<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20735
RESTRAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-2935271
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
91 HARTWELL AVENUE
LEXINGTON, MA 02173
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(781) 869-5000
(REGISTRANT'S TELEPHONE NUMBER)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
TITLE OF EACH CLASS
-------------------
Common stock, $.01 par value, shares outstanding at May 7, 1998: 8,290,698
shares.
================================================================================
<PAGE> 2
RESTRAC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1998 and
September 30, 1997.......................................... 2
Consolidated Statements of Operations for the three and six
months ended March 31, 1998 and March 31, 1997.............. 3
Consolidated Statements of Cash Flows for the six months
ended March 31, 1998 and March 31, 1997..................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities....................................... 14
Item 3. Defaults upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
PART III -- SIGNATURES................................................ 15
Exhibit # 27.......................................................... 16
</TABLE>
1
<PAGE> 3
RESTRAC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 5,259 $ 5,745
Short-term investments.................................... 7,128 9,410
Accounts receivable, less allowance for doubtful accounts
of $300 at March 31, 1998 and $320 at September 30,
1997................................................... 7,018 5,130
Other current assets...................................... 1,182 780
Refundable income taxes................................... 1,060 948
Deferred income taxes..................................... 881 881
------- -------
Total Current Assets................................... 22,528 22,894
Property and equipment, net............................... 3,096 3,383
Long-term investments..................................... 2,584 --
Other assets.............................................. 779 776
------- -------
Total Assets...................................... $28,987 $27,053
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations.............. $ 74 $ 144
Accounts payable.......................................... 2,054 1,459
Accrued expenses.......................................... 2,444 2,523
Deferred revenue.......................................... 4,835 4,084
Accrued income taxes...................................... 217 --
------- -------
Total current liabilities.............................. 9,624 8,210
------- -------
Deferred rent............................................. 183 172
------- -------
Capital lease obligations................................. 131 131
------- -------
Stockholders' Equity:
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 -- 8,958,806 shares at March 31, 1998
and 8,852,303 shares at September 30, 1997............. 90 89
Additional paid-in capital................................ 19,249 19,067
Treasury stock, at cost................................... (831) (831)
Retained earnings......................................... 541 215
------- -------
Total stockholders' equity............................. 19,049 18,540
------- -------
Total Liabilities and Stockholders' Equity........ $28,987 $27,053
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
RESTRAC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product revenue............................ $ 4,142 $ 2,321 $ 8,164 $ 4,454
Services revenue........................... 3,634 2,657 6,609 5,305
---------- ---------- ---------- ----------
Total revenue........................... 7,776 4,978 14,773 9,759
---------- ---------- ---------- ----------
Cost of revenue:
Product revenue............................ 179 165 304 387
Services revenue........................... 2,350 1,441 4,421 2,855
---------- ---------- ---------- ----------
Total cost of revenue................... 2,529 1,606 4,725 3,242
---------- ---------- ---------- ----------
Gross margin................................. 5,247 3,372 10,048 6,517
---------- ---------- ---------- ----------
Operating expenses:
Research and development................... 1,201 1,043 2,466 2,203
Sales and marketing........................ 2,469 2,109 5,035 4,055
General and administrative................. 1,340 918 2,282 1,642
---------- ---------- ---------- ----------
Total operating expenses................ 5,010 4,070 9,783 7,900
---------- ---------- ---------- ----------
Income (loss) from operations................ 237 (698) 265 (1,383)
Other income, net............................ 136 171 278 375
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for
income taxes............................... 373 (527) 543 (1,008)
Provision (benefit) for income taxes......... 149 (192) 217 (365)
---------- ---------- ---------- ----------
Net income (loss)............................ $ 224 $ (335) $ 326 $ (643)
========== ========== ========== ==========
Basic and diluted net income (loss) per
common and common equivalent share......... $ 0.03 $ (0.04) $ 0.04 $ (0.08)
========== ========== ========== ==========
Basic weighted average number of common and
common equivalent shares outstanding....... 8,262,639 8,059,618 8,231,778 7,975,805
