-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L9kfV/d9OGZrd0JHyH4jUrJF5WXZyBI15EDTbIV6n80fmw0f7IdHdC50loSM1pxF 1faVUS8gBCOUsslIhlThwQ== 0000950124-00-001249.txt : 20000316 0000950124-00-001249.hdr.sgml : 20000316 ACCESSION NUMBER: 0000950124-00-001249 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETEK INC CENTRAL INDEX KEY: 0001094360 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 510392671 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28121 FILM NUMBER: 570888 BUSINESS ADDRESS: STREET 1: 801 NICOLLET MALL CITY: MINNEAPOLIS STATE: MN ZIP: 55402 MAIL ADDRESS: STREET 1: 801 NICOLLET MALL CITY: MINNEAPOLIS STATE: MN ZIP: 55402 10-K405 1 FORM 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-28121 ------------------------ RETEK INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE (TITLE OF CLASS) ------------------------ 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of common stock held by non-affiliates of the Registrant was approximately $417,601,934 as of March 1, 2000, based upon the closing price of $64.25 on the Nasdaq National Market reported on such date. Shares of common stock held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer and affiliate status is not necessarily a conclusive determination for other purposes. As of March 1, 2000, the number of shares of common stock outstanding was 46,502,778. DOCUMENTS INCORPORATED BY REFERENCE: Information required by Part III of this document is incorporated by reference to certain portions of the Company's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders to be held May 16, 2000 (to be filed). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 RETEK INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 INDEX PART I...................................................... 3 Item 1: Business.......................................... 3 Item 2: Property.......................................... 13 Item 3: Legal Proceedings................................. 14 Item 4: Submission of Matters to a Vote of Security Holders................................................ 14 PART II..................................................... 14 Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.................................... 14 Item 6: Selected Consolidated Financial Data.............. 15 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 15 Item 7A: Qualitative And Quantitative Disclosures About Market Risk............................................ 28 Item 8: Financial Statements and Supplementary Data....... 29 Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................... 29 PART III.................................................... 29 Item 10: Directors and Executive Officers of the Registrant............................................. 29 Item 11: Executive Compensation........................... 29 Item 12: Security Ownership of Certain Beneficial Owners and Management......................................... 29 Item 13: Certain Relationships and Related Transactions... 30 PART IV..................................................... 30 Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 30
1 3 SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains forward-looking statements in "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 7A -- Quantitative and Qualitative Disclosures About Market Risk," and elsewhere. These statements relate to future events or the Company's 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 the Company's or its 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 the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. The Company is under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual future results. 2 4 PART I ITEM 1: BUSINESS GENERAL The Company provides Internet-based, business-to-business software solutions for retailers and their trading partners. The Company's software offers a retail focused solution that incorporates technology that can predict customer demand and behavior, which the Company refers to as predictive technology. The Company's software solutions enable retailers to use the Internet to communicate and collaborate efficiently with their suppliers, distributors, wholesalers, logistics providers, brokers, transportation companies, consolidators and manufacturers. The Company seeks to further enhance the ability of retailers to interact with their supply chain through retail.com, which the Company believes is the first electronic commerce network providing collaborative business-to-business software solutions to the retail industry. The Company markets its software solutions through its direct and indirect sales channels primarily to retailers who sell to their customers via traditional retail stores, catalogs and/or Internet-based store fronts. To date, the Company has licensed its solutions across a variety of retail industry sectors to over 100 retailers. The Company expects its retail.com network offering to extend its target market by making its solutions available to small and mid-sized retailers and their trading partners. On November 23, 1999, the Company completed its initial public offering. Prior to the completion of its initial public offering, the Company was a wholly-owned subsidiary of HNC Software, Inc. (HNC), a business-to-business software company that develops and markets predictive software solutions. HNC currently owns approximately 86.0% of the Company's outstanding common stock. HNC has informed the Company that it is HNC's current intention to distribute pro rata to its 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. The Company was originally incorporated in Ohio in 1985 as Practical Control Solutions, Inc. ("PCS"), which was renamed Retek Logistics, Inc. in April 1999. In September 1999, Retek Logistics, Inc. was reincorporated as a Delaware corporation and renamed Retek Inc. The Company's principal executive office is located at Midwest Plaza, 801 Nicollet Mall, 11th Floor, Minneapolis, MN 55402, and its telephone number is (612) 630-5700. The Company's common stock is listed on the Nasdaq National Market under the symbol "RETK". All references in this Annual Report on Form 10-K to the "Company," the "Registrant" or "Retek" refer to Retek Inc. and its consolidated subsidiaries. RETEK SOLUTION Most large and mid-sized retailers have historically relied upon custom-built systems, typically developed internally, to manage their interactions with trading partners and customers. Many of these systems use 1970s mainframe technology, are not Internet-based, and do not permit collaboration among the retailer's partners, suppliers and other members of the supply chain. More recently, retailers have begun to purchase packaged solutions with a specific retail industry focus. These products typically lack the scalability required by larger retailers and are not Internet-based. Being "scalable" means being able to support growth in customers, products and stores. Enterprise resource planning systems have also been adopted on a limited scale. These complex systems are expensive to implement and maintain, typically lack the scalability required by retailers, and do not have a specific retail industry focus. Recently introduced business-to-business electronic commerce products do not offer specific retail industry focus and typically lack the scalability and integration required by retailers. The Company believes that a market opportunity exists to provide retailers with a business-to-business software solution that is Internet-based, collaborative and designed specifically for the retail industry. This 3 5 solution should be easy-to-use, leverage a retailer's existing investments in information technology and be flexible enough to meet the specific needs of a particular retail sector, such as fashion, mass merchandise, food and drug. In addition, the solution should be highly scalable to process and analyze vast amounts of customer sales and supplier performance data unique to the retail industry. The Company has developed and deployed Internet-based, business-to-business software solutions that enable retailers to manage the entire retail supply chain. The key features of the Company's software solutions are: - Collaborative retail supply chain. The Company's solutions electronically link retailers with their trading partners to facilitate collaboration across all aspects of the supply chain, from the initial prediction of customer demand through product design and manufacturing, to inventory management. The Company believes that by facilitating this collaboration, it will enable retailers to reduce unnecessary costs and time-to-market, while increasing product quality and improving margins. - Robust, predictive and analytic technologies. The Company's solutions provide advanced predictive tools to process and analyze the vast amounts of data available to retailers. The Company's unique, proprietary technologies enable retailers to identify patterns in data that may not otherwise be visible. This information helps the Company's customers reduce inventories, increase marketing effectiveness and improve customer satisfaction. - Internet-based, easy-to-use and rapidly deployable solutions. The Company's Internet-based software solutions are easy to use and rapidly deployable. Retailers and their trading partners can access the Company's software from any desktop with an Internet interface, and the Company's software can be made available to all employees. Furthermore, because the Company's software solutions are Internet-based, their deployment can reduce capital infrastructure and maintenance costs. - Highly scalable and retail sector focused. The Company's Internet-based solutions are built specifically to address the unique scalability requirements of the retail industry. In addition, the Company has developed solutions that meet the specific requirements of particular retail sectors, including fashion, mass merchandise, food and drug. STRATEGY The Company's objective is to be the leading provider of Internet-based, business-to-business software solutions for retailers and their trading partners. As the retail supply chain evolves into an electronic network, the Company seeks to further enable its customers to better manage, organize and drive efficiencies through this network. Key elements of the Company's strategy include: - Extending the Company's Internet-based, business-to-business collaborative software solution, principally through the introduction of the Company's retail.com network. By leveraging the Company's technological advantages, customer base and retail expertise, the Company intends to make retail.com the electronic commerce network for business-to-business commerce among retailers and their trading partners. The retail.com network is designed to provide a single point of access for all members of the retail supply chain and offer a broad range of software solutions that enable a rich and collaborative information exchange between retailers and their trading partners. This Internet-based, retail focused, business-to-business software solution permits interactive collaboration on the wide range of supply and demand chain issues that retailers encounter. - Introducing existing customers to a broader offering of the Company's software solutions. The Company intends to expand the use of its products within existing client accounts. The Company has sold its software solutions products to more than 100 retailers, primarily large companies, across a range of retail sectors. The Company intends to further penetrate these accounts by cross-selling its other software solutions or suites of software solutions, all of which are independently 4 6 deployable, and by introducing clients to the new collaborative software solution offering at retail.com. - Leveraging the Company's experience in retail. The Company will continue to leverage its expertise in providing solutions to retailers. Since its formation, the Company has developed and deployed software solutions designed specifically for retailers. The Company's solutions address the need of retailers to process and track the millions of transactions they complete with their consumers and to communicate and transact business with their large, geographically diverse supply chain members. This focus on the retail industry permits the Company to constantly update and expand its offerings and to effectively develop new technologies to address the specific needs of the retail industry. - Expanding the Company's relationship with implementation and hosting partners. The Company has established relationships with large, international system integrators and consulting firms, such as Andersen Consulting and KPMG. These firms provide sales leads, implementation expertise and valuable third party endorsement of the Company's software solutions. The Company plans to expand these relationships to increase its capacity to sell and implement its solutions. Systems integrators and consulting firms have a strong influence on software purchasing decisions within large companies, and they are increasingly seeking Internet-based collaborative software solutions that allow them to satisfy their clients' needs more rapidly than they can through customized product development. In addition, the Company intends to continue to offer its software solutions through Internet-based applications service providers for retailers that want a third party to host their solutions. The Company believes that the application service provider option will be particularly attractive to pure electronic commerce retail companies, as well as to small and mid-sized retailers that typically have limited internal information technology resources. - Extending the Company's technological leadership. The Company intends to increase its technological and product leadership by enhancing the core functionality and high performance analytic features of its products. The Company believes that its software solutions, derived from the proprietary analytic and predictive technology of HNC and enhanced by the Company's research scientists, provide the Company with a first mover advantage and an essential basis for the comprehensive Internet solution of retail.com. The Company intends to continue to devote substantial resources to the development of new and innovative Internet-based products for business-to-business retail solutions and to continue to incorporate emerging Internet technologies. In addition, by implementing and actively promoting new industry standards, the Company intends to facilitate widespread adoption of its solutions by retailers. PRODUCTS The Company has developed and deployed Internet-based, business-to-business software solutions that address the entire retail operation. The Company's software solutions allow retailers to effectively manage their demand and supply chain processes, getting the right product in the right place at the right time at the right price. The Company's principal software solutions consist of four integrated, but independently deployable, components, which are accessed via an Internet browser and can be hosted by an individual organization or applications service provider. Transaction Solution Transaction Solution is the Company's core suite of retail business applications providing comprehensive operational management tools. This suite of software solutions provides the foundation of operational support and process execution across the retail enterprise, with the scalability needed to support the mission-critical operations of many of the world's large retailers. The Internet-based design of these solutions helps reduce the cost of supporting store employees, while improving customer service. In addition, the Company's Transaction Solution is designed to ensure the integrity of the data used by the Company's decision support and predictive solutions. 5 7
- --------------------------------------------------------------------------------------------- PRODUCTS FEATURES - --------------------------------------------------------------------------------------------- Retek Merchandising System - Provides the core inventory control and merchandise management functions that support the retail process Retek Trade Management - Enables retailers to manage the global import process Retek Distribution Management - Automates the entire warehousing process Retek Store Operations - Electronically links store employees to corporate data through radio-frequency hand-held devices and intranets - ---------------------------------------------------------------------------------------------
Decision Support Solution Decision Support Solution is the Company's suite of job-specific data analysis and exception management tools. This suite of software solutions supports flexible, multidimensional access to built-in, retail-specific performance measures. Retailers can analyze large volumes of customer sales and supplier performance data by using the packaged data warehouse software, which allows rapid deployment and return on investment. This suite of solutions generates rule-based reports that highlight unusual or novel information, permitting retailers to develop business solutions quickly.
- ------------------------------------------------------------------------------------------------ PRODUCTS FEATURES - ------------------------------------------------------------------------------------------------ Retek Data Warehouse - Provides flexible, job-specific tools to assist retailers in utilizing and analyzing their data to effectively manage their business and share key information with suppliers Active Retail Intelligence - Generates and distributes rule-based exception reports and enables responses, including automated responses, to the exceptions to produce rapid resolution of performance problems - ------------------------------------------------------------------------------------------------
Predictive Solution Predictive Solution is the Company's suite of predictive technologies designed to analyze the huge volume of customer sales and supplier performance data, optimizing the demand and supply chains to minimize inventory costs and maximize sales. By applying advanced algorithms to the mass of data processed by retailers each day, the Company's Predictive Solution is able to identify high value information which supports one-to-one customer marketing, helps manage customer relationships and optimize supply chain management. Analysis of the combinations of products bought in each retail customer transaction can assist retailers in identifying opportunities for increasing sales and the effectiveness of promotions and reducing the cost of markdowns and unnecessary inventory.
- ---------------------------------------------------------------------------------------------- PRODUCTS FEATURES - ---------------------------------------------------------------------------------------------- Retek Behavior Profiler - Enables retailers to cluster and segment their customer and market basket data, uncovering meaningful and valuable relationships between products and customers Retek Demand Forecasting - Moves beyond traditional time-series techniques to tie events and causal factors, such as promotions, to daily forecasts of individual product demand at each store or selling channel Retek Replenishment - Uses optimization and simulation techniques to set up Optimization and maintain efficient inventory replenishment systems - ----------------------------------------------------------------------------------------------
Business-to-Business Collaborative Business-to-Business Collaborative Solution is the Company's suite of software solutions that supports specific retail business processes and is provided on retail.com, a business-to-business electronic commerce network that the Company began operating on September 26, 1999. The Company believes that retail.com is the first electronic commerce network for the retail trading community. The network is designed to provide a single point of access for all members of the retail supply chain and offer a broad range of 6 8 software solutions that enable a rich and collaborative information exchange between retailers and their trading partners. The Company's retail.com solution is designed to allow organizations to increase the speed and effectiveness of complex processes by providing a new collaborative approach to traditional retail challenges. The Company currently offers critical path, merchandise assortment planning, and design process event tracking software solutions to all members of the retail.com network. The Company intends to launch additional software solutions and new services on the retail.com network. These additional software solutions and services are being designed to increase revenue as well as the utility and attractiveness to retailers of the retail.com network. Using this solution, which is available for immediate use with no implementation, support or hardware costs, retailers can quickly improve performance and reduce costs.
- ------------------------------------------------------------------------------------------------ PRODUCTS FEATURES - ------------------------------------------------------------------------------------------------ retail.com WebTrack - Enables users to publish and share a critical path on the Internet, improving collaboration and effectively shortening time scales and reducing costs retail.com Design - Provides an interactive network to parties involved in the product design process, reducing product development times and improving efficiency. retail.com Private Label Exchange - Continues the collaboration process by making possible direct purchases from suppliers, competitive bids for desired products and participation in online exchanges. retail.com Assort - Powers Internet-based assortment planning leading to increased collaboration early in the buying/production process. Enhances a retailer's ability to properly serve stores and customers. retail.com Intelligence Center - Provides personalized information impacting retailers, including real time monitoring of external and internal events, market trends and performance management. - ------------------------------------------------------------------------------------------------
SERVICES The Company provides its customers with consulting and technical support or maintenance services. - Consulting services consist primarily of technical and implementation services and customization of the Company's products for a customer's specific needs. These services are customarily billed at a fixed daily rate plus out-of-pocket expenses. The Company has vendor-specific objective evidence of fair values for these consulting services and recognizes revenue as these services are performed. - Technical support or maintenance services consist primarily of customer support services after implementation of the Company's solutions. Revenue from technical support or maintenance services is recognized on a straight-line basis over the contract period. The Company also provides strategic technical advisory services after the delivery of its products. By providing project management level support to the Company's customers in their dealings with third party integrators, these strategic technical advisory services are designed to help the Company's customers exploit the full value and functionality of the Company's products. Under licenses where these strategic technical advisory services are provided, license fee and services revenues are recognized as these services are performed over the contract period. The Company's services range from technical and implementation support to business benefit realization consulting, which assists retailers in utilizing the Company's software solutions to optimize their potential benefits. The Company offers high-quality, timely, technical support to customers via phone, e-mail and the Internet. Additionally, the Company publishes online versions of manuals, release notes and updates to existing documentation. The Company provides a number of training programs in the United 7 9 States. Courses cover topics such as technical architecture, business use of the merchandizing functionality and development standards and methodology. CUSTOMERS The Company markets its software solutions primarily to retailers who sell to their customers via traditional retail stores, catalogs and/or Internet store fronts. Historically, the Company has focused on organizations with gross sales in excess of $500 million a year. The Company markets across all formats of retailing, including fashion, department stores, catalog and consumer direct, specialty retailers, mass merchandise retailers and food, drug and convenience stores. The Company expects the recent launch of its retail.com network to extend its target market, allowing small and mid-sized retailers and suppliers of all sizes to take advantage of its solutions. During fiscal year 1999, the Company had one customer who accounted for 13.6% and another who accounted for 10.8% of total revenues. GOVERNMENT CONTRACTS No material portion of the Company's business is subject to renegotiation of profits or termination of contract or subcontracts at the election of the government. TECHNOLOGY CHARACTERISTICS The Company seeks to develop innovative software solutions by combining its retail industry and application knowledge and its strategy of partnering with technology market leaders. Although the Company makes extensive use of a broad range of technologies, it takes advantage of two key technologies: Internet Architecture. The Oracle toolset provides the Company with an Internet-based, scalable foundation for its software solutions. By leveraging the Company's applications framework into a unified architecture, the Company is able to focus on creating additional business functionality in its solutions, rather than building and maintaining complex infrastructure code. As a global alliance partner of Oracle, the Company's core development team works very closely with the Oracle technology group to take advantage of the latest features of the 8i database, the developer toolset, and the advances being driven by the Oracle mobile computing group. In addition, the Company's use of Sun Microsystems' Java programming language allows it to deliver software that is portable and efficient, as well as easy to internationalize and reconfigure. Predictive Algorithms. The Company's team of research scientists has expanded and tailored HNC's predictive technologies to fit the retail world. These technologies are able to analyze vast amounts of retail data, recognize and model complicated and sometimes subtle patterns, and apply these models to predicting and understanding the retail environment. The predictive algorithms the Company relies on include: - Hybrid Forecasting Models. The solution to many retail problems relies on good forecasting. Forecasting enhances such functions as store and warehouse replenishment, promotional planning, supplier collaboration, markdown reduction, merchandise and assortment planning and labor scheduling. The Company's hybrid forecasting models were designed specifically for retail problems, and use hybrids of standard techniques, as well as internally developed methods. The models use hierarchical time series techniques, filtering techniques, regression- based causal forecasting, and exception management to provide a platform that may be applied to all of the previous functions. - Context Vectors. Context vectors can automatically categorize unstructured information, providing insight from a previously inaccessible data source. This allows the Company's solutions to extract different dimensions from a retailer's data, allowing actionable information to be unlocked in the key areas of store profiling, single-customer transaction analysis and customer segmentation. 8 10 - Simulation. Simulations are used to model systems that are too complex for basic mathematical algorithms. The Company uses simulation to optimize store and warehouse replenishment. Unlike textbook generalizations and assumptions, the modeling provided by the Company's solutions simulates the entire replenishment process, enabling the Company to optimize the variables that affect the replenishment process. In addition, the Company licenses the ACUMATE component software from Lucent to serve as a foundation for Retek Demand Forecasting and the DSS Web software from MicroStrategy to serve as a user-interface for Retek Data Warehouse. In each case, the Company selected this third party software because it has properties that are particularly appropriate to the function of the specific solution into which it has been integrated by the Company. STRATEGIC ALLIANCES The Company has worked with Oracle to establish Oracle Retail(TM), which provides a single source of technology products, implementation services and support to target the world's largest retailers. Oracle Retail(TM) combines the Company's solutions with Oracle's financial applications to provide customers with a scalable Internet-based solution for the retail industry worldwide. The Company has developed strategic relationships with various system integrators that assist the Company with sales lead generation by recommending that their clients purchase the Company's software solutions. Additionally, these system integrators provide a range of services to the Company's customers, including project implementation services and first-line technical support. The Company has certified and trained system integrators for the implementation and operation of the Company's solutions at Andersen Consulting, Deloitte & Touche, IBM, and KPMG. In addition to providing implementation and support services for the Company's software solutions, Andersen Consulting has dedicated full-time consultants to help the Company in research and development and custom modifications. This allows the Company to rapidly expand its research and development efforts without incurring the costs associated with hiring additional staff internally. SALES, MARKETING AND DISTRIBUTION The Company markets and sells its software solutions worldwide through a combination of a direct sales force, resellers and distributors. The Company's worldwide direct sales, marketing and business development organizations consisted of 102 individuals as of December 31, 1999. The Company's sales, marketing and distribution approaches are designed to help customers understand both the business and technical benefits of the Company's software solutions. The Company conducts a variety of marketing programs worldwide to educate its target market, create awareness and generate leads for its solutions. To achieve these goals, the Company has engaged in marketing activities including e-business seminars, direct mailings, print and online advertising campaigns and trade shows. These programs are targeted at key information technology executives and business users, as well as chief information officers and other senior executives. Markets outside the United States are currently served by the Company's direct sales offices in the United Kingdom, Canada, France, Germany, Australia, Japan and South Africa. In addition, the Company has established distribution relationships with Itochu Techno-Science Corporation and KPMG, which distribute the Company's software solutions in Japan and Australia, respectively. There was no material backlog of orders as of December 31, 1999. Financial information concerning the Company for each of the three fiscal years ended December 31, 1999, 1998 and 1997, including the amount of total revenue contributed by classes of similar products or services that accounted for 10% or more of the Company's consolidated revenue in any one of those periods and information with respect to the Company's operations by geographic area, is set forth in the 9 11 consolidated financial statements and the notes thereto in Item 14 of this Annual Report on Form 10-K beginning on page 30. RESEARCH AND DEVELOPMENT The Company's research and development group has been a critical component of the Company's overall success. The Company believes that it has built a reputation for delivering on its solution commitments in a timely manner. As of December 31, 1999, the research and development group was comprised of 228 individuals in Atlanta, Cincinnati, and Minneapolis. In addition, the Company has developed close alliances with a number of consulting companies to provide additional staffing. These relationships allow the Company to increase its development capacity as quickly as necessary to address new market and product demand. The majority of the Company's research and development group is organized around product offering teams. Each of these teams is responsible for the product management processes, strategy and release path, delivery, and support of its respective applications. In addition to these product offering teams, a centralized enterprise team within research and development is responsible for maintaining consistency across the products teams with respect to quality assurance and testing processes, documentation, application architecture, and methodology. The success of the research and development group is based on a consistent and well-defined development methodology. This methodology enables the delivery of high-quality products in a timely and predictable manner. It involves the traditional checkpoints of development processes such as business requirements, functional and technical specifications, unit, string and integration test plans, and regression analysis. In addition, the Company uses a highly interactive review process to engage future users of the product in the product release cycle through iterative prototypes to ensure the application design goal is met. In addition to predictable delivery cycles, speed to market is critical to the Company's success. The Company believes that it has effectively used build, buy, and partner strategies over the past several years to expand the Company's solution offerings. The key in using each of these strategies is the consistency in the underlying technologies and an overall application architecture that allows modular design and development. Research and development expenses were $9.5 million in 1997, $12.9 million in 1998 and $22.6 million in 1999. The Company believes that significant investments in research and development are required to remain competitive. As a consequence, the Company intends to continue to increase the absolute amount of its research and development expenses. COMPETITION The market for business-to-business software solutions is new, intensely competitive and rapidly evolving. The Company expects competition to continue to increase both from existing competitors and new market entrants. The Company encounters current competition from a number of different sources, including such providers of supply chain software products as i2 Technologies, SAP, Manhattan Associates and JDA Software Group. As the Company develops its global business-to-business electronic commerce network, it expects to face potential competition from business-to-business electronic commerce companies, including Ariba and Commerce One. The Company believes that its ability to compete depends on many factors both within and beyond its control, including: - the ease of use, performance, features, price and reliability of its solutions as compared to those of its competitors; - the timing and market acceptance of new solutions and enhancements to existing solutions developed by the Company and its competitors; 10 12 - the quality of the Company's customer service; and - the effectiveness of the Company's sales and marketing efforts. The Company believes that it currently competes favorably with respect to these factors. In particular, the Company believes that its products are better than those of its competitors in their ease of use, performance, features and reliability. In addition, the Company has in the past introduced new solutions and enhancements to its existing solutions in a timelier manner than its competitors. The Company's prices are generally higher than its competitors reflecting, the Company believes, the added value of its software solutions. Because the market for business-to-business software solutions is new, intensely competitive and rapidly evolving, the Company cannot be assured that it will maintain its competitive position against current and potential competitors, especially those with greater name recognition and greater financial, marketing and other resources. PROPRIETARY RIGHTS AND LICENSING The Company's success and ability to compete are dependent in part on its ability to develop and maintain the proprietary aspects of its technology. The Company relies on a combination of trademark, trade secret, and copyright law and contractual restrictions to protect the proprietary aspects of its technology. The Company seeks to protect its source code for its software, documentation and other written materials under trade secret and copyright laws. The Company licenses its software under signed license agreements, which impose restrictions on the licensee's ability to utilize the software. Finally, the Company seeks to avoid disclosure of its intellectual property by requiring employees and consultants with access to its proprietary information to execute confidentiality agreements with the Company and by restricting access to its source code. The Company relies on technology that it licenses from third parties, including software that is integrated with internally developed software and used in its line of products to perform key functions. For example, the Company licenses the ACUMATE component software from Lucent and the DSS Web software from MicroStrategy. Each of these licenses is non-exclusive, worldwide and royalty-based. Each license has a term of one year and renews automatically unless notice of termination is given by either party. The royalties the Company paid Lucent and MicroStrategy under these licenses were, in each case, less than 5% of the Company's total revenue in each of the 1999 and 1998 fiscal years. In addition, the Company has entered into a technology license agreement with HNC, giving it a license to specified HNC predictive technology. This license is non-exclusive, non-transferable, worldwide, perpetual and royalty-free. If the Company is unable to continue to license any of this software, it will face delays in releases of its software until equivalent technology can be identified, licensed or developed, and integrated into its current product. These delays, if they occur, could seriously harm the Company's business. There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. It is possible that in the future third parties may claim that the Company or its current or potential future software solutions infringe on their intellectual property. The Company expects that software product developers and providers of electronic commerce products will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could seriously harm its business. ENVIRONMENTAL MATTERS The Company is in compliance with federal, state and local provisions which have been enacted or adopted relating to the protection of the environment. Compliance with these provisions does not have any material effect upon the capital expenditures, earnings and competitive position of the Company. 11 13 EMPLOYEES At December 31, 1999, the Company had a total of 461 employees, 417 of whom were based in North America and 44 of whom were based in Europe, Asia, Australia and other countries. Of the total, 228 were in research and development, 102 were engaged in sales, marketing and business development, 89 were engaged in consulting services, customer support and training, and 42 were in administration and finance. None of the Company's employees are subject to a collective bargaining agreement, and the Company believes that its relations with its employees are good. EXECUTIVE OFFICERS The names of the Company's executive officers and certain information regarding these persons, including their ages as of January 15, 2000, are set forth below:
NAME AGE POSITION - ------------------------------------- --- -------------------------------------------------------- John Buchanan........................ 43 Chairman, and Chief Executive Officer Gordon Masson........................ 44 President, Core Applications Jeremy P.M. Thomas................... 57 President, retail.com John L. Goedert...................... 34 Senior Vice President, Core Applications Gregory A. Effertz................... 37 Vice President, Finance & Administration, Chief Financial Officer, Treasurer, and Secretary David A. J. Bagley................... 35 Vice President, Product Strategy & Marketing James Mattecheck..................... 41 Senior Vice President, retail.com Victor Holysh........................ 41 Vice President, Operations Duncan B. Angove..................... 33 Vice President, E-Business
John Buchanan joined the Company in May 1995 and is currently the Company's chairman and chief executive officer. From October 1991 to May 1995, he served as president of Transpacific Information Systems Inc., a technology investment company principally involved in introducing internationally developed software products into North America. Mr. Buchanan also serves on the board of directors of Mediconsult.com, Inc., a company that provides patient oriented healthcare information and services on the Internet. Mr. Buchanan holds a Bachelor of Commerce degree in Accounting and Computer Systems from the University of Otago, New Zealand. Gordon Masson joined the Company in August 1995 and is currently the Company's president, core applications. From August 1995 to July 1999, he served as the Company's senior vice president, sales. Prior to joining the Company, from 1983 to 1995, Mr. Masson was with Comshare, Inc., a decision support software company, serving most recently as vice president. Mr. Masson holds a BACC degree in Accounting and Law from Glasgow University and he is a certified chartered accountant. Jeremy P.M. Thomas joined the Company in October 1999 as president, retail.com. From August 1997 to October 1999, Mr. Thomas served as managing director and a director of WebTrak Limited, a company that specializes in developing Internet solutions for retailers and which we acquired in October 1999. Mr. Thomas served as a director of TSL Limited, a company that specializes in software testing from October 1997 to October 1998, and as TSL's chairman from January 1998 to October 1998. From January 1994 to January 1998, Mr. Thomas served as a director of Drawitem Limited, a company that specializes in software products and services. During the period from January 1994 to July 1997, Mr. Thomas also served as chief executive officer and a director of Workspace Corporation, a corporation that develops collaborative software. Mr. Thomas holds a Bachelor of Science degree in Physics from the University of Southampton. John L. Goedert joined the Company in June 1996 as senior vice president, research and development. From 1987 to 1996, Mr. Goedert was with Andersen Consulting's Consumer Products 12 14 Practice, specifically in retail and distribution, serving most recently as senior manager. Mr. Goedert holds a Bachelor of Business Administration in Finance from Iowa State University. Gregory A. Effertz joined the Company in March 1997 as vice president, finance and administration and chief financial officer. From 1988 to 1997, Mr. Effertz was with American Paging, Inc., a paging service provider, serving most recently as executive director, sales and marketing, corporate controller and treasurer. Mr. Effertz is a certified public accountant certificate holder and holds a Bachelor of Business Administration in Accounting and Management Information Systems from the University of Wisconsin -- Eau Claire. David A. J. Bagley joined the Company in May 1997 as vice president, services and is currently vice president, product strategy and marketing. From 1989 to 1997, Mr. Bagley was with Andersen Consulting's Consumer Products Practice, serving most recently as senior manager. Mr. Bagley holds a Master of Arts in Classics from St. Anne's College, Oxford University. James Mattecheck joined the Company in November 1999 as senior vice president, retail.com. Prior to joining the Company, Mr. Mattecheck served in various capacities with Oracle Corporation. During 1999, he served as the group vice president responsible for Oracle's Consumer Vertical Worldwide. Mr. Mattecheck played an important role in the evaluation, development, and sale of Oracle's retail and consumer products. From 1998 to 1999, he was vice president of Oracle's Consumer Products Group (CPG) and retail sales and from 1997 to 1998 he was vice president of sales for CPG. From 1995 to 1997, Mr. Mattecheck was regional manager for all Northwest verticals. Mr. Mattecheck holds a Bachelor of Arts degree from the University of Portland and a Masters of Business Administration from the University of Notre Dame. Victor Holysh joined the Company in June 1998 as vice president, services. Prior to joining the Company, Mr. Holysh was a partner at Sierra Systems Consultants, Inc. in Toronto, Canada, a systems integration and implementation firm. From 1988 to 1996, Mr. Holysh was with SFG Technologies Inc., a software and related services company for local government applications, where he served in several capacities, including chief financial officer and managing director of SFG New Zealand. Mr. Holysh holds a Bachelor of Science in Computer Science and a Masters of Business Administration from the University of Toronto. He is a member of the Canadian Institute of Chartered Accountants and is a Certified Management Consultant. Duncan B. Angove joined the Company in September 1997 and is currently vice president, e-business. Prior to joining the Company from 1994 to 1997, Mr. Angove served as a consultant with Andersen Consulting's Consumer Products Practice, specifically in retail and distribution, and from 1991 to 1994 as information technology manager of TaiTai Retail Import Export, a furniture import/export company. Mr. Angove holds a BSC Economics degree from the University College London. RECENT DEVELOPMENTS The Company entered a strategic alliance with IBM on March 13, 2000 to develop retail solutions for the food and drug segment. By this agreement, Retek leverages IBM's leading platform technologies, comprehensive service offerings, and marketing organization. ITEM 2: PROPERTY The Company's principal administrative, sales, marketing, and research and development facility occupies approximately 81,469 square feet in Minneapolis, Minnesota under a lease that expires on August 31, 2004. The Company has entered into a lease for approximately 41,681 square feet of additional space in Minneapolis, Minnesota. This lease will begin on May 1, 2000 and expires on December 31, 2001. In addition, the Company has entered into a lease for approximately 130,665 square feet of additional space in Minneapolis, Minnesota. This lease will begin on October 1, 2001 and expires on March 31, 2014. This lease also grants to the Company two options to lease approximately 87,110 square feet of additional space, should the Company require it, over the term of the lease. 13 15 The Company also has leased regional offices located in Atlanta, Georgia, Chicago, Illinois, Cincinnati, Ohio, Australia, Canada, France and the United Kingdom. Properties leased by the Company are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. The Company believes that its existing facilities are adequate for its current needs and that the new lease that it recently entered into will ensure that it has sufficient additional space to meet its future requirements. ITEM 3: LEGAL PROCEEDINGS From time to time the Company has been subject to legal proceedings and claims in the ordinary course of business, although it is not currently involved in any material legal proceedings. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1999. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of the Company's common stock have been traded on the Nasdaq National Market under the symbol "RETK" since November 18, 1999. Prior to November 18, 1999, Retek was a wholly owned subsidiary of HNC Software Inc., a Delaware corporation. The following table shows the high and low sales price for shares of the Company's common stock for the periods indicated:
FISCAL YEAR 1999 HIGH LOW - ---------------- ------ ------ Fourth Quarter (November 18, 1999 until December 31, 1999).................................................... $93.94 $32.56
On March 1, 2000, the last reported sale price for shares of the Company's common stock on the Nasdaq National Market was $64.25 per share. There were approximately 27 holders of record of the Company's common stock as of March 1, 2000. The Company has not paid or declared any dividends on its common stock since its inception and anticipates that its future earnings will be retained to finance the continuing development of its business. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the success of the Company's business activities, regulatory and capital requirements, the general financial condition of the Company and general business conditions. On November 29, 1999, the Company issued an aggregate of 177,778 shares of common stock upon conversion of a note which was issued in connection with the purchase of WebTrak Limited, a company incorporated in England and Wales, by Retek Information Systems, Inc. pursuant to the terms of a Share Purchase Agreement, dated as of October 29, 1999 between the shareholders of WebTrak and Retek Information Systems. These shares of Company common stock were issued to a former shareholder of WebTrak in accordance with the terms of Regulation S of the Securities Act of 1933, as amended. On November 23, 1999, the Company completed its initial public offering of 6,325,000 shares of its common stock registered pursuant to the Company's Registration Statement on Form S-1 (Registration No. 333-86841) declared effective by the Securities and Exchange Commission on November 17, 1999. The managing underwriter of the offering was Credit Suisse First Boston Corporation. The net proceeds to the Company from the sale, at the initial public offering price of $15.00 per share, were approximately $84.9 million after deducting the underwriting discounts and commissions and offering expenses. 14 16 A portion of the net proceeds of the offering have been used by the Company for the payment of $5.33 million to certain of the former shareholders of WebTrak Limited in connection with the Company's recent acquisition of WebTrak. The remainder of the proceeds are currently invested in short-term, interest-bearing, investment-grade securities. ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company are qualified by reference to and should be read in conjunction with the Company's consolidated financial statements and notes thereto included in Item 14 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Total revenue............................ $ 69,159 $55,033 $30,923 $13,433 $3,836 Gross profit............................. 46,176 41,181 27,278 9,554 698 Operating (loss) income.................. (7,096) 8,088 6,619 1,418 (536) Net (loss) income........................ (5,369) 3,878 3,476 2,233 (244) Basic and diluted net (loss) income per common share........................... $ (0.13) $ 0.10 $ 0.09
DECEMBER 31, --------------------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................ $ 83,680 $ 415 $ 2,469 $ 1,459 $ 523 Working capital.......................... 94,542 12,876 5,016 680 (480) Total assets............................. 154,233 51,283 37,896 30,173 1,821 Payable to HNC Software Inc.............. 15,399 5,944 6,491 6,197 883 Total stockholder's equity............... 123,975 36,016 24,607 20,469 237
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and the related notes, and the other financial information included in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. The Company's 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 Annual Report on Form 10-K. OVERVIEW The Company completed its initial public offering on November 23, 1999. Prior to the completion of its initial public offering, the Company was a wholly owned subsidiary of HNC Software Inc., a business-to-business software company that develops and markets predictive software solutions. As of December 31, 1999, HNC owned approximately 86.0% of the Company's outstanding common stock. HNC has informed the Company that it is HNC's current intention to distribute pro rata to its 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, 15 17 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. The Company's 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 the Company's initial public offering on November 23, 1999, in connection with the separation of the Company's 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 of the Company. The acquisition of Retek Information Systems by HNC allowed for the integration of HNC's patented predictive technology into the Company's software solutions for retailers. The Company formalized a marketing relationship with Oracle in September 1998, providing it 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. The Company's total revenue has grown from $30.9 million in 1997 to $55.0 million in 1998 to $69.2 million in 1999. The Company has generated revenue from the sale of software licenses, maintenance and support contracts, and professional consulting and contract development services. Until the fourth quarter of 1999, the Company generally licensed its products to customers on a perpetual basis and recognized revenue upon delivery of the products. Starting in the fourth quarter of 1999, the Company revised the terms of its software licensing agreements for the majority of its software products sold. Under the revised terms, the Company will provide technical advisory services after the delivery of its products to help its customers exploit the full value and functionality of the Company's products. Revenue from the sale of software licenses under these agreements will be recognized as the technical advisory services are performed. The Company expects that these periods of technical advisory services will generally be from 12 to 24 months, as determined by the Company's customers' objectives. As the Company begins to recognize license and service revenues over a period of time, rather than upon the delivery of its products, the Company 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 maintenance service agreements. This revenue is recognized ratably over the term of the service agreement. Customers who license the Company's 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. The Company also offers training services that are billed on a per student or per class session basis. The Company's revenue growth has resulted from a combination of increased market penetration and an expanding product offering. The Company's investments in research and development, acquisitions and alliances have helped bring new software solutions to market. The Company's investments produced a suite of decision support solutions in 1997; the retooling of its 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. To support its growth during these periods, the Company also continued to invest in internal infrastructure by hiring employees throughout various departments of the organization. The Company markets its software solutions worldwide through direct and indirect sales channels. Revenue generated from the Company's direct sales channel accounted for approximately 76%, 86% and 16 18 100% of its total revenue in 1999, 1998 and 1997. The Company's indirect sales channel is driven mainly by its relationship with Oracle. On October 29, 1999, the Company completed the purchase of all the outstanding capital stock of WebTrak Limited. WebTrak owns the WebTrack Critical Path and Portfolio Private Label products that the Company currently distributes. In connection with the purchase of WebTrak, the Company issued to the 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 of the note 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 the Company issued 177,778 shares of its common stock to the holder of the convertible note in full satisfaction of the Company's obligations. The remaining notes were satisfied in full on their due date. Revenue attributable to customers outside of North America accounted for approximately 37%, 33% and 40% of the Company's total revenue in 1999, 1998 and 1997. Approximately 14% and 22% of the Company's sales were denominated in currencies other than the U.S. dollar for 1999 and 1998, respectively. The Company primarily sells perpetual licenses for which it recognizes 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. The Company recognizes revenue: - for sales made through the Company's distributors, resellers and original equipment manufacturers, at the time these partners report to the Company that they have sold the software to the end-user and after all revenue recognition criteria have been met; - from maintenance agreements related to the Company's software, over the respective maintenance periods; - from customer modifications, as the services are performed using the percentage of completion method; and - from services, using the percentage of completion method, based on costs incurred to date compared to total estimated costs at completion. The Company records amounts received under contracts in advance of performance as deferred revenue and recognizes these amounts within one year from receipt. 17 19 RESULTS OF OPERATIONS The following table presents selected financial data for the periods indicated as a percentage of the Company's total revenue. The Company's historical reporting results are not necessarily indicative of the results to be expected for any future period.
AS A PERCENTAGE OF TOTAL REVENUE YEAR ENDED DECEMBER 31, -------------------- 1999 1998 1997 ---- ---- ---- Revenue: License and maintenance................................... 66% 78% 93% Services and other........................................ 34 22 7 --- --- --- Total revenue..................................... 100 100 100 --- --- --- Cost of revenue: License and maintenance................................... 9 8 9 Services and other........................................ 24 17 3 --- --- --- Total cost of revenue............................. 33 25 12 --- --- --- Gross margin................................................ 67 75 88 Operating expenses: Research and development.................................. 33 23 31 Sales and marketing....................................... 28 26 27 General and administrative................................ 9 7 9 Amortization of stock-based compensation.................. 3 -- -- Acquired in-process research and development.............. 2 3 -- Acquisition related amortization of intangibles........... 2 1 -- --- --- --- Total operating expenses.......................... 77 60 67 --- --- --- Operating (loss) income..................................... (10) 15 21 Other income, net........................................... -- -- -- --- --- --- (Loss) income before income tax (benefit) provision......... (10) 15 21 (Loss) income tax (benefit) provision....................... (2) 8 10 --- --- --- Net (loss) income........................................... (8)% 7% 11% === === === Cost of license and maintenance revenue, as a percentage of license and maintenance revenue........................... 14% 10% 10% Cost of services and other revenue, as a percentage of services and other revenue................................ 72% 77% 44%
Years Ended December 31, 1999, 1998 and 1997 Revenue Total revenue. Total revenue increased 25.7% to $69.2 million in 1999 and 78.0% to $55.0 million in 1998 from $30.9 million in 1997. License and maintenance revenue. License and maintenance revenue increased 7.5% to $46.0 million in 1999 and 48.0% to $42.8 million in 1998 from $28.9 million in 1997. The increase in 1999 license revenue was primarily due to the addition of new customers and an increase in the average dollar sale per customer. As noted above in the section entitled "Overview", the Company recently revised the terms of its software license agreements so that revenue is recognized over a number of quarters rather than upon delivery. Due to the revised terms of the software license agreements, year over year revenue growth increased at a slower rate in 1999 compared to 1998. Maintenance revenue increased $3.7 million in 1999 18 20 due to a growing base of customers that have installed our software solutions. The increase in license and maintenance revenue in 1998 was primarily due to the addition of new customers as well as the introduction of new software solutions. Services and other revenue. Services and other revenue increased 88.9% to $23.2 million in 1999 and 505.5% to $12.3 million in 1998 from $2.0 million in 1997. The increase in 1999 was due to a $6.6 million increase in consulting services and custom development projects. The remaining increase was due to an increase in the number of billable employees from 69 in 1998 to 89 in 1999. Services and other revenue balances fluctuate based on the Company's use of third party consultants. Third party consultants are used on an as needed basis depending upon the Company's allocation of available internal resources. The increase in 1998 was due to a $10.2 million increase in consulting services and custom development projects. These increases were a result of our expanding customer base. Cost of Revenue Cost of license and maintenance revenue. Cost of license and maintenance revenue consists primarily of fees for third party software products that are integrated into the Company's products; salaries and related expenses of the Company's customer support organization; and an allocation of the Company's facilities and depreciation expense. Cost of license and maintenance revenue increased 46.2% to $6.4 million in 1999 and 58.3% to $4.3 million in 1998 from $2.7 million in 1997. The absolute dollar increases are attributable to increases in license and maintenance revenue. As license and maintenance revenue has increased, the Company has experienced increased costs resulting from increased royalty fees and an increase in the number of support personnel required to service its growing customer base. The Company expects 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 the Company's consulting organization; cost of third parties contracted to provide consulting services to the Company's customers; and an allocation of the Company's facilities and depreciation expense. Cost of services and other revenue increased 74.9% to $16.6 million in 1999 and increased 958.2% to $9.5 million in 1998 from $898,000 in 1997. As a percentage of services and other revenue, cost of services and other revenue was 71.7% in 1999, 77.4% in 1998, and 44.3% in 1997. During 1999 the Company continued to expand its consulting services business by increasing the number of personnel from 69 to 89. The increase in cost of services and other revenue as a percentage of services and other revenue in 1998 was primarily attributable to an increase in consulting contracts for which the Company utilized a significant amount of contract labor, which in turn caused a decrease in services and other revenue gross margins. During 1997, the Company started to build its consulting services business and as a result began to incur recruiting, training and management support expenses. Operating Expenses Research and development. Research and development expenses, which are expensed as incurred, consist primarily of salaries and related costs of the Company's engineering organization; fees paid to third-party consultants; and an allocation of the Company's facilities and depreciation expenses. The Company has increased its investment in research and development in absolute dollars each year since 1995. Research and development expenses increased 75.0% to $22.6 million in 1999 and 36.2% to $12.9 million in 1998 from $9.5 million in 1997. The absolute dollar increases in research and development expenses in 1999 and 1998 were due to significant increases in labor costs, which included hired personnel and third party consultants. In 1999, research and development personnel increased from 97 to 228. The Company also invested heavily in the development of new retail.com solutions during the fourth quarter of 1999. The Company expects the absolute dollar increase in research and development to continue as the Company invests in the development of other new solutions. Sales and marketing. Sales and marketing expenses consist primarily of salaries and related costs of the Company's sales and marketing organization; sales commissions; costs of the Company's marketing 19 21 programs, including public relations, advertising, trade shows, collateral sales materials, and its customer user reference group program; rent and facilities costs associated with the Company's regional and international sales offices; and an allocation of the Company's facilities and depreciation expenses. Sales and marketing expenses increased 39.4% to $19.6 million in 1999 and 70.4% to $14.1 million in 1998 from $8.3 million in 1997. The increase in 1999 was due to increases of $3.5 million in personnel and related costs, $0.9 million in marketing expense and $1.1 million in travel expenses. In 1999 personnel and related costs increased due to an increase in the number of sales and marketing employees from 58 to 102. The increases in personnel and related costs were due to the Company's build up of its sales force and marketing operations for the new product offering of retail.com during the fourth quarter of 1999. The increase in sales and marketing expenses in 1998 was due to an expansion of the Company's sales and marketing organization, including a $3.6 million increase in personnel and related costs, a $910,000 increase in travel expense and a $203,000 increase in the costs of marketing programs. General and administrative. General and administrative expenses consist primarily of costs from the Company's finance and human resources organizations; third party legal and other professional services fees; and an allocation of the Company's facilities costs and depreciation expenses. General and administrative expenses increased 59.6% to $6.3 million in 1999 and 34.6% to $3.9 million in 1998 from $2.9 million in 1997. The increases in absolute dollars in general and administrative expenses in 1999 and 1998 were attributable to growth of the Company's administrative organization in support of the Company's overall growth. The increase in 1999 was also due to the Company incurring additional expenses required to become an independent public company. In 1999 total general and administrative employees increased from 29 to 42. The Company expects 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 the Company's common stock for accounting purposes on the date that certain stock options were granted. This 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. The Company granted stock options to its employees under the 1999 Equity Incentive Plan and to members of its board of directors through both the 1999 Equity Incentive Plan and the 1999 Directors Stock Option Plan. Through December 1999, the Company granted stock options to its employees to purchase 7,257,250 shares and to members of its board of directors to purchase 100,000 shares of the Company's common stock at an exercise price of $10.00 per share. Amortization of stock-based compensation was $1.9 million for the fiscal year ended December 31, 1999. Acquired in-process research and development. In connection with the acquisition of WebTrak in October 1999, acquired in-process research and development of $1.5 million was charged to results of operations on the acquisition date. In connection with the acquisition of Retek Logistics in March 1998, acquired in-process research and development of $1.8 million was charged to results of operations on the acquisition date. Certain products of Retek Logistics and WebTrak were complete in certain areas and under development in others. The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. For both the Retek Logistics and WebTrak acquisitions the Company used an independent appraisal firm to assist in the valuation of the fair market value of the purchased assets. Fair market value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. The Company provided assumptions by product line of revenue, cost of goods sold and operating expense to the appraiser to assist in the valuation. In connection with the acquisition of WebTrak, the Company estimated that the acquired in-process research and development related to retail.com design was 58% complete as of the acquisition date. This 20 22 estimate was based upon research and development efforts incurred to date as compared to total estimated development efforts. As of the date of the acquisition, the estimated cost to complete the retail.com design to a point of technological feasibility was approximately $174,000, which the Company expected to incur over a period of approximately two months following the acquisition. The Company utilized the income valuation approach to determine the estimated fair value of the acquired in-process research and development. This estimate is based on the following assumptions: - The estimated revenues are based upon projected average annual revenue from future products expected to be derived once technological feasibility is achieved during the period from 2000 through 2002. - Expenses were applied at levels commensurate with the entire Retail.com product line on a percentage of revenue basis. - The discount rate utilized in the valuation was 26.4%. Acquisition-related amortization of intangibles. In connection with the purchase of WebTrak, the application of the purchase method 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, the Company 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, the application of the purchase method 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, the Company recorded various intangible assets, which are being amortized over estimated useful lives ranging from three to five years. In connection with the acquisition of Retek Logistics, HNC has a contingent obligation to issue additional shares of HNC common stock upon the achievement of certain financial objectives during 1999. This consideration will not be reflected in the Company's financial position in the future. Other income, net. Other income, net increased to $30,000 in 1999 and decreased to $11,000 in 1998 from $24,000 in 1997. The increase in 1999 was due to interest income of $469,000, which was partially offset by $310,000 of interest expense related to the factoring of receivable balances. Income tax (benefit) provision. The 1999 income tax benefit of ($1.7) million includes the impact of non-deductible expense for the amortization of certain portions of the stock-based compensation. The 1998 income tax provision of $4.2 million includes the tax effects of the non-deductible, one-time write-off of acquired in-process research and development related to the purchase of Retek Logistics. Other items affecting the tax provision primarily relate to the anticipated future realization of research and development tax credits generated during the year. The 1997 income tax provision of $3.2 million includes the effect of the anticipated future realization of research and development tax credits generated during the year. LIQUIDITY AND CAPITAL RESOURCES Prior to its initial public offering, the Company funded its operations primarily through funding from HNC in the form of intercompany advances. Since the initial public offering, the Company has not obtained further funding from HNC. At December 31, 1999, the Company's cash and cash equivalent balance was $83.7 million. Net cash provided by operating activities was $152,000 in 1999, $885,000 in 1998 and $3.8 million in 1997. Sources of cash for 1999, which offset the Company's net loss and increase in certain assets, were depreciation and amortization, increases to the provision for doubtful accounts, amortization of stock-based compensation and acquired in-process research and development, increases in accounts payable and increases in deferred revenue. Sources of cash for 1997 and 1998 resulted primarily from net income 21 23 generated in those periods. Uses of cash in 1999, 1998 and 1997 due to increases in accounts receivable balances were partially offset by increases in the provision for doubtful accounts. The increases in the bad debt provisions in 1999 and 1998 were primarily attributed to increased accounts receivable levels due to higher sales volume and reserving for specific customers. During 1999, the Company increased its provision for doubtful accounts by $1.2 million for a customer that was unwilling to pay amounts due. During 1998, the Company increased the provision for doubtful accounts by $450,000 for a customer that declared bankruptcy and $250,000 for a customer that had financial difficulties due to political unrest in its primary country of operation. Net cash used in investing activities was $10.8 million in 1999, $2.4 million in 1998 and $3.1 million in 1997. In 1999, uses of cash were due to the acquisition of capital equipment and cash paid for the WebTrak acquisition, which was offset by cash purchased in the acquisition. The uses of cash in 1998 and 1997 were attributable to the acquisition of capital assets, primarily computer equipment and leasehold improvements, which was offset in 1998 by cash provided from the Retek Logistics acquisition. Net cash provided by financing activities was $94.4 million in 1999. Net cash used by financing activities was $547,000 in 1998. Net cash provided by financing activities was $294,000 in 1997. Net cash provided by financing activities in 1999 included $56.9 million in borrowings from HNC and $47.4 million in payments to HNC and net cash proceeds of $84.9 million from the issuance of common stock. Net cash used by financing activities in 1998 included $41.7 million in borrowings from HNC and $42.3 million in payments to HNC. Net cash provided by financing activities in 1997 included $5.5 million in borrowings from HNC and $5.2 million in payments to HNC. Beginning in December 1997, HNC implemented a cash management policy that all cash balances were transferred daily from all of HNC's subsidiaries, including the Company, into a centralized cash management account at HNC. The financing activities with HNC include the borrowings and payments from these cash management activities in 1999, 1998 and 1997. Starting in November 1999, these daily transfers to HNC ceased. The Company believes that the net proceeds of its initial public offering, together with its current cash and cash equivalents and net cash provided by operating activities, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. Management intends to invest the Company's cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities. A portion of the Company's 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. The Company regularly evaluates, in the ordinary course of business, potential acquisitions of such businesses, products, technologies or data. In addition, the Company's 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 the Company, until two years, and possibly longer, after the distribution of HNC's remaining shares of the Company's common stock, the Company's ability to issue common stock in connection with acquisitions, offerings or otherwise will be limited. FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS An investment in the Company's common stock involves a high degree of risk. Investors evaluating the Company and its business should carefully consider the factors described below and all other information contained in this Annual Report on Form 10-K before purchasing the Company's common stock. Any of the following factors could materially harm the Company's business, operating results and financial condition. Additional factors and uncertainties not currently known to the Company or that the Company currently considers immaterial could also harm the Company's business, operating results and financial condition. Investors could lose all or part of their investment as a result of these factors. 22 24 While the Company's management is optimistic about the Company's long-term prospects, the following factors, among others, could materially harm the Company's business, operating results and financial condition and should be considered in evaluating the Company. Industry's rapid pace of change. If the Company is unable to develop new software solutions or enhancements to its existing products on a timely and cost-effective basis, or if new products or enhancements do not achieve market acceptance, the Company's sales may decline. The life cycles of the Company's products are difficult to predict because the business-to-business electronic commerce market for its 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 the Company's existing products or services obsolete and unmarketable. In developing new products and services, the Company may: - fail to respond to technological changes in a timely or cost-effective manner; - encounter products, capabilities or technologies developed by others that render its products and services obsolete or noncompetitive or that shorten the life cycles of its 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 its products and services. Fluctuations in quarterly operating results. The Company's quarterly operating results have fluctuated in the past and are expected to continue to fluctuate in the future. If the Company's quarterly operating results fail to meet analysts' expectations, the trading price of its common stock could decline. In addition, significant fluctuations in the Company's quarterly operating results may harm its business operations by making it difficult to implement its budget and business plan. The factors, many of which are outside the Company's control, which could cause the Company's 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 the Company's software solutions; - competitors' announcements or introductions of new software solutions, services or technological innovations; - the Company's 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; - the Company's success in expanding its sales and marketing programs; - increased sales of Oracle Retail(TM) in the Company's 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 the Company's customers' capital investment levels. In addition, the Company has incurred, and will continue to incur, compensation expense in connection with its grant of options under its 1999 Equity Incentive Plan. This expense will be amortized over the vesting period of these granted options, which is generally four years, resulting in lower quarterly income. The Company's 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 the Company's expectations, its net income will decrease because only a small portion of the Company's expenses vary with its revenue. 23 25 New type of license agreement. Until recently, the Company generally licensed its products to customers on a perpetual basis, and recognized revenue upon delivery of the products. In the fourth quarter of 1999, the Company entered into software licensing agreements with revised terms for the majority of new sales of its software products. Under these agreements, the Company will provide technical advisory services after the delivery of its products to help customers exploit the full value and functionality of its products. Revenue from the sale of software licenses and technical advisory services under these agreements will be recognized as the services are performed over the contract period, which the Company expects will generally be 12 to 24 months, as determined by its customers' objectives. As the Company begins to recognize license and service revenues over a period of time, rather than upon the delivery of its products, the Company 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. The Company began operation of its retail.com network on September 26, 1999. The Company incurred, and will continue to incur, significant infrastructure costs in establishing this network. Through December 1999 the Company invested approximately $1.8 million in retail.com. The Company 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: - the Company's need to provide value-enhancing software solutions and services on its retail.com network to achieve widespread commercial acceptance of this network; - whether the Company's network will be able to support large numbers of retailers and the members of their supply chains; and - the Company's need to significantly expand its internal resources and incur associated expenses to support planned growth of its retail.com network. The Company has established a subscription pricing model for the WebTrack Critical Path software solutions provided on its 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. In addition pricing models have been established for retail.com Private Label Exchange, retail.com Assort, retail.com Intelligence Center and retail.com Design. As additional services are added to the retail.com network, the Company 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, the Company's network will not be commercially successful, which could harm the Company's revenue and business. Increased operating expenses. The Company intends to significantly increase its operating expenses as it: - increases its research and development activities; - increases its services activities; - develops and builds its retail.com network; - expands its distribution channels; - increases its sales and marketing activities, including expanding its direct sales force; - builds its internal information technology system; and - operates as an independent public company. The Company will incur expenses before it generates any revenue from this increase in spending. If the Company does not significantly increase revenue from these efforts, its business and operating results could be seriously harmed. 24 26 Competitive pressures. The market for the Company's software solutions is highly competitive and subject to rapidly changing technology. Competition could seriously impede the Company's ability to sell additional products and services on terms favorable to it. Competitive pressures could reduce the Company's market share or require it to reduce its prices, which would reduce its revenues and/or operating margins. Many of the Company's competitors have substantially greater financial, marketing or other resources, and greater name recognition than the Company. In addition, these companies may adopt aggressive pricing policies that could compel the Company to reduce the prices of its products and services in response. The Company's competitors may also be able to respond more quickly than it can to new or emerging technologies and changes in customer requirements. The Company's current and potential competitors may: - develop and market new technologies that render the Company's 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 the Company's customers; and - establish or strengthen cooperative relationships with the Company's current or future strategic partners, which would limit the Company's ability to sell products through these channels. As a result, the Company may not be able to maintain a competitive position against current or future competitors. Loss of key personnel. The Company believes that its future success will depend upon its ability to attract and retain highly skilled personnel, including John Buchanan, its chairman and chief executive officer; Gordon Masson, its president, core applications; John L. Goedert, its senior vice president, research and development; Gregory A. Effertz, its vice president, finance and administration and chief financial officer and Jeremy Thomas, its president, retail.com. The Company currently does 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 a two year employment contract. The loss of the services of any one or more of these key persons could harm the Company's ability to grow its business. The Company 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 the Company's industry. Failure to hire and retain qualified personnel would harm the Company's ability to grow its business. Relationships with third parties who implement the Company's products. The Company relies, and expects to continue to rely, on a number of third parties to implement its software solutions at customer sites. If the Company is 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 the Company's customers, the Company's revenue will be reduced and its customer relationships will be harmed. The Company's current implementation partners are not contractually required to continue to help implement the Company's software solutions. If the number of the Company's product implementations continues to increase, the Company will need to develop new relationships with additional third-party implementation providers to provide these services. The Company may be unable to establish or maintain relationships with third parties having sufficient qualified personnel resources to provide the necessary implementation services to support its needs. If third-party services are unavailable, the Company will be required to provide these services internally, which would significantly limit its ability to meet its customers' implementation needs and would increase the Company's operating expenses and could reduce its gross margins. A number of the Company's 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 the Company's own. In addition, the Company cannot control the level and quality of service provided by its current and future implementation partners. 25 27 Intellectual property of third parties. The Company 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. The Company's business would be seriously harmed if the providers from whom it licenses 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 the Company on commercially reasonable terms or prices or at all. The Company's inability to maintain or obtain this software could result in shipment delays or reduced sales of its products. Furthermore, the Company might be forced to limit the features available in its current or future product offerings. Either alternative could seriously harm the Company's business and operating results. Confidentiality of intellectual property. The Company depends on its ability to develop and maintain the proprietary aspects of its technology. To protect its proprietary technology, the Company relies primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and copyright and trademark laws. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. In addition, the Company cannot assure investors that any of its proprietary rights with respect to its 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 the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult and expensive, and while the Company is 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 the Company's proprietary rights to the same extent, as do the laws of the United States. The Company intends to vigorously protect its intellectual property rights through litigation and other means. However, such litigation can be costly to prosecute and the Company cannot be certain that it will be able to enforce its rights or prevent other parties from developing similar technology, duplicating its products or designing around its intellectual property. Potential third party claims that the Company's 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 the Company or its current or potential future products infringe their intellectual property. The Company expects 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 the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could seriously harm its business. International sales. Since the Company sells its products worldwide, its business is subject to risks associated with doing business internationally. To the extent that the Company's sales are denominated in foreign currencies, the revenue it receives could be subject to fluctuations in currency exchange rates. If the effective price of the products the Company sells to its customers were to increase due to fluctuations in foreign currency exchange rates, demand for its technology could fall, which would, in turn, reduce its revenue. The Company has not historically attempted to mitigate the effect that currency fluctuations may have on its revenue through use of hedging instruments, and it does not currently intend to do so in the future. 26 28 The Company anticipates that revenue from international operations will continue to represent a substantial portion of its total revenue. Accordingly, the Company's future results could be harmed by a variety of factors, including: - changes in foreign currency exchange rates; - greater risk of uncollectible accounts; - changes in a specific country's or region's political or economic conditions, particularly in emerging markets; - trade protection measures and import or export licensing requirements; - potentially negative consequences from changes in tax laws; - difficulty in staffing and managing widespread operations; - international variations in technology standards; - differing levels of protection of intellectual property; and - unexpected changes in regulatory requirements. Acceptance of the Internet. As the Company's software solutions are Internet-based, it depends 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 the Company's products. The Company's products are complex and, accordingly, may contain undetected errors or failures when the Company first introduces them or as it releases new versions. This may result in loss of, or delay in, market acceptance of its products and could cause it 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, the Company has discovered software errors in its new releases and new products after their introduction. The Company has 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. The Company may in the future discover errors in new releases or new products after the commencement of commercial shipments. Changes in accounting standards. Statement of Position 97-2, "Software Revenue Recognition," was issued in October 1997 by the American Institute of Certified Public Accountants and amended by Statement of Position 98-4. The Company adopted Statement of Position 97-2 effective January 1, 1998 and Statement of Position 98-4 effective March 31, 1998. The American Institute of Certified Public Accountants has also issued Statement of Position 98-9, which is effective for the Company for transactions entered into beginning January 1, 2000. Full implementation guidelines for this standard and additional standards could be issued in the future. These guidelines and additional standards could lead to unanticipated changes in the Company's current revenue recognition policies, which changes could harm its business, financial condition and operating results. Year 2000 Compliance. The risks posed by Year 2000 issues, which arise because computer systems and software products may be unable to distinguish 21st century dates from 20th century dates, could harm the Company's business. Prior to the end of 1999 the Company completed a review of the Year 27 29 2000 compliance of its internally developed proprietary software and its third-party supplied software, computer technology and other services. The Company's review included testing to determine how these systems would function at and beyond the Year 2000. To date, the Company has not experienced any material Year 2000 related problems with its internally developed software or its third party supplied software and computer systems. The Company is not aware of any failure by its third-party suppliers to be Year 2000 compliant that could impact its business or operations. However, there is an ongoing risk that such problems or failures could arise or become apparent in the future. Any such problems or failures experienced by the Company or its customers could have negative consequences for the Company, including decreasing the demand for its products and interrupting the effective operation of its retail.com web site. As a result, the Company's supply chain and revenue could be harmed. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. In July 1999, the FASB issued Statement of Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of FAS 133 is not expected to have a significant impact on the Company's consolidated financial position or results of operations. In January 1999, the American Institute of Certified Public Accountants issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." This SOP retains the limitations of SOP 97-2 on what constitutes vendor-specific objective evidence of fair value. SOP 98-9 will be effective for transactions entered into in fiscal years beginning after March 15, 1999. The adoption of SOP 98-9 is not expected to have a significant impact on the Company's consolidated financial position or results of operations. ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The following discusses the Company's exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices. INTEREST RATE RISK The fair value of the Company's investments available for sale at December 31, 1999 was $83.7 million. The objectives of the Company's investment policy are safety and preservation of invested funds and liquidity of investments that is sufficient to meet cash flow requirements. The Company's policy is to place its 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 the Company's policy to maintain certain concentration limits and to invest only in certain "allowable securities" as determined by the Company's management. The Company's investment policy also provides that its investment portfolio must not have an average portfolio maturity of beyond one year. 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 the Company's financial results as it has no short- or long-term debt. FOREIGN CURRENCY EXCHANGE RATE RISK The Company develops products in the United States and sells in North America, Asia and Europe. As a result, its financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. The Company's foreign currency risks are mitigated principally by contracting primarily in US dollars and maintaining only nominal foreign currency 28 30 cash balances. Working funds necessary to facilitate the short-term operations of the Company's subsidiaries are kept in local currencies in which they do business, with excess funds transferred to the Company's offices in the United States. Approximately 14% and 22% of the Company's total sales were denominated in currencies other than the US dollar in 1999 and 1998, respectively. EQUITY PRICE RISK The Company does not own any equity investments. Therefore, it is not currently exposed to any direct equity price risk. IMPACT OF EUROPEAN MONETARY CONVERSION The Company is 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. The Company is still assessing the impact that conversion to the euro will have on its internal systems, the sale of its solutions and the European and global economies. The Company will take appropriate corrective actions based on the results of its assessment. The Company has not yet determined the cost related to addressing this issue although it does not expect these costs to be significant. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required pursuant to this item are included in Item 14 of this Annual Report on Form 10-K and are presented beginning on page 30. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on any matter of accounting principles, financial statement disclosure, or auditing scope or procedure to be reported under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Securities and Exchange Commission on April 6, 2000 under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance." Certain information regarding executive officers of the Company is included in Part I of this Annual Report on Form 10-K under the caption "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Securities and Exchange Commission on April 6, 2000 under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the 29 31 Securities and Exchange Commission on April 6, 2000 under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Commission on April 6, 2000 under the caption "Certain Transactions." PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT 1. Financial Statements. The following consolidated financial statements, and the related notes thereto, of the Company and the Report of Independent Auditors are filed as a part of this Annual Report on Form 10-K.
