RETEK INC - 10-K Annual Report

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.

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No

The aggregate market value of common stock held by non-affiliates of the Registrant was approximately $211,305,385 as of March 7, 2003, based upon the closing price of $4.28 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 7, 2003, the number of shares of common stock outstanding was 53,176,881.

DOCUMENTS INCORPORATED BY REFERENCE: Information required by Part III of this document is incorporated by reference to certain portions of our definitive Proxy Statement (which will be filed within 120 days after December 31, 2002) for its 2002 Annual Meeting of Stockholders to be held on June 3, 2003.

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 our future financial performance. In some cases, forward-looking statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Such risks, uncertainties and other factors include, among other things, the matters described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors that May Impact Future Results of Operations.” There are a number of factors that could cause our results to differ materially from those indicated by such forward looking statements. These factors are included those set forth in the section titled “Factors That May Impact Future Results of Operations”.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual future results.

Retek is a leading provider of software solutions and services to the retail industry. We provide innovative technology solutions that help retailers create, manage and fulfill consumer demand. Our solutions and services have been developed specifically to meet the needs of the retail industry. We believe the processes and methodologies embedded in our solutions reflect the best retail practices of our customers and partners. By supporting core retail business processes, our solutions help retailers improve the efficiency of their operations and build stronger relationships with their customers.

We market our software solutions through our direct and indirect sales channels primarily to retailers who sell to their customers through traditional retail stores, catalogs and/or Internet-enabled storefronts. To date, we have licensed our solutions to more than 200 retailers across a variety of retail sectors.

We were originally incorporated in Ohio in 1985 as Practical Control Solutions, Inc., 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. On November 23, 1999, we completed our initial public offering. Prior to the completion of our initial public offering, we were a wholly-owned subsidiary of HNC Software, Inc. (“HNC”), a business-to-business software company that developed and marketed predictive software solutions. On October 2, 2000, HNC announced that it had completed the separation of Retek from HNC effective September 29, 2000 through the distribution pro rata to HNC’s stockholders, as a dividend, of all of the shares of Retek common stock owned by HNC.

Our principal executive offices are located at 950 Nicollet Mall, 4th floor, Minneapolis, Minnesota 55403 and our telephone number is (612) 587-5000. Our common stock is listed on the Nasdaq National Market under the symbol “RETK.” Our web site is http://www.retek.com. All of our filings with the Securities and Exchange Commission (SEC) are available free of charge on or through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on our web site is not part of this Annual Report on Form 10-K.

“Retek” is a trademark of Retek. All other trademarks or service marks appearing in this Annual Report on Form 10-K are trademarks or service marks of the respective companies that use them. Unless otherwise stated, the terms “Retek”, “we,” “our” or “us” used in this Annual Report on Form 10-K refer to Retek Inc. and its consolidated subsidiaries.

Historically, large and mid-sized retailers have relied upon custom-built systems, often developed internally, to manage business transactions with trading partners and customers. These legacy systems are typically built on 1970s mainframe technology, are not Internet-enabled, and do not permit collaboration among a retailer’s partners, suppliers and other members of the supply chain. More recently, retailers have begun to purchase packaged solutions designed specifically for the retail industry. Many of these products lack the scalability retailers require to manage the large amounts of data their business generates. Some retailers have also adopted enterprise resource planning systems. These complex systems can be expensive to implement and maintain, typically lack the scalability required by retailers, and do not have specific core retail functionality.

Today, retailers face the additional challenge of operating in a very competitive multi-channel environment. As retailers expand their sales outlets to include the Internet, catalog, kiosk and other distribution networks, the complexity of managing inventory and meeting customer demands places tremendous pressure on their business processes and IT infrastructure. To meet consumer expectations, a retailer needs to deliver the retailing experience on the customer’s terms, which means having the right product, at the right time and in the right place across the multi-channel touch points. Retailers need strong forecasting, planning, allocation, replenishment and merchandising functions to profitably achieve

this goal. A comprehensive, integrated software infrastructure that spans from supplier to consumer and gives the retailer visibility, flexibility and control to meet demand, is required for successful retailers to compete effectively.

We believe a market opportunity exists to provide retailers with a software solution that is designed specifically for the retail industry. This solution should be easy-to-use, leverage a retailer’s existing investments in information technology and be sufficiently flexible to meet the specific needs of several retail sectors, such as fashion, hard-lines, mass merchandise or food and drug. In addition, the solution should be highly scalable to process and analyze vast amounts of product, store, customer and supply chain data unique to the retail industry.