========== ========== ========== ==========
Diluted weighted average number of common and
common equivalent shares outstanding....... 8,497,632 8,059,618 8,517,267 7,975,805
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
RESTRAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------- --------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 326 $ (643)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 868 560
Compensation expense on stock options.................. -- 174
Compensation expense on warrant grants................. -- 84
Changes in assets and liabilities:
Accounts receivable, net............................. (1,888) 230
Other current assets................................. (402) (763)
Refundable income taxes.............................. (112) --
Accounts payable..................................... 595 (94)
Accrued expenses..................................... (79) (666)
Deferred revenue..................................... 751 276
Deferred rent........................................ 11 65
Accrued income taxes................................. 217 (281)
------- --------
Net cash provided by (used in) operating
activities....................................... 287 (1,058)
------- --------
Cash Flows from Investing Activities:
Maturities and purchases of short-term investments, net... 2,282 (8,755)
Purchases of long-term investments........................ (2,584) --
Purchases of property and equipment....................... (581) (1,986)
Increase in other assets.................................. (3) (749)
------- --------
Net cash used in investing activities............. (886) (11,490)
------- --------
Cash Flows from Financing Activities:
Payments of capital lease obligations..................... (70) (4)
Proceeds from exercise of common stock options............ 108 148
Proceeds from employee stock purchase plan stock
issuance............................................... 75 50
Payment of accumulated dividends.......................... -- (569)
------- --------
Net cash provided by (used in) financing
activities....................................... 113 (375)
------- --------
Net decrease in cash and cash equivalents................... (486) (12,923)
Cash and cash equivalents, beginning of period.............. 5,745 20,368
------- --------
Cash and cash equivalents, end of period.................... $ 5,259 $ 7,445
======= ========
Supplemental disclosure of cash flow information
Cash used for interest.................................... $ 11 $ --
======= ========
Cash used for income taxes................................ $ 111 $ 374
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Restrac, Inc. and its wholly-owned subsidiary, Restrac Securities Corporation,
collectively referred to in these Notes to Consolidated Financial Statements as
"the Company". All intercompany accounts and transactions have been eliminated
in consolidation.
The consolidated financial statements of the Company presented herein,
without audit except for balance sheet information at September 30, 1997, have
been prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-Q and do not include all of the information and
footnote disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended September 30, 1997 ("Fiscal
1997") included in the Company's Form 10-K filed with the Securities and
Exchange Commission on December 22, 1997.
The consolidated balance sheet as of March 31, 1998, the consolidated
statements of operations for the three and six month periods ended March 31,
1998 and 1997, and the consolidated statements of cash flows for the six month
periods ended March 31, 1998 and 1997, are unaudited but, in the opinion of
management, include all adjustments (consisting solely of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods.
The consolidated results of operations for the three and six month periods
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 1998 ("Fiscal 1998").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies described below and elsewhere in the
notes to the Fiscal 1997 consolidated financial statements referenced above.
(a) Revenue Recognition
Product revenue includes software license fees. Services revenue includes
customer maintenance fees and fees for training, installation, consulting,
scanning and Restrac WebHire. The Company recognizes product and services
revenue in accordance with the provisions of Statement of Position No. 97-2,
Software Revenue Recognition.
Product revenue from software license fees is recognized upon delivery
provided there are no significant Company obligations remaining and
collectibility of the revenue is probable. If an acceptance period is allowed,
revenue is recognized upon the earlier of the customer acceptance or the
expiration of the acceptance period, as defined in the applicable software
license agreement.
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 approximately 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. Services revenue from training, installation, consulting and resume
scanning is recognized as the related services are performed. Services revenue
from Restrac WebHire is recognized ratably over the service term.
Deferred revenue represents payments received by the Company in advance of
product delivery or service performance.
