<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD
FROM ___ TO ___.
COMMISSION FILE NUMBER 0-28121
_______________
RETEK INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S><C>
DELAWARE MIDWEST PLAZA 51-0392671
(State or Other Jurisdiction of 801 Nicollet Mall, 11th Floor (I.R.S. Employer
Incorporation or Organization) Minneapolis, MN 55402 Identification No.)
(612) 630-5700
</TABLE>
(Address, including zip code, and telephone number, including area code, of
Registrant's Principal Executive Offices)
_______________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 1, 2000, the number of shares of the Registrant's common stock
outstanding was 47,356,314.
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RETEK INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<S> <C> <C>
PART I -- FINANCIAL INFORMATION.................................................................. 3
ITEM 1: Financial Statements..................................................................... 3
Consolidated Balance Sheet at June 30, 2000 and December 31, 1999........................ 3
Consolidated Statement of Income for the six months ended
June 30, 2000 and 1999................................................................... 4
Consolidated Statement of Cash Flows for the six months ended
June 30, 2000 and 1999................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the six months ended June 30, 2000............................. 6
Notes to the Consolidated Financial Statements... ....................................... 7
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk............................... 19
PART II - OTHER INFORMATION...................................................................... 20
ITEM 1: Legal Proceedings........................................................................ 20
ITEM 2: Changes in Securities and Uses of Proceeds............................................... 20
ITEM 3: Defaults Upon Senior Securities.......................................................... 21
ITEM 4: Submission of Matters to a Vote of Security Holders...................................... 21
ITEM 5: Other Information........................................................................ 21
ITEM 6: Exhibits and Reports on Form 8-K......................................................... 21
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements in
"Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Item 3 -- Quantitative and Qualitative Disclosures
About Market Risk," and elsewhere. These statements relate to future events or
our future financial performance. In some cases, forward-looking statements may
be identified by terminology such as "may," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"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 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 Quarterly Report on Form 10-Q to conform these statements to actual
future results.
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
RETEK INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 38,369 $ 83,680
Investments........................................ 3,908 --
Accounts receivable, net........................... 22,044 24,383
Deferred income taxes.............................. 1,589 1,612
Other current assets............................... 9,861 5,560
-------- --------
Total current assets............................ 75,771 115,235
Investments.......................................... 6,045 --
Deferred income taxes................................ 34,746 21,716
Property and equipment, net.......................... 17,078 8,291
Intangible assets, net............................... 32,978 8,958
Other assets......................................... 59 33
-------- --------
$166,677 $154,233
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 5,494 $ 5,946
Accrued liabilities................................ 3,600 3,030
Deferred revenue................................... 33,766 5,883
Note payable....................................... 3,501 --
Payable to HNC Software Inc........................ 755 15,399
-------- --------
Total current liabilities....................... 47,116 30,258
Deferred revenue, net of current portion............. 762 --
-------- --------
Total liabilities............................... 47,878 30,258
Stockholders' equity:
Preferred stock, $0.01 par value -- 5,000 shares
authorized; no shares issued and outstanding.... -- --
Common stock, $0.01 par value--150,000 shares
authorized at June 30, 2000 and December 31,
1999, 47,356 shares and 46,503 shares issued
and outstanding at June 30, 2000 and
December 31, 1999, respectively............... 474 465
Paid-in capital...................................... 156,638 140,089
Deferred stock-based compensation.................... (14,554) (19,978)
Accumulated other comprehensive loss................. (1,240) (582)
(Accumulated deficit) retained earnings.............. (22,519) 3,981
-------- --------
Total stockholders' equity...................... 118,799 123,975
-------- --------
Total liabilities and stockholders' equity........... $166,677 $154,233
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
RETEK INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Revenue:
License and maintenance...................... $ 11,508 $ 15,656 $ 17,938 $ 27,314
Services and other........................... 8,081 5,387 15,615 10,376
-------- -------- -------- --------
Total revenue............................. 19,589 21,043 33,553 37,690
-------- -------- -------- --------
Cost of revenue:
License and maintenance (1) (2).............. 5,305 1,854 9,473 3,258
Services and other (1)....................... 5,878 4,577 11,387 7,462
-------- -------- -------- --------
Total cost of revenue..................... 11,183 6,431 20,860 10,720
-------- -------- -------- --------
Gross profit.............................. 8,406 14,612 12,693 26,970
Operating expenses:
Research and development (1)................. 8,786 5,460 16,794 9,737
Sales and marketing (1)...................... 9,642 4,556 18,313 8,374
General and administrative (1)............... 2,715 1,363 5,018 2,551
Amortization of stock-based compensation..... 2,794 -- 5,424 --
Acquired in-process research and
development................................ 4,000 -- 4,000 --
Acquisition related amortization of
intangibles................................ 1,763 258 2,542 516
-------- -------- -------- --------
Total operating expenses.................. 29,700 11,637 52,091 21,178
-------- -------- -------- --------
Operating (loss) income........................ (21,294) 2,975 (39,398) 5,792
Other income, net.............................. 409 (2) 1,451 14
-------- --------- -------- --------
(Loss) income before income tax (benefit)
provision.................................. (20,885) 2,973 (37,947) 5,806
Income tax (benefit) provision................. (5,671) 1,201 (11,447) 2,346
-------- -------- -------- --------
Net (loss) income............................ (15,214) 1,772 (26,500) 3,460
======== ======== ======== ========
Basic and diluted net loss per common share.... (0.32) (0.57)
======== ========
Weighted average shares used in computing basic
and Diluted net loss per common share........ 47,036 46,770
======== ========
Pro forma basic net income per common share.... 0.04 0.09
======== =========
Weighted average shares used in computing pro
forma Basic net income per common share...... 40,000 40,000
======== =========
(1) Excludes non-cash, amortization of
stock-based compensation as follows:
