<PAGE> 1
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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 MARCH 31, 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> <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 May 1, 2000, the number of shares of the Registrant's common
stock outstanding was 46,967,257.
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RETEK INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION.........................................................3
ITEM 1. Financial Statements.........................................................3
Consolidated Balance Sheet at March 31, 2000 and December 31, 1999...........3
Consolidated Statement of Income for the three months ended
March 31, 2000 and 1999....................................................4
Consolidated Statement of Cash Flows for the three months ended
March 31, 2000 and 1999....................................................5
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the three months ended March 31, 2000.............6
Notes to the Consolidated Financial Statements...............................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operation.................................................................10
ITEM 3. Quantitative and Qualitative Dislcosures About Market Risk..................24
PART II - OTHER INFORMATION............................................................25
ITEM 1. Legal Proceedings...........................................................25
ITEM 2: Changes in Securities and Uses of Proceeds..................................26
ITEM 3: Defaults Upon Senior Securities.............................................26
ITEM 4: Submission of Matters to a Vote of Security Holders.........................26
ITEM 5: Other Information...........................................................26
ITEM 6: Exhibits and Reports on Form 8-K............................................26
</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.
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
RETEK INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................. $ 61,891 $ 83,680
Investments................................................ 2,000 --
Accounts receivable, net................................... 22,505 24,383
Deferred income taxes...................................... 1,589 1,612
Other current assets....................................... 6,606 5,560
--------- ---------
Total current assets.................................... 94,591 115,235
Deferred income taxes........................................ 30,668 21,716
Property and equipment, net.................................. 12,133 8,291
Intangible assets, net....................................... 8,233 8,958
Other assets................................................. 41 33
--------- ---------
$ 145,666 $ 154,233
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 4,998 $ 5,946
Accrued liabilities........................................ 7,932 3,030
Deferred revenue........................................... 14,233 5,883
Payable to HNC Software Inc................................ 80 15,399
--------- ---------
Total current liabilities............................... 27,243 30,258
Deferred revenue, net of current portion..................... 381 --
--------- ---------
Total liabilities....................................... 27,624 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 and 1 shares
authorized at March 31, 2000 and December 31, 1999,
respectively, 46,503 shares and 1 shares issued and
outstanding at March 31, 2000 and December 31, 1999, 465 465
respectively............................................
Paid-in capital............................................ 142,998 140,089
Deferred stock-based compensation.......................... (17,348) (19,978)
Accumulated other comprehensive loss......................... (768) (582)
(Accumulated deficit) retained earnings...................... (7,305) 3,981
--------- ---------
Total stockholders' equity.............................. 118,042 123,975
--------- ---------
Total liabilities and stockholders' equity................... $ 145,666 $ 154,233
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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RETEK INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Revenue:
License and maintenance............................ $ 6,430 $ 11,658
Services and other................................. 7,534 4,989
-------- --------
Total revenue................................... 13,964 16,647
-------- --------
Cost of revenue:
License and maintenance (exclusive of stock
based compensation of $122 in 2000)................. 4,168 1,404
Services and other (exclusive of stock based
compensation of $394 in 2000 )....................... 5,509 2,885
-------- --------
Total cost of revenue............................. 9,677 4,289
-------- --------
Gross profit...................................... 4,287 12,358
Operating expenses:
Research and development (exclusive of stock based
compensation of $1,291 in 2000)...................... 8,008 4,277
Sales and marketing (exclusive of stock based
compensation of $575 in 2000)........................ 8,671 3,818
General and administrative (exclusive of stock
based compensation of $248 in 2000)................ 2,303 1,188
Amortization of stock-based compensation............. 2,630 --
Acquisition related amortization of intangibles...... 779 258
-------- --------
Total operating expenses.......................... 22,391 9,541
-------- --------
Operating (loss) income................................ (18,104) 2,817
Other income, net...................................... 1,042 16
-------- --------
(Loss) income before income tax (benefit) provision.. (17,062) 2,833
Income tax (benefit) provision......................... (5,776) 1,145
-------- --------
Net (loss) income.................................... (11,286) 1,688
======== ========
Basic and diluted net loss per common share............ (0.24)
========
Weighted average shares used in computing basic and
diluted net loss per common share.................... 46,503
========
Pro forma basic net income per common share............ 0.04
=========
Weighted average shares used in computing pro forma
basic net income per common share.................... 40,000
========
</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>
THREE MONTHS ENDED
MARCH 31,
2000 1999
----------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................. $(11,286) $ 1,688
