<PAGE>
As filed with the Securities and Exchange Commission on June 23, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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TALENTPOINT, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 8742 23-3024258
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
170 South Warner Road
Suite 110
Wayne, Pennsylvania 19087
(610) 971-9171
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Nooruddin S. Karsan
Chief Executive Officer
TalentPoint, Inc.
170 South Warner Road
Wayne, Pennsylvania 19087
(610) 971-9171
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------
Copies to:
Barry M. Abelson, Esquire Timothy R.M. Bryant, Esquire
Robert A. Friedel, Esquire Ellen O. Kollar, Esquire
Pepper Hamilton LLP McDermott, Will & Emery
3000 Two Logan Square 277 West Monroe Street
18th and Arch Streets Chicago, IL 60606-5096
Philadelphia, PA 19103-2799 (312) 372-2000
(215) 981-4000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Securities Aggregate Offering Amount of
to be Registered Price(1)(2) Registration Fee
----------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value......... $86,250,000 $22,770
</TABLE>
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(1) Includes shares that the underwriters will have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(o) under the Securities Act.
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 this registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 23, 2000
Shares
[LOGO OF TALENTPOINT, INC.]
TalentPoint, Inc.
Common Stock
--------
We are selling shares of our common stock. Prior to this offering,
there has been no public market for our common stock. The initial public
offering price of our common stock is expected to be between $ and $ per
share. We will apply to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "TPNT."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments.
Investing in our common stock involves risks. See "Risk Factors" starting on
page 6.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and TalentPoint,
Public Commissions Inc.
-------- ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston Robert W. Baird & Co.
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 14
Use of Proceeds..................... 15
Dividend Policy..................... 15
The Reclassifications............... 16
Capitalization...................... 19
Dilution............................ 20
Unaudited Pro Forma Consolidated
Financial Statements............... 21
Selected Financial Data............. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 32
Business............................ 44
Management.......................... 58
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Related Party Transactions......... 66
Principal Shareholders............. 70
Description of Capital Stock....... 71
Shares Eligible for Future Sale.... 75
Material U.S. Tax Considerations
Applicable to Non-U.S. Holders of
Common Stock...................... 77
Underwriting....................... 80
Notice to Canadian Residents....... 82
Legal.............................. 83
Experts............................ 83
Change in Principal Accountants.... 83
Where You Can Find More
Information....................... 84
Index to Financial Statements...... F-1
</TABLE>
------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. This
document may only be used where it is legal to sell these securities. The
information in this prospectus may only be accurate on the date of this
prospectus.
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, especially the risks of purchasing our common
stock discussed under "Risk Factors." References in this prospectus to "we,"
"our," and "us" refer to TalentPoint, Inc.
Our Company
We are a leading provider of integrated human capital management (HCM) and
technology solutions. Our comprehensive products and services enable
organizations to hire, deploy and retain talented and qualified employees in an
effective, timely and cost-efficient manner. TalentPoint Portfolio is our
scalable, fully hosted, web-based suite of proprietary software for human
capital management. Our extensive history and customer base in HCM consulting
and ebusiness technology services provide a strong foundation on which to build
and grow our TalentPoint Portfolio business.
TalentPoint Portfolio is comprised of a number of individual software
modules that address an organization's critical human capital management needs,
such as candidate sourcing, recruitment management, candidate tracking, skills
testing, training, behavioral assessment, survey management and employee
retention. These modules can be implemented individually to address a specific
human capital management need or as an integrated suite to provide a
comprehensive HCM solution.
TalentPoint Portfolio is fully hosted, residing on our web servers, enabling
organizations to access the software through the Internet using standard web
browsers, which are common software applications that allow users to access and
interact with web sites. We configure the TalentPoint Portfolio modules to
mirror the "look and feel" of our customers' web sites. The fully hosted format
of the TalentPoint Portfolio enables organizations to implement our HCM
solutions without incurring a substantial initial capital investment or
significant on-going infrastructure costs. It also enables us to easily upgrade
the technology and content of each module and quickly deliver high quality HCM
solutions to an ever-increasing number of customers. Because of the scalability
of the TalentPoint Portfolio modules, organizations are also able to easily
increase the number of their internal users to accommodate growth.
We have over 13 years of experience in providing HCM consulting services and
over five years of experience in providing ebusiness technology services. We
offer each of these services to complement our TalentPoint Portfolio as well as
on a stand alone basis. Through our HCM consulting services, we offer talent
acquisition, recruitment management and support, sales force solutions,
training consulting and development, retention consulting and employee survey
administration and analysis. Through our ebusiness technology services, we
design, develop and implement a wide range of ebusiness and other information
technology solutions, including the integration of the TalentPoint Portfolio
with customers' existing applications.
There are a number of difficulties faced by organizations today in hiring,
deploying and retaining talented and qualified employees. The inefficiencies in
the traditional human capital management process include:
. multiple intermediaries in the hiring phase, the inability to pre-screen
candidates, high costs per hire and a limited flow of information
between the candidate and the organization;
. often cumbersome and time consuming employee orientation and training
programs, conducted primarily through expensive, labor-intensive
instructor-led seminars which are not tailored to the specific needs of
employees; and
. frequently ineffective retention strategies based primarily on direct
compensation and benefits packages.
1
<PAGE>
As a result of current market factors, such as the increasing mobility of
the workforce, the aging of the employee base and the scarcity of skilled
individuals, we believe organizations with the ability to hire, deploy and
retain talented and qualified employees in a timely and cost-efficient manner
will gain a significant competitive advantage. In order to optimize the human
capital management process, we believe that organizations must use an approach
that effectively integrates all of the phases of the human capital management
process and the information gathered in each phase. Our TalentPoint Portfolio
software modules address the fundamental competencies inherent in hiring,
deploying and retaining employees. Because we offer TalentPoint Portfolio, HCM
consulting services and ebusiness technology services, our customers have the
option of implementing a targeted HCM solution to meet their specific human
capital management needs or a fully integrated comprehensive HCM solution.
Our objective is to be the leading provider of integrated HCM solutions. To
achieve this objective, we intend to continue to:
. focus on expanding and enhancing our TalentPoint Portfolio, while
leveraging our customer base of over 1,600 organizations, including over
130 companies in the Fortune 500, in order to expand the penetration of
our TalentPoint Portfolio modules and cross-sell our HCM consulting and
ebusiness technology services;
. leverage the expertise of our ebusiness technology consultants in the
evaluation and assimilation of new technologies that enhance the
functionality and integration capabilities of our TalentPoint Portfolio;
. increase market recognition of our brand name, our products and our
services through a multifaceted marketing campaign focused on our target
markets, while significantly expanding our sales and distribution
capabilities by hiring at least 70 additional sales professionals and
additional sales support staff in the next 12 months; and
. capitalize on the fragmentation in the human capital management market
by pursuing further strategic acquisitions. Since the beginning of 1986,
we have completed a number of acquisitions to expand our customer base
and add complementary HCM expertise.
For the year ended December 31, 1999, we had pro forma revenues of $48.3
million, pro forma operating income of $5.6 million and pro forma net income
from continuing operations of $2.0 million. See "Unaudited Pro Forma
Consolidated Financial Statements." For the year ended December 31, 1999, we
had total revenues of $51.9 million, operating income of $4.9 million and
income before extraordinary item, representing net income from continuing
operations, of $771,000. See "Selected Financial Data."
Management Ownership and Control
Our executive officers and directors currently own % of our issued and
outstanding common stock, or % on a fully diluted basis, and after
completion of the offering, they will own % of our issued and outstanding
common stock, or % on a fully diluted basis. Through our executive officers'
and directors' common stock ownership, they will be in a position to exert
control over our corporate actions. See "Risk Factors."
Our Address
Our executive offices are located at 170 South Warner Road, Wayne,
Pennsylvania 19087. Our telephone number is (610) 971-9171. Our web address is
www.talentpoint.com. We commenced business in 1987 and conducted business under
the name Raymond Karsan Associates until April 2000, at which time we changed
our name to TalentPoint, Inc. We are a Pennsylvania corporation.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock we are offering........................ shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For general corporate
purposes, including
working capital, capital
expenditures to upgrade
our technology
infrastructure and the
possible acquisition of
complementary businesses,
as well as for repayment
of a $10.0 million bridge
financing and $1.6
million in other debt and
accrued interest.
Proposed Nasdaq National Market symbol.............. TPNT
</TABLE>
The total number of shares of common stock that we assume will be
outstanding after the offering excludes:
. an aggregate of 2,000,000 shares of common stock reserved for future
grants under our 2000 Stock Option Plan; and
. an aggregate of 2,174,990 shares of common stock issuable upon exercise
of outstanding options and warrants at a weighted average exercise price
of $7.55 per share.
See "Capitalization" for information with respect to our capitalization as
of March 31, 2000.
Unless otherwise indicated, the information in this prospectus:
. reflects the reclassifications as described under "The
Reclassifications," which have occurred or will occur immediately prior
to completion of this offering;
. assumes that the over-allotment option granted to the underwriters by us
has not been exercised;
. reflects the conversion of each outstanding share of our Class A common
stock into shares of our common stock, or an aggregate of
shares of common stock, which we will effect immediately prior to
completion of this offering;
. assumes that the initial public offering price is $ per share; and
. assumes that the offering will be completed on , 2000.
3
<PAGE>
Summary Financial Information
The following table sets forth consolidated financial information and
certain pro forma financial information for our business. The pro forma
statement of operations data reflect the pro forma adjustments presented in the
"Unaudited Pro Forma Consolidated Financial Statements" appearing elsewhere in
this prospectus. You should read the following summary of consolidated
financial information together with the financial statements and the notes to
those statements appearing elsewhere in this prospectus and the information
under "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Unaudited Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------- --------------------------
Three Months
Years Ended December 31, Year Ended Ended March 31,
------------------------- Dec. 31, ---------------
1997 1998 1999 1999 1999 2000
------- ------- -------- ---------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
TalentPoint Portfolio.. $ -- $ -- $ 98 $ 3,689 $ 693 $ 2,275
HCM Consulting
Services.............. 31,408 32,964 35,040 27,807 5,610 5,785
eBusiness Technology
Services.............. 6,642 14,127 16,773 16,773 4,880 4,441
------- ------- -------- -------- ------- -------
Total revenues........ 38,050 47,091 51,911 48,269 11,183 12,501
Gross profit:
TalentPoint Portfolio.. -- -- 90 3,277 585 2,032
HCM Consulting
Services.............. 21,505 22,572 27,052 25,165 5,078 5,180
eBusiness Technology
Services.............. 1,554 6,736 7,521 7,521 2,279 2,306
------- ------- -------- -------- ------- -------
Total gross profit.... 23,059 29,308 34,663 35,963 7,942 9,518
Operating expenses:
Compensation and
benefits.............. 15,412 22,604 21,204 21,252 5,428 5,956
Other selling, general
and administrative.... 6,137 8,932 6,984 7,208 1,503 1,866
Depreciation and
amortization.......... 597 1,354 1,625 1,917 448 563
------- ------- -------- -------- ------- -------
Total operating
expenses............. 22,146 32,890 29,813 30,377 7,379 8,385
Operating income (loss).. 913 (3,582) 4,850 5,586 563 1,133
Net interest expense..... 443 970 2,217 2,311 535 286
Market value adjustment
to redeemable warrants.. -- -- 69 -- -- --
------- ------- -------- -------- ------- -------
Income (loss) before
income taxes and
extraordinary item...... 470 (4,552) 2,564 3,275 28 847
Income tax provision
(benefit)............... 14 (10) 1,793 1,311 11 339
------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item...... 456 (4,542) 771 1,964 17 508
Loss on disposal of
business, net of income
tax benefit of $0....... -- -- 517 -- -- --
------- ------- -------- -------- ------- -------
Net income (loss)........ 456 (4,542) 254 1,964 17 508
Accretion of redeemable
Class B common stock to
redemption value........ -- -- (15,546) (15,243) -- --
Accrued dividends on
redeemable Class B
common stock............ -- -- (73) -- -- --
------- ------- -------- -------- ------- -------
Net income (loss)
available to Class A
common shareholders..... $ 456 $(4,542) $(15,365) $(13,279) $ 17 $ 508
======= ======= ======== ======== ======= =======
Earnings (loss) per
common share(1):
Basic.................. $ (1.34) $ 0.00 $ 0.05
Diluted................ $ (1.34) $ 0.00 $ 0.04
Weighted average common
shares outstanding(1):
Basic.................. 9,888 10,778 10,549
Diluted................ 9,888 10,886 11,583
</TABLE>
--------------------
(1) Basic earnings (loss) per common share is computed by dividing net income
(loss) available to Class A common shareholders by the weighted average
number of Class A common shares outstanding during the period, after giving
effect to our corporate restructuring, in which we were formed and in which
we merged our two operating corporations into our newly formed wholly-owned
operating subsidiary, as if it had occurred on January 1, 1999.
4
<PAGE>
Diluted earnings (loss) per common share is computed by dividing net income
(loss) available to Class A common shareholders by the weighted average
number of Class A common shares outstanding during the period, adjusted for
the number of shares that would have been outstanding if the dilutive
potential Class A common shares had been issued. The diluted earnings (loss)
per share does not assume the exercise of any options or warrants or the
conversion of any redeemable Class B common shares that would have an
antidilutive effect on earnings (loss) per share. The weighted average
shares outstanding for all periods presented have been adjusted to reflect
the 50-for-1 stock split which occurred on June 6, 2000.
The pro forma balance sheet data reflect the pro forma adjustments presented
in the "Unaudited Pro Forma Consolidated Financial Statements" appearing
elsewhere in this prospectus. The pro forma as adjusted balance sheet data
reflect the pro forma as adjusted adjustments presented in the "Unaudited Pro
Forma Consolidated Financial Statements" appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- -------------- -----------
(Unaudited) (In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital........................ $ (650) $ (189) $
Total assets........................... 26,567 36,872
Total debt, less current portion....... 3,046 3,046
Redeemable Class B common stock, stated
at redemption value................... 33,712 11,257
Redeemable warrants.................... 2,566 --
Total shareholders' equity (deficit)... $(28,080) $(1,118) $
</TABLE>
5
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Additional risks and uncertainties not presently known to us
or that we currently believe are not important may also impair our business
operations. If any of the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected, the value of our common stock could decline, and you may lose all or
part of your investment.
Risks Related To Our Business
The market for TalentPoint Portfolio, our web-based HCM solution, is newly
emerging and organizations may not adopt our solutions, causing our growth to
suffer or otherwise materially adversely affecting our revenues and the value
of your investment.
Our anticipated growth is dependent upon the adoption of the Internet as a
key mechanism for delivering human capital management solutions. To date, the
use of the Internet as well as organizational intranets and extranets, have not
been widely adopted for human capital management. Our target customers may not
be receptive to the delivery of human capital management solutions over the
Internet because of concerns over transaction security, user privacy, the
reliability and quality of Internet services and other reasons. In addition,
the adoption of web-based human capital management solutions, particularly
among organizations that have relied upon traditional human capital management
solutions, requires the acceptance of a new way of conducting business, and
exchanging and compiling information. The failure of our TalentPoint Portfolio
to achieve market acceptance and generate revenue could result in a material
adverse affect on our revenues and the value of your investment. We expect that
we will need to continue to engage in intensive marketing and sales efforts to
educate our customers about the uses and benefits of our TalentPoint Portfolio.
The demand for and market acceptance of our web-based products are subject to a
high level of uncertainty and we cannot assure that we will be successful in
migrating our current customers to our TalentPoint Portfolio.
We may not be able to develop awareness of our brand name which could
materially adversely affect our revenues and the value of your investment.
We intend to significantly increase our spending on advertising to promote
and market our products and services and our TalentPoint brand name. If we fail
to successfully promote and maintain our TalentPoint brand name, incur
significant expenses in promoting our brand and fail to generate a
corresponding increase in revenue, or encounter legal obstacles which prevent
our continued use of our brand name, our revenues and the value of your
investment could be materially adversely affected. We believe that continuing
to build awareness of our brand name is critical to achieving widespread
acceptance of our TalentPoint Portfolio. In order to maintain and build brand
awareness, we must succeed in our marketing efforts, provide high quality
services and increase the number of organizations using web-based HCM
solutions.
We may not be able to attract customers if we fail to successfully introduce
new or enhanced products and services.
To remain competitive, we must continually improve and enhance the
responsiveness, functionality and features of our products and services and
develop other products and services that address the human capital management
needs and concerns of organizations. We intend to introduce enhanced products
and services in order to generate additional revenues, attract customers, and
respond to competition. We may not succeed in developing or introducing new or
enhanced products and/or new or enhanced products may not achieve market
acceptance or generate revenue. Our failure in any such events may materially
adversely affect our revenues and the value of your investment.
6
<PAGE>
Our failure to meet client expectations or deliver error-free services could
result in losses and negative publicity.
Software products such as our TalentPoint Portfolio may contain undetected
errors or bugs, which may result in product failures or poor product
performance. Our TalentPoint Portfolio may be particularly susceptible to bugs
or performance degradation because of the emerging nature of web-based
technologies and the stress that may be placed on the TalentPoint Portfolio by
its full deployment to thousands of users. Any defects or errors in our
TalentPoint Portfolio modules or any failure to meet customer expectations
could result in delayed or lost revenue due to adverse customer reaction, our
being required to provide additional services to a customer at no charge or
negative publicity regarding us and our TalentPoint Portfolio, any of which
could adversely affect our ability to attract and retain customers. We also
could be subject to claims for damages against us, regardless of our
responsibility for any damages.
Our revenues from our HCM consulting and ebusiness technology services are
difficult to predict because they are primarily generated on a project-by-
project basis and our projects can be terminated on short notice and without
penalty.
Our HCM consulting and ebusiness technology services generally are provided
to our customers on a project-by-project basis, rather than under long term
contracts. These projects vary in size, scope and duration. Because these
services are on a project-by-project basis, a customer may not engage us for
further service once a project is completed. Accordingly, a client that
accounts for a significant portion of our revenues in a particular period may
not account for a similar portion of our revenues in future periods. Also, most
of our HCM consulting and ebusiness technology customers can reduce or cancel
their contracts with little or no notice and without penalty, making it
difficult to predict future revenues. If a significant customer, or a number of
customers, terminate, significantly reduce or modify their contracts with us,
our results of operations could be materially adversely affected.
System failures and security breaches on the Internet may cause delays or
interruptions of our services that could cause us to lose existing customers or
limit our ability to attract new ones.
The performance of our web servers, networking hardware and software
infrastructure is critical to our delivery of our TalentPoint Portfolio and our
ability to provide high quality customer service. Our systems are vulnerable to
damage or interruption from human error, natural disasters, power loss,
telecommunications failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and other similar events. These systems failures may cause
our systems to shut down or incur delays or other service interruptions and
could reduce our revenues and the value of your investment. Further, our
business involves the use of public networks to transmit and store extremely
confidential information about our customers and their employees and potential
employees. We may be required to expend significant capital and other resources
to address security breaches, or protect against the threat of security
breaches, which could reduce our profitability and the value of your
investment. Security breaches could disrupt our operations, damage our
reputation or expose us to litigation and possible liability. Our security
measures may not adequately protect us against security breaches.
We rely heavily on our communications and technology infrastructure, and the
failure to keep pace with changing technologies could disrupt the operation and
growth of our business and result in a loss of customers.
Our success will depend, in part, on our sophisticated computer, Internet
and telecommunications systems. We have invested significantly in our
technological infrastructure and anticipate that it will be necessary to do so
in the future to remain competitive. Our success will depend, in part, on our
ability to keep pace with rapidly changing technology, evolving industry
standards and practices, frequent new service and product introductions and
enhancements, and changing user and client requirements and preferences. Any
delay or failure on our part in responding quickly, cost-effectively and
sufficiently to these developments could render our existing products and
services obsolete and could have a material adverse affect on our business,
financial
7
<PAGE>
condition or results of operations. We may have to incur substantial
expenditures to modify or adapt our products, services or infrastructure to
respond to the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes.
We have designed our TalentPoint Portfolio to work with databases such as
Oracle Enterprise Server and Microsoft SQL Server and operating systems such as
Windows NT and Sun Solaris. Any changes to those databases or systems, or the
increasing popularity of other databases or systems, could require us to modify
our TalentPoint Portfolio and could cause us to delay releasing future modules
and enhancements. As a result, uncertainties related to the timing and nature
of new product announcements, introductions or modifications by vendors or
operating systems, databases, web servers and other enterprise and web-based
applications could delay our product development, increase our product
development expenses or cause customers to delay evaluation, purchase and
deployment of our products.
Our failure to properly manage our recent and expected growth could have a
material adverse affect on the quality of our products and services, our
ability to retain key employees and the efficiency of our operations.
Our growth has placed, and is expected to continue to place, a significant
strain on our management team and on our operational, financial and other
resources. As we continue to grow, we expect we will hire more employees and
expand the scope of our operating and financial systems, which will increase
our operating complexity and the level of responsibility exercised by our
management personnel. In particular, we are seeking to hire at least an
additional 70 employees to expand our direct sales force within the next 12
months. There is strong competition for qualified sales personnel in our
business, and we may not be able to attract and retain sufficient new sales
personnel to expand our operations. To manage our growth effectively we will
need to manage future expansion of our operations and improve our financial and
management controls, reporting systems and procedures on a timely basis. We
cannot assure that we will be able to do so.
We may engage in future acquisitions that may be difficult for us to integrate,
may limit our ability to manage and maintain our business, may result in
adverse accounting treatment or otherwise harm our operating results.
We anticipate that a portion of our future growth may be accomplished by
acquiring existing complementary businesses. The success of any acquisitions
will depend upon, among other things, our ability to integrate personnel,
operations, products and technologies into our organization effectively, to
retain and motivate key personnel of acquired businesses and to retain
customers of acquired businesses. We may not be able to identify suitable
acquisition opportunities, obtain any necessary financing on acceptable terms
or successfully integrate personnel, operations, products or technologies.
These difficulties could disrupt our ongoing business, distract our management
and employees, increase our expenses and materially and adversely affect our
results of operations. Any future acquisitions would involve certain other
risks, including the assumption of additional liabilities, potentially dilutive
issuances of equity securities and diversion of management's attention from
other business concerns. Future acquisitions also may result in adverse
accounting consequences, including one-time or on-going charges to net income.
Furthermore, we may issue equity securities or incur debt to pay for any future
acquisitions. If we issue equity securities, your percentage ownership of our
company would be reduced.
There is competition in each segment of the human capital management market
that we serve, which could make it difficult to attract customers, cause us to
reduce prices and result in reduced margins or loss of market share.
The market for human capital management products and services is
competitive, dynamic, highly fragmented and subject to frequent technological
changes. The intensity of competition and the pace of change are expected to
increase in the future. One source of competition for our HCM products and
services is the
8
<PAGE>
internal human resource departments of our potential customers. If an
organization decides to use external providers of human capital management
solutions, our principal sources of competition are:
. providers of human resources strategy consulting, recruitment services,
employee assessment and training services and web-based and non-web-
based human capital management software;
. providers of hosted software for information technology consultants;
. traditional systems consulting and integration companies;
. facilities management and management information systems outsourcing
companies; and
. information technology consulting companies and Internet professional
services and access providers.
We may be unable to maintain or improve our competitive position. Our
competitors may be able to respond more quickly to technological developments
and changes in customers' needs. We must promote and enhance our reputation and
brand in order to attract new customers and differentiate our company from our
competitors. We cannot assure that we will be able to do so.
We depend on our key personnel, and the loss of any of our key personnel could
materially adversely affect our business, financial condition or results of
operation.
Our future success depends upon the continued employment of our senior
management and other key employees, particularly Rudy Karsan, our Chief
Executive Officer and Chairman of our Board of Directors. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining customers. While members of our
senior management team and key employees have signed agreements that preclude
them from competing with us, the loss of the service of any one of these
individuals could seriously impair our ability to execute our business plan,
which could reduce our revenues and have a material adverse affect on our
results of operations. Further, we may incur costs in connection with enforcing
any such agreements.
An increase in our international activities will expose us to additional
operational challenges that we might not otherwise face.
As we increase our international activities, we will have to confront and
manage a number of risks and expenses that we would not otherwise face if we
conducted our operations solely in the United States. These risks and expenses
include:
. expenses associated with customizing our products for customers in
foreign countries;
. foreign currency exchange rate fluctuations, particularly if we sell our
products in denominations other than U.S. dollars;
. challenges and expenses inherent in managing geographically dispersed
operations;
. protectionist laws and business practices that favor local companies;
. political and economic instability in some international markets;
. multiple, conflicting and changing government laws and regulations;
. tariffs, export controls and other trade barriers;
. reduced protection for intellectual property rights in some countries;
. difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences; and
. potentially adverse tax consequences.
9
<PAGE>
We may not be able to protect or enforce our intellectual property rights, or
avoid infringing on others, any of which could result in the loss of our
rights, loss of business or increased costs.
Our success and ability to compete depend to a significant degree on our
proprietary technology and on our TalentPoint brand, marks and domain names.
We rely on trademarks, copyrights and other intellectual property laws and on
confidentiality and nondisclosure agreements with our employee shareholders
and third parties to establish and protect our proprietary rights. We cannot
assure you that the steps that we have taken will be adequate or that we will
be able to prevent infringement, detect misappropriation, defend our
intellectual property, or obtain patents for any of our internally developed
systems. Our inability to protect our intellectual property in a meaningful
manner, could have a material adverse affect on our business, financial
condition or results of operations. In addition, if any of our products
violate the proprietary rights of third parties, we may be required to
reengineer our products or obtain licenses to continue to offer our products
without substantial reengineering. Any efforts to reengineer our products or
obtain licenses from third parties may not be successful and, in any case,
could have a material adverse affect on our business and financial performance
by substantially increasing our costs.
Increasing governmental regulation of the Internet could limit the market for
our TalentPoint Portfolio.
Increased regulation of the Internet might slow the growth in use of the
Internet, which could decrease demand for our TalentPoint Portfolio, increase
our cost of doing business or otherwise have a material adverse affect on our
business, financial condition or results of operations. Congress has recently
passed legislation regulating certain aspects of the Internet relating to:
. user privacy;
. pricing, usage fees and taxes;
. content;
. distribution; and
. characteristics and quality of products and services.
In addition, federal, state and local governmental organizations as well as
foreign governments are considering other legislative and regulatory proposals
that would regulate the Internet. Areas of potential regulation include libel,
pricing, quality of products and services and intellectual property ownership.
We do not know how courts will interpret laws governing the Internet or the
extent to which they will apply existing laws regulating issues such as
property ownership, libel and personal privacy to the Internet. Therefore, we
are not certain how new laws governing the Internet or other existing laws
will affect our business. Legislation or application of existing laws could
expose companies involved in web-based professional services management or
ecommerce, such as us, to increased liability, which could limit the growth of
the Internet and electronic commerce generally and could have a material
adverse affect on our business, financial condition or results of operations.
Our quarterly financial results may be subject to significant fluctuations and
if our future results are below the expectations of investors the price of our
common stock could decline.
Our results of operations could vary significantly from quarter to quarter.
Our quarterly operating results are likely to be particularly affected by the
number of customers utilizing our TalentPoint Portfolio and our services
during any quarter as well as sales and marketing and other expenses for a
particular quarterly period.
Other factors that could affect our quarterly operating results and the
price of our common stock include:
. our ability to attract new customers and retain current customers;
. the announcement or introduction of new products or services by us or
our competitors;
10
<PAGE>
. the entry of new competitors into any of our markets;
. changes in the pricing of our products and services or those of our
competitors;
. variability in the mix of our products and services revenues in any
quarter;
. the amount and timing of operating costs and capital expenditures
relating to management and expansion of our business; and
. timing of acquisitions and related costs, such as compensation charges
which fluctuate based on the market price of our common stock.
Due to these and other factors, we believe that period-to-period comparisons
of our results of operations are not meaningful and should not be relied upon
as indicators of our future performance. It is possible that in some future
periods, our results of operations may be below the expectations of investors.
If this occurs, the price of our common stock could decline.
Non-cash accounting charges relating to warrants held by our shareholders will
result in a reduction of our earnings, may result in our reporting losses and
may have a negative impact on our stock price.
Upon completion of the offering, we will record a non-recurring adjustment
to compensation to reflect the satisfaction of the contingency associated with
warrants which were issued to our shareholders below the initial public
offering price per share. This adjustment to compensation will be approximately
$ million and will be recorded in the quarter in which the offering
occurs. This charge will result in a reduction in our earnings, may result in
our reporting a loss in the quarter in which the offering occurs, and may have
a negative impact on our stock price.
Risks Related To This Offering
Our executive officers and directors will own approximately % of our voting
stock after this offering and, therefore, will be able to control us.
Our executive officers and directors currently own or control, directly or
indirectly, % of the outstanding shares of our common stock, or % on a
fully diluted basis. After completion of the offering, our executive officers
and directors will own or control, directly or indirectly, % of the
outstanding shares of our common stock, or % on a fully diluted basis. As a
result, if these persons act together, they will have the ability to influence
all matters submitted to our shareholders for approval, including the election
and removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. These shareholders may have interests that
differ from yours and they may approve actions that you vote against or reject
actions that you have voted to approve. Their ability to exercise influence
over all matters requiring shareholder approval could prevent or significantly
delay another company or person from acquiring or merging with us. In addition,
this concentration of ownership may also have the affect of preventing or
discouraging or deferring a change in control of us, which, in turn, could
depress the market price of our common stock.
An active public market for our common stock may not develop or be sustained,
and the market price of our common stock may fall below the initial public
offering price.
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering, and the market price might fall below the initial public
offering price. The initial public offering price may bear no relationship to,
and may be higher than, the price at which our common stock will trade upon
completion of this offering. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters based on factors that may not be indicative of future performance.
11
<PAGE>
The market price for our common stock might be volatile and could result in a
decline in the value of your investment.
We believe that the market price of our common stock could be volatile. The
value of your investment in our common stock could decline due to the impact of
any of the following factors upon the market price of our common stock:
. changes in financial estimates by securities analysts;
. announcements of new product or service offerings by us or our
competitors;
. announcements of new customer relationships by us or our competitors;
. earnings and other announcements by, and changes in market valuations of
Internet or technology- related companies;
. additions to, or departures of, our executive officers;
. conditions and trends in the Internet, electronic commerce and human
capital management industries;
. general economic and stock market conditions;
. changes in business or regulatory conditions affecting us; and
. trading of our common stock.
The stock markets, particularly the Nasdaq National Market on which we have
applied to have our common stock listed, have recently experienced extreme
price and volume fluctuations. These fluctuations have particularly affected
the market prices of equity securities of many technology and Internet-related
companies and have often been unrelated or disproportionate to the operating
performance of those companies. These broad market fluctuations could adversely
affect the market price of our common stock. In addition, in the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation was often brought against the
company. Many technology-related companies have been subject to this type of
litigation. Securities litigation could result in substantial costs and divert
our management's attentions and resources.
Future sales of our common stock, or the belief that such sales could occur,
may cause our stock price to decline.
Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop
in the market price of our common stock. Upon completion of the offering, we
will have outstanding shares of common stock. All of the
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, unless the shares are
purchased by our "affiliates," as that term is defined under the Securities
Act. The remaining shares of common stock outstanding upon
completion of this offering will be "restricted securities," as that term is
defined under Rule 144 of the Securities Act. Shares of our common stock will
be available for sale in the public market as follows:
. 687,050 shares issuable upon exercise of outstanding options will become
eligible for sale, subject to vesting and lock-up agreements with the
underwriters in some cases, following the effectiveness of a
registration statement on Form S-8 covering the shares, which we expect
to file shortly after the completion of this offering.
. 1,487,940 shares, issuable upon exercise of outstanding warrants, will
become eligible for sale, subject to lock-up agreements with the
underwriters and Rule 144 under the Securities Act.
. 7,232,450 outstanding shares held by directors, executive officers and
employee shareholders will become eligible for sale, subject to lock-up
agreements with the underwriters and Rule 144.
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<PAGE>
. 3,597,463 shares that will be outstanding and held by our investors and
an additional shares that will be issued upon the conversion of
19,208 shares of our redeemable Class B common stock will become
eligible for sale, subject to lock-up agreements with the underwriters
and Rule 144. Holders of these shares have registration rights that
entitle them to require us to register these shares under the Securities
Act at any time after six months following the completion of the
offering. If they exercise this right, these shares would become freely
tradeable without restriction upon the effectiveness of the registration
statement.
However, the underwriters have the right to waive lock-up restrictions prior
to the end of the 180-day lock-up period in their sole discretion at any time
and without notice. In addition, the underwriters have the identical right to
waive lock-up restrictions to which we have agreed with respect to the sale of
newly issued shares by us. The shares subject to lock-up agreements may
therefore be available for sale sooner than indicated above. See "Shares
Eligible for Future Sale."
The future issuance of preferred stock may dilute the rights of our common
shareholders.
Following the offering, our Board of Directors will have the authority to
issue shares of preferred stock and to determine the price, privileges and
other terms of the shares of preferred stock. Our Board of Directors may
exercise authority without any further approval of our shareholders. The rights
of the holders of our common stock may be adversely affected by the rights of
the holders of any preferred stock that may be issued in the future.
Provisions of Pennsylvania law and our charter and bylaws could delay or
prevent a takeover of us, even if such a takeover would benefit our
shareholders because they would receive a premium for their shares.
Provisions of Pennsylvania law as well as our charter and bylaws could have
the effect of delaying or preventing a third party from acquiring us, even if a
change in control would be beneficial to our shareholders because they would
receive a premium for their shares. These provisions include:
. authorizing the issuance of preferred stock without shareholder
approval;
. providing for a classified board of directors with staggered, three-year
terms;
. prohibiting cumulative voting in the election of directors;
. prohibiting shareholders from calling special shareholders meetings;
. prohibiting shareholder actions by written consent; and
. prohibiting specific types of mergers with persons who acquire at least
20% of our capital stock without prior approval of our Board of
Directors, unless a majority of our disinterested shareholders approve
the merger.
