<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
REGISTRATION STATEMENT NO. 333-75301
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
STRIDE & ASSOCIATES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7361 13-3789932
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
222 BERKELEY STREET, SUITE 1620
BOSTON, MASSACHUSETTS 02116
(617) 536-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
MICHAEL C. ROBICHAUD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STRIDE & ASSOCIATES, INC.
222 BERKELEY STREET, SUITE 1620
BOSTON, MASSACHUSETTS 02116
(617) 536-3800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN J. EGAN III, P.C. PHILIP P. ROSSETTI, ESQ.
KATHLEEN R. BROWNE, ESQ. JOSEPH E. MULLANEY III, ESQ.
GOODWIN, PROCTER & HOAR LLP HALE AND DORR LLP
EXCHANGE PLACE 60 STATE STREET
BOSTON, MASSACHUSETTS 02109-2881 BOSTON, MASSACHUSETTS 02109
(617) 570-1000 (617) 526-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 21, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
UNDERWRITERS MAY NOT CONFIRM SALES OF THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
PROSPECTUS
4,350,000 SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by Stride & Associates,
Inc. All of the shares of common stock are being sold by Stride. We estimate
that the initial public offering price will be between $11.00 and $13.00 per
share. Several investment funds associated with Summit Partners, LLC, who
together are our principal stockholders, have expressed a desire to purchase
approximately five to ten percent of the shares of common stock which otherwise
would be sold in this offering. Any shares sold to our principal stockholders
will be sold directly by us at the initial offering price per share.
Substantially all of the net proceeds from this offering will be used to redeem
preferred stock and to prepay subordinated debt held by our principal
stockholders and will not be available to fund working capital or capital
expenditures.
--------------
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol STDA.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ----------
<S> <C> <C>
Initial public offering price......................................... $ $
Underwriting discounts and commissions................................ $ $
Proceeds to Stride, before expenses................................... $ $
</TABLE>
The underwriters will not receive any underwriting discounts or commissions
with respect to any shares of common stock sold directly by us to our principal
stockholders. The figures in the table above assume that no shares of common
stock will be sold directly by us to our principal stockholders. We have granted
the underwriters an option for a period of 30 days to purchase up to 652,500
additional shares of common stock.
--------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 10.
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
HAMBRECHT & QUIST BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE>
[Graphic titled "Serving the Rapidly Growing Need for Permanent IT
Professionals," which is a map of the United States with markings to show the
location of each of Stride's offices and the number and specialty of practice
groups in each office. Includes wording below map: "Transaction - Based Business
Model; Team - Based Placement Process; Group Driven Growth; Focus on Mid-Level
IT Market."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................................................... 4
Risk Factors......................................................................... 10
Forward Looking Statements........................................................... 17
Use of Proceeds...................................................................... 18
Dividend Policy...................................................................... 18
Capitalization....................................................................... 19
Dilution............................................................................. 20
Unaudited Pro Forma Condensed Financial Data......................................... 21
Selected Financial Data.............................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of 29
Operations.........................................................................
Business............................................................................. 41
Management........................................................................... 49
Certain Transactions with Related Parties............................................ 56
Principal Stockholders............................................................... 59
Description of Indebtedness.......................................................... 61
Description of Capital Stock......................................................... 63
Shares Eligible for Future Sale...................................................... 67
Underwriting......................................................................... 69
Legal Matters........................................................................ 70
Experts.............................................................................. 70
Where You Can Find More Information.................................................. 71
Index to Financial Statements........................................................ F-1
</TABLE>
--------------
The information on our Web sites is not a part of this prospectus.
STRIDE & ASSOCIATES, ATLANTIS PARTNERS, THE BOYLSTON GROUP, MACARTHUR &
ASSOCIATES and REMINGTON INTERNATIONAL are trade names of Stride. The ATLANTIS,
BOYLSTON, MACARTHUR, REMINGTON and STRIDE logos are trademarks of Stride. All
other trade names and trademarks used in this prospectus are the property of
their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
STRIDE & ASSOCIATES, INC.
We are a provider of placement services for full-time, professional
employees in the information technology field. We currently operate 41 practice
groups, each generally comprised of four or five individual placement
counselors, in 15 offices located in seven major metropolitan markets throughout
the United States. To optimize our focus on the rapidly growing market for
information technology professionals, each practice group generally will
concentrate on placements in one of the following three areas: networking and
communications, software development and implementation, and management
information systems. Our practice groups are structured to motivate our
placement counselors to work together to enhance the overall productivity of
each practice group. We believe our use of practice groups facilitates the
placement of qualified candidates into appropriate job openings, and we believe
that it is a key factor in our ability to hire, develop and retain highly
productive placement counselors. This trained resource base will provide the
professional staff necessary to implement our strategy of rapid growth through
the opening of new offices and the establishment of additional practice groups
within existing offices. We target the rapidly growing market for mid-level
professionals earning between $35,000 and $90,000 per year. We place candidates
on a non-exclusive, contingency basis, receiving fees from employers based upon
a negotiated percentage of a placed candidate's first year salary. Our total
number of placement transactions increased to 2,181 in 1998 from 601 in 1995,
and to 590 for the three months ended March 31, 1999 from 462 for the three
months ended March 31, 1998. Our operating margin, before payment of management
fees and other non-recurring charges, was 37.0% for the year ended December 31,
1998 and 34.0% for the three months ended March 31, 1999. See "Selected
Financial Data."
Businesses increasingly rely on information technology solutions to manage
their operations and information and to enhance their competitiveness. This
increasing reliance has created a strong demand for qualified mid-level
professionals who can maintain and deploy information technology systems.
However, businesses often lack the expertise, resources and contacts necessary
to efficiently identify and attract the professionals they require. Placement
agencies, on the other hand, are uniquely qualified to fill the growing demand
for the limited number of these professionals. Contingency placement firms are
particularly well suited to address the fast-paced immediate demands typical of
this market. Currently, many of the contingency firms that focus on the
permanent placement of mid-level employees in the information technology field
are small, owner-operated businesses with annual revenues of less than $1.0
million, according to Kennedy Information, LLC.
We have developed a working environment and compensation structure designed
to motivate our practice groups to quickly and efficiently process a high number
of placement transactions. Our placement process provides value for both
employers and candidates by rapidly presenting each with a number of qualified
and timely opportunities. The employers served by Stride typically have included
a broad spectrum of business enterprises ranging from start-ups to Fortune 500
companies. We believe that we can continue to expand our business across
multiple metropolitan markets using our practice group approach, which generates
a high volume of placements.
In recent years, we have rapidly expanded our business, primarily by
establishing new practice groups. Between late 1994 and April 30, 1999, we
established 32 new practice groups in both existing and new offices. We intend
to continue expanding our operations in both existing and new geographic
markets. Our practice group approach is designed to develop experienced
placement counselors who can effectively transition from existing to newly
established practice groups as we expand our
4
<PAGE>
operations. This expansion in the past has been accomplished through relatively
modest investments, particularly in connection with the establishment of new
practice groups in existing offices. Our newly opened offices historically have
been able to achieve operating profitability in less than one year after
opening.
Our business objective is to become the leading provider of permanent
placement services in the United States for mid-level professionals in the
information technology field. The key elements of our strategy to achieve this
objective are as follows:
- continue to grow by expanding existing offices and opening new offices;
- continue to focus on the rapidly growing market for mid-level
professionals in the information technology field through the use of
targeted practice groups;
- continue to utilize practice groups to ensure the rapid and effective
matching of candidates to appropriate job opportunities;
- foster a working environment designed to identify quickly both job
openings and available candidates; and
- motivate our placement counselors by providing strong incentive
compensation arrangements and a performance-driven career advancement path
based on individual and practice group productivity.
In June 1998, we effected a leveraged recapitalization of Stride with
investment funds associated with Summit Partners, LLC. As part of the
recapitalization:
- the Summit investors invested $40.0 million to purchase shares of
preferred stock, shares of common stock, warrants to purchase common stock
and subordinated debentures;
- we borrowed $26.0 million in senior bank debt under a senior credit
facility; and
- substantially all of the net proceeds from the recapitalization were used
to redeem shares of common stock held by our founding stockholders for an
aggregate redemption payment of $63.8 million. See "Certain Transactions
with Related Parties--Recapitalization."
Substantially all of the net proceeds of this offering will be used to
redeem the shares of preferred stock and to repay the subordinated debentures
held by the Summit investors and to repay a portion of the senior bank debt. The
Summit investors also will exercise their warrants to purchase common stock in
connection with this offering for an aggregate exercise price of approximately
$3.5 million. Following the completion of this offering, the Summit investors
will own an aggregate of 3,000,010 shares of common stock, or approximately
31.1% of the total outstanding shares of common stock, and our founding
stockholders will own an aggregate of 2,232,560 shares of common stock, or
approximately 22.6% of the total outstanding shares of common stock on a fully
diluted basis. If the Summit investors purchase additional shares of common
stock directly from us, as they have expressed a desire to do, the number and
percentage of shares of common stock owned by them will increase. We do not
anticipate paying cash dividends for the forseeable future. See "Use of
Proceeds," "Dividend Policy" and "Capitalization."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Stride.................. 4,350,000 shares
Common stock to be outstanding after this
offering...................................... 9,652,348 shares
Use of proceeds................................. We expect to use substantially all of
the net proceeds to repay the
outstanding subordinated debentures and
a portion of the senior bank debt and
to redeem the outstanding preferred
stock. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... STDA
</TABLE>
--------------
The number of shares of common stock that will be outstanding after this
offering is an estimate based on the number of shares outstanding as of April
30, 1999. It excludes:
- 339,490 shares of common stock issuable upon exercise of stock options
outstanding as of April 30, 1999, with a weighted average exercise price
of $18.24 per share, of which options to purchase 232,560 shares were then
exercisable, and;
- 172,122 shares available for future grant under our stock option plan as
of April 30, 1999.
See "Management--Executive Compensation" and "--1998 Stock Option and Grant
Plan."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(UNAUDITED)
Listed below is our statement of operations data for the four years ended
December 31, 1998 and the three months ended March 31, 1998 and 1999 and our
balance sheet data as of March 31, 1999. The results for the interim periods are
not necessarily indicative of the results for the full fiscal year or any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview." To calculate the "Pro Forma as Adjusted
Statement of Operations Data," we have assumed the following occurred as of
January 1, 1998:
- our June 4, 1998 leveraged recapitalization;
- our conversion of tax status from a subchapter "S" corporation to a
subchapter "C" corporation;
- the conversion of our series A convertible preferred stock into an equal
number of shares of series B redeemable preferred stock and 1,000,000
shares of common stock; and
- the sale of 4,350,000 shares of common stock in the offering at an assumed
initial public offering price of $12.00 per share, after deducting the
underwriting discounts and estimated offering expenses, and the
application of the net proceeds of the offering to (1) redeem all shares
of our series B redeemable preferred stock; (2) repay all of our
subordinated debentures; and (3) repay a portion of our senior bank debt.
To calculate the pro forma as adjusted balance sheet data, we have assumed
that the conversion of our series A convertible stock, this offering and the
application of the net proceeds of this offering as described above each
occurred on March 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------
STATEMENT OF OPERATIONS DATA: 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING
DATA)
Net revenues............................. $ 6,592 $ 10,614 $ 19,187 $ 28,804 $ 5,879 $ 8,427
--------- --------- --------- --------- --------- ---------
Gross profit............................. 3,641 6,872 12,761 18,955 3,798 5,558
Operating expenses....................... 1,925 2,460 4,655 8,305 1,749 2,692
Management fees(1)....................... 32 3,719 7,620 2,869 1,533 --
Non-recurring recapitalization
costs(2)............................... -- -- -- 2,239 -- 102
--------- --------- --------- --------- --------- ---------
Income from operations................... 1,684 693 486 5,542 516 2,764
--------- --------- --------- --------- --------- ---------
Net income............................... 1,666 732 451 1,859 534 1,129
Preferred stock dividends................ -- -- -- 1,553 -- 666
--------- --------- --------- --------- --------- ---------
Net income available to common
stockholders........................... $ 1,666 $ 732 $ 451 $ 306 $ 534 $ 463
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income per common share:
basic................................ $ 0.33 $ 0.15 $ 0.09 $ 0.07 $ 0.11 $ 0.13
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
diluted.............................. $ 0.33 $ 0.15 $ 0.09 $ 0.06 $ 0.11 $ 0.09
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ----------------
(1) Represents management fees paid through the June 4, 1998 leveraged
recapitalization to several entities affiliated with our founding
stockholders in connection with the management of our business. We do not
expect to incur similar management fees in the future. See
"Management--Compensation Committee Interlocks and Insider Participation"
and note 2 to "Unaudited Pro Forma Condensed Financial Data."
(2) Represents costs associated with the June 4, 1998 leveraged
recapitalization, primarily one-time special compensation bonuses paid to
senior management.
7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------
STATEMENT OF OPERATIONS DATA (CONTINUED): 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED
OPERATING DATA)
Weighted average common shares outstanding:
basic.................................... 5,000 5,000 5,000 4,158 5,000 3,540
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
diluted.................................. 5,000 5,000 5,000 4,734 5,000 5,009
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma provision for income taxes(3).... $ 745 $ 355 $ 270 $ 1,669 $ 235 $ 900
Pro forma net income....................... $ 947 $ 400 $ 243 $ 2,125 $ 299 $ 1,129
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma net income available to common
stockholders............................. $ 947 $ 400 $ 243 $ 572 $ 299 $ 463
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
PRO FORMA AS ADJUSTED STATEMENT OF
OPERATIONS DATA:
Net revenues............................... $ 28,804 $ 5,879 $ 8,427
Income from operations..................... 10,585 1,984 2,866
Net income................................. 5,156 903 1,440
Net income per common share:
basic.................................... $ 0.53 $ 0.09 $ 0.15
--------- --------- ---------
--------- --------- ---------
diluted.................................. $ 0.53 $ 0.09 $ 0.15
--------- --------- ---------
--------- --------- ---------
Weighted average common shares
outstanding(4):
basic and diluted........................ 9,652 9,652 9,652
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------ --------------------
1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of practice groups at end of period......... 11 18 20 33 27 39
Number of placement transactions................... 601 934 1,582 2,181 462 590
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Net working capital...................................................................... $ 168 $ 880
Total assets............................................................................. 9,568 8,856
Total debt (including current debt)...................................................... 34,500 21,913
Series A convertible preferred stock..................................................... 25,965 --
Common stockholders' equity (deficiency)................................................. $ (54,860) $ (16,308)
</TABLE>
- --------------
(3) Before June 4, 1998, we were a subchapter "S" corporation and, accordingly,
federal and state income taxes were paid at the stockholder level only. Upon
consummation of the June 4, 1998 leveraged recapitalization, we terminated
our subchapter "S" corporation status and, accordingly, became subject to
federal and state income taxes. The pro forma income statement information
reflects adjustments to historical net income as if we had not elected
subchapter "S" corporation status for federal and state income tax purposes.
8
<PAGE>
(4) Pro forma weighted average common shares outstanding assumes that the
following occurred at the beginning of the period indicated:
- the issuance of 1,237,505 shares of common stock and the repurchase of
3,000,000 shares of common stock in connection with the June 4, 1998
leveraged recapitalization;
- the issuance of 1,000,000 shares of common stock upon the conversion of
the series A convertible preferred stock;
- the issuance of 762,505 shares of common stock upon the exercise of
outstanding warrants; and
- the issuance of 4,350,000 shares of common stock issuable in this
offering.
We were incorporated in Delaware in 1994. Our principal executive offices
are located at 222 Berkeley Street, Suite 1620, Boston, Massachusetts 02116. Our
telephone number is (617) 536-3800.
UNLESS OTHERWISE STATED IN THIS PROSPECTUS, ALL INFORMATION CONTAINED IN
THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION TO PURCHASE UP
TO 652,500 SHARES OF COMMON STOCK GRANTED TO THE UNDERWRITERS AND NO SALE
DIRECTLY BY US TO OUR PRINCIPAL STOCKHOLDERS OF SHARES OF COMMON STOCK WHICH
OTHERWISE WOULD BE SOLD IN THIS OFFERING.
9
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS AND ALL OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW REPRESENT THE MATERIAL RISKS WE BELIEVE WE FACE. IF ANY OF THE
EVENTS DESCRIBED IN THE RISK FACTORS BELOW ACTUALLY OCCUR, OUR BUSINESS COULD BE
ADVERSELY AFFECTED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON
STOCK.
OUR FAILURE TO IDENTIFY AND PLACE QUALIFIED INFORMATION TECHNOLOGY PROFESSIONALS
WOULD ADVERSELY AFFECT OUR BUSINESS.
Because of the specialized nature of the placement market for information
technology professionals, we are highly dependent upon our ability to identify
and successfully place professionals possessing the technical skills and
experience required by employers. If we fail to do so, our business will be
adversely affected. We may have difficulty accessing a sufficient number of
qualified professionals with the skills and experience necessary to meet
evolving market demands because, among other things, these professionals are in
high demand worldwide and are likely to remain a limited resource for the
foreseeable future. This difficulty may become more pronounced as we seek to
expand and may be further complicated by the nature of the information
technology services market, which is characterized by rapid technological
change, evolving industry standards, changing customer preferences and new
product and service introductions.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY INTENSE COMPETITION FOR BOTH
EMPLOYERS AND INFORMATION TECHNOLOGY PROFESSIONALS.
The permanent placement industry, particularly firms focused on the
placement of information technology professionals, is extremely competitive and
there are few, if any, barriers to entry. We compete with national, regional and
local placement firms for access to both hiring employers and candidates. As we
attempt to expand into new geographic markets, we expect to compete with
additional firms. Many of these national and regional firms have greater
financial, technical and marketing resources than we have. Smaller firms are
typically owner-operated, and each market in which we operate generally has one
or more significant established competitors that are unique to each market and
enjoy greater name recognition and reputation than we do. We expect increased
competition from placement, staffing and consulting firms which are adopting the
Internet to both solicit hiring employers and candidates, as well as post job
openings and candidate profiles. Currently, hundreds of Web sites offer these
services and more can be expected. Although we have begun to post job openings
and solicit resumes on our Web sites, we currently do not conduct any material
amount of business on the Internet.
COMPETITION FROM NON-PERMANENT STAFFING SERVICES, CONSULTING FIRMS AND EMPLOYERS
COULD REDUCE THE MARKET FOR OUR SERVICES.
In addition to other providers of placement services, we also compete with
providers of non-permanent staffing services and consulting firms. These
competitors offer employers qualified professionals on a contract basis, often
at a fixed price, without the long term commitment of hiring permanent
employees. In addition, we compete directly with employers for placement
candidates who continue to rely on their internal human resource departments to
recruit some, if not all, of the information technology professionals they
require. This is often the case with employers who hire professionals on an
ongoing basis and can justify an investment in developing a recruiting staff
in-house and avoid the direct cost of multiple placement fees which, at $8,000
to $20,000 per candidate, can be substantial. Increased competition from the
staffing solutions described above could reduce the market for our services and
adversely effect our business.
10
<PAGE>
THE FACT THAT WE OPERATE UNDER MULTIPLE NAMES COULD PUT US AT A COMPETITIVE
DISADVANTAGE.
Although we have offices in major cities across the United States, we use
multiple operating names. As a result, we do not expect to develop national
brand awareness. This may put us at a competitive disadvantage to regional or
national firms with established identities which are recognizable to employers
and candidates alike.
WE ARE SUBJECT TO MANY FACTORS SPECIFIC TO OUR INDUSTRY AND BUSINESS MODEL THAT
MAY CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND ANY SUCH FLUCTUATIONS COULD
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL.
Our quarterly operating results have varied in the past and are likely to
vary in the future. It is possible that our revenues and operating results may
be below the expectations of securities analysts and investors in future
quarters. If we fail to meet or surpass the expectations of securities analysts
or investors, the market price of our common stock will most likely fall. This
variability depends on a number of factors including many of which are specific
to our industry and business model. Factors that effect our quarterly operating
results include, but are not limited to:
- the timing of new office openings and new practice group additions;
- the length of time required for new offices and groups to become fully
productive and profitable;
- the incurrence of considerable expenses in advance of anticipated revenues
in connection with new office openings;
- the negative impact on the productivity of existing practice groups due to
the transfer of experienced placement counselors to newly established
practice groups;
- any slowdown or other adverse change in the placement market for mid-level
information technology professionals, particularly in industries that
represent a significant portion of our employer customer base;
- any reduction in the level of demand for information technology services
among prospective employers as businesses resolve the "Year 2000"
compliance issue;
- our ability to hire, train and retain personnel;
- any reduction or other adverse change in our placement fee structure or a
decline in the average salary of placed candidates;
- changes in the level of our operating expenses; and
- seasonal fluctuations.
Given that any one or more of these or other factors could have an adverse
effect on our business, the prediction of future quarterly results is difficult
and uncertain. In addition, some of our operating expenses are relatively fixed
in advance of any particular quarter. As a result, we may not be able to reduce
our operating costs in response to unanticipated reductions in our net revenues
or the demand for our services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
11
<PAGE>
THE PROCEEDS FROM THIS OFFERING WILL BENEFIT OUR PRINCIPAL STOCKHOLDERS AND WILL
NOT BE AVAILABLE TO FUND WORKING CAPITAL OR CAPITAL EXPENDITURES.
Substantially all of the estimated $47.7 million in net proceeds from the
offering will be used for the following purposes:
- to make an aggregate net redemption payment of approximately $32.9 million
on our outstanding preferred stock, including approximately $16.9 million
relating to a redemption premium on the preferred stock which will be paid
as a result of this offering, plus accrued and unpaid dividends of
approximately $2.2 million at March 31, 1999;
- to repay $10.0 million in principal amount of our outstanding subordinated
debentures, together with accrued and unpaid interest; and
- to repay with any remaining net proceeds a portion, but not less than $2.0
million, of the $24.5 million in principal amount of our senior bank debt,
together with accrued and unpaid interest.
We do not anticipate that any net proceeds from this offering will be
available to fund our working capital or capital expenditure needs and, upon the
closing of this offering, we will have negative net tangible book value of
approximately $(16.3) million. As a result, we may be limited in our ability to
fund our working capital and capital expenditure requirements and be unable to
fully execute our business model. See "Use of Proceeds" and "Certain
Transactions with Related Parties."
WE WILL INCUR NON-RECURRING CHARGES AS A RESULT OF THIS OFFERING.
In connection with this offering, we will incur a non-recurring charge
available to common stockholders of approximately $17.8 million, consisting of:
- approximately $16.9 million related to the redemption premium on the
preferred stock and the related issuance of 1,000,000 shares of common
stock; and
- deferred compensation charges, which equaled $882,000 as of March 31,
1999, in connection with the acceleration of vesting of our outstanding
restricted common stock.
This non-recurring charge will cause us to have a net loss attributable to
common stockholders for the fiscal quarter in which this offering closes and
could result in a net loss for the entire year ending December 31, 1999. See
"Use of Proceeds;" "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview;" and "Certain Transactions with Related
Parties."
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED BY ECONOMIC DOWNTURNS.
Our results of operations are partially dependent upon general economic
conditions in the United States as well as other factors beyond our control,
including the hiring activity of employers, reductions in hiring budgets and
average salaries. During periods in which overall economic activity slows, our
revenues may fall as a result of a decline in the number of successful
placements or reductions in the amount of our placement fees resulting from a
decline in compensation levels of information technology professionals or the
percentage of this compensation we charge as fees. We believe that the operating
results of businesses that provide placement services, such as ours, will be
particularly affected during periods of economic downturn as employers reduce
their hiring activity and their reliance on outside providers of placement
services. Therefore, a significant economic downturn, particularly in regions,
or in industries prevalent in those regions in which our operations are located,
could have an adverse effect on our business and possibly to a relatively
greater extent than the economy as a whole in such regions. For example, the
financial services industry, which has historically represented a significant
portion of our revenues, undergoes periods of contraction from time to time.
12
<PAGE>
In addition, it is possible that the level of demand for information technology
services among prospective employers may decline.
OUR RAPID GROWTH COULD STRAIN OUR FINANCIAL, MANAGEMENT AND OTHER RESOURCES.
Our rapid growth in recent years has placed, and any future expansion will
continue to place, a significant strain on our financial, management and
operational resources. The failure to maintain resources or to hire, train or
manage new personnel could have an adverse effect on our business. Historically,
the successful management of our business has not depended upon sophisticated
management information systems. However, in light of our expansion strategy and
the public company reporting requirements to which we will become subject after
this offering, we will need to continue to improve and expand our management
information systems to network across our company and process financial and
other information on a timely and accurate basis.
OUR FAILURE TO SUCCESSFULLY IMPLEMENT OUR OFFICE EXPANSION STRATEGY COULD
ADVERSELY AFFECT OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON STOCK.
We intend to grow our business by expanding existing offices and opening new
offices, both in geographic markets in which we already operate and in new
markets. Our failure to successfully implement our expansion strategy could have
an adverse effect on our business, and the market price of our common stock
would most likely fall. The successful expansion of our existing offices and the
opening of new offices depends on many factors, including our ability to:
- successfully compete with existing placement, staffing and consulting
agencies in existing and new markets;
- attract motivated and productive placement counselors while continuing to
train, develop and promote existing placement counselors;
- minimize the disruption to existing practice groups caused by the transfer
of experienced personnel to new practice groups;
- accurately assess the demand for information technology professionals in
existing and new markets; and
- accurately assess the supply of information technology professionals in
existing and new markets.
When we expand an existing office or open a new office, we incur incremental
capital and operating expenses as a result of the need to purchase additional
office equipment and to hire additional entry-level trainees. As there is always
a delay before a new office reaches full productivity, expenses will exceed
revenues generated by the new office for at least several months, resulting in
initial losses. We may fail to successfully identify new markets for expansion
and to establish new office locations, and new offices may fail to meet growth
and profitability objectives within expected time frames, if at all. Moreover,
we may not be able to identify markets that present sufficient placement
opportunities for expanding or opening new offices.
WE MUST HIRE, DEVELOP AND RETAIN PLACEMENT STAFF TO SUSTAIN FUTURE GROWTH.
Our future success will depend in large part upon our ability to attract,
develop and retain highly-motivated and capable placement counselors. The loss
of a significant number of our current placement counselors or an inability to
hire and integrate on an on-going basis a sufficient number of additional
trainees or other employees could have an adverse effect on our business. In
addition, any reduction in our current employee compensation levels or a
restructuring of our compensation system, whether as a result of lower than
expected revenues, declining margins, a decline in the market price of our
common stock or any other reason, could impair our ability to retain our
existing placement staff and attract
13
<PAGE>
additional employees. Historically, we have experienced an annual retention rate
of approximately 32%. This historical retention rate could decrease. We
calculate our retention rate by expressing our total number of employees at the
end of a year as a percentage of the sum of our total number of employees at the
beginning of the year and total number of new employees hired during that year.
Substantially all of our attrition has historically occurred at the placement
trainee level.
OUR SUCCESS IS LARGELY DEPENDENT UPON MR. ROBICHAUD AND OUR SENIOR MANAGEMENT
TEAM.
Our success will depend largely on the continued availability of our senior
management team, in particular, upon Michael C. Robichaud, our President and
Chief Executive Officer. The loss of the services of Mr. Robichaud or any of the
other members of Stride's senior management team could have an adverse effect on
our business. We maintain a life insurance policy on Mr. Robichaud under which
we will receive $1,000,000 in the event Mr. Robichaud were to die while employed
by us. We do not, however, maintain similar policies on any of our other
executive officers or significant employees. We do not have employment
agreements with any members of our senior management team, except Mr. Robichaud,
and the existence of an employment agreement with Mr. Robichaud does not
guarantee his continued employment with us. Although we have entered into
noncompetition agreements with our executive officers, there can be no assurance
that these agreements will be enforceable, and these agreements do not ensure
the continued service of our executive officers.
