
F-12
<PAGE> 106
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- COMPOSITION OF CERTAIN COMBINED FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Billed................................................. $ 9,167 $18,735 $28,950
Unbilled............................................... 3,187 4,886 4,854
------- ------- -------
12,354 23,621 33,804
Less allowance for doubtful accounts..................... (382) (1,571) (3,440)
------- ------- -------
$11,972 $22,050 $30,364
======= ======= =======
</TABLE>
The following is a rollforward of the activity within the allowance for
doubtful accounts:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1996 1997 1998 1999
---- ----- ------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ -- $ 299 $ 382 $1,571
Provisions......................................... 309 212 1,652 1,899
Write-offs......................................... (10) (129) (463) (30)
---- ----- ------ ------
Balance at end of period........................... $299 $ 382 $1,571 3,440
==== ===== ====== ======
</TABLE>
F-13
<PAGE> 107
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unbilled accounts receivable represent revenue recorded in excess of
amounts billable pursuant to contract provisions and generally become billable
at contractually specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be collected within one year.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Other current assets:
Other receivables...................................... $ 864 $ 1,976 $ 922
Prepaid expenses....................................... 136 484 1,170
VAT tax receivable..................................... 158 246 598
------- ------- -------
$ 1,158 $ 2,706 $ 2,690
======= ======= =======
Property and equipment, net:
Computer equipment..................................... $ 1,236 $ 3,093 4,831
Furniture and fixtures................................. 1,878 2,943 4,468
Leasehold improvements................................. 532 749 1,137
------- ------- -------
3,646 6,785 10,436
Less accumulated depreciation and amortization......... (640) (1,898) (3,487)
------- ------- -------
$ 3,006 $ 4,887 $ 6,949
======= ======= =======
Intangible assets, net:
Purchased software costs............................... $ 2,472 $ 3,572 $ 3,667
Goodwill............................................... 109 2,362 2,362
Other.................................................. -- 570 570
------- ------- -------
2,581 6,504 6,559
Less accumulated amortization.......................... (1,451) (2,494) (3,682)
------- ------- -------
$ 1,130 $ 4,010 $ 2,917
======= ======= =======
Accrued liabilities:
Payroll and related benefits........................... $ 1,842 $ 2,875 $ 1,764
Other.................................................. 298 95 723
------- ------- -------
$ 2,140 $ 2,970 $ 2,487
======= ======= =======
</TABLE>
F-14
<PAGE> 108
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- COMMITMENTS
At December 31, 1998, the Company was obligated through 2004 under
noncancelable operating leases for its facilities and certain equipment as
follows:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM LESS SUBLEASE MINIMUM LEASE
LEASE PAYMENTS INCOME PAYMENTS
-------------- ------------- -------------
<S> <C> <C> <C>
1999........................................... $1,144 $630 $514
2000........................................... 966 -- 966
2001........................................... 776 -- 776
2002........................................... 770 -- 770
2003........................................... 742 -- 742
2004........................................... 475 -- 475
</TABLE>
The lease for the Company's headquarters provides for two options to extend
the term for five years each with certain changes to the terms of the lease
agreement. Rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 was approximately $132, $229 and $758, respectively, net of
sublease income of $0, $261, and $886, for the years ended December 31, 1996,
1997 and 1998, respectively.
NOTE 4 -- INCOME TAXES
Income before income tax (benefit) provision was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Domestic.................................................... $(1,796) $5,631 $6,276
Foreign..................................................... 3,214 1,012 1,823
------- ------ ------
$ 1,418 $6,643 $8,099
======= ====== ======
</TABLE>
The income tax (benefit) provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
CURRENT:
Federal................................................... $ 389 $ 795 $2,258
State..................................................... -- 168 699
Foreign................................................... 51 233 511
DEFERRED:
Federal................................................... (743) 1,070 489
State..................................................... (215) 722 144
Foreign................................................... (297) 179 120
------- ------ ------
$ (815) $3,167 $4,221
======= ====== ======
</TABLE>
F-15
<PAGE> 109
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Taxable pooling-of-interests basis difference.......... $17,085 $15,857
Net operating loss carryforwards....................... 185 31
Tax credit carryforwards............................... 786 344
Allowance for doubtful accounts........................ 142 631
Depreciation........................................... -- (175)
Intangible assets...................................... -- (462)
Bonus accrual.......................................... -- 306
Commission advances.................................... -- 277
Other.................................................. (37) 123
------- -------
Net deferred tax asset............................... $18,161 $16,932
======= =======
</TABLE>
During 1996, the Company released its deferred tax asset valuation
allowance of $121 that existed at December 31, 1995 related to the Company's
deferred tax based on management's assessment that it was more likely than not
that the Company would realize those assets in future periods due to
improvements in its operating results.
During 1996, the Company made an Internal Revenue Code Section 338 election
for federal and state tax purposes, resulting in the treatment of the
acquisition of Retek Information Systems, Inc. by HNC as a taxable transaction,
whereby the tax bases of the acquired assets and liabilities were adjusted to
their fair values as of the date of the acquisition. As the purchase price
exceeded the carrying value of the net assets acquired by approximately $46,000,
the Company recorded a deferred tax asset in the amount of $18,397.
A reconciliation of the income tax (benefit) provision to the amount
computed by applying the statutory federal income tax rate to income before
income tax (benefit) provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
Amounts computed at statutory federal rate......... $ 482 $2,259 $2,754
State income taxes, net of federal benefit....... (142) 791 740
Tax credit carryforwards generated............... (89) (116) (429)
Release of valuation allowance................... (121)
Non-deductible acquired technology and other non-
deductible acquisition costs.................. -- -- 1,004
Foreign income taxes............................. (950) 68 11
Other, net....................................... 5 165 141
----- ------ ------
Income tax provision (benefit)..................... $(815) $3,167 $4,221
===== ====== ======
</TABLE>
The Company had foreign net operating loss carryforwards of approximately
$76 at December 31, 1998. The Company also has approximately $344 of foreign tax
credit carryforwards at December 31, 1998.
F-16
<PAGE> 110
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Retek Inc. by HNC, acquired
in-process research and development of $1,750 was charged to operations on the
acquisition date. The Company's products may be classified into two categories:
Nautilus, an off-the-shelf warehouse management software system designed to
provide the tools needed to control the course of warehouse operations and
Nautilus CBT, an operational tutorial database which guides the user through
Nautilus operations. The classification of the technology as complete or under
development was made in accordance with the guidelines of Statement of Financial
Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2
and Financial Accounting Standards Board Interpretation No. 4. At the time of
acquisition, Retek Logistics, Inc. had a number of new software products under
development including Nautilus Versions 6.0 and 7.0 and Nautilus CBT. Nautilus
Version 6.0 and Nautilus CBT were both completed during 1998 and Nautilus
Version 7.0 was completed during 1999.
NOTE 6 -- SEGMENT INFORMATION
The Company operates in one reportable segment as defined in FAS 131. The
operations of the Company are primarily conducted in the United States, the
Company's country of domicile. Geographic data, determined by references to the
location of the Company's operations for the years ended December 31, 1996, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenue by geographic area:
United States............................................. $ 7,717 $17,070 $29,183
Canada.................................................... 990 860 6,310
United Kingdom............................................ 1,491 3,835 4,224
France.................................................... -- 3,358 1,546
Germany................................................... -- -- 1,837
South Africa.............................................. 2,628 2,476 2,706
Other..................................................... 607 3,324 9,227
------- ------- -------
Total revenue.......................................... $13,433 $30,923 $55,033
======= ======= =======
</TABLE>
The following is long-lived asset information by geographic area:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Long-lived assets by geographic area:
United States............................................. $2,174 $3,850 $8,987
Foreign................................................... 114 286 193
------ ------ ------
Total long-lived assets................................ $2,288 $4,136 $9,180
====== ====== ======
</TABLE>
The Company's foreign sales represent revenues from export sales and
international operations. Export sales include sales from the United States to
foreign countries. Export sales were $394, $2,643 and $12,414 for the years
ended December 31, 1996, 1997 and 1998, respectively. International operations
include sales by foreign operations.
F-17
<PAGE> 111
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 -- EMPLOYEE BENEFIT PLANS
During 1995, HNC adopted the 1995 Equity Incentive Plan (the "Incentive
Plan") and the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). For
purposes of the discussion contained in the two paragraphs below, "fair market
value" means the closing price of HNC's common stock on the Nasdaq National
Market on the grant date.
The Incentive Plan provides for the issuance of up to 5,250 shares of HNC's
common stock in the form of nonqualified or incentive stock options, restricted
stock or stock bonuses to employees of HNC and its affiliates including Retek
Inc. and Retek Information Systems, Inc. Nonqualified stock options and
restricted stock may be awarded at a price not less than 85% of the fair market
value of the stock at the date of the award. Incentive stock options must be
awarded at a price not less than 100% of the fair market value of the stock at
the date of the award. Options granted under the Incentive Plan may have a term
of up to ten years. HNC has the discretion to provide for restrictions and the
lapse thereof in respect of restricted stock awards. Options typically vest at
the rate of 25% of the total grant per year over a four-year period; however,
HNC may, at its discretion, implement a different vesting schedule with respect
to any new stock option grant. At December 31, 1998, 217 shares were
exercisable.
The Purchase Plan provides for the issuance of a maximum of 400 shares of
common stock to employees of HNC and its affiliates, including Retek Inc. and
Retek Information Systems, Inc. In each purchase period eligible employees may
designate that between 2% and 10% of their cash compensation, subject to certain
limitations, be deducted from their compensation for the purchase of common
stock under the Purchase Plan. The purchase price of the shares under the
Purchase Plan is equal to 85% of the lesser of the fair market value per share
on the first date of the twelve-month offering period or the last day of each
six-month purchase period. Approximately 31% of eligible employees have
participated in the Purchase Plan in the last three years.
During 1998, HNC adopted the 1998 Stock Option Plan ("1998 Plan"). The 1998
Plan provides for the issuance of up to 1,000 shares of HNC's common stock in
the form of nonqualified stock options to employees, officers, consultants and
independent advisors of HNC and its affiliates including Retek Inc. and Retek
Information Systems, Inc. Options granted under the 1998 Plan may have a term of
up to ten years. Options typically vest at the rate of 25% of the total grant
per year over a four-year period; however, HNC may, at its discretion, implement
a different vesting schedule with respect to any new stock option grant. At
December 31, 1998, there were no shares exercisable under the 1998 Plan.
All Retek Information Systems, Inc. options, outstanding on the date of the
acquisition in 1996, were converted into options to purchase HNC's common stock
and adjusted to give effect to the acquisition exchange ratio. Retek Information
Systems, Inc. stock options are administered by HNC's Board of Directors. No
changes were made to the terms of the Retek Information Systems, Inc. options in
connection with the exchange. Those options granted vest ratably over periods
from one to four years and have a term of up to ten years. At December 31, 1998,
options to purchase 13 shares were exercisable.
F-18
<PAGE> 112
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Transactions relating to employees of the Company under HNC's stock option
and purchase plans during the years ended December 31, 1996, 1997 and 1998,
including options converted from the Retek Logistics, Inc. stock option plan,
are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1997 1998
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 249 $ 2.34 494 $21.19 981 $28.89
Options granted...................... 423 27.11 624 32.13 743 35.36
Options exercised.................... (115) 0.70 (71) 8.94 (108) 16.56
Options canceled..................... (63) 23.62 (66) 23.23 (238) 31.96
------ ------ ------
Outstanding at end of year............. 494 21.19 981 28.89 1,378 32.81
====== ====== ======
Options exercisable at end of year..... 34 93 233
Weighted average fair value of options
granted during the year.............. $19.69 $19.50 $21.50
</TABLE>
The following table summarizes information about employee stock options
relating to employees of the Company outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE (IN YEARS) PRICE 1998 PRICE
--------------- -------------- --------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.92 to $29.75...................... 283 8.01 $24.04 97 $23.08
30.13 to 31.25...................... 204 8.53 30.42 63 30.52
31.44 to 32.56...................... 222 9.14 32.04 5 31.73
32.63 to 35.81...................... 207 8.98 34.51 27 34.83
35.88 to 37.75...................... 218 9.17 37.43 12 37.28
37.88 to 41.38...................... 202 9.12 39.46 26 38.80
42.19 to 46.75...................... 42 9.25 43.33 3 45.25
----- ---
0.92 to 46.75...................... 1,378 8.80 32.81 233 29.40
===== ===
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1998 and
1997 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards
F-19
<PAGE> 113
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Board Statement No. 123 ("FAS 123"), the Company's net income and basic and
diluted pro forma net income per common share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $2,233 $3,476 $ 3,878
Pro forma................................................. 1,743 (893) (2,758)
Basic and diluted net income per common share:
As reported............................................... 0.10
Pro forma................................................. (0.07)
Diluted net income per common share:
As reported............................................... -- -- 0.10
Pro forma................................................. -- -- (0.07)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumption used for grants during the years ended December 31, 1996, 1997 and
1998, respectively: dividend yield of 0.0% for all three years; risk-free
interest rates of 6.03%, 6.10% and 5.14%; expected volatilities of 70%, 65% and
65% (0% for options granted by Retek Information Systems, Inc. prior to its
acquisition by HNC); and expected lives of 3.5, 3.0 and 3.0 years. The fair
value of the employees' purchase rights pursuant to the Purchase Plan is
estimated using the Black-Scholes model with the following assumptions: dividend
yield of 0.0% for all three years; risk-free interest rates of 5.36%, 5.32% and
5.23%; expected volatilities of 70%, 65% and 65%; and an expected life of six
months for all three years. The weighted average fair value of those purchase
rights granted in 1996, 1997 and 1998 was $8.73, $14.23 and $16.32,
respectively.
NOTE 8 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's combined financial position, results of
operations or cash flows.
NOTE 9 -- RELATED PARTY TRANSACTIONS
As described in Note 1, the combined financial statements include
significant transactions with HNC for services such as treasury, cash
management, employee benefits, taxes, financial reporting, legal, corporate
marketing and general corporate services. HNC charged the Company $449, $348 and
$953 for such expenses during the years ended December 31, 1996, 1997, 1998,
respectively, and $590 and $1,682 for the nine months ended September 30, 1998
and 1999 (unaudited), respectively. These charges were principally included in
sales and marketing expenses and general and administrative expenses. Management
believes these allocations approximate the costs that would have been incurred
had the Company performed these functions as a stand-alone entity.
Beginning in 1998, the Company utilized research and development services
of HNC. HNC charged the Company $1,383 for such expenses during the year ended
December 31, 1998, and $1,033 and $101 for the nine months ended September 30,
1998 and 1999 (unaudited), respectively. Management believes these allocations
approximate the costs that would have been incurred had the Company performed
these functions as a stand-alone entity.
Certain of the Company's employees participate in the HNC Purchase Plan.
Amounts included in the payable to HNC Software Inc. related to the Purchase
Plan were $38, $181 and $526 as of December 31,
F-20
<PAGE> 114
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996, 1997 and 1998, respectively, and $526 and $887 as of September 30, 1998
and 1999 (unaudited), respectively.
In conjunction with the acquisition of Retek Information Systems, Inc. in
1996, HNC repaid $3,246 of debt to a third party on Retek Information System
Inc.'s behalf.
Employees of the Company also participate in an HNC-sponsored 401(k) plan.
The Company matched employee contributions up to the lesser of 50% of the
employee contribution or eight hundred dollars. Contributions were $0, $60 and
$120 for the years ended December 31, 1996, 1997 and 1998, respectively, and $0
and $0 for the nine months ended September 30, 1998 and 1999 (unaudited),
respectively.
HNC also provides a treasury service for affiliated companies, and cash
transferred between companies is recorded in the payable to HNC.
The amount payable to HNC Software Inc. includes allocations of expenses
for all corporate services, income taxes and other intercompany transactions,
plus cash advances net of repayments. The amount payable does not bear interest.
The average monthly balances due to HNC for the years ended December 31, 1996,
1997 and 1998 were $2,453, $5,370 and $6,728, respectively, and for the nine
months ended September 30, 1998 and 1999 (unaudited) were $7,449 and $8,986,
respectively.
The change in the amount payable to HNC includes the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997 1998 1998 1999
------ ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $1,001 $ 6,197 $ 6,491 $ 6,491 $ 5,944
Cost allocations payable to HNC................ 487 529 2,862 2,149 2,670
Income taxes payable to HNC.................... 8 231 1,934 799 3,152
Cash transfers from HNC........................ 1,455 4,707 36,951 26,097 41,070
Cash transfers to HNC.......................... -- (5,173) (42,294) (30,259) (43,331)
Repayment of debt by HNC....................... 3,246 -- -- -- --
------ ------- -------- -------- --------
Net change during the period................. 5,196 294 (547) (1,214) 3,561
------ ------- -------- -------- --------
Balance at end of period....................... $6,197 $ 6,491 $ 5,944 $ 5,277 $ 9,505
====== ======= ======== ======== ========
</TABLE>
NOTE 10 -- SUBSEQUENT EVENTS
In September 1999, HNC assigned to Retek Information Systems, Inc. its
rights and interests in, to and under an option agreement ("Agreement") by and
between HNC and WebTrak Limited ("WebTrak"), a United Kingdom company. Upon
assignment, the Agreement provides Retek Information Systems, Inc. with the
option to purchase either (i) all assets of WebTrak, or (ii) all the issued and
outstanding shares of WebTrak. The purchase price under the option is the
greater of $8.0 million or 2.7 times gross revenues, as defined, of WebTrak for
the twelve months preceding the exercise of the option. The purchase option is
exercisable by Retek Information Systems, Inc. during the period September 30,
1999 to December 31, 1999. Management intends to exercise this purchase option
during the exercise period, anticipates paying $8.0 million for the purchase
and does not anticipate incurring significant transaction costs in connection
with the exercise.
F-21
<PAGE> 115
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11 -- SUBSEQUENT EVENTS (UNAUDITED)
In October 1999, Retek Information Systems, Inc. exercised its option to
purchase WebTrak for $8.0 million. In connection with the purchase, Retek
Information Systems, Inc. issued $5.33 million in notes payable in cash and a
$2.67 million note payable in cash or Retek Inc. common stock at the option of
holder. The notes are due on November 26, 1999.
In October 1999, the Board of Directors of Retek Inc. adopted the 1999
Directors Stock Option Plan (the "Directors Plan"), the 1999 Equity Incentive
Plan and the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). These
plans are administered by a committee of the Board of Directors (the
"Committee").
The Directors Plan provides for the issuance of up to 400,000 nonqualified
stock options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25,000 shares of the Company's common stock
will be granted to outside directors upon their becoming a member of the Board
of Directors and 7,500 additional options will be granted on each anniversary of
the initial grant. Options under the Directors Plan will be granted at the fair
value of the stock at the grant date and vest entirely at the end of a period of
one year from the date of grant.
The 1999 Equity Incentive Plan provides for the Committee to award up to
9,000,000 shares of the Company's common stock in the form of nonqualified or
incentive stock options, stock appreciation rights, restricted stock or stock
bonuses. Nonqualified stock options may be awarded at a price not less than 85%
of the fair market value of the stock at the date of the award. Incentive stock
options must be awarded at a price not less than 100% of the fair market value
of the stock at the date of the award or 110% of fair market value of the stock
at the date of the awards to more than 10% stockholders. Options and stock
appreciation rights granted under the Incentive Plan may have a term of up to 10
years. The Committee has the discretion to award restricted stock and stock
bonuses as they deem appropriate.
The Purchase Plan provides for the issuance of a maximum of 700,000 shares
of common stock. Each purchase period, eligible employees may designate between
2% and 15% of their cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under the Purchase
Plan. The purchase price of the shares under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share, as defined by the Purchase
Plan, on the first day of the two year offering period and the date of purchase.
