<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration No. 333-03521
2,500,000 Shares
[RESTRAC LOGO]
Common Stock
Of the 2,500,000 shares of Common Stock offered hereby, 1,500,000 shares
are being sold by the Company and 1,000,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock of
the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol RTRK.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Per Share................. $11.00 $0.77 $10.23 $10.23
Total(3).................. $27,500,000 $1,925,000 $15,345,000 $10,230,000
==================================================================================================
<FN>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) Certain of the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to 375,000 additional shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $31,625,000, the Underwriting
Discount will total $2,213,750, the Proceeds to Company will total
$15,345,000 and the Proceeds to Selling Stockholders will total $14,066,250.
See "Underwriting."
</TABLE>
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about July 26, 1996.
------------------------
MONTGOMERY SECURITIES
WESSELS, ARNOLD & HENDERSON
ADAMS, HARKNESS & HILL, INC.
July 22, 1996
<PAGE> 2
RESTRAC
ENTERPRISE SOFTWARE TO HELP ORGANIZATIONS MORE EFFICIENTLY
ACQUIRE AND DEPLOY THEIR WORKERS
[GRAPHIC OF A BULLSEYE]
"Restrac" is a registered trademark of the Company and all of the Company's
logos and product names are trademarks of the Company. This Prospectus also
contains trademarks of other companies.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 3
1. CAPTURE CANDIDATE
INFORMATION
Restrac provides organizations with multi- [PICTURE OF A COMPUTER SCREEN]
ple methods for automating the collection
of candidate skills. These include resume
scanning, e-mail, fax, employment kiosks
and the Internet. These capabilities reduce
administrative tasks and allow companies
to access a broader candidate pool.
E-mail/ Scan
Internet [GRAPHIC OF A SCANNER]
[GRAPHIC OF A COMPUTER]
[ARROWS] Automated Input
Fax Kiosk
[GRAPHIC OF A PIECE OF PAPER] [GRAPHIC OF A COMPUTER]
[ARROWS]
[GRAPHIC OF A PERSON AT A DESK]
CLIENT/SERVER, WINDOWS-BASED SYSTEMS
Restrac's client/server software supports Microsoft Windows on the desktop,
industry standard SQL databases on the server and TCP/IP protocol - providing
high performance, scalable implementation on local area networks, wide area
networks, the Internet and Intranets.
<PAGE> 4
RESTRAC
ENTERPRISE STAFFING SOFTWARE
2. CREATE CANDIDATE POOL
Organizations create a comprehensive
re-usable pool of candidates. This
repository can then be searched by [GRAPHIC OF A
recruiters throughout the enterprise SPHERE]
who have open positions to fill
or projects to staff. Candidate Skills Repository
Automated Input
3. FIND CANDIDATES
Based on user-defined job
requirements, Restrac provides a
ranked list of qualified candi- [GRAPHIC OF A
dates and displays their resumes COMPUTER SCREEN]
with key skills highlighted.
Spelling
4. EXPEDITE STAFFING PROCESS
Restrac provides database man-
agement and workflow functional-
ity to automate the workflow of [GRAPHIC OF A
the staffing process. Its process- COMPUTER SCREEN]
oriented design enables users to
coordinate the staffing process
across the enterprise.
5. CONNECT STAFFING TEAM
Restrac facilitates communications between
human resources, hiring managers and appli-
cants. Resumes can be reviewed via e-mail. [GRAPHIC OF A PERSON
Interactive voice response capabilities enable IN A CHAIR]
managers to review requisition status using a
telephone to access the system directly.
6. REPORT
After candidates are hired and
deployed, Restrac's reporting
capabilities enable the organi-
zation to analyze staffing
effectiveness and demonstrate
compliance with Equal
Employment Opportunity
(EEO) requirements.
Hire and Deploy
[ARROW]
Review and Interview
[ARROW]
Regional Sales Manager [GRAPHIC OF A PERSON]
[ARROW]
Software Engineer [GRAPHIC OF A PERSON]
[ARROW]
Plant Manager [GRAPHIC OF A PERSON]
[ARROW]
Job Requirements
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the financial statements and notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option and the automatic conversion of all outstanding shares of
Convertible Preferred Stock into an aggregate of 2,502,696 shares of Common
Stock upon the closing of this offering and (ii) has been adjusted to reflect a
three-for-one stock split of the Common Stock effected as a stock dividend in
May 1995 and a three-for-two stock split of the Common Stock effected as a stock
dividend in May 1996.
THE COMPANY
Restrac, Inc. ("Restrac" or the "Company") designs, develops, markets,
implements and supports human resource ("HR") staffing software to automate the
recruitment, selection and placement of an organization's workforce. The
Company's staffing software enables organizations to strategically manage their
human capital by reducing hiring and placement costs, decreasing time to fill
positions and providing more effective skills management and worker deployment.
The Company's products -- Restrac Hire and Resume Reader for
PeopleSoft -- provide HR departments with client/server solutions to quickly and
efficiently build and search comprehensive "pools" of resume skills data to find
the workers they need, while also managing the workflow of the staffing process.
The management of human capital is increasingly being viewed as a business
imperative and has emerged in recent years as a key element of corporate
strategy. Recruiting and deploying the most qualified employees is now being
recognized as critical to an organization's long-term success. In addition, the
development of distributed client/server computing and the emergence of the
Internet have provided the technological framework for organizations to automate
and disseminate a process that was historically centralized on systems designed
for other record-keeping functions, such as payroll processing, accounting and
reporting. As a result, demand has grown for a new generation of HR staffing
systems that provide HR departments with the ability to rapidly build and search
comprehensive pools of candidate skills data and automate the staffing process.
The Company's current software offerings are open, client/server
applications that utilize standard industry communications protocols, such as
TCP/IP, allowing for high performance, scalable implementations across local
area networks, wide area networks, the Internet and Intranets (Internet-based
networks within an enterprise). The Company's software supports industry
standards, such as Microsoft Windows and most leading relational databases
(including Oracle, Microsoft SQLServer and Sybase), server platforms (including
Windows NT and many UNIX variants), e-mail systems (including Microsoft Mail and
Lotus
cc:Mail) and desktop productivity tools (including Lotus Notes). This open
architecture has facilitated integration with other systems providing customers
with integrated, multi-vendor solutions to meet their specific needs.
Since the introduction of Restrac Hire in 1993, the Company has licensed
its client/server, Windows-based staffing software to approximately 200
customers. Approximately 250 other organizations continue to license the
Company's earlier DOS-based recruiting and succession planning products. Within
these 450 organizations, there are over 4,000 licensed users of the Company's
products. The Company's products are primarily licensed by large corporate
employers experiencing accelerated growth, significant reorganization or
downsizing or a scarcity of skilled labor, or by companies reengineering their
HR function to reduce costs. Due to its flexible skills management and search
capabilities, the Company's software is also licensed by consulting firms and
providers of full-time, contract or temporary labor. Twenty-eight of the 50 most
profitable U.S. companies cited in Fortune magazine's 1996 "Fortune 1000" report
use the Company's software. The Company's customer base includes
Hewlett-Packard, American Express, British Telecom, AT&T, Intel, Johnson &
Johnson and Levi Strauss.
3
<PAGE> 6
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<TABLE>
THE OFFERING
<S> <C>
Common Stock offered by the Company................. 1,500,000 shares
Common Stock offered by the Selling Stockholders.... 1,000,000 shares
Common Stock to be outstanding after this
Offering.......................................... 7,874,383 shares(1)
Use of Proceeds..................................... Working capital and other general
corporate purposes
Nasdaq National Market symbol....................... RTRK
</TABLE>
<TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $2,325 $3,879 $5,670 $9,737 $15,014 $6,211 $9,903
Non-recurring charge(2)...................... -- -- -- -- 1,011 -- --
Income (loss) from operations................ (189) 54 172 871 537 583 835
Net income (loss)............................ (213) 13 89 606 401 387 527
Pro forma net income per common
and common equivalent share(3)............. $ .06 $ .08
Pro forma weighted average number of common
and common equivalent shares outstanding... 6,949 6,938
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------
PRO FORMA
PRO FORMA(4) AS ADJUSTED(4)(5)
------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 4,313 $18,489
Working capital..................................................... 2,073 16,818
Total assets........................................................ 10,084 24,260
Total liabilities................................................... 6,607 6,038
Stockholders' equity................................................ 3,477 18,222
<FN>
- ---------------
(1) Based upon shares outstanding as of May 8, 1996. Excludes 641,844 shares of
Common Stock which were subject to outstanding options under the Company's
1994 Stock Option Plan (the "1994 Stock Option Plan") as of May 8, 1996 at a
weighted average exercise price of approximately $2.65 per share. See
"Capitalization," "Management -- Stock Option Plans" and Note 6 of Notes to
Financial Statements.
(2) Related to the buy-out of certain product distribution rights. Income (loss)
from operations before non-recurring charge for the year ended September 30,
1995 totalled $1,548,000. See Note 2 of Notes to Financial Statements.
(3) Computed on the basis described in Note 1 of Notes to Financial Statements.
(4) Gives effect to the conversion of all then outstanding shares of Convertible
Preferred Stock into an aggregate of 2,502,696 shares of Common Stock upon
the closing of this offering and the accrual of accumulated dividends due
upon conversion of the Convertible Preferred Stock.
(5) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 1,500,000 shares of Common Stock offered by the Company hereby, after
deducting the underwriting discount and estimated offering expenses and the
payment of dividends due upon conversion of the Convertible Preferred Stock.
See "Use of Proceeds" and "Capitalization."
</TABLE>
------------------------
The Company was incorporated in Massachusetts in 1982 and reincorporated in
Delaware in 1994. The Company's principal executive offices are located at 3
Allied Drive, Dedham, Massachusetts 02026, and its telephone number is (617)
320-5600. The Company's home page is located at www.restrac.com.
- -------------------------------------------------------------------------------
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered in evaluating the Company and its business before
purchasing the Common Stock offered hereby.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's results of operations have been, and may in the future be,
subject to significant quarterly fluctuations, due to a variety of factors,
including the relatively lengthy sales cycle for the Company's products (see
"Business -- Sales and Marketing"), the relatively large size of a typical
product sale (see "Business -- Products"), the timing of contracts, the
introduction of new products by the Company or its competitors, capital spending
patterns of customers, the Company's sales incentive strategy (which is based in
part on annual sales targets) and general economic conditions. Historically,
revenue in each of the first two fiscal quarters has been lower than in the
preceding fourth fiscal quarter (which typically has the highest revenue and net
income), due largely to sales incentive programs. A substantial portion of the
Company's revenue occurs during the last few weeks of each quarter; therefore,
any delays in orders or shipments are more likely to result in revenue not being
recognized until the following quarter. The Company's current expense levels are
based in part on its expectations of future revenue and, as a result, net income
for a given period could be disproportionately affected by any reduction in
revenue. There can be no assurance that the Company will be able to achieve
significant revenue, that the level of revenue in the future will not decrease
from past levels or that in some future quarter the Company's revenue or
operating results will not be below the expectations of stock market securities
analysts and investors. In such event, the Company's profitability and price of
its Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EMERGING MARKETS
The market for automated human resource staffing solutions is relatively
new and undeveloped. The Company's future success is substantially dependent on
broader recognition of the potential benefits afforded by automated staffing
software and the growth in demand for such solutions. Because the market for
such software is only beginning to develop, it is difficult to assess the size
of the market, the customer demands that will evolve and the competition that
may emerge. There can be no assurance that the market for automated staffing
software will continue to grow or that the introduction of new technologies or
services will not render the Company's existing software obsolete or
unmarketable.
The market for automated staffing solutions is undergoing rapid changes,
including continuing advances in technology and changes in customer requirements
and preferences. These market dynamics have been exacerbated by the emergence of
the Internet as a communications medium for staffing solutions. The Company's
future success will depend in significant part on its ability to continually
improve the performance, features and reliability of its software in response to
the evolving demands of the marketplace and competitive product offerings, and
there can be no assurance that the Company will be successful in doing so. In
addition, an element of the Company's business strategy is the development and
introduction of new products, functionalities and other staffing solutions that
capitalize on the increasing use of the Internet as a communications medium. The
development process for the Company's new products, functionalities and other
staffing solutions which target the Internet may be significantly different and
longer than the development process for the Company's current software, and this
may result in higher development costs, longer development cycles or a loss in
market acceptance. There can be no assurance that the Company will be successful
in developing and marketing products, functionalities and other staffing
solutions for the Internet, that its future offerings will keep pace with
technological changes in the market or new technologies introduced by
competitors or that it will satisfy evolving consumer preferences. Development
of Internet-based products, functionalities and other staffing solutions will
also depend on increased acceptance of the Internet for staffing solutions and
the development of the necessary infrastructure to facilitate commercial
applications on the Internet. There can be no assurance of such acceptance or
infrastructure development. Failure to develop and introduce new products,
functionalities and other staffing solutions in a timely fashion could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Product Development."
5
<PAGE> 8
DEPENDENCE ON PRINCIPAL PRODUCT
The Company currently derives most of its revenue from its Restrac Hire
product. As a result, any factor adversely affecting sales of this product would
have a material adverse effect on the Company. The future success of the Company
also depends, in part, on achieving broader market acceptance of Restrac Hire,
as well as the ability to continue to enhance Restrac Hire to meet the evolving
needs of its customers. Moreover, the Company anticipates that its existing and
new competitors will introduce additional competitive products. This competition
may reduce future market acceptance of Restrac Hire. The market acceptance of
the Company's software is difficult to estimate due in large measure to the
effect of new products, applications or product enhancements, technological
changes in the marketplace for staffing solutions and future competition. There
can be no assurance that the Company will maintain and expand acceptance of
Restrac Hire. The failure of the Company to maintain and expand its market
acceptance as a result of competition, technological change or other factors
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Products."
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in recent periods, with total
revenue increasing from $5.7 million in fiscal 1993 to $15 million in fiscal
1995. The growth of the Company's business and expansion of the Company's
customer base has resulted in substantial growth in the number of its employees,
the scope of its operating and financial systems and the geographic area of its
operations, resulting in increased responsibility for management personnel. The
Company's future results of operations will depend on the ability of its
officers and other key employees to continue to implement its operational,
customer support and financial control systems and to expand, train and manage
its employee base. Although the Company currently has no agreements, commitments
or understandings relating to any acquisitions, the Company may undertake
acquisitions in the future. Any such transactions would place additional strains
upon the Company's management resources. There can be no assurance that the
Company will be able to manage any future expansion successfully, and any
inability to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The marketplace for staffing solutions is intensely competitive and is
rapidly changing. The Company encounters direct competition from a number of
companies providing staffing solutions, including (i) other human resource
staffing software companies, (ii) providers of general human resource
information systems, (iii) agencies providing or sourcing full-time, contract
and temporary labor, (iv) information systems departments of potential prospects
that develop custom software, and (v) providers of other client/server
application software or document management systems.
The Company's primary direct competitor is Resumix, Inc., which was
acquired by Ceridian, Inc. in 1995. The Company also competes directly against
other providers of human resource staffing software, most of which are small
privately held companies providing less functional products at lower prices. In
addition, vendors of general human resource information systems generally
include applicant tracking modules in their offerings which can compete with the
Company's products. Moreover, there can be no assurance that such vendors will
not develop and market products in direct competition with the Company. Some of
the Company's current and many of its potential competitors, including
PeopleSoft, IBM and many other providers of general human resource information
systems, are large, publicly traded organizations with access to significantly
greater financial, technical, marketing and other resources. As a result, they
may be able to respond to market changes, emerging technologies or changes in
customer requirements more rapidly and devote more resources to the development,
marketing and sales of their products than the Company. Competition may increase
from new market entrants (particularly if the market for automated staffing
solutions continues to develop) or through consolidations in the software
industry and/or cooperative relationships among companies. Although the Company
believes that at the present time its products are competitively priced, an
increase in competition could result in price reductions and loss of market
share. Such
6
<PAGE> 9
competition and any resulting price reductions could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
DEPENDENCE ON THIRD PARTIES
A key element of the Company's business strategy is to develop
relationships with leading industry organizations in order to increase the
Company's market presence, expand distribution channels and broaden the
Company's product line. For example, the Company generated approximately 18% of
its product revenue during the first six months of fiscal 1996 from the sale of
Resume Reader for PeopleSoft, a product jointly marketed by the Company and
PeopleSoft which integrates the high volume resume-scanning, skills management
and search capabilities found in the Company's Restrac Hire product with
PeopleSoft's HRMS product. The Company believes that its continued success
depends in large part on its ability to maintain such relationships and
cultivate additional relationships. There can be no assurance that the Company's
existing strategic partners such as PeopleSoft or future strategic partners will
not develop and market products in direct competition with the Company or
otherwise discontinue their relationships with the Company, or that the Company
will be able to successfully develop additional strategic relationships.
In addition, certain technology incorporated in the Company's software,
including Verity's text search technology and TASC's imaging technology, is
licensed from third parties on a nonexclusive basis. The Company believes that
there are alternative sources for each of the material components of technology
licensed by the Company from third parties. However, the termination of any of
such licenses, or the failure of the third party licensors to adequately
maintain or update their products, could result in delay in the Company's
ability to ship certain of its products while it seeks to implement technology
offered by alternative sources. In addition, any required replacement licenses
could prove more costly than the Company's current license relationships and
might not provide technology as powerful and functional as the third-party
technology currently licensed by the Company. Also, any such delay, to the
extent it becomes extended or occurs at or near the end of a fiscal quarter,
could have a material adverse effect on the Company's results of operations for
that quarter. While it may be necessary or desirable in the future to obtain
other licenses relating to one or more of the Company's products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms or at all. See "Business --
Strategic Relationships."
RISK OF NEW PRODUCT INTRODUCTIONS; RISK OF PRODUCT DEFECTS
As the marketplace for staffing solutions continues to evolve, the Company
plans to develop and introduce new products to enable it to effectively address
the changing needs of that market. There is no guarantee that the Company will
be able to develop new products or that such products will achieve market
acceptance or, if market acceptance is achieved, that the Company will be able
to maintain such acceptance for a significant period of time. Any inability of
the Company to quickly develop products that address changes in technology or
customer demands may require the Company to substantially increase development
expenditures or result in a loss of market share to a competitor.
Products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. The Company has
in the past discovered software errors in certain of its product offerings after
their introduction. There can be no assurance that, despite testing by the
Company, errors will not occur in new products or releases after commencement of
commercial shipments, resulting in adverse publicity, in loss of or delay in
market acceptance, or in claims by the customer against the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products."
7
<PAGE> 10
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on its senior
management and other key employees, including its Chief Executive Officer, Lars
D. Perkins. The Company also believes that its future success will depend in
large part on its ability to attract and retain additional key employees.
Competition for such personnel in the computer software industry is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. Furthermore, although the Company is a party to
non-competition agreements with each of its senior executives, the laws
governing such agreements are in continual flux and the enforceability of such
agreements in each jurisdiction in which enforcement might be sought is
uncertain. The Company's inability to attract and retain additional key
employees or the loss of one or more of its current key employees could
materially adversely affect the Company's business, financial condition and
results of operations. See "Management" and "Business -- Employees."
RISK OF INTERNATIONAL EXPANSION
Although international sales have been insignificant to date, an important
element of the Company's business strategy is the expansion of its existing
international operations and entry into additional international markets, which
will require significant management attention and financial resources. The
Company established a regional sales and services office in Reading, England in
March 1995. In order to successfully expand international sales, the Company
must establish additional foreign operations and hire additional personnel. To
the extent that the Company is unable to do so in a timely manner, the Company's
growth, if any, in international sales will be limited, and the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, there can be no assurance that the Company will
be able to maintain or increase international market demand for its products.
Additional risks inherent in the Company's international business activities
generally include currency fluctuations, unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and difficulties
associated with localizing products for foreign countries, lack of acceptance of
localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences, restrictions on the repatriation of earnings, the burdens of
complying with a wide variety of foreign laws and political and economic
instability. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales or the
Company's overall business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategy."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND DEPENDENCE ON PROPRIETARY
RIGHTS; RISK OF LITIGATION
The Company relies on a combination of copyright and trade secret laws,
employee and third party non-disclosure agreements and other methods to protect
its proprietary rights. There can be no assurance that the measures taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or independent development by others of
similar technology. In addition, the Company may be subject to additional risk
as it enters into transactions in countries where intellectual property laws are
not well developed or are poorly enforced. The Company's inability to protect
its proprietary rights would have a material adverse effect on the Company's
business, financial condition and results of operations.
As the number of human resource application software products in the
industry increases and the functionality of these products further overlaps,
software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. Although the Company is not currently the subject of
any intellectual property litigation, there has been substantial litigation
regarding copyright, patent and other intellectual property rights involving
computer software companies. Any claims or litigation, with or without merit,
could be costly and could result in a diversion of management's attention, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such claims or
litigation may require the Company to obtain a license and/or pay damages, which
could also have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Intellectual Property."
8
<PAGE> 11
NO PRIOR PUBLIC MARKET; MARKET VOLATILITY
Prior to this offering, there has been no public market for the Company's
Common Stock. Although the Company's Common Stock has been approved for
quotation on the Nasdaq National Market, there can be no assurance that an
active trading market will develop or be sustained following this offering. The
initial public offering price of the Common Stock was determined in negotiations
among the Company, the Selling Stockholders and the Representatives of the
Underwriters, and may not be indicative of future market prices. In addition, in
recent years the stock market in general, and the market for shares of small
capitalization companies in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
General market price declines or market volatility in the future could adversely
affect the market price of the Common Stock. See "Underwriting."
CONCENTRATION OF SHARE OWNERSHIP
Based on the number of shares of Common Stock that will be outstanding upon
completion of this offering, directors and officers of the Company, together
with entities affiliated with them, will own 62.6% of the Company's outstanding
Common Stock in the aggregate (57.9% assuming the exercise in full of the
Underwriters' over-allotment option). As a result, these stockholders will
retain the voting power required to elect all directors and to approve other
matters requiring approval by the stockholders of the Company. See
"Management -- Executive Officers and Directors" and "Principal and Selling
Stockholders."