Cost of revenue:
License and maintenance....................... 158 -- 306 --
Services and other............................ 401 -- 779 --
Operating expenses:
Research and development...................... 1,334 -- 2,589 --
Sales and marketing........................... 626 -- 1,216 --
General and administrative.................... 275 -- 534 --
-------- -------- --------- --------
Total amortization of stock-based
compensation............................ $ 2,794 $ -- $ 5,424 $ --
======== ======== ======== ========
(2) Excludes non-cash, acquisition related
amortization of intangibles:................... $ 770 $ 92 $ 1,273 $ 183
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RETEK INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
--------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................... $(26,500) $ 3,460
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Provision for doubtful accounts................. 445 1,491
Depreciation and amortization expense........... 4,608 1,873
Amortization of stock-based compensation........ 5,424 --
Acquired in-process research and development.... 4,000 --
Deferred tax benefit............................ (14,868) (206)
Tax benefit from stock option transactions...... 3,420 37
Changes in assets and liabilities, excluding
business acquisitions:
Accounts receivable.......................... 1,894 (8,165)
Other assets................................. (4,282) 1,415
Accounts payable............................. (523) 1,552
Accrued liabilities.......................... 274 276
Deferred revenue............................. 28,034 (435)
-------- --------
Net cash provided by operating activities.. 1,926 1,298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash purchased in business acquisition.......... 166 --
Cash paid for business acquisition.............. (18,694) --
Net purchases of investments for sale........... (9,953) --
Acquisitions of property and equipment.......... (10,646) (2,753)
-------- --------
Net cash used in investing activities...... (39,127) (2,753)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of Retek common
stock................................... 5,635 --
Proceeds from issuance of notes................. 2,250 --
Repayment of debt............................... (693) --
Borrowings from HNC Software Inc................ 755 28,656
Repayments to HNC Software Inc.................. (15,399) (26,673)
-------- --------
Net cash (used in) provided by financing
activities............................... (7,452) 1,983
-------- --------
Effect of exchange rate changes on cash......... (658) (13)
-------- --------
Net (decrease) increase in cash and cash
equivalents................................... (45,311) 515
Cash and cash equivalents at beginning of
period........................................ 83,680 415
-------- --------
Cash and cash equivalents at end of period...... $ 38,369 $ 930
======== ========
SIGNIFICANT NON-CASH FINANCING ACTIVITIES:
Business acquisition through issuance of Retek
common stock and stock options.................. $ 7,503 $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
RETEK INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------ DEFERRED OTHER
PAID-IN STOCK-BASED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION LOSS
------- --------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999......... 46,503 $ 465 $ 140,089 $ (19,978) $ (582)
Tax benefit from exercise of HNC
Software Inc. stock options........ 3,420
Common stock issuance costs.......... (287)
Common stock issued under Employee
Stock Purchase Plan.................. 464 5 5,917
Common stock and stock options
issued for acquisition of
HighTouch.......................... 389 4 7,499
Amortization of stock-based
compensation....................... 5,424
Unrealized loss on investments....... (54)
Foreign currency translation
adjustment......................... (604)
Net loss.............................
----- ----- -------- --------- -------
BALANCE AT JUNE 30, 2000............. 47,356 $ 474 $156,638 $ (14,554) $(1,240)
====== ===== ======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS' COMPREHENSIVE
(DEFICIT) EQUITY LOSS
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999......... $ 3,981 $ 123,975
Tax benefit from exercise of HNC
Software Inc. stock options........ 3,420
Common stock issuance costs.......... (287)
Common stock issued under Employee
Stock Purchase Plan................ 5,922
Common stock and stock options
issued for acquisition of
HighTouch.......................... 7,503
Amortization of stock-based
compensation....................... 5,424
Unrealized loss on investments....... (54) $ (54)
Foreign currency translation
adjustment......................... (604) (604)
Net loss............................. (26,500) (26,500) (26,500)
--------- --------- --------
BALANCE AT JUNE 30, 2000............. $ (22,519) $ 118,799 $(27,158)
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION
The Company
Retek Inc. and its wholly owned subsidiaries, Retek Information Systems,
Inc., WebTrak Limited and HighTouch Technologies, Inc. ("we" "us" or the
"Company"), develop Internet based business-to-business commerce networks,
warehouse management software solutions, and market and support management
decision software products for retailers and their trading partners. The
Internet based business-to-business commerce networks provide retailers a single
point of access for all members of the retail supply chain. Additional solutions
offered through the retail.com portal provide a collaborative approach to
traditional retail challenges. These solutions are designed to increase
efficiencies by sharing data among retailers and their trading partners,
effectively shortening their supply chains. The 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. We are headquartered in Minneapolis, Minnesota.
Basis of Presentation
We have prepared the accompanying interim consolidated financial statements,
without audit, in accordance with the instructions to Form 10-Q and, therefore,
the accompanying interim consolidated financial statements do not necessarily
include all information and footnotes necessary for a fair presentation of our
financial position, results of operations and cash flows in accordance with
generally accepted accounting principles.
We believe the accompanying unaudited financial information for interim
periods presented reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. These consolidated financial
statements and notes thereto should be read in conjunction with our audited
financial statements and notes thereto presented in our Annual Report on Form
10-K for the fiscal year ended December 31, 1999. The interim financial
information contained in this Report on Form 10-Q is not necessarily indicative
of the results to be expected for any other interim period or for an entire
fiscal year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 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. In 2000, the FASB issued Statement of Accounting Standards No. 138 (FAS
138) "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133", which is effective for all
fiscal quarters after June 15, 2000. FAS 138 amends the accounting and reporting
standards of FAS 133 for certain derivative instruments and certain hedging
activities. The adoption of FAS 133 and the amendments thereof in FAS 138 are
not expected to have a significant impact on our consolidated financial position
or results of operations.