In October 1999, the Company granted stock options to its employees, under
the Company's 1999 Equity Incentive Plan, to purchase approximately 6,740,000
shares of the Company's common stock. Of the approximately 6,740,000 options
granted, 6,239,000 were granted in connection with the exchange of HNC options
by the Company's employees. These options were granted at an exercise price of
$10 per share. Based upon an estimated fair market value of $11 per share for
the underlying common stock, the Company will recognize compensation expense of
approximately $6.7 million over the option vesting period. Due to the terms of
the vesting, compensation will be accelerated in the early years and is expected
to result in the recognition of approximately $600,000, $3.2 million, $1.7
million, $900,000 and $300,000 of compensation expense for the years ended
December 31, 1999, 2000, 2001, 2002 and 2003, respectively.
In November 1999, the Company granted stock options to certain directors,
under the Directors Plan, to purchase approximately 75,000 shares of the
Company's common stock. These options were granted at an exercise price of $10
per share. Based upon an estimated fair market value of $11 per share for the
F-22
<PAGE> 116
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
underlying common stock, the Company will recognize compensation expense of
$12,500 and $62,500 during the years ended December 31, 1999 and 2000,
respectively.
In November 1999, the Company entered into a new non-cancelable operating
lease for its corporate headquarters which commences in October 2001. The lease
includes two options to expand the facilities and terminates in March 2014.
F-23
<PAGE> 117
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
RETEK LOGISTICS, INC.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in stockholders' equity and
comprehensive income present fairly, in all material respects, the financial
position of Retek Logistics, Inc. (formerly Practical Control Systems
Technologies, Inc.) at December 31, 1996 and 1997, and March 31, 1998, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997, and the three months in the period ended March
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
September 9, 1999
F-24
<PAGE> 118
RETEK LOGISTICS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- ---------
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 388 $ 413 $ 559
Accounts receivable, net.................................. 560 1,061 997
Accounts receivable, affiliates........................... 14 -- --
Current portion of deferred income taxes.................. 9 13 13
Other current assets...................................... 2 47 37
------ ------ ------
Total current assets................................... 973 1,534 1,606
Property and equipment, net................................. 380 247 211
Software development costs, net............................. 1,211 1,181 1,232
Graphic design costs, net................................... 382 183 133
Other assets................................................ 33 55 58
------ ------ ------
$2,979 $3,200 $3,240
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 27 $ 79 $ 126
Accounts payable, affiliates.............................. 194 178 --
Accrued liabilities....................................... 249 250 352
Deferred revenue.......................................... 106 323 412
Notes payable............................................. 180 -- --
------ ------ ------
Total current liabilities.............................. 756 830 890
Deferred income taxes....................................... 457 493 514
Stockholders' equity:
Common stock, without par value -- 5,000,000 shares
authorized:
2,237,683 shares issued and outstanding................ 1 1 1
Paid-in capital........................................... 2,238 2,238 2,238
Retained earnings......................................... (410) (299) (340)
Treasury stock at cost, 144 shares........................ (63) (63) (63)
------ ------ ------
Total stockholders' equity............................. 1,766 1,877 1,836
------ ------ ------
$2,979 $3,200 $3,240
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 119
RETEK LOGISTICS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------- ---------------------
1996 1997 1997 1998
------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Licensing and other revenue........................ $5,108 $5,086 $ 957 $1,231
Operating expenses:
Cost of sales.................................... 1,662 1,880 297 431
Selling, general and administrative.............. 3,812 2,813 723 670
------ ------ ------ ------
Total operating expenses...................... 5,474 4,693 1,020 1,101
------ ------ ------ ------
(Loss) income from operations................. (366) 393 (63) 130
------ ------ ------ ------
Other income (expense), net........................ 129 (211) (1) (104)
Interest expense................................... 49 10 -- --
------ ------ ------ ------
(Loss) income before income taxes............. (286) 172 (64) 26
Income tax expense (benefit)....................... 448 61 (24) 67
------ ------ ------ ------
Net (loss) income............................. $ (734) $ 111 $ (40) $ (41)
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 120
RETEK LOGISTICS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------- --------------------
1996 1997 1997 1998
------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................... $ (734) $ 111 $ (40) $ (41)
Adjustments to reconcile net (loss) income to net
cash provided (used in) by operating activities:
Depreciation and amortization........................ 509 634 153 155
Loss on disposition of property and equipment........ -- 38 -- --
Increase in bad debts provision...................... -- 15 -- --
Deferred income taxes................................ 448 31 (23) 21
Changes in operating assets and liabilities:
Accounts receivable, trade........................ 85 (516) 59 64
Accounts receivable, affiliates................... 12 14 -- --
Other assets...................................... 107 (57) (163) (113)
Accounts payable.................................. (100) 53 105 47
Accounts payable, affiliates...................... 156 (16) (194) (178)
Unearned revenue.................................. (92) 216 (10) 89
Accrued expenses.................................. 42 1 (214) 102
------ ------ ------ ------
Net cash provided by (used in) operating
activities................................... 433 524 (327) 146
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs........................... (309) (236) -- --
Acquisition of non-compete agreement and related
assets............................................ -- (61) -- --
Purchase of property and equipment................... (73) (32) (2) --
Proceeds from sale of property and equipment......... -- 10 -- --
------ ------ ------ ------
Net cash used in investing activities........... (382) (319) (2) --
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit....................................... (923) -- 185 --
Payments on debt..................................... (43) -- -- --
Payments on note payable, affiliate.................. (16) (180) (48) --
Distributions to stockholders........................ (125) -- -- --
Issuance of common stock............................. 1,303 -- -- --
------ ------ ------ ------
Net cash provided by (used in) financing
activities................................... 196 (180) 137 --
------ ------ ------ ------
Net increase in cash................................... 247 25 (192) 146
Cash balance, beginning of year........................ 141 388 388 413
------ ------ ------ ------
Cash balance, end of year.............................. $ 388 $ 413 $ 196 $ 559
====== ====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest............... $ 49 $ 9 $ 3 $ --
====== ====== ====== ======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Note payable to affiliate for purchase of equipment,
furniture and fixtures............................ $ 196 $ -- $ -- $ --
====== ====== ====== ======
Distribution of rental property to stockholders...... $ 115 $ -- $ -- $ --
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 121
RETEK LOGISTICS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
(ACCUMULATED
COMMON STOCK DEFICIT) TOTAL
--------------- PAID-IN TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK EARNINGS EQUITY
------ ------ ------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995............................... 375 $ 1 $ 262 $(63) $1,237 $1,437
Issuance of common stock, net of issuance costs............ 1,863 1,303 1,303
Distributions to stockholders.............................. (240) (240)
PCS contribution to capital................................ 673 (673) --
Net and comprehensive loss................................. (734) (734)
----- ------ ------ ---- ------ ------
BALANCE AT DECEMBER 31, 1996............................... 2,238 1 2,238 (63) (410) 1,766
Net and comprehensive income............................... 111 111
----- ------ ------ ---- ------ ------
BALANCE AT DECEMBER 31, 1997............................... 2,238 1 2,238 (63) (299) 1,877
Net and comprehensive income............................... (41) (41)
----- ------ ------ ---- ------ ------
BALANCE AT MARCH 31, 1998.................................. 2,238 $ 1 $2,238 $(63) $ (340) $1,836
===== ====== ====== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 122
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Retek Logistics, Inc. (formerly Practical Control Systems Technologies,
Inc.), an Ohio corporation (the "Company"), is a supplier of fully integrated
distribution center management software products that address the distribution
needs of the retail, wholesale and manufacturing industries.
In March 1998, the Company's stockholders approved an agreement between the
Company and HNC Software Inc. ("HNC") pursuant to which the Company's
stockholders exchanged all issued and outstanding capital stock of the Company
for HNC stock.
Use of Estimates
The preparation of the financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
On June 1, 1996, the Company terminated its S Corporation status and
recognized deferred tax assets and liabilities based on the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount "more likely than not" to be realized in
future tax returns. Tax rate changes are reflected in income during the period
such changes are enacted.
Revenue Recognition
On certain systems development contracts, the percentage of completion
method is used to recognize the revenues. The Company measures a contract's
progress based on actual costs incurred to date compared to total estimated
contract costs. A contract is considered complete once formal acceptance from a
customer has been obtained. Because the percentage of completion method requires
estimates of costs to complete contracts, it is possible that estimated costs to
complete contracts will be revised in the near term. Revenues from software
maintenance agreements are deferred and are recognized over the maintenance
period. Software licensing revenues are recognized when delivery of the software
occurs if the Company does not have to provide additional significant service
under the contract. All other revenues are recognized when the services are
performed.
Included in accounts receivable are unbilled accounts receivable, which
represent revenue recognized in excess of amounts billed. From time to time,
depending upon billing terms, cash may be received in advance of the performance
of services or providing systems. When this occurs, these amounts are recorded
as unearned revenue.
F-29
<PAGE> 123
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Cash Equivalents
The Company considers its investments with an original maturity of three
months or less to be cash equivalents. The Company invests excess funds in
reverse repurchase agreements for U.S. government securities. At December 31,
1996 and 1997, respectively, the Company had purchased $537 and $455 of U.S.
government securities under agreements to resell. Generally, the maturity date
of the Company's reverse repurchase agreements is the next day of business. Due
to the short-term nature of the agreements, the Company does not take possession
of the securities, which are instead held at the Company's principal bank from
which it purchases the securities. The carrying value of the agreements
approximates fair market value because of the short maturity of the investments
and the Company believes that it is not exposed to any significant risk on its
investments in reverse repurchase agreements.
Software Development Costs
Costs incurred internally in creating computer software products are
charged to expense until technological feasibility of the software has been
established. Thereafter, all software production costs are capitalized.
Capitalization of computer software costs is discontinued when the product is
available for sale to customers. The costs capitalized include the direct labor
costs of those involved with the software development effort, their supervision
and indirect costs of overhead relating to those employees, the facilities they
occupy and equipment they utilize.
The ultimate realization of these costs requires considerable judgment from
management related to the estimated useful life and anticipated future sales.
Computer software costs are amortized by the straight-line method over the
estimated useful life of the products developed, which is five years.
Amortization expense related to software development costs was $234 and $265 for
the years ended December 31, 1996 and 1997, and $64 and $69 for the three months
ended March 31, 1997 (unaudited) and March 31, 1998, respectively.
Graphic Design Costs
Costs associated with the production of graphic design applications include
computer programs to assist in the sale of the Company's product. These costs
have been capitalized and are being amortized by the straight-line method over
the asset's estimated useful life of three years. Amortization of graphic design
costs was $200 and $199 for the years ended December 31, 1996 and 1997 and $50
for both the three months ended March 31, 1997 (unaudited) and March 31, 1998.
Property and Equipment
Property and equipment are recorded at cost. The Company computes
depreciation using the straight-line method over the estimated useful lives of
the assets of three to seven years. The Company amortizes leasehold improvements
over the shorter of their estimated useful lives or the remaining term of the
related lease. Repair and maintenance costs are charged to expense as incurred.
In 1996, rental property with a net book value of $115 was distributed to the
principal stockholders in a non-cash distribution. Depreciation expense was $75
and $169 for the years ended December 31, 1996 and 1997, respectively, and $41
and $35 for the three months ended March 31, 1997 (unaudited) and March 31,
1998, respectively.
F-30
<PAGE> 124
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
certain identifiable intangibles and associated goodwill when events or changes
in circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized if the sum of the expected future net cash
flows were less than the carrying amount of the asset. No such impairments of
long-lived assets existed through March 31, 1998.
Diversification of Credit Risk
The Company had approximately 45% and 42% of its sales for the years ended
December 31, 1996 and 1997, respectively, and 49% and 29% for the three months
ended March 31, 1997 (unaudited) and March 31, 1998, respectively, to
international customers in South America, Africa, and Asia. The same five
customers comprised 81% of revenues for the years ended December 31, 1996 and
1997 and 87% and 91% of the revenues for the three months ended March 31, 1997
(unaudited) and March 31, 1998.
Disclosures about Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short-term
maturities of these financial instruments.
Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS
130"). FAS 130 requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. Comprehensive income is defined as "the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources." It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133") which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement establishes a new
model for accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standard No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" ("FAS 137") which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
adoption of FAS 133 is not expected to have a significant impact on the
Company's financial position or results of operations.
In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." This SOP
retains the limitations of SOP 97-2 on what constitutes vendor-specific
objective evidence of fair value. SOP 98-9 will be effective for transactions
entered into in fiscal years
F-31
<PAGE> 125
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
beginning after March 15, 1999. The adoption of SOP 98-9 is not expected to have
a significant impact on the Company's financial position or results of
operations.
Interim Results (unaudited)
The accompanying statement of operations and the related statements of cash
flows for the three months ended March 31, 1997 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of only normal
recurring adjustments, necessary for the fair statement of results of the
interim periods. The data disclosed in these notes to financial statements for
this period is also unaudited.
NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
Accounts receivable, net
Billed.................................................... $ 577 $1,090 $ 743
Unbilled.................................................. 1 4 296
------ ------ ------
578 1,094 1,039
Less allowance for doubtful accounts........................ (18) (33) (42)
------ ------ ------
$ 560 $1,061 $ 997
====== ====== ======
Property and equipment, net
Equipment................................................. $ 264 $ 308 $ 307
Furniture and fixtures.................................... 29 28 28
Leasehold improvements.................................... 105 77 77
Purchased software........................................ 121 122 122
------ ------ ------
519 535 534
Less accumulated depreciation and amortization.............. (139) (288) (323)
------ ------ ------
$ 380 $ 247 $ 211
====== ====== ======
Software development costs, net
Software development costs................................ $1,445 $1,680 $1,800
Less accumulated amortization............................. (234) (499) (568)
------ ------ ------
$1,211 $1,181 $1,232
====== ====== ======
Graphic design costs, net
Software development costs................................ $ 598 $ 598 $ 598
Less accumulated amortization............................. (216) (415) (465)
------ ------ ------
$ 382 $ 183 $ 133
====== ====== ======
</TABLE>
NOTE 3 -- RELATED PARTY TRANSACTIONS
During 1996 and 1997, one of the principal stockholders of the Company had
a majority stock ownership in Professional Contract Systems Technical Services,
Inc. ("Technical Services"), a provider of contract engineering services. Also
during 1996 and 1997, another principal stockholder of the Company had a
majority stock ownership in PCS Computers, Inc. ("Computers"), a company engaged
in the design
F-32
<PAGE> 126
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and sale of specialized computer systems and electrical components for
industrial computer applications. In October 1997, one of the principal
stockholders sold his interest in the Company to the other principal stockholder
and, subsequently, in November 1997, terminated his employment with the Company.
Operating expenses include the following amounts from related parties:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDING FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------- ---------------------
1996 1997 1997 1998
---- ------ ------------ -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Technical services.................................... $146 $ 483 $43 $ 83
Computers............................................. 679 541 10 315
---- ------ --- ----
Total............................................... $825 $1,024 $53 $398
==== ====== === ====
</TABLE>
The Company leases office space from a company owned by one the Company's
previous principal stockholders under an agreement expiring December 31, 2002.
Rent expense related to this agreement for the years ended December 31, 1996 and
1997 was $259 and $252, respectively, and for the three months ended March 31,
1997 (unaudited) and March 31, 1998 was $66 and $51, respectively. At March 31,
1998, the Company was obligated under non-cancelable operating leases for its
facilities as follows:
<TABLE>
<S> <C>
1998...................................................... $ 155
1999...................................................... 212
2000...................................................... 218
2001...................................................... 225
2002...................................................... 231
------
$1,041
======
</TABLE>
The Company purchased equipment, furniture and fixtures in 1996 for
consideration equal to an 8.25% note payable to Technical Services in the amount
of $196. Monthly principal and interest payments were paid through November
1997. The note was repaid during 1997. The equipment, furniture and fixtures had
previously been leased from Technical Services. Rent expense in 1996 includes
$109 related to the lease.
NOTE 4 -- LINE OF CREDIT
In 1996, the Company negotiated a line of credit agreement with a bank that
was collateralized by substantially all corporate assets and was payable on
demand. The line of credit allowed borrowings of up to $500,000 with an interest
rate equal to the bank's prime rate. No outstanding borrowings existed at
December 31, 1996, 1997 or at March 31, 1998.
F-33
<PAGE> 127
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- INCOME TAXES
Prior to June 1, 1996 the Company was taxed as an S Corporation. Income tax
expense for 1996 includes a net deferred tax liability of $512 recorded in
connection with the termination of the Company's S Corporation status. Income
tax expense (benefit) for the years-ended December 31, 1996 and 1997 and the
three months ended March 31, 1997 (unaudited) and March 31, 1998 is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------ -------------------
1996 1997 1997 1998
---- ---- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Current.................................................. $ -- $30 $ -- $45
Deferred................................................. 448 31 (24) 22
---- --- ---- ---
$448 $61 $(24) $67
==== === ==== ===
</TABLE>
The components of the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------- --------------------
1996 1997 1997 1998
----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 64 $ -- $ 40 $ --
Accounts receivable............................... 7 12 12 17
State taxes
Other............................................. 2 1 6 2
----- ----- ----- -----
Gross deferred tax assets...................... 73 13 58 19
Deferred tax liabilities:
Capitalized software.............................. (514) (478) (467) (501)
Property and equipment............................ (7) (15) (15) (13)
Other............................................. (6)
----- ----- ----- -----
Gross deferred tax liability................... (521) (493) (482) (520)
----- ----- ----- -----
Net deferred tax liability................... $(448) $(480) $(424) $(501)
===== ===== ===== =====
</TABLE>
F-34
<PAGE> 128
RETEK LOGISTICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A reconciliation of the income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate to income before
income tax provision (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------ -------------------
1996 1997 1997 1998
---- ---- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Amounts computed at statutory federal rate.................. $(97) $ 59 $(22) $ 9
State income taxes, net of federal benefit................ 47 13 (2) 27
Tax credit carryforwards generated........................ (7)
Non-deductible purchased technology and other
non-deductible acquisition costs....................... 37
S-corp termination deferred balances...................... 501
Other, net................................................ (3) (11) 1
---- ---- ---- ---
Income tax provision (benefit).............................. $448 $ 61 $(24) $67
==== ==== ==== ===
</TABLE>
NOTE 6 -- PROFIT SHARING PLANS
The Company has a Sec. 401(k) profit sharing plan covering all eligible
employees who desire to participate in the plan. Company matching contributions
are based on a percentage of the employees' contributions. Company matching
contributions were $14 and $12 during the years ended December 31, 1996, 1997,
and $0 for both the three months ended March 31, 1997 (unaudited) and March 31,
1998. Additionally, the Company may, at its option, contribute a portion of
annual profits to the plan. The Company did not make such a contribution during
the years ended December 31, 1996, 1997 or the three months ended March 31,
1998.
NOTE 7 -- SUBSEQUENT EVENTS
On March 24, 1998, the Company's stockholders approved an agreement between
the Company and HNC pursuant to which the Company's stockholders would exchange
all issued and outstanding capital stock of the Company for HNC stock.
On March 31, 1998, the Company's stockholders received 143 shares of HNC
common stock in exchange for all of the issued and outstanding shares of the
Company.
F-35
<PAGE> 129
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
On March 31, 1998, HNC Software Inc. ("HNC") completed its acquisition of
Retek Inc. (formerly Retek Logistics, Inc.) in a transaction accounted for under
the purchase method of accounting by HNC. Under the purchase method, the
aggregate purchase price is required to be allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their fair values on the acquisition date. The pro forma unaudited combined
statement of income is based on the audited combined statement of income of
Retek Inc. and Retek Information Systems, Inc. for the year ended December 31,
1998, which includes the accounts of Retek Inc. for the period from March 31,
1998 through December 31, 1998, and the audited financial statements for Retek
Inc. for the period from January 1, 1998 through March 31, 1998. Adjustments
have been made to such information to give effect to the acquisition of Retek
Inc. as if the acquisition had occurred on January 1, 1998.