POTENTIAL IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
the offering could have an adverse effect on the market price of the Common
Stock. Approximately 2,530,000 shares (including the 2,500,000 shares offered
hereby) will be eligible for sale in the public market immediately following the
effective date of the Registration Statement, and approximately 5,241,624
additional shares will become eligible for sale in the public market upon the
expiration of agreements with the Underwriters not to sell such shares until 180
days after the date of this Prospectus. Holders of 4,823,357 shares have
contractual rights to have those shares registered with the Securities and
Exchange Commission for resale to the public. In addition, 30 days after the
effective date of the Registration Statement, the Company intends to file a
registration statement covering the 1,750,000 shares of Common Stock issued or
reserved for issuance under the 1994 Stock Option Plan, the Company's 1996 Stock
Option and Grant Plan (the "1996 Stock Option Plan") and the Company's 1996
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"), and upon
filing any shares subsequently issued under such Plans will be eligible for sale
in the public market, subject to compliance with Rule 144 in the case of
affiliates of the Company. See "Shares Eligible for Future Sale."
EFFECT OF CERTAIN CHARTER PROVISIONS
The Company's Board of Directors has the authority to issue shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock. In
addition, the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law. In general, this statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is generally a person who, together with affiliates and
associates, owns (or within three years
9
<PAGE> 12
prior, did own) 15% or more of the corporation's voting stock. Furthermore,
certain provisions of the Company's Certificate of Incorporation and By-laws,
such as the classification of the Board of Directors and prohibitions against
stockholders acting by written consent or calling special meetings of
stockholders, may have the effect of delaying or preventing changes in control
or management of the Company, which could adversely affect the market price of
the Company's Common Stock and deprive stockholders of an opportunity to receive
a premium for their shares. See "Management" and "Description of Capital Stock."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of the net tangible book value of the Common Stock. See
"Dilution."
10
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$14,745,000. The Company will not receive any proceeds from the sale of shares
of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The principal reasons for this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock,
which will facilitate future access by the Company to public equity markets and
enhance the ability of the Company to use its Common Stock as consideration for
acquisitions and as a means for attracting and retaining key employees.
The Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes, including expansion of the
Company's product development and sales and marketing efforts, payment of an
estimated $569,000 of accumulated dividends due upon conversion of the
Convertible Preferred Stock, and potential acquisitions, including the purchase
or license of new technologies. The amounts actually expended by the Company for
working capital purposes will vary significantly depending upon a number of
factors, including future revenue growth, the amount of cash generated by the
Company's operations and the progress of the Company's product development
efforts. In addition, the Company may make one or more acquisitions of
complementary technologies, products or businesses which broaden or enhance the
Company's current product offerings. However, the Company has no specific
agreements, commitments or understandings with respect to any such acquisition.
Pending the uses described above, the net proceeds will be invested in
interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. In April and
July, 1994, the Company paid aggregate dividends of $146,871 to the holders of
Convertible Preferred Stock, in accordance with the terms and conditions of that
certain Stock Purchase Agreement dated January 5, 1994 (the "1994 Financing
Agreement"). In connection with the conversion of the Convertible Preferred
Stock into Common Stock upon the closing of this offering, the Company will be
required to pay an estimated $569,000 of dividends to the holders of Convertible
Preferred Stock. The Company currently intends to retain any earnings for future
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company is restricted by its bank credit
agreement from paying cash dividends without the prior written consent of the
bank (which has been obtained with respect to the dividends described above).
11
<PAGE> 14
<TABLE>
CAPITALIZATION
The following table sets forth, as of March 31, 1996, the Company's
unaudited (i) actual capitalization, (ii) pro forma capitalization after giving
effect to the conversion of all outstanding shares of Convertible Preferred
Stock into an aggregate of 2,502,696 shares of Common Stock upon the closing of
this offering, and (iii) pro forma as adjusted capitalization to reflect the
sale by the Company of the 1,500,000 shares of Common Stock offered hereby and
the receipt by the Company of the estimated net proceeds therefrom, after
deducting the underwriting discount and estimated offering expenses and the
payment of accumulated dividends due upon conversion of the Convertible
Preferred Stock. The capitalization information set forth in the table below is
qualified by the more detailed Financial Statements and Notes thereto appearing
elsewhere in this Prospectus and should be read in conjunction with such
Financial Statements and Notes.
<CAPTION>
MARCH 31, 1996(1)
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt (including current portion of long-term
debt)................................................... $ 11 $ 11 $ 11
====== ====== =======
Long-term debt (excluding current portion)................ $ 6 $ 6 $ 6
------ ------ -------
Convertible Preferred Stock, $1.00 par value, 1,000,000
shares authorized, 556,155 shares issued at March 31,
1996 and none issued or outstanding at March 31, 1996
pro forma and pro forma as adjusted..................... 3,983 -- --
Stockholders' equity(2):
Preferred Stock, $.01 par value, 5,000,000 shares
authorized,
no shares issued or outstanding...................... -- -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized, 4,558,587 shares issued at March 31,
1996; 7,061,283 shares issued pro forma; 8,561,283
shares issued pro forma as adjusted.................. 46 71 86
Additional paid-in capital.............................. 221 3,700 18,430
Treasury stock, at cost, 686,900 shares................. (831) (831) (831)
Retained earnings....................................... 627 537 537
------ ------ -------
Total stockholders' equity........................... 63 3,477 18,222
------ ------ -------
Total capitalization............................ $ 69 $3,483 $18,228
====== ====== =======
<FN>
- ---------------
(1) The Company's Board of Directors and the stockholders have approved the
amendment and restatement of the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock and Preferred Stock
to 30,000,000 and 5,000,000 shares, respectively. See "Description of
Capital Stock" and Note 6 of Notes to Financial Statements.
(2) Excludes 517,919 shares of Common Stock which were subject to outstanding
stock options under the Company's 1994 Stock Option Plan as of March 31,
1996 at a weighted average exercise price of approximately $1.01 per share.
See "Management -- Stock Option Plans" and Note 6 of Notes to Financial
Statements.
</TABLE>
12
<PAGE> 15
DILUTION
<TABLE>
The pro forma net tangible book value of the Company as of March 31, 1996
was $3,476,668, or $0.55 per share, after giving effect to the conversion of all
outstanding shares of Convertible Preferred Stock into an aggregate of 2,502,696
shares of Common Stock upon the closing of this offering. Pro forma net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, including the accrual of accumulated dividends on
the Convertible Preferred Stock, divided by the pro forma number of shares of
Common Stock outstanding, including the shares of Common Stock resulting from
the conversion of the Convertible Preferred Stock. Without taking into account
any other changes in the net tangible book value after March 31, 1996, other
than to give effect to the receipt by the Company of the net proceeds from the
sale of the 1,500,000 shares of Common Stock offered by the Company hereby,
after deducting the underwriting discount and estimated offering expenses and
the payment of accumulated dividends due upon conversion of the Convertible
Preferred Stock, the pro forma net tangible book value of the Company as of
March 31, 1996 would have been $18,221,668, or $2.31 per share. This represents
an immediate increase in pro forma net tangible book value of $1.76 per share to
existing stockholders and an immediate dilution of $8.69 per share to new
investors. The following table illustrates this per share dilution:
<S> <C> <C>
Initial public offering price per share............................. $11.00
------
Pro forma net tangible book value per share as of March 31,
1996........................................................... $0.55
-----
Increase per share attributable to new investors.................. 1.76
-----
Pro forma net tangible book value per share as of March 31, 1996.... 2.31
------
Dilution per share to new investors................................. $ 8.69
======
</TABLE>
<TABLE>
The following table summarizes, as of March 31, 1996, after giving effect
to the conversion of all outstanding shares of Convertible Preferred Stock into
an aggregate of 2,502,696 shares of Common Stock upon the closing of this
offering, the differences between existing stockholders and purchasers of shares
in this offering with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid:
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 6,374,383 81.0% $ 3,546,887 17.7% $ 0.56
New investors(1)............ 1,500,000 19.0 16,500,000 82.3 11.00
--------- ----- ----------- -----
Total............. 7,874,383 100.0% $20,046,887 100.0%
========= ===== =========== =====
<FN>
- ---------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 5,374,383 or approximately 68.3% and
will increase the number of shares held by new investors to 2,500,000 or
approximately 31.7% of the total number of shares of Common Stock
outstanding after this offering.
</TABLE>
The foregoing computations do not give effect to the exercise of any stock
options outstanding as of March 31, 1996. As of March 31, 1996, 517,919 shares
of Common Stock were subject to outstanding options under the Company's 1994
Stock Option Plan at a weighted average exercise price of approximately $1.01
per share. To the extent that any outstanding options are exercised, there will
be further dilution to new investors. See "Capitalization," "Management -- Stock
Option Plans" and Note 6 of Notes to Financial Statements.
13
<PAGE> 16
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for the three fiscal years ended September 30, 1993,
1994 and 1995 and the balance sheets at September 30, 1994 and 1995 are derived
from the financial statements of the Company included elsewhere in this
Prospectus that have been audited by Arthur Andersen LLP, independent public
accountants. The selected balance sheet data as of September 30, 1993 are
derived from the Company's financial statements, not included in this
Prospectus, which have been audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data for the two fiscal years ended
September 30, 1991 and 1992 and the balance sheet data as of September 30, 1991
and 1992 are derived from the Company's unaudited financial statements not
included herein. The statement of operations data for the six months ended March
31, 1995 and 1996 and the balance sheet at March 31, 1996 are derived from
unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the six months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending September 30, 1996. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.................................. $1,150 $2,365 $3,776 $6,816 $10,024 $4,133 $ 6,100
Services revenue................................. 1,175 1,514 1,894 2,921 4,990 2,078 3,803
------ ------ ------ ------ ------- ------ -------
Total revenue................................ 2,325 3,879 5,670 9,737 15,014 6,211 9,903
Cost of revenue:
Product revenue.................................. 154 325 719 1,350 1,425 713 932
Services revenue................................. 653 746 1,362 1,589 2,984 1,148 2,192
------ ------ ------ ------ ------- ------ -------
Total cost of revenue........................ 807 1,071 2,081 2,939 4,409 1,861 3,124
------ ------ ------ ------ ------- ------ -------
Gross margin....................................... 1,518 2,808 3,589 6,798 10,605 4,350 6,779
Operating expenses:
Research and development......................... 54 515 674 1,343 1,365 593 864
Sales and marketing.............................. 897 1,145 1,553 3,335 5,661 2,395 3,758
General and administrative....................... 756 1,094 1,190 1,249 2,031 779 1,322
Non-recurring charge............................. -- -- -- -- 1,011 -- --
------ ------ ------ ------ ------- ------ -------
Total operating expenses..................... 1,707 2,754 3,417 5,927 10,068 3,767 5,944
------ ------ ------ ------ ------- ------ -------
Income (loss) from operations...................... (189) 54 172 871 537 583 835
Other income (expense), net........................ (24) (26) 24 73 138 63 101
------ ------ ------ ------ ------- ------ -------
Income (loss) before provision for income taxes.... (213) 28 196 944 675 646 936
Provision for income taxes......................... -- 15 107 338 274 259 409
------ ------ ------ ------ ------- ------ -------
Net income (loss).................................. $ (213) $ 13 $ 89 $ 606 $ 401 $ 387 $ 527
====== ====== ====== ====== ======= ====== =======
Pro forma net income per common and
common equivalent share.......................... $ .06 $ .08
======= =======
Pro forma weighted average number of common and
common equivalent shares outstanding............. 6,949 6,938
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 331 $ 272 $ 200 $2,735 $2,967 $ 4,313
Working capital.................................... (233) (227) (315) 2,466 2,079 2,642
Total assets....................................... 1,204 1,616 2,609 6,150 9,139 10,084
Total liabilities.................................. 1,235 1,587 2,430 6,629 9,498 10,021
Stockholders' equity (deficit)..................... (31) 29 179 (479) (359) 63
</TABLE>
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's products and the markets it serves have evolved and expanded
in concert with the rapid advancements in technology and the elevated focus on
human resource management. From its inception in 1982 through the first half of
fiscal 1993, the Company's product sales consisted primarily of DOS-based
applicant tracking and succession planning systems. In June 1993, the Company
introduced a new generation of Windows-based, client/server staffing software,
which incorporates high-volume resume-scanning, skills management and search
capabilities. From its inception though fiscal 1993, the Company was essentially
self-financed. In January 1994, the Company raised approximately $3.2 million in
net proceeds from a preferred equity financing from various venture capital
funds, of which approximately $800,000 was used to redeem certain outstanding
shares of Common Stock.
At March 31, 1996, the Company had approximately 450 licensed customers,
approximately 200 of which were using its client/server, Windows-based software.
Prior to fiscal 1995, the Company focused primarily on the North American
market. To date, revenue from outside of North America has not exceeded 4% of
total revenue for any fiscal year.
Total revenue consists of product revenue and services revenue. In recent
years, product revenue has represented approximately two-thirds of total
revenue, with services revenue accounting for approximately one-third. Product
revenue is primarily derived from perpetual licenses to use the Company's
products. Through September 30, 1995, the Company's product revenue included
revenue from the resale of third-party scanning hardware. In October 1995, the
Company stopped serving as a reseller of hardware. Scanning hardware resale
revenue ranged from 11% to 21% of total product revenue for fiscal 1993, 1994
and 1995. Royalty income is also included in product revenue and accounted for
less than 1% of total product revenue in all periods presented except for fiscal
1994 when it was 4%. Royalty income consisted primarily of royalties paid to the
Company by PeopleSoft, Inc., in connection with PeopleSoft's distribution of one
of the Company's software products. The relationship was restructured in 1994 so
that for periods subsequent to fiscal 1994, the product is licensed to
PeopleSoft customers directly by the Company, and the Company makes royalty
payments to, rather than receiving royalty payments from, PeopleSoft. Services
revenue consists of revenue from product support and maintenance and
installation, training and consulting services.
Product revenue is recognized upon delivery, provided there are no
significant Company obligations remaining and collectibility is probable. Prior
to fiscal 1994, the Company recognized product revenue upon installation rather
than delivery, as its then current product releases required extensive
customization subsequent to delivery. Fiscal 1994 product revenue included
$1,262,000 in software license fees for products delivered in fiscal 1993 but
for which revenue was deferred until installation under this former business
practice. Revenue from product support and maintenance contracts is recognized
ratably over the applicable 12-month maintenance period. Since October 1, 1995,
the Company has included first year maintenance with the purchase of a system
license; however, for accounting purposes, 15% of the software license fee is
treated as a maintenance fee and is recognized ratably over the 12-month
maintenance period. Services revenue from installation, training and consulting
is recognized as the related services are performed. Deferred revenue represents
cash received by the Company in advance of product delivery or service
performance.
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company is required to
capitalize software development costs incurred after the establishment of the
technological feasibility of a project. Generally, the Company's products are
released soon after technological feasibility has been established.
Consequently, the Company has not capitalized any software development costs
since costs qualifying for capitalization have not been material.
15
<PAGE> 18
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item reflected in the Company's Statements
of Income.
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
---------------------- ---------------
AS A PERCENTAGE OF TOTAL REVENUE: 1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue....................................... 67 % 70 % 67 % 67 % 62 %
Services revenue...................................... 33 30 33 33 38
--- --- --- --- ---
Total revenue................................. 100 100 100 100 100
--- --- --- --- ---
Cost of revenue:
Product revenue....................................... 13 14 9 11 10
Services revenue...................................... 24 16 20 19 22
--- --- --- --- ---
Total cost of revenue......................... 37 30 29 30 32
--- --- --- --- ---
Gross margin............................................ 63 70 71 70 68
--- --- --- --- ---
Operating expenses:
Research and development.............................. 12 14 9 10 9
Sales and marketing................................... 27 34 38 39 38
General and administrative............................ 21 13 14 12 13
Non-recurring charge.................................. -- -- 7 -- --
--- --- --- --- ---
Total operating expenses...................... 60 61 68 61 60
--- --- --- --- ---
Income from operations.................................. 3 9 3 9 8
Other income, net....................................... -- 1 1 1 1
--- --- --- --- ---
Income before provision for income taxes................ 3 10 4 10 9
Provision for income taxes.............................. 2 4 2 4 4
--- --- --- --- ---
Net income.............................................. 1% 6% 2% 6% 5%
=== === === === ===
</TABLE>
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
REVENUE
Product Revenue. Product revenue increased 48% to $6,100,000 for the six
months ended March 31, 1996 from $4,133,000 for the six months ended March 31,
1995. Approximately $1,000,000 of the growth in product revenue was attributable
to the purchase of additional user licenses by existing customers and
approximately $1,300,000 was attributable to proportionately larger initial
licenses for the six months ended March 31, 1996. There can be no assurances
that the Company will sustain these levels of revenue growth.
Services Revenue. Services revenue increased 83% to $3,803,000 for the six
months ended March 31, 1996 from $2,078,000 for the six months ended March 31,
1995. Installation, training and consulting services accounted for approximately
$950,000, or 55%, of this increase, with the remainder attributable to
maintenance revenue. Throughout fiscal 1995, the Company significantly enhanced
its service offerings, adding project management and standardized training and
education programs. These enhancements, combined with a higher number of larger
implementations and price increases, resulted in a 60% increase in average
services revenue per system license, accounting for over $500,000 of the revenue
increase. The remainder of the increase in installation, training and consulting
revenue was largely attributable to additional services sold to existing
customers. Maintenance revenue increased approximately 53% for the six months
ended March 31, 1996 as compared to the six months ended March 31, 1995 due to
the increase in the installed base of client/server, Windows-based customers.
16
<PAGE> 19
COST OF REVENUE
Cost of Product Revenue. Cost of product revenue includes third-party
hardware costs (through fiscal 1995), royalty payments for third-party software
embedded in the Company's products, royalty payments to PeopleSoft, Inc.
(beginning in fiscal 1995) and costs of documentation and shipping. Cost of
product revenue increased 31% to $932,000 for the six months ended March 31,
1996 from $713,000 for the six months ended March 31, 1995. Cost of product
revenue decreased as a percentage of product revenue to approximately 15% for
the six months ended March 31, 1996 from approximately 17% for the six months
ended March 31, 1995. This decrease is primarily attributable to the Company's
decision to discontinue reselling scanning hardware, which represented over 60%
of cost of product revenue for the six months ended March 31, 1995. This
reduction has been partially offset by the increase in royalty payments to
PeopleSoft resulting from a proportional increase in sales of Resume Reader for
PeopleSoft during the six months ended March 31, 1996.
Cost of Services Revenue. Cost of services revenue includes royalty
payments for third-party hardware and software maintenance and all costs of
maintaining the client services organization, including salaries and
personnel-related expenses, travel, outside consulting services and facilities
costs. Cost of services revenue increased 91% to $2,192,000 for the six months
ended March 31, 1996 from $1,148,000 for the six months ended March 31, 1995.
Cost of services revenue increased as a percentage of services revenue to 58%
for the six months ended March 31, 1996 from 55% for the six months ended March
31, 1995 due largely to the increase in service personnel and the addition of a
dedicated account management group which is not revenue generating, offset in
part by increased services revenue. Cost of services revenue for the six months
ended March 31, 1996 also included overhead costs associated with a training
facility at the Company's corporate headquarters that was opened in June 1995.
OPERATING EXPENSES
Research and Development. Research and development expenses include all
costs associated with the product engineering and quality functions, including
salaries and personnel-related expenses, travel, outside consulting services and
facilities costs. Research and development expenses increased 46% to $864,000
for the six months ended March 31, 1996 from $593,000 for the six months ended
March 31, 1995. As a percentage of total revenue, research and development
expenses decreased slightly to 9% for the six months ended March 31, 1996 from
10% for the six months ended March 31, 1995. The increase in total expenses was
largely attributable to an increase in personnel and in consulting costs. The
product engineering and quality staff is expected to continue to increase in
size during the remainder of fiscal 1996.
Sales and Marketing. Sales and marketing expenses include promotional
costs and trade shows and costs associated with personnel involved in sales and
marketing functions, including salaries, commissions and other personnel-related
expenses, travel, outside consulting services and facilities costs. Sales and
marketing expenses increased 57% to $3,758,000 for the six months ended March
31, 1996 from $2,395,000 for the six months ended March 31, 1995. As a
percentage of total revenue, sales and marketing expenses were 38% for the six
months ended March 31, 1996 and 39% for the six months ended March 31, 1995.
Approximately 20% of the dollar increase related to increased marketing program
costs in support of the Company's sales efforts. The remainder was largely
attributable to increases in the number of sales and marketing personnel and
increased commissions as a result of higher total revenue.
General and Administrative. General and administrative expenses consist
principally of costs for corporate operations personnel (executive, finance and
accounting, information technology, human resources, legal and administrative),
professional fees and other general corporate expenses. General and
administrative expenses increased 70% to $1,322,000 for the six months ended
March 31, 1996 from $779,000 for the six months ended March 31, 1995. As a
percentage of total revenue, general and administrative expenses were 13% for
the six months ended March 31, 1996 and 12% for the six months ended March 31,
1995. These increases were principally due to personnel increases to support the
Company's growth and infrastructure.
OTHER INCOME, NET
Other income consists primarily of interest income from cash and cash
equivalents. The Company generally invests its cash balances in
interest-bearing, investment grade securities. Other income increased
17
<PAGE> 20
62% to $101,000 for the six months ended March 31, 1996 from $63,000 for the six
months ended March 31, 1995, due to an increase in average funds available for
investment.
PROVISION FOR INCOME TAXES
The Company's effective tax rate increased to 44% for the six months ended
March 31, 1996 from 40% for the six months ended March 31, 1995 due primarily to
equity related compensation not benefited for financial statement purposes.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUE
Product Revenue. Product revenue increased 47% to $10,024,000 for fiscal
1995 from $6,816,000 for fiscal 1994. The increase would have been 80%, after
deducting $1,262,000 in fiscal 1994 product revenue resulting from recognizing
revenue upon shipment rather than upon installation. The increase in fiscal 1995
product revenue was due principally to an increase in the number of systems
licensed and the number of licensed users per system. The Company experienced a
40% increase in the number of new systems licensed in fiscal 1995, due largely
to the growth of the sales force, which provided broader and deeper geographical
coverage, and to increased acceptance of its principal product, Restrac Hire.
Services Revenue. Services revenue increased 71% to $4,990,000 for fiscal
1995 from $2,921,000 for fiscal 1994. Approximately half of the services revenue
increase was attributable to greater revenue for installation, training and
consulting, with the remaining half associated with increased maintenance
revenue. These increases resulted from the expansion of the client services
organization to service the new accounts and from the growing installed customer
base.