We have developed and deployed web-based software solutions that enable retailers to manage the entire scope of their operations. These operations include point-of-sale, customer relationship management, merchandising, supply chain management and planning, forecasting and optimization operations. Key areas which differentiate our software solutions include:


	•	Value — Our modular architecture helps retailers meet return on investment (ROI) objectives by allowing them to implement the most critical and valuable applications first. This modular architecture decreases migration path risk for the replacement of legacy systems and increases the probability of an on-time, on-budget implementation project.

	•	Proven — We are a leading provider of retail infrastructure software and services. We understand the complex needs of retailers and have designed our solutions specifically for the retail industry. We provide certain software products and services infrastructure for retailers with combined revenues of over $900 billion annually.

	•	Scalable — Our solutions are engineered to provide scalability to efficiently handle large volumes of transactions and users.

	•	Innovative — Our solutions include some of the most advanced technologies available to retailers. We invested over 160,000 development days on our last enterprise release, Retek 10, demonstrating our commitment to research and development.

	•	Scientific — To help retailers make smarter and better decisions, we embed predictive and optimization technology into many areas of our enterprise solutions, including planning, allocation and replenishment. Our research labs have dedicated professionals focused on applying complex scientific solutions to address the problems facing retailers.

Our mission is to create value for retailers by providing innovative technology solutions that help to create, manage, and fulfill consumer demand. In pursuing this goal, we intend to maintain and expand our status as a leading provider of fully scalable web-based software solutions for the retail industry. Key elements of our strategy include:


	•	Increase our market share of retail packaged applications and services. We believe we can continue to build and expand our position of leadership within the retail packaged software applications market as the retail industry increasingly turns to packaged software applications as an alternative to expensive in-house and custom developed applications.

	•	Provide high customer satisfaction. The retail industry is strongly influenced by formal and informal references. We believe we have the opportunity to expand market share by providing high levels of customer satisfaction with our current customers, thereby fostering strong customer references to support sales activities.

	•	Provide deployed return on investment (deliver value to our customers). We believe that maximizing our customers’ deployed return on investment will help us compete in our market space and increase our market share.


	•	Become the preferred application and technology architecture for the retail industry on a global basis. By leveraging both our success within the Tier 1 retail market and a renewed focus on retail’s Mid-Market, we believe we are uniquely positioned to become the preferred application and technology architecture provider for retail software and associated services. We believe our strong market share within the core backbone of a retailer’s application architecture can be leveraged to develop a leading technology and best business practice standard.

We develop and sell software solutions that support virtually all of the operational activities of a typical retailer. Our software solutions create value by applying innovative technology to help our customers efficiently create, manage and fulfill consumer demand. Our products can be deployed individually to meet specific business needs, or as part of a scalable and fully integrated, end-to-end solution. Our primary software solutions consist of six integrated, but independently deployable groups of products, which are accessed via an Internet browser and can be hosted by a customer or by an outside application service provider. The six product groups are: Merchandise Optimization and Planning; Merchandise Operations Management; Inventory Optimization and Planning; Supply Chain Management; Integrated Store Operations; and Enterprise Infrastructure.

Our solutions utilize advanced technology to help retailers make smarter decisions and to enable management by exception. Retailers require an accurate forecast of future consumer demand and the ability to apply sophisticated mathematical models and optimization routines to determine what products should be on the shelves of their stores, when those products should be re-ordered, how products should be priced, what should be marked down and when those markdowns should occur.

Key business functions covered within the area of Merchandise Optimization and Planning include: merchandise and channel planning, assortment planning, item planning, visual space planning, promotional planning, markdown optimization, price optimization, assortment to space optimization and customer optimization.


	Retek® TopPlan^TM — Our solution provides highly flexible financial, product and location planning with the ability to fully reconcile and approve plans.

	Retek® Assort^TM — Our solution supports the planning of product assortments consistent with overall financial plans as well as space constraints. It gives retailers the ability to optimize the assortment and presentation of merchandise at an individual product and store level, resulting in improved service levels and lower overall inventory levels.

	Retek® KeyPlan^TM — Our solution provides item level planning capabilities to produce a bottom up plan in support of, and in conjunction with, an overall financial plan.

	Retek® Visual Space Planning^TM — Our solution provides space planning capabilities that enable a retailer to visualize merchandise assortments in a three dimensional environment and to optimize the use of space for the highest possible return on the inventory investment.