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Provision for doubtful accounts................... 149 270
Depreciation and amortization expense............. 1,587 873
Amortization of stock-based compensation.......... 2,630 --
Deferred income tax expense ...................... (8,929) (43)
Tax benefit from stock option transactions........ 3,153 --
Changes in assets and liabilities:
Accounts receivable............................ 1,729 (2,396)
Other assets................................... (1,047) 2,223
Accounts payable............................... (948) (1,124)
Accrued liabilities............................ 4,903 (1,020)
Deferred revenue............................... 8,732 617
-------- --------
Net cash provided by operating activities.... 673 1,088
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of investments for sale............. (2,000) --
Acquisitions of property and equipment............ (4,714) (1,916)
-------- --------
Net cash used in investing Activities........ (6,714) (1,916)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs incurred from the issuance of common stock.. (243) --
Borrowings from HNC Software Inc.................. 80 14,440
Repayments to HNC Software Inc.................... (15,399) (12,269)
-------- --------
Net cash (used in) provided by financing
activities................................ (15,562) 2,171
-------- --------
Effect of exchange rate changes on cash........... (186) (223)
-------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (21,789) 1,120
Cash and cash equivalents at beginning of
period.......................................... 83,680 415
-------- --------
Cash and cash equivalents at end of period........ $ 61,891 $ 1,535
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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RETEK INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK DEFERRED OTHER RETAINED TOTAL
------------ PAID-IN STOCK-BASED COMPREHENSIVE EARNINGS STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION LOSS (DEFICIT) EQUITY LOSS
------ ------ ------- ------------ ------------- --------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999... 46,503 $465 $140,089 $(19,978) $ (582) $ 3,981 $123,975
Tax benefit from HNC
Software Inc. stock options.. 3,152 3,152
Common stock issuance costs.... (243) (243)
Amortization of stock-based
compensation................. 2,630 2,630
Foreign currency translation
adjustment................... (186) (186) $ (186)
Net loss....................... (11,286) (11,286) (11,286)
------ ---- -------- -------- ------ ------- -------- --------
BALANCE AT MARCH 31, 2000..... 46,503 $465 $142,998 $(17,348) $ (768) $(7,305) $118,042 $(11,472)
====== ==== ======== ======== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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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. and WebTrak Limited ("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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
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RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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's 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." An amendment in March 2000
delayed the effective date until the second 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 ended March 31, 2000, the calculation of diluted loss per
share excludes the impact of the potential exercise of 7,614,250 outstanding
stock options because their effect would be antidilutive.
Pro forma unaudited income per common share for the three months ended March
31, 1999 is calculated for basic income per share only since we had no
outstanding stock options during those periods.
8
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RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- RECLASSIFICATIONS
Certain reclassifications have been made to our December 31, 1999
consolidated balance sheet to conform with the presentation at March 31, 2000.
These reclassifications had no impact on previously reported stockholders'
equity.
NOTE 4 -- SUBSEQUENT EVENTS
On May 10, 2000, we completed our acquisition of HighTouch
Technologies, Inc., ("HighTouch") 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 $18.0
million in cash and issued approximately 389,057 shares of our common stock to
the former sole shareholder of HighTouch. This transaction will be accounted for
under the purchase method of accounting. Accordingly, the purchase will be
allocated to the estimated fair value of assets acquired, liabilities assumed
and purchased in-process research and development.
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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. As of March 31, 2000, HNC owned
approximately 86.0% of our outstanding common stock. HNC has informed us that it
is their current intention to distribute pro rata to their stockholders, as a
dividend, all of the shares of the Company's common stock that HNC owns, subject
to the satisfaction and fulfillment of several conditions, including the 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.
However, 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.
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. Neil Thall Associates, Inc., a developer of predictive software solutions
for retailers and a wholly owned subsidiary of HNC since 1991, was merged into
Retek Information Systems in April 1997. Financial results of Neil Thall
Associates are included in all periods presented. 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.
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Total revenue decreased from $16.6 million in the first quarter of 1999
to $14.0 million in the first quarter of 2000. We generate revenue from the sale
of software licenses, maintenance and support contracts, and professional
consulting and 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 97.4% and 85.6% of our total revenue in the first quarter of 2000
and the first quarter of 1999, respectively. Indirect sales channel revenue
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
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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 $18.0 million in cash and
issued approximately 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 31.2% and 58.0% of our total revenue in the first quarter of
2000 and the first quarter of 1999, respectively. Approximately 11.2% and 41.4%
of our sales were denominated in currencies other than the U.S. dollar for the
first quarter of 2000 and the first quarter of 1999, respectively.