In January 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force published Issue No. 00-2 "Accounting for Web Site Development Costs",
or EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software
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<PAGE> 8
and Web site development costs, include internal and external costs incurred to
develop internal-use computer software during the application development stage
are capitalized. Application development stage costs generally include software
configuration, coding, installation to hardware and testing. Costs of
significant upgrades and enhancements that result in additional functionality
are also capitalized. Costs incurred for maintenance and minor upgrades and
enhancements are expensed as incurred. The estimated useful lives are based on
planned or expected significant modification or replacement of software
applications, in response to the rapid rate of change in the Internet industry
and technology in general. Adoption of EITF 00-2 is required for the third
quarter of 2000. We have not yet determined the impact of the adoption of this
new accounting standard on our consolidated financial position, results of
operations or disclosures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition." Amendments to the Bulletin delayed the
effective date until the fourth quarter of 2000. We are reviewing the
requirements of this standard and have not yet determined the impact of this
standard on our consolidated financial statements.
NOTE 2 -- PER SHARE DATA
Basic net loss per share is calculated based only on the weighted average common
shares outstanding during the period. Diluted earnings per share is computed on
the basis of the weighted average basic shares outstanding plus the dilutive
effect of outstanding stock options using the "treasury stock" method. For
periods prior to our initial public offering, the weighted average basic shares
outstanding is a pro forma amount which reflects the September 1999
reincorporation of Retek Inc. and the 40 for .001 stock split of Retek Inc.
common shares.
For the three months and six months ended June 30, 2000, the calculation of
diluted loss per share excludes the impact of the potential exercise of
8,503,101 outstanding stock options outstanding at June 30, 2000 because their
effect would be antidilutive.
Pro forma unaudited income per common share for the three months and six months
ended June 30, 1999 is calculated for basic income per share only since we had
no outstanding stock options during those periods.
NOTE 3 - COMMITMENTS
At June 30, 2000, we have factored accounts receivable to a financial
institution aggregating $14.6 million, which we are contingently liable in the
event of non-collection.
NOTE 4 - ACQUISITION
On May 10, 2000, we acquired HighTouch Technologies, Inc. ("HighTouch") for
a cash payment of $18.7 million, including direct acquisition costs and 389
shares of Retek common stock. The application of the purchase method of
accounting for the acquisition resulted in an excess of cost over net assets
acquired of approximately $30.6 million, of which $26.6 million has been
allocated to intangible assets and $4.0 million has been allocated to in-process
research and development.
In conjunction with these purchases, we 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>
AMORTIZATION METHOD ESTIMATED USEFUL LIFE
<S> <C> <C>
Purchased software costs........ Straight-line 36 to 42 months
Assembled work force............ Straight-line 3 years
Customer base................... Straight-line 3 to 5 years
Noncompetition agreements....... Straight-line 5 years
Trademarks...................... Straight-line 5 years
Goodwill........................ Straight-line 5 years
</TABLE>
In connection with the acquisition of HighTouch, acquired research and
development of $4.0 million was charged to operations on the acquisition date.
HighTouch's products provide real-time transaction management and customer
service solutions that support multi-channel customer interactions. HighTouch
owns certain direct consumer management technologies that we have incorporated
into Retek CRM, our enterprise-level customer interaction system. 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 Standards No. 2 and Financial Accounting
Standards Board Interpretation No. 4. At the time of the acquisition, HighTouch
had three products under development including Customer Order Management, which
was subsequently completed by Retek in July of 2000 and Customer Direct
Marketing and Customer Loyalty and Retention, which are still in development.
The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of HighTouch Technologies, Inc.
had taken place at the beginning of each year (dollars in thousands).
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
Net revenues................................. $ 33,586 $ 38,963
Net (loss) income............................ (30,649) 1,873
Pro forma net (loss) income per share........ (0.65) 0.05
</TABLE>
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The unaudited pro forma results of operations are for comparative purposes
only and do not necessarily reflect the results that would have occurred had the
acquisition occurred at the beginning of the periods presented or the results
which may occur in the future.
NOTE 5 - SUBSEQUENT EVENTS
On August 7, 2000, HNC Software Inc. announced that its board of directors
has declared a dividend on HNC common stock of all the shares of Retek Inc.
common stock owned by HNC. As announced by HNC, the 40 million Retek common
shares owned by HNC will be distributed by HNC on or about September 29, 2000 as
a dividend on each share of HNC common stock that are outstanding on the
September 15, 2000 dividend record date. Currently, HNC owns approximately 84.5%
of the outstanding Retek common stock. HNC has announced that it has received a
private letter ruling from the Internal Revenue Service that HNC's dividend of
its shares of Retek common stock will be tax-free to HNC and its stockholders
for U.S. federal income tax purposes.
NOTE 6 -- RECLASSIFICATIONS
Certain reclassifications have been made to our December 31, 1999
consolidated balance sheet to conform with the presentation at June 30, 2000.
These reclassifications had no impact on previously reported stockholders'
equity.
ITEM 2. 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 consolidated financial
statements and the related notes, and the other financial information included
in this Quarterly Report on Form 10-Q. 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 in the
section below entitled "Factors That May Impact Future Results of Operations"
and elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
We completed our initial public offering on November 23, 1999. Prior to the
completion of our initial public offering, we were a wholly owned subsidiary of
HNC Software Inc., a business-to-business software company that develops and
markets predictive software solutions. On August 7, 2000, HNC Software Inc.
announced that its board of directors has declared a dividend on HNC common
stock of all the shares of Retek Inc. common stock owned by HNC. As announced by
HNC, the 40 million Retek common shares owned by HNC will be distributed by HNC
on or about September 29, 2000 as a dividend on each share of HNC common stock
that are outstanding on the September 15, 2000 dividend record date. Currently,
HNC owns approximately 84.5% of the outstanding Retek common stock. HNC has
announced that it has received a private letter ruling from the Internal Revenue
Service that HNC's dividend of its shares of Retek common stock will be tax-free
to HNC and its stockholders for U.S. federal income tax purposes.