	Retek® Customer Revenue Optimization^TM — Our solution provides a “tool kit” of analytical methods and algorithms that are used in conjunction with Retek’s proprietary “behavior profiling” techniques to deliver insight on customer and product behavior.

Our Merchandise Operations Management solutions enable retailers to coordinate their operations and maintain a single, comprehensive source of consistent and accurate data. This coordination enables retailers

Key business functions covered within the area of Merchandise Operations Management include merchandise management, sales audit, rules based pricing, invoice matching and collaborative design and source.


	Retek® Merchandising System^TM — Our solution is a flexible, scalable, and proven foundation from which to execute a broad range of core merchandising activities, including inventory replenishment, purchasing and vendor management.

	Retek® Sales Audit^TM — Our solution is a data cleansing and loss prevention application that cleans the data coming from a retailer’s point-of-sale devices while also identifying suspicious transactions.

	Retek® Invoice Matching^TM — Our solution accurately and efficiently automates the process of verifying products received against supplier invoices within the cost and quantity tolerance levels specified for each supplier.

	Retek® Price Management^TM — Our solution provides a well-defined and efficient price change process that allows for aggregated permanent and clearance price change execution.

	Retek® Trade Management^TM — Our solution automates the international procurement process, linking partners in the supply chain and moving information as products move through the sourcing, buying and delivery processes.

	Retek® WebTrack^TM — Our solution links retailers and their trading partners via the Internet to collaboratively manage the process of sourcing goods.

	Retek® Design^TM — Our solution enables real-time visual collaboration to support new product development.

Inventory management is a data intensive task in the retail industry. A combination of large product assortments, multiple store and warehouse locations, numerous vendors and high sales volumes makes it very challenging for retailers to accurately match supply with demand. Our Inventory Optimization and Planning solutions enable retailers to unite their planning functions with execution systems. These scalable applications use optimization techniques to drive improvements in inventory turns and profitability. Key business functions covered within the area of Inventory Optimization and Planning include demand forecasting, replenishment planning, allocation planning, replenishment optimization, collaborative planning, forecasting and replenishment and vendor managed inventory.


	Retek® Demand Forecasting^TM — Our solution utilizes advanced scientific formulas to produce highly accurate forecasts used for supply chain planning, allocation and replenishment.

	Retek® Promote^TM — Our solution provides promotional forecasting using advanced technology to plan, track and analyze the profitability of promotions or the effectiveness of specific promotional features and components.

	Retek® Advanced Inventory Planning^TM — Our solution integrates with Retek Demand Forecasting to produce time-phased order plans that are synchronized with the complete supply chain and take into account real world constraints such as actual inventory, logistics, and available labor. This solution is scheduled for release in 2003.


	Retek® Allocation^TM — Our solution supports the process of allocating products to individual stores and manages multiple types of allocation, ensuring the right quantity of product in the right location at the right time to maximize sales, profits and customer satisfaction.

	Retek® Replenishment Optimization^TM — Our solution uses advanced forecasting and simulation techniques to determine the optimal parameters for a retailer’s supply chain. These parameters include how often an item should be ordered and whether it should be stocked in a warehouse or shipped directly from a supplier.

	Retek® Collaborate^TM — Our solution is web-based and collaborative and supports standard best practices for Collaborative Planning Forecasting and Replenishment (CPFR). This enables retailers to share information directly with suppliers regarding sales trends and inventory needs.

	Retek® Vendor Managed Inventory^TM — Our solution is designed to drive product replenishment by SKU, by location, enabling vendors to play a more direct role in the management of their inventory in the supply chain.

Retailers devote significant resources to managing their supply chains. Advances in technology have enabled retailers to take greater control of their supply chains, resulting in improved service levels with lower inventories and operating costs. Our Supply Chain Management (SCM) solutions put retailers in control of their supply chains by providing the transaction support necessary to move goods as well as the tools necessary to properly manage, measure and control the global movement of goods. Key business functions covered within the area of Supply Chain Management include import management, transportation, and warehouse and labor management.


	Retek® Distribution Management^TM — Our solution is a best-of-breed warehouse management system that plans, manages and optimizes distribution center operations while extending execution capabilities across the supply chain to trading partners.