PAGE NUMBER ------ RETEK INC.: Report of Independent Accountants........................... 31 Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................... 32 Consolidated Statements of Operations as of December 31, 1999 and 1998............................................. 33 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 34 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.............. 35 Notes to Consolidated Financial Statements.................. 36 RETEK LOGISTICS, INC.: Report of Independent Accountants........................... 51 Balance Sheet as of March 31, 1998 and December 31, 1997.... 52 Statement of Operations for the three months ended March 31, 1998, for the three months ended March 31, 1997 (unaudited) and for the year ended December 31, 1997...... 53 Statement of Cash Flows for the three months ended March 31, 1998, for the three months ended March 31, 1997 (unaudited) and for the year ended December 31, 1997...... 54 Statement of changes in Stockholders' Equity and Comprehensive Income for the three months ended March 31, 1998 and for the year ended December 31, 1997............. 55 Notes to Financial Statements............................... 56
2. Financial Statement Schedules. Schedules not listed below have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules is included in the financial statements or related notes. Schedule II -- Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and 1997.............. 63
3. Exhibits. The exhibits filed in response to Item 601 of Regulation S-K are listed in the Index to Exhibits. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1999. 30 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of RETEK INC. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 30, present fairly, in all material respects, the financial position of Retek Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 30 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits 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. PricewaterhouseCoopers LLP Minneapolis, Minnesota January 25, 2000 31 33 RETEK INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 83,680 $ 415 Accounts receivable, net.................................. 24,383 22,050 Deferred income taxes..................................... 11,177 2,972 Other current assets...................................... 5,560 2,706 -------- ------- Total current assets................................... 124,800 28,143 Deferred income taxes....................................... 12,151 13,960 Property and equipment, net................................. 8,291 4,887 Intangible assets, net...................................... 8,958 4,010 Other assets................................................ 33 283 -------- ------- $154,233 $51,283 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 5,946 $ 3,289 Accrued liabilities....................................... 3,030 2,970 Deferred revenue.......................................... 5,883 3,064 Payable to HNC Software Inc............................... 15,399 5,944 -------- ------- Total current liabilities.............................. 30,258 15,267 Commitments and contingencies (Notes 3 and 9) Stockholders' equity: Preferred stock, $0.01 par value -- 5,000,000 shares authorized; no shares issued and outstanding........... -- -- Common stock, $0.01 par value -- 150,000,000 and 1,000 shares authorized at December 31, 1999 and 1998, respectively, 46,502,778 shares and 1,000 shares issued and outstanding at December 31, 1999 and 1998, respectively........................................... 465 -- Paid-in capital........................................... 140,089 26,854 Deferred stock-based compensation......................... (19,978) -- Accumulated other comprehensive loss........................ (582) (188) Retained earnings........................................... 3,981 9,350 -------- ------- Total stockholders' equity............................. 123,975 36,016 -------- ------- Total liabilities and stockholders' equity.................. $154,233 $51,283 ======== =======
See accompanying notes to consolidated financial statements. 32 34 RETEK INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Revenue: License and maintenance................................... $45,965 $42,753 $28,895 Services and other........................................ 23,194 12,280 2,028 ------- ------- ------- Total revenue.......................................... 69,159 55,033 30,923 ------- ------- ------- Cost of revenue: License and maintenance................................... 6,358 4,349 2,747 Services and other........................................ 16,625 9,503 898 ------- ------- ------- Total cost of revenue.................................. 22,983 13,852 3,645 ------- ------- ------- Gross profit........................................... 46,176 41,181 27,278 Operating expenses: Research and development.................................. 22,612 12,918 9,485 Sales and marketing....................................... 19,625 14,075 8,261 General and administrative................................ 6,257 3,921 2,913 Amortization of stock-based compensation.................. 1,908 -- -- Acquired in-process research and development.............. 1,480 1,750 -- Acquisition related amortization of intangibles........... 1,390 429 -- ------- ------- ------- Total operating expenses............................... 53,272 33,093 20,659 ------- ------- ------- Operating (loss) income..................................... (7,096) 8,088 6,619 Other income, net........................................... 30 11 24 ------- ------- ------- (Loss) income before income tax (benefit) provision....... (7,066) 8,099 6,643 Income tax (benefit) provision.............................. (1,697) 4,221 3,167 ------- ------- ------- Net (loss) income......................................... $(5,369) $ 3,878 $ 3,476 ======= ======= ======= Basic and diluted net loss per common share................. $ (0.13) ======= Weighted average shares used in computing basic and diluted net loss per common share................................. 40,779 ======= Pro forma unaudited basic net income per common share....... $ 0.10 $ 0.09 ======= ======= Weighted average shares used in computing pro forma unaudited basic net income per common share............... 40,000 40,000 ======= =======
See accompanying notes to consolidated financial statements. 33 35 RETEK INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income...................................... $ (5,369) $ 3,878 $ 3,476 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Provision for doubtful accounts........................ 2,399 1,652 212 Depreciation and amortization expense.................. 4,505 2,420 1,266 Amortization of stock-based compensation............... 1,908 -- -- Acquired in-process research and development........... 1,480 1,750 -- Deferred income tax (benefit) expense.................. (2,079) 753 1,971 Tax benefit from stock option transactions............. 4,248 1,060 815 Changes in assets and liabilities: Accounts receivable................................. (4,987) (10,814) (5,915) Other assets........................................ (7,272) (1,736) (869) Accounts payable.................................... 2,633 185 1,567 Accrued liabilities................................. 44 532 726 Deferred revenue.................................... 2,642 1,205 580 -------- -------- -------- Net cash provided by operating activities......... 152 885 3,829 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash purchased in business acquisition................. 235 559 -- Cash paid for business acquisition..................... (5,333) -- -- Acquisitions of property and equipment................. (5,741) (2,938) (3,101) -------- -------- -------- Net cash used in investing Activities............. (10,839) (2,379) (3,101) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Proceeds from the issuance of common stock......... 84,899 -- -- Borrowings from HNC Software Inc....................... 56,864 41,747 5,467 Repayments to HNC Software Inc......................... (47,409) (42,294) (5,173) -------- -------- -------- Net cash provided by (used in) financing activities..................................... 94,354 (547) 294 -------- -------- -------- Effect of exchange rate changes on cash................ (402) (13) (12) -------- -------- -------- Net increase (decrease) in cash and cash equivalents... 83,265 (2,054) 1,010 Cash and cash equivalents at beginning of period....... 415 2,469 1,459 -------- -------- -------- Cash and cash equivalents at end of period............. $ 83,680 $ 415 $ 2,469 ======== ======== ======== SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES: Business acquisition through issuance of HNC Software Inc. common stock................................... $ -- $ 6,564 $ -- ======== ======== ======== Business acquisition through issuance of convertible note................................................ $ 2,667 $ -- $ -- ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: Income taxes paid...................................... $ 176 $ 67 $ 3 ======== ======== ========
See accompanying notes to consolidated financial statements. 34 36 RETEK INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS)
ACCUMULATED COMMON STOCK DEFERRED OTHER TOTAL --------------- PAID-IN STOCK-BASED COMPREHENSIVE RETAINED STOCKHOLDERS' COMPREHENSIVE SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) EARNINGS EQUITY INCOME (LOSS) ------ ------ -------- ------------ ------------- -------- ------------- ------------- BALANCE AT DECEMBER 31, 1996..................... -- -- $ 18,415 -- $ 58 $ 1,996 $ 20,469 Tax benefit from HNC Software Inc. stock options.................. 815 815 Foreign currency translation adjustment... (153) (153) $ (153) Net income................. 3,476 3,476 3,476 ------ ---- -------- -------- ----- ------- -------- ------- BALANCE AT DECEMBER 31, 1997..................... -- -- 19,230 -- (95) 5,472 24,607 $ 3,323 ======= Acquisition of Retek Logistics, Inc. by HNC Software Inc............. 1 6,564 6,564 Tax benefit from HNC Software Inc. stock options.................. 1,060 1,060 Foreign currency translation adjustment... (93) (93) $ (93) Net income................. 3,878 3,878 3,878 ------ ---- -------- -------- ----- ------- -------- ------- BALANCE AT DECEMBER 31, 1998..................... 1 -- 26,854 -- (188) 9,350 36,016 $ 3,785 ======= Tax benefit from HNC Software Inc. stock options.................. 4,248 4,248 Issuance of common stock, net of issuance costs of $1.05.................... 46,325 $463 84,436 84,899 Deferred stock-based compensation............. 21,886 $(21,886) Amortization of stock-based compensation............. 1,908 1,908 Conversion of note payable to Common stock.......... 177 2 2,665 2,667 Foreign currency translation Adjustment... (394) (394) $ (394) Net loss................... (5,369) (5,369) (5,369) ------ ---- -------- -------- ----- ------- -------- ------- BALANCE AT DECEMBER 31, 1999..................... 46,503 $465 $140,089 $(19,978) $(582) $ 3,981 $123,975 $(5,763) ====== ==== ======== ======== ===== ======= ======== =======
See accompanying notes to consolidated financial statements. 35 37 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES The Company Retek Inc. and its wholly owned subsidiaries, Retek Information Systems, Inc. and WebTrak Limited (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. The Company is headquartered in Minneapolis, Minnesota. On November 23, 1999, the Company completed its initial public offering. Prior to completing its initial public offering, the Company was a wholly owned subsidiary of HNC Software Inc. ("HNC"), a business-to-business software company that develops and markets predictive software solutions. As of December 31, 1999, HNC owned approximately 86.0% of the Company's outstanding common stock. Retek Inc. was originally incorporated in Ohio in 1985 as Practical Control Solutions, Inc. ("PCS"), which was renamed Retek Logistics, Inc. in April 1999. In September 1999, Retek Logistics, Inc. was reincorporated as a Delaware corporation and renamed Retek Inc. In connection with the reincorporation, each share of Retek Logistics, Inc.'s common stock was converted to shares of Retek Inc.'s common stock. Immediately prior to the completion of the Company's initial public offering, HNC contributed all of the outstanding capital stock of Retek Information Systems Inc. to Retek Inc. As a result of the contribution, Retek Information Systems, Inc. became a wholly owned subsidiary of Retek Inc. HNC has informed the Company that it is HNC's current intention to distribute pro rata to its 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. Retek Logistics, Inc. was acquired by HNC in March 1998 in a transaction that was accounted for under the purchase method of accounting by HNC. Retek Information Systems, Inc. was acquired by HNC in November 1996 in a transaction that was accounted for under the pooling-of-interests method of accounting by HNC. In April 1997, Neil Thall Associates, Inc. ("NTA"), formerly a wholly owned subsidiary of HNC, which was formed in 1991, was merged with the business of Retek Information Systems, Inc. Retek Inc. acquired WebTrak Limited in October 1999 in a transaction accounted for under the purchase method of accounting. Basis of Presentation Following HNC's November 1999 contribution of Retek Information Systems, Inc. capital stock to Retek Inc., the consolidated financial statements include the accounts of Retek Inc. and its wholly owned subsidiaries Retek Information Systems, Inc and WebTrak Limited. The accounts of Retek Information Systems, Inc. include its wholly owned subsidiaries. 36 38 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Prior to the 1999 legal restructuring, the financial statements reflect the combined financial position, results of operations and cash flows of Retek Inc. and Retek Information Systems, Inc. The combined financial statements include the accounts of Retek Inc. for the periods after its acquisition by HNC in March 1998 and the accounts of Retek Information Systems, Inc. and its wholly owned subsidiaries for all periods presented. The financial statements have been prepared using HNC's historical basis in the assets and liabilities and historical results of operations of each of the entities, which comprise the Company's business. All significant intercompany transactions and balances have been eliminated in all periods presented. The stockholders' equity accounts in the accompanying consolidated financial statements reflect the balances of Retek Information Systems, Inc. for the period prior to HNC's acquisition of Retek Logistics, Inc. in March 1998. Subsequent to March 1998, the stockholders' equity accounts reflect the balances of Retek Logistics, Inc. and Retek Inc., which reflects the reincorporation in September 1999. General corporate overhead related to HNC's corporate headquarters and common support divisions have been allocated to the Company based on the proportion of the Company's revenues and headcount to HNC's consolidated revenues and headcount. Management believes these allocations reasonably approximate the costs incurred by HNC on behalf of the Company's operations and the costs that would have been incurred if the Company had performed these functions as a stand-alone entity. The Company's financing activities are represented by cash transactions with HNC and are reflected in the payable to HNC Software Inc. Activity in the payable to HNC Software Inc. primarily relates to cash activity with HNC as well as cost allocations and other intercompany charges to the Company from HNC. Financial Statement Preparation The preparation of the consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are highly liquid investments and consist of investments in money market accounts and commercial paper purchased with maturities of three months or less. Property and Equipment Property and equipment are recorded at cost. The Company recognizes depreciation and amortization expense using the straight-line method over the estimated useful lives of the assets of three to seven years. The Company amortizes leasehold improvements over the shorter of their estimated useful lives or the remaining term of the related lease. Repair and maintenance costs are charged to expense as incurred. Depreciation and amortization expense of property and equipment was $2,299, $1,268 and $569 for the years ended December 31, 1999, 1998 and 1997, respectively. Capitalized Software Development costs for software to be licensed or sold that are incurred from the time technological feasibility is established until the product is available for general release to customers are capitalized and 37 39 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) reported at the lower of cost or net realizable value. Through December 31, 1999, no significant amounts were expended subsequent to reaching technological feasibility. Intangible Assets Retek Logistics, Inc. was acquired by HNC in March 1998 in exchange for 143 shares of HNC common stock, 14 of which are subject to an escrow to secure certain indemnification obligations of the former stockholders plus the contingent right, subject to the achievement of certain financial objectives during calendar 1999 and 1998, to receive certain additional shares of HNC common stock. In April 1999, HNC issued an additional 45 shares of HNC common stock for the achievement of these financial objectives during calendar 1998, which was recorded as an addition to goodwill of $1,476 in the consolidated financial statements in 1998. However, any shares granted in the future will not be reflected in the financial position or results of operations of the Company if HNC's share of ownership of the Company at the time of such issuance is less than 95%. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net assets acquired of approximately $5,781, of which $4,031 has been allocated to intangible assets and $1,750 has been allocated to in-process research and development (see note 5). In October 1999, the Company acquired WebTrak Limited ("WebTrak") for a cash payment of $5,333 and a $2,667 convertible note, which was subsequently converted into 177,778 shares of the Company's common stock. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net assets acquired of approximately $8,131, of which $6,651 has been allocated to intangible assets and $1,480 has been allocated to in-process research and development (see note 5). In conjunction with these purchases, the Company recorded various intangible assets. Intangible assets are comprised of purchased software and other rights that are stated at lower of cost or net realizable value. Intangible assets are amortized as follows:
ESTIMATED USEFUL LIFE AMORTIZATION METHOD ------------- ------------------- Purchased software costs............................ Straight-line 36 to 42 months Assembled work force................................ Straight-line 3 years Customer base....................................... Straight-line 3 to 5 years Noncompetition agreements........................... Straight-line 5 years Trademarks.......................................... Straight-line 5 years Goodwill............................................ Straight-line 5 years
Amortization expense of intangible assets was $2,206, $1,152 and $809 for the years ended December 31, 1999, 1998 and 1997, respectively. Long-Lived Assets When events or changes in circumstances warrant, the Company investigates potential impairments of long-lived assets, certain identifiable intangibles and associated goodwill. An impairment loss would be recognized if the sum of the expected future net cash flows were less than the carrying amount of the asset. No such impairments of long-lived assets existed through December 31, 1999. 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 38 40 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. Starting in the fourth quarter of 1999, the Company revised the terms of the software licensing agreements for the majority of the software products sold. Under these terms, the Company will provide technical advisory services after the delivery of its products to help its customers exploit the full value and functionality of the Company's products. Revenue from the sale of software licenses under these agreements is recognized over the period that the technical advisory services are performed. For sales made through distributors, resellers and original equipment manufacturers, the Company recognizes revenue at the time these partners report to the Company that they have sold the software to the end user and all revenue recognition criteria have been met. Service revenue includes maintenance revenue, which is deferred and recognized ratably over the maintenance period, and revenue from consulting and training services, which is recognized as services are performed. Consulting services are customarily billed at a fixed daily rate plus out-of-pocket expenses. The Company's revenue from contract development services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year from receipt. Contract losses are recorded as a charge to income in the period such losses are first identified. Unbilled accounts receivable are stated at estimated realizable value. Deferred revenue consists primarily of deferred maintenance revenue. Income Taxes The taxable income or loss of the Company is included in the consolidated tax return of HNC. Income taxes are computed on a stand-alone basis under the provisions of Financial Accounting Standards No. 109, "Accounting for Income Taxes." In accordance with HNC's policy, the current tax receivable or payable is included in the amount due to or due from HNC. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount "more likely than not" to be realized in future tax returns. Tax rate changes are reflected in income during the period such changes are enacted. Foreign Currency Translation The consolidated financial statements of the Company's international operations are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from the consolidated results of operations and are recorded as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in the consolidated statement of income and are not material. Diversification of Credit Risk The Company's financial instruments that are subject to concentrations of credit risk consist primarily of cash equivalents and accounts receivable, which are generally not collateralized. The Company's policy is to place its cash and cash equivalents with high credit quality financial institutions in order to limit the amount of its credit exposure. The Company's software license and installation agreements and commercial 39 41 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) development contracts are primarily with large customers in the retail industries. The Company maintains allowances for potential credit losses. Disclosures about Fair Value of Financial Instruments The carrying amounts of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term maturities of these financial instruments. Comprehensive Income (Loss) The Company reports in the consolidated financial statements, in addition to net income (loss), comprehensive income (loss) and its components including foreign currency items. Comprehensive income (loss) is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. In July 1999, the FASB issued Statement of Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" which defers the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of FAS 133 is not expected to have a significant impact on the Company's consolidated financial position or results of operations. In January 1999, the American Institute of Certified Public Accountants issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." This SOP retains the limitations of SOP 97-2 on what constitutes vendor-specific objective evidence of fair value. SOP 98-9 will be effective for transactions entered into in fiscal years beginning after March 15, 1999. The adoption of SOP 98-9 is not expected to have a significant impact on the Company's consolidated financial position or results of operations. Net Loss Per Share and Unaudited Pro Forma Net Income Per Share Basic net (loss) income 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 the Company's 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 year ended December 31, 1999, the calculation of diluted loss per share excludes 5,771 potential common shares of the Company's common stock attributed to outstanding stock options because their effect would be antidilutive. Pro forma unaudited income per common share for the years ended December 31, 1998 and 1997 is calculated for basic income per share only since the Company had no outstanding stock options during those periods. 40 42 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31, ------------------ 1999 1998 ------- ------- Accounts receivable, net: Billed.................................................... $25,239 $18,735 Unbilled.................................................. 3,084 4,886 ------- ------- 28,323 23,621 Less allowance for doubtful accounts........................ (3,940) (1,571) ------- ------- $24,383 $22,050 ======= =======
The following is a rollforward of the activity within the allowance for doubtful accounts:
DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------ ----- Balance at beginning of period.............................. $1,571 $ 382 $ 299 Provisions.................................................. 2,399 1,652 212 Write-offs.................................................. (30) (463) (129) ------ ------ ----- Balance at end of period.................................... $3,940 $1,571 $ 382 ====== ====== =====
Unbilled accounts receivable represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be collected within one year. 41 43 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, ------------------ 1999 1998 ------- ------- Other current assets: Other receivables......................................... $ 3,122 $ 1,976 Prepaid expenses.......................................... 1,568 484 VAT tax receivable........................................ 870 246 ------- ------- $ 5,560 $ 2,706 ======= ======= Property and equipment, net: Computer equipment........................................ 6,230 $ 3,093 Furniture and fixtures.................................... 5,043 2,943 Leasehold improvements.................................... 1,214 749 ------- ------- 12,487 6,785 Less accumulated depreciation and amortization............ (4,196) (1,898) ------- ------- $ 8,291 $ 4,887 ======= ======= Intangible assets, net: Purchased software costs.................................. $ 8,512 $ 3,572 Goodwill.................................................. 2,423 2,362 Other..................................................... 2,314 570 ------- ------- 13,249 6,504 Less accumulated amortization............................. (4,291) (2,494) ------- ------- $ 8,958 $ 4,010 ======= ======= Accrued liabilities: Payroll and related benefits.............................. $ 3,023 $ 2,875 Other..................................................... 7 95 ------- ------- $ 3,030 $ 2,970 ======= =======
NOTE 3 -- COMMITMENTS At December 31, 1999, the Company was obligated through 2004 under non-cancelable operating leases for its facilities and certain equipment as follows:
FUTURE MINIMUM LEASE PAYMENTS -------------- 2000........................................................ $ 2,002 2001........................................................ 2,616 2002........................................................ 3,315 2003........................................................ 3,110 2004........................................................ 2,835 Thereafter.................................................. 22,971
The lease for the Company's headquarters provides for two options to extend the term for five years each with certain changes to the terms of the lease agreement. Rent expense under operating leases for the years ended December 31, 1999, 1998 and 1997 was approximately $1,340, $758 and $229, respectively, 42 44 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) net of sublease income of $1,040, $886 and $261, for the years ended December 31, 1999, 1998 and 1997, respectively. The Company has licensing arrangements with third party software providers under which it pays a royalty when third party software is delivered to an end user. Each license arrangement contains no minimum royalty payments and has a one-year term, which renews automatically unless terminated by either party. Royalty expense under these licensing arrangements for the years ended December 31, 1999 1998 and 1997 was approximately $3,313, $2,429 and $708. At December 31, 1999, the Company had factored accounts receivable to a financial institution aggregating $7,500, which the Company was contingently liable in the event of non-collection. NOTE 4 -- INCOME TAXES Income before income tax (benefit) provision was taxed under the following jurisdictions:
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------ ------ Domestic.................................................... $(7,851) $6,276 $5,631 Foreign..................................................... 785 1,823 1,012 ------- ------ ------ $(7,066) $8,099 $6,643 ======= ====== ======
The income tax (benefit) provision is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------ ------ CURRENT: Federal................................................... $ 62 $2,258 $ 795 State..................................................... 70 699 168 Foreign................................................... 250 511 233 DEFERRED: Federal................................................... (1,609) 489 1,070 State..................................................... (497) 144 722 Foreign................................................... 27 120 179 ------- ------ ------ $(1,697) $4,221 $3,167 ======= ====== ======
Deferred tax assets are summarized as follows:
DECEMBER 31, ------------------ 1999 1998 ------- ------- Taxable pooling-of-interests basis difference............... $14,620 $15,857 Net operating loss carryforwards............................ 5,389 31 Tax credit carryforwards.................................... 948 344 Allowance for doubtful accounts............................. 1,464 631 Depreciation................................................ (88) (175) Intangible assets........................................... 718 (462) Accrued liabilities and other............................... 277 706 ------- ------- Net deferred tax asset.................................... $23,328 $16,932 ======= =======
43 45 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) A reconciliation of the income tax (benefit) provision to the amount computed by applying the statutory federal income tax rate to income before income tax (benefit) provision is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------ ------ Amounts computed at statutory federal rate.................. $(2,402) $2,754 $2,259 State income taxes, net of federal benefit................ 16 740 791 Tax credit carryforwards generated........................ (208) (429) (116) Non-deductible acquired technology and other non-deductible acquisition costs....................... 378 1,004 -- Foreign income taxes...................................... 10 11 68 Stock based compensation.................................. 396 -- -- Other, net................................................ 113 141 165 ------- ------ ------ Income tax (benefit) provision.............................. $(1,697) $4,221 $3,167 ======= ====== ======
At December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $13,536 and $13,482 respectively. Substantially all carryforwards expire in 2019. The Company also has approximately $571 of federal research and development credit carryforwards expiring at various dates through 2019, $51 of state research and development credit carryforwards expiring at various dates through in 2014, and $344 of foreign tax credit carryforwards which expire from 2000 to 2004. NOTE 5 -- ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisition of WebTrak, Inc. (WebTrak) by the Company in October 1999, acquired in-process research and development of $1,480 was charged to operations on the acquisition date. WebTrak's products may be classified into two categories: WebTrak Core Products, which allow parties along the supply chain of a product, to network around a common product tracking database and Retail.com products, which represent the next generation of supply chain applications, retaining the functionality of the WebTrak core products but hosted through a website. The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. At the time of the acquisition, WebTrak had a new software product under development, retail.com design, which was completed during 2000. In connection with the acquisition of Retek Logistics, Inc. by HNC, acquired in-process research and development of $1,750 was charged to operations on the acquisition date. The Company's products may be classified into two categories: Nautilus, an off-the-shelf warehouse management software system designed to provide the tools needed to control the course of warehouse operations and Nautilus CBT, an operational tutorial database which guides the user through Nautilus operations. The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. At the time of acquisition, Retek Logistics, Inc. had a number of new software products under development including Nautilus Versions 6.0 and 7.0 and Nautilus CBT. Nautilus Version 6.0 and Nautilus CBT were both completed during 1998 and Nautilus Version 7.0 was completed during 1999. 44 46 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 6 -- SEGMENT INFORMATION AND MAJOR CUSTOMERS The Company operates in one reportable segment. The operations of the Company are primarily conducted in the United States, the Company's country of domicile. Geographic data, determined by references to the location of the Company's operations for the years ended December 31, 1999, 1998 and 1997 are as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Revenue by geographic area: United States............................................. $37,917 $29,183 $17,070 Canada.................................................... 4,295 6,310 860 United Kingdom............................................ 8,402 4,224 3,835 France.................................................... 1,408 1,546 3,358 Germany................................................... 9,569 1,837 -- Other..................................................... 7,568 11,933 5,800 ------- ------- ------- Total revenue.......................................... $69,159 $55,033 $30,923 ======= ======= =======
The following is long-lived asset information by geographic area:
DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Long-lived assets by geographic area: United States............................................. $16,878 $ 8,987 $ 3,850 Foreign................................................... 404 193 286 ------- ------- ------- Total long-lived assets................................ $17,282 $ 9,180 $ 4,136 ======= ======= =======
The Company's foreign sales represent revenues from export sales and international operations. Export sales include sales from the United States to foreign countries. Export sales were $18,164, $12,414 and $2,643 for the years ended December 31, 1999, 1998 and 1997, respectively. International operations include sales by foreign operations. During 1999, the Company had sales to two customers that exceeded 10% of the Company's total revenues. Sales to customer A accounted for 13.6% and sales to customer B accounted for 10.8% of the Company's total revenues for fiscal year 1999. No single customer accounted for more than 10% of the Company's total revenue in either 1998 or 1997. NOTE 7 -- EMPLOYEE BENEFIT PLANS Retek Inc. Sponsored Plans During 1999, the Company adopted the 1999 Equity Incentive Plan (the "Incentive Plan"), the 1999 Employee Stock Purchase Plan (the "Purchase Plan"), the 1999 Director Stock Option Plan (the "Directors Plan") and the Employee Stock Option Exchange Program (the "Exchange Program"). The Incentive Plan provides for the Compensation Committee of the Board of Directors to award up to 9,000 shares of the Company's common stock in the form of nonqualified or incentive stock options, stock appreciation rights, restricted stock or stock bonuses. Nonqualified stock options may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award or 110% of fair market value of the stock at the date of the awards to more than 10% stockholders. Options and stock appreciation rights granted under the Incentive Plan may have a term of up to 10 years. The Compensation Committee of the Board of Directors has the discretion to award 45 47 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) restricted stock and stock bonuses, as they deem appropriate. Options vest over four years at the rate of 25% of the total grant after one year and then at a rate of 2.08% of the total grant per month over the remaining 36 months. However, the Company may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 1999, no options were exercisable. The Purchase Plan provides for the issuance of a maximum of 700 shares of common stock. Each purchase period, eligible employees may designate between 2% and 15% of their cash compensation, subject to certain limitations, to be deducted from their pay for the purchase of common stock under the Purchase Plan. The purchase price of the shares under the Purchase Plan is equal to 85% of the lesser of the fair market value per share, as defined by the Purchase Plan, on the first day of the two-year offering period and the date of purchase. Employee contributions to the plan were $396 during the year ended December 31, 1999. No shares were issued to employees during the year ended December 31, 1999. The Directors Plan provides for the issuance of up to 400 nonqualified stock options to the Company's outside directors. Under the provisions of the Directors Plan, options to purchase 25 shares of the Company's common stock will be granted to outside directors upon their becoming a member of the Board of Directors and 7.5 additional options will be granted on each anniversary of the initial grant, so long as they remain on the Board of Directors. Options under the Directors Plan will be granted at the fair value of the stock at the grant date and vest entirely at the end of a period of one year from the date of grant. At December 31, 1999, no shares were exercisable. In 1999, the Company granted stock options to its employees and directors, under the Equity Incentive Plan and the Directors Plan, to purchase approximately 7,362 shares of the Company's common stock. Of the approximately 7,262 options granted to employees, 6,239 were granted in connection with the exchange of HNC stock options by the Company's employees. These options were granted at an exercise price of $10 per share. The difference between the option price and market value at the date of the grant has been recorded as additional paid-in capital with an offsetting debit within stockholders equity to deferred stock-based compensation. Due to the terms of the vesting, compensation will be accelerated in the early years and resulted in a compensation charge of $1,908 as of December 31, 1999. Transactions relating to employees and directors of the Company under the Company's Incentive Plan and Directors Plan during the year ended December 31, 1999 is summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Outstanding at beginning of year............................ 0 $ 0 Options granted........................................... 7,416 10.38 Options canceled.......................................... (5) 10.00 ----- Outstanding at end of year.................................. 7,411 10.38 ----- Options exercisable at end of year.......................... 0 Weighted average fair value of options Granted during the year...................................................... $7.62
46 48 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPTIONS OUTSTANDING ------------------------------------------------------ WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISE PRICES DECEMBER 31, 1999 LIFE (IN YEARS) EXERCISE PRICE - --------------- ----------------- --------------- -------------- $10.00 to $54.88................................. 7,357 9.83 $10.00 54.88 to $56.00................................. 7 9.98 54.88 56.00 to 63.69.................................. 18 9.97 56.00 63.69 to 71.56.................................. 14 9.91 63.99 71.56 to 74.13.................................. 13 9.95 71.56 74.13 to 74.13.................................. 2 9.92 74.13 ----- 10.00 to 74.13.................................. 7,411 9.83 10.38 -----
HNC Software Inc. Sponsored Plans During 1995, HNC adopted the 1995 Equity Incentive Plan (the "HNC Incentive Plan") and the 1995 Employee Stock Purchase Plan (the "HNC Purchase Plan"). For purposes of the discussion contained in the two paragraphs below, "fair market value" means the closing price of HNC's common stock on the NASDAQ National Market on the grant date. The HNC Incentive Plan provides for the issuance of up to 7,250 shares after 1999 amendments of HNC's common stock in the form of nonqualified or incentive stock options, restricted stock or stock bonuses to employees of HNC and its affiliates including Retek Inc. and Retek Information Systems, Inc. Nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award. Options granted under the Incentive Plan may have a term of up to ten years. HNC has the discretion to provide for restrictions and the lapse thereof in respect of restricted stock awards. Options typically vest at the rate of 25% of the total grant per year over a four-year period; however, HNC may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 1999 employees of the Company held 124 options that were exercisable. The HNC Purchase Plan provides for the issuance of a maximum of 650 shares after 1999 amendments of common stock to employees of HNC and its affiliates, including the Company. In each purchase period eligible employees may designate that between 2% and 10% of their cash compensation, subject to certain limitations, be deducted from their compensation for the purchase of common stock under the Purchase Plan. The purchase price of the shares under the Purchase Plan is equal to 85% of the lesser of the fair market value per share on the first date of the twelve-month offering period or the last day of each six-month purchase period. During 1998, HNC adopted the 1998 Stock Option Plan ("1998 Plan"). The 1998 Plan provides for the issuance of up to 1,000 shares of HNC's common stock in the form of nonqualified stock options to employees, officers, consultants and independent advisors of HNC and its affiliates including the Company. Options granted under the 1998 Plan may have a term of up to ten years. Options typically vest at the rate of 25% of the total grant per year over a four-year period; however, HNC may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 1999, there were 13 shares exercisable under the 1998 Plan. During 1999 the Company's employees were given the opportunity to exchange their HNC options granted through the HNC Incentive Plan and the 1998 Plan for a grant of the Company's stock options through the Company's Incentive Plan. During 1999 the 47 49 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Company's employees exchanged 1,136 HNC stock options for the right to receive the Company's stock options. All Retek Information Systems, Inc. options, outstanding on the date of the acquisition in 1996, were converted into options to purchase HNC's common stock and adjusted to give effect to the acquisition exchange ratio. Retek Information Systems, Inc. stock options are administered by HNC's Board of Directors. No changes were made to the terms of the Retek Information Systems, Inc. options in connection with the exchange. Those options granted vest ratably over periods from one to four years and have a term of up to ten years. At December 31, 1999 employees of the Company held five options that were exercisable. Transactions relating to employees of the Company under HNC's stock option plan during the years ended December 31, 1999, 1998 and 1997 are summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1999 1998 1997 ------------------------ ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------------- ------ -------------- ------ -------------- Outstanding at beginning of year................. 1,378 $31.81 981 $28.89 494 $21.19 Options granted................................ 695 27.93 743 35.36 624 32.13 Options exercised.............................. (408) 30.83 (108) 16.56 (71) 8.94 Options canceled............................... (1,325) 31.44 (238) 31.96 (66) 23.23 ------- ------ ------ Outstanding at end of year....................... 340 30.62 1,378 32.81 981 28.89 ======= ====== ====== Options exercisable at end of year............... 0 233 93 Weighted average fair value of options Granted during the year................................ $ 10.77 $21.50 $19.50
Financial Accounting Standard No. 123 Information 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 and HNC stock-based compensation awards issued to the Company's employees during 1999, 1998 and 1997 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 income and basic and diluted pro forma net income per common share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- ------- ------- Net (loss) income: As reported............................................ $ (5,369) $ 3,878 $ 3,476 Pro forma.............................................. (14,391) (2,758) (893) Basic and diluted net (loss) income per common share: As reported............................................ (0.13) 0.10 0.09 Pro forma.............................................. (0.35) (0.07) (0.02)
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 years ended December 31, 1999, 1998 and 1997, respectively: dividend yield of 0.0% for all three years; risk-free interest rates of 5.47%, 5.14% and 6.10%; expected volatilities of 100%, 65% and 65%; and expected lives of 2.0, 3.0 and 3.0 years. The fair value of the employees' purchase rights pursuant to the Purchase Plan is estimated using the Black-Scholes model with the following assumptions for 1999, 1998 and 1997, 48 50 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) respectively: dividend yield of 0.0% for all three years; risk-free interest rates of 4.98%, 5.23% and 5.32%; expected volatilities of 100%, 65% and 65%; and an expected life of six months for all three years. The weighted average fair value of those purchase rights granted in 1999, 1998 and 1997 for HNC stock was $ 10.77, $16.32 and $14.23, respectively. The weighted average fair value of those purchase rights granted in 1999 for the Company's stock was $7.62. NOTE 8 -- PREFERRED STOCK The Company has authorized 5,000 shares of $0.01 par value preferred stock. The specific terms of any preferred stock will be determined by the Company's board of directors prior to issuance. NOTE 9 -- CONTINGENCIES Various claims arising in the course of business, seeking monetary damages and other relief are pending. The amount of the liability, if any, from such claims cannot be determined with certainty; however, in the opinion of management, the ultimate liability for such claims will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 10 -- RELATED PARTY TRANSACTIONS As described in Note 1, the combined financial statements include significant transactions with HNC for services such as treasury, cash management, employee benefits, taxes, financial reporting, legal, corporate marketing and general corporate services. HNC charged the Company $1,232, $953 and $348 for such expenses during the years ended December 31, 1999, 1998, 1997, respectively. These charges were principally included in sales and marketing expenses and general and administrative expenses. Management believes these allocations approximate the costs that would have been incurred had the Company performed these functions as a stand-alone entity. Beginning in 1998, the Company utilized research and development services of HNC. HNC charged the Company $135 and $1,383 for such expenses for the years ended December 31, 1999 and 1998 respectively. Certain of the Company's employees participate in the HNC Purchase Plan. Amounts included in the payable to HNC Software Inc. related to the Purchase Plan were $887, $526 and $181 as of December 31, 1999, 1998 and 1997, respectively. Employees of the Company also participate in an HNC-sponsored 401(k) plan. The Company matched employee contributions up to the lesser of 50% of the employee contribution or eight hundred dollars. Contributions were $293, $120 and $60 for the years ended December 31, 1999, 1998 and 1997, respectively. The amount payable to HNC Software Inc. includes allocations of expenses for all corporate services, income taxes and other intercompany transactions, plus cash advances net of repayments. The amount payable does not bear interest. The average monthly balances due to HNC for the years ended December 31, 1999, 1998 and 1997 were, $10,243, $6,728 and $5,370, respectively. 49 51 RETEK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The change in the amount payable to HNC includes the following:
1999 1998 1997 -------- -------- -------- Balance at beginning of period............................. $ 5,944 $ 6,491 $ 6,197 Cost allocations payable to HNC............................ 5,408 4,796 760 Cash transfers from HNC.................................... 51,456 36,951 4,707 Cash transfers to HNC...................................... (47,409) (42,294) (5,173) -------- -------- -------- Net change during the period............................. 9,455 (547) 294 -------- -------- -------- Balance at end of period................................... $ 15,399 $ 5,944 $ 6,491 ======== ======== ========
50 52 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of RETEK LOGISTICS, INC. In our opinion, the accompanying balance sheet and the related statements of operations, of cash flows and of changes in stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of Retek Logistics, Inc. (formerly Practical Control Systems Technologies, Inc.) at March 31, 1998 and December 31, 1997 and the results of its operations and its cash flows for the three months ended March 31, 1998 and for the year ended December 31, 1997 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 audits. We conducted our audits of these statements in accordance with generally accepted auditing standards 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. PricewaterhouseCoopers LLP San Diego, California September 9, 1999 51 53 RETEK LOGISTICS, INC. BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, --------- ------------ 1998 1997 --------- ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 559 $ 413 Accounts receivable, net.................................. 997 1,061 Current portion of deferred income taxes.................. 13 13 Other current assets...................................... 37 47 ------ ------ Total current assets................................... 1,606 1,534 Property and equipment, net................................. 211 247 Software development costs, net............................. 1,232 1,181 Graphic design costs, net................................... 133 183 Other assets................................................ 58 55 ------ ------ $3,240 $3,200 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 126 $ 79 Accounts payable, affiliates.............................. -- 178 Accrued liabilities....................................... 352 250 Deferred revenue.......................................... 412 323 ------ ------ Total current liabilities.............................. 890 830 Deferred income taxes....................................... 514 493 Stockholders' equity: Common stock, without par value -- 5,000,000 shares authorized: 2,237,683 shares issued and outstanding................ 1 1 Paid-in capital........................................... 2,238 2,238 Retained earnings......................................... (340) (299) Treasury stock at cost, 144 shares........................ (63) (63) ------ ------ Total stockholders' equity............................. 1,836 1,877 ------ ------ $3,240 $3,200 ====== ======
See accompanying notes to financial statements. 52 54 RETEK LOGISTICS, INC. STATEMENT OF OPERATIONS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------------- ------------------ 1998 1997 1997 ------- ----------- ------------------ (UNAUDITED) Licensing and other revenue........................... $1,231 $ 957 $5,086 Operating expenses: Cost of sales....................................... 431 297 1,880 Selling, general and administrative................. 670 723 2,813 ------ ------ ------ Total operating expenses......................... 1,101 1,020 4,693 ------ ------ ------ Income (loss) from operations.................... 130 (63) 393 ------ ------ ------ Other (expense) income, net........................... (104) (1) (211) Interest expense...................................... -- -- 10 ------ ------ ------ Income (loss) before income taxes................ 26 (64) 172 Income tax expense (benefit).......................... 67 (24) 61 ------ ------ ------ Net (loss) income................................ $ (41) $ (40) $ 111 ====== ====== ======
See accompanying notes to financial statements. 53 55 RETEK LOGISTICS, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, -------------------- ------------ 1998 1997 1997 ------ ----------- ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $ (41) $ (40) $ 111 Adjustments to reconcile net (loss) income to net cash provided (used in) by operating activities: Depreciation and amortization............................. 155 153 634 Loss on disposition of property and equipment............. -- -- 38 Increase in bad debts provision........................... -- -- 15 Deferred income taxes..................................... 21 (23) 31 Changes in operating assets and liabilities: Accounts receivable, trade............................. 64 59 (516) Accounts receivable, affiliates........................ -- -- 14 Other assets........................................... (113) (163) (57) Accounts payable....................................... 47 105 53 Accounts payable, affiliates........................... (178) (194) (16) Unearned revenue....................................... 89 (10) 216 Accrued expenses....................................... 102 (214) 1 ------ ------ ----- Net cash provided by (used in) operating activities........................................ 146 (327) 524 ------ ------ ----- CASH FLOWS FROM INVESTING ACTIVITIES: Software development costs................................ -- -- (236) Acquisition of non-compete agreement and related assets... -- -- (61) Purchase of property and equipment........................ -- (2) (32) Proceeds from sale of property and equipment.............. -- -- 10 ------ ------ ----- Net cash used in investing activities................ -- (2) (319) ------ ------ ----- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit............................................ -- 185 -- Payments on note payable, affiliate....................... -- (48) (180) ------ ------ ----- Net cash provided by (used in) financing activities........................................ -- 137 (180) ------ ------ ----- Net increase (decrease) in cash............................. 146 (192) 25 Cash balance, beginning of year............................. 413 388 388 ------ ------ ----- Cash balance, end of year................................... $ 559 $ 196 $ 413 ====== ====== ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest.................... $ -- $ 3 $ 9 ====== ====== =====
See accompanying notes to financial statements. 54 56 RETEK LOGISTICS, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS)
(ACCUMULATED COMMON STOCK DEFICIT) TOTAL --------------- PAID-IN TREASURY RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCK EARNINGS EQUITY ------ ------ ------- -------- ------------ ------------- BALANCE AT DECEMBER 31, 1996............................... 2,238 1 2,238 (63) (410) 1,766 Net and comprehensive income............................... 111 111 ----- ------ ------ ---- ------ ------ BALANCE AT DECEMBER 31, 1997............................... 2,238 1 2,238 (63) (299) 1,877 Net and comprehensive loss................................. (41) (41) ----- ------ ------ ---- ------ ------ BALANCE AT MARCH 31, 1998.................................. 2,238 $ 1 $2,238 $(63) $ (340) $1,836 ===== ====== ====== ==== ====== ======
See accompanying notes to financial statements. 55 57 RETEK LOGISTICS, INC. NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES The Company Retek Logistics, Inc. (formerly Practical Control Systems Technologies, Inc.), an Ohio corporation (the "Company"), is a supplier of fully integrated distribution center management software products that address the distribution needs of the retail, wholesale and manufacturing industries. In March 1998, the Company's stockholders approved an agreement between the Company and HNC Software Inc. ("HNC") pursuant to which the Company's stockholders exchanged all issued and outstanding capital stock of the Company for HNC stock. On March 31, 1998 the Company's stockholders received 143 shares of HNC common stock in exchange for all of the issued and outstanding shares of the Company. Use of Estimates The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes On June 1, 1996, the Company terminated its S Corporation status and recognized deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The Company's current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount "more likely than not" to be realized in future tax returns. Tax rate changes are reflected in income during the period such changes are enacted. Revenue Recognition On certain systems development contracts, the percentage of completion method is used to recognize the revenues. The Company measures a contract's progress based on actual costs incurred to date compared to total estimated contract costs. A contract is considered complete once formal acceptance from a customer has been obtained. Because the percentage of completion method requires estimates of costs to complete contracts, it is possible that estimated costs to complete contracts will be revised in the near term. Revenues from software maintenance agreements are deferred and are recognized over the maintenance period. Software licensing revenues are recognized when delivery of the software occurs if the Company does not have to provide additional significant service under the contract. All other revenues are recognized when the services are performed. Included in accounts receivable are unbilled accounts receivable, which represent revenue recognized in excess of amounts billed. From time to time, depending upon billing terms, cash may be received in advance of the performance of services or providing systems. When this occurs, these amounts are recorded as unearned revenue. 56 58 RETEK LOGISTICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Cash Equivalents The Company considers its investments with an original maturity of three months or less to be cash equivalents. The Company invests excess funds in reverse repurchase agreements for U.S. government securities. At December 31, 1997, the Company had purchased $455 of U.S. government securities under agreements to resell. Generally, the maturity date of the Company's reverse repurchase agreements is the next day of business. Due to the short-term nature of the agreements, the Company does not take possession of the securities, which are instead held at the Company's principal bank from which it purchases the securities. The carrying value of the agreements approximates fair market value because of the short maturity of the investments and the Company believes that it is not exposed to any significant risk on its investments in reverse repurchase agreements. Software Development Costs Costs incurred internally in creating computer software products are charged to expense until technological feasibility of the software has been established. Thereafter, all software production costs are capitalized. Capitalization of computer software costs is discontinued when the product is available for sale to customers. The costs capitalized include the direct labor costs of those involved with the software development effort, their supervision and indirect costs of overhead relating to those employees, the facilities they occupy and equipment they utilize. The ultimate realization of these costs requires considerable judgment from management related to the estimated useful life and anticipated future sales. Computer software costs are amortized by the straight-line method over the estimated useful life of the products developed, which is five years. Amortization expense related to software development costs was $69 for the three months ended March 31, 1998, $265 for the year ended December 31, 1997, and $64 for the three months ended March 31, 1997 (unaudited). Graphic Design Costs Costs associated with the production of graphic design applications include computer programs to assist in the sale of the Company's product. These costs have been capitalized and are being amortized by the straight-line method over the asset's estimated useful life of three years. Amortization of graphic design costs was $50 for the three months ended March 31, 1998, $199 for the year ended December 31, 1997 and $50 for the three months ended March 31, 1997 (unaudited). Property and Equipment Property and equipment are recorded at cost. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets of three to seven years. The Company amortizes leasehold improvements over the shorter of their estimated useful lives or the remaining term of the related lease. Repair and maintenance costs are charged to expense as incurred. Depreciation expense was $35 for the three months ended March 31, 1998, $169 for the year ended December 31, 1997, and $41 for the three months ended March 31, 1998 (unaudited). Long-Lived Assets The Company investigates potential impairments of long-lived assets, certain identifiable intangibles and associated goodwill when events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss would be recognized if the sum of the expected future net cash flows 57 59 RETEK LOGISTICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) were less than the carrying amount of the asset. No such impairments of long-lived assets existed through March 31, 1998. Diversification of Credit Risk The Company had approximately 29% of its sales for the three months ended March 31, 1998, 42% of its sales for the year ended December 31, 1997, and 49% for the three months ended March 31, 1997 (unaudited) to international customers in South America, Africa, and Asia. The same five customers comprised 91% of revenues for the three months ended March 31 1998, 81% of revenues for the year ended December 31, 1997 and 87% of the revenues for the three months ended March 31, 1997 (unaudited). Disclosures about Fair Value of Financial Instruments The carrying amounts of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term maturities of these financial instruments. Comprehensive Income During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS 130 requires the Company to report in the financial statements, in addition to net income, comprehensive income and its components including foreign currency items and unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Interim Results (unaudited) The accompanying statement of operations and the related statements of cash flows for the three months ended March 31, 1997 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of results of the interim periods. The data disclosed in these notes to financial statements for this period is also unaudited. 58 60 RETEK LOGISTICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ Accounts receivable, net Billed.................................................... $ 743 $1,090 Unbilled.................................................. 296 4 ------ ------ 1,039 1,094 Less allowance for doubtful accounts........................ (42) (33) ------ ------ $ 997 $1,061 ====== ====== Property and equipment, net Equipment................................................. $ 307 $ 308 Furniture and fixtures.................................... 28 28 Leasehold improvements.................................... 77 77 Purchased software........................................ 122 122 ------ ------ 534 535 Less accumulated depreciation and amortization.............. (323) (288) ------ ------ $ 211 $ 247 ====== ====== Software development costs, net Software development costs................................ $1,800 $1,680 Less accumulated amortization............................. (568) (499) ------ ------ $1,232 $1,181 ====== ====== Graphic design costs, net Software development costs................................ $ 598 $ 598 Less accumulated amortization............................. (465) (415) ------ ------ $ 133 $ 183 ====== ======