Our business combines the business activities of Retek Information Systems,
Inc. and Retek Inc., formerly Retek Logistics, Inc. Founded in 1995, Retek
Information Systems, a developer and marketer of Internet-based,
business-to-business software solutions for retailers, was acquired by HNC in
1996. Founded in 1985 as Practical Control Solutions, Inc., Retek Logistics, a
developer of warehouse management software solutions, was acquired by HNC in
1998. On September 9, 1999, Retek Logistics was reincorporated as a Delaware
corporation and renamed "Retek Inc." Immediately prior to the completion of our
initial public offering on November 23, 1999, in connection with the separation
of our business from HNC, HNC contributed all of the outstanding capital stock
of Retek Information Systems to Retek Inc. Retek Information Systems currently
operates as a wholly owned subsidiary.
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.
We generate revenue from the sale of software licenses, maintenance and
support contracts, and professional consulting and
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<PAGE> 10
contract development services. Until the fourth quarter of 1999, we generally
licensed products to customers on a perpetual basis and recognized revenue upon
delivery of the products. Starting in the fourth quarter of 1999, we revised the
terms of our software licensing agreements for the majority of our software
products sold. Under the revised terms, we provide technical advisory services
after the delivery of our products to help customers exploit the full value and
functionality of our products. Revenue from the sale of software licenses under
these agreements will be recognized as the technical advisory services are
performed. We expect the periods of technical advisory services will generally
range from 12 to 24 months, as determined by the customers' objectives. As we
continue to recognize license and service revenue over a period of time, rather
than upon delivery of the product, we will recognize significantly less revenue,
have lower associated margins for several quarters, as compared to previous
quarters, have higher operating expenses as a percentage of total revenues and
incur operating losses for several quarters. Deferred revenue consists
principally of the unrecognized portion of revenue received under license and
maintenance service agreements. Deferred license revenue is recognized ratably
or as a percentage of completion based on the contract terms. Deferred
maintenance revenue is recognized ratably over the term of the service
agreement.
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.
The growth of our customer base is primarily attributable to our increased
market penetration and our expanding product offering. Our investment in
research and development, and recent acquisitions and alliances have helped us
bring new software solutions to market. These investments produced a suite of
decision support solutions in 1997; the retooling of our applications for the
web in 1998; and the delivery of Internet-based, business-to-business
collaborative planning, critical path and product design solutions in 1999; and
several additional collaborative offerings on the retail.com network through the
first quarter of 2000. To support our growth during these periods, we also
continued to invest in internal infrastructure by hiring employees throughout
our various departments.
We market our software solutions worldwide through direct and indirect sales
channels. Revenue generated from our direct sales channel accounted for
approximately 91.1% and 90.0% for the quarter and six months ended June 30,
2000, respectively as compared to 64.1% and 73.6% for the same periods as of
June 30, 1999. Indirect sales channel revenue primarily arises from our
relationship with Oracle.
On October 29, 1999, we completed the purchase of all the outstanding
capital stock of WebTrak Limited. WebTrak owns the WebTrack Critical Path and
Portfolio Private Label products that we currently distribute. In connection
with the purchase of WebTrak, we issued to former WebTrak shareholders notes,
which were due on November 26, 1999, in the principal amount of $5.33 million
and a convertible note, which was due on November 26, 1999, in the principal
amount of $2.67 million. The convertible note was, at the option of the holder,
convertible at the time of payment into the number of shares of the Company's
common stock equal to the principal amount of the note divided by the initial
offering price of $15.00. On November 29, 1999 we issued 177,778 shares of our
common stock to the holder of the convertible note in full satisfaction of our
obligations. The remaining notes were paid in full on their due date.
On May 10, 2000, we completed our acquisition of HighTouch Technologies,
Inc., a provider of real-time transaction management and customer service
solutions that support multi-channel customer interactions. HighTouch owns
certain direct consumer management technologies that we have incorporated into
Retek Retail CRM, our enterprise-level customer interaction system. In
connection with the purchase of HighTouch, we paid $18.7 million in cash,
including direct acquisition costs and issued 389,057 shares of our common stock
to the former sole shareholder of HighTouch.
Revenue attributable to customers outside of North America accounted for
approximately 28.9% and 29.9% for the quarter and six months ended June 30,
2000, respectively as compared to 30.4% and 42.6% for the same periods as of
June 30, 1999. Approximately 6.1 % and 8.8% of our sales were denominated in
currencies other than the U.S. dollar for the quarter and six months as of
June 30, 2000, respectively as compared to 3.6% and 19.4% for the same periods
as of June 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;
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- 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 generally recognize these amounts within one year from
receipt. Any amount that will not be recognized within one year of receipt is
recorded in non-current deferred revenue.
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 AS A PERCENTAGE OF
TOTAL REVENUE TOTAL REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
License and maintenance.................... 58.7% 74.4% 53.5% 72.5%
Services and other......................... 41.3 25.6 46.5 27.5
Total revenue...................... 100.0 100.0 100.0 100.0
Cost of revenue:
License and maintenance.................... 27.1 8.8 28.2 8.6
Services and other......................... 30.0 21.8 34.0 19.8
Total cost of revenue.............. 57.1 30.6 62.2 28.4
Gross margin................................. 42.9 69.4 37.8 71.6
Operating expenses:
Research and development................... 44.8 25.9 50.0 25.8
Sales and marketing........................ 49.2 21.7 54.5 22.2
General and administrative................. 13.9 6.5 15.0 6.8
Amortization of stock-based compensation... 14.3 - 16.2 -
Acquired in-process research and
development.............................. 20.4 - 11.9 -
Acquisition related amortization of
intangibles.............................. 9.0 1.2 7.6 1.4
Total operating expenses........... 151.6 55.3 155.2 56.2
Operating (loss) income...................... (108.7) 14.1 (117.4) 15.4
Other income, net............................ 2.1 - 4.3 -
(Loss) income before income tax (benefit)
provision.................................. (106.6) 14.1 (113.1) 15.4
Income tax (benefit) provision............... (28.9) 5.7 (34.1) 6.2
Net (loss) income............................ (77.7) 8.4 (79.0) 9.2
Cost of license and maintenance revenue, as a
percentage of license and maintenance
revenue.................................... 46.1 11.8 52.8 11.9
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Cost of services and other revenue, as a
percentage of services and other revenue.......... 72.7 85.0 72.9 71.9
</TABLE>
Three Months Ended and Six Months ended June 30, 2000 and 1999
Revenue
Total revenue. Total revenue decreased 6.9% and 11.0% to $19.6 and $33.6
million for the quarter and six months ended June 30, 2000, respectively, from
$21.0 and $37.7 million for the same periods in 1999.