Store operations represent the largest expense that retailers incur. New technologies allow retailers to reduce store operation costs and improve customer service. Our Integrated Store Operations (ISO) solutions support these goals, leveraging a common web-based, scalable and open architecture that is operating system and hardware independent. Key business functions covered within the area of Integrated Store Operations include point of sale, store back office (inventory management) and store labor management.


	Retek® Point-of-Sale^TM — Our solution provides retailers a technologically advanced application that allows customers to complete a purchase anywhere in the store. The application provides rapid execution and greater personalization while enabling reduced operating costs and greater flexibility.

	Retek® Labor Management^TM — Our solution provides time and attendance and labor scheduling capabilities enabling retailers to manage complex scheduling requirements, to reduce fraud and to reduce the cost of labor in the stores.

	Retek® Store Inventory Management^TM — Our solution provides instantaneous, real-time data communications between stores and the corporate office. This application supports store level activities such as item look-up, stock counts, and transfers, improving the accuracy of inventory information, improving in-store efficiency and improving sell-thru.

Additional companion products in ISO support consumer interaction and selling efficiency.


	Retek® Brickstream^TM — Our solution allows retailers to monitor customer shopping behavior and deliver back to the retailer aggregate information about customer check-out wait times, customer shopping patterns, and customer interactions with promotions and displays.

	Retek® Customer Order Management^TM — Our solution supports retailers that sell through catalogs and web sites by providing accurate inventory and customer order information. As a result, customers are presented with a consistent shopping experience and retailers are able to maintain a comprehensive view of the customer, while reducing the amount of inventory necessary to satisfy demand.

	Retek® Data Warehouse^TM — Our solution provides web-based performance analysis that is tailored for use by individual store managers.

Supporting a retail enterprise is a substantial task. To quickly respond to changing consumer demands, and to effectively plan and manage their supply chains, retailers need robust and scalable IT systems. Key applications and characteristics of an effective Enterprise Infrastructure include data warehousing, alerts and workflow, intuitive application usability and integration.


	Retek® Data Warehouse^TM— Our solution is a robust and retail-specific data warehouse that delivers improved decision support through advanced analytics.

	Retek® Active Retail Intelligence^TM — Our solution provides exception management that immediately identifies opportunities, recommends courses of action and automates routine tasks.

	Retek® Workbench^TM — Our solution provides a role based portal for intuitive application navigation and enhanced usability by end users.

	Retek® Integration Solution^TM — Our solution offers message-based integration and monitoring through the Retek Integration Bus (RIB) which enables all Retek solutions to communicate with each other as well as with other applications developed by the retailer or acquired from outside vendors utilizing industry standard formats.

Retek Professional Services helps retailers and their integration partners implement Retek solutions rapidly and cost effectively. We offer a comprehensive range of services designed to address a retailer’s business and technical objectives, including consulting, training and custom solution services.


	•	Consulting services consist primarily of technical and implementation services and customization of our products for a customer’s specific needs. These services are customarily billed at a fixed daily rate plus out-of-pocket expenses.

	•	Technical support or maintenance services consist primarily of customer support services provided after implementation of our solutions.

We also provide strategic technical advisory services after product delivery. Project management support is designed to help our customers exploit the full value and functionality of our products.

Our services range from technical and implementation support to business benefit realization consulting, which assists retailers in utilizing our software solutions to optimize their potential benefits. We offer high-quality timely technical support to customers via phone, e-mail and the Internet. Additionally, we publish online versions of manuals, release notes and updates to existing documentation. We provide a number of training programs. Courses cover topics such as technical architecture, business use of the merchandizing functionality and development standards and methodology.

We market our software solutions primarily to retailers who sell to their customers via traditional retail stores, catalogs and/or Internet storefronts. Historically, we have focused on organizations with gross sales in excess of $500 million a year. We market across all sectors of retailing, including fashion, department stores, catalog and consumer direct, specialty retailers, mass merchandise retailers and food, drug and convenience stores. During fiscal year 2002, we had two customers who each accounted for greater than 10% of total revenues.

No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States government.

We market and sell our software solutions worldwide through a combination of a direct sales force, resellers and distributors. Our sales, marketing and distribution approaches are designed to help customers understand both the business and technical benefits of our software solutions. We conduct a variety of marketing programs worldwide to educate our target market, create awareness and generate leads for our solutions. To achieve these goals, we have engaged in marketing activities including 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. Revenue generated from our direct sales channel accounted for approximately 98%, 96%, and 93% of our total revenue in 2002, 2001 and 2000, respectively.