Management does not have a specific plan for using a significant portion of the
proceeds of this offering and might apply a significant portion of the net
proceeds from this offering to uses that do not increase our operating results
or market value.
Approximately $ million of the net proceeds from the sale of our common
stock in this offering will be added to our general working capital.
Consequently, our management will have broad discretion with respect to the
application of these net proceeds, and you will not have the opportunity, as
part of your investment in our common stock, to assess whether the proceeds are
being used appropriately. These offering proceeds may be used for corporate
purposes that do not increase our operating results or market value. Pending
application of the proceeds, they might be placed in investments that do not
produce income or that lose value.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, words such as "may," "intend,"
"anticipate," "believe," "estimate," "plan," "expect," and similar expressions
as they relate to us, are included to identify forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. In
evaluating these statements, you should consider the inherent risks and
uncertainties involved, including the risks described under "Risk Factors."
These statements are only predictions. While we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. We
also assume no obligation to publicly update or revise these forward-looking
statements for any reason, or to update the reasons actual results could differ
materially from those anticipated in these forward-looking statements, even if
new information becomes available in the future.
This prospectus contains estimates made by independent parties relating to
market size and growth. These estimates involve a number of assumptions and
limitations. We cannot assure you that these estimates of market size are
accurate or that projections of market growth will be achieved. Projections,
assumptions and estimates of our future performance and the future performance
of our industry are necessarily subject to a high degree of uncertainty and
risk due to a variety of factors, including those described in "Risk Factors"
and elsewhere in this prospectus.
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<PAGE>
USE OF PROCEEDS
Based on an assumed initial public offering price of $ per share, the
mid-point of the range set forth on the cover page of this prospectus, our net
proceeds from the sale of shares of common stock are expected to be
approximately $ million, after deducting underwriting discounts and
commissions and our estimated offering expenses. If the underwriters' over-
allotment option is exercised in full, our net proceeds are expected to be $
million.
The primary purposes of the offering are to obtain additional capital, to
create a public market for our common stock, and to facilitate our future
access to the public equity markets. We intend to use approximately $11.6
million of the net proceeds from the offering to repay notes payable,
consisting of notes in the aggregate principal amount of $10.0 million that we
issued in a bridge financing that occurred on June 16, 2000, $1.3 million owed
to two of our former employee shareholders in connection with the repurchase of
their shares in our company, and $300,000 of accrued interest on these notes
payable. In the bridge financing, we issued notes payable in the aggregate
principal amount of $10.0 million to Parthenon Investors, L.P. and PCIP
Investors, two of our shareholders which are affiliates of our company, for
aggregate cash proceeds of $8.1 million, representing an original issue
discount of $1.9 million. As part of this bridge financing, Parthenon Investors
and PCIP Investors also exercised warrants to purchase an aggregate of 116,210
shares of our Class A common stock at an exercise price of $16.70 per share,
for aggregate cash proceeds of $1.9 million. The notes issued in the bridge
financing mature on June 16, 2004 and currently bear interest at a stated
annual rate of 13% on the principal amount for the first year and 16%
thereafter. The proceeds of this bridge financing were used to repay
indebtedness that we incurred in connection with our recent acquisition of a
complementary business and for general corporate purposes, including working
capital. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and "Related Party
Transactions."
We intend to use the remainder of the net proceeds from the offering for
general corporate purposes, including working capital, capital expenditures to
upgrade our technology infrastructure and the possible acquisition of
complementary businesses. Our management will have broad discretion and
significant flexibility in directing the use of the remainder of the net
proceeds of the offering. Pending our use of the undesignated portion of the
net proceeds from the offering, we intend to invest them in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We currently intend to retain our future earnings to finance the operation
and expansion of our business and we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Our existing bank
credit facility prohibits us from paying cash dividends on our common stock.
Prior to December 15, 1999, we operated as an S corporation and were not
subject to federal and certain state income taxes. As a result, our net income
for federal and certain state income tax purposes was reported by and taxed
directly to our shareholders. We made cash distributions to our shareholders in
amounts not exceeding taxes required to be paid on our undistributed earnings.
15
<PAGE>
THE RECLASSIFICATIONS
Redeemable Class B Common Stock
Prior to this offering, we had two classes of common stock outstanding,
designated as Class A common stock and redeemable Class B common stock. In
December 1999, we issued 98,948 shares of our redeemable Class B common stock
to five investors in an equity financing. Two of these investors, Parthenon
Investors, L.P. and PCIP Investors, are affiliates of our company by virtue of
their both being affiliated with a member of our Board of Directors. See
"Related Party Transactions" and "Principal Shareholders."
The holders of our redeemable Class B common stock had contractual rights to
require us to redeem 38,416 shares for an aggregate of $22 million plus 8% per
annum at the earliest of (i) a registered public offering of our common stock
where the aggregate proceeds exceeded $50.0 million, (ii) our failure to
indemnify a holder of our redeemable Class B common stock pursuant to a
contractual obligation to do so, (iii) our failure to meet specified financial
objectives or (iv) December 16, 2004. In addition, if a registered public
offering or sale transaction did not occur prior to December 16, 2004, the
holders of our redeemable Class B common stock would also have had the ability
to require us to redeem an additional 60,532 shares, representing the balance
of our redeemable Class B common stock issued in the December 1999 equity
financing, at the fair market value on the date of redemption. The redemption
value of all of the outstanding shares of our redeemable Class B common stock
has been and will continue to be adjusted quarterly based upon fluctuations in
the estimated fair value of our common stock and to reflect accrued dividends
at 8% per annum so long as this stock is outstanding. We recorded charges to
accumulated deficit of $15.6 million and $1.2 million at December 31, 1999 and
March 31, 2000, respectively, to accrete the value of our redeemable Class B
common stock to its estimated aggregate redemption value, including accrued
dividends, at the end of these periods. The shares of our redeemable Class B
common stock are included in the balance sheet as temporary equity and are
stated at their estimated redemption value at December 31, 1999 and March 31,
2000 of $32.5 million and $33.7 million, respectively, which includes
cumulative accrued dividends of $73,000 and $513,000, respectively.
On June 16, 2000, the holders of our redeemable Class B common stock agreed:
. to convert, effective upon the filing of the registration statement of
which this prospectus is a part, which occurred on June 23, 2000, 19,208
shares of our redeemable Class B common stock into 454,653 shares of our
Class A common stock;
. to convert, effective immediately prior to completion of this offering,
an additional 19,208 shares of our redeemable Class B common stock into
a number of shares of Class A common stock equal to the redemption value
of these redeemable Class B common shares ($11.3 million as of March 31,
2000) divided by the initial public offering price per share or,
assuming an initial public offering price of $ per share, shares
of our Class A common stock; and
. to convert, effective immediately prior to the completion of this
offering, the remaining 60,532 shares of our redeemable Class B common
stock into 3,026,600 shares of our Class A common stock.
As a result of these conversions, there will be no redeemable Class B common
stock outstanding after completion of this offering.
Accordingly, upon completion of this offering, assuming an initial public
offering price of $ per share, the investors in our December 1999 financing
will own shares of our common stock or % of our common stock. As a
result of these conversions, the redemption value of the converted shares of
our redeemable Class B common stock will be reclassified into shareholders'
equity (deficit) upon completion of the offering.
Our Warrants
In connection with our December 1999 equity financing, we also issued
warrants to purchase our Class A common stock to the investors and to certain
of our employee shareholders, including our executive officers and some of our
directors.
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The warrants issued in December 1999 include the following:
<TABLE>
<CAPTION>
Aggregate number of
shares of common stock
Aggregate number of entitled to be
shares of Class A purchased and
common stock entitled Exercise price status of warrant upon
Type of holder Type of warrant to be purchased per share completion of offering
-------------- --------------- --------------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Investors Contingent 495,250 $ 0.01 None; Cancelled
Redeemable
Warrants
Employee Contingent Non- 495,250 $ 0.01 495,250; exercisable until
Shareholders Redeemable December 16, 2006
Warrants
Investors Redeemable 198,100 $ 3.34 198,100; exercisable until
Warrants December 16, 2006
Investors Non-Redeemable 910,800 $16.70 794,590; exercisable until
Warrants December 16, 2006
</TABLE>
Investors holding Contingent Redeemable Warrants and Redeemable Warrants had
the ability to require us to repurchase these warrants at their fair market
value five years after date of issuance if an initial public offering of our
stock or a sale of our company had not occurred. The fair value of the put
features of these warrants was estimated at $662,000 for the Redeemable
Warrants and $1.7 million for the Contingent Redeemable Warrants on the date of
issuance. Since the investors could require us to repurchase these warrants at
fair value, the carrying value of the Contingent Redeemable Warrants and the
Redeemable Warrants has been and will continue to be adjusted quarterly based
upon fluctuations in the estimated fair value of our common stock until the
redemption feature is terminated. A charge of $69,000 and $181,000 has been
recorded at December 31, 1999 and March 31, 2000, respectively, to adjust these
warrants to their respective fair values of $2.4 million and $2.6 million.
On June 16, 2000, in connection with a bridge financing, Parthenon
Investors, L.P. and PCIP Investors exercised Non-Redeemable Warrants to
purchase an aggregate of 116,210 shares of our Class A common stock at an
exercise price per share of $16.70 for an aggregate exercise price of $1.9
million. See "Related Party Transactions."
Reclassifications
The following transactions, all of which are referred to in this prospectus
as the "reclassifications," have occurred or will occur immediately prior to
completion of the offering:
. 19,208 shares of our redeemable Class B common stock were converted into
454,653 shares of our Class A common stock effective upon the filing of
the registration statement of which this prospectus is a part, which
occurred on June 23, 2000;
. 19,208 shares of our Class B common stock will be converted into
shares of our Class A common stock at the initial public offering price
per share as described above. The conversion of these shares has not
been reflected in the unaudited pro forma consolidated financial
statements but has been reflected in the unaudited pro forma as adjusted
consolidated financial statements;
. the remaining 60,532 shares of our redeemable Class B common stock will
be converted into 3,026,600 shares of our Class A common stock;
. all Contingent Redeemable Warrants held by our investors will be
canceled;
. the put feature in the Redeemable Warrants held by our investors will be
terminated;
. the carrying value of the Contingent Redeemable Warrants and the
Redeemable Warrants held by our investors will be reclassified into
shareholders' equity (deficit);
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. the contingency associated with the Contingent Non-Redeemable Warrants
held by our employee shareholders will be satisfied and these warrants
will vest and become exercisable; and
. a nonrecurring compensation charge will be recorded equal to the excess
of the initial public offering price per share over the exercise price
of the Contingent Non-Redeemable Warrants held by employee shareholders,
multiplied by the number of shares subject to the warrants. Assuming an
initial public offering price of $ per share, this charge is estimated
to be $ million. In accordance with the SEC's rules governing the
presentation of pro forma financial statements, this nonrecurring charge
has not been reflected in the unaudited pro forma consolidated financial
statements included elsewhere in this prospectus.
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CAPITALIZATION
The following table sets forth our total capitalization as of March 31,
2000:
. on an actual basis;
. on a pro forma basis to give effect to the reclassifications as
described under "The Reclassifications" and the June 16, 2000 bridge
financing in which we issued notes payable in the aggregate principal
amount of $10.0 million for aggregate cash proceeds of $8.1 million, and
two of our investors exercised warrants to purchase an aggregate of
116,210 shares of our Class A common stock for aggregate cash proceeds
of $1.9 million; and
. on a pro forma as adjusted basis to give effect to the pro forma
adjustments described above, the conversion of 19,208 shares of Class B
common stock into shares of Class A common stock at an assumed
initial public offering price of $ per share, the reclassification
of each outstanding share of our Class A common stock into
shares of our common stock, the retirement of all
treasury shares, the sale of shares of common stock offered
hereby at an assumed initial offering price of $ per share and the
application of the net proceeds from the offering, after deducting
underwriting discounts and commissions and estimated offering expenses.
You should read this information together with the sections of this prospectus
entitled "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- --------- -----------
(Unaudited) (In thousands)
<S> <C> <C> <C>
Current debt:
Current portion of long-term debt........... $ 1,717 $ 9,777 $
Line of credit.............................. 5,408 5,408
-------- ------- -------
Total current debt.......................... 7,125 15,185
Long term debt, net of current portion....... 3,046 3,046
Redeemable Class B common stock, par value
$0.01 per share, 200,000 shares authorized;
98,948 shares issued and outstanding,
actual; 19,208 shares issued and
outstanding, pro forma; no shares issued or
outstanding, pro forma, as adjusted......... 33,712 11,257 --
Redeemable warrants.......................... 2,566 -- --
Shareholders' equity (deficit):
Preferred stock, par value $0.01; 100,000
shares authorized, no shares issued and
outstanding, actual, pro forma and pro
forma, as adjusted
Common stock, par value $0.01; 100,000,000
shares authorized, no shares issued and
outstanding, actual and pro forma;
shares issued and outstanding pro forma, as
adjusted................................... -- --
Class A common stock, par value, $0.01 per
share; 100,000,000 shares authorized;
9,379,450 shares issued, 7,232,450 shares
outstanding, actual; 12,976,913 shares
issued, 10,829,913 shares outstanding,
pro forma; no shares issued or outstanding,
pro forma, as adjusted..................... 94 130 --
Additional paid-in capital.................. 1,263 --
Accumulated equity (deficit)................ (20,367) 7,822
Treasury stock, 2,147,000 shares, actual and
pro forma; no shares outstanding, pro
forma, as adjusted......................... (7,386) (7,386) --
Notes due on common stock................... (1,684) (1,684) (1,684)
-------- ------- -------
Total shareholders' equity (deficit)........ (28,080) (1,118)
-------- ------- -------
Total capitalization........................ $ 18,369 $28,370 $
======== ======= =======
</TABLE>
---------------------
The data presented in the above table excludes:
. an aggregate of 2,000,000 shares of common stock reserved for future
grants under our 2000 Stock Option Plan; and
. an aggregate of 2,174,990 shares of common stock issuable upon exercise
of outstanding options and warrants at a weighted average exercise price
of $7.55 per share.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was negative
$11.4 million, or negative $1.05 per share of common stock. We determined our
pro forma net tangible book value per share by subtracting our total
liabilities from our total tangible assets and dividing that number by
10,829,913 pro forma shares of our common stock outstanding as of March 31,
2000. This pro forma basis gives effect to the pro forma adjustments referred
to in the "Unaudited Pro Forma Consolidated Financial Statements" beginning on
page 21.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the as adjusted pro forma net tangible book
value per share of our common stock immediately following this offering.
Assuming an initial offering price of $ per share, after giving effect to
our sale of shares of common stock in this offering and after deducting the
underwriting discount and our estimated offering expenses, our as adjusted pro
forma net tangible book value as of March 31, 2000 would have been $
million, or $ per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to our
existing shareholders and an immediate and substantial dilution of $
per share to new shareholders purchasing shares of our common stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial offering price per share....................... $
Pro forma net tangible book value per share as of March 31,
2000........................................................ (1.05)
Increase per share attributable to new shareholders.......... $
---
As adjusted pro forma net tangible book value per share after
this offering.................................................
------
Dilution per share to new shareholders......................... $
======
</TABLE>
The following table summarizes the difference between the existing
shareholders and new shareholders with respect to the number of shares of
common stock purchased from us, the total consideration paid to us, and the
average price per share paid. The information is presented as of March 31,
2000. The information presented is based on an assumed initial public offering
price of $ per share, before deducting the underwriting discount and our
estimated offering expenses.
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. % $ % $
New shareholders....................... % % $
--- ----- --- ----- ---
Total................................ 100.0% 100.0%
=== ===== === ===== ===
</TABLE>
The discussion and tables above assume no exercise of any stock options
outstanding as of March 31, 2000. As of March 31, 2000, options and warrants
were outstanding to purchase a total of 2,174,990 shares of our common stock at
a weighted average exercise price of $7.55 per share. To the extent that any of
these options or warrants are exercised, there may be further dilution to new
shareholders.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statements of operations for
the three months ended March 31, 2000 and 1999 and the year ended December 31,
1999 have been prepared to reflect the following, as if each had occurred on
the first day of each respective period:
. our acquisition of a division of Noll, Inc. on February 23, 2000 for a
purchase price consisting of $750,000 in cash and short term notes in
the aggregate principal amount of $150,000;
. our acquisition of Know It All, Inc. on March 31, 2000 in exchange for
392,200 shares of our common stock;
. our acquisition of Paragon, Inc. on May 26, 2000 for $1.6 million in
cash;
. the disposition of our temporary staffing division and related
businesses from our HCM consulting services business during 1999; and
. the reclassifications described under "The Reclassifications."
Noll, Know It All and Paragon constitute all of the companies that we
acquired in the first two quarters of 2000, all of which were accounted for
under the purchase method of accounting.
The unaudited pro forma consolidated financial statements are based on our
historical financial statements appearing elsewhere in this prospectus and the
historical financial statements of Noll, Know It All and Paragon not appearing
elsewhere in this prospectus.
Our historical consolidated statements of operations for the three months
ended March 31, 2000 include the results of operations of Noll for one month,
because it was acquired on February 23, 2000. Because we acquired Know It All
on March 31, 2000 and Paragon on May 26, 2000, our historical consolidated
statements of operations do not include the results of operations of either
Know It All or Paragon. The historical consolidated statements of operations
for the three months ended March 31, 1999 and the year ended December 31, 1999
include the results of operations of our temporary staffing and related
businesses which were sold or discontinued in various transactions during 1999.
The following unaudited pro forma consolidated balance sheet as of March 31,
2000 has been prepared to reflect the following, as if each had occurred as of
such date:
. our acquisition of Paragon;
. the reclassifications, as described under "The Reclassifications;" and
. the June 16, 2000 bridge financing in which we issued notes payable in
the aggregate principal amount of $10.0 million to two of our investors
for aggregate cash proceeds of $8.1 million and these investors
exercised warrants for the purchase of 116,210 shares of our Class A
common stock at an exercise price of $16.70 per share, for aggregate
cash proceeds of $1.9 million.
The historical consolidated balance sheet as of March 31, 2000 includes the
Noll and Know It All acquisitions, as they occurred on or prior to March 31,
2000. Accordingly, no pro forma adjustments to our historical balance sheet are
needed to reflect these acquisitions as of March 31, 2000.
The unaudited pro forma as adjusted consolidated balance sheet reflects the
pro forma adjustments described above, together with:
. the conversion of 19,208 shares of our redeemable Class B common stock
into shares of Class A common stock at an assumed initial
public offering price of $ per share;
. the reclassification of each share of our Class A common stock into
shares of our common stock;
. the retirement of all treasury shares;
. the sale of shares of our common stock offered hereby at an
assumed initial public offering price of $ per share; and
. the application of the net proceeds from the offering.
21
<PAGE>
The unaudited pro forma consolidated financial statements are provided for
informational purposes only and, while they are based on assumptions that we
believe are reasonable, they are not necessarily indicative of our financial
position or results of operations had the transactions assumed therein occurred
as of such dates. Additionally, the unaudited pro forma consolidated financial
statements are not meant to project our financial position or results of
operations for any period or date, nor do they give effect to any matters other
than those described above or in the notes thereto. The allocations of purchase
price to the assets and liabilities of each of the acquired companies are
preliminary and the final allocations may differ from the amounts reflected
herein. The unaudited pro forma consolidated financial statements should be
read in conjunction with our consolidated financial statements and notes
thereto appearing elsewhere in this registration statement.
22
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Dispositions Adjustments Pro Forma
---------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
TalentPoint
Portfolio............ $ 880 $1,395 $ -- $ -- $ 2,275
HCM Consulting
Services............. 5,785 -- -- -- 5,785
eBusiness Technology
Services............. 4,441 -- -- -- 4,441
------- ------ ----- ----- -------
Total revenues...... 11,106 1,395 -- -- 12,501
------- ------ ----- ----- -------
Cost of revenues:
TalentPoint
Portfolio............ 159 84 -- -- 243
HCM Consulting
Services............. 605 -- -- -- 605
eBusiness Technology
Services............. 2,135 -- -- -- 2,135
------- ------ ----- ----- -------
Total cost of
revenues........... 2,899 84 -- -- 2,983
------- ------ ----- ----- -------
Gross profit............ 8,207 1,311 -- -- 9,518
Operating expenses:
Compensation and
benefits............. 5,459 497 -- -- (1) 5,956
Other selling, general
and administrative... 2,110 253 (497) -- 1,866
Depreciation and
amortization......... 508 11 -- 44 (2) 563
------- ------ ----- ----- -------
Total operating
expenses........... 8,077 761 (497) 44 8,385
------- ------ ----- ----- -------
Operating income
(loss)................. 130 550 497 (44) 1,133
Net interest expense.... 236 10 -- 40 (2) 286
Market value adjustment
to redeemable
warrants............... 181 -- -- (181)(3) --
------- ------ ----- ----- -------
Income (loss) before
income taxes........... (287) 540 497 97 847
Income tax provision
(benefit).............. (52) -- -- 391 (4) 339
------- ------ ----- ----- -------
Net income (loss) from
continuing operations.. (235) 540 497 (294) 508
Accretion of redeemable
Class B common stock to
redemption value....... (787) -- -- 787 (3) --
Accrued dividends on
redeemable Class B
common stock........... (440) -- -- 440 (3) --
------- ------ ----- ----- -------
Net income (loss) from
continuing operations
available to Class A
common shareholders.... $(1,462) $ 540 $ 497 $ 933 $ 508
======= ====== ===== ===== =======
Earnings per share:
Basic
Per share........... $ 0.05
=======
Weighted average
shares............. 10,549(5)
=======
Diluted
Per share........... $ 0.04
=======
Weighted average
shares............. 11,583(6)
=======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
statements.
23
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Dispositions Adjustments Pro Forma
---------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
TalentPoint
Portfolio............ $ -- $ 693 $ -- $ -- $ 693
HCM Consulting
Services............. 8,421 -- (2,811) -- 5,610
eBusiness Technology
Services............. 4,880 -- -- -- 4,880
------- ----- ------- ---- -------
Total revenues...... 13,301 693 (2,811) -- 11,183
------- ----- ------- ---- -------
Cost of revenues:
TalentPoint
Portfolio............ -- 108 -- -- 108
HCM Consulting
Services............. 2,420 -- (1,888) -- 532
eBusiness Technology
Services............. 2,601 -- -- -- 2,601
------- ----- ------- ---- -------
Total cost of
revenues........... 5,021 108 (1,888) -- 3,241
------- ----- ------- ---- -------
Gross profit............ 8,280 585 (923) -- 7,942
Operating expenses:
Compensation and
benefits............. 5,481 410 (463) -- 5,428
Other selling, general
and administrative... 1,541 265 (303) -- 1,503
Depreciation and
amortization......... 407 10 (17) 48 (2) 448
------- ----- ------- ---- -------
Total operating
expenses........... 7,429 685 (783) 48 7,379
------- ----- ------- ---- -------
Operating income
(loss)................. 851 (100) (140) (48) 563
Net interest expense.... 512 12 (29) 40 (2) 535
------- ----- ------- ---- -------
Income (loss) before
income taxes........... 339 (112) (111) (88) 28
Income tax provision.... -- -- -- 11 (4) 11
------- ----- ------- ---- -------
Net income (loss) from
continuing operations
available to Class A
common shareholders.... $ 339 $(112) $ (111) $(99) $ 17
======= ===== ======= ==== =======
Earnings per share:
Basic
Per share........... $ 0.00
=======
Weighted average
shares............. 10,778(5)
=======
Diluted
Per share........... $ 0.00
=======
Weighted average
shares............. 10,886(6)
=======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
statements.
24
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Dispositions Adjustments Pro Forma
---------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
TalentPoint
Portfolio............ $ 98 $3,591 $ -- $ -- $ 3,689
HCM Consulting
Services............. 35,040 -- (7,233) -- 27,807
eBusiness Technology
Services............. 16,773 -- -- -- 16,773
-------- ------ ------- ----- --------
Total revenues...... 51,911 3,591 (7,233) -- 48,269
-------- ------ ------- ----- --------
Cost of revenues:
TalentPoint
Portfolio............ 8 404 -- -- 412
HCM Consulting
Services............. 7,988 -- (5,346) -- 2,642
eBusiness Technology
Services............. 9,252 -- -- -- 9,252
-------- ------ ------- ----- --------
Total cost of
revenues........... 17,248 404 (5,346) -- 12,306
-------- ------ ------- ----- --------
Gross profit............ 34,663 3,187 (1,887) -- 35,963
Operating expenses:
Compensation and
benefits............. 21,204 1,830 (1,782) -- 21,252
Other selling, general
and administrative... 6,984 1,197 (973) -- 7,208
Depreciation and
amortization......... 1,625 149 (48) 191 (2) 1,917
-------- ------ ------- ----- --------
Total operating
expenses........... 29,813 3,176 (2,803) 191 30,377
-------- ------ ------- ----- --------
Operating income
(loss)................. 4,850 11 916 (191) 5,586
Net interest expense.... 2,217 64 (130) 160 (2) 2,311
Market value adjustment
to redeemable
warrants............... 69 -- -- (69)(3) --
-------- ------ ------- ----- --------
Income (loss) before
income taxes........... 2,564 (53) 1,046 (282) 3,275
Income tax provision
(benefit).............. 1,793 134 -- (616)(4) 1,311
-------- ------ ------- ----- --------
Net income (loss) from
continuing operations.. 771 (187) 1,046 334 1,964
Accretion of redeemable
Class B common stock to
redemption value....... (15,546) -- -- 303 (3) (15,243)
Accrued dividends on
redeemable Class B
common stock........... (73) -- -- 73 (3) --
-------- ------ ------- ----- --------
Net income (loss) from
continuing operations
available to Class A
common shareholders.... $(14,848) $ (187) $ 1,046 $ 710 $(13,279)
======== ====== ======= ===== ========
Loss per share:
Basic
Per share........... $ (1.34)
========
Weighted average
shares............. 9,888 (5)
========
Diluted
Per share........... $ (1.34)
========
Weighted average
shares............. 9,888 (6)
========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
statements.
25
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Offering Pro Forma
Historical Acquisitions Adjustments Forma Adjustments as Adjusted
---------- ------------ ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 941 $ 17 $ 8,400 (7)(8) $ 9,358 $ (9) $
Accounts receivable,
net.................. 11,000 191 -- 11,191 -- 11,191
Employee advances..... 253 -- -- 253 -- 253
Deferred income
taxes................ 123 -- -- 123 -- 123
Prepaid expenses and
other current
assets............... 564 36 100 (7) 700 -- 700
-------- ---- ------- ------- -------- -------
Total current
assets.............. 12,881 244 8,500 21,625
-------- ---- ------- ------- -------- -------
Property and equipment,
net.................... 4,283 31 -- 4,314 -- 4,314
Intangibles, net........ 8,784 -- 1,520 (8) 10,304 -- 10,304
Other assets............ 619 10 -- 629 -- 629
-------- ---- ------- ------- -------- -------
Total assets......... $ 26,567 $285 $10,020 $36,872 $ $
======== ==== ======= ======= ======== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 1,086 $ 15 $ -- $ 1,101 $ -- $ 1,101
Line of credit........ 5,408 -- -- 5,408 -- 5,408
Current portion of
notes payable........ 968 -- 8,059 (7) 9,027 (9)
Commission payable.... 1,052 -- -- 1,052 -- 1,052
Other accrued
liabilities.......... 931 -- 165 (7)(8) 1,096 -- 1,096
Accrued compensation
and benefits......... 1,784 44 -- 1,828 -- 1,828
Unearned revenue...... 1,552 -- -- 1,552 -- 1,552
Capital lease
obligations.......... 750 -- -- 750 -- 750
-------- ---- ------- ------- -------- -------
Total current
liabilities......... 13,531 59 8,224 21,814
-------- ---- ------- ------- -------- -------
Capital lease
obligations............ 272 -- -- 272 -- 272
Notes payable........... 2,774 -- -- 2,774 -- 2,774
Income taxes payable,
noncurrent............. 1,294 -- -- 1,294 -- 1,294
Other liabilities....... 498 81 -- 579 -- 579
Commitments and
contingencies..........
Redeemable Class B
common stock........... 33,712 -- (22,455)(3) 11,257 (11,257)(9) --
Redeemable warrants..... 2,566 -- (2,566)(3) -- -- --
Shareholders' equity
(deficit):
Preferred stock....... -- -- -- -- -- --
Class A common stock.. 94 1 35 (3)(7)(8) 130 (130)(9) --
Common stock.......... -- -- -- -- (9)
Additional paid-in-
capital.............. 1,263 -- (1,263)(3) -- (9)
Accumulated deficit... (20,367) 144 28,045 (3)(7)(8) 7,822 (9)
Treasury stock........ (7,386) -- -- (7,386) 7,386 (9) --
Notes due on common
stock................ (1,684) -- -- (1,684) --
-------- ---- ------- ------- -------- -------
Total shareholders'
equity (deficit)..... (28,080) 145 26,817 (1,118)
-------- ---- ------- ------- -------- -------
Total liabilities and
shareholders'
equity.............. $ 26,567 $285 $10,020 $36,872 $ $
======== ==== ======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
statements.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited pro forma consolidated statement of operations for the three
months ended March 31, 2000 does not reflect an estimated $
nonrecurring compensation charge, representing the excess of the initial
public offering price per share over the exercise price per share of the
Contingent Non-Redeemable Warrants which were issued to certain of our
employee shareholders, multiplied by the number of shares subject to the
warrants, as described under "The Reclassifications."
(2) For all periods presented, the unaudited pro forma consolidated statements
of operations reflect the acquisitions of Noll, Know It All and Paragon as
if these acquisitions occurred on the first day of each respective period.
Pro forma adjustments were made to reflect:
. The amortization of goodwill and other intangibles related to these
acquisitions. This amortization charge assumes that the aggregate $3.8
million of goodwill and other intangibles related to these acquisitions
will be amortized on a straight-line basis over a period of 20 years.
. An increase in interest expense from the financing of these acquisitions
through the issuance of notes payable aggregating $1.75 million. This
adjustment assumes a weighted average interest rate of 9.14% per annum,
the weighted average interest rate under our bank line of credit at
March 31, 2000.
(3) The unaudited pro forma consolidated statements of operations for the three
months ended March 31, 2000 and the year ended December 31, 1999 and the
unaudited pro forma consolidated balance sheet as of March 31, 2000 have
been adjusted to reflect the reclassifications, as described under "The
Reclassifications."
(4) The unaudited pro forma consolidated statements of operations have been
prepared to reflect adjustments to income taxes for the periods noted in
the table below. The "Cash to accrual basis adjustment" represents the
elimination of the portion of the historical tax provision related to our
conversion from an S corporation to a C corporation in December 1999. The
"C corporation adjustment" represents the increase in the historical
provision for income taxes as if we were a C corporation for income tax
purposes on the first day of each respective period. "Other adjustments"
represents the increase in income taxes to an effective rate of 40% for
acquisitions, dispositions and pro forma adjustments, as if these
transactions occurred on the first day of each respective period.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended
------------- December 31,
2000 1999 1999
------ ------ ------------
<S> <C> <C> <C>
Cash to accrual basis adjustment.................. $ -- $ -- $(1,471)
C corporation adjustment.......................... -- 136 704
Other adjustments................................. 391 (125) 151
------ ------ -------
Total........................................... $ 391 $ 11 $ (616)
====== ====== =======
</TABLE>
(5) Pro forma basic weighted average common shares for all periods presented
have been adjusted to reflect the issuance of 392,200 shares of our Class A
common stock to the former shareholders of Know It All in payment of the
purchase price for that acquisition, as if such shares were issued at the
beginning of each respective period. In addition, pro forma basic weighted
average common shares for the three month period ended March 31, 2000 and
the year ended December 31, 1999 have been adjusted to reflect the
conversion of 60,532 shares of our redeemable Class B common stock into
3,026,600 shares of our Class A common stock and the conversion of 19,208
shares of our redeemable Class B common stock into 454,653 shares of our
Class A common stock, as described under "The Reclassifications," as if
such conversions occurred at December 16, 1999. Pro forma basic weighted
average common shares for the three month period ended March 31, 1999 and
the year ended December 31, 1999 have also been adjusted to reflect the
repurchase of 233,650 shares of our Class A common stock in connection with
the sale of our temporary staffing and related businesses, as if such sales
occurred at January 1, 1999.
27
<PAGE>
(6) In addition to the adjustments made to the pro forma basic weighted average
common shares, pro forma diluted weighted average common shares have also
been adjusted to reflect the cancellation of the Contingent Redeemable
Warrants to purchase 495,250 shares of our Class A common stock held by our
investors, as described under "The Reclassifications," as if such
cancellation occurred at December 16, 1999.
(7) The unaudited pro forma consolidated balance sheet reflects the issuance of
notes payable in the aggregate principal amount of $10.0 million in a
bridge financing for cash proceeds of $8.1 million. The notes are reflected
net of an original issue discount of $1.9 million, which will be amortized
as additional interest expense during the first year of the notes. The
notes bear interest at a stated annual rate of 13% on the principal amount
for the first year and 16% thereafter. As part of this bridge financing,
the bridge lenders exercised warrants to purchase an aggregate of 116,210
shares of our Class A common stock at an exercise price of $16.70 per
share, for aggregate cash proceeds of $1.9 million. Estimated issuance
costs of $100,000 have been accrued in connection with this bridge
financing.