WE MAY FACE LIABILITY CLAIMS FROM EMPLOYERS AND PLACEMENT CANDIDATES.
Our business may expose us to liability with respect to the placement of
candidates with employers. An employer could assert a claim against us for
referring a candidate who proves to be unsuitable for the position filled. A
liability claim, even one without merit, could result in significant legal
defense costs and expenditure of executive time, thereby increasing expenses,
lowering earnings and possibly resulting in operating losses. Any failure in an
employer's computer system which is the result of an act or omission by a
candidate referred by us could result in a claim for substantial damages against
us regardless of the merit of the claim. We generally do not conduct candidate
reference checks unless requested by a particular employer. In addition, a
candidate could assert an action against us for failure to maintain the
confidentiality of his or her employment search, or for discrimination or other
violations of employment laws by us or an employer with whom the candidate was
placed. Our professional liability insurance may not provide adequate coverage
for any claim or continue to be available on acceptable costs and terms.
FUTURE ACQUISITIONS COULD ADVERSELY AFFECT OUR BUSINESS AND HAVE A DILUTIVE
EFFECT ON OUTSTANDING COMMON STOCK.
Although we have no current acquisition plans, we may decide to pursue
acquisitions in the future. Risks associated with acquisitions could have an
adverse effect on our business, including the diversion of management's
attention, the loss of key personnel, legal and tax liabilities and exposure to
the Year 2000 issue. Acquisitions also may involve an increase in our debt or
new issuances of equity securities, which could have a dilutive effect on the
then outstanding shares of common stock. Even if we identify suitable
acquisition candidates, we may fail to negotiate favorable terms or successfully
integrate any proposed acquisition into our existing business operations.
OUR SHARES OF COMMON STOCK MAY EXPERIENCE EXTREME MARKET PRICE AND VOLUME
FLUCTUATIONS.
The market for shares in companies that have recently gone public has been
subject to extreme price and volume fluctuations. In the past, companies that
have experienced volatility in the market price of their stock have been the
object of securities class action litigation. If we were the object of
securities class action litigation, it could result in substantial costs and a
diversion of our management's attention and resources and have an adverse effect
on our business.
14
<PAGE>
OUR EXISTING STOCKHOLDERS WILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE
AND, AS A RESULT, COULD PREVENT OR DELAY A CHANGE IN CONTROL.
Upon the closing of the offering, our existing directors, officers and
stockholders will beneficially own approximately 56.0% of our outstanding common
stock. If our principal stockholders purchase additional shares of common stock
from us, as they have expressed a desire to do, this percentage will increase.
This control by our existing stockholders could have the effect of delaying,
deferring or preventing a change in control because these stockholders will be
in a position to control the outcome of all stockholder votes, including votes
concerning director elections, by-law amendments and possible mergers, corporate
control contests and other significant corporate transactions. As a result, a
change in control of our business that may be in the interest of new investors
who purchase shares in this offering could be delayed or prevented by our
existing stockholders. See "Principal Stockholders."
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT.
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt which is opposed by
our management. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the ability of public
stockholders to change our management could be substantially impeded by these
anti-takeover provisions. We have a staggered board of directors and we have the
right under our charter documents to issue preferred stock without further
stockholder approval, which could adversely affect the holders of our common
stock.
THE ESTIMATED INITIAL PUBLIC OFFERING PRICE IS SIGNIFICANTLY HIGHER THAN THE
BOOK VALUE OF OUR COMMON STOCK.
The pro forma net tangible book value per share of common stock following
this offering will be $(1.69). As a result, purchasers of common stock in this
offering will experience immediate and substantial dilution of $13.69 per share
in the net tangible book value of the common stock from the initial public
offering price based upon an assumed initial public offering price of $12.00 per
share. To the extent outstanding options or warrants to purchase common stock
are exercised, there will be further dilution to the new investors. See
"Dilution."
THE FUTURE SALE OF OUR COMMON STOCK COULD AVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.
Substantial sales of common stock in the public market following this
offering, or the perception that sales could occur, could lower the market price
of the common stock or make it difficult for us to raise additional equity
capital in the future. The shares of common stock which are being sold by the
underwriters in this offering will generally be freely tradeable without
restriction, and:
- the remaining 5,302,348 shares of common stock outstanding, assuming that
our principal stockholders do not purchase any additional shares of common
stock directly from us, will be "restricted securities" as defined in Rule
144 under the Securities Act, and may be sold in the future without
registration under the Securities Act subject to compliance with the
provisions of Rule 144 or any other applicable exemption under the
Securities Act;
- our principal stockholders and our founding stockholders have registration
rights requiring us to register for sale under the Securities Act up to
5,000,010 shares of common stock currently outstanding and an additional
232,560 shares of common stock issuable upon exercise of outstanding
options, and will have registration rights with respect to any additional
shares of common stock that may be sold directly by us to our principal
stockholders; and
15
<PAGE>
- all shares of common stock held by our officers, directors and
stockholders, who hold all of the currently outstanding shares of common
stock, are subject to lock-up agreements and may not be sold for 180 days
after the date of this prospectus. Hambrecht & Quist LLC may, however, in
its sole discretion and at any time without notice, release all or any
portion of the shares subject to these restrictions.
In addition, as of April 30, 1999, there were 511,612 shares reserved for
issuance under our 1998 Stock Option and Grant Plan, of which 339,490 were then
outstanding. Beginning 180 days after the date of this prospectus, approximately
237,100 shares issuable upon exercise of vested options will become eligible for
sale.
COVENANTS IN OUR DEBT AGREEMENTS WILL RESTRICT OUR BUSINESS.
Our existing senior bank debt agreements, which will remain in effect and
under which we will owe approximately $21.9 million after this offering, contain
a number of significant covenants. The covenants will not expire until our
senior bank debt, which is due June 4, 2003, is paid in full. Our senior bank
debt agreements, among other matters, require us to maintain:
- a maximum leverage ratio not to exceed 2.50:1.00 for January 1, 1999 until
December 31, 1999 and not to exceed 2.00:1.00 at any time thereafter;
- a minimum debt service coverage ratio of not less than 1.00:1.00 at the
end of the fiscal quarter ending March 31, 1999 and of not less than
1.25:1.00 at the end of any other fiscal quarter; and
- a minimum current ratio of not less than 1.00:1.00 of consolidated current
assets to consolidated current liabilities.
Our senior bank debt agreements, including further details regarding these
required ratios, are attached as exhibits to our publicly available registration
statement of which this prospectus is a part. Our senior bank debt agreements
also place significant limitations on our ability to incur additional
indebtedness that we may need to finance our working capital needs or to expand
our operations. These restrictions on incurring indebtedness exclude
indebtedness incurred:
- under the loan documents;
- in connection with endorsements for collection, deposit, or negotiation
and warranties of products or services in the ordinary course of business;
- with respect to subordinated debt;
- under any capitalized lease in connection with real or personal property
not in excess of $100,000;
- prior to the senior bank debt;
- with respect to our interest rate collar;
- with respect to our preferred stock;
- with respect to stock repurchases or redemptions under our 1998 Stock
Option and Grant Plan; and
- that is unsecured and is less than $250,000 in the aggregate.
These covenants also prohibit us from paying any dividends to our
stockholders, other than dividends payable in shares of common stock. If we are
unable to meet our debt service obligations or comply with these covenants,
there will be a default under these agreements. A default, if not waived, could
result in acceleration of our repayment obligations, which would have an adverse
effect on our business. See "Management's Discussion and Analysis of Financial
Condition and Results of
16
<PAGE>
Operations--Liquidity and Capital Resources," "Description of Indebtedness" and
"Where You Can Find More Information."
WE DO NOT INTEND TO PAY DIVIDENDS.
Since June 4, 1998, we have neither declared nor paid any cash dividends on
shares of our common stock. We currently intend to retain our earnings for
future growth and, therefore, do not anticipate paying any dividends in the
foreseeable future. In addition, under the terms of our senior bank debt, we are
prohibited from paying any dividends to our stockholders, other than dividends
payable in shares of common stock.
FORWARD LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors."
17
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the common stock
will be approximately $47.7 million, at an assumed initial offering price of
$12.00 per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $55.0 million. We expect to use substantially all of the
net proceeds as follows:
- make a mandatory redemption payment due to a group of investment funds
associated with Summit Partners, LLC with respect to our preferred stock
upon consummation of this offering in an aggregate net amount of
approximately $32.9 million, which represents a gross redemption payment
of approximately $36.5 million less an offset of approximately $3.5
million representing the aggregate exercise price of outstanding warrants
that will be exercised in connection with this offering, plus accrued
dividends on the preferred stock, which amounted to approximately $2.2
million as of March 31, 1999;
- repay $10.0 million in principal amount of the subordinated debentures
owed to the Summit investors, together with any accrued and unpaid
interest, which debt bears interest at a rate of 12.0% annually, is
subject to mandatory repayment upon consummation of this offering and
otherwise matures on August 4, 2003; and
- repay with any remaining amount of net proceeds a portion, but not less
than $2.0 million, of the principal amount of senior bank debt owed in
respect of the senior credit facility with a number of lending
institutions, together with accrued and unpaid interest, which senior bank
debt bears interest at a variable rate, which is currently set at 6.75%
per annum and matures on June 4, 2003.
The gross redemption payment of approximately $36.5 million payable to the
Summit investors includes a redemption premium of approximately $16.9 million
which will be paid with the proceeds of this offering.
The proceeds from the senior bank debt and the sale to the Summit investors
of subordinated debentures, together with the proceeds from the sale to the
Summit investors of shares of preferred stock and common stock, were used to
redeem shares of common stock held by our founding stockholders in connection
with the leveraged recapitalization of Stride in June 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions with
Related Parties."
DIVIDEND POLICY
Before June 4, 1998, we were a subchapter "S" corporation. While maintaining
such status, we declared and paid an aggregate cash dividend of $929,000 to our
stockholders in June 1998. We terminated our subchapter "S" status in connection
with our recapitalization in June 1998. Since June 4, 1998, we have neither
declared nor paid any dividends on our common stock. Under the terms of our
senior bank debt, we are prohibited from paying any dividends to our
stockholders other than dividends payable in shares of common stock. In
addition, we currently intend to retain our earnings for future growth and,
therefore, do not anticipate paying dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 (a)
on an actual basis, (b) on a pro forma basis after giving effect to the
conversion of the series A convertible preferred stock into an aggregate of
1,000,000 shares of common stock and an aggregate of 24,802.5 shares of series B
redeemable preferred stock and the exercise of outstanding warrants to purchase
762,505 shares of common stock for an aggregate purchase price of $3.5 million
and (c) on a pro forma basis as adjusted to, in addition, give effect to our
receipt of the estimated net proceeds from the sale of the 4,350,000 shares of
common stock offered hereby at an assumed initial public offering price of
$12.00 per share, after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us and the use of the net proceeds
as described in "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes to those statements
included elsewhere in this prospectus.
The table below excludes: 293,607 shares of common stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$19.21 per share and 218,005 additional shares of common stock available for
future grant under our 1998 Stock Option and Grant Plan, in each case as of
March 31, 1999. On April 1, 1999, we issued stock options to purchase an
additional 45,383 shares of common stock at a price per share of $12.00 under
our 1998 Stock Option and Grant Plan, which options are also excluded from the
table below. The weighted average exercise price of all outstanding stock
options as of April 30, 1999 was $18.24 per share. See "Management--Executive
Compensation" and "--1998 Stock Option and Grant Plan."
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of term loan................................................ $ 4,002 $ 4,002 $ 4,002
--------- ----------- -----------
Term loan, less current portion............................................. 20,498 20,498 17,911
--------- ----------- -----------
Subordinated debentures..................................................... 10,000 10,000 --
--------- ----------- -----------
Series A convertible preferred stock, $0.01 par value per share; 24,802.5
shares authorized, issued and outstanding, actual; no shares authorized,
issued or outstanding pro forma and pro forma as adjusted................. 25,965 -- --
--------- ----------- -----------
Series B redeemable preferred stock, $0.01 par value per share; 24,802.5
shares authorized; no shares issued or outstanding, actual; 24,802.5
shares issued and outstanding, pro forma; no shares authorized, issued or
outstanding pro forma as adjusted......................................... -- 21,765 --
--------- ----------- -----------
Common stockholder's equity (deficiency):
Common stock, $0.01 par value per share; 50,000,000 shares authorized,
3,539,843 shares issued and outstanding actual; 50,000,000 shares
authorized, 5,302,348 shares issued and outstanding on a pro forma basis;
50,000,000 shares authorized, 9,652,348 shares issued and outstanding, pro
forma as adjusted......................................................... 35 53 97
Additional paid-in capital.................................................. 5,052 12,757 43,542(1)
Deferred compensation(2).................................................... (882) (882) --
Note receivable from officer and stockholder................................ (166) (166) (166)
Accumulated deficit......................................................... (58,899) (58,899) (59,781)(3)
--------- ----------- -----------
Total stockholders' equity (deficiency)................................. (54,860) (47,137) (16,308)
--------- ----------- -----------
Total capitalization................................................ $ 5,605 $ 9,128 $ 5,605
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------
(1) Includes approximately $16.9 million relating to a redemption premium on the
preferred stock which will be paid as a result of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(2) Upon consummation of this offering, 290,710 shares of restricted common
stock which currently have a three year vesting schedule will accelerate and
become unrestricted. The deferred compensation charge related to these
restricted shares will be recognized as compensation expense upon completion
of this offering.
(3) Includes $882,000 of non-recurring charges to net income available to common
stockholders, consisting of deferred compensation charges related to the
acceleration of the vesting of restricted common stock as a result of this
offering.
19
<PAGE>
DILUTION
As of March 31, 1999, we had a pro forma net deficit in tangible book value
of $(47.1) million, or $(8.89) per share, after giving effect to the conversion
of the series A preferred stock and the exercise of the warrant. Pro forma net
deficit in tangible book value per share is equal to our total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding, after giving effect to the conversion of all outstanding shares of
our series A convertible preferred stock into common stock and the exercise of
the warrant. Without taking into account any other changes in the deficit in net
tangible book value after March 31, 1999, other than to give effect to our
receipt of the estimated net proceeds from the sale of the 4,350,000 shares of
common stock offered hereby at an assumed initial public offering price of
$12.00 per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us and the use of the net proceeds
as described in "Use of Proceeds," our pro forma net deficit in tangible book
value as of March 31, 1999 would have been $(16.3) million, or $(1.69) per
share. This represents an immediate increase in pro forma net tangible book
value of $7.20 per share to existing stockholders and an immediate dilution of
$13.69 per share to new investors. If the initial public offering price is
higher or lower than $12.00 per share, the dilution to new stockholders will be
lower or higher, respectively. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.00
Pro forma net deficit in tangible book value per share as
of March 31, 1999....................................... $ (8.89)
Increase per share attributable to new investors.......... 7.20
---------
Pro forma net deficit in tangible book value per share after
this offering............................................. (1.69)
---------
Dilution per share to new investors......................... $ 13.69
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the difference between existing stockholders and the new investors with respect
to the number of shares of common stock purchased, the total consideration paid
to Stride and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 5,302,348 54.9% $ 13,096,273 20.0% $ 2.47
New investors................... 4,350,000 45.1 52,200,000 80.0 12.00
---------- ----- ------------- -----
Total....................... 9,652,348 100.0% $ 65,296,273 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing table:
- excludes 293,607 shares of common stock subject to outstanding options as
of March 31, 1999 at a weighted average exercise price of $19.21 per
share.
- excludes 218,005 shares available for future grant under our stock option
plan as of March 31, 1999;
- assumes that our principal stockholders will not purchase any additional
shares of common stock directly from us.
On April 1, 1999, we issued stock options to purchase an additional 45,383
shares of common stock at a price per share of $12.00 under our 1998 Stock
Option and Grant Plan, which options are also excluded from the foregoing table.
The weighted average exercise price of all outstanding stock options as of April
30, 1999 was $18.24 per share. To the extent these options are exercised and the
underlying shares are granted, there will be further dilution to new investors.
See "Management" and note 9 of notes to our financial statements included
elsewhere in this prospectus.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed financial data has been prepared
by our management from our financial statements and the notes to those
statements included elsewhere in this prospectus. We believe that the accounting
treatment used to prepare the pro forma data provides a reasonable basis on
which to present this unaudited pro forma condensed financial data. The
unaudited pro forma condensed statement of operations for the year ended
December 31, 1998 and the three months ended March 31, 1998 and 1999 reflects
adjustments as if our leveraged recapitalization in June 1998 and this offering
had occurred on January 1, 1998. The unaudited pro forma as adjusted condensed
balance sheet as of March 31, 1999 gives effect to this offering and the use of
proceeds as stated in "Use of Proceeds" as if it had occurred on March 31, 1999.
The unaudited pro forma as adjusted condensed statements of operations do not
reflect non-recurring charges of $19.8 million directly related to the June 1998
recapitalization and this offering, consisting of:
- approximately $16.9 million which will be charged against net income
available to common stockholders in connection with the redemption of our
preferred stock and the related issuance of 1,000,000 shares of common
stock as a result of this offering;
- approximately $2.0 million in special non-recurring bonuses paid to senior
management as a result of the June 1998 recapitalization;
- $882,000 of deferred compensation charges which will be expensed in
connection with the acceleration of the vesting of restricted common stock
as a result of this offering; and
- approximately $35,000 of other non-recurring recapitalization costs.
We are providing the unaudited pro forma condensed financial data for
informational purposes only. The pro forma condensed financial data shown below
may not necessarily be indicative of either our financial position or the
results of our operations which would have occurred had the recapitalization and
this offering actually occurred on the dates described above, nor are they
necessarily indicative of the results of operations for any future period. The
unaudited pro forma condensed financial data and accompanying notes should be
read in conjunction with our financial statements and the notes to those
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATED TO THE RELATED TO PRO FORMA
ACTUAL RECAPITALIZATION PRO FORMA THIS OFFERING AS ADJUSTED
--------- --------------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS:
Net revenues............................................. $ 28,804 $ -- $ 28,804 $ -- $ 28,804
Cost of services......................................... 9,849 -- 9,849 -- 9,849
--------- ------- ----------- ------------- -------------
Gross profit............................................. 18,955 -- 18,955 -- 18,955
Operating expenses....................................... 8,305 65(1) 8,370 -- 8,370
Management fees.......................................... 2,869 (2,869)(2) -- -- --
Non-recurring recapitalization costs..................... 2,239 (1,832)(3) 407 (407)(4) --
--------- ------- ----------- ------------- -------------
Income from operations................................... 5,542 4,636 10,178 407 10,585
Other income (expense):
Interest income.......................................... 108 -- 108 -- 108
Interest expense......................................... (1,856) (1,167)(5) (3,023) 1,375(6) (1,648)
--------- ------- ----------- ------------- -------------
Income before provision for income taxes................. 3,794 3,469 7,263 1,782 9,045
Provision for income taxes............................... 1,935 1,188(7) 3,123 766(7) 3,889
--------- ------- ----------- ------------- -------------
Net income............................................... 1,859 2,281 4,140 1,016 5,156
Preferred stock dividends................................ 1,553 1,147(8) 2,700 (2,700)(9) --
--------- ------- ----------- ------------- -------------
Net income available to common stockholders.............. $ 306 $ 1,134 $ 1,440 $ 3,716 $ 5,156
--------- ------- ----------- ------------- -------------
--------- ------- ----------- ------------- -------------
Net income per common share--
basic.................................................. $ 0.07 $ 0.41(10) $ 0.53(10)
--------- ----------- -------------
--------- ----------- -------------
diluted................................................ $ 0.06 $ 0.32(10) $ 0.53(10)
--------- ----------- -------------
--------- ----------- -------------
Pro forma weighted average common shares outstanding--
basic.................................................. 4,158 3,540(11) 9,652(12)
--------- ----------- -------------
--------- ----------- -------------
diluted................................................ 4,734 4,540(11) 9,652(12)
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
- --------------
(SEE ACCOMPANYING NOTES)
21
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATED TO THE RELATED TO THE
ACTUAL RECAPITALIZATION PRO FORMA OFFERING
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS:
Net revenues.................................................. $ 5,879 $ -- $ 5,879 $ --
Cost of services.............................................. 2,081 -- 2,081 --
----------- ------- ----------- -----
Gross profit.................................................. 3,798 -- 3,798 --
Operating expenses............................................ 1,749 65(1) 1,814
Management fees............................................... 1,533 (1,533)(2) -- --
Non-recurring recapitalization costs.......................... -- 102(3) 102 (102)(4)
----------- ------- ----------- -----
Income from operations........................................ 516 1,366 1,882 102
Other income (expense):
Interest income............................................... 18 -- 18 --
Interest expense.............................................. -- (761)(5) (761) 343(6)
----------- ------- ----------- -----
Income before provision for income taxes...................... 534 605 1,139 445
Provision for income taxes.................................... -- 490(7) 490 191(7)
----------- ------- ----------- -----
Net income.................................................... 534 115 649 254
Preferred stock dividends..................................... -- 666(8) 666 (666)(9)
----------- ------- ----------- -----
Net income available to common stockholders................... $ 534 $ (551) $ (17) $ 920
----------- ------- ----------- -----
----------- ------- ----------- -----
Net income per common share--
basic....................................................... $ 0.11 $ 0.00(10)
----------- -----------
----------- -----------
diluted..................................................... $ 0.11 $ 0.00(10)
----------- -----------
----------- -----------
Pro forma weighted average common shares outstanding--
basic....................................................... 5,000 3,540(11)
----------- -----------
----------- -----------
diluted..................................................... 5,000 4,540(11)
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA
AS ADJUSTED
-------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS:
Net revenues.................................................. $ 5,879
Cost of services.............................................. 2,081
------
Gross profit.................................................. 3,798
Operating expenses............................................ 1,814
Management fees............................................... --
Non-recurring recapitalization costs.......................... --
------
Income from operations........................................ 1,984
Other income (expense):
Interest income............................................... 18
Interest expense.............................................. (418)
------
Income before provision for income taxes...................... 1,584
Provision for income taxes.................................... 681
------
Net income.................................................... 903
Preferred stock dividends..................................... --
------
Net income available to common stockholders................... $ 903
------
------
Net income per common share--
basic....................................................... $ 0.09(10)
------
------
diluted..................................................... $ 0.09(10)
------
------
Pro forma weighted average common shares outstanding--
basic....................................................... 9,652(12)
------
------
diluted..................................................... 9,652(12)
------
------
</TABLE>
- ------------------
(SEE ACCOMPANYING NOTES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
RELATED TO THE RELATED TO THE
ACTUAL RECAPITALIZATION PRO FORMA OFFERING
----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS:
Net revenues................................................ $ 8,427 $ -- $ 8,427 $ --
Cost of services............................................ 2,869 -- 2,869 --
----------- ------ ----------- -----
Gross profit................................................ 5,558 -- 5,558 --
Operating expenses.......................................... 2,692 -- 2,692
Management fees............................................. -- -- -- --
Non-recurring recapitalization costs........................ 102 -- 102 (102)(4)
----------- ------ ----------- -----
Income from operations...................................... 2,764 -- 2,764 102
Other income (expense):
Interest income............................................. 41 -- 41 --
Interest expense............................................ (776) 52(5) (724) 343(6)
----------- ------ ----------- -----
Income before provision for income taxes.................... 2,029 52 2,081 445
Provision for income taxes.................................. 900 (5)(7) 895 191(7)
----------- ------ ----------- -----
Net income.................................................. 1,129 57 1,186 254
Preferred stock dividends................................... 666 -- 666 (666)(9)
----------- ------ ----------- -----
Net income available to common stockholders................. $ 463 $ 57 $ 520 $ 920
----------- ------ ----------- -----
----------- ------ ----------- -----
Net income per common share--
basic..................................................... $ 0.13 $ 0.15(10)
----------- -----------
----------- -----------
diluted................................................... $ 0.09 $ 0.10(10)
----------- -----------
----------- -----------
Pro forma weighted average common shares outstanding--
basic..................................................... 3,540 3,540(11)
----------- -----------
----------- -----------
diluted................................................... 5,009 5,009(11)
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA
AS ADJUSTED
-------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS:
Net revenues................................................ $ 8,427
Cost of services............................................ 2,869
------
Gross profit................................................ 5,558
Operating expenses.......................................... 2,692
Management fees............................................. --
Non-recurring recapitalization costs........................ --
------
Income from operations...................................... 2,866
Other income (expense):
Interest income............................................. 41
Interest expense............................................ (381)
------
Income before provision for income taxes.................... 2,526
Provision for income taxes.................................. 1,086
------
Net income.................................................. 1,440
Preferred stock dividends................................... --
------
Net income available to common stockholders................. $ 1,440
------
------
Net income per common share--
basic..................................................... $ 0.15(10)
------
------
diluted................................................... $ 0.15(10)
------
------
Pro forma weighted average common shares outstanding--
basic..................................................... 9,652(12)
------
------
diluted................................................... 9,652(12)
------
------
</TABLE>
- ------------------
(SEE ACCOMPANYING NOTES)
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(1) Represents additional compensation currently payable to our Chief Executive
Officer as required under his employment agreement entered into in
connection with the June 1998 recapitalization, in excess of actual
compensation paid during the respective periods. See
"Management--Employment, Severance and Non-Competition Agreements."
(2) Represents the elimination of management fees paid to entities affiliated
with our founding stockholders. See "Certain Transactions with Related
Parties--Management Fees." Prior to the June 1998 recapitalization, our
founding stockholders provided significant oversight and strategic advice
for which they were compensated through management fees. Three of our
founding stockholders no longer provide any such services. During 1998, many
of the functions formerly performed by our founding stockholders were
transitioned to our senior management team. This overlap in management
during the transition period resulted in additional costs of doing business
that we do not anticipate incurring in the future. Moreover, one of our
founding stockholders, Mr. Robichaud, has been employed under an employment
agreement since June 1998 under which his salary was increased and he is now
eligible for an annual bonus.
(3) Represents non-recurring expenses which are directly attributable to the
June 1998 recapitalization as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1998 1998 1999
----------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Special non-recurring bonuses...................................... $ (1,967) $ -- $ --
Amortization of deferred compensation.............................. 170 102 --
Other non-recurring recapitalization costs......................... (35) -- --
------- --------- ---------
$ (1,832) $ 102 $ --
------- --------- ---------
------- --------- ---------
</TABLE>
(4) Represents the elimination of non-recurring expenses with are directly
attributable to this offering as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1998 1998 1999
----------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortization of deferred compensation.............................. $ (407) $ (102) $ (102)
------- --------- ---------
------- --------- ---------
</TABLE>
(5) The interest expense adjustment relating to this offering is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1998 1998 1999
----------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense relating to the bank term loan using an assumed
interest rate of 6.75% per annum................................. $ 644 $ 453 $ (52)
Interest expense relating to the subordinated debentures computed
at a fixed rate of 12.0% per annum............................... 510 300 --
Amortization of deferred financing costs relating to borrowings
under the term loan.............................................. 13 8 --
------- --------- ---------
$ 1,167 $ 761 $ (52)
------- --------- ---------
------- --------- ---------
</TABLE>
23
<PAGE>
(6) Represents the elimination of interest expense due to the repayment of such
debt with the proceeds of this offering as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1998 1998 1999
----------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Elimination of interest expense relating to repayment of
approximately $2.6 million of the term loan...................... $ 175 $ 43 $ 43
Elimination of interest expense relating to repayment of
subordinated debentures.......................................... 1,200 300 300
------- --------- ---------
$ 1,375 $ 343 $ 343
------- --------- ---------
------- --------- ---------
</TABLE>
(7) We were a subchapter "S" corporation before closing of the June 1998
recapitalization. The pro forma income statement information reflects
adjustments to historical net income as if we had not elected subchapter "S"
corporation status for federal and state income tax purposes and reflects
the income tax effect of the pro forma adjustments related to the June 1998
recapitalization and this offering assuming an effective tax rate of 43.0%.