To date, we have not experienced difficulties in obtaining raw materials for the manufacture of our products. We had no material backlog of orders as of December 31, 2002. Revenues derived from and expenses associated with our business operations are not generally subject to seasonal fluctuations.

Financial information concerning us for each of the three fiscal years ended December 31, 2002, 2001 and 2000, including the amount of total revenue contributed by classes of similar products or services that accounted for 10% or more of our consolidated revenue in any one of those periods and information with respect to our operations by geographic area, is set forth in the consolidated financial statements and the notes thereto in Item 15 of this Annual Report on Form 10-K beginning on page 39.

Our research and development group has been a critical component of our overall success. As of December 31, 2002, our research and development group was comprised of 331 individuals in Atlanta, GA, Cincinnati, OH, Rochester, MN, Minneapolis, MN, Houston, TX and Cambridge, UK. In addition, we have developed close alliances with a number of consulting companies to provide additional staffing if required. These relationships allow us to increase our development capacity as quickly as necessary to address new market and product demand.

Our research and development group is organized on a centralized basis. Our research and development group is responsible for product development, product management processes, implementation of development strategy and release path, delivery and support of our software applications. The research and development group also has resources organized around specific product offerings.

The research and development group is also responsible for overall quality assurance and testing processes, documentation, application architecture and methodology.

The research and development group operates with a well-defined development methodology. This methodology enables the delivery of high-quality products in a timely and predictable manner. It involves the traditional checkpoints of development processes such as business requirements, functional and technical specifications, unit, string and integration test plans and regression analysis. In addition, we use a

highly interactive review process to engage future users of the product in the product release cycle through iterative prototypes to ensure the application design goal is met.

Speed to market is critical to our success. We believe that we have effectively used build, buy, and partner strategies to expand our 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 $47.2 million, $42.6 million and $42.8 million in the fiscal years 2002, 2001, and 2000, respectively. We believe that significant investments in research and development will be required in the future to remain competitive.

The markets for our software solutions are intensely competitive, constantly evolving and subject to rapid technological change. We encounter competition in our products and services from a number of different sources, including in-house technical staffs, traditional enterprise resource planning vendors and other vendors of retail specific solutions. Of these vendors, our principal competitors include i2 Technologies, JDA Software, Manhattan Associates, Manugistics and SAP. We compete with a substantial number of other companies focused on providing point solution software applications for specific segments of the retail application market. In addition, there are new market entrants that may offer competitive products in the future. We believe that our ability to compete depends on many factors both within and beyond our control, including:


	•	the ease of use, performance, features, price and reliability of our solutions as compared to those of our competitors;

	•	the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors;

	•	the quality of our customer service; and

	•	the effectiveness of our sales and marketing efforts.

We believe that our product solution suite is better than those of our competitors in its performance, features and reliability. In addition, we have in the past introduced new solutions and enhancements to our existing solutions in a timelier manner. Our prices are generally higher than our competitors’ reflecting, we believe, the added value of our software solutions. Because the market for our software solutions is intensely competitive and rapidly evolving, we cannot be assured that we will maintain our competitive position against current and potential competitors, especially those with greater name recognition and greater financial, marketing and other resources.

We expect competition may increase as a result of software industry consolidation. For example, a number of enterprise software companies have acquired point solution providers to expand their product offerings. Our competitors may also package their products in ways that may discourage users from purchasing our products. Current and potential competitors may establish alliances among themselves or with third parties or adopt aggressive pricing policies to gain market share. In addition, new competitors could emerge and rapidly capture market share.

Our success and ability to compete are in part dependent upon our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of trademark, trade secret, and copyright law and contractual restrictions to protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by

requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code.

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our line of products to perform key functions. For example, we license the e*Gate enterprise application integration software from SeeBeyond Corporation, business intelligence software from MicroStrategy, Inc. and the Accumate component from Lucent Technologies. These licenses are non-exclusive, worldwide and royalty-based. The royalties we paid SeeBeyond, MicroStrategy and Lucent under these licenses were, in each case, less than 5% of our total revenue in each of the 2002, 2001 and 2000 fiscal years. We have also entered into a technology license agreement with HNC, giving us a license to specified HNC predictive technology. This license is non-exclusive, non-transferable, worldwide, perpetual and royalty-free. We also license and will continue to license certain products integral to our products and services from other third parties, including Accenture, IBM, Oracle Corp. and Sun Microsystems, Inc. If we are unable to continue any of theses licenses, we will face delays in releases of our software until equivalent technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could seriously harm our business.