(8) We acquired Paragon in May 2000. The unaudited pro forma consolidated
balance sheet reflects our acquisition of Paragon as if such acquisition
occurred at March 31, 2000. These adjustments include payment of cash of
$1.6 million, the excess of purchase price over net assets acquired
(goodwill) of $1.5 million, the accrual of estimated acquisition costs of
$65,000 and the elimination of the shareholders' equity accounts of
Paragon. The related goodwill will be amortized on a straight line basis
over 20 years.
(9) These adjustments to the unaudited pro forma as adjusted consolidated
balance sheet reflect the conversion of 19,208 shares of our redeemable
Class B common stock into shares of our Class A common stock at
an assumed initial public offering price of $ per share, the
reclassification of each outstanding share of our Class A common stock into
shares of our common stock, the retirement of all treasury
shares, the sale of shares of our common stock in the offering at an
assumed initial public offering price of $ per share and the
application of the net proceeds from the offering.
28
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," appearing
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1997, 1998 and 1999 are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the year ended December 31,
1996 are derived from our audited financial statements that do not appear in
this prospectus. The statement of operations data for the year ended December
31, 1995 are derived from our unaudited financial statements that do not appear
in this prospectus. The statement of operations data for the three month
periods ended March 31, 1999 and 2000 are derived from our unaudited financial
statements included elsewhere in this prospectus. Our unaudited statements of
operations have been prepared on the same basis as the audited statements of
operations and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. The historical results are
not necessarily indicative of the operating results to be expected in the
future.
29
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share data)
-----------------------------------------------------------------
Three Months
Years Ended December 31, Ended March 31,
--------------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
----------- ------- ------- ------- -------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
TalentPoint
Portfolio............. $ -- $ -- $ -- $ -- $ 98 $ -- $ 880
HCM Consulting
Services.............. 15,633 21,863 31,408 32,964 35,040 8,421 5,785
eBusiness Technology
Services.............. -- 4,706 6,642 14,127 16,773 4,880 4,441
------- ------- ------- ------- -------- ------- -------
Total revenues....... 15,633 26,569 38,050 47,091 51,911 13,301 11,106
Cost of revenues:
TalentPoint
Portfolio............. -- -- -- -- 8 -- 159
HCM Consulting
Services.............. 6,286 8,507 9,903 10,392 7,988 2,420 605
eBusiness Technology
Services.............. -- 3,391 5,088 7,391 9,252 2,601 2,135
------- ------- ------- ------- -------- ------- -------
Total cost of
revenues............ 6,286 11,898 14,991 17,783 17,248 5,021 2,899
Gross profit:
TalentPoint
Portfolio............. -- -- -- -- 90 -- 721
HCM consulting
services.............. 9,347 13,356 21,505 22,572 27,052 6,001 5,180
eBusiness technology
services.............. -- 1,315 1,554 6,736 7,521 2,279 2,306
------- ------- ------- ------- -------- ------- -------
Total gross profit... 9,347 14,671 23,059 29,308 34,663 8,280 8,207
Operating expenses:
Compensation and
benefits.............. 6,389 9,458 15,412 22,604 21,204 5,481 5,459
Other selling, general
and administrative.... 2,071 4,208 6,137 8,932 6,984 1,541 2,110
Depreciation and
amortization.......... 48 225 597 1,354 1,625 407 508
------- ------- ------- ------- -------- ------- -------
Total operating
expenses............ 8,508 13,891 22,146 32,890 29,813 7,429 8,077
Operating income
(loss)................. 839 780 913 (3,582) 4,850 851 130
Net interest expense.... 57 96 443 970 2,217 512 236
Market value adjustment
to redeemable
warrants............... -- -- -- -- 69 -- 181
------- ------- ------- ------- -------- ------- -------
Income (loss) before
income taxes and
extraordinary item..... 782 684 470 (4,552) 2,564 339 (287)
Income tax provision
(benefit).............. -- -- 14 (10) 1,793 -- (52)
------- ------- ------- ------- -------- ------- -------
Income (loss) before
extraordinary item..... 782 684 456 (4,542) 771 339 (235)
Loss on disposal of
business, net of Income
tax benefit of $0...... -- -- -- -- 517 -- --
------- ------- ------- ------- -------- ------- -------
Net income (loss)....... 782 684 456 (4,542) 254 339 (235)
Accretion of redeemable
Class B common stock to
redemption value(1).... -- -- -- -- (15,546)(1) -- (787)(1)
Accrued dividends on
redeemable Class B
common stock(1)........ -- -- -- -- (73)(1) -- (440)(1)
------- ------- ------- ------- -------- ------- -------
Net income (loss)
available to Class A
common shareholders.... $ 782 $ 684 $ 456 $(4,542) $(15,365)(1) $ 339 $(1,462)(1)
======= ======= ======= ======= ======== ======= =======
Earnings (loss) per
common share:
Basic and diluted....... $ 0.12 $ 0.09 $ 0.05 $ (0.43) $ (1.60) $ 0.03 $ (0.22)
Weighted average common
shares outstanding(2):
Basic.................. 6,575 7,434 9,537 10,565 9,587 10,745 6,680
Diluted................ 6,544 7,670 9,748 10,565 9,587 10,854 6,680
</TABLE>
30
<PAGE>
---------------------
(1) Reflects the accretion and accrued dividends on our redeemable Class B
common stock. Upon completion of the offering, all of the outstanding
shares of our redeemable Class B common stock will have been converted into
shares of common stock and no further accretion or accrued dividends will
be recorded. See "The Reclassifications."
(2) Basic earnings (loss) per common share is computed by dividing net income
(loss) available to Class A common shareholders by the weighted average
number of Class A common shares outstanding during the period, after giving
effect to our corporate restructuring, in which our current company was
formed and in which we merged our two operating corporations into our newly
formed, wholly-owned operating subsidiary, as if it had occurred on January
1, 1995. Diluted earnings (loss) per share is computed by dividing net
income (loss) available to Class A common shareholders by the weighted
average number of Class A common shares outstanding during the period
adjusted for the number of shares that would have been outstanding if the
dilutive potential Class A common shares had been issued. The diluted
earnings (loss) per share does not assume the exercise of any options or
warrants or the conversion of any redeemable Class B common shares that
would have an antidilutive effect on earnings (loss) per share. The
weighted average shares outstanding for all periods presented have been
adjusted to reflect a 50-for-1 stock split which occurred on June 6, 2000.
The balance sheet data as of December 31, 1998 and 1999 are derived from,
and are qualified by reference to, our audited financial statements included
elsewhere in this prospectus. The balance sheet data as of December 31, 1996
and December 31, 1997 are derived from our audited financial statements that do
not appear in this prospectus. The balance sheet data as of December 31, 1995
are derived from our unaudited financial statements that do not appear in this
prospectus. The balance sheet data as of March 31, 2000 are derived from our
unaudited financial statements included elsewhere in this prospectus. Our
unaudited balance sheet data have been prepared on the same basis as the
audited balance sheet data and, in the opinion of our management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
Balance Sheet Data: ----------- ------- ------- ------- -------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Working capital......... $1,428 $(2,206) $(1,630) $(9,881) $ 309 $ (650)
Total assets............ 3,768 10,321 15,586 23,817 29,771 26,567
Total debt, less current
portion................ -- 1,036 1,799 3,013 3,061 3,046
Redeemable Class B
common stock........... -- -- -- -- 32,485 33,712
Redeemable warrants..... -- -- -- -- 2,385 2,566
Total shareholders'
equity (deficit)....... 1,816 1,834 3,960 (581) (28,287) (28,080)
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following Management's Discussion and Analysis of
Financial Condition and Results of Operations together with the financial
statements and related notes and the Unaudited Pro Forma Consolidated Financial
Statements included elsewhere in this prospectus. This discussion contains
forward-looking statements as a result of various factors, including those set
forth under "Risk Factors" and elsewhere in this prospectus.
Company History
We are a leading provider of integrated human capital management (HCM) and
technology solutions. Our comprehensive products and services enable
organizations to hire, deploy and retain talented and qualified employees in an
effective and cost-efficient manner. TalentPoint Portfolio is our scalable,
fully hosted, web-based suite of proprietary software that addresses an
organization's critical human capital management needs. Our extensive history
and established customer base in HCM consulting and ebusiness technology
services provides a strong foundation on which to build and grow our
TalentPoint Portfolio business.
We commenced operations in 1987 as Insurance Services, Inc., which provided
recruitment and talent acquisition services initially to the actuarial
industry. In 1991, we began to offer these services to a wide variety of
industries. In 1992, we formed International Holding Company, Inc., as an S
corporation, to carry on our business in a more tax efficient manner, and these
two companies together conducted business under the name Raymond Karsan
Associates. On December 15, 1999, we reorganized our corporate structure by
forming Raymond Karsan Holdings, Inc. ("RKH") and merging our two companies
into Raymond Karsan Associates, Inc., a newly formed operating subsidiary of
RKH. We refer to this corporate reorganization in this prospectus as the
"reorganization." As a result of the reorganization, we converted from an S
corporation to a C corporation for federal income tax purposes in December
1999. On April 3, 2000, we changed our name from Raymond Karsan Holdings, Inc.
to TalentPoint, Inc. and changed the name of Raymond Karsan Associates, Inc.,
our operating subsidiary, to TalentPoint Technologies, Inc.
From 1987 through 1995, we focused exclusively on recruitment and talent
acquisition services. In late 1995, responding to a growing demand from our
customers, we embarked on a strategy to provide comprehensive human capital
management services integrated with ebusiness technology. Between late 1995 and
1998, we completed 12 acquisitions, which served to expand our customer base
and geographic presence and add complementary HCM consulting expertise and
ebusiness technology services to our existing recruitment and talent
acquisition services.
In 1997, we sold an HCM consulting business that we had acquired in 1996, as
it did not fit with our existing business or our future objectives. In 1999, we
made a strategic decision to exit our temporary staffing and related
businesses, which generated lower gross profit margins than our other
businesses. In a series of transactions during 1999, beginning after the first
quarter, we discontinued and sold the various elements of these businesses,
including a temporary staffing business that we acquired in 1998 as well as our
internally developed temporary staffing business.
In December 1999, a private equity investor group invested $22.0 million in
us. In connection with this investment, Barry Raymond, a co-founder of our
company and our former President, sold his shares of Class A common stock back
to us, and his employment with our company terminated at that time.
We have continued to build and strengthen our TalentPoint Portfolio through
recent strategic acquisitions. In February 2000, we purchased the behavioral
testing and interviewing division of Noll, Inc., which has provided behavioral
testing products since 1992, for a purchase price of $750,000 in cash and
$150,000 in short-term promissory notes. In March 2000, we acquired Know It
All, Inc., a company that has been in the business of developing and marketing
human capital management software since 1993, in exchange for
32
<PAGE>
392,200 shares of our common stock. In May 2000, we acquired Paragon, Inc., a
company that has provided on-line and off-line behavioral testing for employees
since 1990. The aggregate purchase price for this acquisition was $1.6 million
in cash, plus a contingent purchase price that may be earned depending on the
revenues generated in this business line through December 31, 2000. Any
contingent purchase price earned will be payable in the first quarter of 2001,
and we do not expect that the amount will exceed $750,000. We intend to
continue to capitalize on the fragmentation in the human capital management
market by pursuing further strategic acquisitions.
Strategic Acquisition History
The following table summarizes our strategic acquisition history since
December 31, 1995:
<TABLE>
<CAPTION>
Asset /
Closing Stock
Date Company Acquired Business Line Strategic Rationale Purchase
------- ---------------------------------------- --------------------- ------------------------------------- --------
<S> <C> <C> <C> <C>
12/31/95 Pragma eBusiness Technology Line of business Assets
9/1/96 Pharmasearch, Ltd. HCM Consulting Geographic - Europe Assets
10/1/96 The Docker Group, Inc. HCM Consulting Geographic - New England Stock
6/1/96 Nutter Consulting (1) HCM Consulting Geographic - Midwest Assets
11/15/96 SDA Corporation HCM Consulting Line of business - Training Stock
6/1/97 Human Resource Innovations, Inc. HCM Consulting Line of business - Retention Stock
7/1/97 Advanced Consulting, Inc. HCM Consulting Line of business - Training Stock
9/1/97 Human Resource Technologies, Inc. HCM Consulting Geographic - Chicago Stock
5/1/98 Enhanced Communications, Inc. HCM Consulting Line of business - Training Stock
6/23/98 Synex Technologies, Inc. eBusiness Technology Line of business Stock
7/15/98 Morestaff(1) HCM Consulting Line of business - Temporary Staffing Assets
12/31/98 Software Support Services, Inc. eBusiness Technology Geographic - Mid-Atlantic Stock
2/23/00 Noll, Inc. - Behavioral Testing Division TalentPoint Portfolio Software and Support Assets
3/31/00 Know It All, Inc. TalentPoint Portfolio Software and Support Stock
5/26/00 Paragon, Inc. TalentPoint Portfolio Software and Support Stock
<CAPTION>
Adjusted
Purchase
Closing Price (In
Date thousands)(2)
------- -------------
<S> <C>
12/31/95 $ 80
9/1/96 156
10/1/96 860
6/1/96 681
11/15/96 3,169
6/1/97 4,000
7/1/97 2,229
9/1/97 888
5/1/98 3,039
6/23/98 1,311
7/15/98 2,384
12/31/98 4,300
2/23/00 900
3/31/00 1,497
5/26/00 1,600(3)
</TABLE>
---------------------
(1) We have subsequently disposed of the assets of these companies.
(2) Includes contingent payments.
(3) Excludes potential contingent payments.
Revenues and Operating Expenses
We derive revenues from three business segments, consisting of:
. TalentPoint Portfolio;
. HCM Consulting Services; and
. eBusiness Technology Services.
TalentPoint Portfolio. TalentPoint Portfolio, our newest business segment,
consists of our scalable, fully hosted, web-based suite of proprietary
software, sales of which commenced in December 1999. TalentPoint Portfolio
software is available either as individual modules to address specific customer
needs or as an integrated suite. We charge an installation fee for all
TalentPoint Portfolio modules, which is recognized ratably over the life of the
contract. With the TalentPoint Recruiter module, we offer subscriptions
generally for a one to three year term. We recognize revenue from sales of
subscriptions ratably over the life of the subscription contract. For all other
TalentPoint Portfolio modules, we charge usage fees which are recognized as
incurred. We also recognize revenue from the services we provide to our
customers to aid in their implementation and adaptation of the TalentPoint
Portfolio modules, ratably over the life of the contract.
As of June 16, 2000, we had 1,290 TalentPoint Portfolio modules installed.
Of our 46 recently hired salespeople dedicated to selling the modules, 28 had
sold modules to customers as of that date. The aggregate outstanding contract
value for the 12 months following June 16, 2000 was approximately $1.3 million.
From
33
<PAGE>
the beginning of the second quarter of 2000 through June 16, 2000, we had 588
customers generating revenues in our TalentPoint Portfolio segment.
HCM Consulting Services. We have been performing HCM consulting services for
over 13 years. Our HCM consulting services segment addresses the full spectrum
of human capital management needs of organizations, including talent
acquisition, human resource consulting and support, sales force solutions,
retention consulting services, employee survey administration and analysis and
training consulting services. We currently offer these services to complement
our TalentPoint Portfolio as well as on a stand alone basis. With the exception
of our recruitment engagements, we recognize revenue from our HCM consulting
services as they are performed. We recognize revenue from our retained
recruitment engagements ratably over the period of the engagement. We recognize
revenue from our contingent recruitment engagements upon a candidate's
commencement of employment.
eBusiness Technology Services. We have been providing ebusiness technology
services for over five years. Through this business segment, we design, develop
and implement a wide range of ebusiness and other information technology
solutions. We provide our ebusiness technology services to complement our
TalentPoint Portfolio as well as on a stand alone basis. We recognize revenue
from these services as they are performed.
We classify our operating expenses as follows:
Cost of Revenues. Our cost of revenues consists primarily of compensation
and employee benefits of our employees and independent contractors who provide
consulting and other professional services to our customers in our HCM
consulting and ebusiness technology services segments. Additionally, the costs
of our technical support for the development of TalentPoint Portfolio, hosting
costs of TalentPoint Portfolio and the implementation and adaptation of the
TalentPoint Portfolio modules, are also recorded as cost of revenues.
Compensation and Benefits. Compensation and benefits expense consists
primarily of compensation and benefits, including bonuses, of the sales forces
of our three business segments, and of our executive and administrative
personnel.
Other Selling, General and Administrative. Other selling, general and
administrative expenses consist primarily of marketing, advertising and
promotional expenses, research and product development expenses, fees for
professional services, charges for uncollectible accounts receivable, travel
expenses and general office expenses. We have significantly increased our
advertising and marketing expenses commencing in 2000 in order to continue to
develop and promote our TalentPoint Portfolio.
Depreciation and Amortization. Depreciation and amortization expense
consists primarily of depreciation of equipment and computers, as well as
amortization of goodwill. We expect depreciation to increase in 2000 in
connection with additional capital expenditures for our technology
infrastructure to support the growth of the TalentPoint Portfolio, with such
capital expenditures currently budgeted at $2.2 million for 2000. Our year to
date capital expenditures as of June 16, 2000 were $1.2 million. We also expect
amortization of goodwill to increase in 2000 in connection with the
acquisitions that we completed in the first half of 2000.
34
<PAGE>
Pro Forma Results of Operations
The following table sets forth, as a percentage of total revenues, and the
subsequent discussion sets forth, the results of our operations for the three
months ended March 31, 1999 and March 31, 2000, on a pro forma basis to reflect
the pro forma adjustments described in "Unaudited Pro Forma Consolidated
Financial Statements:"
<TABLE>
<CAPTION>
Pro Forma
Three
Months
Ended
March 31,
------------
1999 2000
----- -----
<S> <C> <C>
Revenues:
TalentPoint Portfolio........................................ 6.2% 18.2%
HCM Consulting Services...................................... 50.2 46.3
eBusiness Technology Services................................ 43.6 35.5
----- -----
Total revenues............................................. 100.0 100.0
Cost of revenues:
TalentPoint Portfolio........................................ 1.0 1.9
HCM Consulting Services...................................... 4.7 4.9
eBusiness Technology Services................................ 23.3 17.1
----- -----
Total cost of revenues..................................... 29.0 23.9
----- -----
Gross profit................................................... 71.0 76.1
Operating expenses:
Compensation and benefits.................................... 48.5 47.6
Other selling, general and administrative.................... 13.5 14.9
Depreciation and amortization................................ 4.0 4.5
----- -----
Operating income .............................................. 5.0 9.1
Net interest expense........................................... 4.8 2.3
Market value adjustment to redeemable warrants................. -- --
Income tax provision........................................... 0.1 2.7
----- -----
Net income available to common shareholders................ 0.1% 4.1%
===== =====
</TABLE>
Pro Forma Three Months Ended March 31, 1999 Compared to Pro Forma Three Months
Ended March 31, 2000
Revenues. Total pro forma revenues increased 11.8%, from $11.2 million in
the first quarter of 1999 to $12.5 million in the first quarter of 2000. Of the
total pro forma revenues in the first quarter of 2000, 18.2% were derived from
our TalentPoint Portfolio, 46.3% were generated from HCM consulting services
and 35.5% were derived from ebusiness technology services. Of the total pro
forma revenues in the first quarter of 1999, 6.2% were derived from our
TalentPoint Portfolio, 50.2% were generated from HCM consulting services and
43.6% were derived from ebusiness technology services. Our pro forma revenues
increase in the first quarter of 2000 was primarily attributable to a $1.6
million increase in TalentPoint Portfolio revenues, partially offset by a
$439,000 decrease in revenues in our ebusiness technology services. The
increase in our TalentPoint Portfolio revenues was due primarily to businesses
acquired in the first quarter of 2000 and to the introduction of our
TalentPoint Portfolio products in the last quarter of 1999. Our ebusiness
technology services revenue decrease was primarily due to a general information
technology implementation slowdown by our customers related to Year 2000
concerns.
Cost of Revenues. Our pro forma cost of revenues decreased 8.0%, from $3.2
million in the first quarter of 1999 to $3.0 million in the first quarter of
2000. As a percentage of total pro forma revenues, pro forma cost
35
<PAGE>
of revenues decreased from 29.0% in the 1999 quarter to 23.9% in the 2000
quarter. The decrease was principally the result of a decline in the cost of
revenues in our ebusiness technology segment, which was greater, on a
percentage basis, than the decrease in revenues in this segment.
Gross Profit. Pro forma gross profit increased 19.8%, from $7.9 million in
the first quarter of 1999 to $9.5 million in the first quarter of 2000. Pro
forma gross profit as a percentage of total pro forma revenues increased to
76.1% in the first quarter of 2000 as compared to 71.0% in the comparable
quarter in 1999. The increase as a percentage of total pro forma revenues was
primarily the result of improved gross margins in our TalentPoint Portfolio and
ebusiness technology segments.
Compensation and Benefits. Pro forma compensation and benefit expense
increased 9.7%, from $5.4 million in the first quarter of 1999 to $6.0 million
in the first quarter of 2000. As a percentage of total pro forma revenues, pro
forma compensation and benefits expense decreased from 48.5% in the 1999
quarter to 47.6% in the 2000 quarter. The increase in dollar amount is
primarily a result of our sales force hiring initiative to support and drive
growth in the TalentPoint Portfolio products in 2000. In the quarter in which
the offering is completed, we will incur a non-recurring compensation charge
related to the vesting of Contingent Non-Redeemable Warrants outstanding. See
"The Reclassifications - Our Warrants."
Other Selling, General and Administrative. Pro forma other selling, general
and administrative expense increased 24.2%, from $1.5 million in the first
quarter of 1999 to $1.9 million in the first quarter of 2000. As a percentage
of total pro forma revenues, pro forma other selling, general and
administrative expense increased from 13.5% in the first quarter 1999 to 14.9%
in the comparable quarter in 2000. The increase is primarily the result of the
establishment in the first quarter of 2000 of a $250,000 reserve for
uncollectible accounts receivable which resulted from the transition of our
accounts receivable management system from an outsourced operation to an
internally managed function. Since the end of the first quarter of 2000, the
resulting temporary inefficiencies have substantially abated.
Depreciation and Amortization. Pro forma depreciation and amortization
expense increased 25.7%, from $448,000 in the first quarter of 1999 to $563,000
in the first quarter of 2000. As a percentage of total pro forma revenues, pro
forma depreciation and amortization expense increased from 4.0% in the 1999
quarter to 4.5% in the 2000 quarter. This increase was primarily the result of
increases in capital expenditures in computer hardware and software as we
continued to upgrade our technology and to support our TalentPoint Portfolio
product growth.
Net Interest Expense. Pro forma net interest expense decreased 46.5%, from
$535,000 in the first quarter of 1999 to $286,000 in the first quarter of 2000.
As a percentage of pro forma total revenues, pro forma net interest expense
decreased from 4.8% in the 1999 quarter to 2.3% in the 2000 quarter. Pro forma
net interest expense decreased primarily as a result of reduced short-term
borrowings.
36
<PAGE>
Historical Results of Operations
The following table sets forth, as a percentage of total revenues, and the
subsequent discussion sets forth, the results of our operations for each of the
three years ended December 31, 1997, December 31, 1998 and December 31, 1999
and the three months ended March 31, 1999 and March 31, 2000:
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
-------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
TalentPoint Portfolio.................. -- -- 0.2 % -- 7.9 %
HCM Consulting Services................ 82.5% 70.0 % 67.5 63.3% 52.1
eBusiness Technology Services.......... 17.5 30.0 32.3 36.7 40.0
----- ----- ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
TalentPoint Portfolio.................. -- -- -- -- 1.4
HCM Consulting Services................ 26.0 22.1 15.4 18.2 5.5
eBusiness Technology Services.......... 13.4 15.7 17.8 19.5 19.2
----- ----- ----- ----- -----
Total cost of revenues............... 39.4 37.8 33.2 37.7 26.1
----- ----- ----- ----- -----
Gross profit............................. 60.6 62.2 66.8 62.3 73.9
Operating expenses:
Compensation and benefits.............. 40.5 48.0 40.8 41.2 49.2
Other selling, general and
administrative........................ 16.1 19.0 13.5 11.6 19.0
Depreciation and amortization.......... 1.6 2.8 3.1 3.1 4.6
----- ----- ----- ----- -----
Operating income (loss).................. 2.4 (7.6) 9.4 6.4 1.1
Net interest expense..................... 1.2 2.1 4.3 3.9 2.1
Market value adjustment to redeemable
warrants................................ -- -- 0.1 -- 1.6
Income tax provision (benefit)........... -- -- 3.5 -- (.5)
Loss on disposal of business............. -- -- 1.0 -- --
----- ----- ----- ----- -----
Net income (loss).................... 1.2% (9.7)% 0.5 % 2.5% (2.1)%
===== ===== ===== ===== =====
Net income (loss) available to Class
A common shareholders............... 1.2% (9.7)% (29.6)% 2.5% (13.2)%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1999 compared to Three Months Ended March 31,
2000
Revenues. Our total revenues decreased 16.5%, from $13.3 million in the
first quarter of 1999 to $11.1 million in the first quarter of 2000. Of the
total revenues in the 2000 quarter, 7.9% were derived from our TalentPoint
Portfolio, 52.1% were derived from HCM consulting services and 40.0% were
derived from ebusiness technology services. Of the total revenues in the 1999
quarter, 63.3% were derived from HCM consulting services and 36.7% were derived
from ebusiness technology services. Our revenue decrease in the first quarter
of 2000 was primarily attributable to the discontinuation and sale of our
temporary staffing and related businesses in various transactions during 1999
after the first quarter. Also contributing to the decrease was the decline in
demand by our customers for ebusiness technology services due to Year 2000
concerns. The first quarter of 2000 included $880,000 in revenues from sales of
our TalentPoint Portfolio products in 2000, sales of which commenced in
December 1999.
Cost of Revenues. Our cost of revenues decreased 42.3%, from $5.0 million in
the first quarter of 1999 to $2.9 million in the first quarter of 2000. As a
percentage of total revenues, cost of revenues decreased from
37
<PAGE>
37.7% in the 1999 quarter to 26.1% in the 2000 quarter. The decrease was
principally the result of the disposal of our temporary staffing and related
businesses in 1999 after the end of the first quarter, which aggregated
$1.9 million in costs in the first quarter of 1999. The primary expense
associated with the temporary staffing and related businesses were direct
salaries and benefits, which are included in cost of revenues. The decline in
demand for ebusiness technology services due to customers' year 2000 concerns
also contributed to the decrease in the cost of revenues in the first quarter
of 2000.
Gross Profit. Gross profit decreased 0.9%, from $8.3 million in the first
quarter of 1999 to $8.2 million in the first quarter of 2000. Gross profit as a
percentage of total revenues increased from 62.3% in the first quarter of 1999
to 73.9% in the comparable quarter in 2000. The decrease in dollar amount and
the increase as a percentage of total revenues are primarily due to the
disposal of our temporary staffing and related lower margin businesses during
the last eight months of 1999.
Compensation and Benefits. Compensation and benefits expense remained
constant in the first quarter of 2000 as compared to the first quarter of 1999.
As a percentage of total revenues, compensation and benefits expense increased
from 41.2% in the 1999 quarter to 49.2% in the 2000 quarter. The percentage
increase is primarily a result of our sales force hiring initiative which
commenced in the first quarter of 2000 to support and drive growth in the
TalentPoint Portfolio products. Because this new sales force had just recently
been hired, they did not generate a substantial amount of revenues in the first
quarter of 2000. Also contributing to the percentage increase was the reduction
in revenues associated with the reassignment in the first quarter of 2000 of
two of our senior sales people in our HCM consulting services segment to senior
management positions in our TalentPoint Portfolio segment. This increase was
partially offset by a reduction in sales employees from our disposed temporary
staffing and related businesses.
Other Selling, General and Administrative. Other selling, general and
administrative expense increased 36.9%, from $1.5 million in the first quarter
of 1999 to $2.1 million in the first quarter of 2000. As a percentage of total
revenues, other selling, general and administrative expense increased from
11.6% in the first quarter of 1999 to 19.0% in the comparable quarter in 2000.
The increase is primarily the result of the establishment in the first quarter
of 2000 of a reserve for uncollectible accounts receivable in the amount of
$450,000 related to our disposed temporary staffing and related businesses. We
also incurred a $250,000 increase in our reserve for other uncollectible
accounts receivable due to the transition of our accounts receivable management
system from an outsourced operation to an internally managed system in December
1999. Since the end of the first quarter of 2000, the temporary inefficiencies
during the first quarter of 2000 that resulted from this transition have
substantially abated.
Depreciation and Amortization. Depreciation and amortization expense
increased 24.8%, from $407,000 in the first quarter of 1999 to $508,000 in the
first quarter of 2000. As a percentage of total revenues, depreciation and
amortization expense increased from 3.1% in the 1999 quarter to 4.6% in the
2000 quarter. This increase was primarily the result of increases in capital
expenditures related to computer hardware and software as we continued to
upgrade our technology to support our TalentPoint Portfolio growth.
Net Interest Expense. Net interest expense decreased 53.9%, from $512,000 in
the first quarter of 1999 to $236,000 in the first quarter of 2000. This
decrease was primarily the result of decreased borrowings from our line of
credit in the first quarter of 2000 as compared to the first quarter of 1999
and the repayment of notes in December 1999.
Market Value Adjustment to Redeemable Warrants. In the first quarter of
2000, we incurred a charge for a market value adjustment related to certain
redeemable warrants issued in December 1999 that have a "put" feature that
permits the holders to require us to repurchase the warrants at a stated price.
We expect to record a market value adjustment for fluctuations in the value of
this put feature as a result of fluctuations in the market value of our stock
until the completion of the offering, at which time the "put" feature will
terminate. See "The Reclassifications - Our Warrants."
38
<PAGE>
Net Income (Loss) Available to Class A Common Shareholders. We had net
income available to Class A common shareholders of $339,000 in the first
quarter of 1999 as compared to a net loss available to Class A common
shareholders in the first quarter of 2000 of $1.5 million. In the 2000 quarter,
we incurred charges of $787,000 and $440,000 relating to accretion and accrued
dividends, respectively, on our redeemable Class B common stock. See "The
Reclassifications - Redeemable Class B Common Stock."
Year Ended December 31, 1998 Compared to Year Ended December 31, 1999
Revenues. Our total revenues increased 10.2%, from $47.1 million in 1998 to
$51.9 million in 1999. Of the total 1999 revenues, 0.2% were derived from
TalentPoint Portfolio, 67.5% were derived from HCM consulting services and
32.3% were derived from ebusiness technology services. Of the total 1998
revenues, 70.0% were derived from HCM consulting services and 30.0% were
derived from ebusiness technology services. Sales of our TalentPoint Portfolio
software did not commence until December 1999. Our growth in 1999 was primarily
attributable to increased sales of $2.6 million in our ebusiness technology
services segment by companies acquired in the last seven months of 1998. In
addition, our HCM consulting services segment experienced an increase in sales
of $5.7 million from continuing operations, which was largely offset by reduced
sales in our temporary staffing and related businesses of $3.7 million that
were either sold or discontinued during 1999.
Cost of Revenues. Our cost of revenues decreased 3.0%, from $17.8 million in
1998 to $17.2 million in 1999. As a percentage of total revenues, cost of
revenues decreased from 37.7% in 1998 to 33.2% in 1999. The decrease was
principally the result of a net decrease in cost of revenues in our HCM
consulting services segment of $2.4 million, which included $1.7 million
related to our temporary staffing and related businesses that were sold or
discontinued during 1999. This decrease was offset by an increase in 1999 in
the cost of revenues in our ebusiness technology services segment of $1.8
million as a result of the inclusion of a full year of these expenses from
businesses acquired in 1998.
Gross Profit. Gross profit increased 18.3% from $29.3 million in 1998 to
$34.7 million in 1999. Gross profit as a percentage of total revenues increased
from 62.2% in 1998 to 66.8% in 1999. This increase was primarily the result of
improved gross profit as a percentage of total revenues from our HCM consulting
services, in which we discontinued and sold our temporary staffing and related
businesses during 1999. Also contributing to this increase was an improvement
in gross profit as a percentage of total revenue from our ebusiness technology
services, due in large part to an increase in billing rates in this segment.
Compensation and Benefits. Compensation and benefits expense decreased 6.2%
from $22.6 million in 1998 to $21.2 million in 1999. As a percentage of total
revenues, compensation and benefits expense decreased from 48.0% in 1998 to
40.8% in 1999. This decrease was primarily as a result of the reduction in work
force during 1999 associated with the discontinuation and sale of our temporary
staffing and related businesses as well as a reduction in executive level staff
due to redundancy resulting from prior acquisitions. These decreases were
offset by a small increase in compensation and benefits expense resulting from
the addition of employees in our continuing operations.
Other Selling, General and Administrative. Other selling, general and
administrative expense decreased 21.8%, from $8.9 million in 1998 to $7.0
million in 1999. As a percentage of total revenues, other selling, general and
administrative expense decreased from 19.0% in 1998 to 13.5% in 1999. These
decreases were primarily the result of improvements in our billing and
collection procedures during 1999, which resulted in a reduction in our
reserves for uncollectible accounts receivable.
Depreciation and Amortization. Depreciation and amortization expense
increased 20.0%, from $1.4 million in 1998 to $1.6 million in 1999. As a
percentage of total revenues, depreciation and amortization expense increased
from 2.9% in 1998 to 3.1% in 1999. The overall increase in depreciation and
amortization expense was primarily the result of increases in capital
expenditures in computer hardware and software as we
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continued to upgrade our technology infrastructure to support our TalentPoint
Portfolio growth. Additionally, this increase reflects a full year of
amortization of goodwill resulting from the acquisition of several companies in
the last seven months of 1998.
