<PAGE> 1
HIGHTOUCH TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
PAGE(S)
Report of Independent Accountants 1
Financial Statements:
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Stockholder's Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-12
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
HighTouch Technologies, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholder's equity and cash flows present fairly, in
all material respects, the financial position of HighTouch Technologies, Inc.
(the Company) at March 31, 2000, and the results of its operations and its
cash flows for the period from December 22, 1999 to March 31, 2000, in
conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 11 to the financial statements, on May 10, 2000, Retek
Inc. purchased 100% of the outstanding common stock of the Company.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 24, 2000
1
<PAGE> 3
HIGHTOUCH TECHNOLOGIES, INC.
BALANCE SHEET
MARCH 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 231,532
Accounts receivable 5,736
Deferred software project costs 16,661
Prepaid expenses and other current assets 22,587
---------
Total current assets 276,516
Property and equipment, net 199,473
Intangible assets, net 16,966,621
Other assets 18,321
---------
Total assets 17,460,931
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 164,022
Current maturities of long-term debt 2,152,701
Deferred revenue 715,886
Accrued expenses and other 106,810
----------
Total current liabilities 3,139,419
----------
Deferred income taxes 760,000
Long-term debt and capital lease obligations 334,018
Total liabilities 4,233,437
Commitments and contingencies (Notes 5 and 10)
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares authorized, 1,000 shares
issued and outstanding 10
Additional paid-in capital 14,628,052
Accumulated deficit (1,400,568)
----------
Total stockholder's equity 13,227,494
----------
Total liabilities and stockholder's equity $17,460,931
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenues $ 31,937
Cost of revenues, including amortization of acquired technology 460,833
------------
Gross loss (428,896)
------------
Operating expenses:
General and administrative 448,198
Sales and marketing 138,908
Product development 172,303
Amortization of acquired intangibles, other than acquired technology 725,890
------------
Total operating expenses 1,485,299
------------
Loss from operations (1,914,195)
Interest expense (26,373)
------------
Loss before deferred income tax benefit 1,940,568
Deferred income tax benefit 540,000
-----------
Net Loss $(1,400,568)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES PAR VALUE CAPITAL DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
Balances at December 22, 1999 1,000 $ 10 $ 14,628,052 $ $ 14,628,062
Net loss (1,400,568) (1,400,568)
-------- --------- ------------ ------------ ------------
Balances at March 31, 2000 1,000 $ 10 $ 14,628,052 $ (1,400,568) $ 13,227,494
======== ========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (1,400,568)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 12,994
Amortization 1,156,464
Deferred income tax benefit (540,000)
Changes in assets and liabilities:
Accounts receivable 84,602
Prepaid expenses and other current assets (1,657)
Other assets (5,847)
Accounts payable (327,033)
Deferred revenue (31,938)
Accrued expenses and other 22,192
-------------
Net cash used in operating activities (1,030,791)
-------------
Cash flows from investing activities:
Purchase of property and equipment (40,899)
-------------
Net cash used in financing activities (40,899)
-------------
Cash flows from financing activities:
Proceeds from issuance of debt 1,180,000
Principal payments on debt (15,416)
-------------
Net cash provided by financing activities 1,164,584
-------------
Net increase in cash 92,894
Cash at beginning of year 138,638
-------------
Cash at end of year $ 231,532
-------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,967
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HighTouch Technologies, Inc. (the Company) was incorporated on January 9,
1998 under the laws of the state of Florida. The Company has developed
customer order processing software applications targeted for large
enterprises with multiple marketing and distribution channels to end-user
consumers. The Company also provides consulting services to these
enterprises.
ACQUISITION AND BASIS OF PRESENTATION
On December 21, 1999, Kipling Investments Labuan Limited (Kipling)
purchased 100% of the outstanding stock of the Company. The purchase
price totaled $14,628,062. The consideration for the acquisition was paid
by Kipling directly to the former stockholders of the Company.
The Company used the purchase method of accounting related to the
acquisition. Accordingly, as of December 21, 1999, the Company recorded
its assets and liabilities at their estimated fair values. In connection
with the purchase, the Company recorded various intangible
assets as follows:
<TABLE>
Estimated
Amount Useful Life
---------- -----------
<S> <C> <C>
Technology $4,800,000 3
Assembled workforce 520,000 3
Customer base 900,000 3
Non-competition agreement 1,000,000 3
Goodwill 10,903,085 5
</TABLE>
All of the above intangible assets are amortized on the straight line
method over the respective useful lives.
In connection with the acquisition, the Company revised its articles of
incorporation to authorize 1,000 shares of $0.01 per share par value
common stock.