There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. It is possible that in the future third parties may claim that we or our current or potential future software solutions infringe on their intellectual property. We expect that software product developers and providers of electronic commerce products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

We are in substantial compliance with federal, state and local provisions that have been enacted or adopted relating to the protection of the environment. We do not expect that continued compliance with these provisions would have any material effect upon our capital expenditures and earnings.

At December 31, 2002, we had 735 employees based in North America, Europe, Asia, Australia and other countries. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.

The names of our executive officers and certain information regarding these persons, including their ages as of January 31, 2003, are set forth below:

Steven D. Ladwig joined us in August 2001 and is currently our president and chief executive officer. From July 1998 to July 2001, he served as senior vice president and president, Data Storage and Information Management at Imation Corp. Prior to that, Mr. Ladwig served at IBM, most recently as the General Manager for Network Computing and Software for Global Small and Medium Businesses. Mr. Ladwig holds a Bachelor of Computer Science and Business Administration from Minnesota State University, Mankato.

John L. Goedert joined us in June 1996 as senior vice president, research and development and is currently our chief operating officer. Mr. Goedert holds a Bachelor of Business Administration in Finance from Iowa State University.

Gregory A. Effertz joined us 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.

Peter A. Espinosa joined us in April 2002 as senior vice president, field operations. From May 2001 to March 2002, Mr. Espinosa was with Vignette Corporation, a content management applications solutions provider, serving most recently as Senior Vice President of Global Sales and Operations. From December 1999 to May 2001, Mr. Espinosa was Vice President and Chief Sales Officer for NetSales, Inc., a provider of e-business solutions for supplier enablement. From May 1999 to December 1999, he was Vice President of North American Sales for Cambridge Technology Partners, a global e-services subsidiary of Novell, Inc. From May 1998 to May 1999, Mr. Espinosa was the Vice President of World-Wide Sales and Marketing for Peritus Software Services, an independent software development organization. Prior to his employment with Peritus Software Services, Mr. Espinosa worked at IBM Corp. for 17 years in a variety of sales and marketing positions. His most recent position at IBM Corp. was as Executive Assistant to the Chairman of the Board of Directors and Chief Executive Officer. Mr. Espinosa received his Bachelor of Arts degree in Speech Communications and Political Science from Luther College in Decorah, Iowa.

Duncan B. Angove joined us in September 1997 and is currently vice president, strategy and marketing. From 1994 to 1997, he served as a consultant with Andersen Consulting’s Consumer Products Practice, specifically in retail and distribution. Mr. Angove holds a BSC Economics degree from the University College London.

John Gray joined us in April 2002 and is currently our chief technology officer. From February 1999 to April 2002 was with Chelsea Market Systems, LLC, serving most recently as Chief Architect and Vice President of Research and Development. From 1998 to 1999 he was a Java Architect with Sun Microsystems and from 1996 to 1998, he served as a Consultant with Sprint Corporation. Mr. Gray holds a Bachelor of Business Administration in Information Systems from the University of North Texas.

James B. Murdy joined us in April 1997 as controller. From 1988 to 1997 Mr. Murdy was with American Paging, Inc, a paging service provider, serving most recently as Assistant Controller. Mr. Murdy is a certified public accountant certificate holder and holds a Bachelor of Business Administration in Accounting from the University of North Dakota.

Our principal administrative, sales, marketing, and research and development facility occupies approximately 242,000 square feet in Minneapolis, Minnesota under a lease that expires in 2014.

We also have leased regional offices located in Atlanta, Georgia; Cincinnati, Ohio; Rochester, Minnesota; Houston, Texas; Australia, France, Germany, Japan and the United Kingdom. Properties leased by us are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. We believe that our existing facilities are adequate for our current needs and future requirements.

Between June 11 and June 26, 2001, three class action complaints alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 were filed in the Southern District of New York against us, certain of our current and former officers and directors, and certain underwriters of our initial public offering (“IPO”). On August 9, 2001, these actions were consolidated for pre-trial purposes before a single judge along with similar actions involving the initial public offerings of numerous other issuers.