COST OF REVENUE
Cost of Product Revenue. Cost of product revenue increased slightly to
$1,425,000 for fiscal 1995 from $1,350,000 for fiscal 1994. The cost of product
revenue decreased as a percentage of product revenue to 14% in fiscal 1995 from
20% in fiscal 1994 primarily due to low-margin scanning hardware becoming a
proportionately lower component of total product revenue. Customers can
generally operate one scanning station for an unlimited number of users.
Consequently, as the average number of licensed users has increased, the
hardware needs of customers and, therefore, hardware revenue have remained
relatively constant. In addition, more customers purchased scanning hardware
directly rather than through the Company as the ease of use and reliability of
this technology was enhanced over time. The Company discontinued reselling
scanning hardware in October 1995.
Cost of Services Revenue. Cost of services revenue increased 88% to
$2,984,000 for fiscal 1995 from $1,589,000 for fiscal 1994. The cost of services
revenue also increased as a percentage of services revenue to 60% in fiscal 1995
from 54% in fiscal 1994. Personnel increases accounted for a substantial portion
of these increases. The client services staff increased to 46 at September 30,
1995 from 28 employees at September 30, 1994, respectively. Cost of services
revenue for fiscal 1995 also included overhead costs associated with a training
facility at the Company's corporate headquarters that was opened in June 1995.
OPERATING EXPENSES
Research and Development. Research and development expenses increased 2%
to $1,365,000 for fiscal 1995 from $1,343,000 for fiscal 1994. As a percentage
of total revenue, research and development expenses decreased to 9% for fiscal
1995 from 14% for fiscal 1994. While the development organization grew from 10
employees at the end of fiscal 1994 to 17 employees at the end of fiscal 1995,
the relatively flat level of expenses and reduction in costs as a percentage of
revenue was attributable in part to expenses related to beta testing performed
by client services personnel in fiscal 1994 which were charged to research and
development expense. In fiscal 1995, these services were performed by product
development personnel.
Sales and Marketing. Sales and marketing expenses increased 70% to
$5,661,000 for fiscal 1995 from $3,335,000 for fiscal 1994. As a percentage of
total revenue, sales and marketing expenses increased to 38% for fiscal 1995
from 34% for fiscal 1994. These increases were largely attributed to increases
in the number of sales
18
<PAGE> 21
and marketing personnel, which increased from 22 employees at the end of fiscal
1994 to 38 employees at the end of fiscal 1995, and increases in commissions as
a result of higher revenue. The Company also increased its participation in
trade shows, seminars and other promotional activities. In addition, the Company
positioned sales personnel in Sacramento, Chicago, Dallas and Orlando (now
Atlanta) in fiscal 1995, and the Palo Alto office, which opened in fiscal 1993,
was also expanded in fiscal 1995.
General and Administrative. General and administrative expenses increased
63% to $2,031,000 for fiscal 1995 from $1,249,000 for fiscal 1994. As a
percentage of total revenue, general and administrative expenses remained the
same at 13% for both fiscal 1995 and fiscal 1994. Corporate operations staff
increased from 13 employees at the end of fiscal 1994 to 20 employees at end of
fiscal 1995. While the Company experienced economies of scale in the
productivity of the corporate operations staff in fiscal 1995, this positive
impact was offset by a $317,000 increase in the allowance for doubtful accounts
in fiscal 1995. To date the Company has not experienced any significant
writeoffs of uncollectible accounts; however, given the increased level of
revenue and the large dollar amount of the Company's revenue transactions,
management deemed it appropriate at the end of fiscal 1995 to increase the level
of the reserves.
Non-recurring Charge. On January 1, 1991, the Company acquired certain of
the assets of Borwick International, Inc., an international consulting firm
which developed and marketed related software known as SuccessPlan. As part of
this 1991 agreement, Borwick International was granted the exclusive right to
distribute SuccessPlan outside of North America, and the Company was prohibited
from selling any competitive products in these territories. On September 30,
1995, the Company entered into an agreement that terminated the remaining
distribution rights of Borwick International to SuccessPlan and removed any
restrictions on the Company's ability to sell competitive products. The process
of succession planning is in transition; thus the Company's succession planning
product strategy is in flux. Its evolving line of staffing products may
incorporate certain elements that could be construed as succession planning
under a broad interpretation of the 1991 agreement. Accordingly, the Company
believed that removal of these restrictions was necessary. As a result of the
September 1995 agreement, the Company recorded a non-recurring charge to
operations of $1,010,952 in fiscal 1995, representing the present value of
payments made and payable under the terms of this agreement. The Company does
not have a succession planning product which is suitably responsive to the
international market. In addition, the Company lacks the internal infrastructure
and established distribution channels necessary to license and support such
products outside of North America. Based on the minimal current and anticipated
cash flows from succession planning products, any intangible asset recorded
would be deemed to be non-recoverable and require recognition of an impairment
loss in accordance with SFAS No. 121. Accordingly, the cost of the distribution
rights was charged to operations, as management believes that the realizability
of such cost is uncertain. The Company also executed a Finder's Fee and
Non-Competition Agreement with Irving P. Borwick, a principal of Borwick
International, in conjunction with the September 1995 termination agreement.
Although the Company wished to ensure that Borwick International and Irving P.
Borwick would not compete with the Company, neither was viewed as a serious
competitive threat. Accordingly, the stated amounts in the non-competition
agreement were not deemed to reflect their overall value to the Company and were
included in the total ascribed to the termination of distribution rights.
OTHER INCOME, NET
Other income increased 89% to $138,000 in fiscal 1995 from $73,000 in
fiscal 1994, due to an increase in average funds available for investment.
PROVISION FOR INCOME TAXES
The Company's effective tax rate increased to 40.6% in fiscal 1995 from
35.9% in fiscal 1994. This increase was attributable to the utilization of
research and development tax credits in fiscal 1994. The Company had a valuation
allowance of $258,550 and $171,672 against its gross deferred tax asset at
September 30, 1994 and 1995, respectively. The valuation allowance at September
30, 1994 and 1995 was established due to management's estimate that it was more
likely than not that a benefit of certain deferred tax assets would not be
realized in the future. In assessing the realizability of these assets at
September 30, 1994, management took into consideration historical levels of
taxable income, the volatile nature of the industry in
19
<PAGE> 22
which it competes and the potential levels of future taxable income. At
September 30, 1995, the valuation allowance related specifically to the buyout
of distribution rights.
FISCAL 1994 COMPARED TO FISCAL 1993
REVENUE
Product Revenue. Product revenue increased 81% to $6,816,000 in fiscal
1994 from $3,776,000 in fiscal 1993. The increase would have been 47%, after
deducting $1,262,000 in fiscal 1994 product revenue resulting from the change to
recognizing revenue upon shipment rather than upon installation. The increase
was largely attributable to the shift in sales from the DOS-based products to
the more functionally-rich client/server, Windows-based software solutions, with
an approximate 80% higher average price per system licensed due primarily to
price increases. Royalty income, consisting primarily of payments to the Company
by PeopleSoft in connection with PeopleSoft's distribution of certain of the
Company's products, added 4% to product revenue in fiscal 1994.
Services Revenue. Services revenue increased 54% to $2,921,000 in fiscal
1994 from $1,894,000 in fiscal 1993. This increase is primarily due to both
higher maintenance fees, commensurate with the higher license fees of its new
client/server, Windows-based software and improved revenue realization on
implementation and training services.
COST OF REVENUE
Cost of Product Revenue. Cost of product revenue increased 88% to
$1,350,000 for fiscal 1994 from $719,000 for fiscal 1993. Cost of product
revenue increased as a percentage of product revenue to 21% in fiscal 1994 from
19% in fiscal 1993. These increases were primarily due to the fact that scanning
hardware was a larger component of cost of product revenue as the Company began
reselling scanners in conjunction with its client/server, Windows-based
software.
Cost of Services Revenue. Cost of services revenue increased 17% to
$1,589,000 in fiscal 1994 from $1,362,000 in fiscal 1993. Cost of services
revenue decreased as a percentage of services revenue to 54% in fiscal 1994 from
72% in fiscal 1993 due primarily to the Company's efforts to enhance the
productivity of its client services personnel in fiscal 1994, which resulted in
average revenue per billable person increasing by 63%.
OPERATING EXPENSES
Research and Development. Research and development expenses increased 99%
to $1,343,000 in fiscal 1994 from $674,000 in fiscal 1993. As a percentage of
total revenue, research and development expenses increased to 14% for fiscal
1994 from 12% for fiscal 1993. An increase in development personnel and costs
incurred by the client services department for beta testing activity on the new
client server products accounted for these increases.
Sales and Marketing. Sales and marketing expenses increased 115% to
$3,335,000 in fiscal 1994 from $1,553,000 in fiscal 1993. As a percentage of
total revenue, sales and marketing expenses increased to 34% for fiscal 1994
from 27% for fiscal 1993. The Company doubled the average number of personnel
dedicated to sales and marketing efforts in fiscal 1994 as compared to fiscal
1993. These personnel increases were made to build the direct sales force and
enhance the Company's marketing capabilities to support the anticipated demand
for its new client/server, Windows-based software.
General and Administrative. General and administrative expenses increased
5% to $1,249,000 in fiscal 1994 from $1,190,000 in fiscal 1993, but decreased as
a percentage of total revenue to 13% for fiscal 1994 from 21% for fiscal 1993.
This reduction was largely the result of economies of scale realized as revenues
increased.
OTHER INCOME, NET
Other income increased 204% to $73,000 in fiscal 1994 from $24,000 in
fiscal 1993, due to an increase in average funds available for investment.
PROVISION FOR INCOME TAXES
The Company's effective tax rate decreased to 35.9% in fiscal 1994 from
54.3% in fiscal 1993 due to the settlement of an Internal Revenue Service audit
that resulted in an assessment recorded in fiscal 1993 and the utilization of
research and development tax credits during fiscal 1994.
20
<PAGE> 23
<TABLE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth the unaudited quarterly results of
operations for each of the ten fiscal quarters ended March 31, 1996, as well as
the percentage of the Company's total revenue by each item. In management's
opinion, this unaudited quarterly information has been prepared on the same
basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented when read in
conjunction with the audited Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1993 1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product
revenue....... $1,573 $1,680 $1,366 $2,197 $2,012 $2,121 $2,498 $3,393 $3,151 $2,949
Services
revenue....... 578 729 698 916 992 1,087 1,370 1,541 1,677 2,126
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
revenue... 2,151 2,409 2,064 3,113 3,004 3,208 3,868 4,934 4,828 5,075
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenue:
Product
revenue....... 309 385 257 399 357 356 303 409 484 448
Services
revenue....... 398 433 395 363 553 595 805 1,031 1,061 1,131
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost
of
revenue... 707 818 652 762 910 951 1,108 1,440 1,545 1,579
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin...... 1,444 1,591 1,412 2,351 2,094 2,257 2,760 3,494 3,283 3,496
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
expenses:
Research and
development... 316 353 333 341 265 328 381 391 380 484
Sales and
marketing..... 559 827 836 1,113 934 1,461 1,566 1,700 1,847 1,911
General and
administrative... 342 297 325 285 398 382 441 810 669 653
Non-recurring
charge........ -- -- -- -- -- -- -- 1,011 -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
operating
expenses... 1,217 1,477 1,494 1,739 1,597 2,171 2,388 3,912 2,896 3,048
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations...... 227 114 (82) 612 497 86 372 (418) 387 448
Other income,
net............. -- 20 29 24 26 36 35 41 46 55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before provision
for income
taxes........... 227 134 (53) 636 523 122 407 (377) 433 503
Provision for
income taxes.... 81 48 (19) 228 209 49 163 (147) 208 201
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss).......... $ 146 $ 86 $ (34) $ 408 $ 314 $ 73 $ 244 $ (230) $ 225 $ 302
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1993 1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product
revenue....... 73.1% 69.7% 66.2% 70.6% 67.0% 66.1% 64.6% 68.8% 65.3% 58.1%
Services
revenue....... 26.9 30.3 33.8 29.4 33.0 33.9 35.4 31.2 34.7 41.9
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total
revenue... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Cost of revenue:
Product
revenue....... 14.4 16.0 12.5 12.8 12.2 11.1 7.8 8.1 10.0 8.8
Services
revenue....... 18.5 18.0 19.1 11.7 18.1 18.5 20.8 21.1 22.0 22.3
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total cost
of
revenue... 32.9 34.0 31.6 24.5 30.3 29.6 28.6 29.2 32.0 31.1
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Gross margin...... 67.1 66.0 68.4 75.5 69.7 70.4 71.4 70.8 68.0 68.9
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Operating
expenses:
Research and
development... 14.7 14.7 16.1 11.0 8.8 10.2 9.9 7.9 7.9 9.5
Sales and
marketing..... 26.0 34.3 40.6 35.7 31.1 45.6 40.5 34.5 38.2 37.7
General and
administrative... 15.9 12.3 15.7 9.2 13.2 11.9 11.4 16.4 13.9 12.9
Non-recurring
charge........ -- -- -- -- -- -- -- 20.5 -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total
operating
expenses... 56.6 61.3 72.4 55.9 53.1 67.7 61.8 79.3 60.0 60.1
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations...... 10.5 4.7 (4.0) 19.6 16.6 2.7 9.6 (8.5) 8.0 8.8
Other income,
net............. 0.0 0.8 1.4 0.8 0.9 1.1 0.9 0.8 0.9 1.1
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss)
before provision
for income
taxes........... 10.5 5.5 (2.6) 20.4 17.5 3.8 10.5 (7.7) 8.9 9.9
Provision for
income taxes.... 3.8 1.9 (0.9) 7.3 7.0 1.5 4.2 (3.0) 4.3 4.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income
(loss).......... 6.7% 3.6% (1.7)% 13.1% 10.5% 2.3% 6.3% (4.7)% 4.6% 5.9%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
21
<PAGE> 24
The Company's results of operations have been, and may in the future be,
subject to significant quarterly fluctuations, due to a variety of factors,
including the relatively lengthy sales cycle for the Company's products, the
relatively large size of a typical product sale, the timing of contracts, the
introduction of new products by the Company or its competitors, capital spending
patterns of customers, the Company's sales incentive strategy and general
economic conditions. These uncertainties make the estimation of revenues and
results of operations on a quarterly basis difficult and increase the potential
margin for error in performance forecasts derived from such estimates. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance.
Product revenue is difficult to forecast quarter to quarter, as no
significant backlog exists at the end of any quarter. Revenues are substantially
dependent on deliveries related to new contracts executed in that quarter.
Additionally, a significant portion of the Company's revenue in a quarter is
typically received in the last few weeks of that quarter. Historically, revenue
in each of the first two fiscal quarters has been lower than in the preceding
fourth fiscal quarter (which typically has the highest revenue and net income),
due largely to sales incentive programs focused on annual sales goals.
Management believes that this trend may continue.
A substantial portion of the Company's operating expenses is related to
personnel, facilities and marketing programs. The level of spending for such
expenses cannot be adjusted quickly and is, therefore, relatively fixed in the
short term. The Company's expense levels are based on expectations of future
revenue. If actual revenue levels on a quarterly basis are below management's
expectations, results of operations are likely to be disproportionately
adversely affected.
RECENT OPERATING RESULTS
Total revenue for the Company increased 45% to $5,597,000 for the three
months ended June 30, 1996 from $3,868,000 for the three months ended June 30,
1995. This increase was due to approximately $1,000,000 of additional product
revenue resulting from the sale of a larger number of user licenses and
approximately $700,000 of additional service revenue for the three months ended
June 30, 1996. The increase in service revenue was primarily attributable to an
increase in maintenance revenue. Total cost of revenue increased 44% to
$1,596,000 for the three months ended June 30, 1996 from $1,108,000 for the
three months ended June 30, 1995 due to the corresponding increase in total
revenue for the three months ended June 30, 1996. Total operating expenses
increased 45% to $3,466,000 for the three months ended June 30, 1996 from
$2,388,000 for the three months ended June 30, 1995 primarily due to an increase
in sales and marketing expenditures to support higher revenue levels and to a
lesser extent an increase in research and development and general and
administrative expenditures. Net income increased 43% to $350,000 for the three
months ended June 30, 1996 from $244,000 for the three months ended June 30,
1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations and
capital expenditures through internally generated cash flow and $3,233,549 of
net proceeds from the issuance of Convertible Preferred Stock in January 1994.
The Company generated cash from operations of $1,774,545 for the six months
ended March 31, 1996 and $1,414,094, $678,939 and $576,240 for fiscal 1995, 1994
and 1993, respectively. Cash and cash equivalents were $4,312,773 at March 31,
1996 and $2,966,637, $2,734,772 and $200,264 at September 30, 1995, 1994 and
1993, respectively. In each period, the Company experienced significant growth
in accounts receivable, accompanying increased sales volumes. Deferred revenue
also increased for the six months ended March 31, 1996 and in fiscal 1993 and
fiscal 1995, representing cash received on contracts pending delivery of product
or performance of services. Accrued expenses reflected a significant increase
for fiscal 1995 due to bonuses and commissions associated with the increased
sales volume and employee base.
Investing activities have consisted principally of the acquisition of
property and equipment, most notably computer equipment to support the growing
employee base and corporate infrastructure. The Company expects to continue its
purchases of property and equipment as part of its infrastructure growth.
22
<PAGE> 25
The other notable financing activities were the repurchases by the Company
of Common Stock. In January 1994, the Company repurchased 607,500 shares of
Common Stock at $1.32 per share or an aggregate price of $799,470. In November
1995, the Company repurchased 56,900 shares of Common Stock for $2.00 per share
or an aggregate purchase price of $113,799.
The Company has available a bank revolving line of credit. Borrowings
outstanding under the line are limited to the lesser of $1 million or 70% of
eligible accounts receivable, as defined, bear interest at the bank's corporate
base rate plus 1% and are collateralized by all corporate assets. There were no
borrowings outstanding as of March 31, 1996 or as of September 30, 1995. This
revolving line of credit expires on March 1, 1997.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Cash has
been and the Company contemplates that it will continue to be invested in
interest-bearing, investment grade securities.
From time to time, the Company evaluates potential acquisitions of
products, businesses and technologies that may complement or expand the
Company's business. The Company currently does not have any understandings,
commitments or agreements with respect to any such acquisitions. Any such
transactions consummated may use a portion of the Company's working capital or
require the issuance of equity or debt.
The Company believes that the net proceeds from this offering, together
with its current cash balances and cash provided by future operations, will be
sufficient to meet its working capital and anticipated capital expenditure
requirements for at least the next twelve months. Although operating activities
may provide cash in certain periods, to the extent the Company experiences
growth in the future, its operating and investing activities may use cash.
Consequently, any such future growth may require the Company to obtain
additional equity or debt financing.
23
<PAGE> 26
BUSINESS
OVERVIEW
Restrac designs, develops, markets, implements and supports HR staffing
software to automate the recruitment, selection and placement of an
organization's workforce. The Company's staffing software enables organizations
to strategically manage their human capital by reducing hiring and placement
costs, decreasing time to fill positions and providing more effective skills
management and worker deployment. The Company's products -- Restrac Hire and
Resume Reader for PeopleSoft -- provide HR departments with client/server
solutions to quickly and efficiently build and search comprehensive "pools" of
resume skills data to find the workers they need, while also managing the
workflow of the staffing process.
The Company's current software offerings are open, client/server
applications that utilize standard industry communications protocols, such as
TCP/IP, allowing for high performance, scalable implementations across local
area networks, wide area networks, the Internet and Intranets. The Company's
software supports industry standards, such as Microsoft Windows and most leading
relational databases (including Oracle, Microsoft SQLServer and Sybase), server
platforms (including Windows NT and many UNIX variants), e-mail systems
(including Microsoft Mail and Lotus cc:Mail) and desktop productivity tools
(including Lotus Notes). This open architecture has facilitated integration with
other systems providing customers with integrated, multi-vendor solutions to
meet their specific needs.
Since the introduction of Restrac Hire in 1993, the Company has licensed
its client/server, Windows-based staffing software to approximately 200
customers. Approximately 250 other organizations continue to license the
Company's earlier DOS-based recruiting and succession planning products. Within
these 450 organizations, there are over 4,000 licensed users of the Company's
products. The Company's products are primarily licensed by large corporate
employers experiencing accelerated growth, significant reorganization or
downsizing or a scarcity of skilled labor, or by companies reengineering their
HR function to reduce costs. Due to its flexible skills management and search
capabilities, the Company's software is also licensed by consulting firms and
providers of full-time, contract or temporary labor. Twenty-eight of the 50 most
profitable U.S. companies cited in Fortune magazine's 1996 "Fortune 1000" report
use the Company's software. The Company's customer base includes
Hewlett-Packard, American Express, British Telecom, AT&T, Intel, Johnson &
Johnson and Levi Strauss.
INDUSTRY BACKGROUND
The management of human capital is increasingly being viewed as a business
imperative and has emerged in recent years as a key element of corporate
strategy. Recruiting and deploying the most qualified employees is now being
recognized as critical to an organization's long-term success. In addition,
intensifying global competition, shortened product lifecycles and the need to
improve operating efficiencies have caused organizations to search for more
efficient ways to employ and deploy a more dynamic and skilled workforce. As a
result, HR departments have come under pressure to improve the quality of the
candidates they hire, to shorten the time to fill open positions and to reduce
the costs associated with staffing.
Historically, the recruitment, hiring and deployment of an organization's
workforce has been an inefficient, expensive and time-consuming process.
Industry sources estimate that the average cost to hire a salaried exempt
employee from outside the company in 1994 was $8,566 and ranged as high as
$15,766 in skilled industries such as electronics. In recent years, the average
company hired approximately 14% of its workforce externally and redeployed
approximately 7% of its internal workforce annually. The complexities and
inefficiencies inherent in the hiring process have resulted in a plethora of
recruiting and employment agencies charging fees representing as much as 30% of
an employee's starting annual salary, contributing to the hiring costs described
above. Despite the widespread use of such agencies, in 1994, companies took an
average of 41 days to hire an employee. The inefficiencies and costs associated
with the hiring process are particularly acute problems for large organizations
with 1,000 or more employees, of which there are estimated to be more than
15,000 in the United States.
24
<PAGE> 27
These costs and inefficiencies are due in large part to the difficulty that
organizations have in managing data on workers' skills and to a complex staffing
process which typically involves significant data collection, numerous manual
functions and the coordination of activities among many participants both within
and outside the organization. Organizations need to collect and manage extensive
skills data on their own employees as well as an even larger applicant pool in
order to manage hiring, redeployment, attrition, turnover and growth.