(8) Represents dividends of 9.0% per annum of the base liquidation amount, or
$1,209.56 per share, accrued on the preferred stock.
(9) Represents the elimination of the dividends accrued on the preferred stock
due to the redemption of the preferred stock in connection with this
offering.
(10) Pro forma net income per common share has been computed by dividing pro
forma net income available to common stockholders by the pro forma weighted
average shares outstanding.
(11) Pro forma weighted average common shares outstanding assumes that the
shares issued and repurchased in connection with the June 1998
recapitalization occurred at the beginning of the period.
(12) Pro forma weighted average shares outstanding assumes that the shares of
common stock issued and repurchased in connection with the June 1998
recapitalization occurred at the beginning of the period and further assumes
the issuance of 1,000,000 shares of common stock upon the conversion of the
series A preferred stock, the issuance of 762,505 shares of common stock
upon the exercise of outstanding warrants and the issuance of 4,350,000
shares of common stock issuable in this offering were outstanding at the
beginning of the period indicated.
24
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- ADJUSTMENTS -----------
RELATED TO THE
OFFERING
--------------
(IN THOUSANDS)
<S> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 4,079 $ 47,746(1) $ 4,079
3,523(2)
(51,269)(5)
Accounts receivable, net of allowances for placement fall-offs and
doubtful accounts................................................. 3,302 -- 3,302
Prepaid expenses and other current assets........................... 202 -- 202
-------- -------------- -----------
Total current assets................................................ 7,583 -- 7,583
Property, plant and equipment......................................... 1,139 1,139
Deferred costs........................................................ 712 (712)(6) --
Debt issuance costs................................................... 134 -- 134
-------- -------------- -----------
Total................................................................. $ 9,568 $ (712) $ 8,856
-------- -------------- -----------
-------- -------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of term loan........................................ $ 4,002 $ -- $ 4,002
Accounts payable.................................................... 708 -- 708
Accrued expenses.................................................... 2,680 (712)(6) 1,968
Deferred income taxes............................................... 25 -- 25
-------- -------------- -----------
Total current liabilities........................................... 7,415 (712) 6,703
Term loan............................................................. 20,498 (2,587)(5) 17,911
Subordinated debentures............................................... 10,000 (10,000)(5) --
Deferred income taxes................................................. 550 -- 550
-------- -------------- -----------
Total liabilities................................................... 38,463 (13,299) 25,164
-------- -------------- -----------
(4,200)(3)
16,917(4)
Series A Convertible Preferred Stock.................................. 25,965 (38,682)(5) --
-------- -------------- -----------
Series B Convertible Preferred Stock.................................. -- -- --
-------- -------------- -----------
Common stockholders' equity (deficiency):
Common stock........................................................ 35 44(1) 97
8(2)
10(3)
Additional paid-in capital.......................................... 5,052 47,702(1) 43,542
3,515(2)
4,190(3)
(16,917)(4)
Deferred compensation............................................... (882) 882(7) --
Note receivable from officer and stockholder........................ (166) -- (166)
Accumulated deficit................................................. (58,899) (882)(7) (59,781)
-------- -------------- -----------
Total common stockholders' equity (deficiency)...................... (54,860) 38,552 (16,308)
-------- -------------- -----------
Total................................................................. $ 9,568 $ (712) $ 8,856
-------- -------------- -----------
-------- -------------- -----------
</TABLE>
- --------------------------
(1) Represents the issuance of 4,350,000 shares of common stock in connection
with this offering at an assumed initial public offering price of $12.00 per
share, less expenses directly relating to this offering.
(2) Represents the exercise of warrants to purchase 762,605 shares of common
stock at an exercise price of $4.62 per share.
(3) Represents the issuance of 1,000,000 shares of common stock upon the
redemption of the series A preferred stock. Prior to the redemption of the
series A preferred stock, we will reduce the carrying value of the series A
preferred stock by $4.2 million, which represents the fair value allocation
of the cash proceeds received at issuance attributable to the 1,000,000
shares of common stock, and increase common stock and additional paid-in
capital.
25
<PAGE>
(4) Represents the redemption premium associated with our preferred stock. The
redemption premium is the difference between the aggregate redemption
payment of approximately $36.5 million, which the Summit investors are
entitled to receive upon the closing of this offering, and the carrying
amount of the series A preferred stock at the offering date (before accrued
and unpaid dividends of approximately $2.2 million at March 31, 1999). Prior
to the redemption of the series A preferred stock, we will reduce the
carrying value of the series A preferred stock by $4.2 million, which
represents the fair value allocation of the cash proceeds received at
issuance attributable to the 1,000,000 shares of common stock (see pro forma
adjustment (3)).
(5) Represents the application of the net proceeds of this offering and from the
exercise of the warrant to repay the outstanding subordinated debentures, to
repay approximately $2.6 of the $24.5 million of the principal amount of our
senior bank debt and to redeem our preferred stock.
(6) Represents deferred costs associated with this offering which will be
charged against additional paid-in capital upon the effective date of this
offering.
(7) Represents the amortization of deferred compensation relating to the
acceleration of vesting of restricted common stock as a result of this
offering.
26
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the three months ended March 31,
1998 and 1999 are derived from our unaudited financial statements and the notes
to those statements included elsewhere in this prospectus. In the opinion of our
management, our unaudited financial statements have been prepared on the same
basis as our audited financial statements and include all adjustments,
consisting of only normal recurring adjustments, and adjustments necessary to
record the recapitalization discussed in note 1 to our financial statements
included elsewhere in this prospectus, necessary for a fair presentation of our
financial condition and results of operations for such periods. The selected
financial data at December 31, 1995 and 1996 and for the year ended December 31,
1995 have been derived from our audited financial statements and the notes to
those statements which are not included in this prospectus. The selected
financial data at December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998 have been derived from our audited financial
statements and the notes to those statements included elsewhere in this
prospectus. The selected financial data should be read in conjunction with, and
is qualified in its entirety by, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our audited financial statements
and the notes to those statements and the other financial data included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------
1995 1996 1997 1998 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................................................ $ 6,592 $ 10,614 $ 19,187 $ 28,804 $ 5,879
Cost of services........................................................ 2,951 3,742 6,426 9,849 2,081
--------- --------- --------- --------- ---------
Gross profit............................................................ 3,641 6,872 12,761 18,955 3,798
Operating expenses...................................................... 1,925 2,460 4,655 8,305 1,749
Management fees(1)...................................................... 32 3,719 7,620 2,869 1,533
Non-recurring recapitalization costs(2)................................. -- -- -- 2,239 --
--------- --------- --------- --------- ---------
Income from operations.................................................. 1,684 693 486 5,542 516
Other income (expense):
Interest income......................................................... 23 85 38 108 18
Interest expense........................................................ (15) (23) (11) (1,856) --
--------- --------- --------- --------- ---------
Income before provision for income taxes................................ 1,692 755 513 3,794 534
Provision for income taxes.............................................. 26 23 62 1,935 --
--------- --------- --------- --------- ---------
Net income.............................................................. 1,666 732 451 1,859 534
--------- --------- --------- --------- ---------
Preferred stock dividends............................................... -- -- -- 1,553 --
--------- --------- --------- --------- ---------
Net income available to common stockholders............................. $ 1,666 $ 732 $ 451 $ 306 $ 534
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per common share
basic................................................................. $ 0.33 $ 0.15 $ 0.09 $ 0.07 $ 0.11
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
diluted............................................................... $ 0.33 $ 0.15 $ 0.09 $ 0.06 $ 0.11
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding
basic................................................................. 5,000 5,000 5,000 4,158 5,000
diluted............................................................... 5,000 5,000 5,000 4,734 5,000
Pro forma provision for income taxes(3)................................. $ 745 $ 355 $ 270 $ 1,669 $ 235
Pro forma net income.................................................... 947 400 243 2,125 299
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income available to common stockholders................... $ 947 $ 400 $ 243 $ 610 $ 299
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
"S" corporation distributions........................................... $ -- $ -- $ -- $ 929 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SELECTED OPERATING DATA:
Number of practice groups at end of period.............................. 11 18 20 33 27
Number of placement transactions........................................ 601 934 1,582 2,181 462
BALANCE SHEET DATA:
Net working capital..................................................... $ 1,482 $ 2,129 $ 2,288 $ 703 $ 2,710
Total assets............................................................ 2,072 2,852 3,780 8,348 4,520
Total debt (including current debt)..................................... 90 52 10 35,200 6
Series A convertible preferred stock.................................... -- -- -- 25,299 --
Common stockholders' equity (deficiency)................................ $ 1,665 $ 2,397 $ 2,848 $ (55,419) $ 3,382
<CAPTION>
1999
---------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................................................ $ 8,427
Cost of services........................................................ 2,869
---------
Gross profit............................................................ 5,558
Operating expenses...................................................... 2,692
Management fees(1)...................................................... --
Non-recurring recapitalization costs(2)................................. 102
---------
Income from operations.................................................. 2,764
Other income (expense):
Interest income......................................................... 41
Interest expense........................................................ (776)
---------
Income before provision for income taxes................................ 2,029
Provision for income taxes.............................................. 900
---------
Net income.............................................................. 1,129
---------
Preferred stock dividends............................................... 666
---------
Net income available to common stockholders............................. $ 463
---------
---------
Net income per common share
basic................................................................. $ 0.13
---------
---------
diluted............................................................... $ 0.09
---------
---------
Weighted average common shares outstanding
basic................................................................. 3,540
diluted............................................................... 5,009
Pro forma provision for income taxes(3)................................. $ 900
Pro forma net income.................................................... 1,129
---------
---------
Pro forma net income available to common stockholders................... $ 463
---------
---------
"S" corporation distributions........................................... $ --
---------
---------
SELECTED OPERATING DATA:
Number of practice groups at end of period.............................. 39
Number of placement transactions........................................ 590
BALANCE SHEET DATA:
Net working capital..................................................... $ 168
Total assets............................................................ 9,568
Total debt (including current debt)..................................... 34,500
Series A convertible preferred stock.................................... 25,965
Common stockholders' equity (deficiency)................................ $ (54,860)
</TABLE>
- ------------------
(FOOTNOTES ON NEXT PAGE)
27
<PAGE>
- --------------
(1) Represents management fees paid to entities affiliated with our founders in
connection with the management of our business. In connection with the June
1998 recapitalization, we ceased paying management fees. See "Certain
Transactions with Related Parties--Management Fees."
(2) Represents costs associated with the June 1998 recapitalization, primarily
one-time special compensation bonuses paid to senior management.
(3) Before June 4, 1998, we were a subchapter "S" corporation and, accordingly,
federal and state income taxes were paid at the stockholder level only. Upon
consummation of the June 1998 recapitalization, we terminated our subchapter
"S" corporation status and, accordingly, became subject to federal and state
income taxes. The pro forma income statement information reflects
adjustments to historical net income as if we had not elected subchapter "S"
corporation status for federal and state income tax purposes.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTAINED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We have experienced 64% annualized compound revenue growth between 1995 and
1998. In 1998, we completed 2,181 placement transactions, as compared to 601
placement transactions in 1995. In the three months ended March 31, 1999 we
completed 590 placement transactions, as compared to 462 for the three months
ended March 31, 1998. The principal factor driving this growth has been the
establishment of new practice groups, both in existing and new offices. Changes
in the average annual compensation rate of candidates placed and in the average
contracted placement fee as a percentage of such compensation have historically
not contributed significantly to the rate of growth in net revenues. Between
late 1994 and April 30, 1999, we established 32 new practice groups, including
practice groups in 12 offices opened during this period. During the four years
ended December 31, 1998, net revenues over the average number of practice groups
in operation in each year increased by approximately 46%, primarily as a result
of the maturation of practice groups, which further contributed to the growth in
net revenues. However, as a result of our method of forming new practice groups
with experienced placement professionals taken from existing practice groups, we
anticipate that we will not experience continued growth in annualized revenue
per practice group but will rather derive additional revenue principally through
the successful establishment of new practice groups and offices. While we intend
to expand operations by adding practice groups at existing offices, opening new
offices in existing geographic markets and entering new markets, there can be no
assurance that we will be successful in growing in this manner. We recognize
revenue upon a candidate's employment start date, net of a provision for
anticipated refunds based on historical refund rates. See "Risk Factors--Our
rapid growth could strain our financial management and other resources;" "--Our
failure to successfully implement our office expansion strategy could adversely
affect our business and the market price of our common stock;" and "--Our
business could be materially adversely affected by economic downturns."
In general, the least expensive method of opening a new practice group is to
expand the number of practice groups in an existing office from two to three. In
such cases, we incur relatively small capital expenditures and only a modest
investment in working capital. However, the productivity of existing groups may
decline because experienced placement professionals are transferred from
existing practice groups into the newly formed groups. When opening a new
office, we have generally invested less than $250,000 in capital expenditures
and working capital and have incurred operating losses over the first several
months. Typically, we have achieved operating profitability at our newly opened
offices within one year or less of opening the office. As a result of our growth
strategy, we may in the future experience quarterly fluctuations in our results
of operations. See "--Selected Quarterly Data" and "Risk Factors--We are subject
to many factors specific to our industry and business model that may cause our
quarterly results to fluctuate and any such fluctuations could cause the market
price of our common stock to fall."
Our employer customer base has historically been very diversified. No one
customer represented more than five percent of net revenues for the years ended
December 31, 1997 or 1998 or for the three months ended March 31, 1999. However,
our business has historically been concentrated in the financial services
industry, the technology industry and the telecommunications industry,
reflecting our presence in Atlanta, Boston, New York City and several cities in
California. In the years ended
29
<PAGE>
December 31, 1997 and 1998 and in the three months ended March 31, 1999,
placements in these three industries collectively represented in excess of 50%
of net revenues and placements for such periods, and financial services and
related industries accounted for a majority of such portions of net revenues and
placements for such periods.
For the years ended December 31, 1997 and 1998 and for the three months
ended March 31, 1999, the single largest cost item was compensation expense,
which represented approximately 67% and 69% of total expenses, respectively,
excluding management fees and non-recurring charges. A substantial portion of
compensation expense is commission based and varies directly with net revenues.
Commissions are accrued upon a placed candidate's start date, but are paid to
the placement counselor only upon actual receipt of payment from the candidate's
employer. Cost of services consists of salaries and commissions of personnel
whose day to day activity is providing placement services in one of our practice
groups.
Operating expenses include:
- compensation expense of executive management and administrative personnel;
- facility costs, including rent, office costs, communications, and
depreciation and amortization;
- advertising costs; and
- general and administrative costs.
A substantial portion of our operating expenses are relatively fixed as of the
beginning of any period. As a result, our failure to achieve anticipated
placement transaction volume, particularly from any newly formed groups, would
have a disproportionate impact on the results of operations during any such
period. Our operating expenses as a percentage of net revenues may increase over
time as we open new offices, enhance our information technology infrastructure
and expand our senior management team.
From inception until the time of the leveraged recapitalization in June
1998, we compensated our founding stockholders, Rachel C. Burnett, John J.
Devine, Alan P. Matthews and Michael C. Robichaud, for oversight and strategic
advice principally through management fees paid to affiliates of our founding
stockholders. In 1997 and 1998, we paid management fees of approximately $7.6
million and $2.9 million, respectively. At the time of the recapitalization, we
ceased making payments of management fees and entered into an employment
agreement with Mr. Robichaud, our Chief Executive Officer. In addition, in 1998,
many of the functions previously performed by our founding stockholders were
transitioned to our senior management team. See "Certain Transactions with
Related Parties-- Management Fees;" "Unaudited Pro Forma Condensed Financial
Data;" and "Management-- Employment, Severance and Non-Competition Agreements."
The founders commenced their placement business operations in 1989 with the
establishment of an office in Boston. Between 1989 and 1994, the founders
conducted operations through several loosely affiliated predecessor entities
with additional offices in New York and Los Angeles. In January 1995, we
consolidated our operations into one legal entity. While each of the founders
has served Stride and its predecessors in various capacities since 1989, Mr.
Robichaud has been the only founder involved in the day-to-day operations of
Stride since March 1996.
During the period beginning October 7, 1994 through June 3, 1998, we elected
to be treated as a subchapter "S" corporation. During that period, all of our
outstanding common stock was owned by our founding stockholders. On June 4,
1998, we effected a leveraged recapitalization with a group of investment funds
affiliated with Summit Partners, LLC in which the funds purchased subordinated
debentures, shares of series A convertible preferred stock, shares of common
stock and warrants. At that time, we also borrowed $26.0 million in senior bank
debt. The proceeds from the investment by the Summit investors and the senior
bank debt were used principally to fund the redemption of
30
<PAGE>
approximately 60% of the common stock owned by the founders for an aggregate
redemption price of approximately $63.8 million. We accounted for the
transaction using the leveraged recapitalization accounting convention. As a
result of the recapitalization, we incurred non-recurring recapitalization costs
totaling approximately $2.2 million in 1998, consisting principally of one-time
bonus awards to senior management. See "Certain Transactions with Related
Parties--Recapitalization."
Upon consummation of the recapitalization, we terminated our subchapter "S"
corporation election, and, effective June 4, 1998, we became obligated to pay
federal and state income taxes as a subchapter "C" corporation. We currently
estimate our combined effective income tax rate will approximate 43% of taxable
income in 1999.
In connection with the sale of shares of common stock in the offering and
the use of the net proceeds therefrom as described in "Use of Proceeds," we
expect to incur a non-recurring charge to earnings of $17.8 million, consisting
of (a) approximately $16.9 million in connection with the redemption of shares
of the preferred stock and the related issuance of 1,000,000 shares of common
stock and (b) deferred compensation charges, which would equal $882,000 as of
March 31, 1999, related to the acceleration of vesting of restricted common
stock as a result of the offering. See "Use of Proceeds" and "Certain
Transactions with Related Parties."
RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenues represented
by specific items reflected in the statement of operations. The information that
follows should be read in conjunction with our financial statements and the
notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services..................................... 35.3 33.5 34.2 35.4 34.0
--------- --------- --------- --------- ---------
Gross profit......................................... 64.7 66.5 65.8 64.6 66.0
Operating expenses................................... 23.2 24.3 28.8 29.7 31.9
Management fees(1)................................... 35.0 39.7 10.0 26.1 --
Non-recurring recapitalization costs................. -- -- 7.8 -- 1.2
--------- --------- --------- --------- ---------
Income from operations............................... 6.5 2.5 19.2 8.8 32.9
Other income (expense):
Interest income.................................... 0.8 0.2 0.4 0.3 0.5
Interest expense................................... (0.2) 0.0 (6.4) -- (9.2)
--------- --------- --------- --------- ---------
Income before provision for income taxes............. 7.1% 2.7% 13.2% 9.1% 24.2%
</TABLE>
- --------------
(1) Represents management fees paid to affiliates of our founders in connection
with the management of our business. In connection with the
recapitalization, we ceased paying management fees. See
"Management--Compensation Committee Interlocks and Insider Participation."
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET REVENUES
Net revenues increased by $2.5 million, or 43.3%, to $8.4 million in the
three months ended March 31, 1999, from $5.9 million in the three months ended
March 31, 1998. The increase resulted principally from an increase in the
overall number of placement transactions. Growth in the number of placement
transactions reflected the establishment of 12 new practice groups, increasing
the total to 39
31
<PAGE>
as of March 31, 1999, from 27 as of March 31, 1998. Of these additional practice
groups, six were established during the three months ended March 31, 1999 in
three new offices. In addition, the average fee per placement increased by
approximately $1,600, or 12.2%, to approximately $14,300 in the three months
ended March 31, 1999, from approximately $12,700 in the three months ended March
31, 1998, reflecting, in part, an increase in the number of candidates receiving
higher compensation relative to the total number of candidates placed.
GROSS PROFIT
Gross profit increased by $1.8 million, or 46.3%, to $5.6 million in the
three months ended March 31, 1999, from $3.8 million in the three months ended
March 31, 1998. Gross profit as a percentage of net revenues increased to 66.0%
in the three months ended March 1999, from 64.6% in the three months ended March
31, 1998. The increase in gross profit as a percentage of net revenues reflects,
in part, a faster rate of increase in revenues in new offices as compared to the
rate of increase in revenues from new offices in the comparable quarter in 1998.
OPERATING EXPENSES
Operating expenses increased by $943,000, or 53.9%, to $2.7 million in the
three months ended March 31, 1999, from $1.7 million in the three months ended
March 1998. Operating expenses as a percent of net revenues increased to 31.9%
in the three months ended March 1999, from 29.7% in the three months ended March
31, 1998. The increase resulted principally from an increase in compensation
expense related to the expansion of our executive management team in the second
half of 1998.
MANAGEMENT FEES--DISCONTINUED AFTER THE RECAPITALIZATION
Management fees paid during the three months ended March 31, 1998 were $1.5
million. During the second quarter of 1998, we ceased paying management fees.
The payment of such management fees should not be relied upon as an indication
of future results of operations. See "Unaudited Pro Forma Condensed Financial
Data."
NON-RECURRING RECAPITALIZATION COSTS
Non-recurring recapitalization costs of $102,000 were incurred in the three
months ended March 31, 1999, reflecting primarily amortization of deferred
compensation relating to restricted common stock awards. See note 9 of notes to
our financial statements included elsewhere in this prospectus.
OTHER INCOME--EXPENSE
Interest income increased by $23,000 to $41,000 in the three months ended
March 31, 1999, from $18,000 in the three months ended March 31, 1998. Interest
expense was $776,000 in the three months ended March 31, 1999 reflecting the
interest on debt obligations incurred in connection with the June 1998
recapitalization. See note 1 of notes to our financial statements included
elsewhere in this prospectus.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUES
Net revenues increased by $9.6 million, or 50.1%, to $28.8 million in the
year ended December 31, 1998, from $19.2 million in the year ended December 31,
1997. This increase resulted principally from
32
<PAGE>
an increase in the overall number of placement transactions. Growth in the
number of placement transactions reflected the establishment of 13 new practice
groups, increasing the total to 33 as of December 31, 1998, from 20 as of
December 31, 1997. Of these additional practice groups, five were established at
existing offices and eight were established in connection with the opening of
three new offices in January 1998. In addition, the average fee per placement
increased by $1,100, or 9.1%, to approximately $13,200 in the year ended
December 31, 1998, from approximately $12,100 in the year ended December 31,
1997, reflecting, in part, an increase in the number of candidates receiving
higher compensation relative to the total number of candidates placed.
GROSS PROFIT
Gross profit increased by $6.2 million, or 48.5%, to $19.0 million in the
year ended December 31, 1998, from $12.8 million in the year ended December 31,
1997. Gross profit as a percentage of net revenues decreased to 65.8% in the
year ended December 31, 1998, from 66.5% in the year ended December 31, 1997.
The decline in gross profit as a percentage of net revenues reflects the
addition of 13 new practice groups during 1998 and the impact on gross margin
associated with the lower initial productivity of these new practice groups, as
well as the disruption to existing practice groups from the transfer of
experienced placement counselors from existing to new practice groups.
OPERATING EXPENSES
Operating expenses increased by $3.6 million, or 78.4%, to $8.3 million in
the year ended December 31, 1998, from $4.7 million in the year ended December
31, 1997. Operating expenses as a percentage of net revenues increased to 28.8%
in the year ended December 31, 1998, from 24.3% in the year ended December 31,
1997. The increase resulted principally from an increase in compensation expense
related to the expansion of our executive management team in 1998. To a lesser
degree, the increase also reflects higher advertising and recruiting costs as a
percentage of net revenues.
MANAGEMENT FEES--DISCONTINUED AFTER THE RECAPITALIZATION
Management fees paid decreased by $4.8 million, or 62.3%, to $2.9 million in
the year ended December 31, 1998 from $7.6 million in the year ended December
31, 1997 because we ceased paying management fees in the second quarter of 1998.
The payment of such management fees should not be relied upon as an indication
of future results of operations. The management fees were paid to affiliates of
our founding stockholders in return for the provision of strategic advice, as
well as their oversight of our operations prior to the June 1998
recapitalization. See "Unaudited Pro Forma Condensed Financial Data."
NON-RECURRING RECAPITALIZATION COSTS
Non-recurring recapitalization costs of $2.2 million were incurred in the
year ended December 31, 1998, reflecting primarily one-time bonus awards to
senior management. See note 11 of notes to our financial statements included
elsewhere in this prospectus.
OTHER INCOME--EXPENSE
Interest income increased by $70,000 to $108,000 in the year ended December
31, 1998, from $38,000 in the year ended December 31, 1997. Interest expense
increased to $1.9 million in the year ended December 31, 1998, from $11,000 in
the year ended December 31, 1997. This increase reflected the interest on debt
obligations incurred in connection with the June 1998 recapitalization. See note
1 of notes to our financial statements included elsewhere in this prospectus.
33
<PAGE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUES
Net revenues increased by $8.6 million, or 80.8%, to $19.2 million in the
year ended December 31, 1997 from $10.6 million in the year ended December 31,
1996. This increase resulted principally from an increase in the overall number
of placement transactions. This growth in the number of placement transactions
reflects the addition of two new practice groups in 1997, increasing the total
number of practice groups to 20 as of December 31, 1997, from 18 as of December
31, 1996, and an increase in the productivity of the four practice groups
established in the fourth quarter of 1996. The two practice groups added in 1997
were established in connection with the opening of one new office. The average
productivity of our practice groups also improved in 1997, reflecting the
maturation of three offices opened in 1996. In addition, the average fee per
placement increased by approximately $700, or 6.1%, to approximately $12,100 in
the year ended December 31, 1997, from approximately $11,400 in the year ended
December 31, 1996, reflecting, in part, an increase in the number of candidates
receiving higher compensation relative to the total number of candidates placed.
GROSS PROFIT
Gross profit increased by $5.9 million, or 85.7%, to $12.8 million in the
year ended December 31, 1997, from $6.9 million in the year ended December 31,
1996. Gross profit as percentage of net revenues increased to 66.5% in 1997 from
64.7% in 1996. The increase in gross profit reflects the increased profitability
of two new offices opened in late 1996 and the return to higher profitability of
practice groups from which experienced placement counselors had been transferred
to staff new groups.
OPERATING EXPENSES
Operating expenses increased by $2.2 million, or 89.2%, to $4.7 million in
the year ended December 31, 1997, from $2.5 million in the year ended December
31, 1996. Operating expenses as a percentage of net revenues increased to 24.3%
in the year ended December 31, 1997, from 23.2% in the year ended December 31,
1996. The increase in operating expenses was due primarily to additional hiring
in our finance department, expansion of senior management and increases in
facility costs, including rent, office costs, communications, depreciation and
amortization, advertising costs and general and administrative costs associated
with the opening of new offices.
MANAGEMENT FEES--DISCONTINUED AFTER THE RECAPITALIZATION
Management fees paid increased $3.9 million to $7.6 million in the year
ended December 31, 1997, from $3.7 million in the year ended December 31, 1996.
The payment of such management fees should not be relied upon as an indication
of the results of operations for any future period. See "Unaudited Pro Forma
Condensed Financial Data."
OTHER INCOME--EXPENSE
Interest income decreased by $47,000 to $38,000 in the year ended December
31, 1997, from $85,000 in the year ended December 31, 1996. Interest expense
decreased by $12,000 to $11,000 in the year ended December 31, 1997, from
$23,000 in the year ended December 31, 1996.