On February 14, 2002, the parties signed and filed a stipulation dismissing the consolidated action without prejudice against us and the individual officers and directors, which the Court approved and entered as an order on March 1, 2002. On April 20, 2002, the plaintiffs filed an amended complaint in which they elected to proceed with their claims against us and the individual officers and directors only under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint alleges that the prospectus filed in connection with the IPO was false or misleading in that it failed to disclose: (i) that the underwriters allegedly were paid excessive commissions by certain of the underwriters’ customers in return for receiving shares in the IPO and (ii) that certain of the underwriters’ customers allegedly agreed to purchase additional shares of our common stock in the aftermarket in return for an allocation of shares in the IPO. The complaint further alleges that the underwriters offered to provide positive market analyst coverage for the Company after the IPO, which had the effect of manipulating the market for our stock. Plaintiffs contend that, as a result of the omissions from the prospectus and alleged market manipulation through the use of analysts, the price of our common stock was artificially inflated between November 18, 1999 and December 6, 2001, and that the defendants are liable for unspecified damages to those persons who purchased our common stock during that period.

On July 15, 2002, the Company and the individual defendants, along with the rest of the issuers and related officer and director defendants, filed a joint motion to dismiss based on common issues. Opposition and reply papers were filed. The Court rendered its decision on February 19, 2003, which granted dismissal in part of a claim against one of the individual defendants and denied dismissal in all other respects. The class action suits may now proceed to the discovery phase. We intend to defend against these claims vigorously. Securities class action litigation can result in substantial costs and divert our management’s attention and resources, which may have a material adverse effect on our business and results of operations.

Between October 30, 2002 and December 8, 2002, several purported shareholder class action suits were filed in federal district court in Minnesota. The Court has not yet certified any class. The complaints allege, among other things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against us and certain of our current and former officers and directors. Specifically, the complaints allege that, among other things, between October 17, 2001 and July 8, 2002 (the “Class Period”), defendants made false and misleading statements and/or concealed material adverse facts from the market in press releases, presentations and SEC disclosures. The complaints claim that our Company and the individual defendants misled the market with respect to, among other things our alliance with IBM, our ability to develop certain software, and our expectations regarding certain customer sales. Plaintiffs further allege that defendants manipulated financial statements and failed to disclose problems with existing and potential customer deals, which led to the Company’s stock price being artificially inflated during the Class Period. The plaintiffs seek compensatory damages and other unspecified relief. The federal court in Minnesota appointed a lead plaintiff and lead plaintiff’s counsel on February 14, 2003, and we anticipate that the lead plaintiff will file a Consolidated Complaint. After such Consolidated Complaint is filed, defendants will answer or respond to these allegations.

We dispute plaintiffs’ allegations in the federal class actions in Minnesota and believe that the allegations are subject to a variety of meritorious defenses. We intend to establish a vigorous defense.

While there can be no assurance, and while the outcome of federal class action litigation cannot be predicted with certainty, our management currently believes that the ultimate outcome of the federal class action litigation in Minnesota is unlikely to have a material adverse affect on our financial position, results of operations or cash flows. Despite our belief that the federal class action complaints in Minnesota are without merit, it is possible that the federal litigation in Minnesota could be resolved adversely. Were the federal court in Minnesota to issue a ruling or rulings unfavorable to us, such ruling or rulings could have a material adverse impact on the results of operations for the period in which the ruling occurs, or in a period thereafter.

In addition to the above federal litigation, in December 2002 two shareholder derivative lawsuits were filed in state court in Hennepin County, Minnesota, against certain of our current and former officers and directors, naming us as a nominal defendant. Plaintiffs in both derivative cases have agreed to coordinate their respective actions, and the process of coordination is currently underway. The derivative suits claim that certain of our officers and directors breached their fiduciary duties to us and our stockholders by: (i) selling shares of our common stock while in possession of material adverse non-public information regarding our business and prospects, and (ii) disseminating inaccurate information regarding our business and prospects to the market and/or failing to correct such inaccurate information. The derivative complaints seek compensatory and other damages, restitution, disgorgement, and other legal and equitable relief. As stated above, the complaints are brought derivatively on our behalf, and consequently do not seek relief from us. We however, have entered into indemnification agreements in the ordinary course of business with certain of the officer and director defendants and may be obligated throughout the pendency of this action to advance payment of legal fees and costs incurred by those defendants pursuant to our obligations under the indemnification agreements and/or applicable Delaware law.

While there can be no assurance, our management currently believes that the ultimate outcome of the derivative proceedings will not have a material adverse affect on our financial position, results of operations, or cash flows. However, we are unable to predict with certainty the results of the derivative litigation.