Net Interest Expense. Net interest expense increased 128.6% from $970,000 in
1998 to $2.2 million in 1999. As a percentage of total revenues, net interest
expense increased from 2.1% in 1998 to 4.3% in 1999. These increases were
primarily the result of increased short-term borrowings throughout the year to
support working capital requirements and an increase in notes payable resulting
from acquisitions in 1998.
Market Value Adjustment to Redeemable Warrants. In 1999, we incurred a
charge for a market value adjustment related to certain warrants issued in
December 1999 that have a "put" feature that permits the holders to require us
to repurchase the warrants at a stated price. We expect to record a market
value adjustment for fluctuations in the value of this "put" feature as a
result of fluctuations in the market value of our stock until the completion of
the offering, at which time the "put" feature will terminate. See "The
Reclassifications - Our Warrants."
Income Taxes. Income taxes increased from a benefit of $10,000 in 1998 to an
expense of $1.8 million in 1999. In 1999, we converted from an S corporation to
a C corporation. As a result, we were required to recognize a $1.5 million tax
liability for federal income tax purposes associated with our conversion to an
accrual basis from a cash basis for income tax purposes. This tax liability is
payable in installments through 2002.
Loss on Disposal of Business. In connection with the discontinuation and
sale of our temporary staffing and related businesses in 1999, we recorded a
loss of approximately $517,000. This loss is classified as an extraordinary
item due to the fact that the sale occurred within two years of the acquisition
of a business that had been accounted for under the pooling-of-interests method
of accounting.
Net Loss Available to Class A Common Shareholders. We had a net loss
available to Class A common shareholders in 1998 of $4.5 million as compared to
$15.4 million in 1999. In 1999, we incurred a charge of $15.5 million and
$73,000 relating to accretion and accrued dividends, respectively, on our
redeemable Class B common stock. See "The Reclassifications - Redeemable Class
B Common Stock."
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Revenues. Our total revenues increased 23.8%, from $38.1 million in 1997 to
$47.1 million in 1998. Of the total 1998 revenues, 70.0% were generated from
HCM consulting services and 30.0% were derived from ebusiness technology
services. Of the total 1997 revenues, 82.5% were derived from HCM consulting
services and 17.5% were derived from ebusiness technology services. The
increase in revenues was primarily attributable to an expansion of the breadth
of our service offerings in the HCM consulting and ebusiness technology
services segments, due in part to the acquisition of four companies in 1998.
Revenues in our HCM consulting services segment increased by $1.6 million, due
to an increase in revenues from continuing operations of $3.9 million,
partially offset by a decline in revenues from our temporary staffing and
related businesses of $2.4 million. Revenues from our ebusiness technology
segment increased by $7.5 million, due primarily to customer demand for
projects with higher billing rates.
Cost of Revenues. Our cost of revenues increased 18.6%, from $15.0 million
in 1997 to $17.8 million in 1998. As a percentage of total revenues, cost of
revenues decreased from 39.4% in 1997 to 37.8% in 1998, primarily as a result
of the increase in 1998 revenues in our ebusiness technology segment from
higher billing rate projects, which led to an increase in revenues without a
commensurate increase in cost of revenues.
Gross Profit. Gross profit increased 27.1%, from $23.1 million in 1997 to
$29.3 million in 1998. Gross profit as a percentage of total revenues increased
from 60.6% in 1997 to 62.2% in 1998. The percentage increase was primarily the
result of an increase in ebusiness technology revenues without a commensurate
increase in the costs of revenues of that segment.
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Compensation and Benefits. Compensation and benefits expense increased
46.7%, from $15.4 million in 1997 to $22.6 million in 1998. As a percentage of
total revenues, compensation and benefits expense increased from 40.5% in 1997
to 48.0% in 1998. The increase in dollar amount was primarily the result of the
inclusion in 1998 of a full year of these expenses for companies acquired in
mid-1997. The percentage increase was primarily the result of the addition of
employees through the acquisition of four companies in 1998 and, to a lesser
extent, a hiring initiative in 1998. The acquired companies had higher
compensation expenses as a percentage of total revenues as compared to our
historical levels. The impact of this higher compensation expense margin has
subsequently diminished as a result of workforce reductions and integration of
personnel from the acquired companies.
Other Selling, General and Administrative Expense. Other selling, general
and administrative expense increased 45.5%, from $6.1 million in 1997 to $8.9
million in 1998. The increase in dollar amount was due primarily to an increase
in our reserve for uncollectible accounts receivable in 1998, relating
principally to our temporary staffing and related businesses. Also contributing
to the increase was the inclusion of expenses from the four companies we
acquired in 1997. As a percentage of total revenues, other selling, general and
administrative expense increased from 16.1% in 1997 to 19.0% in 1998. This
percentage increase is primarily attributable to the increase in the reserve
for uncollectible accounts receivable in 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased 126.8%, from $597,000 in 1997 to $1.4 million in 1998. As a
percentage of total revenues, depreciation and amortization expense increased
from 1.6% in 1997 to 2.8% in 1998. The increase is primarily the result of
capital expenditures for our technology infrastructure in the fourth quarter of
1997 to improve productivity. The cost of these systems and the related
hardware was capitalized and is being depreciated over 3 to 5 years. The
increase is also the result of the amortization of goodwill associated with the
acquisition of several companies during 1997 and 1998.
Net Interest Expense. Net interest expense increased 119.0%, from $443,000
in 1997 to $970,000 in 1998. As a percentage of total revenues, net interest
expense increased from 1.2% in 1997 to 2.1% in 1998. These increases were
primarily the result of increased borrowings on our line of credit agreement,
as well as accrued interest and imputed interest on notes payable issued in
connection with the acquisition of several companies during 1997 and 1998.
Income Taxes. Income taxes decreased from an expense of $14,000 in 1997 to a
benefit of $10,000 in 1998. Prior to December, 1999, we were an S corporation
for federal and certain state income taxes. Income tax expense and benefit
related primarily to certain states which do not recognize S corporations.
Net Income (Loss). We had net income of $456,000 in 1997 as compared to a
net loss of $4.5 million in 1998.
Liquidity and Capital Resources
Over the past three years, our principal sources of cash have been proceeds
from the private placement of our equity securities, borrowings under lines of
credit with banks and our June 2000 bridge financing.
As of March 31, 2000, we had $941,000 of cash and cash equivalents and a
$650,000 deficit in working capital.
Net cash used in operating activities was $1.8 million for the three month
period ended March 31, 2000, resulting primarily from payments for accounts
payable, accrued compensation and other accrued liabilities and accrued
commissions, partially offset by earnings before depreciation, amortization,
imputed interest, the market value adjustment to redeemable warrants and a
decrease in accounts receivable.
Net cash provided by operating activities was $983,000 in 1999. Net cash
provided by operating activities in 1999 resulted primarily from earnings
before depreciation, amortization, imputed interest and deferred income taxes
and, increases in accrued compensation and other accrued liabilities and
unearned revenue, partially offset by an increase in accounts receivable and a
decrease in accounts payable.
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Net cash used in investing activities in 1999 and the first quarter of 2000
was primarily related to the improvement of our technology infrastructure and
payments for acquisitions of other companies to enhance our product and service
offerings.
Net cash provided by financing activities in 1999 was primarily due to our
private placement of our redeemable Class B common stock in December 1999,
partially offset by debt repayments and the repurchase of stock from departing
management shareholders. Net cash used in financing activities in the first
quarter of 2000 was primarily a result of repayments on our line of credit and
notes payable.
In December 1999, we entered into a loan and security agreement (Loan
Agreement) with a financial institution which provides for borrowings to fund
general working capital requirements and acquisitions based upon a borrowing
base formula. Borrowings under the Loan Agreement bear interest at a
fluctuating rate based on either (i) the announced prime rate of the Lender
plus the applicable margin defined by the Loan Agreement (Adjusted Prime Rate),
or (ii) the London Interbank Borrowing Rate, as elected from time to time by
us, plus the applicable margin defined by the Loan Agreement (Adjusted LIBOR).
As of March 31, 2000, the Adjusted Prime Rate was 10.0% and Adjusted LIBOR was
9.14%.
Maximum available borrowings under the Loan Agreement represent the lesser
of $10.0 million or (a) 80% of our eligible accounts receivable, plus (b) the
lesser of (i) $3.0 million or (ii) 2.5 times the Company's earnings before
interest, taxes, depreciation and amortization for the four most recent fiscal
quarters. Based upon these criteria, maximum available borrowings at March 31,
2000 was $7.8 million, of which $5.4 million was outstanding. All borrowings
under the Loan Agreement are payable on December 27, 2002, at which time the
Loan Agreement will terminate unless extended by mutual agreement.
On June 16, 2000, we entered into a bridge financing in which we issued
promissory notes in the aggregate principal amount of $10.0 million to
Parthenon Investors, L.P. and PCIP Investors for aggregate cash proceeds of
$8.1 million. The original issue discount of $1.9 million on the notes will be
amortized as additional interest expense during the first year. In connection
with the bridge financing, Parthenon and PCIP also exercised warrants to
purchase an aggregate of 116,210 shares of our Class A common stock at an
exercise price of $16.70 per share, for aggregate proceeds of $1.9 million. The
bridge notes mature on June 16, 2004 and bear interest at a stated annual rate
of 13% on the principal amount for the first year and 16% thereafter. We must
pay interest on the bridge notes quarterly. We must pay in cash at least that
portion of the quarterly accrued interest which is sufficient for the bridge
lenders to pay federal and state income taxes on the accrued interest and
original issue discount on the notes, and we must pay the remaining accrued
interest by issuing additional promissory notes in the principal amount of the
remaining interest payable. The bridge notes are subordinate to our Loan
Agreement. We will be required to issue 348,630 shares of our common stock to
the bridge lenders if we do not repay the bridge notes by June 16, 2001, and we
will be required to issue an additional 58,105 for each of the four months
thereafter (up to an aggregate of 232,420 shares) if any amounts remain
outstanding under the bridge notes as of the end of each such month. The bridge
notes are prepayable at any time without penalty and will be prepaid in full
with a portion of the net proceeds of the offering. See "Related Party
Transactions - Bridge Financing."
We anticipate incurring up to approximately $2.2 million in capital
expenditures in 2000 to support the continued improvement of our TalentPoint
Portfolio technology infrastructure. Our year to date capital expenditures as
of June 16, 2000 were approximately $1.2 million.
We believe that the net proceeds of this offering, together with existing
cash and cash equivalents and cash flow from operations will be sufficient to
meet our anticipated cash requirements for working capital, acquisitions and
capital expenditures for at least the next 12 months.
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Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS 137, which
defers the effective date of SFAS 133 until June 15, 2000. This pronouncement
is not expected to significantly impact our financial position or results of
operations as we have no significant derivative instruments or participate in
hedging activities.
On December 3, 1999, the Securities and Exchange Commission staff issued
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The
bulletin identifies four basic criteria that must be met before revenue can be
recognized. These criteria are: (1) persuasive evidence that an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the
seller's price to buyer is fixed or determinable; and (4) collectibility is
reasonably assured. We do not expect that the adoption of the guidance required
by this bulletin will have a material impact on our financial condition or
results of operations.
In March 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board published their consensus on EITF Issue No. 00-2, "Accounting
for Web Site Development Costs," regarding the accounting for costs incurred to
develop a web site. EITF Issue No. 00-2 is effective for fiscal quarters
beginning after June 30, 2000. We do not expect the adoption of EITF Issue No.
00-2 to have a significant impact on our financial position or results of
operations.
In March 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board published their consensus on EITF Issue No. 00-3, "Application
of AICPA Statement of Position 97-2 Software Revenue Recognition to
Arrangements that Include the Right to Use Software Stored on Another Entity's
Hardware." EITF Issue No. 00-3 outlines the accounting criteria for such
hosting arrangements. We do not expect the adoption of EITF Issue No. 00-3 to
have a significant impact on our financial position or results of operations.
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BUSINESS
Overview
We are a leading provider of integrated human capital management (HCM) and
technology solutions. Our comprehensive products and services enable
organizations to hire, deploy and retain talented and qualified employees in an
effective, timely and cost-efficient manner. TalentPoint Portfolio is our
scalable, fully hosted, web-based suite of proprietary software for human
capital management. Our extensive history and customer base in HCM consulting
and ebusiness technology services provide a strong foundation on which to build
and grow our TalentPoint Portfolio business.
TalentPoint Portfolio is comprised of a number of individual software
modules that address an organization's critical human capital management needs,
such as candidate sourcing, recruitment management, candidate tracking, skills
testing, training, behavioral assessment, survey management and employee
retention. These modules can be implemented individually to address a specific
human capital management need or as an integrated suite to provide a
comprehensive HCM solution.
TalentPoint Portfolio is fully hosted, residing on our web servers, enabling
organizations to access the software through the Internet using standard web
browsers, which are common software applications that allow users to access and
interact with web sites. We configure the TalentPoint Portfolio modules to
mirror the "look and feel" of our customers' web sites. The fully hosted format
of the TalentPoint Portfolio enables organizations to implement our HCM
solutions without incurring a substantial initial capital investment or
significant on-going infrastructure costs. It also enables us to easily upgrade
the technology and content of each module and quickly deliver high quality HCM
solutions to an ever-increasing number of customers. Because of the scalability
of the TalentPoint Portfolio modules, organizations are also able to easily
increase the number of their internal users to accommodate growth.
We have over 13 years of experience in providing HCM consulting services and
over five years of experience in providing ebusiness technology services. We
offer each of these services to complement our TalentPoint Portfolio as well as
on a stand alone basis. Through our HCM consulting services, we offer talent
acquisition, recruitment management and support, sales force solutions,
training consulting and development, retention consulting and employee survey
administration and analysis. Through our ebusiness technology services, we
design, develop and implement a wide range of ebusiness and other information
technology solutions including the integration of the TalentPoint Portfolio
with customers' existing applications. As a result of our extensive experience
in HCM consulting and ebusiness technology, we have a customer base of over
1,600 organizations, including over 130 companies in the Fortune 500.
Market Opportunity
As a result of current market factors, such as the increasing mobility of
the workforce, the aging of the employee base and the scarcity of skilled
individuals, we believe organizations with the ability to hire, deploy and
retain talented and qualified employees in a timely and cost-efficient manner
will gain a significant competitive advantage. We believe that organizations
will also increasingly turn to outsourced service providers who can improve
their capabilities in the areas of hiring, deploying and retaining their human
capital. Outsourcing, generally, as a means to improve business operations and
efficiency is growing rapidly. Dun and Bradstreet estimates that outsourcing
expenditures in the U.S. market alone will increase from $295 billion in 1999
to $340 billion in 2000 with strong growth also projected in other world
markets. Outsourced human capital management services are expected to be a high
growth sector of the total outsourced services market. In fact, Dataquest
estimates that the U.S. market for integrated, multi-process human resource
outsourcing services will grow from $900 million in 1999 to more than $12
billion in 2003, representing a compound annual growth rate of 91%. The
companies providing these outsourcing services are numerous, ranging from large
international firms to small independent consultancies.
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Hire
In order to hire employees successfully, an organization must have the
ability to effectively and efficiently source and assess talented and qualified
candidates and to sell those individuals on the benefits of joining the
organization.
Traditionally, organizations have satisfied their hiring needs through a
variety of methods such as classified and other print advertisements, job
fairs, on-campus recruiting, in-house referral programs and external employment
firms. Key limitations to these methods include multiple intermediaries, the
inability to pre-screen candidates, high costs per hire and a limited flow of
information between the candidate and the organization.
New technologies, including the Internet, are expanding organizations'
access to information and employee candidates and have transformed the manner
in which many organizations are managing their hiring needs. Forrester Research
estimates that by 2003, most large companies, 60% of medium-sized companies and
20% of small companies will use the Internet for recruiting purposes. In
addition, Forrester estimates that employer spending on web-based recruiting
will increase from $105 million in 1998 to $1.7 billion in 2003, representing a
compound annual growth rate of over 74%.
While new technologies offer organizations rapid access to large pools of
candidates, the associated productivity gains are often offset by the
organizations' difficulty in screening, assessing and selecting candidates in
an efficient and timely manner. Many organizations are addressing these
limitations by using web-based assessment and selection solutions. Forrester
estimates that the online candidate assessment market will grow from $5 million
in 1999 to $326 million in 2003, a 184% compound annual growth rate.
To address the limitations imposed by traditional hiring methods as well as
those imposed through an employer's use of new technologies, we believe an
organization's hiring solution must include tools that enable it to:
. quickly screen, assess and select from a large pool of candidates;
. efficiently manage and disseminate candidate data; and
. quickly validate candidate data.
These tools, whether coupled with internal or external hiring expertise,
will provide an organization with the ability to quickly find the right person
for the right job.
Deploy
In addition to hiring, to achieve maximum productivity an organization must
have the ability to rapidly deploy its employees. To accomplish this task, an
organization must have the tools to effectively place, orient and train its
employees in a cost-efficient manner.
Historically, the process of collection and dissemination of candidate
information gathered during the hiring phase generally has been inefficient and
has resulted in inappropriate employee placements. In addition, employee
orientation and training have been conducted primarily through expensive,
labor-intensive instructor-led seminars. These approaches are often cumbersome
and time consuming and are not tailored to the specific needs of employees.
With the advent of interactive multimedia software such as CD-ROMs and
distance-based learning media such as video conferencing, organizations are now
able to overcome the cost, space and time constraints of traditional
orientation and training methods. The Internet now offers employers the
opportunity to communicate orientation and training content without the
inconvenience of using a physical medium for delivery.
The advantages of Internet based training are leading to a significant
increase in the percentage of the training market that is offered in a web-
based format or as "elearning." International Data Corporation (IDC) estimates
the market for elearning is expected to grow from $1.1 billion in 1999 to $11.4
billion in 2003, representing a compound annual growth rate of over 79%.
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As a result, we believe organizations increasingly will seek to improve
their ability to deploy their employees through the use of advanced
technologies and the efficient use of information gathered during the hiring
process.
Retain
An organization must not only hire and deploy its employees in a cost-
effective manner, but it must also retain its talented workforce. To avoid the
high cost of employee turnover, an organization must establish programs that
communicate with, develop and engage its employees.
Traditionally, retention strategies relied primarily upon direct
compensation and benefits packages. Increasing competition for skilled and
talented employees, however, has generally rendered these limited programs
ineffective. In a report issued by the Bureau of National Affairs, the median
rates of permanent departures for non-manufacturing employers of all sizes
averaged 16.8% per year in 1999, up from 13.2% per year in 1998. New
technologies, including the Internet, have exacerbated the difficulties
encountered by organizations in retaining their talented employees by providing
them with immediate access to information on millions of job opportunities.
Conversely, these new technologies have provided organizations with the
opportunity to better communicate with their employees as well as a means for
efficient and effective training.
As part of an effective retention strategy, we believe organizations will
increasingly use advanced technologies as a platform from which to disseminate
information, gain employee feedback, offer career development and engender an
overall sense of attachment to the organization and its goals.
In order to implement effective human capital management solutions,
organizations increasingly are adopting new technologies to address their human
capital management functions. In addition, we believe that organizations are
recognizing the need for an integrated approach to their human capital
management needs and are increasingly turning to external sources of expertise
and implementation. We believe that organizations must use an approach that
effectively integrates all of the phases of the human capital management
process and the information gathered in each phase in order to gain a
competitive advantage.
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The TalentPoint Solution
We offer integrated and comprehensive HCM and technology solutions that
enable organizations to hire, deploy and retain talented and qualified
employees in an effective, timely and cost-efficient manner. We believe that an
organization's ability to implement an effective HCM solution requires it to
address the fundamental competencies within the three phases of the human
capital management process as illustrated below.
The Human Capital Management Process
[Logo of TalentPoint]
We recognize the importance of the interrelationship between the effective
gathering of information and the efficient execution of each of the fundamental
competencies that we believe are inherent in each of the phases within the
human capital management process. Our TalentPoint Portfolio software modules
address each of these fundamental competencies. By offering TalentPoint
Portfolio software, HCM consulting services and ebusiness technology services,
we give our customers the option of implementing a targeted HCM solution to
meet their specific human capital management needs or a fully integrated
comprehensive HCM solution.
TalentPoint Portfolio
TalentPoint Portfolio is our suite of proprietary web-based software modules
that is designed to optimize our customers' ability to hire, deploy and retain
talented individuals. The fully hosted format of TalentPoint Portfolio allows
us to easily upgrade the technology and content of each module. This enables us
to quickly deliver high quality HCM solutions to an ever increasing number of
customers and provides significant efficiencies as compared to historical
methods of distributing software upgrades through CD-ROM or other physical
media. Our
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scalable, web-based modules also provide organizations with the ability to
easily increase the number of their internal users to accommodate growth.
The chart below illustrates the particular competencies within each phase of
the HCM process that our TalentPoint Portfolio software modules are designed to
address. TalentPoint Portfolio modules can be purchased individually to meet a
specific organizational need or as an integrated suite to provide a
comprehensive HCM solution.
<TABLE>
<CAPTION>
HIRE DEPLOY RETAIN
--------------------------------------------------------------------------------------------
TalentPoint Portfolio
Module Source Sell Assess Place Orient Train Communicate Engage Develop
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Currently Available:
--------------------------------------------------------------------------------------------
TalentPoint Recruiter . .
--------------------------------------------------------------------------------------------
TalentPoint Prove It! . .
--------------------------------------------------------------------------------------------
TalentPoint Insight . .
--------------------------------------------------------------------------------------------
TalentPoint Insight
Online . .
--------------------------------------------------------------------------------------------
TalentPoint Interview
Builder .
--------------------------------------------------------------------------------------------
TalentPoint Virtual
University . . . .
--------------------------------------------------------------------------------------------
TalentPoint Improve It! . . .
--------------------------------------------------------------------------------------------
TalentPoint Surveys
Online . . .
--------------------------------------------------------------------------------------------
TalentPoint 360
Perspective . . .
--------------------------------------------------------------------------------------------
Soon to be available:
--------------------------------------------------------------------------------------------
TalentPoint
CareerTracker . . . .
--------------------------------------------------------------------------------------------
TalentPoint Community . . .
</TABLE>
HCM Consulting Services
We have over 13 years of experience in providing HCM consulting services. We
offer these services to complement our TalentPoint Portfolio as well as on a
stand alone basis. We provide these services in a variety of functional areas
within the HCM process, including talent acquisition, onsite and offsite
recruitment management and support, sales force solutions, training consulting
and development, retention consulting and employee survey administration and
analysis.
eBusiness Technology Services
We have over five years of experience in providing ebusiness technology
services, which include the design, development and implementation of a wide
range of ebusiness and other information technology solutions. Our ebusiness
technology professionals also fully integrate the TalentPoint Portfolio with
our customers' existing web technology and other systems and configure our
TalentPoint Portfolio modules to mirror the "look and feel" of our customers'
web sites.
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Strategy
Our objective is to be the leading provider of integrated HCM solutions. Key
elements of our strategy include:
Focus on TalentPoint Portfolio
We intend to continue to focus on expanding and enhancing our TalentPoint
Portfolio. Our more than 70 development and implementation professionals in
this segment are supported by our extensive HCM consulting and ebusiness
technology experience and expertise. Since TalentPoint Portfolio is web-based,
it is highly scalable in two distinct respects:
. We can deliver our HCM expertise to a larger number of customers than
would be possible through traditional consulting methods; and
. Our customers can easily increase the number of their internal users
without incurring a significant additional capital investment for
installation and integration and without incurring significant on-going
infrastructure costs.
We offer our TalentPoint Portfolio software modules individually or as a
fully integrated suite. We are currently developing two additional modules,
expected to be released in the first quarter of 2001, which will complement our
existing modules.
Leverage Our Large, Existing Customer Base
As a result of our extensive HCM consulting and ebusiness technology
experience, combined with recent acquisitions, we have a customer base of more
than 1,600 organizations, including more than 130 companies in the Fortune 500.
We intend to aggressively leverage this existing customer base in order to
expand the penetration of our TalentPoint Portfolio modules and cross-sell our
HCM consulting and ebusiness technology services. We believe these established
relationships, combined with our comprehensive HCM offerings, provide us with a
competitive advantage and a platform from which to rapidly expand our business.
Build TalentPoint Brand as an Integrated HCM Solution
We intend to increase market recognition of our brand name, our products and
our services through a combination of print and Internet advertising, direct
mail/email and trade show participation focused on our target markets. We
further intend to invest in marketing efforts that will highlight the ability
of our products and services to save our customers time and money by automating
and outsourcing their HCM functions. We also intend to emphasize the expertise
of our HCM and ebusiness consultants and their ability to provide an integrated
and flexible HCM solution.
Leverage Our Technological Expertise
We intend to continue to leverage the expertise of our ebusiness technology
consultants in the evaluation and assimilation of new technologies that enhance
the functionality and integration capabilities of our TalentPoint Portfolio. In
addition, we intend to capitalize on our strength in ebusiness technology
services by continuing to incorporate our HCM industry experience into
technology driven web-based solutions. Our ebusiness technology experience
enables us to more quickly adapt to a changing market, and by leveraging this
experience, we believe we will have an on-going competitive advantage in the
marketplace.
Expand Sales and Distribution Capabilities
From January 1, 2000 to May 31, 2000, we increased our sales force from 111
to 139 sales professionals. We intend to hire at least 70 additional sales
professionals and additional sales support staff in 2000. To attract and deploy
additional sales professionals, we intend to use the same proprietary selection
techniques, attribute-based assessments, skills-based testing and recruitment
processes that we offer to our customers. We also intend to pursue reseller
relationships with small human resource consulting providers, providers of
business process management products and services and corporate web site
developers in order to establish a broad base of cost-effective distribution
channels for our TalentPoint Portfolio modules.
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Pursue Strategic Acquisitions
We have completed 15 acquisitions since late 1995. We intend to continue to
capitalize on the fragmentation in the human capital management market by
pursuing further strategic acquisitions of complementary businesses to:
. gather technologies that will enhance our existing solutions and allow
us to maintain our technological advantage in the human capital
management field;
. gain top quality content and other intellectual property;
. accelerate geographic expansion in targeted markets;
. add or enhance sales and distribution channels; and
. expand our industry expertise in specific areas of human capital
management.
Products and Services
Our products and services include TalentPoint Portfolio, HCM consulting
services and ebusiness technology services. We offer these as individual
products and services or as a comprehensive, integrated solution to an
organization's human capital management needs.
TalentPoint Portfolio
Our TalentPoint Portfolio is a scalable, fully hosted web-based suite of
proprietary software modules that address the fundamental competencies that we
believe are inherent in each of the phases of the human capital management
process. Our TalentPoint Portfolio modules can be purchased individually or as
an integrated suite, depending on a customer's particular request. The
TalentPoint Portfolio modules are designed to meet the human capital management
needs of a broad range of organizations, varying in size from small companies
with a few dozen employees to large, multinational corporations.
Our TalentPoint Portfolio currently includes the following HCM software
modules:
. TalentPoint Recruiter(TM) - our recruitment and candidate tracking
module used by organizations to source candidates and manage all aspects
of the application and hiring process. This module essentially becomes a
customer's "private label" career center and recruitment management
platform. Key features include:
. web-based posting of job opportunities to an organization's own web
site as well as to subscription-based or free job board web sites;
. sourcing and identification of candidates through the use of "web
spiders" (e.g., web-based search engines);
. automated on-line background checks on candidates;
. management of a customer's internal candidate and resume database;
and
. prompt and efficient scheduling of interviews and collection of
interview feedback.
. TalentPoint Prove It!(R) - our candidate and employee testing module
which tests and automatically scores an individual's technical skills
with respect to competencies ranging from popular office applications to
complex programming languages.
. TalentPoint Insight(TM) - our training and qualification module which
trains human resource professionals in administering and analyzing
structured interviews for predictive behavioral assessment.
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. TalentPoint Insight Online(TM) - our predictive behavioral assessment
module which administers and analyzes interviews with automated scoring.
. TalentPoint Interview Builder(TM) - our interviewing improvement module,
which trains human resource professionals in using our comprehensive
compendium of questions specifically designed for structured,
competency-based interviews.
. TalentPoint Virtual University(TM) - our non-technical skills training
module, which provides training for newly hired and current employees on
a wide range of non-technical skills and knowledge.
. TalentPoint Improve It!(TM) - our technical skills training module which
provides training for newly hired and current employees on a wide range
of technical skills.
. TalentPoint Surveys Online(TM) - our employee survey module which
provides administration, interpretation and reporting on employee survey
data.
. TalentPoint 360 Perspective(TM) - our leadership assessment module,
which provides human resource professionals and managers the tools to
administer, interpret and report on leadership effectiveness surveys.
These surveys include responses from an individual, persons reporting to
an individual, the individual's peers and his or her superiors.
We are also currently developing two additional software modules, which we
expect to added to the TalentPoint Portfolio during the first quarter of 2001:
. TalentPoint Community(TM) - our employee communications module designed
to enhance employee engagement and commitment through effective
communication of employer programs including work- related and social
events, career boards and employee recognition programs.
. TalentPoint CareerTracker(TM) - our career development module designed
to be used by employers and employees to identify and track an
employee's career advancement and skills development.
HCM Consulting Services
We have over 90 HCM consultants who provide services complementary to our
TalentPoint Portfolio as well as on a stand alone basis. We offer our HCM
consulting services in a variety of functional areas, including the following:
. Talent Acquisition. We offer services such as candidate sourcing, resume
screening, interviewing, and recruitment for positions ranging from
chief executive officers to mid-level managers and technical
professionals.
. Onsite and Offsite Recruitment Management and Support. We provide onsite
and remote support services for organizations having recurrent
recruitment needs. We also provide recruitment management for
organizations undertaking large recruiting projects. We assist
organizations in identifying recurring or project-specific human capital
needs, critical skills and behavioral attributes desired in potential
candidates.
. Sales Force Solutions. We provide strategic planning and implementation
services to organizations that need to recruit and manage large sales
forces. We also design and implement skill development training
programs, skills testing and assessment programs consistent with an
organization's sales strategy.
. Training Consulting and Development. We offer comprehensive training and
consulting services including project consulting, course design and
content authoring, interface design, audio/video production, graphics
design, computer programming, quality assurance and technical support.
Our training products can be pre-packaged or custom designed by our team
of industry specialists. Our training specialists include experienced
course developers and educators and multimedia and web-based training
program developers.
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. Retention Consulting. We assist organizations in addressing excessive
employee turnover by identifying critical indicators of such turnover,
establishing retention goals and intervention strategies and designing
means to effectively communicate those goals and strategies to managers
and supervisors. We also identify the methods for successful strategy
implementation.
. Employee Survey Administration and Analysis. We design, conduct and
process employee surveys to measure employee satisfaction and engagement
and to measure organizational effectiveness and leadership.
eBusiness Technology Services
We have over 95 professionals who design, develop and implement a wide range
of ebusiness and other information technology solutions. These professionals
include software development engineers, network engineers, systems architects,
business process consultants, database administrators, web designers and
graphic artists. We implement solutions that include systems integration and
the connection of web sites to existing systems for a wide range of business
processes, including accounting, manufacturing, human resources management,
strategic procurement and customer relationship management.
As our TalentPoint Portfolio sales increase, we expect that an increasing
number of our ebusiness projects will relate to the integration of our
TalentPoint Portfolio with our customers' existing human resource information
systems, such as those offered by Oracle, PeopleSoft and J.D. Edwards. We
believe our in-house expertise in ebusiness technology services differentiates
us from our competitors.
New Product Development
Product Development
We employ more than 70 professionals dedicated to expanding and enhancing
our TalentPoint Portfolio. These individuals are responsible for software
module development, content development, software design and software testing
and maintenance. We continuously evaluate new product concepts as a result of
the constant interaction and communication between our TalentPoint Portfolio
product development team and our HCM and ebusiness technology consultants, as
well as interaction with our customers.
Product Enhancements
In order to remain competitive and to take advantage of advances in
technology, we intend to continuously assess and upgrade our existing products.
Historically, enhancements to the TalentPoint Portfolio software modules have
included improved functionality such as additional reports, enhanced searching
and new training content. Enhancements also have included improvements in the
technical aspect of the product, such as the conversion from HTML to XML
programming languages, support for Oracle, and advanced data archiving. Future
enhancements are expected to include translation of the content of the
TalentPoint Portfolio modules into multiple languages for multinational
organizations and customers in foreign countries, and tighter integration with
third party human resource information systems. The scalability of the fully
hosted TalentPoint Portfolio modules enables our customers to take advantage of
upgrades immediately upon our adding features and enhancements on our web
servers. As a result, we are able to avoid the time and expense typically
associated with software installation, version control and support across
multiple versions.
Sales and Marketing
Sales and Distribution
We traditionally have generated the majority of our new customers through
the telemarketing efforts of our sales staff and through referrals from
existing customers. Our sales professionals have focused on direct sales of our
HCM consulting and ebusiness technology solutions to potential customers in the
industries in which they have expertise and the geographic regions in which
they are based. As of May 31, 2000, we employed 139
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full-time sales professionals, of which 46 were exclusively dedicated to
selling the TalentPoint Portfolio. In order to support the growth of our
TalentPoint Portfolio, we intend to add at least 70 additional sales people in
2000, and expect to do so by using the same recruitment processes and screening
methodologies that we provide to our customers. We expect these new sales
people to target multinational organizations in North America, Europe and Asia
and middle-market organizations in North America and Europe. We offer our
direct sales professionals a highly incentive-based compensation package.
We intend to leverage our HCM solutions by cross-selling our TalentPoint
Portfolio modules, HCM consulting services and ebusiness technology services to
new and existing customers. We believe that because we provide comprehensive
HCM solutions, our customers will increase the quantity and range of products
and services they obtain from us. As a result, we train all of our sales
personnel on the basic features and use of all of our HCM products and
services.