NOTE 3 -- RELATED PARTY TRANSACTIONS During 1997, one of the principal stockholders of the Company had a majority stock ownership in Professional Contract Systems Technical Services, Inc. ("Technical Services"), a provider of contract engineering services. Also during 1997, another principal stockholder of the Company had a majority stock ownership in PCS Computers, Inc. ("Computers"), a company engaged in the design and sale of specialized computer systems and electrical components for industrial computer applications. In October 1997, one of the principal stockholders sold his interest in the Company to the other principal stockholder and, subsequently, in November 1997, terminated his employment with the Company. 59 61 RETEK LOGISTICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating expenses include the following amounts from related parties:
THREE MONTHS ENDED MARCH 31, YEAR ENDED ------------------- DECEMBER 31, 1998 1997 1997 ---- ----------- ------------ (UNAUDITED) Technical services........................................ $ 83 $43 $ 483 Computers................................................. 315 10 541 ---- --- ------ Total................................................... $398 $53 $1,024 ==== === ======
The Company leases office space from a company owned by one the Company's previous principal stockholders under an agreement expiring December 31, 2002. Rent expense related to this agreement for the three months ended March 31, 1998 was $51, for the year ended December 31, 1997 was $252, and for the three months ended March 31, 1997 (unaudited) $66. At March 31, 1998, the Company was obligated under non-cancelable operating leases for its facilities as follows: 1998...................................................... $ 155 1999...................................................... 212 2000...................................................... 218 2001...................................................... 225 2002...................................................... 231 ------ $1,041 ======
The Company purchased equipment, furniture and fixtures in 1996 for consideration equal to an 8.25% note payable to Technical Services in the amount of $196. Monthly principal and interest payments were paid through November 1997. The note was repaid during 1997. The equipment, furniture and fixtures had previously been leased from Technical Services. NOTE 4 -- LINE OF CREDIT In 1996, the Company negotiated a line of credit agreement with a bank that was collateralized by substantially all corporate assets and was payable on demand. The line of credit allowed borrowings of up to $500 with an interest rate equal to the bank's prime rate. No outstanding borrowings existed at December 31, 1997 or at March 31, 1998. NOTE 5 -- INCOME TAXES Prior to June 1, 1996 the Company was taxed as an S Corporation. Income tax expense (benefit) is summarized as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------- ------------ 1998 1997 1997 ---- ----------- ------------ (UNAUDITED) Current.................................................... $45 $ -- $30 Deferred................................................... 22 (24) 31 --- ---- --- $67 $(24) $61 === ==== ===
60 62 RETEK LOGISTICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The components of the Company's net deferred tax liability are as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------- ------------ 1998 1997 1997 ----- ----------- ------------ (UNAUDITED) Deferred tax assets: Net operating loss carryforwards....................... $ -- $ 40 $ -- Accounts receivable.................................... 17 12 12 State taxes Other.................................................. 2 6 1 ----- ----- ----- Gross deferred tax assets........................... 19 58 13 Deferred tax liabilities: Capitalized software................................... (501) (467) (478) Property and equipment................................. (13) (15) (15) Other.................................................. (6) -- -- ----- ----- ----- Gross deferred tax liability........................ (520) (482) (493) ----- ----- ----- Net deferred tax liability........................ $(501) $(424) $(480) ===== ===== =====
A reconciliation of the income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate to income before income tax provision (benefit) is summarized as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------- ------------ 1998 1997 1997 ---- ----------- ------------ (UNAUDITED) Amounts computed at statutory federal rate................ $ 9 $(22) $ 59 State income taxes, net of federal benefit.............. 27 (2) 13 Tax credit carryforwards generated...................... (7) Non-deductible purchased technology and other non-deductible acquisition costs..................... 37 S-corp termination deferred balances.................... Other, net.............................................. 1 (11) ---- ---- ---- Income tax provision (benefit)............................ $ 67 $(24) $ 61 ==== ==== ====
NOTE 6 -- PROFIT SHARING PLANS The Company has a Sec. 401(k) profit sharing plan covering all eligible employees who desire to participate in the plan. Company matching contributions are based on a percentage of the employees' contributions. Company matching contributions were $0 during the three months ended March 31, 1998, $12 during the year ended December 31, 1997, and $0 for the three months ended March 31, 1997 (unaudited). Additionally, the Company may, at its option, contribute a portion of annual profits to the plan. The Company did not make such a contribution during the three months ended March 31, 1998 or the year ended December 31, 1997. 61 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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/ JOHN BUCHANAN ------------------------------------ John Buchanan Chairman and Chief Executive Officer March 14, 2000 We, the undersigned directors and executive officer of the Registrant, hereby severally constitute John Buchanan and Gregory A. Effertz, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 14, 2000 by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE (CAPACITY) --------- ---------------- /s/ JOHN BUCHANAN Chairman and Chief Executive Officer - --------------------------------------------------- (PRINCIPAL EXECUTIVE OFFICER) John Buchanan /s/ GREGORY A. EFFERTZ Vice President, Finance & Administration, - --------------------------------------------------- Chief Financial Officer, Treasurer and Gregory A. Effertz Secretary (PRINCIPAL FINANCIAL OFFICER) /s/ N. ROSS BUCKENHAM Director - --------------------------------------------------- N. Ross Buckenham /s/ WARD CAREY Director - --------------------------------------------------- Ward Carey /s/ CHARLES H. GAYLORD Director - --------------------------------------------------- Charles H. Gaylord /s/ ALEX WAY HART Director - --------------------------------------------------- Alex Way Hart /s/ GLEN A. TERBEEK Director - --------------------------------------------------- Glen A. Terbeek /s/ STEPHEN E. WATSON Director - --------------------------------------------------- Stephen E. Watson
62 64 RETEK INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
BALANCE AT BEGINNING COSTS AND DEDUCTIONS/ BALANCE AT OF PERIOD EXPENSES WRITE-OFFS END OF PERIOD ---------- --------- ----------- ------------- Year ended December 31, 1999 -- allowance for doubtful accounts................................. 1,571 2,399 (30) 3,940 Year ended December 31, 1998 -- allowance for doubtful accounts................................. 382 1,652 (463) 1,571 Year ended December 31, 1997 -- allowance for doubtful accounts................................. 299 212 (129) 382
63 65 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 2.1** Agreement and Plan of Merger and Reorganization between Retek Logistics, Inc. and Registrant 2.2 Separation Agreement 2.3 Technology License Agreement 2.4 Tax Sharing Agreement 2.5 Services Agreement 2.6 Corporate Rights Agreement 2.7 Stock Contribution Agreement 3.1 Amended and Restated Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 10.1* Industry Solutions Initiative Master Agreement between ** Oracle Corporation and Retek Information Systems, Inc. 10.5** Retek 1999 Equity Incentive Plan 10.6** Retek 1999 Employee Stock Purchase Plan 10.7** Retek 1999 Director Stock Option Plan 10.8** Employment Agreement of Jeremy Thomas 21.1 Schedule of Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of PricewaterhouseCoopers LLP 24.1 Power of Attorney (contained on signature page) 27.1 Financial Data Schedule
- --------------- * Portions of this Exhibit were granted confidential treatment by the Securities and Exchange Commission. Accordingly, portions thereof were omitted and filed separately. ** Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-86841), effective November 17, 1999, and incorporated herein by reference. 64 EX-2.2 2 SEPARATION AGREEMENT 1 EXHIBIT 2.2 SEPARATION AGREEMENT This SEPARATION AGREEMENT (this "Agreement"), is made and entered into effective as of November 23, 1999 (the "Effective Date") by and among HNC Software Inc., a Delaware corporation ("HNC"), Retek Inc., a Delaware corporation ("Retek") and Retek Information Systems, Inc., a Delaware corporation ("RIS"). RECITALS A. As of the Effective Date, Retek is a wholly-owned subsidiary of HNC, and RIS is a wholly-owned subsidiary of HNC. B. HNC's Board of Directors has determined that it is in the best interests of HNC and its stockholders to separate the businesses of Retek and RIS from HNC's other operations. In furtherance of that objective, HNC has also determined that it is appropriate and desirable for HNC to contribute and transfer to Retek all of the capital stock of RIS which HNC owns (so that RIS will become a wholly-owned subsidiary of Retek) together with certain other assets as provided herein and to cause Retek to assume certain liabilities, in accordance with this Agreement and the Ancillary Agreements (as defined herein) (such contribution and transfer of assets by HNC and such assumption of liabilities by Retek and RIS in accordance with this Agreement are collectively hereinafter referred to as the "Separation"). C. The Board of Directors of HNC and Retek have determined that it is appropriate and desirable, on the terms and conditions contemplated by this Agreement, that Retek issue and sell shares of its Common Stock (as defined herein) in an initial public offering registered under the Securities Act (the "Initial Public Offering"), provided that (i) immediately prior to the first closing of the sale of shares of Retek's Common Stock in such Initial Public Offering, HNC owns forty million (40,000,000) shares of the outstanding common stock of Retek, all of which shares have been duly and validly issued, are outstanding and are fully paid and non-assessable, and (ii) the total number of shares of Retek's capital stock issued and sold in the Initial Public Offering does not exceed Six Million Three Hundred Twenty-Five Thousand (6,325,000) shares of Retek's Common Stock following the final closing of the Initial Public Offering. D. HNC's current intention is that, after the closing of the Initial Public Offering, HNC may in its sole discretion elect to distribute pro rata to HNC's stockholders, as a dividend, the remaining shares of Common Stock of Retek which it holds after the closing of the Initial Public Offering (the "Distribution"). E. It is appropriate and desirable to set forth in this Agreement the agreements of the parties regarding the Separation and the transactions required to effect the Separation and the Initial Public Offering, and the relationship of HNC, Retek and RIS following the Separation. 2 NOW, THEREFORE, in consideration of the foregoing recitals and the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS 1.1 CERTAIN DEFINITIONS. As used herein, the following terms have the following meanings: "Action" means any claim, suit, arbitration, inquiry, proceeding or investigation by or before any court, governmental, regulatory or administrative agency or commission, any other tribunal or other Governmental Authority, or any arbitrator or arbitration panel. "Affiliate" of any specified Person means any other Person that, directly or indirectly, controls, is controlled by or is under direct or indirect common control with such specified Person. For purposes of this definition, the term "control" (including, with correlative meanings, the terms, "controls" "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to vote a majority of the securities having voting power for the election of directors (or other Persons acting in similar capacities) of such Person or otherwise to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "After Tax Basis" means a basis such that the Original Payment shall be supplemented by a further payment to such Person so that the sum of the two payments shall equal the Original Payment, after taking into account all Taxes that would result from the receipt or accrual of such payments, if legally required, with all payments hereunder being calculated on the assumption that the payee is subject to Tax at the highest marginal rates of Tax applicable to such class of taxpayer. "Ancillary Agreements" means, collectively, the Corporate Rights Agreement, the License Agreement, the Services Agreement, the Stock Contribution Agreement and the Tax Sharing Agreement. "Closing" has the meaning assigned to such term in Section 2.4. "Closing Date" has the meaning assigned to such term in Section 2.4. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the U.S. Securities and Exchange Commission. "Common Stock" means the common stock, par value $0.01 per share, of Retek. "Consents" means any consents, waivers or approvals from, or notification requirements to, any third parties. 3 "Covered Claims" means any claim that is of a type covered by insurance or self insurance of HNC in effect on the Closing Date and is listed and described as a "Covered Claim" on Schedule 3.1(k). "Corporate Rights Agreement" means the Corporate Rights Agreement to be entered into by and among HNC, Retek and RIS at the Closing in substantially the form of Exhibit 1. "Distribution" has the meaning assigned to such term in Recital D of this Agreement. "Effective Initial Public Offering Date" means the date on which the Registration Statement is declared effective by the Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Assets" has the meaning assigned to such term in Section 2.1(b). "Excluded Liabilities" has the meaning assigned to such term in Section 2.2(b). "Governmental Authority" means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. "HNC Group" means HNC and each Person (other than Retek and RIS or any subsidiary of Retek or RIS) that is an Affiliate of HNC immediately after the Closing Date. "Liabilities" means any and all losses, claims, charges, debts, demands, Actions, causes of action, suits, damages, obligations, payments, costs and expenses, accounts, bonds, indemnities and similar obligations, covenants, contracts, agreements, promises, guarantees and other liabilities, including all contractual obligations, whether absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or not accrued, known or unknown, whenever arising, in each case, whether or not recorded or reflected or required to be recorded or reflected in the books and records or financial statements of any Person, including, without limitation, those arising under (i) any law, rule or regulation, (ii) any Action, threatened or contemplated Action (including the costs and expenses of demands, assessments, judgments, arbitration awards, settlements and compromises relating thereto and attorneys' fees and any and all costs and expenses whatsoever (including without limitation allocated costs of in-house counsel and other personnel), reasonably incurred in investigating, preparing or defending against any such Actions or threatened or contemplated Actions), (iii) any order or consent decree of any Governmental Authority or any award of any arbitrator or mediator of any kind and (iv) any contract, commitment or undertaking, including those arising under this Agreement or any Ancillary Agreement. "License Agreement" means the Technology License Agreement to be entered into between HNC and RIS at the Closing in substantially the form of Exhibit 2. 4 "Lien" means any mortgage, security interest, pledge, encumbrance or charge upon property of a Person to secure or obtain payment of a debt or performance of an obligation, whether arising by contract, consent or by operation of law. "Original Payment" means the payment received or deemed to have been received by a Person before any adjustments made to take into account that such payment is Taxable to the payee. "Person" means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability company, any other entity and any Governmental Authority. "Policy" has the meaning assigned to such term in Section 3.1(k). "Prospectus" means each preliminary, final or supplemental prospectus forming a part of the Registration Statement. "Registration Statement" means the registration statement on Form S-1 (or other appropriate form promulgated by the Commission) filed by Retek with the Commission to effect the registration for issuance by Retek in the Initial Public Offering of shares of its Common Stock pursuant to the Securities Act, as such registration statement may be amended or supplemented from time to time. "Retek Assets" has the meaning assigned to such term in Section 2.1(a). "Retek Business" means the business and operations of Retek and RIS, which consist of developing, marketing, selling and supporting enterprise software products that provide business solutions to retailers and their suppliers. "Retek Bylaws" means the amended and restated bylaws of Retek which will be in effect immediately prior to the closing of the Initial Public Offering in the form thereof filed as an exhibit to the Registration Statement. "Retek Certificate" means the amended and restated certificate of incorporation of Retek which will be in effect immediately prior to the closing of the Initial Public Offering in the form thereof filed as an exhibit to the Registration Statement. "Retek Contracts" means the following contracts and agreements, to which HNC or any of its Affiliates is a party or by which HNC or any of its Affiliates or and of their respective assets is bound, except for any such contract or agreement that is contemplated to be retained by HNC or any of its Affiliates (other than Retek or RIS) pursuant to any provision of this Agreement or any Ancillary Agreement: (a) the contracts or agreements listed or described on Schedule 1.1(a) (as such Schedule may be supplemented by mutual written agreement signed by HNC and Retek after the Effective Date and prior to the Closing Date); 5 (b) any contracts or agreements entered into by HNC in the name of, or expressly on behalf of, Retek or RIS; and (c) any guarantee, indemnity, representation, warranty or other Liability of Retek or HNC in respect of any other Retek Contract, any Retek Liability or the Retek Business. "Retek Group" means Retek, RIS and any subsidiary of either Retek or RIS immediately after the Closing Date. "Retek Intercompany Payables" means all accounts payable and other intercompany amounts payable by Retek, RIS or any other member of the Retek Group to HNC or to any other member of the HNC Group as set forth in Schedule 2.6 or reflected in the books and records of the parties or otherwise documented in writing in accordance with the parties' past practices. "Retek Intercompany Receivables" means all accounts receivable and other intercompany amounts payable by HNC or by any other member of the HNC Group to Retek, RIS or any other member of the Retek Group as set forth in Schedule 2.6 or reflected in the books and records of the parties or otherwise documented in writing in accordance with the parties' past practices. "Retek Liabilities" has the meaning assigned to such term in Section 2.2. "RIS Bylaws" means the bylaws of RIS, as amended. "RIS Certificate" means the restated certificate of incorporation of RIS. "RIS Common Stock" means the shares of common stock of RIS, par value $0.001 per share. "Securities Act" means the Securities Act of 1933, as amended. "Separation" has the meaning assigned to such term in Recital B of this Agreement. "Separation Date" means the date determined by the Board of Directors of HNC as the date on which the Separation shall be effected, which is contemplated to occur on the date of the closing of the Initial Public Offering. "Services Agreement" means the Services Agreement to be entered into between HNC, Retek and RIS at the Closing in substantially the form of Exhibit 3. "Stock Contribution Agreement" means the Stock Contribution Agreement to be entered into by HNC, Retek and RIS at the Closing in substantially the form of Exhibit 4. "Tax," "Taxes" or "Taxable" has the meaning given to such term in the Tax Sharing Agreement. 6 "Tax Sharing Agreement" means the Tax Sharing Agreement to be entered into among HNC and Retek at the Closing providing for certain tax related matters, in substantially the form of Exhibit 5. "Underwriting Agreement" means the agreement executed between Retek and the managing Underwriter with regard to the Initial Public Offering. "Underwriter" means a Person who agrees to act as an underwriter in connection with the Initial Public Offering. Unless otherwise specified, any reference herein to any "subsidiary" or "subsidiaries" of HNC shall not include either Retek or RIS. ARTICLE II TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES 2.1 TRANSFER OF ASSETS. (a) Assignment of Retek Assets. Effective upon the Closing, HNC will assign, transfer, convey and deliver to Retek as of the Closing Date, and HNC agrees to cause each of its subsidiaries (other than Retek and RIS) to assign, transfer, convey and deliver to Retek as of the Closing Date, and Retek will accept from HNC and such subsidiaries as of the Closing Date, all of HNC's and such subsidiaries' respective right, title and interest in, to or under the following assets and properties described in the following subparagraphs of this Section 2.1(a) (collectively, the "Retek Assets"): (i) all shares of RIS Common Stock owned directly or beneficially by HNC as of the Closing Date; (ii) all of the Retek Contracts; (iii) tangible copies of any sales, marketing and promotional literature, and other sales-related materials owned, used, associated with or employed by HNC relating primarily to the Retek Business. Notwithstanding the foregoing, Retek Assets shall not in any event include any of the Excluded Assets referred to in Section 2.1(b) below. (b) Excluded Assets. For the purposes of this Agreement, "Excluded Assets" shall mean all assets, properties and rights owned or held by HNC or any member of the HNC Group that are not expressly described in any of the subparagraphs of Section 2.1(a). 7 2.2 ASSUMPTION OF RETEK LIABILITIES. (a) Assumption. Effective upon the Closing, except as may be otherwise expressly set forth in one or more of the Ancillary Agreements, from and after the Closing Date, Retek and RIS hereby jointly and severally assume and agree to faithfully and timely pay, perform, fulfill and satisfy all Retek Liabilities, in accordance with their respective terms. As used herein, the term "Retek Liabilities" means, collectively, all Liabilities (other than Taxes based on, or measured by reference to, net income), including any employee-related or office lease Liabilities, primarily relating to, arising out of or resulting from: (i) the conduct or operation of the Retek Business at any time prior to, on or after the Closing Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative of Retek or RIS (whether or not such act or failure to act is or was within such Person's authority)); (ii) the conduct or operation of any business conducted by Retek or RIS at any time after the Closing Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative or Retek or RIS (whether or not such act or failure to act is or was within such Person's authority)); and/or (iii) any Retek Assets. Notwithstanding the foregoing, Retek Liabilities shall not in any event include any of the Excluded Liabilities (as defined in Section 2.2(b) below). (b) Excluded Liabilities. For the purposes of this Agreement, the term "Excluded Liabilities" shall mean (i) any and all Liabilities that are expressly contemplated by this Agreement or by any Ancillary Agreement to be Liabilities that will be retained by or assumed by HNC or any member of the HNC Group after the Closing and (ii) all agreements and obligations of any member of the HNC Group under this Agreement or under any of the Ancillary Agreements. (c) Third-Party Releases. Except as provided in any Ancillary Agreement or with regard to any obligations of HNC under this Agreement and such Ancillary Agreements, from and after the execution of this Agreement, HNC, Retek and RIS will cooperate in good faith and Retek and RIS will take such reasonable steps (at the expense of HNC) as HNC may request so that HNC may obtain from third parties (other than Retek or RIS) the release, discharge and exoneration of HNC's obligations or Liabilities (including but not limited to guaranty obligations) to any such third party (whether or not such party's Consent is required to effect the transfer of any Retek Asset or the assumption of any Retek Liability as contemplated herein) and the discharge of any Lien on the property of HNC or any of its subsidiaries, arising from or related to any of the Retek Assets or Retek Liabilities or the Retek Business, to the end that Retek and/or RIS will become the sole obligors, debtors or responsible parties on such Liabilities (the "HNC Releases"). (d) Retek Liabilities. Retek shall be responsible for all Retek Liabilities, regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the Effective Date, regardless of where or against whom such Liabilities are asserted or determined (including any Retek Liabilities arising out of claims made by HNC's, Retek's or RIS's respective directors, officers, employees, agents or Affiliates) or whether asserted or determined prior to the Effective Date, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of law, fraud or misrepresentation by HNC, Retek or RIS or any of their respective directors, officers, employees, 8 agents or Affiliates. As between the Retek Group and the HNC Group, no member of the HNC Group shall have any responsibility for any Retek Liability. 2.3 TRANSFERS NOT EFFECTED ON OR PRIOR TO THE CLOSING DATE. To the extent any transfers of assets contemplated by Section 2.1 shall not have been fully effected on or prior to the Closing Date, HNC and Retek shall cooperate to effect such transfers as promptly as possible following the Closing Date. Nothing herein shall be deemed to require the transfer of any assets or the assignment or assumption of any Liabilities that by their terms or by operation of law cannot be so transferred, assigned or assumed; provided, however, that any such asset shall be deemed a Retek Asset for purposes of determining whether any Liability is a Retek Liability; and provided, further, that HNC and Retek and their respective Affiliates shall cooperate in seeking to obtain any necessary Consents for the transfer of all assets and the assignment or assumption of all Liabilities as contemplated by this Article II. In the event that any transfer of assets or assignment or assumption of Liabilities contemplated by this Article II has not been consummated effective as of the Closing Date, (i) the parties retaining such assets shall thereafter hold such assets in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto); and (ii) the party retaining such Liabilities shall thereafter hold such Liabilities for the account of the party assuming such Liability or to whom such Liability is to be assigned pursuant hereto, and in each such case shall take such other actions as may be reasonably required in order to place the parties, insofar as reasonably possible, in the same position as would have existed had such asset been transferred, or such Liability been assigned or assumed as contemplated hereby. As and when any such asset or Liability become transferable, assignable or assumable, as the case may be, such transfer, assignment or assumption, as the case may be, shall be effected forthwith. HNC and Retek agree that, as of the Closing Date, each party hereto shall be deemed to have acquired complete and sole beneficial ownership over all of the assets, together with all of the rights, powers and privileges incidental thereto, that such party is entitled to acquire pursuant to the terms of this Agreement. 2.4 CLOSING MATTERS. The closing of the Separation under this Agreement will take place at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California, at 7:00 a.m. Pacific Time, concurrent with the consummation and closing of the Initial Public Offering or at such other time and place as HNC, Retek and RIS shall mutually agree upon in a writing signed by each of them. The "Closing" and the date on which the Closing occurs is referred to herein as the "Closing Date"), provided, however, that HNC's obligation to consummate the Separation and to effect the Closing shall be subject to the satisfaction and fulfillment of the conditions to HNC's obligations set forth in Section 3.3. At the Closing, to the extent that they have not already done so, the parties will take each of the following actions: (a) HNC shall execute and deliver to Retek (or to RIS, in the case of deliverables relevant to RIS) such bills of sale, stock powers, assignments of contracts and other instruments or transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of all of HNC's or its subsidiaries' (other than Retek or RIS) right, title and interest in and to Retek Assets to Retek or RIS, as the case may be; (b) HNC shall execute and deliver each of the Ancillary Agreements to Retek and RIS, as applicable; 9 (c) Retek shall execute and deliver to HNC (and, with regard to any liabilities assumed for RIS, to RIS) such bills of sale, assumptions of contracts and other instruments or assumption as may be necessary to evidence the valid and effective assumption of Retek Liabilities by Retek and RIS; (d) Retek shall execute and deliver each of the Ancillary Agreements to HNC and RIS, as applicable; (e) RIS shall execute and deliver to HNC and RIS such bills of sale, assumptions of contracts and other instruments or assumption as may be necessary to evidence the valid and effective assumption of any Retek Liabilities by RIS; (f) RIS shall execute and deliver each of the Ancillary Agreements to HNC and Retek, as applicable; and (g) Either (i) Retek and RIS on the one hand, or (ii) HNC on the other hand, as applicable under the provisions of Section 2.6, shall pay to the other the amount payable by it under the provisions of Section 2.6 to settle all then outstanding intercompany accounts in accordance with Section 2.6. 2.5 NO REPRESENTATIONS OR WARRANTIES; CONSENTS. (a) Asset Status. Each of the parties hereto understands and agrees that no party hereto is, in this Agreement, in any Ancillary Agreement or in any other agreement or document contemplated by this Agreement, any Ancillary Agreement or otherwise, making any representation or warranty whatsoever to any other party as to the value, quality or condition of any assets of such party, and all such representations and warranties are hereby disclaimed and negated. The parties also agree and understand that there are no warranties whatsoever, whether express or implied, given by any party to this Agreement, as to the condition, quality, merchantability or fitness for a particular purpose of any of the assets, businesses or other rights transferred or retained by the parties, as the case may be, and all such assets, businesses and other rights shall be "as is, where is" and "with all faults" (provided that the absence of warranties given by the parties shall not negate the assumption of Liabilities under this Agreement and shall have no effect on any manufacturers, sellers, or other third party warranties that are intended to be transferred with such assets). (b) Consents. Each party hereto understands and agrees that no party hereto is, in this Agreement, in any Ancillary Agreement or in any other agreement or document contemplated by this Agreement, any Ancillary Agreement or otherwise, representing or warranting in any way that the obtaining of any Consents, the execution and delivery of any amendatory agreements and the taking of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable laws or judgments or other instruments or agreements relating to such assets. Notwithstanding the foregoing, the parties shall use their reasonable good faith efforts to obtain all Consents (including without limitation such Consents as may be required by any Governmental Authorities), and to take all such further actions as shall be deemed reasonably necessary to preserve for each of HNC, Retek and RIS, to the greatest extent reasonably feasible (where the determination of feasibility shall take into account the expense 10 and time associated with preserving such benefits as compared to the value of such benefits) to carry out the purposes and intent of this Agreement. If at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall take all such necessary or desirable action, provided that any financial cost shall be borne by the party receiving the benefit of the action. 2.6 SETTLEMENT AND OFFSET OF INTERCOMPANY ACCOUNTS. (a) Current Intercompany Accounts. The parties agree that, as of the Effective Date: (i) the Retek Intercompany Payables consist entirely of those payables designated as Retek Intercompany Payables in Part A of Schedule 2.6 in the respective amounts set forth therein, and (ii) the Retek Intercompany Receivables consist entirely of those accounts receivable designated as Retek Intercompany Receivables in Part B of Schedule 2.6 in the respective amounts set forth therein. (b) Closing Update Certificates. At the Closing, Retek (on behalf of itself and the Retek Group) and HNC (on behalf of itself and the HNC Group) shall each deliver to the other a certificate (the "Intercompany Accounts Certificate"), executed by its respective Chief Financial Officer, which shall set forth in reasonable detail (and be accompanied by appropriate supporting documentation): (i) a list of all Retek Intercompany Payables and Retek Intercompany Receivables arising or accrued on and after the Effective Date and (ii) a list of all payments of Retek Intercompany Receivables made after the Effective Date and prior to the Closing Date. (c) Closing Offset and Settlement Payment. At the Closing, Retek (on behalf of itself, RIS and the Retek Group) and HNC (on behalf of itself and the HNC Group), shall set-off, settle and pay all then outstanding Retek Intercompany Payables and Retek Intercompany Receivables, as follows. The parties shall examine Schedule 2.6, the HNC Intercompany Accounts Certificate and the Retek Intercompany Accounts Certificate, and shall determine from such documents: (i) the amount of Retek Intercompany Payables as of the Closing Date; (ii) the amount of Retek Intercompany Receivables as of the Closing Date; (iii) the amount, if any, by which the Retek Intercompany Payables as of the Closing Date exceeds the Retek Intercompany Receivables as of the Closing Date (such excess amount if any, being referred to as the "Net Retek Closing Payable"); and (iv) the amount, if any, by which the total Retek Intercompany Receivables as of the Closing Date exceed the Retek Intercompany Payables as of the Closing Date (such excess amount, if any, being referred to as the "Net Retek Closing Receivable"). If there is a Net Retek Closing Payable, then at the Closing Retek shall pay to HNC an amount equal to the Net Retek Closing Payable. If there is a Net Retek Closing Receivable, then at the Closing HNC shall pay to Retek an amount equal to the Net Retek Closing Receivable. If there is no Net Retek Closing Payable and no Net Retek Closing Receivable, then no payment shall be made by HNC or Retek under this Section at the Closing. Any dispute between HNC and Retek regarding the amount of Retek Intercompany Payables and/or Retek Intercompany Receivables shall be resolved in accordance with Article VII. 11 ARTICLE III THE SEPARATION AND THE INITIAL PUBLIC OFFERING 3.1 COOPERATION PRIOR TO THE SEPARATION. In addition to the matters set forth in Section 3.2 concerning preparations for the Initial Public Offering and in Article V (concerning preparations, if undertaken, for the Distribution), and subject to the conditions set forth in Section 3.3, from and after the date of this Agreement until the earlier of the Closing or the termination of this Agreement pursuant to Section 8.1, HNC, Retek and RIS shall cooperate with each other and use their diligent good faith efforts to prepare for the Separation, including doing each of the following: (a) Conduct Affairs in Ordinary Course. Except as set forth in this Agreement and the Ancillary Agreements, Retek and RIS shall each continue to conduct its affairs in the ordinary course of its business consistent with past practices and shall operate its business for the sole benefit of HNC, its sole stockholder; provided that notwithstanding the foregoing: (i) Retek shall be entitled to exercise its option to purchase certain assets and/or stock of Webtrak Limited pursuant to the terms and conditions of that certain Option Agreement dated as of January 11, 1999 between Webtrak Limited and HNC, which HNC has assigned to Retek, as such agreement was in effect on the date it was assigned to Retek by HNC, pursuant to an Assignment of Option Agreement between HNC and Retek dated as of September 9, 1999; and (ii) Retek may enter into, and perform its obligations under, a loan or credit agreement with a bank or similar financial institution for the borrowing of up to a maximum of Ten Million Dollars ($10,000,000) in cash, provided that (i) such borrowing is on an unsecured basis with no security interest or other lien imposed on any assets or properties of Retek or any other member of the Retek Group or of HNC or any other member of the HNC Group; and (ii) neither HNC nor any other member of the HNC Group is required to provide any guarantee, indemnification or similar assurance with regard to any borrowing or other obligation of Retek or any member of the Retek Group with respect to such loan or credit agreement. (b) Equity Incentive Plans. Retek shall establish and maintain for the benefit of its directors, officers, employees, consultants and advisors and those of its subsidiaries, equity incentive, stock option and similar plans or arrangements satisfactory and acceptable to HNC; (c) Board of Directors. Each of Retek, RIS and HNC shall nominate (and if necessary and permitted to be done by them, elect and appoint) such persons to the Retek and the RIS Board of Directors, as applicable, and such officers of Retek and RIS, as applicable, as HNC may request in order to effect the composition of the Board of Directors and officers of each of Retek and RIS which must be in effect upon the Closing as provided in Section 3.3, consistent with the provisions of the Corporate Rights Agreement, and to establish such committees of their respective Boards as HNC may request in preparation for the Initial Public Offering, consistent with the provisions of the Corporate Rights Agreement; (d) Charter Documents Amendments. HNC shall cause Retek and RIS to adopt by all necessary board and stockholder actions any amendments to their Certificates of Incorporation and Bylaws to effect changes necessary thereto so that, upon the Closing, their Certificates of 12 Incorporation and Bylaws conform, in each case, to those required to be in effect upon the Closing as provided in Section 3.3; (e) Remedial Actions. In addition to the actions set forth in the preceding subparagraph (e), Retek and RIS shall consult with HNC in advance of any remedial action therefor (unless delay in such consultation would create a serious, present threat to the lives of HNC, Retek or RIS personnel or third-parties present on their premises, or HNC's, Retek's or RIS's property) when any event occurs which, in the judgment of Retek's or RIS's management requires suspension or termination of any key Retek or RIS employee; (f) Consents. Retek and RIS shall assist HNC in identifying each Retek Asset or Retek Liability to be assigned at the Closing which requires an HNC Release or Consent to assignment and co-operate with HNC to obtain such HNC Releases and such Consents; (g) Investigations. Retek and RIS shall notify HNC immediately (and in no event more than 24 hours after the discovery thereof) of the receipt of any correspondence or communications from any Governmental Authority revealing the investigation of their affairs or any aspect thereof or correspondence or communications from any Person revealing the commencement of any litigation against either of them, and comply with HNC's reasonable requests in responding to any such event; (h) Material Adverse Effect. Retek and RIS shall inform HNC as promptly as reasonably possible upon the occurrence of any other event the occurrence of which may have a material adverse affect on the Retek Business, on the Separation, the Initial Public Offering or the Distribution; (i) Returns and Reports. Retek and RIS shall co-operate with HNC, in a manner consistent with past practices, so that all tax returns filed jointly by HNC with either or both of them shall be timely prepared and filed, any reports (including HNC periodic reports under the Exchange Act) shall be timely prepared and filed, and any other accounting or administrative matters between HNC and Retek or HNC and RIS shall be handled in a reasonably prompt and prudent manner; (j) Stock Options. Retek hereby agrees with HNC that: (a) prior to the closing of the Initial Public Offering, Retek shall not grant any options to purchase shares of Retek common stock to any person who holds options to purchase shares of HNC common stock, unless such person first executes and delivers to Retek and HNC a Notice of Election to Exchange Options attached to the Retek Employee Stock Option Exchange Program documentation, dated October 18, 1999, the form of which has been agreed upon by HNC and Retek; and (b) until the closing of the Initial Public Offering the aggregate number of shares of Retek common stock reserved and/or previously issued under all Retek stock option plans or stock option agreements at any one time shall not exceed an aggregate total of 10,100,000 shares of Retek common stock, as presently constituted. (k) Insurance Matters. HNC, Retek and RIS shall use reasonable efforts to maintain in full force and effect at all times up to and including the Closing Date all property and casualty insurance programs currently maintained by HNC, Retek or RIS as of the Effective Date, including, without limitation, primary and excess general liability, automobile, workers' 13 compensation, property and crime insurance policies (collectively, the "Policies" and individually, a "Policy"). HNC and its subsidiaries shall retain, with respect to any Covered Claims set forth on Schedule 3.1(k) relating to periods prior to the Closing Date, all of their respective rights, benefits and privileges, if any, under such Policies. (i) Except to the extent otherwise expressly provided in the Services Agreement, commencing on and as of the Closing Date, Retek (for itself and for RIS) shall be responsible for establishing and for maintaining its own separate insurance programs (including, without limitation, primary and excess general liability, automobile, workers' compensation, property, director and officer liability, errors and omissions, fire, crime, surety and other similar insurance policies) for activities, losses and claims relating to any period on or after the Closing Date involving Retek, RIS or any other member of the Retek Group. Notwithstanding any other agreement or understanding to the contrary, except as expressly otherwise provided in the Services Agreement or in Section 3.1(k)(ii) with respect to claims administration and financial administration of the Policies, neither HNC nor any of its subsidiaries shall have any responsibility for or obligation to Retek or its subsidiaries relating to liability and casualty insurance matters for any period, whether prior to, at or after the Closing Date; (ii) HNC shall be responsible for the claims administration and financial administration of all Policies for Covered Claims relating to the assets, ownership or operation of the Retek Business prior to the Closing Date. Retek shall be responsible for all administrative and financial matters relating to insurance policies established and maintained by Retek and RIS for claims relating to any period on or after the Closing Date involving Retek or RIS or any other member of the Retek Group. (iii) Retek shall promptly notify HNC of any claim (including any Covered Claim) relating to Retek or RIS under one or more of the Policies relating to a period prior to the Closing Date, and Retek and RIS agree to cooperate and coordinate with HNC concerning any strategy HNC may reasonably elect to pursue to secure coverage and payment for such claim by the appropriate insurance carrier. Notwithstanding anything contained herein, in any other agreement or applicable Policy or any understanding to the contrary, except to the extent otherwise expressly provided in the Services Agreement, Retek assumes responsibility for, and shall pay to the appropriate insurance carriers or otherwise, any premiums, retrospectively-rated premiums, defense costs, indemnity payments, deductibles, retentions or other charges, as appropriate (collectively, "Insurance Charges"), whenever arising, which shall become due and payable under the terms and conditions of any applicable Policy in respect of any liabilities, losses, claims, actions or occurrences, whenever arising or becoming known, involving or relating to any of the assets, businesses, operations or liabilities of Retek or RIS during the period after the Closing Date. To the extent that the terms of any applicable Policy provide that HNC or a subsidiary thereof, as appropriate, shall have an obligation to pay or guarantee the payment of any Insurance Charges for which Retek has assumed responsibility in the 14 preceding sentence, HNC or such subsidiary shall be entitled to demand that Retek or RIS make such payment directly to the person or entity entitled thereto. In connection with any such demand, HNC shall submit to Retek or RIS a copy of any invoice received by HNC or a subsidiary pertaining to such Insurance Charges, together with appropriate supporting documentation, if available. If Retek or its subsidiary fails to pay any such Insurance Charges when due and payable, whether at the request of the party entitled to payment or upon demand by HNC or a subsidiary of HNC, HNC or a subsidiary of HNC may (but shall not be required to) pay such Insurance Charges for and on behalf of Retek or its subsidiary and, thereafter, Retek or its subsidiary shall forthwith reimburse HNC or such subsidiary of HNC for such payment; and (l) HNC, Retek and RIS shall take any and all other steps reasonably necessary to prepare for the Separation and to cause the satisfaction of the closing conditions thereto. 3.2 PREPARATIONS FOR THE INITIAL PUBLIC OFFERING. (a) Efforts; Abandonment. Subject to the conditions specified in Section 3.3, HNC, Retek and RIS shall use their good faith efforts to consummate the Initial Public Offering; provided, however, that notwithstanding the foregoing, HNC, in its sole and absolute discretion, may cause Retek to abandon the Separation and the Initial Public Offering as provided in Section 8.1, in which event the Separation shall not occur and Retek shall not consummate or close the Initial Public Offering, and shall discontinue all efforts to consummate the Initial Public Offering and shall withdraw the Registration Statement as soon as practicable thereafter. (b) Expenses. HNC and Retek shall pay the costs and expenses as described in Section 8.2 as set forth therein. (c) D&O Insurance. Retek shall diligently attempt to secure directors' and officers' insurance on customary terms reasonably acceptable to HNC, insuring the directors and officers of Retek. (d) Proceeds of the Initial Public Offering. The Initial Public Offering will include only a primary offering of Common Stock by Retek. Retek will retain the net proceeds of the primary offering. 3.3 HNC BOARD ACTION; CONDITIONS PRECEDENT TO HNC'S OBLIGATION TO EFFECT THE SEPARATION. HNC's Board of Directors shall, in its discretion, establish any appropriate procedures, in addition to those set forth in this Section 3, in connection with the Separation. In no event shall HNC be obligated to effect the Separation and in no event shall the Separation occur until concurrently with the initial closing of Retek's issuance and sale of shares of its Common Stock in the Initial Public Offering and in no event shall the Separation occur unless and until each of the following conditions, together with those established by HNC's Board of Directors, shall have been satisfied, unless waived in writing by HNC in its sole discretion: 15 (a) All necessary regulatory approvals from Governmental Authorities for the Separation, the Initial Public Offering and the performance of this Agreement shall have been received; (b) The Registration Statement shall have been filed with the Commission, and Retek shall have been notified by the staff of the Commission that it has no further comments on the Registration Statement and is prepared to declare the Registration Statement effective upon Retek's request and no stop-order or other action by the Commission prohibiting or enjoining the sale of Retek Common Stock shall be outstanding and in effect; (c) All required actions and filings with regard to state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) with respect to the Initial Public Offering shall have been taken and no impediment other than the effectiveness of the Registration Statement shall exist to the qualification under such securities laws of the shares of Common Stock to be issued in the Initial Public Offering; (d) Retek's Board of Directors and executive officers, as named in the Registration Statement and agreed on between Retek and HNC, shall have been elected by HNC, as sole stockholder of Retek, and the Retek Certificate and the Retek Bylaws, in the form set forth as exhibits to the Registration Statement, shall be in effect; (e) Retek shall have entered into indemnity agreements with, and for the benefit of, each of its directors identified in subparagraph (d) of this Section 3.3, in a form reasonably satisfactory to HNC and shall have obtained directors' and officers' insurance covering such directors under a policy reasonably satisfactory in substance and amount to HNC; (f) RIS's Board of Directors, as agreed on between Retek and HNC, shall have been elected by Retek as sole stockholder of RIS and RIS' officers, as agreed between Retek and HNC shall have been elected; (g) The RIS Certificate and the RIS Bylaws, in the form satisfactory to HNC and Retek, shall be in effect; (h) Retek shall have entered into an Underwriting Agreement with the managing Underwriters for the Initial Public Offering which shall be reasonably satisfactory to HNC; (i) An application for quotation of the Common Stock on the National Market System of the Nasdaq Stock Market shall have been filed in connection with the Initial Public Offering, and Retek shall have been notified that, subject to the effectiveness of the Registration Statement and official notice of issuance, the Common Stock has been accepted for quotation thereon; (j) HNC's Board of Directors, Retek's Board of Directors and RIS's Board of Directors shall have formally approved this Agreement, the Separation, the Initial Public Offering, the Ancillary Agreements and the related transactions contemplated thereby and shall not have abandoned, deferred or modified the Separation or the Initial Public Offering at any time prior to the Closing Date; 16 (k) No restraining order or injunction or other order, decree or ruling issued by a court or by a government, regulatory or administrative agency or commission, and no statute, rule, regulation or executive order promulgated or enacted by any Governmental Authority shall be in effect preventing the consummation of the Separation or the Initial Public Offering or any of the other transactions contemplated by this Agreement or any Ancillary Agreement, except for the rules and regulations of such Governmental Authorities, the Nasdaq Stock Market, the National Association of Securities Dealers and state securities regulations which require that the Registration Statement be declared effective before the consummation of the Initial Public Offering will be lawful; (l) The HNC Releases shall have been obtained and HNC shall have been released from any liabilities, guarantees or other obligations with respect to any indebtedness or other obligations of Retek or its subsidiaries; provided, that the satisfaction of such conditions shall not create any obligation on the part of HNC to effect the Separation or in any way limit HNC's power of termination set forth in Section 8.1 or alter the consequences of any such termination from those specified in such Section; (m) HNC shall be satisfied in its sole discretion that: (i) it will own at least eighty-six and three-tenths percent (86.3%) of the outstanding shares of the capital stock of Retek immediately following the final closing of the Initial Public Offering (assuming the exercise in full of any over-allotment option held by the Underwriters in connection with the Initial Public Offering), and at least forty million (40,000,000) shares of Retek's Common Stock; (ii) all of the outstanding shares of Retek's Common Stock owned by HNC shall be duly and validly issued, fully paid and non-assessable; (iii) the number of shares of Retek Common Stock that are subject to outstanding options to purchase shares of Retek Common Stock immediately after the closing of the Initial Public Offering will not exceed a total of 7,245,400 such shares; and (iv) all conditions to permit any Distribution of the Common Stock held by HNC to HNC's stockholders after the closing of the Initial Public Offering to qualify as a tax-free distribution to HNC, any member of the HNC Group, Retek, and RIS and any member of the Retek Group and HNC's stockholders, to the extent applicable as of the time of the Closing, can be satisfied and there shall be no event or condition that is likely to cause any of such conditions not to be satisfied thereafter; (n) Retek (and/or RIS, as applicable) shall have executed and delivered each of the Ancillary Agreements to which each is a party; (o) Retek shall either (i) have set-off, settled and paid all outstanding Retek Intercompany Payables and Retek Intercompany Receivables in accordance with the terms of Section 2.6 or (ii) have executed and delivered to HNC a full recourse promissory note reasonably satisfactory in form and substance to HNC obligating Retek to pay in full to HNC all sums due from Retek to HNC pursuant to Section 2.6 of this Agreement by no later than the second (2nd) business day after the Closing, and any portion of such sum not paid to HNC by the second (2nd) business day after the Closing shall bear interest at the rate of six percent (6%) per annum until paid to HNC; (p) Such other actions as the parties hereto may, based upon the advice of counsel, reasonably request to be taken prior to the Separation in order to assure the successful 17 completion of the Separation and the Initial Public Offering and the other transactions contemplated by this Agreement shall have been taken; and (q) This Agreement shall not have been terminated. 3.4 CONDITION PRECEDENT TO RETEK'S OBLIGATION TO EFFECT THE SEPARATION. Retek shall not be obligated to effect the Separation unless the following condition shall have been satisfied, unless such condition is waived in writing by Retek in its sole discretion: (a) HNC shall have executed the Letter Agreement with John Buchanan, Retek's Chief Executive Officer, in the form of Exhibit 6. ARTICLE IV INDEMNIFICATION 4.1 RELEASE OF CLAIMS. (a) Release by Retek. Except as provided in Section 4.1(d), effective as of the Closing Date, Retek does hereby, for itself and its Affiliates (other than any member of the HNC Group), successors and assigns, and all Persons who at any time prior to the Closing Date have been stockholders, directors, officers, agents or employees of Retek or any of its Affiliates (other than any member of the HNC Group) (in each case, in their respective capacities as such), remise, release and forever discharge HNC and each member of the HNC Group, their respective successors and assigns, and all Persons who at any time prior to the Closing Date have been stockholders, directors, officers, agents or employees of HNC or of any member of the HNC Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any facts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Closing Date, including in connection with the transactions and all other activities to implement the Separation and the Initial Public Offering. (b) Release by RIS. Except as provided in Section 4.1(d), effective as of the Closing Date, RIS does hereby, for itself and its Affiliates (other than any member of the HNC Group), successors and assigns, and all Persons who at any time prior to the Closing Date have been stockholders, directors, officers, agents or employees of RIS or any of its Affiliates (other than any member of the HNC Group) (in each case, in their respective capacities as such), remise, release and forever discharge HNC and each member of the HNC Group, their respective successors and assigns, and all Persons who at any time prior to the Closing Date have been stockholders, directors, officers, agents or employees of HNC or of any member of the HNC Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any facts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or 18 alleged to have existed on or before the Closing Date, including in connection with the transactions and all other activities to implement the Separation and the Initial Public Offering. (c) Release by HNC. Except as provided in Section 4.1(d), effective as of the Closing Date, HNC does hereby, for itself and each member of the HNC Group, HNC's successors and assigns, and all Persons who at any time prior to the Closing Date have been stockholders, directors, officers, agents or employees of HNC or any member of the HNC Group (in each case, in their respective capacities as such), remise, release and forever discharge Retek and RIS, their respective successors and assigns, and all Persons who at any time prior to the Closing Date have been stockholders, directors, officers, agents or employees of Retek or RIS (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any facts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Closing Date, including in connection with the transactions and all other activities to implement the Separation and the Initial Public Offering. (d) Exclusions. Nothing contained in Section 4.1(a), 4.1(b) or 4.1(c) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in this Agreement as not to terminate as of the Closing Date, in each case in accordance with its terms. In addition, nothing contained in Section 4.1(a), 4.1(b) or 4.1(c) shall release any Person from: (i) Any Liability provided in or resulting from any agreement between Retek, and/or RIS, on the one hand, and any member of the HNC Group, on the other hand, that is specified in this Agreement as not to terminate as of the Closing Date, including but not limited to the liability and obligation of Retek or HNC, as applicable, to make any payment to the other required to be made by the provisions of Section 2.6; (ii) Any Liability, contingent or otherwise, assumed, transferred or assigned to such Person in accordance with this Agreement; (iii) Any Liability of any Person under this Agreement (including but not limited to indemnification obligations of such Person under this Article IV) or under any Ancillary Agreement; (iv) Any Liability for the sale, lease or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by Retek or RIS from any member of the HNC Group or by any member of the HNC Group from Retek or RIS; (v) Any Liability that the parties may have with respect to indemnification or contribution pursuant to this Agreement or any Ancillary Agreement, including but not limited to indemnification or contribution for claims brought against any of the parties by third Persons, which Liability shall be governed by the provisions of this Article IV and, if applicable, the appropriate provisions of the Ancillary Agreements; or 19 (vi) Any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 4.1; provided that the parties agree not to bring suit or permit any of their subsidiaries to bring suit against any Person with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 4.1 but for the provision of this clause (vi). (e) Covenant Not to Make Claims on Released Matters. Retek shall not make any claim or demand or bring or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against HNC or any member of the HNC Group or any other Person released pursuant to Section 4.1(a), with respect to any Liabilities released pursuant to Section 4.1(a). RIS shall not make any claim or demand or bring or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against HNC or any member of the HNC Group or any other Person released pursuant to Section 4.1(b), with respect to any Liabilities released pursuant to Section 4.1(b). HNC shall not make, and shall not permit any member of the HNC Group to make, any claim or demand or bring or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against Retek or RIS or any other Person released pursuant to Section 4.1(c), with respect to any Liabilities released pursuant to Section 4.1(c). (f) Intent. It is the intention of each of HNC, Retek and RIS, by virtue of the provisions of this Section 4.1, to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts, omissions and events occurring or failing to occur or alleged to have occurred or failed to occur and all conditions existing or alleged to have existed on or before the Closing Date, between or among Retek or RIS or any of their Affiliates, on the one hand, and HNC or any member of the HNC Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among such Persons on or before the Closing Date), except as expressly set forth in Section 4.1(d). At any time, at the request of any other party, each party shall execute and deliver, confirmations or releases reflecting the provisions hereof. (g) Waiver. In connection with the releases granted by the parties hereunder, each of Retek, RIS and HNC, on behalf of itself and each Person for whom it granted a release pursuant to this Section 4.1, hereby expressly waives any and all rights conferred upon it by the provisions of Section 1542 of the California Civil Code and any similar law. Section 1542 of the California Civil Code reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." Each of the parties hereto hereby represents and warrants that it has discussed the provisions of Section 1542 of the California Civil Code with its respective counsel and has been advised of the effect of the waiver of the provisions of that Section. 4.2 INDEMNIFICATION BY RETEK AND RIS. Except as provided in Section 4.5 and except as otherwise expressly provided in any of the Ancillary Agreements, from and after the Closing Date, Retek and RIS shall indemnify, defend and hold harmless HNC, each member of the HNC Group and each of their respective directors, officers, agents and employees and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "HNC 20 Indemnitees") from and against any and all Liabilities of the HNC Indemnitees relating to, arising out of or resulting from any of the following items (without duplication): (a) The failure of Retek or any other Person to pay, perform or otherwise promptly discharge any Retek Liability or Retek Contract in accordance with their respective terms, whether prior to or after the Closing Date or the Effective Date hereof; (b) The Retek Business, any or all of the Retek Liabilities or any Retek Contract; (c) Any breach by Retek or RIS of this Agreement or any of the Ancillary Agreements; (d) Any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Registration Statement or the Prospectus; provided, however, that Retek and RIS shall not be liable to any HNC Indemnitee in any such case to the extent (and only to the extent) that any such liability arises out of or relates to any untrue statement or allegedly untrue statement or omission or alleged omission, directly relating to HNC that is contained in the following parts of the Prospectus or the Registration Statement: (i) the first sentence of the fourth paragraph in "Prospectus Summary - Retek Inc."; (ii) the first sentence of the first paragraph in "Prospectus Summary - Our Relationship with HNC Software Inc."; (iii) the first sentence of the second risk factor in "Risk Factors - Risks Related to Securities Markets and Ownership of Our Common Stock"; (iv) the second paragraph in "Our Separation from HNC - Overview"; (v) the second paragraph and the third sentence of the third paragraph in "Our Separation from HNC - Possible Future Distribution by HNC of our Common Stock"; and (vi) all the information in "Principal Stockholder". (e) Any violation by Retek or RIS of (i) the Securities Act, (ii) any other federal law, rule or regulation regarding securities or (iii) any state or other law, rule or regulation regarding securities in connection with the Initial Public Offering or any subsequent offering or transaction involving securities of Retek or RIS; provided however, that neither Retek nor RIS shall be liable to provide indemnification for any Liabilities arising from matters specifically described in the foregoing provisions of this subparagraph (e) that were directly caused by or arose from information regarding an HNC Indemnitee that is contained in a registration statement or prospectus giving rise to such Liabilities if such information was provided by such HNC Indemnitee to Retek or RIS specifically for use in such registration statement or prospectus; and (f) Any indemnification or contribution payments made by HNC to any of the Underwriters (including but not limited to Credit Suisse First Boston Corporation) that are paid or payable as a result of any indemnification obligation of HNC or Retek arising under the Underwriting Agreement, that were not paid or satisfied by Retek. 