The information has been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and is provided for
comparative purposes only. The pro forma information does not purport to be
indicative of the results that actually would have occurred had the acquisition
been effected at the beginning of the period presented.
F-36
<PAGE> 130
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
----------------- THREE MONTHS YEAR ENDED
COMBINED ENDED MARCH 31, DECEMBER 31,
RETEK INC. AND 1998 1998
RETEK INFORMATION --------------------- PRO FORMA ------------
SYSTEMS, INC. RETEK LOGISTICS, INC. ADJUSTMENTS PRO FORMA
----------------- --------------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue..................................... $55,033 $1,231 $ -- $56,264
Cost of revenue............................. 13,852 431 -- 14,283
------- ------ ----- -------
Gross profit................................ 41,181 800 -- 41,981
Operating expenses:
Research and development.................. 12,918 -- -- 12,918
Selling, general and administrative....... 17,996 670 -- 18,666
Acquisition related amortization of
intangible.............................. 429 -- 603(A) 1,032
Acquired in-process research and
development............................. 1,750 -- -- 1,750
------- ------ ----- -------
Total operating expenses................ 33,093 670 603 34,366
------- ------ ----- -------
Operating income............................ 8,088 130 (603) 7,615
Other income (expense), net................. 11 (104) -- (93)
------- ------ ----- -------
Income before income tax provision.......... 8,099 26 (603) 7,522
Income tax provision........................ 4,221 67 -- 4,288
------- ------ ----- -------
Net income (loss)........................... $ 3,878 $ (41) $(603) $ 3,234
======= ====== ===== =======
Pro forma unaudited basic and diluted net
income per common share (Note 3).......... $ 0.10 $ 0.08
======= =======
Pro forma unaudited weighted average
shares -- basic and diluted (Note 3)...... 40,000 40,000
======= =======
</TABLE>
(A) See Note 4 to Pro Forma Combined Statement of Income
See accompanying notes to pro forma combined statement of income.
F-37
<PAGE> 131
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
In March 1998 HNC acquired Retek Inc. (formerly Retek Logistics, Inc.)
which develops warehouse management software solutions.
The pro forma unaudited combined statement of income presented is not
necessarily indicative of the future combined operating results of Retek Inc.
and Retek Information Systems, Inc. (the "Company") or the combined operating
results that would have resulted had the acquisition taken place on January 1,
1998. The unaudited pro forma combined statement of income for the year ended
December 31, 1998 reflects the effects of the acquisition, assuming the
acquisition occurred on January 1, 1998.
NOTE 2--PURCHASE PRICE ALLOCATION
The unaudited pro forma combined financial statements reflect a total
purchase price of $6,564 consisting of the initial purchase price of $5,088 and
the additional consideration of $1,476 paid by HNC related to the achievement of
financial objectives by Retek Inc. in 1998. HNC has a contingent obligation to
issue additional shares of HNC common stock upon the achievement of certain
financial objectives during 1999. This additional consideration will not be
reflected in the Company's financial position or results of operations in the
future if HNC's share of ownership of the Company at the time of issuance is
less than 95%. If HNC continues to own 100% of the Company, such issuance will
be reflected as an increase in intangible assets.
The Company's allocation of Retek Inc.'s aggregate purchase price to the
tangible and identifiable intangible assets acquired in connection with this
acquisition was based on fair values as determined by independent appraisers.
The allocation is summarized below:
<TABLE>
<S> <C>
Goodwill.................................................... $2,360
Acquired in-process research and development................ 1,750
Purchased software costs.................................... 1,100
Customer base............................................... 300
Assembled work force........................................ 200
Trademarks.................................................. 70
Net assets.................................................. 784
------
Total purchase price................................... $6,564
======
</TABLE>
The goodwill, customer base and trademarks are being amortized on a
straight-line basis over the estimated period of benefit of five years. The
purchased software costs is being amortized on a straight-line basis over the
estimated period of benefit of thirty-six to forty-two months. The assembled
work force is being amortized on a straight-line basis over the estimated period
of benefit of two years.
NOTE 3--PRO FORMA UNAUDITED COMBINED NET INCOME PER SHARE
Pro forma unaudited net income per share is calculated based upon the
outstanding shares of Retek Inc. of 2,238 at December 31, 1998, as if Retek
Information Systems, Inc. became a wholly-owned subsidiary of Retek Logistics,
Inc. on January 1, 1998.
F-38
<PAGE> 132
RETEK INC. AND RETEK INFORMATION SYSTEMS, INC.
NOTES TO PRO FORMA COMBINED STATEMENT OF INCOME -- (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
NOTE 4--PURCHASE ADJUSTMENTS:
The following adjustment was applied to the combined financial statements
of Retek Inc. and Retek Information Systems, Inc. and the financial statements
of Retek Logistics, Inc. to arrive at the pro forma combined statement of
operations:
To record annual amortization of goodwill and other identifiable intangible
assets that is being amortized over the estimated period of benefit of three to
five years. This adjustment is calculated as follows:
<TABLE>
<CAPTION>
HISTORICAL AMORTIZATION ANNUAL
COST PERIOD AMORTIZATION
---------- ------------ ------------
<S> <C> <C> <C>
Purchased software costs................................ $1,100 3 years $ 367
Assembled workforce..................................... 200 3 years 67
Customer base........................................... 300 5 years 60
Trademark............................................... 70 5 years 14
Goodwill................................................ 2,361 4 - 5 years 524
------ ------
$4,031 1,032
======
Amortization recognized for the year ended December 31,
1998.................................................. 429
------
Adjustment to reflect acquisition as of January 1,
1998.................................................. $ 603
======
</TABLE>
F-39
<PAGE> 133
[Inside Back Cover]
[The following text center justified appears at the top of the page:]
Retek knows retail
[Five images, each representative of a different segment of the retail market,
are arranged in a vertical column down the middle of the page. Centered below
each image is a one or two word description of the retail market segment
represented by that image. From top to bottom, the following words appear below
these images:]
fashion, grocery, specialty, mass merchandise, department store
[Outside Back Cover]
[The Company's logo appears at the center of the page with the word "Retek"
directly underneath.]
<PAGE> 134
RETEKBW.eps
<PAGE> 135
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale and distribution of the common stock being registered. All amounts
are estimated, except the Securities and Exchange Commission Registration Fee,
the NASD Filing Fee and the Nasdaq National Market Filing Fee:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ----------
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 25,896
NASD Filing Fee............................................. 9,815
Nasdaq National Market Filing Fee........................... 30,000
Blue Sky Fees and Expenses.................................. 0
Accounting Fees and Expenses................................ 650,000
Legal Fees and Expenses..................................... 750,000
Transfer Agent and Registrar Fees........................... 20,000
Printing and Engraving...................................... 225,000
Miscellaneous............................................... 39,289
----------
Total..................................................... $1,750,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer or director of such corporation or is or was
serving at the request of such corporation as a director, officer, employer or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such officer or director acted in good faith
and in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, in the case of criminal proceedings, had
no reasonable cause to believe his or her conduct was illegal. A Delaware
corporation may indemnify officers and directors against expenses (including
attorneys' fees) in connection with the defense or settlement of an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against expenses
which such officer or director actually and reasonably incurred. The Certificate
of Incorporation of the Registrant provides for indemnification of the officers
and directors of the Registrant to the full extent permitted by applicable law.
In accordance with Delaware law, the Certificate of Incorporation of the
Registrant contains, and the Amended and Restated Certificate of Incorporation
of the Registrant will contain, a provision to limit the personal liability of
directors of the Registrant for violations of their fiduciary duty. This
provision eliminates each director's liability to the Registrant or its
stockholders for monetary damages except (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, providing for liability
of directors for unlawful payment of dividends or unlawful stock purchases or
redemptions or (iv) for any transaction from which a director derived an
II-1
<PAGE> 136
improper personal benefit. The effect of this provision is to eliminate the
personal liability of directors for monetary damages for actions involving a
breach of their fiduciary duty of care, including any such actions involving
gross negligence.
Pursuant to the underwriting agreement between the Registrant and the
underwriters filed as an exhibit to this Registration Statement, the
underwriters, a party thereto, have agreed to indemnify each officer and
director of the Registrant and each person, if any, who controls the Registrant
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), against certain liabilities, including liabilities under the Securities
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the incorporation in Delaware of Retek Inc., the
Registrant issued shares of its common stock to HNC Software Inc. The
Registrant believes that this issuance was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving any public
offering.
In addition, in connection with the exercise of the option to purchase all
of the issued and outstanding capital stock of WebTrak Limited, a company
organized under the laws of England, the Registrant issued notes, payable in
cash, and a note, payable in cash or, at the election of the holder thereof, in
shares of the Registrant's common stock. The Registrant believes that this
issuance was exempt from registration under Regulation S of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger and Reorganization between
Retek Logistics, Inc. and Registrant.
2.2* Form of Separation Agreement.
2.3* Form of Technology Licensing Agreement.
2.4* Form of Tax Sharing Agreement.
2.5* Form of Services Agreement.
2.6 Form of Corporate Rights Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Certificate of Amendment to the Certificate of Incorporation
of the Registrant.
3.3* Bylaws of the Registrant.
3.4** Form of Amended and Restated Certificate of Incorporation of
the Registrant as in effect immediately prior to the closing
of this offering.
3.5** Form of Amended and Restated Bylaws of the Registrant as in
effect immediately prior to the closing of this offering.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Shearman & Sterling.
10.1*+ Industry Solutions Initiative Master Agreement between
Oracle Corporation and Retek Information Systems, Inc.
10.2* Employment Agreement of John Buchanan.
</TABLE>
II-2
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.3* Assignment of Option Agreement relating to Webtrak Limited
between HNC Software Inc. and Retek Information Systems,
Inc.
10.4* Option Agreement between HNC Software Inc., Webtrak Limited
and the shareholders of Webtrak Limited.
10.5* Retek 1999 Equity Incentive Plan.
10.6* Retek 1999 Employee Stock Purchase Plan.
10.7* Retek 1999 Director Stock Option Plan.
10.8* Employment Agreement of Jeremy Thomas
21.1* Schedule of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3* Consent of Shearman & Sterling (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
27.2* Financial Data Schedule.
27.3* Financial Data Schedule.
27.4* Financial Data Schedule.
</TABLE>
- -------------------------
* Filed previously.
** To be filed by amendment.
+ The Registrant applied for confidential treatment of portions of this
Exhibit. Accordingly, portions thereof have been omitted and filed
separately.
(B) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
14 or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE> 138
(c) The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective; and
(2) for purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein and this offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on November 12, 1999.
RETEK INC.
By: *
--------------------------------------
Name: John Buchanan
Title: Chairman, Chief Executive
Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Buchanan and Gregory A. Effertz, and each of
them, his attorneys-in-fact, each with the power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and to each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, Chief Executive Officer November 12, 1999
- --------------------------------------------- and Director (Principal Executive
John Buchanan Officer)
/s/ GREGORY A. EFFERTZ Vice President, Finance and November 12, 1999
- --------------------------------------------- Administration, Chief Financial
Gregory A. Effertz Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
/s/ N. ROSS BUCKENHAM Director November 12, 1999
- ---------------------------------------------
N. Ross Buckenham
/s/ WARD CAREY Director November 12, 1999
- ---------------------------------------------
Ward Carey
/s/ CHARLES H. GAYLORD Director November 12, 1999
- ---------------------------------------------
Charles H. Gaylord
</TABLE>
<PAGE> 140
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALEX WAY HART Director November 12, 1999
- ---------------------------------------------
Alex Way Hart
/s/ GLEN A. TERBEEK Director November 12, 1999
- ---------------------------------------------
Glen A. Terbeek
/s/ STEPHEN E. WATSON Director November 12, 1999
- ---------------------------------------------
Stephen E. Watson
*By /s/ GREGORY A. EFFERTZ
---------------------------------------
Gregory A. Effertz
Attorney-in-fact
</TABLE>
<PAGE> 141
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger and Reorganization between
Retek Logistics, Inc. and Registrant.
2.2* Form of Separation Agreement.
2.3* Form of Technology Licensing Agreement.
2.4* Form of Tax Sharing Agreement.
2.5* Form of Services Agreement.
2.6 Form of Corporate Rights Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Certificate of Amendment to the Certificate of Incorporation
of the Registrant.
3.3* Bylaws of the Registrant.
3.4** Form of Amended and Restated Certificate of Incorporation of
the Registrant as in effect immediately prior to the closing
of this offering.
3.5** Form of Amended and Restated Bylaws of the Registrant as in
effect immediately prior to the closing of this offering.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Shearman & Sterling.
10.1*+ Industry Solutions Initiative Master Agreement between
Oracle Corporation and Retek Information Systems, Inc.
10.2* Employment Agreement of John Buchanan.
10.3* Assignment of Option Agreement relating to Webtrak Limited
between HNC Software Inc. and Retek Information Systems,
Inc.
10.4* Option Agreement between HNC Software Inc., Webtrak Limited
and the shareholders of Webtrak Limited.
10.5* Retek 1999 Equity Incentive Plan.
10.6* Retek 1999 Employee Stock Purchase Plan.
10.7* Retek 1999 Director Stock Option Plan.
10.8* Employment Agreement of Jeremy Thomas.
21.1* Schedule of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3* Consent of Shearman & Sterling (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
27.2* Financial Data Schedule.
27.3* Financial Data Schedule.
27.4* Financial Data Schedule.
</TABLE>
- -------------------------
* Filed previously.
** To be filed by amendment.
+ The Registrant applied for confidential treatment of portions of this
Exhibit. Accordingly, portions thereof have been omitted and filed
separately.
<PAGE> 1
EXHIBIT 1.1
FORM OF UNDERWRITING AGREEMENT
5,750,000 SHARES
RETEK INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
November __, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION,
BANCBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
As Representatives of the Several Underwriters,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Ladies and Gentlemen:
1. Introductory. Retek Inc., a Delaware corporation ("COMPANY"),
proposes to issue and sell 5,000,000 shares ("FIRM SECURITIES") of its Common
Stock, par value $.01 per share ("SECURITIES"), and also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than 750,000 shares ("OPTIONAL SECURITIES") of its Securities as set forth
below. The Firm Securities and the Optional Securities are herein collectively
called the "OFFERED SECURITIES". As part of the offering contemplated by this
Agreement, U.S. Bancorp Piper Jaffray Inc. (the "DESIGNATED UNDERWRITER") has
agreed to reserve out of the Firm Securities purchased by it under this
Agreement, up to 500,000 shares, for sale to the Company's directors, officers,
employees and other parties associated with the Company (collectively,
"PARTICIPANTS"), as set forth in the Prospectus (as defined herein) under the
heading "Underwriters" (the "DIRECTED SHARE PROGRAM"). The Firm Securities to be
sold by the Designated Underwriter pursuant to the Directed Share Program (the
"DIRECTED SHARES") will be sold by the Designated Underwriter pursuant to this
Agreement at the public offering price. Any Directed Shares not orally confirmed
for purchase by a participant by the end of the business day on which this
Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus. The Company and HNC Software Inc., a Delaware
corporation ("PARENT"), hereby agree with the several Underwriters named in
Schedule A hereto ("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company and Parent. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-86841) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (i) has been
declared effective under the Securities Act of 1933 ("ACT") and is not proposed
to be amended or (ii) is proposed to be amended by amendment or post-effective
amendment. If such registration statement ("INITIAL REGISTRATION STATEMENT") has
been declared effective, either (i) an additional registration statement
("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may
have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(b)")
under the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule 462(b)
and will become
<PAGE> 2
effective upon filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to the
initial registration statement and such additional registration statement. If
the Company does not propose to amend the initial registration statement or if
an additional registration statement has been filed and the Company does not
propose to amend it, and if any post-effective amendment to either such
registration statement has been filed with the Commission prior to the execution
and delivery of this Agreement, the most recent amendment (if any) to each such
registration statement has been declared effective by the Commission or has
become effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the
Act or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "EFFECTIVE TIME" with respect to the initial
registration statement or, if filed prior to the execution and delivery of this
Agreement, the additional registration statement means (i) if the Company has
advised the Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement, or the
most recent post-effective amendment thereto (if any) filed prior to the
execution and delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c), or (ii)
if the Company has advised the Representatives that it proposes to file an
amendment or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such amendment
or post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed prior to
the execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "EFFECTIVE TIME" with respect to
such additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule 462(b).
"EFFECTIVE DATE" with respect to the initial registration statement or the
additional registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its Effective Time,
including all information contained in the additional registration statement (if
any) and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("RULE 430A(b)") under the Act, is
hereinafter referred to as the "INITIAL REGISTRATION STATEMENT." The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "ADDITIONAL REGISTRATION STATEMENT." The Initial
Registration Statement and the Additional Registration Statement are herein
referred to collectively as the "REGISTRATION Statements" and individually as a
"REGISTRATION STATEMENT." The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "PROSPECTUS." No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective Date
of the Initial Registration Statement, the Initial Registration Statement
conformed in all respects to the requirements of the Act and the rules and
regulations of the Commission ("RULES AND REGULATIONS") and did not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
(ii) on the Effective Date of the Additional Registration Statement (if any),
each Registration Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations and did not include, or
will not include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) on the date of
this Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each conforms, and at the
time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing
is required) at the Effective Date of the Additional Registration Statement in
which the Prospectus is included, each Registration Statement and the Prospectus
will conform, in all respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the Effective
Date of
-2-
<PAGE> 3
the Initial Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all respects to the requirements of the Act and the
Rules and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only such
information is that described as such in Section 8(c) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business requires
such qualification.
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction of
its incorporation, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and each
subsidiary of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its ownership
or lease of property or the conduct of its business requires such qualification;
all of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the Company,
directly or through subsidiaries, is owned free from liens, encumbrances and
defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding shares
of capital stock of the Company are, and, when the Offered Securities have been
delivered and paid for in accordance with this Agreement on each Closing Date
(as defined below), such Offered Securities will have been, validly issued,
fully paid and nonassessable and will conform to the description thereof
contained in the Prospectus; the stockholders of the Company have no preemptive
rights with respect to the Securities; and the authorized, issued and
outstanding capital stock of the Company is as set forth in the Prospectus in
the column entitled "Actual" under the caption "Capitalization."
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would give
rise to a valid claim against the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with this offering.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in the
securities registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by the
Company under the Act.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market, subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance and sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be required under
state securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities, will not result in a breach or
violation of any of the terms and provisions of, or constitute
-3-
<PAGE> 4
a default under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over the
Company or any subsidiary of the Company or any of their properties, or any
agreement or instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the charter or
by-laws of the Company or any such subsidiary, and the Company has full power
and authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered
by the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all other
properties and assets owned by them, in each case free from liens, encumbrances
and defects that would materially affect the value thereof or materially
interfere with the use made or to be made thereof by them; and except as
disclosed in the Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or bodies
necessary to conduct the business now operated by them and have not received any
notice of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a material
adverse effect on the condition (financial or other), business, properties or
results of operations of the Company and its subsidiaries taken as a whole
("MATERIAL ADVERSE EFFECT").
(n) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent that might
have a Material Adverse Effect.