Historically, organizations seeking to fill a position would receive numerous
applications and resumes that were, once the position had been filled, either
discarded or stored in a manner that did not allow the organization to
effectively access and search this data when it sought to fill additional
positions in the future.
The typical staffing process is initiated by a hiring manager who fills out
a job requisition form to define the job's skill requirements, duties, pay and
other parameters. Copies of the requisition are routed to finance and accounting
and a compensation specialist for budget and salary approvals. An internal
recruiter then generates applicants through job advertising, requiring the
coordination of recruitment advertising firms, employment agencies, outplacement
companies and college placement offices. Recruiters must read and categorize
incoming resumes and, with the aid of administrators, copy, file and distribute
the appropriate resumes to managers. Follow-up letters are typically sent to
applicants. Recruiters and administrators then coordinate and track the
selection process with the applicants, hiring manager and an interviewing team.
This process typically requires the completion of multiple forms for interview
scheduling, skills assessment and feedback, reference checking, testing, equal
opportunity compliance and job offers and may involve the coordination of
outside suppliers for credit checking, testing and assessment and relocation.
Each division within an organization may have its own staffing process,
resulting in further inefficiencies and complicating the creation of
consolidated governmental compliance and management reports.
In order to address the challenges of hiring and deploying workers, HR
departments have begun to automate the staffing process. Until recently, the
only staffing software applications available were applicant tracking systems,
which were primarily designed to perform record-keeping functions and did not
offer automated workflow or resume searching capabilities. These applicant
tracking applications traditionally operated on centralized mainframe or
mini-computer systems, although such applications today are also being deployed
with client/server-based human resource information systems. These applications,
however, are ill-suited for capturing and managing the vast amount, variety and
diverse formatting of skills, experience and education information supplied by
candidates. Coding this information is generally a manual process which is
cumbersome, time-consuming and costly. Moreover, because the candidate
information is recorded in an oversimplified format, searches of this
information typically yield poor results. A more effective solution would allow
organizations to easily collect and manage large amounts of unstructured skills
and experience data on both job candidates and their current workforce and
perform sophisticated structured searches on this data to select the best
candidates.
The development of distributed client/server computing and enabling
technologies such as document scanning, optical character recognition (OCR) and
concept-based text searching have created a technological framework for the
efficient collection of staffing information and its dissemination among
recruiters, managers and, with the emergence of the Internet, other members of
the extended enterprise. Client/server technology not only permits any member of
the organization to effectively collect information relating to a particular
job, applicant or employee, but also gives other members of the organization in
geographically dispersed locations rapid access to that information and enables
them to participate in the hiring process. In addition, the proliferation of
Internet career sites is a dramatic recent development which creates a
significant new forum for the exchange of candidate and job information. These
new technologies, together with the increased emphasis on the strategic
management of human capital, have created a demand for a new generation of human
resource staffing systems.
THE RESTRAC SOLUTION
The Company's staffing software enables organizations to strategically
manage their human capital by reducing hiring and placement costs, decreasing
time to fill positions and providing more effective skills management and worker
deployment. The Company's software provides HR departments with client/server
25
<PAGE> 28
solutions to quickly and efficiently build and search comprehensive electronic
pools of resume skills data to find the workers they need, while also managing
the workflow of the staffing process. Key attributes of the Restrac solution are
as follows:
Sophisticated Skills Management and Selection. The Company's software uses
a sophisticated search process to rapidly identify and rank qualified candidates
based on skills criteria determined by the user. User searches are enhanced by
the Company's integrated skills library, which translates high-level job
requirements into the words and synonyms commonly used by candidates on resumes.
These same capabilities facilitate the quick and efficient management and
redeployment of an organization's existing workforce in response to job
openings, downsizings and restructurings.
More Efficient Staffing Process. The Company's software incorporates a
user-friendly, process-oriented GUI and is designed to reduce the time required
to fill positions by prompting users to advance candidates through the staffing
process. Such automatic workflow notifications reduce delays typical to the
staffing process and eliminate redundancies. The Company's software also
integrates with e-mail and interactive voice response technologies to facilitate
access to and participation in the staffing process. The Company's software can
be easily adapted by the customer to its own staffing requirements without
extensive customization. In addition, the Company's software eliminates the time
and expense associated with maintaining multiple parallel databases to track
different aspects of the staffing process.
Comprehensive, Reusable Candidate Pools. The Company's software uses
resume scanning and integrated e-mail input from Intranets or the Internet to
create consolidated, reusable candidate pools that can be shared throughout the
organization. Manual input is virtually eliminated, allowing organizations to
collect and store skills and experience data on hundreds of thousands of
candidates. The Company's software is designed to provide a shared, re-useable
pool of candidates, limiting the need for organizations to use employment
agencies and advertising to source candidates.
Open, Rapidly Deployable and Scalable Technology. The Company's software
is based on an open, client/server architecture that supports industry
standards, such as Microsoft Windows and most leading relational databases,
server platforms, e-mail systems and desktop productivity tools. The customer's
implementation cycle, including hardware implementation and basic process
reengineering, is typically less than three months. The Company's software is
scalable from the departmental level to multi-site, enterprise-wide
implementations and is designed to easily incorporate new technologies as they
become available.
Reduced Costs. By providing an easily-accessible, shared, re-useable pool
of candidates, the Company's software allows organizations to significantly
reduce recruitment advertising costs and employment agency fees. In addition,
the Company's software is designed to reduce HR headcount and increase recruiter
productivity through the elimination of manual entry of resume information and
by increasing the efficiency of the hiring process.
STRATEGY
The Company's objective is to become the leading provider of human resource
staffing software. To achieve this objective, the Company has adopted the
following strategies:
Expand Presence in Principal Markets. The Company's Restrac Hire product
has achieved a leading market position among large organizations (1,000+
employees), which are estimated to represent over 15,000 companies in the United
States alone. The Company believes that only a small portion of such large
organizations currently use automated staffing software, and the Company plans
to expand its established market position among such organizations by leveraging
its existing customer base and expanding its sales and marketing efforts.
Offer Self-Service Solutions. The Company's software is currently used
primarily by HR departments. In response to the increasing dispersion of the
staffing process outside of HR departments, the Company intends to enhance its
software to allow line managers, employees and job candidates to directly access
staffing information. Such self-service solutions should significantly expand
the Company's potential user-base while further reducing the administrative
demand on HR departments.
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Expand Markets to Include Smaller Organizations. The Company intends to
expand the markets for its software to smaller organizations with 100 to 1,000
employees (of which there are estimated to be over 100,000 in the United States)
by unbundling its current software offerings and marketing discrete modules to
customers. The Company also intends to offer customers access to staffing
solutions on a transaction-fee basis. Such unbundling of modules and
transaction-fee offerings should allow smaller organizations to take advantage
of the Company's technologies without the associated infrastructure investment
necessary to support a client/server application.
Pursue Internet Opportunities. The Company believes that the emergence of
the Internet creates opportunities to streamline the connection between job
seekers and employers. By enabling a new, more efficient channel of
communication, the Internet can allow information about jobs to be more widely
distributed and permit easy, on-line application by job seekers. The Company
believes that its high-volume, unstructured search technologies and the
utilization of TCP/IP, the Internet communications protocol, in its software
should facilitate the Company's development of staffing solutions which are
accessible across Intranets and over the Internet. The Company is currently
developing an enhancement to its software that allows users to directly post
jobs and receive applications via Internet career sites. In conjunction with the
development of this enhancement, the Company has entered into strategic
relationships with The Monster Board, Intellimatch and the Online Career Center,
three of the largest Internet career sites, and intends to enter into similar
arrangements with other career sites. In addition, the Company is currently
exploring other strategies to capitalize on opportunities offered by the
Internet.
Leverage Strategic Relationships. The Company has established a number of
relationships both to leverage marketing channels and complementary technologies
and to meet customer demands for open, integrated, multi-vendor solutions. The
Company's partners include leading technology vendors such as Verity, which, as
part of an OEM relationship, provides its text search software for integration
with the Company's internally-developed skills library. The Company also has a
relationship with PeopleSoft, a leading HR management system vendor, under which
PeopleSoft jointly markets the Company's Resume Reader for PeopleSoft product as
an integrated solution with its HRMS product. The Company believes that its
strategic relationships allow it to bring products to market more quickly and
enhance its image as a provider of industry standard automated staffing
products. The Company intends to continue to pursue the establishment of such
relationships to take advantage of emerging technologies and marketing
opportunities.
Develop International Presence. The Company believes that the growing
globalization of the workforce combined with the increasing standardization of
regulations across the European Community will provide it with significant
opportunities to continue its international expansion. The Company markets its
software in Canada and the United Kingdom and recently established a sales
office in the United Kingdom. In addition, the Company is currently developing a
localized version of its software specifically for the United Kingdom and
intends to develop additional localized versions to accommodate different
business practices and foreign languages.
PRODUCTS
The Company's principal products are Restrac Hire and Resume Reader for
PeopleSoft, which is sold in conjunction with PeopleSoft's HRMS product.
RESTRAC HIRE
The Company's primary product, Restrac Hire, automates the applicant
sourcing and selection functions in the staffing process and supports industry
standards such as Microsoft Windows and most leading relational databases
(including Oracle, Microsoft SQLServer and Sybase), server platforms (including
Windows NT and many UNIX variants), e-mail systems (including Microsoft's Mail
and Lotus cc:Mail) and desktop productivity tools (including Lotus Notes). The
license fee for a four-user Restrac Hire system is $91,000 and system prices
range from approximately $70,000 to $1 million, depending on the number of
licensed users. Implementation services, which are not included in the license
fee, generally amount to an additional 25% of
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the license fee. Maintenance for the first year is included in the license fee
and is renewable on an annual basis thereafter, at approximately 15% of the
license fee.
Restrac Hire is comprised of three bundled functional modules: Skill
Server, Candidate Finder and Recruiting Workbench.
Skill Server. The Company's Skill Server module automates the collection
of worker skills data by integrating scanning and OCR technologies for the
processing of paper or faxed resumes. Using Skill Server, electronic resumes can
also be received and input through e-mail, commonly available World-Wide Web
("Web") browsers and PC-based kiosk stations. Skill Server retains an electronic
image of the original resume as well as a text file which is made available for
searching the candidate pool. Managers can conduct a comprehensive search of
this candidate pool by using Candidate Finder before seeking candidates from
external sources.
Candidate Finder. The Company's Candidate Finder module provides users
with a search capability to rapidly identify and rank qualified job candidates
based upon skills criteria determined by the user, using the Company's extensive
skills library and Verity's text search software. Candidate Finder presents
users with an intuitive, flexible GUI for defining job requirements by clicking
on relevant skills from the Company's extensive skills library and reviewing
selected candidates' resumes and skills. Once a candidate is selected, Candidate
Finder automatically initiates the staffing process in the Recruiting Workbench
module.
Recruiting Workbench. The Company's Recruiting Workbench, which provides
database management and workflow functionality, automates the staffing process,
including: requisition management for job openings, job advertising, candidate
screening, interview scheduling, reference checking, correspondence, cost
tracking and government compliance reporting. Recruiting Workbench is designed
to guide users through each step in the staffing process. Activity history,
current status and pending actions are displayed for each candidate. Integrated
business rules and workflow processes help prevent common errors and delays
which can often result in poor selection results and extended placement times.
Recruiting Workbench also contains a report writer which allows users to
generate management reports, including standard reports used to benchmark
effectiveness or demonstrate compliance with Equal Employment Opportunity (EEO)
requirements.
RESUME READER FOR PEOPLESOFT
The Company's open architecture, which accommodates integration with other
HR software solutions, has allowed the Company to create a plug-in product that
offers high volume resume-scanning, skills management and search capabilities to
users of PeopleSoft's HRMS product. Resume Reader for PeopleSoft incorporates
the Skill Server and Candidate Finder modules of Restrac Hire. The license fee
for a four-user system is $87,000.
CUSTOMER SERVICES
The Company believes that superior customer service and support are
critical to customer satisfaction. As of April 30, 1996, the Company's customer
service organization was led by a Vice President and included 44 other people
who were assigned to one of four groups -- Account Management, Professional
Services, Training and Education and Technical Support -- as well as three
administrative personnel.
Account Management. As of April 30, 1996, the Company had six Account
Managers who were responsible for coordinating the corporate resources necessary
to ensure customer satisfaction. An Account Manager is assigned to each new
Restrac customer and oversees all aspects of the customer relationship. The
Company believes that its Account Manager program has helped it establish a high
degree of customer satisfaction.
Professional Services. The Professional Services Group, which was
comprised of 17 people as of April 30, 1996, manages system implementation and
provides additional services such as process design and system tailoring. In
order to ensure an effective and timely implementation, the implementation
process is
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coordinated by a Restrac project manager. The customer's implementation cycle is
typically less than three months, including hardware implementation and basic
process reengineering.
Training and Education. The Training and Education Group, which was
comprised of 10 people as of April 30, 1996, provides basic and advanced
training both on-site during system implementation and at the Company's
Corporate Training Center throughout the year.
Technical Support. The Technical Support Group, which was comprised of 11
people as of April 30, 1996, provides daily assistance to customers with
maintenance agreements through the Company's support help line. Approximately
98% of customers who have purchased the Company's client/server, Windows-based
products since their introduction are currently under maintenance agreements.
The Company provides support Monday through Friday from 8:00 a.m.-8:30 p.m.
Eastern Time as well as 4:00 a.m.-8:00 a.m. Eastern Time to support the
Company's European customers.
TECHNOLOGY
In 1993, the Company introduced Restrac Hire, the industry's first
Windows-based client/server staffing system. The Company's Restrac Hire software
is based on the Company's unique client/server development platform, which can
accommodate changing customer needs and technical infrastructure, simplify the
deployment of the Company's client/server software, and enable the rapid
integration of leading edge technologies and other innovations. Key aspects of
the Company's development platform are as follows:
Development Toolset. The Company's development platform includes a unique
application toolset which allows it to create and change its interfaces through
high level "screen painting" rather than low level programming. This toolset
also accommodates the creation and editing of business and workflow rules.
Applications developed with the Company's toolset inherit its full
functionality, including features critical to sophisticated, mission-critical,
enterprise-wide applications. The Company also includes in its software a
scaled-down version of the Company's application development tool, which allows
customers to make interface changes to accommodate their specific staffing
processes without compromising the integrity of the system.
Data Model. The Company's software includes an open, flexible and
extensible model for enterprise staffing that can operate in multiple standard
SQL databases. The model incorporates the Company's expertise in staffing
process modeling and allows for effective workflow and third-party integration.
Centralized Administration and Security. The Company's development
platform includes functionality for application deployment and version control,
reducing costs through centralized management by allowing the application to be
configured and updated automatically from a central location. The Company's
products also include security features to control user access. Access to
information and functionality is configured based on the user's login, allowing
users to access their recruiting desktop from anywhere in the system and further
securing against unauthorized access.
Support for Heterogeneous Computing Environments. The Company's
development platform is designed to enable applications developed on the
platform to operate in diverse computing environments. The platform supports
Microsoft Windows on the client as well as most leading relational databases
(including Oracle, Microsoft SQLServer and Sybase) and server platforms
(including Windows NT and many UNIX variants). The Company's products use the
industry-standard TCP/IP protocol, which allows the Company to develop
applications which operate over local area networks, wide area networks,
Intranets and the Internet.
Advanced Technology Integration. The Company has designed its development
platform to facilitate the integration of advanced technologies while insulating
the user from the complexities associated with multiple interfaces,
import/export utilities and switching between different applications. The
Company's products take advantage of Verity's text search software, TASC's
imaging technology and Caere's OCR technology.
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PRODUCT DEVELOPMENT
The Company believes that its future success will depend upon its ability
to enhance its existing software and develop and introduce new products and
functionalities which keep pace with rapid changes in the marketplace. The
Company has made increasing investments in its engineering and quality groups to
enhance product functionality, improve performance and expand the ability of its
software to interoperate with third-party software. While the Company expects
that certain of its new products and functionalities will be developed
internally, the Company may, based on timing and cost considerations, expand its
product offerings through acquisitions or strategic relationships. Software
products as complex as those currently under development by the Company are
subject to frequent delays and there can be no assurance that the Company will
not encounter difficulties that could delay or prevent the successful and timely
development, introduction and marketing of these potential new products.
The Company is currently developing several potential new products and
functionalities, including an enhancement of its software that allows users to
directly post jobs and receive applications via Internet career sites and a
localized version of Restrac Hire 3.0 to accommodate different business
practices in the United Kingdom. The Company also is planning to integrate
foreign language capabilities into its products. In addition, the Company is
currently developing new versions of Recruiting Workbench which will allow
organizations to deploy Restrac Hire in Lotus Notes and over an Intranet, with
access provided via a standard Web browser. The Company is also considering the
enhancement of a version of its software that is used for succession planning.
In addition, the Company is exploring the unbundling of certain of the
functionalities in its current software in order to offer discrete applications
to smaller organizations. The Company also intends to offer customers access to
staffing solutions on a transaction-fee basis. Such unbundling of modules and
transaction-fee offerings should allow smaller organizations to take advantage
of the Company's technologies without the associated infrastructure investment
necessary to support a client/server application. The Company is evaluating
extensions of its Candidate Finder module that would allow organizations to
access external candidate pools, such as the growing number of candidate
information bases being developed at career sites on the Internet, college and
graduate school databases and professional organization databases. In addition,
the Company is evaluating the unbundling of the Skill Server module for
organizations that want to publish candidate or job information on the Internet,
such as Internet career sites. The Company does not expect these products to
generate material revenue in fiscal 1996.
SALES AND MARKETING
The Company currently markets its products and services through a direct
sales force in North America and the United Kingdom and also markets its Resume
Reader for PeopleSoft product through a joint marketing arrangement with
PeopleSoft. The Company supports its sales force through comprehensive marketing
programs which include telemarketing, public relations, direct mail,
advertising, seminars, trade shows, ongoing customer communication programs and
strategic relationships. While the sales cycle varies from customer to customer,
it typically spans four to nine months from generation of a lead from one of
these sources to execution of a license agreement. The Company's sales force is
structured regionally and includes three area directors -- two domestic and one
international. The sales staff is managed through sales and service offices in
Dedham, Massachusetts, Palo Alto, California and Reading, England and through
sales personnel located in Sacramento, California, Chicago, Illinois, Dallas,
Texas, Flemington, New Jersey and Atlanta, Georgia. As of April 30, 1996, the
Company's sales and marketing organization consisted of 39 employees, including
11 sales representatives.
Restrac seeks to build goodwill with its customers by playing an active
role in its user community. Since 1994, the Company has hosted an annual Users
Conference, a three-day event that provides an environment of extensive learning
and peer networking. In addition, five user-hosted conferences are conducted
annually, organized regionally into East, South, Midwest, West and UK user
groups. The Company recently formed a Client Advisory Board to further guide
product strategy.
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CUSTOMERS
Since the introduction of Restrac Hire in 1993, the Company has licensed
its client/server, Windows-based staffing software to approximately 200
customers. Approximately 250 other organizations continue to license the
Company's earlier DOS-based recruiting and succession planning products. Within
these 450 organizations, there are over 4,000 licensed users of the Company's
products. Twenty-eight of the 50 most profitable U.S. companies cited in Fortune
magazine's 1996 "Fortune 1000" report use the Company's software. In fiscal
1995, no customer accounted for more than 10% of the Company's total revenue.
The following is a partial listing of the Company's customers as of April
30, 1996:
FINANCIAL SERVICES
American Express
Bank of America
Banc One
Fleet Bank
Merrill Lynch
M&T Bank
Union Bank
INSURANCE
Aetna Life and Casualty
Blue Cross/Blue Shield
Cigna
John Hancock
Nationwide
Occidental Insurance
Phoenix Home Life
Prudential
PUBLISHING/ENTERTAINMENT
Blockbuster Entertainment
Conde Nast Publications
Gannett
Paramount Pictures
The Washington Post
TECHNOLOGY/COMMUNICATIONS
AT&T
Amdahl
British Telecom
Cellular One
Cray Computers
EMC
Genentech
Hewlett-Packard
Intel
Lucent Technologies
Lockheed
Oracle
Sequent Computers
Stratus Computers
Vanstar
ENGINEERING/CONSULTING
Brown & Root
CH2M Hill
Logica
Mason & Hanger
Modern Engineering
HEALTHCARE/PHARMACEUTICALS
Abbott Laboratories
Baxter International
Bristol Myers Squibb
Johnson & Johnson
The Mayo Clinic
Memorial Sloan Kettering
PacifiCare
SmithKline Beecham
CONSUMER
Anheuser-Busch
Canadian Tire
Cargill
Delco
Levi Strauss
Mattel Toys
Overnite Transportation
Reebok
Starbucks
the good guys!
Toys R' Us
Examples of how the Company's customers have used Restrac software
successfully to address their needs are described below. The benefits achieved
by these customers will not necessarily be achieved by every customer.
Overnite Transportation, a Union-Pacific company, employs 15,000 workers in
44 states. Overnite's decentralized organizational structure and reliance on
paper-based recruiting resulted in multiple redundant staffing efforts being
conducted in different offices. Prior to implementing the Company's products,
managers in the field would often initiate a new recruitment effort every time a
position opened, incurring advertising, agency and administrative expenses that
could have been avoided. Overnite implemented Restrac Hire at its corporate
office in 1994. Since then, Overnite has streamlined its recruiting process,
reduced advertising and relocation expenses by 20%, eliminated manual tabulation
of government reporting data and cut agency fees by 80%, reporting annual
savings of $300,000 per year.
Amdahl Corporation, a provider of hardware/software solutions and
consulting services to help organizations achieve productivity improvements in
information technology, employs more than 8,000 people worldwide. Amdahl's
growing consulting business places demand on staffing to find specialized
skills. In addition, a recent acquisition will add 2,000 employees to its
current employee base. Amdahl replaced its previous resume scanning system with
Restrac Hire in 1995, and has linked the Restrac product to its
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information systems infrastructure to allow for greater productivity and to
assist in the integration of the additional employees.
Logica plc, an international systems integrator with over 3,600 employees
in 18 countries, implemented Restrac products in the United States, the United
Kingdom and the Netherlands in 1995 to manage its global consulting business.
Resumes are collected from offices throughout the world and consolidated to
provide shared access for bidding on upcoming jobs and staffing projects for
which Logica has been engaged. Logica also has used the Restrac system to direct
projects to offices where the most appropriate skill sets exist to increase
effectiveness and reduce expenses.