5
<PAGE> 7
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1998
(b) Net Income (Loss) per Common and Common Equivalent Share
The Company has implemented Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. Prior period amounts have been restated to
conform to current year presentation. One of the more significant changes is the
replacement of primary earnings per share with "basic" earnings per share. Basic
earnings per share is computed by dividing reported earnings available to common
stockholders by weighted average shares outstanding, with no consideration given
for any potentially dilutive securities. Fully diluted earnings per share, now
called "diluted" earnings per share, includes the effect of dilutive securities.
Basic and dilutive weighted average shares as required by SFAS No. 128 are
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ----- -----
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding....... 8,263 8,060 8,232 7,976
Weighted average common equivalent shares....... 235 -- 285 --
----- ----- ----- -----
Diluted weighted average shares outstanding..... 8,498 8,060 8,517 7,976
</TABLE>
For the three and six month periods ended March 31, 1998, 284,984 and
243,820 anti-dilutive weighted shares, respectively, have been excluded from the
number of potential common shares outstanding.
(c) New Accounting Standard
In March 1998, the AICPA issued Statement of Position No. 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, which
is effective for financial statements for fiscal years beginning after December
15, 1998. Management does not anticipate that the adoption of this statement
will have a material impact on the Company or its results of operations.
(d) Reclassifications
Certain reclassifications have been made to the Fiscal 1997 consolidated
financial statements to conform to the Fiscal 1998 presentation. Such
reclassifications have no effect on previously reported income.
(e) Cash and Cash Equivalents
Cash equivalents are recorded at amortized cost and consist of highly
liquid investments with original maturities of three months or less.
(f) Short and Long Term Investments
Short-term investments consist of investments with an original maturity
greater than three months that will mature within twelve months from the balance
sheet date. Long-term investments consists of investments that will mature
greater than twelve months from the balance sheet date. The Company classifies
these short-and long-term investments as held-to-maturity, and accordingly, they
are carried at amortized cost, which approximates market. These investments
consist of municipal debt securities.
6
<PAGE> 8
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998
CONSOLIDATED RESULTS OF OPERATIONS
(IN THOUSANDS)
Revenue
Total revenue increased 56% and 51% for the respective three and six month
periods ended March 31, 1998 to $7,776 and $14,773 from $4,978 and $9,759 for
the three and six month periods ended March 31, 1997, respectively.
Product Revenue. Product revenue increased 78% to $4,142 for the three
months ended March 31, 1998 from $2,321 for the three months ended March 31,
1997. For the six months ended March 31, 1998, product revenue of $8,164
increased 83% from $4,454 for the comparable 1997 period. The increase in
product revenue for both the three and six month periods of Fiscal 1998 resulted
largely from an increase in the number of seats associated with shipments to
both new and existing customers.
Services Revenue. Services revenue of $3,634 for the three months ended
March 31, 1998 increased 37% from $2,657 for the three months ended March 31,
1997. For the six months ended March 31, 1998, services revenue of $6,609
increased 25% from $5,305 for the comparable 1997 period. The increases were
attributable primarily to an increase in maintenance revenue for both the three
and six month periods of Fiscal 1998 compared to the Fiscal 1997 periods, due to
the continued growth in the Restrac Hire and Resume Reader for PeopleSoft
installed base. The remaining increase was attributable to the growth in
scanning revenue in both periods.
Cost of Revenue
Cost of Product Revenue. Cost of product revenue represented 4% of total
product revenue for both the three and six month periods of Fiscal 1998 compared
to 7% and 9% for the comparable Fiscal 1997 periods, respectively. The decrease
as a percentage of product revenue for both periods is due primarily to
favorable rate revisions in the royalties due under third party licensing
arrangements.