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;
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- 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
TOTAL REVENUE
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
------- ----
<S> <C> <C>
Revenue:
License and maintenance........................... 46.0% 70.0%
Services and other................................ 54.0 30.0
Total revenue............................. 100.0 100.0
Cost of revenue:
License and maintenance........................... 29.8 8.4
Services and other................................ 39.5 17.4
Total cost of revenue..................... 69.3 25.8
Gross margin........................................ 30.7 74.2
Operating expenses:
Research and development.......................... 57.3 25.7
Sales and marketing............................... 62.1 22.9
General and administrative........................ 16.5 7.2
Amortization of stock-based compensation.......... 18.8 -
Acquisition related amortization of intangibles... 5.6 1.5
Total operating expenses.................. 160.3 57.3
Operating (loss) income............................. (129.6) 16.9
Other income, net................................... 7.5 0.1
(Loss) income before income tax (benefit) provision. (122.1) 17.0
Income tax (benefit) provision...................... 41.4 6.9
Net (loss) income................................... (80.7) 10.1
Cost of license and maintenance revenue, as a
percentage of license and maintenance revenue....... 64.8 12.0
Cost of services and other revenue, as a percentage
of services and other revenue....................... 73.1 57.8
</TABLE>
Three Months Ended March 31, 2000 and 1999
Revenue
Total revenue. Total revenue decreased 16.1% to $14.0 million in the
first quarter of
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2000 from $16.6 million in the first quarter of 1999.
License and maintenance revenue. License and maintenance revenue
decreased 44.8% to $6.4 million in the first quarter of 2000 from $11.7 million
in the first quarter of 1999. The decrease in license revenue in the first
quarter of 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 quarter revenue decreased in the first quarter of 2000 compared
to the first quarter of 1999. However, the average dollar contract value per
customer increased for the same time period. Maintenance revenue increased $2.5
million in the first quarter of 2000 compared to the first quarter of 1999 due
to a growing base of customers that have installed our software solutions.
Services and other revenue. Services and other revenue increased 51.0%
to $7.5 million in the first quarter of 2000 from $5.0 million in the first
quarter of 1999. The increase was due to a $2.5 million increase in consulting
services and custom development projects. Our number of billable employees
increased to 81 as of March 31, 2000 from 60 as of March 31, 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; 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 196.9%
to $4.2 million in the first quarter of 2000 from $1.4 million in the first
quarter of 1999. In the first quarter of 2000, we incurred expenses to support
the implementation of the network required for retail.com. In addition, 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. 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 91.0% to $5.5 million in the first quarter of 2000 from $2.9
million in the first quarter of 1999. As a percentage of services and other
revenue, cost of services and other revenue was 73.1% in the first quarter of
2000 and 57.8% in the first quarter of 1999. The increase in cost as a
percentage of revenue in the first quarter of 2000 was due to project fees
earned in the first quarter of 1999 that did not require additional costs to
complete. During the first quarter of 2000, we continued to expand our
consulting services business by increasing the number of personnel to 81 from 60
in the first quarter of 1999.
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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 87.2% to $8.0 million in the first quarter of
2000 from $4.3 million in the first quarter of 1999. The absolute dollar
increase in research and development expenses was due to significant increases
in labor costs, which included hired personnel and third party consultants. In
the first quarter of 2000, research and development personnel increased to 265
from 120 in the first quarter of 1999. We also invested heavily in the
development of new retail.com solutions during the first quarter of 2000. 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; rent and facilities costs
associated with our regional and international sales offices; and an allocation
of facilities and depreciation expenses. Sales and marketing expenses increased
127.1% to $8.7 million in the first quarter of 2000 from $3.8 million in the
first quarter of 1999. The increase was primarily due to increases of $2.3
million in personnel and related costs and $1.5 million in marketing expenses.
In the first quarter of 2000 personnel and related costs increased due to an
increase in the number of sales and marketing employees to 118 from 61 in the
first quarter of 1999. The increase during the first quarter of 2000 in
personnel and related costs was due to the continued build up of our sales force
and marketing operations for our new retail.com product offering.