SELECTED UNAUDITED HISTORICAL QUARTERLY FINANCIAL DATA
The following table sets forth unaudited quarterly operating results for
each of our last eight quarters, as well as a subset of such data expressed as a
percentage of net revenues for the periods
34
<PAGE>
indicated. This information has been prepared by us on a basis consistent with
our audited financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the data.
These quarterly results are not necessarily indicative of results of operations
for any future period. This information should be read in conjunction with our
financial statements and the notes to those statements included elsewhere in
this prospectus. We have historically experienced and expect to experience in
the future, fluctuations in quarterly operating results as a result of our
growth model, including factors such as the timing of the opening of new offices
and the establishment of new practice groups, the length of time required for
new offices and practice groups to become fully productive, the adverse impact
of the transfer of experienced employees from existing into new practice groups
and economic and competitive changes impacting the availability of, demand for
and compensation levels of information technology professionals.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1998 1998
----------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net revenues...................................... $ 4,554 $ 5,178 $ 5,155 $ 5,879 $ 7,261
----------- ------- ------------- ----------- -----------
Gross profit...................................... 3,158 3,407 3,306 3,798 4,864
Operating expenses................................ 1,194 1,241 1,129 1,749 2,050
Management fees................................... 1,474 2,402 3,247 1,533 1,336
Non-recurring recapitalization costs.............. -- -- -- -- 2,035
----------- ------- ------------- ----------- -----------
Income (loss) from operations..................... $ 490 $ (236) $ (1,070) $ 516 $ (557)
----------- ------- ------------- ----------- -----------
----------- ------- ------------- ----------- -----------
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ------- ------------- ----------- -----------
Gross profit...................................... 69.3 65.8 64.1 64.6 67.0
Operating expenses................................ 26.2 24.0 21.9 29.7 28.2
Management fees................................... 32.4 46.4 63.0 26.1 18.4
Nonrecurring recapitalization costs............... 0.0 0.0 0.0 0.0 28.0
----------- ------- ------------- ----------- -----------
Income (loss) from operations..................... 10.8% (4.6)% (20.8 )% 8.8% (7.7)%
----------- ------- ------------- ----------- -----------
----------- ------- ------------- ----------- -----------
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1999
-------------- ------------- -----------
<S> <C> <C> <C>
Net revenues...................................... $ 7,954 $ 7,710 $ 8,427
------- ------------- -----------
Gross profit...................................... 5,270 5,023 5,558
Operating expenses................................ 1,984 2,522 2,692
Management fees................................... -- -- --
Non-recurring recapitalization costs.............. 102 102 102
------- ------------- -----------
Income (loss) from operations..................... $ 3,184 $ 2,399 $ 2,764
------- ------------- -----------
------- ------------- -----------
<S> <C> <C> <C>
Net revenues...................................... 100.0% 100.0% 100.0%
------- ------------- -----------
Gross profit...................................... 66.3 65.1 66.0
Operating expenses................................ 24.9 32.7 31.9
Management fees................................... 0.0 0.0 --
Nonrecurring recapitalization costs............... 1.3 1.3 1.2
------- ------------- -----------
Income (loss) from operations..................... 40.0% 31.1% 32.9%
------- ------------- -----------
------- ------------- -----------
</TABLE>
Operating expenses as a percentage of net revenue as shown in the table above
increased to 32.7% in the quarter ended December 31, 1998 from 24.9% in the
quarter ended September 30, 1998. This increase principally came from the
expense of holiday bonuses and gifts to all of our employees, an increase in
advertising spending and development costs for the creation of our Web site and
official logos. We have in the past experienced seasonal fluctuations in revenue
in the fourth quarter due primarily to the fewer number of business days and the
holiday periods occurring in that quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our business through cash provided by
operations. We had cash and cash equivalents of approximately $4.1 million at
March 31, 1999. Although we believe that cash generated from operations will be
sufficient to meet our anticipated cash requirements, including scheduled debt
repayments and anticipated capital expenditures, for at least the next 12
months, we may in the future require additional funds to meet our cash
requirements and successfully execute on our business model beyond that 12-month
period. We may be required to raise additional funds through sales of equity or
debt securities or seek additional financing from financing institutions. There
can be no assurance, however, that financing will be available to us on
favorable terms or, if obtained, will be sufficient for our needs.
For the three months ended March 31, 1999, the major use of cash generated
by operations was to fund investing and financing activities. For the three
months ended March 31, 1998 and for the years ended December 31, 1997 and 1996,
the major use of cash generated by operations was to fund management fees. For
the year ended December 31, 1998, the major use of cash generated by operations
was to fund both management fees and non-recurring recapitalization costs. We
ceased paying
35
<PAGE>
management fees in the second quarter of 1998. See "--Comparison of the Three
Months Ended March 31, 1999 and 1998--Management Fees--Discontinued after the
Recapitalization;" "--Comparison of the Years Ended December 31, 1998 and
1997--Management Fees--Discontinued after the Recapitalization;" and
"--Comparison of the Years Ended December 31, 1997 and 1996--Management
Fees--Discontinued after the Recapitalization."
Cash provided by operating activities in the three months ended March 31,
1999 and 1998 and in the years ended December 31, 1998, 1997 and 1996 was
approximately $1.7 million, $898,000, $4.0 million, $556,000 and $441,000,
respectively. Cash provided by operating activities in the three months ended
March 31, 1999 was generated primarily by net income, as adjusted primarily by
an increase in accounts payable of $312,000 and an increase in accrued expenses
of $528,000, offset primarily by an increase in accounts receivable of $574,000.
Cash provided by operating activities in the three months ended March 31, 1998
was generated primarily by net income. Cash provided by operating activities in
the year ended December 31, 1998 was generated primarily by net income adjusted
primarily by an increase in accrued expenses of $1.3 million, offset primarily
by an increase in accounts receivable of $678,000. Cash from operating
activities in the year ended December 31, 1997 was generated primarily by net
income as adjusted by an increase in accrued expenses of $562,000, offset
primarily by an increase in accounts receivable of $721,000. Cash from operating
activities in the year ended December 31, 1996 was generated primarily by net
income, offset primarily by an increase in accounts receivable of $615,000.
Cash used in investing activities for the three months ended March 31, 1999
and 1998 and for the years ended December 31, 1998, 1997 and 1996 was $393,000,
$168,000, $529,000, $463,000 and $152,000, respectively. Cash used was for the
purchase of property and equipment, and we expect to continue to invest in
fixtures and equipment in the ordinary course of business, including
expenditures in connection with the opening of new offices and the upgrading of
computer equipment and networking in existing offices.
Cash (used in) provided by financing activities for the three months ended
March 31, 1999 and 1998 and for the years ended December 31, 1998, 1997 and 1996
was $(947,000), $0, $(490,000), $640,000 and $(286,000), respectively. Cash used
in financing activities in the three months ended March 31, 1999 was due
primarily to the repayment of debt of $700,000 and an increase in deferred costs
of $247,000. Cash provided by financing activities in the year ended December
31, 1998 was due primarily to the net recapitalization and redemption and
purchase of our founding stockholders' common stock of approximately $1.7
million net of direct costs, as offset by an increase in deferred costs of
$465,000, the repayment of principal of $800,000 of senior debt and the payment
of "S" corporation distributions of $929,000. Cash provided by financing
activities in the year ended December 31, 1997 was due primarily to the
repayment of loans by our founding stockholders to us. Cash used by financing
activities in the year ended December 31, 1996 was due primarily to loans made
to our founders.
36
<PAGE>
The following table compares operating income, before management fees and
non-recurring recapitalization costs, to the cash flows generated from operating
income before management fees, non-recurring recapitalization costs and
non-operating expenses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from operations...................................... $ 693 $ 486 $ 5,542 $ 516 $ 2,764
Management fees............................................. 3,719 7,620 2,869 1,533 --
Non-recurring recapitalization costs........................ -- -- 2,239 -- 102
--------- --------- --------- --------- ---------
Operating income--before management fees and non-recurring
recapitalization costs.................................... $ 4,412 $ 8,106 $ 10,650 $ 2,049 $ 2,866
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net cash provided by operating activities................... $ 441 $ 556 $ 3,966 $ 898 $ 1,736
Add back (deduct):
Management fees........................................... 3,719 7,620 2,869 1,533 --
Cash paid for special non-recurring bonuses............... -- -- 1,967 -- --
Cash paid for other non-recurring recapitalization
costs................................................... -- -- 35 -- --
Interest paid........................................... 23 11 1,837 -- 768
Interest income received................................ (85) (38) (108) (18) (41)
Income tax paid......................................... 48 62 1,347 -- 10
--------- --------- --------- --------- ---------
Cash generated by operating income--before management fees,
non-recurring recapitalization costs and other
non-operating expenses.................................... $ 4,146 $ 8,211 $ 11,913 $ 2,413 $ 2,473
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
We expect to use substantially all of the net proceeds from the offering to
redeem outstanding shares of preferred stock and repay our outstanding
subordinated debentures and repay with any remaining net proceeds a portion, but
not less than $2.0 million, of the $25.2 million of senior bank debt. As such,
the senior bank debt will remain in place after the completion of the offering
and until the term loan matures and the revolving debt loan expires on June 4,
2003. See "Risks Factors--We will incur non-recurring charges as a result of
this offering" and "--The proceeds from this offering will benefit our existing
stockholders and will not be available to the fund working capital or capital
expenditures;" "Description of Indebtedness;" and "Certain Transactions With
Related Parties-- Recapitalization."
Management does not expect that the effect of inflation on the average
candidate compensation level and associated average placement fee will be
greater for us than for our competitors.
INTEREST RATE RISK
We have variable interest rate exposure under our senior bank debt
agreements, which we mitigate by utilizing derivative financial instruments. We
do not use derivative financial instruments for speculative or trading purposes.
We entered into an interest rate collar agreement on August 4, 1998,
covering a notional amount of $13.0 million of our outstanding senior bank debt,
to reduce our exposure to market risks from changes in interest rates. The
interest rate collar agreement expires on August 4, 2000. Under the interest
rate collar agreement, if during any period the floating interest rate on our
senior bank debt exceeds the cap rate under the interest rate collar agreement,
which is currently 7.75 percent, our bank will pay us the difference between the
two rates for the period. If the floating interest rate on our senior bank debt
during the period is less than the floor rate under the interest rate collar
agreement, which is currently 7.38 percent, we will pay our bank the difference
between the two rates for the period. If the floating interest rate is equal to
or between the floor rate and the cap rate during the period, neither we nor our
bank will be required to make any payment. Payments under the interest
37
<PAGE>
rate collar agreement are to be made on the last business day of March, June,
September and December in each year. We record income or expense under the
interest rate collar agreement as a component of interest expense on our
statement of income.
The interest rate collar agreement carrying value is $0. As of December 31,
1998 the interest rate collar agreement had a fair value liability of
approximately $125,000. The fair value liability of the interest rate collar was
calculated on the assumption that the underlying LIBOR rates will continue to
decrease through the remaining term of the agreement. As such, our obligation to
make payments under the terms of the interest rate collar agreement will be
largely offset by the impact of lower LIBOR rates on the balance outstanding
under our senior bank debt agreements. See "Description of Indebtedness."
THE YEAR 2000 ISSUE
INTRODUCTION
The term "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems arise from hardware and software unable
to distinguish dates in the "2000's" from dates in the "1900's" and from other
sources such as the use of special codes and conventions in software that make
use of a date field.
OUR STATE OF READINESS
Being a provider of employment services, we do not furnish any of our
customers with date-sensitive devices or computer based services. Consequently,
we believe that we have no need to make any changes to its business practices in
response to the Year 2000 issue.
We do not rely on electronic interaction with customers or vendors. However,
we utilize in our day-to-day operations software, consisting principally of an
off-the-shelf accounting package and an internally customized billing system
developed in Lotus Notes-Registered Trademark-. This software has run on a
personal computer-based network since 1994 and has been upgraded as needed since
then.
We have undertaken an assessment of our vulnerability to the Year 2000 issue
with respect to our internal software. The assessment is based upon
communications with the software vendors, literature supplied with the software
and preliminary test evaluations of the software. The assessment is expected to
be completed, utilizing our existing resources, and is not expected to have a
material adverse effect on our financial results.
We are aware that some of our systems, such as telephone systems, facsimile
machines, heating and air conditioning systems, security systems and other
non-data processing oriented systems, may include embedded chips which process
dates and date sensitive material. Our failure to identify or remedy any
embedded chips, either on an individual or an aggregate basis, in systems on
which significant business operations depend, such as telephone systems, could
have a material adverse impact on our business.
COST TO ADDRESS OUR YEAR 2000 ISSUES
We are not currently able to estimate the final aggregate cost of addressing
the Year 2000 issue because funds may be required as a result of future
findings. We do not expect such costs to have a material effect on our business.
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RISKS PRESENTED BY YEAR 2000 ISSUES
We are still in the process of evaluating potential disruptions or
complications that might result from Year 2000 related problems. Any long term
disruption in the operation of our telephone system or in our ability to place
classified advertisements in any of the newspapers in which we advertize,
however unlikely, would have a material adverse effect on our business. Any
disruption in our accounting software or billing system would not, we believe,
have a material adverse effect on our business.
We believe that the results of our assessment to date indicate that our
accounting software is Year 2000 compliant, and based on our preliminary review,
that our billing system and the functionality of our telephone system is Year
2000 compliant. We have no knowledge regarding whether the systems of the
newspapers in which we place classified advertisements, particularly those
systems necessary for us to place such advertisements, are Year 2000 compliant.
We intend to continue reviewing the Year 2000 compliance of our billing system.
Based on our assessment to date, we believe that the Year 2000 issue is unlikely
to have a material impact on our operations. It is possible, however, that we
may identify business functions in the future that are specifically at risk of
Year 2000 related disruption. The absence of any such determination at this
point represents only our current status of evaluating potential Year 2000
related problems and facts presently known to us, and should not be construed to
mean that there is no risk of Year 2000 related disruption. Additionally, there
can be no assurances that the systems or software of third parties on which we
rely will be timely made Year 2000 compliant, and we may be adversely affected
by the failure of the systems or software of such a third party to become Year
2000 compliant. We believe that we have a sufficient base of third party product
and service suppliers so that if any supplier is unable to deliver products or
services due to Year 2000 related problems, alternate sources will be available
and that any supply interruption will not be material to operations. There can
be no assurances, however, that we would be able to obtain all of our product
and service requirements from such alternate sources on terms comparable with
that of its current product and service suppliers.
OUR CONTINGENCY PLANS
In the event that our accounting software or billing system fails as a
result of Year 2000 related problems, we will immediately begin to utilize
spreadsheet and word processing software known to be Year 2000 compliant to
track our revenues and expenses and to create sales invoices. We do not have a
contingency plan to address any disruption in the operations of our telephone
system or in our ability to place classified advertisements in the newspapers in
which we advertise and, based on our assessment to date, we do not believe that
any such contingency plan is necessary. In the event of a Year 2000 disruption
with respect to other third party suppliers of products and services, we plan to
immediately utilize any other available third party suppliers of such products
and services.
Although we have contingency plans for some business risks that might result
from Year 2000 related events, there can be no assurance that this plan will
cover all risks, and we will continue to evaluate the need for more
comprehensive contingency plans for all of our business risks.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement 133 requires that all derivative financial
instruments be recognized as either assets or liabilities on a balance sheet.
Measurement is at fair value, and if the derivative is not designated as a
hedging instrument, changes in fair value, such as gains and losses, are to be
recognized in earnings in the period of change. If certain conditions are met, a
derivative may be designated as a hedge, in which case the accounting for
changes in fair value will depend on the specific exposure being hedged. The
method that will be used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for
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determining the ineffective aspects of the hedge, must be established at the
inception of the hedge. The methods must be consistent with our approach to
managing risk. Statement 133 will be effective for fiscal years beginning after
June 15, 1999. We are currently evaluating the impact that Statement 133 will
have on our financial statements.
On September 28, 1998, the SEC issued a press release stating that it "will
formulate and augment new and existing accounting rules and interpretations
covering revenue recognition, restructuring reserves, materiality and
disclosure" for all publicly traded companies. Until such time as the SEC staff
issues such interpretative guidelines, it is unclear what, if any, impact such
interpretative guidelines will have on our current revenue recognition policy.
However, the potential changes in accounting practice being considered by the
SEC staff could have a material impact on the manner in which we recognize
revenue.
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BUSINESS
OVERVIEW
We are a provider of placement services for full-time professional employees
in the information technology field. We have placed thousands of professionals
in the rapidly growing market for mid-level professionals with information
technology skills and now have 41 practice groups in 15 offices. We place
candidates on a non-exclusive, contingency basis by using a practice group-based
approach that has allowed us to grow rapidly while providing our employees with
strong compensation incentives and a performance-driven career advancement path.
Our placement transactions increased to 2,181 in 1998 from 601 in 1995, and to
590 for the three months ended March 31, 1999 from 462 for the three months
ended March 31, 1998.
INDUSTRY BACKGROUND
As information technology systems have become more cost-effective, easier to
use and more readily available, they have enabled businesses to streamline
operations, increase responsiveness to clients and customers, reduce costs and
improve profitability. As more and more businesses are rapidly adopting
comprehensive information technology solutions, businesses find themselves
compelled to develop, deploy and maintain robust information technology
solutions that connect an increasing number of end-users across multiple
hardware platforms, operating systems, networking and telecommunications
protocols and architectures.
This increasing reliance on information technology systems has created a
growing demand for qualified mid-level professionals in the information
technology field. Compounding the demand for these professionals are continuous
changes brought about by technological advancements coupled with a continuing
shortage of professionals skilled in the latest technologies. As a result, these
professionals have a broad range of job opportunities available to them and have
become increasingly mobile as they seek out higher pay, broader experience and
faster career advancement. These factors make it increasingly difficult for
businesses to identify, recruit and retain qualified employees as quickly as
they require. Nearly 190,000 job openings in the information technology field
were unfilled in 1997, which increased to approximately 340,000 unfilled
information technology jobs by the first half of 1998, according to the
Information Technology Association of America.
Businesses often lack the expertise, resources and contacts necessary to
efficiently identify and attract professionals with the desired skills and
experience. In response to these challenges, many businesses are turning to
placement agencies, professional search firms and professional service companies
to obtain qualified personnel rapidly and on a cost-effective basis. The
increasing use of placement agencies and professional search firms to satisfy
recruiting and hiring requirements also represents part of an overall trend in
business to outsource non-core activities to reduce costs and increase
efficiency. Worldwide executive search industry revenue has grown at a 20%
compound annual growth rate, from approximately $3.8 billion in 1993 to
approximately $6.6 billion in 1997, according to Kennedy Information, LLC.
Placement agencies and professional search firms are particularly well
qualified to meet the growing demand for professionals with information
technology skills. Placement agencies and professional search firms can offer
employers not only industry contacts, but also access to qualified candidates,
expertise in qualifying and judging candidates and experience in understanding
skill requirements for open positions. Those placement agencies that specialize
in particular industries also benefit from their knowledge of current industry
trends, skill requirements and pay scales. Placement agencies and professional
search firms therefore can create an efficient selection process, with the
result that employers can consider several candidates for an open position, and
a candidate can interview with several employers before accepting an offer.
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Placement agencies and professional search firms usually operate under
either an exclusive retainer-based model or a non-exclusive contingency-based
model. We believe that retainer-based firms, which are paid regardless of
whether a search is successful, are not particularly well suited to meet the
fast-paced and high turnover market for mid-level professionals in the
information technology field. Retained search firms generally work on searches
to fill senior executive positions with annual compensation of $150,000 or more.
These searches can take a long time to complete and require that the search firm
have in-depth knowledge of the employer, its industry and the particular
requirements of the open position. Moreover, the exclusive nature of its
employer relationships often limit a retained firm's available candidate pool
and the job opportunities that it can offer to candidates. As a result,
employers tend to engage search firms on a retainer basis only for hard-to-fill
executive positions.
Contingency-based firms, on the other hand, generally conduct searches on a
non-exclusive basis for positions with annual compensation of less than
$150,000. These firms are paid only upon the successful placement of a
candidate. Contingency-based firms are particularly well suited to handle a high
volume of hiring activity because contingency firms generally do not enter into
exclusive arrangements with employers and are not limited in their ability to
approach potential candidates. Due to the high transaction volume in mid-level
positions, industry-focused contingency firms are generally better able to
rapidly train and develop qualified placement staff, eliminating one of the
constraints to growth in high volume markets, such as the market for mid-level
employees in the information technology field. We believe that relatively few
contingency-based firms have built nationwide practices, resulting in a highly
fragmented market. While contingency-based firms accounted for almost two-thirds
of the approximately 4,000 search firms which were in business in 1997, the vast
majority of them had revenues below $1.0 million, according to Kennedy
Information, LLC. As a result, we believe that a focused contingency-based
placement firm can successfully achieve market penetration across multiple
metropolitan markets by leveraging a proven business model and expansion plan.
THE STRIDE SOLUTION
We provide placement services on a non-exclusive, contingency basis targeted
toward mid-level professionals in the information technology field seeking
full-time employment. Our focus on the mid-level segment of this market and our
structured, performance-driven approach to completing placements enables us to
quickly and effectively match candidates with the appropriate skills to
available job opportunities and thereby serve the needs of both hiring employers
and placement candidates. The benefits to employers include our ability to
produce for consideration a number of candidates with the skills required for an
employer's particular needs, frequently within a matter of days. In addition, we
believe that our contingency-based placements are a more cost-effective solution
for employers because they only pay for our services if a candidate is hired.
Our process also benefits candidates by quickly identifying a range of available
job opportunities among multiple employers.
Our practice groups concentrating on networking and communications
placements place professionals capable of providing networking and hardware
maintenance support and other related services. Our software development and
implementation practice groups focus on professionals with expertise in software
tools development and proficiency in a wide range of software languages. Our
management information systems practice groups place individuals into positions
requiring business data processing and business applications development skills.
Our compensation structure and emphasis on productivity motivate each of the
practice group's counselors to leverage their combined efforts to process as
many placement transactions as quickly and effectively as possible. We believe
that our use of practice groups is a key factor in our ability to hire, develop
and retain highly productive placement professionals. We believe that this
trained resource base will provide the professional staff necessary to implement
our strategy of rapid growth through the opening of new offices and the
establishment of new practice groups within existing offices. In addition, we
believe that reproducing our high volume placement strategy in additional
markets will allow us to
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effectively scale our business. The chart below sets forth the total number of
candidates placed by us and the number of different employers with which such
candidates were placed for the periods presented below:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- -----------
1995 1996 1997 1998 1998
----- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Number of Placement Transactions.................................. 601 934 1,582 2,181 462
Number of Different Employers Served.............................. 353 531 856 1,247 349
<CAPTION>
1999
-----
<S> <C>
Number of Placement Transactions.................................. 590
Number of Different Employers Served.............................. 469
</TABLE>
STRATEGY
Our business objective is to become the leading provider of permanent
placement services in the United States for mid-level employees in the
information technology field. The key elements of our business strategy include:
CONTINUE GROWING BY EXPANDING EXISTING OFFICES AND OPENING NEW OFFICES. We
intend to expand our operations aggressively by adding practice groups at
existing offices, opening new offices in existing markets and entering new
markets. Stride has historically formed a new practice group or opened a new
office with experienced placement counselors taken from existing practice
groups. Our approach of transitioning experienced employees from existing
practice groups to newly established practice groups is designed to maximize the
effectiveness of the new practice group while minimizing the disruptive impact
on existing practice groups. We believe that this systematic expansion process
can reduce both the costs and risks associated with expanding the number of
practice groups and provide a career path for successful placement counselors.
We increased the number of practice groups to 39 at March 31, 1999 from 18 at
December 31, 1996.
SPECIALIZE IN THE MARKET FOR MID-LEVEL EMPLOYEES WITH INFORMATION TECHNOLOGY
SKILLS. We believe that the rapidly growing market for mid-level employees in
the information technology field affords an extremely attractive opportunity.
Mid-level professionals with these skills have been limited in number and in
high demand, command salaries in a range well-suited for contingency placement
and often seek positions that employers must fill immediately.
CONTINUE UTILIZING PRACTICE GROUPS TO COMPLETE PLACEMENTS. We believe that
our use of practice groups can result in more efficient placements involving
fewer candidate interviews by the hiring companies and the rapid placement of
qualified candidates whose skills match the needs of the employers served by us.
In each office, our placement counselors are organized into two or three
practice groups consisting of one group manager, one senior placement counselor
and two to four placement counselors, including trainees. Practice groups handle
placements as team transactions, with any member of a group initially
identifying either a candidate or hiring company and the team as a whole working
to quickly match available candidates and job orders. We believe that this
team-based approach provides a rigorous and structured mechanism for training
and developing employees and has been a significant factor in our growth as
newly trained employees have advanced to more senior positions in conjunction
with the establishment of new practice groups within existing offices and the
opening of new offices.
FOSTER PERFORMANCE-DRIVEN CULTURE. The transactional nature of our business
model requires a fast-paced working environment with increases in compensation
and career advancement based on an individual's and a practice group's
performance. Our practice groups are organized to identify job openings rapidly
and to promote the quick evaluation and placement of candidates with the
available openings. Our placement counselors regularly contact the line managers
of employers in the region to determine immediate and future hiring needs. At
the same time, each practice group conducts skill-set screening interviews on a
daily basis with candidates who have responded to our advertisements or have
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been referred to us by other professionals. The combination of the flow of
evaluated candidates and the direct contact with corporate customer line
managers with immediate hiring needs allows a practice group to quickly match
available candidates with relevant skills to new job openings. Nearly all of our
successfully filled job orders are filled within two to three weeks of the
initial contact with the line manager.
PROVIDE PERFORMANCE-BASED COMPENSATION AND CAREER ADVANCEMENT
OPPORTUNITIES. To motivate our employees and attract new trainees, we provide
the opportunity for rapid career advancement and significant increases in
compensation. We hire entry-level placement counselors and provide "hands-on"
training on an on-going basis in our team-based operating environment.
Experienced counselors are promoted in conjunction with the establishment of new
practice groups. With each promotion, a counselor takes on an increased level of
responsibility for training junior counselors and, at the higher levels,
responsibility for the business generated by a practice group, office or
district. We believe that our methodology of hiring and training entry-level
employees and providing career growth opportunities through practice group and
office expansion will enable us to grow while still maintaining the
effectiveness and profitability of our existing practice groups.
PLACEMENT SERVICES
The mid-level professionals placed by us generally have two to three years
of experience in the information technology field and typically earn annual
salaries ranging from $35,000 to $90,000 a year. We operate on a non-exclusive
contingency basis and receive fees from employers based upon a negotiated
percentage of the placed candidate's first year salary. Our placement fees
typically range between $8,000 and $20,000 and are refundable if a candidate
does not remain employed for at least 30 days. In order to maximize market
penetration, we operate more than one office in several markets under various
names. Our offices within the same market compete with each other for qualified
candidates and job orders. We believe that this multiple office strategy has
allowed us to target numerous business operations in our markets and address the
preferences of hiring managers to choose candidates from multiple sources. The
following table lists each of our current offices, together with the name under
which it operates and when it was opened.