Cost of Services Revenue. Cost of services revenue increased 63% to $2,350
for the three months ended March 31, 1998 from $1,441 for the three months ended
March 31, 1997. For the six months ended March 31, 1998, cost of services
revenue of $4,421 increased 55% from $2,855 for the comparable 1997 period. Cost
of services revenue increased as a percentage of services revenue to 65% and 67%
for the three and six month periods of Fiscal 1998, respectively, from 54% for
both the three and six month periods of Fiscal 1997. The increases in absolute
dollars and as a percentage of services revenue are principally attributable to
costs associated with the introduction of Restrac WebHire, an increase in the
use of third party service providers and the increase in technical support
resources available to the expanding base of customers on maintenance.
Operating Expenses
Research and Development. Research and development expenses were $1,201 or
15% of total revenue and $2,466 or 17% of total revenue for the three and six
month periods ended March 31, 1998, respectively, as compared to $1,043 or 21%
of total revenue and $2,203 or 23% of total revenue for the comparable Fiscal
1997 periods. The increase in absolute dollars for both periods is primarily due
to increases in both personnel and consulting expenses in support of the
Company's new and existing product development initiatives and its quality
assurance programs. The Company considers investment in research and development
to be integral to its future success. All of the Company's research and
development costs have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses were $2,469 or 32% of
total revenue and $5,035 or 34% of total revenue for the three and six month
periods ended March 31, 1998, respectively, as compared to
7
<PAGE> 9
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 -- CONTINUED
$2,109 or 42% of total revenue and $4,055 or 42% of total revenue for the
comparable Fiscal 1997 periods. The increases in absolute dollars are due
primarily to the effect of the increased commissions expense resulting from the
increase in revenue and to sales and marketing costs associated with Restrac
WebHire, introduced in the first quarter of Fiscal 1998. The Company expects
that sales and marketing expenses may vary from quarter to quarter as a
percentage of total revenue.
General and Administrative. General and administrative expenses were
$1,340 or 17% of total revenue and $2,282 or 15% of total revenue for the three
and six month periods ended March 31, 1998, respectively, as compared to $918 or
18% of total revenue and $1,642 or 17% of total revenue for the comparable
Fiscal 1997 periods. The increase for the three-month period ended March 31,
1998 is due primarily to isolated accounts receivable charged-off during the
quarter. The remaining increase for both the three and six month periods of
Fiscal 1998 as compared to Fiscal 1997 is the result of personnel increases and
investments in internal systems.
During Fiscal 1997 the Company increased the size of its operating
facilities by over 100% and entered into new leases for its corporate
headquarters, its Chicago office and its West Coast office. The direct increase
in facilities costs associated with these leases for the first half of Fiscal
1998 compared to the first half of Fiscal 1997 approximated $700. Facilities
costs are allocated among income statement expense categories based principally
on functional headcount.
Other Income, Net
Other income decreased to $136 and $278 for the three and six month periods
ended March 31, 1998 from $171 and $375 for the comparable Fiscal 1997 period.
The decreases were due to lower combined cash and cash equivalents and short-
and long-term investment balances during the first two quarters of Fiscal 1998
as compared to the first two quarters of Fiscal 1997. The Company expects to
continue to yield investment income on its average balance of combined cash and
cash equivalents and short- and long-term investments at an average rate
consistent with that experienced for the first half of Fiscal 1998.
Provision (Benefit) for Income Taxes
The Company's effective tax rate for both the three and six month periods
ended March 31, 1998 was 40% as compared to (36%) for both the three and six
month periods of Fiscal 1997. The effective tax rate represents the Company's
estimate of the rate expected to be applicable for the full fiscal year. The
increase in the effective rate for the first half or Fiscal 1998 was due
primarily to the taxable income as compared to the net loss generated for the
first half of Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents and short- and
long-term investments of $14,971, a decrease of $184 from $15,155 at September
30, 1997. Working capital was $12,904 at March 31, 1998 as compared to $14,684
at September 30, 1997, a decrease of $1,780. Long-term investments increased to
$2,584 at March 31, 1998 as compared to $0 at September 30, 1997.