We also intend to pursue reseller relationships with small human resource
consulting providers, providers of business process management products and
services and corporate web site developers in order to cost-effectively sell
and distribute our TalentPoint Portfolio modules to markets that we do not
currently reach with our direct sales force.
Marketing Strategy
Our marketing efforts historically have been undertaken through a
combination of speaking engagements and involvement in industry associations
and tradeshows. Through our four person dedicated marketing team, we intend to
market TalentPoint Portfolio, together with our HCM consulting and ebusiness
technology services:
. over the Internet by placing informational materials and advertisements
on human resource and recruiting web sites;
. through a combination of general and niche print advertising in national
business periodicals, and in periodicals targeting the human resource,
information technology and Internet industries; and
. by sending newsletters to human resource, staffing and information
technology personnel through the mail and by email.
In addition, we intend to actively participate in human resource, electronic
commerce, Internet and information technology trade shows in order to cost-
effectively showcase our products and services and establish personal points of
contact with industry participants and decision-makers.
We expect our marketing efforts to highlight the ability of our products and
services to save organizations time and money by automating and outsourcing
their human capital management and business process technology implementation
functions and to improve the quality and performance of their employees. Our
marketing efforts will further emphasize that TalentPoint Portfolio is easy to
use, is scalable to support growth, and is secure, yet flexible enough to
accommodate new service offerings.
Case Study
Cardinal Health, Inc., Cardinal MarketForce Division
Cardinal Health, Inc. is one of the nation's largest wholesalers of
pharmaceuticals and hospital supplies. Cardinal MarketForce is the contract
sales division of Cardinal Health. In the first quarter of 1999, Cardinal
MarketForce was retained to build a dedicated sales force to launch a new
pharmaceutical drug that was targeted to the women's health market. In that
effort, Cardinal MarketForce faced several unique challenges in order to build
a dedicated sales force for this new drug, including:
. the need to develop an appropriate hiring profile for the sales
professionals;
. the need to recruit 125 successful sales professionals in only ten
weeks;
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. the need to rapidly orient and deploy those recruited sales
professionals;
. the need to gather and disseminate all of the candidate data;
. the need to coordinate and communicate with hiring personnel located all
over North America; and
. the need to schedule hundreds of pre-employment physical examinations
and background checks.
Cardinal retained TalentPoint to assist in the development of a success
profile of the target candidates and to manage all phases of the project with
both on-site and off-site recruitment support. We installed TalentPoint
Recruiter(TM) software which allowed remote access through the Internet for the
Cardinal staff to utilize in all locations. The robust database management, job
posting and resume search and collection features of the TalentPoint Recruiter
software module assisted in the creation of a candidate pool of over 1,000
qualified applicants from which the sales force was selected and hired in less
than nine weeks. The traveling sales managers who conducted the interviews were
able to access TalentPoint Recruiter and schedule all of their meetings,
provide interview feedback and communicate hiring decisions from offsite
interview locations. Cardinal's internal human resources group was able to
produce real time progress reports and capture the database information for
future hiring.
Cardinal also solicited the support of TalentPoint for a retention staffing
application that would help them develop a tracking tool for skill and personal
development of their sales force in order to better retain their talented
employees. As a result, our TalentPoint Portfolio product development team
launched the development of the TalentPoint CareerTracker software module. This
module is scheduled for release as a new component of the TalentPoint Portfolio
in the first quarter of 2001.
As a result of our successful efforts, Cardinal has retained us to be the
exclusive provider of its talent acquisition services and software for sales
force expansion.
Customers
Our customers include multinational organizations based primarily in North
America, Europe and Asia and middle-market organizations based primarily in the
United States and Europe. Our more than 1,600 customers operate in a wide range
of industries and include more than 130 companies in the Fortune 500. In 1999,
we served over 600 customers, none of which accounted for more than 3% of our
revenues in 1999. Ninety-two percent of our top 50 customers in 1998 continued
to be our customers in 1999. Our customer base also includes over 1,000
organizations served in 1999 by companies we acquired in 2000, providing what
we believe to be a natural market for complementary products such as our
TalentPoint Portfolio.
The following is a list of some of our top 50 customers in terms of revenue
generated in 1999:
<TABLE>
<S> <C> <C>
American Airlines Corning Merck
American Express Gateway Novartis
Au Bon Pain Honeywell Sherwin-Williams
Bank of America John Hancock Financial Services Siemens
BellSouth Liberty Mutual Insurance Company Staples
Cardinal Health Lucent Technologies Teradyne
CIGNA Marriott International VerticalNet
</TABLE>
Technology Infrastructure and Capabilities
The internal network on which we operate and develop our products consists
of a series of high-performance, fault-resistant servers, routers and Internet-
networking equipment provided by leading hardware companies such as Dell and
Cisco. Our multi-tiered network utilizes Microsoft COM/DCOM Microsoft
Transition Server programming languages and was designed to scale rapidly. Our
network's open architecture
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supports all leading web browsers and computer platforms, and most commercial
database systems and popular human resource management systems. We use industry
standard secure socket layer encryption, combined with a challenge/response
authentication system, to help ensure data security.
Our infrastructure is managed by more than a dozen individuals responsible
for network engineering and maintenance. These individuals are skilled in
Microsoft NT, Solaris Sun Unix, Novell networks, Microsoft Exchange, VPN
networks, RAS server networking protocols and system maintenance as well as
web-based networking protocols. Our internal networks are hosted at two
locations in Wayne, Pennsylvania and Lincoln, Nebraska, in secured server rooms
that include fire suppression systems. We maintain and update disaster recovery
and offsite backup procedures as needed.
We have developed customized, integrated internal systems designed to
maximize productivity and to aid in the management of our business. For
example, our internal accounting system, which is based on Oracle software,
interfaces with our key outside vendors for rapid payroll processing and
invoicing. We also maintain wide area and virtual private networks, based on
Microsoft Windows NT, to link all of our offices and provide our employees with
email and access to both the Internet and a proprietary intranet site.
In addition to our internal network, we have an agreement with Exodus
Communications, Inc., an Internet service provider located in San Jose,
California, to host our network and web-based software modules, including each
customer's private and secure database of human resource information. Exodus
maintains fully redundant, high-speed network connections using T3 lines, and
provides nightly data back-up and 24 hours per day, seven days per week network
monitoring and disaster recovery services. International Data Corporation
recently named Exodus as the top U.S.-based hosting service provider.
Competition
The market for our products and services is competitive, dynamic, highly
fragmented and subject to frequent technological changes. We compete with
companies that offer one or more of the products or services we offer, such as
providers of human resource strategy consulting, recruitment services, employee
assessment and training services, and both web-based and non-web-based human
capital management software applications.
Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
greater financial, technical, marketing and public relations resources than we
do. However, we believe that there are few, if any, competitors that offer
products and services that provide a comprehensive solution to organizations'
critical human capital management needs in all three phases of the human
capital management process, which include hiring, deployment and retention.
In each of these three phases of hiring, deployment and retention, we
compete with organizations ranging from independent consultancies to large
international firms providing outsourced human capital management products and
services, as well as the internal human resource staffs of our customers and
potential customers. In the software applications area, we compete with
recruiting software offered by providers such as Webhire, the Softshoe(TM)
product by Hotjobs.com and products offered by Icarian. In hiring and pre-
employment testing and assessment, some of the companies with which we compete
are Qwiz and Development Dimensions International (DDI). In offering web-based
training, we compete with organizations such as Click2Learn, Smartforce and
Skillsoft.
In the hiring services area, we compete with small and large executive
search firms, including organizations such as divisions of TMP Worldwide, which
also owns Monster.com, and divisions of Korn Ferry International such as
FutureStep. In the area of onsite and offsite recruitment management, we
compete with organizations such as Aon and Management Recruiters International.
In our retention consulting practice, we compete with survey management
companies such as The Gallup Organization and International Survey Research.
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In our ebusiness technology services segment, one source of competition is
the internal technological staffs of our customers and potential customers. If
an organization decides to use an external provider for some or all of its
ebusiness technology needs, our principal sources of competition include
traditional information technology consulting and integration companies,
facilities management and management information systems outsourcing companies
and Internet professional services and access providers.
We believe the key competitive factors in our markets are quality, breadth
of product and service offerings and price. We believe our comprehensive range
of HCM solutions, in-house ebusiness technology expertise, 13 years of HCM
consulting experience, speed of execution and the reliability of our products
and services provide us with a competitive advantage and differentiate us from
our competitors.
Intellectual Property
We believe that the proprietary nature of our TalentPoint Portfolio provides
us with a competitive advantage over other providers of HCM products and
services that do not include a proprietary software HCM solution. We rely upon
a combination of copyrights, trademarks, service marks, trade secrets and
trademark laws and employee and third party non-disclosure agreements to
protect our proprietary rights.
We have registered or are in the process of registering our trademarks. We
intend to seek registration of any additional trademarks we develop in relation
to our TalentPoint Portfolio software applications and our HCM consulting and
ebusiness technology services. Our trademarks include all the names of our
TalentPoint Portfolio modules. We also own 17 Internet domain names, including
www.talentpoint.com, www.tpnt.com, www.raymondkarsan.com and www.rkaglobal.com.
Our success depends, in part, upon our proprietary information. There can be
no assurance that our agreements with employees, consultants and others who
participate in the development of our software will not be breached, that we
will have adequate remedies for any breach, or that our trade secrets will not
otherwise become known. Furthermore, there can be no assurance that the
measures taken by us to protect our proprietary rights will be adequate to
prevent misappropriation of our technology or the content of our TalentPoint
Portfolio modules, or independent development by others of similar technology
or content.
Despite our efforts to protect our proprietary information, it is possible
that third parties could acquire trademarks or domain names that are
substantially similar or conceptually similar to our trademarks and domain
names. This could decrease the value of our trademarks or domain names and
could hurt our business. The regulation of domain names in the United States
and in foreign countries is unclear and is subject to change.
We are not aware of any patent infringement charge or violation of other
proprietary rights claimed by any third party relating to us or our products.
However, the computer technology market is characterized by frequent and
substantial intellectual property litigation. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict.
Employees
As of May 31, 2000, we had 472 employees, including 143 sales and marketing
personnel, 96 HCM consultants, 96 professionals in our ebusiness technology
group, 72 individuals in TalentPoint Portfolio product development and
implementation and 65 individuals in administration and finance. There are no
collective bargaining agreements covering any of our employees. We have never
experienced any labor disruptions, nor are we aware of any efforts to organize
our employees, and we consider our relations with our employees to be good.
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Facilities
We serve our customers through a network of 18 corporate offices located
throughout the U.S. and in Hyderabad, India and London, England. Our Wayne,
Pennsylvania office location currently serves as our corporate headquarters.
Our India office primarily serves as a recruitment center for non-U.S.
technical personnel to work in our ebusiness technology services group.
We do not own any real estate. The total square footage of office space
under lease as of March 31, 2000 was approximately 95,000 square feet. Our
office leases generally have three to five year terms. We believe that our
office facilities are adequate for our needs and that we can expand our
facilities if needed.
Legal Proceedings
From time to time, various inquiries, potential claims and charges are made,
asserted or commenced by or against us, principally arising from or related to
contractual relations. We believe that no claim currently pending, individually
and the aggregate with any other claims, will have any material adverse effect
on our consolidated financial position or results of operations, although no
assurance can be made in this regard.
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MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers, directors and key employees and their ages as of May
31, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and
Directors
Chairman of the Board and Chief Executive
Nooruddin ("Rudy") S. Karsan.. 42 Officer
Bill L. Erickson.............. 51 Vice Chairman of the Board and Executive
Vice President -HCM Consulting, Deployment
and Retention Services and TalentPoint
Portfolio
Chief Operating Officer, Secretary,
Elliot H. Clark............... 38 Treasurer and Director
Donald F. Volk................ 50 Chief Financial Officer
Executive Vice President - Sales and
Troy A. Kanter................ 32 Marketing
Executive Vice President - eBusiness
Anita A. Sakuru............... 30 Technology Services
P. Grant Parker............... 42 Executive Vice President - HCM Consulting,
Talent Acquisition and Recruitment Services
John C. Rutherford............ 50 Director
Archie L. Jones, Jr........... 29 Director
Key Employees
Kevin E. Kruse................ 33 Senior Vice President - TalentPoint
Portfolio
Ellen E. Thompson............. 32 Senior Vice President - TalentPoint
Portfolio Product Development
Kevin T. Hudson............... 46 Senior Vice President - HCM Consulting,
Talent Acquisition and Recruitment Services
Roger E. Lipson............... 38 Senior Vice President - HCM Consulting,
Retention Services
Raghuveer Sakuru.............. 33 Senior Vice President - eBusiness
Technology Services
Thomas J. Connolly............ 35 Senior Vice President - eBusiness
Technology Services
Shawn M. Sterling............. 31 Vice President of Customer Service -
TalentPoint Portfolio
Grant R. Coren................ 37 Vice President - HCM Consulting, Talent
Acquisition and Recruitment Services
Lisa A. Butler................ 34 Corporate Controller
Richard P. Ongirski........... 41 Vice President - HCM Consulting, Deployment
and Retention Services
</TABLE>
Executive Officers and Directors
Nooruddin ("Rudy") S. Karsan co-founded TalentPoint in 1987 and has served
as the Chairman of our Board of Directors since 1997, and as our Chief
Executive Officer since 1991. From 1987 until 1991, Mr. Karsan was one of the
principal executive officers of our company. From 1979 to 1987, Mr. Karsan was
an actuary for the Mercantile & General Insurance Company in Toronto, Canada.
Mr. Karsan holds the designation of Fellow of the Society of Actuaries.
Bill L. Erickson has been our Vice Chairman of our Board of Directors and
Executive Vice President - HCM Consulting, Deployment and Retention Services,
since he joined TalentPoint in 1997. From 1995 until 1997, he was chief
executive officer of Human Resources Innovations, Inc., a company he co-founded
which provided employee survey research and consulting and that was acquired by
TalentPoint in 1997. Prior to that, Mr. Erickson was with The Gallup
Organization from 1979 to 1994, most recently serving as the executive vice
president of the Management Research Division.
Elliot H. Clark joined TalentPoint in 1991 and has been our Chief Operating
Officer since 1999 and a director on our Board of Directors since 1997. From
1992 until 1999 Mr. Clark served as a general manager in
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the talent acquisition services division. In addition, Mr. Clark has served as
our Secretary and Treasurer since 1997. Mr. Clark's legal name is Eliot H.
Chack, but he uses for business purposes, and is known in the industry as,
Elliot H. Clark.
Donald F. Volk joined TalentPoint in 1996 as our Chief Financial Officer.
From 1987 until 1996, Mr. Volk was a partner in the accounting firm of Brinker,
Simpson, Nicastro & Volk. He received a Masters of Science degree in Taxation
from the Villanova University School of Law. Mr. Volk has been a Certified
Public Accountant since 1973.
Troy A. Kanter joined TalentPoint in 1997 and has served as our Executive
Vice President - Sales and Marketing since 1999. From 1997 to 1999, he managed
our HCM Consulting, Retention Services operations. From 1995 until 1997, Mr.
Kanter was the president of Human Resources Innovations, Inc., a company he co-
founded which provided employee survey research and consulting and that was
acquired by TalentPoint in 1997. Prior to that, he was with that The Gallup
Organization from 1990 to 1994, most recently serving as vice president of
Client Services.
Anita A. Sakuru has served as our Executive Vice President - eBusiness
Technology Services since she joined TalentPoint in 1996. From 1994 to 1996,
she was a managing principal of Pragma, Inc., a company she co-founded which
provided ebusiness and information technology consulting and which we acquired
in 1996. In addition, from 1991 to 1996, Ms. Sakuru worked as a consultant for
several organizations in the information technology Industry. Ms. Sakuru is
married to Raghu Sakuru, our Senior Vice President - eBusiness Technology
Services.
P. Grant Parker joined TalentPoint in 1988 and has been our Executive Vice
President - HCM Consulting, Talent Acquisition and Recruitment Services since
1999. He has been a member of our management team since 1991. Prior to joining
our company, Mr. Parker was responsible for major account development at
Clement Communications from 1984 to 1988.
John C. Rutherford joined TalentPoint as a member of our Board of Directors
in December 1999. Mr. Rutherford is a founding Managing Director of Parthenon
Capital, Inc., a private equity investment firm which was formed in 1998 and an
affiliate of Parthenon Investors, L.P., one of the investors in our December
1999 equity financing. He also is co-founder and Chairman of The Parthenon
Group, a strategic advisory consulting and principal investment firm. Prior to
founding The Parthenon Group in 1991, Mr. Rutherford served as a Director of
Bain & Company. He has over 20 years experience as a management consultant and
private equity investor. He holds a Masters of Business Administration from the
Harvard Business School and a Masters of Science in Computer Science from the
University of Connecticut.
Archie L. Jones, Jr. joined TalentPoint as a member of our Board of
Directors in December 1999. Since 1998, Mr. Jones has been a senior associate
at Parthenon Capital, Inc., a private equity investment firm and an affiliate
of Parthenon Investors, L.P., one of the investors in our December 1999 equity
financing. In 1996, Mr. Jones served as a strategy consultant to The Parthenon
Group. From 1993 to 1996, Mr. Jones was a financial analyst at Stonington
Partners, Inc., a private equity fund. Mr. Jones holds a Masters of Business
Administration from the Harvard Business School.
Key Employees
Kevin E. Kruse joined TalentPoint in 1997 and currently serves as our Senior
Vice President - TalentPoint Portfolio and is responsible for the day-to-day
operating management of that business. From 1997 to 1999, he managed our HCM
Consulting, Deployment Services operations. From 1993 until 1997, Mr. Kruse was
the president of Advanced Consulting, Inc., a company he founded which provided
multimedia and web-based corporate orientation and training programs and that
was acquired by TalentPoint in 1997. Mr. Kruse is the co-author of Technology
Based Training, a text dealing with web-based training.
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Ellen E. Thompson has served as our Senior Vice President - TalentPoint
Portfolio Product Development since she joined TalentPoint in 2000. Ms.
Thompson is responsible for product development and customer service for our
TalentPoint Portfolio business. From 1993 until 2000, she was chief executive
officer of Know It All, Inc., a company she founded which provided online
employee skills assessment and training programs and that was acquired by
TalentPoint in 2000.
Kevin T. Hudson joined TalentPoint in 1993 and, since 1998, Mr. Hudson has
served as our Senior Vice President - HCM Consulting, Talent Acquisition and
Recruitment Services, for which he is responsible for sales, marketing and
product development. From 1993 to 1998, Mr. Hudson led the technology and
staffing solutions components of our HCM Consulting, Talent Acquisition and
Recruitment Services operations. From 1990 until he joined our company, Mr.
Hudson served as director of human resources and director of staffing for Arco
Chemical (a division of Atlantic Richfield).
Roger E. Lipson has served as the Senior Vice President - HCM Consulting,
Retention Services since he joined TalentPoint in 1998. He is also a lead
consultant for a number of TalentPoint's key accounts. Prior to joining our
company, Mr. Lipson was with The Gallup Organization for 14 years, most
recently serving as Vice President.
Raghuveer Sakuru joined TalentPoint in 1996 and has served since that time
as our Senior Vice President - eBusiness Technology Services, with
responsibility for the New England region. Prior to joining our company, he was
a managing principal of Pragma, Inc., a company that he co-founded which
provided ebusiness and information technology consulting and which we acquired
in 1996. Prior to joining our company, since 1991, he has worked as a
consultant for several organizations in the information technology industry.
Mr. Sakuru is married to Anita A. Sakuru, our Executive Vice President -
eBusiness Technology Services.
Thomas J. Connolly joined TalentPoint in 1998 and has served since that time
as our Senior Vice President - eBusiness Technology Services, with
responsibility for the Mid-Atlantic region. From 1994 to 1998, he was president
of Software Support Services, Inc., a company he founded in 1994 which provided
ebusiness and information technology consulting and which we acquired in 1998.
He received his Masters degree in Electrical and Computer Engineering from
Villanova University in 1990.
Shawn M. Sterling joined TalentPoint in 1997. Since 1999, he has served as
our Vice President of Customer Service - TalentPoint Portfolio. From 1997 to
1999, he was responsible for managing our HCM Consulting, Retention Services
business. From 1995 to 1997, Mr. Sterling was vice president of operations with
Human Resource Innovations, Inc., a company which provided employee survey
research and consulting that was acquired by TalentPoint in 1997. From 1991 to
1995, Mr. Sterling was with The Gallup Organization, where he was a project
manager.
Grant R. Coren joined TalentPoint in 1996, establishing the organization's
first European operation, in London, and he has been our Vice President - HCM
Consulting, Talent Acquisition and Recruitment Services since January 2000. His
responsibilities include general management of our Global Pharmaceutical
Practice. From 1993 until 1996, he was managing director of PharmaSearch
Limited, a company he founded which provided executive search services to the
pharmaceutical and healthcare industries on a pan-European basis. Dr. Coren
received his Ph.D. in the Molecular Biology of Cancer Research from Charing
Cross & Westminster Medical School, London.
Lisa A. Butler joined TalentPoint as our Corporate Controller in August
1999. Prior to joining our company, Ms. Butler provided independent accounting
and Securities and Exchange Commission reporting services for privately held
and publicly traded companies from February 1999 to August 1999. From 1995 to
1999, she served as director of finance for Home Health Corporation of America.
From 1987 to 1995, Ms. Butler was an accountant with Coopers & Lybrand, LLP,
the last three years serving as an audit manager. Ms. Butler has been a
Certified Public Accountant since 1989.
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Richard P. Ongirski joined TalentPoint in 1991 and has managed our HCM
Consulting, Deployment and Retention Services business since January 2000. From
1994 to 1999, Mr. Ongirski managed the managed care and healthcare practices in
our HCM Consulting, Talent Acquisition and Recruitment Services business.
Prior to that, Mr. Ongirski was one of our key client relationship managers. He
has had responsibility for managing TalentPoint's largest clients for each of
the past five years (1994 to 1999).
Messrs. Rutherford and Jones, Jr. were appointed to our Board in connection
with our 1999 equity financing. See "Related Party Transactions - Shareholders
Agreement." Upon completion of the offering, we expect to appoint at least one
additional independent director.
Our executive officers are elected by the Board and serve at the discretion
of the Board.
Classified Board of Directors
Upon completion of the offering, our Board will consist of six directors. In
accordance with the terms of our amended and restated charter and bylaws, each
of which will become effective upon the completion of the offering, our Board
of Directors will be divided into three classes that will serve staggered
three-year terms, as follows:
<TABLE>
<CAPTION>
Initial
Class Expiration Member
----- ---------- ------
<S> <C> <C>
Class I............. 2001 Messrs. Karsan and Clark
Class II............ 2002 Messrs. Rutherford and Erickson
Class III........... 2003 Mr. Jones and the new director to be added
</TABLE>
Board Committees
Our Board has established a compensation committee and an audit committee.
The compensation committee consists of Messrs. Rutherford, Clark and
Erickson. The compensation committee reviews and makes recommendations to the
Board regarding the compensation to be provided to our executive officers. The
compensation committee also administers our bonus and other incentive
arrangements, not including the grant of stock options. The 2000 Stock Option
Plan is administered by the full Board.
The audit committee consists of Messrs. Rutherford and Jones, Jr. The audit
committee makes recommendations to the Board regarding the selection of
independent public accountants, reviews the results and scope of the audit and
other services provided by our independent public accountants, and reviews and
evaluates our control functions. Upon completion of the offering, we expect to
appoint an additional independent director to the audit committee.
Our Board of Directors does not have a nominating committee. The selection
of nominees for the Board will be made by the entire Board. The Board may from
time to time establish other committees to facilitate our management.
Compensation Committee Interlocks and Insider Participation
Prior to December 1999, our Board of Directors did not have a compensation
committee, and all compensation decisions relating to our executive officers
were made by the full Board of Directors. Since December 1999, our compensation
committee, which includes Messrs. Clark and Erickson, who are each executive
officers, has made all compensation decisions regarding our executive officers.
None of our directors or executive officers serves as a member of the
compensation committee or other board committee performing equivalent functions
of any other company whose directors or executive officers serve on our
compensation committee.
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Director Compensation
Directors serving on our Board currently are not entitled to receive any
compensation for serving on the Board. Our directors are reimbursed for their
out-of-pocket expenses incurred in connection with their services. Following
the completion of the offering, directors who are not our employees or who are
not otherwise affiliated with us or our principal shareholders will receive
compensation that is commensurate with arrangements offered to directors of
companies that are similar to us. Compensation arrangements for independent
directors established by our Board could be in the form of cash payments and/or
option grants.
Executive Compensation
Summary of Compensation
The following table sets forth the compensation we paid to our Chief
Executive Officer and to each of our four other most highly compensated
executive officers who earned more than $100,000 for services rendered in all
capacities during 1999 and for one individual who would have been one of our
most highly compensated executive officers but for the fact that he was not an
executive officer as of December 31, 1999. These executives are referred to as
the named executive officers elsewhere in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position Year ($) ($) Options (#) ($)(2)
--------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rudy S. Karsan............... 1999 $375,000 $ 94,944 21,750 $2,500
Chief Executive Officer
Bill L. Erickson............. 1999 150,000 102,250 -- 2,500
Executive Vice President -
HCM Consulting, Deployment
and Retention Services and
TalentPoint Portfolio
Elliot H. Clark.............. 1999 160,000 80,000 5,550 2,500
Chief Operating Officer,
Secretary and Treasurer
Troy A. Kanter............... 1999 150,000 102,250 -- 2,500
Executive Vice President -
Sales and Marketing
Anita Sakuru................. 1999 150,000 129,089 31,850 2,500
Executive Vice President -
eBusiness Technology
Barry Raymond(1)............. 1999 325,000 -- -- --
Former President
</TABLE>
---------------------
(1) Mr. Raymond's employment with us terminated in December 1999.
(2) The amounts indicated reflect the value of our contributions for each of
the named executive officers to our 401(k) defined contribution plan.
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Option Grants During Fiscal 1999
The following table sets forth information with respect to stock options
granted to our named executive officers in 1999.
Options Grants in 1999
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------ Gain at Assumed Rates
Number of Percent of of Stock Appreciation
Securities Total for Option Terms
Underlying Options Exercise Compounded
Options Granted to or Base Annually(3)
Granted Employees Price Expiration ----------------------
Name (#)(1) in 1999 ($/Sh)(2) Date 5% 10%
---- ---------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rudy S. Karsan.......... 21,750 5.2% $3.50 01/15/02 $ 11,999 $ 25,197
Bill L. Erickson........ -- -- -- -- -- --
Elliot H. Clark......... 5,550 1.3% 3.50 01/15/02 3,062 6,430
Troy A. Kanter.......... -- -- -- -- -- --
Anita Sakuru............ 31,850 7.6% 3.50 01/15/02 17,571 36,898
Barry Raymond........... -- -- -- -- -- --
</TABLE>
---------------------
(1) All options granted were non-qualified stock options and are exercisable in
whole or in part only on the first three anniversaries of the grant date.
(2) We granted options at an exercise price equal to the fair market value of
our common stock on the date of grant as determined by our Board of
Directors.
(3) Potential realizable values are net of exercise price, but before the
payment of taxes associated with the exercise. Amounts represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. The 5% and 10% assumed annual
rates of compounded stock price appreciation are mandated by the SEC and do
not represent our estimate or projection of our future common stock prices.
These amounts represent assumed rates of appreciation in value of the
common stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance
of our common stock and overall stock market conditions. The amounts
reflected in the table may not necessarily be achieved.
Aggregated Option Exercises in 1999 and Fiscal Year-End Option Values
The following table sets forth certain information regarding options
exercised by our named executive officers in 1999 and options for the purchase
of common stock that were held by the named executive officers at December 31,
1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Options at FY-End (#) Options at FY-End ($)(1)
on Value ---------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable(2) Exercisable Unexercisable
---- ------------ ------------ ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rudy S. Karsan.......... 29,200 $47,146 -- 54,450 --
Bill L. Erickson........ 29,100 46,985 -- 51,850 --
Elliot H. Clark......... 24,850 40,123 -- 45,700 --
Troy A. Kanter.......... 4,250 6,862 -- 6,950 --
Anita Sakuru............ -- -- -- 31,850 --
Barry Raymond........... 29,100 46,985 -- -- -- --
</TABLE>
---------------------
(1) Based on an assumed initial public offering price of $ per share, less the
exercise price, multiplied by the number of shares underlying the option.
(2) Options are exercisable in whole or in part only on the first three
anniversaries of the option grant date.
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Bonus and Severance Arrangements
We have agreed to pay Messrs. Clark, Kanter and Erickson each a bonus in an
amount equal to 1% of our earnings before interest taxes, depreciation and
amortization in 2000, with each to receive a guaranteed minimum bonus of
$75,000. In addition, our Board has authorized Mr. Karsan to award additional
performance bonuses for the year 2000 to our executive officers in an amount
for each executive officer of up to $150,000. The recipient and the amount of
the bonus and the performance criteria for the bonus will be determined in Mr.
Karsan's sole discretion.
We have agreed that in the event we terminate Mr. Volk's employment prior to
the completion of an initial public offering of our common stock, we will
cancel a $240,000 loan payable by Mr. Volk to us as a severance benefit, and we
will pay any taxes payable by him as a result of such cancellation. We have
also agreed to cancel the note and provide this tax benefit in the event Mr.
Volk continues to be an employee until the maturity date of the note, which is
October 17, 2002. See "Related Party Transactions - Loans in Connection with
Stock Purchases."
Employee Benefit Plans
2000 Stock Option Plan
Our 2000 Stock Option Plan is intended to enable us to:
. provide selected directors, executive officers, key employees and
consultants with incentives to maximize shareholder value; and
. attract and retain the best candidates for positions of substantial
responsibility.
This plan provides for the grant of incentive stock options and non-
qualified stock options and is administered by our Board of Directors or a
subcommittee designated by the Board. The persons receiving grants of options
under the plan, the number of shares subject to those options, and the exercise
price, vesting conditions and other terms of those options are determined by
our Board of Directors or its subcommittee.
A grantee of an incentive stock option will not recognize taxable income
upon either the grant or exercise of the incentive stock option. A grantee who
disposes of the shares acquired upon exercise of an incentive stock option
after two years from the date the incentive stock option was granted and after
one year from the date such shares were transferred to him or her upon exercise
of the incentive stock option will recognize long-term capital gain or loss in
the amount of the difference between the amount realized on the sale and the
exercise price. We will not be entitled to any tax deduction by reason of the
grant or exercise of the incentive stock option. A disposition of shares
acquired upon exercise of an incentive stock option before satisfying both
holding period requirements referenced above is known as a "disqualifying
disposition." Generally, the gain recognized on such a disposition will be
taxed as ordinary income to the extent of the difference between the fair
market value of such shares on the date of exercise and the exercise price, and
we will be entitled to a deduction in that amount. The gain, if any, in excess
of the amount recognized as ordinary income on such a disqualifying disposition
will be long-term or short-term capital gain, depending upon the length of time
the grantee held his or her shares prior to the disposition.
There are no federal income tax consequences to a grantee or to us upon the
grant of a nonqualified stock option. Upon the exercise of a nonqualified stock
option, a grantee will recognize ordinary compensation income in an amount
equal to the excess of the fair market value of the shares at the time of
exercise over the exercise price of the nonqualified stock option, and we will
generally be entitled to a corresponding federal income tax deduction. Upon the
sale of shares acquired by the exercise of an nonqualified stock option, a
grantee will have a capital gain or loss, long-term or short-term depending
upon the length of time the shares were held, in an amount equal to the
difference between the amount realized upon the sale and the fair market value
of the shares on the date of exercise.
Unless our Board of Directors or its subcommittee determines otherwise for
nonqualified stock options, no option granted under this plan may be
transferred, except by will or inheritance. All options granted under the plan
will expire no later than 10 years following their date of grant, and no
options may be granted later than
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10 years following the date the plan was adopted. Shares of common stock
subject to an exercisable option may be purchased by the option holder upon
payment of the option exercise price in cash, by check or, in the discretion of
our Board of Directors or its subcommittee, upon delivery of shares of common
stock with a fair market value equal to the option exercise price.
Upon the disposition of more than 50% of our common stock, our liquidation,
a sale of substantially all of our assets or other similar types of
transactions, this plan provides that our Board of Directors or its
subcommittee may, in its discretion, accelerate the vesting of outstanding
options, exchange outstanding options for new options to purchase shares of any
successor company, or cancel outstanding options in exchange for a payment of
the option "spread," the difference between the option exercise price and the
then fair market value of the stock subject to the option. The offering
described in this prospectus will not trigger this discretionary right of our
Board of Directors or its subcommittee.
A total of 2,000,000 shares of common stock have been authorized for
issuance under this plan, none of which are subject to options that have been
granted as of the date of this prospectus. In addition to shares available
under this plan, we have options outstanding to purchase a total of 687,050
shares of common stock that were granted before we adopted this plan. These
options are subject to the same terms and conditions as provided under the 2000
Stock Option Plan.
Limitation of Liability of Directors and Indemnification of Directors and
Officers
Our bylaws provide that none of our directors will be personally liable to
us or our shareholders for monetary damages for any action taken or failure to
take any action, unless:
. such director has breached or failed to perform the duties of his or her
office under Pennsylvania law; and
. the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
In addition, our bylaws provide that we shall indemnify our directors and
officers for expenses, attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding, if he or she met the standard of conduct set
forth under Pennsylvania law, namely that he or she has acted in good faith and
in a manner he or she believed to be in our best interest, or in the case of a
criminal proceeding that he or she had no reasonable cause to believe his or
her conduct was unlawful. Our bylaws also provide that we may advance expenses
to any director or officer upon our receipt of an undertaking by the director
or officer to repay those amounts if it is finally determined that he or she is
not entitled to indemnification.