4.3 INDEMNIFICATION BY HNC. Except as provided in Section 4.5 and except as otherwise expressly provided in any of the Ancillary Agreements, from and after the Closing Date, HNC shall indemnify, defend and hold harmless Retek and each of its subsidiaries and each of their respective directors, officers and employees and each of the heirs, executors, successors and 21 assigns of any of the foregoing (collectively, the "Retek Indemnitees") from and against any and all Liabilities of Retek Indemnitees relating to, arising out of or resulting from any of the following items (without duplication): (a) The failure of HNC or any other member of the HNC Group or any other Person to pay, perform or otherwise promptly discharge any Liability of any member of the HNC Group (other than Retek Liabilities) in accordance with its terms, whether prior to or after the Closing Date or the date hereof; (b) Any Liability of any member of the HNC Group other than Retek Liabilities; (c) Any breach by HNC or any member of the HNC Group of this Agreement or any of the Ancillary Agreements. (d) Any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated in the Registration Statement or necessary to make the statements in the Registration Statement not misleading to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission directly relates to HNC and is contained in the following parts of the Prospectus or the Registration Statement: (i) the first sentence of the fourth paragraph in "Prospectus Summary - Retek Inc."; (ii) the first sentence of the first paragraph in "Prospectus Summary - Our Relationship with HNC Software Inc."; (iii) the first sentence of the second risk factor in "Risk Factors - Risks Related to Securities Markets and Ownership of Our Common Stock"; (iv) the second paragraph in "Our Separation from HNC - Overview"; (v) the second paragraph and the third sentence of the third paragraph in "Our Separation from HNC - Possible Future Distribution by HNC of our Common Stock"; and (vi) all the information in "Principal Stockholder. 4.4 NOTICE AND PAYMENT OF CLAIMS. If any HNC Indemnitee or Retek Indemnitee (the "Indemnified Party") determines that it is or may be entitled to indemnification under this Article IV (other than in connection with any Action subject to Section 4.5), then the Indemnified Party shall deliver to the person from whom such indemnification is sought (the "Indemnifying Party"), a written notice (a "Claim Notice") specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. After the Indemnifying Party shall have been notified of the amount for which the Indemnified Party seeks indemnification, the Indemnifying Party shall, within sixty (60) days after its receipt of such written notice, either (i) pay the Indemnified Party such amount in cash or other immediately available funds (or reach agreement with the Indemnified Party as to a mutually agreeable alternative payment schedule) or (ii) object to the claim for indemnification or the amount thereof by giving the Indemnified Party written notice setting forth the grounds therefor. Any objection shall be resolved in accordance with the provisions of Article VII. If the Indemnifying Party does not give such notice within such sixty (60) day period, then the Indemnifying Party shall be deemed to have acknowledged its liability for such claim to the extent that the amount of such liability is specifically set forth in the Claim Notice and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. 22 4.5 NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following the earlier of (A) receipt of written notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (B) receipt of written information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought by an Indemnified Party pursuant to Article IV of this Agreement (a "Third-Party Claim"), the Indemnified Party shall give the Indemnifying Party prompt written notice thereof. Failure of the Indemnified Party to give such written notice as provided in this Section 4.5 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is prejudiced by such failure to give notice. Such notice shall describe the Third-Party Claim in reasonable detail, and attach any documentation received from the claimant (including, if applicable, a copy of any complaint filed against the Indemnified Party) asserting such Third-Party Claim. (a) Within thirty (30) days after receipt of such notice, the Indemnifying Party may, by giving written notice thereof to the Indemnified Party, (i) elect to assume the defense of such Third-Party Claim at its sole cost and expense or (ii) object to the claim of indemnification for such Third-Party Claim setting forth the grounds for its objection. Any objection shall be resolved in accordance with the provisions of Article VII. If the Indemnifying Party does not within such thirty (30) day period give the Indemnified Party such notice, then the Indemnifying Party shall be deemed to have acknowledged its liability for such Third-Party Claim. (b) Any defense of a Third-Party Claim as to which the Indemnifying Party has elected to assume the defense shall be conducted by counsel employed by the Indemnifying Party and reasonably satisfactory to HNC (in the case of HNC Indemnitees) or Retek (in the case of Retek Indemnitees). The Indemnified Party shall have the right to participate in such proceedings and to be represented by counsel of its own choosing at the Indemnified Party's sole cost and expense; provided that if the defendants or parties against which relief is sought in any such claim include both the Indemnifying Party and one or more Indemnified Parties and, in the reasonable judgment of HNC (in the case of HNC Indemnitees) or Retek (in the case of Retek Indemnitees), an actual or potential conflict of interest between such Indemnified Parties and such Indemnifying Party exists in respect of such claim or with regard to a defense thereto, such Indemnified Parties shall have the right to employ one firm of counsel selected by HNC (for HNC Indemnitees) or Retek (for Retek Indemnitees) and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. (c) If the Indemnifying Party assumes the defense of a Third-Party Claim, then the Indemnifying Party may settle or compromise the claim without the prior written consent of the Indemnified Party; provided that without the prior written consent of HNC (in the case of HNC Indemnitees) and Retek (in the case of Retek Indemnitees), the Indemnifying Party may not agree to any such settlement unless as a condition to such settlement the Indemnified Party receives a written release from any and all liability relating to such Third-Party Claim and such settlement or compromise does not include any remedy or relief to be applied to or against the Indemnified Party or its assets, properties or business, other than monetary damages for which the Indemnifying Party shall be fully responsible hereunder and which the Indemnifying Party pays upon execution of the settlement. 23 (d) If the Indemnifying Party does not assume the defense of a Third-Party Claim for which it has acknowledged liability for indemnification under this Article IV, HNC (in the case of HNC Indemnitees) and Retek (in the case of Retek Indemnitees) may pursue the defense of such Third-Party Claim and choose one firm of counsel in connection therewith. The Indemnifying Party is required to reimburse HNC or Retek, as the case may be, on a current basis for its reasonable expenses of investigation, reasonable attorney's fees and reasonable out-of-pocket expenses as incurred by HNC (in the case of HNC Indemnitees) and Retek (in the case of Retek Indemnitees) in defending against such Third-Party Claim and the Indemnifying Party shall be bound by the result obtained with respect to such Third-Party Claim with respect to such Indemnifying Party's indemnification obligations under this Article IV, provided that the Indemnifying Party shall not be liable for any settlement effected without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld, delayed or conditioned. (e) The Indemnifying Party shall pay to the Indemnified Party in cash the amount for which the Indemnified Party is entitled to be indemnified (if any) no later than the later of (i) the date on which the Indemnified Party makes any payment in satisfaction (partial or otherwise) of the Third-Party Claim or (ii) the date on which such Indemnifying Party's objection, if any, to its responsibility for indemnification under this Article IV has been resolved pursuant to the provisions of Article VII or by settlement or compromise or the final nonappealable judgment of a court of competent jurisdiction. 4.6 INSURANCE PROCEEDS. The amount that any Indemnifying Party is or may be required to pay to any Indemnified Party pursuant to this Article IV shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by or on behalf of such Indemnified Parties in reduction of the related Liability. If an Indemnified Party shall have received the payment required by this Agreement from an Indemnifying Party in respect of a Liability and shall subsequently actually receive insurance proceeds, or other amounts in respect of such Liability as specified above, then such Indemnified Party shall pay to such Indemnifying Party a sum equal to the amount of such insurance proceeds or other amounts actually received in respect of such Liability. 4.7 CONTRIBUTION. If the indemnification provided for in this Article IV is for any reason unavailable to an Indemnified Party in respect of any Liability arising out of or related to information contained in or omitted from the Registration Statement, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party shall contribute to the amount paid or payable by the Indemnified Party as a result of such Liability in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and the Indemnified Party, on the other hand, in connection with the actions or omissions which resulted in such Liability. If the Liability in question arises from statements or omissions that are untrue or are alleged to be untrue, then the relative fault of the Indemnifying Party, on the one hand, and of the Indemnified Party, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party, on the one hand, or the Indemnified Party, on the other hand; and the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission; but not by reference to any Indemnified Party's stock ownership in Retek. Notwithstanding the foregoing, no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) 24 of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 4.8 SUBROGATION. In the event of payment by an Indemnifying Party to any Indemnified Party in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the first place of such Indemnified Party as to any events or circumstances in respect of which such Indemnified Party may have any right or claim relating to such Third-Party Claim. Such Indemnified Party shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim, provided, however, that this right of subrogation shall be construed in such a way so that it does not discharge any insurance carrier for an Indemnifying Party for any obligation under any insurance policy which provides coverage for such Indemnifying Party from any loss asserted or involved in or related to such Third-Party Claim. 4.9 NO THIRD-PARTY BENEFICIARIES. This Article IV shall inure to the benefit of, and be enforceable by HNC, the HNC Indemnitees, Retek and Retek Indemnitees and their respective successors and permitted assigns. The indemnification provided for by this Article IV shall not inure to the benefit of any other third party or parties, relieve any insurer who would otherwise be obligated to pay any claim of the responsibility to pay such claim or, solely by virtue of the indemnification provisions hereof, provide any subrogation rights with respect thereto. Each party agrees to waive such subrogation rights against the other to the fullest extent permitted. 4.10 REMEDIES CUMULATIVE. The remedies provided in this Article IV shall be cumulative and shall not preclude assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies against an Indemnifying Party. The procedures set forth in this Article IV, however, shall be the exclusive procedures governing any indemnity action brought under this Article IV or otherwise relating to Liabilities. 4.11 SURVIVAL OF INDEMNITIES. The rights and obligations of each of HNC and Retek and their respective Indemnitees under this Article IV shall survive the sale or other transfer by it of any assets or businesses or the assignment by it of any Liabilities and shall, without limitation, survive the consummation and closing of the Separation, the Initial Public Offering and (if it should ever occur) the Distribution. ARTICLE V THE DISTRIBUTION 5.1 POTENTIAL DISTRIBUTION. HNC currently intends (but HNC has not agreed or committed that), following the consummation of the Initial Public Offering, to complete the Distribution, subject to the satisfaction and fulfillment of several conditions. These conditions would include, but not necessarily be limited to, the following conditions: (a) HNC's receipt of a written ruling from the Internal Revenue Service that the Distribution qualifies for tax-free treatment under Section 355 of the Code such that HNC's stockholders and HNC and its Affiliates will not recognize income for federal income tax purposes as a result of the Distribution, (b) the approval and declaration of the Distribution by HNC's Board of Directors, (c) the absence of any change in economic or market conditions or other circumstances that would cause HNC's Board of 25 Directors to conclude that the Distribution was not in the best interests of HNC and HNC's stockholders, and (d) HNC being able to effect the Distribution in compliance with applicable laws (including but not limited to applicable securities laws and the Delaware General Corporation Law) and HNC's contractual obligations. However, HNC shall not have any obligation or commitment whatsoever so any Person (including but not limited to Retek or RIS or their security holders) to effect or consummate the Distribution. HNC shall, in its sole and absolute discretion, determine when and whether to proceed with all or part of the Distribution and all terms of the Distribution, including, without limitation, the form, structure and terms of any transaction(s) and/or offering(s) to effect the Distribution and the timing of and conditions to the consummation of the Distribution. In addition, HNC may at any time and from time to time until the completion of the Distribution abandon, modify or change any or all of the terms of the Distribution, including without limitation, by accelerating or delaying the timing of the consummation of all or part of the Distribution. Retek shall cooperate with HNC in all commercially reasonable respects to accomplish the Distribution (if HNC elects, in its sole and absolute discretion, to effect the Distribution) and shall, at HNC's direction, promptly take any and all actions necessary or desirable to effect the Distribution, including, without limitation, the registration under the Securities Act of Retek Common Stock on an appropriate registration form or forms to be designated by HNC. HNC shall select any investment banker(s) and manager(s) in connection with the Distribution, as well as any other institutions providing services in connection with the Distribution. 5.2 CERTAIN MATTERS. If HNC elects, in its sole discretion, to effect the Distribution, then from and after the distribution of Retek Common Stock in connection with any transaction(s) included as part of the Distribution and until such Retek Common Stock is duly transferred in accordance with applicable law, Retek shall regard the Persons receiving Retek Common Stock in such transaction(s) as record holders of Retek Common Stock in accordance with the terms of such transaction(s) without requiring any action on the part of such Persons. Retek agrees that, subject to any transfers of such stock, (a) each such holder shall be entitled to receive all dividends payable on, and exercise voting rights and all other rights and privileges with respect to, the shares of Retek Common Stock then held by such holder and (b) each such holder shall be entitled, without any action on the part of such holder, to receive one or more certificates representing, or other evidence of ownership of, the shares of Retek Common Stock then held by such holder. HNC shall cooperate, and shall instruct the HNC stock transfer agent to cooperate, with Retek and the Retek stock transfer agent, and Retek shall cooperate, and shall instruct the Retek stock transfer agent to cooperate, with HNC and the HNC Transfer Agent, in connection with all aspects of the Distribution and all other matters relating to the issuance and delivery of certificates representing, or other evidence of ownership of, the shares of Retek Common Stock distributed to the holders of HNC Common Stock in connection with any transaction(s) included as part of the Distribution. Following the Distribution, HNC shall promptly, but in no event no later than two (2) business days thereafter, instruct the HNC stock transfer agent to deliver to the Retek stock transfer agent true, correct and complete copies of the stock and transfer records reflecting the holders of HNC Common Stock receiving shares of Retek Common Stock in connection with any transaction(s) included as part of the Distribution. 5.3 FURTHER ASSURANCES REGARDING THE DISTRIBUTION. (a) General. In addition to the actions specifically provided for elsewhere in this Agreement, if HNC elects, in its sole discretion, to effect the Distribution, then Retek shall, at 26 HNC's direction, use all commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things commercially reasonably necessary, proper or expeditious under applicable laws, regulations and agreements in order to consummate and make effective the Distribution as promptly as reasonably practicable. In particular, Retek agrees with HNC that, if in the reasonable opinion of counsel for HNC or for Retek, it is necessary to register HNC's transfer of its shares of Retek stock to HNC's stockholders in the Distribution in order for the Distribution to be effected in compliance with the Securities Act and/or for recipients of shares of Retek stock in the Distribution to be able to immediately effect public resales of such Retek shares in compliance with the Securities Act, then Retek will promptly cooperate with HNC to cause the Distribution to be registered under the Securities Act, provided that HNC's counsel has first consulted with Retek's counsel regarding the necessity of such registration. Without limiting the generality of the foregoing, Retek shall, at HNC's direction, cooperate with HNC, and execute and deliver, or use all commercially reasonable efforts to cause to have executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any domestic or foreign Governmental Authority and each self-regulatory body and securities exchange or automated inter-dealer quotation system on which Retek's Common Stock is listed or quoted requested by HNC in order to consummate and make effective the Distribution. (b) Assistance. After the Closing Date, Retek and RIS shall cooperate with HNC and shall take such actions as HNC may reasonably request (including without limitation providing all information, preparing and filing all documentation as HNC may reasonably request and, if requested by HNC, participating in any conferences with the Internal Revenue Service to seek a ruling as to whether the Distribution qualifies for tax-free treatment under Section 355 of the Code such that HNC's stockholders and HNC and its Affiliates will not recognize income for federal income tax purposes as a result of the Distribution to assist HNC in planning or effecting the Distribution and/or in determining whether the Distribution can be effected without recognition of taxable income as aforesaid. If the Internal Revenue Service provides HNC with a favorable ruling that the Distribution will be tax-free under Section 355 of the Code, then after the Closing Date, Retek and RIS shall take such actions and refrain from taking such actions as necessary to insure, as nearly as reasonably possible consistent with the fiduciary duties which HNC, Retek and RIS owe to stockholders, that the conditions announced in any such ruling to the tax-free nature of the Distribution are satisfied. (c) Participation Rights. If HNC elects, in its sole and absolute discretion, to effect the Distribution, then HNC shall keep Retek informed in a timely manner of all material actions taken or proposed to be taken by HNC in connection therewith. HNC shall, reasonably in advance of any submission by HNC to the Internal Revenue Service of any request for a ruling by the Internal Revenue Service as to whether the Distribution qualifies for tax-free treatment under Section 355 of the Code such that HNC's stockholders and HNC and its Affiliates will not recognize income for federal income tax purposes as a result of the Distribution, (A) provide Retek with a draft copy of such ruling request, (B) reasonably consider Retek's comments on such draft copy, and (C) provide Retek with a final copy of such ruling request submitted to the Internal Revenue Service. 27 (d) Capital Stock. Retek shall not issue any shares of its capital stock such that, immediately following such issuance, HNC would be unable to effect the Distribution on a tax-free basis as described in Section 5.1 and in Section 5.3(b). 5.4 RETEK BOARD OF DIRECTORS. HNC and Retek shall each take all actions which may be required to elect or otherwise appoint as directors of Retek, effective immediately after the date on which the Distribution occurs, such individuals as may be designated by Retek's Board of Directors (which designation shall be approved by the majority of Retek's directors who are at such time neither officers nor directors of HNC) as additional or substitute members of the Board of Directors of Retek on the date on which the Distribution occurs. HNC shall use its diligent and reasonable efforts to cause those members of Retek's Board of Directors who are HNC's designees pursuant to Section 3.1 of this Agreement or the Corporate Rights Agreement to resign from Retek's Board of Directors as promptly as practicable after the date on which the Distribution occurs. 5.5 CERTAIN POST-DISTRIBUTION TRANSACTIONS. (a) Actions Inconsistent with the Rulings. In the event that stock of Retek (or any successor thereto) is ultimately distributed to any or all of HNC's stockholders pursuant to transactions intended to qualify under Section 355 of the Code, Retek shall not take or fail to take, and shall not permit any Affiliate of Retek to take or fail to take, any action if such act or failure to act would be inconsistent with any representation, covenant, information or condition in any ruling, including for all purposes of this Agreement any supplemental rulings (collectively, the "Rulings") issued by the Internal Revenue Service in connection with the Distribution or in any representation, covenant or any information included in any submission to the Internal Revenue Service in connection with the Rulings (together with the Rulings, the "Rulings and Submissions"). (b) Liability. Notwithstanding anything to the contrary in this Agreement or the Tax Sharing Agreement, Retek and the Affiliates of Retek (other than HNC or any member of the HNC Group) as of the time immediately following the occurrence of the Distribution shall be jointly and severally liable for, and shall indemnify and hold harmless HNC and each Affiliate of HNC (other than any member of the Retek Group) from and against, on an After-Tax Basis, any and all Taxes (including interest, penalties and additions to Tax) resulting from the Distribution to the extent such Taxes result in whole or in part from (i) any event or transaction occurring after the Distribution that involves the stock, assets or business of Retek or any of its Affiliates, whether or not such event or transaction is the result of the direct actions of, or within the control of, Retek or any of its Affiliates, (ii) any act or failure to act on the part of Retek or any of its Affiliates after the Distribution, (iii) the breach of any representation, covenant, information or condition regarding Retek or any of its Affiliates included in the Rulings and Submissions or in any Subsequent Ruling (as defined below), or (iv) any actions contemplated by Section 5.5(c) below, regardless of whether HNC consents to such actions pursuant to Section 5.5(d) below. (c) Covenants Specific to Distribution Tax Matters. Retek agrees that during the two (2) year period immediately following completion of the Distribution (the "Restriction Period"), Retek and RIS will not, and will not permit any Affiliates of Retek or RIS to: 28 (i) sell, exchange, distribute or otherwise transfer or agree to sell, exchange, distribute or transfer, all or a substantial portion of its assets (within the meaning of Rev. Proc. 77-37), or any stock or equity interest in any Affiliate of Retek, in a single transaction or a series of transactions; (ii) voluntarily dissolve or liquidate or enter into any merger, consolidation or reorganization transaction; (iii) (A) solicit any Person or Persons to make a tender offer for the equity securities of Retek, (B) participate in or support any unsolicited tender offer for the equity securities of Retek or (C) approve any proposed business combination or any transaction which would result in any Person or Persons acquiring directly or indirectly a 50% or greater interest (within the meaning of Section 355(e) of the Code) in Retek; (iv) whether before or subsequent to the expiration of the Restriction Period, engage in any action described in clause (iii) above if it is pursuant to an arrangement negotiated (in whole or in part) prior to or subsequent to the Distribution, even if at the time of the Distribution it is subject to various conditions; (v) liquidate, dispose of or otherwise discontinue or otherwise fail to maintain the active conduct of the trade or business relied upon in connection with the Rulings and Submissions; (vi) sell or otherwise issue to any Person or Persons, or redeem or otherwise acquire from any Person or Persons, any of its outstanding stock (other than stock purchases meeting the requirements of section 4.05(1)(b) of Rev. Proc. 96-30) that in the aggregate (including shares issued and sold in the Initial Public Offering) would result in the acquisition of a 50% or greater interest (within the meaning of Section 355(e) of the Code) directly or indirectly by any Person or Persons in Retek; (vii) issue any stock or equity interests (except pursuant to the exercise of employee stock options) that in the aggregate (including shares issued and sold in the Initial Public Offering) would result in the acquisition of a 50% or greater interest (within the meaning of Section 355(e) of the Code) directly or indirectly by any Person or Persons in Retek; (viii) enter into any agreement for the sale or other disposition of its stock or equity interests; (ix) take any action inconsistent with the representations, covenants or information included in the Rulings and Submissions or that would result in the Distribution being Taxable in whole or part to HNC or any of its Affiliates or HNC's stockholders; or 29 (x) engage in any agreement, understanding, arrangement or negotiation, directly or indirectly, with any Person or Persons with respect to any of the restricted actions described in clauses (i) through (ix) above. If the Internal Revenue Service issues guidance, or Treasury Regulations are issued under Section 355(e) of the Code, the parties hereby agree to meet to review the covenants set forth in this Section 5.5(c) and to consider making appropriate revisions thereto to reflect such guidance and/or Treasury Regulations. (d) Exceptions to Covenants. Notwithstanding Section 5.5(c) above, Retek or any Affiliate of Retek may take actions inconsistent with the covenants contained in such Section 5.5(c), if, and only if: (i) HNC expressly consents in writing to such actions, such consent to be given or withheld by HNC in its sole and absolute discretion taking into account solely the preservation of the tax-free status of the Distribution under Section 355 of the Code; or (ii) HNC has obtained a ruling from the Internal Revenue Service, in form and substance reasonably satisfactory to HNC, to the effect that such proposed transaction will not adversely affect the tax-free status of the Distribution under Section 355 of the Code (a "Subsequent Ruling"). Retek agrees that HNC is to have no liability for any Tax to the extent such Tax results from any restricted action or actions of Retek or any Affiliate of Retek that are permitted pursuant to this Section 5.5(d) and Retek agrees to indemnify and hold harmless HNC against any such Tax notwithstanding the giving by HNC of its consent to such restricted action or actions or the receipt by HNC of any Subsequent Ruling. (e) Cooperation. HNC shall cooperate with Retek in connection with a request by Retek that HNC seek a Subsequent Ruling; provided, however, that HNC shall have no obligation to seek a Subsequent Ruling if, after consulting with its tax advisors, HNC in good faith believes that (a) it is not reasonably probable that the Internal Revenue Service will rule that the proposed action or transaction by Retek will not adversely affect the tax-free status of the Distribution under Section 355 of the Code; or (b) seeking the Subsequent Ruling may adversely affect or change any prior ruling or determination by the Internal Revenue Service that the Distribution qualifies for tax-free treatment under Section 355 of the Code. Such cooperation shall include, without limitation, providing any information and/or representations required to enable HNC or its counsel to obtain and maintain any Subsequent Ruling; provided that HNC's reasonable refusal to give or make a representation will not be deemed to be a failure to cooperate. (f) Notice. Until the first day after the Restriction Period, Retek will provide adequate written notice to HNC of any action described in paragraphs (i) through (x) of Section 5.5(c) above, without regard to the exceptions thereto, within a period of time reasonably sufficient to enable HNC (i) to make the determination to give or withhold its consent to such action as referred to in Section 5.5(d), (ii) to prepare and seek any Subsequent Ruling in connection with such proposed action, or (iii) to seek injunctive relief enjoining such action pursuant to Section 5.6 hereof in a court of competent jurisdiction. Each such notice shall set forth the terms and conditions of the proposed action, including, without limitation, the nature of any related action proposed to be taken by the Board of Directors of Retek, the approximate number of shares of Retek stock (if any) proposed to be sold by Retek or otherwise issued by Retek in such proposed action, if any, the approximate value of Retek's assets (or assets of any of the Retek Subsidiaries) proposed to be transferred in such proposed action, if any, and the 30 proposed timetable for such transaction, all with sufficient particularity to enable HNC to make such determination, to prepare and seek such Subsequent Ruling or to seek such injunctive relief. Promptly, but in any event within thirty (30) days, after HNC receives such written notice from Retek, HNC shall notify Retek in writing of such determination or of HNC's intent to seek (or not to seek) a Subsequent Ruling and the proposed date for the initial submission thereof, which date shall not be more than sixty (60) days after HNC so notifies Retek of its intent to seek such Subsequent Ruling, provided that such 30-day period or 60-day period, as the case may be, shall be appropriately extended for any period of noncompliance by Retek with this Section 5.5(f). Notwithstanding the foregoing, nothing in this Section 5.5(f) is intended to permit Retek to take any action described in paragraphs (i) through (x) of Section 5.5(c) unless such action is taken as permitted strictly in accordance with the provisions of Section 5.5(d). 5.6 ENFORCEMENT. The parties hereto acknowledge that irreparable harm would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. The parties hereto agree that, in order to preserve the tax-free treatment of the Distribution, injunctive relief is appropriate to prevent any violation by Retek or RIS of the foregoing covenants, provided, however, that injunctive relief shall not be the exclusive legal or equitable remedy for any such violation. ARTICLE VI ACCESS TO INFORMATION 6.1 PROVISION OF CERTAIN CORPORATE DOCUMENTS. Each of HNC, Retek and RIS shall arrange as soon as practicable following the Closing Date for the provision to the other party of the other party's existing corporate governance documents (e.g. certificate of incorporation, by laws, minute books, stock registers, stock certificates, etc.) in its possession relating to the other party. Each party may make and keep copies of all such documents as it is required to provide to any other party hereunder. 6.2 ACCESS TO INFORMATION. From and after the Closing Date, each of HNC, Retek and RIS shall afford the other, including its accountants, counsel and other designated representatives, reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information in such party's possession relating to the business and affairs of the other (other than data and information subject to an attorney/client or other privilege), insofar as such access is reasonably required by the other party including, without limitation, for audit, accounting and litigation purposes, as well as for purposes of fulfilling disclosure and reporting obligations. In particular, for so long as HNC is required to include, incorporate or reflect financial information, financial statements or operating results of Retek and/or any other member of the Retek Group (a) in HNC's financial statements under generally accepted accounting principles and/or (b) in any reports or filings required to be made by HNC under the Securities Act, the Exchange Act or other applicable law, then Retek shall (i) provide HNC in good faith with prompt and full access to such information, including the right to duplicate and retain copies of such information, (ii) cooperate promptly with HNC as necessary to enable HNC to timely prepare and file or make any such financial statements, reports or filings and (iii) provide all time, attention and effort of Retek personnel as 31 may be reasonably requested by HNC to assist HNC in preparing any such financial statements, reports or filings. 6.3 LITIGATION COOPERATION. Each of HNC, Retek and RIS shall use reasonable efforts to make available to the other(s), upon written request, its officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings arising out of the business of the other in which the requesting party may from time to time be involved. 6.4 REIMBURSEMENT. Each party providing witnesses under Section 6.3 to the other shall be entitled to receive from the party for whom the witness is provided, upon the presentation of invoices therefor, payment for all out-of-pocket costs and expenses as may be reasonably incurred in providing such witnesses. 6.5 CONFIDENTIALITY. Subject to Section 6.6, each party and each of its subsidiaries shall hold and shall cause its respective directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of law, all confidential, trade secret or proprietary information (other than any such information relating solely to the business or affairs of such party) concerning the other party (except to the extent that such information can be shown to have been (i) in the public domain through no fault of such party, (ii) later lawfully acquired on a non-confidential basis from other sources by the party to which it was furnished, and without breach of any obligation or duty by a third-party concerning confidentiality, (iii) independently generated without reference to any proprietary or confidential information of the other party, or (iv) information that may be disclosed pursuant to any Ancillary Agreement). No party shall release or disclose any such information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who shall be advised of and agree to comply with the provisions of this Section 6.5. 6.6 PROTECTIVE ARRANGEMENTs. If any party hereto (or any of its subsidiaries) either (a) determines on the advice of its counsel that it is required to disclose any information pursuant to applicable law (including but not limited to disclosure required pursuant to the Code, the Securities Act or the Exchange Act, including the disclosure of financial and other information in filings or reports made under the Securities Act or the Exchange Act) or (b) receives any demand under lawful process or from any Governmental Authority, to disclose or provide information of any other party hereto (or any of its subsidiaries) that is subject to the confidentiality provisions hereof, such party shall (except with respect to filings in reports under the Exchange Act that require such disclosure) notify the other party prior to disclosing or providing such information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide information to the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority. 6.7 MAIL. After the Closing Date, each of HNC, Retek and RIS may receive mail, telegrams, packages and other communications properly belonging to the other. Accordingly, at all times after the Closing Date, each of HNC, Retek and RIS authorizes the other to receive and open all mail, telegrams, packages and other communications received by it and not unambiguously 32 addressed to or intended for the other party or any of the other party's officers or directors specifically in their capacities as such, and to retain the same to the extent that they relate to the business of the receiving party or, to the extent that they do not relate to the business of the receiving party and do relate to the business of the other party, or to the extent that they relate to both businesses, the receiving party shall promptly contact the other party by telephone for delivery instructions and such mail, telegrams, packages or other communications (or, in case the same relate to both businesses, copies thereof) shall promptly be forwarded to the other party in accordance with its delivery instructions. If any party receives mail, telegrams, packages and other communications belonging to another party and unambiguously addressed to or intended for such other party, then the party who receives such material shall promptly contact the other party by telephone for delivery instructions and such mail, telegrams, packages or other communications shall promptly be forwarded to the other party in accordance with its delivery instructions. The foregoing provisions of this Section 6.7 shall constitute full authorization to the postal authorities, all telegraph and courier companies and all other persons to make deliveries to HNC, Retek or RIS, as the case may be, addressed to either of them or to any of their officers or directors specifically in their capacities as such. The provisions of this Section 6.7 are not intended to and shall not be deemed to constitute an authorization by either HNC, Retek or RIS to permit any of the other to accept service of process on its behalf, and no party is or shall be deemed to be the agent of the other for service of process purposes or for any other purpose. 6.8 RETENTION OF RECORDS. Except as otherwise required by law or agreed to in writing, each party shall, and shall cause each of its respective subsidiaries to, retain all information relating to the other party's business in accordance with such party's written record retention policy or, if no such policy exists, the past practice of such party. Notwithstanding the foregoing and except as provided in any Ancillary Agreement, any party may destroy or otherwise dispose of any such information at any time upon not less than thirty (30) days prior written notice to the other party, specifying the information proposed to be destroyed or disposed of; provided, however, that if the recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such information as was requested at the expense of the requesting party. Except as provided in the Tax Sharing Agreement or otherwise required by law or agreed to in writing, either party shall have the right to destroy or otherwise dispose of any such information at any time after the second anniversary of the Effective Date. ARTICLE VII DISPUTE RESOLUTION 7.1 PROCEDURE. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement and shall attempt in good faith to negotiate a settlement of any dispute arising under this Agreement pursuant to the following process: (a) Any party having a dispute or claim shall give the other party written notice stating the nature of the dispute in reasonable detail. Within twenty (20) business days after delivery of the notice, the receiving party shall submit to the other a written response also in reasonable detail. Within five (5) business days after delivery of the written response the Chief 33 Financial Officers (or other individual who has authority to settle the controversy and who has direct responsibility for administration of the relationships established pursuant to this Agreement) for each affected party shall meet (in person or by telephone) at a mutually acceptable time and place (including telephonic conference), and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other shall be honored. (b) If such matter has not been resolved within twenty (20) business days of the referral of the dispute to the Chief Financial Officers, then the parties may pursue litigation or, if mutually agreed, alternative dispute resolution mechanisms; provided that a party may earlier pursue litigation if reasonably necessary to prevent or enjoin any breach of this Agreement for which money damages would be an inadequate remedy, or that would alter the status quo or result in injury to such party that cannot readily be compensated for in money damages. 7.2 SCOPE OF SECTION 7.1. The provisions of Section 7.1 shall apply only to disputes arising under this Agreement (and not to disputes arising under any Ancillary Agreement). ARTICLE VIII MISCELLANEOUS 8.1 TERMINATION. This Agreement may be terminated and the Separation and the Initial Public Offering may be deferred, modified or abandoned at any time prior to the Closing Date by, and in the sole and absolute discretion of, the Board of Directors of HNC without the need for any approval or consent of Retek or RIS. In the event of such termination, no party hereto (or any of its respective directors or officers) shall have any liability to any other party pursuant to this Agreement and the Initial Public Offering shall be discontinued and terminated. 8.2. EXPENSES. Except for the fees and disbursements related to HNC's counsel, accountants and other advisors, Retek shall pay or cause to be paid all third party expenses relating to the Initial Public Offering or any other primary offering by Retek prior to a Distribution, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto or any other registration statements, (ii) the preparation, printing and delivery to any underwriters of any underwriting agreement, any agreement among underwriters and any other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Retek Common Stock or any other securities of Retek, (iii) the preparation, issuance and delivery of the certificates for the Retek Common Stock or any other securities of Retek to any underwriters or any other purchasers, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Retek Common Stock or any other securities of Retek to any underwriters or any other securities, (iv) the qualification of the Retek Common Stock or any other securities of Retek under the securities laws in accordance with any state (Blue Sky laws), including filing fees and the reasonable fees and disbursements of counsel for any underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (v) the printing and delivery to any underwriters of copies of each preliminary prospectus, any term sheets and of the final prospectus and any amendments or supplements thereto, (vi) the preparation, printing and delivery to any underwriters of copies of 34 the Blue Sky Survey and any supplement thereto, (vii) the fees and expenses of any transfer agent or registrar for the Retek Common Stock or any other securities of Retek, (viii) the filing fees incident to, and the reasonable fees and disbursements of counsel to any underwriters in connection with, the review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Retek Common Stock or any other securities of Retek and (ix) the fees and expenses incurred in connection with the listing of the Retek Common Stock or any other securities of Retek on the Nasdaq Stock Market, any national securities exchange or any national over the counter quotation system. 8.3 NOTICES. All notices and communications under this Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been duly given when received addressed as follows: If to HNC, to: HNC Software Inc. 5935 Cornerstone Court West San Diego, California 92121 Attn: Chief Financial Officer Telecopy Number: (858) 452-3220 If to Retek, to: Retek Inc. Midwest Plaza 801 Nicollet Mall, 11th Floor Minneapolis, MN 55402 Attn: President Telecopy Number: (612) 630-5641 If to RIS, to: c/o Retek Inc. Midwest Plaza 801 Nicollet Mall, 11th Floor Minneapolis, MN 55402 Attn: President Telecopy Number: (612) 630-5641 Any party may, by written notice so delivered to the other party, change the address to which delivery of any notice shall thereafter be made. 8.4. AMENDMENT AND WAIVER. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one 35 or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. 8.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all the parties reflected hereon as signatories. 8.6 GOVERNING LAW; JURISDICTION; FORUM. This Agreement shall be construed in accordance with, and governed by, the internal laws of the State of California, without regard to the conflicts of law rules of such state. Each party hereto expressly submits and consents in advance to the non-exclusive jurisdiction of the State and Federal courts sitting in the City of San Diego, State of California, in any Action between the parties arising under this Agreement or under any Ancillary Agreement, and hereby waives any claim that any such state or federal court is an inconvenient or forum or improper venue. 8.7 ENTIRE AGREEMENT. This Agreement including the schedules and exhibits hereto, together with the Ancillary Agreements, constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. To the extent that the provisions of this Agreement are inconsistent with the provisions of any Ancillary Agreements, the provisions of such Ancillary Agreement shall prevail. 8.8 PARTIES IN INTEREST. None of the parties hereto may assign its rights or delegate any of its duties under this Agreement without the prior written consent of each other party; provided, however, that the rights and obligations of HNC may be assigned, without the consent of Retek or RIS, pursuant to a merger, exchange, recapitalization or other reorganization to which HNC is a party or by operation of law. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights or remedies upon any person or entity other than HNC and Retek, and HNC Indemnitees and Retek Indemnitees under Article IV hereof. 8.9 FURTHER ASSURANCES AND CONSENTS. Subject to HNC's rights of termination under Section 8.1, in addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any Consents and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement; provided that no party hereto shall be obligated to pay any consideration therefor (except for filing fees and other similar charges) to any third party from 36 whom such Consents and amendments are requested or to take any action or omit to take any action if the taking of or the omission to take such action would be unreasonably burdensome to the party or its business. 8.10 EXHIBITS AND SCHEDULES. The Exhibits and Schedules shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. 8.11 LEGAL ENFORCEABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or enforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. 8.12 TITLES AND HEADINGS. Titles and headings to Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. [THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK] 37 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the day and year first above written. HNC Software Inc. By /s/ R. V. Thomas -------------------------------------- Name: R. V. Thomas ------------------------------------ Title: CFO ----------------------------------- RETEK INC. By: /s/ Gregory A. Effertz -------------------------------------- Name: Gregory A. Effertz ------------------------------------ Title: VP, Finance and Administration ----------------------------------- RETEK INFORMATION SYSTEMS, INC. By: /s/ Gregory A. Effertz -------------------------------------- Name: Gregory A. Effertz ------------------------------------ Title: VP, Finance and Administration ----------------------------------- Attachment: List of Exhibits List of Schedules [SIGNATURE PAGE TO SEPARATION AGREEMENT] 38 LIST OF EXHIBITS Exhibit 1 - Corporate Rights Agreement Exhibit 2 - License Agreement Exhibit 3 - Services Agreement Exhibit 4 - Stock Contribution Agreement Exhibit 5 - Tax Sharing Agreement Exhibit 6 - Letter Agreement 39 LIST OF SCHEDULES Schedule 1.1(a) - Retek Contracts Schedule 2.6 - Retek Intercompany Payables and Receivables Schedule 3.1(k) - Covered Claims 40 SCHEDULE 1.1(a) TO SEPARATION AGREEMENT RETEK CONTRACTS None. There are no "Retek Contracts". 41 SCHEDULE 2.6 TO SEPARATION AGREEMENT AMONG HNC SOFTWARE INC., RETEK INC. AND RETEK INFORMATION SYSTEMS, INC. HNC, Retek and RIS hereby agree that, to the extent that this Schedule 2.6 is inconsistent or in conflict with the provisions of Section 2.6 ("Settlement and Offset of Intercompany Accounts") of this Separation Agreement ("SECTION 2.6"), the provisions and agreements set forth in this Schedule 2.6 shall govern, control and supersede. Notwithstanding the provisions of Section 2.6, the parties hereby agree that: 1) As of November 23, 1999, the Effective Date of this Agreement, the Retek Intercompany Payables exceed the Retek Intercompany Receivables. The parties also acknowledge and agree that it is difficult to complete a final computation of such amounts by November 23, 1999. 2) Based on its good faith review of its accounting records, HNC estimates that the Net Retek Closing Payable as of the Closing Date of November 23, 1999 is $9,505,000 (the "ESTIMATED RETEK PAYABLE"). 3) Retek agrees to pay HNC the full amount of the Estimated Retek Payable by no later than the second (2nd) business day after the Closing in accordance with the provisions of Section 3.3(o) of this Separation Agreement. 4) HNC agrees that, by December 31, 1999, it will complete a final determination of the Retek Intercompany Payables and the Retek Intercompany Receivables as of November 23, 1999, and the actual Net Retek Closing Payable as of November 23, 1999 (the "ACTUAL RETEK PAYABLE") and will provide Retek a written notice of HNC's determination of each of such amounts (the "DETERMINATION NOTICE") by no later than January 7, 1999. 5) The parties agree that: (a) if the Actual Retek Payable is greater than the Estimated Retek Payable, then Retek shall pay to HNC, within five (5) business days after HNC sends the Determination Notice to Retek, the amount by which the Actual Retek Payable (as set forth in the Determination Notice) exceeds the Estimated Retek Payable previously paid by Retek to HNC; and (b) if the Actual Retek Payable (as set forth in the Determination Notice) is less than the Estimated Retek Payable, then HNC shall pay to Retek, within five (5) business days after HNC has finally determined the Actual Retek 42 Payable, but in no event later than January 10, 1999, the amount by which the amount of the Estimated Retek Payable previously paid by Retek to HNC exceeds the Actual Retek Payable. 6) The parties also agree that, notwithstanding the provisions of Section 2.6, no party shall be required to deliver an Intercompany Accounts Certificate at the Closing or at any other time. HNC SOFTWARE INC. RETEK INC. By: /s/ R.V. Thomas By: /s/ Gregory A. Effertz ------------------------------- ----------------------------------- Title: CFO Title: VP, Finance and Administration --------------------------- ------------------------------- RETEK INFORMATION SYSTEMS, INC. By: /s/ Gregory A. Effertz ---------------------------------- Title: VP, Finance and Administration ------------------------------- 43 SCHEDULE 3.1(K) TO SEPARATION AGREEMENT COVERED CLAIMS The Covered Claims, if and to the extent they may be covered by any of the Policies, are as follows: 1. JDA vs. Retek - an employment issue, Retek hired JDA employees 2. Wim Ooms vs. Retek - an employee claim in the Netherlands 3. Jens Munk vs. Retek - an employee claim in Germany 4. Alan Ranson vs. Retek - an employee claim in South Africa 5. Scott Bieler vs. Retek - an employee claim in the United States 6. Kurt Waltenbaugh vs. Retek - an employee claim in the United States 7. Jeff Goke vs. Retek - an employee claim in the United States Nothing in this schedule is an admission of any liability or obligation on the part of HNC, Retek or RIS, or any of their respective directors, officers, employees, agents or stockholders, nor is HNC making any representation, warranty or agreement that any of the Covered Claims is covered under any of the Policies. EX-2.3 3 TECHNOLOGY LICENSE AGREEMENT 1 EXHIBIT 2.3 TECHNOLOGY LICENSE AGREEMENT This Technology License Agreement (this "AGREEMENT") is made and entered into as of November 23, 1999 (the "EFFECTIVE DATE"), by and between HNC Software Inc., a Delaware corporation having its principal place of business at 5935 Cornerstone Court West, San Diego, California 92121 ("HNC"), and Retek Inc. ("RETEK"), a Delaware corporation having its principal place of business at Midwest Plaza, 801 Nicollet Mall, 11th Floor, Minneapolis, MN 55402 and, solely for purposes of Section 3.3, Retek Information Systems Inc., a Delaware corporation ("RIS"). RECITALS A. As of the Effective Date, Retek is a wholly-owned subsidiary of HNC, and RIS is a wholly-owned subsidiary of HNC. B. HNC's Board of Directors has determined that it is in the best interests of HNC and its stockholders to separate the businesses of Retek and RIS from HNC's other operations. In furtherance of that objective, HNC has also determined that it is appropriate and desirable for HNC to contribute and transfer to Retek all of the capital stock of RIS which HNC owns (so that RIS will become a wholly-owned subsidiary of Retek), and that Retek issue and sell shares of its common stock in an initial public offering registered under the Securities Act of 1933, as amended, as contemplated by a Separation Agreement among HNC, Retek and RIS dated as of November 23, 1999 (the "SEPARATION AGREEMENT"). C. HNC has previously given RIS access to certain software and know-how owned by HNC, which RIS has incorporated into certain RIS products, and the parties desire to enter into this Agreement, pursuant to the Separation Agreement, in order to confirm the terms and conditions on which Retek will be licensed, on a non-exclusive basis, to use such HNC software and know-how. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE 1: CERTAIN DEFINITIONS For the purposes of this Agreement: 1.1 "DERIVATIVE WORK" mean any additions, modifications, improvements or enhancements based upon or incorporating the Licensed Technology, such as modifications, enhancements or any other form in which the Licensed Software may be recast, transformed or adapted. 2 1.2 "FIELD OF USE" means, and is limited to, the field of software products and/or software-based services that are both: (a) designed specifically to provide, automate, manage and/or otherwise facilitate any one or more of the following functions or applications for Retailers (as defined below) and/or the members of their Retail Supply Chain (as defined below): the design, manufacture, assembly, shipment, import, storage, delivery, tracking, marketing, merchandising, retail store management, inventory planning, inventory management and/or the pricing of, consumer goods sold at retail; and (b) marketed for ultimate use solely by Retailers and/or the members of their Retail Supply Chain. The "Field of Use" shall not include any functions or applications not expressly described in the preceding sentence, and shall, without limitation, not include any functions or applications relating to risk management. 1.3 "INTELLECTUAL PROPERTY RIGHTS" means, collectively, all of the following worldwide intangible legal rights, whether or not filed, perfected, registered or recorded and whether now or hereafter existing, filed, issued or acquired: (i) patents, patent applications, and patent rights, including any and all continuations, divisions, reissues, reexaminations or extensions thereof; (ii) rights associated with works of authorship, including but not limited to copyrights, copyright applications and copyright registrations, Moral Rights (as defined below); (iii) rights relating to the protection of trade secrets, know-how and other confidential information, including but not limited to rights in industrial property and all associated information and other confidential or proprietary information; (iv) industrial design rights; and (v) any rights analogous to those set forth in the preceding clauses and any other proprietary rights relating to intangible property; but specifically excluding trademarks, service marks, logos, trade dress, trade names and service names; 1.4 "LICENSED KNOW-HOW" means the proprietary know-how and trade secrets related to the Licensed Software which were delivered by HNC to Retek in tangible form on or before October 15, 1999, and all Intellectual Property Rights therein. 1.5 "LICENSED SOFTWARE" means the software described in Exhibit A hereto, in the form in which such software has been delivered by HNC to RIS prior to the Effective Date, and all Intellectual Property Rights therein. 1.6 "LICENSED TECHNOLOGY" means the Licensed Know-How and the Licensed Software, collectively. 1.7 "MORAL RIGHTS" means any rights of paternity or integrity, any right to claim authorship of, to object to or prevent any distortion, mutilation or modification of, or other derogatory action in relation to, the subject work, whether or not such would be prejudicial to the author's honor or reputation, to withdraw from circulation or control the publication or distribution of the subject work, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a "moral" right. 2 3 1.8 "PERMITTED DERIVATIVE WORK" means a software product that is a Derivative Work that is solely within the Field of Use. The term "Permitted Derivative Work" does not include any software product that addresses any different business function or functions than those expressly included within the Field of Use. 1.9 "RETAILERS" means businesses whose primary business is the sale of consumer goods at retail. 1.10 "RETAIL SUPPLY CHAIN" means wholesalers, distributors, manufacturers, suppliers, brokers, bailors and transporters of consumer goods sold at retail. ARTICLE 2: NON-EXCLUSIVE LICENSE GRANT 2.1 LICENSE GRANT. Subject to the terms, conditions and limitations of this Agreement, HNC hereby grants to Retek a non-exclusive, non-transferable, worldwide, perpetual, royalty-free (except as provided in Article 4 hereof) license under HNC's Intellectual Property Rights: (a) to use Licensed Technology internally and to copy Licensed Software internally, solely (i) for internal purposes, and/or (ii) to create and test Permitted Derivative Works; (b) to market, sell, license and distribute Licensed Software and/or Permitted Derivative Works created by Retek pursuant to the license rights granted in subparagraph 2.1(a) above, but only as an embedded component of a software product that is solely within the Field of Use; and (c) to use Licensed Technology and/or Permitted Derivative Works created by Retek pursuant to the license rights granted in subparagraph 2.1(a) above, in each case only internally and only in order to provide services that are solely within the Field of Use to Retailers and members of their Retail Supply Chains. 2.2 RESTRICTIONS. Notwithstanding anything herein to the contrary, Retek is not licensed to, and Retek expressly agrees that it shall not (and shall not permit any third party to): (a) provide any third party with access to (i) any source code of any Licensed Software or any Derivative Work of the Licensed Technology, except that Retek's licensees may be provided with source code solely for their internal use without any right to further copy or distribute such source code, which restriction shall be included in all Retek's license agreements with its licensees, or (ii) to any Licensed Know-How in any form whatsoever; (b) sublicense or otherwise allow or permit any third party to create or develop any Derivative Work of any Licensed Technology. 3 4 In addition, Retek acknowledges and agrees that, except to the extent necessary for Retek to exercise its rights under the licenses granted in this Agreement, Retek is not being granted, and will not hold, any license or other rights whatsoever with respect to HNC's proprietary context vector technology. Retek acknowledges and agrees that the restrictions set forth in this Section 2 constitute a material inducement and consideration for HNC's willingness to grant the licenses set forth in Section 2.1. Any failure of Retek to adhere to these restrictions will be considered a material failure of consideration and a material breach of this Agreement that will entitle HNC to terminate this Agreement and all Retek's rights and licenses hereunder upon written notice to Retek in accordance with the provisions of Section 10.2(b). 2.3 RESERVATION OF RIGHTS. Retek's rights in the Licensed Technology are hereby limited to those license rights expressly granted to Retek under Section 2.1 of this Agreement and all rights not expressly granted to Retek herein are expressly reserved and retained by HNC. 2.4 TRADEMARKS. Nothing herein shall be construed to grant any right or license to Retek to use any of HNC's trademarks, service marks, logos, trade dress, trade names, product names, or service names or goodwill associated therewith. 2.5 NO RIGHT TO UPDATES, ETC. Neither HNC nor any of its affiliates shall have any obligation whatsoever to provide Retek with any update, upgrade, new version, new release, modification or enhancement of any Licensed Technology. ARTICLE 3: OWNERSHIP 3.1 HNC OWNERSHIP. Retek acknowledges that HNC and its suppliers own all right, title and interest in and to the Licensed Technology and all Intellectual Property Rights therein. Retek will not delete or in any manner alter the copyright, or other proprietary rights notices of HNC appearing on or in the Licensed Technology as delivered to Retek. Retek will reproduce such notices on all copies it makes of the Licensed Technology (including Derivative Works of Licensed Technology), in whole or in part. In addition, Retek will use its reasonable efforts to protect HNC's Intellectual Property Rights in the Licensed Technology and will report promptly to HNC any infringement of such rights of which Retek becomes aware. HNC reserves the right at its discretion to assert claims against third parties for infringement or misappropriation of its Intellectual Property Rights in the Licensed Technology and to retain all compensation, damages and other amount payable to HNC with regard to such infringement or misappropriation. 