Cash provided by operating activities was $287 during the six month period
ended March 31, 1998. Cash provided by operating activities consisted mainly of
the net income for the six month period of $326, the effect of depreciation and
amortization of $868, growth in deferred revenue of $751, and the timing of
receipts and disbursements, resulting in prepayment of certain expenses and
fluctuations in certain liabilities, offset by an increase in accounts
receivable of $1,888.
The Company used $886 in investing activities during the first half of
Fiscal 1998, principally for the net purchase of long-term investments of $2,584
and the purchase of property and equipment of $581 (primarily
8
<PAGE> 10
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 -- CONTINUED
computer equipment), partially offset by the maturities of short-term
investments of $2,282. Net cash provided by financing activities for the six
month period ended March 31, 1998 was $113.
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 may evaluate 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 its current cash and cash equivalent and
investment balances and cash provided by future operations will be sufficient to
meet its working capital expenditure requirements for at least the next twelve
months. Although operating activities may provide cash in certain periods,
operating and investing activities may use cash in other periods. Consequently,
any future growth may require the Company to obtain additional equity or debt
financing.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This report contains forward looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Forward looking statements include, without
limitation, statements containing the words "Anticipates", "Believes",
"Expects", "Intends", "Future", and words of similar import which express
management's belief, expectations or intentions regarding the Company's future
performance. All forward looking statements included in this report are based on
information available to the Company on the date hereof, and the Company has no
obligation to update any such forward looking statements. The Company's actual
results could differ materially from its historical operating results and from
those anticipated in these forward looking statements as a result of certain
factors, including, without limitation, those set forth below.
The Company operates in a dynamic and rapidly changing environment that
involves risks and uncertainties. The following section lists some, but not all,
of these risks and uncertainties which may have a material adverse effect on the
Company's business, financial condition or results of operations. This section
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto, and Management's Discussions and Analysis of Financial Condition
and Results of Operations for the years ended September 30, 1997, 1996 and 1995
and for the quarters ended March 31, 1998 and 1997.
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, 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 (which is based in
part on annual sales targets), the number of experienced sales personnel
employed by the Company 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
sales often 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
9
<PAGE> 11
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 -- CONTINUED
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.
Emerging Markets
The Company's future success is substantially dependent on broader
recognition of the potential benefits afforded by automated staffing software
and services and the growth in demand for such solutions. Because the market for
such software is developing, 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 and
services will grow or that the introduction of new technologies or services will
not render the Company's existing software and services 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 amplified 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 and services
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
introduction of new products, functionalities and other staffing solutions that
capitalize on the increasing use of the Internet and corporate intranets. There
can be no assurance that the Company will be successful in developing and
marketing products that 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- and intranet-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.
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.
10
<PAGE> 12
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 -- CONTINUED
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.
Dependence on Key Personnel
The Company's future success depends to a significant extent on its senior
management and other key employees. 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 training 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.
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. 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 is
licensed from third parties on a nonexclusive basis. The termination of any of
such licenses, or the failure of the third party licensers 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.
Reliance on Single Client Interface and Single Server Platform
At the present time, the Company supports client (workstation) platforms
utilizing Microsoft's Windows family of software products, including Windows
3.1, Windows NT and Windows 95. If Microsoft were to fundamentally change the
architecture of its software product such that users of the Company's software
applications experienced significant performance degradation or were rendered
incompatible with future versions of Microsoft's Windows Operating System, the
Company's business, financial condition and results of
11
<PAGE> 13
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 -- CONTINUED
operations could be materially adversely affected. If a new client platform or
other interface were to gain broad acceptance in the marketplace, there can be
no assurance that the Company's architecture would be compatible with such an
interface.