We maintain directors and officers liability insurance to provide directors
and officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts. At present, there
is no pending litigation or proceeding, and we are not aware of any threatened
litigation or proceeding, involving any director, officer, employee or agent
where indemnification will be required or permitted under our bylaws.
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<PAGE>
RELATED PARTY TRANSACTIONS
Shareholder Loans
In mid-1999 we borrowed $1.1 million from 10 of our shareholders for working
capital purposes including $225,000 from Rudy Karsan, $200,000 from Bill
Erickson and $100,000 from Elliot Clark, each of whom is an executive officer
and a member of our Board of Directors. In return, we issued unsecured term
notes to each of the lenders bearing interest at 15% per annum. The term of the
notes expired on the later of December 1, 1999 or the date on which our payment
of the notes would not result in an event of default under our bank line of
credit. In December 1999, we repaid these notes including accrued interest at
15% per annum.
Redeemable Class B Common Stock Private Placement
In December 1999, we sold 98,948 shares of our redeemable Class B common
stock and warrants to purchase our Class A common stock at a purchase price of
$22.0 million. Of this amount, Parthenon Investors, L.P. and PCIP Investors
purchased 90,699 shares for approximately $19.8 million. Parthenon and PCIP are
affiliated with one another and became affiliates of our Company as a result of
the transaction. See "- Shareholders Agreement and "Principal Shareholders."
Each share of redeemable Class B common stock was convertible, at the option of
the holder, at any time, into 50 shares of Class A common stock, subject to
adjustments to prevent dilution. On June 16, 2000, the holders of our
redeemable Class B common stock agreed to convert 19,208 shares of our
redeemable Class B common stock into 454,653 shares of our Class A common
stock, effective upon the date of filing of the registration statement of which
this prospectus is a part, which occurred on June 23, 2000. They also agreed to
convert an additional 19,208 shares of our redeemable Class B common stock,
effective immediately prior to the completion of the offering, into a number of
shares of our Class A common stock equal to the redemption value of these
redeemable Class B common shares divided by the initial public offering price
per share or, assuming an initial public offering price of $ per share,
shares of our common stock. These holders also agreed to convert the remaining
60,532 shares of our redeemable Class B common stock into 3,026,600 shares of
our Class A common stock effective immediately prior to the completion of the
offering. Accordingly, upon completion of the offering, the investors will own
shares, or % of our outstanding common stock, and there will be no
redeemable Class B common stock outstanding.
Holders of our redeemable Class B common stock were entitled to notice of
any shareholders' meeting and to vote on any matters on which the Class A
common stock may be voted, other than elections of directors. Each share of
redeemable Class B common stock was entitled to a number of votes equal to the
number of shares of Class A common stock into which a share of redeemable Class
B common stock was then convertible. In addition, the approval of the holders
of a majority of the then outstanding redeemable Class B common stock was
required in order for us to effect any changes in the powers, preferences or
rights of the redeemable Class B common stock or to take certain other
specified actions that would adversely affect the rights of the holders of the
redeemable Class B common stock.
In connection with our December 1999 private placement, we issued warrants
to purchase in the aggregate 2,099,400 shares of our Class A common stock at an
average weighted exercise price of $7.56 per share. Of these, warrants to
purchase 116,210 shares have been exercised by investors in our December 1999
private placement and warrants to purchase 495,250 shares owned by investors in
our December 1999 private placement will be cancelled upon completion of the
offering. See "The Reclassifications - Our Warrants."
We have an agreement with the investors in our December 1999 private
placement that in the event we are required to recognize any tax liability as a
result of any of our prior acquisitions or mergers, the investors will be
entitled to either a return of cash in an amount equal to 47% of the total tax
liability required to be recognized by us or a distribution of additional
equity in the form of common stock equal to such amount. Our Board of Directors
will make the determination as to whether any such adjustment will be satisfied
with cash or a distribution of stock.
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Bridge Financing
On June 16, 2000, we entered into a bridge financing in which we issued
promissory notes in the aggregate principal amount of $10.0 million to
Parthenon Investors, L.P. and PCIP Investors for aggregate cash proceeds of
$8.1 million, representing an original initial issue discount of $1.9 million.
In connection with the bridge financing, Parthenon and PCIP also exercised
warrants to purchase an aggregate of 116,210 shares of our Class A common stock
at an aggregate exercise price of $1.9 million.
The bridge notes mature on June 16, 2004 and bear interest at a stated
annual rate of 13% on the principal amounts for the first year and 16%
thereafter. We must pay interest on the bridge notes quarterly. We must pay in
cash at least that portion of the quarterly accrued interest which is
sufficient for the bridge lenders to pay federal and state income taxes on the
accrued interest and original issue discount on the notes, and we must pay the
remaining accrued interest by issuing additional promissory notes in the
principal amount of the remaining interest payable. The bridge notes are
subordinated to our Loan Agreement. We will be required to issue 348,630 shares
of our common stock to the bridge lenders if we do not repay the bridge notes
by June 16, 2001, and we will be required to issue an additional 58,105 shares
for each of the four months thereafter (up to an aggregate of 232,420 shares)
if any amounts remain outstanding under the bridge notes as of the end of each
such month. The bridge notes are prepayable at any time without penalty and
will be prepaid in full with a portion of the net proceeds of the offering.
Until the bridge notes are fully repaid, we are required to obtain the prior
consent of at least one director on our board of directors who has been
nominated by our investors in order to issue or sell any stock, notes or other
securities other than:
. shares of common stock issuable upon the exercise of warrants
outstanding;
. shares of common stock and options to purchase common stock issued to
employees, officers or directors pursuant to options, warrants or rights
outstanding as of June 16, 2000 or pursuant to a plan approved by our
Board of Directors;
. shares of Class A common stock in one or more private placements,
provided that the aggregate number of shares issued, or issuable
pursuant to options or warrants in connection with such private
placements, does not exceed 20% of our outstanding stock;
. notes issued pursuant to our senior credit facility or as provided under
the terms of our stockholders agreement; and
. shares of common stock issued in the reclassifications and this
offering.
Shareholders Agreement
In connection with the private placement of our redeemable Class B common
stock, we entered into a stockholder agreement with the investors in our
redeemable Class B common stock and our other shareholders. In accordance with
this agreement, shareholders holding % of our common stock after the
offering have agreed to vote their shares in favor of two directors designated
by Parthenon Investors, L.P. to our Board of Directors and also have the right
to appoint two directors to the board of directors of TalentPoint Technologies,
Inc., our operating subsidiary. Accordingly, Messrs. Rutherford and Jones, Jr.,
designees of the holders of the Class B common stock, have been elected to our
Board of Directors. This right expires at the time that the investors own less
than 50% of their original investment or two years after an initial public
offering of our common stock, whichever occurs first.
Registration Rights Agreement
In connection with our private placement, we have entered into a
registration rights agreement with the investors in our redeemable Class B
common stock, who will own shares of common stock upon completion of
the offering. Under this registration rights agreement, these investors have
the right, exercisable at any time after six months after the offering, to
demand the registration of their common stock. In addition,
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<PAGE>
each time we propose to register any of our securities under the Securities
Act, whether for our own account or for other shareholders, these investors are
entitled to have their shares of common stock registered by us as well, unless
we are registering our securities on Form S-4 or Form S-8. The registration
rights are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in the
registration by these investors. We must pay expenses related to the
registration and distribution of our shares of common stock held by these
investors under the registration rights agreement.
Redemptions of Stock
On December 16, 1999, we redeemed shares of our Class A common stock from
Barry Raymond, a co-founder, former director and President, for an aggregate
purchase price of $6.9 million, equal to approximately $3.44 per share.
Acquisition of Human Resource Innovations, Inc.
In 1997, we purchased all of the stock of Human Resource Innovations, Inc.,
a company owned by Troy A. Kanter and Bill L. Erickson, two of our executive
officers. In exchange for their stock of Human Resources Innovations, Inc.,
each of Mr. Erickson and Mr. Kanter received 500,000 shares of our Class A
common stock.
Management Agreement
We are a party to a management agreement with Parthenon Capital, Inc., an
affiliate of Parthenon Investors, L.P. Under this agreement, Parthenon Capital,
Inc. provides advisory services to us for an annual management fee of $75,000.
This agreement is for a period of five years, terminating on December 16, 2004,
and does not expire upon completion of the offering. We can terminate the
management agreement prior to its expiration if Parthenon Investors, L.P. holds
securities representing less than 1,335,150 shares of our common stock.
Confidentiality and Non-competition Agreements
All of our executive officers have executed agreements which preclude them
from disclosing any confidential and proprietary information or trade secrets
during the term of their employment and at any time thereafter. In addition,
these agreements prohibit our executive officers from soliciting our customers
or competing with our business for periods ranging from one to two years after
he or she is no longer employed by us.
Loans in Connection With Stock Purchases
Stock Purchase by Elliot H. Clark. In January 2000, Mr. Clark executed a
promissory note in favor of us for approximately $63,000 as partial
consideration for his purchase of 40,150 shares of our Class A common stock
pursuant to his exercise of stock options. The promissory note is full
recourse, has a term of three years, provides for annual payments of
approximately $21,000, carries no interest and is secured, pursuant to a
security agreement, by all of our capital stock held or thereafter acquired by
him. Upon a default under the note, the unpaid portion of the note will become
immediately due and payable together with interest from the original date of
the note at 15% per annum.
Stock Purchase by Bill L Erickson. In January 2000, Mr. Erickson executed a
promissory note in favor of us for approximately $108,000 as consideration for
his purchase of 51,850 shares of our Class A common stock pursuant to his
exercise of stock options. The promissory note is full recourse, has a term of
four years, provides for annual payments of approximately $27,000, carries no
interest and is secured, pursuant to a security agreement, by all of our
capital stock held or thereafter acquired by him. Upon a default under the
note, the unpaid portion of the note will become immediately due and payable
together with interest from the original date of the note at 15% per annum.
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Stock Purchase by Rudy S. Karsan. In January 2000, Mr. Karsan executed a
promissory note in favor of us for approximately $68,000 as consideration for
his purchase of 32,700 shares of our Class A common stock pursuant to his
exercise of stock options. The promissory note is full recourse, has a term of
four years, provides for annual payments of approximately $17,000, carries no
interest and is secured, pursuant to a security agreement, by all of our
capital stock held or thereafter acquired by him. Upon a default under the
note, the unpaid portion of the note will become immediately due and payable
together with interest from the original date of the note at 15% per annum.
Stock Purchase by P. Grant Parker. In January 1997, Mr. Parker executed a
promissory note in favor of us for approximately $75,000 as partial
consideration for his purchase of shares of stock in one of the companies under
which we previously did business pursuant to his exercise of stock options. The
promissory note was full recourse had a term of three years, provided for
annual payments of approximately $25,000, carried no interest and was not
secured. Mr. Parker paid this note in full, without interest, in January 2000.
Stock Purchase by Donald F. Volk. In October 1997, Mr. Volk executed a
promissory note in favor of us for approximately $240,000 as consideration for
his purchase of shares of common stock in one of the companies under which we
previously did business. The promissory note is full recourse, has a term of
five years, carries no interest and is secured, pursuant to a security
agreement, by all of our capital stock held or thereafter acquired by Mr. Volk.
Upon a default under the note, the unpaid portion of the note will become
immediately due and payable, together with interest from the original date of
the note at 15% per annum. We have agreed that in the event we terminate Mr.
Volk's employment without cause prior to the completion of an initial public
offering of our common stock, we will cancel the note and pay any taxes payable
by Mr. Volk as a result of such cancellation. We have also agreed to cancel the
note and provide this tax benefit in the event Mr. Volk continues to be an
employee until the maturity date of the note, which is October 17, 2002.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock by:
. each of our named executive officers;
. each of our directors;
. all of our directors and executive officers as a group; and
. each other person known to us to own beneficially more than 5% of our
outstanding shares.
Unless otherwise noted below, the address of each shareholder in the table
is 170 South Warner Road, Philadelphia, PA 19087 and, to our knowledge, each
person has sole voting and investment power over the shares shown as
beneficially owned except to the extent authority is shared by spouses under
applicable law. The information presented in the table assumes that the
reclassifications described in "The Reclassifications" have occurred, excluding
the conversion of 19,208 shares of our redeemable Class B common stock into
Class A common stock that will occur immediately prior to completion of the
offering.
<TABLE>
<CAPTION>
Percent Beneficially Owned
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Parthenon Investors,
L.P.(1).................... 3,860,531 33.6% %
Parthenon Investment
Advisors, LLC(1)(2)........ 3,860,531 33.6% %
Parthenon Investment
Partners, LLC(1)(3)........ 3,860,531 33.6% %
Parthenon Capital,
Inc.(1)(4)................. 3,860,531 33.6% %
Rudy Karsan(5).............. 2,220,800 20.2% %
Bill L. Erickson(6)......... 621,550 5.7% %
Elliot H. Clark(7).......... 702,200 6.5% %
Troy A. Kanter(8)........... 549,900 5.1% %
Anita Sakuru(9)............. 60,050 * %
P. Grant Parker(10)......... 769,700 7.1% %
Barry Raymond............... -- -- --
John C. Rutherford(11)...... 3,942,051 34.2% %
Archie L. Jones............. -- * *
Executive officers and
directors as a group (9
persons)(12)............... 8,949,551 75.4% %
</TABLE>
---------------------
* Less than one percent
(1) Located at 200 State Street, 8th Floor, Boston, Massachusetts 02109.
Includes 676,848 shares issuable upon exercise of warrants. Does not
include shares issuable upon the conversion of 17,872 shares of our
redeemable Class B common stock upon completion of the offering.
(2) Consists of shares held by Parthenon Investors, L.P., of which Parthenon
Investment Advisors, LLC is the general partner and may be deemed thereby
to beneficially own the shares.
(3) Consists of shares held by Parthenon Investors, L.P., of which Parthenon
Investment Partners, LLC is the managing member of Parthenon Investment
Advisors, LLC, the general partner of Parthenon Investors, L.P. and may be
deemed thereby to beneficially own the shares.
(4) Consists of shares held by Parthenon Investors, L.P., which by contractual
agreement with Parthenon Capital, Inc. may be deemed to beneficially own
the shares.
(5) Includes 155,950 shares issuable upon exercise of warrants.
(6) Includes 40,600 shares issuable upon exercise of warrants and 50,000
shares held by a revocable trust of which Mr. Erickson is a co-trustee.
(7) Includes 47,200 shares issuable upon exercise of warrants.
(8) Includes 38,700 shares issuable upon exercise of warrants and 50,000
shares held by a revocable trust of which Mr. Kanter is a co-trustee.
(9) Includes 4,300 shares issuable upon exercise of warrants.
(10) Includes 54,850 shares issuable upon exercise of warrants.
(11) Consists of 3,860,531 shares beneficially owned by Parthenon Investors,
L.P., Parthenon Investment Advisors, LLC, Parthenon Investment Partners,
LLC and Parthenon Capital, Inc. (collectively, the "Parthenon Entities")
and 81,250 shares beneficially owned by PCIP Investors. Does not include
shares issuable upon the conversion of 18,082 shares of our redeemable
Class B common stock upon completion of the offering. Mr. Rutherford is a
principal member of Parthenon Investment Partners, LLC and a Managing
Director of Parthenon Capital, Inc. and may be deemed to beneficially own
the shares held of record by the Parthenon Entities. In addition, Mr.
Rutherford is a General Partner of PCIP Investors and may be deemed to
beneficially own the shares held of record by PCIP Investors. Mr.
Rutherford disclaims beneficial ownership of all shares held by the
Parthenon Entities and all of the shares held by PCIP Investors, except to
the extent of his pecuniary interest in the shares held by PCIP Investors.
(12) Includes 1,036,590 shares issuable upon exercise of warrants.
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DESCRIPTION OF CAPITAL STOCK
General
Our amended and restated articles of incorporation authorize the issuance of
up to 100,000,000 shares of common stock, par value $0.01 per share and 100,000
shares of preferred stock, par value $0.01 per share, the rights and
preferences of which may be established from time to time by our Board of
Directors. As of June 16, 2000, there were 7,348,660 shares of Class A common
stock outstanding held by 45 shareholders, and 98,948 shares of redeemable
Class B common stock outstanding held by five shareholders. Prior to the
completion of the offering, all of the outstanding shares of redeemable Class B
common stock will be converted into shares of Class A common stock and
all of our Class A common stock will be reclassified into shares of common
stock. Accordingly, upon completion of the offering, we will have
shares of common stock issued and outstanding and no shares of Class A common
stock, redeemable Class B common stock or preferred stock will be issued or
outstanding.
The following is qualified in its entirety by reference to our charter and
our bylaws, copies of which are included as exhibits to the registration
statement of which this prospectus is a part, and by the provisions of
applicable law.
Common Stock
Holders of common stock are entitled to one vote for each share for the
election of directors and on all other matters submitted to a vote of
shareholders, and do not have cumulative voting rights in the election of
directors. Whenever corporate action is to be taken by vote of the
shareholders, it generally becomes authorized upon receiving the affirmative
vote of a majority of the votes cast by all shareholders entitled to vote on
the matter, although certain matters will require approval by the affirmative
vote of the holders of at least 80% of the voting power of all of our
outstanding capital stock. Holders of common stock are entitled to receive, as,
when and if declared by the Board of Directors from time to time, such
dividends and other distributions in cash, stock or property from our assets or
funds legally available for such purposes.
No liquidation rights or sinking fund provisions apply to our common stock.
All outstanding shares of common stock are fully paid and non-assessable. In
the event of our liquidation, dissolution or winding up, holders of our common
stock are entitled to share ratably in the assets available for distribution.
Preferred Stock
Our Board of Directors has the authority, without action by our
shareholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of our common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the Board of Directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in our control without further action by
the common stockholders.
Upon the completion of the offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
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Anti-Takeover Effects of Provisions of Our Charter, Our Bylaws and Pennsylvania
Law
Our amended and restated charter and restated bylaws as well as laws of the
Commonwealth of Pennsylvania contain various provisions intended to promote
stability of our shareholder base and render more difficult certain unsolicited
or hostile attempts to take us over which could disrupt us, divert the
attention of our directors, executive officers and employees and adversely
affect the independence and integrity of our business. A summary of these
provisions of our charter, bylaws and Pennsylvania law is set forth below.
Classified Board; Removal of Directors. Pursuant to our charter, the number
of directors on our Board of Directors will be one or more as determined by a
majority vote of our Board of Directors. The directors will be divided into
three classes, each class to consist as nearly as possible of one-third of the
directors. Directors elected by our shareholders at an annual meeting of
shareholders will be elected by a plurality of all votes cast at such annual
meeting. Initially, the terms of office of the three classes of directors will
expire, respectively, at the annual meeting of shareholders in 2001, 2002 and
2003. After the expiration of the terms of the initial classified Board of
Directors, the terms of the successors of each of the three classes of
directors will expire three years from the year of their respective election.
See "Management - Classified Board of Directors."
Our bylaws provide that except as otherwise provided for or fixed by or
pursuant to an amendment to the bylaws setting forth the rights of the holders
of any class or series of preferred stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on our
Board of Directors resulting from death, resignation, disqualification, removal
or other cause will be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the
Board, or by a sole remaining director. Any director elected in accordance with
the preceding sentence will hold office for the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been duly elected and qualified. No
decrease in the number of directors constituting our Board of Directors will
shorten the term of any incumbent director. Subject to the rights of holders of
any preferred stock, any director may be removed from office only for cause by
the affirmative vote of the holders of at least 80% of the voting power of all
of our outstanding capital stock entitled to vote generally in the election of
directors, voting together as a single class.
These provisions of our bylaws would preclude a third party from removing
incumbent directors and simultaneously gaining control of our Board of
Directors by filling the vacancies created by removal with its own nominees.
Under the classified board provisions described above, it would take at least
two elections of directors for any individual or group to gain control of our
Board of Directors. Accordingly, these provisions could discourage a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of us.
Special Shareholders' Meetings and Right to Act by Written Consent. Our
charter provides that a special meeting of shareholders may be called only by
the Chairman of our Board or our Chief Executive Officer or upon a resolution
adopted by a majority of our entire Board of Directors. Our shareholders are
not permitted to call, or to require that the Board of Directors call, a
special meeting of shareholders pursuant to the terms of our bylaws. Moreover,
the business permitted to be conducted at any special meeting of shareholders
is limited to the business brought before the meeting pursuant to the notice of
the meeting given by us. Our bylaws provide that any action of shareholders may
be taken only at a meeting of the shareholders or a class of shareholders and
may not be taken without a meeting through the execution of a consent or
consents thereto by the shareholders.
Procedures for Shareholder Nominations and Proposals. Our bylaws establish
an advance notice procedure for shareholders to nominate candidates for
election as directors and to propose any new business at any annual meeting.
With respect to shareholder nominations and proposals, only persons nominated
in accordance with this procedure are eligible to serve as directors, and only
business brought before the annual meeting in accordance with this procedure
may be conducted at the annual meeting. Under this procedure, notice of
shareholder nominations and proposals for new business at the annual meeting
must be received by
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our secretary not later than 60 days nor earlier than 90 days before the first
anniversary of the previous year's annual meeting; provided, however, that if
the annual meeting date is more than 30 days before or more than 60 days after
the anniversary date, notice must be received no more than 90 days before or 60
days after the annual meeting date, or the 15th day following the day on which
we first publicly announced the special meeting. For nominations and proposals
for any special meetings, our bylaws require notice not more than 90 days nor
less than 60 days before the special meeting or the 15th day following the day
on which we first publicly announced the special meeting. Our bylaws provide
that notice to our secretary with respect to any shareholder nomination or
proposal must include certain information regarding the nominee, the proposal
and the shareholder nominating a director or proposing business.
By requiring advance notice of nominations by our shareholders, this
procedure will afford our Board of Directors an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by our Board of Directors, to inform shareholders about such
qualifications. By requiring advance notice of other proposed business, we
believe this shareholder notice procedure will provide a more orderly procedure
for conducting annual meetings of our shareholders and, to the extent deemed
necessary or desirable by our Board of Directors, will provide our Board of
Directors with an opportunity to inform our shareholders, prior to such
meetings, of the Board of Directors' position regarding action to be taken with
respect to such business, so that our shareholders can better decide whether to
attend such a meeting or to grant a proxy regarding the disposition of any such
business.
Although our bylaws do not give the Board of Directors any power to approve
or disapprove shareholder nominations for the election of directors or
proposals for action, our Chairman of the Board has the power to determine
compliance with the shareholder notice procedure described above. Our bylaws
may have the effect of precluding a contest for the election of directors or
the consideration of shareholder proposals if the proper procedures are not
followed, and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to us and our shareholders.
Amendment of Our Charter and Bylaws. Unless previously approved by our Board
of Directors, the affirmative vote of at least 80% of the voting power of all
of our outstanding capital stock entitled to vote generally in the election of
directors, voting together as a single class, would be required to:
. amend or repeal the provisions of our charter or bylaws with respect to
the election and removal of directors, the right to call a special
shareholders' meeting or the right of shareholders to vote by written
consent;
. adopt any provision inconsistent with such provisions; and
. amend or repeal the provisions of our charter with respect to amendments
to our charter or our bylaws.
In addition, our bylaws provide that the amendment or repeal by our
shareholders of any bylaws made by our Board of Directors would require the
affirmative vote of at least 80% of the voting power of all of our outstanding
capital stock entitled to vote generally in the election of directors.
Pennsylvania Anti-Takeover Law. Pennsylvania law contains the following of
statutory "anti-takeover" provisions applicable to us.
Subchapter F of the Pennsylvania Business Corporation Law generally
prohibits a "business combination" with a shareholder or group of shareholders
(and affiliates and associates of such shareholders) who beneficially own(s) at
least 20% of the voting power of a public corporation (an "interested
shareholder") for a five-year period following the date on which the holder
became an interested shareholder unless this business combination or the
acquisition by the shareholder or group of shareholders of at least 20% of the
voting power of the corporation is approved in advance by our Board of
Directors or approved by a majority of those
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shareholders who are not an interested shareholder nor affiliates or associates
thereof. This provision may discourage open market purchases of our stock or a
non-negotiated tender or exchange offer for our stock and, accordingly, may be
considered disadvantageous by a shareholder who would desire to participate in
any such transaction.
Under Section 1715 of the Pennsylvania Business Corporation Law, our
directors are not required to regard the interests of any particular group,
including those of the shareholders, as being dominant or controlling in
considering our best interests. The directors may consider, to the extent they
deem appropriate, such factors as:
. the effects of any action upon any group affected by such action,
including our shareholders, employees, suppliers, customers and
creditors, and communities in which we have offices or other
establishments;
. our short-term and long-term interests, including benefits that may
accrue to us from our long-term plans and the possibility that these
interests may be best served by our continued independence;
. the resources, intent and conduct of any person seeking to acquire
control of us; and
. all other pertinent factors.
Section 1715 further provides that any act of our Board of Directors, a
committee of the Board or an individual director relating to or affecting an
acquisition or potential or proposed acquisition of control to which a majority
of our disinterested directors have assented will be presumed to satisfy the
standard of care set forth in the Pennsylvania Business Corporation Law, unless
it is proven by clear and convincing evidence that our disinterested directors
did not consent to such act in good faith after reasonable investigation. As a
result of this and the other provisions of Section 1715, our directors are
provided with broad discretion with respect to actions that may be taken in
response to acquisitions or proposed acquisitions of corporate control.
Section 1715 may discourage open market purchases of our common stock or a
non-negotiated tender or exchange offer for our common stock and, accordingly,
may be considered disadvantageous by a shareholder who would desire to
participate in any such transaction. As a result, Section 1715 may have a
depressive effect on the price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is StockTrans, Inc.
StockTrans, Inc. is located at 7 East Lancaster Avenue, Ardmore, Pennsylvania
19003 and its phone number is (610) 649-7300.
Listing
We will apply to list the shares of our common stock on The Nasdaq Stock
Market's National Market under the symbol "TPNT."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common stock.
Based on the number of shares outstanding on June 16, 2000, upon completion of
the offering we will have outstanding an aggregate of shares of our
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, all of the
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act, unless such shares are purchased
by our "affiliates" as that term is defined in Rule 144 under the Securities
Act. The remaining shares of common stock that are held by
existing shareholders will be "restricted securities" as that term is defined
in Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration, such as Rule 144 promulgated under the Securities Act, which is
summarized below.
Shares of our common stock will be available for sale in the public market
as follows:
. 687,050 shares issuable upon exercise of outstanding options will be
eligible for sale, subject to vesting, following the effectiveness of a
registration statement on Form S-8 covering these shares, which we
expect to file shortly after the completion of the offering. Of these
shares, shares are held by optionholders who have signed a lock-up
agreement with the underwriters and, as a result, those shares will not
be eligible for sale until the expiration of the 180-day lock-up period.
. 1,487,940 shares issuable upon exercise of outstanding warrants will be
eligible for sale from time to time subject to lock-up agreements with
the underwriters and the volume and manner-of-sale requirements of Rule
144.
. 7,232,450 outstanding shares held by directors, executive officers and
employee shareholders will be eligible for sale, subject to lock-up
agreements with the underwriters and the volume and manner-of-sale
requirements of Rule 144.
. 3,597,463 shares that will be outstanding and held by our investors and
an additional shares that will be issued upon the conversion of
19,208 shares of our redeemable Class B common stock held by our
investors will become eligible for sale, subject to lock-up agreements
with the underwriters and the volume and manner-of-sale requirements of
Rule 144.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this registration statement, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of any prior owner since they were last held by us or one of our affiliates
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after the offering; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 of the sale with the SEC.
Sales under Rule 144 may also be subject to manner-of-sale provisions and
notice requirements, and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates 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,
including the holding period of any prior owner since they were last held by us
or one of our affiliates, is
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entitled to sell his or her shares without complying with the manner-of-sale,
public information, volume limitation or notice provisions of Rule 144.
Registration Rights
We entered into a registration rights agreement with investors in our
redeemable Class B common stock pursuant to which we granted to each of them
"demand" and "piggy-back" registration rights. Under this registration rights
agreement, these investors, who will, upon completion of the offering, own
shares of our outstanding common stock and warrants to purchase
shares of our common stock, have the right, exercisable at any time after six
months after the offering, to demand the registration of their common stock at
our expense. See "Related Party Transactions - Registration Rights."
Stock Options
As soon as practicable after completion of the offering, we plan to file a
registration statement on Form S-8 under the Securities Act covering the
2,000,000 shares of common stock reserved for issuance under our stock option
plan as well as the 687,050 shares of common stock subject to options
outstanding as of June 16, 2000. Accordingly, shares registered on the Form S-8
will, subject to lock-up agreements, vesting provisions and Rule 144 volume
limitations applicable to our affiliates, be available for sale into the public
market immediately after such registration statement becomes effective.
Warrants
As of June 16, 2000, warrants to purchase 1,487,940 shares of our common
stock were exercisable, all of which are subject to lock-up agreements with the
underwriters.
Market Price
We cannot estimate the number of shares that may be sold in the future by
our shareholders or the effect that sales of shares by our shareholders will
have on the market price of our common stock. Sales of substantial amounts of
our common stock, or the prospect of these sales, could have a material adverse
effect on the market price of our common stock and make it more difficult for
us to sell equity or equity related securities in the future at a time and
price that we deem appropriate.
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MATERIAL U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by a non-U.S. holder. As used in this discussion, the term "non-
U.S. holder" means a beneficial owner of our common stock that is not, for U.S.
federal income tax purposes:
. an individual who is a citizen or resident of the United States;
. a corporation or partnership created or organized in or under the laws
of the United States or of any political subdivision of the United
States, other than a partnership treated as foreign under U.S. Treasury
regulations;
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust, in general, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the
trust.
An individual may be treated as a resident of the United States in any
calendar year for U.S. federal income tax purposes, instead of a nonresident,
by, among other ways, being present in the United States on at least 31 days in
that calendar year and for an aggregate of at least 183 days during a three-
year period ending in the current calendar year. For purposes of this
calculation, you would count all of the days present in the current year, one-
third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Residents are taxed for U.S.
federal income purposes as if they were U.S. citizens.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences;
. specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership that the U.S. tax consequences of holding and disposing of
our common stock may be affected by certain determinations made at the
partner level;
. the tax consequences for the shareholders, partners or beneficiaries of
a non-U.S. holder;
. special tax rules that may apply to particular non-U.S. holders, such as
financial institutions, insurance companies, tax-exempt organizations,
U.S. expatriates, broker-dealers, and traders in securities; or
. special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," "conversion transaction,"
"synthetic security" or other integrated investment.
The following discussion is based on provisions of the U.S. Internal Revenue
Code of 1986, as amended, applicable U.S. Treasury regulations and
administrative and judicial interpretations, all as in effect on the date of
this prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes that a non-U.S. holder holds our
common stock as a capital asset. Each non-U.S. holder should consult a tax
advisor regarding the U.S. federal, state, local and non-U.S. income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
Dividends
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that we pay
dividends on our common stock, we will have to withhold a U.S. federal
withholding tax at a rate of 30%, or a lower rate under an applicable income
tax treaty, from the gross
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amount of the dividends paid to a non-U.S. holder. Non-U.S. holders should
consult their tax advisors regarding their entitlement to benefits under a
relevant income tax treaty.
Dividends that effectively are connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are taxed on a
net income basis at the regular graduated rates and in the manner applicable to
U.S. persons. In that case, we will not have to withhold U.S. federal
withholding tax if the non-U.S. holder complies with applicable certification
and disclosure requirements. In addition, a "branch profits tax" may be imposed
at a 30% rate, or a lower rate under an applicable income tax treaty, on
dividends received by a foreign corporation that are effectively connected with
the conduct of a trade or business in the United States.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes
of determining the applicability of a tax treaty rate. For dividends paid after
2000:
. a non-U.S. holder who claims the benefit of an applicable income tax
treaty rate generally will be required to satisfy applicable
certification and other requirements;
. in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number; and
. look-through rules will apply for tiered partnerships.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
Gain on disposition of common stock
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our common stock unless:
. the gain effectively is connected with the non-U.S. holder's conduct of
a trade or business in the United States or, alternatively, if an income
tax treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States; in these cases,
the gain will be taxed on a net income basis at the regular graduated
rates and in the manner applicable to U.S. persons and, if the non-U.S.
holder is a foreign corporation, the "branch profits tax" described
above may also apply;
. the non-U.S. holder is an individual who holds our common stock as a
capital asset, is present in the United States for more than 182 days in
the taxable year of the disposition and meets other requirements; or
. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the five-
year period ending on the date of disposition or the period that the
non-U.S. holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade or business.
The tax relating to stock in a U.S. real property holding corporation generally
will not apply to a non-U.S. holder whose holdings, direct and indirect, at all
times during the applicable period, constituted 5% or less of our common stock,
provided that our common stock was regularly traded on an established
securities market. We believe that we are not currently, and we do not
anticipate becoming in the future, a U.S. real property holding corporation.
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Federal estate tax
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
Information reporting and backup withholding tax
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to that holder and the tax
withheld from those dividends. Copies of the information returns reporting
those dividends and withholding may also be made available to the tax
authorities in the country in which the non-U.S. holder is a resident under the
provisions of an applicable income tax treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional
information reporting and backup withholding at a rate of 31% on some payments
on common stock. Under currently applicable law, non-U.S. holders generally
will be exempt from these additional information reporting requirements and
from backup withholding on dividends paid prior to 2001 if we either were
required to withhold a U.S. federal withholding tax from those dividends or we
paid those dividends to an address outside the United States. After 2000,
however, the gross amount of dividends paid to a non-U.S. holder that fails to
certify its non-U.S. holder status in accordance with applicable U.S. Treasury
regulations generally will be reduced by backup withholding at a rate of 31%.