3.2 RETEK OWNERSHIP. Subject to the license grants set forth in Section 2.1 and HNC's ownership rights described in Section 3.1, Retek will own all worldwide right, title and interest in and to the Permitted Derivative Works created by Retek pursuant to and in accordance with Section 2.1. Retek shall not have or acquire any right, title or interest whatsoever in or to any of the Licensed Technology or any Intellectual Property Rights 4 5 therein. Notwithstanding the provisions of this Section, Retek shall not exploit any Derivative Works created by Retek in any manner other than the manner in which Retek is expressly licensed to exploit the Licensed Technology or any Permitted Derivative Works under Section 2.1. Neither Retek nor any of its affiliates shall be obligated to license or otherwise provide HNC any Derivative Works of the Licensed Technology for HNC's use. 3.3 DFM. The parties acknowledge and agree that: (a) Retek currently markets a software product known as the "Demand Forecasting Module" (the "DFM"), which was originally known as "SkuPlan"; (b) the DFM was originally developed by HNC and its formerly existing wholly-owned subsidiary Neil Thall Associates, Inc., a Georgia corporation ("NTA") that was merged with and into RIS, with use of Underlying Technology (as defined below); and (c) the DFM has been further developed by RIS with the support and assistance of HNC and use of Underlying Technology (as defined below). The parties further acknowledge and agree that: (a) RIS owns the DFM, subject to HNC's retained ownership of the Underlying Technology (as defined below); (b) HNC shall retain ownership of the Underlying Technology and all Intellectual Property Rights associated therewith; and (c) Retek is hereby granted by HNC a perpetual, non-exclusive, irrevocable, worldwide, royalty-free license to (i) use the Underlying Technology to develop products and services with functions and applications that are solely within the Field of Use; and (ii) market, sell, license and distribute the Underlying Technology as an embedded component of the DFM and other products and services with functions and applications that are solely within the Field of Use. The term "UNDERLYING TECHNOLOGY" means any software, technology, know-how, proprietary techniques and other trade secrets that HNC provided to NTA or RIS at any time prior to October 15, 1999 for the purpose of developing the DFM and/or any prior version of the DFM. Retek acknowledges and agrees, on behalf of itself and RIS, that HNC shall be entitled to freely use, develop, license, sell, lease, market and commercially exploit any Underlying Technology in any manner. ARTICLE 4: ROYALTIES In the event that HNC's grant, or Retek's exercise, of any of the license rights set forth in this Agreement triggers an obligation on the part of HNC or any of its affiliates to pay any royalty or other payment to a third party by virtue of any agreement or fact existing on or before the Effective Date, then Retek shall be responsible for the payment of such royalties or other payments in full and shall indemnify HNC against all such royalties and other payments. ARTICLE 5: WARRANTY DISCLAIMER THE LICENSED TECHNOLOGY IS PROVIDED ON AN "AS IS" BASIS WITHOUT WARRANTY OF ANY KIND AND HNC AND ITS SUPPLIERS HEREBY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR PARTICULAR PURPOSE. HNC DOES NOT WARRANT THAT THE LICENSED TECHNOLOGY IS ERROR-FREE OR THAT IT WILL MEET RETEK'S REQUIREMENTS OR THAT THE OPERATION OF THE 5 6 LICENSED TECHNOLOGY WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT ERRORS IN THE LICENSED TECHNOLOGY OR NONCONFORMITY TO ITS DOCUMENTATION CAN OR WILL BE CORRECTED. ARTICLE 6: CONFIDENTIAL INFORMATION 6.1 DEFINITION. "CONFIDENTIAL INFORMATION" means confidential and proprietary information of HNC and its affiliates ("DISCLOSING PARTY") that is disclosed to Retek and its affiliates (collectively, "RECEIVING PARTY") which, in the case of written information, is marked "confidential" or "proprietary" and which, in the case of information disclosed orally, is identified at the time of the disclosure as confidential and proprietary and will be summarized and confirmed in writing as such by the Disclosing Party within thirty (30) calendar days of the disclosure. Confidential Information shall not include information that: (i) is now or subsequently becomes generally available to the public through no fault or breach of the Receiving Party; (ii) is independently developed by the Receiving Party after the Effective Date without the use of any Confidential Information of Disclosing Party; or (iii) the Receiving Party rightfully obtains from a third party who has the right to transfer or disclose it. Notwithstanding anything herein to the contrary, each party acknowledges that all of the Licensed Technology (in any form) shall be deemed "Confidential Information" of HNC for all purposes of this Agreement, whether or not it is so marked or designated by HNC. 6.2 NONDISCLOSURE. The Receiving Party shall not disclose, publish, or disseminate the Confidential Information of the Disclosing Party to anyone other than those of such Receiving Party's employees and consultants with a need to know, or as may by required by legal process, and the Receiving Party agrees to use the same degree of care that it takes to hold in confidence its own most valuable proprietary information, but not less than reasonable care, to prevent any unauthorized use, disclosure, publication, or dissemination of the Disclosing Party's Confidential Information. The Receiving Party agrees to accept and use the Disclosing Party's Confidential Information only for the purpose of carrying out its authorized activities under this Agreement. In the event a Receiving Party is required to disclose Disclosing Party's Confidential Information by an order of a court or governmental agency, then the Receiving Party shall first give written notice to the Disclosing Party to allow the Disclosing Party to make a reasonable effort to obtain a protective order or other confidential treatment for the Confidential Information. ARTICLE 7: INJUNCTIVE RELIEF Retek acknowledges that any breach of its obligations under this Agreement with respect to the Licensed Technology, HNC's Intellectual Property Rights or HNC's Confidential Information or any failure by Retek to use Licensed Technology strictly in accordance with the license rights granted to Retek under Section 2.1 of this Agreement and the additional restrictions contained in Section 2.2 of this Agreement will cause HNC irreparable injury for which there are inadequate remedies at law, and therefore, HNC will be entitled to equitable relief (including but not limited to injunctive relief and the remedy of 6 7 specific performance) in addition to all other rights and remedies provided by this Agreement or available at law. ARTICLE 8: INDEMNITY Retek will be solely responsible for any commercial or legal liability that may arise as a result of Retek's exercise of any of the license rights granted by HNC to Retek under this Agreement, and Retek shall defend, indemnify, and hold HNC harmless from and against any and all suits, claims, proceedings, judgments, awards, damages, loss, liability, cost and expenses (including without limitation reasonable attorney's fees and other related costs) that are incurred or suffered by HNC or any of its affiliates, directors, officers, employees, or agents to the extent they arise or result, directly or indirectly, from (i) Retek's exercise of any license or other rights granted to Retek under this Agreement; or (ii) the conduct of Retek's business directly or through any affiliate of Retek. ARTICLE 9: EXCLUSION OF DAMAGES; LIMITATION OF LIABILITY (a) IN NO EVENT SHALL HNC BE LIABLE TO RETEK OR TO ANY THIRD PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF USE, DATA, BUSINESS OR PROFITS) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE USE, OPERATION OR PERFORMANCE OF ANY OF THE LICENSED TECHNOLOGY, WHETHER SUCH LIABILITY ARISES FROM ANY CLAIM BASED UPON CONTRACT, WARRANTY, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE, AND WHETHER OR NOT HNC HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE. (b) IN NO EVENT SHALL HNC'S AGGREGATE CUMULATIVE TOTAL LIABILITY UNDER THIS AGREEMENT EXCEED $10,000. (c) THIS SECTION IS A MATERIAL INDUCEMENT AND CONDITION TO HNC FOR ENTERING INTO THIS AGREEMENT. ARTICLE 10: TERM AND TERMINATION 10.1 TERM. This Agreement will commence on the Effective Date and will remain in full force and effect thereafter unless terminated in accordance with the terms of this Agreement. 10.2 MATERIAL BREACH. (a) Subject to the provisions of Section 10.2(b), HNC shall have the right to immediately terminate this Agreement and all licenses granted by HNC hereunder upon written notice to Retek if Retek breaches any material term or condition of this Agreement and 7 8 fails to fully cure such breach within thirty (30) days after receiving written notice of such breach from HNC. (b) Notwithstanding the foregoing provisions of Section 10.2(a), and in addition to HNC's rights under Section 10.2(a), HNC shall have the right to immediately terminate this Agreement and all licenses granted by HNC hereunder upon written notice to Retek if Retek breaches any of its obligations under Section 2.1 or Section 2.2 of this Agreement and fails to fully cure such breach within four (4) business days after receiving written notice of such breach from HNC. 10.3 INSOLVENCY. Either party shall have the right to terminate this Agreement immediately upon notice to the other party if the other party: (a) becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors; or (b) becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing. 10.4 CERTAIN OTHER EVENTS OF TERMINATION. (a) Upon the occurrence of (i) any breach or violation by Retek of its obligations under Section 5.5 (Certain Post-Distribution Transactions) of the Separation Agreement; or (ii) the occurrence of any event that would trigger an indemnification obligation of Retek under Section 5.5 of the Separation Agreement, HNC shall be entitled to immediately terminate this Agreement and all Retek's rights and licenses hereunder upon giving written notice to Retek. (b) Upon the occurrence of any Change of Control (as defined below) this Agreement and all Retek's rights and licenses hereunder shall automatically terminate unless, prior to the occurrence of such Change of Control, HNC has consented to such Change of Control in a writing executed by an officer of HNC; provided that HNC will not unreasonably withhold its consent to the consummation of a Change of Control. For purposes of the preceding sentence, HNC will be deemed to have reasonably withheld its consent to a Change of Control if any person or entity who would acquire direct or indirect control (as defined below) of Retek pursuant to such Change of Control then conducts a business that is directly or indirectly competitive with a business then conducted by HNC or any of its affiliates. As used herein, the term "CHANGE OF CONTROL" means: (i) a transaction or series of related transactions that results in the sale or other disposition of all or substantially all of Retek's assets; or (ii) a merger or consolidation in which Retek is not the surviving corporation or in which, if Retek is the surviving corporation, the shareholders of Retek immediately prior to the consummation of such merger or consolidation do not, immediately after consummation of such merger or consolidation, own stock or other securities of Retek that possess a majority of the voting power of all Retek's outstanding stock and other securities and the power to elect a majority of the members of Retek's board of directors; or (iii) a transaction or series of related 8 9 transactions (which may include without limitation a tender offer for Retek's stock or the issuance, sale or exchange of stock of Retek) if the shareholders of Retek immediately prior to the initial such transaction do not, immediately after consummation of such transaction or any of such related transactions, own stock or other securities of Retek that possess a majority of the voting power of all Retek's outstanding stock and other securities and the power to elect a majority of the members of Retek's board of directors. As used herein, the term "CONTROL" (including, with correlative meanings, the terms, "CONTROLS" "CONTROLLING", "CONTROLLED BY" or "UNDER COMMON CONTROL WITH") with respect to a designated person means the possession, directly or indirectly, of the power to vote a majority of the securities having voting power for the election of directors (or other persons acting in similar capacities) of such person or otherwise to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise. 10.5 CESSATION OF BUSINESS. In the event Retek winds up, dissolves or otherwise ceases doing business, HNC shall be entitled to terminate this Agreement immediately upon written notice to Retek. 10.6 EFFECT OF TERMINATION. Upon termination of this Agreement: (a) the rights and licenses granted to Retek pursuant to this Agreement will automatically terminate, and (b) Retek shall, within thirty (30) days, ship to HNC or destroy (including purging from any system or storage media) all items all Licensed Technology and other Confidential Information in its possession or control, and an officer of Retek shall certify in writing that Retek as complied with the provisions of this Section. However, termination of this Agreement will not terminate customer software licenses validly granted by Retek in accordance with this Agreement prior to the effective date of termination of this Agreement. 10.7 NONEXCLUSIVE REMEDY. Termination of this Agreement by either party will be a nonexclusive remedy for breach and will be without prejudice to any other right or remedy of such party. 10.8 NO DAMAGES FOR TERMINATION. NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION INCIDENTAL OR CONSEQUENTIAL DAMAGES, DAMAGES FOR THE LOSS OF GOODWILL, PROSPECTIVE PROFITS OR ANTICIPATED INCOME, OR DAMAGES RESULTING FROM ANY EXPENDITURES, INVESTMENTS, LEASES OR COMMITMENTS MADE BY EITHER PARTY ON ACCOUNT OF THE TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS. 10.9 SURVIVAL. The rights and obligations of the parties under the following Articles of this Agreement shall survive any termination of this Agreement: Article 3 (Ownership), Article 4 (Royalties), Article 5 (Warranty Disclaimer) Article 6 (Confidentiality), Article 7 (Injunctive Relief), Article 8 (Indemnity), Article 9 (Exclusion of Damages), Article 10 (Term and Termination) and Article 11 (General Provisions). 9 10 ARTICLE 11: GENERAL PROVISIONS 11.1 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the internal laws of the State of California, without reference to its conflict of law rules. 11.2 COMPLIANCE WITH LAWS. Retek agrees to comply in all material respects with all applicable laws, rules, and regulations in connection with its activities under this Agreement, including without limitation, any applicable export controls imposed by the U.S. Export Administration Act of 1978, as amended (the "ACT") and the regulations promulgated under the Act. 11.3 ASSIGNMENT. Retek may not assign this Agreement or assign its license rights hereunder in whole or in part without HNC's prior written consent. Any attempt to assign this Agreement or assign or sublicense Retek's license rights hereunder without such consent will be void and of no effect. For purposes of this Agreement, any Change of Control (as defined in Section 10.4(b)) shall be governed by the provisions of Section 10.4(b) and not the provisions of this Section 11.3. Subject to the terms of this Section 11.3, this Agreement will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 11.4 ATTORNEYS' FEES. In the event that any action or proceeding is brought in connection with this Agreement, the prevailing party shall be entitled to recover its costs and reasonable attorneys' fees following a final judgment. 11.5 SEVERABILITY. If for any reason a court of competent jurisdiction finds any provision of this Agreement invalid or unenforceable, then that provision of the Agreement will not be voided, but rather will be enforced to the maximum extent legally permissible and the other provisions of this Agreement will remain in full force and effect. 11.6 INDEPENDENT CONTRACTOR. The parties to this Agreement are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise, or agency between the parties. Neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. 11.7 NOTICES. All notices required or permitted under this Agreement will be in writing and delivered by confirmed facsimile transmission, by courier or overnight delivery service, or by certified mail, and in each instance will be deemed given upon receipt. All communications to a party will be sent to the address of the party set forth in the preamble above or to such other address as may be specified by such party to the other in accordance with this Section. Either party may change its address for notices under this Agreement by giving written notice to the other party by the means specified in this Section. 10 11 11.8 COUNTERPARTS. This Agreement may be executed in counterparts, each of which will be deemed an original, but both of which together will constitute one and the same instrument. 11.9 ENTIRE AGREEMENT. This Agreement, together with the Separation Agreement, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof, superseding and replacing any and all prior and contemporaneous agreements, communications, and understandings (both written and oral) regarding such subject matter. 11.10 MODIFICATION. No modification to this Agreement, nor any waiver of any rights, shall be effective unless consented to in writing and the waiver of any breach or default shall not constitute a waiver of any other right or of any subsequent breach or default. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Effective Date by their duly authorized representatives. HNC SOFTWARE INC. RETEK INC. By: /s/ R.V. Thomas By: /s/ Gregory A. Effertz ---------------------------- ----------------------------------- Name: R.V. Thomas Name: Gregory A. Effertz ---------------------------- -------------------------------- Title: Title: C.F.O VP, Finance & Administration ---------------------------- -------------------------------- SOLELY FOR PURPOSES OF SECTION 3.3 RETEK INFORMATION SYSTEMS, INC. By: /s/ Gregory A. Effertz ----------------------------------- Name: Gregory A. Effertz --------------------------------- Title: VP, Finance & Administration -------------------------------- [SIGNATURE PAGE TO TECHNOLOGY LICENSE AGREEMENT] 11 12 EXHIBIT A TO TECHNOLOGY LICENSE AGREEMENT BETWEEN HNC SOFTWARE INC. AND RETEK INC. LICENSED SOFTWARE The Licensed Software consists of the following items of software: 1) SELECTPROFILE The SelectProfile software delivered to Retek on or about November 1998, which embodies HNC context vector technology and which includes modules for: (a) context vector learning: representing transactional data with high dimensional vectors ("CVs"), and learning the relationships between items of transactional data. (b) context vector profiling of transaction streams: representing consumers, merchants, and products, or other entities using CVs, based on their respective aggregate transactions. (c) context vector comparison: comparing CV's with each other to determine similarity, including but not limited to determining similarities between consumers, merchants, and/or products. (d) context vector clustering: grouping CV's clusters, and creating summary vectors to represent the clusters, including but not limited to the creation of merchant clusters, consumer clusters, and/or product clusters. (e) fast vector storage and retrieval: efficient storage of CVs and high speed retrieval of CVs. 2) MARKDOWN MANAGEMENT The Markdown Management software delivered to Retek on or about February 15th, 1999, which embodies dynamic programming technology for optimizing retail pricing to maximize profit. 3) MULTI-ECHELON INVENTORY MANAGEMENT The Multi-Echelon Inventory Management software delivered to Retek on or about March 15th, 1999 which embodies re-enforcement learning technology to optimize retail inventory across multiple stores and multiple distribution centers. 12 EX-2.4 4 TAX SHARING AGREEMENT 1 TAX SHARING AGREEMENT This TAX SHARING AGREEMENT ("Agreement") is made effective as of January 1, 1999 between HNC Software Inc. ("HNC"), a Delaware corporation, on behalf of itself, the Affiliated Group (as defined below) and the HNC Subgroup (as defined below), on the one hand, and Retek Inc. ("Retek"), a Delaware corporation, on behalf of Retek and the Retek Subgroup (as defined below), on the other hand. Capitalized terms used herein shall have the meanings assigned to them in Section 1 below. RECITALS WHEREAS, HNC is the common parent corporation of an Affiliated Group of corporations (as defined in Section 1504(a) of the Code) which includes Retek; WHEREAS, the Affiliated Group files consolidated federal income Tax returns under Section 1501 of the Code, so that the Tax liability of the Affiliated Group is determined under Section 1502 of the Code and the Regulations thereunder by consolidating the income, expenses, gains, losses and credits of all of the members of the Affiliated Group; WHEREAS, HNC files state Combined Returns on behalf of itself and other members of the Affiliated Group; WHEREAS, it is the intent and desire of HNC, on behalf of itself and its present and future subsidiaries other than Retek, RIS (as defined below) and Retek's and RIS' present and future subsidiaries (collectively, the "HNC Subgroup"), and Retek, on behalf of itself, RIS and Retek's and RIS' present and future subsidiaries (collectively, the "Retek Subgroup") to provide for the allocation and apportionment between the HNC Subgroup and the Retek Subgroup of responsibilities, liabilities, and benefits relating to Taxes paid or payable by the Affiliated Group, the HNC Subgroup, the Retek Subgroup or any member of any such group; WHEREAS, HNC's Board of Directors has determined that it is in the best interest of HNC and its stockholders to separate the business of Retek and Retek Information Systems, Inc. a Delaware corporation ("RIS") from HNC's other operations in accordance with the series of related transactions set forth in the Separation Agreement (the "Separation"); 2 WHEREAS, the Boards of Directors of HNC and Retek have determined that it is appropriate and desirable that Retek issue and sell shares of its common stock in an initial public offering registered under the Securities Act of 1933, as amended (the "Initial Public Offering"); and WHEREAS, HNC's current intention is that, after the closing of the Initial Public Offering, HNC may in its sole discretion elect to distribute pro rata to HNC's stockholders, as a dividend, the remaining shares of common stock of Retek which it holds after the closing of the Initial Public Offering (the "Distribution") subject to the terms, conditions and covenants set forth in the Separation Agreement. AGREEMENT NOW THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties agree as follows: 1. DEFINITIONS 1.1 "Adjustment" means an adjustment determined on an issue-by-issue or transaction-by-transaction basis, as appropriate, made or proposed by a Taxing Authority with respect to any amount reflected or required to be reflected on any Return relating to such Tax. 1.2 "Affiliated Group" means HNC, Retek and all other corporations which may now or from time to time hereafter be eligible or required to be included in a Consolidated Group Return with HNC as the common parent corporation. 1.3 "After Tax Basis" in reference to an indemnity payment under Section 5.3 shall mean an amount that, after (i) subtraction of the aggregate additional Taxes incurred or to be incurred by the party receiving the indemnity payment as a result of the receipt of such payment and (ii) addition of the tax benefit to the party receiving the indemnity payment on account of the Adjustment to which such indemnity payment relates, is equal to the amount of the Tax Adjustment. "After-Tax Basis" in reference to a benefit payment under Section 5.3 shall mean an amount that, after (i) addition of the aggregate additional Taxes incurred or to be incurred by the party making the benefit payment on account of the Tax benefit to which such benefit payment relates and (ii) subtraction of the Tax benefit to the party making the benefit payment as a result of the making of such payment, is equal to the amount of the Tax benefit. For purpose of determining such additional Taxes incurred or to be incurred and such Tax benefit, the following assumptions will be used: (a) in the case of any income Tax, the highest marginal Tax rate or, in 2 3 the case of any other Tax, the highest applicable Tax rate, in each case in effect with respect to that Tax for the Taxable period or any portion of the Taxable period to which the indemnity payment or benefit payment relates; and (b) such determination shall be made without regard to whether any actual additional Taxes or Tax benefit will in fact be realized with respect to the Return to which such payment relates. 1.4 "Carryforward Tax Attribute" means a deductible or creditable consolidated Federal tax attribute, including, but not limited to, (i) a consolidated net operating loss, a consolidated net capital loss, a consolidated unused foreign investment credit, a consolidated unused foreign tax credit, or a consolidated excess charitable contribution (see Section 1.1502-79 of the Regulations), and (ii) the consolidated minimum tax credit, or other consolidated general business credits, that can be carried forward from one tax period to subsequent tax periods. 1.5 "Code" means the U.S. Internal Revenue Code of 1986, as amended. 1.6 "Combined Return" means the Return of state income or franchise Tax filed by a group of controlled corporations on a unitary basis as opposed to a separate company basis. 1.7 "Consolidated Group Return" means, with respect to any Consolidated Return Year, the federal income Tax return of the Affiliated Group for such Consolidated Return Year. 1.8 "Consolidated Period" means that period of time during which Retek is a member of the Affiliated Group. 1.9 "Consolidated Return Date" means each date upon which the Consolidated Group Return is filed. 1.10 "Consolidated Return Year" means any Taxable year or period during which HNC owns outstanding stock of Retek in such amounts and having such characteristics as shall meet the requirements of Section 1504(a)(1) of the Code. 1.11 "Distribution Date" means the date on which the Distribution occurs. 1.12 "Effective Date" means January 1, 1999. 1.13 "Estimated Payment Date" means each date occurring during any Consolidated Return Year upon which the Consolidated Group is required to make a payment of estimated Tax, whether or not such a payment is due, for such Consolidated Return Year. 3 4 1.14 "Extension Payment Date" means, with respect to any Consolidated Return Year, any date upon which the Affiliated Group shall be required to make a payment of federal income Taxes in connection with any request by HNC, on behalf of the Affiliated Group, for an extension of the date upon which it would have been required, absent such extension, to file its federal income Tax return for such Consolidated Return Year. 1.15 "Final Determination" means (a) a decision, judgment, decree or other order by any court of competent jurisdiction, which has become final and is either no longer subject to appeal or for which a determination not to appeal has been made; (b) a closing agreement made under Section 7121 of the Code or any comparable foreign, state, local, municipal or other Taxing statute; (c) a final disposition by any Taxing Authority of a claim for refund; or (d) any other written agreement relating to an Adjustment to which any Taxing Authority is a party the execution of which is final and prohibits such Taxing Authority from seeking any further legal or administrative remedies with respect to such Adjustment. 1.16 "Group Refund Claim" means any claim filed by HNC on behalf of the Affiliated Group for a refund of federal income Taxes or on behalf of the Unitary Group for a refund of state income Taxes. 1.17 "HNC Tax Adjustment" shall mean, with respect to any Taxable period or portion of a Taxable period, and as computed separately with respect to each Tax, the net increase in each such Tax equal to the sum of all Tax Adjustments made pursuant to a Final Determination with respect to each such Tax for each such Taxable period or portion of a Taxable period that are attributable to the income, assets and/or business of any member of the HNC Subgroup; provided, however, that any Tax Adjustment comprising a Restructuring Adjustment shall not be considered in determining the amount of any HNC Tax Adjustment. 1.18 "HNC Tax Benefit" shall mean, with respect to any Taxable period or portion of a Taxable period, and as computed separately with respect to each Tax, the net decrease in each such Tax equal to the sum of all Tax Adjustments made pursuant to a Final Determination with respect to each such Tax for each such Taxable period or portion of a Taxable period that are attributable to the income, assets and/or business of any member of the HNC Subgroup; provided, however, that any Tax Adjustment comprising a Restructuring Adjustment shall not be considered in determining the amount of any HNC Tax Benefit. 1.19 "IRS" means the United States Internal Revenue Service. 4 5 1.20 "Person" means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, or any other entity regardless of the type or nature thereof. 1.21 "Regulations" means the Regulations issued by the Secretary of the Treasury interpreting the Code. 1.22 "Restructuring Adjustment" shall mean, with respect to any Taxable period or portion of a Taxable period, and as computed separately with respect to each Tax, the net increase or decrease in each such Tax, as the case may be, equal to the sum of all Tax Adjustments made pursuant to a Final Determination with respect to each such Tax for each Taxable period or portion of a Taxable period that are attributable to, or are a result of, the Separation, the Initial Public Offering or the Distribution. 1.23 "Retek Tax Adjustment" shall mean, with respect to any Taxable period or portion of a Taxable period, and as computed separately with respect to each Tax, the net increase in each such Tax equal to the sum of all Tax Adjustments made pursuant to a Final Determination with respect to each such Tax for each such Taxable period or portion of a Taxable period that are attributable to the income, assets and/or business of any member of the Retek Subgroup; provided, however, that any Tax Adjustment comprising a Restructuring Adjustment shall not be considered in determining the amount of any Retek Tax Adjustment. 1.24 "Retek Tax Benefit" shall mean, with respect to any Taxable period or portion of a Taxable period, and as computed separately with respect to each Tax, the net decrease in each such Tax equal to the sum of all Tax Adjustments made pursuant to a Final Determination with respect to each such Tax for each such Taxable period or portion of a Taxable period that are attributable to the income, assets and/or business of any member of the Retek Subgroup; provided, however, that any Tax Adjustment comprising a Restructuring Adjustment shall not be considered in determining the amount of any Retek Tax Benefit. 1.25 "Return" means any return, report, form or similar statement or document (including, without limitation, any related or supporting information or schedule attached thereto and any information return, claim for, amended return and declaration of estimated Tax) that has been or is required to be filed with any Taxing Authority or that has been or is required to be furnished to any Taxing Authority in connection with the determination, assessment or collection of any Taxes or the administration of any laws, regulations or administrative requirements relating to any Taxes. 5 6 1.26 "Separate Return Period" means that period of time during which Retek is not a member of the Affiliated Group. 1.27 "Separation Agreement" means the Separation Agreement, dated as of November 23, 1999 by and among HNC, Retek and RIS. 1.28 "Tax" (and, with correlative meanings, "Taxes" and "Taxable") means, without limitation, and as determined on a jurisdiction-by-jurisdiction basis, each foreign or U.S. federal, state, local or municipal income, alternative or add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, value added or any other tax, custom, tariff, impost, levy, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, or penalty, addition to tax or additional amount related thereto, imposed by any Taxing Authority. 1.29 "Tax Adjustment" shall mean the deemed increase or decrease in a Tax, determined on an issue-by-issue or transaction-by-transaction basis, as appropriate, and using the assumptions set forth in the next sentence, resulting from an adjustment made or proposed by a Taxing Authority with respect to any amount reflected or required to be reflected on any Return relating to such Tax. For purpose of determining such deemed increase or decrease in a Tax, the following assumptions will be used: (a) in the case of any Income Tax, the highest marginal Tax rate or, in the case of any other Tax, the highest applicable Tax rate, in each case in effect with respect to that Tax for the Taxable period or any portion of the Taxable period to which the adjustment relates; and (b) such determination shall be made without regard to whether any actual increase or decrease in such Tax will in fact be realized with respect to the Return to which such adjustment relates. 1.30 "Taxing Authority" means any governmental authority or any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or other imposition of Taxes. 1.31 "Tax Contest" means, without limitation, any audit, examination, claim, suit, action or other proceeding relating to Taxes in which an Adjustment to Taxes may be proposed, collected or assessed and in respect of which an indemnity payment, reimbursement or other payment may be sought under this Agreement. 6 7 1.32 "Unitary Group" means HNC, Retek and all other corporations which may now or from time to time hereafter be eligible or required to be included in a Combined Return with HNC. 2. FILING OF CONSOLIDATED RETURNS 2.1 Consent to File. Retek hereby consents to the filing of Consolidated Group Returns by HNC on behalf of the Affiliated Group, including Retek and the Retek Subgroup, for each Consolidated Return Year, and to any applications for extensions of time to file such Returns which HNC in its sole judgment shall make to the IRS. Retek hereby consents to the filing of Combined Returns by HNC on behalf of the Unitary Group, including Retek and the Retek Subgroup, for each year (or portion thereof) in which HNC owns, directly or indirectly, 50% or more of the equity of Retek, and to any applications for extensions of time to file such Returns which application HNC in its sole judgment shall make to the applicable Taxing Authorities. 2.2 Responsibility for Preparing and Filing. HNC shall be entitled to prepare and file and shall be responsible for the preparation and filing, of the Consolidated Group Returns and any Combined Returns, including but not limited to determining all Tax Return positions, paying estimated taxes and other consolidated Taxes and making all federal and state tax elections for the Affiliated Group and/or the Unitary Group and each member of such groups; provided, however, that at least 10 days prior to filing any Consolidated Group Return, HNC shall provide Retek the opportunity to review the portion of such draft Consolidated Group Return that reflects the income and operations of the Retek Subgroup. Retek shall communicate its comments, if any, to HNC at least 5 days prior to the due date, including extensions, for filing such Tax return. 2.3 Further Action. Retek agrees, at HNC's request, to furnish to HNC and/or any Taxing Authority any and all information and to execute all elections and other documents which may be necessary or appropriate, in the judgment of HNC, to evidence Retek's consent or to facilitate the preparing and filing of such Returns and applications for extension of time to file such Returns. This obligation applies to all Tax Returns for any Consolidated Return Year even if such Return is filed after Retek is no longer a member of the Affiliated Group. 3. ALLOCATION AND PAYMENT OF LIABILITIES FOR TAXES 3.1 Federal Income Taxes for Periods Commencing on and after the Effective Date. HNC (on behalf of itself and other members of the HNC Subgroup) and Retek (on behalf of itself and other members of the Retek Subgroup) agree to determine and allocate the federal income Tax liability of the Affiliated Group among themselves in the following manner: 7 8 (a) For each Taxable period commencing on or after the Effective Date in which Retek and/or any other member of the Retek Subgroup is included in the Affiliated Group, the Retek Subgroup shall be allocated, and Retek shall pay to HNC as provided in this Section 3 and in Section 4 an amount equal to, the federal income Tax liability, if any (including any alternative minimum Tax), of Retek and/or the other member(s) of the Retek Subgroup included in the Affiliated Group, as determined by HNC in accordance with the methods set forth in this Section 3.1. Such federal Tax liability shall equal the hypothetical separate return Tax liability of the Retek Subgroup, as determined in accordance with the provisions of Treasury Regulations Section 1.1552-1(a)(2)(ii) (treating references to a "member" therein as references to the Retek Subgroup, and including the adjustments under clauses (a)-(i) thereof) as if the Retek Subgroup had filed a separate consolidated federal income Tax Return. If the Retek Subgroup's federal Tax liability as so determined is zero, then HNC shall pay to Retek an amount equal to the excess, if any, of the HNC Subgroup's federal income Tax liability, determined as if the HNC Subgroup had filed a separate consolidated federal income Tax Return for such Taxable period or portion thereof (and any Taxable year of the HNC Subgroup to which a net operating loss or other Tax item of the Retek Subgroup is carried) under the same principles as set forth in the preceding sentence, over the actual federal income Tax liability of the Affiliated Group for such Taxable period or portion thereof (or such year to which such item is carried). (b) For purposes of determining and allocating Tax liabilities and payment obligations for Tax periods commencing on or after the Effective Date, (i) the Retek Subgroup's federal and state income Tax liability will be computed by HNC in a manner consistent with HNC's policies and procedures for accounting for income taxes for financial statement purposes; (ii) the benefit of the graduated Tax rates provided under Section 11 of the Code and any alternative minimum Tax exemption amount under Section 55 of the Code shall be allocated to the Retek Subgroup in proportion to the ratio of the Retek Subgroup's federal Tax liability to the total federal Tax liability of the Affiliated Group (computed without regard to such benefit); and (iii) items not otherwise specifically addressed hereunder shall be allocated between the Retek Subgroup and the HNC Subgroup by HNC in a manner that reasonably reflects the provisions, purposes and intent of this Agreement. (c) The Retek Subgroup's federal income Tax liability for the Taxable year during which Retek ceases to be a member of the Affiliated Group shall be determined in accordance with the provisions of Regulations Section 1.1502-76(b)(2) by closing the books of Retek and the other members of the Retek Subgroup as of the end of the last day of the Consolidated Return Year and taking into account only items accruing during the portion of the Taxable year ending on such date in computing such liability. Items shall not be pro-rated in 8 9 accordance with clauses (ii) or (iii) of Section 1.1502-76(b)(2) of the Regulations except to the extent HNC in its discretion determines that it is impracticable to allocate particular items in accordance with the preceding sentence. (d) The parties acknowledge that the allocation of federal Tax liability provided for by this Section 3.1 is for purposes of determining the parties' actual payment obligations to each other with respect to Taxes of the Affiliated Group for the Consolidated Return Year and not for purposes of computing earnings and profits pursuant to Section 1552 of the Code. HNC and Retek each recognizes that such allocation may differ from the allocation provided by Section 1552 for earnings and profits purposes. (e) It is acknowledged that allocation of the consolidated federal income Tax liability for the Affiliated Group under Section 1.1552-1(a) of the Regulations shall (in accordance with Section 1.1552-1(b)(2) of the Regulations), in the amount allocated to each member of the HNC Subgroup and the Retek Subgroup, decrease the earnings and profits of such member and be treated as a liability of such member for such amount. It is further acknowledged that if allocations of federal income Tax liability in accordance with Section 3.1 of this Agreement differ from the allocations in accordance with Section 1.1552-1(a)(1), HNC and Retek hereby agree that such differences will not create liabilities and receivables, but rather will be regarded as distributions with respect to stock, contributions to capital, or combinations thereof, as applicable. 3.2 State Income and Franchise Taxes for Periods Commencing on or after the Effective Date. (a) For each Taxable period commencing on or after the Effective Date for which Retek and/or any other member of the Retek Subgroup is included in any Combined Return filed by the Unitary Group, the Retek Subgroup shall be allocated, and Retek shall pay to HNC in accordance with this Section 3.2 and Section 4 an amount equal to, the state income Tax liability of Retek and/or such other Retek Subgroup members that are so included, as determined under this Section 3.2. Such state income Tax liability shall equal the hypothetical state income Tax liability of the Retek Subgroup members so included, computed as if they filed a Combined Return (or if only one such member is so included, a separate state income or franchise Tax return ) including only such included member(s). To the extent that the same or analogous federal consolidated reporting principles as are referred to in Section 3.1 apply for purposes of filing such Combined Return(s), then such principles shall also apply for purposes of determining the Retek Subgroup's state Tax liability in respect of any Combined Return of the Unitary Group. If the state income Tax liability of the Retek Subgroup as so determined is zero, then HNC shall pay to 9 10 Retek an amount equal to the excess, if any, of the HNC Subgroup's state income Tax liability, determined as if the HNC Subgroup had filed a separate Combined Return not including any Retek Subgroup members, over the actual state income Tax liability of the Unitary Group. HNC shall have the discretion to determine each subgroup's liability for Taxes under this Section 3.2(a) in any manner that is reasonable in light of the applicable state and local Tax reporting principles and the purposes and intent of this Agreement. (b) Retek shall be responsible for payment of any state Taxes due from it or any members of the Retek Subgroup, and HNC shall be responsible for payment of any state Taxes due from HNC or any member of the HNC Subgroup, in connection with state income or franchise Returns that are not Combined Returns. Retek shall be responsible for preparing and filing any state Tax returns, other than Combined Returns, for itself and the Retek Subgroup. (c) To the extent that HNC pays any Tax on behalf of any member of the Retek Subgroup, Retek shall reimburse HNC with ten (10) days of receipt of an invoice requesting payment thereof. 4. ESTIMATED PAYMENTS OF TAX SHARING LIABILITY 4.1 Hypothetical Tax Computation and Payment Thereof. At least three (3) days prior to each Estimated Payment Date of each Consolidated Return Year, HNC shall deliver to Retek hypothetical computations of estimated Tax for Retek reflecting the amounts, if any, of the estimated payment of federal and/or state income Taxes and franchise Taxes for such Consolidated Return Year, as applicable, which Retek would have been required to pay on such Estimated Payment Date if it were not included in the Affiliated Group or Unitary Group (calculated in accordance with Article 3). Retek shall pay to HNC, on such Estimated Payment Date, the amounts reflected as owing in such hypothetical computations. 4.2 Extension Payments. Notwithstanding Section 4.1, if HNC shall request an extension of time to file the Consolidated Group Return and/or the Combined Return for any Consolidated Return Year, HNC shall compute the hypothetical amounts of the federal or state income Tax payment, as applicable, which would have been payable by Retek on such Extension Payment Date had Retek requested such an extension and had Retek not been included in the Affiliated Group or Unitary Group during such Consolidated Return Year (calculated in accordance with Article 3). Retek shall pay to HNC, on such Extension Payment Date, the amounts computed by HNC. 10 11 4.3 Waiver. HNC, in its sole discretion, may waive on an annual basis the requirement for Retek to make the estimated Tax payments as described in this Section 4. 4.4 Date Consolidated Group and/or Combined Return Filed. HNC shall compute the hypothetical amount of the federal, state and/or franchise Tax which would have been payable by Retek on such actual filing date had Retek not been included in the Affiliated Group or Unitary Group during such Consolidated Return Year (calculated in accordance with Section 3). Retek shall pay to HNC the amount computed, less the aggregate of any amounts previously paid on each Estimated Payment Date and Extension Payment Date pursuant to this Section 4. Retek shall pay HNC the computed amount owed within ten (10) days of the later of (i) the date on which the Tax Return is filed, or (ii) receipt of an invoice showing the computed amount owed. If the aggregate amounts paid by Retek on the Estimated Payment Dates and Extension Payment Dates for a Consolidated Return Year exceed the computed hypothetical federal, state and/or franchise Tax payable by Retek, then HNC shall refund to Retek any such excess amount within ten (10) days of filing the applicable Tax Return. 5. DISPUTES WITH TAXING AUTHORITIES 5.1 Confirmation of Authority. In the event of a Tax Contest with the IRS or any other Taxing Authority concerning the amount of any Tax liability of or refund due to the Affiliated Group or any member thereof for any Consolidated Return Year, and in connection with every Group Refund Claim or other claim for refund of Tax for any Consolidated Return Year, Retek hereby expressly confirms, with respect to federal income Tax liability, the authority granted to HNC in Regulations Section 1.1502-77 (and in any successor provision thereto) of the Regulations to act on behalf of Retek and the Retek Subgroup notwithstanding that Retek may be liable for additional tax or for additional payments to HNC. With respect to such federal Taxes and all other Taxes, Retek hereby expressly and irrevocably appoints HNC to be its sole agent and expressly relinquishes any rights it may have to act for or represent itself in any manner in any such Tax Contest or with respect to any such Group Refund Claim related to the time period in which Retek and/or any member of the Retek Subgroup is a member of the Affiliated Group. Retek hereby authorizes HNC and its representatives to pursue such Tax Contest, Group Refund Claim, or other claim for refund of Tax either administratively or by court action. Retek hereby irrevocably agrees that HNC shall have the exclusive right, on behalf of Retek and the Retek Subgroup, to make any and all decisions to pursue, settle, or appeal any Tax Contest, Group Refund Claim or other claim for refund of Tax, and to control all administrative and court proceedings and any and all negotiations and settlements related thereto. Retek hereby expressly consents to HNC entering into settlements on its behalf and on behalf of the Retek Subgroup, as 11 12 HNC deems appropriate in its sole discretion, exercised in good faith; provided, however, that prior to settling an issue that would give rise to Tax Adjustment for which Retek or a member of the Retek Subgroup would be liable under this Agreement, Retek shall have the right and opportunity to review such settlement. HNC may, in its sole discretion, exercised in good faith, accept or reject any suggestions made by Retek with respect to such settlement; provided, however, that HNC shall not reject any suggestion made by Retek if to do so would be unreasonable. Retek may assist in the defense of audit issues arising from its operations, at its own expense, subject to the direction and control of HNC. Retek shall reimburse HNC for all reasonable out-of pocket expenses (including, with limitation, legal, consulting and accounting fees) in the course of a Tax Contest regarding an item of the Retek Subgroup for any Taxable period during which the Retek Subgroup was a member of the Affiliated Group to the extent such expenses are reasonably attributable to such Tax Contest. 5.2 Agreement to Cooperate. Retek agrees to cooperate and cause the Retek Subgroup to cooperate fully and in a timely manner with HNC in connection with the preparation of Tax Returns, the pursuit of any Group Refund Claim or other claim for refund of Taxes or the conduct of any Tax Contest for any Consolidated Return Year, at Retek's own expense by taking any and all action that may be necessary or helpful, as requested by HNC, including (without limitation) furnishing to HNC access to and copies of all records and documents and making personnel available for interviews and testimony. This agreement to cooperate extends beyond the date after which Retek is no longer a member of the Affiliated Group. 5.3 Adjustments. (a) In the event there is an Adjustment, made pursuant to a Final Determination, of an item of income, gain, loss, deduction, or credit with respect to any Return of any member of the Affiliated Group for any Taxable period during which Retek and/or any other member of the Retek Subgroup is or was a member of the Affiliated Group: (i) Retek shall be liable for, and shall indemnify and hold harmless, as appropriate, any member of the HNC Subgroup, on an After Tax Basis against any and all Retek Tax Adjustments; (ii) Retek shall be entitled to any Retek Tax Benefits on an After Tax Basis; 12 13 (iii) HNC shall be liable for, and shall indemnify and hold harmless, as appropriate, any member of the Retek Subgroup on an After Tax Basis against any and all HNC Tax Adjustments; and (iv) HNC shall be entitled to receive on an After Tax Basis the amount of any HNC Tax Benefits. (b) HNC and Retek shall share the amount of any Tax Adjustment, other than a Restructuring Adjustment, if, and to the extent, each party is liable for and/or has an obligation to make, or has the right to receive, as the case may be, any indemnity payment, or other payment with respect to such Tax Adjustment under Section 5.3(a), in proportion to the amounts of the underlying Adjustments giving rise to such Tax Adjustment attributable to the HNC Subgroup and the Retek Subgroup respectively. (c) HNC and Retek shall share the amount of any Tax Adjustment, other than a Restructuring Adjustment, not covered by Section 5.3(a) or Section 5.3(b) above in proportion to the amounts of the underlying Adjustments related to such Tax Adjustment attributable to the HNC Subgroup and the Retek Subgroup respectively. (d) Notwithstanding any other provision of this Agreement, Retek shall be liable for, and shall indemnify and hold harmless, as appropriate, any member of the HNC Subgroup on an After Tax Basis against any and all Restructuring Adjustments arising out of, or in connection with, the Separation or the Initial Public Offering. (e) The indemnification provisions of this Agreement shall supplement the indemnification provisions of the Separation Agreement. In particular, the Separation Agreement provides for indemnification with respect to any Restructuring Adjustment arising out of, or in connection with, the Distribution. To the extent there is any conflict between the indemnification provisions of this Agreement and the indemnification provisions of the Separation Agreement, the indemnification provisions of the Separation Agreement shall control. (f) Indemnity payments and other amounts required to be paid under Sections 5.3(a), 5.3(b) 5.3(c) and 5.3(d) shall be paid within 60 days of the date of such Final Determination. HNC shall provide Retek with prompt written notice of each such Final Determination. 13 14 6. DISTRIBUTION TAXES AND TAX ATTRIBUTE CARRYOVERS 6.1 Taxes Relating to the Distribution. Notwithstanding any statement herein to the contrary, any Taxes relating to or arising out of the Distribution shall be governed by Article V of the Separation Agreement. 6.2 Carryforward Tax Attributes. The Carryforward Tax Attributes available to Retek for Separate Return Periods will be determined by allocating the Carryforward Tax Attributes of the HNC Group to tax periods beginning after the Distribution Date among the HNC Subgroup and Retek Subgroup as described below: (a) Federal Tax Attributes. Any Carryforward Tax Attributes allocable to Retek or a member of the Retek Subgroup shall remain with Retek or such member. The portion, if any, of any HNC Group consolidated unused foreign tax credit which is allocable to Retek shall be determined separately with respect to each of the items of income listed in Section 904(d) of the Code. (b) State or Local Income Tax Attributes. No tax attributes arising from state or local Income Tax Returns shall be allocated to Retek, unless under the provisions of applicable state law or state regulations such tax attributes are expressly required to be allocated to Retek. 6.3 Carryback Items from Separate Return Tax Periods. With respect to carrybacks of Retek or net operating losses, net capital losses, unused tax credits and other deductible or creditable Tax attributes to a Consolidated Period from a Separate Return Period which would be permitted under the Code and the Regulations (or state law or state regulations), Retek shall make an irrevocable election under Regulations Section 1.1502-21(b)(3)(i) (or comparable state law or state regulations), to relinquish any carryback period which would include the Consolidated Period. In cases where Retek cannot relinquish the carryback period or, if the parties otherwise agree, HNC shall cooperate with Retek in seeking Tax refunds from the appropriate Taxing Authority, at Retek's expense, and Retek shall be entitled to such refund, including interest paid by the Taxing Authority in connection with such refund; provided however, that Retek shall indemnify and hold HNC harmless from and against any and all collateral Tax consequences, including interest, resulting from or caused by the carryback of deductible or creditable Tax attributes by Retek from a Separate Return Period to a Consolidated Period, including but not limited to, Tax attributes of HNC that expire unused (including Tax attributes that expire during a Tax period subsequent to the Tax period during which the Retek Tax attribute carried back was generated) and which would have been used but for Retek's carryback. The amount of such indemnity shall be limited to the actual Tax benefits to which HNC would 14 15 have been entitled in the absence of the carryback of the deductible or creditable Tax attribute of Retek. Retek shall have the right to review the collateral Tax consequences being indemnified. The amount of the refund due to Retek from HNC shall be reduced and offset by the amount of the indemnification, if any. 6.4 Post-Consolidated Period Taxes. (a) HNC shall indemnify and hold Retek and the Retek Subgroup harmless for any Taxes relating to Tax Returns of HNC or the HNC Subgroup for any Separate Return Period. (b) Retek shall indemnify and hold HNC and the HNC Subgroup harmless for any Taxes relating to Tax Returns of Retek or the Retek Subgroup for any Separate Return Period. 7. PRIORITY OF AGREEMENT 7.1 Fixing of Liability. The provisions of this Agreement shall determine and fix the liability of the parties to each other as to the matters provided for herein, regardless of how the payments made pursuant hereto are treated for Tax purposes. 8. OTHER GROUP MEMBERS 8.1 Agreements. HNC and Retek recognize that other corporations are now or may from time to time hereafter become members of the Affiliated Group and it may become appropriate to adopt different or additional methods of sharing Taxes. Retek, on behalf of itself and the Retek Subgroup, hereby authorizes HNC to enter into the same, similar or different supplemental, conflicting or replacement Tax sharing agreements on behalf of the Affiliated Group (including Retek and the Retek Subgroup) with any corporation which is now or may hereafter become a member of the Affiliated Group. 9. RECORDS 9.1 Retention by HNC. HNC shall, until the end of the applicable statute of limitations for each Tax year (giving effect to any extensions thereof), retain all material, including but not limited to, returns, supporting schedules, workpapers, correspondence, and other documents relating to the Consolidated Group Returns and Combined Returns filed for a Taxable year during which Retek is a member of the Affiliated Group and shall make such items available to Retek for inspection or copying (at Retek's expense) during HNC's regular business hours. 15 16 9.2 Retention by Retek. Retek shall, until the end of the applicable statute of limitations for each Tax year (giving effect to any extensions thereof), retain all material, supporting schedules, workpapers, correspondence, and other documents relating to Consolidated Group Returns and Combined Returns filed for a Taxable year during which Retek is a member of the Affiliated Group and shall make such items available to HNC for inspection or copying (at HNC's expense) during Retek's regular business hours. 10. TERM AND TERMINATION 10.1 Term. This Agreement shall be effective as of January 1, 1999, and shall apply to and govern all subsequent Taxable periods, unless the parties hereto each agree in writing to terminate this Agreement. Notwithstanding any such termination, this Agreement shall continue in effect with respect to any payment due from one party to the other with respect to any Taxable period occurring prior to the effective date of the termination of this Agreement. 11. MISCELLANEOUS 11.1 Governing Law. The internal laws of the State of California (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms and the interpretation and enforcement of the rights and duties of the parties hereto. 11.2 Assignment; Binding Upon Successors and Assigns. Retek may not assign, whether voluntarily or by operation of law, any of its rights or obligations hereunder without the prior written consent of HNC, which consent may be withheld in its sole discretion. HNC may assign its rights (but not its obligations) under this Agreement without the consent of Retek; provided, however, that the rights and obligations of HNC may be assigned, without the consent of Retek, pursuant to a merger, exchange, recapitalization or other reorganization to which HNC is a party or by operation of law. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Any member corporation which leaves the Affiliated Group shall be bound by this Agreement. 11.3 Severability. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business, Tax and other purposes of the void or unenforceable provision. 16 17 11.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all the parties reflected hereon as signatories. 11.5 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy will not preclude the exercise of any other. 11.6 Amendment and Waivers. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. Failure by either party, at any time, to require performance by the other party or to claim a breach of any provision of this Agreement shall not be construed as a waiver of any right accruing under this Agreement, nor shall it affect any subsequent breach or the effectiveness of this Agreement or any part hereof, or prejudice either party with respect to any subsequent action. 11.7 Expenses. Unless otherwise provided, all fees and expenses incurred in connection with this Agreement will be paid by the party incurring such fees or expenses. 11.8 Attorneys' Fees. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party will be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees to be fixed by the court (including, without limitation, costs, expenses and fees on any appeal). The prevailing party will be entitled to recover its costs of suit, regardless of whether such suit proceeds to final judgment. 11.9 Dispute Resolution. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement and shall attempt in good faith to negotiate a settlement of any dispute pursuant to the following process: (a) Any party having a dispute or claim shall give the other party written notice stating the nature of the dispute in reasonable detail. Within ten (10) business days after delivery of the notice, the receiving party shall submit to the other a written response also in reasonable 17 18 detail. Within five (5) business days after delivery of the written response the Chief Financial Officer (or other individual who has authority to settle the controversy and who has direct responsibility for administration of the relationships established pursuant to this Agreement) for each party shall meet (in person or by telephone) at a mutually acceptable time and place (including telephonic conference), and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other shall be honored. (b) If such matter has not been resolved within ten (10) business days of the referral of the dispute to the Chief Financial Officers, then the parties may pursue litigation or, if mutually agreed, alternative dispute resolution mechanisms. 11.10 Notices. All notices and other communications pursuant to this Agreement shall be in writing and deemed to be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the addresses indicated on the signature page of this Agreement (or at such other address for a party as shall be specified by like notice). All such notices and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of a telecopy, when the party receiving such copy shall have confirmed receipt of the communication, (c) in the case of delivery by nationally-recognized overnight courier, on the business day following dispatch, and (d) in the case of mailing, on the tenth business day following such mailing. Failure of a party to provide notice in a prescribed time period or in a timely manner shall not constitute a waiver of the other party's obligation hereunder. Where notice is a condition to payment, the obligation to make the payment shall not be waived, forgiven or eliminated by virtue of a failure to give notice; however, the time period in which an amount must be paid shall be measured from the date on which notice is actually given. 11.11 Representation by Counsel. Each of the parties hereto is represented by separate counsel of its own choosing. Each of the parties hereto has had an opportunity to ask questions of and receive advice from its counsel regarding the terms and conditions of this Agreement. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof will not be construed for or against either party, notwithstanding that as of the date hereof Retek is a wholly-owned subsidiary of HNC. 11.12 Construction of Agreement. A reference to a Section will mean a Section in this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference 18 19 purposes only and will not in any manner limit the construction of this Agreement which will be considered as a whole. 11.13 Jurisdiction and Venue. The parties hereto irrevocably consent to and agree that any litigation or other dispute resolution proceeding among the parties relating to this Agreement will take place in San Diego County, California. The parties hereby irrevocably consent to the personal jurisdiction or and the venue in the state and federal court within such county. 11.14 Further Assurances. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to evidence and reflect the transactions contemplated hereby and to carry into effect the intents and purposes of this Agreement. 