<TABLE>
<CAPTION>
LOCATION OFFICE NAME QUARTER OPENED
- ----------------------------------- ---------------------------- ------------------------
<S> <C> <C>
Atlanta, GA Atlantis Partners First Quarter 1999
Remington International First Quarter 1997
Boston, MA Atlantis Partners Second Quarter 1996
Remington International Second Quarter 1989
Chicago, IL Remington International First Quarter 1999
Los Angeles, CA The Boylston Group First Quarter 1999
Remington International Fourth Quarter 1996
New York, NY Atlantis Partners First Quarter 1998
The Boylston Group Third Quarter 1993
MacArthur & Associates Fourth Quarter 1994
Remington International Second Quarter 1995
Newport Beach, CA Atlantis Partners First Quarter 1998
MacArthur & Associates First Quarter 1991
San Jose, CA Remington International Fourth Quarter 1996
Stride & Associates First Quarter 1998
</TABLE>
THE PLACEMENT PROCESS. We conduct our placement operations using multiple
practice groups, each of which works as a team to complete placements. Each
practice group is responsible for both
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identifying job openings and generating a list of qualified professionals
available for placement. To identify job openings, our counselors regularly
contact line managers who have previously used our placement services and
continually cold-call other employers with potential hiring needs. Our
counselors determine whether the line managers they contact have a budget to
hire any professionals and seek to understand the skill sets required to fill
open positions. At the same time, the counselors communicate with their practice
group to begin reviewing available candidates for any job openings they have
identified. The counselors conclude their calls with employers by establishing
several time slots during which the contacted line manager will be available to
interview candidates. Establishing a time commitment from the line manager,
which we call a "send-out," is the primary goal for counselors on every call to
an employer.
Following calls to line managers, and often even before a call has
concluded, counselors and their teams begin matching existing candidates with
open positions, or "job orders," based on the skill sets and experience of
available candidates and those required for the identified job orders. We
generally do not conduct candidate reference checks unless requested by a
particular employer. Scheduling candidates for send-outs often occurs within 48
hours of the initial call to the line manager. Promptly following the initial
round of candidate interviews by the line managers, our counselors call the line
managers to determine which candidates should be scheduled for second interviews
and make the necessary arrangements for those interviews.
We identify qualified professionals both through advertising and referrals.
As part of this process, each practice group regularly runs print advertisements
for a variety of skills, not only based upon immediate needs but also in
anticipation of market requirements in the practice group's specialized area.
Our counselors follow-up with all respondents and are trained to use such
follow-up both to initially assess the candidate's qualifications and to
generate other potential candidate leads as part of the placement process. We
have historically generated a substantial portion of our leads on available
candidates through referrals from professionals previously placed by us. To
ensure that we have access to the broadest pool of available candidates, we have
not entered into any agreements restricting our ability to recruit professionals
from any employer.
Our placement counselors interview all candidates before send-outs with
prospective employers. During the interview process, the counselors discuss
career goals, desired income level, income history, background in technology and
previous experience. Our counselors also use the interview process to prepare
the candidate for a successful interview with the hiring manager for a
prospective employer. The counselors provide candidates with available
background information on the prospective employer, as well as the hiring
process, including who has the responsibility for negotiating the salary and
terms of the employment offer. Our placement process is designed to ensure that
individual candidates are quickly matched with appropriate opportunities based
upon their experience, pay requirements and career objectives. After the
candidate's interview with us, the practice group updates its list of available
candidates to reflect the likely level of interest in the candidate. Individual
members of a practice group share job orders and candidates and work together to
match several candidates to a job order and several job orders to a particular
candidate. If a send-out does not result in a prompt placement, the practice
group will seek to place the candidate into other appropriate job opportunities
and to match other qualified candidates if the job order remains unfilled.
OUR GROWTH METHODOLOGY. In recent years, we have grown rapidly by adding
practice groups at existing offices, opening new offices in existing markets and
entering new markets. We continuously evaluate new markets and expansion
opportunities within our existing markets. Although our individual offices act
independently with respect to developing lists of candidates and filling job
orders, we have common internal procedures which govern training, operations and
sales.
After selecting the metropolitan area for a new office, which may be in an
existing or new market, we then select the team to open the new office.
Generally, new offices are initially staffed with an
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office manager, who also acts as a group manager, another group manager and two
senior counselors. These employees are generally drawn from different practice
groups and offices, mitigating the impact on each office that loses an
experienced group manager or counselor and distributing the opportunity for
advancement among several offices. We believe that the successful transition of
employees to date is due, in part, to our procedures for training employees and
our structured approach to expanding operations. After the initial staff at a
new office has generated several successful placements, we generally expand the
office by fully staffing the two initial practice groups with additional
counselors and adding a third practice group. As each office reaches its
targeted operating level, we generally consider whether the demand for employees
with information technology skills within that market can support an additional
office or if a new office would be more successful in a geographic market in
which the company does not already have a presence. We believe that this
proprietary approach of adding practice groups and opening new offices can
reduce the costs and risks associated with expansion and provides a clear and
defined career path for successful employees.
MANAGEMENT STRUCTURE, TRAINING AND CAREER ADVANCEMENT
We have a relatively flat management structure, which is intended to provide
direct performance incentives for key managers and to facilitate growth by
developing group managers who can replicate our business model in new practice
groups and offices. In addition to our executive management team, we currently
have five district managers with responsibility for the Northern California,
Southern California, Boston, Chicago/New York and Atlanta regions. Each district
manager has oversight responsibility for all offices within his or her region,
as well as direct responsibility as an office manager. At the office level, each
office manager is responsible for his or her own practice group and has
oversight of the other two practice groups within the office. Each group manager
is responsible for the counselors and trainees within the practice group. We
believe that our requirement that senior managers bear multiple responsibilities
at the district, office and group levels both minimizes our compensation costs
related to non-revenue generating personnel and provides opportunities for
career progression as managers develop and advance within the company.
Our offices and operations are structured both to produce rapid and
successful placements and to encourage employees to assume increasing levels of
responsibility. As counselors demonstrate an ability to generate successful
placements and train new counselors, they are eligible to progress along a clear
and defined career path with the company with successive levels of increased
compensation and responsibility as new offices are opened and existing offices
are expanded. For example, a senior counselor is eligible to transition to the
position of group manager, where he or she will lead a practice group and be
responsible for the development of each team member of that group. Successful
group managers are then eligible to advance to the position of office manager,
in which they retain responsibilities as group managers, but also assume
responsibility for the overall office, including the development of the other
group managers in the office.
Historically, we have experienced a retention rate of approximately 32%.
Substantially all of our attrition has occurred at the placement trainee level,
which we believe is largely due to our, or the trainee's, determination early on
that the trainee does not have the skills or interest necessary to succeed in an
aggressive working environment which demands high productivity and the ability
to work as part of a team. Since 1995, of the 70 employees who have progressed
through the placement trainee and counselor stages during their first 18 months
with the company, only six have left us. Substantially all of the individuals
who reached the group manager level have remained with us.
Our compensation structure is designed to reward major contributors and
provide a lucrative opportunity for motivated and productive employees. We
review our placement trainees regularly and provide performance-based salary
increases after the trainee's first two to six months. Trainees, counselors and
senior counselors are generally paid salaries, with no commission-based
compensation. Group managers, office managers and district managers receive
commission-based compensation, which is
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highly dependent on the individual's position and the revenues generated by the
individual's practice group, office or district.
EMPLOYERS SERVED BY US
We have historically provided placement services across a broad spectrum of
businesses ranging from start-ups to Fortune 500 companies. The future success
of our business strategy will depend in large part on the ability of our
practice groups to continually identify and solicit job orders from new
employers. We provided placement services to 1,247 different employers for the
year ended December 31, 1998, to 856 different employers during the year ended
December 31, 1997 and to 469 different employers for the three months ended
March 31, 1999 from 349 for the three months ended March 31, 1998. For these
same periods, the ten largest employers we served represented less than 10% of
net revenues. However, our business historically has been concentrated in
specific industries, reflecting our geographic presence in markets where those
industries are prevalent. Therefore, a significant economic downturn,
particularly in regions, or industries prevalent in those regions, in which our
operations are located, could have an adverse effect on our business. For
example, the financial services industry, which has historically represented a
significant portion of our revenues, undergoes a period of contraction from time
to time, prompting financial institutions to announce layoffs. In addition, it
is possible that the level of demand for information technology services among
prospective employers may decline. For example, as businesses resolve the "Year
2000" issue, demand among prospective employers for information technology
services and employees with information technology skills may diminish
significantly.
COMPETITION
We face significant competition, both for employers looking for solutions to
information technology problems, and for mid-level employees in the information
technology field looking for improved career opportunities.
We believe that the availability and quality of candidates, the scope of
geographic service and, to a lesser extent, the price of service, are the
principal elements of competition. The availability of qualified mid-level
information technology professionals is a particularly important facet of
competition. To attract employers we emphasize our ability to quickly provide
employers with a choice of several candidates with the applicable skill set, as
well as a guarantee to refund its fee if the placement is not successful for at
least 30 days. To attract qualified candidates, we place emphasis upon our
ability to provide such candidates with a choice of attractive full-time
employment opportunities at competitive compensation levels. We believe that our
ability to compete also depends in part on a number of other competitive factors
outside our control, including the ability of competitors to recruit qualified
candidates. Although to date we have not experienced any significant pricing
pressure from our competitors, there can be no assurance that we will not
experience such pressure in the future.
The permanent placement industry, particularly firms focused on the
placement of employees with information technology skills, is extremely
competitive, and there are few, if any, barriers to entry. We compete with
national, regional and local placement firms for both employers seeking
candidates and information technology professionals. Many of these national and
regional firms have greater financial, technical and marketing resources than we
have. Smaller firms typically are owner-operated, and each market generally has
one or more significant established competitors. Particularly as we attempt to
expand into new geographic markets, we expect to compete with additional
national, regional and local firms. Although we focus on permanent placements,
we also compete with providers of non-permanent
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information technology staffing services and consulting firms. These competitors
offer employers professionals on a contract basis, often at a fixed price,
without the long term commitment of hiring permanent employees. The information
technology staffing and consulting industry is itself intensely competitive,
with multinational, national, regional and local firms aggressively marketing
their services to the same employers targeted by us.
In addition, we compete for candidates directly with employers who continue
to rely on their internal human resource departments to recruit some, if not
all, of the professionals they require. This is often the case with employers
who hire professionals on an ongoing basis and can justify the investment in
developing an experienced recruiting staff in-house and avoid the direct cost of
multiple placement fees which, at $8,000 to $20,000 per candidate, can be
substantial.
We expect increased competition from placement, staffing and consulting
firms which are adopting the Internet to both solicit employers and candidates,
as well as post job openings and candidate profiles. Currently, hundreds of Web
sites offer these services and more can be expected. We recently established
several Web sites for our different offices on which we post job openings and
solicit resumes. However, we currently do not conduct any material amount of
business on the Internet. There can be no assurance that we will be able to
compete successfully against competitors using the Internet.
Although we have offices in major cities across the United States, we use
multiple operating names. As a result, we do not expect to develop any national
brand awareness. This may put us at a competitive disadvantage to regional or
national firms with established identities which are recognizable to employers
and candidates alike.
EMPLOYEES
As of April 30, 1999, we had 187 full-time employees, which included 67
counselors, 41 group managers and 54 trainees. We are not a party to any
collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption and are unaware of any current efforts
or plans to organize our employees. We consider our relationships with our
employees to be good. See "Risk Factors--We must hire, develop and retain
placement staff to sustain future growth" and "--Our success is largely
dependent upon Mr. Robichaud and our senior management team."
FACILITY
We lease each of our 15 office locations. Our leases cover in the aggregate
approximately 42,000 square feet of space, with each office lease covering
approximately 2,700 square feet. We believe that our current facilities are
suitable and adequate for our business and, upon expiration of our leases, we do
not anticipate any significant difficulty in obtaining renewals or alternative
space.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of April 30, 1999,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Michael C. Robichaud (1)............................. 35 President, Chief Executive Officer and Director
Anthony J.M. Groves.................................. 42 Chief Financial Officer, Senior Vice
President--Finance and Administration
Glen P. Froio........................................ 29 Senior Vice President--Operations
Bethann G. Gilfeather................................ 29 Senior Vice President--Operations
Rachel C. Burnett.................................... 35 Director
Scott C. Collins (1)(2).............................. 33 Director
John J. Devine....................................... 46 Director
Alan P. Matthews (1)................................. 41 Director
James C. New......................................... 53 Director
Thomas S. Roberts (1)(2)............................. 35 Director
</TABLE>
- --------------
(1) Member of the compensation committee
(2) Member of the audit committee
MICHAEL C. ROBICHAUD co-founded Stride in July 1989 and has served as our
President since January 1995 and our Chief Executive Officer since January 1998.
Mr. Robichaud has served as a director since October 1994. From 1991 to 1995,
Mr. Robichaud served in numerous positions with us, including operations
manager, with responsibility for strategic planning and implementation of
expansion efforts. Before joining us, Mr. Robichaud served as an information
technology recruiter and sales manager for D.C.R., an employee placement
company. Mr. Robichaud is also a stockholder and a director of Bond
Technologies, Inc., an information technology consulting company, and Percussion
Software, Inc., a software development company, each of which is privately owned
and affiliated with our founding stockholders. See "Certain Transactions with
Related Parties."
ANTHONY J.M. GROVES joined us in June 1998 and has served as our Chief
Financial Officer and Senior Vice President of Finance and Administration since
then. From November 1997 to June 1998, Mr. Groves was an employee of Percussion
Software, Inc. where he provided consulting services to us and to Bond
Technologies, Inc. Before that, Mr. Groves served in numerous positions with
Cognos Inc., a Canadian software company, between 1988 and November 1997, most
recently as Vice President of Finance and Administration of its U.S. subsidiary.
See "Certain Transactions with Related Parties."
GLEN P. FROIO joined us in August 1992 and has served as Senior Vice
President of Operations since January 1998. Mr. Froio has served in numerous
positions with us, including Group Manager from January 1994 to December 1995,
Office Manager of our Los Angeles office from January 1996 to December 1996 and
District Manager of our California region from January 1997 to December 1997.
BETHANN G. GILFEATHER joined us in September 1991 and has served as Senior
Vice President of Operations since January 1998. Ms. Gilfeather has served in
numerous positions with us, including Group Manager from December 1992 to April
1993, Office Manager at various offices from May 1994 to November 1995 and
District Manager of our New York region from December 1995 to December 1997.
RACHEL C. BURNETT co-founded Stride in July 1989 and has served as a
director since October 1994. Ms. Burnett has been the Chief Operating Officer of
Bond Technologies, Inc. since April 1996. Before joining Bond Technologies,
Inc., Ms. Burnett served in numerous positions with us with responsibility for
strategic planning and implementation of expansion efforts, including
responsibility for the opening
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<PAGE>
of our Los Angeles MacArthur Associates and New York Boylston Group offices. Ms.
Burnett is also a stockholder and director of Bond Technologies, Inc. and
Percussion Software, Inc. See "Certain Transactions with Related Parties."
SCOTT C. COLLINS has served as a director since June 1998. Mr. Collins has
been employed by Summit Partners, LLC or its predecessors since 1996. Before
joining Summit Partners, Mr. Collins was employed by McKinsey & Company, a
management consulting firm, from 1995 to 1996 and worked as an Assistant U.S.
Attorney from 1992 to 1995. See "Certain Transactions with Related Parties."
JOHN J. DEVINE co-founded Stride in July 1989 and served as President until
January 1995 and as Chief Executive Officer until March 1996. Mr. Devine is also
a founding stockholder and director of Bond Technologies, Inc. and Percussion
Software, Inc. See "Certain Transactions with Related Parties."
ALAN P. MATTHEWS co-founded Stride in July 1989 and has served as Chairman
of our board of directors since October 1994. Mr. Matthews is also a founding
stockholder and director of Bond Technologies, Inc. and Percussion Software,
Inc. Mr. Matthews has been Chief Executive Officer of Bond Technologies, Inc.
since 1987. See "Certain Transactions with Related Parties."
JAMES C. NEW has served as a director of Stride since August 1998. Mr. New
has served as the President, Chief Executive Officer and a director of
AmeriPath, Inc., a physician practice management services company, since
February 1996. Before joining AmeriPath, Inc., Mr. New served as President and
Chief Executive Officer and as a director of RehabClinics, Inc., an outpatient
rehabilitation company, which he formed in 1991. RehabClinics merged with
NovaCare, Inc. in February 1994. Mr. New was President of NovaCare, Inc.'s
Outpatient Division from 1994 to 1996. From 1993 through 1996, Mr. New was the
Chairman of the Acquisition Committee of the board of directors of Pet Practice,
Inc.
THOMAS S. ROBERTS has served as a director of Stride since June 1998. Mr.
Roberts has been associated with Summit Partners, LLC or its predecessor since
1989 and is currently a member of that firm. Mr. Roberts is a director of AMX
Corporation, a manufacturer and marketer of integrated remote control systems,
and is Chairman of the Board of Directors of AmeriPath, Inc. See "Certain
Transactions with Related Parties."
The number of our directors is currently fixed at seven. Following the
completion of this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
board of directors will consist of two Class I directors, Rachel C. Burnett and
Thomas S. Roberts, three Class II directors, Scott C. Collins, John J. Devine
and Alan P. Matthews, and two Class III directors, James C. New and Michael C.
Robichaud. At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The terms of the Class I directors, Class II directors
and Class III directors expire upon the election and qualification of successor
directors at the annual meeting of stockholders to be held during the calendar
year 2000, 2001 and 2002, respectively.
Each officer, except the Chief Executive Officer, serves at the discretion
of the board of directors and holds office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. The Chief
Executive Officer serves under his employment agreement with us. See
"--Employment, Severance and Non-Competition Agreements." There are no family
relationships among any of our directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
The audit committee is responsible for recommending to the board of
directors the engagement of our outside auditors and reviewing our accounting
controls and the results and scope of audits and other services provided by our
auditors. The members of the Audit Committee are Scott C. Collins and Thomas S.
Roberts.
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Under our 1998 Stock Option and Grant Plan, the board of directors may
designate a committee of two independent directors to administer the 1998 Stock
Option and Grant Plan. No such committee has been appointed and the 1998 Stock
Option and Grant Plan is currently administered by the board of directors.
The compensation committee is responsible for reviewing and approving the
amount and type of consideration to be paid to senior management. The members of
the compensation committee are Scott C. Collins, Alan P. Matthews, Thomas S.
Roberts and Michael C. Robichaud.
The board of directors may establish, from time to time, other committees to
facilitate the management of our business.
DIRECTOR COMPENSATION
James C. New, one of our directors, will be paid a fee of $1,500 for each
meeting of the board of directors attended and be reimbursed for all travel
related expenses in connection with attendance. In addition, Mr. New has been
granted an option to purchase 14,535 shares of common stock at an exercise price
of $13.76 per share and an option to purchase 7,500 shares of common stock at an
exercise price of $12.00 per share. No other current director will receive
compensation for their services as a director. We anticipate that persons who in
the future become directors and are not employees will be offered compensation
for their services substantially similar to that received by Mr. New.
EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation that was
paid to our Chief Executive Officer and the other most highly compensated
executive officers whose aggregate compensation exceeded $100,000 in the year
ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
------------------------
ANNUAL COMPENSATION SECURITIES RESTRICTED
---------------------- UNDERLYING STOCK
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS AWARDS
- ----------------------------------------------------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Michael C. Robichaud (1)......................................... $ 317,250 $ -- 58,140 --
President and Chief Executive Officer
Anthony J.M. Groves (2).......................................... 116,667 60,000 46,512 --
Chief Financial Officer, Senior Vice President--Finance and
Administration
Glen P. Froio (3)................................................ 200,000 522,725 -- 41,530
Senior Vice President--Operations
Bethann G. Gilfeather (4)........................................ 200,000 522,725 -- 41,530
Senior Vice President--Operations
</TABLE>
- --------------
(1) Mr. Robichaud became our Chief Executive Officer in January 1998. Mr.
Robichaud's compensation from January 1998 to March 1998 was $69,000.
Beginning in April 1998, Mr. Robichaud was compensated at an annual base
salary rate of $400,000 and is eligible to receive an annual incentive bonus
in an annual amount determined by our compensation committee if we meet
targets set by the compensation committee for financial performance. In
addition to the compensation shown in the table above, an entity affiliated
with Mr. Robichaud was paid $666,667 in management fees by us in 1998. See
"--Employment, Severance and Non-Competition Agreements" and "--Compensation
Committee Interlocks and Insider Participation."
(2) Mr. Groves became our Chief Financial Officer in June 1998. Mr. Groves was
employed by Percussion Software, Inc. from November 1997 to June 1998.
During 1998, we paid an aggregate of $31,398 in consulting fees to
Percussion Software, Inc. for services provided to us by Mr. Groves. See
"Certain Transactions with Related Parties--Services of Chief Financial
Officer."
(3) Mr. Froio became our Senior Vice President of Operations in January 1998.
During 1997, Mr. Froio was District Manager of our California region.
(4) Ms. Gilfeather became our Senior Vice President of Operations in January
1998. Before becoming Senior Vice President of Operations, Ms. Gilfeather
was District Manager of our New York region.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during 1998 to our Chief Executive Officer and the other most highly compensated
executive officers. The exercise price per share of each option is equal to the
fair market value of the common stock as of the grant date as determined by our
board of directors after consideration of a number of factors, including, but
not limited to:
- our financial performance;
- our status as a private company at the time of grant;
- the minority interests represented by shares underlying options; and
- the price of shares of equity securities sold to or purchased by outside
investors.
The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term using
the 5% and 10% appreciation rates established in regulations of the SEC
compounded annually. The options granted to each of Mr. Robichaud and Mr. Groves
have no potential realizable value using an assumed initial public offering
price of $12.00 per share and an assumed 5% or 10% appreciation rate. The
potential realizable value is not intended to predict future appreciation of the
price of our common stock. The values shown do not consider nontransferability,
vesting or termination of the options upon termination of employee's employment
relationship with us.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE PER FOR OPTION TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- -------------------------------------- ----------- --------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael C. Robichaud.................. 58,140 19.8% $ 20.64 6/04/03 $ 0 $ 0
Anthony J.M. Groves................... 46,512 15.8% 13.76 7/14/03 45,392 193,965
Glen P. Froio......................... -- -- -- -- -- --
Bethann G. Gilfeather................. -- -- -- -- -- --
</TABLE>
Mr. Robichaud's options are fully vested and exercisable as of the date of
grant until the expiration date. These options were granted on June 4, 1998.
Mr. Groves' options vest 33 1/3% on April 30, 2000 and 8.333% on each fiscal
quarter end thereafter. These options were granted on July 14, 1998. Vesting of
these options is subject to the continuation of such employee's employment
relationship with us.
OPTIONS EXERCISES AND YEAR-END HOLDINGS. The following table sets forth
information concerning the number and value of unexercised options to purchase
common stock held by our Chief Executive Officer and the other most highly
compensated executive officers. The Chief Executive Officer and the named
executive officers did not exercise any stock options during 1998. There was no
public trading market for our common stock as of December 31, 1998. Accordingly,
the values of the unexercised in-the-money options have been calculated on the
basis of an assumed initial public offering price of $12.00 per share, less the
applicable exercise price.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Neither our Chief Executive Officer nor the named executive officers
exercised any stock option during the fiscal year ended December 31, 1998. The
following table sets forth certain information
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<PAGE>
regarding stock options held as of December 31, 1998 by our Chief Executive
Officer and by the named executive officers. The "Value of Unexercised
In-The-Money Options at December 31, 1998" is based upon a value of $12.00 per
share, the estimated initial public offering price, minus the per share exercise
price, multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998
-------------------------- ----------------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- --------------- -----------------
Michael C. Robichaud...................................... 58,140 -- -- --
Anthony J.M. Groves....................................... -- 46,512 -- --
Glen P. Froio............................................. -- -- -- --
Bethann G. Gilfeather..................................... -- -- -- --
</TABLE>
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION AND GRANT PLAN. Our board of directors and stockholders
adopted the 1998 Stock Option and Grant Plan in June 1998, which was amended and
restated in November 1998. The 1998 Stock Option and Grant Plan permits us to:
- grant incentive stock options;
- grant non-qualified stock options; and
- issue or sell common stock with vesting or other restrictions, or without
restrictions.
These grants may be made to our officers, employees, directors, consultants,
advisors and other key persons of Stride. The 1998 Stock Option and Grant Plan
allows for the issuance of 813,950 shares of common stock.
Of the shares reserved for issuance under the 1998 Stock Option and Grant
Plan:
- 232,560 shares are subject to outstanding options granted on June 4, 1998
to our founding stockholders, Rachel C. Burnett, John J. Devine, Alan P.
Matthews and Michael C. Robichaud, with an exercise price of $20.64 per
share. These options were fully vested and exercisable as of the date of
grant;
- an additional 46,512 shares are subject to outstanding options granted to
Anthony J.M. Groves, our Chief Financial Officer, on July 14, 1998, with
an exercise price of $13.76 per share of which 15,504 shares will vest on
April 30, 2000 and an additional 3,876 shares will vest at the end of each
fiscal quarter thereafter;
- an additional 14,535 shares are subject to options granted to James C.
New, a director, on August 11, 1998 with an exercise price of $13.76 per
share, of which 3,631.25 shares will vest on August 11, 1999 and an
additional 908.4375 will vest at the end of each fiscal quarter
thereafter;
- an additional 290,710 shares were granted on June 4, 1998 to several of
our key employees as restricted common stock awards, all of which shares
will vest upon the closing of the offering;
- an additional 11,628 shares were sold on June 23, 1998 to Mr. Groves as
restricted common stock awards for an aggregate purchase price of
$160,001, all of which shares will vest on April 30, 1999;
- an additional 38,383 shares are subject to options granted to Mr. Groves
on April 1, 1999 with an exercise price of $12.00 per share, of which
19,191.5 will vest on October 1, 1999 and an additional 3,198.5833 will
vest at the end of each fiscal quarter thereafter; and
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- an additional 7,500 shares are subject to options granted to Mr. New on
April 1, 1999 with an exercise price of $12.00 per share, of which 1,875
will vest on April 1, 2000 and an additional 468.75 will vest at the end
of each fiscal quarter thereafter.
The 1998 Stock Option and Grant Plan is administered by the board of
directors or a committee designated by the board of directors consisting solely
of two or more independent directors. Subject to the provisions of the 1998
Stock Option and Grant Plan, the committee may select the individuals eligible
to receive awards, determine the terms and conditions of the awards granted,
accelerate the vesting schedule of any award and generally administer and
interpret the plan.
The exercise price of options granted under the 1998 Stock Option and Grant
Plan is determined by the committee. Under present law, incentive stock options
and options intended to qualify as performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986 may not be granted at an exercise
price less than the fair market value of the common stock on the date of grant,
or less than 110% of the fair market value in the case of incentive stock
options granted to optionees holding more than 10% of the voting power.
Non-qualified stock options may be granted at prices which are less than the
fair market value of the underlying shares on the date granted. Options are
typically subject to vesting schedules, terminate ten years from the date of
grant and may be exercised for specified periods after to the termination of the
optionee's employment or other service relationship with us. Upon the exercise
of options, the option exercise price must be paid in full either in cash or by
certified or bank check or other instrument acceptable to the committee or, in
the sole discretion of the committee, by delivery of shares of common stock that
have been owned by the optionee free of restrictions for at least six months.
The exercise price may also be delivered to us (a) by the optionee in the form
of a promissory note if the loan of such funds to the optionee has been
authorized by the board of directors and the optionee pays so much of the
exercise price as represents the par value of the common stock acquired in a
form other than a promissory note and (b) by a broker under irrevocable
instructions to the broker selling the underlying shares from the optionee.