The payment of the proceeds from the disposition of common stock by a non-
U.S. holder to or through the U.S. office of a broker or a non-U.S. office of a
U.S. broker generally will be reported to the U.S. Internal Revenue Service and
reduced by backup withholding at a rate of 31% unless the non-U.S. holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption and the broker has no actual knowledge to
the contrary. The payment of the proceeds from the disposition of common stock
by a non-U.S. holder to or through a non-U.S. office of a non-U.S. broker will
not be reduced by backup withholding or reported to the U.S. Internal Revenue
Service unless the non-U.S. broker is a "U.S. related person." In general, the
payment of proceeds from the disposition of common stock by or through a non-
U.S. office of a broker that is a U.S. person or a "U.S. related person" will
be reported to the U.S. Internal Revenue Service and, after 2000, may be
reduced by backup withholding at a rate of 31%, unless the broker receives a
statement from the non-U.S. holder, signed under penalty of perjury, certifying
its non-U.S. status or the broker has documentary evidence in its files that
the holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business; or
. effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (B) the partnership is engaged
in a U.S. trade or business.
Non-U.S. holders should consult their own tax advisors regarding the
application of the information reporting and backup withholding rules to them,
including changes to these rules that will become effective after 2000. Any
amounts withheld under the backup withholding rules from a payment to a non-
U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the U.S. Internal Revenue Service.
79
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation and Robert W. Baird &
Co. Incorporated are acting as representatives the following respective numbers
of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation...........................
Robert W. Baird & Co. Incorporated...............................
-----
Total..........................................................
=====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price per
share less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions
paid by us ............ $ $ $ $
Expenses payable by us
....................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days
after the date of this prospectus, except issuances pursuant to the exercise of
employee stock options outstanding on the date hereof.
Our executive officers, directors and shareholders have agreed that they
will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any such
aforementioned
80
<PAGE>
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price per share up to shares of the common stock for employees, directors
and certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We will apply to list the shares of common stock on the Nasdaq Stock
Market's National Market, under the symbol "TPNT."
Prior to the offering, there was no established public trading market for
our common stock. The initial public offering price per share for our common
stock will be determined by negotiation between Credit Suisse First Boston
Corporation, the representatives and us. The primary factors to be considered
in determining the initial public offering price per share include:
. the history of and the prospects of the industry in which we compete;
. the ability of our management;
. our past and present operations;
. our prospects for future earnings;
. the general condition of the securities markets at the time of the
offering; and
. the recent market prices of securities of generally comparable
companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934 (the "Exchange Act").
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
81
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
82
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Pepper Hamilton LLP. Some legal matters related to the offering
will be passed upon for the underwriters by McDermott, Will & Emery.
EXPERTS
The financial statements as of December 31, 1999 and for the year then ended
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of International Holding Company, Inc. and
Insurance Services, Inc. and Subsidiaries as of December 31, 1998 and for each
of the two 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 herein (which report expresses an unqualified
opinion and includes an explanatory paragraph referring to substantial doubt
about our ability to continue as a going concern), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
CHANGE IN PRINCIPAL ACCOUNTANTS
In February 2000, our Board of Directors elected to engage
PricewaterhouseCoopers LLP as independent accountants to audit our consolidated
financial statements for the year ending December 31, 1999. Our Board of
Directors approved, effective January 2000 the replacement of Deloitte & Touche
LLP, which had previously served as our independent auditors and had completed
its audit of our financial statements for the year ended December 31, 1998. The
report of Deloitte & Touche LLP on our financial statements for the year ended
December 31, 1998 contained an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern. There were no
disagreements on any matter of accounting principals or practices, financial
statement disclosure, or auditing scope or procedure between us and Deloitte &
Touche LLP during the two most recent fiscal years or during the year-to-date
period ended December 31, 1999, which if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused it to make reference to the subject
matter of the disagreements in connection with their report. There did not
occur during the year ended December 1998 or any subsequent interim period
prior to December 1999, any "reportable events" between us and Deloitte &
Touche LLP within the meaning of Item 304(a)(1)(v) of Regulation S-K
promulgated by the SEC.
83
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-l under the
Securities Act with respect to the common stock offered in the offering. As
permitted by the SEC's rules, this prospectus does not contain all the
information set forth in the registration statement and the exhibits to the
registration statement. For further information about us or our common stock,
you should refer to the registration statement and to the financial statements,
schedules and exhibits filed as a part of the registration statement. While
statements contained in this prospectus concerning the contents of any
contract, agreement or other document filed with the registration statement as
exhibits are necessarily summaries of the material provisions of such
documents, all material information has been presented in this prospectus.
However, each statement is qualified in its entirety by reference to the copy
of the applicable document filed as an exhibit to the registration statement.
Upon completion of the offering, we will be subject to the information
requirements of the Securities Exchange Act of 1934, and will file reports,
proxy statements and other information with the SEC. You may read and copy all
or any portion of the registration statement, the exhibits and schedules
forming a part of the registration statement, and the reports, proxy statements
and other information filed by us with the SEC at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional SEC office located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information
regarding the operation of the public reference rooms by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet web site at
http://www.sec.gov that contains reports, proxy statements and other
information, including those we file.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants.............. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Report of Deloitte & Touche LLP, Independent Auditors...................... F-25
Combined Balance Sheet..................................................... F-26
Combined Statements of Operations.......................................... F-27
Combined Statements of Shareholders' Equity................................ F-28
Combined Statements of Cash Flows.......................................... F-29
Notes to Combined Financial Statements..................................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders of
TalentPoint, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' deficit and cash flows
present fairly, in all material respects, the financial position of
TalentPoint, Inc. and its subsidiaries (the "Company") at December 31, 1999,
and the results of their operations and their cash flows for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
March 21, 2000, except for paragraph 1 of Note 10,
for which the date is June 6, 2000
Philadelphia, Pennsylvania
F-2
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 6,340,852 $ 940,937
Accounts receivable, net of allowance for
doubtful accounts of $758,705 and
$1,276,639, respectively.................... 11,480,381 11,000,440
Employee advances............................ 417,611 253,350
Deferred income taxes........................ 122,591 122,591
Prepaid expenses and other current assets.... 287,545 564,804
------------ ------------
Total current assets....................... 18,648,980 12,882,122
------------ ------------
Property and equipment, net of accumulated
depreciation.................................. 4,048,141 4,282,576
Intangibles, net of accumulated amortization... 6,515,981 8,783,836
Other assets................................... 558,011 618,936
------------ ------------
Total assets............................... $ 29,771,113 $ 26,567,470
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 1,386,652 $ 1,086,338
Line of credit............................... 6,908,000 5,408,000
Current portion of notes payable............. 1,799,694 967,572
Commissions payable.......................... 1,419,177 1,052,518
Other accrued liabilities.................... 2,324,339 931,490
Accrued compensation and benefits............ 1,906,296 1,783,567
Unearned revenue............................. 1,830,170 1,552,183
Capital lease obligations.................... 765,273 749,557
------------ ------------
Total current liabilities.................. 18,339,601 13,531,225
------------ ------------
Capital lease obligation, less current
portion....................................... 272,172 272,172
Notes payable, less current portion............ 2,788,672 2,774,301
Income taxes payable, noncurrent............... 1,294,121 1,294,121
Other liabilities.............................. 493,848 498,377
Commitments and contingencies
Redeemable Class B common stock, stated at
redemption value.............................. 32,484,837 33,711,753
Redeemable warrants............................ 2,385,061 2,565,584
Shareholders' deficit:
Preferred stock, par value $0.01; authorized
100,000 shares; no shares issued or
outstanding................................. -- --
Class A common stock, $0.01 par value;
authorized 100,000,000 shares; issued
8,601,350 and 9,379,450, respectively;
outstanding 6,454,350 and 7,232,450,
respectively................................ 86,014 93,795
Additional paid-in capital................... -- 1,262,933
Accumulated deficit.......................... (20,131,996) (20,366,842)
Treasury stock, 2,147,000 and no shares,
stated at cost.............................. (7,385,535) (7,385,535)
Notes due on common stock.................... (855,682) (1,684,414)
------------ ------------
Total shareholders' deficit................ (28,287,199) (28,080,063)
------------ ------------
Total liabilities and shareholders'
deficit................................... $ 29,771,113 $ 26,567,470
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended -----------------------
December 31, March 31, March 31,
1999 1999 2000
------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues............................... $ 51,910,673 $13,300,919 $11,106,476
Costs of revenues...................... 17,247,243 5,020,790 2,899,201
------------ ----------- -----------
Gross profit..................... 34,663,430 8,280,129 8,207,275
Operating expenses:
Compensation and benefits............ 21,204,322 5,480,617 5,459,224
Other selling, general and
administrative...................... 6,983,644 1,541,633 2,110,188
Depreciation and amortization........ 1,625,105 407,432 507,467
------------ ----------- -----------
Total operating expenses......... 29,813,071 7,429,682 8,076,879
------------ ----------- -----------
Operating income (loss)................ 4,850,359 850,447 130,396
Net interest expense................... 2,216,689 511,905 236,270
Market value adjustment to redeemable
warrants.............................. 69,335 -- 180,523
------------ ----------- -----------
Income (loss) before income taxes and
extraordinary item.................... 2,564,335 338,542 (286,397)
Income tax provision (benefit)......... 1,792,832 -- (51,551)
------------ ----------- -----------
Income (loss) before extraordinary
item.................................. 771,503 338,542 (234,846)
Extraordinary item:
Loss on disposal of business, net of
income tax benefit of $0............ (516,864) -- --
------------ ----------- -----------
Net income (loss)...................... 254,639 338,542 (234,846)
Accretion of redeemable Class B common
stock to redemption value............. (15,546,479) -- (786,916)
Accrued dividends on redeemable Class B
common stock.......................... (73,333) -- (440,000)
------------ ----------- -----------
Net income (loss) available to
Class A common shareholders..... $(15,365,173) $ 338,542 $(1,461,762)
============ =========== ===========
Earnings (loss) per common share:
Basic:
Earnings (loss) per share.......... $ (1.60) $ 0.03 $ (0.22)
============ =========== ===========
Weighted average shares
outstanding....................... 9,587,015 10,745,468 6,679,764
============ =========== ===========
Diluted:
Earnings per share................. $ (1.60) $ 0.03 $ (0.22)
============ =========== ===========
Weighted average shares
outstanding....................... 9,587,015 10,854,179 6,679,764
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TALENTPOINT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
For the year ended December 31, 1999 and the three months ended March 31, 2000
(unaudited)
<TABLE>
<CAPTION>
International Holding
TalentPoint, Inc. Company, Inc. Insurance Services,
Common Stock Common Stock Inc. Common Stock
----------------- ----------------------- --------------------- Additional
Class A Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
--------- ------- ---------- ----------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1999.......... -- -- 10,415,900 $ 4,248,525 10,588,550 $ 287,588 -- $ (4,046,396)
Exercise of
common stock
options......... -- -- 283,350 406,494 283,350 -- -- --
Repurchase and
retirement of
shares of common
stock........... -- -- (1,935,650) (4,959,583) (2,036,900) -- -- --
Payments
received on
notes due on
common stock.... -- -- -- -- -- -- -- --
Reclassification
of notes due on
common stock,
current......... -- -- -- -- -- -- -- --
Disposal of
business........ -- -- (198,250) (408,169) (233,650) (209,268) -- --
Conversion of
IHC and ISI
common shares to
Class A common
stock in
connection with
merger.......... 8,601,350 86,014 (8,601,350) 712,733 (8,601,350) (78,320) -- (720,427)
Repurchase of
Class A common
stock........... -- -- -- -- -- -- -- --
Issuance of
common stock
warrants........ -- -- -- -- -- -- 295,619 --
Accretion of
redeemable
Class B common
stock to
redemption
value........... -- -- -- -- -- -- (295,619) (15,546,479)
Accrued
dividends on
redeemable
Class B common
stock........... -- -- -- -- -- -- -- (73,333)
Net income...... -- -- -- -- -- -- -- 254,639
--------- ------- ---------- ----------- ---------- --------- ---------- ------------
Balance, December
31, 1999......... 8,601,350 86,014 -- -- -- -- -- (20,131,996)
Issuance of
Class A common
stock........... 385,900 3,859 -- -- -- -- 1,043,000 --
Payments
received on
notes due on
Class A common
stock........... -- -- -- -- -- -- -- --
Accrued
dividends on
redeemable
Class B common
stock........... -- -- -- -- -- -- (440,000) --
Accretion of
redeemable
Class B common
stock to
redemption
value........... -- -- -- -- -- -- (786,916) --
Issuance of
Class A common
stock in
connection with
acquisition..... 392,200 3,922 -- -- -- -- 1,446,849 --
Net loss........ -- -- -- -- -- -- -- (234,846)
--------- ------- ---------- ----------- ---------- --------- ---------- ------------
Balance, March
31, 2000
(unaudited)...... 9,379,450 $93,795 -- $ -- -- $ -- $1,262,933 $(20,366,842)
========= ======= ========== =========== ========== ========= ========== ============
<CAPTION>
TalentPoint, Inc.
Treasury Stock
------------------------ Notes Due Total
Class A on Common Shareholders'
Shares Amount Stock Deficit
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Balance, January
1, 1999.......... -- -- $(1,071,132) $ (581,415)
Exercise of
common stock
options......... -- -- (305,435) 101,059
Repurchase and
retirement of
shares of common
stock........... -- -- 411,136 (4,548,447)
Payments
received on
notes due on
common stock.... -- -- 440,482 440,482
Reclassification
of notes due on
common stock,
current......... -- -- (330,733) (330,733)
Disposal of
business........ -- -- -- (617,437)
Conversion of
IHC and ISI
common shares to
Class A common
stock in
connection with
merger.......... -- -- -- --
Repurchase of
Class A common
stock........... (2,147,000) (7,385,535) -- (7,385,535)
Issuance of
common stock
warrants........ -- -- -- 295,619
Accretion of
redeemable
Class B common
stock to
redemption
value........... -- -- -- (15,842,098)
Accrued
dividends on
redeemable
Class B common
stock........... -- -- -- (73,333)
Net income...... -- -- -- 254,639
----------- ------------ ------------ --------------
Balance, December
31, 1999......... (2,147,000) (7,385,535) (855,682) (28,287,199)
Issuance of
Class A common
stock........... -- -- (906,244) 140,615
Payments
received on
notes due on
Class A common
stock........... -- -- 77,512 77,512
Accrued
dividends on
redeemable
Class B common
stock........... -- -- -- (440,000)
Accretion of
redeemable
Class B common
stock to
redemption
value........... -- -- -- (786,916)
Issuance of
Class A common
stock in
connection with
acquisition..... -- -- -- 1,450,771
Net loss........ -- -- -- (234,846)
----------- ------------ ------------ --------------
Balance, March
31, 2000
(unaudited)...... (2,147,000) $(7,385,535) $(1,684,414) $(28,080,063)
=========== ============ ============ ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended ------------------------
December 31, March 31, March 31,
1999 1999 2000
------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating Activities:
Net income (loss)..................... $ 254,639 $ 338,542 $ (234,846)
Adjustments to reconcile income from
continuing operations to net cash
flow provided by (used in) operating
activities:
Depreciation and amortization....... 1,664,022 407,432 529,423
Imputed interest.................... 326,963 -- 28,594
Gain on sale of business............ (50,000) -- --
Loss on disposal of business........ 516,864 -- --
Deferred income taxes............... 1,205,585 -- --
Market value adjustment to
redeemable warrants................ 69,335 -- 180,523
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable................. (2,582,135) (1,390,746) 790,020
Prepaid expenses and other current
assets............................. (239,471) 125,861 (106,482)
Other assets........................ (47,356) (8,777) (21,024)
Accounts payable.................... (1,243,397) (1,279,030) (483,985)
Accrued compensation and other
accrued liabilities................ 691,666 461,210 (1,820,382)
Commissions payable................. 94,026 (103,567) (366,659)
Unearned revenue.................... 248,486 71,808 (277,987)
Other liabilities................... 73,548 (267,723) 4,529
----------- ----------- -----------
Net cash provided by (used in)
operating activities............. 982,775 (1,644,990) (1,778,276)
----------- ----------- -----------
Investing Activities:
Property and equipment acquired, net
of retirements....................... (961,145) (141,814) (206,901)
Disposal of business.................. (6,386) -- --
Cash paid for acquisitions............ -- -- (822,431)
Payment of accrued acquisition costs.. (500,000) -- --
----------- ----------- -----------
Net cash used in investing
activities....................... (1,467,531) (141,814) (1,029,332)
----------- ----------- -----------
Financing Activities:
Borrowings (repayments) under line of
credit with former lender............ (8,077,587) 1,577,001 --
Borrowings (repayments) under new line
of credit agreement.................. 6,908,000 -- (1,500,000)
Repayments of notes payable........... (3,679,806) -- (1,056,949)
Issuance of notes payable to
shareholders......................... 1,100,000 -- --
Repayments of notes payable to
shareholders......................... (1,100,000) -- --
Proceeds from notes receivable on
common stock......................... 440,482 400,155 77,512
Proceeds from issuance of Class A
common stock......................... 101,059 100,047 140,616
Payments on capital lease
obligations.......................... (634,711) (166,548) (225,011)
Proceeds from capital lease
financings........................... 211,859 -- --
Repurchases of common shares.......... (7,908,998) (643,410) --
Issuance of redeemable Class B common
stock................................ 19,180,751 -- --
Deferred financing costs.............. (235,000) -- (28,475)
----------- ----------- -----------
Net cash provided by (used in)
financing activities............. 6,306,049 1,267,245 (2,592,307)
----------- ----------- -----------
Net increase (decrease) in cash......... 5,821,293 (519,559) (5,399,915)
Cash and cash equivalents, beginning of
period................................. 519,559 519,559 6,340,852
----------- ----------- -----------
Cash and cash equivalents, end of
period................................. $ 6,340,852 $ -- $ 940,937
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31,1999 and three months ended
March 31, 1999 and 2000 (Unaudited)
1. ORGANIZATION
TalentPoint, Inc. ("TalentPoint"), formerly known as Raymond Karsan
Holdings, Inc. ("RKH") prior to changing its name on April 3, 2000, and its
subsidiaries provide human capital management and information technology
services and solutions to its corporate clientele, including it's web-based
TalentPoint Portfolio product, information technology and human resource
consulting and training. TalentPoint, transacts business primarily through its
wholly-owned operating subsidiary, TalentPoint Technologies, Inc., formerly
known as Raymond Karsan Associates, Inc. ("RKA") prior to changing its name on
April 3, 2000.
RKH and RKA were formed December 16, 1999 under an Agreement and Plan of
Merger in connection with a corporate reorganization (the "Reorganization")
whereby International Holding Company, Inc. ("IHC") and Insurance Services,
Inc. ("ISI"), entities under common control and management, were merged with
and into RKA, now TalentPoint Technologies. See Note 10. TalentPoint's
consolidated operations consist of IHC's and ISI's former operations.
References to the "Company" throughout these notes to consolidated financial
statements refer collectively to TalentPoint and its subsidiaries.
Additionally, immediately after the Reorganization, TalentPoint issued
98,948 shares of a new class of common stock to non-management investors for
$22,000,000, before reduction for issuance costs, in a private placement
transaction (the "Private Placement"). Subsequent to the Private Placement,
TalentPoint is approximately 57% owned by employee shareholders and 43% owned
by non-management shareholders. See Note 10 for further discussion.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements of the
Company include the accounts of TalentPoint and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Quarterly Financial Information--The accompanying unaudited consolidated
financial statements as of March 31, 2000 and for the three months ended March
31, 1999 and 2000 have been prepared in accordance with generally accepted
accounting principles for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1999 and March 31, 2000 are not
necessarily indicative of the results that may be expected for the full year.
Cash and Cash Equivalents--Cash and cash equivalents consist of highly
liquid investments with remaining maturities of three months or less at the
time of purchase.
Prepaid Expenses and Other Current Assets--Prepaid expenses and other
current assets consist primarily of prepaid software maintenance agreements,
rent, insurance and other current assets.
Property and Equipment--Property and equipment are stated at cost or
respective fair market value in the case of business combinations at the date
of acquisition. Equipment under capital lease is stated at the lower of the
fair market value at the date of acquisition or net present value of the
minimum lease payments at inception of the lease. Depreciation and amortization
is provided on the straight-line basis over the assets' estimated useful lives
or, if shorter, the lease terms for leasehold improvements and equipment under
capital lease. The estimated useful life is 7 years for office furniture, 5
years for computer equipment and 3 to 5 years for software.
F-7
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs of maintenance and repairs are charged to expense as incurred. Gains
and losses on sales and retirements of assets are reflected in the results of
operations.
Intangibles--Intangible assets are comprised of excess purchase price over
net assets acquired (goodwill) and intellectual property. Goodwill is amortized
on a straight-line basis over twenty years. Included in intangibles is $600,235
and $560,851 of intellectual property (which is net of accumulated
amortization) as of December 31, 1999 and March 31, 2000, respectively.
Intellectual property is amortized on a straight-line basis over 7 years.
Accumulated amortization of intangibles is $1,223,291 and $1,373,931 as of
December 31, 1999 and March 31, 2000, respectively.
Revenue Recognition--Revenue from TalentPoint Portfolio products are
recognized ratably over the subscription period, typically one to three years.
Revenue from talent acquisition services are recognized: (i) on retained
searches one-third of the retainer is recognized upon execution of the contract
as the Company has already performed initial services required under the terms
of the engagement, one-third recognized 30 days from the execution date and the
remaining balance recognized upon completion of the contract, typically 60 to
90 days from the execution date; and (ii) on contingent search engagements
revenue is recognized upon the applicant's start of employment. Revenue from
time-based billings on consultant services are recognized when services are
performed. Revenues from the Company's former temporary and contract personnel
business are recognized concurrently with the performance of services. Unearned
revenue represents payments received from the Company's customers for services
not completed, and amounts billed under contracts in advance of project
completion.
Income Taxes--The Company files a consolidated tax return with its
subsidiaries for federal tax purposes and on a separate Company basis for state
tax purposes. Deferred income taxes are provided using the asset and liability
method for temporary differences between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
IHC was principally taxed under the provisions of Subchapter S of the
Internal Revenue Code through December 16, 1999. Pursuant to Subchapter S, all
income was reported through the shareholders' individual tax returns and the
resulting tax liability is the responsibility of the individual shareholders.
Accordingly, no provision for federal and state income taxes was recorded for
the operations of IHC through the period ended December 16, 1999. ISI and a
subsidiary of IHC were principally taxed as C corporations and provided for
federal and state income taxes on their operations. ISI and IHC's C corporation
subsidiary recognized deferred tax assets and liabilities for temporary
differences between the financial statement and tax bases of its assets and
liabilities and expected benefits of utilizing net operating loss
carryforwards. In connection with the Reorganization (see Note 1), IHC's
Subchapter S status was terminated. This resulted in recognition of a tax
liability in connection with converting IHC to an accrual basis for income tax
purposes from a cash basis. See Note 8 for further discussion.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk consist primarily of accounts
receivable. Credit risk arising from receivables is minimal due to the large
number of clients comprising the Company's customer base and their dispersion
across many industries. The customers are concentrated primarily in the
Company's U.S. market area.
401(k) Plan--The Company sponsors a defined contribution plan (401(k) Plan)
which is available for participation to all eligible employees. Company
contributions to the plan are based upon a percentage of each employee's
contribution to the plan to the total of all employees' contributions, subject
to the Board of Directors election to make a contribution each year.
F-8
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, the Company's Board of Directors elected to make a
matching contribution of 25% of each employee's pretax contribution amounts for
the calendar year ended December 31, 1999 for those employees who were employed
by the Company on the last day of calendar 1999. The Company recorded $157,900
during the year ended December 31, 1999 in connection with this matching
contribution. This amount is reflected in accrued compensation and benefits at
December 31, 1999.
Stock-Based Compensation--The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 encourages, but does not require, companies
to record compensation cost for stock-based compensation plans at fair value.
The Company has elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations, as permitted
by SFAS 123. Compensation expense for stock options is measured as the excess,
if any, of the fair value of the Company's stock over the amount an employee
must pay to acquire the stock. See Note 10 for further discussion.
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments--The carrying amounts of the Company's
financial assets and liabilities, including cash, accounts receivable, prepaid
expenses, employee receivables, other current assets, accounts payable, accrued
compensation and other current liabilities at December 31, 1999 and March 31,
2000 approximate fair value because of the short maturity of these instruments.
The carrying amount of the Company's long-term notes payable approximates fair
value at December 31, 1999 and March 31, 2000, based on current market rates of
interest and maturities.
New Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS 137, which defers the effective date of SFAS
133 until June 15, 2000. This pronouncement is not expected to significantly
impact the Company's financial position or results of operations as the Company
does not have significant derivative instruments or participate in hedging
activities. See Note 6 for discussion of the Company's interest rate cap
agreement.
In March 2000, the Emerging Issues Task Force ("EITF") published their
consensus on EITF Issue No. 00-2, "Accounting for Web Site Development Costs,"
regarding the accounting for costs incurred to develop a web site. EITF Issue
No. 00-2 is effective for fiscal quarters beginning after June 30, 2000. The
Company does not expect the adoption of EITF Issue No. 00-2 to have a material
effect on its consolidated financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
"Application of AICPA Statement of Position 97-2 Software Revenue Recognition
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware." EITF Issue No. 00-3 outlines the accounting criteria for
such hosting arrangements. The Company does not expect the adoption of EITF
Issue No. 00-3 to have a material effect on its consolidated financial position
or results of operations.
F-9
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Cash Flow Information--The Company had the following
supplemental cash flow activity for the year ended December 31, 1999 and the
three months ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
December March 31, March 31,
31, 1999 1999 2000
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash paid for:
Interest................................... $ 1,875,582 $ 458,517 $210,051
=========== ========== ========
Income taxes............................... $ -- $ -- $575,800
=========== ========== ========
Noncash investing and financing activities:
Notes payable issued for common stock...... $ 4,024,985 $1,569,680 $ --
=========== ========== ========
Capital lease obligations.................. $ 327,797 $ 69,435 $209,295
=========== ========== ========
Accrued liabilities converted to notes
payable in 1999 in connection with
business acquisitions prior to 1999....... $ 504,550 $ 504,550 $ --
=========== ========== ========
Notes receivable in connection with
exercise of common stock options and
issuance of common stock.................. $ 305,435 $ 212,715 $906,244
=========== ========== ========
Accretion of redeemable Class B common
stock to redemption value................. $15,546,479 $ -- $786,916
=========== ========== ========
Accrued dividends on redeemable Class B
common stock.............................. $ 73,333 $ -- $440,000
=========== ========== ========
Issuance of common stock warrants.......... $ 2,611,345 $ -- $ --
=========== ========== ========
Notes receivable cancelled in connection
with defaults on loan repayment terms and
due to termination of employment by
shareholders prior to maturity of notes... $ 411,136 $ -- $ --
=========== ========== ========
</TABLE>
F-10
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1999 1999 2000
------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Sale of businesses:
Accounts receivable and other current
assets................................ $ 331,220 $ -- $ --
Goodwill............................... 1,937,342 -- --
Fixed assets........................... 85,743 -- --
Current liabilities.................... (19,044) -- --
Forgiveness of notes payable........... (1,579,474) -- --
Issuance of notes payable.............. 322,127 -- --
Common stock returned by owner......... (617,436) -- --
Net loss on disposals.................. (466,864) -- --
----------- ----- -----------
Net cash transferred................. $ (6,386) $ -- $ --
=========== ===== ===========
Cash paid for acquisitions:
Accounts receivable.................... $ -- $ -- $ (493,180)
Goodwill............................... -- -- (2,418,865)
Liabilities assumed.................... -- -- 488,474
Issuance of notes payable.............. -- -- 150,000
Common stock issued.................... -- -- 1,451,140
----------- ----- -----------
Net cash paid........................ $ -- $ -- $ 822,431
=========== ===== ===========
</TABLE>
Comprehensive Income--The Company applies the provisions of SFAS No.130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income (loss) and its components in financial
statements. Comprehensive income (loss), as defined, includes all changes in
equity during a period from non-owner sources. To date, the Company's only
component of accumulated other comprehensive income (loss) has been cumulative
translation adjustments. The financial position and operating results of the
United Kingdom operations are consolidated using the local currency as the
functional currency. Local currency assets and liabilities are translated at
the rate of exchange to the U.S. dollar on the balance sheet date, and the
local currency revenues and expenses are translated at average rates of
exchange to the U.S. dollar during the period. The related translation
adjustments are not material and are included in additional paid-in capital.
The foreign currency translation adjustment is not adjusted for income taxes as
it relates to an indefinite investment in a non-U.S. subsidiary.
Impairment of Long Lived Assets--The Company evaluates its long-lived
assets, including goodwill and certain identifiable intangibles, for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of any asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
Earnings (Loss) Per Share--Basic earnings (loss) per common share is
computed by dividing net income (loss) available to Class A common shareholders
by the weighted-average number of Class A common shares outstanding during the
period. Diluted earnings (loss) per share is computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period adjusted for the number of shares that would have been outstanding if
the dilutive potential common shares had been issued. The diluted earnings
(loss) per share does not assume the exercise of options or warrants or
redeemable Class B common shares that would have an antidilutive effect on
earnings (loss) per share. The weighted average shares outstanding for all
periods presented have been adjusted to reflect a 50 for 1 stock split which
occurred on June 6, 2000 and the merger of our two corporations on December 15,
1999. See Notes 1 and 10.
F-11
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SALE OF BUSINESSES
Morestaff
Effective April 30, 1999, the Company sold its entire interest in Morestaff,
a temporary staffing company, to the previous owners of Morestaff ("Morestaff
Buyers"). Morestaff Buyers received net assets of approximately $364,000 that
consisted of cash, accounts receivable, other current assets, fixed assets and
current liabilities. In return, Morestaff Buyers forgave the Company of
approximately $1,579,000 in notes payable due Morestaff Buyers as a result of
the Company's acquisition of Morestaff on July 15, 1998. In connection with the
sale, the Company recorded a loss of approximately $517,000. The loss resulting
from the Morestaff sale has been classified as an extraordinary item, due to
the fact that the sale occurred within two years of a separate acquisition
accounted for under the pooling-of-interest method of accounting. The Company
has not recorded any tax benefit resulting from this loss. Included in the
Company's consolidated statements of operations for 1999 were the following
amounts related to the Morestaff operation:
<TABLE>
<S> <C>
Revenue........................................................ $900,298
Income from operations......................................... 29,404
Net income..................................................... 29,404
</TABLE>
Temporary Staffing Business
Effective October 29, 1999, the Company sold a portion of its temporary
staffing business to two former shareholders of the Company ("Temp Staff
Buyers") who previously managed this portion of the business (the "Temp Staff
Sale"). The Temp Staff Buyers received net assets that consisted of fixed
assets of $5,500 and a note receivable of $322,000. The Temp Staff Buyers
returned 198,250 shares of IHC and 198,250 shares of ISI to the Company in
connection with this transaction for an aggregate value of approximately
$595,000. The gain on this sale of $187,000 was recorded as an increase in
shareholders equity due to the transaction occurring between related parties.
In addition, on December 10, 1999, the Company sold the remainder of its
temporary staffing assets to an unrelated third party for $50,000 in cash. The
gain on this sale of $50,000 was reflected in the consolidated statements of
operations for 1999. Included in the Company's consolidated statements of
operations for 1999 were the following amounts related to the Temp Staff Sale
operation:
<TABLE>
<S> <C>
Revenue...................................................... $6,194,488
Loss from operations......................................... (848,702)
Net loss..................................................... (848,702)
</TABLE>
4. EMPLOYEE ADVANCES AND LOANS
Included in employee advances at December 31, 1999 and March 31, 2000 were
commissions advanced in the amount of $409,699 and $234,678, respectively. In
addition, employee advances and other assets included loans to Company
employees and shareholders aggregating $13,721 and $21,562 at December 31, 1999
and March 31, 2000, respectively. Employee advances and loans bear no interest.
F-12
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PROPERTY AND EQUIPMENT
A summary of property and equipment and related accumulated depreciation as
of December 31, 1999 and March 31, 2000 is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Equipment........................................... $4,461,032 $4,894,376
Software............................................ 921,292 939,176
Office furniture and fixtures....................... 415,294 503,453
Leasehold improvements.............................. 266,368 297,680
Construction in process............................. 703,076 738,831
---------- ----------
6,767,062 7,373,516
Less accumulated depreciation....................... 2,718,921 3,090,940
---------- ----------
$4,048,141 $4,282,576
========== ==========
</TABLE>
Equipment includes capital leases of approximately $2,371,000 and $2,580,000
at December 31, 1999 and March 31, 2000, respectively. Depreciation expense,
including amortization of assets under capital leases, was approximately
$1,231,000, $296,000 and $372,000 for the year ended December 31, 1999 and the
three months ended March 31, 1999 and 2000, respectively.
6. LINE OF CREDIT
On December 27, 1999, the Company entered into a loan and security agreement
("Loan Agreement") with a financial institution ("Lender") which provides for
maximum available borrowings to fund general working capital requirements and
acquisitions based upon a borrowing base formula described below. Borrowings
under the Loan Agreement bear interest at a fluctuating rate based on either
(i) the announced prime rate of the Lender plus the applicable margin (1% at
December 31, 1999 and March 31, 2000) defined by the Loan Agreement (the
"Adjusted Prime Rate") or (ii) the London Interbank Borrowing Rate, as elected
from time to time by the Company, plus the applicable margin (3% at December
31, 1999 and March 31, 2000) defined by the Loan Agreement ("Adjusted LIBOR").