Brown & Root, a worldwide engineering and construction company which
employs 40,000 engineers, used Restrac Hire to identify and quickly deploy more
than 1,000 engineers in connection with the U.S. Department of Defense's Bosnian
recruitment effort. These engineers were needed to establish five military base
camps in and around Tuzla. Brown & Root was able to compile a list of personnel
with disparate skills such as telecommunications, construction, computer system
management and armored vehicle maintenance.
STRATEGIC RELATIONSHIPS
The Company has established a number of relationships both to leverage
marketing channels and complementary technology and to meet customer demands for
open, integrated, multi-vendor solutions. Strategic partners are categorized
into three groups: Technology Partners, who provide the Company with innovative
technologies that are integrated into the Company's products; Joint Marketing
Partners, who provide the Company's customers with value-added software,
consulting or other services that are complementary to the Company's software
and services and that enable the Company's customers to better utilize the
Company's software; and ConnecTeam Partners, who develop and deliver integrated
products and/or services that are designed specifically for Restrac systems and
for which the Company receives a royalty. Examples of the Company's strategic
partners include:
Verity, Inc. The Company's software incorporates the text search software
tools developed by Verity, Inc., a Technology Partner, which allows Restrac
clients to search through vast amounts of candidate and job data, delivering
only the most relevant information directly to the desktop.
PeopleSoft, Inc. PeopleSoft, Inc., a leading worldwide provider of human
resource software, is a Joint Marketing Partner. In conjunction with the
Company's sales force, PeopleSoft markets the Company's Resume Reader for
PeopleSoft product, which integrates the Company's high-volume resume-scanning,
skills management and search technology with PeopleSoft's HRMS product. The
Company makes a royalty payment to PeopleSoft for each Resume Reader for
PeopleSoft product licensed.
The Monster Board. The Company is currently developing an enhancement to
its software that allows users to directly post jobs and receive applications
via Internet career sites. In conjunction with the development of this
enhancement, the Company has entered into a strategic relationship with The
Monster Board, one of the largest Internet career sites, pursuant to which the
Company will receive a portion of the fees paid to The Monster Board in
connection with such postings.
ESSENSE Systems, Inc. ESSENSE Systems, Inc., a Restrac ConnecTeam Partner,
is developing a suite of kiosk and interactive voice response self-service
applications called Restrac ExprESS, which are specifically designed to operate
with the Company's software. Through the use of its advanced development
environment and server system and Edify Corporation's interactive voice response
technology, ESSENSE will offer a complete multi-platform self-service solution
for Restrac customers, including desktop PC, kiosk and touch-tone telephone.
COMPETITION
The marketplace for staffing solutions is intensely competitive and is
rapidly changing. The Company encounters direct competition from a number of
companies providing human resource staffing solutions, including (i) other human
resource staffing software companies, (ii) providers of general human resource
information systems, (iii) agencies providing or sourcing full-time, contract
and temporary labor,
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(iv) information systems departments of potential prospects that develop custom
software, and (v) providers of other client/server application software or
document management systems.
The Company's primary direct competitor is Resumix, Inc., which was
acquired by Ceridian, Inc. in 1995. The Company also competes directly against
other providers of human resource staffing software, most of which are small
privately held companies providing less functional products at lower prices. In
addition, vendors of general human resource information systems generally
include applicant tracking modules in their offerings which can compete with the
Company's products. Moreover, there can be no assurance that such vendors will
not develop and market products in direct competition with the Company. Some of
the Company's current and many of the Company's potential competitors, including
PeopleSoft, IBM and many other providers of general human resource information
systems, are large, publicly traded organizations with long operating histories
and access to significantly greater financial, technical, marketing and other
resources. As a result, they may be able to respond to market changes, emerging
technologies or changes in customer requirements more rapidly and devote more
resources to the development, marketing and sales of their products than the
Company. Competition may increase from new market entrants (particularly if the
market for automated staffing solutions continues to develop) or through
consolidations in the software industry and/or cooperative relationships among
companies or with third parties.
The Company believes that the principal competitive factors affecting its
market include product functionality, breadth, ease of use, scalability and
flexibility, integration and interoperability with standard platforms and
operating systems and other software products, price, product reputation,
customer service and support, sales and marketing effectiveness and company
reputation. Although the Company believes it competes favorably with respect to
such factors, there can be no assurance that the Company can maintain this
position against current and potential competitors.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company believes that, due to the rapid pace of
technological innovation within its industry, the Company's ability to establish
and maintain a position of technology leadership in the industry is dependent
more upon the skills of its development personnel and its existing skills
library than upon the legal protections afforded its existing technology.
The Company's success is dependent in part upon its proprietary software.
There can be no assurance that the Company's agreements with employees,
consultants and others who participate in the development of its software will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known. Furthermore,
there can be no assurance that the measures taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology.
The Company is not aware of any patent infringement charge or any violation
of other proprietary rights claimed by any third party relating to the Company
or the Company's products. However, the computer technology market is
characterized by frequent and substantial intellectual property litigation.
Intellectual property litigation is complex and expensive, and the outcome of
such litigation is difficult to predict.
The Company relies on Verity for text search software, TASC for image
compression and Caere for OCR technology. The Company's success will depend in
part on its continued ability to obtain and use licensed technology that is
important to the functionality of its products. An inability to continue to
procure or use such technology would likely have a material adverse effect on
the Company's business, financial condition and operating results.
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EMPLOYEES
As of April 30, 1996, the Company had 125 full time employees consisting of
39 in sales and marketing, 16 in product development, 48 in client services and
22 in corporate operations. The Company's employees are not represented by any
collective bargaining organizations, and the Company has never experienced any
work stoppages. The Company considers its relations with its employees to be
good.
FACILITIES
The Company's corporate headquarters are located in Dedham, Massachusetts,
where it currently occupies approximately 24,000 square feet of office space
under a lease expiring in December 1996. The Company expects that additional
space will be available when needed by the Company. The Company has regional
sales and service offices on the West Coast and in the United Kingdom. The
Company occupies approximately 2,200 square feet of office space in Palo Alto,
California under a lease expiring in September 1997 and 400 square feet of
office space in Reading, England under a lease expiring in October 1996. The
Company also leases office space for its sales representatives in Chicago and
Dallas.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages and their
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Lars D. Perkins........................... 36 President, Chief Executive Officer and
Chairman of the Board
Michael L. Amato.......................... 38 Vice President of Client Services
Charles A. Borwick........................ 34 Vice President of Marketing
Raymond M. Desrochers..................... 29 Vice President of Product Development and
Quality
Cynthia G. Eades.......................... 40 Chief Financial Officer, Vice President of
Finance and Treasurer
Martin J. Fahey........................... 42 Vice President and Chief Operating Officer
Thomas J. McCarthy III.................... 34 Vice President of Sales
Rachael T. Shanahan....................... 29 Vice President of Business Development,
General Counsel and Secretary
Russell J. Campanello(1)(2)............... 40 Director
J. Paul Costello.......................... 57 Director
A. Bruce Johnston(1)(2)................... 36 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Lars D. Perkins, co-founder of the Company, has served as President, Chief
Executive Officer and Chairman of the Board of the Company since 1986. Prior to
such time, he was the Company's Vice President.
Michael L. Amato has been the Company's Vice President of Client Services
since November 1994. From November 1988 to October 1994, Mr. Amato was Area
Manager for the Northeast Region of Innovative Information Systems, Inc., a
client/server systems integration company.
Charles A. Borwick was elected Vice President of Marketing of the Company
in October 1995. From August 1993 to September 1995, Mr. Borwick served as the
Company's Vice President of Business Development; from June 1992 to July 1993,
he served as its Vice President of Client Services; and from January 1991 to May
1992, he served as Vice President of the Company's SuccessPlan product line.
Beginning in July 1996, Mr. Borwick began transitioning responsibility for the
Company's marketing organization to Martin J. Fahey, the Company's Chief
Operating Officer, with the understanding that Mr. Borwick's employment with the
Company would be terminated on December 31, 1996. Until the termination of his
employment, Mr. Borwick will focus on certain strategic marketing and product
development tasks. Prior to joining the Company, Mr. Borwick co-founded Borwick
International, Inc., an international consulting firm. At Borwick International,
Mr. Borwick headed the human resource planning software division, where he
directed sales, marketing and operations.
Raymond M. Desrochers was elected Vice President of Product Development and
Quality of the Company in October 1995. From April 1995 to October 1995, he
served as the Company's Director of Product Development and from October 1994 to
March 1995, he served as the Company's Manager of Software Development. Mr.
Desrochers was a senior software engineer for the Company from July 1992 to
September 1994. Prior to joining the Company in July 1992, he had been Software
Project Manager for New England Business Service, Inc., a company that provides
accounting software solutions to both small and medium-sized businesses, from
October 1991 to June 1992. In addition, Mr. Desrochers was Software Development
Manager for Multi Tasking Systems, Inc., a leasing software provider, from
September 1989 to September 1991.
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Cynthia G. Eades joined the Company as Chief Financial Officer, Vice
President of Finance and Treasurer in December 1994. From February 1993 to
February 1994, she was Vice President and Chief Financial Officer of Virtual
World Entertainment, a developer and operator of virtual reality entertainment
centers. Prior to such time, Ms. Eades was employed by Dun & Bradstreet Software
Services, Inc., a business applications software company, as Controller from
October 1991 to February 1993 and Director of Finance from June 1990 to October
1991. Ms. Eades is a Certified Public Accountant and was employed by Price
Waterhouse from June 1978 to June 1990, most recently as a Senior Manager in
Audit and Accounting.
Martin J. Fahey joined the Company as Vice President and Chief Operating
Officer in May 1996. Mr. Fahey began assuming responsibility for the Company's
marketing organization in July 1996. From January 1995 to May 1996, Mr. Fahey
was an independent consultant for a variety of software companies. From July
1991 to December 1994, he was Chief Executive Officer of Vertigo Development, a
multimedia company which Mr. Fahey co-founded. Mr. Fahey was employed by Lotus
Development Corporation, a software company, from January 1983 to June 1991,
most recently as the Director of Spreadsheet Marketing.
Thomas J. McCarthy III joined the Company as Vice President of Sales in
February 1995. From October 1994 to January 1995, Mr. McCarthy was Vice
President and General Manager of Padcom Inc., a clinical studies software
company, where he was responsible for all North American operations. Prior to
joining Padcom, Mr. McCarthy had been employed by Software 2000, Inc., a
business applications software company, as a regional manager from May 1993 to
September 1994, a district manager from September 1992 to April 1993 and an
account executive from January 1992 to August 1992. Mr. McCarthy was an account
executive at Dun & Bradstreet Software Services, Inc., a business applications
software company, from December 1989 to December 1991.
Rachael T. Shanahan was elected Vice President of Business Development of
the Company in October 1995 and has served as the Company's Secretary since
January 1994 and its General Counsel since August 1993. Prior to such time, she
had been the Company's Contract Administrator/Legal Assistant since December
1990. Ms. Shanahan first joined the Company in 1988 as a systems specialist.
Russell J. Campanello was elected as a director of the Company in October
1994. He has been Vice President of Human Development and Organizational
Productivity at Industry.Net, a facilitator of electronic commerce on the
Internet, since February 1996. Prior to joining Industry.Net, Mr. Campanello
spent eight years as the Vice President of Human Resources of Lotus Development
Corporation.
J. Paul Costello co-founded the Company in 1982 with Lars D. Perkins and
has been a director of the Company since its founding. Mr. Costello has served
as President of J. Paul Costello Associates, Inc., a consulting company, since
1969 and of Costello & Company, Inc., a contract recruiting company, since 1979.
In December 1992, he also was named President of Corporate Staffing Center,
Inc., a provider of outsourced staffing services to large corporate clients. Mr.
Costello has been a human resource management consultant for over thirty years.
A. Bruce Johnston was elected as a director of the Company in January 1994.
Since January 1996, Mr. Johnston has been a Principal of TA Associates, Inc., a
private equity firm. From June 1992 to January 1996, Mr. Johnston was a Vice
President of TA Associates. Prior to such time, Mr. Johnston was a General
Manager of Lotus Development Corporation from June 1988 to June 1992. Mr.
Johnston also serves on the Boards of Directors of Expert Software, Inc. and
Trident International, Inc., both Nasdaq-traded public companies, as well as on
the Boards of Directors of several private companies.
BOARD OF DIRECTORS
Effective upon the closing of this offering, the Company's Board of
Directors will be divided into three classes, whose members will serve for
staggered three-year terms. The Board will be comprised of one Class I Director
(Mr. Campanello), one Class II Director (Mr. Johnston) and two Class III
Directors (Messrs. Perkins and Costello) whose initial terms will expire upon
the election and qualification of directors at the annual meetings of
stockholders to be held following fiscal 1996, 1997 and 1998, respectively. At
each annual
36
<PAGE> 39
meeting of stockholders, directors will be reelected or elected for a full term
of three years to succeed those directors whose terms are expiring.
Each of Messrs. Perkins, Costello and Johnston has been nominated and
elected to the Board of Directors pursuant to a voting agreement among certain
stockholders of the Company. This agreement will terminate upon consummation of
this offering.
The Company has entered into Indemnity Agreements with its directors which
provide a contractual right to indemnification for certain expenses incurred by
such directors arising from suits brought against them in their capacities as
directors of the Company, to the extent permitted by Delaware law and the
Company's Certificate of Incorporation.
The Company's Board of Directors has established an Audit Committee (the
"Audit Committee") and a Compensation Committee (the "Compensation Committee").
The Audit Committee recommends the firm to be appointed as independent
accountants to audit the Company's financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's year-end operating results and considers the adequacy of the
Company's internal accounting procedures. The Audit Committee consists of
Messrs. Campanello and Johnston. The Compensation Committee, which also consists
of Messrs. Campanello and Johnston, reviews and recommends the compensation
arrangements for all directors and officers and approves such arrangements for
other senior level employees. The Compensation Committee also administers and
takes such other action as may be required in connection with the incentive
plans of the Company, including the 1994 Stock Option Plan and the 1996 Stock
Option Plan.
DIRECTOR COMPENSATION
Prior to this offering, non-employee directors of the Company received an
annual directors' fee equal to 5% of the total compensation paid to the chief
executive officer of the Company for the period in question, which fee amounted
to $13,500 in fiscal 1995. Upon completion of this offering, non-employee
directors will receive $5,000 per year for services rendered as directors, plus
a per meeting fee of $1,000 for each directors' meeting attended in person after
the fifth meeting, up to a maximum additional amount of $5,000 per fiscal year.
In addition, all directors of the Company are reimbursed for travel expenses
incurred in attending meetings of the Board of Directors and its committees.
Each non-employee director will automatically receive an option to purchase
5,000 shares of Common Stock when such director is first elected to the Board of
Directors, with such option shares vesting proportionately over four years,
under the Company's 1996 Stock Option Plan. In addition, each non-employee
director will automatically receive an option to purchase 2,500 shares of Common
Stock on each October 1 that such director is a member of the Board of
Directors, with such option shares vesting proportionately over four years. All
option grants to non-employee directors will be at a per share exercise price
equal to the fair market value of the Common Stock at the time of grant. See
"Stock Option Plans."
37
<PAGE> 40
EXECUTIVE COMPENSATION
The following table shows compensation paid to the Chief Executive Officer
and the other executive officers of the Company whose salary plus bonus exceeded
$100,000 for services rendered to the Company in all capacities during the
fiscal year ended September 30, 1995 (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Lars D. Perkins............................ $135,000 $136,450 -- $5,135(2)
President and Chief Executive Officer
Michael L. Amato........................... 92,051(3) 16,550 35,460 596(4)
Vice President of Client Services
Charles A. Borwick......................... 104,582 30,770 70,875 984(4)
Vice President of Marketing
Cynthia G. Eades........................... 87,083(5) 16,778 53,190 383(4)
Chief Financial Officer
David G. Fisher(6)......................... 130,769 66,714 -- 8,305(7)
Vice President of Marketing
Thomas J. McCarthy III..................... 83,333(8) 133,202 141,840 350(4)
Vice President of Sales
<FN>
- ---------------
(1) Martin J. Fahey was named Vice President and Chief Operating Officer of the
Company in May 1996. His annual salary is $135,000.
(2) Includes a car allowance of $4,133 and a matching contribution of $1,002
made by the Company on behalf of Mr. Perkins under the Company's 401(k)
savings plan.
(3) Based on 11 months of service with the Company during the fiscal year ended
September 30, 1995. Mr. Amato's salary would have totaled $100,000 had he
been employed by the Company for the entire fiscal year.
(4) Represents a matching contribution made by the Company on behalf of the
Named Executive under the Company's 401(k) savings plan.
(5) Based on 9.5 months of service with the Company during the fiscal year ended
September 30, 1995. Ms. Eades' salary would have totaled $110,000 had she
been employed by the Company for the entire fiscal year.
(6) Mr. Fisher resigned from the Company, effective October 1995. In connection
with his resignation, Mr. Fisher is receiving severance payments which will
aggregate approximately $111,600 from the Company.
(7) Includes a moving allowance of $6,847 and a matching contribution of $1,458
made by the Company on behalf of Mr. Fisher under the Company's 401(k)
savings plan.
(8) Based on eight months of service with the Company during the fiscal year
ended September 30, 1995. Mr. McCarthy's salary would have totaled $125,000
had he been employed by the Company for the entire fiscal year.
</TABLE>
38
<PAGE> 41
<TABLE>
The following table provides information on option grants made during the
fiscal year ended September 30, 1995 to the Named Executives.
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(1)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ------------------
NAME OPTIONS GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------ --------------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Lars D. Perkins............... -- -- -- -- -- --
Michael L. Amato.............. 35,460 7.86% $0.44 10/31/04 $ 9,812 $ 24,866
Charles A. Borwick............ 70,875 15.71% 0.44 10/1/04 19,612 49,701
Cynthia G. Eades.............. 53,190 11.79% 0.44 12/12/04 14,718 37,299
David G. Fisher............... -- -- -- -- -- --
Thomas J. McCarthy III........ 70,920 15.72% 0.44 2/1/05 19,625 49,732
70,920 15.72% 2.00 9/15/05 89,202 226,056
<FN>
- ---------------
(1) This column shows the hypothetical gains or "option spreads" of the options
granted based on assumed annual compound stock appreciation rates of 5% and
10% over the full 10-year term of the options. The 5% and 10% assumed rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise of the option or the sale of the underlying shares. The
actual gains, if any, on the exercises of stock options will depend on the
future performance of the Common Stock, the option holder's continued
employment through the option period and the date on which the options are
exercised.
</TABLE>
<TABLE>
The following table sets forth for each of the Named Executives certain
information concerning options held as of September 30, 1995. No Named
Executives exercised stock options during fiscal 1995.
AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END(2)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
- --------------------------------------------- -------------------------------- --------------------------
<S> <C> <C> <C> <C>
Lars D. Perkins.............................. -- -- -- --
Michael L. Amato............................. 35,460(3) / -- $ 55,318/ --
Charles A. Borwick........................... 70,875(4) / -- 110,565/ --
Cynthia G. Eades............................. 53,190(3) / -- 82,976/ --
David G. Fisher.............................. 130,054(5) / -- 202,884/ --
Thomas J. McCarthy III....................... 141,840(3) / -- 110,635/ --
<FN>
- ---------------
(1) Under the 1994 Stock Option Plan, all options are exercisable upon grant,
but the underlying shares vest over time. The Company reserves the right to
repurchase, upon termination of employment, all shares issued upon exercise
(unvested shares at the exercise price and vested shares at the then current
fair market value).
(2) These values have been calculated on the basis of the fair market value per
share of the Common Stock at September 30, 1995 as determined by the Board
of Directors ($2.00), less the applicable exercise price.
(3) At fiscal year end, none of the shares were vested.
(4) At fiscal year end, all of the shares were vested.
(5) Mr. Fisher resigned from the Company, effective October 1995. In November
1995, Mr. Fisher exercised his option to purchase 56,900 vested shares of
Common Stock and the Company repurchased those shares at a negotiated price
pursuant to the terms of a separation agreement for an aggregate purchase
price of $113,799. Mr. Fisher's remaining option to purchase 73,154 shares
of Common Stock terminated in November 1995.
</TABLE>
39
<PAGE> 42
STOCK OPTION PLANS
Each of the 1994 Stock Option Plan and the 1996 Stock Option Plan permits
the grant of (i) options to purchase shares of Common Stock intended to qualify
as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), (ii) options that do not so qualify and (iii)
shares of Common Stock. The 1994 Stock Option Plan and the 1996 Stock Option
Plan are designed and intended as a performance incentive for officers,
directors, employees, consultants and other key persons performing services for
the Company to encourage such persons to acquire or increase a proprietary
interest in the success of the Company. As of May 8, 1996, options to purchase
641,844 shares of Common Stock pursuant to the 1994 Stock Option Plan were
outstanding. No further option grants will be made under the 1994 Stock Option
Plan. Stock options granted under the 1994 Stock Option Plan are exercisable
upon grant, subject to the Company's right to repurchase, upon termination of
employment, shares of Common Stock issued upon exercise.
On May 8, 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1996 Stock Option Plan, which provides for the
issuance of options to purchase 958,156 shares of Common Stock. The Company
anticipates that options to purchase approximately 140,000 shares of Common
Stock will be granted to a consultant of the Company and the Company's employees
upon pricing of this offering at an exercise price equal to the public offering
price. Under the 1996 Stock Option Plan, each non-employee director first
joining the Board of Directors in the future will automatically receive an
option to purchase 5,000 shares of Common Stock when such director is first
elected or appointed to the Board of Directors, with option shares vesting
proportionately over four years. In addition, each non-employee director will
automatically receive an option to purchase 2,500 shares of Common Stock on each
October 1 that such director is a member of the Board of Directors, with option
shares vesting proportionately over four years. All option grants to
non-employee directors will be at a per share exercise price equal to the fair
market value of the Common Stock at the time of grant. The 1996 Stock Option
Plan is administered by the Compensation Committee as appointed by the Board of
Directors from time to time. Beginning on August 15, 1996, the 1996 Stock Option
Plan may be administered by the Board of Directors in accordance with recent
modifications to the rules promulgated under Section 16 of the Securities
Exchange Act of 1934, as amended.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan was adopted by the Board of Directors and
approved by the stockholders of the Company in May 1996. The Company has
reserved a total of 150,000 shares of Common Stock for issuance under the
Employee Stock Purchase Plan. The Employee Stock Purchase Plan, which is
intended to qualify under Section 423(b) of the Code, permits eligible employees
of the Company to purchase Common Stock through payroll deductions of up to ten
percent of their compensation. The price of Common Stock purchased under the
Employee Stock Purchase Plan will be 85% of the lower of the fair market value
of the Common Stock on the first or last day of each six month purchase period.