In the event of a merger, reorganization or consolidation, the sale of all
or substantially all of our assets or all of our outstanding capital stock or a
liquidation or other similar transaction, 50% of any outstanding awards, issued
under the 1998 Stock Option and Grant Plan that are not then vested will become
fully vested and exercisable upon the closing of the transaction. The 1998 Stock
Option and Grant Plan and all awards issued under the plan will terminate upon
any of the transactions described above, unless Stride and the other parties to
such transactions have agreed otherwise. All participants under the 1998 Stock
Option and Grant Plan will be permitted to exercise for a period of 15 days
before any such termination all awards held by them which are then exercisable
or will become exercisable upon the closing of the transaction.
EMPLOYMENT, SEVERANCE AND NON-COMPETITION AGREEMENTS
Under an employment agreement dated June 4, 1998, we agreed to employ
Michael C. Robichaud as our President and Chief Executive Officer. The
employment agreement also provides that Mr. Robichaud will be nominated to serve
as a director during the term of the employment agreement. Under the terms of
the employment agreement, Mr. Robichaud will receive an annual base salary of
$400,000 and will be eligible to receive an annual incentive bonus in an amount
determined annually by the compensation committee of the board of directors if
we meet targets set by the compensation committee for financial performance. We
also agreed to provide Mr. Robichaud 12 months of base salary continuation and
continuation of hospital, health and insurance benefits upon termination of Mr.
Robichaud's employment if we terminate him without cause, including any
constructive termination such as a significant change in his responsibilities or
other similar demotion. For purposes of Mr. Robichaud's employment agreement,
"cause" is defined as one or more of the following:
- conviction of a felony or crime of moral turpitude under any state or
federal law;
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- willful failure to fulfill any of his material duties or responsibilities;
- failure or refusal to adhere to any established lawful policy of ours;
- commission of any fraud, embezzlement or misappropriation of funds or
breach of fiduciary duty or other act of dishonesty which results in harm
to us; and
- any material breach of his obligations under his confidentiality and
non-competition agreement.
In connection with our June 1998 leveraged recapitalization, we entered into
Non-Solicitation, Non-Competition and Non-Disclosure Agreements with Rachel C.
Burnett, John J. Devine, Alan P. Matthews and Michael C. Robichaud. Each of the
agreements provides that the individual will not engage in competitive
activities before the later of (a) May 31, 2003 and (b) the first anniversary of
the termination of the individual's employment with us. Each of the agreements
also places restrictions on the individual during the same period with respect
to solicitation of our clients or employees and restrictions for an unlimited
period with respect to disclosure of confidential information. We also entered
into typical non-solicitation, non-competition and confidentiality agreements
with substantially all of our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before June 1998, we did not have a compensation committee or similar
committee of the board of directors. In June 1998, the compensation committee of
the board of directors consisting of Michael C. Robichaud, Scott C. Collins,
Alan P. Matthews and Thomas S. Roberts was established. Before the establishment
of the compensation committee, Michael C. Robichaud, Rachel C. Burnett and John
J. Devine and Alan P. Matthews each participated in deliberations of our board
of directors concerning executive officer compensation. During 1997, in
connection with the management of our business, we paid management fees totaling
approximately $7.6 million to entities affiliated with Messrs. Robichaud, Devine
and Matthews and Ms. Burnett. Each of Messrs. Robichaud, Devine and Matthews and
Ms. Burnett also serve on the board of directors of Bond Technologies, Inc. and
Percussion Software, Inc. and has participated in deliberations of the board of
directors of each company concerning executive compensation. For information
regarding transactions and relationships between Stride and Messrs. Robichaud,
Devine and Matthews and Ms. Burnett, see "--Employment, Severance and
Non-Competition Agreements" and "Certain Transactions with Related Parties."
In connection with the management of our business from its founding until
June 1998, we paid management fees to affiliates of our founding stockholders.
The payment of such management fees ceased upon the closing of the
recapitalization in June 1998. In the years ended December 31, 1994, 1995, 1996,
1997 and 1998, we paid the following management fees:
- on behalf of Rachel C. Burnett, $666,667 in 1998, $1,866,980 in 1997 and
$897,887 in 1996;
- on behalf of John J. Devine, $668,005 in 1998, $1,931,172 in 1997,
$944,435 in 1996 and $217,727 in 1994;
- on behalf of Alan P. Matthews, $868,005 in 1998, $1,942,050 in 1997,
$979,069 in 1996, $31,703 in 1995 and $217,727 in 1994;
- on behalf of Michael C. Robichaud, $666,667 in 1998, $1,866,980 in 1997
and $897,887 in 1996.
Several investment funds associated with Summit Partners, LLC, who together
are our principal stockholders, have expressed a desire to purchase
approximately five to ten percent of the shares of common stock which otherwise
would be sold in this offering. Any shares that are sold to our principal
stockholders will be sold directly by us at the initial public offering price
per share.
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CERTAIN TRANSACTIONS WITH RELATED PARTIES
RECAPITALIZATION
On June 4, 1998, we underwent a leveraged recapitalization. The proceeds of
the recapitalization were used primarily to redeem 60% of the outstanding common
stock then held by our founding stockholders, Rachel C. Burnett, John J. Devine,
Alan P. Matthews and Michael C. Robichaud. As part of the recapitalization, a
group of investment funds associated with Summit Partners, LLC, but unaffiliated
with any of our founding stockholders, acquired shares of series A convertible
preferred stock, shares of common stock, warrants to purchase additional shares
of common stock and subordinated debentures, each as described in more detail
below. Immediately before the closing of this offering, the Summit investors
will convert their shares of series A convertible preferred stock into 1,000,000
shares of common stock and 24,802.5 shares of series B redeemable preferred
stock. Approximately $32.9 million of the net proceeds of this offering will be
used to make a net redemption payment on the the shares of series B redeemable
preferred stock, and $10.0 million of the net proceeds of this offering will be
used to repay the outstanding subordinated debentures. Following the closing of
this offering, the Summit investors will own an aggregate of 3,000,010 shares of
common stock, or 31.1% of the total shares of common stock outstanding, and our
founding stockholders will own an aggregate of 2,000,000 shares of common stock,
or 2,232,560 shares of common stock assuming the exercise by the founders of
outstanding options to purchase 232,560 shares of common stock, or 20.7% of the
total outstanding shares of common stock, or 22.6% assuming the exercise by the
founders of outstanding options to purchase 232,560 shares of common stock. The
terms of the recapitalization are shown in more detail below.
- The Summit investors invested $40.0 million in our business to acquire:
-- 24,802.5 shares of series A convertible preferred stock, which shares
are convertible in connection with this offering into 1,000,000 shares
of common stock and 24,802.5 shares of series B redeemable preferred
stock;
-- warrants to purchase 762,505 shares of common stock with an exercise
price of $4.62 per share;
-- 1,237,505 shares of common stock; and
-- $10.0 million in subordinated debentures which bear interest at a rate
of 12.0% annually.
In connection with this offering, the Summit investors will convert their
shares of series A convertible preferred stock into 24,802.5 shares of
series B redeemable preferred stock and 1,000,000 shares of common stock,
and we will redeem all of the series B redeemable preferred stock for an
aggregate redemption price of approximately $36.5 million, including
approximately $16.9 million relating to a redemption premium which will be
paid as a result of this offering. together with accrued dividends of
approximately $2.2 million as of March 31, 1999, and we will repay the
outstanding subordinated debentures, which would otherwise mature as of
August 4, 2003, for an aggregate repayment of $10.0 million. In addition,
the Summit investors will exercise their warrants for an aggregate exercise
price of approximately $3.5 million.
- We borrowed $26.0 million in senior bank debt from BankBoston, N.A., an
affiliate of BancBoston Robertson Stephens, which bears interest at a
variable rate and matures on June 4, 2003. As of March 31, 1999, the
interest rate was approximately 6.75% annually. In connection with this
offering, we will repay with any remaining net proceeds a portion, but not
less than $2.0 million, of the $24.5 in principal of the senior bank debt.
- We redeemed 750,000 shares of common stock held by each of our founding
stockholders at a per share price of approximately $21.26, representing an
aggregate of approximately 60% of the
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outstanding common stock held by each of them, for a price of
approximately $15.9 million each and an aggregate price of approximately
$63.8 million;
- The parties to the recapitalization entered into a Registration Rights
Agreement under which the Summit investors and the founding stockholders
each received rights to require us (a) to file a registration statement
with the SEC covering the shares of common stock held by such stockholders
and (b) to register shares of common stock held by such stockholders in a
registration statement being filed by Stride to register other securities
for sale to the public. See "Description of Capital Stock--Registration
Rights."
- The parties to the recapitalization entered into a Shareholders' Agreement
under which the Summit investors and the founding stockholders were
granted rights regarding proposed sales or other transfers of shares of
common stock and future issuances of securities proposed by us. The
parties to the Shareholders' Agreement also agreed to vote their shares of
common stock in favor of individuals nominated by each of the founding
stockholders and the Summit investors for election as directors. All of
our current directors were nominated for and elected to their positions as
provided under the Shareholders' Agreement. Effective upon and subject to
the closing of this offering, the Shareholders' Agreement will terminate
under its original terms.
DIRECT OFFERING TO SUMMIT INVESTORS
The Summit investors, our principal stockholders, have expressed a desire to
purchase approximately five to ten percent of the shares of common stock which
otherwise would be sold in this offering. Any shares that are sold to our
principal stockholders will be sold directly by us at the initial public
offering price per share. The provisions of our Registration Rights Agreement
with the Summit investors and our founding stockholders will apply to any
additional shares of common stock purchased by the Summit investors. See
"Description of Capital Stock--Registration Rights."
MANAGEMENT FEES
In connection with the management of our business from its founding until
June 1998, we paid management fees to affiliates of our founding stockholders.
See "Management--Compensation Committee Interlocks and Insider Participation."
1995 REORGANIZATION
Prior to 1995, our placement business was conducted through the three
separate entities listed below. On January 1, 1995, we reorganized into one
corporation by purchasing:
- N.Y. Futures, Inc., a New York corporation in which Messrs. Devine and
Matthews and Ms. Burnett held an interest, for consideration of $101,385,
consisting of $14,496 in cash and the assumption of capital leases;
- LA Futures, Inc., a California corporation in which Messrs. Devine and
Matthews held an interest, for consideration of $17,197; and
- Mass. Futures, Inc., a Massachusetts corporation in which Messrs. Devine,
Matthews and Robichaud held an interest, for consideration of $46,480,
consisting of $12,660 in cash and the assumption of capital leases.
RESTRICTED STOCK GRANTS
In June 1998, we sold 11,628 shares of restricted common stock to Anthony
J.M. Groves, our Chief Financial Officer, under the 1998 Stock Option and Grant
Plan for an aggregate purchase price of $160,001. In connection with the sale,
we loaned Mr. Groves $160,001. The loan to Mr. Groves
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matures as of July 14, 2002, bears interest at the rate of 6% annually, is
required to be prepaid to the extent of the after-tax net proceeds realized from
the sale of the restricted common stock as such stock is sold and is secured by
a pledge of the stock, with recourse to Mr. Groves' personal assets limited to
25% of the principal and accrued and unpaid interest thereon.
PLACEMENT SERVICES FOR AFFILIATES OF OUR FOUNDING STOCKHOLDERS
In the regular course of business, we provide placement services to Bond
Technologies, Inc., an information technology consulting firm, and Percussion
Software, Inc., a software development company, each of which is affiliated with
our founding stockholders, Messrs. Devine, Matthews and Robichaud and Ms.
Burnett. We receive fees for such services which we believe are no less
favorable from those entities than fees we could receive from unaffiliated third
parties.
PROPERTY LEASES
Our Remington Boston and Atlantis New York offices are situated in office
space sublet from Bond Technologies, Inc., a majority interest of which is owned
collectively by our founding stockholders, Messrs. Devine, Matthews and
Robichaud and Ms. Burnett. Remington Boston currently occupies all of the office
space covered by the Bond Technologies, Inc. master lease for the Boston office
space, and we pay the full amount due under such lease. Atlantis New York
currently occupies a portion of the office space covered by the Bond
Technologies, Inc. master lease for the New York office space, and we pay a
pro-rata portion of the full amount due under such lease.
SERVICES OF CHIEF FINANCIAL OFFICER
From November 1997 to June 1998, Anthony J.M. Groves, our Chief Financial
Officer, was employed by Percussion Software, Inc. During that period, Mr.
Groves provided consulting services to us and to Bond Technologies, Inc. Stride
and Bond Technologies, Inc. together paid to Percussion Software, Inc.
consulting fees in an aggregate amount of approximately $62,000 for such
services, $31,398 of which was paid solely by Stride.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of April 30, 1999 and as adjusted to reflect the
sale of the common stock offered hereby, by (a) all persons known by us to own
beneficially 5% or more of the common stock, (b) each of our directors, (c) the
Chief Executive Officer and each of the other named executive officers and (d)
all directors and named executive officers as a group. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares of common stock beneficially owned by such stockholder.
The address of the Summit Partners Group is 600 Atlantic Avenue, Boston, MA
02210. The address of Messrs. Collins and Roberts is c/o Summit Partners, LLC,
600 Atlantic Avenue, Boston, MA 02210. The address of all other listed
stockholders is c/o Stride & Associates, Inc., 222 Berkeley Street, Suite 1620,
Boston, MA 02116.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the SEC. The information is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting power or investment power and any shares as to which the
individual or entity has the right to acquire beneficial ownership within 60
days after April 30, 1999 through the exercise of any stock option or other
right. As of April 30, 1999, a total of 5,534,908 shares of common stock were
either outstanding or subject to options, warrants or other convertible
securities that are exercisable or that will become exercisable within 60 days
of the estimated effective date of this offering. The inclusion in this
prospectus of such shares, however, does not constitute an admission that the
named stockholder is a direct or indirect beneficial owner of such shares. In
the event that the overallotment option is exercised in full, the aggregate
number of outstanding shares of common stock would be 10,304,848. The applicable
percentage of "beneficial ownership" after this offering is based upon 3,539,843
shares of common stock outstanding at April 30, 1999. The number of shares of
common stock shown in this prospectus includes 24,802.5 shares of series A
convertible preferred stock on an as converted basis, which will be converted
into an aggregate of 1,000,000 shares of common stock and 24,802.5 shares of
series B redeemable preferred stock upon completion of this offering. The Summit
investors have expressed a desire to purchase approximately five to ten percent
of the shares of common stock which otherwise would be sold in this offering.
The number and percentage of shares of common stock beneficially owned after
this offering by the Summit investors set forth on the table below assumes that
no additional shares of common stock will be sold directly by us to the Summit
investors.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE OF SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNERS OWNED BEFORE THIS OFFERING AFTER THIS OFFERING
- ----------------------------------------------------------- -------------- --------------------- -------------------
<S> <C> <C> <C>
Summit Partners Group (1).................................. 3,000,010 56.6% 31.1%
Thomas S. Roberts (2)...................................... 3,000,010 56.6 31.1
Rachel C. Burnett (3)...................................... 558,140 15.5 5.7
John J. Devine (3)......................................... 558,140 15.5 5.7
Alan P. Matthews (3)....................................... 558,140 15.5 5.7
Michael C. Robichaud (3)................................... 558,140 15.5 5.7
Glen P. Froio (4).......................................... 41,530 * *
Bethann G. Gilfeather (5).................................. 41,530 * *
Anthony J.M. Groves (6).................................... 11,628 * *
Scott C. Collins (7)....................................... 3,904 * *
James C. New (8)........................................... -- -- --
All executive officers and directors as a group (10
persons) (9)............................................. 5,327,258 96.2 53.9
</TABLE>
- --------------
* Less than 1%
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(1) Represents:
- 1,372,128.1495 shares of common stock owned by Summit Ventures IV, L.P.;
- 1,175,557.80 shares of common stock owned by Summit Ventures V, L.P.;
- 196,570.3285 shares of common stock owned by Summit V Companion Fund,
L.P.;
- 123,800.0 shares of common stock owned by Summit Subordinated Debt Fund
II, L.P.;
- 78,629.2685 shares of common stock owned by Summit V Advisors Fund (QP),
L.P.;
- 29,294.1790 shares of common stock owned by Summit Investors III, L.P.;
and
- 24,030.2745 shares of common stock owned by Summit V Advisors Fund, L.P.
Summit Ventures IV, L.P., Summit Ventures V, L.P., Summit V Companion Fund,
L.P., Summit Subordinated Debt Fund II, L.P., Summit V Advisors Fund (QP),
L.P., Summit Investors III, L.P. and Summit V Advisors Fund, L.P. are part
of an affiliated group of investment partnerships referred to, collectively,
as the Summit Partners Group. Mr. Roberts, one of our directors, is a
general partner of Stamps, Woodsum & Co., IV, which is the ultimate general
partner of Summit Ventures IV, L.P., a member of Summit Partners, LLC, which
is the ultimate general partner of each of Summit Ventures V, L.P., Summit V
Companion Fund, L.P., Summit V Advisors Fund (QP), L.P. and Summit V
Advisors Fund, L.P. and a member of Summit Partner SD II, LLC, which is the
general partner of Summit Subordinated Debt Fund II, L.P.
(2) Represents shares described in note (1) above. Mr. Roberts, one of our
directors is a member of Summit Partners, LLC and is a member or general
partner of affiliates of Summit Partners, LLC, and, as such, has the power
to vote or direct the vote of and to dispose of or direct the disposition of
the shares owned by the Summit Partners Group. Mr. Roberts disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(3) Includes 58,140 shares of common stock which may be acquired upon exercise
of stock options that are currently exercisable.
(4) Represents shares of restricted common stock held by Mr. Froio all of which
shares will be vested upon the completion of this offering.
(5) Represents shares of restricted common stock held by Ms. Gilfeather all of
which shares will be vested upon the completion of this offering.
(6) Represents shares of restricted common stock held by Mr. Groves of which no
shares will be vested upon the completion of this offering. All of such
shares of restricted common stock will vest on April 30, 1999. Excludes
46,512 shares of common stock which may be acquired upon exercise of
unvested stock options, of which 15,504 will vest on April 30, 2000 and an
additional 3,878 will vest at the end of each fiscal quarter beginning June
30, 2000 and ending March 31, 2002, and 38,383 shares of common stock which
may be acquired upon exercise of unvested stock options, of which 19,191.5
will vest on October 1, 2000 and an additional 3,192.5833 will vest at the
end of each fiscal quarter beginning December 31, 2000 and ending March 31,
2002.
(7) Represents shares of common stock owned by Summit Investors III, L.P. in
which Mr. Collins holds a pecuniary interest.
(8) Excludes 14,535 shares of common stock which may be acquired upon exercise
of unvested stock options, of which 3,631.25 will vest on August 11, 1999
and an additional 908.4375 will vest at the end of each fiscal quarter
beginning September 30, 1999 and ending June 30, 2002, and 7,500 shares of
common stock which may be acquired upon exercise of unvested stock options,
of which 1,875 will vest on April 1, 2000 and an additional 468.75 will vest
at the end of each fiscal quarter beginning June 30, 2000 and ending March
31, 2002.
(9) Represents 5,327,258 shares held of record by current executive officers and
directors as a group and 207,650 shares subject to options or warrants
exercisable within 60 days of April 30, 1999 held by current executive
officers and directors as a group.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
Our senior bank debt with BankBoston, N.A. and several other lending
institutions will remain in place following the completion of this offering. The
following is a summary of all of the material terms of the senior bank debt. You
should refer to the forms of the relevant documents filed as exhibits to our
registration statement, of which this prospectus forms a part, to review all of
the terms of the documents.
SENIOR BANK DEBT
As of March 31, 1999, as part of our senior bank debt, we had $24.5 million
outstanding under a term loan and $2.0 million available under a revolving
credit facility. The term loan matures on June 4, 2003, and the revolving credit
facility commitment terminates June 4, 2003. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The senior bank debt is secured, with limited exceptions, by a perfected
first priority security interest in all our assets owned today and all assets we
acquire in the future. We have agreed to pledge as additional collateral all
assets owned by any subsidiaries which we may form or acquire in the future, and
we have agreed to cause any future subsidiaries to guarantee all outstanding
amounts.
Interest accrues on each base rate loan made under the revolving credit
facility at a rate equal to the higher of the interest rate established by
BankBoston, N.A. as its base rate or 0.5% above the federal funds effective
rate, plus the applicable margin.
Interest accrues on each LIBOR rate loan made under the revolving credit
facility at a rate equal to the rate determined by BankBoston, N.A. at which
dollar deposits for the applicable interest period are offered based on
information presented on Telerate Page 3750 as of 11:00 a.m. London time on the
second LIBOR business day before the first day of the applicable interest
period, divided by a number equal to 1.00 minus the eurocurrency reserve rate
determined under the loan documents.
Interest accrues on borrowings under the term loan, at our option, at either
of the following rates:
- to the extent that all or any portion of the term loan bears interest
during the applicable interest period at the base rate, the loan will bear
interest at the base rate, plus the applicable margin; or
- to the extent that all or any portion of the term loan bears interest
during the applicable interest period at the LIBOR rate, the loan will
bear interest at the LIBOR rate, plus the applicable margin.
The senior bank debt agreements impose a number of affirmative covenants on
us, including, without limitation, obligations to:
- deliver to the lenders financial statements and other periodic reports;
- provide the lenders notice of defaults, litigation, material events,
claims against collateral and judgments;
- afford the lenders access to our business for inspection purposes;
- pay all taxes or other assessments when due;
- comply with applicable laws and contracts;
- maintain our corporate existence and maintain our properties in good
repair; and
- maintain adequate and suitable insurance for our industry.
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<PAGE>
The senior bank debt agreements also impose on us a number of negative
covenants, including, without limitation, prohibitions on:
- incurring indebtedness, other than pursuant to subordinated indebtedness
or other limited circumstances;
- incurring liens on assets, other than in limited circumstances;
- making investments, except for permitted investments such as government
obligations and deposit accounts;
- making dividend or distribution payments on any class of our capital
stock, other than dividends payable in shares of common stock;
- making any payments to affiliates;
- entering into any merger or acquisition transaction with any third party
or any dissolution transaction;
- entering into sale leaseback transactions;
- changing lines of business; and
- entering into transactions with affiliates, other than on terms as
favorable as those obtainable on an arm's length basis in the ordinary
course of business.
We are required under the senior bank debt to meet financial covenants,
consisting of (a) a maximum leverage ratio, (b) a minimum debt service coverage
ratio and (c) a minimum current ratio of consolidated current assets to
consolidated current liabilities. See "Risk Factors--Covenants in our debt
agreements will restrict our business."
The senior bank debt agreements specify events of default, including,
without limitation:
- non-payment of principal when due or interest, fees or other amounts after
a three-day grace period;
- breach of any other agreement in the senior bank debt agreements not cured
within 30 days of notice of the breach;
- default under other agreements governing indebtedness;
- material breach of any representation or warranty in the agreements;
- events of bankruptcy or insolvency;
- failure of the lenders' security interest to be perfected or to have first
priority;
- failure to satisfy material ERISA requirements;
- any reduction of the ownership of the Summit investors below 25% of the
outstanding common stock; and
- any liquidity event.
Our senior bank debt agreements, including further detail regarding the
affirmative covenants, negative covenants, financial covenants and default
provisions of such agreements, are attached as exhibits to our publicly
available registration statement of which this prospectus is a part. See "Where
You Can Find More Information."
In connection with our senior bank debt, we also entered into an interest
rate collar agreement for the term loan, with a notional amount of $13.0
million, to reduce our exposure to market risks from changes in interest rates.
The interest rate collar expires on August 4, 2000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Interest Rate
Risk," and notes 2 and 5 of notes to our financial statements included elsewhere
in this prospectus.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
There are 3,539,843 shares of common stock and 24,802.5 shares of series A
convertible preferred stock issued and outstanding. In connection with and
subject to the closing of this offering, the Summit investors will convert all
of the outstanding shares of series A convertible preferred stock into an
aggregate of 1,000,000 shares of common stock and 24,802.5 shares of series B
redeemable preferred stock. Under the terms of the series B redeemable preferred
stock, upon the closing of this offering all of the outstanding shares of series
B redeemable preferred stock will be redeemed by us for an aggregate of
approximately $36.5 million, together with accrued dividends of approximately
$2.2 million as of March 31, 1999. At the same time, the holders of the
outstanding warrants will exercise the warrants for 780,005 shares of common
stock for an aggregate exercise price of approximately $3.5 million.
Following this offering, our authorized capital stock will consist of
50,000,000 shares of common stock of which 9,652,348 will be issued and
outstanding; and 5,000,000 shares of undesignated preferred stock issuable in
one or more series designated by the board of directors, of which no shares will
be issued and outstanding.
COMMON STOCK
VOTING RIGHTS
The holders of common stock have one vote per share. Holders of common stock
are not entitled to vote cumulatively for the election of directors. Generally,
all matters to be voted on by stockholders must be approved by a majority, or,
in the case of election of directors, by a plurality, of the votes entitled to
be cast at a meeting at which a quorum is present by all shares of common stock
present in person or represented by proxy, voting together as a single class,
subject to any voting rights granted to holders of any then outstanding
preferred stock. Except as otherwise provided by law, amendments to our
certificate of incorporation, which will be effective upon consummation of this
offering must be approved by a majority of the voting power of the common stock.
DIVIDENDS
Holders of common stock will share ratably in any dividends declared by the
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock.
OTHER RIGHTS
In the event of any merger or consolidation of Stride with or into another
company as a result of which shares of common stock are converted into or
exchangeable for shares of stock, other securities or property, including cash,
all holders of common stock will be entitled to receive the same kind and
amount, on a per share of common stock basis, of such shares of stock and other
securities and property, including cash. On liquidation, dissolution or winding
up of Stride, all holders of common stock are entitled to share ratably in any
assets available for distribution to holders of shares of common stock. No
shares of common stock are subject to redemption or have preemptive rights to
purchase additional shares of common stock.
Following this offering, all the outstanding shares of common stock will be
legally issued, fully paid and nonassessable.
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<PAGE>
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock may
be issued from time to time in one or more series. Our board of directors is
authorized to fix the voting rights, if any, designations, powers, preferences,
qualifications, limitations and restrictions thereof, applicable to the shares
of each series. The board of directors may, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the
voting power and other rights of the holders of the common stock and could have
anti-takeover effects. We have no present plans to issue any shares of preferred
stock. The ability of the board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control of Stride or the removal of existing management.
REGISTRATION RIGHTS
Under the terms of the Registration Rights Agreement entered into for the
June 1998 leveraged recapitalization, after the date of the recapitalization,
any of the Summit investors and our founding stockholders, who in the aggregate
hold 25% of the shares of common stock held by all of them, may demand that we
file a registration statement for the registration of at least 15% of their
shares under the Securities Act. We are not required to effect more than a total
of four of these demand registrations.
After the closing of this offering, those stockholders also will be entitled
to piggyback registration rights in connection with any registration by us of
securities for our own account or the account of other stockholders. If we
propose to register any shares of common stock under the Securities Act, we are
required to give those stockholders notice of the registration and to include
their shares in the registration statement. At any time after we become eligible
to file a registration statement on Form S-3 under the Securities Act, these
stockholders may require us to file an unlimited number of registration
statements on Form S-3 with respect to their shares of common stock.
The registration rights of these stockholders will terminate when the shares
held by them may be sold under Rule 144 under the Securities Act. We are
generally required to bear all of the expenses of all demand and piggyback
registrations, except underwriting discounts and commissions. We also have
agreed to indemnify those stockholders under the terms of the Registration
Rights Agreement.
INDEMNIFICATION MATTERS
Our 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 in improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of the board of directors, non-officer employees may
be, indemnified by Stride 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
Stride. The by-laws 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. We also have directors' and officers'
insurance against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Stride as
described above, we have been advised that in the
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opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. At present, there is no
pending material litigation or proceeding involving any director, officer,
employee or agent of Stride in which indemnification will be required or
permitted.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any amendment to our certificate of incorporation must first be approved by
a majority of the board of directors and thereafter approved by a majority of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment.