11.15 Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto. 19 20 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers. HNC SOFTWARE INC. RETEK, INC. on behalf of itself and the HNC on behalf of itself and the Retek Subgroup Subgroup By: /s/ R.V. Thomas By: /s/ Gregory A. Effertz --------------------------- ------------------------------- Name: R.V. Thomas Name: Gregory A. Effertz --------------------------- ------------------------------- Title: C.F.O. Title: V.P. Finance and Administration --------------------------- ------------------------------- Address for Notice: Address for Notice: - ------------------- ------------------- HNC Software Inc. Retek, Inc. 5935 Cornerstone Court West Midwest Plaza San Diego, CA 92121 801 Nicollet Mall, 11th Floor FAX: (858) 452-3220 Minneapolis, MN 55402 FAX: (612) 630-5641 Attention: Chief Financial Officer Attention: Chief Financial Officer EX-2.5 5 SERVICES AGREEMENT 1 EXHIBIT 2.5 SERVICES AGREEMENT This SERVICES AGREEMENT (this "Agreement") is made and entered into effective as of November 23, 1999 (the "Effective Date") by and among HNC Software Inc., a Delaware corporation ("HNC"), on the one hand, and Retek Inc., a Delaware corporation ("Retek") and Retek Information Systems, Inc., a Delaware corporation ("RIS"), on the other hand. RECITALS A. Retek is currently a wholly-owned subsidiary of HNC and receives administrative and other services from HNC. RIS is also a wholly-owned subsidiary of HNC. B. Retek is considering carrying out an initial public offering of shares of its Common Stock pursuant to a registration statement filed under the Securities Act of 1933 ("Public Offering"). C. After the final closing of the Public Offering, HNC will own approximately 86.3% of the outstanding shares of Retek's Common Stock (the "Retained Shares") and, pursuant to the terms of a Separation Agreement dated as even date herewith (the "Separation Agreement") among HNC, Retek and RIS, HNC will contribute to Retek all shares of RIS's outstanding stock held by HNC so that RIS will become a wholly-owned subsidiary of Retek. Unless otherwise defined herein, defined terms used in this Agreement shall have the meanings ascribed to them in the Separation Agreement. D. After the Public Offering, Retek and RIS desire to continue to obtain administrative and other services from HNC, and HNC desires to continue to provide such services, durings the term of this Agreement on the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, HNC and Retek, for themselves, their successors and assigns, hereby agree as follows: ARTICLE I: SERVICES 1.1 Services Provided. Subject to the terms and conditions of the Agreement, during the term of this Agreement, HNC agrees to provide to Retek and RIS the services described in Exhibit A to this Agreement (collectively, the "Services"). 1.2 Business Insurance Coverage. During the term of this Agreement, HNC, as part of its Risk Management services, will use good faith efforts to extend coverage to Retek and RIS -1- 2 under HNC's insurance policies for those (and only those) types of insurance coverage that are expressly listed in Exhibit B to this Agreement (the "Insurance Coverage") by adding (or maintaining) Retek and RIS as named insureds under the policy or policies in question and advancing the applicable premiums necessary to extend such insurance coverage to Retek and RIS. RIS will be solely responsible for providing its own directors' and officers' liability insurance coverage ("D&O Coverage"), which D&O coverage shall be in addition to the D&O Coverage to be maintained by HNC under its Risk Management services hereunder as provided above and shall be maintained at not less than the following minimum coverage levels: $15,000,000. 1.3 Additional Services. In the event that Retek or RIS requires services which exceed the scope or extent of the Services HNC has agreed to provide to Retek under this Agreement, and if HNC in its sole discretion agrees in writing to provide such services to Retek or RIS, then HNC and Retek, shall negotiate in good faith an adjustment to the fee payable by Retek hereunder; provided, however, that the fee or fees charged to Retek for such services shall be no less favorable to Retek than the charges for comparable services from unaffiliated third parties. ARTICLE II: BILLING AND PAYMENT. 2.1 Fees for Services. Retek shall pay to HNC a fee for each of the Services provided by HNC to Retek and/or RIS hereunder, the amount of which fee shall be calculated in accordance with the applicable provisions of Part 2 of Exhibit A ("Fees for Services") corresponding to such Services. In addition, Retek shall pay to HNC a fee for the Insurance Coverage calculated in accordance with the provisions of Exhibit B. 2.2 Billing. On a monthly basis, HNC shall submit to Retek for payment a billing invoice setting forth HNC's good faith estimate of the amount of fees payable by Retek to HNC for Services rendered during the preceding month and/or business insurance premiums allocable to the preceding month (with such estimates to be based on the methods used to compute such charges in Part 2 of Exhibit A and in Exhibit B). HNC, at its option, may also invoice Retek for any costs paid by HNC to third-parties in the course of providing any Services ("Third-Party Costs") or any premiums relating to the Insurance Coverage immediately upon payment of such Third-Party Costs or premiums by HNC. Within thirty (30) days after the close of each calendar quarter, HNC will compute and reconcile the actual amounts of fees and premiums payable by Retek to HNC in respect of such calendar quarter (the "Actual Quarter's Charge") against the sum of the estimated amounts previously invoiced to Retek by HNC in respect of each calendar month occurring within such calendar quarter (the "Estimated Quarter's Charge") and will send Retek a statement of such computation and reconciliation (the "Quarterly Statement"). The parties agree that if (a) the Actual Quarter's Charge for such calendar quarter is greater than the Estimated Quarter's Charge for such calendar quarter, then Retek shall pay such difference (the "Quarterly Shortfall") to HNC within fifteen (15) days after HNC sends the Quarterly Statement for such calendar quarter to Retek; and (b) if the Estimated Quarter's Charge for such calendar quarter is greater than the Actual Quarter's Charge for such calendar quarter, then HNC shall reimburse Retek for the amount of such difference within fifteen (15) days after HNC sends the -2- 3 Quarterly Statement for such calendar quarter to Retek, subject to HNC's right to offset as a credit any amounts previously invoiced by HNC to Retek under this Section 2.2 and not yet paid to HNC. 2.3 Payment. Retek shall pay in full to HNC the amount due as stated on each HNC invoice within thirty (30) days after the date of such invoice; provided that Retek shall pay in full the amount of any Third-Party Costs or premiums for Insurance Coverage billed to Retek on any HNC invoice within ten (10) days of the date of such invoice; and provided further that Retek shall pay any quarterly any Quarterly Shortfall to HNC within fifteen (15) days after HNC issues Retek an invoice for such Quarterly Shortfall as provided in Section 2.2. In addition, Retek agrees with HNC to promptly and timely pay any insurance premiums for an HNC group insurance policy that are billed directly to Retek, in time to avoid any default or breach of such policy and any late charges or other penalties. 2.4 Taxes. In addition to the payments to be made by Retek under this Article II, Retek will pay all taxes, including without limitation sales and use taxes and value added taxes, if imposed by any government as a result of Retek's payment to HNC of any of the fees and costs payable by Retek hereunder. 2.5 RIS Guarantee. Retek shall be primarily liable for the payment of all amounts payable to HNC under this Agreement, but RIS hereby guarantees and promises to pay HNC in full, upon HNC's demand, the full amount of any and all payments that are due and payable by Retek to HNC under this Agreement that have not been paid in full when due, without any right of offset or counterclaim. ARTICLE III : TERM AND TERMINATION 3.1 Initial Term. The initial term of this Agreement shall commence on the date hereof and shall continue for a period ending on the earlier of (a) one (1) year after the Effective Date; (b) the last day of the first calendar month during which HNC owns less than fifty percent (50%) of the outstanding voting stock of Retek; or (c) the date on which this Agreement is terminated in accordance with the provisions of Section 3.4. 3.2 No Voluntary Termination of Certain Services. Notwithstanding the provisions of Section 3.1 or Section 3.4, all Services relating to the preparation of consolidated financial statements and tracking of fixed assets and inventory (a) may not be terminated by Retek so long as HNC is required to consolidate its financial statements with Retek in accordance with generally accepted accounting principles ("GAAP"), and (b) will terminate only when HNC is no longer required to consolidate its financial statements with Retek in accordance with GAAP. 3.3 Discontinuation of Services. 3.3.1 By Retek. Except as provided in Section 3.2, Retek may elect (on behalf of itself and RIS) to discontinue receiving any Service (including but not limited to any employee benefit) or any Insurance Coverage to be provided by HNC hereunder by providing HNC at least thirty (30) days' advance written notice of Retek's election to discontinue such -3- 4 Services or Insurance Coverage and paying HNC any accrued but unpaid sums for any Service commenced or partially or fully performed by HNC, or any insurance premium paid by HNC hereunder, for which Retek has not previously paid HNC in full. Neither Retek nor RIS will not be entitled to any rebate or refund of sums it previously paid to HNC under this Agreement as a result of any such discontinuation by Retek. 3.3.2 By HNC. Without incurring any liability to Retek whatsoever, HNC may, prior to the expiration or termination of this Agreement: (a) discontinue providing Retek any Insurance Coverage that HNC discontinues carrying for itself and does not replace with similar Insurance Coverage for itself during the term of this Agreement, by providing Retek at least sixty (60) days' advance written notice of the discontinuance of such Insurance Coverage; (b) discontinue providing any employee group insurance or other employee benefit plan coverage that HNC is providing or extending to Retek employees under this Agreement: (i) if such employee group insurance or other employee benefit plan is substantially similar in nature, or is substantially replaced or duplicated by, an employee group insurance plan or plans or other employee benefit plan or plans adopted by Retek; (ii) if HNC is no longer permitted, whether by applicable laws or regulations or by the terms of such employee group insurance or employee benefit plan, to provide or extend such employee group insurance or employee benefit plan to Retek employees; or (iii) if Retek is required, by applicable laws or regulations, to adopt and provide employee group insurance coverage or an employee benefit plan that is substantially similar to such employee group insurance or other employee benefit plan coverage; and/or (c) change or modify any employee group insurance or other employee benefit plan coverage that HNC is providing or extending to Retek employees under this Agreement provided HNC makes such change or modification generally with respect to its employees. 3.4 Default and Remedies; Termination. 3.4.1 Event of Default. A party to this Agreement will be in default hereunder if (a) such party commits a material breach of any term or condition of this Agreement and such breach continues uncured for thirty (30) days (or ten (10) days in the case of a failure by Retek to pay HNC any sums payable to HNC when due under this Agreement) following receipt of written notice of such breach from the other party. 3.4.2 Remedies. In the event of a default by Retek hereunder, HNC may exercise any or all of the following remedies: (a) declare immediately due and payable all sums for which Retek and/or RIS is liable under this Agreement; (b) decline to provide any Service or Services or Insurance Coverage hereunder; and/or (c) terminate this Agreement. In the event of any default by HNC hereunder, Retek may terminate this Agreement. In addition to the foregoing, a non-defaulting party will have all other rights and remedies available at law or equity. -4- 5 3.4.3 Termination on Notice. Except as provided in Section 3.2, this Agreement may be terminated (in addition to a termination pursuant to Section 3.4.1 or Section 3.4.2) at any time at the option of either HNC or Retek upon ninety (90) days' prior written notice of termination given to the other in accordance with this Agreement. 3.4.4 Effect of Termination. Termination of this Agreement will not effect or terminate the effectiveness of the provisions of Sections 3.2 or 4.2, which shall survive termination of this Agreement and remain in effect thereafter. ARTICLE IV: RECORDS AND ACCOUNTS 4.1 Record Retention. (a) HNC shall maintain accurate records and accounts of all transactions relating to its performance of the Services pursuant to this Agreement. Such records and accounts shall reflect such information as would normally and reasonably be examined by an independent accountant in performing a complete audit in accordance with GAAP for the purpose of certifying financial statements and shall be maintained by HNC in a manner that will enable an independent accountant to complete an audit of Retek in accordance with GAAP. Retek shall have the right to inspect and copy, at its expense upon reasonable notice and at reasonable intervals during HNC's regular office hours, the separate records and accounts maintained by HNC relating to the Services, provided that such records shall be Confidential Information of HNC and shall be held in confidence by Retek as provided in Section 8.2 hereof. (b) Retek shall maintain, in accordance with HNC's record retention policy, accurate records and accounts of all transactions relating to the provision of Services under this Agreement and all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") insofar as such Information may be reasonably required by HNC to comply with all applicable federal, state, county and local laws, administrative or court orders, ordinances, regulations and codes, including but not limited to ERISA and securities laws. Without limiting the foregoing, Information may be requested under this Section 4.1(b) for audit, accounting, claims, regulatory, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing this Agreement and the transactions contemplated hereby. 4.2 HNC Oversight of Retek Accounting. So long as HNC is required to consolidate its financial statements with Retek under GAAP, HNC shall have the right to oversee and review Retek's accounting policies and practices and Retek will not change its accounting policies or practices without the prior written approval of HNC, which approval may be withheld in HNC's sole discretion, unless Retek's independent accountants advise Retek that its accounting policies and practices must be changed to conform with GAAP or are necessary in order to improve Retek's internal accounting controls. Retek shall provide HNC with Retek's financial accounting statements and other reports reasonably requested for each month, quarter and annual fiscal period on a timely basis according to the schedules announced by HNC for the completion of financial accounting statements in order to enable HNC to timely produce its own consolidated financial statements. -5- 6 ARTICLE V: OBLIGATIONS; LIMITATIONS; SERVICE PROVIDERS 5.1 Limitations on HNC's Obligations. Notwithstanding anything herein to the contrary, HNC may, at its sole discretion, decline to provide any Service hereunder if: (a) facilities or personnel of HNC are not reasonably available to provide such Service; (b) providing such Service requested by Retek or RIS would materially interfere with HNC's conduct of its business; or (c) in HNC's good faith judgment based upon the advice of its tax advisors, HNC's providing such Service could result in significant tax disadvantages for HNC, could conflict with any applicable law, regulation or ordinance or could result in a conflict of interest. 5.2 Service Providers. Services to be provided by HNC hereunder may, in HNC's sole discretion, be provided by employees or service providers of HNC or any of its subsidiaries (other than Retek), HNC shall remain responsible, in accordance with the terms of this Agreement, for performance of any Service it causes to be so provided. 5.3 Changes. Notwithstanding anything to the contrary herein, HNC may, at any time and in its sole discretion, change in any reasonable respect the manner, scheduling or timing of the Services to be rendered, provided that HNC provides Retek at least thirty (30) days' prior written notice of such change. 5.4 Rights of HNC. Nothing in this Agreement shall limit or restrict the right of HNC or any of HNC's directors, officers or employees, agents, subsidiaries or affiliates to engage in any other business or devote their time and attention in part to the management or other aspects of any other business, whether of a similar nature, or to limit or restrict the right of HNC to engage in any other business or to render services of any kind to any entity. ARTICLE VI: DISCLAIMER; LIABILITY; INDEMNIFICATION 6.1 Disclaimer of Warranty. ALL SERVICES AND INSURANCE COVERAGE PROVIDED HEREUNDER ARE PROVIDED TO RETEK AND RIS ON AN "AS IS" BASIS WITHOUT WARRANTY OF ANY KIND. HNC HEREBY DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 6.2 Limitation on Liability. HNC shall have no liability whatsoever to Retek or RIS for any error, act or omission in connection with the Services to be rendered by HNC to Retek hereunder unless any such error, act or omission is attributable to HNC's willful misconduct or gross negligence. 6.3 Independent Contractors. The parties will operate as, and have the status of, independent contractors and will not act as or be an agent, partner, co-venturer or employee of the other party. Except as expressly provided in this Agreement, neither party will have the right or authority to assume or create any obligations on behalf of any other party, or to bind the other party in any respect whatsoever. HNC shall be entitled to determine the means and manner by which it performs the Services hereunder. -6- 7 ARTICLE VII: OTHER AGREEMENTS 7.1 Alternative Services. It is acknowledged that from time to time Retek or RIS may find it necessary or desirable either to enter into agreements covering services of the type contemplated by this Agreement to be provided by parties other than HNC or to enter into other agreements with other parties covering Services or functions to be performed by HNC hereunder. Except as provided in Section 3.2, nothing in this Agreement shall be deemed to limit in any way the right of Retek or RIS to acquire such Services from others or to enter into such other agreements; provided that in no such event shall the fees to be paid to HNC pursuant to Section 2 hereof be reduced on account thereof unless this Agreement is terminated, or the applicable Services are discontinued in accordance with Section 3.3 hereof. ARTICLE VIII: CONFIDENTIALITY 8.1 Confidential Information. Each party acknowledges that, in connection with the performance of this Agreement, it may receive certain confidential or proprietary information and materials of the other party ("Confidential Information"). 8.2 Confidentiality. Subject to Section 8.3, each party and each of its subsidiaries shall hold and shall cause its respective directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of law, all Confidential Information (other than any such information relating solely to the business or affairs of such party) concerning the other party (except to the extent that such information can be shown to have been (i) in the public domain through no fault of such party, (ii) later lawfully acquired on a non-confidential basis from other sources by the party to which it was furnished, and without breach of any obligation or duty by a third-party concerning confidentiality, (iii) independently generated without reference to any proprietary or Confidential Information of the other party, or (iv) information that may be disclosed pursuant to any Ancillary Agreement). No party shall release or disclose any such information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who shall be advised of and agree to comply with the provisions of this Section 8.2. 8.3 Protective Arrangements. If any party hereto (or any of its subsidiaries) either (a) determines on the advice of its counsel that it is required to disclose any Confidential Information pursuant to applicable law (including but not limited to disclosure required pursuant to the Code, the Securities Act or the Exchange Act, including the disclosure of financial and other information in filings or reports made under the Securities Act or the Exchange Act) or (b) receives any demand under lawful process or from any Governmental Authority, to disclose or provide information of any other party hereto (or any of its subsidiaries) that is subject to the confidentiality provisions hereof, such party shall (except with respect to filings in reports under the Exchange Act that require such disclosure) notify the other party prior to disclosing or providing such information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide Confidential Information -7- 8 to the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority. ARTICLE IX: MISCELLANEOUS 9.1 Assignment. This Agreement may not be transferred or assigned by any party hereto, whether voluntarily or by operation of law, without the prior written consent of the other; provided, however, that the rights and obligations of HNC may be assigned, without the consent of Retek or RIS, pursuant to a merger, exchange, recapitalization or other reorganization to which HNC is a party or by operation of law. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 9.2 Governing Law. This Agreement shall be governed by the internal laws of the State of California (without regard to that state's laws regarding conflict of laws) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. 9.3 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all the parties reflected hereon as signatories. 9.4 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon receipt if delivered personally, by a national overnight delivery service or by facsimile transmission, or upon deposit in the U.S. mail (certified or registered mail, postage prepaid, return receipt requested):
If to HNC, to: If to Retek or RIS, to: HNC Software Inc. Retek Inc. 5935 Cornerstone Court West Midwest Plaza, 801 Nicollet Mall San Diego, CA 92121-3728 11th Floor Attention: Chief Financial Officer Minneapolis, MN 55402 Facsimile: (858) 799-1501 Attention: Chief Financial Officer Facsimile: (612) 630-5641
or to such other person or address as any party shall specify by providing notice in writing to the other party in the manner specified above. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, the business day following deposit with a national overnight delivery service, one (1) business day -8- 9 after transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. 9.5 Force Majeure. A party will not be deemed to have breached this Agreement to the extent that performance of such party's obligations or attempts to cure any breach are delayed or prevented by reason of any act of God, fire, natural disaster, accident, act of government, shortage of materials or supplies, labor unrest or other cause beyond the reasonable control of such party (a "Force Majeure"); provided that the party whose performance is delayed or prevented promptly notifies the other party of the Force Majeure preventing or delaying performance; and provided further that if the prevention or delay of performance continues for more than sixty (60) days, then the other party may terminate this Agreement by providing written notice of termination. 9.6 Waiver; Amendment. This Agreement may be amended only by the written agreement of the parties hereto. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. Failure by either party, at any time, to require performance by the other party or to claim a breach of any provision of this Agreement shall not be construed as a waiver of any right accruing under this Agreement, nor shall it affect any subsequent breach or the effectiveness of this Agreement or any part hereof, or prejudice either party with respect to any subsequent action. 9.7 Entire Agreement. This Agreement and its Exhibits contains the entire agreement and understanding of the parties hereto with respect to its subject matter. This Agreement supersedes all prior agreements and understandings, oral or written, with respect to its subject matter. This Agreement is made and entered into pursuant to the Separation Agreement. 9.8 Limitation of Liability. NO PARTY HERETO WILL BE LIABLE TO ANY OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE, INCLUDING WITHOUT LIMITATION LOSS OF DATA, SERVICES, PROFITS, REVENUE, BUSINESS OR SERVICE INTERRUPTION IN CONNECTION WITH, OR RELATED TO, THE PERFORMANCE OF THIS AGREEMENT, OR ARISING OUT OF THE SERVICES RENDERED HEREUNDER, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT (INCLUDING WITHOUT LIMITATION BREACH OF THIS AGREEMENT OR TERMINATION OF THIS AGREEMENT), TORT (INCLUDING WITHOUT LIMITATION NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, EVEN IF ANY OTHER PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE IN ADVANCE. -9- 10 9.9 Survival. The provisions of Section 3.2, Article VI, Article VIII and Article IX hereof shall survive any termination of this Agreement. Termination of this Agreement will not terminate any obligation of Retek or RIS to pay for any Services rendered, or any insurance provisions or other costs paid by HNC, prior to the effective date of termination. 9.10 Severability. In the event any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or otherwise unenforceable, then such provision will, to the extent permitted by such court, not be voided but will instead be construed to give effect to its intent to the maximum extent permissible under applicable law and the remainder of this Agreement will remain in full force and effect according to its terms. 9.11 Construction. This Agreement will be interpreted in accordance with its terms and without any strict construction in favor of or against either of the parties. 9.12 Section Headings. The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. ARTICLE X: DISPUTE RESOLUTION. 10.1 Resolution. Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be resolved in accordance with the procedures set forth in Article VII of the Separation Agreement. [THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK] -10- 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above. HNC SOFTWARE INC. RETEK INFORMATION SYSTEMS, INC. By: /s/ R. V. Thomas By: /s/ Gregory A. Effertz ------------------------------ --------------------------------- Name: R. V. Thomas Name: Gregory A. Effertz ------------------------------ --------------------------------- Title: C. F. O. Title: V. P. Finance and Administration ------------------------------ --------------------------------- RETEK INC. By: /s/ Gregory A. Effertz ---------------------------------- Name: Gregory A. Effertz ---------------------------------- Title: V. P. Finance and Administration ---------------------------------- [SIGNATURE PAGE TO SERVICES AGREEMENT] -11- 12 EXHIBIT A TO SERVICES AGREEMENT BETWEEN HNC SOFTWARE INC., RETEK INC. AND RETEK INFORMATION SYSTEMS, INC. SERVICES TO BE PROVIDED BY HNC TO RETEK 1. DESCRIPTION OF SERVICES. Subject to the terms and conditions of the Services Agreement to which this Exhibit A is an exhibit, during the term of the Agreement, HNC agrees to provide to Retek the following services (collectively, the "Services"). (a) Corporate, General and Administrative Services. (i) Finance and Accounting Services. The services of HNC's finance and accounting departments, including general accounting, intra-corporate billing between HNC and its affiliates and Retek and its affiliates, preparation of HNC's consolidated financial statements (including SEC and other regulatory reports required from time to time), state and federal income tax return preparation and consultation, investor services and those services currently provided by HNC to Retek. Without limitation, the provisions of Sections 3.2 and 4.2 will apply to the Services described in this Section 1(a)(i). (ii) Risk Management Services. HNC shall continue to provide risk management services, including the administration of Retek's property and casualty insurance programs that are currently provided by HNC to Retek. (iii) Corporate G&A. HNC shall provide services of its general corporate management. (iv) Equity Plan Administration. HNC shall provide services to support HNC's employee equity plans in which Retek's employees participate. (v) Human Resources Administration Services. The services of HNC's human resources department to administer employment, compensation and employee benefits matters for Retek employees for so long as, and only to the extent that, Retek employees participate in such HNC employment, compensation and/or employee benefits programs. (b) Corporate Communication Services. HNC shall provide Retek with corporate communication services support during the term of this Agreement, which shall include services similar to those provided currently that are in support of the consolidated organization, such as general communications to the investment community, trade shows, corporate media that -12- 13 incorporates Retek in its campaign, or communication that generally addresses HNC as an organization. (c) Employee Group Insurance. The extension to Retek's and RIS' employees of those HNC employee group insurance benefits specifically listed in Part 1 of Attachment II to this Exhibit A that are currently provided to HNC employees; provided that HNC shall not be obligated to provide such group insurance to Retek and RIS employees if (i) HNC ceases to provide such group insurance to HNC employees; (ii) HNC is not permitted to extend such employee group insurance to Retek or RIS employees by the providers of such group insurance; or (iii) the extension of such group insurance to Retek employees is not permitted under the agreements and documents governing such group insurance or is not permitted under applicable law. No other employee group insurance shall be provided by HNC to employees of Retek or RIS unless otherwise explicitly agreed to in writing by HNC. (d) Other Employee Benefits. The extension to Retek employees of participation in the other HNC employee benefit plans listed in Part 2 of Attachment II to this Exhibit A that are currently provided to HNC employees; provided that HNC shall not be obligated to provide participation in such employee benefit plans to Retek employees if (i) HNC ceases to provide such benefit plans to HNC employees; (ii) HNC is not permitted to extend such benefit plans to Retek employees by the providers of such benefit plans; or (iii) the extension of such benefit plans to Retek employees is not permitted under the agreements and documents governing such benefit plans or is not permitted under applicable law. No benefits under any other HNC employee benefit plans shall be extended to employees of Retek unless otherwise explicitly agreed to in writing by HNC. (e) Other Employee-Related Services. The extension of statutorily required workers' compensation insurance for Retek employees. (f) Other Services. HNC Financial Solutions shall continue to provide office space in Japan to Retek that is currently provided by HNC Financial Solutions to Retek and Retek shall pay its proportionate share of the costs of such office space. 2. FEES FOR SERVICES. (a) For the services described in subsections 1(a) and 1(b) of this Exhibit A, Retek will pay HNC an amount equal to 100% of HNC's actual cost of labor and associated overhead (and the amount of all fees charged by an outsource supplier) to provide such services that is fairly allocable to Retek and RIS under generally accepted cost accounting principles, taking into account HNC's cost allocation policies and practices consistently applied given Retek's and RIS's historic share of the use of such services. These amounts may be adjusted by HNC from time to time upon thirty (30) days' advance notice to Retek if Retek's or RIS's actual use of Services warrants a change in Retek's allocable portion under generally accepted cost accounting principles. The initial estimated monthly fees for the services described in this Exhibit A are set forth on Attachment I to this Exhibit A and shall be adjusted when HNC's actual expenditures are known for the covered period as provided in the quarterly reconciliation provisions of Section 2.2 of this Agreement. -13- 14 (b) For the services described in subsection 1(c) of this Exhibit A ("Employee Group Insurance"), Retek will pay HNC an amount per Retek or RIS employee equal to HNC's actual cost for providing the employee group insurance (including but not limited to all premiums paid by HNC for employee group insurance, self-insurance claims and administrative fees for the administration of these benefits). This amount may be adjusted by HNC from time to time to reflect any changes in the cost of providing employee group insurance. (c) For the services described in subsection 1(d) of this Exhibit A ("Other Employee Benefits"), Retek will pay HNC an amount per Retek or RIS employee equal to the cost to HNC of providing the other employee benefit plans (including but not limited to all plan administrative and audit fees incurred by HNC in connection with such employee benefit plans). This amount may be adjusted by HNC from time to time to reflect any changes in the cost of providing employee benefits. (d) For the services described in subsection 1(e) of this Exhibit A ("Other Employee-Related Services"), Retek will pay HNC (i) the direct charges incurred by HNC to pay for worker's compensation insurance for Retek or RIS employees, based on the actual insurance premium rate, plus (ii) the direct charges incurred by HNC for payroll withholding items. (e) For other services described in subsection 1(f) of this Exhibit A, Retek will pay HNC Financial Solutions an amount per Retek or RIS employee equal to HNC Financial Solutions' actual cost for providing the Japan office space. This amount may be adjusted by HNC Financial Solutions from time to time to reflect any changes in the cost of providing this office space. -14- 15 ATTACHMENT I TO EXHIBIT A TO SERVICES AGREEMENT BETWEEN HNC SOFTWARE INC., RETEK INC. AND RETEK INFORMATION SYSTEMS, INC. INITIAL MONTHLY FEES FOR SERVICES The fees to be charged to Retek for the following services are based upon the forecasted actual costs expected to be incurred by HNC for such services and are subject to adjustment for actual expenditures based on HNC's cost accounting and changes in underlying facts and forecasts. Fees are allocated to all HNC subsidiaries and business units based upon forecasted headcount and revenues for the same period. All fees are due and payable from Retek monthly based upon the final budget prepared by HNC staff, subject to adjustment and reconciliation as provided in Section 2.2 of the Agreement. The following represents a preliminary estimate of those fees for the first quarter of 2000 and is subject to final HNC management approval. Estimates of monthly fee charges for subsequent quarters will be communicated to Retek in advance of any billing for time periods in that quarter.
SERVICE CATEGORY INITIAL MONTHLY ESTIMATE Corporate, General and Administrative Services: $121,000 per month Employee Group Insurance: Actual costs billed by the insurance carrier or invoiced by HNC Corporate Communications: $36,000 per month
-15- 16 ATTACHMENT II TO EXHIBIT A TO SERVICES AGREEMENT BETWEEN HNC SOFTWARE INC., RETEK INC. AND RETEK INFORMATION SYSTEMS, INC. EMPLOYEE GROUP INSURANCE AND EMPLOYEE BENEFIT PLANS 1. Employee Group Insurance Group Insurance programs for which Retek or its subsidiaries participate as a member of the HNC organization are as follows: Medical Dental Basic Life Optional Life Vision Short-Term Disability Long-Term Disability Employee Assistance Program Business Travel Accident Background Investigation Service 2. Other Employee Benefit Plans Section 125 401(K) -16- 17 EXHIBIT B TO SERVICES AGREEMENT BETWEEN HNC SOFTWARE INC., RETEK, INC. AND RETEK INFORMATION SYSTEMS, INC. BUSINESS INSURANCE 1. DESCRIPTION OF BUSINESS INSURANCE COVERAGE PROVIDED. General Liability Errors and Omissions Property Insurance Directors' and Officers' * Employee Dishonesty Crime Insurance Excess Umbrella Auto International HNC shall in good faith determine the amount of the above coverages based on historical past practices. * Subject to the provisions of Section 1.2 of this Agreement regarding Retek's obligation to maintain and pay for its own additional directors' and officers' insurance coverage. 2. PAYMENT FOR BUSINESS INSURANCE COVERAGE. Retek shall pay to HNC a fee equal to a prorated portion of the premium paid by HNC for such Business Insurance Coverage - where the prorated amount of such premium allocated to, and payable by Retek, shall be computed based upon HNC's Corporate Allocation practices consistently applied; provided that HNC will not be obligated to extend such Business Insurance Coverage if the insurer is not willing to extend such Business Insurance Coverage to Retek or its subsidiaries or the extension of coverage to Retek and/or its subsidiaries results in any significant increase in the cost of the insurance premium paid for HNC's portion of the coverage. NOTE: Retek shall be responsible for purchasing and paying for its own additional directors' and officers' insurance coverage as provided in Section 1.2 of the Agreement. Retek shall also be responsible for purchasing and paying for its own Workers' Compensation Policies, which shall be purchased and paid for by Retek and its subsidiaries for their benefit. -17- EX-2.6 6 CORPORATE RIGHTS AGREEMENT 1 EXHIBIT 2.6 CORPORATE RIGHTS AGREEMENT This Corporate Rights Agreement (this "Agreement") is made and entered into as of November 23, 1999 (the "Effective Date") by and among HNC Software Inc., a Delaware corporation ("HNC"), and Retek Inc., a Delaware corporation ("Retek") and, solely for purposes of Section 4.5 and Article V hereof, Retek Information Systems, Inc., a Delaware corporation that is a wholly-owned subsidiary of Retek ("RIS"). RECITALS A. HNC owns all of the outstanding shares of Common Stock, par value $0.01 per share of Retek ("Common Stock"). B. The parties are contemplating the possibility that Retek may issue shares of its Common Stock in an initial public offering of such Common Stock registered under the Securities Act of 1933, as amended (the "Initial Public Offering"). C. The parties desire to enter into this Agreement pursuant to a Separation Agreement among themselves dated as of November 23, 1999 (the "Separation Agreement") in order to set forth their agreement regarding (i) HNC's rights to purchase additional shares of Common Stock of Retek upon any issuance of Capital Stock to any Person in order to permit HNC to own at least the Minimum Ownership Percentage of the Capital Stock of Retek, (ii) certain rights of HNC with respect to the governance of Retek and RIS, (iii) the grant to HNC of certain registration rights with respect to the Common Stock (and any other securities issued in respect thereof or in exchange therefor) held by HNC, and (iv) certain representations, warranties, covenants and agreements that will continue in effect so long as Retek is a subsidiary of HNC. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, HNC, Retek and RIS, for themselves, their successors, and assigns, hereby agree as follows: ARTICLE I: DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms will have the following meanings, applicable both to the singular and the plural forms of the terms described: "Action" has the meaning ascribed thereto in Section 4.5(o). "Additional Securities" has the meaning ascribed thereto in Section 3.1(d). "Affiliate" means, with respect to a given Person, any Person controlling, controlled by or under common control with such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to vote a majority of the securities having voting power for the election of directors (or other Persons acting in similar capacities) of such Person or otherwise to direct or cause the direction of the management 2 and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Agreement" has the meaning ascribed thereto in the preamble hereto, as such agreement may be amended and supplemented from time to time in accordance with its terms. "Annual Business Plan and Budget" has the meaning ascribed thereto in Section 4.8. "Applicable Stock" means at any time the (i) shares of Common Stock owned by the HNC Entities that were owned on the Effective Date, to the extent then owned by any HNC Entity, plus (ii) shares of Common Stock purchased by the HNC Entities pursuant to Article II of this Agreement, plus (iii) shares of Common Stock that were issued to HNC Entities in respect of shares described in either clause (i) or clause (ii) of this sentence in connection with any conversion of such shares or any reclassification, share combination (including any reverse stock split), share subdivision (including any stock split), share dividend, share exchange, merger, consolidation or similar transaction or event. "Capital Stock" means (i) in the case of a corporation, corporate stock (including without limitation, common stock, preferred stock and rights, options, warrants or any securities convertible into or ultimately exchangeable or exercisable for common or preferred stock), (ii) in the case of an association, limited liability company or other non-corporate business entity, any and all shares, interests, memberships, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Common Stock" has the meaning ascribed thereto in the recitals. "Disadvantageous Condition" has the meaning ascribed thereto in Section 3.1(a). "Distribution" means the pro rata distribution by HNC to its stockholders of the shares of Common Stock of Retek owned by HNC in one or more transactions occurring after the Initial Public Offering, whenever (and if ever) such transaction(s) shall occur, in HNC's sole discretion. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. "HNC Entities" means HNC, its Subsidiaries and any Parent of HNC (other than Subsidiaries that constitute Retek Entities), and "HNC Entity" shall mean any of the HNC Entities. "HNC Ownership Reduction" means any decrease at any time in the Ownership Percentage to less than eighty percent (80%). "Holder" means HNC, the other HNC Entities and any Transferee. "Holder Securities" has the meaning ascribed thereto in Section 3.2(b). "Initial Public Offering" has the meaning ascribed thereto in the recitals to this Agreement. 2 3 "Initial Public Offering Date" means the date of completion of the initial sale of Common Stock by Retek in the Initial Public Offering. "Issuance Event" has the meaning ascribed thereto in Section 2.2. "Issuance Event Date" has the meaning ascribed thereto in Section 2.2. "Market Price" of any shares of Common Stock (or other Capital Stock) on any date means (i) the average of the last sale price of such shares on each of the five (5) trading days immediately preceding such date on the Nasdaq National Market or, if such shares are not listed or quoted thereon, on the principal national securities exchange or automated interdealer quotation system on which such shares are traded or (ii) if such sale prices are unavailable or such shares are not so traded, the value of such shares on such date determined in accordance with agreed-upon procedures reasonably satisfactory to Retek and HNC. "Minimum Ownership Percentage" means the ownership of such number of: (i) shares of Capital Stock of Retek to the extent, and only to the extent, necessary for HNC to maintain all of the following: (a) control of Retek (within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code")); (b) the status of Retek as a member of the affiliated group of corporations (within the meaning of Section 1504 of the Code) of which HNC is the common parent, provided such status has theretofore been maintained; and (c) HNC's then-existing Ownership Percentage; and (ii) shares of any non-voting Capital Stock of Retek to the extent, and only to the extent, necessary to own eighty percent (80%) of each outstanding class of such stock. "Option" has the meaning ascribed thereto in Section 2.1(a). "Option Notice" has the meaning ascribed thereto in Section 2.2. "Other Securities" has the meaning ascribed thereto in Section 3.2. "Ownership Percentage" means, at any time, the fraction, expressed as a percentage and rounded to the next highest thousandth of a percent, whose numerator is the aggregate Value of the Applicable Stock and whose denominator is the aggregate Value of all the then outstanding shares of Capital Stock of Retek. For purposes of this definition, "Value" means, with respect to any share of stock, the value of such share determined by HNC under principles applicable for purposes of Section 1504 of the Code. "Parent" means any corporation (other than HNC) in an unbroken chain of corporations ending with HNC if each of such corporations other than HNC owns stock representing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, association, unincorporated organization, government (and any department or agency thereof) or other entity. 3 4 "register", "registration" and "registered" means a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement. "Registrable Securities" means shares of Common Stock and any stock or other securities into which or for which such Common Stock may now or hereafter be changed, converted or exchanged and any other shares or securities of Retek issued to any Holder or any Holder's permitted successors and assigns (or such shares or other securities into which or for which such shares are so changed, converted or exchanged) upon any reclassification, share combination, share subdivision, share dividend, share exchange, merger, consolidation or similar transaction or event or pursuant to the exercise of the Option. As to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of Registrable Securities by the Holder thereof shall have been declared effective under the Securities Act and such Registrable Securities shall have been disposed of in accordance with such registration statement, (ii) such Registrable Securities are sold by a person in a transaction in which the rights under the provisions of this Agreement are not assigned, (iii) such Registrable Securities are sold pursuant to Rule 144 promulgated under the Securities Act, (iv) such Registrable Securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by Retek and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any state securities or blue sky law then in effect or (v) such Registrable Securities shall have ceased to be outstanding. "Registration Expenses" means any and all expenses incident to performance of or compliance with any registration of securities pursuant to Article III, including, without limitation, (i) the fees, disbursements and expenses of Retek's counsel and accountants; (ii) all expenses, including filing fees, in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof to any underwriters and dealers; (iii) the cost of printing or producing any agreements among underwriters, underwriting agreements and blue sky or legal investment memoranda, any selling agreements and any other documents in connection with the offering, sale or delivery of the securities to be disposed of; (iv) all expenses in connection with the qualification of the securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such qualification and in connection with any blue sky and legal investment surveys; (v) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the securities to be disposed of; (vi) transfer agents', depositories' and registrars' fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such offering; (vii) all security engraving and security printing expenses; (viii) all fees and expenses payable in connection with the listing of the securities on any securities exchange or automated interdealer quotation system or the rating of such securities; and (ix) any other fees and disbursements of underwriters customarily paid by the sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any. "Retek Entities" means Retek and its Subsidiaries, and "Retek Entity" shall mean any of the Retek Entities. 4 5 "Retek Securities" has the meaning ascribed thereto in Section 3.2(b). "Rule 144" means Rule 144 (or any successor rule to similar effect) promulgated under the Securities Act. "Rule 415 Offering" means an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated under the Securities Act. "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute. "Selling Holder" has the meaning ascribed thereto in Section 3.4(a). "Special Transaction" has the meaning ascribed thereto in Section 4.5. "Subsidiary" means, as to any Person, any partnership, limited liability company, joint venture, corporation, trust, association, unincorporated organization or other business entity of which more than fifty percent (50%) of the voting capital stock or other voting ownership interests is owned or controlled, directly or indirectly, by such Person or by one or more of the Subsidiaries of such Person or by a combination thereof. "Subsidiary," when used with respect to HNC or Retek, shall also include any other entity affiliated with HNC or Retek, as the case may be, that HNC and Retek may hereafter agree in writing shall be treated as a "Subsidiary" of HNC or Retek, as the case may be, for the purposes of this Agreement. "Transferee" has the meaning ascribed thereto in Section 3.8. 1.2. Internal References. Unless the context indicates otherwise, references to Articles, Sections and paragraphs shall refer to the corresponding articles, sections and paragraphs in this Agreement and references to the parties shall mean the parties to this Agreement. ARTICLE II: OPTIONS 2.1. Options. (a) Retek hereby grants to HNC, on the terms and conditions set forth herein, a continuing right (the "Option") to purchase from Retek from time to time such number of shares of the Common Stock as is necessary to allow the HNC Entities to maintain the Minimum Ownership Percentage of the Capital Stock of Retek. The Option shall be assignable, in whole or in part and from time to time, by HNC to any HNC Entity. The exercise price for the shares of Common Stock purchased pursuant to the Option shall be the Market Price of the Common Stock as of the date of first delivery of the applicable notice of exercise of the Option by HNC (or its permitted assignee hereunder) to Retek. The exercise price of the Option will be payable in cash as provided in Section 2.3. (b) The provisions of Section 2.1(a) hereof notwithstanding, the Option granted pursuant to Section 2.1 shall not apply and shall not be exercisable in connection with the issuance by Retek of any shares of Common Stock pursuant to any stock option or other executive or 5 6 employee benefit or compensation plan maintained by Retek, so long as, from and after the Effective Date and prior to the issuance of such shares, Retek has repurchased from stockholders and not subsequently reissued a number of shares equal or greater to the number of shares to be issued in any such issuance. 2.2. Notice. At least twenty (20) business days prior to the earlier of (a) the issuance of any shares of Capital Stock (other than in connection with the Initial Public Offering, including the full exercise of all underwriters' over-allotment options and other than issuances of Capital Stock to any HNC Entity), or (b) the first date on which any event could occur that, in the absence of a full or partial exercise of the Option, would result in an HNC Ownership Reduction, Retek will notify HNC in writing (an "Option Notice") of any plans it has to issue such shares and the date on which such event could first occur. Each Option Notice must specify (a) the date on which Retek intends to issue such additional shares or on which such event could first occur (such issuance or event being referred to herein as an "Issuance Event" and the date of such issuance or event as an "Issuance Event Date"), (b) the number of shares Retek intends to issue or may issue and, (c) the other terms and conditions of such Issuance Event. 2.3. Option Exercise and Payment. The Option may be exercised by HNC (or any HNC Entity to which all or any part of the Option has been assigned) for a number of shares equal to or less than the number of shares that are necessary for the HNC Entities to maintain, in the aggregate, the Minimum Ownership Percentage. Each Option may be exercised at any time after the delivery of an Option Notice and prior to an Issuance Event Date by the delivery to Retek by HNC or any HNC entity of a written notice (the "Exercise Notice") to such effect specifying (i) the number of shares of Common Stock to be purchased by HNC or any of the HNC Entities upon such exercise of the Option and (ii) a calculation of the exercise price for such shares. Upon any such exercise of the Option, Retek will, prior to the Issuance Event Date, deliver to HNC (or any HNC Entity who is exercising the Option or who is designated by HNC), against payment therefor, certificates (issued in the name of HNC or its permitted assignee hereunder or as directed by HNC) representing the shares of Common Stock being purchased upon such exercise. If after the receipt of an Option Notice and prior to the corresponding Issuance Event Date, HNC delivers to Retek an Exercise Notice, Retek shall deliver the certificates for the shares of Common Stock being purchased prior to the applicable Issuance Event Date. Payment for such shares shall be made, on the date of delivery of such certificates, by wire transfer or intrabank transfer of immediately-available funds to such account as shall be specified by Retek, for the full purchase price for such shares. 2.4. Effect of Failure to Exercise. Except as provided in Section 2.6, any failure by HNC to exercise the Option in full shall not affect HNC's right to thereafter exercise the Option at any time in the future. 2.5. Initial Public Offering. Notwithstanding the foregoing, HNC shall not be entitled to exercise the Option in connection with the Initial Public Offering of the Common Stock by Retek if, upon the completion of the Initial Public Offering, including the full exercise of all underwriters' over-allotment options, HNC owns at least the Minimum Ownership Percentage (without regard to clause (i)(c) of the definition of the Minimum Ownership Percentage). 6 7 2.6. Termination of Option . The Option shall terminate upon the occurrence of any Issuance Event that results in HNC's Ownership Percentage being less than fifty percent (50%), other than any Issuance Event consummated in violation of this Agreement. Any portion of the Option assigned to any HNC Entity other than HNC, also shall terminate in the event that the Person to whom such portion of the Option has been transferred, ceases to be a HNC Entity for any reason whatsoever. If Retek fails to deliver any Option Notice on a timely basis as required by Section 2.2, then the Option shall remain exercisable with respect to the Issuance Event that triggered such right to exercise the Option until such time as an Option Notice is provided to HNC and twenty (20) business days elapse after HNC's receipt of such Option Notice without exercise of the Option. ARTICLE III: REGISTRATION RIGHTS 3.1. Demand Registration - Registrable Securities. (a) Upon written notice provided to Retek at any time after the Initial Public Offering Date from any Holder of Registrable Securities requesting that Retek effect the registration under the Securities Act of any or all of the Registrable Securities held by such Holder, which notice shall specify the intended method or methods of disposition of such Registrable Securities and whether the Holders wish such registration to be a Rule 415 Offering (the "Demand Notice"), Retek shall use its best efforts to promptly effect the registration under the Securities Act and applicable state securities laws of such Registrable Securities for disposition in accordance with the intended method or methods of disposition stated in such Demand Notice (including in a Rule 415 Offering, if Retek is then eligible to register such Registrable Securities on Form S-3, or a successor form, for such offering); provided that: (i) with respect to any registration statement filed, or to be filed, pursuant to this Section 3.1, if Retek shall furnish to the Holders of Registrable Securities that have made such request (within three (3) business days after Retek's receipt of the Demand Notice) a certified resolution of the Board of Directors of Retek (adopted by the affirmative vote of a majority of the directors not designated by the HNC Entities) stating that in the Board of Directors' good faith judgment it would be significantly disadvantageous to Retek, because of the existence of, or in anticipation of, any acquisition or financing activity, or the unavailability, for reasons beyond Retek's reasonable control, of any financial statements required to effect such requested registration, or any other event or condition of similar significance to Retek (a "Disadvantageous Condition"), for such a registration statement to be maintained effective, or to be filed and become effective at such time, and setting forth the general reasons for such judgment, then, (a) in the event no registration statement has yet been filed, Retek shall be entitled not to file any such registration statement, or (b) in the event a registration statement covering the disposition of the Registrable Securities is then filed and declared effective, the Holders will not sell Registrable Securities under such registration statement until such Disadvantageous Condition no longer exists (at which time Retek shall promptly deliver notice to such Holders that such Disadvantageous Condition no longer exists). Upon receipt of any such notice of a Disadvantageous Condition, such Holders shall forthwith discontinue use of the prospectus contained in such registration statement and, if so directed by Retek, each such Holder will deliver to Retek all copies (other than permanent file copies then in such Holder's possession) of the prospectus then covering such Registrable Securities that is current at the time of receipt of such 7 8 notice and Retek shall promptly amend such prospectus as necessary to enable the Holders to sell their Registrable Securities under the registration statement at any time that they are permitted to do so under the provisions of this Agreement, provided, that notwithstanding the foregoing, the filing of any such registration statement may not be delayed, nor may sales or other dispositions of Registrable Securities by Holders under a registration statement be prevented, for a period in excess of ninety (90) consecutive days (or until such earlier time as the Disadvantageous Condition no longer exists) due to the occurrence of any particular Disadvantageous Condition and no more than one resolution regarding Disadvantageous Conditions may be made by the Board of Directors of Retek in any twelve (12) month period; and (ii) the Holders of Registrable Securities shall not have the right to exercise registration rights pursuant to this Section 3.1 within (A) the 180-day period following the effective date of the registration statement for the Initial Public Offering or (B) the 60-day period following the effective date of any subsequent registration pursuant to the exercise of the registration rights provided in this Section 3.1 in which the Holders of Registrable Securities were allowed to include ten percent (10%) of their Registrable Securities; (iii) the Holders of Registrable Securities shall have the right to request that Retek effect a registration of their Registrable Securities pursuant to this Section 3.1 on not more than two (2) separate registrations during any twelve (12) month period, excluding any prior exercises of such rights that are not deemed to have been effected pursuant to Section 3.1(b). The priority of exercise for such rights shall be allocated among the Holders in such manner as the Holders may agree. If Registrable Securities relating to different Request Notices delivered by more than one Holder are registered under the same registration statement, such offering shall be deemed to be a single exercise of demand rights by the first Holder to deliver a Request Notice and the filing of only one registration statement for purposes of this Section 3.1; and (iv) the Registrable Securities requested by all Holders to be registered pursuant to any Demand Notice must have an anticipated aggregate public offering price (before any underwriters' discounts or commissions) of at least $5,000,000; and (v) after the reduction in HNC's Ownership Percentage to less than twenty percent (20%), the Holders of Registrable Securities may collectively exercise their rights under this Section 3.1 (through notice delivered by Holders owning in the aggregate a majority in economic interest of the Registrable Securities then held by Holders) on not more than three (3) occasions. (b) Notwithstanding any other provision of this Agreement to the contrary, a registration requested by a Holder of Registrable Securities pursuant to this Section 3.1 shall not be deemed to have been effected (and, therefore, not requested for purposes of paragraph (a) above), (i) unless it has become effective, (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation or an omission by such Holder, or is withdrawn by Retek pursuant to Section 3.1(a)(i) or otherwise, and, as a result thereof, the Registrable Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the related registration statement or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into 8 9 in connection with such registration are not satisfied or waived other than by reason of some act or omission by such Holder of Registrable Securities. (c) In the event that any registration pursuant to this Section 3.1 shall involve, in whole or in part, an underwritten offering, the Holders of a majority of the Registrable Securities to be registered shall have the right to designate an underwriter or underwriters reasonably acceptable to Retek as the lead or managing underwriters of such underwritten offering and, in connection with each registration pursuant to this Section 3.1, such Holders may select one counsel reasonably acceptable to Retek to represent all such Holders in connection with such offering. (d) Retek shall have the right to cause the registration of additional equity securities for sale for its account, the account of any Retek Entity or any existing or former directors, officers or employees of the Retek Entities (the "Additional Securities") in any registration of Registrable Securities requested by the Holders pursuant to Section 3.1(a); provided, however, that if the registration and sale of such Additional Securities would require HNC or any HNC Entity to exercise the Option in order (i) to maintain HNC's then-current Ownership Percentage or (ii) to enable the HNC Entities (in the aggregate) to maintain ownership of the Minimum Ownership Percentage, then the number of such Additional Securities shall be reduced so that exercise of the Option would not be necessary for HNC or any HNC Entity to maintain such ownership levels and provided, further, that if such Holders are advised by a nationally recognized investment banking or commercial banking firm selected by such Holders and reasonably acceptable to Retek (which shall be the lead underwriter or a managing underwriter in the case of an underwritten offering) that, in such firm's good faith view, the inclusion of the Additional Securities in such registration would be likely to have an adverse effect on the price, timing or distribution of the offering and sale of the Registrable Securities then proposed to be sold by any Holder, then all or part of the Additional Securities shall be excluded from the registration. In the event that any Additional Securities are included in the registration, the Holders of the Registrable Securities to be offered may require that any Additional Securities be subject to the same conditions as are applicable to the Registrable Securities being sold in the offering. In the event that the number of Registrable Securities requested to be included in a registration statement by the Holders thereof exceeds the number which, in the good faith view of such lead or managing underwriter, can be sold without adversely affecting the price, timing, distribution or sale of securities in the offering, the number of Registrable Securities to be included in such offering shall be allocated pro rata among the requesting Holders on the basis of the relative number of Registrable Securities then held by each such Holder (provided that any number of Registrable Securities in excess of a Holder's request may be reallocated among the remaining requesting Holders in a like manner, or as may be otherwise agreed in writing by the Holders). Retek agrees that, if requested by a Selling Holder, it will not effect any public sale or distribution of its securities of the same class proposed to be registered by the Holders, or any securities convertible into the same class, during the thirty (30) days before the commencement of, during, and for a period of ninety (90) days after termination of, an offering effected by the Holders pursuant to this Section 3.1, except: (i) as part of such offering in accordance with this paragraph (d); (ii) in connection with any dividend reinvestment plan, employee stock option, bonus, retirement or other compensation plan or arrangement (other than secondary registrations for resales pursuant to such plans or arrangements) of Retek; (iii) any public sale or distribution, 9 10 the registration statement for which was filed with the SEC before the receipt of the notice from the requesting Holder or Holders pursuant to Section 3.1 (otherwise than pursuant to a Rule 415 Offering); or (iv) upon delivery by Retek of a written opinion addressed to the Selling Holder from a nationally recognized investment banking firm jointly selected by Retek and the Selling Holder, at Retek's expense, stating that, in the view of such firm, such pubic sale and distribution by Retek could be effected without adversely affecting the market price for the Registrable Securities. 