(o) Assuming the execution and delivery of the Technology License
Agreement to be dated as of the First Closing Date between the Company and
Parent (the "TECHNOLOGY LICENSE AGREEMENT"), the Company and its subsidiaries
own, possess or can acquire on reasonable terms, adequate trademarks, trade
names and other rights to inventions, know-how, patents, copyrights,
confidential information and other intellectual property (collectively,
"INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now operated
by them, or presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect to any
intellectual property rights that, if determined adversely to the Company or any
of its subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic or
foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL
LAWS"), owns or operates any real property contaminated with any substance that
is subject to any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any claim
relating to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to such a
claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined adversely
to the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect, or would materially and adversely
affect the ability of the Company to perform its obligations under this
Agreement, or which are otherwise material in the context of the sale of the
Offered Securities; and no such actions, suits or proceedings are threatened or,
to the Company's knowledge, contemplated.
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(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and its
consolidated subsidiaries and the combined financial position of the Company and
Retek Information Systems, Inc., a Delaware corporation ("RIS"), as the case may
be, as of the dates shown and their results of operations and cash flows for the
periods shown, and such financial statements have been prepared in conformity
with the generally accepted accounting principles in the United States applied
on a consistent basis and the schedules included in each Registration Statement
present fairly the information required to be stated therein; and the
assumptions used in preparing the pro forma financial statements included in
each Registration Statement and the Prospectus provide a reasonable basis for
presenting the significant effects directly attributable to the transactions or
events described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts; and PricewaterhouseCoopers LLP, who certified the
financial statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries taken as
a whole, and, except as disclosed in or contemplated by the Prospectus, there
has been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(t) The execution and delivery of the Agreement and Plan of Merger
dated as of September 9, 1999 (the "MERGER AGREEMENT") between the Company and
Retek Logistics, Inc., an Ohio corporation ("RETEK LOGISTICS"), effecting the
reincorporation of Retek Logistics under the laws of the State of Delaware and
changing the name of Retek Logistics, was duly authorized by all necessary
corporate action on the part of each of Retek Logistics and the Company. Each of
Retek Logistics and the Company had all requisite corporate power and authority
to execute and deliver the Merger Agreement, to file the Merger Agreement with
the Secretary of State of Ohio and the Secretary of State of Delaware and to
consummate the reincorporation contemplated by the Merger Agreement, and the
Merger Agreement at the time of execution and filing constituted a valid and
binding obligation of each of Retek Logistics and the Company.
(u) The execution delivery and performance of each of the Separation
Agreement dated as of November __, 1999 and the Corporate Rights Agreement, the
Services Agreement, and the Tax Sharing Agreement, each to be dated as of the
First Closing Date, among the Company, RIS and Parent and the Technology License
Agreement (collectively, the "SEPARATION AGREEMENTS") was duly authorized by all
necessary corporate action on the part of each of the Company and RIS. Each of
the Separation Agreements was duly executed and delivered by each of the Company
and RIS and constitutes a legal, valid and binding obligation of the Company and
RIS, respectively, enforceable in accordance with its terms, subject to the
effect of any bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfer), reorganization, moratorium and similar laws
affecting the enforcement of creditors' rights generally and subject to the
effect of general principles of equity, including, without limitation, concepts
of materiality, reasonableness, good faith and fair dealing (regardless of
whether enforcement is considered in a proceeding in equity or law).
(v) The execution, delivery and performance of each of the
Separation Agreements and the Merger Agreement will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any statute, any rule, regulation or order of any governmental agency or body or
any court, domestic or foreign, having jurisdiction over the Company, RIS or any
subsidiary of the Company or any of their properties, or any agreement or
instrument to which the Company, RIS or any such subsidiary is a party or by
which the Company, RIS or any such subsidiary is bound or to which any of the
properties of the Company, RIS or any such subsidiary is subject, or the charter
or by-laws of the Company, RIS or any such subsidiary, and each of the Company
and RIS has full power and authority to enter into each of the Separation
Agreements and to perform its obligations thereunder.
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<PAGE> 6
(w) There have not been, and are not proposed to be, any
transactions or agreements between the Company and Parent or any of their
respective officers, directors or stockholders that are required to be, but are
not, disclosed in the Registration Statement and the Prospectus.
(x) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(y) The Company has filed, or has had filed on its behalf, all
foreign, federal, state and local tax returns that are required to be filed by
the Company or has requested extensions thereof (except in any case in which the
failure so to file would not have a Material Adverse Effect) and has paid all
taxes required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by the Prospectus.
(z) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect, except as described in or contemplated
by the Prospectus.
(aa) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in Section 4043 of
ERISA) has occurred with respect to any "pension plan" (as defined in Section
3(2) of ERISA) for which the Company would have liability, other than a
reportable event for which the 30-day notice requirement has been waived; the
Company has not incurred and does not expect to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretations thereunder (the
"CODE"); and each "pension plan" (as defined in Section 3(2) of ERISA) for which
the Company would have any liability that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would cause the loss
of such qualification.
(bb) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any identified differences.
(cc) The Company has reviewed its operations and is making inquiries
of the Year 2000 compliance of any third parties with which the Company has a
material relationship to evaluate the extent to which the business or operations
of the Company will be affected by Year 2000 issues. As a result of such review
and except to the extent otherwise disclosed in the Prospectus, the Company has
no reason to believe, and does not believe, that Year 2000 issues will have a
Material Adverse Effect. "YEAR 2000 ISSUES" as used herein has the meaning given
such term in the Prospectus.
3. Representations and Warranties of Parent. Parent represents and
warrants to, and agrees with, the several Underwriters that:
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<PAGE> 7
(a) Parent has been duly incorporated and is an existing corporation
in good standing under the laws of the State of Delaware, with power and
authority (corporate and other) to own its properties and conduct its business
as described in the Prospectus.
(b) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between Parent and any person that would give rise
to a valid claim against any Underwriter for a brokerage commission, finder's
fee or other like payment in connection with this offering.
(c) The execution, delivery and performance of this Agreement by
Parent will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any rule, regulation
or order of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over Parent or any of its properties, or any agreement or
instrument to which Parent is a party or by which Parent is bound or to which
any of the properties of Parent is subject, or the certificate of incorporation
or by-laws of Parent.
(d) This Agreement has been duly authorized, executed and delivered
by Parent.
(e) There are no pending actions, suits or proceedings against or
affecting Parent, any of its subsidiaries or any of their respective properties
that, if determined adversely to Parent or any of its subsidiaries, would
materially and adversely affect the ability of Parent to perform its obligations
under this Agreement or any Separation Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no such
actions, suits or proceedings are threatened or, to Parent's knowledge,
contemplated.
(f) The execution delivery and performance of each of the Separation
Agreements was duly authorized by all necessary corporate action on the part of
Parent. Each of the Separation Agreements was duly executed and delivered by
Parent and constitutes a legal, valid and binding obligation of Parent,
enforceable in accordance with its terms, subject to the effect of any
bankruptcy, insolvency (including, without limitations, all laws relating to
fraudulent transfer), reorganization, moratorium and similar laws affecting the
enforcement of creditors' rights and subject to the effect of general principles
of equity including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether enforcement
is considered in a proceeding in equity or at law).
(g) The execution, delivery and performance of each of the
Separation Agreements will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over Parent or any of its properties, or any
agreement or instrument to which Parent is a party or by which Parent is bound
or to which any of the properties of Parent is subject, or the certificate of
incorporation or by-laws of Parent, and Parent has full power and authority to
enter into each of the Separation Agreements and to perform its obligations
thereunder.
(h) There have not been, and are not proposed to be, any
transactions or agreements between the Company and Parent or any of their
respective officers, directors or stockholders that are required to be, but are
not, disclosed in the Registration Statement and the Prospectus.
(i) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective Date
of the Initial Registration Statement, the Initial Registration Statement did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case solely with respect to Parent, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit,
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<PAGE> 8
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case, solely with respect to
Parent, and (iii) on the date of this Agreement, no Registration Statement or
Prospectus includes, or will include, any untrue statement of a material fact or
omits, or will omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case, solely
with respect to Parent. If the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, neither the Initial
Registration Statement nor the Prospectus will include any untrue statement of a
material fact or will omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
solely with respect to Parent, and no Additional Registration Statement has been
or will be filed. The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based upon written
information furnished to Parent by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only such
information is that described as such in Section 8(c) hereof.
4. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ [_______] per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, at the office of Credit Suisse First Boston
Corporation ("CSFBC"), Eleven Madison Avenue, New York, New York, against
payment of the purchase price in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company at the office of [____________], at [______] A.M., New
York time, on November __, 1999, or at such other time not later than seven full
business days thereafter as CSFBC and the Company determine, such time being
herein referred to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1
under the Securities Exchange Act of 1934, the First Closing Date (if later than
the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered Securities sold
pursuant to the offering. The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the above office of [___________] at least 24 hours prior to the
First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase, on up to three Optional Closing Dates (as defined
below), all or less than all of the Optional Securities at the purchase price
per Security to be paid for the Firm Securities. The Company agrees to sell to
the Underwriters the number of shares of Optional Securities specified in such
notice and the Underwriters agree, severally and not jointly, to purchase such
Optional Securities. Such Optional Securities shall be purchased for the account
of each Underwriter in the same proportion as the number of shares of Firm
Securities set forth opposite such Underwriter's name bears to the total number
of shares of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company, at the
above office of [___________]. The certificates for the Optional Securities
being purchased on each Optional Closing Date will be in definitive form, in
such denominations and registered in such names as CSFBC requests upon
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<PAGE> 9
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of CSFBC at a reasonable time in
advance of such Optional Closing Date.
5. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
6. Certain Agreements of the Company and Parent. The Company agrees with
the several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule
424(b) not later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business day after
the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant
to Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed or
the related prospectus or the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not effect such
amendment or supplementation without CSFBC's consent, which consent will not be
unreasonably withheld; and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any amendment
or supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the issuance of
any such stop order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 7.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of
such fourth fiscal quarter.
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<PAGE> 10
(e) The Company will furnish to the Representatives copies of each
Registration Statement (six of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC reasonably requests. The Prospectus shall be so furnished on or prior to
3:00 P.M., New York time, on the business day following the later of the
execution and delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as soon as
available. The Company will pay the expenses of printing and distributing to the
Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates and
will continue such qualifications in effect so long as required for the
distribution.
(g) During the period of two years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as CSFBC may reasonably
request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other expenses
(including fees and disbursements of its counsel) incurred in connection with
qualification of the Offered Securities for sale under the laws of such
jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of the Securities or securities convertible into or
exchangeable or exercisable for any shares of the Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except grants of employee
stock options pursuant to the terms of a plan in effect on the date hereof,
issuances of Securities pursuant to the exercise of such options.
(j) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of the effectiveness of the Registration Statement.
The Designated Underwriter will notify the Company as to which Participants will
need to be so restricted. The Company will direct the transfer agent to place
stop transfer restrictions upon such securities for such period of time.
(k) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
(l) Furthermore, the Company covenants with the Underwriters that
the Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
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<PAGE> 11
Parent agrees that it will advise CSFBC promptly, so long as delivery of
a Prospectus relating to the Securities by an underwriter or dealer maybe
required under the Act of (i) any material change in Parent's condition
(financial or otherwise), prospects, earnings, business or properties, (ii) any
change in information in the Registration Statement or the Prospectus relating
to Parent, or (iii) any new material information relating to the Company or any
matter stated in the Registration Statement or the Prospectus that comes to the
attention of Parent.
7. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and Parent herein, to the accuracy of the
statements of Company and Parent officers made pursuant to the provisions
hereof, to the performance by the Company of its obligations hereunder and to
the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), from PricewaterhouseCoopers LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
interim financial statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements of
the Company and RIS, inquiries of officials of the Company and RIS who
have responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited interim financial statements included
in the Registration Statements do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published Rules and Regulations or any
material modifications should be made to such unaudited interim
financial statements for them to be in conformity with generally
accepted accounting principles;
(B) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date not
more than three business days prior to the date of such letter,
there was any change in the capital stock or any increase in
short-term indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest
available balance sheet read by such accountants, there was any
decrease in combined net assets, as compared with amounts shown
on the latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing date
of the latest available income statement read by such
accountants there were any decreases, as compared with the
corresponding period of the previous year and with the period of
corresponding length ended the date of the latest
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<PAGE> 12
income statement included in the Prospectus, in combined net
sales, net operating income or in the total or per share amounts
of combined net income;
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by analysis
or computation) with the results obtained from inquiries, a reading of
such general accounting records and other procedures specified in such
letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery of
this Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "REGISTRATION STATEMENTS" shall mean
the Initial Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"PROSPECTUS" shall mean the prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or such later date as shall have been consented to by CSFBC. If
the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 6(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and, to the knowledge of the Company, no proceedings for
that purpose shall have been instituted or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries taken as
one enterprise which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public offering or
the sale of and payment for the Offered Securities; (ii) any material suspension
or material limitation of trading in securities generally on the New York Stock
Exchange, or any setting of minimum prices for trading on such exchange, or any
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market; (iii) any banking moratorium declared by U.S. Federal
or New York authorities; or (iv) any outbreak or escalation of major hostilities
in which the United States is involved, any declaration of war by Congress or
any other substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Offered
Securities.
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<PAGE> 13
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Shearman & Sterling, counsel for the Company, to the effect
that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware, with
corporate power and authority under such laws to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification;
(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform in all material respects to the description
thereof contained in the Prospectus; and the stockholders of the Company
have no preemptive rights with respect to the Securities;
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act;
(iv) The Company is not, and after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended;
(v) No consent, approval, authorization, order, registration, or
qualification of, or filing with, any governmental agency or body or any
court in the United States or the State of New York is required for the
consummation of the transactions contemplated by this Agreement, the
Merger Agreement [or any Separation Agreement] or in connection with the
issuance or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be required
under state securities laws and as may have been made to effect the
merger contemplated by the Merger Agreement;
(vi) The execution, delivery and performance of this Agreement,
the Merger Agreement, and each of the Separation Agreements and the
issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a
default under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over the
Company or any subsidiary of the Company or any of their properties, or
the agreements or instruments that are filed as exhibits to the
Registration Statement pursuant to Item 601 (b)(10) of Regulation S-K,
or the charter or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement;
(vii) To the best of counsel's knowledge, except as disclosed in
the Prospectus, there are no legal or governmental proceedings pending
in the United States against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement or any Separation Agreement, or which
are otherwise material in the context of the sale of the Offered
Securities; and no such proceedings are, to the best of counsel's
knowledge, threatened or contemplated;
(viii) The information in the Prospectus under "Management --
Director Compensation;" "-- Employee Benefit Plans;" "Certain
Transactions;" "Description of Capital Stock;"
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<PAGE> 14
["Shares Eligible for Future Sale;"] and in the Registration Statement
under Items 14 and 15, in each case insofar as those statements describe
the provisions of statutes, proceedings or documents referred to
therein, are accurate summaries and fairly present the information
called for with respect thereto;
(ix) The execution delivery and performance of each of the
Separation Agreements was duly authorized by all necessary corporate
action on the part of the Company. Each of the Separation Agreements was
duly executed and delivered and constitutes a legal, valid and binding
obligation of the Company, enforceable in accordance with its terms,
subject to the effect of any bankruptcy, insolvency (including, without
limitation, laws relating to fraudulent transfers), reorganization,
moratorium and similar laws of affecting the enforcement of creditors'
rights generally and subject to the effect of general principles of
equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether
enforcement is considered in a proceeding in equity or law);
(x) The execution and delivery of the Merger Agreement was duly
authorized by all necessary corporate action on the part of each of
Retek Logistics and the Company. Each of Retek Logistics and the Company
had all requisite corporate power and authority to execute and deliver
the Merger Agreement, to file the Merger Agreement with the Secretary of
State of Ohio and the Secretary of State of Delaware and to consummate
the reincorporation contemplated by the Merger Agreement, and the Merger
Agreement at the time of execution and filing constituted a valid and
binding obligation of each of Retek Logistics and the Company; and
(xi) This Agreement had been duly authorized, executed and
delivered by the Company.
In addition, such counsel will state that the Initial Registration
Statement was declared effective under the Act as of the date and time specified
in such opinion, the Additional Registration Statement (if any) was filed and
became effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the Commission
pursuant to the subparagraph of Rule 424(b) specified in such opinion on the
date specified therein or was included in the Initial Registration Statement or
the Additional Registration Statement (as the case may be). Such counsel will
further state that each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective or issue
dates, appears on its face to be appropriately responsive in all material
respects to the requirements of the Act and the Rules and Regulations. Counsel
rendering the foregoing opinion shall also include a statement to the effect
that no facts have come to the attention of such counsel that gave it reason to
believe that any part of a Registration Statement or any amendment thereto, as
of its effective date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and such counsel
does not know of any contracts or documents of a character required to be filed
as an exhibit to a Registration Statement which are not so filed; it being
understood that such counsel need express no opinion as to the financial
statements or other financial data contained in the Registration Statements or
the Prospectus. In addition, such counsel shall state that to the best of its
knowledge after due inquiry, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no proceedings
for that purpose have been instituted or are pending or contemplated under the
Act.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Fenwick & West LLP, counsel for Parent, to the
effect that:
(i) The Parent has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus;
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<PAGE> 15
(ii) [To the best of counsel's knowledge, there are no
pending actions, suits or proceedings against or affecting
Parent, any of its subsidiaries or any of their respective
properties that, if determined adversely to Parent or any of its
subsidiaries, would materially and adversely affect the ability
of Parent to perform its obligations under this Agreement or any
Separation Agreement, or which are otherwise material in the
context of the sale of the Offered Securities; and no such
actions, suits or proceedings are, to the best of counsel's
knowledge, threatened or contemplated;]
(iii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is
required for the performance by Parent of its obligations under
this Agreement or any Separation Agreement, except such as have
been made or obtained;
(iv) The execution, delivery and performance of this
Agreement and each of the Separation Agreements will not result
in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation
or, to such counsel's knowledge, any order of any governmental
agency or body or any court having jurisdiction over Parent or
any of its properties, or any agreement or instrument identified
on a schedule attached to such opinion to which Parent is a
party or by which Parent is bound or to which any of the
properties of Parent is subject, or the certificate of
incorporation or by-laws of Parent, and Parent has full power
and authority to enter into this Agreement and each of the
Separation Agreements and to perform its obligations thereunder;
(v) The execution, delivery and performance by Parent of
each of the Separation Agreements was duly authorized by all
necessary corporate action on the part of Parent. Each of the
Separation Agreements was duly executed and delivered by Parent
and constitutes a legal, valid and binding obligation of Parent,
enforceable in accordance with its terms, subject to the effect
of any bankruptcy, insolvency (including, without limitation,
laws relating to fraudulent transfers), reorganization,
moratorium and similar laws of affecting the enforcement of
creditors' rights generally and subject to the effect of general
principles of equity, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing
(regardless of whether enforcement is considered in a proceeding
in equity or law); and
(vi) This Agreement has been duly authorized, executed
and delivered by Parent.
(f) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, such
opinion or opinions, dated such Closing Date, with respect to the incorporation
of the Company, the validity of the Offered Securities delivered on such Closing
Date, the Registration Statements, the Prospectus and other related matters as
the Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the Chief Executive Officer, President or any Vice
President and a principal financial or accounting officer of the Company in
which such officers, to the best of their knowledge after reasonable
investigation, shall state on behalf of the Company and not in their personal
capacity, that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder at
or prior to such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
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<PAGE> 16
(h) The Representatives shall have received a letter, dated such
Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to in
such subsection will be a date not more than three days prior to such Closing
Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies
of such opinions, certificates, letters and documents as the Representatives
reasonably request. CSFBC may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
8. Indemnification and Contribution. (a) The Company will indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person, if any, who controls such Underwriter within the meaning of Section
15 of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and provided, further,
that with respect to any untrue statement or alleged untrue statement in or
omission or alleged omission from any preliminary prospectus the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a copy of
the Prospectus if the Company had previously furnished copies thereof to such
Underwriter.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "DESIGNATED ENTITIES"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) Parent will indemnify and hold harmless each Underwriter, its
partners, directors and officers and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise
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<PAGE> 17
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that Parent will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
in or omission or alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below; and provided, further, that with respect to any untrue statement or
alleged untrue statement in or omission or alleged omission from any preliminary
prospectus the indemnity agreement contained in this subsection (b) shall not
inure to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased the Offered Securities
concerned, to the extent that a prospectus relating to such Offered Securities
was required to be delivered by such Underwriter under the Act in connection
with such purchase and any such loss, claim, damage or liability of such
Underwriter results from the fact that there was not sent or given to such
person, at or prior to the written confirmation of the sale of such Offered
Securities to such person, a copy of the Prospectus if the Company had
previously furnished copies thereof to such Underwriter.