BY-LAW PROVISIONS
Our by-laws provide that a special meeting of stockholders may be called
only by the President or the board of directors unless otherwise required by
law. Our by-laws provide that only those matters included in the notice of the
special meeting may be considered or acted upon at that special meeting unless
otherwise provided by law. In addition, our by-laws include advance notice and
informational requirements and time limitations on any director nomination or
any new proposal which a stockholder wishes to make at an annual meeting of
stockholders.
ABILITY TO ADOPT STOCKHOLDER RIGHTS PLAN
The board of directors may in the future resolve to issue shares of
preferred stock or rights to acquire such shares to implement a stockholder
rights plan. A stockholder rights plan typically creates voting or other
impediments to discourage persons seeking to gain control of Stride by means of
a merger, tender offer, proxy contest or otherwise if the board of directors
determines that such change in control is not in the best interests of Stride
and our stockholders. The board of directors has no present intention of
adopting a stockholder rights plan and is not aware of any attempt to obtain
control of Stride.
STATUTORY BUSINESS COMBINATION PROVISION
Following this offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more
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difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. A Delaware corporation
may "opt out" of Section 203 with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or by-laws resulting from an amendment approved by holders of at
least a majority of the outstanding voting stock. Neither our certificate of
incorporation nor our by-laws contains any such exclusion.
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol STDA.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and no prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market price
of the common stock prevailing from time to time. Nonetheless, substantial sales
of common stock in the public market following this offering, or the perception
that such sales could occur, could lower market price of the common stock or
make it difficult for us to raise additional equity capital in the future.
Following this offering, there will be 9,652,348 shares of common stock
outstanding. Of these shares, the 4,350,000 shares which are being sold in this
offering by the underwriters generally will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares held by our "affiliates" as is defined in Rule 144 under the Securities
Act may be sold only in compliance with the limitations described below. The
remaining 5,302,348 shares of common stock which will be outstanding after this
offering, plus any shares of common stock that are sold directly by us to the
Summit investors, who are our principal stockholders, will be "restricted
securities" as defined in Rule 144, and may be sold in the future without
registration under the Securities Act subject to compliance with the provisions
of Rule 144 or any other applicable exemption under the Securities Act. In
connection with this offering, our existing officers, directors and
stockholders, who hold all of the currently outstanding shares of common stock
and will own the remaining 5,302,348 shares of common stock after this offering,
have agreed with the underwriters that, subject to exceptions, they will not
sell or dispose of any of their shares for 180 days after the date of this
prospectus. The figures set forth in this section assume that no additional
shares of common stock will be sold directly by us to the Summit investors.
Hambrecht & Quist LLC may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to such restrictions.
Subject to these lock-up agreements, the shares of common stock outstanding upon
the closing of this offering will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
4,350,000 After the date of this prospectus, freely tradeable shares sold in this offering.
5,302,348 After 180 days from the date of this prospectus, the lock-up is released and these shares are
saleable under Rule 144 (subject, in some cases, to volume limitations), Rule 144(k), or under a
registration statement to register for resale shares of common stock issued upon the exercise of
stock options.
</TABLE>
In general, under Rule 144, as currently in effect, a person or persons
whose shares are required to be aggregated, including an affiliate of ours, and
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, which is expected to be approximately
97,000 shares upon the completion of the offering, or the average weekly trading
volume of the common stock during the calendar weeks preceding the date on which
notice of such sale is filed, subject to certain restrictions. In addition, a
person who is not deemed to have been an affiliate of ours at any time during
the 90 days preceding a sale and who has beneficially owned the shares proposed
to be sold for at least two years would be entitled to sell such shares under
Rule 144(i) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate of ours, such person's holding
period for the purpose of effecting a sale under Rule 144 commences on the date
of transfer from the affiliate.
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We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under the 1998
Stock Option and Grant Plan. See "Risk Factors--The future sale of our common
stock could adversely affect the market price of our common stock."
Following the offering, under specified circumstances and subject to
customary conditions, the Summit investors and our founding stockholders will
have rights with respect to 5,000,010 shares of common stock, subject to the
180-day lock-up arrangement described above, to require us to register their
shares of common stock under the Securities Act, and they will have rights to
participate in any future registration of securities by us. If the Summit
investors purchase additional shares of common stock directly from us, this
number will increase. We are not required to effect more than an aggregate of
four demand registrations on behalf of these holders.
As of April 30, 1999, 511,612 shares were reserved for issuance under our
1998 Stock Option and Grant Plan, of which options to purchase 339,490 shares
were then outstanding. Beginning 180 days after the date of this prospectus,
approximately 237,100 shares issuable upon the exercise of vested options will
become eligible for sale.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC
and BancBoston Robertson Stephens Inc. have severally agreed with us to purchase
from us the following respective numbers of shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------
<S> <C>
Hambrecht & Quist LLC......................................................
BancBoston Robertson Stephens Inc. .......................................
---
Total......................................................................
---
---
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions precedent, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, our counsel and independent auditors. The nature of the
underwriters' obligation is that they are committed to purchase all shares of
common stock offered by this prospectus if any of the shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price shown on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow and the dealers may reallow
a concession not in excess of $ per share to other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the representatives of the underwriters. The
representatives have advised us that the underwriters do not intend to confirm
discretionary sales in excess of 5% of the shares of common stock offered by
this prospectus.
Several investment funds associated with Summit Partners, LLC, who together
are our principal stockholders, have expressed a desire to purchase
approximately five to ten percent of the shares of commom stock which otherwise
would be sold in this offering. Any additional shares sold to our principal
stockholders will be sold directly by us at the initial public offering price
per share. The underwriters will not receive any underwriting discounts or
commissions with respect to any shares of common stock sold directly by us to
our principal stockholders.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus to purchase up to 652,500 additional
shares of common stock at the initial public offering price less the
underwriting discount, shown on the cover page of this prospectus. To the extent
that the underwriters exercise this option, each of the underwriters will have a
firm commitment to purchase approximately the same percentage of the option
which the number of shares of common stock to be purchased by it shown in the
above table bears to the total number of shares of common stock offered. We will
be obligated, as part of the option, to sell shares to the underwriters to the
extent the option is exercised. The underwriters may exercise such option only
to cover over-allotments made in connection with the sale of shares of common
stock offered.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
69
<PAGE>
Stride, the founding stockholders and a group investment funds associated
with Summit Partners, LLC have agreed to indemnify the underwriters against
specific liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
those liabilities.
All our stockholders and directors, who will own in the aggregate 5,302,348
shares of common stock after the offering, have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell, or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them during the 180-day period following the date of
this prospectus. We have agreed that we will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted before the closing of this
offering, and may grant additional options under our stock option plans,
provided that, without the prior written consent of Hambrecht & Quist LLC, these
additional options will not be exercisable during that period.
Before the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation among us and the underwriters. Among the factors considered in
determining the initial public offering price are prevailing market and economic
conditions, our revenue and earnings, market valuations of other companies
engaged in activities similar to us, estimates of our business potential and
prospects, the present state of our business operations, our management and
other factors deemed relevant. The estimated initial public offering price range
shown on the cover of this prospectus is subject to change as a result of market
conditions and other factors.
Some persons participating in the offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effective syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when the common stock sold by the syndicate member is purchased in
syndicate covering transactions. 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.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Stride by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Various
legal matters related to the sale of the common stock offered hereby will be
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
Our audited financial statements as of December 31, 1997 and 1998, and for
each of the three years in the period ended December 31, 1998 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing in this prospectus, and have been so included
in reliance upon their authority as experts in accounting and auditing.
70
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus, which forms a part of the
registration statement, does not contain all the information included in the
registration statement, parts of which have been omitted as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract or other document are not necessarily complete.
Where the contract or other document is an exhibit to the registration
statement, each statement is qualified by the provisions of that exhibit.
The registration statement can be inspected and copied at the public
reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the Web site of the SEC referred to above.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT............................................................................... F-2
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (Unaudited)........................... F-3
Statements of Income for the Years Ended December 31, 1996, 1997 and 1998
and for the Three Months Ended March 31, 1998 (Unaudited) and 1999 (Unaudited)......................... F-4
Statements of Common Stockholders' Equity (Deficiency) for the Years Ended December 31, 1996, 1997 and
1998 and for the Three Months Ended March 31, 1999 (Unaudited)......................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and for the Three Months
Ended March 31, 1998 (Unaudited) and 1999 (Unaudited).................................................. F-6
Notes to Financial Statements............................................................................ F-7
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES:
The information required for supplemental financial statement schedules is either not applicable or is included
elsewhere in the financial statements.
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Stride & Associates, Inc.
Boston, Massachusetts
We have audited the accompanying balance sheets of Stride & Associates, Inc.
(the "Company") as of December 31, 1997 and 1998, and the related statements of
income, common stockholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 1998. 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
FEBRUARY 1, 1999 (MAY 6, 1999 AS TO NOTE 14)
------------------------
F-2
<PAGE>
STRIDE & ASSOCIATES, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- -----------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 736 $ 3,683 $ 4,079
Accounts receivable, net of allowances for placement fall-offs and doubtful
accounts of $380, $640 and $744, respectively (Note 13).................. 2,359 2,832 3,302
Prepaid expenses and other current assets.................................. 125 388 202
---------- ---------- -----------
Total current assets................................................... 3,220 6,903 7,583
DEBT ISSUANCE COSTS.......................................................... -- 142 134
DEFERRED COSTS............................................................... -- 465 712
PROPERTY AND EQUIPMENT, Net.................................................. 560 838 1,139
---------- ---------- -----------
TOTAL ASSETS................................................................. $ 3,780 $ 8,348 $ 9,568
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable........................................................... $ 71 $ 396 $ 708
Accrued expenses........................................................... 861 2,152 2,680
Current portion of term loan............................................... -- 3,577 4,002
Deferred income taxes...................................................... -- 75 25
---------- ---------- -----------
Total current liabilities.............................................. 932 6,200 7,415
TERM LOAN.................................................................... -- 21,623 20,498
SUBORDINATED DEBENTURES...................................................... -- 10,000 10,000
DEFERRED INCOME TAXES........................................................ -- 645 550
---------- ---------- -----------
Total liabilities...................................................... 932 38,468 38,463
---------- ---------- -----------
SERIES A CONVERTIBLE PREFERRED STOCK,
$0.01 par value per share; 24,802.5 shares authorized, issued and
outstanding as of December 31, 1998 and March 31, 1999..................... -- 25,299 25,965
---------- ---------- -----------
SERIES B REDEEMABLE PREFERRED STOCK,
$0.01 par value per share; 24,802.5 shares authorized and no shares issued
and outstanding............................................................ -- -- --
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY):
Common Stock, $0.01 par value per share; 50,000,000 shares authorized;
5,000,000 shares issued and outstanding as of December 31, 1997;
3,539,843 shares issued and outstanding as of December 31, 1998 and March
31, 1999................................................................. 50 35 35
Additional paid-in capital................................................. -- 5,718 5,052
Deferred compensation...................................................... -- (984) (882)
Note receivable from officer and stockholder............................... -- (160) (166)
Retained earnings (accumulated deficit).................................... 2,798 (60,028) (58,899)
---------- ---------- -----------
Total common stockholders' equity (deficiency)......................... 2,848 (55,419) (54,860)
---------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)...................... $ 3,780 $ 8,348 $ 9,568
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
STRIDE & ASSOCIATES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET REVENUES (Note 13)....................................... $ 10,614 $ 19,187 $ 28,804 $ 5,879 $ 8,427
COST OF SERVICES............................................. 3,742 6,426 9,849 2,081 2,869
--------- --------- --------- --------- ---------
GROSS PROFIT................................................. 6,872 12,761 18,955 3,798 5,558
OPERATING EXPENSES........................................... 2,460 4,655 8,305 1,749 2,692
MANAGEMENT FEES (Note 13).................................... 3,719 7,620 2,869 1,533 --
NON-RECURRING RECAPITALIZATION COSTS (Note 11)............... -- -- 2,239 -- 102
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS....................................... 693 486 5,542 516 2,764
OTHER INCOME (EXPENSE):
Interest income............................................ 85 38 108 18 41
Interest expense........................................... (23) (11) (1,856) -- (776)
--------- --------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES..................... 755 513 3,794 534 2,029
PROVISION FOR INCOME TAXES................................... 23 62 1,935 -- 900
--------- --------- --------- --------- ---------
NET INCOME................................................... 732 451 1,859 534 1,129
PREFERRED STOCK DIVIDENDS.................................... -- -- 1,553 -- 666
--------- --------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.................. $ 732 $ 451 $ 306 $ 534 $ 463
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME PER COMMON SHARE:
Basic...................................................... $ 0.15 $ 0.09 $ 0.07 $ 0.11 $ 0.13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................... $ 0.15 $ 0.09 $ 0.06 $ 0.11 $ 0.09
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic...................................................... 5,000 5,000 4,158 5,000 3,540
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................... 5,000 5,000 4,734 5,000 5,009
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
STRIDE & ASSOCIATES, INC.
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS
------------------------- PAID-IN DEFERRED FROM OFFICER AND (ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDER DEFICIT)
------------ ----------- ----------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............... 5,000,000 $ 50 $ -- $ -- $ -- $ 1,615
Net income........................... -- -- -- -- -- 732
------------ --- ----------- ------------- ----- ------------
BALANCE, DECEMBER 31, 1996............. 5,000,000 50 -- -- -- 2,347
Net income........................... -- -- -- -- -- 451
------------ --- ----------- ------------- ----- ------------
BALANCE, DECEMBER 31, 1997............. 5,000,000 50 -- -- -- 2,798
"S" corporation distributions........ -- -- -- -- -- (929)
Issuance of common stock............. 1,237,505 12 5,185 -- -- --
Common stock warrants granted in
connection with the issuance of
Series A Convertible Preferred
Stock.............................. -- -- 1,057 -- -- --
Direct costs of common and preferred
stock issuance..................... -- -- (349) -- -- --
Issuance of restricted stock......... 302,338 3 1,378 (1,221) (160) --
Repurchase of common stock........... (3,000,000) (30) -- -- -- (63,756)
Dividends on Series A Convertible
Preferred Stock.................... -- -- (1,553) -- -- --
Compensation expense recognized...... -- -- -- 237 -- --
Net income........................... -- -- -- -- -- 1,859
------------ --- ----------- ------------- ----- ------------
BALANCE, DECEMBER 31, 1998............. 3,539,843 35 5,718 (984) (160) (60,028)
Dividends on Series A Convertible
Preferred Stock (Unaudited)........ -- -- (666) -- -- --
Compensation expense recognized
(Unaudited)........................ -- -- -- 102 -- --
Interest on Note Receivable from
Officer and Stockholder
(Unaudited)........................ -- -- -- -- (6) --
Net income (Unaudited)............... -- -- -- -- -- 1,129
------------ --- ----------- ------------- ----- ------------
BALANCE, MARCH 31, 1999 (Unaudited).... 3,539,843 $ 35 $ 5,052 $ (882) $ (166) $ (58,899)
------------ --- ----------- ------------- ----- ------------
------------ --- ----------- ------------- ----- ------------
<CAPTION>
TOTAL
----------
<S> <C>
BALANCE, JANUARY 1, 1996............... $ 1,665
Net income........................... 732
----------
BALANCE, DECEMBER 31, 1996............. 2,397
Net income........................... 451
----------
BALANCE, DECEMBER 31, 1997............. 2,848
"S" corporation distributions........ (929)
Issuance of common stock............. 5,197
Common stock warrants granted in
connection with the issuance of
Series A Convertible Preferred
Stock.............................. 1,057
Direct costs of common and preferred
stock issuance..................... (349)
Issuance of restricted stock......... --
Repurchase of common stock........... (63,786)
Dividends on Series A Convertible
Preferred Stock.................... (1,553)
Compensation expense recognized...... 237
Net income........................... 1,859
----------
BALANCE, DECEMBER 31, 1998............. (55,419)
Dividends on Series A Convertible
Preferred Stock (Unaudited)........ (666)
Compensation expense recognized
(Unaudited)........................ 102
Interest on Note Receivable from
Officer and Stockholder
(Unaudited)........................ (6)
Net income (Unaudited)............... 1,129
----------
BALANCE, MARCH 31, 1999 (Unaudited).... $ (54,860)
----------
----------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
STRIDE & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 732 $ 451 $ 1,859 $ 534 $ 1,129
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 95 180 251 56 92
Provision for doubtful accounts receivable................... 247 180 205 137 104
Amortization of deferred compensation........................ -- -- 237 -- 102
Amortization of debt issuance costs.......................... -- -- 19 -- 8
Deferred income taxes........................................ -- -- 720 -- (145)
Other........................................................ 15 -- -- -- (6)
Changes in operating assets and liabilities:
Accounts receivable........................................ (615) (721) (678) 29 (574)
Prepaid expenses and other current assets.................. (81) (11) (263) (65) 186
Accounts payable........................................... (45) (85) 325 57 312
Accrued expenses........................................... 93 562 1,291 150 528
--------- --------- ---------- --------- ---------
Net cash provided by operating activities................ 441 556 3,966 898 1,736
--------- --------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment............................ (152) (463) (529) (168) (393)
--------- --------- ---------- --------- ---------
Net cash used in investing activities.................... (152) (463) (529) (168) (393)
CASH FLOWS FROM FINANCING ACTIVITIES:
S corporation distributions.................................... -- -- (929) -- --
Proceeds from issuance of common stock......................... -- -- 5,197 -- --
Proceeds from issuance of Series A Convertible Preferred Stock
and warrants................................................. -- -- 24,803 -- --
Direct costs of common and preferred stock issuance............ -- -- (349) -- --
Proceeds from issuance of subordinated debentures.............. -- -- 10,000 -- --
Borrowings under term loan..................................... -- -- 26,000 -- --
Repayments under term loan..................................... -- -- (800) -- (700)
Debt issuance costs............................................ -- -- (161) -- --
Repurchase of common stock..................................... -- -- (63,786) -- --
Deferred costs................................................. -- -- (465) -- (247)
Decrease in notes receivable from stockholders................. (286) 640 -- -- --
--------- --------- ---------- --------- ---------
Net cash provided by (used in) financing activities...... (286) 640 (490) -- (947)
--------- --------- ---------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 3 733 2,947 730 396
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................... 0 3 736 736 3,683
--------- --------- ---------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR........................... $ 3 $ 736 $ 3,683 $ 1,466 $ 4,079
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest......................... $ 23 $ 11 $ 1,837 $ -- $ 768
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Cash paid during the year for income taxes..................... $ 48 $ 62 $ 1,347 $ -- $ 10
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
See notes to financial statements
F-6
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 (INFORMATION AS IT RELATES TO THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
NATURE OF BUSINESS--Stride & Associates, Inc. (the "Company") was formed on
October 7, 1994 and commenced operations on January 1, 1995. The Company
operates in one business segment and is a leading provider of information
technology professionals on a permanent, full-time basis. At December 31, 1998,
the Company had 12 offices in New York, California, Massachusetts and Georgia.
In January 1999, the Company opened three new offices in Chicago, Illinois,
Atlanta, Georgia and Los Angeles, California.
On June 4, 1998, the Company engaged in a leveraged recapitalization of the
Company (the "Recapitalization") pursuant to which, (i) the Company borrowed
$26.0 million under a term loan agreement (ii) the Company received $10.0
million in cash from an investor in connection with the issuance of Subordinated
Debentures (iii) the Company received $24,802,500 in cash from an investor in
connection with the issuance of 24,802.5 shares of Series A Convertible
Preferred Stock and warrants to purchase 762,505 shares of common stock at an
exercise price of $4.62 per share (iv) the Company received $5,197,500 in cash
from an investor in connection with the issuance of 1,237,505 shares of common
stock, and (v) the Company paid $63,786,100 in cash to reacquire 3,000,000
shares of common stock (the "Redemption Shares") from the founding stockholders.
Upon the surrender of the Redemption Shares to the Company, the Company
cancelled such Redemption Shares, which shares thereafter ceased to be issued
and outstanding.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION--Placement fee revenues are recognized at the effective
hire date of the individual placed, net of the appropriate allowance for
placement fall-offs. The Company's placement contracts typically provide a
30-day refundable guarantee under which the Company will refund payments to the
customer if the placed candidate ceases to be employed for any reason at the end
of the 30-day period.
The table below depicts the activity in the allowances for placement
fall-offs and doubtful accounts for the years ended December 31, 1996, 1997 and
1998:
<TABLE>
<CAPTION>
ALLOWANCE FOR
PLACEMENT ALLOWANCE FOR TOTAL
FALL-OFFS DOUBTFUL ACCOUNTS ALLOWANCES
------------------ ------------------- -----------
<S> <C> <C> <C>
Balance, January 1, 1996...................................... $ 106 $ 130 $ 236
Charged to operating expenses................................. -- 247 247
Charged against revenues...................................... 584 -- 584
Amounts written off........................................... (570) (252) (822)
------- ----- -----------
Balance, December 31, 1996.................................... 120 125 245
Charged to operating expenses................................. -- 180 180
Charged against revenues...................................... 1,151 -- 1,151
Amounts written off........................................... (1,071) (125) (1,196)
------- ----- -----------
Balance, December 31, 1997.................................... 200 180 380
Charged to operating expenses................................. -- 205 205
Charged against revenues...................................... 1,711 -- 1,711
Amounts written off........................................... (1,604) (52) (1,656)
------- ----- -----------
Balance, December 31, 1998.................................... $ 307 $ 333 $ 640
------- ----- -----------
------- ----- -----------
</TABLE>
F-7
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--Cash equivalents represent investments with
maturities of three months or less and are stated at carrying value, which
approximates market value.
DEBT ISSUANCE COSTS--Debt issuance costs relate to the costs associated with
obtaining the term loan and revolving credit facility, and are being amortized
on a straight-line basis over the five-year term of the related debt and are
included in interest expense.
DEFERRED COSTS--Deferred costs include costs associated with the Company's
proposed initial public offering. Such costs will be charged against additional
paid-in capital upon the effective date of the initial public offering.
PROPERTY AND EQUIPMENT--Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation of property and
equipment is provided for by the straight-line method over the estimated useful
lives of the related assets (3 to 5 years). Leasehold improvements are amortized
over the lesser of the term of the respective lease or the estimated useful
lives of the improvements (5 years).
LONG-LIVED ASSETS--In 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
which requires the Company to periodically assess the recoverability of the
carrying value of long-lived assets, including intangible assets, property and
equipment, based on estimated undiscounted cash flows on an individual asset
basis. If the estimated undiscounted cash flows are less than the carrying
value, an impairment loss is charged to operations based on the difference
between the carrying amount and the estimated discounted cash flows. The
adoption of SFAS 121 did not have a material impact on the Company's financial
statements.
INCOME TAXES--Prior to the Recapitalization, the Company was an "S"
corporation, pursuant to the Internal Revenue Code. Under the "S" corporation
election, all of the Company's income, deductions and credits are passed through
to, and taken into account by, the Company's stockholders in computing their own
taxable income. No provision for Federal income taxes has been recorded in the
accompanying financial statements for the periods prior to the Recapitalization.
A provision for state and local taxes has been recorded in the accompanying
financial statements for those jurisdictions which tax "S" corporations. Upon
consummation of the Recapitalization, the Company terminated its "S" corporation
status.
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires an asset and liability approach to income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using enacted tax rates and laws that are expected to be in effect when
the differences are expected to reverse.
NET INCOME PER COMMON SHARE--Basic net income per common share is computed
by dividing net income available to common stockholders by the weighted average
common shares outstanding. Diluted net income per common share further assumes
the issuance of common shares for all dilutive outstanding common stock
equivalents. For the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1998, there were no outstanding common stock equivalents. For
the year ended December 31, 1998 and the three months ended March 31, 1999, the
effect of dilutive common stock equivalents was approximately 576,000 shares and
1,000,000 shares, respectively, resulting from the
F-8
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assumed conversion of the Series A Convertible Preferred Stock. The effect of
outstanding options and warrants for the year ended December 31, 1998 and the
three months ended March 31, 1999 was zero and approximately 469,000 shares,
respectively.
STOCK SPLIT--Effective June 4, 1998, the Company authorized a 5,000 for one
stock split effected in the form of a stock dividend. All share and per share
data in these financial statements have been retroactively restated to reflect
this stock split.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
1. CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts approximate fair value because of the short
maturity of these instruments.
2. TERM LOAN AND SUBORDINATED DEBENTURES--The carrying amounts approximate fair
value based on borrowing rates currently available to the Company for debt
with similar terms.
3. NOTE RECEIVABLE FROM OFFICER AND STOCKHOLDER--The carrying amount
approximates fair value based on the Company's estimate of the current
replacement cost of this instrument.
4. SERIES A CONVERTIBLE PREFERRED STOCK--The carrying amount approximates fair
value due to the relatively short period of time between the issuance of
this instrument and the balance sheet date, and the Company's estimate of
the current replacement cost of this instrument.
5. INTEREST RATE COLLAR--The carrying value of the financial instrument is $0
and the approximate fair value at December 31, 1998 is a liability of
approximately $125,000, based on the net present value of the future
expected cash flows using the current LIBOR yield curve at December 31,
1998.
UNAUDITED INTERIM FINANCIAL STATEMENTS--In the opinion of management, the
unaudited financial statements for the three months ended March 31, 1998 and
1999 are presented on a basis consistent with the audited financial statements
and reflect all adjustments, consisting of only normal recurring adjustments
necessary for a fair presentation of the results thereof. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year.
INTEREST RATE COLLAR AGREEMENT--The Company's interest rate collar agreement
is designated and effective as a modification to an existing debt obligation to
reduce the impact of changes in the interest rate on its floating rate
borrowings and, accordingly, is accounted for using the settlement method of
accounting. The differential to be paid or received under the interest rate
collar agreement is accrued as interest rates change and is recognized as an
adjustment to interest expense. The Company considers collar terms including the
reference rate, payment and maturity dates and the notional amount in
determining if an interest rate collar agreement is effective at modifying an
existing debt obligation. If the criteria for designation are no longer met or
the underlying instrument is extinguished, the Company will account for its
outstanding collar agreement at fair market value and any resulting gain or loss
will be recognized as other income or expense. Any gains or losses on the early
termination of the collar agreement will be deferred and amortized over the
shorter of the remaining useful life of the hedged existing debt obligation or
the original life of the interest rate collar agreement.
USE OF ESTIMATES--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
F-9
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS--Certain prior year balances have been reclassified to
conform with current year classifications.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS--During 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that all derivative financial instruments be recognized
as either assets or liabilities in the balance sheet. Measurement is at fair
value, and if the derivative is not designated as a hedging instrument, changes
in fair value (i.e., gains and losses) are to be recognized in earnings in the
period of change. If certain conditions are met, a derivative may be designated
as a hedge, in which case the accounting for changes in fair value will depend
on the specific exposure being hedged. The method that will be used for
assessing the effectiveness of a hedging derivative, as well as the measurement
approach for determining the ineffective aspects of the hedge, must be
established at the inception of the hedge. The methods must be consistent with
the Company's approach to managing risk. SFAS 133 will be effective for fiscal
years beginning after June 15, 1999. The Company is currently evaluating the
impact that SFAS 133 will have on its financial statements.