FINANCIAL STATEMENT PRESENTATION
The preparation of the 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 dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The
carrying value of cash equivalents approximates fair value due to the
short maturity of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company recognizes
depreciation expense using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years. Repair
and maintenance costs are charged to expense as incurred.
CAPITALIZED SOFTWARE Development costs for software to be licensed or
sold that are incurred from the time technological feasibility is
established until the product is available for general release to
customers are capitalized and reported at the lower of cost or net
realizable value. Through March 31, 2000, no significant amounts were
expended subsequent to reaching technological feasibility.
6
<PAGE> 8
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
LONG-LIVED ASSETS
When events or changes in circumstances warrant, the Company investigates
potential impairments of long-lived assets and certain identifiable
intangibles. An impairment loss would be recognized if the sum of the
expected future net cash flows were less than the carrying amount of the
asset. No such impairments of long-lived assets occurred during the
period from December 22, 1999 to March 31, 2000.
REVENUE RECOGNITION
The Company recognizes software license revenue upon meeting each of the
following criteria: execution of a license agreement or contract;
delivery of software; 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. Service revenue
includes maintenance revenue, which is deferred and recognized ratably
over the maintenance period, and revenue from consulting and training
services, which is recognized as services are performed. Consulting
services are customarily billed at a fixed daily rate plus out-of-pocket
expenses.
The Company's revenue, other than maintenance revenue, is generally
recognized using the completed contract method, with the associated costs
of the contract deferred until the revenue is recognized. Amounts
received under contracts in advance of completion are recorded as
deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period
such losses are first identified.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS No.
109). Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year end based
on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized based on expectations about future
taxable income.
ADVERTISING EXPENSE
The costs incurred for advertising and promotion are expensed when
incurred. Included in sales and marketing expenses were advertising
expense of $3,302 for the period from December 22, 1999 to
March 31, 2000.
CONCENTRATIONS OF CREDIT RISK
The Company's financial investments that are subject to concentrations of
credit risk consist primarily of cash. The Company's policy is to place
its cash with high credit quality financial institutions in order to
limit the amount of its credit exposure.
7
<PAGE> 9
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
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
of FAS 133 to all fiscal quarters of fiscal years beginning after June
15, 2000. In June 2000, the FASB issued Statement of Accounting Standards
No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of FASB Statement No. 133" which
amends certain aspects of FAS 133. The adoption of FAS 133 and FAS 138 is
not expected to have a significant impact on the Company's financial
position or results of operations.
In April 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB 25," which is effective July 1, 2000, except for
certain conclusions which cover specific events after either December 15,
1998 or January 12, 2000. FIN No. 44 clarifies the application of APB 25
related to modifications of stock options, changes in grantee status, and
options issued on a business combination, among other things. The
adoption of FIN No. 44 is not expected to have a significant impact on
the Company's financial position or results of operations.
2. PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Property and equipment consisted of the following at March 31, 2000:
Furniture and office equipment $ 32,497
Computer equipment 159,134
Software 20,826
---------
212,467
Less accumulated depreciation (12,994)
---------
$199,473
=========
</TABLE>
8
<PAGE> 10
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<S> <C>
At March 31, 2000, long-term debt consisted of the following:
Note payable to officer, uncollateralized, interest at 7%, payment due on
demand $ 12,265
Note payable to a vendor, uncollateralized, interest at 7%, monthly
interest payments of $2,500, all principal and remaining accrued
interest due on July 1, 2005 400,000
Note payable to officer, uncollateralized, interest at 8%, payment due on
demand 680,000
Note payable to Kipling Investments Labuan Limited, uncollateralized, no
interest, payment due on demand 250,000
Note payable to Retek Inc., uncollateralized, no interest payment due on
demand 250,000
Note payable, uncollateralized, interest at 8%, all principal and interest
due on August 2000 500,000
Capitalized lease obligations, interest at 7%, monthly payments
through July 1, 2005 394,454
---------
Total debt obligations 2,486,719
Less current portion (2,152,701)
---------
Long-term debt and capital lease obligations, less current portion $ 334,018
----------
</TABLE>
The annual principal requirements on capital lease obligations for
subsequent fiscal years are as follows:
<TABLE>
<S> <C>
2001 $ 90,000
2002 90,000
2003 90,000
2004 90,000
2005 90,000
Thereafter 22,500
----------
472,500
Less: Amount representing interest (78,046)
----------
$ 394,454
==========
</TABLE>
9
<PAGE> 11
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
4 SAVINGS PLAN
Effective January 1, 1999, the Company established a defined contribution
savings plan (the Plan) under Section 401(k) of the Internal Revenue Code
for all eligible employees. The Plan allows employees to defer up to 15%
of their total compensation up to a maximum allowed on an annual basis
under Internal Revenue Service regulations. The Company is not required
to match any deferrals; however, the Company, may, at its discretion,
make profit sharing contributions to the Plan. For the period from
December 22, 1999 to March 31, 2000, the Company did not make a matching
contribution to the Plan.