If an Underwriter has sought indemnification from the Company under
this Section 8 and has determined in its good faith judgment that
indemnification from the Company will be unavailable or insufficient, the
Underwriter may seek indemnification under this subsection (b) from Parent to
the extent, but only to the extent, of such unavailability or insufficiency.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless each of the Company and Parent, their directors and officers and
each person, if any who controls the Company or Parent within the meaning of
Section 15 of the Act, against any losses, claims, damages or liabilities to
which the Company or Parent may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or Parent by such
Underwriter through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company or
Parent in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting" and the information regarding sales
to discretionary accounts and stabilizing transactions appearing in the tenth
and eleventh paragraphs, respectively, under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
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<PAGE> 18
Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to the last paragraph in Section 8 (a) hereof
in respect of such action or proceeding, then in addition to such separate firm
for the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in addition to
any local counsel) for the Designated Underwriter for the defense of any losses,
claims, damages and liabilities arising out of the Directed Share Program, and
all persons, if any, who control the Designated Underwriter within the meaning
of either Section 15 of the Act of Section 20 of the Exchange Act. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened action in respect of
which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party unless such settlement (i)
includes an unconditional release of such indemnified party from all liability
on any claims that are the subject matter of such action and (ii) does not
include a statement as to, or an admission of, fault, culpability or a failure
to act by or on behalf of an indemnified party.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or (c)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and Parent on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and Parent on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities as well as any
other relevant equitable considerations. The relative benefits received by the
Company and Parent on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or Parent or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (e). Notwithstanding the provisions of this subsection (e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and Parent under this Section
shall be in addition to any liability which the Company or Parent may otherwise
have and shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section shall be in addition to any
liability which the respective Underwriters may otherwise have and shall extend,
upon the same terms and conditions, to each director of the Company and/or
Parent, to each officer of the Company who has signed a Registration Statement
and to each person, if any, who controls the Company and/or Parent within the
meaning of the Act.
9. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate--principal
amount--number of shares--of Offered Securities that such defaulting Underwriter
or Underwriters agreed but failed to purchase does not exceed 10% of the
total--principal amount--number of shares--of Offered Securities that the
Underwriters are obligated to purchase on such Closing Date, CSFBC may make
arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but
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<PAGE> 19
if no such arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate--principal
amount--number of shares--of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total--principal amount--number of
shares--of Offered Securities that the Underwriters are obligated to purchase on
such Closing Date and arrangements satisfactory to CSFBC and the Company for the
purchase of such Offered Securities by other persons are not made within 36
hours after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter or the Company, except as provided in
Section 10 (provided that if such default occurs with respect to Optional
Securities after the First Closing Date, this Agreement will not terminate as to
the Firm Securities or any Optional Securities purchased prior to such
termination). As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
10. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the Company or any of their respective
representatives, officers or directors or any controlling person, and will
survive delivery of and payment for the Offered Securities. If this Agreement is
terminated pursuant to Section 9 or if for any reason the purchase of the
Offered Securities by the Underwriters is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 6 and the respective obligations of the Company and the Underwriters
pursuant to Section 8 shall remain in effect, and if any Offered Securities have
been purchased hereunder the representations and warranties in Section 2 and
Section 3 and all obligations under Section 6 shall also remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 9 or the occurrence of any event specified in clause (ii)
(iii), or (iv) of Section 7(c), the Company will reimburse the Underwriters for
all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
11. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
(a) if to the Representatives, c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, (b) if to the Company, Midwest Plaza,
801 Nicollet Mall, Minneapolis, MN 55402, Attention: Gregory A. Effertz; or (c)
if to Parent, 5935 Cornerstone Court West, San Diego, CA 92121-3728, Attention:
Chief Executive Officer; provided, however, that any notice to an Underwriter
pursuant to Section 8 will be mailed, delivered or telegraphed and confirmed to
such Underwriter.
12. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8, and no other
person will have any right or obligation hereunder.
13. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
-19-
<PAGE> 20
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
-20-
<PAGE> 21
If the foregoing is in accordance with the Representative's
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
RETEK INC.
By
--------------------------------------
Vice-President, Finance and
Administration, Chief Financial
Officer, Secretary and Treasurer
HNC SOFTWARE INC.
By
--------------------------------------
[Insert title]
The foregoing Underwriting
Agreement is hereby confirmed and
accepted as of the date first above
written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BANCBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
Acting on behalf of themselves
and as the Representatives of the
several Underwriters.
CREDIT SUISSE FIRST BOSTON CORPORATION
BY:
-----------------------------------
TITLE:
---------------------------------
-21-
<PAGE> 22
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SECURITIES
----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation........................
BancBoston Robertson Stephens Inc. ...........................
U.S. Bancorp Piper Jaffray Inc................................
Total................................... ----------------
================
</TABLE>
<PAGE> 1
EXHIBIT 2.6
FORM OF CORPORATE RIGHTS AGREEMENT
This Corporate Rights Agreement (this "Agreement") is made and entered
into as of _______, 1999 (the "Effective Date") by and among HNC Software Inc.,
a Delaware corporation ("HNC"), and Retek Inc., a Delaware corporation ("Retek")
and, solely for purposes of Section 4.5 and Article V hereof, Retek Information
Systems, Inc., a Delaware corporation that is a wholly-owned subsidiary of Retek
("RIS").
RECITALS
A. HNC owns all of the outstanding shares of Common Stock, par value
$0.01 per share of Retek ("Common Stock").
B. The parties are contemplating the possibility that Retek may issue
shares of its Common Stock in an initial public offering of such Common Stock
registered under the Securities Act of 1933, as amended (the "Initial Public
Offering").
C. The parties desire to enter into this Agreement pursuant to a
Separation Agreement among themselves dated as of ________, 1999 (the
"Separation Agreement") in order to set forth their agreement regarding (i)
HNC's rights to purchase additional shares of Common Stock of Retek upon any
issuance of Capital Stock to any Person in order to permit HNC to own at least
the Minimum Ownership Percentage of the Capital Stock of Retek, (ii) certain
rights of HNC with respect to the governance of Retek and RIS, (iii) the grant
to HNC of certain registration rights with respect to the Common Stock (and any
other securities issued in respect thereof or in exchange therefor) held by HNC,
and (iv) certain representations, warranties, covenants and agreements that will
continue in effect so long as Retek is a subsidiary of HNC.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, HNC, Retek and
RIS, for themselves, their successors, and assigns, hereby agree as follows:
ARTICLE I: DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms will
have the following meanings, applicable both to the singular and the plural
forms of the terms described:
"Action" has the meaning ascribed thereto in Section 4.5(o).
"Additional Securities" has the meaning ascribed thereto in Section
3.1(d).
"Affiliate" means, with respect to a given Person, any Person
controlling, controlled by or under common control with such Person. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as applied to any
Person, means the possession, directly or indirectly, of the power to vote a
majority of the securities having voting power for the election of directors (or
other Persons acting in similar capacities) of such Person or otherwise to
direct or cause the direction of the management
<PAGE> 2
and policies of such Person, whether through the ownership of voting securities
or by contract or otherwise.
"Agreement" has the meaning ascribed thereto in the preamble hereto, as
such agreement may be amended and supplemented from time to time in accordance
with its terms.
"Annual Business Plan and Budget" has the meaning ascribed thereto in
Section 4.8.
"Applicable Stock" means at any time the (i) shares of Common Stock
owned by the HNC Entities that were owned on the Effective Date, to the extent
then owned by any HNC Entity, plus (ii) shares of Common Stock purchased by the
HNC Entities pursuant to Article II of this Agreement, plus (iii) shares of
Common Stock that were issued to HNC Entities in respect of shares described in
either clause (i) or clause (ii) of this sentence in connection with any
conversion of such shares or any reclassification, share combination (including
any reverse stock split), share subdivision (including any stock split), share
dividend, share exchange, merger, consolidation or similar transaction or event.
"Capital Stock" means (i) in the case of a corporation, corporate stock
(including without limitation, common stock, preferred stock and rights,
options, warrants or any securities convertible into or ultimately exchangeable
or exercisable for common or preferred stock), (ii) in the case of an
association, limited liability company or other non-corporate business entity,
any and all shares, interests, memberships, participations, rights or other
equivalents (however designated) of corporate stock, (iii) in the case of a
partnership, partnership interests (whether general or limited) and (iv) any
other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing
Person.
"Common Stock" has the meaning ascribed thereto in the recitals.
"Disadvantageous Condition" has the meaning ascribed thereto in Section
3.1(a).
"Distribution" means the pro rata distribution by HNC to its
stockholders of the shares of Common Stock of Retek owned by HNC in one or more
transactions occurring after the Initial Public Offering, whenever (and if ever)
such transaction(s) shall occur, in HNC's sole discretion.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute.
"HNC Entities" means HNC, its Subsidiaries and any Parent of HNC (other
than Subsidiaries that constitute Retek Entities), and "HNC Entity" shall mean
any of the HNC Entities.
"HNC Ownership Reduction" means any decrease at any time in the
Ownership Percentage to less than eighty percent (80%).
"Holder" means HNC, the other HNC Entities and any Transferee.
"Holder Securities" has the meaning ascribed thereto in Section 3.2(b).
"Initial Public Offering" has the meaning ascribed thereto in the
recitals to this Agreement.
2
<PAGE> 3
"Initial Public Offering Date" means the date of completion of the
initial sale of Common Stock by Retek in the Initial Public Offering.
"Issuance Event" has the meaning ascribed thereto in Section 2.2.
"Issuance Event Date" has the meaning ascribed thereto in Section 2.2.
"Market Price" of any shares of Common Stock (or other Capital Stock) on
any date means (i) the average of the last sale price of such shares on each of
the five (5) trading days immediately preceding such date on the Nasdaq National
Market or, if such shares are not listed or quoted thereon, on the principal
national securities exchange or automated interdealer quotation system on which
such shares are traded or (ii) if such sale prices are unavailable or such
shares are not so traded, the value of such shares on such date determined in
accordance with agreed-upon procedures reasonably satisfactory to Retek and HNC.
"Minimum Ownership Percentage" means the ownership of such number of:
(i) shares of Capital Stock of Retek to the extent, and only to the extent,
necessary for HNC to maintain all of the following: (a) control of Retek (within
the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended
(the "Code")); (b) the status of Retek as a member of the affiliated group of
corporations (within the meaning of Section 1504 of the Code) of which HNC is
the common parent, provided such status has theretofore been maintained; and (c)
HNC's then-existing Ownership Percentage; and (ii) shares of any non-voting
Capital Stock of Retek to the extent, and only to the extent, necessary to own
eighty percent (80%) of each outstanding class of such stock.
"Option" has the meaning ascribed thereto in Section 2.1(a).
"Option Notice" has the meaning ascribed thereto in Section 2.2.
"Other Securities" has the meaning ascribed thereto in Section 3.2.
"Ownership Percentage" means, at any time, the fraction, expressed as a
percentage and rounded to the next highest thousandth of a percent, whose
numerator is the aggregate Value of the Applicable Stock and whose denominator
is the aggregate Value of all the then outstanding shares of Capital Stock of
Retek. For purposes of this definition, "Value" means, with respect to any share
of stock, the value of such share determined by HNC under principles applicable
for purposes of Section 1504 of the Code.
"Parent" means any corporation (other than HNC) in an unbroken chain of
corporations ending with HNC if each of such corporations other than HNC owns
stock representing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"Person" means any individual, partnership, limited liability company,
joint venture, corporation, trust, association, unincorporated organization,
government (and any department or agency thereof) or other entity.
3
<PAGE> 4
"register", "registration" and "registered" means a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement.
"Registrable Securities" means shares of Common Stock and any stock or
other securities into which or for which such Common Stock may now or hereafter
be changed, converted or exchanged and any other shares or securities of Retek
issued to any Holder or any Holder's permitted successors and assigns (or such
shares or other securities into which or for which such shares are so changed,
converted or exchanged) upon any reclassification, share combination, share
subdivision, share dividend, share exchange, merger, consolidation or similar
transaction or event or pursuant to the exercise of the Option. As to any
particular Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of Registrable Securities by the Holder thereof shall have been declared
effective under the Securities Act and such Registrable Securities shall have
been disposed of in accordance with such registration statement, (ii) such
Registrable Securities are sold by a person in a transaction in which the rights
under the provisions of this Agreement are not assigned, (iii) such Registrable
Securities are sold pursuant to Rule 144 promulgated under the Securities Act,
(iv) such Registrable Securities shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer shall
have been delivered by Retek and subsequent disposition of them shall not
require registration or qualification of them under the Securities Act or any
state securities or blue sky law then in effect or (v) such Registrable
Securities shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
Article III, including, without limitation, (i) the fees, disbursements and
expenses of Retek's counsel and accountants; (ii) all expenses, including filing
fees, in connection with the preparation, printing and filing of the
registration statement, any preliminary prospectus or final prospectus, any
other offering document and amendments and supplements thereto and the mailing
and delivering of copies thereof to any underwriters and dealers; (iii) the cost
of printing or producing any agreements among underwriters, underwriting
agreements and blue sky or legal investment memoranda, any selling agreements
and any other documents in connection with the offering, sale or delivery of the
securities to be disposed of; (iv) all expenses in connection with the
qualification of the securities to be disposed of for offering and sale under
state securities laws, including the fees and disbursements of counsel for the
underwriters in connection with such qualification and in connection with any
blue sky and legal investment surveys; (v) the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of the sale of the securities to be disposed of; (vi) transfer
agents', depositories' and registrars' fees and expenses and the fees and
expenses of any other agent or trustee appointed in connection with such
offering; (vii) all security engraving and security printing expenses; (viii)
all fees and expenses payable in connection with the listing of the securities
on any securities exchange or automated interdealer quotation system or the
rating of such securities; and (ix) any other fees and disbursements of
underwriters customarily paid by the sellers of securities, but excluding
underwriting discounts and commissions and transfer taxes, if any.
"Retek Entities" means Retek and its Subsidiaries, and "Retek Entity"
shall mean any of the Retek Entities.
4
<PAGE> 5
"Retek Securities" has the meaning ascribed thereto in Section 3.2(b).
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 415 Offering" means an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule to similar effect) promulgated under
the Securities Act.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Selling Holder" has the meaning ascribed thereto in Section 3.4(a).
"Special Transaction" has the meaning ascribed thereto in Section 4.5.
"Subsidiary" means, as to any Person, any partnership, limited liability
company, joint venture, corporation, trust, association, unincorporated
organization or other business entity of which more than fifty percent (50%) of
the voting capital stock or other voting ownership interests is owned or
controlled, directly or indirectly, by such Person or by one or more of the
Subsidiaries of such Person or by a combination thereof. "Subsidiary," when used
with respect to HNC or Retek, shall also include any other entity affiliated
with HNC or Retek, as the case may be, that HNC and Retek may hereafter agree in
writing shall be treated as a "Subsidiary" of HNC or Retek, as the case may be,
for the purposes of this Agreement.
"Transferee" has the meaning ascribed thereto in Section 3.8.
1.2. Internal References. Unless the context indicates otherwise,
references to Articles, Sections and paragraphs shall refer to the corresponding
articles, sections and paragraphs in this Agreement and references to the
parties shall mean the parties to this Agreement.
ARTICLE II: OPTIONS
2.1. Options.
(a) Retek hereby grants to HNC, on the terms and conditions set
forth herein, a continuing right (the "Option") to purchase from Retek from time
to time such number of shares of the Common Stock as is necessary to allow the
HNC Entities to maintain the Minimum Ownership Percentage of the Capital Stock
of Retek. The Option shall be assignable, in whole or in part and from time to
time, by HNC to any HNC Entity. The exercise price for the shares of Common
Stock purchased pursuant to the Option shall be the Market Price of the Common
Stock as of the date of first delivery of the applicable notice of exercise of
the Option by HNC (or its permitted assignee hereunder) to Retek. The exercise
price of the Option will be payable in cash as provided in Section 2.3.
(b) The provisions of Section 2.1(a) hereof notwithstanding, the
Option granted pursuant to Section 2.1 shall not apply and shall not be
exercisable in connection with the issuance by Retek of any shares of Common
Stock pursuant to any stock option or other executive or
5
<PAGE> 6
employee benefit or compensation plan maintained by Retek, so long as, from and
after the Effective Date and prior to the issuance of such shares, Retek has
repurchased from stockholders and not subsequently reissued a number of shares
equal or greater to the number of shares to be issued in any such issuance.
2.2. Notice. At least twenty (20) business days prior to the earlier of
(a) the issuance of any shares of Capital Stock (other than in connection with
the Initial Public Offering, including the full exercise of all underwriters'
over-allotment options and other than issuances of Capital Stock to any HNC
Entity), or (b) the first date on which any event could occur that, in the
absence of a full or partial exercise of the Option, would result in an HNC
Ownership Reduction, Retek will notify HNC in writing (an "Option Notice") of
any plans it has to issue such shares and the date on which such event could
first occur. Each Option Notice must specify (a) the date on which Retek intends
to issue such additional shares or on which such event could first occur (such
issuance or event being referred to herein as an "Issuance Event" and the date
of such issuance or event as an "Issuance Event Date"), (b) the number of shares
Retek intends to issue or may issue and, (c) the other terms and conditions of
such Issuance Event.
2.3. Option Exercise and Payment. The Option may be exercised by HNC (or
any HNC Entity to which all or any part of the Option has been assigned) for a
number of shares equal to or less than the number of shares that are necessary
for the HNC Entities to maintain, in the aggregate, the Minimum Ownership
Percentage. Each Option may be exercised at any time after the delivery of an
Option Notice and prior to an Issuance Event Date by the delivery to Retek by
HNC or any HNC entity of a written notice (the "Exercise Notice") to such effect
specifying (i) the number of shares of Common Stock to be purchased by HNC or
any of the HNC Entities upon such exercise of the Option and (ii) a calculation
of the exercise price for such shares. Upon any such exercise of the Option,
Retek will, prior to the Issuance Event Date, deliver to HNC (or any HNC Entity
who is exercising the Option or who is designated by HNC), against payment
therefor, certificates (issued in the name of HNC or its permitted assignee
hereunder or as directed by HNC) representing the shares of Common Stock being
purchased upon such exercise. If after the receipt of an Option Notice and prior
to the corresponding Issuance Event Date, HNC delivers to Retek an Exercise
Notice, Retek shall deliver the certificates for the shares of Common Stock
being purchased prior to the applicable Issuance Event Date. Payment for such
shares shall be made, on the date of delivery of such certificates, by wire
transfer or intrabank transfer of immediately-available funds to such account as
shall be specified by Retek, for the full purchase price for such shares.
2.4. Effect of Failure to Exercise. Except as provided in Section 2.6,
any failure by HNC to exercise the Option in full shall not affect HNC's right
to thereafter exercise the Option at any time in the future.