Certain of the Company's products and products planned for release in
fiscal 1998 operate exclusively on Microsoft's NT Server and Internet
Information Server (IIS) platforms. If Microsoft were to fundamentally change
the architecture of its server product such that users of the Company's software
applications experienced significant performance degradation or were rendered
incompatible with future versions of Microsoft's NT Server or IIS, the Company's
business, financial condition and results of operations could be materially
adversely affected. If a new type of server were to gain broad acceptance in the
marketplace, there can be no assurance that the Company's architecture would be
compatible with such a server.
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 and services 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 services or that such
solutions 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 and
services that address changes in technology or customer demands may require the
Company to substantially increase development expenditures or result in 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.
Management of Change
The evolution of the Company's business and expansion of the Company's
customer base has resulted in growth in the number of its employees, the scope
of its operation 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.
Risk of International Expansion
Although international sales have not been significant to date, an 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. To the
extent that the Company is unable to make the investments required to expand 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
12
<PAGE> 14
RESTRAC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 -- CONTINUED
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.
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 and services
in the industry increases and the functionality of these solutions 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.
Product Liability
Although the Company has not experienced any product liability claims to
date, the sale and support of products by the Company and the incorporation of
products from other companies may entail the risk of product liability claims.
The Company's license agreements with its customers typically contain provisions
intended to limit the Company's exposure to such claims, but such provisions may
not be effective in limiting the Company's exposure. A successful product
liability action brought against the Company could adversely affect the
Company's business, financial condition and results of operations.
13
<PAGE> 15
RESTRAC, INC.
FORM 1
MARCH 31, 1998
PART II -- OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
those arising in the ordinary course of the Company's business. Management
believes that the resolution of these matters will not materially affect the
Company's business or the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Stockholders' Meeting on February 4, 1998: At the annual meeting of
the Company's stockholders, 7,916,596 shares, or 96.43% of the Company's
outstanding common stock as of the record date of December 12, 1997, voted on
the following matters;
(1) The election of A. Bruce Johnston and Martin J. Fahey as Class II
Directors to serve until the Annual Meeting of Stockholders following the
close of the Company's Fiscal Year 2000 and until their successors are duly
elected and qualified. Shares were voted as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --------- --------
<S> <C> <C>
A. Bruce Johnston................. 7,871,253 45,343
Martin J. Fahey................... 7,861,193 55,403
</TABLE>
(2) The approval of an amendment to the Company's 1996 Stock Option
and Grant Plan to increase the number of shares issuable thereunder. Shares
were voted as follows: for 4,969,846; against 387,941; abstain 24,264;
broker non-vote 2,534,545;
(3) The approval of an amendment to the Company's 1996 Employee Stock
Purchase Plan to increase the number of shares issuable thereunder. Shares
were voted as follows: for 5,338,273; against 60,470; abstain 29,564;
broker non-vote 2,488,289.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished as Exhibits hereto:
Exhibit 27- Financial Data Schedule Pursuant to Regulation S-X Article 5
(b) No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
14
<PAGE> 16
RESTRAC, INC.
FORM 10-Q
MARCH 31, 1998
PART III -- SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESTRAC, INC.
/s/ Lars D. Perkins
--------------------------------------
Lars D. Perkins
Chief Executive Officer
/s/ Cynthia G. Eades
--------------------------------------
Cynthia G. Eades
Chief Financial Officer
Date: May 14, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,259
<SECURITIES> 9,712
<RECEIVABLES> 7,318
<ALLOWANCES> 300
<INVENTORY> 0
<CURRENT-ASSETS> 22,528
<PP&E> 6,902
<DEPRECIATION> 3,806
<TOTAL-ASSETS> 28,987
<CURRENT-LIABILITIES> 9,624
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 19,249
<TOTAL-LIABILITY-AND-EQUITY> 28,987
<SALES> 7,776
<TOTAL-REVENUES> 7,776
<CGS> 2,529
<TOTAL-COSTS> 5,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 237
<INCOME-TAX> 149
<INCOME-CONTINUING> 224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