5. OPERATING LEASES
The Company leases office space under non-cancelable operating leases
expiring in various years through 2001. Rental expense under
non-cancelable operating leases was approximately $40,505 for the period
from December 22, 1999 to March 31, 2000.
Future minimum lease payments under non-cancelable operating leases
having remaining terms in excess of one year as of March 31, 2000 for
their remaining terms and in the aggregate are:
YEAR ENDING MARCH 31,
<TABLE>
<S> <C>
2001 $ 72,412
2002 74,476
2003 70,004
----------
$ 216,892
----------
</TABLE>
10
<PAGE> 12
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
6. STOCK OPTION PLAN
In August 1999, the Company adopted the HighTouch Technologies, Inc. 1999
Stock Option Plan ("Stock Option Plan"). The Stock Option plan provides
the Board of Directors to award up to 345,345 shares of the Company's
common stock in the form of nonqualified or incentive stock options.
Nonqualified stock options may be awarded at a price not less than 85% of
the fair market value of the stock at the date of the award. Incentive
stock options must be awarded at a price not less than 100% of the fair
market value of the stock at the date of the award or 110% of fair market
value of the stock at the date of the awards to more than 10%
stockholders. Options granted under the Stock Option Plan may have a term
of up to 10 years. Options vest over three years at the rate of 33.33% of
the total grant each year. However, the Board of Directors may, at its
discretion, implement a different vesting schedule with respect to any
new stock option grant. At March 31, 2000, options outstanding had a 9.7
weighted average remaining contractual life and no options were
exercisable.
Transactions relating to employees of the Company under the Company's
Stock Option Plan during the period from December 22, 1999 to March 31,
2000 is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding, December 22, 1999 88,500 $ 3.40
Granted 6,000 $ 3.40
Cancelled (17,500) $ 3.40
--------------
Outstanding, March 31, 2000 77,000 $ 3.40
-------------- -------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock-based compensation.
Had compensation cost for the Company's stock-based compensation awards
to the Company's employees been determined based on the fair value at the
grant dates of awards consistent with the method of Financial Accounting
Standards Board Statement No. 123 ("FAS 123"), the Company's net loss for
the period from December 22, 1999 to March 31, 2000 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net loss applicable to common stockholders
As reported $ (1,400,568)
Pro forma (1,407,087)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants during the period from December 22,
1999 to March 31, 2000: dividend yield of 0.0%; risk-free interest rates
of 6.55%; expected volatility of 0% and expected lives of 4 years. The
weighted average fair value of the stock options granted in the period
from December 22, 1999 to March 31, 2000 was $ 5.84 per share.
11
<PAGE> 13
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
7. INCOME TAXES
At March 31, 2000, the Company had a deferred tax asset of $1,624,000
related to its net operating loss carryforward offset by a deferred
tax liability of $2,384,000 related to the Company's acquired
identifiable intangible assets. The income tax benefit, computed by
applying the federal statutory rate to loss before taxes, and the
actual benefit for income taxes differ due to nondeductible goodwill
amortization. As of March 31, 2000, the Company had a net operating loss
of approximately $4.4 million available to reduce future federal income
taxes. This net operating loss carryforward will begin to expire in
2018 and is subject to limitation in any given year in the event of
certain changes in ownership as set forth in the Internal Revenue Code
and related Treasury Regulations.
8. CUSTOMER AND VENDOR CONCENTRATIONS
For the period from December 22, 1999 to March 31, 2000, the Company
derived approximately $14,125 (44%) of revenues from customer A and
$17,812 (56%) of revenues from customer B.
9. RELATED PARTY TRANSACTIONS
The Company received a $250,000 advance through a note payable from
Kipling Investments Labaun Limited on January 7, 2000. This note payable
is uncollateralized and there is no interest being charged to the
Company.
12
<PAGE> 14
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 TO MARCH 31, 2000
--------------------------------------------------------------------------------
10. COMMITMENTS
The Company has entered into a software marketing agreement with an
unrelated third party. The agreement requires the Company to pay
royalties based upon percentages of future sales of specified software.
11. SUBSEQUENT EVENT
In April 2000, one of the Company's founders and an executive officer
died. As a result, the Company is expected to receive $1 million in a
payout of the life insurance policy held by the Company.
On May 10, 2000, Retek acquired 100% of the outstanding common stock of
the Company. The purchase price totaled $18 million in cash and 389,057
shares in Retek Inc. common stock.
13