2.5. Initial Public Offering. Notwithstanding the foregoing, HNC shall
not be entitled to exercise the Option in connection with the Initial Public
Offering of the Common Stock by Retek if, upon the completion of the Initial
Public Offering, including the full exercise of all underwriters' over-allotment
options, HNC owns at least the Minimum Ownership Percentage (without regard to
clause (i)(c) of the definition of the Minimum Ownership Percentage).
6
<PAGE> 7
2.6. Termination of Option. The Option shall terminate upon the
occurrence of any Issuance Event that results in HNC's Ownership Percentage
being less than fifty percent (50%), other than any Issuance Event consummated
in violation of this Agreement. Any portion of the Option assigned to any HNC
Entity other than HNC, also shall terminate in the event that the Person to whom
such portion of the Option has been transferred, ceases to be a HNC Entity for
any reason whatsoever. If Retek fails to deliver any Option Notice on a timely
basis as required by Section 2.2, then the Option shall remain exercisable with
respect to the Issuance Event that triggered such right to exercise the Option
until such time as an Option Notice is provided to HNC and twenty (20) business
days elapse after HNC's receipt of such Option Notice without exercise of the
Option.
ARTICLE III: REGISTRATION RIGHTS
3.1. Demand Registration - Registrable Securities.
(a) Upon written notice provided to Retek at any time after the
Initial Public Offering Date from any Holder of Registrable Securities
requesting that Retek effect the registration under the Securities Act of any or
all of the Registrable Securities held by such Holder, which notice shall
specify the intended method or methods of disposition of such Registrable
Securities and whether the Holders wish such registration to be a Rule 415
Offering (the "Demand Notice"), Retek shall use its best efforts to promptly
effect the registration under the Securities Act and applicable state securities
laws of such Registrable Securities for disposition in accordance with the
intended method or methods of disposition stated in such Demand Notice
(including in a Rule 415 Offering, if Retek is then eligible to register such
Registrable Securities on Form S-3, or a successor form, for such offering);
provided that:
(i) with respect to any registration statement filed, or to be
filed, pursuant to this Section 3.1, if Retek shall furnish to the Holders of
Registrable Securities that have made such request (within three (3) business
days after Retek's receipt of the Demand Notice) a certified resolution of the
Board of Directors of Retek (adopted by the affirmative vote of a majority of
the directors not designated by the HNC Entities) stating that in the Board of
Directors' good faith judgment it would be significantly disadvantageous to
Retek, because of the existence of, or in anticipation of, any acquisition or
financing activity, or the unavailability, for reasons beyond Retek's reasonable
control, of any financial statements required to effect such requested
registration, or any other event or condition of similar significance to Retek
(a "Disadvantageous Condition"), for such a registration statement to be
maintained effective, or to be filed and become effective at such time, and
setting forth the general reasons for such judgment, then, (a) in the event no
registration statement has yet been filed, Retek shall be entitled not to file
any such registration statement, or (b) in the event a registration statement
covering the disposition of the Registrable Securities is then filed and
declared effective, the Holders will not sell Registrable Securities under such
registration statement until such Disadvantageous Condition no longer exists (at
which time Retek shall promptly deliver notice to such Holders that such
Disadvantageous Condition no longer exists). Upon receipt of any such notice of
a Disadvantageous Condition, such Holders shall forthwith discontinue use of the
prospectus contained in such registration statement and, if so directed by
Retek, each such Holder will deliver to Retek all copies (other than permanent
file copies then in such Holder's possession) of the prospectus then covering
such Registrable Securities that is current at the time of receipt of such
7
<PAGE> 8
notice and Retek shall promptly amend such prospectus as necessary to enable the
Holders to sell their Registrable Securities under the registration statement at
any time that they are permitted to do so under the provisions of this
Agreement, provided, that notwithstanding the foregoing, the filing of any such
registration statement may not be delayed, nor may sales or other dispositions
of Registrable Securities by Holders under a registration statement be
prevented, for a period in excess of ninety (90) consecutive days (or until such
earlier time as the Disadvantageous Condition no longer exists) due to the
occurrence of any particular Disadvantageous Condition and no more than one
resolution regarding Disadvantageous Conditions may be made by the Board of
Directors of Retek in any twelve (12) month period; and
(ii) the Holders of Registrable Securities shall not have the
right to exercise registration rights pursuant to this Section 3.1 within (A)
the 180-day period following the effective date of the registration statement
for the Initial Public Offering or (B) the 60-day period following the effective
date of any subsequent registration pursuant to the exercise of the registration
rights provided in this Section 3.1 in which the Holders of Registrable
Securities were allowed to include ten percent (10%) of their Registrable
Securities;
(iii) the Holders of Registrable Securities shall have the right
to request that Retek effect a registration of their Registrable Securities
pursuant to this Section 3.1 on not more than two (2) separate registrations
during any twelve (12) month period, excluding any prior exercises of such
rights that are not deemed to have been effected pursuant to Section 3.1(b). The
priority of exercise for such rights shall be allocated among the Holders in
such manner as the Holders may agree. If Registrable Securities relating to
different Request Notices delivered by more than one Holder are registered under
the same registration statement, such offering shall be deemed to be a single
exercise of demand rights by the first Holder to deliver a Request Notice and
the filing of only one registration statement for purposes of this Section 3.1;
and
(iv) the Registrable Securities requested by all Holders to be
registered pursuant to any Demand Notice must have an anticipated aggregate
public offering price (before any underwriters' discounts or commissions) of at
least $5,000,000; and
(v) after the reduction in HNC's Ownership Percentage to less
than twenty percent (20%), the Holders of Registrable Securities may
collectively exercise their rights under this Section 3.1 (through notice
delivered by Holders owning in the aggregate a majority in economic interest of
the Registrable Securities then held by Holders) on not more than three (3)
occasions.
(b) Notwithstanding any other provision of this Agreement to the
contrary, a registration requested by a Holder of Registrable Securities
pursuant to this Section 3.1 shall not be deemed to have been effected (and,
therefore, not requested for purposes of paragraph (a) above), (i) unless it has
become effective, (ii) if after it has become effective such registration is
interfered with by any stop order, injunction or other order or requirement of
the SEC or other governmental agency or court for any reason other than a
misrepresentation or an omission by such Holder, or is withdrawn by Retek
pursuant to Section 3.1(a)(i) or otherwise, and, as a result thereof, the
Registrable Securities requested to be registered cannot be completely
distributed in accordance with the plan of distribution set forth in the related
registration statement or (iii) if the conditions to closing specified in the
purchase agreement or underwriting agreement entered into
8
<PAGE> 9
in connection with such registration are not satisfied or waived other than by
reason of some act or omission by such Holder of Registrable Securities.
(c) In the event that any registration pursuant to this Section 3.1
shall involve, in whole or in part, an underwritten offering, the Holders of a
majority of the Registrable Securities to be registered shall have the right to
designate an underwriter or underwriters reasonably acceptable to Retek as the
lead or managing underwriters of such underwritten offering and, in connection
with each registration pursuant to this Section 3.1, such Holders may select one
counsel reasonably acceptable to Retek to represent all such Holders in
connection with such offering.
(d) Retek shall have the right to cause the registration of
additional equity securities for sale for its account, the account of any Retek
Entity or any existing or former directors, officers or employees of the Retek
Entities (the "Additional Securities") in any registration of Registrable
Securities requested by the Holders pursuant to Section 3.1(a); provided,
however, that if the registration and sale of such Additional Securities would
require HNC or any HNC Entity to exercise the Option in order (i) to maintain
HNC's then-current Ownership Percentage or (ii) to enable the HNC Entities (in
the aggregate) to maintain ownership of the Minimum Ownership Percentage, then
the number of such Additional Securities shall be reduced so that exercise of
the Option would not be necessary for HNC or any HNC Entity to maintain such
ownership levels and provided, further, that if such Holders are advised by a
nationally recognized investment banking or commercial banking firm selected by
such Holders and reasonably acceptable to Retek (which shall be the lead
underwriter or a managing underwriter in the case of an underwritten offering)
that, in such firm's good faith view, the inclusion of the Additional Securities
in such registration would be likely to have an adverse effect on the price,
timing or distribution of the offering and sale of the Registrable Securities
then proposed to be sold by any Holder, then all or part of the Additional
Securities shall be excluded from the registration. In the event that any
Additional Securities are included in the registration, the Holders of the
Registrable Securities to be offered may require that any Additional Securities
be subject to the same conditions as are applicable to the Registrable
Securities being sold in the offering. In the event that the number of
Registrable Securities requested to be included in a registration statement by
the Holders thereof exceeds the number which, in the good faith view of such
lead or managing underwriter, can be sold without adversely affecting the price,
timing, distribution or sale of securities in the offering, the number of
Registrable Securities to be included in such offering shall be allocated pro
rata among the requesting Holders on the basis of the relative number of
Registrable Securities then held by each such Holder (provided that any number
of Registrable Securities in excess of a Holder's request may be reallocated
among the remaining requesting Holders in a like manner, or as may be otherwise
agreed in writing by the Holders).
Retek agrees that, if requested by a Selling Holder, it will not
effect any public sale or distribution of its securities of the same class
proposed to be registered by the Holders, or any securities convertible into the
same class, during the thirty (30) days before the commencement of, during, and
for a period of ninety (90) days after termination of, an offering effected by
the Holders pursuant to this Section 3.1, except: (i) as part of such offering
in accordance with this paragraph (d); (ii) in connection with any dividend
reinvestment plan, employee stock option, bonus, retirement or other
compensation plan or arrangement (other than secondary registrations for resales
pursuant to such plans or arrangements) of Retek; (iii) any public sale or
distribution,
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<PAGE> 10
the registration statement for which was filed with the SEC before the receipt
of the notice from the requesting Holder or Holders pursuant to Section 3.1
(otherwise than pursuant to a Rule 415 Offering); or (iv) upon delivery by Retek
of a written opinion addressed to the Selling Holder from a nationally
recognized investment banking firm jointly selected by Retek and the Selling
Holder, at Retek's expense, stating that, in the view of such firm, such pubic
sale and distribution by Retek could be effected without adversely affecting the
market price for the Registrable Securities.
3.2. Piggyback Registration.
In the event that Retek at any time after the Initial Public Offering
Date proposes to file a registration statement covering the issuance or sale of
any shares of Retek Common Stock, or any other equity securities or securities
convertible into or exchangeable for equity securities of Retek (collectively,
including Common Stock, "Other Securities") under the Securities Act, whether or
not for sale for Retek's account in a manner that would permit the Registrable
Securities to be sold for cash under the Securities Act, then Retek shall, at
least twenty (20) days prior to the filing of such registration statement,
provide written notice to each Holder of Registrable Securities of its intention
to file a registration statement. Subject to the terms and conditions hereof,
such notice shall offer each Holder the opportunity to include in such
registration statement such number of Registrable Securities as any Holder may
request. Upon the written request of any Holder made within fifteen (15) days
after the receipt of Retek's notice (which request shall specify the number of
Registrable Securities intended to be disposed of and the intended method of
distribution thereof), Retek shall use its best efforts to effect, in connection
with the registration of the Other Securities, the registration under the
Securities Act of all Registrable Securities that the Holders have requested to
have registered (to the extent required to permit the disposition (in accordance
with such intended method of disposition thereof) of the Registrable Securities
so requested to be registered); provided that:
(a) if, at any time after giving the Holders written notice of
Retek's intention to register any Other Securities and prior to the effective
date of the registration statement filed in connection therewith, the Board of
Directors of Retek shall determine for any reason not to register the Other
Securities, then Retek shall, after giving prompt written notice of such
determination to the Holders, be relieved of its obligation to register such
Registrable Securities in connection with the registration of the Other
Securities. Any such termination of a registration shall not preclude the
Holders of Registrable Securities from immediately requesting that such
registration be effected as a registration under Section 3.1 to the extent
permitted thereunder;
(b) if the registration referred to in the first sentence of this
Section 3.2 is to be an underwritten registration on behalf of Retek, and a
nationally recognized investment banking or commercial banking firm selected by
Retek advises Retek in writing that, in such firm's good faith view, all or a
part of such Registrable Securities cannot be sold and the inclusion of all or a
part of such Registrable Securities in such registration would be likely to have
an adverse effect upon the price, timing or distribution of the offering and
sale of the Other Securities then contemplated, then Retek shall include in such
registration:
(i) first, all Other Securities Retek proposes to sell for its
own account ("Retek Securities");
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<PAGE> 11
(ii) second, up to the full number of Registrable Securities
held by Holders that have been requested by such Holders to be included
in such registration ("Holder Securities") in excess of the number of
Retek Securities to be sold in such offering, which number of Holder
Securities, in the good faith view of such investment banking or
commercial banking firm, can be sold without adversely affecting such
offering of Retek Securities and (x) if such number is less than the
full number of such Holder Securities, such number shall be allocated by
HNC among such Holders and (y) in the event that such investment banking
or commercial banking firm advises that less than all of such Holder
Securities may be included in such offering, the Holders may withdraw
their request for registration of their Registrable Securities in such
offering under this Section 3.2 and ninety (90) days subsequent to the
effective date of the registration statement relating to the Other
Securities, the Holders may request that a registration relating to the
Holder Securities be effected under Section 3.1 to the extent permitted
thereunder; and
(iii) third, up to the full number of the Other Securities
(other than Retek Securities), if any, in excess of the number of Retek
Securities and Registrable Securities to be sold in such offering, which
number of such Other Securities, in the good faith view of such
investment banking firm, can be so sold without so adversely affecting
such offering of Retek Securities and Registrable Securities (and, if
such number is less than the full number of such Other Securities, such
number shall be allocated pro rata among the holders of such Other
Securities (other than Retek Securities) on the basis of the number of
securities requested to be included therein by each such holder of such
Other Securities);
(c) Retek shall not be required to effect any registration of
Registrable Securities under this Section 3.2 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or employee
benefit/compensation plans (other than secondary registrations for resales
pursuant to such plans); and
(d) no registration of Registrable Securities effected under this
Section 3.2 shall relieve Retek of its obligation to effect any registration of
Registrable Securities pursuant to Section 3.1.
3.3. Expenses. Except as provided herein and except for underwriting
discounts and commissions attributable to the Registrable Securities sold by the
Holders, Retek shall pay all Registration Expenses with respect to a particular
offering (or proposed offering). Notwithstanding the foregoing, each Holder and
Retek shall be responsible for its own internal administrative and similar
costs, which shall not constitute Registration Expenses.
3.4. Registration and Qualification. If and whenever Retek is required
to effect the registration of any Registrable Securities under the Securities
Act as provided in Sections 3.1 or 3.2, Retek shall as promptly as practicable:
(a) prepare, file and use its best efforts to cause to become
effective a registration statement under the Securities Act relating to the
Registrable Securities proposed to be
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<PAGE> 12
offered; provided, that before filing any such registration statement, Retek
will furnish to each Holder of Registrable Securities included in such
registration (each a "Selling Holder"), counsel designated by the Selling
Holders and the underwriters, if any, copies of any such registration statement
(which registration statement shall be subject to review of such Selling
Holders, counsel and underwriters) and Retek shall consider in good faith
incorporating such changes in the registration statement as are reasonably
requested by the Selling Holders, their counsel and underwriters;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
Registrable Securities until the earlier of (i) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement and (ii) the
expiration of six (6) months after such registration statement becomes effective
if the registration is effected on Form S-3 (or a comparable successor form
which permits the incorporation by reference of any subsequently filed periodic
reports under the Exchange Act or the expiration of the date that is three (3)
months after the date on which such registration statement becomes effective on
any other registration statement form; provided, that such six-month or
three-month period shall be extended for such number of days that equals the
number of days elapsing from (x) the date the written notice contemplated by
paragraph 3.4(g) below is given by Retek to (y) the date on which Retek delivers
to the Holders of Registrable Securities the supplement or amendment
contemplated by paragraph 3.4(g) below; and provided further, that Retek may
keep such registration statement effective for longer time periods if desired by
Retek;
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed or original
copies of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus included in such registration statement (including each preliminary
prospectus and any summary or final prospectus), in conformity with the
requirements of the Securities Act, such documents incorporated by reference in
such registration statement or prospectus, and such other documents, as the
Holders of Registrable Securities or such underwriter may reasonably request,
and upon request a copy of any and all transmittal letters or other
correspondence to, or received from, the SEC or any other governmental agency,
stock exchange or automated inter-dealer quotation system, self-regulatory body
or other body having jurisdiction (including any domestic or foreign securities
exchange) relating to such offering;
(d) use its diligent and reasonable best efforts to register or
qualify all Registrable Securities covered by such registration statement under
the securities or blue sky laws of such U.S. jurisdictions as the Holders of
such Registrable Securities or any underwriter to such Registrable Securities
shall request, and use its diligent and reasonable best efforts to obtain all
appropriate registrations, permits and consents in connection therewith, and do
any and all other acts and things which may be necessary or advisable to enable
the Holders of Registrable Securities or any such underwriter to consummate the
disposition in such jurisdictions of its Registrable Securities covered by such
registration statement; provided, that Retek shall not for any such purpose be
required to qualify generally to do business as a foreign corporation in any
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<PAGE> 13
such jurisdiction wherein it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) in any underwritten offering use its diligent and reasonable
best efforts to furnish to each Holder of Registrable Securities included in
such registration (each, a "Selling Holder") and to any underwriter of such
Registrable Securities an opinion of independent counsel for Retek addressed to
each Selling Holder and dated the date of the closing under the underwriting
agreement (if any) (or if such offering is not underwritten, dated the effective
date of the registration statement) covering such matters as are customarily
covered in opinions of issuer's counsel delivered to underwriters in
underwritten public offerings of securities and such other matters as the
Selling Holders may reasonably request;
(f) in any underwritten offering use its diligent and reasonable
best efforts to furnish to each Selling Holder a "cold comfort" letter addressed
to each Selling Holder and to any underwriter of such Registrable Securities
signed by the independent public accountants who have audited the financial
statements of Retek included in such registration statement, in each such case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) as are customarily covered in
accountants' letters delivered to underwriters in underwritten public offerings
of securities and with respect to events subsequent to the date of such
financial statements;
(g) as promptly as practicable, notify the Selling Holders in
writing (i) at any time when a prospectus relating to a registration pursuant to
Section 3.1 or Section 3.2 is required to be delivered under the Securities Act
of the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (ii) of any request
by the SEC or any other regulatory body or other body having jurisdiction for
any amendment of or supplement to any registration statement or other document
relating to such offering, and in either such case, at the request of the
Selling Holders prepare and furnish to the Selling Holders a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
are made, not misleading;
(h) enter into customary agreements (including if the method of
distribution is by means of an underwriting, an underwriting agreement in
customary form) and take such other actions as are reasonably required in order
to expedite or facilitate the disposition of the Registrable Securities to be so
included in the registration statement;
(i) use its best efforts to list all such Registrable Securities
covered by such registration on each securities exchange and/or automated inter-
dealer quotation system on which a class of common equity securities of Retek is
then listed;
(j) to the extent reasonably requested by the lead or managing
underwriters, send appropriate officers of Retek to attend any "road shows"
scheduled in connection with any
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<PAGE> 14
such registration, with all out-of-pocket costs and expense incurred by Retek or
such officers in connection with such attendance to be paid by Retek;
(k) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected pursuant
to Section 3.1 or Section 3.2 certificates bearing no legends and representing
ownership of the Registrable Securities being sold in such denominations as
shall be requested by the Selling Holders or the underwriters; and
(l) notify each Selling Holder in writing, as soon as practicable
after Retek becomes aware that any registration statement under which such
Selling Holder may sell any Registrable Securities has ceased to be effective,
of the fact that such registration statement has ceased to be effective.