License and maintenance revenue. License and maintenance revenue decreased
to $11.5 and $17.9 million for the quarter and six months ended June 30, 2000,
respectively, a decrease of 26.5% and 34.3% from comparable periods in prior
year. The decrease in license revenue for the quarter and six months ended June
30, 2000 was primarily due to the revised terms used in negotiating our license
contracts. As noted above in the section entitled "Overview", we recently
revised the terms of our software license agreements so that revenue is
recognized over a number of quarters rather than upon delivery. As a result,
year over year period revenue decreased in the quarter and six-month period
ended June 30, 2000 compared to similar periods in 1999. Maintenance revenue
increased $1.3 and $2.5 million for the quarter and six months ended June 30,
2000, respectively, due to the growing base of customers that have installed our
software solutions.
Services and other revenue. Services and other revenue totaled $8.1 and
$15.6 million for the quarter and six months ended June 30, 2000, respectively,
an increase of 50.0% and 50.5% from comparable periods in prior year. The
increase was due to a $3.4 and $6.9 million increase in consulting services and
custom development projects for the quarter and six months ended in June 30,
2000, respectively. The number of billable employees increased to 89 as of June
30, 2000 from 65 as of June 30, 1999. In addition, third party consultants are
used on an as needed basis depending upon our allocation of internal resources.
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; third party license consultant costs; salaries and
related expenses of our customer support organization; and an allocation of our
facilities and depreciation expense. Cost of license and maintenance revenue
increased to $5.3 and $9.5 million for the quarter and six months ended June 30,
2000, respectively an increase of 186.1% and 190.8% over comparable periods in
prior year. As license and maintenance revenue increases, we expect to
experience increased costs resulting from increased royalty fees and an increase
in the number of support personnel required to service our growing customer
base. The number of cost of license and maintenance revenue personnel increased
to 35 as of June 30, 2000 from 8 as of June 30, 1999. In addition, we incurred
higher third party license consultant costs. We expect the cost of license and
maintenance revenue to continue to increase in absolute dollars as license and
maintenance revenue increases.
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 facilities and depreciation expense. Cost of services and other
revenue increased to $5.9 and $11.4 million for the quarter and six months ended
June 30, 2000, respectively an increase of 28.4% and 52.6% over comparable
periods in prior year. As a percentage of services and other revenue, cost of
services and other revenue was 72.7% and 85.0% in the quarter ended June 30,
2000 and 1999 respectively and 72.9% and 71.9% for the six-month period ended
June 30, 2000 and 1999, respectively. During the second quarter of 2000, we
continued to expand our consulting services business by increasing the number of
personnel to 89 as of June 30, 2000 from 65 as of June 30, 1999.
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 facilities and depreciation expenses. We increased investment in
research and development in absolute dollars each year since 1995. Research and
development expenses increased to $8.8 million and $16.8 million for the quarter
and six months ended June 30, 2000 and 1999, respectively, an increase of 60.9%
and 72.5% over comparable periods in prior year. The absolute dollar increase in
research and development expenses was due to significant increases in personnel
costs, which included hired personnel and third party consultants. In the second
quarter of 2000, research and development personnel increased to 296 from 139 in
the second quarter of 1999. We invested heavily in
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<PAGE> 13
the development of new product solutions during the first two quarters of 2000.
Also, the allocation for facilities and depreciation expense increased as a
result of expenditures required for additional office space and capital
equipment to support the additional personnel. We expect the absolute dollar
increase in research and development to continue as we invest in the development
of other new solutions.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and related costs of the sales and marketing organization; sales
commissions; costs of marketing programs, including public relations,
advertising, trade shows and sales collateral; and an allocation of facilities
and depreciation expenses. Sales and marketing expenses increased to $9.6 and
$18.3 million for the quarter and six months ended June 30, 2000, respectively,
an increase of 111.6% and 118.7% over comparable periods in prior year. The
increase was primarily due to an increase in personnel and related costs of $1.8
and $3.9 million for the quarter and six-month period ended June 30, 2000,
respectively, an increase in third party consulting of $978,000 and $1.5 million
for the quarter and six-month period ended June 30, 2000, respectively, and an
increase in marketing costs of $1.6 and $3.1 million for the quarter and
six-month period ended June 30, 2000, respectively. In the second quarter of
2000 personnel and related costs increased due to an increase in the number of
sales and marketing employees to 139 from 60 in the second quarter of 1999. The
increase during the second quarter of 2000 in personnel and related costs was
due to the continued build up of our sales force and marketing operations. Also,
the allocation for facilities and depreciation expense increased as a result of
expenditures required for additional office space and capital equipment to
support the additional personnel.
General and administrative. General and administrative expenses consist
primarily of costs from our finance and human resources organizations; legal and
other professional service fees; and an allocation of facilities costs and
depreciation expenses. General and administrative expenses increased to $2.7
million and $5.0 million for the quarter and six-month period ended June 30,
2000, respectively, an increase of 99.2% and 96.7% over comparable periods in
prior year. The increase in absolute dollars in general and administrative
expenses in the quarter and six months ended June 30, 2000 was attributable to
the growth of the administrative organization to support our overall growth.