3.2. Piggyback Registration. In the event that Retek at any time after the Initial Public Offering Date proposes to file a registration statement covering the issuance or sale of any shares of Retek Common Stock, or any other equity securities or securities convertible into or exchangeable for equity securities of Retek (collectively, including Common Stock, "Other Securities") under the Securities Act, whether or not for sale for Retek's account in a manner that would permit the Registrable Securities to be sold for cash under the Securities Act, then Retek shall, at least twenty (20) days prior to the filing of such registration statement, provide written notice to each Holder of Registrable Securities of its intention to file a registration statement. Subject to the terms and conditions hereof, such notice shall offer each Holder the opportunity to include in such registration statement such number of Registrable Securities as any Holder may request. Upon the written request of any Holder made within fifteen (15) days after the receipt of Retek's notice (which request shall specify the number of Registrable Securities intended to be disposed of and the intended method of distribution thereof), Retek shall use its best efforts to effect, in connection with the registration of the Other Securities, the registration under the Securities Act of all Registrable Securities that the Holders have requested to have registered (to the extent required to permit the disposition (in accordance with such intended method of disposition thereof) of the Registrable Securities so requested to be registered); provided that: (a) if, at any time after giving the Holders written notice of Retek's intention to register any Other Securities and prior to the effective date of the registration statement filed in connection therewith, the Board of Directors of Retek shall determine for any reason not to register the Other Securities, then Retek shall, after giving prompt written notice of such determination to the Holders, be relieved of its obligation to register such Registrable Securities in connection with the registration of the Other Securities. Any such termination of a registration shall not preclude the Holders of Registrable Securities from immediately requesting that such registration be effected as a registration under Section 3.1 to the extent permitted thereunder; (b) if the registration referred to in the first sentence of this Section 3.2 is to be an underwritten registration on behalf of Retek, and a nationally recognized investment banking or commercial banking firm selected by Retek advises Retek in writing that, in such firm's good faith view, all or a part of such Registrable Securities cannot be sold and the inclusion of all or a part of such Registrable Securities in such registration would be likely to have an adverse effect upon the price, timing or distribution of the offering and sale of the Other Securities then contemplated, then Retek shall include in such registration: (i) first, all Other Securities Retek proposes to sell for its own account ("Retek Securities"); 10 11 (ii) second, up to the full number of Registrable Securities held by Holders that have been requested by such Holders to be included in such registration ("Holder Securities") in excess of the number of Retek Securities to be sold in such offering, which number of Holder Securities, in the good faith view of such investment banking or commercial banking firm, can be sold without adversely affecting such offering of Retek Securities and (x) if such number is less than the full number of such Holder Securities, such number shall be allocated by HNC among such Holders and (y) in the event that such investment banking or commercial banking firm advises that less than all of such Holder Securities may be included in such offering, the Holders may withdraw their request for registration of their Registrable Securities in such offering under this Section 3.2 and ninety (90) days subsequent to the effective date of the registration statement relating to the Other Securities, the Holders may request that a registration relating to the Holder Securities be effected under Section 3.1 to the extent permitted thereunder; and (iii) third, up to the full number of the Other Securities (other than Retek Securities), if any, in excess of the number of Retek Securities and Registrable Securities to be sold in such offering, which number of such Other Securities, in the good faith view of such investment banking firm, can be so sold without so adversely affecting such offering of Retek Securities and Registrable Securities (and, if such number is less than the full number of such Other Securities, such number shall be allocated pro rata among the holders of such Other Securities (other than Retek Securities) on the basis of the number of securities requested to be included therein by each such holder of such Other Securities); (c) Retek shall not be required to effect any registration of Registrable Securities under this Section 3.2 incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or employee benefit/compensation plans (other than secondary registrations for resales pursuant to such plans); and (d) no registration of Registrable Securities effected under this Section 3.2 shall relieve Retek of its obligation to effect any registration of Registrable Securities pursuant to Section 3.1. 3.3. Expenses. Except as provided herein and except for underwriting discounts and commissions attributable to the Registrable Securities sold by the Holders, Retek shall pay all Registration Expenses with respect to a particular offering (or proposed offering). Notwithstanding the foregoing, each Holder and Retek shall be responsible for its own internal administrative and similar costs, which shall not constitute Registration Expenses. 3.4. Registration and Qualification. If and whenever Retek is required to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3.1 or 3.2, Retek shall as promptly as practicable: (a) prepare, file and use its best efforts to cause to become effective a registration statement under the Securities Act relating to the Registrable Securities proposed to be 11 12 offered; provided, that before filing any such registration statement, Retek will furnish to each Holder of Registrable Securities included in such registration (each a "Selling Holder"), counsel designated by the Selling Holders and the underwriters, if any, copies of any such registration statement (which registration statement shall be subject to review of such Selling Holders, counsel and underwriters) and Retek shall consider in good faith incorporating such changes in the registration statement as are reasonably requested by the Selling Holders, their counsel and underwriters; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities until the earlier of (i) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement and (ii) the expiration of six (6) months after such registration statement becomes effective if the registration is effected on Form S-3 (or a comparable successor form which permits the incorporation by reference of any subsequently filed periodic reports under the Exchange Act or the expiration of the date that is three (3) months after the date on which such registration statement becomes effective on any other registration statement form; provided, that such six-month or three-month period shall be extended for such number of days that equals the number of days elapsing from (x) the date the written notice contemplated by paragraph 3.4(g) below is given by Retek to (y) the date on which Retek delivers to the Holders of Registrable Securities the supplement or amendment contemplated by paragraph 3.4(g) below; and provided further, that Retek may keep such registration statement effective for longer time periods if desired by Retek; (c) furnish to the Holders of Registrable Securities and to any underwriter of such Registrable Securities such number of conformed or original copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary or final prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as the Holders of Registrable Securities or such underwriter may reasonably request, and upon request a copy of any and all transmittal letters or other correspondence to, or received from, the SEC or any other governmental agency, stock exchange or automated inter-dealer quotation system, self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering; (d) use its diligent and reasonable best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such U.S. jurisdictions as the Holders of such Registrable Securities or any underwriter to such Registrable Securities shall request, and use its diligent and reasonable best efforts to obtain all appropriate registrations, permits and consents in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable the Holders of Registrable Securities or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; provided, that Retek shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any 12 13 such jurisdiction wherein it is not so qualified or to consent to general service of process in any such jurisdiction; (e) in any underwritten offering use its diligent and reasonable best efforts to furnish to each Holder of Registrable Securities included in such registration (each, a "Selling Holder") and to any underwriter of such Registrable Securities an opinion of independent counsel for Retek addressed to each Selling Holder and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement) covering such matters as are customarily covered in opinions of issuer's counsel delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Holders may reasonably request; (f) in any underwritten offering use its diligent and reasonable best efforts to furnish to each Selling Holder a "cold comfort" letter addressed to each Selling Holder and to any underwriter of such Registrable Securities signed by the independent public accountants who have audited the financial statements of Retek included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in accountants' letters delivered to underwriters in underwritten public offerings of securities and with respect to events subsequent to the date of such financial statements; (g) as promptly as practicable, notify the Selling Holders in writing (i) at any time when a prospectus relating to a registration pursuant to Section 3.1 or Section 3.2 is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case, at the request of the Selling Holders prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; (h) enter into customary agreements (including if the method of distribution is by means of an underwriting, an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities to be so included in the registration statement; (i) use its best efforts to list all such Registrable Securities covered by such registration on each securities exchange and/or automated inter- dealer quotation system on which a class of common equity securities of Retek is then listed; (j) to the extent reasonably requested by the lead or managing underwriters, send appropriate officers of Retek to attend any "road shows" scheduled in connection with any 13 14 such registration, with all out-of-pocket costs and expense incurred by Retek or such officers in connection with such attendance to be paid by Retek; (k) furnish for delivery in connection with the closing of any offering of Registrable Securities pursuant to a registration effected pursuant to Section 3.1 or Section 3.2 certificates bearing no legends and representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the Selling Holders or the underwriters; and (l) notify each Selling Holder in writing, as soon as practicable after Retek becomes aware that any registration statement under which such Selling Holder may sell any Registrable Securities has ceased to be effective, of the fact that such registration statement has ceased to be effective. 3.5. Underwriting; Due Diligence. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Article III, Retek shall enter into an underwriting agreement with such underwriters for such offering, which agreement will contain such representations and warranties by Retek and such other terms and provisions as are customarily contained in underwriting agreements of Retek to the extent relevant and as are customarily contained in underwriting agreements generally with respect to secondary distributions to the extent relevant, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 3.6 and agreements as to the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 3.4(e) and Section 3.4(f). The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, Retek to and for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by such Selling Holders and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, when relevant, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 3.6. (b) In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act pursuant to this Article III, Retek shall give the Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants, such reasonable and customary access to its books and records and such opportunities to discuss the business of Retek with its officers and the independent public accountants who have certified the financial statements of Retek as shall be necessary, in the opinion of such Holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 3.6. Indemnification and Contribution. (a) In the case of each offering of Registrable Securities made pursuant to this Article III, Retek agrees to indemnify and hold harmless, to the extent permitted by law, each Selling Holder, each underwriter of Registrable Securities so offered and each Person, if any, who 14 15 controls any of the foregoing Persons within the meaning of the Securities Act and the officers, directors, affiliates, employees and agents of each of the foregoing, jointly and severally, from and against any and all losses, liabilities, costs (including reasonable attorney's fees and disbursements), claims and damages, each as incurred, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in investigation, defense or settlement of any litigation commenced or threatened, insofar as such losses, liabilities, costs, claims and damages (or actions or proceedings in respect thereof, whether or not such indemnified Person is a party thereto) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities prepared by Retek or at its direction, or in any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising from or relating to any violation or alleged violation of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered and relating to action required of, or inaction by, Retek in connection with such offering; provided, however that Retek shall not be liable to any Holder in any such case to the extent that any such loss, liability, cost, claim or damage arises out of or relates to any untrue statement or alleged untrue statement, or any omission, if such statement or omission shall have been made in reliance upon and in conformity with information that relates to such Selling Holder, if such information was furnished in writing to Retek by or on behalf of such Selling Holder specifically for use in the registration statement (or in any preliminary or final prospectus included therein), offering memorandum or other offering document, or in any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Selling Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability that Retek may otherwise have to each Selling Holder, other holder or underwriter of the Registrable Securities or any controlling person of the foregoing and the officers, directors, affiliates, employees and agents of each of the foregoing; provided, further, that, in the case of an offering with respect to which a Selling Holder has designated the lead or managing underwriters (or a Selling Holder is offering Registrable Securities directly, without an underwriter), this indemnity does not apply to any loss, liability, cost, claim or damage arising out of or relating to any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a final prospectus was not sent or given by or on behalf of any underwriter (or such Selling Holder or other holder, as the case may be) legally required to deliver a final prospectus to such Person asserting such loss, liability, cost, claim or damage at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such final prospectus. (b) In the case of each registered offering made pursuant to this Agreement, each Selling Holder, by exercising its registration rights hereunder, agrees to indemnify and hold harmless Retek, each underwriter who participates in such offering, each other Selling Holder or other holder with securities included in such offering and each Person, if any, who controls (within the meaning of the Securities Act) such underwriter, other Selling Holder or other holder and the officers, directors, affiliates, employees and agents of each of the foregoing, against any and all losses, liabilities, costs (including reasonable attorney's fees and disbursements), claims and controls any of the foregoing Persons within the meaning of the Securities Act and the officers, directors, affiliates, employees and agents of each of the foregoing, jointly and severally, from and against any and all losses, liabilities, costs (including reasonable attorney's fees and disbursements), claims and 15 16 damages, each as incurred, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in investigation, defense or settlement of any litigation commenced or threatened, insofar as such losses, liabilities, costs, claims and damages (or actions or proceedings in respect thereof, whether or not such indemnified Person is a party thereto) arise out of or are based upon any untrue statement or alleged untrue statement by such Selling Holder of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities prepared by Retek or at its direction, or in any amendment thereof or supplement thereto, or any omission by such Selling Holder or alleged omission by such Selling Holder of a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement of a material fact is contained in, or such material fact is omitted from, information relating to such Selling Holder furnished to Retek in writing by or on behalf of such Selling Holder specifically for use in such registration statement (or in any preliminary or final prospectus included therein), offering memorandum or other offering document, or any amendment thereof or supplement thereto; provided that the maximum liability of any Holder for any loss, liability, cost, claim or damage pursuant to the foregoing indemnity shall not exceed the amount of the net proceeds, if any, obtained by the Holder upon the sale of such Holder's Registrable Securities pursuant to such offering. The foregoing indemnity is in addition to any liability which such Selling Holder may otherwise have to Retek, or controlling persons and the officers, directors, affiliates, employees, and agents of each of the foregoing; provided, however, that, in the case of an offering made pursuant to this Agreement with respect to which Retek has designated the lead or managing underwriters (or Retek is offering securities directly, without an underwriter), this indemnity does not apply to any loss, liability, cost, claim, or damage arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a final prospectus was not sent or given by or on behalf of any underwriter (or Retek, as the case may be) legally required to provide a final prospectus to such Person asserting such loss, liability, cost, claim or damage at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such final prospectus. (c) Each party indemnified under paragraph (a) or (b) above (an "Indemnified Party") shall, promptly after receipt of notice of a claim or action against such Indemnified Party in respect of which indemnity may be sought hereunder, notify the party required to provide indemnification hereunder (an "Indemnifying Party") in writing of the claim or action; provided, that the failure to notify the Indemnifying Party shall not relieve it from any liability that it may have to an Indemnified Party under this Section 3.6 (except that the failure to notify an Indemnifying Party promptly of the commencement of any such action, to the extent materially prejudicial to the Indemnifying Party's ability to defend such action, shall relieve such Indemnifying Party of any liability only to the extent the Indemnifying Party is prejudiced with respect to its indemnification obligations under this Section 3.6). If any such claim or action shall be brought against an Indemnified Party, and it shall have notified the Indemnifying Party thereof, unless in such Indemnified Party's good faith reasonable judgment a conflict of interest between such Indemnified Party and Indemnifying Party may exist in respect of such claim, the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified Indemnifying Party, to assume the defense thereof with counsel reasonably acceptable to the Indemnified Party (who shall not, except with the consent of the 16 17 Indemnified Party, be counsel to the Indemnifying Party). After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action using counsel reasonably acceptable to the Indemnified Party, the Indemnifying Party shall not be liable to the Indemnified Party under this Section 3.6 for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that, any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of any such claim or action, but the fees and expenses of such counsel shall be at the expense of such Person, unless (i) the Indemnifying Party has agreed to pay such fees or expenses, (ii) the Indemnifying Party shall have failed to assume the defense of such claim and employ counsel reasonably acceptable to such Person, or (iii) in the reasonable good faith judgment of any such Person based on advice of its counsel, a conflict of interest may exist between such Person and the Indemnifying Party with respect to such claims or actions (in which case, if such Person notifies the Indemnifying Party in writing that such Person elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such claim or action on behalf of such Person). If the Indemnifying Party is not entitled to or does not assume the defense of such claim or action, it is understood that the Indemnifying Party shall not, in connection with any one such claim or action or separate but substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to one separate firm of local attorneys in each such jurisdiction) at any time for all such Indemnified Parties. Any Indemnifying Party against whom indemnity may be sought under this Section 3.6 shall not be liable to indemnify an Indemnified Party if such Indemnified Party settles such claim or action without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld, conditioned or delayed. (d) If the indemnification provided for in this Section 3.6 shall for any reason be unavailable (other than in accordance with its terms) to an Indemnified Party in respect of any loss, liability, cost, claim or damage referred to therein, then each Indemnifying Party shall, in lieu of indemnifying such Indemnified Party, contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, cost, claim or damage in such proportion as shall be appropriate to reflect (i) the relative benefits received by the Indemnifying Party on the one hand and the Indemnified Party on the other hand or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or if the Indemnified Party failed to give the notice required under paragraph 3.6(c) above, the relative benefits to and the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other hand with respect to the statements or omissions which resulted in such loss, liability, cost, claim or damage as well as any other relevant equitable considerations. The relative benefits received by the Indemnifying Party and the Indemnified Party shall be deemed to be in the same respective proportion as the net proceeds (before deducting expenses) of the offering received by such party (or, in the case of an underwriter, such underwriter's discounts and commissions) bear to the aggregate offering price of the Registrable Securities or Other Securities. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party on the one hand or the Indemnified Party on the other hand, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any Indemnified Party's stock ownership in Retek. The amount paid or payable by an 17 18 Indemnified Party as a result of the loss, cost, claim, damage or liability, or action in respect thereof, referred to above in this paragraph 3.6(d) shall be deemed to include, for purposes of this paragraph (d), any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 3.6(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediate preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Indemnification and contribution similar to that specified in the preceding paragraphs of this Section 3.6 (with appropriate modifications) shall be given by Retek and the Selling Holders with respect to any required registration or other qualification of securities under any state law or regulation or governmental authority. (f) The obligations of the parties under this Section 3.6 shall be in addition to any liability which any party may otherwise have to any other party. 3.7. Rule 144 and Form S-3. Commencing ninety (90) days after the Initial Public Offering Date, Retek shall use its best efforts to ensure that the conditions to the availability of Rule 144 set forth in paragraph (c) thereof shall be satisfied. Upon the request of any Holder of Registrable Securities, Retek will deliver to such Holder a written statement as to whether it has complied with such requirements. Retek further agrees to use its reasonable efforts to cause all conditions to the availability of Form S-3 (or any successor form) under the Securities Act of the filing of registration statements under this Agreement to be met as soon as practicable after the Initial Public Offering Date. 3.8. Transfer of Registration Rights. Any Holder may transfer all or any portion of its rights under this Article III to any transferee of a number of Registrable Securities owned by such Holder exceeding five percent (5%) of the outstanding class or series of such securities at the time of transfer (each transferee that receives such minimum number of Registrable Securities, a "Transferee"); provided, that each Transferee of Registrable Securities (other than HNC Entities) to which Registrable Securities are transferred, sold or assigned directly by a HNC Entity (such Transferee, an "HNC Transferee") together with any Affiliate of such HNC Transferee (and any subsequent direct or indirect Transferees of Registrable Securities from such HNC Transferee and any Affiliates thereof) shall be entitled to request the registration of Registrable Securities pursuant to Section 3.1 only once prior to a reduction in HNC's Ownership Percentage to less than fifty percent (50%) and thereafter shall only be entitled to request the registration of Registrable Securities pursuant to Section 3.2; provided further, that no HNC Transferee shall be entitled to request registration pursuant to Section 3.1 for an amount of Registrable Securities equal to less than $5,000,000; and provided further, that notwithstanding the foregoing, HNC shall not transfer any of its rights under this Article III to any stockholder of HNC in connection with the transfer of Registrable Securities to such stockholder in the Distribution. Any transfer of registration rights pursuant to this Section 3.8 shall be effective upon receipt by Retek of (i) written notice from such Holder stating the name and address of any Transferee and 18 19 identifying the number of Registrable Securities with respect to which the rights under this Agreement are being transferred and the nature of the rights so transferred and (ii) a written agreement from such Transferee to be bound by the terms of this Agreement. The Holders may exercise their rights hereunder in such priority as they shall agree upon among themselves. 3.9. Market Standoff Agreement. If any registration pursuant to this Article III shall be in connection with an underwritten public offering of Registrable Securities, each Selling Holder agrees not to effect any public sale or distribution, including any sale under Rule 144, of any equity security of Retek or any security convertible into or exchangeable or exercisable for any equity security of Retek, in the case of Registrable Securities (otherwise than through the registered public offering then being made), within seven (7) days (after the receipt of satisfactory notice from Retek) prior to or ninety (90) days (or such lesser period as the lead or managing underwriters may permit) after the effective date of the registration statement (or the commencement of the offering to the public of such Registrable Securities in the case of Rule 415 offerings), provided that each officer, director, and each person or entity who is a "beneficial owner" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of five percent (5%) of more of the outstanding shares of Capital Stock of Retek prior to such offering also agrees to be similarly bound by this restriction. 3.10. Limitation on Subsequent Registration Rights. After the date of this Agreement, Retek shall not, without the prior written consent of the Holders of majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of Retek that would grant such holder registration rights that would prevent Retek from honoring the registration rights of Holders described herein. ARTICLE IV: CORPORATE GOVERNANCE MATTERS AND INFORMATION RIGHTS 4.1. Seats on Retek Board of Directors. At and after the Initial Public Offering Date, the Board of Directors of Retek shall consist of not more and not less than seven (7) members and shall be comprised of (a) the Chief Executive Officer of Retek, (b) three (3) individuals, each of whom shall have been designated by HNC (each an "HNC Designee") and (c) three (3) independent directors, each of whom shall have appropriate retail industry (or other relevant industry) experience and shall have been designated by the Chief Executive Officer of Retek; provided, however, that HNC's right to designate the three (3) HNC Designees shall terminate once HNC and its Affiliates own (including without limitation voting their shares of Capital Stock of Retek) less than twenty-five percent (25%) of the outstanding Common Stock; and provided, further, that when HNC and its Affiliates own less than twenty-five percent (25%) of the outstanding Common Stock, HNC will use reasonable, good faith efforts to cause the HNC Designees to tender their resignations as members of Retek's Board of Directors effective at the next annual meeting of Retek's stockholders regardless of whether the term of such HNC Designee ends at such meeting; provided, further, that when HNC and its Affiliates own less than five percent (5%) of the outstanding Common Stock, HNC will use reasonable, good faith efforts to cause the HNC Designees to tender their resignations as members of Retek's Board of Directors as promptly as possible thereafter. The HNC Designees will serve in the class of Retek directors whose board seats will come up for election at the most distant time from the Initial Public Offering than any other class of Retek directors (currently this class of Retek directors is 19 20 anticipated to be Retek's Class III Directors, whose seats will come up for election in 2002). The parties agree to take all necessary action within their control as is necessary from time to time to implement and carry out the agreements set forth in the immediately preceding sentence, including without limitation voting their shares of Capital Stock in favor of the election to Retek's Board of Directors of the Board nominees designated as provided above. 4.2. HNC Designees - Vacancy. For so long as HNC has the right to nominate the HNC Designees, if a vacancy on the Retek Board of Directors is caused by the death, disability, retirement, resignation, or removal for cause or otherwise of an HNC Designee, then HNC shall have the sole right to designate an individual to fill such vacancy on the Retek Board of Directors. The parties agree to take all necessary action within their control as may be necessary from time to time to cause each individual so designated by HNC pursuant to this Section 4.2 to promptly become a member of the Board of Directors of Retek, by election, appointment by the Retek Board of Directors or otherwise. 4.3. Removal. (a) Any HNC Designee may be removed from office only (i) for Cause (as defined below) by the vote of the stockholders representing not less than a majority of the issued and outstanding shares of the Capital Stock of Retek entitled to vote upon the election of directors; or (ii) upon HNC's determination that the HNC Designee should no longer serve as such. Upon any such determination by HNC pursuant to part (ii) of the immediately preceding sentence, the parties agree to take all necessary action within their control (including without limitation voting their shares of Capital Stock of Retek) to cause such HNC Designee to be promptly removed from the Board of Directors of Retek and to cause a successor HNC Designee designated by HNC to be immediately elected or appointed to the Board of Directors of Retek to replace such removed HNC Designee. For purposes of this Agreement, "Cause" means (i) the willful failure by the HNC Designee to perform his or her lawful duties as a member of Retek's Board of Directors consistent with such HNC Designee's position, (ii) such HNC Designee's neglect of his or her duties on a general basis (other than as a result of illness or disability), (iii) the commission by such HNC Designee of any act of fraud, theft or criminal dishonesty with respect to Retek or any of its Affiliates, or the conviction of HNC Designee of any crime involving a felony, fraud, embezzlement or the like, and (iv) the commission of any act involving moral turpitude which (A) brings Retek or any of its Affiliates into public disrepute or disgrace, or (B) causes material injury to the customer relations, operations or the business prospects of Retek or any of its Affiliates. (b) Notwithstanding the rights granted to it under Retek's Amended and Restated Certificate of Incorporation, HNC agrees that it will not vote its shares of Retek Common Stock to remove any member of Retek's Board of Directors who is not an HNC Designee from the Retek Board of Directors, except for the removal of any such director for Cause; provided, however, if the person who is Retek's Chief Executive Officer is a member of Retek's Board of Directors and such person ceases to be Retek's Chief Executive Officer for any reason, then HNC shall not be restricted in seeking the removal of such person from Retek's Board of Directors. Concurrently herewith, John Buchanan, Retek's current Chief Executive Officer, has executed and delivered to HNC and Retek a letter in the form of Exhibit 1 attached hereto, in which he has made 20 21 certain agreements with Retek and HNC which are a material inducement and consideration to HNC to enter into this Agreement. 4.4. Board Committees. The Board of Directors of Retek shall have a Compensation Committee and an Audit Committee. The Compensation Committee will be comprised of two (2) non-employee directors and will include at least one (1) HNC Designee. The Audit Committee will be comprised of two (2) directors and will include at least one (1) HNC Designee and one independent director. 4.5. Special Transactions. Retek and RIS covenant and agree with HNC that neither Retek nor RIS shall take any action relating to a Special Transaction (as defined below) unless (i) such Special Transaction, such Special Transaction is approved by at least two (2) of the HNC Designees to the Board of Directors of Retek, and (ii) with respect to a Special Transaction described in Sections 4.5(a), (c), (g), (h), (i), (k), (l) (m), (n) or (o) below, such Special Transaction is approved by HNC as the majority stockholder of Retek. In connection with any approvals required by HNC under this Section 4.5, Retek will provide adequate notice to HNC of any action described in Sections 4.5(a), (c), (g), (h), (i), (k), (l), (m), (n) or (o) below, without regard to the exceptions thereto, within a period of time sufficient to enable HNC to approve or disapprove of any such action. Each such notice shall set forth the terms and conditions of the proposed transaction, including, without limitation, the nature of any related action proposed to be taken by the Board of Directors of Retek, the approximate number of shares of Retek or RIS Capital Stock (if any) proposed to be sold by Retek or RIS or otherwise issued by Retek or RIS, the approximate value of Retek's assets (or assets of any of Retek's Subsidiaries) proposed to be transferred, and the proposed timetable for such transaction, all with sufficient particularity to enable HNC to approve or disapprove of such transaction. Promptly, but in any event within seven (7) days after HNC receives such written notice from Retek, HNC shall notify Retek in writing of its approval or disapproval of any such transaction. For the purposes of this Section 4.5, a "Special Transaction" shall mean any of the following events: (a) any merger, consolidation or other business combination by Retek, RIS or any direct or indirect or indirect wholly-owned Subsidiary of Retek or RIS with one or more Persons in which the outstanding shares of Retek, RIS or such a wholly-owned Subsidiary of Retek or RIS are exchanged for securities or other consideration, issued or caused to be issued by the acquiring corporation or its Subsidiary (other than a mere reincorporation transaction in which the relative interests of the securityholders of such entity are not changed) in which the holders of Capital Stock of Retek, RIS or such a wholly-owned Subsidiary of Retek or RIS immediately prior to such merger or consolidation do not own a majority of the outstanding shares of the surviving entity or such merger, consolidation or business combination; (b) a sale, lease, exchange or other disposition of all or a substantial portion of the assets of Retek, RIS or any of their Subsidiaries; (c) any material change in the scope or nature of the business presently conducted by Retek, RIS or any of their Subsidiaries as described in the registration statement for the Initial Public Offering; 21 22 (d) any liquidation, dissolution or winding up of Retek, RIS or any of their Subsidiaries; (e) any transaction or proposed transaction that would involve the issuance of Capital Stock of Retek in an amount that would result in an HNC Ownership Reduction; (f) any commitment by Retek or RIS to incur annual capital expenditures or to make investments or capital contributions on behalf of Retek or RIS in excess of $5,000,000 in the aggregate; other than any such expenditures that were not otherwise identified in any Annual Business Plan and Budget, (as described below) previously submitted to and approved by HNC; (g) any issuance, sale or exchange of shares of Capital Stock of Retek or RIS, except the Initial Public Offering or pursuant to sales of Common Stock of Retek to directors, employees or consultants of Retek or RIS pursuant to stock option or stock purchase plans previously approved (including approval of the number of shares reserved under such plan(s)) in writing by HNC (it being understood that in connection with the Initial Public Offering, HNC has approved Retek's adoption of, and the reservation of the following respective number of shares of Retek Common Stock under, (i) the Retek 1999 Equity Incentive Plan, under which a total of 9,000,000 shares of Retek Common Stock have been reserved for issuance; (ii) the Retek 1999 Employee Stock Purchase Plan, under which a total of 700,000 shares of Retek Common Stock have been reserved for issuance; and (iii) the Retek 1999 Directors Stock Option Plan, under which a total of 400,000 shares of Retek Common stock have been reserved for issuance. (h) the creation, incurrance, assumption, or guarantee of any obligation for borrowed money in an aggregate principal amount, in a single transaction or a series of transactions, of more than $10,000,000, or the extension, refinancing, or modification in any material respect of such obligation; (i) any sale, purchase, lease, exchange, mortgage, pledge, transfer or other acquisition or disposition (in one transaction or a series of transaction) of assets or a business having a fair market value of more than $3,000,000; (j) the formation, or the modification of the structure of, any committees of the Board of Directors of Retek or RIS; (k) the appointment, election or employment of, or termination of, Retek's Chief Executive Officer and Chief Financial Officer; (l) any adoption or amendment of any employee benefit, stock option, stock purchase or other equity incentive plan, program or arrangement for Retek's employees; (m) any material change in any Annual Business Plan and Budget; (n) any amendment to Retek's certificate of incorporation or by-laws that would (i) authorize any new class or series of capital stock of Retek or any preferred stock of Retek, (ii) affect or change the rights of the Common Stock, (iii) change or alter any provision directly or indirectly relating to the taking of action by stockholders or the Board of Directors of 22 23 Retek or the composition or election of Retek's Board of Directors, including, but not limited to, the voting requirements of the stockholders and directors of Retek; (o) any adoption or amendment of a stockholder rights plan, poison pill or similar antitakeover device; (p) the commencement by Retek of any legal action, suit, arbitration or other proceeding (each, an "Action"), other than any such proceeding that (i) is in the ordinary course of Retek's business and not material in amount or in the likely impact on Retek or (ii) where the aggregate amount of (A) damages or other relief (including the reasonably anticipated economic impact of any non-monetary relief, as determined by the Board of Directors of Retek in its good faith judgment) sought by Retek in such Action, (B) the amount of damages or other relief that would reasonably be expected to be sought by the defendant or defendants in any counterclaim against Retek in such Action and (C) the amount of expenses Retek would reasonably expect to pay to prosecute or defend such Action is not in the good faith judgment of the Board of Directors of Retek reasonably anticipated to exceed $500,000; and (q) the settlement of any Action against Retek of other than (i) any Action that arises in the ordinary course of Retek's business and not material in amount or in the likely impact on Retek or (ii) any such settlement that would result in a cost to Retek (net of any amounts payable to Retek under insurance policies or recoveries by Retek on any counterclaims) of not more than $500,000 (including the reasonably anticipated economic impact of any non-monetary relief, as determined by the Board of Directors of Retek in its good faith judgment). 4.6. Information Rights. Retek shall deliver to HNC in such format and media as HNC may reasonably request: (a) as soon as available, but in any event within twenty (20) days after the end of each month and each quarter, a consolidated balance sheet of Retek and its consolidated subsidiaries as of the end of such month or quarter and the related consolidated statements of earnings, stockholders' equity and statement of cash flows for such month or quarter, as the case may be, and for the year to date, setting forth, in each case, in comparative form the figures for the corresponding period of one year earlier, all in reasonable detail and prepared in accordance with generally accepted accounting principles ("GAAP") (except for the omission of footnotes) applied on a consistent basis throughout the periods represented; (b) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of Retek, a consolidated audited balance sheet of Retek and its consolidated subsidiaries as of the end of such fiscal year and the related statements of earnings, stockholders' equity and statement of cash flows for such fiscal year setting forth, in comparative form the figures for the previous fiscal year, all in reasonable detail for audit clearance within HNC. Retek will deliver to HNC within ninety (90) days after the end of each fiscal year such materials accompanied by the report thereon of Retek's independent auditors, which report shall state that such financial statements present fairly the financial condition and results of operations of Retek and its consolidated subsidiaries as of the close of such fiscal year in conformity with GAAP consistently applied; 23 24 (c) at least three (3) business days prior to Retek's filing thereof with the SEC, all reports, proxy statements, registration statements and other filings made by Retek under the Securities Act or the Exchange Act; (d) all written reports, analyses or studies relating to the business or financial condition of Retek as Retek shall deliver to any other holder of its Common Stock, simultaneously with its delivery to such holder; (e) as soon as available, but in any event no later than five (5) business days following receipt of a request by HNC, such other information relating to Retek as HNC may reasonably request, in connection with the reporting of its ownership interest in Retek under the "equity method" of accounting in accordance with GAAP or as may otherwise be required by GAAP, to prepare HNC's own financial statements and reports under the Exchange Act and in accordance with GAAP; and (f) as soon as practicable, but in any event no later than two (2) business days prior to issuance, copies of substantially final drafts of all press releases and other statements to be made available by Retek or any of its Subsidiaries or to the public concerning material developments in the business, properties, earnings, results of operations, financial condition or prospects of Retek or any of its Subsidiaries or the relationship between (i) Retek or any of its Subsidiaries and (ii) HNC or any of its Affiliates. In addition, within such two day period prior to the issuance of any such press release or public statement, Retek shall actively consult with HNC regarding any changes (other than typographical or other similar minor changes) to such substantially final drafts. Retek further agrees to review any proposed press release regarding its financial or operating results for any period with the audit committee of Retek's Board of Directors and Retek's independent auditors a reasonable amount of time prior to the initial public release of such press release. 4.7. Annual Business Plan and Budget. Retek will (a) at least one (1) month prior to the commencement of each fiscal year and at least thirty (30) days prior to the Initial Public Offering Date, prepare and submit to the Board of Directors of Retek and to HNC for approval and to HNC a budget and operating plan for the upcoming fiscal year, including projections or forecasts of capital and operating expenses, cash flow and profits and losses (the "Annual Business Plan and Budget"), all itemized in reasonable detail; and (b) at least one month prior to the commencement of each quarter, prepare and submit to the Board of Directors of Retek for approval and to HNC projections or forecasts of capital and operating expenses, cash flow and profits and losses for the remainder of the fiscal year together with profit projections for the following fiscal year. Before Retek takes any action that would materially deviate from the approved Annual Business Plan and Budget, the Board of Directors of Retek and HNC must first approve such action. 4.8. Inspection and Audit Rights. Retek agrees to permit authorized representatives of HNC to visit and inspect any of the properties of Retek, including its books of account, and to take extracts or copies thereof, and to discuss Retek's affairs, finances and accounts with Retek's officers and independent accountants, all at such times and as often as may be reasonably requested, and to make such other inspections as may be necessary to permit HNC to review any of the financial statements of Retek delivered to HNC pursuant to this Agreement; provided however, that such representative shall hold in confidence all non-public information so provided 24 25 and so designated by Retek (except that such representatives may disclose such information to officers of HNC, to HNC's counsel and independent auditors, to others and as required by law and regulations, including, without limitation, any laws or regulations requiring HNC to report (or to incorporate in any reports of HNC) such information regarding Retek). In addition, Retek will allow the independent auditors of HNC to audit the working papers or, and to assist in any review undertaken by, Retek's independent accountants. 4.9 Change in Fiscal Year. Retek shall, and shall cause each of its Subsidiaries to, maintain a fiscal year which commences and ends on the same dates as does HNC's fiscal year of each calendar year. 4.10 No Violations. (a) Retek covenants and agrees that it will not take any action or enter into any commitment or agreement which to Retek's knowledge, after due inquiry, may reasonably be anticipated to result, with or without notice and with or without lapse of time or otherwise, in a contravention, violation or event of default by HNC or any of its Affiliates of (i) any provision of HNC's certificate of incorporation or by-laws, each as amended, (ii) any credit agreement or other material agreements (including agreements relating to covenants not to compete) binding upon HNC or (iii) any judgment, order or decree of any governmental body, agency or court having jurisdiction over HNC or any of its respective assets. (b) Retek and HNC agree to provide to the other any information and documentation requested by the other for the purpose of evaluating and ensuring compliance with Section 4.10(a) hereof. 4.11. Termination of Certain Rights. Except as provided in Section 4.1, the provisions of this Article IV shall terminate and be of no further force or effect at such time as HNC (together with its Affiliates) ceases to own at least fifty percent (50%) of the outstanding shares of the Capital Stock of Retek; provided that the provisions of this Article IV shall not terminate if HNC (together with its Affiliates (other than Retek and RIS)) ceases to own at least fifty percent (50%) of the outstanding shares of the Capital Stock of Retek due to any breach, violation or default by Retek or RIS of any of their duties or obligations under the certificate of incorporation or bylaws of Retek, each as amended, or under any agreement to which they are a party or to which HNC is a party or beneficiary. ARTICLE V: MISCELLANEOUS 5.1. Limitation of Liability. Neither HNC nor Retek shall be liable to the other for any special, indirect, incidental or consequential damages of the other arising in connection with this Agreement. 5.2. Amendments; Waiver. This Agreement may not be amended or terminated orally, but only by a writing duly executed by or on behalf of the parties hereto. Any such amendment shall be validly and sufficiently authorized for purposes of this Agreement if it is signed on behalf of HNC and Retek by any of their respective presidents or vice presidents. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The 25 26 waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. Failure by either party, at any time, to require performance by the other party or to claim a breach of any provision of this Agreement shall not be construed as a waiver of any right accruing under this Agreement, nor shall it affect any subsequent breach or the effectiveness of this Agreement or any part hereof, or prejudice either party with respect to any subsequent action. 5.3. Term. This Agreement shall remain in effect until all Registrable Securities held by Holders have been transferred by them to Persons other than Transferees; provided, that the provisions of Section 3.6 shall survive any such expiration. 5.4. Severability. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid, illegal or unenforceable to any extent, the remainder of this Agreement or such provision of the application of such provision to such party or circumstances, other than those to which it is so determined to be invalid, illegal or unenforceable, shall remain in full force and effect to the fullest extent permitted by law and shall not be affected thereby, unless such a construction would be unreasonable. 5.5. Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon receipt if delivered personally, by a national overnight delivery service or by facsimile transmission, or upon deposit in the U.S. mail (certified or registered mail, postage prepaid, return receipt requested): If to HNC, to: If to Retek or RIS, to: HNC Software Inc. Retek Inc. 5935 Cornerstone Court West Midwest Plaza San Diego, CA 92121-3728 801 Nicollet Mall, 11th Floor Attention: Chief Financial Officer Minneapolis, MN 55402 Facsimile: (858) 452-3220 Attention: Chief Financial Officer Facsimile: (612) 630-5641 or to such other person or address as any party shall specify by providing notice in writing to the other party in the manner specified above. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, the business day following deposit with a national overnight delivery service, one (1) business day after transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. 5.6. Further Assurances. HNC and Retek shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments and take such other action as may be necessary or advisable to carry out their obligations under this Agreement and under any exhibit, document or other instrument delivered pursuant hereto. 26 27 5.7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same agreement. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all the parties reflected hereon as signatories. 5.8. Governing Law. This Agreement and the transactions contemplated hereby shall be construed in accordance with, and governed by, the laws of the State of Delaware, without regard to its principles of conflicts of laws. 5.9. Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof. 5.10. Successors. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. Nothing contained in this Agreement, express or implied, is intended to confer upon any other person or entity any benefits, rights or remedies. 5.11. Specific Performance. The parties hereto acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, it is agreed that they shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States or any state thereof, in addition to any other remedy to which they may be entitled at law or equity. 5.12 Dispute Resolution. Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby, shall be resolved in accordance with the procedures set forth in Article VII of the Separation Agreement. 5.13 Attorneys' Fees. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party will be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees to be fixed by the court (including, without limitation, costs, expenses and fees on any appeal). The prevailing party will be entitled to recover its costs of suit, regardless of whether such suit proceeds to final judgment. 5.14 Jurisdiction and Venue. The parties hereto irrevocably consent to and agree that any litigation or other dispute resolution proceeding among the parties relating to this Agreement shall take place in San Diego, County, California. The parties hereby irrevocably consent to the personal jurisdiction or and the venue in the state and federal court within such county. 5.15 Construction of Agreement. A reference to a Section will mean a Section in this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and will not in any manner limit the construction of this Agreement which will be considered as a whole. 27 28 IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. HNC SOFTWARE INC. RETEK INC. By: /s/ R.V. Thomas By: /s/ Gregory A. Effertz ------------------------------- -------------------------------- Name: R.V. Thomas Name: Gregory A. Effertz ----------------------------- ------------------------------ Title: CFO Title: VP, Finance and Adminstration ---------------------------- ----------------------------- Solely for purposes of Section 4.5 and Article V RETEK INFORMATION SYSTEMS, INC. By: /s/ Gregory A. Effertz -------------------------------- Name: Gregory A. Effertz ------------------------------ Title: VP, Finance and Adminstration ----------------------------- Attachments Exhibit "1" - Letter of Mr. Buchanan 28 29 EXHIBIT "1" November 23, 1999 HNC Software Inc. Retek Inc. 5935 Cornerstone Court West Midwest Plaza San Diego, CA 92121-3728 801 Nicollet Mall, 11th Floor Attn: Chief Executive Officer Minneapolis, MN 55402 Attn: Chief Financial Officer Re: Retek Board of Directors Gentlemen: Reference is made to Section 4.3(b) of that certain Corporate Rights Agreement dated of even date herewith (the "Corporate Rights Agreement") among Retek Inc., a Delaware corporation ("Retek"), HNC Software Inc., a Delaware corporation ("HNC") and Retek Information Systems, Inc., a Delaware corporation. All capitalized terms used but not defined in this letter will have the meanings given to such terms in the Corporate Rights Agreement. In order to induce HNC to enter into the Corporate Rights Agreement and the Separation Agreement, I hereby agree with HNC and Retek that if, at any time prior to the Cutoff Date (as defined below), I cease for any reason to be the Chief Executive Officer of Retek, then I will immediately tender my written resignation from the Board of Directors of Retek if and when I am requested to do so in writing by HNC or by the persons who are then a majority of the members of the Board of Directors of Retek. As used in this letter, the term "CUTOFF DATE" means the date and time on which the provisions of Article IV of the Corporate Rights Agreement terminate pursuant to the provisions of Section 4.11 of the Corporate Rights Agreement. Sincerely, /s/ John Buchanan John Buchanan EX-2.7 7 STOCK CONTRIBUTION AGREEMENT 1 EXHIBIT 2.7 STOCK CONTRIBUTION AGREEMENT This Stock Contribution Agreement (this "Agreement") is made and entered into as of November 23, 1999 (the "Effective Date") by and between HNC Software Inc., a Delaware corporation ("HNC") and Retek Inc., a Delaware corporation ("Retek"). R E C I T A L S A. HNC, Retek and Retek Information Systems, Inc., a Delaware corporation ("RIS") have entered into a certain Separation Agreement dated as of November 23, 1999 (the "Separation Agreement") pursuant to which the parties have made certain agreements providing for the separation of the businesses of Retek and RIS from HNC in connection with the initial public offering of the common stock of Retek (the "Initial Public Offering'). B. The Separation Agreement provides that, at the closing of the Initial Public Offering, HNC will contribute and transfer to Retek all of the outstanding shares of RIS owned by HNC, and this Agreement is being entered into pursuant to the Separation Agreement to document such contribution and transfer. NOW THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereby agree as follows: 1. CONTRIBUTION OF SHARES. Pursuant to the Separation Agreement, and subject to the terms and conditions of this Agreement, as of the Effective Date, HNC hereby contributes, assigns and transfers to Retek, and Retek hereby accepts from HNC, one hundred (100) shares of Common Stock, par value $0.001 per share, of RIS (the "Contributed Shares"). Accordingly HNC is hereby delivering to Retek: (i) a stock certificate representing the Contributed Shares and (ii) a stock power separate from certificate in the form attached hereto as Exhibit A, duly endorsed, transferring the Contributed Shares to Retek. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF RETEK. In consideration of the contribution of the Contributed Shares, Retek represents and warrants to HNC, and agrees with HNC as follows: 2.1 COMPLIANCE WITH SECURITIES LAWS. Retek understands and acknowledges that the Contributed Shares have not been registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "1933 Act") and have not been registered or qualified under the securities laws of any state, but instead were issued and are being transferred hereunder under exemptions from such registration and/or qualification requirements which impose certain restrictions on Retek's ability to transfer the Contributed Shares. Retek understands and acknowledges that HNC is an "affiliate" of RIS within the meaning of Rule 144 promulgated under the 1933 Act ("Rule 144") and Retek has been advised by its counsel of the restrictions on transfer of the Contributed Shares under Rule 144. 2.2. INVESTMENT INTENT. Retek is acquiring the Contributed Shares for its own account, for investment purposes only and not with a view to, or for sale in connection with, any distribution of the Contributed Shares within the meaning of the 1933 Act. Purchaser has no present intention of selling or otherwise disposing of all or any portion of the Contributed Shares and no one other than Retek has any beneficial ownership of any of the Contributed Shares. 1 2 2.3 ACCESS TO INFORMATION. Retek is an accredited investor and has had access to all information regarding RIS and its present and prospective business, assets, liabilities and financial condition that Retek reasonably considers important in making the decision to purchase the Contributed Shares, and Retek has had ample opportunity to ask questions of RIS's representatives concerning such matters and this investment. 2.4 LEGENDS. Retek understands and agrees that RIS will place the legend set forth below on any stock certificate(s) evidencing the Contributed Shares, together with any other legends that may be required by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. 2.5 STOP-TRANSFER INSTRUCTIONS. Retek agrees that, to ensure compliance with the restrictions imposed by this Agreement and applicable securities laws, RIS may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and if RIS transfers its own securities, it may make appropriate notations to the same effect in its own records. 3. GENERAL PROVISIONS. 3.1 ASSIGNMENTS; SUCCESSORS AND ASSIGNS. Any assignment of rights and obligations by any party to this Agreement requires the prior written consent of the other party. 3.2 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of California, without giving effect to that body of laws pertaining to conflict of laws. 3.3 FURTHER ASSURANCES. The parties agree to execute such further documents and instruments and to take such further actions as may be reasonably necessary to carry out the purposes and intent of this Agreement. 3.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement. This Agreement may be executed and delivered by facsimile. 3.5 AMENDMENT AND WAIVERS. No amendment, modification or waiver of any provision of this Agreement will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. Any amendment effected in accordance with this section will be binding upon all parties hereto and each of their respective successors and assigns. 3.6 ENTIRE AGREEMENT. This Agreement and the documents referred to herein constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersede all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof. 2 3 IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. HNC SOFTWARE INC. RETEK INC. By: /s/ R.V. Thomas By: /s/ Gregory A. Effertz ----------------------------------- ----------------------------------- Name: R.V. Thomas Name: Gregory A. Effertz --------------------------------- ---------------------------------- Title: CFO Title: VP, Finance and Administration --------------------------------- -------------------------------- [SIGNATURE PAGE TO STOCK CONTRIBUTION AGREEMENT] 3 4 EXHIBIT A TO THE STOCK CONTRIBUTION AGREEMENT STOCK POWER SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, the undersigned stockholder of Retek Information Systems, Inc., a Delaware corporation (the "COMPANY"), hereby assigns and transfers to Retek Inc., effective as of November 23, 1999, the number of shares specified below of the Common Stock of the Company standing in such stockholder's name on the books of the Company represented by the certificate(s) specified below, and hereby irrevocably constitutes and appoints the Secretary of the Company as attorney-in-fact, with full power to transfer such stock on the books of the Company with full power of substitution in the premises.
Certificate No. No. of Shares to be Transferred Date of Certificate --------------- ------------------------------- ------------------- C-1 One Hundred (100) December 23, 1996
- --------------------------------------------------- --------------------------------------------------- - --------------------------------------------------- --------------------------------------------------- Signature(s), exactly as the name(s) appears on the Name(s), exactly as it (they) appears on the Stock Stock Certificate(s). Certificate(s) (please print or type).