The Employee Stock Purchase Plan will be administered by the Compensation
Committee of the Board of Directors. Employees are eligible to participate if
they are customarily employed by the Company or any designated subsidiary for at
least 20 hours per week and for more than six months.
SAVINGS PLAN
The Company's savings plan (the "Restrac 401(k) Plan") was adopted by the
Company in 1994 and amended, effective October 1995. All United States full-time
employees of the Company are eligible to participate in the Restrac 401(k) Plan
without regard to age or length of service. Participants may elect to have their
compensation reduced by up to 20% and have such reduced amount contributed to
the Restrac 401(k) Plan. The Company made discretionary matching contributions
under the Restrac 401(k) Plan aggregating approximately $14,000 and $33,000
during fiscal 1994 and fiscal 1995, respectively.
NON-COMPETITION AGREEMENTS
The Company has entered into a non-competition agreement with each
executive officer which generally (i) restricts such executive officer from
engaging in any "competitive business" (as defined in the agreement) for a
period of up to two years following termination of employment, subject to
payment by the Company of up to 30% of the executive officer's base salary; (ii)
requires the executive officer to assign to the Company all
40
<PAGE> 43
rights in all works, ideas and inventions made by such executive officer during
the term of employment which directly relate to the Company's actual or proposed
business; and (iii) requires the executive officer to keep confidential, both
during the term of employment and for a defined period thereafter, all
confidential or proprietary information of the Company.
1996 MANAGEMENT INCENTIVE COMPENSATION PLANS
The Company's 1996 Management Incentive Compensation Plans allow senior
managers to receive up to 20% of annual salary in an annual bonus and other
managers to receive up to 15% of annual salary in an annual bonus, 50% of which
is based upon the achievement of individual goals and 50% of which is based upon
the Company's achievement of its annual financial goals. These plans do not
apply to sales personnel, who are covered by separate incentive plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to May 8, 1996, all matters concerning executive officer compensation
were addressed by a Compensation Committee comprised of Messrs. Costello and
Johnston. Since May 8, 1996, the Compensation Committee has been comprised of
Messrs. Campanello and Johnston. Neither Mr. Campanello nor Mr. Johnston is an
employee of the Company. Mr. Campanello has been a director of the Company since
October 1994. Mr. Johnston has been a director of the Company since January
1994.
CERTAIN TRANSACTIONS
Pursuant to the 1994 Financing Agreement, on January 5, 1994, the Company
sold 517,546 shares of Convertible Preferred Stock to investment funds
associated with TA Associates, Inc. (the "TA Investors"), 28,951 shares of
Convertible Preferred Stock to Chestnut III Limited Partnership ("CLP") and
9,658 shares of Convertible Preferred Stock to Chestnut Capital International
III Limited Partnership ("CCILP") (CLP and CCILP collectively, the "Chestnut
Investors"). The purchase price per share of Convertible Preferred Stock was
$6.30. Upon the closing of this offering, the shares of Convertible Preferred
Stock will convert into an aggregate of 2,502,696 shares of Common Stock as
provided by a formula set forth in the Company's Certificate of Incorporation.
Mr. Johnston, a director of the Company, is a Principal of TA Associates, Inc.,
the indirect general partner of each of the TA Investors other than TA Venture
Investors Limited Partnership. Mr. Johnston is a general partner of TA Venture
Investors Limited Partnership. Approximately $800,000 of the proceeds were used
by the Company to repurchase shares of Common Stock, including 225,000 shares
from Lars D. Perkins, the President and Chief Executive Officer of the Company,
and 225,000 shares from J. Paul Costello, a director of the Company, at a per
share price of $1.32.
For a description of certain registration rights held by the TA Investors
and the Chestnut Investors, see "Description of Capital Stock -- Registration
Rights."
Since the Company's inception in 1982, Costello & Company, Inc.
("Costello") has been permitted to use the Company's software products and
documentation thereto which is part of the Company's standard offering to its
customers. To formalize this arrangement, on January 1, 1993, the Company
entered into a License Agreement with Costello pursuant to which the Company
granted Costello a fully-paid, perpetual license to use the Company's then
current software products and all replacement products developed and/or marketed
by the Company, with certain limited exceptions, and documentation thereto.
Pursuant to the terms of the License Agreement, Costello does not acquire any
rights of ownership in the software or documentation and said software and
documentation may only be used by Costello and J. Paul Costello, his wife,
children and any business entity at least 51% owned by any of them, each of whom
Costello may grant rights to use the software. John P. Costello III, J. Paul
Costello's son, performs general consulting services for the Company on behalf
of J. Paul Costello Associates, Inc. ("JPC Associates"). J. Paul Costello, the
President and principal shareholder of both Costello and JPC Associates and a
director of the Company, derives a personal benefit from such arrangements.
On January 1, 1991, the Company purchased certain assets from Borwick
International, Inc., an international consulting firm, pursuant to that certain
Agreement for Purchase and Sale of Assets dated
41
<PAGE> 44
January 1, 1991 (the "Asset Agreement"). The Asset Agreement contains a
non-competition clause pursuant to which the Company agreed not to sell software
used for "succession planning" anywhere outside of North America. On September
30, 1995, the Company executed a Termination Agreement with Borwick
International and Irving P. Borwick and a Finder's Fee and Non-Competition
Agreement with Irving P. Borwick. Pursuant to these two agreements, the Company
agreed to pay (i) $550,951.77 to Borwick International in return for the
termination of the Company's non-competition agreement under the Asset Agreement
and a five-year non-competition covenant from Borwick International and (ii)
$500,000 to Irving P. Borwick over a three-year period in exchange for a
five-year non-competition covenant from Irving P. Borwick. In connection with
this transaction, Borwick International has paid $137,738 to Charles A. Borwick
and Irving P. Borwick has agreed to pay $125,000 to Charles A. Borwick. The
Finder's Fee and Non-Competition Agreement also provides for the payment of a
finder's fee to Mr. Borwick in the event that certain entities purchase a
license to certain Restrac software on or before September 30, 1997. Irving P.
Borwick is the father of Charles A. Borwick, the Company's Vice President of
Marketing. Charles A. Borwick is a former principal of Borwick International and
was given a share of the proceeds of the transaction in return for his
contribution to the development of Borwick International's succession planning
business.
The Company believes that all transactions with the TA Investors, the
Chestnut Investors, JPC Associates and the Borwick entities were made on terms
no less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company has adopted a policy that transactions between the
Company and its officers, directors or other affiliates shall be reviewed on an
ongoing basis and be submitted to the Audit Committee or other comparable body
for review where appropriate.
42
<PAGE> 45
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 8, 1996, and as
adjusted to reflect the sale by the Company and the Selling Stockholders of the
shares offered hereby, (i) by each person who is known by the Company to own
beneficially five percent or more of the outstanding shares of Common Stock,
(ii) by each of the Company's directors, (iii) by each of the Named Executives,
(iv) by each of the Selling Stockholders, and (v) by all current directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO SHARES BENEFICIALLY
OWNED PRIOR TO BE SOLD OWNED AFTER
OFFERING(1) IN OFFERING OFFERING(1)
------------------------ ----------- --------------------------
NAME AND ADDRESS NUMBER PERCENT(2) NUMBER PERCENT(2)
- ------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
TA Investors................... 2,328,956(3) 36.5% 360,134(4) 1,968,822(5) 25.0%
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
Chestnut Investors............. 173,740(6) 2.7% 26,866(7) 146,874(8) 1.9%
c/o MVP Ventures
45 Milk Street
Boston, MA 02109
Lars D. Perkins................ 1,446,626 22.7% 216,000 1,230,626 15.6%
J. Paul Costello............... 1,685,385(9) 26.4% 252,000 1,433,385(9) 18.2%
Russell J. Campanello.......... 11,250(10) * -- 11,250(10) *
A. Bruce Johnston.............. 4,311(11) * 665(12) 3,646(13) *
Michael L. Amato............... 53,190(14) * -- 53,190(14) *
Charles A. Borwick............. 354,634(15) 5.5% 136,000 218,634(15) 2.8%
Cynthia G. Eades............... 53,190(16) * -- 53,190(16) *
Martin J. Fahey................ 80,000(17) 1.2% -- 80,000(17) 1.0%
David G. Fisher................ -- -- -- -- --
Thomas J. McCarthy III......... 141,840(18) 2.2% -- 141,840(18) 1.8%
John P. Jopling................ 52,650 * 9,000 43,650 *
All directors and executive
officers as a group (11
persons)..................... 3,901,113(19) 56.9% 604,665 3,296,448(19) 39.5%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares
(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise indicated. In accordance with the
rules of the Securities and Exchange Commission, each stockholder is deemed
to beneficially own any shares subject to stock options which are currently
exercisable or which become exercisable within 60 days after May 8, 1996;
and any reference in these footnotes to shares subject to stock options
held by the person or entity in question refers to stock options which are
currently exercisable or which become exercisable within 60 days after May
8, 1996. The inclusion herein of shares listed as beneficially owned does
not constitute an admission of beneficial ownership.
(2) Number of shares deemed outstanding includes any shares subject to stock
options held by the person or entity in question that are currently
exercisable or exercisable within 60 days following May 8, 1996. Number of
shares deemed outstanding after this offering includes the additional
1,500,000 shares of Common Stock which are being offered by the Company
hereby.
(3) Includes 1,668,465 shares owned by Advent VII L.P., 344,439 shares owned by
Advent Atlantic and Pacific II L.P., 166,846 shares owned by Advent New
York L.P., 124,177 shares owned by Advent Industrial II L.P. and 25,029
shares owned by TA Venture Investors Limited Partnership. Advent VII L.P.,
Advent Atlantic and Pacific II L.P., Advent New York L.P., Advent
Industrial II L.P. and TA Venture Investors Limited Partnership are part of
an affiliated group of investment partnerships referred to, collectively,
as the TA Investors. The general partner of Advent VII L.P. is TA
Associates VII, L.P.
43
<PAGE> 46
The general partner of Advent Atlantic and Pacific II L.P. is TA Associates
AAP II Partners, L.P. The general partner of each of Advent New York L.P.
and Advent Industrial II L.P. is TA Associates VI, L.P. The general parner
of each of TA Associates VII, L.P., TA Associates AAP II Partners, L.P. and
TA Associates VI, L.P. is TA Associates, Inc. In such capacity, TA
Associates, Inc. exercises sole voting and investment power with respect to
all of the shares held of record by the named investment partnerships, with
the exception of those shares held by TA Venture Investors Limited
Partnership; individually no stockholder, director or officer of TA
Associates, Inc. is deemed to have or share such voting or investment
power. Principals and employees of TA Associates, Inc. (including A. Bruce
Johnston, a director of the Company) comprise the general partners of TA
Venture Investors Limited Partnership. In such capacity, Mr. Johnston may
be deemed to share voting and investment power with respect to the 25,029
shares held of record by TA Venture Investors Limited Partnership. Mr.
Johnston disclaims beneficial ownership of such shares, except as to 4,311
shares as to which he holds a pecuniary interest.
(4) Includes 258,000 shares to be sold by Advent VII L.P., 53,262 shares to be
sold by Advent Atlantic and Pacific II L.P., 25,800 shares to be sold by
Advent New York L.P., 19,202 shares to be sold by Advent Industrial II L.P.
and 3,870 shares to be sold by TA Venture Investors Limited Partnership.
(5) Includes 1,410,465 shares owned by Advent VII L.P., 291,177 shares owned by
Advent Atlantic and Pacific II L.P., 141,046 shares owned by Advent New
York L.P., 104,975 shares owned by Advent Industrial II L.P. and 21,159
shares owned by TA Venture Investors Limited Partnership.
(6) Includes 130,279 shares owned by Chestnut III Limited Partnership and
43,461 shares owned by Chestnut Capital International III Limited
Partnership. Messrs. Jonathan J. Fleming, Michael F. Schiavo, Peter A.
Schober and John G. Turner are the general partners of Chestnut III
Management Limited Partnership ("CMLP") and MVP Capital Limited Partnership
("MVP"). CMLP has voting and investment power to act for Chestnut III
Limited Partnership. MVP has voting and investment power to act for
Chestnut Capital International III Limited Partnership.
(7) Includes 20,145 shares to be sold by Chestnut III Limited Partnership and
6,721 shares to be sold by Chestnut Capital International III Limited
Partnership.
(8) Includes 110,134 shares owned by Chestnut III Limited Partnership and
36,740 shares owned by Chestnut Capital International III Limited
Partnership.
(9) Includes 403,164 shares of Common Stock beneficially owned by Joseph A.
Bartoloni and Paul D. Spiro as trustees of trusts for the benefit of Mr.
Costello's children, John P. Costello III and Brett Ann Costello. Mr.
Costello disclaims beneficial ownership of such shares.
(10) Represents 11,250 shares subject to options held by Mr. Campanello.
(11) Represents 4,311 shares of Common Stock beneficially owned by A. Bruce
Johnston through TA Venture Investors Limited Partnership, which are
included in the shares described in footnote (3) above as being owned by TA
Venture Investors Limited Partnership. Does not include any shares
beneficially owned by Advent VII L.P., Advent Atlantic and Pacific II L.P.,
Advent New York L.P. or Advent Industrial II L.P. or the remainder of the
shares described in footnote (3) above as being owned by TA Venture
Investors Limited Partnership, as to which Mr. Johnston disclaims
beneficial ownership.
(12) Represents 665 shares of Common Stock to be sold by TA Venture Investors
Limited Partnership which are included in footnote (4) above as being sold
by TA Venture Investors Limited Partnership.
(13) Represents 3,646 shares of Common Stock in which A. Bruce Johnston has a
pecuniary interest through TA Venture Investors Limited Partnership which
are included in footnote (5) above as being owned by TA Venture Investors
Limited Partnership.
(14) Represents 53,190 shares subject to options held by Mr. Amato.
(15) Includes 70,875 shares subject to options held by Mr. Borwick.
(16) Represents 53,190 shares subject to options held by Ms. Eades.
(17) Represents 80,000 shares subject to options held by Mr. Fahey.
(18) Represents 141,840 shares subject to options held by Mr. McCarthy.
(19) Includes 481,032 shares subject to options held by directors and executive
officers as a group.
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<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company upon completion of the offering
and the conversion of all of the Convertible Preferred Stock into Common Stock
will consist of 30,000,000 shares of Common Stock, of which 7,874,383 shares
will be outstanding, and 5,000,000 shares of undesignated preferred stock
issuable in series by the Board of Directors (the "Preferred Stock"), of which
no shares will be issued and outstanding. There were 17 stockholders of record
as of May 8, 1996. The following summary description of the capital stock of the
Company is qualified in its entirety by reference to the Company's Certificate
of Incorporation and Amended and Restated By-laws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
Certificate of Incorporation and the Amended and Restated By-laws have been
adopted by the stockholders and the Board of Directors of the Company.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election, subject to the rights of the holders of Preferred Stock, if and
when issued. The holders of Common Stock have no preemptive or other
subscription rights.
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor, with each share of Common Stock sharing equally in
such dividends. The possible issuance of Preferred Stock with a preference over
Common Stock as to dividends could impact the dividend rights of holders of
Common Stock.
There are no redemption or sinking fund provisions with respect to the
Common Stock. All outstanding shares of Common Stock, including the shares
offered hereby, are, or will be upon completion of the offering, fully paid and
non-assessable.
The By-laws provide, subject to the rights of the holders of the Preferred
Stock, if and when issued, that the number of directors shall be fixed by the
Board of Directors. The directors, other than those who may be elected by the
holders of Preferred Stock, if and when issued, are divided into three classes,
as nearly equal in number as possible, with each class serving for a three-year
term, except with respect to the initial term of each class of directors which
shall be for the period described under "Management -- Board of Directors."
Subject to any rights of the holders of Preferred Stock, if and when issued, to
elect directors, and to remove any director whom the holders of any such stock
had the right to elect, any director of the Company may be removed from office
only with cause and by the affirmative vote of at least two-thirds of the total
votes which would be eligible to be cast by stockholders in the election of such
director.
UNDESIGNATED PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in classes or series and to fix the designations, powers, preferences and
the relative, participating, optional or other special rights of the shares of
each series and any qualifications, limitations and restrictions thereon as set
forth in the Certificate of Incorporation. Any such Preferred Stock issued by
the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock
is, in part, to eliminate delays associated with a stockholder vote on specific
issuances. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring or seeking to acquire, a significant portion of the outstanding
stock of the Company.
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<PAGE> 48
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BY-LAWS
A number of provisions of the Company's Certificate of Incorporation and
By-laws concern matters of corporate governance and the rights of stockholders.
Certain of these provisions, as well as the ability of the Board of Directors to
issue shares of Preferred Stock and to set the voting rights, preferences and
other terms thereof, may be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Board of Directors
(including takeovers which certain stockholders may deem to be in their best
interests). These provisions, together with the classified Board of Directors
and the ability of the Board of Directors to issue Preferred Stock without
further stockholder action, also could delay or frustrate the removal of
incumbent Directors or the assumption of control by stockholders, even if such
removal or assumption would be beneficial to stockholders of the Company. These
provisions also could discourage or make more difficult a merger, tender offer
or proxy contest, even if they could be favorable to the interests of
stockholders, and could potentially depress the market price of the Common Stock
and deprive stockholders of an opportunity to receive a premium for their
shares. The Board of Directors of the Company believes that these provisions are
appropriate to protect the interests of the Company and all of its stockholders.
The Board of Directors has no present plans to adopt any other measures or
devices which may be deemed to have an "anti-takeover effect."
Meetings of Stockholders. The Company's By-laws provide that a special
meeting of stockholders may be called only by the Board of Directors unless
otherwise required by law. The Company's By-laws provide that only those matters
set forth in the notice of the special meeting may be considered or acted upon
at that special meeting, unless otherwise provided by law. In addition, the
Company's By-laws set forth certain advance notice and informational
requirements and time limitations on any director nomination or any new business
which a stockholder wishes to propose for consideration at an annual meeting of
stockholders.
No Stockholder Action by Written Consent. The Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company at an annual or special meeting of stockholders must be effected
at a duly called meeting and may not be taken or effected by a written consent
of stockholders in lieu thereof.
Indemnification and Limitation of Liability. The By-laws of the Company
provide that directors and officers of the Company shall be, and in the
discretion of the Board of Directors non-officer employees may be, indemnified
by the Company to the fullest extent authorized by Delaware law, as it now
exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of the Company.
The By-laws of the Company also provide that the right of directors and officers
to indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any by-law, agreement,
vote of stockholders or otherwise. The Certificate of Incorporation contains a
provision permitted by Delaware law that generally eliminates the personal
liability of directors for monetary damages for breaches of their fiduciary
duty, including breaches involving negligence or gross negligence in business
combinations, unless the director has breached his or her duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or a knowing
violation of law, paid a dividend or approved a stock repurchase in violation of
the Delaware General Corporation Law or obtained an improper personal benefit.
This provision does not alter a director's liability under the federal
securities laws. In addition, this provision does not affect the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty.
Amendment of the Certificate. The Certificate of Incorporation provides
that an amendment thereof must first be approved by a majority of the Board of
Directors and (with certain exceptions) thereafter approved by the holders of a
majority of the total votes eligible to be cast by holders of voting stock with
respect to such amendment or repeal; provided, however, that the affirmative
vote of 80% of the total votes eligible to be cast by holders of voting stock,
voting together as a single class, is required to amend the provisions described
above.
Amendment of By-laws. The Certificate of Incorporation provides that the
By-laws may be amended or repealed by the Board of Directors or by the
stockholders. Such action by the Board of Directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the
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<PAGE> 49
affirmative vote of the holders of at least two-thirds of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal at an annual meeting of stockholders or a special meeting called for such
purpose, unless the Board of Directors recommends that the stockholders approve
such amendment or repeal at such meeting, in which case such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation that was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder. The
Board of Directors has agreed that Lars D. Perkins, J. Paul Costello and the TA
Investors, who would immediately after the offering be deemed to own 15% or more
of the Company's outstanding Common Stock, and their affiliates and associates
will not be considered "interested stockholders" for purposes of Section 203 and
that the provisions of Section 203 do not apply to transactions between the
Company and any of the above-referenced stockholders or their affiliates and
associates.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such charter or
by-law amendment shall not become effective until 12 months after the date it is
adopted. Neither the Certificate of Incorporation nor the By-laws contains any
such exclusion.
REGISTRATION RIGHTS
Upon consummation of the offering, Lars D. Perkins, J. Paul Costello and
John P. Jopling (collectively the "Management Stockholders") and the TA
Investors and the Chestnut Investors (collectively the "Venture Investors") will
have "piggy-back" registration rights under the Securities Act pursuant to the
Registration Rights Agreement and the 1994 Financing Agreement, respectively. If
the Company proposes to effect certain registrations of its securities under the
Securities Act, such holders are entitled to notice of such registration and to
include their shares of Common Stock in such registration, subject to the right
of an underwriter participating in the offering to limit the number of shares
included in such registration. In addition, at any time at least six months
after the effective date of the Company's initial public offering, the Venture
Investors shall have the right to demand two registrations on Form S-1, but no
more than one in any consecutive twelve-month period. At such time as the
Company has qualified for use of Form S-3, the Venture Investors shall each have
the right to request an unlimited number of registrations on Form S-3, except
that the Company shall not be obligated to file and cause to become effective
more than one registration statement on Form S-3 in any one twelve-month period
or where the proposed aggregate offering price of the securities proposed to be
registered is less than $1,000,000. The Management Stockholders are entitled to
participate in any registration demanded by the Venture Investors, subject to
the right of an
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<PAGE> 50
underwriter participating in the offering, or in certain circumstances the right
of the Venture Investors, to limit the ability of the Management Stockholders to
include their shares in the offering. All expenses relating to the filing of
such registration statements (other than the second demand registration on Form
S-1), excluding underwriting discounts and selling expenses relating to the
filing of such registration statements and in some instances the fees for
counsel for the Venture Investors and/or the Management Stockholders, will be
paid by the Company. Except to the extent the Selling Stockholders have
exercised their registration rights with respect to the shares of Common Stock
offered hereby, the holders of such registration rights have waived such rights
in connection with the offering and have also agreed with the Underwriters not
to exercise such rights with respect to any shares subject to the lock-up
restrictions described below for a period of 180 days following the date of this
Prospectus.