3.5. Underwriting; Due Diligence.
(a) If requested by the underwriters for any underwritten offering
of Registrable Securities pursuant to a registration requested under this
Article III, Retek shall enter into an underwriting agreement with such
underwriters for such offering, which agreement will contain such
representations and warranties by Retek and such other terms and provisions as
are customarily contained in underwriting agreements of Retek to the extent
relevant and as are customarily contained in underwriting agreements generally
with respect to secondary distributions to the extent relevant, including,
without limitation, indemnification and contribution provisions substantially to
the effect and to the extent provided in Section 3.6 and agreements as to the
provision of opinions of counsel and accountants' letters to the effect and to
the extent provided in Section 3.4(e) and Section 3.4(f). The Selling Holders on
whose behalf the Registrable Securities are to be distributed by such
underwriters shall be parties to any such underwriting agreement and the
representations and warranties by, and the other agreements on the part of,
Retek to and for the benefit of such underwriters, shall also be made to and for
the benefit of such Selling Holders. Such underwriting agreement shall also
contain such representations and warranties by such Selling Holders and such
other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, when relevant, including,
without limitation, indemnification and contribution provisions substantially to
the effect and to the extent provided in Section 3.6.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the Securities
Act pursuant to this Article III, Retek shall give the Holders of such
Registrable Securities and the underwriters, if any, and their respective
counsel and accountants, such reasonable and customary access to its books and
records and such opportunities to discuss the business of Retek with its
officers and the independent public accountants who have certified the financial
statements of Retek as shall be necessary, in the opinion of such Holders and
such underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
3.6. Indemnification and Contribution.
(a) In the case of each offering of Registrable Securities made
pursuant to this Article III, Retek agrees to indemnify and hold harmless, to
the extent permitted by law, each Selling Holder, each underwriter of
Registrable Securities so offered and each Person, if any, who
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<PAGE> 15
controls any of the foregoing Persons within the meaning of the Securities Act
and the officers, directors, affiliates, employees and agents of each of the
foregoing, jointly and severally, from and against any and all losses,
liabilities, costs (including reasonable attorney's fees and disbursements),
claims and damages, each as incurred, to which they or any of them may become
subject, under the Securities Act or otherwise, including any amount paid in
investigation, defense or settlement of any litigation commenced or threatened,
insofar as such losses, liabilities, costs, claims and damages (or actions or
proceedings in respect thereof, whether or not such indemnified Person is a
party thereto) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the registration statement (or
in any preliminary or final prospectus included therein) or in any offering
memorandum or other offering document relating to the offering and sale of such
Registrable Securities prepared by Retek or at its direction, or in any
amendment thereof or supplement thereto, or in any document incorporated by
reference therein, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or arising from or relating to any violation or alleged
violation of the Securities Act, any blue sky laws, securities laws or other
applicable laws of any state or country in which the Registrable Securities are
offered and relating to action required of, or inaction by, Retek in connection
with such offering; provided, however that Retek shall not be liable to any
Holder in any such case to the extent that any such loss, liability, cost, claim
or damage arises out of or relates to any untrue statement or alleged untrue
statement, or any omission, if such statement or omission shall have been made
in reliance upon and in conformity with information that relates to such Selling
Holder, if such information was furnished in writing to Retek by or on behalf of
such Selling Holder specifically for use in the registration statement (or in
any preliminary or final prospectus included therein), offering memorandum or
other offering document, or in any amendment thereof or supplement thereto. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of any Selling Holder and shall survive the transfer of
such securities. The foregoing indemnity agreement is in addition to any
liability that Retek may otherwise have to each Selling Holder, other holder or
underwriter of the Registrable Securities or any controlling person of the
foregoing and the officers, directors, affiliates, employees and agents of each
of the foregoing; provided, further, that, in the case of an offering with
respect to which a Selling Holder has designated the lead or managing
underwriters (or a Selling Holder is offering Registrable Securities directly,
without an underwriter), this indemnity does not apply to any loss, liability,
cost, claim or damage arising out of or relating to any untrue statement or
alleged untrue statement or omission or alleged omission in any preliminary
prospectus if a copy of a final prospectus was not sent or given by or on behalf
of any underwriter (or such Selling Holder or other holder, as the case may be)
legally required to deliver a final prospectus to such Person asserting such
loss, liability, cost, claim or damage at or prior to the written confirmation
of the sale of the Registrable Securities as required by the Securities Act and
such untrue statement or omission had been corrected in such final prospectus.
(b) In the case of each registered offering made pursuant to this
Agreement, each Selling Holder, by exercising its registration rights hereunder,
agrees to indemnify and hold harmless Retek, each underwriter who participates
in such offering, each other Selling Holder or other holder with securities
included in such offering and each Person, if any, who controls (within the
meaning of the Securities Act) such underwriter, other Selling Holder or other
holder and the officers, directors, affiliates, employees and agents of each of
the foregoing, against any and all losses, liabilities, costs (including
reasonable attorney's fees and disbursements), claims and
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<PAGE> 16
damages, each as incurred, to which they or any of them may become subject,
under the Securities Act or otherwise, including any amount paid in
investigation, defense or settlement of any litigation commenced or threatened,
insofar as such losses, liabilities, costs, claims and damages (or actions or
proceedings in respect thereof, whether or not such indemnified Person is a
party thereto) arise out of or are based upon any untrue statement or alleged
untrue statement by such Selling Holder of a material fact contained in the
registration statement (or in any preliminary or final prospectus included
therein) or in any offering memorandum or other offering document relating to
the offering and sale of such Registrable Securities prepared by Retek or at its
direction, or in any amendment thereof or supplement thereto, or any omission by
such Selling Holder or alleged omission by such Selling Holder of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that such untrue statement
of a material fact is contained in, or such material fact is omitted from,
information relating to such Selling Holder furnished to Retek in writing by or
on behalf of such Selling Holder specifically for use in such registration
statement (or in any preliminary or final prospectus included therein), offering
memorandum or other offering document, or any amendment thereof or supplement
thereto; provided that the maximum liability of any Holder for any loss,
liability, cost, claim or damage pursuant to the foregoing indemnity shall not
exceed the amount of the net proceeds, if any, obtained by the Holder upon the
sale of such Holder's Registrable Securities pursuant to such offering. The
foregoing indemnity is in addition to any liability which such Selling Holder
may otherwise have to Retek, or controlling persons and the officers, directors,
affiliates, employees, and agents of each of the foregoing; provided, however,
that, in the case of an offering made pursuant to this Agreement with respect to
which Retek has designated the lead or managing underwriters (or Retek is
offering securities directly, without an underwriter), this indemnity does not
apply to any loss, liability, cost, claim, or damage arising out of or based
upon any untrue statement or alleged untrue statement or omission or alleged
omission in any preliminary prospectus if a copy of a final prospectus was not
sent or given by or on behalf of any underwriter (or Retek, as the case may be)
legally required to provide a final prospectus to such Person asserting such
loss, liability, cost, claim or damage at or prior to the written confirmation
of the sale of the Registrable Securities as required by the Securities Act and
such untrue statement or omission had been corrected in such final prospectus.
(c) Each party indemnified under paragraph (a) or (b) above (an
"Indemnified Party") shall, promptly after receipt of notice of a claim or
action against such Indemnified Party in respect of which indemnity may be
sought hereunder, notify the party required to provide indemnification hereunder
(an "Indemnifying Party") in writing of the claim or action; provided, that the
failure to notify the Indemnifying Party shall not relieve it from any liability
that it may have to an Indemnified Party under this Section 3.6 (except that the
failure to notify an Indemnifying Party promptly of the commencement of any such
action, to the extent materially prejudicial to the Indemnifying Party's ability
to defend such action, shall relieve such Indemnifying Party of any liability
only to the extent the Indemnifying Party is prejudiced with respect to its
indemnification obligations under this Section 3.6). If any such claim or action
shall be brought against an Indemnified Party, and it shall have notified the
Indemnifying Party thereof, unless in such Indemnified Party's good faith
reasonable judgment a conflict of interest between such Indemnified Party and
Indemnifying Party may exist in respect of such claim, the Indemnifying Party
shall be entitled to participate therein, and, to the extent that it wishes,
jointly with any other similarly notified Indemnifying Party, to assume the
defense thereof with counsel reasonably acceptable to the Indemnified Party (who
shall not, except with the consent of the
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<PAGE> 17
Indemnified Party, be counsel to the Indemnifying Party). After notice from the
Indemnifying Party to the Indemnified Party of its election to assume the
defense of such claim or action using counsel reasonably acceptable to the
Indemnified Party, the Indemnifying Party shall not be liable to the Indemnified
Party under this Section 3.6 for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that, any Person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of any such claim or action, but the
fees and expenses of such counsel shall be at the expense of such Person, unless
(i) the Indemnifying Party has agreed to pay such fees or expenses, (ii) the
Indemnifying Party shall have failed to assume the defense of such claim and
employ counsel reasonably acceptable to such Person, or (iii) in the reasonable
good faith judgment of any such Person based on advice of its counsel, a
conflict of interest may exist between such Person and the Indemnifying Party
with respect to such claims or actions (in which case, if such Person notifies
the Indemnifying Party in writing that such Person elects to employ separate
counsel at the expense of the Indemnifying Party, the Indemnifying Party shall
not have the right to assume the defense of such claim or action on behalf of
such Person). If the Indemnifying Party is not entitled to or does not assume
the defense of such claim or action, it is understood that the Indemnifying
Party shall not, in connection with any one such claim or action or separate but
substantially similar or related claims or actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
one separate firm of local attorneys in each such jurisdiction) at any time for
all such Indemnified Parties. Any Indemnifying Party against whom indemnity may
be sought under this Section 3.6 shall not be liable to indemnify an Indemnified
Party if such Indemnified Party settles such claim or action without the consent
of the Indemnifying Party, which consent shall not be unreasonably withheld,
conditioned or delayed.
(d) If the indemnification provided for in this Section 3.6 shall
for any reason be unavailable (other than in accordance with its terms) to an
Indemnified Party in respect of any loss, liability, cost, claim or damage
referred to therein, then each Indemnifying Party shall, in lieu of indemnifying
such Indemnified Party, contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, cost, claim or damage in
such proportion as shall be appropriate to reflect (i) the relative benefits
received by the Indemnifying Party on the one hand and the Indemnified Party on
the other hand or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law or if the Indemnified Party failed to give the
notice required under paragraph 3.6(c) above, the relative benefits to and the
relative fault of the Indemnifying Party on the one hand and the Indemnified
Party on the other hand with respect to the statements or omissions which
resulted in such loss, liability, cost, claim or damage as well as any other
relevant equitable considerations. The relative benefits received by the
Indemnifying Party and the Indemnified Party shall be deemed to be in the same
respective proportion as the net proceeds (before deducting expenses) of the
offering received by such party (or, in the case of an underwriter, such
underwriter's discounts and commissions) bear to the aggregate offering price of
the Registrable Securities or Other Securities. The relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Indemnifying Party on the one hand or the
Indemnified Party on the other hand, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, but not by reference to any Indemnified Party's stock ownership in
Retek. The amount paid or payable by an
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<PAGE> 18
Indemnified Party as a result of the loss, cost, claim, damage or liability, or
action in respect thereof, referred to above in this paragraph 3.6(d) shall be
deemed to include, for purposes of this paragraph (d), any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.6(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediate preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) Indemnification and contribution similar to that specified in
the preceding paragraphs of this Section 3.6 (with appropriate modifications)
shall be given by Retek and the Selling Holders with respect to any required
registration or other qualification of securities under any state law or
regulation or governmental authority.
(f) The obligations of the parties under this Section 3.6 shall be
in addition to any liability which any party may otherwise have to any other
party.
3.7. Rule 144 and Form S-3. Commencing ninety (90) days after the
Initial Public Offering Date, Retek shall use its best efforts to ensure that
the conditions to the availability of Rule 144 set forth in paragraph (c)
thereof shall be satisfied. Upon the request of any Holder of Registrable
Securities, Retek will deliver to such Holder a written statement as to whether
it has complied with such requirements. Retek further agrees to use its
reasonable efforts to cause all conditions to the availability of Form S-3 (or
any successor form) under the Securities Act of the filing of registration
statements under this Agreement to be met as soon as practicable after the
Initial Public Offering Date.
3.8. Transfer of Registration Rights. Any Holder may transfer all or any
portion of its rights under this Article III to any transferee of a number of
Registrable Securities owned by such Holder exceeding five percent (5%) of the
outstanding class or series of such securities at the time of transfer (each
transferee that receives such minimum number of Registrable Securities, a
"Transferee"); provided, that each Transferee of Registrable Securities (other
than HNC Entities) to which Registrable Securities are transferred, sold or
assigned directly by a HNC Entity (such Transferee, an "HNC Transferee")
together with any Affiliate of such HNC Transferee (and any subsequent direct or
indirect Transferees of Registrable Securities from such HNC Transferee and any
Affiliates thereof) shall be entitled to request the registration of Registrable
Securities pursuant to Section 3.1 only once prior to a reduction in HNC's
Ownership Percentage to less than fifty percent (50%) and thereafter shall only
be entitled to request the registration of Registrable Securities pursuant to
Section 3.2; provided further, that no HNC Transferee shall be entitled to
request registration pursuant to Section 3.1 for an amount of Registrable
Securities equal to less than $5,000,000; and provided further, that
notwithstanding the foregoing, HNC shall not transfer any of its rights under
this Article III to any stockholder of HNC in connection with the transfer of
Registrable Securities to such stockholder in the Distribution. Any transfer of
registration rights pursuant to this Section 3.8 shall be effective upon receipt
by Retek of (i) written notice from such Holder stating the name and address of
any Transferee and
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identifying the number of Registrable Securities with respect to which the
rights under this Agreement are being transferred and the nature of the rights
so transferred and (ii) a written agreement from such Transferee to be bound by
the terms of this Agreement. The Holders may exercise their rights hereunder in
such priority as they shall agree upon among themselves.
3.9. Market Standoff Agreement. If any registration pursuant to this
Article III shall be in connection with an underwritten public offering of
Registrable Securities, each Selling Holder agrees not to effect any public sale
or distribution, including any sale under Rule 144, of any equity security of
Retek or any security convertible into or exchangeable or exercisable for any
equity security of Retek, in the case of Registrable Securities (otherwise than
through the registered public offering then being made), within seven (7) days
(after the receipt of satisfactory notice from Retek) prior to or ninety (90)
days (or such lesser period as the lead or managing underwriters may permit)
after the effective date of the registration statement (or the commencement of
the offering to the public of such Registrable Securities in the case of Rule
415 offerings), provided that each officer, director, and each person or entity
who is a "beneficial owner" (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of five percent (5%) of more of the outstanding shares of
Capital Stock of Retek prior to such offering also agrees to be similarly bound
by this restriction.
3.10. Limitation on Subsequent Registration Rights. After the date of
this Agreement, Retek shall not, without the prior written consent of the
Holders of majority of the Registrable Securities then outstanding, enter into
any agreement with any holder or prospective holder of any securities of Retek
that would grant such holder registration rights that would prevent Retek from
honoring the registration rights of Holders described herein.
ARTICLE IV: CORPORATE GOVERNANCE MATTERS AND
INFORMATION RIGHTS
4.1. Seats on Retek Board of Directors. At and after the Initial Public
Offering Date, the Board of Directors of Retek shall consist of not more and not
less than seven (7) members and shall be comprised of (a) the Chief Executive
Officer of Retek, (b) three (3) individuals, each of whom shall have been
designated by HNC (each an "HNC Designee") and (c) three (3) independent
directors, each of whom shall have appropriate retail industry (or other
relevant industry) experience and shall have been designated by the Chief
Executive Officer of Retek; provided, however, that HNC's right to designate the
three (3) HNC Designees shall terminate once HNC and its Affiliates own
(including without limitation voting their shares of Capital Stock of Retek)
less than twenty-five percent (25%) of the outstanding Common Stock; and
provided, further, that when HNC and its Affiliates own less than twenty-five
percent (25%) of the outstanding Common Stock, HNC will use reasonable, good
faith efforts to cause the HNC Designees to tender their resignations as members
of Retek's Board of Directors effective at the next annual meeting of Retek's
stockholders regardless of whether the term of such HNC Designee ends at such
meeting; provided, further, that when HNC and its Affiliates own less than five
percent (5%) of the outstanding Common Stock, HNC will use reasonable, good
faith efforts to cause the HNC Designees to tender their resignations as members
of Retek's Board of Directors as promptly as possible thereafter. The HNC
Designees will serve in the class of Retek directors whose board seats will come
up for election at the most distant time from the Initial Public Offering than
any other class of Retek directors (currently this class of Retek directors is
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anticipated to be Retek's Class III Directors, whose seats will come up for
election in 2002). The parties agree to take all necessary action within their
control as is necessary from time to time to implement and carry out the
agreements set forth in the immediately preceding sentence, including without
limitation voting their shares of Capital Stock in favor of the election to
Retek's Board of Directors of the Board nominees designated as provided above.
4.2. HNC Designees - Vacancy. For so long as HNC has the right to
nominate the HNC Designees, if a vacancy on the Retek Board of Directors is
caused by the death, disability, retirement, resignation, or removal for cause
or otherwise of an HNC Designee, then HNC shall have the sole right to designate
an individual to fill such vacancy on the Retek Board of Directors. The parties
agree to take all necessary action within their control as may be necessary from
time to time to cause each individual so designated by HNC pursuant to this
Section 4.2 to promptly become a member of the Board of Directors of Retek, by
election, appointment by the Retek Board of Directors or otherwise.
4.3. Removal.
(a) Any HNC Designee may be removed from office only (i) for Cause
(as defined below) by the vote of the stockholders representing not less than a
majority of the issued and outstanding shares of the Capital Stock of Retek
entitled to vote upon the election of directors; or (ii) upon HNC's
determination that the HNC Designee should no longer serve as such. Upon any
such determination by HNC pursuant to part (ii) of the immediately preceding
sentence, the parties agree to take all necessary action within their control
(including without limitation voting their shares of Capital Stock of Retek) to
cause such HNC Designee to be promptly removed from the Board of Directors of
Retek and to cause a successor HNC Designee designated by HNC to be immediately
elected or appointed to the Board of Directors of Retek to replace such removed
HNC Designee.
For purposes of this Agreement, "Cause" means (i) the willful failure by
the HNC Designee to perform his or her lawful duties as a member of Retek's
Board of Directors consistent with such HNC Designee's position, (ii) such HNC
Designee's neglect of his or her duties on a general basis (other than as a
result of illness or disability), (iii) the commission by such HNC Designee of
any act of fraud, theft or criminal dishonesty with respect to Retek or any of
its Affiliates, or the conviction of HNC Designee of any crime involving a
felony, fraud, embezzlement or the like, and (iv) the commission of any act
involving moral turpitude which (A) brings Retek or any of its Affiliates into
public disrepute or disgrace, or (B) causes material injury to the customer
relations, operations or the business prospects of Retek or any of its
Affiliates.
(b) Notwithstanding the rights granted to it under Retek's Amended
and Restated Certificate of Incorporation, HNC agrees that it will not vote its
shares of Retek Common Stock to remove any member of Retek's Board of Directors
who is not an HNC Designee from the Retek Board of Directors, except for the
removal of any such director for Cause; provided, however, if the person who is
Retek's Chief Executive Officer is a member of Retek's Board of Directors and
such person ceases to be Retek's Chief Executive Officer for any reason, then
HNC shall not be restricted in seeking the removal of such person from Retek's
Board of Directors. Concurrently herewith, John Buchanan, Retek's current Chief
Executive Officer, has executed and delivered to HNC and Retek a letter in the
form of Exhibit 1 attached hereto, in which he has made
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certain agreements with Retek and HNC which are a material inducement and
consideration to HNC to enter into this Agreement.