On September 28, 1998, the Securities and Exchange Commission ("SEC") issued
a press release stating that it "will formulate and augment new and existing
accounting rules and interpretations covering revenue recognition, restructuring
reserves, materiality and disclosure" for all publicly-traded companies. Until
such time as the SEC staff issues such interpretative guidelines, it is unclear
what, if any, impact such interpretative guidelines will have on our current
revenue recognition policy. However, the potential changes in accounting
practice being considered by the SEC staff could have a material impact on the
manner in which we recognize revenue.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Computer equipment............................................... $ 178 $ 307 $ 378
Furniture and fixtures........................................... 662 942 1,245
Leasehold improvements........................................... 123 231 250
--------- --------- -----------
963 1,480 1,873
Less accumulated depreciation and amortization................... 403 642 734
--------- --------- -----------
Property and equipment--net...................................... $ 560 $ 838 $ 1,139
--------- --------- -----------
--------- --------- -----------
</TABLE>
During 1997 and 1998, approximately $20,000 and $12,000 of fully depreciated
computer equipment was written-off.
F-10
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Employee compensation............................................ $ 551 $ 1,412 $ 1,025
Advertising...................................................... 74 120 150
Income taxes payable............................................. -- -- 904
Other............................................................ 236 620 601
--------- --------- -----------
Total............................................................ $ 861 $ 2,152 $ 2,680
--------- --------- -----------
--------- --------- -----------
</TABLE>
5. TERM LOAN AND REVOLVING CREDIT FACILITY
The Company has an available line of credit with a bank totaling $300,000.
Borrowings under this line of credit bear interest at the prime rate (the prime
rate being 7.75 percent at December 31, 1998) plus one percent. The line of
credit expires December 31, 1999. There were no borrowings under this line of
credit as of December 31, 1997 and 1998.
In connection with the Recapitalization, the Company borrowed $26.0 million
under a term loan agreement with a number of lending institutions (the "Term
Loan"). Additionally, a $2.0 million revolving credit facility (the "Credit
Facility") was also obtained from the same lending institutions, to provide for
working capital requirements, and such Credit Facility expires in June 2003.
There were no borrowings under the Credit Facility as of December 31, 1998. The
Term Loan is payable in twenty consecutive quarterly payments, payable on the
last day of each calendar quarter commencing on September 30, 1998, with a final
payment representing the remaining unpaid principal balance due on June 4, 2003.
In addition, the Company is required to make mandatory annual repayments equal
to fifty percent of excess cash flow, as defined, no later than 120 days after
the end of the fiscal year end. As of December 31, 1998, approximately $777,000
representing mandatory payments for excess cash flow for the period from June 4,
1998 to December 31, 1998, is included in the current portion of term loan on
the accompanying balance sheet. In the event of an Asset Sale, as defined, or
Equity Issuance, as defined, all of the net proceeds must be applied first to
repay the remaining outstanding balance of the Term Loan (see Note 14). Minimum
required repayments of the Term Loan are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------- AMOUNT
-----------------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
1999............................................................... $ 3,577
2000............................................................... 4,500
2001............................................................... 6,300
2002............................................................... 7,300
2003............................................................... 3,523
-------
Total.............................................................. $ 25,200
-------
-------
</TABLE>
Borrowings under the Term Loan and Credit Facility bear interest at the
bank's base rate, as defined, plus the applicable margin (ranging between 25 and
100 basis points), or at the LIBOR rate plus the applicable margin (ranging
between 150 and 225 basis points). Such margins are subject to
F-11
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. TERM LOAN AND REVOLVING CREDIT FACILITY (CONTINUED)
reduction based upon the achievement of certain performance targets, as defined.
The Company's borrowing rate at December 31, 1998 was 7.03 percent per annum.
The Company must also pay a commitment fee of 0.375 percent per annum. The Term
Loan and Credit Facility are secured by substantially all of the assets of the
Company.
The Term Loan and Credit Facility, among other matters, requires the Company
to maintain certain leverage, debt service and current ratios and places
restrictions on additional indebtedness and the payment of dividends.
Additionally, effective August 4, 1998, the Company entered into an interest
rate collar agreement (the "Collar") with a notional amount of $13.0 million
related to the Term Loan to reduce its exposure to market risks from changes in
interest rates. The Collar expires on August 4, 2000. Under the terms of the
Collar, if the floating rate option is greater than the cap rate of 7.75 percent
(inclusive of the applicable margin at December 31, 1998), the bank will pay the
Company an amount equal to the difference of the two rates. If the floating rate
option is less than the floor rate of 7.38 percent (inclusive of the applicable
margin at December 31, 1998), the Company will pay the bank an amount equal to
the difference of the two rates. If the floating rate option is equal to or
between the floor rate of 7.38 percent and the cap rate of 7.75 percent, no
payments will be made. The payment dates are on the last business days of March,
June, September and December in each year. Income or expense with respect to the
Collar is recorded as a component of interest expense on the accompanying
statement of income.
At December 31, 1998, the fair market value of the Collar, as discussed in
Note 2, was calculated on the assumption that the underlying LIBOR rates will
continue to decrease through the remaining term of the Collar. As such, the
Company's obligation to make payments under the terms of the Collar will be
largely offset by the impact of lower LIBOR rates on the balance of the Term
Loan.
6. SUBORDINATED DEBENTURES
The Subordinated Debentures (the "Debentures") bear interest at 12 percent
per annum, payable quarterly. Upon an occurrence of an Event of Default, as
defined, any unpaid principal balance may become due upon demand and shall bear
an interest rate of 14 percent per annum. The Debentures mature on August 4,
2003. The Debentures are subordinated in right of payment to all existing and
future senior indebtedness of the Company. The Debentures are required to be
repaid in full upon consummation of a Liquidity Event, as defined. The Company
can repay the Debentures in whole or from time to time in installments of not
less than $100,000, without premium or penalty.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996 and
1997, and through the consummation of the Recapitalization on June 4, 1998,
represents state and local taxes for those jurisdictions that impose a tax on
"S" corporations. Upon consummation of the Recapitalization, the Company
terminated its "S" corporation status.
F-12
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Current:
Federal............................................................ $ -- $ -- $ 787
State and local.................................................... 23 62 428
--------- --------- ---------
23 62 1,215
--------- --------- ---------
Deferred:
Federal............................................................ -- -- 493
State and local.................................................... -- -- 227
--------- --------- ---------
-- -- 720
--------- --------- ---------
$ 23 $ 62 $ 1,935
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of timing differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The income tax effects of
significant items comprising the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
CURRENT LONG-TERM TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Deferred tax assets:
Allowance for doubtful accounts............................ $ 277 $ -- $ 277
Difference between book and tax basis of property and
equipment................................................ -- 29 29
Accrued straight-line rent................................. 28 -- 28
----- ----- ---------
305 29 334
----- ----- ---------
Deferred tax liabilities:
Deferred compensation...................................... (151) (215) (366)
Change from cash to accrual basis.......................... (229) (459) (688)
----- ----- ---------
(380) (674) (1,054)
----- ----- ---------
Net deferred tax liabilities................................. $ (75) $ (645) $ (720)
----- ----- ---------
----- ----- ---------
</TABLE>
F-13
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The difference between the statutory Federal tax rate and the Company's
effective tax rate is as follows (as a percentage of pre-tax income):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Statutory Federal income tax rate............................... 34.0% 34.0% 34.0%
State and local income taxes (net of Federal tax benefit)....... 3.0 12.1 12.3
Exempt income due to "S" corporation status..................... (34.0) (34.0) (10.8)
Change in tax status............................................ -- -- 11.0
Other........................................................... -- -- 4.5
--------- --------- ---------
Effective tax rate.............................................. 3.0% 12.1% 51.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
8. PREFERRED STOCK AND WARRANTS
Each share of Series A Non-voting Convertible Preferred Stock ("Series A
Preferred Stock") may, at the election of the holder, be converted into one
share of Series B Non-voting Redeemable Preferred Stock ("Series B Preferred
Stock") and 40.3185 shares of common stock (which represents a total of
1,000,000 shares of common stock). Upon the conversion of the Series A Preferred
Stock to Series B Preferred Stock, the Company will reduce the balance
applicable to the preferred stock by $4.2 million, which represents the fair
value allocation of the cash proceeds received at issuance attributable to the
1,000,000 shares of common stock, and increase common stock and additional
paid-in capital. The Series A Preferred Stock shall pay dividends of nine
percent per annum of the Base Liquidation Amount ($1,209.56 per share) when and
as declared by the Board of Directors. To the extent not paid, dividends shall
cumulate and compound annually. Upon conversion of the Series A Preferred Stock,
any dividends which have cumulated and have not been paid shall attach to the
Series B Preferred Stock into which such Series A Preferred Stock is convertible
and thereafter shall be payable with respect to the Series B Preferred Stock. In
the event of a Liquidity Event, as defined, the holders of the Series A
Preferred Stock shall be entitled to be paid an amount in cash equal to (i)
$1,470.13 per share, plus (ii) all accrued and unpaid dividends, plus (iii) the
amount which would have been payable with respect to the shares of common stock
issuable upon conversion of the Series A Preferred Stock had such conversion
occurred immediately prior to such Liquidity Event (collectively, the "Series A
Liquidation Amount").
The holders of a majority of the Series B Preferred Stock may, at their
election and upon the consummation of a Liquidity Event, as defined, require the
Company to redeem all the Series B Preferred Stock. In the event of a Liquidity
Event, as defined, the holders of the Series B Preferred Stock shall be entitled
to be paid an amount in cash equal to (i) $1,470.13 per share, plus (ii) all
accrued and unpaid dividends (collectively, the "Series B Liquidation Amount"
and together with the Series A Liquidation Amount, the "Liquidation Amount").
The Series B Preferred Stock shall pay a dividend of nine percent per annum of
the Base Liquidation Amount ($1,209.56 per share) when and as declared by the
Board of Directors. To the extent not paid, dividends shall cumulate and
compound annually.
Upon an initial public offering, the Company shall redeem all of the shares
of Series A and Series B Preferred Stock at the Liquidation Amount, except that,
with respect to the Series A Preferred Stock, the Company shall issue the shares
of common stock in lieu of the cash payment which would
F-14
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. PREFERRED STOCK AND WARRANTS (CONTINUED)
otherwise be required upon a Liquidity Event. Prior to the redemption of the
Series A Preferred Stock, the Company will reduce the Series A Preferred Stock
by $4.2 million, which represents the fair value allocation of the cash proceeds
received at issuance attributable to the 1,000,000 shares of common stock, and
increase common stock and additional paid-in capital.
The Company is prohibited from paying dividends on its common stock without
the consent of a majority of the holders of the outstanding shares of Series A
and Series B Preferred Stock (the "Preferred Stock"). In the event the holders
of the Series A Preferred Stock consent to the payment of a dividend to the
common stockholders, the holders of the Series A Preferred Stock would be
entitled to be paid a dividend equal to the amount which would have been paid to
them had they held the shares of common stock into which the Series A Preferred
Stock is convertible immediately prior to the record date of payment of such
dividends.
In connection with the issuance of the Series A Preferred Stock to an
investor, the Company also issued warrants to purchase 762,505 shares of common
stock at an exercise price of $4.62 per share. The warrants expire on June 4,
2008. If the Series A or Series B Preferred Stock is ever redeemed, the Company
may require the holders of the warrants to exercise any warrants then
outstanding in full and offset the redemption amount with the proceeds from the
exercise of the warrants. The fair value of the warrants was approximately
$1,057,000, as determined by the Black-Scholes method, and recorded as an
increase in additional paid-in capital.
9. COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
In connection with the Recapitalization, the Board of Directors and the
stockholders of the Company adopted the 1998 Stock Option and Grant Plan (the
"Plan"). The Plan permits the Company to (i) grant incentive stock options, (ii)
grant non-qualified stock options and (iii) issue or sell common stock with
vesting or other restrictions ("Restricted Stock") or without restrictions.
These grants may be made to officers, employees, directors, consultants,
advisors and other key persons of the Company. Options which are designated as
incentive stock options under the Plan may be granted with an exercise price not
less than fair market value of the underlying shares at the date of grant and
are subject to certain limitations specified in Section 422 of the Internal
Revenue Code. Non-qualified stock options may be granted at prices which are
less than the fair market price of the underlying shares on the date of grant.
The rights to exercise the options generally vest in annual increments over a
period of up to four years from the grant date. The Plan provides for the
issuance of up to 813,950 shares of common stock. At December 31, 1998,
1,056,112 shares of common stock were reserved for issuance upon the exercise of
outstanding warrants and stock options and 218,005 shares of common stock were
available for future grant under the Plan.
During the year ended December 31, 1998, options to purchase 293,607 shares
of common stock were granted at a weighted average exercise price of $19.21 per
share. At December 31, 1998, options to purchase 293,607 shares of common stock
were outstanding with exercise prices ranging from $20.64 to $13.76 per share.
At December 31, 1998, options to purchase 232,560 shares of common stock were
exercisable at a weighted average exercise price of $20.64 per share.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Compensation Issued to Employees," and selected interpretations, in
accounting for its option plans. Accordingly, as options have been granted at
exercise prices equal to or in excess of fair market value on the date of grant,
no compensation expense has been recognized by the Company in connection
F-15
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
with its stock option issuances. Had compensation cost for the Company's stock
options been determined based upon the fair value at the date of grant
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income available to common stockholders and related per share
amounts would not have changed for the year ended December 31, 1998. The
weighted average fair value of the options granted during the year ended
December 31, 1998 is estimated at $-0- per share on the date of grant (using the
minimum value method) with the following weighted average assumptions; zero
volatility, risk-free interest rate of 5.5 percent, and expected life of five
years.
In June 1998, the Company issued 290,710 shares of restricted common stock
to certain key employees of the Company. The Company recorded deferred
compensation of approximately $1,221,000 related to this restricted stock. The
Company is amortizing the deferred compensation over the three-year vesting
period of the stock. Upon the effective date of an initial public offering of
the Company's common stock, the vesting of the restricted stock accelerates to
become fully vested. In June 1998, the Company sold approximately 11,628 shares
of restricted common stock to an officer and stockholder of the Company for
approximately $160,000. In connection with the sale, the Company issued a note
receivable from the officer and stockholder for approximately $160,000. The note
receivable from an officer and stockholder matures on July 14, 2002 and bears
interest at six percent per annum. The note is required to be prepaid to the
extent of the after-tax net proceeds realized from the sale of the restricted
common stock and is secured by a pledge of the restricted common stock, with
recourse to the officer and stockholder's personal assets limited to twenty-five
percent of the principal and accrued and unpaid interest thereon.
10. EMPLOYEE BENEFIT PLAN
On January 1, 1992, Bond Technologies, Inc. ("Bond"), a corporation under
the common control of the stockholders of the Company, established the Bond
Technologies 401(k) Savings Plan (the "401(k) Plan") covering substantially all
employees who have at least one year of service. This 401(k) Plan was
subsequently amended to include employees of the Company. Under the terms of the
401(k) Plan, the Company may make a discretionary contribution equal to a
percentage of the amounts contributed by the participants. As of December 31,
1996, 1997 and 1998, the Company matched 25 percent of the first 4 percent of
salary contributed by each employee. The Company's matching contributions under
the 401(k) Plan for the years ended December 31, 1996, 1997 and 1998 were
$18,000, $25,000 and $50,000, respectively. Effective January 1, 1999, the
Company established its own 401(k) Savings Plan with terms identical to the
401(k) Plan.
11. NON-RECURRING RECAPITALIZATION COSTS
In connection with the Recapitalization, the Company paid special
non-recurring bonuses of approximately $1,967,000 (inclusive of the Company's
portion of related payroll taxes), and incurred approximately $35,000 related to
other costs of the Recapitalization which are included in the caption
non-recurring recapitalization costs on the accompanying statement of income for
the year ended December 31, 1998. Also included in non-recurring
recapitalization costs is amortization expense relating to deferred compensation
(see Note 9) of approximately $237,000.
F-16
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company was obligated to make rental payments
under noncancelable lease agreements which provide for escalations based on real
estate taxes and other costs. The minimum annual rental commitments under
noncancelable leases having an initial or remaining term of more than one year
from December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------------- AMOUNT
-----------------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
1999............................................................................... $ 951
2000............................................................................... 879
2001............................................................................... 817
2002............................................................................... 573
2003............................................................................... 307
Thereafter......................................................................... 274
------
$ 3,801
------
------
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$300,000, $517,000 and $889,000, respectively.
The Company has an employment agreement with its President and Chief
Executive Officer, the terms of which expire on June 4, 2001. Such agreement
provides for annual compensation of $400,000 per year, as well as incentive
bonuses that are payable if specified earnings targets are achieved.
The Company has been, from time to time, involved in various litigation
matters arising in the ordinary course of business. The Company believes that
the resolution of currently pending legal proceedings, either individually or
taken as a whole, will not have an adverse effect on the Company, its business
and its financial statements.
13. RELATED PARTY TRANSACTIONS
The Company had an arrangement with various affiliated companies, owned by
the individual stockholders of the Company, whereby the individual stockholders
provide management services to the Company at a fee, plus certain allocated and
out-of-pocket expenses. The services provided include consultation and direct
management assistance with respect to operations, strategic planning and other
aspects of the business of the Company. Fees and expenses paid to the affiliated
companies for these services amounted to $3,719,000, $7,620,000 and $2,869,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company had sales to affiliated entities which are under the common
control of the stockholders of the Company. Sales to these affiliated entities
for the years ended December 31, 1996, 1997 and 1998 were $115,000, $116,000 and
$339,000, respectively. As of December 31, 1997 and 1998, accounts receivable
from these affiliated entities amounted to $45,000 and $128,000, respectively.
14. SUBSEQUENT EVENTS
On March 16, 1999, the Company amended its Term Loan to allow the Company to
use proceeds from an initial public offering ("IPO") to repay the outstanding
Preferred Stock and Debentures, with the remaining proceeds used to repay a
portion of the outstanding principal amount of the Term Loan (which remaining
amount shall in no event be less than $2.0 million) in consideration for a fee
payable
F-17
<PAGE>
STRIDE & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
( 1/4% of the total commitment after giving effect to the prepayment) to the
lending institutions upon the receipt of the cash proceeds by the Company,
subject to certain conditions set forth in the Term Loan.
On March 17, 1999, the Board of Directors approved a change in the
authorized number of shares of the Common and Preferred Stock to 50,000,000 and
5,000,000, respectively.
On March 30, 1999, the Company filed a registration statement on Form S-1 in
respect of an offering by the Company for sale to the public of shares of its
common stock. The expected use of the net proceeds of the IPO together with
available cash resources of the Company will be used to redeem all the
outstanding shares of the Preferred Stock, which has an aggregate liquidation
preference of approximately $36.5 million (plus accrued and unpaid dividends
thereon), to repay the $10.0 million of principal relating to the Debentures
(plus accrued and unpaid interest) and pay down, with any remaining net
proceeds, principal relating to the Term Loan.
Effective May 6, 1999, the Company authorized a five-for-one stock split
effected in the form of a dividend. All share and per share data in these
financial statements have been retroactively restated to reflect this stock
split.
* * * * *
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,350,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
-----------
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
--------------
, 1999
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
The following table sets forth the estimated expenses payable by us in
connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
SEC Registration Fee................................................................................ $ 18,079.04
NASD Filing Fee..................................................................................... 7,004
Nasdaq National Market Listing Fee.................................................................. 75,625
Accounting Fees and Expenses........................................................................ *
Legal Fees and Expenses............................................................................. *
Printing Expenses................................................................................... *
Blue Sky Qualification Fees and Expenses............................................................ 10,000
Transfer Agent's Fee................................................................................ *
Miscellaneous....................................................................................... *
------------
Total........................................................................................... $ 800,000
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
- --------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VIII of our first amended and restated certificate of incorporation
provides that no director of Stride be personally liable to Stride, its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
Stride or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) in respect of
unlawful dividend payments or stock redemptions or repurchases, or (4) for any
transaction from which the director derived an improper personal benefit. In
addition, the first amended and restated certificate of incorporation provides
that if the Delaware General Corporation Law is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by Stride of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of the registrant if such person acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of Stride, and, with respect to criminal actions or proceedings, if
such person had no reasonable cause to believe his or her conduct was unlawful.
Under Section 7 of the underwriting agreement filed as Exhibit 1.1 hereto,
the underwriters have agreed to indemnify, under certain conditions, Stride, its
directors, certain officers and persons who control Stride within the meaning of
the Securities Act against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Registrant during the past three years.
Further included is the consideration, if any, received by the Registrant for
such shares, and information relating to the section of the Securities Act or
rule of the Securities and Exchange Commission under which exemption from
registration was claimed.
(1) In June 1998, pursuant to a Securities Purchase and Redemption
Agreement, the Registrant sold an aggregate of 24,802.5 shares of the
Registrant's Series A Convertible Preferred Stock and warrants to
purchase an aggregate of 762,505 shares of common stock for an aggregate
purchase price of $24,802,500 and 1,237,505 shares of the Registrant's
common stock for an aggregate purchase price of $5,197,500 to Summit
Ventures IV, L.P., Summit Subordinated Debt Fund II, L.P., Summit V
Ventures, L.P., Summit V Advisors Fund, L.P., Summit Advisors V (QP),
L.P. and Summit Investors III, L.P., in reliance upon the exemption from
registration under Regulation D of the Securities Act.
(2) In June 1998, pursuant to Restricted Stock Award Agreements, the
Registrant issued an aggregate of 290,710 shares of restricted common
stock to seven employees in reliance upon the exemption from registration
under Rule 701 promulgated under the Securities Act.
(3) In June 1998, pursuant to Non-Qualified Stock Option Agreements, the
Registrant granted options to purchase up to an aggregate of 279,072
shares of common stock to four directors in reliance upon the exemption
from registration under Rule 701 promulgated under the Securities Act.
(4) In June 1998, pursuant to a Restricted Stock Award Agreement, the
Registrant sold an aggregate of 11,628 shares of restricted common stock
for an aggregate purchase price of $160,001 to the Registrant's Chief
Financial Officer in reliance upon the exemption from registration under
Rule 701 promulgated under the Securities Act.
(5) In July 1998, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted options to purchase up to an aggregate of 46,512
shares of common stock to the Registrant's Chief Financial Officer in
reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(6) In August 1998, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted options to purchase up to an aggregate of 14,535
shares of common stock to one director in reliance on the exemption from
registration under Rule 701 promulgated under the Securities Act.
(7) In April 1999, pursuant to Non-Qualified Stock Option Agreements, the
Registrant granted options to purchase up to an aggregate of 45,883
shares of common stock to one director and the Registrant's Chief
Financial Officer in reliance on the exemption from registration under
Rule 701 promulgated under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <C> <S>
* 1.1 Form of Underwriting Agreement.
+ 2.1 Securities Purchase and Redemption Agreement, dated as of June 4, 1998, by and
among the Registrant, the Principal Stockholders and the Purchasers named
therein (excluding schedules, which the Registrant agrees to furnish
supplementally to the Commission upon request).
+ 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
+ 3.2 Form of Third Amended and Restated Certificate of Incorporation of the
Registrant (to be effective upon consummation of this offering).
+ 3.3 By-laws of the Registrant.
+ 3.4 Form of Amended and Restated By-laws of the Registrant (to be effective upon
consummation of this offering)
+ 4.1 Specimen certificate for shares of common stock, $.01 par value, of the
Registrant.
* 5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the securities
being offered.
+ 10.1 Shareholders' Agreement, dated June 4, 1998, between the Registrant and the
Shareholders named therein.
+ 10.2 Registration Rights Agreement, dated June 4, 1998, between the Registrant and
the Shareholders named therein.
+ 10.3 Warrant Agreement, dated June 4, 1998, between the Registrant and the Purchasers
named therein.
+ 10.4 Second Amendment and Restatement of the 1998 Stock Option and Grant Plan of the
Registrant.
+ 10.5 Form of standard Non-Qualified Stock Option Agreement.
+ 10.6 Form of standard Restricted Stock Award Agreement.
+ 10.7 Form of Non-Qualified Stock Option Agreement issued to Rachel C. Burnett, John
J. Devine, Alan P. Matthews and Michael C. Robichaud on June 4, 1998.
+ 10.8 Form of Amended and Restated Restricted Stock Award Agreement between the
Registrant and Glen P. Froio, Bethann G. Gilfeather and other senior level
employees entered into on November 16, 1998.
+ 10.9 Form of Non-Solicitation, Non-Competition and Non-Disclosure Agreement, dated
June 4, 1998, between the Registrant and Michael C. Robichaud, Rachel C.
Burnett, John J. Devine, and Alan P. Matthews entered into on June 4, 1998.
+ 10.10 Amended and Restated Employment Agreement, dated March 19, 1999, between the
Registrant and Michael C. Robichaud.
+ 10.11 Promissory Note, dated July 14, 1998, from Anthony J.M. Groves in favor of the
Registrant.
+ 10.12 Subordinated Debenture D-1 Due August 4, 2003 of the Registrant.
+ 10.13 Subordinated Debenture D-2 Due August 4, 2003 of the Registrant.
10.14 Revolving Credit and Term Loan Agreement, dated as of June 4, 1998, among the
Registrant, BankBoston, N.A. and other lending institutions named therein.
+ 10.15 First Amendment to Revolving Credit and Term Loan Agreement, dated as of August
10, 1998, among the Registrant, BankBoston, N.A. and the other lending
institutions named therein.
+ 10.16 Second Amendment to Revolving Credit and Term Loan Agreement, dated as of
December 31, 1998, among the Registrant, BankBoston, N.A. and the other lending
institutions named therein.
+ 10.17 Third Amendment to Revolving Credit and Term Loan Agreement, dated as of March
16, 1999, among the Registrant, BankBoston, N.A. and the other lending
institutions named therein.
+ 10.18 Subordination and Intercreditor Agreement, dated as of June 4, 1998, among
BankBoston, N.A., Summit Investors III, L.P., Summit Subordinated Debt Fund II,
L.P. and the Registrant.
+ 10.19 Security Agreement, dated as of June 4, 1998, between the Registrant and
BankBoston, N.A.
+ 10.20 Interest Rate Collar Transaction Letter Agreement, dated July 31, 1998, between
the registrant and BankBoston, N.A.
+ 11.1 Computation of income per common share.
* 23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <C> <S>
23.2 Consent of Deloitte & Touche LLP.
+ 24.1 Powers of Attorney (included on page II-5).
+ 27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment to this Registration Statement.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because the
required information is given in our Financial Statements or Notes to those
statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts, on May 21, 1999.
STRIDE & ASSOCIATES, INC.
BY: /S/ MICHAEL C. ROBICHAUD
----------------------------------------
Michael C. Robichaud
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ MICHAEL C. ROBICHAUD Officer and Director
- ------------------------------ (Principal Executive May 21, 1999
Michael C. Robichaud Officer)
Chief Financial Officer
* (Principal Financial
- ------------------------------ Officer and Principal May 21, 1999
Anthony J.M. Groves Accounting Officer)
* Director
- ------------------------------ May 21, 1999
Rachel C. Burnett
* Director
- ------------------------------ May 21, 1999
Scott C. Collins
* Director
- ------------------------------ May 21, 1999
John J. Devine
* Director
- ------------------------------ May 21, 1999
Alan P. Matthews
* Director
- ------------------------------ May 21, 1999
James C. New
* Director
- ------------------------------ May 21, 1999
Thomas S. Roberts
</TABLE>
/S/ MICHAEL C. ROBICHAUD
----------------------------------------
Michael C. Robichaud
*By: Attorney-in-Fact
II-5
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-75301 of Stride & Associates, Inc. of our report dated February 1,
1999 (May 6, 1999 as to Note 14) appearing in the Prospectus, which is a part
of such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/S/ Deloitte & Touche LLP
New York, New York
May 19, 1999