If the stockholder is a corporation, partnership, limited liability company, trust or other entity, please fill in the title of the authorized person signing on behalf of the shareholder: HNC SOFTWARE INC. By: /s/ R.V. Thomas -------------------------------------------- Raymond V. Thomas, Chief Financial Officer and Secretary Dated: November 23, 1999 4 EX-3.1 8 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF RETEK INC. RETEK INC., a Delaware corporation, hereby certifies as follows: 1. The name of the corporation is Retek Inc. (the "Corporation"). The date of filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was August 30, 1999. The original name of the Corporation was Retek, Inc. 2. This Amended and Restated Certificate of Incorporation amends and restates the provisions of the Certificate of Incorporation of the Corporation and was duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. 3. The text of the Certificate of Incorporation is hereby amended and restated in its entirety to read as follows: ARTICLE I NAME SECTION 1.01. Name. The name of the corporation is Retek Inc. (the "Corporation"). ARTICLE II REGISTERED AGENT SECTION 2.01. Agent. The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III PURPOSE SECTION 3.01. Purpose. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. ARTICLE IV CAPITAL STOCK SECTION 4.01. Capital Stock. The total number of shares of all classes of capital stock that the Corporation shall have the authority to issue is 155,000,000 shares, of which (i) 150,000,000 shares shall be common stock, par value $0.01 per share ("Common 2 2 Stock"), and (ii) 5,000,000 shares shall be preferred stock, par value $0.01 per share ("Preferred Stock"). Upon the effective date of the filing of this Amended and Restated Certificate of Incorporation, each share of the Corporation's outstanding capital stock shall be converted and reconstituted into 40,000 shares of Common Stock (the "Stock Split"). No further adjustment of any preference or price set forth in this Article IV shall be made as a result of this Stock Split. SECTION 4.02. Common Stock. Each holder of Common Stock shall have one vote on each matter submitted to a vote at a meeting of stockholders, including the election of directors, for each share of Common Stock held of record by such holder as of the record date for such meeting. Except as otherwise required by law or provided in any resolution adopted by the Corporation's Board of Directors (the "Board of Directors") with respect to any series of Preferred Stock, the holders of shares of Common Stock will possess all voting power, and holders of shares of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. No provision herein should be interpreted as providing for cumulative voting in the election of directors. SECTION 4.03. Dividends and Distributions. Subject to any preferential rights of any outstanding series of Preferred Stock created by the Board of Directors from time to time, when, as and if dividends or distributions are declared on outstanding shares of Common Stock, whether payable in cash, in property or in securities of the Corporation, each holder of outstanding shares of Common Stock shall be entitled to share ratably in such dividends and distributions in proportion to the number of shares of Common Stock held by such holder. SECTION 4.04. Dissolution. Subject to any preferential rights of any outstanding series of Preferred Stock created by the Board of Directors from time to time, upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Common Stock shall be entitled to share ratably in the assets of the Corporation to be distributed among the holders of shares of Common Stock in proportion to the number of shares of Common Stock held by such holder. SECTION 4.05. Preemptive Rights. The holders of shares of Common Stock shall have no preemptive or preferential rights of subscription to any shares of any class of capital stock of the Corporation or any securities convertible into or exchangeable for shares of any class of capital stock of the Corporation. SECTION 4.06. Preferred Stock. Subject to the terms of any contract to which the Corporation is bound, the Preferred Stock may be issued, if so determined by the Board of Directors, either as a class without series or from time to time in one or more series and with such designation for such class or such series adopted by the Board of Directors. The Board of Directors in any such resolution or resolutions is expressly authorized to state and express for such class or each such series: (a) Voting rights, if any, including, without limitation, the authority to confer multiple votes per share, voting rights as to specified matters or issues or, subject to the provisions of this Amended and Restated Certificate of Incorporation, voting rights to be 3 3 exercised either together with the holders of Common Stock as a single class, or independently as a separate class; (b) The rate per annum and the times at and conditions upon which the holders of shares of such class or series shall be entitled to receive dividends, the conditions and dates upon which such dividends shall be payable and whether such dividends shall be cumulative or noncumulative, and, if cumulative, the terms upon which such dividends shall be cumulative; (c) Redemption, repurchase, retirement and sinking fund rights, preferences and limitations, if any, the amount payable on shares of such class or series in the event of such redemption, repurchase or retirement, the terms and conditions of any sinking fund, the manner of creating such fund or funds and whether any of the foregoing shall be cumulative or noncumulative; (d) The rights to which the holders of the shares of such class or series shall be entitled upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (e) The terms, if any, upon which the shares of such class or series shall be convertible into or exchangeable for shares of stock of any other class or classes or of any other series of the same or any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) Any other designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof insofar as they are not inconsistent with the provisions of this Amended and Restated Certificate of Incorporation (as it may be amended from time to time) and to the full extent now or hereafter permitted by the laws of the State of Delaware; and (g) All shares of Preferred Stock, if issued as a class without series, or all shares of the Preferred Stock of any one series, if issued in series, shall be identical to each other in all respects and shall entitle the holders thereof to the same rights and privileges, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if cumulative, shall be cumulative. ARTICLE V BOARD OF DIRECTORS SECTION 5.01. Business. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all the powers of the Corporation and do all such lawful acts and things that are not conferred upon or reserved to the stockholders or others by law, by this Amended and Restated Certificate of Incorporation, by the Bylaws of the Corporation or by any contract to which the Corporation is bound. SECTION 5.02. Election. Election of directors need not be by written ballot unless the Bylaws of the Corporation so provide. 4 4 SECTION 5.03. General. The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of its directors and stockholders: (a) The Bylaws of the Corporation may be altered, amended or repealed and new Bylaws may be adopted by the affirmative vote of directors constituting not less than a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors. (b) Prior to the first date on which HNC Software Inc., a Delaware corporation ("HNC"), and/or its affiliates collectively cease to beneficially own an aggregate of at least a majority of the then outstanding shares of Common Stock (the "Trigger Date"), the Board of Directors shall consist of seven (7) directors. After the Trigger Date, and subject to the rights, if any, of holders of Preferred Stock the Board of Directors shall consist of not less than three (3) and not more than ten (10) directors, the exact number of directors to be determined as set forth in, or in the manner provided in, the Bylaws of the Corporation. The directors, other than those (if any) who may be elected by the holders of Preferred Stock voting as a separate class, shall be divided, with respect to the time they severally hold office, into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. The term of the initial Class I directors shall terminate on the date of the 2000 annual meeting of stockholders; the term of the initial Class II directors shall terminate on the date of the 2001 annual meeting of stockholders; and the term of the initial Class III directors shall terminate on the date of the 2002 annual meeting of stockholders. At each annual meeting of stockholders, beginning with the 2000 annual meeting of stockholders, successors to the class of directors whose terms expire at that annual meeting of stockholders shall be elected for a three year term. The initial Class III directors shall be Ward Carey, Charles H. Gaylord, Jr. and Alex W. Hart. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of stockholders for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Subject to the rights, if any, of the holders of Preferred Stock or the terms of any contract to which the Corporation is bound, any vacancy on the Board of Directors that results from an increase in the number of directors and any other vacancy occurring on the Board of Directors, howsoever resulting, may be filled only by a majority of the remaining members of the Board of Directors, though less than a quorum, or by the sole remaining director, and except as otherwise provided by law or the terms of any contract to which the Corporation is bound, any such vacancy may not be filled by the stockholders of the Corporation; provided, however, that notwithstanding the foregoing, for so long as HNC has the right to nominate persons for election to the Board of Directors of the Corporation pursuant to the Corporate Rights Agreement referenced in Section 13.01 hereof, as such agreement may be amended from time to time (such nominated persons being hereinafter called "HNC Designees"), if a vacancy on the Corporation's Board of Directors is caused by the death, disability, retirement, resignation or removal for cause or otherwise of an HNC Designee, then HNC shall have the sole right to nominate an individual to fill such vacancy on the Corporation's Board of Directors. Any director elected in accordance with the preceding 5 5 sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been fully elected and qualified. (c) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Amended and Restated Certificate of Incorporation (as it may be amended from time to time) or the resolution or resolutions adopted by the Board of Directors pursuant to Section 4.06 hereof, and such directors so elected shall not be divided into classes pursuant to Section 5.03(b) unless expressly provided by such terms. (d) Advance notice of stockholder nominations for the election of directors and of the proposal of business by stockholders shall be given in the manner provided in the Bylaws of the Corporation, as amended and in effect from time to time. (e) Prior to the Trigger Date, any or all of the Directors may be removed with or without cause at any time by either (i) the vote of the holders of a majority of the outstanding shares of Common Stock then entitled to vote at an election of Directors, or (ii) by written consent of the holders of the Common Stock pursuant to Section 6.01 hereof. After the Trigger Date, any or all of the Directors may be removed only with cause at any time by vote of the holders of a majority of the Common Stock then entitled to vote at an election of Directors. (f) Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, after the Trigger Date, the affirmative vote of the holders of at least 80% of the voting power of all Voting Stock then outstanding, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article V. ARTICLE VI STOCKHOLDER ACTION SECTION 6.01. Action By Written Consent. Prior to the Trigger Date, any corporate action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of the outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation (either by hand or by certified or registered mail, return receipt requested) at its registered office in the State of Delaware or its principal place of business, or to an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded; provided, however, that effective as of and after the Trigger Date, unless otherwise required by applicable law, any corporate action required or permitted to be taken at any annual or special meeting of stockholders may be taken only at a duly called annual or special meeting of stockholders and may not be taken by written consent in lieu of such a meeting. 6 6 SECTION 6.02. Special Meetings. Effective as of and after the Trigger Date, unless otherwise prescribed by law and subject to any preferential rights of any outstanding series of Preferred Stock created by the Board of Directors from time to time, special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Chairman of the Board of Directors, the President or, at the request in writing of a majority of the members of the Board of Directors, any officer of the Corporation, and effective as of and after the Trigger Date, any power of the stockholders of the Corporation to call a special meeting is specifically denied, provided, however, that prior to the Trigger Date, the Corporation shall call a special meeting of the stockholders of the Corporation promptly upon the request of HNC or any of its affiliates (other than the Corporation or any subsidiary of the Corporation), in each case if such entity is a stockholder of the Corporation. SECTION 6.03. Amendment. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, after the Trigger Date, the affirmative vote of the holders of at least 80% of the voting power of all Voting Stock then outstanding, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article VI. ARTICLE VII INDEMNIFICATION SECTION 7.01. Indemnification. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any 7 7 claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 7.01(a) and (b) hereof, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under Section 7.01(a) and (b) hereof (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 7.01(a) and (b) hereof. Such determination shall be made with respect to a person who is a director or officer at the time of such determination, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by majority vote of such directors, even though less than quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders of the Corporation. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation pursuant to this Article VII. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, other Sections of this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. (g) For purposes of this Article VII, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VII with 8 8 respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (h) For purposes of this Article VII, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves service by, such director, officer, employee or agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VII. (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.02. Insurance for Indemnification. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation has the power to indemnify such person against such liability under this Article VII or the provisions of Section 145 of the General Corporation Law of the State of Delaware. ARTICLE VIII BYLAWS SECTION 8.01. Amendment of Bylaws. The Bylaws of the Corporation may be altered, amended or repealed and new Bylaws may be adopted (i) at any annual or special meeting of stockholders or, to the extent permitted hereby, the written consent of the stockholders, by the affirmative vote of the holders of a majority of the voting power of the outstanding Common Stock entitled to vote on that matter, provided, however, that any proposed alteration, amendment or repeal of, or the adoption of any Bylaw inconsistent with, Sections 2.02, 2.04, 2.11, 3.02, 3.04 or 3.05 of the Bylaws, by the stockholders shall require the affirmative vote of the holders of at least 80% of the voting power of all Common Stock then outstanding, voting together as a single class, or (ii) by the affirmative vote of directors constituting not less than a majority of the total number of directors which the Corporation would have if there were no vacancies. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the outstanding shares of Common Stock shall be required to amend, repeal or adopt any provision inconsistent with this Article VIII. 9 9 ARTICLE IX LIMITATION ON LIABILITY OF DIRECTORS SECTION 9.01. Limitation on Liability. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. ARTICLE X CORPORATE OPPORTUNITIES SECTION 10.01. Purpose. In anticipation that the Corporation will cease to be a wholly-owned subsidiary of HNC, but that HNC will remain a substantial stockholder of the Corporation, and in anticipation that the Corporation and HNC may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of the benefits to be derived by the Corporation through its continued contractual, corporate and business relations with HNC (including possible service of officers and directors of HNC as officers and/or directors of the Corporation), the provisions of this Article are set forth to regulate and define the conduct of certain affairs of the Corporation as they may involve HNC and its officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith. SECTION 10.02. No Duty to Refrain. HNC shall have no duty to refrain from engaging in the same or similar activities or lines of business as the Corporation, and neither HNC nor any officer or director thereof (except as provided in Section 10.03 below) shall be liable for breach of any fiduciary duty by reason of any such activities of HNC. In the event that HNC acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both HNC and the Corporation, HNC shall have no duty to communicate or offer such corporate opportunity to the Corporation and shall not be liable for breach of any fiduciary duty as a stockholder of the Corporation by reason of the fact that HNC pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person, or does not communicate information regarding such corporate opportunity to the Corporation. SECTION 10.03. Corporate Opportunities. In the event that a director or officer of the Corporation who is also a director or officer of HNC acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both the Corporation and HNC, such director or officer of the Corporation shall have fully satisfied and fulfilled the fiduciary duty of such director or officer to the Corporation and its stockholders with respect to such corporate opportunity, if such director or officer acts in a manner consistent with the following policy: (i) A corporate opportunity offered to any person who is an officer of the Corporation, and who is also a director but not an officer of HNC, shall belong to the Corporation; (ii) a corporate opportunity offered to any person who is a director but not an officer of the Corporation, and who is also a director or officer of HNC shall belong to the Corporation if such opportunity is expressly offered to such person in writing solely in his or her 10 10 capacity as a director of the Corporation, and otherwise shall belong to HNC; and (iii) a corporate opportunity offered to any person who is an officer of both the Corporation and HNC shall belong to the Corporation if such opportunity is expressly offered to such person in writing solely in his or her capacity as an officer of the Corporation, and otherwise shall belong to HNC. SECTION 10.04. Successors. Any person purchasing or otherwise acquiring any interest in shares of the capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article. SECTION 10.05. Definitions. For purposes of this Article only: (a) A director of the Corporation who is Chairman of the Board of Directors of the Corporation or of a committee thereof shall not be deemed to be an officer of the Corporation by reason of holding such position (without regard to whether such position is deemed an office of the Corporation under the Bylaws of the Corporation), unless such person is a full-time employee of the Corporation; and (b) (1) The term "Corporation" shall mean the Corporation and all corporations, partnerships, joint ventures, associations and other entities in which the Corporation beneficially owns (directly or indirectly) 50% or more of the outstanding voting stock, voting power, partnership interests or similar voting interests, and (2) the term "HNC," for the purpose of this Article only, shall mean HNC and all corporations, partnerships, joint ventures, associations and other entities (other than the Corporation, defined in accordance with clause (1) of this paragraph Section 10.05(b)) in which HNC beneficially owns (directly or indirectly) 50% or more of the outstanding voting stock, voting power, partnership interests or similar voting interests. SECTION 10.06. Expiration. Notwithstanding anything in this Amended and Restated Certificate of Incorporation to the contrary, (i) the foregoing provisions of this Article shall expire on the date that HNC ceases to own beneficially Common Stock representing at least 25% of the total voting power of all classes of outstanding Common Stock of the Corporation and no person who is a director or officer of the Corporation is also a director or officer of HNC; and (ii) in addition to any vote of the stockholders required by this Amended and Restated Certificate of Incorporation, until the time that HNC ceases to own beneficially Common Stock representing at least 25% of the total voting power of all classes of outstanding Common Stock of the Corporation, the affirmative vote of the holders of more than 80% of the total voting power of all classes of outstanding Common Stock of the Corporation shall be required to alter, amend or repeal in a manner adverse to the interests of HNC, or adopt any provision adverse to the interests of HNC and inconsistent with, any provision of this Article. Neither the alteration, amendment or repeal of this Article nor the adoption of any provision of this Amended and Restated Certificate of Incorporation inconsistent with this Article shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such alteration, amendment, repeal or adoption. 11 11 ARTICLE XI AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION SECTION 11.01. Amendment. Subject to any contract to which the Corporation is bound, the Corporation reserves the right to amend, alter, restate, change or repeal an provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by the laws of the State of Delaware, and all rights of the stockholders herein are granted subject to this reservation. ARTICLE XII BUSINESS COMBINATIONS SECTION 12.01. Applicability of Section 203. The Corporation shall not be and hereby elects not to be governed by Section 203 of the General Corporation Law of the State of Delaware, as in effect on the date this provision becomes effective or as it may hereafter be amended ("Section 203"), until such time as HNC (or any corporation or other entity into which HNC has merged or consolidated in a statutory merger or consolidation) owns (as defined by Section 203) less than fifteen percent (15%) of the Corporation's outstanding voting stock (as defined in Section 203). ARTICLE XIII MISCELLANEOUS SECTION 13.01. Contracts References. Whenever in this Amended and Restated Certificate of Incorporation the phrase "any contract to which the Corporation is bound" or a similar phrase is used, the reference therein to a contract to which the Corporation is bound shall specifically include, without limitation, that certain Separation Agreement entered into among the Corporation, HNC and Retek Information Systems, Inc., as such may be amended from time to time, and that certain Corporate Rights Agreement among the Corporation, HNC and Retek Information Systems, Inc., as such may be amended from time to time, and the contents of such contracts shall be deemed to have been incorporated herein by reference. 12 12 This Amended and Restated Certificate of Incorporation shall become effective at 8:00 a.m. (Wilmington, Delaware time), November 23, 1999. IN WITNESS WHEREOF, RETEK INC. has caused this certificate to be signed by Gordon Masson, its President, and attested by Gregory A. Effertz, its Secretary, on this twenty-second day of November, 1999. RETEK INC. By: /s/ John Buchanan ------------------------- Name: John Buchanan Title: Chairman and Chief Executive Officer ATTEST: /s/ Gregory A. Effertz - -------------------------- Name: Gregory A. Effertz Title: Secretary EX-3.2 9 BYLAWS 1 EXHIBIT 3.2 ======================== BYLAWS OF RETEK INC. ======================== 2 TABLE OF CONTENTS
Page ARTICLE I - OFFICES..............................................................................................1 SECTION 1.01. Registered Office...................................................................1 SECTION 1.02. Other Offices.......................................................................1 ARTICLE II - STOCKHOLDERS........................................................................................1 SECTION 2.01. Annual Meetings.....................................................................1 SECTION 2.02. Special Meetings....................................................................1 SECTION 2.03. Notice of Meetings..................................................................2 SECTION 2.04. Notice of Stockholder Business and Nominations......................................2 SECTION 2.05. Waiver of Notice....................................................................4 SECTION 2.06. Adjournments........................................................................5 SECTION 2.07. Quorum..............................................................................5 SECTION 2.08. Organization and Conduct of Business................................................5 SECTION 2.09. Proxies and Voting..................................................................6 SECTION 2.10. Inspectors of Election..............................................................6 SECTION 2.11. No Stockholder Action by Written Consent............................................6 ARTICLE III - BOARD OF DIRECTORS.................................................................................6 SECTION 3.01. General Powers......................................................................6 SECTION 3.02. Number and Term of Office...........................................................7 SECTION 3.03. Resignation.........................................................................7 SECTION 3.04. Removal.............................................................................7 SECTION 3.05. Vacancies...........................................................................8 SECTION 3.06. Meetings............................................................................8 SECTION 3.07. Directors' Consent in Lieu of Meeting...............................................9 SECTION 3.08. Action by Means of Telephone or Similar Communications Equipment....................9 SECTION 3.09. Compensation........................................................................9 SECTION 3.10. Reliance upon Books, Reports and Records...........................................10 ARTICLE IV - COMMITTEES OF THE BOARD OF DIRECTORS...............................................................10 SECTION 4.01. Committees of the Board of Directors...............................................10 SECTION 4.02. Audit Committee....................................................................10 SECTION 4.03. Compensation Committee.............................................................11 SECTION 4.04. Rules and Procedures...............................................................11 SECTION 4.05. Application of Article.............................................................11 ARTICLE V - OFFICERS............................................................................................11 SECTION 5.01. Officers...........................................................................11 SECTION 5.02. Chairman of the Board of Directors.................................................12 SECTION 5.03. Chief Executive Officer............................................................12 SECTION 5.04. President..........................................................................12 SECTION 5.05. Senior Vice Presidents and Vice Presidents.........................................12
i 3 SECTION 5.06. Treasurer and Assistant Treasurer..................................................13 SECTION 5.07. Secretary and Assistant Secretary..................................................13 SECTION 5.08. Assistant Vice Presidents and Other Officers.......................................13 SECTION 5.09. General Counsel....................................................................13 SECTION 5.10. Salaries...........................................................................14 SECTION 5.11. Vacancies..........................................................................14 SECTION 5.12. Removal or Discharge...............................................................14 SECTION 5.13. Resignations.......................................................................14 ARTICLE VI - CHECKS, DRAFTS, NOTES, AND PROXIES.................................................................14 SECTION 6.01. Checks, Drafts and Notes...........................................................14 SECTION 6.02. Execution of Proxies...............................................................15 ARTICLE VII - SHARES AND TRANSFERS OF SHARES....................................................................15 SECTION 7.01. Certificates Evidencing Shares.....................................................15 SECTION 7.02. Stock Ledger.......................................................................15 SECTION 7.03. Transfers of Shares................................................................15 SECTION 7.04. Addresses of Stockholders..........................................................16 SECTION 7.05. Lost, Destroyed and Mutilated Certificates.........................................16 SECTION 7.06. Regulations........................................................................16 SECTION 7.07. Fixing Date for Determination of Stockholders of Record............................16 SECTION 7.08. Record of Holder of Shares.........................................................16 ARTICLE VIII - SEAL.............................................................................................17 SECTION 8.01. Seal...............................................................................17 ARTICLE IX - FISCAL YEAR........................................................................................17 SECTION 9.01. Fiscal Year........................................................................17 ARTICLE X - INDEMNIFICATION AND INSURANCE.......................................................................17 SECTION 10.01. Indemnification....................................................................17 SECTION 10.02. Insurance for Indemnification......................................................19 ARTICLE XI - MISCELLANEOUS......................................................................................19 SECTION 11.01. Notices and Waivers Thereof........................................................19 SECTION 11.02. Audits.............................................................................20 ARTICLE XII - AMENDMENTS........................................................................................20 SECTION 12.01. Amendments.........................................................................20
ii 4 BYLAWS OF RETEK INC. ARTICLE I OFFICES SECTION 1.01. Registered Office. The registered office of Retek Inc. (the "Corporation") in the State of Delaware shall be at the principal office of The Corporation Trust Company in the City of Wilmington, County of New Castle, and the registered agent in charge thereof shall be The Corporation Trust Company. SECTION 1.02. Other Offices. The Corporation may also have an office or offices at any other place or places within or without the State of Delaware as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine or the business of the Corporation may from time to time require. ARTICLE II STOCKHOLDERS SECTION 2.01. Annual Meetings. The annual meeting of stockholders of the Corporation for the election of directors of the Corporation ("Directors"), and for the transaction of such other business as may properly come before such meeting, shall be held at such place, date and time as shall be fixed by the Board of Directors and designated in the notice or waiver of notice of such annual meeting; provided, however, that no annual meeting of stockholders need be held if all actions, including the election of Directors, required by the General Corporation Law of the State of Delaware (the "General Corporation Law") to be taken at such annual meeting are taken by written consent in lieu of meeting pursuant to Section 2.09 hereof. SECTION 2.02. Special Meetings. Unless otherwise prescribed by law or by the Corporation's Amended and Restated Certificate of Incorporation, as amended from time to time (the "Charter"), and subject to any preferential rights of any outstanding series of Preferred Stock (as defined in the Charter), special meetings of stockholders of the Corporation for any purpose or purposes may be called only by the Chairman of the Board of Directors, the President, or, at the request in writing of a majority of the Board of Directors, any officer. Such request shall state the purpose or purposes of the proposed meeting. In addition, prior to the first date on which HNC Software Inc., a Delaware corporation ("HNC"), and/or its affiliates collectively cease to beneficially own an aggregate of at least a majority of the then outstanding shares of common stock, par value $0.01 per share ("Common Stock"), of the Corporation (the "Trigger Date"), the Corporation shall call a special meeting of stockholders of the Corporation promptly upon the request of HNC or any of its affiliates (other than the Corporation or any subsidiary of the Corporation), in each case if such entity is a stockholder of the Corporation. SECTION 2.03. Notice of Meetings (a) Except as otherwise provided by law, written notice of each annual or special meeting of stockholders stating the place, date and time 5 of such meeting and, in the case of a special meeting, the purpose or purposes for which such meeting is to be held, shall be given personally or by first-class mail (airmail in the case of international communications) to each stockholder of record (a "Stockholder") entitled to vote thereat, not less than 10 nor more than 60 calendar days before the date of such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the Stockholder at such Stockholder's address as it appears on the records of the Corporation. If, prior to the time of mailing, the Secretary of the Corporation (the "Secretary") shall have received from any Stockholder a written request that notices intended for such Stockholder are to be mailed to some address other than the address that appears on the records of the Corporation, notices intended for such Stockholder shall be mailed to the address designated in such request. Any previously scheduled meeting of the stockholders not called at the request of HNC may be postponed, and any special meeting of the stockholders not called at the request of HNC may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. Any previously scheduled meeting of the stockholders called at the request of HNC may be postponed or canceled, upon the written consent of HNC, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. SECTION 2.04. Notice of Stockholder Business and Nominations. (a) Annual Meetings of Stockholders. (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the Corporation's notice of meeting delivered pursuant to Section 2.03 of this Article II, (B) by or at the direction of the Board of Directors, (C) by any stockholder of the Corporation who was a stockholder of record at the time of the giving of the notice provided for in this Section 2.04, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.04, or (D) prior to the Trigger Date, by HNC or any of its affiliates that is a stockholder of the Corporation without the need to comply with the procedures set forth in this Section 2.04. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i) of this Section 2.04, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must be a proper subject for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. For purposes of determining whether a stockholder's 2 6 notice shall have been delivered in a timely manner for the annual meeting of stockholders in 2000, the first anniversary of the previous year's meeting shall be deemed to be September 3, 1999. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) with respect to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this Section 2.04 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by paragraph (a)(ii) of this Section 2.04 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting pursuant to Section 4 of this Article II. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors, (ii) by any stockholder of the Corporation who was a stockholder of record at the time of the giving of the notice provided for in this Section 2.04, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.04, or (iii) prior to the Trigger Date, by HNC, or any of its affiliates that is a stockholder of the Corporation. In the event that the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, (A) prior to the Trigger Date, HNC may nominate any person or persons for election to the Board of Directors at, or at any time prior to, such special meeting of stockholders, or (B) any stockholder may nominate such person or persons (as the case may be), for election to the Board 3 7 of Directors at such special stockholders' meeting, if the stockholder's notice required by paragraph (a)(ii) of this Section 2.04 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the sixtieth day prior to such special meeting or the tenth day following the day on which public announcement by the Corporation is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. (i) Only persons who are nominated in accordance with the procedures set forth in this Section 2.04 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.04. Except as otherwise provided by law, the Charter or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with this Section 2.04 and, if any proposed nomination or business is not in compliance with this Section 2.04, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 2.04, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 2.04, for so long as the Corporation is subject to the reporting requirements of the Exchange Act, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder applicable to such stockholder with respect to the matters set forth in this Section 2.04. Nothing in this Section 2.04 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of any series or Preferred Stock to elect directors. SECTION 2.05. Waiver of Notice Notice of any annual or special meeting of Stockholders need not be given to any Stockholder who files a written waiver of notice with the Secretary, signed by the person entitled to notice, whether before or after such meeting. Neither the business to be transacted at, nor the purpose of, any meeting of Stockholders need be specified in any written waiver of notice thereof. Attendance of a Stockholder at a meeting, in person or by proxy, shall constitute a waiver of notice of such meeting, except when such Stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the notice of such meeting was inadequate or improperly given. SECTION 2.06. Adjournments Whenever a meeting of Stockholders, annual or special, is adjourned to another date, time or place, notice need not be given of the adjourned 4 8 meeting if the date, time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder entitled to vote thereat. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. SECTION 2.07. Quorum . Except as otherwise provided by law or in the Charter, the holders of a majority of the voting power of all outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), present in person or by proxy, shall constitute a quorum for the transaction of business at all meetings of Stockholders, whether annual or special, except that, if required by law or pursuant to the provisions of the Charter, when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. If, however, such quorum shall not be present in person or by proxy at any meeting of Stockholders, the person serving as chairman of the meeting or the holders of a majority in interest of the stockholders present in person or by proxy and who are entitled to vote on every matter that is to be voted on without regard to class at such meeting may adjourn the meeting from time to time in accordance with Section 2.07 hereof until a quorum shall be present in person or by proxy. SECTION 2.08. Organization and Conduct of Business. The Chairman of the Board of Directors shall act as chairman of meetings of the stockholders. The Board of Directors may designate any other officer or director of the Corporation to act as chairman of any meeting in the absence of the Chairman of the Board of Directors, and the Board of Directors may further provide for determining who shall act as chairman of any stockholder's meeting in the absence of the Chairman of the Board of Directors and such designee. The person serving as chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders, but in the absence of the Secretary the presiding officer may appoint any other person to act as secretary of any meeting. SECTION 2.09. Proxies and Voting. At any meeting of Stockholders, every Stockholder entitled to vote may vote in person or by proxy authorized by an instrument executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware) by the Stockholder, or by such person's duly authorized attorney in fact. Election of Directors at all meetings of the Stockholders at which Directors are to be elected need not be by written ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect Directors, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Charter and these Bylaws and subject to the rights of the holders of any series of Preferred Stock, in all matters other than the election of Directors, the affirmative vote of a majority of the voting power of the outstanding shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the Stockholders. 5 9 SECTION 2.10. Inspectors of Election. The Board of Directors may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting, decide upon the qualification of voters, count the votes, decide the results and make a written report thereof in accordance with the General Corporation Law of the State of Delaware. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall have the duties prescribed by law. SECTION 2.11. Action by Written Consent. Prior to the Trigger Date, any corporate action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation (either by hand or by certified or registered mail, return receipt requested) at its registered office in the State of Delaware or its principal place of business, or to an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded; provided, however, that effective as of and after the Trigger Date, unless otherwise required by applicable law, any corporate action required or permitted to be taken at any annual or special meeting of stockholders may be taken only at a duly called annual or special meeting of stockholders and may not be taken by written consent in lieu of such a meeting. ARTICLE III BOARD OF DIRECTORS SECTION 3.01. General Powers. The business and affairs of the Corporation shall be managed or under the direction of the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things that are not conferred upon or reserved to the stockholders or others by law, the Charter, these Bylaws or by any contract to which the Corporation is bound. SECTION 3.02. Number and Term of Office. Prior to the Trigger Date, the Board of Directors shall consist of seven (7) directors. After the Trigger Date, and subject to the rights, if any, of holders of Preferred Stock, the number of Directors of the Corporation shall be fixed from time to time exclusively by resolution of the Board of Directors adopted by the affirmative vote of directors constituting not less than a majority of the Whole Board (as defined below), but shall consist of not less than three (3) nor more than ten (10) directors. The directors, other than those (if any) who may be elected by the holders of Preferred Stock voting as a separate class, shall be divided, with respect to the time they severally hold office, into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. The term of the initial Class I directors shall terminate on the date of the 2000 annual meeting of stockholders; the term of the initial Class II directors shall terminate on the date of the 2001 annual meeting of 6 10 stockholders; and the term of the initial Class III directors shall terminate on the date of the 2002 annual meeting of stockholders. At each annual meeting of stockholders, beginning with the 2000 annual meeting of stockholders, successors to the class of directors whose terms expire at that annual meeting of stockholders shall be elected for a three year term. The initial Class III directors shall be Ward Carey, Charles H. Gaylord, Jr. and Alex W. Hart. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of stockholders for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. For purposes of these Bylaws, the term "Whole Board" shall mean the total number of Directors that the Corporation would have if there were no vacancies on the Corporation's Board of Directors. SECTION 3.03. Resignation. Any Director may resign at any time by giving written notice to the Board, the Chairman of the Board of the Corporation (the "Chairman") or the Secretary. Such resignation shall take effect at the time specified in such notice or, if the time be not specified, upon receipt thereof by the Board, the Chairman or the Secretary, as the case may be. Unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. SECTION 3.04. Removal. Prior to the Trigger Date, any or all of the Directors may be removed with or without cause at any time by either (i) the vote of the holders of a majority of the outstanding shares of Voting Stock, or (ii) by written consent of the holders of the Voting Stock pursuant to Section 2.11 hereof. After the Trigger Date, any or all of the Directors may be removed only with cause at any time by vote of the holders of a majority of the Voting Stock. SECTION 3.05. Vacancies. Subject to the rights, if any, of holders of Preferred Stock or the terms of any contract to which the Corporation is bound, any vacancy on the Board of Directors that results from an increase in the number of directors and any other vacancy occurring on the Board of Directors, howsoever resulting, may be filled by the affirmative vote of a majority of the remaining members of the Board of Directors, though less than a quorum, or by the sole remaining director, and except as otherwise provided by law or the terms of any contract to which the Corporation is bound, any such vacancy may not be filled by the stockholders of the Corporation; provided, however, that notwithstanding the foregoing, for so long as HNC has the right to nominate persons for election to the Board of Directors of the Corporation pursuant to the Corporate Rights Agreement referenced in Section 11.03 hereof, as such agreement may be amended from time to time (such nominated persons being hereinafter called "HNC Designees"), if a vacancy on the Corporation's Board of Directors is caused by the death, disability, retirement, resignation or removal for cause or otherwise of an HNC Designee, then HNC shall have the sole right to nominate an individual to fill such vacancy on the Corporation's Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the 7 11 new directorship was created or the vacancy occurred and until such director's successor shall have been duly elected and qualified. SECTION 3.06. Meetings. (a) Regular Meetings. Regular meetings of the Board of Directors may be held at such place, either inside or outside of the State of Delaware, and at such time, as may from time to time be designated by the Chairman of the Board of Directors or resolution of the Board of Directors or as may be specified in the call of any meeting. An annual meeting of the Board of Directors shall be held on the same day as, and as soon as practicable following, the annual meeting of stockholders or at such other time or place as shall be determined by the Board of Directors at its regular meeting next preceding said annual meeting of stockholders. (b) Special Meetings. Special meetings of the Board of Directors may be held at any time on the call of the Chairman of the Board of Directors, the Chief Executive Officer or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the time and place of the meetings. Meetings may be held at any time or place without notice if all the directors are present or if those not present waive notice of the meeting in writing. (c) Notice of Meetings. The Secretary shall give written notice to each Director of each meeting of the Board of Directors, which notice shall state the place, date, time and purpose of such meeting. Notice of each such meeting shall be given to each Director, if by mail, addressed to him at his residence or usual place of business, at least two days before the day on which such meeting is to be held, or shall be sent to him at such place by telecopy, telegraph, cable, or other form of recorded communication, or be delivered personally or by telephone not later than the day before the day on which such meeting is to be held. A written waiver of notice, signed by the Director entitled to notice, whether before or after the time of the meeting referred to in such waiver, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of any meeting of the Board of Directors need be specified in any written waiver of notice thereof. Attendance of a Director at a meeting of the Board of Directors shall constitute a waiver of notice of such meeting, except as provided by law. (d) Place of Meetings. The Board of Directors may hold its meetings at such place or places within or without the State of Delaware as the Board of Directors or the Chairman of the Board of Directors may from time to time determine, or as shall be designated in the respective notices or waivers of notice of such meetings. (e) Quorum and Manner of Acting. Subject to Section 2.04, a whole number of Directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. Subject to the terms of any contract to which the Corporation is bound, the act of a majority of the Directors present at a meeting at which a quorum of the Board of Directors is present shall be the act of the Board of Directors. The Directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Directors to leave less than a quorum. 8 12 SECTION 3.07. Directors' Consent in Lieu of Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all the members of the Board of Directors or such committee and such consent is filed with the minutes of the proceedings of the Board of Directors or such committee. SECTION 3.08. Action by Means of Telephone or Similar Communications Equipment. Any one or more members of the Board of Directors, or of any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. SECTION 3.09. Compensation. Unless otherwise restricted by the Charter, the Board of Directors may determine the compensation of Directors. In addition, as determined by the Board of Directors, Directors may be reimbursed by the Corporation for their expenses, if any, in the performance of their duties as Directors. No such compensation or reimbursement shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 3.10. Reliance upon Books, Reports and Records. Each Director, each member of any committee designated by the Board of Directors and each officer, in the performance of his or her duties, shall be fully protected in relying in good faith upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or by committees of the Board of Directors, or by any other person, as to matters such Director, member or officer, as the case may be, reasonably believes are within such person's professional or expert competence and who has been selected with reasonable care by the Board of Directors or by any such committee, or in relying in good faith upon other records of the Corporation. ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS SECTION 4.01. Committees of the Board of Directors. There are hereby established as committees of the Board of Directors an Audit Committee and a Compensation Committee, each of which shall have the powers and functions set forth in Sections 2 and 3 hereof, respectively, and such additional powers as may be delegated to it by the Board of Directors. The Board of Directors may from time to time establish additional standing committees or special committees of the Board of Directors, each of which shall have such powers and functions as may be delegated to it by the Board of Directors. The Board of Directors may abolish any committee established by or pursuant to this Section 1 as it may deem advisable. Each such committee shall consist of two or more directors, the exact number being determined from time to time by the Board of Directors. Designations of the chairman and members of each such committee, and, if desired, a vice chairman and alternates for members, shall be made by the Board of Directors. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the 9 13 committee present at the meeting and not disqualified from voting whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Each committee shall have a secretary who shall be designated by its chairman. A vice chairman of a committee shall act as the chairman of the committee in the absence or disability of the chairman. Nothing herein shall be deemed to prevent the Board of Directors from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board of Directors. SECTION 4.02. Audit Committee. The Audit Committee shall select and engage, on behalf of the Corporation, independent public accountants to (a) audit the books of account and other corporate records of the Corporation and (b) perform such other duties as the Audit Committee may from time to time prescribe. The Audit Committee shall transmit financial statements certified by such independent public accountants to the Board of Directors after the close of each fiscal year. The selection of independent public accountants for each fiscal year shall be made in advance of the annual meeting of stockholders in such fiscal year and shall be submitted for ratification or rejection at such meeting. The Audit Committee shall confer with such accountants and review and approve the scope of the audit of the books of account and other corporate records of the Company. The Audit Committee shall have the power to confer with and direct the officers of the Corporation to the extent necessary to review the internal controls, accounting practices, financial structure and financial reporting of the Corporation. From time to time the Audit Committee shall report to and advise the Board of Directors concerning the results of its consultation and review and such other matters relating to the internal controls, accounting practices, financial structure and financial reporting of the Corporation as the Audit Committee believes merit review by the Board of Directors. The Audit Committee also shall perform such other functions and exercise such other powers as may be delegated to it from time to time by the Board of Directors. SECTION 4.03. Compensation Committee. The Compensation Committee shall fix from time to time the salaries of members of the Board of Directors who are officers or employees of the Corporation and of all Senior Vice Presidents and Vice Presidents of the Corporation. It also shall perform such functions as may be delegated to it under the provisions of any bonus, supplemental compensation, special compensation or stock option plan of the Corporation. SECTION 4.04. Rules and Procedures. Each committee may fix its own rules and procedures and shall meet at such times and places as may be provided by such rules, by resolution of the committee or by call of the chairman or vice chairman of such committee. Notice of meeting of each committee, other than of regular meetings provided for by its rules or resolutions, shall be given to committee members. The presence of a majority of its members, but not less than two, shall constitute a quorum of any committee, and all questions shall be decided by a majority vote of the members present at the meeting. All action taken at each committee meeting shall be recorded in minutes of the meeting. SECTION 4.05. Application of Article. Whenever any provision of any other document relating to any committee of the Corporation named therein shall be in conflict with 10 14 any provision of this Article IV, the provisions of this Article IV shall govern, except that if such other document shall have been approved by the stockholders or by the Board of Directors, the provisions of such other document shall govern. ARTICLE V OFFICERS SECTION 5.01. Officers. The officers of the Company may include a Chairman of the Board of Directors, who shall be chosen from among the directors, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, a General Counsel and a Secretary, each of whom shall be elected by the Board of Directors to hold office until his or her successor shall have been chosen and shall have qualified. The Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer and the President may elect or appoint one or more Controllers, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant General Counsels and one or more Assistant Secretaries, and the Board of Directors may elect or appoint such other officers as it may deem necessary, or desirable, each of whom shall have such authority, shall perform such duties and shall hold office for such term as may be prescribed by the Board of Directors from time to time. Any person may hold at one time more than one office, excepting that the duties of the President and Secretary shall not be performed by one person. SECTION 5.02. Chairman of the Board of Directors. The Chairman of the Board of Directors shall have ultimate authority for decisions relating to the general management and control of the affairs and business of the Corporation, subject to the control of the Board of Directors, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chairman of the Board of Directors shall perform all other duties and exercise all other powers commonly incident to the office of Chairman or which are or from time to time may be delegated to him or her by the Board of Directors, or which are or may at any time be authorized or required by law. He or she shall preside at all meetings of the Board of Directors and shall make reports to the Board of Directors and stockholders. The Chairman of the Board may also serve as Chief Executive Officer, if so elected by the Board of Directors. The Board of Directors may also elect a Vice-Chairman to act in the place of the Chairman upon his or her absence or inability to act. SECTION 5.03. Chief Executive Officer. Subject to the provisions of these Bylaws and to the direction of the Board of Directors and the Chairman of the Board of Directors, the Chief Executive Officer shall exercise supervision over the business of the Corporation and over its several officers, subject to the oversight of the Chairman of the Board of Directors, and shall exercise all other powers commonly incident of the office of Chief Executive Officer or which are or from time to time may be delegated to him or her by the Board of Directors, or which are or may at any time be authorized or required by law. SECTION 5.04. President. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the Chairman of the Board of Directors and of the Chief Executive Officer, the President shall have such powers and shall perform such duties as from time to time may be delegated to him or her by the Board of Directors, the Chairman of the 11 15 Board of Directors or by the Chief Executive Officer, or which are or may at any time be authorized or required by law. SECTION 5.05. Senior Vice Presidents and Vice Presidents. Each of the Senior Vice Presidents and each of the other Vice Presidents shall have such powers and shall perform such duties as may be delegated to him or her by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President or such other officer or officers to whom he or she is directly responsible. SECTION 5.06. Treasurer and Assistant Treasurer. The Treasurer, subject to the direction of the Board of Directors, shall have the care and custody of all funds and securities of the Corporation. When necessary or proper he or she shall endorse on behalf of the Corporation, for collection, checks, notes and other obligations, and shall deposit all funds of the Corporation in such banks or other depositaries as may be designated by the Board of Directors or by such officers or employees as may be authorized by the Board of Directors so to designate. He or she shall perform all acts incident to the office of Treasurer, subject to the control of the Board of Directors and such other officer or officers to whom he or she is directly responsible. He or she may be required to give a bond for the faithful discharge of his or her duties, in such sum and upon such conditions as the Board of Directors may require. At the request and direction of the Treasurer or, in the case of his or her absence or inability to act, any Assistant Treasurer may act in his or her place. In the case of the death of the Treasurer, or in the case of his or her absence or inability to act without having designated an Assistant Treasurer to act temporarily in his or her place, the Assistant Treasurer so to perform the duties of the Treasurer shall be designated by the Chairman of the Board of Directors, the Chief Executive Officer, the President or a Senior Vice President. SECTION 5.07. Secretary and Assistant Secretary. The Secretary shall keep full and accurate minutes of the meetings of the stockholders and of the Board of Directors in the proper record book of the Corporation provided therefor, and, when required, the minutes of meetings of the committees, and shall be responsible for the custody of all such minutes. Subject to the direction of the Board of Directors, the Secretary shall have custody of the stock ledgers and documents of the Corporation. He or she shall have custody of the corporate seal of the Corporation and shall affix and attest such seal to any instrument whose execution under seal shall have been duly authorized. He or she shall give due notice of meetings and, subject to the direction of the Board of Directors, shall perform all other duties commonly incident to his or her office or as properly required of him or her by the Chairman of the Board of Directors and such other officer or officers to whom he or she is directly responsible and shall enjoy all other powers commonly incident to his or her office. At the request and direction of the Secretary or, in the case of his or her absence or inability to act, any Assistant Secretary may act in his or her place. In the case of the death of the Secretary, or in the case of his or her absence or inability to act without having designated an Assistant Secretary to act temporarily in his or her place, the Assistant Secretary or other person so to perform the duties of the Secretary shall be designated by the Chairman of the Board of Directors, the President or an Executive Vice President. 12 16 SECTION 5.08. Assistant Vice Presidents and Other Officers. Each assistant vice president and other officers shall perform such duties commonly incident to his or her office or as properly required of him or her by the Chairman of the Board of Directors and such other officer or officers to whom he or she is directly responsible. SECTION 5.09. General Counsel. The General Counsel shall have general supervision of all matters of a legal nature concerning the Corporation. He or she shall perform all such duties commonly incident to his or her office or as properly required of him or her by the Chairman of the Board of Directors and such other officer or officers to whom he or she is directly responsible. SECTION 5.10. Salaries. Salaries of officers, agents or employees shall be fixed from time to time by the Board of Directors or by such committee or committees, or person or persons, if any, to whom such power shall have been delegated by the Board of Directors. An employment contract, whether with an officer, agent or employee, if expressly approved or specifically authorized by the Board of Directors, may fix a term of employment thereunder; and such contract, if so approved or authorized, shall be valid and binding upon the Corporation in accordance with the terms thereof, provided that this provision shall not limit or restrict in any way the right of the Corporation at any time to remove from office, discharge or terminate the employment of any such officer, agent or employee prior to the expiration of the term of employment under any such contract. SECTION 5.11. Vacancies. A vacancy in any office filled by election of the Board of Directors may be filled by the Board of Directors by the election of a new officer who shall hold office, subject to the provisions of this Article V, until the regular meeting of the directors following the next annual meeting of the stockholders and until his or her successor is elected. SECTION 5.12. Removal or Discharge. Any officer may be removed or discharged by the Chairman of the Board of Directors at any time excepting an officer who is also a director. Any officer who also is a director may be discharged as an officer at any time by the Board of Directors. SECTION 5.13. Resignations. Any officer of the Corporation, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board of Directors, the Chief Executive Officer, the President, or the Secretary, and such resignation shall be deemed effective as of the close of business on the date said notice is received by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. ARTICLE VI CHECKS, DRAFTS, NOTES, AND PROXIES SECTION 6.01. Checks, Drafts and Notes. All checks, drafts and other orders for the payment of money, notes and other evidences of indebtedness issued in the name of the 13 17 Corporation shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall be determined, from time to time, by resolution of the Board. SECTION 6.02. Execution of Proxies. The Chairman of the Board of Directors, the Chief Executive Officer, or the President, or, in the absence or disability of both of them, any Senior Vice President or Vice President, may authorize, from time to time, the execution and issuance of proxies to vote shares of stock or other securities of other corporations held of record by the Corporation and the execution of consents to action taken or to be taken by any such corporation. All such proxies and consents, unless otherwise authorized by the Board, shall be signed in the name of the Corporation by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President. ARTICLE VII SHARES AND TRANSFERS OF SHARES SECTION 7.01. Certificates Evidencing Shares. Shares shall be evidenced by certificates in such form or forms as shall be approved by the Board of Directors. Certificates shall be issued in consecutive order and shall be numbered in the order of their issue, and shall be signed by the Chairman, the Chief Executive Officer, the President or any Vice President and by the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer. Any and all signatures on the certificate may be a facsimile. In the event any such officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to hold such office or to be employed by the Corporation before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such officer had held such office on the date of issue. SECTION 7.02. Stock Ledger. A stock ledger in one or more counterparts shall be kept by the Secretary, in which shall be recorded the name and address of each person, firm or corporation owning the Shares evidenced by each certificate evidencing Shares issued by the Corporation, the number of Shares evidenced by each such certificate, the date of issuance thereof and, in the case of cancellation, the date of cancellation. Except as otherwise expressly required by law, the person in whose name Shares stand on the stock ledger of the Corporation shall be deemed the owner and recordholder thereof for all purposes. SECTION 7.03. Transfers of Shares. Registration of transfers of Shares shall be made only in the stock ledger of the Corporation upon request of the registered holder of such shares, or of his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, and upon the surrender of the certificate or certificates evidencing such Shares properly endorsed or accompanied by a stock power duly executed, together with such proof of the authenticity of signatures as the Corporation or its agents may reasonably require. SECTION 7.04. Addresses of Stockholders. Each Stockholder shall designate to the Secretary an address at which notices of meetings and all other corporate notices may be served or mailed to such Stockholder, and, if any Stockholder shall fail to so designate such an address, corporate notices may be served upon such Stockholder by mail directed to the mailing address, if any, as the same appears in the stock ledger of the Corporation or at the last known mailing address of such Stockholder. 14 18 SECTION 7.05. Lost, Destroyed and Mutilated Certificates. Each recordholder of Shares shall promptly notify the Corporation of any loss, destruction or mutilation of any certificate or certificates evidencing any Share or Shares of which he is the recordholder. The Board of Directors may, in its discretion, cause the Corporation to issue a new certificate in place of any certificate theretofore issued by it and alleged to have been mutilated, lost, stolen or destroyed, upon the surrender of the mutilated certificate or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction, and the Board of Directors or any financial officer of the Corporation may, in its discretion, require the recordholder of the Shares evidenced by the lost, stolen or destroyed certificate or his legal representative to give the Corporation a bond sufficient to indemnify the Corporation against any claim made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 7.06. Regulations. The Board of Directors may make such other rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates evidencing Shares. SECTION 7.07. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, or to express consent to, or to dissent from, corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other such action. A determination of the Stockholders entitled to notice of or to vote at a meeting of Stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 7.08. Record of Holder of Shares. The Corporation shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claims to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the General Corporation Law of the State of Delaware. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner. ARTICLE VIII SEAL SECTION 8.01. Seal. The Board may approve and adopt a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation, the year of its incorporation and the words "Corporate Seal Delaware". 15 19 ARTICLE IX FISCAL YEAR SECTION 9.01. Fiscal Year. The fiscal year of the Corporation shall end on the thirty-first day of December of each year unless changed by resolution of the Board. ARTICLE X INDEMNIFICATION AND INSURANCE SECTION 10.01. Indemnification. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 10.01(a) and (b) of these Bylaws, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 16 20 (d) Any indemnification under Section 10.01(a) and (b) of these Bylaws (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 10.01(a) and (b) of these Bylaws. Such determination shall be made with respect to a person who is a director or officer at the time of such determination, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by majority vote of such directors, even though less than quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders of the Corporation. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation pursuant to this Article X. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, other Sections of this Article X shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. (g) For purposes of this Article X, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article X with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (h) For purposes of this Article X, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves service by, such director, officer, employee or agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article X. 17 21 (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article X shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 10.02. Insurance for Indemnification. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation has the power to indemnify such person against such liability under this Article X or the provisions of Section 145 of the General Corporation Law. ARTICLE XI MISCELLANEOUS SECTION 11.01. Notices and Waivers Thereof . Whenever any notice whatever is required by these Bylaws, the Charter or any of the laws of the State of Delaware to be given to any stockholder, director or officer, such notice, except as otherwise provided by the laws of the State of Delaware, may be given personally or by telephone or be given by facsimile transmission or other form of electronic communication, addressed to such stockholder at such person's address as it appears on the stock transfer books of the Corporation, or to such director or officer at his or her Corporation location, if any, or at such address as appears on the books of the Corporation, or the notice may be given in writing by depositing the same in a post office, or in a regularly maintained letter box, or by sending it via courier in a postpaid, sealed wrapper addressed to such stockholder at such person's address as it appears on the stock transfer books of the Corporation, or to such director or officer at his or her Corporation location, if any, or such address as appears on the books of the Corporation. Any notice given by facsimile transmission or other form of electronic communication shall be deemed to have been given when it shall have been transmitted. Any notice given by mail or courier shall be deemed to have been given when it shall have been mailed or delivered to the courier. A waiver of any such notice in writing, including by facsimile transmission, signed or dispatched by the person entitled to such notice or by his or her duly authorized attorney, whether before or after the time stated therein, shall be deemed equivalent to the notice required to be given, and the presence at any meeting of any person entitled to notice thereof shall be deemed a waiver of such notice as to such person. SECTION 11.02. Audits. The accounts, books and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be done annually. 18 22 SECTION 11.03. Contracts References. Whenever in these Bylaws the phrase "any contract to which the Corporation is bound" or a similar phrase is used, the reference therein to a contract to which the Corporation is bound shall specifically include, without limitation, that certain Separation Agreement entered into among the Corporation, HNC and Retek Information Systems, Inc., as such may be amended from time to time, and that certain Corporate Rights Agreement among the Corporation, HNC and Retek Information Systems, Inc., as such may be amended from time to time, and the contents of such contracts shall be deemed to have been incorporated herein by reference. ARTICLE XII AMENDMENTS SECTION 12.01. Amendments. These Bylaws may be altered, amended or repealed, and new Bylaws may be adopted (a) at any annual or special meeting of stockholders by the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, provided, however, that after the Trigger Date, any proposed alteration, amendment or repeal of, or the adoption of any Bylaw inconsistent with, Sections 2.02, 2.04, 2.11, 3.02, 3.04 and 3.05 of the Bylaws by the stockholders shall require the affirmative vote of the holders of at least 80% of the voting power of all Voting Stock then outstanding, voting together as a single class, and provided, further, however, that, in the case of any such stockholder action at a special meeting of stockholders, notice of the proposed alteration, amendment, repeal or adoption of the new Bylaw or Bylaws must be contained in the notice of such special meeting, (b) by the affirmative vote of a majority of the Whole Board or (c) by written consent of the stockholders of the Corporation if permitted by the Charter, these Bylaws or the General Corporation Law. 19 EX-21.1 10 SCHEDULE OF SUBSIDIARIES 1 EX-21.1
Name Jurisdiction of Organization - ---- ---------------------------- Retek Information Systems Delaware WebTrak Limited United Kingdom Retek Information Systems, Limited United Kingdom Retek Information Systems, Inc. Canada Retek Information System France Retek Information Systems Pty Ltd Australia Retek Information Systems GmbH Germany
EX-23.1 11 CONSENT OF PRICEWATERHOUSECOOPER LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-91339) of Retek Inc., of our report dated January 25, 2000, on our audits of the consolidated financial statements and financial statement schedule of Retek Inc. and subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota March 14, 2000 EX-23.2 12 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-91339) of Retek Inc., of our report dated September 9, 1999, on our audits of the financial statements of Retek Logistics Inc. as of March 31, 1998 and December 31, 1997, and for the three months ended March 31, 1998 and for the year ended December 31, 1997, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota March 14, 2000 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 0001094360 RETEK INC. 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 83,680 0 28,323 (3,940) 0 124,800 12,487 (4,196) 154,233 30,258 0 0 0 465 123,975 154,233 69,159 69,159 22,983 22,983 53,272 2,399 0 (7,066) (1,697) 0 0 0 0 (5,369) (0.13) (0.13)
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