4.4. Board Committees. The Board of Directors of Retek shall have a
Compensation Committee and an Audit Committee. The Compensation Committee will
be comprised of two (2) non-employee directors and will include at least one (1)
HNC Designee. The Audit Committee will be comprised of two (2) directors and
will include at least one (1) HNC Designee and one independent director.
4.5. Special Transactions. Retek and RIS covenant and agree with HNC
that neither Retek nor RIS shall take any action relating to a Special
Transaction (as defined below) unless (i) such Special Transaction, such Special
Transaction is approved by at least two (2) of the HNC Designees to the Board of
Directors of Retek, and (ii) with respect to a Special Transaction described in
Sections 4.5(a), (c), (g), (h), (i), (k), (l) (m), (n) or (o) below, such
Special Transaction is approved by HNC as the majority stockholder of Retek. In
connection with any approvals required by HNC under this Section 4.5, Retek will
provide adequate notice to HNC of any action described in Sections 4.5(a), (c),
(g), (h), (i), (k), (l), (m), (n) or (o) below, without regard to the exceptions
thereto, within a period of time sufficient to enable HNC to approve or
disapprove of any such action. Each such notice shall set forth the terms and
conditions of the proposed transaction, including, without limitation, the
nature of any related action proposed to be taken by the Board of Directors of
Retek, the approximate number of shares of Retek or RIS Capital Stock (if any)
proposed to be sold by Retek or RIS or otherwise issued by Retek or RIS, the
approximate value of Retek's assets (or assets of any of Retek's Subsidiaries)
proposed to be transferred, and the proposed timetable for such transaction, all
with sufficient particularity to enable HNC to approve or disapprove of such
transaction. Promptly, but in any event within seven (7) days after HNC receives
such written notice from Retek, HNC shall notify Retek in writing of its
approval or disapproval of any such transaction.
For the purposes of this Section 4.5, a "Special Transaction" shall mean
any of the following events:
(a) any merger, consolidation or other business combination by
Retek, RIS or any direct or indirect or indirect wholly-owned Subsidiary of
Retek or RIS with one or more Persons in which the outstanding shares of Retek,
RIS or such a wholly-owned Subsidiary of Retek or RIS are exchanged for
securities or other consideration, issued or caused to be issued by the
acquiring corporation or its Subsidiary (other than a mere reincorporation
transaction in which the relative interests of the securityholders of such
entity are not changed) in which the holders of Capital Stock of Retek, RIS or
such a wholly-owned Subsidiary of Retek or RIS immediately prior to such merger
or consolidation do not own a majority of the outstanding shares of the
surviving entity or such merger, consolidation or business combination;
(b) a sale, lease, exchange or other disposition of all or a
substantial portion of the assets of Retek, RIS or any of their Subsidiaries;
(c) any material change in the scope or nature of the business
presently conducted by Retek, RIS or any of their Subsidiaries as described in
the registration statement for the Initial Public Offering;
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(d) any liquidation, dissolution or winding up of Retek, RIS or any
of their Subsidiaries;
(e) any transaction or proposed transaction that would involve the
issuance of Capital Stock of Retek in an amount that would result in an HNC
Ownership Reduction;
(f) any commitment by Retek or RIS to incur annual capital
expenditures or to make investments or capital contributions on behalf of Retek
or RIS in excess of $5,000,000 in the aggregate; other than any such
expenditures that were not otherwise identified in any Annual Business Plan and
Budget, (as described below) previously submitted to and approved by HNC;
(g) any issuance, sale or exchange of shares of Capital Stock of
Retek or RIS, except the Initial Public Offering or pursuant to sales of Common
Stock of Retek to directors, employees or consultants of Retek or RIS pursuant
to stock option or stock purchase plans previously approved (including approval
of the number of shares reserved under such plan(s)) in writing by HNC (it being
understood that in connection with the Initial Public Offering, HNC has approved
Retek's adoption of, and the reservation of the following respective number of
shares of Retek Common Stock under, (i) the Retek 1999 Equity Incentive Plan,
under which a total of 9,000,000 shares of Retek Common Stock have been reserved
for issuance; (ii) the Retek 1999 Employee Stock Purchase Plan, under which a
total of 700,000 shares of Retek Common Stock have been reserved for issuance;
and (iii) the Retek 1999 Directors Stock Option Plan, under which a total of
400,000 shares of Retek Common stock have been reserved for issuance.
(h) the creation, incurrance, assumption, or guarantee of any
obligation for borrowed money in an aggregate principal amount, in a single
transaction or a series of transactions, of more than $10,000,000, or the
extension, refinancing, or modification in any material respect of such
obligation;
(i) any sale, purchase, lease, exchange, mortgage, pledge, transfer
or other acquisition or disposition (in one transaction or a series of
transaction) of assets or a business having a fair market value of more than
$3,000,000;
(j) the formation, or the modification of the structure of, any
committees of the Board of Directors of Retek or RIS;
(k) the appointment, election or employment of, or termination of,
Retek's Chief Executive Officer and Chief Financial Officer;
(l) any adoption or amendment of any employee benefit, stock option,
stock purchase or other equity incentive plan, program or arrangement for
Retek's employees;
(m) any material change in any Annual Business Plan and Budget;
(n) any amendment to Retek's certificate of incorporation or by-laws
that would (i) authorize any new class or series of capital stock of Retek or
any preferred stock of Retek, (ii) affect or change the rights of the Common
Stock, (iii) change or alter any provision directly or indirectly relating to
the taking of action by stockholders or the Board of Directors of
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Retek or the composition or election of Retek's Board of Directors, including,
but not limited to, the voting requirements of the stockholders and directors of
Retek;
(o) any adoption or amendment of a stockholder rights plan, poison
pill or similar antitakeover device;
(p) the commencement by Retek of any legal action, suit, arbitration
or other proceeding (each, an "Action"), other than any such proceeding that (i)
is in the ordinary course of Retek's business and not material in amount or in
the likely impact on Retek or (ii) where the aggregate amount of (A) damages or
other relief (including the reasonably anticipated economic impact of any
non-monetary relief, as determined by the Board of Directors of Retek in its
good faith judgment) sought by Retek in such Action, (B) the amount of damages
or other relief that would reasonably be expected to be sought by the defendant
or defendants in any counterclaim against Retek in such Action and (C ) the
amount of expenses Retek would reasonably expect to pay to prosecute or defend
such Action is not in the good faith judgment of the Board of Directors of Retek
reasonably anticipated to exceed $500,000; and
(q) the settlement of any Action against Retek of other than (i) any
Action that arises in the ordinary course of Retek's business and not material
in amount or in the likely impact on Retek or (ii) any such settlement that
would result in a cost to Retek (net of any amounts payable to Retek under
insurance policies or recoveries by Retek on any counterclaims) of not more than
$500,000 (including the reasonably anticipated economic impact of any
non-monetary relief, as determined by the Board of Directors of Retek in its
good faith judgment).
4.6. Information Rights. Retek shall deliver to HNC in such format and
media as HNC may reasonably request:
(a) as soon as available, but in any event within twenty (20) days
after the end of each month and each quarter, a consolidated balance sheet of
Retek and its consolidated subsidiaries as of the end of such month or quarter
and the related consolidated statements of earnings, stockholders' equity and
statement of cash flows for such month or quarter, as the case may be, and for
the year to date, setting forth, in each case, in comparative form the figures
for the corresponding period of one year earlier, all in reasonable detail and
prepared in accordance with generally accepted accounting principles ("GAAP")
(except for the omission of footnotes) applied on a consistent basis throughout
the periods represented;
(b) as soon as available, but in any event within ninety (90) days
after the end of each fiscal year of Retek, a consolidated audited balance sheet
of Retek and its consolidated subsidiaries as of the end of such fiscal year and
the related statements of earnings, stockholders' equity and statement of cash
flows for such fiscal year setting forth, in comparative form the figures for
the previous fiscal year, all in reasonable detail for audit clearance within
HNC. Retek will deliver to HNC within ninety (90) days after the end of each
fiscal year such materials accompanied by the report thereon of Retek's
independent auditors, which report shall state that such financial statements
present fairly the financial condition and results of operations of Retek and
its consolidated subsidiaries as of the close of such fiscal year in conformity
with GAAP consistently applied;
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(c) at least three (3) business days prior to Retek's filing thereof
with the SEC, all reports, proxy statements, registration statements and other
filings made by Retek under the Securities Act or the Exchange Act;
(d) all written reports, analyses or studies relating to the
business or financial condition of Retek as Retek shall deliver to any other
holder of its Common Stock, simultaneously with its delivery to such holder;
(e) as soon as available, but in any event no later than five (5)
business days following receipt of a request by HNC, such other information
relating to Retek as HNC may reasonably request, in connection with the
reporting of its ownership interest in Retek under the "equity method" of
accounting in accordance with GAAP or as may otherwise be required by GAAP, to
prepare HNC's own financial statements and reports under the Exchange Act and in
accordance with GAAP; and
(f) as soon as practicable, but in any event no later than two (2)
business days prior to issuance, copies of substantially final drafts of all
press releases and other statements to be made available by Retek or any of its
Subsidiaries or to the public concerning material developments in the business,
properties, earnings, results of operations, financial condition or prospects of
Retek or any of its Subsidiaries or the relationship between (i) Retek or any of
its Subsidiaries and (ii) HNC or any of its Affiliates. In addition, within such
two day period prior to the issuance of any such press release or public
statement, Retek shall actively consult with HNC regarding any changes (other
than typographical or other similar minor changes) to such substantially final
drafts. Retek further agrees to review any proposed press release regarding its
financial or operating results for any period with the audit committee of
Retek's Board of Directors and Retek's independent auditors a reasonable amount
of time prior to the initial public release of such press release.
4.7. Annual Business Plan and Budget. Retek will (a) at least one (1)
month prior to the commencement of each fiscal year and at least thirty (30)
days prior to the Initial Public Offering Date, prepare and submit to the Board
of Directors of Retek and to HNC for approval and to HNC a budget and operating
plan for the upcoming fiscal year, including projections or forecasts of capital
and operating expenses, cash flow and profits and losses (the "Annual Business
Plan and Budget"), all itemized in reasonable detail; and (b) at least one month
prior to the commencement of each quarter, prepare and submit to the Board of
Directors of Retek for approval and to HNC projections or forecasts of capital
and operating expenses, cash flow and profits and losses for the remainder of
the fiscal year together with profit projections for the following fiscal year.
Before Retek takes any action that would materially deviate from the approved
Annual Business Plan and Budget, the Board of Directors of Retek and HNC must
first approve such action.
4.8. Inspection and Audit Rights. Retek agrees to permit authorized
representatives of HNC to visit and inspect any of the properties of Retek,
including its books of account, and to take extracts or copies thereof, and to
discuss Retek's affairs, finances and accounts with Retek's officers and
independent accountants, all at such times and as often as may be reasonably
requested, and to make such other inspections as may be necessary to permit HNC
to review any of the financial statements of Retek delivered to HNC pursuant to
this Agreement; provided however, that such representative shall hold in
confidence all non-public information so provided
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and so designated by Retek (except that such representatives may disclose such
information to officers of HNC, to HNC's counsel and independent auditors, to
others and as required by law and regulations, including, without limitation,
any laws or regulations requiring HNC to report (or to incorporate in any
reports of HNC) such information regarding Retek). In addition, Retek will allow
the independent auditors of HNC to audit the working papers or, and to assist in
any review undertaken by, Retek's independent accountants.
4.9 Change in Fiscal Year. Retek shall, and shall cause each of its
Subsidiaries to, maintain a fiscal year which commences and ends on the same
dates as does HNC's fiscal year of each calendar year.
4.10 No Violations.
(a) Retek covenants and agrees that it will not take any action or
enter into any commitment or agreement which to Retek's knowledge, after due
inquiry, may reasonably be anticipated to result, with or without notice and
with or without lapse of time or otherwise, in a contravention, violation or
event of default by HNC or any of its Affiliates of (i) any provision of HNC's
certificate of incorporation or by-laws, each as amended, (ii) any credit
agreement or other material agreements (including agreements relating to
covenants not to compete) binding upon HNC or (iii) any judgment, order or
decree of any governmental body, agency or court having jurisdiction over HNC or
any of its respective assets.
(b) Retek and HNC agree to provide to the other any information and
documentation requested by the other for the purpose of evaluating and ensuring
compliance with Section 4.10(a) hereof.
4.11. Termination of Certain Rights. Except as provided in Section 4.1,
the provisions of this Article IV shall terminate and be of no further force or
effect at such time as HNC (together with its Affiliates) ceases to own at least
fifty percent (50%) of the outstanding shares of the Capital Stock of Retek;
provided that the provisions of this Article IV shall not terminate if HNC
(together with its Affiliates (other than Retek and RIS)) ceases to own at least
fifty percent (50%) of the outstanding shares of the Capital Stock of Retek due
to any breach, violation or default by Retek or RIS of any of their duties or
obligations under the certificate of incorporation or bylaws of Retek, each as
amended, or under any agreement to which they are a party or to which HNC is a
party or beneficiary.
ARTICLE V: MISCELLANEOUS
5.1. Limitation of Liability. Neither HNC nor Retek shall be liable to
the other for any special, indirect, incidental or consequential damages of the
other arising in connection with this Agreement.
5.2. Amendments; Waiver. This Agreement may not be amended or terminated
orally, but only by a writing duly executed by or on behalf of the parties
hereto. Any such amendment shall be validly and sufficiently authorized for
purposes of this Agreement if it is signed on behalf of HNC and Retek by any of
their respective presidents or vice presidents. The observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) only by a writing signed by the party to
be bound thereby. The
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waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. Failure by either party, at any time, to require performance
by the other party or to claim a breach of any provision of this Agreement shall
not be construed as a waiver of any right accruing under this Agreement, nor
shall it affect any subsequent breach or the effectiveness of this Agreement or
any part hereof, or prejudice either party with respect to any subsequent
action.
5.3. Term. This Agreement shall remain in effect until all Registrable
Securities held by Holders have been transferred by them to Persons other than
Transferees; provided, that the provisions of Section 3.6 shall survive any such
expiration.
5.4. Severability. If any provision of this Agreement or the application
of any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid, illegal or unenforceable to any
extent, the remainder of this Agreement or such provision of the application of
such provision to such party or circumstances, other than those to which it is
so determined to be invalid, illegal or unenforceable, shall remain in full
force and effect to the fullest extent permitted by law and shall not be
affected thereby, unless such a construction would be unreasonable.
5.5. Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given upon receipt if delivered
personally, by a national overnight delivery service or by facsimile
transmission, or upon deposit in the U.S. mail (certified or registered mail,
postage prepaid, return receipt requested):
If to HNC, to: If to Retek or RIS, to:
HNC Software Inc. Retek Inc.
5935 Cornerstone Court West Midwest Plaza
San Diego, CA 92121-3728 801 Nicollet Mall, 11th Floor
Attention: Chief Financial Officer Minneapolis, MN 55402
Facsimile: (858) 452-3220 Attention: Chief Financial Officer
Facsimile: (612) 630-5641
or to such other person or address as any party shall specify by providing
notice in writing to the other party in the manner specified above. All such
notices, requests, demands, waivers and communications shall be deemed to have
been received on the date on which hand delivered, the business day following
deposit with a national overnight delivery service, one (1) business day after
transmission of the facsimile transmission by the sender and issuance by the
transmitting machine of a confirmation slip confirming that the number of pages
constituting the notice have been transmitted without error, or on the third
business day following the date on which so mailed, except for a notice of
change of address, which shall be effective only upon receipt thereof.
5.6. Further Assurances. HNC and Retek shall execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, such instruments
and take such other action as may be necessary or advisable to carry out their
obligations under this Agreement and under any exhibit, document or other
instrument delivered pursuant hereto.
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5.7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same agreement. This Agreement
will become binding when one or more counterparts hereof, individually or taken
together, will bear the signatures of all the parties reflected hereon as
signatories.
5.8. Governing Law. This Agreement and the transactions contemplated
hereby shall be construed in accordance with, and governed by, the laws of the
State of Delaware, without regard to its principles of conflicts of laws.
5.9. Entire Agreement. This Agreement constitutes the entire agreement
and understanding of the parties hereto with respect to the subject matter
hereof.
5.10. Successors. This Agreement shall be binding upon, and shall inure
to the benefit of, the parties hereto and their respective successors and
assigns. Nothing contained in this Agreement, express or implied, is intended to
confer upon any other person or entity any benefits, rights or remedies.
5.11. Specific Performance. The parties hereto acknowledge and agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. Accordingly, it is agreed that they shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of competent jurisdiction in the United States or any state thereof, in
addition to any other remedy to which they may be entitled at law or equity.
5.12 Dispute Resolution. Any dispute, controversy or claim arising out
of or relating to this Agreement or the breach, termination or validity hereof,
or any transaction contemplated hereby, shall be resolved in accordance with the
procedures set forth in Article VII of the Separation Agreement.
5.13 Attorneys' Fees. Should suit be brought to enforce or interpret any
part of this Agreement, the prevailing party will be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees to
be fixed by the court (including, without limitation, costs, expenses and fees
on any appeal). The prevailing party will be entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment.
5.14 Jurisdiction and Venue. The parties hereto irrevocably consent to
and agree that any litigation or other dispute resolution proceeding among the
parties relating to this Agreement shall take place in San Diego, County,
California. The parties hereby irrevocably consent to the personal jurisdiction
or and the venue in the state and federal court within such county.
5.14 Construction of Agreement. A reference to a Section will mean a
Section in this Agreement unless otherwise explicitly set forth. The titles and
headings herein are for reference purposes only and will not in any manner limit
the construction of this Agreement which will be considered as a whole.
27
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
HNC SOFTWARE INC. RETEK INC.
By: By:
--------------------------------- ----------------------------------
Name: Name:
--------------------------------- ----------------------------------
Title: Title:
--------------------------------- ----------------------------------
Solely for purposes of Section 4.5 and
Article V
RETEK INFORMATION SYSTEMS, INC.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
Attachments
Exhibit "1" - Letter of Mr. Buchanan
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EXHIBIT "1"
_______________, 1999
HNC Software Inc. Retek Inc.
5935 Cornerstone Court West Midwest Plaza
San Diego, CA 92121-3728 801 Nicollet Mall, 11th Floor
Attn: Chief Executive Officer Minneapolis, MN 55402
Attn: Chief Financial Officer
Re: Retek Board of Directors
Gentlemen:
Reference is made to Section 4.3(b) of that certain Corporate Rights
Agreement dated of even date herewith (the "CORPORATE RIGHTS AGREEMENT") among
Retek Inc., a Delaware corporation ("RETEK"), HNC Software Inc., a Delaware
corporation ("HNC") and Retek Information Systems, Inc., a Delaware corporation.
All capitalized terms used but not defined in this letter will have the meanings
given to such terms in the Corporate Rights Agreement.
In order to induce HNC to enter into the Corporate Rights Agreement and
the Separation Agreement, I hereby agree with HNC and Retek that if, at any time
prior to the Cutoff Date (as defined below), I cease for any reason to be the
Chief Executive Officer of Retek, then I will immediately tender my written
resignation from the Board of Directors of Retek if and when I am requested to
do so in writing by HNC or by the persons who are then a majority of the members
of the Board of Directors of Retek. As used in this letter, the term "CUTOFF
DATE" means the date and time on which the provisions of Article IV of the
Corporate Rights Agreement terminate pursuant to the provisions of Section 4.11
of the Corporate Rights Agreement.
Sincerely,
John Buchanan
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 (No.
333-86841) of Retek Inc. of our report dated September 9, 1999, relating to the
combined financial statements of Retek Inc. and Retek Information Systems,
Inc., which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 10, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 (No.
333-86841) of Retek Inc. of our report dated September 9, 1999, relating to the
financial statements of Retek Logistics, Inc., which appears in such
Registration Statement.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 10, 1999