Personnel costs increased $577,000 and $1.2 million for the quarter and
six-month period ended June 30, 2000, respectively. In the second quarter of
2000 total general and administrative employees increased to 61 from 38 in the
second quarter of 1999. The increase was also due to us incurring additional
compliance expenses and other professional fees associated with being an
independent public company. Also, the allocation for facilities and depreciation
expense increased as a result of expenditures required for additional office
space and capital equipment to support the additional personnel. We expect
general and administrative expenses to increase in absolute dollars in the
foreseeable future to support infrastructure growth.
Amortization of stock-based compensation. Deferred stock-based compensation
represents the difference between the exercise price and the fair value of our
common stock for accounting purposes on the date that certain stock options were
granted. This deferred amount is included as a component of stockholders' equity
and is being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in Financial
Accounting Standards Board Interpretation No. 28. We granted stock options to
our employees under the 1999 Equity Incentive Plan and the HighTouch
Technologies, Inc 1999 Stock Option Plan and to members of our board of
directors through both the 1999 Equity Incentive Plan and the 1999 Directors
Stock Option Plan. Amortization of stock-based compensation was $2.8 and $5.4
million for the quarter and six-month period ended June 30, 2000, respectively.
Acquired in-process research and development. In connection with the
acquisition of HighTouch in May 2000, acquired in-process research and
development of $4.0 million was charged to results of operation on the
acquisition date. HighTouch is a provider of customized software and services
relating to customer relationship management ("CRM"). 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. Prior to its acquisition, HighTouch primarily sold
customized software and services to a variety of customers in the retail
industry. At the time of acquisition, HighTouch had technology under development
relating to the creation of the company's first fully integrated standardized
off-the-shelf CRM product. This in-process R&D project was estimated to achieve
technological feasibility in the third quarter of 2000.
We used an independent appraisal firm to assist us with our valuation of the
fair market value of the purchased assets of HighTouch. 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. The in-process R&D
projects were valued through the use of a discounted cash flow analysis, taking
into account projected future cash flows associated with these projects once
they achieve technological feasibility, their stage of completion as of the
acquisition date, and the expected return requirements (i.e. discount rate) for
present valuing of the projected cash flows. Stage of completion was estimated
by considering time, cost, and complexity of tasks completed prior to the
acquisition as a percentage of total time, cost and effort required for the
total project up to achieving technological feasibility.
With respect to the projected financial information provided to the
appraiser, Retek prepared a detailed set of projections forecasting revenue from
the CRM technology as well as gross profit and operating profit margins. These
projections were made based on an assessment of customer needs and the expected
pricing and cost structure.
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. 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 26.2% based
upon the following methodology:
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 21.2%, which was used for valuing
completed technology. Since incomplete technology would require a higher return
than completed technology, the valuation report prepared by the Company's
appraiser used a rate of 26.2% to present value cash flows (in excess of a
return on other assets of the business) attributable to in-process research and
development projects.
The HighTouch in-process research and development project continues to
progress, in all material respects, consistently with our original assumptions
that were provided to the independent appraiser and used to value the in-process
research and development.
These statements regarding revenues and expenses are forward-looking
statements, which are subject to risks and uncertainties. Actual results may
differ materially from those anticipated. Our inability to complete the
in-process technologies within the expected timeframes could materially impact
future revenues and earnings, which could have a material adverse effect on our
business, financial condition and results of operations.
Acquisition-related amortization of intangibles. Acquisition-related
amortization of intangibles increased to $1.8 and $2.5 million for the quarter
and six-month period ended June 30, 2000, respectively from $258,000 and
$516,000 for the comparable period in 1999. In connection with the purchase of
HighTouch Technologies, Inc. in 2000 the application of the purchase method of
accounting for the acquisition resulted in an excess of cost over net assets
acquired of $30.6 million, of which $26.6 million was allocated to intangibles
and $4.0 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 purchase of WebTrak in 1999, the application of the purchase
method of accounting for the acquisition resulted in an excess of cost over net
assets acquired of $8.1 million, of which $6.6 million was allocated to
intangibles and $1.5 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 purchase of Retek Logistics in 1998, the
application of the purchase method of accounting for the acquisition resulted in
an excess of cost over net assets acquired of approximately $5.8 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.
Other income, net. Other income, net increased to $409,000 and $1.5 million
for the quarter months and six months ended June 30,
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<PAGE> 14
2000, respectively up from ($2,000) and $14,000 for the same period in 1999. The
increase was due to interest income earned on cash equivalents and investments.
Income tax (benefit) provision. The income tax (benefit)/provision was
($5.7) and ($11.4) million for the quarter and six months ended June 30, 2000,
respectively, from $1.2 million and $2.3 million for the same periods in 1999.
These amounts are based on management's estimates of the effective tax rates to
be incurred by us during those respective full fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we funded operations primarily through
HNC in the form of intercompany advances. Since our initial public offering, we
have not obtained further funding from HNC. At June 30, 2000, our cash and cash
equivalent balance was $38.4 million. In addition, we had investments of $9.9
million.
Net cash provided by operating activities was $1.9 million for the six
months ended June 30, 2000 and $1.3 million for the comparable period in 1999.
Principal operating cash flow adjustments that offset our net loss were
amortization of stock-based compensation, acquired in-process research and
development, depreciation and amortization, increases in deferred revenue, and
decreases in accounts receivable. Uses of cash in the for the six months ended
June 30, 2000 were due to increases in deferred tax benefit and other assets
and a decrease in accounts payable.
Net cash used in investing activities was $39.1 million for the six months
ended June 30, 2000 and $2.8 million for the comparable period in 1999. In the
six months ended June 30, 2000, uses of cash were due to the cash paid for
business acquisitions, acquisition of capital equipment, primarily computer
equipment and software and purchase of investments.