In addition to the matters discussed above, we are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe that the resolution of such matters will not have a material impact on our financial position, results of operations or cash flows.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.

Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters

Shares of our common stock are traded on the Nasdaq National Market under the symbol “RETK”.

The following table shows the high and low sales price for shares of our common stock for the periods indicated:

On March 7, 2003, the last reported sale price for shares of our common stock on the Nasdaq National Market was $4.28 per share.

There were approximately 192 holders of record of our common stock as of March 7, 2003.

On February 5, 2003, our Board of Directors approved a grant of 4,396,750 stock options to our employees. This grant utilized most of our shares available for future issuance as of that date. The recent trading prices for our stock have reduced the value of stock options granted to employees prior to 2003. We granted these options to employees in February 2003 across all business functions and all geographies to assist in the retention of personnel, which is critical to our business.

We have not paid or declared any dividends on our common stock since inception and we anticipate that our future earnings will be retained to finance the continuing development of our business. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, the success of our business activities, regulatory and capital requirements, our general financial condition and general business conditions.

The following selected consolidated financial data is qualified by reference to and should be read in conjunction with our consolidated financial statements and notes thereto included in Item 15 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.


PART I		3
	Item 1: Business	3
	Item 2: Property	12
	Item 3: Legal Proceedings	13
	Item 4: Submission of Matters to a Vote of Security Holders	14
PART II		15
	Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters	15
	Item 6: Selected Consolidated Financial Data	16
	Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 7A: Qualitative and Quantitative Disclosures About Market Risk	36
	Item 8: Financial Statements and Supplementary Data	36
	Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	37
PART III		38
	Item 10: Directors and Executive Officers of the Registrant	38
	Item 11: Executive Compensation	38
	Item 12: Security Ownership of Certain Beneficial Owners and Management	38
	Item 13: Certain Relationships and Related Transactions	38
	Item 14: Controls and Procedures	38
	Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K	39


Name	Age		Position

Steven D. Ladwig		45	President and Chief Executive Officer
John L. Goedert		37	Chief Operating Officer
Gregory A. Effertz		40	Senior Vice President, Finance & Administration, Chief Financial Officer, Treasurer, and Secretary
Peter A. Espinosa		43	Senior Vice President, Field Operations
Duncan B. Angove		36	Vice President, Strategy and Marketing
John R. Gray		38	Chief Technology Officer
James B. Murdy		40	Controller


	High		Low

2001:
First Quarter	$	35.44	$	15.56
Second Quarter	$	48.00	$	15.81
Third Quarter	$	43.85	$	11.65
Fourth Quarter	$	32.95	$	11.45
2002:
First Quarter	$	35.00	$	17.09
Second Quarter	$	28.51	$	18.20
Third Quarter	$	24.30	$	2.99
Fourth Quarter	$	4.75	$	1.50



	Year Ended December 31,

	2002			2001			2000			1999			1998


	(in thousands, except per share data)
Consolidated Statement of Income Data:
Total revenue	$	191,832		$	179,474		$	91,957		$	69,159		$	55,033
Gross profit		107,299			104,449			38,212			45,166			41,181
Operating (loss) income		(46,742	)		(23,319	)		(65,598	)		(7,096	)		8,088
Net (loss) income		(123,583	)		(14,310	)		(42,905	)		(5,369	)		3,878
Basic and diluted net (loss) income per common share	$	(2.35	)	$	(0.29	)	$	(0.91	)	$	(0.13	)	$	0.10
Cash dividend declared per common share		—			—			—			—			—



	December 31,

	2002		2001		2000		1999		1998


	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	56,464	$	70,166	$	31,058	$	83,680	$	415
Working capital		46,857		59,309		35,069		84,977		12,876
Total assets		198,567		299,370		195,183		154,233		51,283
Payable to HNC Software Inc.		—		—		598		15,399		5,944
Debt obligations		159		236		453		—		—
Total stockholder’s equity		101,448		203,523


Delaware (State or Other Jurisdiction of Incorporation or Organization)		Retek on the Mall 950 Nicollet Mall Minneapolis, MN 55403 (612) 587-5000		51-0392671 (I.R.S. Employer Identification No.)


	Federal Litigation in the U.S. District Court for the Southern District of New York


	Legal Proceedings that Arise in the Ordinary Course of Business


Item 4:	*Submission of Matters to a Vote of Security Holders*


Item 2:	*Property*


	State Derivative Litigation in Hennepin County, Minnesota