TRANSFER AGENT AND REGISTRAR
The Company has selected Fleet National Bank as the transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of 7,874,383
shares of Common Stock outstanding. Of these shares, the 2,500,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of the
Company, as defined in the Securities Act, who would be required to sell under
Rule 144 under the Securities Act. The remaining 5,374,383 shares of Common
Stock outstanding will be "restricted securities" as that term is defined by
Rule 144 (the "Restricted Shares"). The Restricted Shares were issued and sold
by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act.
Of the Restricted Shares, 445,230 shares will be eligible for sale in the
public market in reliance on Rule 144(k) immediately following the commencement
of this offering; 415,230 of these shares are subject to the lock-up agreements
described below. An additional 4,826,394 Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144 and Rule 701 under the Securities
Act beginning 90 days after the date of this Prospectus; all of these shares are
subject to the lock-up agreements described below. The remaining 102,759 shares
will become eligible for sale in the public market under Rule 144 at various
times; all of these shares are subject to the lock-up agreements described
below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately 78,744 shares upon completion of the
offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an affiliate),
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement. The Securities and Exchange Commission has proposed
an amendment to Rule 144 which would reduce the holding period required for
shares subject to Rule 144 to become eligible for sale in the public market from
two years to one year, and from three years to two years in the case of Rule
144(k).
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired on the exercise of outstanding options may be resold by
persons other than affiliates, beginning 90 days after the date of this
Prospectus, subject only to the manner of sale provisions of Rule 144, and by
affiliates, beginning
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<PAGE> 51
90 days after the date of this Prospectus, subject to all provisions of Rule 144
except its two-year minimum holding period.
The Company's executive officers and directors, the Selling Stockholders
and certain other stockholders of the Company (who in the aggregate will hold
5,344,383 Restricted Shares upon completion of the offering) have agreed,
subject to certain limited exceptions, not to sell or offer to sell or otherwise
dispose of any shares of Common Stock currently held by them, any right to
acquire any shares of Common Stock or any securities exercisable for or
convertible into any shares of Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of Montgomery
Securities. Montgomery Securities may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, the Company has agreed that for a period of 180
days after the date of this Prospectus it will not, without the prior written
consent of Montgomery Securities, issue, offer, sell, grant options to purchase
or otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities except for shares of Common Stock offered
hereby and shares issued pursuant to the 1994 Stock Option Plan and the Employee
Stock Purchase Plan.
As of May 8, 1996, options to purchase a total of 641,844 shares of Common
Stock pursuant to the 1994 Stock Option Plan were outstanding with a weighted
average exercise price of $2.65 per share; an additional 958,156 shares of
Common Stock were available for future issuance under the 1996 Stock Option Plan
and 150,000 shares of Common Stock were available for purchase under the
Employee Stock Purchase Plan. The Company intends to file one or more
registration statements on Form S-8 under the Securities Act to register shares
of Common Stock issuable under the 1994 Stock Option Plan, the 1996 Stock Option
Plan and the Employee Stock Purchase Plan; however, the Company has agreed with
the Underwriters not to file any such registration statement on Form S-8 with
respect to, or otherwise register for resale with the Commission, shares of
Common Stock subject to stock options, for a period of 30 days after the date of
this Prospectus.
In addition, various holders of Common Stock have demand and "piggyback"
registration rights to require the Company to file one or more registration
statements to effect the registration under the Securities Act of the shares of
Common Stock held by such holders, which would permit such holders to resell
such shares without complying with Rule 144. Registration and sale of such
shares could have an adverse effect on the trading price of the Common Stock.
See "Description of Capital -- Stock Registration Rights."
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors -- Shares Eligible for Future Sale."
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<PAGE> 52
UNDERWRITING
<TABLE>
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities, Wessels, Arnold & Henderson, L.L.C. and Adams, Harkness &
Hill, Inc. (the "Representatives"), have severally agreed, subject to the terms
and conditions set forth in the Underwriting Agreement, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such shares, if any are purchased.
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Montgomery Securities..................................................... 686,000
Wessels, Arnold & Henderson, L.L.C........................................ 515,000
Adams, Harkness & Hill, Inc............................................... 359,000
Hambrecht & Quist LLC..................................................... 100,000
Morgan Stanley & Co. Incorporated......................................... 100,000
Robertson, Stephens & Company LLC......................................... 100,000
UBS Securities LLC........................................................ 100,000
George K. Baum & Company.................................................. 60,000
Dakin Securities Corporation.............................................. 60,000
First Albany Corporation.................................................. 60,000
Pennsylvania Merchant Group Ltd........................................... 60,000
SoundView Financial Group, Inc............................................ 60,000
Tucker Anthony Incorporated............................................... 60,000
Unterberg Harris.......................................................... 60,000
Van Kasper & Company...................................................... 60,000
H.C. Wainwright & Co., Inc................................................ 60,000
---------
Total........................................................... 2,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer the Common Stock to the public
on the terms set forth on the cover page of this Prospectus. The Underwriters
may allow to selected dealers a concession of not more than $0.44 per share; and
the Underwriters may allow, and such dealers may reallow, a concession of not
more than $0.10 per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
Certain of the Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 375,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial 2,500,000 shares to be purchased by the Underwriters. To the extent that
the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
Each director and officer of the Company, the Selling Stockholders and
certain other holders of Common Stock prior to this offering have agreed,
subject to certain limited exceptions, not to sell or offer to sell or otherwise
dispose of any shares of Common Stock currently held by them, any right to
acquire any shares of Common Stock or any securities exercisable for or
convertible into any shares of Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of Montgomery
Securities. Montgomery Securities may, in its sole discretion and at any time
without notice, release all or any portion of
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<PAGE> 53
the securities subject to these lock-up agreements. In addition, the Company has
agreed that for a period of 180 days after the date of this Prospectus it will
not, without the prior written consent of Montgomery Securities, issue, offer,
sell, grant options to purchase or otherwise dispose of any equity securities or
securities convertible into or exchangeable for equity securities except for
shares of Common Stock offered hereby and shares issued pursuant to the 1994
Stock Option Plan, the 1996 Stock Option Plan and the Employee Stock Purchase
Plan. See "Management -- Stock Option Plans" and "-- Employee Stock Purchase
Plan."
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined through
negotiations between the Company, the Selling Stockholders and the
Representatives. Among the factors considered in such negotiations were the
history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, the Company's past and
present operations and financial performance, its past and present earnings and
the trend of such earnings, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of the offering and the market prices of publicly
traded common stocks of comparable companies in recent periods.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Goodwin, Procter &
Hoar LLP, Boston, Massachusetts. Hale and Dorr, Boston, Massachusetts, will pass
upon certain legal matters relating to the offering for the Underwriters.
EXPERTS
The financial statements and schedule included in this Prospectus and
elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
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<PAGE> 54
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any agreement or other document referred to are
not necessarily complete. With respect to each such agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in all respects by such reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 and
at the following regional offices of the Commission: Seven World Trade Center,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the public
reference section of the Commission at its Washington address upon payment of
the prescribed fees. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
Upon completion of the offering, the Company will be subject to the
informational reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by the Company's independent accountants
and quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information.
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<PAGE> 55
RESTRAC, INC.
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of September 30, 1994 and 1995, March 31, 1996 (unaudited) and Pro
Forma March 31, 1996 (unaudited).................................................... F-3
Statements of Income for the Years Ended September 30, 1993, 1994 and 1995 and for the
Six Months Ended March 31, 1995 and 1996 (unaudited)................................ F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit) for the Years Ended September 30, 1993, 1994 and 1995 and for the Six
Months Ended March 31, 1996 (unaudited) and Pro Forma March 31, 1996 (unaudited).... F-5
Statements of Cash Flows for the Years Ended September 30, 1993, 1994 and 1995 and for
the Six Months Ended March 31, 1995 and 1996 (unaudited)............................ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Restrac, Inc.:
We have audited the accompanying balance sheets of Restrac, Inc. (formerly
MicroTrac Systems, Inc.) as of September 30, 1994 and 1995, and the related
statements of income, redeemable convertible preferred stock and stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
September 30, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Restrac, Inc. as of
September 30, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 30, 1995 (except with respect
to Note 6, as to which the date
is May 8, 1996)
F-2
<PAGE> 57
RESTRAC, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, PRO FORMA
------------------------ MARCH 31, MARCH 31, 1996
1994 1995 1996 ---------------
---------- ---------- ----------- (UNAUDITED)
(UNAUDITED) (NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $2,734,772 $2,966,637 $ 4,312,773 $ 4,312,773
Accounts receivable, less allowance for doubtful
accounts of approximately $17,000, $300,000 and
$350,000, at September 30, 1994 and 1995 and
March 31, 1996, respectively.................... 2,152,755 3,485,744 3,073,482 3,073,482
Other current assets.............................. 157,290 454,470 379,350 379,350
Deferred income taxes............................. 302,569 718,254 835,831 835,831
---------- ---------- ----------- -----------
Total current assets............................ 5,347,386 7,625,105 8,601,436 8,601,436
---------- ---------- ----------- -----------
Property and Equipment, net......................... 788,571 1,452,548 1,408,906 1,408,906
---------- ---------- ----------- -----------
Deferred Income Taxes............................... -- 46,328 46,328 46,328
---------- ---------- ----------- -----------
Other Assets, net................................... 13,891 14,832 27,430 27,430
---------- ---------- ----------- -----------
$6,149,848 $9,138,813 $10,084,100 $10,084,100
========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt................. $ 65,387 $ 14,367 $ 10,714 $ 10,714
Accounts payable.................................. 539,889 585,471 643,800 643,800
Accrued expenses.................................. 705,565 2,180,479 2,426,882 2,995,872
Deferred revenue.................................. 996,294 2,526,073 2,669,664 2,669,664
Accrued income taxes.............................. 574,048 239,900 207,998 207,998
---------- ---------- ----------- -----------
Total current liabilities....................... 2,881,183 5,546,290 5,959,058 6,528,048
---------- ---------- ----------- -----------
Deferred Income Taxes............................... 53,777 63,777 63,777 63,777
---------- ---------- ----------- -----------
Other Liabilities................................... 132,068 45,119 15,597 15,597
---------- ---------- ----------- -----------
Commitments (Note 4)
Redeemable Convertible Preferred Stock.............. 3,562,172 3,842,474 3,982,625 --
---------- ---------- ----------- -----------
Stockholders' Equity (Deficit) (Note 6):
Preferred stock, $.01 par value -- Authorized --
5,000,000 shares, Issued and
outstanding -- none............................. -- -- -- --
Common stock, $.01 par value -- Authorized --
30,000,000 shares, Issued -- 4,500,000 shares at
September 30, 1994 and 1995, 4,558,587 shares at
March 31, 1996 and 7,061,283 shares pro forma... 45,000 45,000 45,586 70,613
Additional paid-in capital........................ 160,618 160,618 221,197 3,699,946
Treasury stock, at cost........................... (804,970) (804,970) (830,764) (830,764)
Retained earnings................................. 120,000 240,505 627,024 536,883
---------- ---------- ----------- -----------
Total stockholders' equity (deficit)............ (479,352) (358,847) 63,043 3,476,678
---------- ---------- ----------- -----------
$6,149,848 $9,138,813 $10,084,100 $10,084,100
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 58
RESTRAC, INC.
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue......................... $3,775,551 $6,816,249 $10,023,919 $4,132,744 $6,100,352
Services revenue........................ 1,894,131 2,921,248 4,989,965 2,078,413 3,802,646
---------- ---------- ----------- ---------- ----------
Total revenue.................... 5,669,682 9,737,497 15,013,884 6,211,157 9,902,998
---------- ---------- ----------- ---------- ----------
Cost of Revenue:
Product revenue......................... 718,803 1,350,318 1,424,847 713,006 932,293
Services revenue........................ 1,362,518 1,588,778 2,983,931 1,148,486 2,191,806
---------- ---------- ----------- ---------- ----------
Total cost of revenue............ 2,081,321 2,939,096 4,408,778 1,861,492 3,124,099
---------- ---------- ----------- ---------- ----------
Gross Margin.............................. 3,588,361 6,798,401 10,605,106 4,349,665 6,778,899
---------- ---------- ----------- ---------- ----------
Operating Expenses:
Research and development................ 673,701 1,342,692 1,364,542 592,695 863,487
Sales and marketing..................... 1,552,675 3,335,599 5,661,133 2,394,527 3,758,042
General and administrative.............. 1,190,034 1,248,630 2,031,079 779,166 1,322,397
Non-recurring charge (Note 2)........... -- -- 1,010,952 -- --
---------- ---------- ----------- ---------- ----------
Total operating expenses......... 3,416,410 5,926,921 10,067,706 3,766,388 5,943,926
---------- ---------- ----------- ---------- ----------
Income From Operations.................... 171,951 871,480 537,400 583,277 834,973
Other Income, net......................... 23,910 73,063 137,707 62,596 101,380
---------- ---------- ----------- ---------- ----------
Income Before Provision for Income
Taxes................................... 195,861 944,543 675,107 645,873 936,353
Provision for Income Taxes................ 106,417 338,835 274,300 258,737 409,683
---------- ---------- ----------- ---------- ----------
Net Income................................ $ 89,444 $ 605,708 $ 400,807 $ 387,136 $ 526,670
========== ========== =========== ========== ==========
Pro Forma Net Income per Common and Common
Equivalent Share........................ $ 0.06 $ 0.08
=========== ==========
Pro Forma Weighted Average Number of
Common and Common Equivalent Shares
Outstanding............................. 6,949,273 6,937,578
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 59
RESTRAC, INC.
<TABLE>
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(NOTE 6)
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------------------
REDEEMABLE CONVERTIBLE COMMON STOCK
PREFERRED STOCK ------------------- TREASURY STOCK TOTAL
------------------------ NUMBER $.01 ADDITIONAL ---------------------- RETAINED STOCKHOLDERS'
NUMBER CARRYING OF PAR PAID-IN NUMBER EARNINGS EQUITY
OF SHARES VALUE SHARES VALUE CAPITAL OF SHARES COST (DEFICIT) (DEFICIT)
---------- ----------- --------- ------- ---------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30,
1992......... -- $ -- 4,072,500 $40,725 $ 87,778 -- $ -- $ (99,658) $ 28,845
Exercise of
common
stock
options.... -- -- 427,500 4,275 (4,180) -- -- -- 95
Purchase of
treasury
stock...... -- -- -- -- -- 22,500 (5,500) -- (5,500)
Amortization
of deferred
compensation
expense.... -- -- -- -- 20,267 -- -- -- 20,267
Tax benefit
from stock
options
exercised... -- -- -- -- 45,417 -- -- -- 45,417
Net income... -- -- -- -- -- -- -- 89,444 89,444
-------- ----------- --------- ------- ---------- ------- --------- --------- ----------
Balance,
September 30,
1993......... -- -- 4,500,000 45,000 149,282 22,500 (5,500) (10,214) 178,568
Issuance of
preferred
stock, less
issuance
costs of
$270,227... 556,155 3,503,776 -- -- -- -- -- (270,227) (270,227)
Purchase of
treasury
stock...... -- -- -- -- -- 607,500 (799,470) -- (799,470)
Amortization
of deferred
compensation
expense.... -- -- -- -- 11,336 -- -- -- 11,336
Dividends
paid on
redeemable
convertible
preferred
stock...... -- -- -- -- -- -- -- (146,871) (146,871)
Accretion of
dividends... -- 58,396 -- -- -- -- -- (58,396) (58,396)
Net income... -- -- -- -- -- -- -- 605,708 605,708
-------- ----------- --------- ------- ---------- ------- --------- --------- ----------
Balance,
September 30,
1994......... 556,155 3,562,172 4,500,000 45,000 160,618 630,000 (804,970) 120,000 (479,352)
Accretion of
dividends... -- 280,302 -- -- -- -- -- (280,302) (280,302)
Net income... -- -- -- -- -- -- -- 400,807 400,807
-------- ----------- --------- ------- ---------- ------- --------- --------- ----------
Balance,
September 30,
1995......... 556,155 3,842,474 4,500,000 45,000 160,618 630,000 (804,970) 240,505 (358,847)
Exercise of
common
stock
options.... -- -- 58,587 586 25,579 -- -- -- 26,165
Purchase of
treasury
stock...... -- -- -- -- -- 56,900 (25,794) -- (25,794)
Accretion of
dividends... -- 140,151 -- -- -- -- -- (140,151) (140,151)
Tax benefit
from stock
options
exercised... -- -- -- -- 35,000 -- -- -- 35,000
Net income... -- -- -- -- -- -- -- 526,670 526,670
-------- ----------- --------- ------- ---------- ------- --------- --------- ----------
Balance, March
31, 1996
(Unaudited)... 556,155 3,982,625 4,558,587 45,586 221,197 686,900 (830,764) 627,024 63,043
Pro Forma
Effect of
Conversion of
Redeemable
Convertible
Preferred
Stock into
Common Stock
(Unaudited)... (556,155) (3,982,625) 2,502,696 25,027 3,478,749 -- -- (90,141) 3,413,635
-------- ----------- --------- ------- ---------- ------- --------- --------- ----------
Pro Forma
Balance,
March 31,
1996
(Unaudited)... -- $ -- 7,061,283 $70,613 $3,699,946 686,900 $(830,764) $ 536,883 $3,476,678
======== =========== ========= ======= ========== ======= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 60
RESTRAC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................... $ 89,444 $ 605,708 $ 400,807 $ 387,136 $ 526,670
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization.......... 214,849 243,948 430,597 159,044 491,171
Provision for doubtful accounts........ 9,714 -- 317,080 15,091 129,131
Deferred income taxes, net............. (53,000) (153,669) (448,000) (96,759) (117,577)
Amortization of deferred compensation
expense.............................. 20,267 11,336 -- -- --
Loss on disposal of property and
equipment............................ 7,333 -- 9,061 11,219 --
Deferred rent.......................... 86,364 23,124 (64,329) (50,659) (29,522)
Changes in assets and liabilities --
Accounts receivable.................. (483,670) (885,961) (1,650,069) (237,879) 283,131
Prepaid expenses and other current
assets............................ (162,354) 66,425 (297,180) (41,452) 75,120
Accounts payable..................... 178,680 118,502 45,582 503,340 58,329
Accrued expenses..................... 275,889 251,088 1,474,914 276,649 246,403
Accrued taxes........................ (6,187) 507,118 (334,148) (466,941) (31,902)
Deferred revenue..................... 398,911 (108,680) 1,529,779 450,660 143,591
--------- ---------- ----------- ---------- ----------
Net cash provided by operating
activities...................... 576,240 678,939 1,414,094 909,449 1,774,545
--------- ---------- ----------- ---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment...... (432,551) (285,088) (1,115,455) (400,590) (447,529)
Proceeds from sale of property and
equipment.............................. -- -- 7,770 -- --
Increase in other assets................. -- (4,255) (941) (1,851) (12,598)
--------- ---------- ----------- ---------- ----------
Net cash used in investing
activities........................ (432,551) (289,343) (1,108,626) (402,441) (460,127)
--------- ---------- ----------- ---------- ----------
Cash Flows from Financing Activities:
Payments on capital lease obligations.... (68,685) (74,182) (26,936) (44,216) (3,653)
Payments of bank notes payable........... (89,299) (40,000) (46,667) -- --
Payments of note payable................. (73,014) -- -- -- --
Payment of promissory note payable to a
related party.......................... (24,000) (28,114) -- -- --
Proceeds from issuance of redeemable
convertible preferred stock, net of
$270,227 of issuance costs............. -- 3,233,549 -- -- --
Proceeds from exercise of common stock
options................................ 95 -- -- -- 26,165
Tax benefit of stock option exercises.... 45,417 -- -- -- 35,000
Dividends paid........................... -- (146,871) -- -- --
Purchase of treasury stock............... (5,500) (799,470) -- -- (25,794)
--------- ---------- ----------- ---------- ----------
Net cash (used in) provided by
financing activities.............. (214,986) 2,144,912 (73,603) (44,216) 31,718
--------- ---------- ----------- ---------- ----------
Net (Decrease) Increase in Cash and Cash
Equivalents.............................. (71,297) 2,534,508 231,865 462,792 1,346,136
--------- ---------- ----------- ---------- ----------
Cash and Cash Equivalents, beginning of
period................................... 271,561 200,264 2,734,772 2,734,772 2,966,637
--------- ---------- ----------- ---------- ----------
Cash and Cash Equivalents, end of period... $ 200,264 $2,734,772 $ 2,966,637 $3,197,564 $4,312,773
========= ========== =========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for
Interest............................... $ 29,560 $ 23,000 $ 9,683 $ 6,412 $ 927
========= ========== =========== ========== ==========
Income taxes........................... $ 166,851 $ 105,241 $ 1,280,025 $ 789,767 $ 386,764
========= ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 61
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Restrac, Inc. (formerly MicroTrac Systems, Inc.) (the Company) designs,
develops, markets, implements and supports human resource staffing software to
automate the recruitment, selection and placement of an organization's
workforce. The Company's staffing software enables organizations to
strategically manage their human capital by reducing hiring and placement costs,
decreasing time to fill positions and providing more effective skills management
and worker deployment. The Company's products -- Restrac Hire and Resume Reader
for PeopleSoft -- provide human resource departments with client/server
solutions to quickly and efficiently build and search comprehensive "pools" of
resume skills data to find the workers they need, while also managing the
workflow of the staffing process.
In 1982 the Company was incorporated under the laws of the Commonwealth of
Massachusetts. On January 5, 1994, the Company was reincorporated as a Delaware
corporation. On June 15, 1995, the Company amended its Certificate of
Incorporation to effect a name change from MicroTrac Systems, Inc. to Restrac,
Inc.
The Company is subject to risks common to rapidly growing, technology-based
companies, including dependence on key personnel, rapid technological change,
competition from substitute products and larger companies, and the successful
development and marketing of new commercial products and services.
The accompanying financial statements reflect the application of certain
significant accounting policies as described below and elsewhere in the notes to
financial statements.
(a) Unaudited Pro Forma Presentation
The unaudited pro forma balance sheet and unaudited statement of redeemable
convertible preferred stock and stockholders' equity as of March 31, 1996
reflect the automatic conversion of the redeemable convertible preferred stock
into 2,502,696 shares of common stock and the accrual of $569,000 of estimated
accumulated dividends payable to the redeemable convertible preferred
stockholders upon the closing of the Company's initial public offering (see Note
5).