Net cash used by financing activities was $7.5 million in the six months
ended June 30, 2000. Net cash provided by financing activities was $2.0 million
for the six months ended June 30, 1999. Net cash used in 2000 included repayment
of debt, $755,000 in borrowings from HNC and $15.4 million in payments to HNC.
Beginning in 1997, HNC implemented a cash management policy that all cash
balances were transferred daily from all of HNC's subsidiaries, including us,
into a centralized cash management account at HNC. The financing activities with
HNC include borrowings and payment from these cash management activities in
1999. Starting in November 1999 these daily transfers to HNC ceased. Net cash
provided by financing activities in 2000 included proceeds from the issuance of
common stock and proceeds from the issuance of debt.
We believe that our current cash and cash equivalents, investments 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.
Management has invested the excess of current operating requirements in
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.
In addition, our ability to enter into any acquisition of a business or
assets may be limited if HNC completes the distribution. Specifically, pursuant
to the terms of a corporate rights agreement between HNC and us, after the
distribution of HNC's remaining shares of our common stock, our ability to issue
common stock in connection with acquisitions, offerings or otherwise will be
limited for two years, and possibly longer.
FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS
An investment in our common stock involves a high degree of risk. Investors
evaluating our company and its business should carefully consider the factors
described below and all other information contained in this Quarterly Report on
Form 10-Q before purchasing our common stock. Any of the following factors could
materially harm our business, operating results and financial condition.
Additional factors and uncertainties not currently known to us or that we
currently consider immaterial could also harm our business, operating results
and financial condition. Investors could lose all or part of their investment as
a result of these factors, in addition to others.
While management is optimistic about our long-term prospects, the following
factors, among others, could materially harm our business, operating results and
financial condition and should be considered in evaluating the Company.
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Industry's rapid pace of change. 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.
Fluctuations in quarterly operating results. 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 business operations by
making it difficult to implement our budget and business plan. Factors, many of
which are outside of 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;
- 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) during 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 have incurred, and will continue to incur, compensation
expense in connection with our grant of options under the 1999 Equity Incentive
Plan and the 1999 Directors Stock Option Plan. This expense will be amortized
over the vesting period of these granted options, which is generally four years,
resulting in lower quarterly income.
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, net income will decrease because only a small portion of our
expenses vary with revenue.
New type of license agreement. Until recently, we generally licensed our
products to customers on a perpetual basis, and recognized revenue upon delivery
of the products. In the fourth quarter of 1999, we entered into software
licensing agreements with revised terms for the majority of new sales of
software products. Under the revised agreements, we provide technical advisory
services after the delivery of our product to help customers exploit the full
value and functionality of our products. Revenue from the sale of software
licenses and technical advisory services under these agreements is recognized as
the services are performed over the contract
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period, which is generally 12 to 24 months, as determined by our customers'
objectives. As we continue 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, have lower associated margins for several quarters,
as compared to previous quarters, have higher operating expenses as a percentage
of total revenues and will incur operating losses for several quarters.
Early stage of development of the retail.com network. We began operation of
the retail.com network on September 26, 1999. We incurred, and will continue to
incur, significant infrastructure costs in establishing this network. We will
continue to invest in new products and services to be offered over the
retail.com network in the foreseeable future. Broad and timely acceptance of the
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 the
retail.com network to achieve widespread commercial acceptance of this
network;
- whether our network will be able to support large numbers of retailers and
the members of their supply chains; and
- our need to significantly expand internal resources and incur associated
expenses to support planned growth of the retail.com network.
We have established a subscription pricing model for the 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 pricing models 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 customers, our network will not be commercially successful, which
could harm our revenue and business.
Increased operating expenses. We intend to significantly increase operating
expenses as we:
- increase research and development activities;
- increase services activities;
- develop and build the retail.com network;
- expand our distribution channels;
- increase sales and marketing activities, including expanding our direct
sales force;
- build our internal information technology system; and
- operate as an independent public company.
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. 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 us. Competitive pressures could reduce our market share or require us
to reduce 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 us. 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
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- 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.
Loss of key personnel. 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 chief operating officer;
Gregory A. Effertz, our vice president, finance and administration and chief
financial officer and Jeremy Thomas, our chief technology officer. We currently
do not have any key-man life insurance relating to key personnel, who are
employees at-will and are not subject to employment contracts except for Jeremy
Thomas who has an employment contract that expires in October 2001. 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 the business.
Relationships with third parties who implement our products. 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 solutions. If the number of 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 customers' implementation needs
and would increase our operating expenses and could reduce 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.
Intellectual property of third parties. 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. 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 business and operating results.
Confidentiality of intellectual property. We depend on our ability to
develop and maintain the proprietary aspects of our technology. To protect
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 investors that any of our proprietary rights with
respect to the 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 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 its 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
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,
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duplicating our products or designing around our intellectual property.
Potential third party claims that our products infringe on their
intellectual property. 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 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 infringement claims as the number of
products and competitors in our industry segment grow and the functionality of
products in different industry segments overlap. 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.
International sales. Since we sell products worldwide, our business is
subject to risks associated with doing business internationally. 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.
Acceptance of the Internet. As our software solutions are Internet-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.
Errors and defects in 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
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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 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.
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. In 2000, the
FASB issued Statement of Accounting Standards No. 138 (FAS 138) "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- an amendment of
FASB Statement No. 133", which is effective for all fiscal quarters after June
15, 2000. FAS 138 amends the accounting and reporting standards of FAS 133 for
certain derivative instruments and certain hedging activities. The adoption of
FAS 133 and the amendments thereof in FAS 138 are not expected to have a
significant impact on our consolidated financial position or results of
operations.
In January 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force published Issue No. 00-2 "Accounting for Web Site Development Costs",
or EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
include internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the Internet industry and technology in general.