General and administrative. General and administrative expenses consist
primarily of costs from our finance and human resources organizations; legal and
other professional services fees; and an allocation of facilities costs and
depreciation expenses. General and administrative expenses increased 93.9% to
$2.3 million in the first quarter of 2000 from $1.2 million in the first quarter
of 1999. The increase in absolute dollars in general and administrative expenses
in the first quarter of 2000 was attributable to the growth of the
administrative organization to support our overall growth. The increase in the
first quarter of 2000 was also due to us incurring additional compliance
expenses associated with being an independent public company. In the first
quarter of 2000 total general and administrative employees increased to 51 from
31 in the first quarter of 1999. 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
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employees under the 1999 Equity Incentive Plan and to members of
our board of directors through both the 1999 Equity Incentive Plan and the 1999
Directors Stock Option Plan. Through March 31, 2000, we had granted stock
options to employees to purchase 7,514,250 shares and to members of our board of
directors to purchase 100,000 shares of our common stock at an exercise price of
$10 per share. Amortization of stock-based compensation was $2.6 million for the
first quarter of 2000.
Acquisition-related amortization of intangibles. Acquisition-related
amortization of intangibles increased to $779,000 for the first quarter of 2000
from $258,000 for the first quarter of 1999. 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 $1.0 million in the
first quarter of 2000 from $16,000 in the first quarter of 1999. The increase
was due to interest income earned on cash equivalents and investments.
Income tax (benefit) provision. The income tax (benefit)/provision was
($5.8) million in the first quarter of 2000 and was $1.1 million in the first
quarter of 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 March 31, 2000, our
cash and cash equivalent balance was $61.9 million. In addition, we had
investments in short-term securities of $2.0 million.
Net cash provided by operating activities was $673,000 in the first
quarter of 2000 and $1.1 million in the first quarter of 1999. Principal
operating cash flow adjustments that offset our net loss were amortization of
stock-based compensation, depreciation and amortization, increases in accrued
liabilities and deferred revenue, and decreases in accounts receivable. Uses of
cash in the first quarter of 2000 were due to increases in deferred income taxes
and other assets and a decrease in accounts payable.
Net cash used in investing activities was $6.7 million in the first
quarter of 2000 and $1.9
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million in the first quarter of 1999. In the first quarter of 2000, uses of cash
were due to the acquisition of capital equipment, primarily computer equipment
and software and purchase of investments.
Net cash used by financing activities was $15.6 million in the first
quarter of 2000. Net cash provided by financing activities was $2.2 million in
the first quarter of 1999. Net cash used in the first quarter 2000 included
$80,000 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.
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
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.
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.
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
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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.
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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 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.
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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
- 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
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attract and retain highly skilled personnel, including John Buchanan, our
chairman and chief executive officer; Gordon Masson, our president, core
applications; John L. Goedert, our senior vice president, research and
development; Gregory A. Effertz, our vice president, finance and administration
and chief financial officer and Jeremy Thomas, our president, retail.com. 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
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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, 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:
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- 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 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.
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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 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's 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." An amendment in March 2000
delayed the effective date until the second 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 March 31, 2000 was $63.9 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
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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
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 11.2% and 41.4% of our total sales were denominated in
currencies other than the US dollar in the first quarter of 2000 and the first
quarter of 1999, respectively.
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.
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ITEM 2: CHANGES IN SECURITIES AND USES OF PROCEEDS
(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 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. 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. 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
No matters were submitted to a vote of security holders during the
first quarter of 2000.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
26
<PAGE> 27
(a) EXHIBITS
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
None.
27
<PAGE> 28
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: May 15, 2000
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDING MARCH 31, 2000 AND MARCH 31, 1999.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 61,891 1,535
<SECURITIES> 2,000 0
<RECEIVABLES> 26,388 25,932
<ALLOWANCES> (3,883) (1,756)
<INVENTORY> 0 0
<CURRENT-ASSETS> 104,179 29,576
<PP&E> 12,133 6,363
<DEPRECIATION> 808 2,332
<TOTAL-ASSETS> 145,666 53,393
<CURRENT-LIABILITIES> 27,243 15,916
<BONDS> 0 0
0 0
0 0
<COMMON> 465 6,564
<OTHER-SE> 117,577 30,913
<TOTAL-LIABILITY-AND-EQUITY> 145,666 53,393
<SALES> 13,964 16,647
<TOTAL-REVENUES> 13,964 16,647
<CGS> 9,677 4,289
<TOTAL-COSTS> 9,677 4,289
<OTHER-EXPENSES> 22,391 9,541
<LOSS-PROVISION> 149 270
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (18,104) 2,833
<INCOME-TAX> (5,776) 1,145
<INCOME-CONTINUING> (11,286) 1,688
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,286) 1,688
<EPS-BASIC> (0.24) .04
<EPS-DILUTED> (0.24) .04
</TABLE>