(b) Interim Financial Statements
The accompanying balance sheet as of March 31, 1996, the statements of
income and cash flows for the six months ended March 31, 1995 and 1996 and the
statement of redeemable convertible preferred stock and stockholders' equity for
the six months ended March 31, 1996 are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The results of operations for the six months ended March 31, 1996 are
not necessarily indicative of results to be expected for the fiscal year ending
September 30, 1996.
(c) Revenue Recognition
Product revenue includes software license fees, third-party hardware and
royalty revenue. Services revenue includes customer maintenance fees, training,
installation and consulting. The Company recognizes product and services revenue
in accordance with the provisions of Statement of Position No. 91-1 (SOP No.
91-1), Software Revenue Recognition.
Product revenue from software license fees and hardware is recognized upon
delivery provided there are no significant Company obligations remaining and
collectibility of the revenue is probable. If an acceptance period is required,
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period, as defined in the applicable software
license agreement. Prior to fiscal 1994, the Company recognized software license
fees upon installation rather than delivery, as its then current product
releases
F-7
<PAGE> 62
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
required extensive customization subsequent to delivery. Software license fees
for fiscal 1994 included $1,262,000 related to this former business practice.
Royalty revenue is recognized as earned.
Services revenue from customer maintenance fees for postcontract support is
recognized ratably over the maintenance term, which is typically 12 months. When
customer maintenance fees are included in an initial software license fee, the
Company allocates 15% of the software license fee to the first year's
maintenance. The amount allocated to customer maintenance fees for the first
year is comparable to customer maintenance fees charged separately by the
Company. Other services revenue from training, installation and consulting is
recognized as the related services are performed.
Deferred revenue represents payments received by the Company in advance of
product delivery or service performance.
(d) Research and Development Costs
Research and development costs are generally charged to operations as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86, Accounting
for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have not
been material. Through March 31, 1996, all research and development costs have
been expensed.
(e) Cash and Cash Equivalents
Cash equivalents consist of highly liquid investment grade securities with
original maturities of 90 days or less. The Company adopted SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, effective
October 1, 1994. Under SFAS No. 115, the Company's cash equivalents are
classified as held-to-maturity securities. At September 30, 1994 and 1995 and
March 31, 1996, cash equivalents consisted primarily of investments in money
market funds.
(f) Other Current Assets
Other current assets primarily consist of prepaid operating expenses and
inventories. The Company capitalizes prepaid expenses and amortizes them over
the applicable period. Prepaid expenses amounted to $119,968 and $330,238 at
September 30, 1994 and 1995, respectively, and $315,373 at March 31, 1996.
Inventories are stated at the lower of cost, as determined on a first-in,
first-out (FIFO) basis, or market. Inventories consist primarily of equipment
that has been purchased for resale. Also included in other current assets are
refundable income taxes of approximately $73,000 at September 30, 1995 and
$32,000 at March 31, 1996.
F-8
<PAGE> 63
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
(g) Property and Equipment
<TABLE>
The Company records property and equipment at cost and provides for
depreciation and amortization on a straight-line basis over the estimated useful
lives of the assets, as follows:
<CAPTION>
SEPTEMBER 30, MARCH 31,
ESTIMATED ----------------------- ----------
ASSET CLASSIFICATION USEFUL LIFE 1994 1995 1996
-------------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Office equipment..................... 3 -- 5 Years $ 932,291 $1,854,638 $2,244,481
Furniture and fixtures............... 3 -- 7 Years 143,322 307,423 365,108
Leasehold improvements............... 5 Years 127,804 133,129 133,129
Equipment under capital lease........ Life of Lease 123,098 123,098 123,098
---------- ---------- ----------
1,326,515 2,418,288 2,865,816
Less -- Accumulated depreciation and
amortization....................... 537,944 965,740 1,456,910
---------- ---------- ----------
$ 788,571 $1,452,548 $1,408,906
========== ========== ==========
</TABLE>
(h) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or
liability is measured by the enacted tax rates expected to be in effect when the
differences between the financial statement and tax bases of assets and
liabilities reverse.
(i) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Concentration of Credit Risk
The Company has no significant off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. The Company's accounts receivable credit risk is not
concentrated within any geographical area, and no single customer accounts for
greater than 10% of total revenue or represents a significant credit risk to the
Company.
(k) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(l) Pro Forma Net Income per Common and Common Equivalent Share
For the fiscal year ended September 30, 1995 and for the six-month period
ended March 31, 1996, pro forma net income per common and common equivalent
share was based on the weighted average number of common and common equivalent
shares outstanding during the period, computed in accordance with the treasury
stock method, plus the number of shares of common stock issuable upon conversion
of the redeemable convertible preferred stock and the number of shares of common
stock issued pursuant to the initial public offering sufficient to generate
proceeds for the payment of $569,000 of estimated accumulated redeemable
convertible preferred stock dividends payable upon the closing of the initial
public offering. The
F-9
<PAGE> 64
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
pro forma weighted average number of common and common equivalent shares assumes
that common stock options granted and shares issued one year prior to the
initial filing of a registration statement for the Company's initial public
offering are outstanding for the periods presented, computed in accordance with
the treasury stock method. Historical net income per share data has not been
presented, as such information is not considered to be relevant or meaningful.
(m) New Accounting Standards
During March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, which is effective for fiscal years
beginning after December 15, 1995. The Company elected early adoption of SFAS
No. 121 in the fiscal year ended September 30, 1995. The adoption of this
standard did not have a material effect on its financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has determined that it will continue to account for
employee stock-based compensation under Accounting Principles Board No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company will be
required to disclose the pro forma net income or loss and per share amounts in
the notes to the financial statements using the fair value based method
beginning in the fiscal year ending September 30, 1997 with comparable
disclosures for the fiscal year ending September 30, 1996. The Company has not
determined the impact of these pro forma adjustments.
(n) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, accounts receivable and long-term debt, approximates
their carrying value.
(o) Noncash Investing and Financing Activities
Noncash investing and financing activities include dividend accretion in
the amount of $58,396 and $280,302 for the fiscal years ended September 30, 1994
and 1995, respectively, and $128,480 and $140,151 for the six months ended March
31, 1995 and 1996, respectively. Additional noncash investing and financing
activities during the fiscal year ended September 30, 1994 include a $31,174
increase in equipment under capital leases and a $100,000 increase in property
and equipment under a note payable.
(2) BUYOUT OF DISTRIBUTION RIGHTS
On January 1, 1991, the Company acquired certain of the assets of Borwick
International, Inc. (Borwick), an international consulting firm which developed
and marketed related software known as SuccessPlan (the Product). As part of
this 1991 agreement, Borwick was granted the exclusive right to distribute the
Product outside of North America, and the Company was prohibited from selling
any competitive products in these territories.
On September 30, 1995, the Company entered into an agreement that
terminated Borwick's remaining distribution rights to the Product and removed
any restrictions on the Company's ability to sell competitive products. The
process of succession planning is in transition; thus the Company's succession
planning product strategy is in flux. Its evolving line of staffing products may
incorporate certain elements that could be construed as succession planning
under a broad interpretation of the 1991 agreement. Accordingly, the Company
believed that removal of these restrictions was necessary.
F-10
<PAGE> 65
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
As a result of the September 1995 agreement, the Company recorded a
non-recurring charge to operations of $1,010,952 in the fiscal year ended
September 30, 1995, representing the present value of payments made and payable
under the terms of this agreement. The Company does not have a succession
planning product which is suitably responsive to the international market. In
addition, the Company lacks the internal infrastructure and established
distribution channels necessary to license and support such products outside of
North America. Based on the minimal current and anticipated cash flows from
succession planning products, any intangible asset recorded would be deemed to
be non-recoverable and require recognition of an impairment loss in accordance
with SFAS No. 121. Accordingly, the cost of the distribution rights was charged
to operations, as management believes that the realizability of such cost is
uncertain.
The Company also executed a Finder's Fee and Non-Competition Agreement with
Irving P. Borwick, a principal of Borwick, in conjunction with the September
1995 termination agreement. Although the Company wished to ensure that Borwick
and Irving P. Borwick would not compete with the Company, neither was viewed as
a serious competitive threat. Accordingly, the stated amounts in the
non-competition agreement were not deemed to reflect their overall value to the
Company and were included in the total ascribed to the termination of
distribution rights.
(3) LINE OF CREDIT
At March 31, 1996, the Company had a $1,000,000 revolving line of credit
with a bank. Borrowings outstanding under the line are limited to 70% of
eligible accounts receivable, as defined, bear interest at the bank's prime rate
(8.25% at March 31, 1996) plus 1%, and are collateralized by all corporate
assets. There were no borrowings outstanding as of September 30, 1994 and 1995
or as of March 31, 1996. As part of the loan agreement, the Company is required
to maintain certain restrictive financial covenants, as defined. This revolving
line of credit expires on March 1, 1997.
(4) LONG TERM OBLIGATIONS AND COMMITMENTS
(a) Note Payable to Bank
Included in other liabilities at September 30, 1994, is a note payable to a
bank with interest at prime (7.75%) plus 2%. During 1995, the Company paid all
amounts outstanding under the note payable to the bank.
(b) Leases
The Company leases its facilities and certain equipment under operating
leases and certain equipment under capital leases that expire through 1997.
Future minimum rental payments as of March 31, 1996 under both the
operating and capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996 (six months as of March 31)................................ $ 5,507 $ 279,642
1997............................................................ 5,343 163,211
------- --------
10,850 $ 442,853
========
Less -- Amount representing interest.................. 897
-------
Present value of minimum lease payments......................... 9,953
Less -- Current portion............................... 3,967
-------
$ 5,986
=======
</TABLE>
F-11
<PAGE> 66
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
Aggregate net rental expense included in the accompanying statements of
income for the fiscal years ended September 30, 1993, 1994 and 1995 and the six
months ended March 31, 1995 and 1996 is approximately $159,000, $188,000,
$330,200, $108,000 and $255,500, respectively.
Leases with escalating rents or free rent periods are expensed on a
straight-line basis over the fixed term of the lease. Deferred rent arises when
expense recorded exceeds actual payments. Deferred rent of approximately
$109,000, $45,000 and $15,000 is included in other liabilities in the
accompanying balance sheets at September 30, 1994 and 1995 and March 31, 1996,
respectively.
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On January 5, 1994, the Company amended its Certificate of Incorporation to
authorize the issuance of 1,000,000 shares of Preferred Stock with a par value
of $1.00 per share and issued 556,155 shares of redeemable convertible preferred
stock (Preferred Stock) for a purchase price of $6.30 per share for proceeds of
$3,233,549, net of $270,227 of issuance costs. The Company has reserved
2,502,696 shares of common stock for the conversion of Preferred Stock into
common stock.
The rights, preferences and privileges of the Preferred Stock are as
follows:
(a) Redemption
At the request of any holder of Preferred Stock at any date within 30
days following November 5, 1998 (the Redemption Date), the Company is
required to redeem the Preferred Stock 60 days following the Redemption
Date. The redemption price for the Preferred Stock is $6.30 plus any
accrued but unpaid dividends.
(b) Conversion
Each share of Preferred Stock is convertible based on a conversion
rate of four and one-half shares of common stock for each share of
Preferred Stock, subject to adjustment for certain dilutive events.
Conversion is at the option of the holder; however, conversion of all the
Preferred Stock is automatic upon the closing of a qualified public
offering of the Company's common stock at an offering price of at least
$4.20 per share and aggregating net proceeds to the Company of at least
$10,000,000. In connection with the Company's initial public offering, the
outstanding shares of Preferred Stock will automatically convert into
2,502,696 shares of common stock.
(c) Liquidation Preferences and Voting Rights
Preferred stockholders have a preference in liquidation over common
stockholders of $6.30 per share plus any accrued and unpaid dividends
whether or not declared. The total liquidation preference as of September
30, 1994 and 1995 and March 31, 1996 was $3,562,172, $3,842,474, and
$3,982,625, respectively. Preferred stockholders are entitled to vote as if
the Preferred Stock had been converted into common stock.
(d) Dividends
Dividends accrue on the conversion value of the Preferred Stock at 8%
per annum whether or not declared. The conversion value of the Preferred
Stock is equal to $6.30 per share. The dividend rate will increase to 12%
per annum if net operating income, as defined, in the prior year is less
than $800,000. This increase has been waived for fiscal 1996 due to the
impact of the non-recurring charge recorded in fiscal 1995, as discussed in
Note 2. In addition, the dividends are payable quarterly, if declared, or
upon liquidation or automatic conversion of the Preferred Stock. During the
fiscal years ended September 30, 1994 and 1995 and the six months ended
March 31, 1996, the carrying value of the Preferred Stock has
F-12
<PAGE> 67
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
been increased by accreted dividends of $58,396, $280,302 and $140,151,
respectively. In fiscal 1994, dividends of $146,871 were declared and paid;
no dividends were either declared or paid in fiscal 1995 and fiscal 1996.
Both accreted and paid dividends were charged to retained earnings in the
accompanying financial statements. Upon the closing of the initial public
offering of common stock, accumulated dividends of $569,000, which includes
approximately $91,000 of dividends accrued from April 1, 1996 through the
estimated date of closing, will be paid to the preferred stockholders.
(6) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Authorized Capital Stock
On May 8, 1996, the stockholders of the Company approved an increase in the
authorized number of shares of $.01 par value common stock to 30,000,000 shares
and the authorization of 5,000,000 shares of $.01 par value preferred stock.
(b) Stock Dividends
On May 22, 1995, the Company's Board of Directors declared a three-for-one
stock split, effected in the form of a stock dividend, payable on May 22, 1995.
On May 8, 1996, the Board of Directors approved a three-for-two stock split,
effected in the form of a stock dividend. Accordingly, all shares of common
stock, options to purchase common stock and the conversion ratio of the
Preferred Stock have been retroactively adjusted to reflect these stock splits
for all periods presented in the accompanying balance sheets and statements of
changes in redeemable convertible preferred stock and stockholders' equity
(deficit).
(c) Stock Option Plans
All of the outstanding options under the 1990 Stock Option Plan (the 1990
Plan) were exercised prior to the establishment of the 1994 Stock Option Plan
(the 1994 Plan). The 1994 Plan enables the Company's Board of Directors to grant
nonqualified and incentive stock options (ISOs) and shares of common stock. ISOs
are granted at the then fair market value as determined by the Company's Board
of Directors. On May 8, 1996, the 1994 Plan was amended to decrease the maximum
number of statutory and nonstatutory options to purchase to 641,844 shares of
common stock. The Company has reserved 641,844 shares of common stock for the
exercise of stock options under the 1994 Plan. No further option grants will be
made under the 1994 Plan. Under the terms of the 1994 Plan, options generally
are exercisable at the date of grant, vest over four years and expire ten years
after the date of grant. Upon termination of employment, exercised but unvested
options are repurchasable by the Company at the exercise price, while exercised
and vested options are repurchasable by the Company at the then current fair
market value of the common stock.
<TABLE>
Stock option activity for the 1990 Plan and 1994 Plan were as follows:
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding, September 30, 1992........................... 405,000 $ 0.0002
Granted................................................. 22,500 0.0002
Exercised............................................... (427,500) 0.0002
-------- --------------
Outstanding, September 30, 1993........................... -- --
Granted................................................. 325,134 0.44
-------- --------------
Outstanding, September 30, 1994........................... 325,134 0.44
Granted................................................. 471,313 0.44 -- 2.00
Canceled................................................ (195,079) 0.44
-------- --------------
</TABLE>
F-13
<PAGE> 68
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
-------- ----------
<S> <C> <C>
Outstanding, September 30, 1995........................... 601,368 0.44 -- 2.00
Granted................................................. 54,480 2.00 -- 3.00
Exercised............................................... (58,587) 0.44 -- 2.00
Canceled................................................ (79,342) 0.44 -- 2.00
-------- --------------
Outstanding, March 31, 1996............................... 517,919 $0.44 -- $3.00
======== ==============
Vested, March 31, 1996.................................... 158,143 $ 0.44
======== ==============
</TABLE>
In October 1995, an employee exercised options under the 1994 Plan to
purchase 56,900 shares of common stock at an exercise price of $0.44 per share.
The Company repurchased these shares at $2.00 per share for an aggregate of
$113,799. The Company recorded the difference between the aggregate exercise
price and the amount paid to the former employee as compensation expense
included in sales and marketing expense for the six months ended March 31, 1996.
In April and May 1996, the Company granted 28,425 and 95,500 options under
the 1994 Plan to purchase common stock at $4.67 and $11.00 per share,
respectively.
On May 8, 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1996 Stock Option and Grant Plan (the 1996 Plan),
which provides for the issuance of options to purchase 958,156 shares of Common
Stock. The 1996 Plan permits the grant of (i) options to purchase shares of
Common Stock intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended, (ii) options that do not so
qualify and (iii) shares of Common Stock. The 1996 Plan is administered by the
Compensation Committee as appointed by the Board of Directors from time to time.
(d) Employee Stock Purchase Plan
On May 8, 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan (the Employee Plan). Under the Employee Plan, the Company may
issue up to an aggregate of 150,000 shares of common stock to employees at 85%
of the lower of the fair market value of the common stock on the first or last
day of each six-month purchase period.
(7) INCOME TAXES
<TABLE>
The provision for income taxes in the accompanying statements of income
consists of the following for the fiscal years ended September 30, 1993, 1994
and 1995:
<CAPTION>
1993 1994 1995
-------- --------- ---------
<S> <C> <C> <C>
Current --
Federal........................................ $123,811 $ 378,475 $ 541,200
State.......................................... 35,606 114,029 181,100
-------- --------- ---------
159,417 492,504 722,300
-------- --------- ---------
Deferred --
Federal........................................ (9,000) (117,417) (354,250)
State.......................................... (44,000) (36,252) (93,750)
-------- --------- ---------
(53,000) (153,669) (448,000)
-------- --------- ---------
Total provision........................ $106,417 $ 338,835 $ 274,300
======== ========= =========
</TABLE>
F-14
<PAGE> 69
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
<TABLE>
The deferred tax amounts as of September 30, 1994 and 1995 are as follows:
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred tax asset --
Current --
Nondeductible reserves.................................... $154,119 $197,254
Deferred revenue.......................................... 399,000 521,000
-------- --------
553,119 718,254
-------- --------
Long-term --
Buyout of distribution rights............................. -- 188,000
Nondeductible reserves.................................... 8,000 30,000
-------- --------
8,000 218,000
-------- --------
Total gross deferred tax asset....................... 561,119 936,254
-------- --------
Less -- Valuation allowance.................................. 258,550 171,672
-------- --------
Net deferred tax asset............................... $302,569 $764,582
======== ========
Deferred tax liability --
Long-term --
Differences between book and tax depreciation............. $ 53,777 $ 63,777
======== ========
</TABLE>
The Company had a valuation allowance of $258,550 and $171,672 against its
gross deferred tax asset at September 30, 1994 and 1995, respectively. The
valuation allowance at September 30, 1994 and 1995 was established due to
management's estimate that it was more likely than not that a benefit of certain
deferred tax assets would not be realized in the future. In assessing the
realizability of these assets at September 30, 1994, management took into
consideration historical levels of taxable income, the volatile nature of the
industry in which it competes and the potential levels of future taxable income.
At September 30, 1995, the valuation allowance related specifically to the
buyout of distribution rights.
<TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Provision at federal statutory rate............................ 34.0% 34.0% 34.0%
State income tax, net of federal benefit....................... 6.3 6.3 6.3
Settlement of IRS examination.................................. 10.7 -- --
Utilization of R&D tax credits................................. -- (4.0) --
Other, net..................................................... 3.3 (0.4) .3
---- ---- ----
Effective tax rate................................... 54.3% 35.9% 40.6%
==== ==== ====
</TABLE>
For the six months ended March 31, 1995 and 1996, the Company provided for
income taxes at an effective rate of 40.1% and 43.8%, respectively.
(8) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan (the Benefit Plan) under
Section 401(k) of the Internal Revenue Code. The Benefit Plan is available to
all full-time U.S. employees. The Benefit Plan allows for employees to make
contributions up to a specified percentage of their compensation. Under the
Benefit Plan, the Company makes discretionary contributions, which for the
fiscal years ended September 30, 1994 and 1995 was a match of 20% of the
employees' contributions up to a maximum annual match of 1% of each employee's
salary. The Company contributed approximately $14,000 and $33,000 during the
fiscal years ended September 30, 1994 and 1995, respectively.
F-15
<PAGE> 70
RESTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS -- CONTINUED)
(9) ACCRUED EXPENSES
<TABLE>
Accrued expenses at September 30, 1994 and 1995 and at March 31, 1996
consist of the following:
<CAPTION>
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Payroll and payroll-related costs............... $286,164 $1,338,855 $ 947,497
Buyout of distribution rights (Note 2).......... -- 310,000 310,000
Customer deposits............................... -- -- 395,000
Other accrued expenses.......................... 419,401 531,624 774,385
-------- ---------- ----------
$705,565 $2,180,479 $2,426,882
======== ========== ==========
</TABLE>
(10) OTHER INCOME
<TABLE>
Other income consists of the following:
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------- ----------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Interest income.............. $ 3,655 $ 70,592 $163,003 $71,149 $ 88,485
Interest expense............. (29,560) (23,028) (9,683) (6,412) (927)
Other........................ 49,815 25,499 (15,613) (2,141) 13,822
-------- -------- -------- ------- --------
$ 23,910 $ 73,063 $137,707 $62,596 $101,380
======== ======== ======== ======= ========
</TABLE>
F-16
<PAGE> 71
===============================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, any Selling Stockholder or any of the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of any
offer to buy any securities other than the shares of Common Stock to which it
relates or an offer to, or a solicitation of, any person in any jurisdiction
where such offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company or that
the information contained herein is correct as of any time subsequent to the
date hereof.
<TABLE>
-----------------------------
TABLE OF CONTENTS
-----------------------------
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 11
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 24
Management............................ 35
Certain Transactions.................. 41
Principal and Selling Stockholders.... 43
Description of Capital Stock.......... 45
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 51
Additional Information................ 52
Index to Financial Statements......... F-1
</TABLE>
--------------------------------
Until August 16, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriters
and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
2,500,000 SHARES
[LOGO]
COMMON STOCK
-----------------------------
PROSPECTUS
-----------------------------
MONTGOMERY SECURITIES
WESSELS, ARNOLD & HENDERSON
ADAMS, HARKNESS & HILL, INC.
July 22, 1996
================================================================================