Adoption of EITF 00-2 is required for the third quarter of 2000. We have not yet
determined the impact of the adoption of this new accounting standard on our
consolidated financial position, results of operations or disclosures.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." Amendments to the Bulletin
delayed the effective date until the fourth quarter of 2000. We are reviewing
the requirements of this standard and have not yet determined the impact of this
standard on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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
The fair value of our cash, cash equivalents and investments available for
sale at June 30, 2000 was $48.3 million. The objectives of our investment policy
are safety and preservation of invested funds and liquidity of investments that
is sufficient to meet cash flow requirements. It is our policy to place cash,
cash equivalents and investments available for sale with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of credit exposure. It is also our policy to maintain
certain concentration limits and to invest only in certain "allowable
securities" as determined by management. Our investment policy also provides
that our investment portfolio must not have an average portfolio maturity of
beyond eighteen months. Investments are prohibited in certain industries and
speculative activities. Investments must be denominated in U.S. dollars. An
increase in market interest rates would not directly affect our financial
results, as we have no short- or long-term debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
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We develop products in the United States and sell in North America, Asia and
Europe. As a result, 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.
Approximately 6.1 % and 8.8% of our sales were denominated in currencies other
than the U.S. dollar for the quarter and six months as of June 30, 2000,
respectively as compared to 3.6% and 19.4% for the same periods as of June 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 currencies, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we have been subjected to legal proceedings in the
ordinary course of business, although we are not currently involved in any
material legal proceedings.
ITEM 2: CHANGES IN SECURITIES AND USES OF PROCEEDS
(c) Changes in Securities
On May 10, 2000, in connection with the acquisition of HighTouch
Technologies, Inc., we issued 389,057 shares of our common stock to the former
shareholder of HighTouch. The offer and sale of such common stock was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to section 4 (2) thereof. The Company relied on the following criteria
to make such exemption available: the fact that there was only one offeree, the
size and manner of the offering in the context of a business acquisition, the
sophistication of the offeree and the availability of material information.
(d) Use of Proceeds
On November 23, 1999, we completed the initial public offering of our common
stock. The managing underwriters in the offering were Credit Suisse First
Boston, Robertson Stephens and U.S. Bancorp Piper Jaffray. The shares of the
common stock sold in the offering were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-1 (No. 333-86841). The
Securities and Exchange Commission declared the Registration Statement effective
on November 17, 1999.
The offering commenced on November 18, 1999 and terminated on November 23,
1999 after we had sold all of the 6,325,000 shares of common stock registered
under the Registration Statement (including 825,000 shares sold in connection
with the exercise of the underwriters' over-allotment option). The initial
public offering price was $15.00 per share for an aggregate initial public
offering
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of $94.875 million.
We have paid a total of $6.6 million in underwriting discounts and
commissions and approximately $3.6 million for costs and expenses related to the
offering. None of the costs and expenses related to the offering were paid
directly or indirectly to any of our directors, officers, general partners or
their associates, persons owning 10 percent or more of any class of our equity
securities or any of our affiliates.
After deducting the underwriting discounts and commissions and the offering
expenses the estimated net proceeds to Retek from the offering were
approximately $84.7 million. A portion of the net offering proceeds have been
used for general corporate purposes, to provide working capital to develop
products, including our retail.com product offering, and to expand our
operations. A portion of the net offering proceeds were also used to pay $15.4
million in inter-company debt owed to HNC and $18.7 million was used in
connection with the acquisition of HighTouch Technologies, Inc. HNC owns more
than 10% of our outstanding common stock. Funds that have not been used have
been invested in money market funds, certificate of deposits and other
investment grade securities. We also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders in Minneapolis, Minnesota on May
16, 2000. Of the 46,502,778 shares outstanding as of the record date for the
meeting, 44,789,280 shares were present or represented by proxy at the meeting
on May 16, 2000. At these meetings the following actions were voted upon:
a. To elect the following directors to serve for a term ending upon the
2003 Annual Meeting of Stockholders or until their successors are
elected and qualified:
<TABLE>
<CAPTION>
Nominee For Withheld Against
<S> <C> <C> <C>
Glen A. Terbeek............ 44,760,644 28,636 -
Stephen E. Watson.......... 44,745,344 43,936 -
</TABLE>
Following the meeting John Buchanan, N. Ross Buckenham, Ward Carey III,
Charles H. Gaylord and Alex Way Hart continued as our directors. Effective
August 6, 2000, Charles H. Gaylord resigned from our board of directors.
b. To ratify the appointment of PricewaterhouseCoopers LLP as our
independent public accountants for the fiscal year ending December 31,
2000.
For Against Abstain
44,772,504 12,500 4,276
ITEM 5: OTHER INFORMATION
On August 7, 2000, HNC Software Inc. announced that its board of directors
has declared a dividend on HNC common stock of all the shares of Retek Inc.
common stock owned by HNC. As announced by HNC the 40 million Retek common
shares owned by HNC will be distributed by HNC on or about September 29, 2000 as
a dividend on each share of HNC common stock that are outstanding on the
September 15, 2000 dividend record date. Currently, HNC owns approximately 84.5%
of the outstanding Retek common stock. HNC has announced that it has received a
private letter ruling from the Internal Revenue Service that HNC's dividend of
its shares of Retek common stock will be tax-free to HNC and its stockholders
for U.S. federal income tax purposes.
Effective August 6, 2000, Charles H. Gaylord resigned from our board of
directors.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
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(a) EXHIBITS
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
A current report on Form 8-K was filed with the Securities and Exchange
Commission by Retek on May 25, 2000 to report the consummation of our purchase
of HighTouch Technologies, Inc. An amendment to this current report on Form 8-K
was filed with the Securities and Exchange Commission by Retek on July 25, 2000
with the required financial information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Retek Inc.
By: /s/ Gregory A. Effertz
-----------------------
Gregory A. Effertz Vice President,
Finance and Administration, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
Date: August 14, 2000
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