Interest is payable monthly if a rate based on the Adjusted Prime Rate is
elected or at the end of the Adjusted LIBOR period if a rate based on Adjusted
LIBOR is elected.
Maximum available borrowings under the Loan Agreement represent the lesser
of $7,000,000 or the borrowing base, which is defined as (a) 80% of the amount
of Eligible Receivables plus (b) the lesser of (i) $3,000,000 or (ii) 2.5 times
the Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") for the four most recent fiscal quarters. Based upon this criteria,
maximum available borrowings at December 31, 1999 were $7,000,000. Upon
submitting the audited financial statements for the year ended December 31,
1999 to the Lender, maximum available borrowings were increased to the lesser
of $10,000,000 or the borrowing base. The borrowing base aggregated $7,769,000
at March 31, 2000. Amounts outstanding under the Loan Agreement were $6,908,000
and $5,408,000 as of December 31, 1999 and March 31, 2000, respectively, with
interest at the Adjusted Prime Rate at December 31, 1999 (9.50% per annum) and
Adjusted LIBOR at March 31, 2000 (9.14% per annum). Borrowings under the Loan
Agreement mature on December 27, 2002 in the absence of an event requiring
earlier repayment, as defined by the Loan Agreement.
F-13
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Borrowings under the Loan Agreement are collateralized by generally all the
Company's assets. The Agreement contains various terms and covenants which
provide for certain restrictions on the Company's indebtedness, capital
expenditures, disposition of assets, investments and acquisitions and require
the Company, among other things, to maintain minimum levels of EBITDA, debt
service coverage, debt to EBITDA and certain other minimum financial ratios.
The Company was in compliance with these terms and covenants at December 31,
1999 and March 31, 2000.
Prior to this Loan Agreement, the Company had an agreement with another
financial institution that provided for general working capital requirements
and acquisitions. This agreement was repaid in full upon consummation of the
Reorganization and issuance of the redeemable Class B common stock. See Notes 1
and 10.
Interest Rate Cap Agreement
On January 10, 2000 the Company entered into a two-year interest rate cap
agreement with its Lender (the "Cap Agreement"). The Cap Agreement provides the
Company with protection from rising interest rates by requiring the Lender to
pay the Company quarterly beginning April 2000 the amount by which the three-
month prevailing LIBOR rate exceeds 7.5% on a notional amount of $3.5 million.
The three-month prevailing LIBOR rate was 5.9% and 6.14% at December 31, 1999
and March 31, 2000, respectively. The Company paid $28,475 in fees in
connection with the Cap Agreement. This amount will be amortized over the
period of the agreement and included in interest expense.
7. DEBT
Notes Payable--In connection with various acquisitions prior to 1999 and in
connection with the repurchase by the Company of common stock owned by employee
shareholders who left the Company, the Company issued interest and non-interest
bearing notes to these individuals. Principal and interest on the interest-
bearing notes are payable semi-annually and annually. Maturity dates on these
notes vary from January 19, 2000 through October 31, 2003. As of December 31,
1999 and March 31, 2000, the non-interest bearing notes are presented at their
estimated net present value based on an imputed interest rate of 8%. The
unamortized discount based on imputed interest for all non-interest bearing
notes was $543,969 and $465,593 as of December 31, 1999 and March 31, 2000,
respectively.
On May 14, 1999, the Company entered into an amendment to a promissory note
("Note") issued in connection with the Company's May 1, 1998 acquisition of
Enhanced Communications, Inc. and Enhanced Courseware, Inc. ("ECI"). In
connection with this amendment, certain payment terms were adjusted. Interest
on the amount outstanding from the April 30, 1999 payment accrued at a rate of
16% per annum. This note was repaid in full on December 20, 1999.
Maturities of notes outstanding, less unamortized discounts and excluding
capital leases, for each of the five years in the period ended December 31 is
as follows:
Description 2000 2001 2002 2003 Total
----------- ---------- ---------- ---------- ------- ----------
Notes Payable....... $1,799,694 $1,345,425 $1,404,147 $39,100 $4,588,366
========== ========== ========== ======= ========== ===
Loans from Shareholders--Between May and July 1999, certain of the Company's
shareholders contributed $1,100,000 to the Company in exchange for unsecured
notes payable. These notes were repaid, including interest at 15% per annum, in
December 1999.
F-14
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. INCOME TAXES
The 1999 provision for income taxes consisted of the following:
<TABLE>
<S> <C>
Current:
Federal...................................................... $1,585,016
State and local.............................................. 296,353
----------
1,881,369
----------
Deferred:
Federal...................................................... (101,463)
State and local.............................................. 12,926
----------
(88,537)
----------
Income tax provision....................................... $1,792,832
==========
</TABLE>
The current income tax provision at December 31, 1999 includes an adjustment
of approximately $1,471,000 in connection with converting IHC to an accrual
basis for income tax purposes from a cash basis as a result of the termination
of its Subchapter S status upon consummation of the Reorganization See Notes 1
and 10. This amount is payable equally over four tax periods beginning with the
year ended December 31, 1999.
A reconciliation of the Company's effective income tax rate to the statutory
federal income tax rate of 34% for the year ended December 31, 1999 is as
follows:
<TABLE>
<S> <C>
Statutory federal tax rate......................................... 34.0 %
S corporation income, not subject to tax........................... (31.4)
Cash to accrual basis adjustment................................... 69.5
State income taxes................................................. 14.4
Other.............................................................. (1.8)
-----
84.7 %
=====
</TABLE>
Significant components of the Company's net deferred tax assets
(liabilities) as of December 31, 1999 were as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable............................................ $ 1,185
Foreign net operating loss carryforward........................ 149,851
Accrued expenses............................................... 52,566
--------
203,602
--------
Deferred tax liabilities:
Prepaid expenses............................................... 77,853
Other.......................................................... 3,158
--------
81,011
--------
Net deferred tax asset....................................... $122,591
========
</TABLE>
F-15
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. COMMITMENTS AND CONTINGENCIES
Leasing Arrangements--The Company leases certain of its facilities and
equipment under various operating and capital leases. Equipment under capital
leases primarily consist of computer equipment and furniture and fixtures.
These leases generally have terms of three to five years and bear interest
between 9% and 13%. Operating leases primarily consist of leases for office
space and equipment. Future minimum lease payments for each of the five years
in the year ended December 31 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
Year Ended December 31:
2000.................................................. $ 751,133 $1,347,505
2001.................................................. 251,172 1,233,561
2002.................................................. 132,388 994,923
2003.................................................. 38,906 692,046
2004 and thereafter................................... 16,951 916,300
----------
Total minimum lease payments........................ 1,190,550
Less amount representing interest....................... 153,105
----------
Present value of net minimum payments under capital
leases................................................. 1,037,445
Less current portion.................................... 765,273
----------
$ 272,172
==========
</TABLE>
Rent expense was approximately $1,567,000, $384,000 and $381,000 for the
year ended December 31, 1999 and the three months ended March 31, 1999 and
March 31, 2000, respectively.
During September 1999, the Company entered into a sale leaseback transaction
whereby the Company received approximately $211,000 from a leasing company for
certain fixed assets the Company had recently purchased and paid for. The
proceeds from this transaction were equivalent to the cost the Company paid for
the equipment. As a result, no gain or loss was recorded on this transaction.
Deferred Compensation--The Company has an unfunded deferred compensation
contract with a former employee shareholder of the Company. Under the terms of
the contract, the former employee shareholder or his beneficiary is entitled to
retirement benefits upon reaching the Company's normal retirement date. The
retirement benefits under the plan provide for 120 monthly installments to be
paid to the former employee shareholder or his beneficiary.
At December 31, 1999 and March 31, 2000, the liability under the deferred
compensation plan was approximately $306,000 and $301,000, respectively. The
present value of the estimated liability, which is included in other
liabilities, was determined by calculating the net present value of the
retirement benefits expected to be earned by the shareholder from the effective
date of the agreement through the shareholder's expected retirement date using
a discount rate of 8%. The interest expense associated with this plan was
approximately $24,500, $6,600 and $6,100 for the year ended December 31, 1999
and the three months ended March 31, 1999 and 2000, respectively.
Litigation--The Company is a party to certain legal actions arising in the
ordinary course of business. While it is not possible to determine with
certainty the outcome of these matters, in the opinion of management the
eventual resolution of all claims and actions outstanding will not
individually, or in the aggregate, have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
F-16
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. EQUITY
Stock Split
On June 6, 2000, the Company declared a 50 for 1 stock split for Class A
common stock. In addition, the Articles of Incorporation were amended to
increase the number of authorized Class A common shares to 100,000,000. As a
result, all Class A common shares, options and warrants have been adjusted for
all periods presented.
Corporate Reorganization and Private Placement
Effective December 16, 1999, under an Agreement and Plan of Merger, IHC and
ISI were merged with and into RKA, now TalentPoint Technologies, Inc. In
connection with the Reorganization, each share of IHC and ISI common stock
issued and outstanding immediately prior to the merger was converted into one-
half a share of TalentPoint Class A common stock. Additionally, each option to
purchase a share of IHC and ISI's common stock was converted into the right to
receive and option to purchase one-half a share of TalentPoint Class A common
stock at two times the exercise price in effect immediately prior to the
consummation of the Reorganization.
Immediately after the Reorganization, the Company issued 98,948 shares of
redeemable Class B common stock in the Private Placement for $22,000,000,
before reduction for approximately $2.8 million of issuance costs. The
redeemable Class B common shares have certain redemption and dividend features.
The Company also issued warrants to the Class A and redeemable Class B common
shareholders to purchase additional shares of such common stock for an agreed
upon price. See below for a discussion of the warrants outstanding at December
31, 1999 and March 31, 2000.
Stock and Voting Rights
Class A Common Stock
At December 31, 1999 and March 31, 2000, TalentPoint had 100,000,000
authorized shares of Class A common stock with 8,601,350 and 9,379,450 shares
issued, respectively, and 6,454,350 and 7,232,450 shares outstanding,
respectively, net of treasury stock discussed below. Each share of Class A
common stock has one-for-one voting rights. In connection with the Private
Placement, each owner of Class A common shares or owner of options to purchase
Class A common shares was also granted Class C warrants to purchase additional
shares of such stock for an exercise price of $0.01 per share. See discussion
of warrants below.
Redeemable Class B Common Stock
At December 31, 1999, TalentPoint had 200,000 authorized shares of
redeemable Class B common stock with 98,948 shares issued and outstanding which
were held by an outside third-party investor group (collectively, the
"Parthenon Investors"). Redeemable Class B common shares are convertible into
Class A common shares upon election by the holder at a rate of 50 shares of
Class A common stock for each share of redeemable Class B common stock, subject
to adjustment for anti-dilution events, as defined. Each redeemable Class B
common shareholder is entitled to a number of votes equal to the number of
shares of Class A common stock into which the redeemable Class B shares are
convertible, except for the election of directors. The redeemable Class B
common shareholders have the right to designate two of the Company's five
directors pursuant to an agreement. In connection with the Private Placement,
each owner of redeemable Class B common shares was also granted Class A and B
warrants to purchase additional shares of such stock for an exercise price of
$0.01 and $16.70 per share, respectively. See discussion of warrants below.
F-17
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of redeemable Class B common stock have the ability to require
the Company to redeem 38,416 shares of redeemable Class B common stock at the
earlier of five years from issuance or at the time of certain other events, as
defined, for $22,000,000 plus 8% per annum from the issuance date. If an
initial public offering or sale transaction has not occurred prior to five
years from issuance, the holders of redeemable Class B common stock also have
the ability to require the Company to redeem an additional 60,532 shares of
redeemable Class B common stock at the fair market value on the date of
redemption. The Company recorded charges to accumulated deficit of $15,546,479
and $786,916 at December 31, 1999 and March 31, 2000, respectively, to accrete
the value of the redeemable Class B common stock to its estimated redemption
value. The redemption value will be adjusted quarterly based upon fluctuations
in the estimated fair value of the Company's common stock. The redeemable Class
B common shares are included in the balance sheet as temporary equity and are
stated at their estimated redemption value at December 31, 1999 and March 31,
2000 of $32,484,837 and $33,711,753, respectively, which includes cumulative
accrued dividends payable to the holders of the redeemable Class B common
shares of $73,333 and $513,333, respectively.
Treasury Stock
Concurrent with the Private Placement, the Company repurchased 2,147,000
shares of Class A common stock from two former employee shareholders for cash
aggregating approximately $7,909,000. These shares were recorded as treasury
stock and are stated at their cost.
Preferred Stock
TalentPoint has 100,000 shares of $0.01 par value preferred stock
authorized, with no shares issued or outstanding at December 31, 1999. These
shares may have preferential rights in liquidation.
Shareholder Agreements
All Class A shareholders have entered into shareholder agreements that
define and provide for, among other things, the purchase, sale and transfer of
shares in accordance with the agreements. Certain employees have purchased
shares of common stock using notes. These employees elected to purchase stock
available under existing stock option grants in accordance with provisions
under the stock purchase agreement that permitted an initial 25% cash payment
at the time of purchase with the remainder due in equal annual installments
each January 15 of the next three years. The subscriptions bear no interest to
the employee. The unpaid portion of subscriptions receivable has been
classified as contra-equity, notes due on common stock at December 31, 1999 and
March 31, 2000.
Stock Repurchases
During the year ended December 31, 1999, the Company entered into stock
repurchase agreements with former employee shareholders of the Company. The
Company acquired a total of 4,183,900 shares in these transactions for total
consideration of approximately $11,934,000, net of the cancellation of secured
notes related to the purchase of stock options in the amount of approximately
$411,000. The Company funded these transactions principally through payment of
cash aggregating approximately $7,909,000 and the issuance of unsecured
promissory notes in the amount of approximately $4,025,000. There were no such
repurchases during the three months ended March 31, 2000.
During the year ended December 31, 1999 the Company also received shares of
its common stock in connection with certain sales of businesses to former
owners and employee shareholders. These former owners and employee shareholders
returned 198,250 and 233,650 shares of IHC and ISI common stock, respectively,
to
F-18
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company in exchange for certain assets, the assumption of certain
liabilities and the forgiveness of debt. See Note 3. There were no such
exchanges during the three months ended March 31, 2000.
In addition, two stock repurchase agreements require the Company to repay
all amounts outstanding under the notes following the completion of an initial
public offering. These amounts aggregate $1,260,764 at March 31, 2000.
Stock Option Plan
In accordance with the bylaws of TalentPoint, options may be granted at the
discretion of TalentPoint's Board of Directors. The purpose of the options is
to recognize past services rendered and to provide additional incentive in
furthering the continued success of the Company. Vesting of the stock options
is at the discretion of the Board of Directors and generally occurs on the
first anniversary date from the date of grant. The price of the stock options
issued to employees under the plan is not less than 100% of the fair market
value of the common shares at the date of grant.
Options expire three years from the date of grant through January 2002. Upon
an employee's termination, the unexercised portion of incentive stock options
expire. Prior to the Reorganization, options granted entitled the employee to
receive, when exercised, one share of IHC and ISI's common stock. In connection
with the Reorganization (see Note 1), each option to purchase a share of IHC
and ISI's common stock was converted into the right to receive and option to
purchase one-half a share of TalentPoint common stock at two times the exercise
price in effect immediately prior to the consummation of the Reorganization.
Presented below is the activity in the plan for the twelve months ended
December 31, 1999, reflecting the conversion of the option to the right to
receive TalentPoint common shares as if the conversion occurred as of the
beginning of the year:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Exercise
Options Share Price
--------- ----------- --------
<S> <C> <C> <C>
Balance, December 31, 1998................... 667,500 $1.43-$2.09 $1.74
Exercised.................................. (283,350) $1.43 1.43
Granted.................................... 420,450 $3.50 3.50
Cancelled.................................. (281,850) $1.43-$3.50 2.55
--------
Balance, December 31, 1999................... 522,750 $2.09-$3.50 2.89
Exercised.................................. (234,550) $2.09 2.09
Granted.................................... 398,850 $3.70 3.70
Cancelled.................................. -- -- --
--------
Balance, March 31, 2000...................... 687,050 $3.50-$3.70 3.62
========
Exercisable at March 31, 2000................ -- -- --
========
</TABLE>
Because the Company accounts for the plan under APB 25, no compensation cost
has been recognized in the financial statements for stock options issued under
the plan. Had compensation expense for the plan been determined based on the
fair value at the grant dates under the provisions of SFAS 123, the Company's
pro forma net income would not have been materially different. The fair value
of each option grant is estimated on the date of grant using the minimum value
option pricing model, with a risk-free interest rate of 4.61% for the year
ended December 31, 1999, no expected dividend yield and an expected life of
three years.
At March 31, 2000, there were 398,850 non-vested options outstanding with an
exercise price of $3.70 and an average remaining life of 3 years and 288,200
vested options outstanding with an exercise price of $3.50 and an average
remaining life of 2 years.
F-19
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
In connection with the Private Placement, TalentPoint issued several classes
of warrants. The information below represents the warrants outstanding at
December 31, 1999 and a general description of their terms.
<TABLE>
<CAPTION>
Class of Number of
Shares Shares
Entitled to Entitled to Exercise Expiration
Warrant Class Purchase Purchase Price Date
------------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Class A-1........................ Class A 275,150 $ 0.01 12/16/2006
Class A-2........................ Class A 220,100 0.01 12/16/2006
Class B.......................... Class A 894,400 16.70 12/16/2006
Class C-1........................ Class A 275,150 0.01 12/16/2006
Class C-2........................ Class A 220,100 0.01 12/16/2006
Class D.......................... Class A 198,100 3.34 12/16/2006
Class E.......................... Class A 16,400 16.70 12/16/2006
</TABLE>
Class A and D warrants entitle the holder to purchase Class A common shares.
Class A warrants are exerciseable upon the earlier of December 16, 2006 or a
qualified public offering or sale transaction (collectively "Realization
Events") if the offering or sales price per share is below certain thresholds.
Class D warrants are currently exerciseable. The holders of the Class A and D
warrants also have the ability to require the Company to repurchase these
warrants at the "Put Price," as defined by the warrant agreement, five years
after date of issuance if a Realization Event has not occurred. Class A
warrants were issued to the holders of the redeemable Class B common stock.
Class D warrants were issued to the Company's investment advisor in the Private
Placement. The estimated redemption value for the Class A and D warrants was
estimated at $1,654,072 and $661,654, respectively, on the date of issuance
based upon the estimated market value of the Company's Class A common stock.
Since the holders of these warrants can require the Company to repurchase them
at fair value, these warrants have been adjusted to estimated fair value at
December 31, 1999 and March 31, 2000. This market value adjustment resulted in
charges to interest expense of $69,335 and $180,523 at December 31, 1999 and
March 31, 2000, respectively. The value of the Class A and Class D warrants are
included as a separate component of long term liabilities in the accompanying
consolidated balance sheets. The requirement to adjust the carrying value of
these warrants to reflect changes in the market value of our common stock will
continue until these warrants are exercised or they expire.
Upon completion of a qualified public offering, the Class A warrants and
related put feature will expire and Class C warrants to purchase 495,250 Class
A common stock will become exerciseable. When this occurs, the carrying value
of the Class A warrants will be reclassified into shareholders' equity
(deficit). In addition, upon completion of an initial public offering, the
Class D warrant put feature will expire and the Class D warrant carrying value
will be reclassified into shareholders' equity.
Class B and E warrants entitle the holder to purchase Class A common shares
and are exerciseable until their expiration on December 16, 2006. Class B
warrants were issued to the holders of the redeemable Class B common stock.
Class E warrants were issued to the Company's investment advisor in the Private
Placement. The fair value has been estimated at $290,296 and $5,323 for the
Class B and E warrants, respectively, on the date of issuance using the Black-
Scholes valuation model. The value of the Class B and Class E warrants was
included in additional paid-in capital and subsequently reclassified to
accumulated deficit upon accreting the redeemable Class B common shares to
redemption value at December 31, 1999.
Class C warrants entitle the holder to purchase Class A common shares and
are exerciseable upon the earlier of a qualified public offering or sale
transaction (collectively "Realization Events") if the offering or sales price
per share is above certain thresholds. Class C warrants were issued to the
holders of the Class A
F-20
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock. In the event of a Realization Event, a portion or all of the
Class C warrants may become exercisable depending upon the initial public
offering or sale price. To the extent the Class C warrants become exerciseable,
an equivalent number of Class A warrants will be terminated.
All outstanding warrants are subject to anti-dilution provisions and
correspondingly their exercise and conversion prices will be adjusted for
changes in shares, options and warrants issued and currently outstanding. If
certain other events occur, as defined, the price at which the warrants are
exercisable is subject to change.
11. BASIC AND DILUTED EARNINGS PER SHARE
The reconciliation of the numerator and denominator for basic and diluted
earnings per share for the periods presented below is as follows:
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1999 1999 2000
------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Calculation of Basic Earnings Per
Share:
Net income (loss)................... $ 254,639 $ 338,542 $ (234,846)
Accretion of redeemable Class B
common stock to redemption value... (15,546,479) -- (786,916)
Accrued dividends on redeemable
Class B common stock............... (73,333) -- (440,000)
------------ ----------- -----------
Net income available to common
shareholders..................... $(15,365,173) $ 338,542 $(1,461,672)
============ =========== ===========
Weighted average number of common
shares outstanding............... 9,587,015 10,745,468 6,679,764
============ =========== ===========
Basic Earnings Per Share.......... $ (1.60) $ 0.03 $ (0.22)
============ =========== ===========
Calculation of Diluted Earnings Per
Share:
Net Income.......................... $ 338,542
===========
Weighted average number of common
shares outstanding................. 10,745,468
Effect of potentially dilutive
securities:
Employee stock options.............. 108,711
Warrants............................ --
-----------
Weighted average number of common
shares outstanding, assuming
dilution......................... 10,854,179
===========
Diluted Earnings Per Share........ $ 0.03
===========
</TABLE>
Basic and diluted earnings per share before extraordinary item was $0.08 for
the year ended December 31, 1999. Basic and diluted loss per share for extra
ordinary item was $0.05 for the year ended December 31, 1999.
12. BUSINESS SEGMENT INFORMATION
The Company's businesses are organized, managed and internally reported as
three segments: TalentPoint Portfolio, human capital management (HCM)
consulting services and ebusiness technology services. TalentPoint Portfolio,
the Company's newest business segment, consists of a scalable, fully hosted,
web-based suite of proprietary software for human capital management that are
available either as individual modules to
F-21
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
address specific customer needs or as an integrated suite. The HCM consulting
services segment addresses the full spectrum of human capital management needs
of organizations, including talent acquisition, onsite and offsite recruitment
management services and support, sales force solutions training consulting and
development, retention consulting and employee survey administration and
analysis. The Company offers each of these services to complement the
TalentPoint Portfolio as well as on a stand alone basis. Through our ebusiness
technology services, we design, develop and implement a wide range of ebusiness
and other information technology solutions. The Company offers ebusiness
technology services to complement the TalentPoint Portfolio as well as on a
stand alone basis.
The Company's management evaluates performance of each segment primarily
based on revenues and operating income or loss (before interest and income
taxes). The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies. See Note 2. The information
in the following table is derived directly from the segments' internal
financial reporting used for corporate management purposes. Operating income or
losses of these segments include an allocation of general corporate expenses.
<TABLE>
<CAPTION>
HCM eBusiness
Year ended December 31, TalentPoint Consulting Technology
1999 Portfolio Services(1) Services Other(2) Total
----------------------- ----------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenue................... $ 98 $35,040 $16,773 -- $51,911
Gross profit.............. 90 27,052 7,521 -- 34,663
Operating income (loss)... (288) 3,105 2,072 (39) 4,850
<CAPTION>
Three months ended March
31, 1999
------------------------
(Unaudited)
-----------
<S> <C> <C> <C> <C> <C>
Revenue................... -- 8,421 4,880 -- 13,301
Gross profit.............. -- 6,001 2,279 -- 8,280
Operating income (loss)... -- 265 900 (314) 851
<CAPTION>
Three months ended March
31, 2000
------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................... 880 5,785 4,441 -- 11,106
Gross profit.............. 721 5,180 2,306 -- 8,207
Operating income (loss)... (215) (82) 953 (526) 130
</TABLE>
---------------------
(1) HCM consulting services includes operations of discontinued lines of
business.
(2) Other consists primarily of unallocated corporate expenses.
The Company has no single customer representing greater than 10% of
revenues. Revenues in the United Kingdom were approximately $1.0 million,
$293,000 and $313,000 for the year ended December 31, 1999 and the three months
ended March 31, 1999 and 2000, respectively.
F-22
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. SUBSEQUENT EVENTS
Acquisitions
Noll Asset Acquisition
Effective February 23, 2000, the Company acquired certain assets and
intellectual property from Noll, Inc. (the "Noll Acquisition") for $750,000 in
cash and $150,000 in notes payable. This acquisition was recorded as a purchase
with the excess of purchase price and acquisition costs over net assets
acquired of approximately $975,000 being primarily recorded as goodwill.
Goodwill will be amortized over 20 years. The information below represents the
unaudited pro forma consolidated results of operations of the Company and the
Noll Acquisition for the year ended December 31, 1999 as if this acquisition
had occurred as of January 1, 1999:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Revenue..................................................... $52,587,000
Income from operations...................................... 4,932,000
Net income.................................................. 331,000
</TABLE>
Know It All Acquisition (Unaudited)
Effective March 31, 2000, the Company acquired all the outstanding stock of
Know It All, Inc. (the "KIA Acquisition") for 392,200 shares of its common
stock. This acquisition was recorded as a purchase with the excess of purchase
price and acquisition costs over net assets acquired of approximately $1.4
million being recorded as goodwill. Goodwill will be amortized over 20 years.
The information below represents the unaudited pro forma consolidated results
of operations of the Company and the KIA Acquisition for the year ended
December 31, 1999 as if this acquisition had occurred as of January 1, 1999:
<TABLE>
<S> <C>
Revenue..................................................... $53,959,000
Income from operations...................................... 5,075,000
Net income.................................................. 318,000
</TABLE>
Paragon Acquisition (Unaudited)
Effective May 26, 2000, the Company acquired all the outstanding stock of
Paragon, Inc. (the "Paragon Acquisition") for approximately $1,600,000 in cash.
This acquisition was recorded as a purchase with the excess of purchase price
and acquisition costs over net assets acquired of approximately $1.5 million
being recorded as goodwill. Goodwill will be amortized over 20 years. The
information below represents the unaudited pro forma consolidated results of
operations of the Company and the Paragon Acquisition for the year ended
December 31, 1999 as if this acquisition had occurred as of January 1, 1999:
<TABLE>
<S> <C>
Revenue..................................................... $52,777,000
Income from operations...................................... 4,555,000
Net loss.................................................... 72,000
</TABLE>
Bridge Financing (Unaudited)
On June 16, 2000 the Company entered into a bridge financing in which the
Company issued promissory notes ("bridge notes") in the aggregate principal
amount of $10.0 million to Parthenon Investors, L.P. and
F-23
<PAGE>
TALENTPOINT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PCIP Investors, two of the Company's shareholders, for aggregate cash proceeds
of $8.1 million. In connection with the bridge financing, Parthenon and PCIP
exercised warrants to purchase 116,210 shares of Class A common stock at an
exercise price of $16.70 per share, for aggregate cash proceeds of $1.9
million. The Company received total cash proceeds of $10 million from these
investor lenders in connection with these transactions.
The bridge notes mature on June 16, 2004 and bear interest at a stated
annual rate of 13% on the principal amount for the first year and 16%
thereafter. The original issue discount of $1.9 million on the bridge notes
will be amortized as additional interest expense during the first year.
Interest on the bridge notes is payable quarterly. Quarterly accrued interest
in an amount sufficient for the investor lenders to pay federal and state
income taxes on the accrued interest and original issue discount on the notes
must be paid in cash, and the remaining accrued interest payable by the
issuance of additional promissory notes in the principal amount of the interest
payable. The bridge notes are subordinate to the Company's Loan Agreement. The
Company will be required to issue 348,630 shares of common stock to the
investor lenders if the Company does not repay the bridge notes by June16, 2001
and we will be required to issue an additional 58,105 for each of the four
months thereafter (up to an aggregate amount of an additional 232,420 shares of
common stock) if any amounts remain outstanding under the bridge notes. The
bridge notes are prepayable at any time without penalty. The bridge note
agreements contain various terms and covenants which provide for certain
restrictions on the Company's capital expenditures and require the Company to
maintain minimum levels of working capital and EBITDA.
Exchange and Conversion Agreement (Unaudited)
On June 16, 2000, the Company entered into an Exchange and Conversion
Agreement ("Conversion Agreement") with the Parthenon Investors whereby the
Parthenon Investors agreed to exchange 19,208 shares of the redeemable Class B
common stock for 454,653 shares of the Company's Class A common stock upon the
initial filing of a registration statement for the initial public offering of
the Company's common stock, expected to be June 23, 2000. Effective immediately
prior to the completion of an initial public offering, the Parthenon Investors
will convert an additional 19,208 shares of the redeemable Class B common stock
to Class A common stock at the exchange ratio, as defined in the Conversion
Agreement. In addition, the remaining 60,532 shares of redeemable Class B
common stock will be converted into 3,026,600 shares of Class A common stock
effective immediately prior to the completion of our initial public offering.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
International Holding Company, Inc. and Insurance Services, Inc. and
subsidiaries:
We have audited the accompanying combined balance sheet of International
Holding Company, Inc. and Insurance Services, Inc. and subsidiaries (d/b/a
Raymond Karsan Associates) (the "Company") as of December 31, 1998, and the
related combined statements of operations, stockholders' equity (deficit) and
of cash flows for each of the two years in the period ended December 31, 1998.
These companies are under common ownership and management. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined financial statements present fairly, in all
material respects, the combined financial position of International Holding
Company, Inc. and Insurance Services, Inc. and subsidiaries as of December 31,
1998, and the combined results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the combined financial statements, the Company's deficiency in working capital,
stockholders' deficit and notification from a financial institution of the
acceleration of the repayment on December 17, 1999 of all amounts outstanding
under the Company's loan and security agreement and the Company's lack of
available financing raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Deloitte & Touche LLP
November 19, 1999, except for Note 3
as to which the date is December 1, 1999 and except for the effects of the
reorganization and stock split described in Note 13 as to which the date is
June 6, 2000
F-25
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC. AND
INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
COMBINED BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 519,559
Accounts receivable, net of allowance for doubtful accounts of
$1,022,678..................................................... 9,216,268
Employee advances............................................... 188,406
Subscriptions receivable........................................ 330,733
Prepaid expenses and other current assets....................... 324,532
-----------
Total current assets.......................................... 10,579,498
Property and equipment, net of accumulated depreciation........... 4,076,114
Intangibles, net of accumulated amortization...................... 8,914,837
Other assets...................................................... 246,990
-----------
$23,817,439
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................ $ 2,630,049
Line of credit.................................................. 8,075,605
Current portion of notes payable................................ 2,240,052
Commissions payable............................................. 1,244,623
Other accrued liabilities....................................... 2,227,068
Accrued compensation and benefits............................... 1,913,455
Unearned revenue................................................ 1,581,684
Capital lease obligation........................................ 548,193
-----------
Total current liabilities..................................... 20,460,729
Capital lease obligation, less current portion.................... 584,307
Notes payable, less current portion............................... 2,428,969
Other liabilities................................................. 924,849
Commitments and contingencies
Stockholders' deficit:
International Holding Company, Inc. common stock, no par value;
authorized 50,000,000 shares; issued and outstanding
10,451,900..................................................... 4,248,525
Insurance Services, Inc. common stock, no par value; authorized
50,000,000 shares; issued and outstanding 10,588,550 shares.... 287,588
Accumulated deficit............................................. (4,046,396)
Notes due on common stock....................................... (1,071,132)
-----------
Total stockholders' deficit................................... (581,415)
-----------
$23,817,439
===========
</TABLE>
See notes to combined financial statements.
F-26
<PAGE>
INTERNATIONAL HOLDING COMPANY INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
COMBINED STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues............................................... $47,090,562 $38,050,214
Cost of revenues....................................... 17,783,485 14,990,774
----------- -----------
Gross margin........................................... 29,307,077 23,059,440
Costs and expenses:
Compensation and benefit expense..................... 22,603,526 15,411,952
Other selling, general and administrative expense.... 8,931,637 6,137,236
Depreciation and amortization expense................ 1,353,651 597,247
----------- -----------
Total costs and expenses........................... 32,888,814 22,146,435
----------- -----------
Operating income (loss)................................ (3,581,737) 913,005
Interest expense....................................... 970,378 450,106
Other income (expense)................................. -- 7,130
----------- -----------
Income (loss) before taxes............................. (4,552,115) 470,029
Income tax provision (benefit)......................... (10,246) 14,297
----------- -----------
Net income (loss)...................................... $(4,541,869) $ 455,732
=========== ===========
Earnings (loss) per common share:
Basic:
Earnings (Loss) Per Share.......................... $ (0.43) $ 0.05
=========== ===========
Weighted Average Shares Outstanding................ 10,564,550 9,537,050
=========== ===========
Diluted:
Earnings (Loss) Per Share.......................... $ (0.43) $ 0.05
=========== ===========
Weighted Average Shares Outstanding................ 10,564,550 9,748,400
=========== ===========
</TABLE>
See notes to combined financial statements.
F-27
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
International Holding Insurance
Company, Inc. Services, Inc. Retained Total
Common Stock Common Stock Earnings Notes Due Stockholders'
---------------------- -------------------- (Accumulated on Common Equity
Shares Amount Shares Amount Deficit) Stock (Deficit)
---------- ---------- ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 7,958,450 $1,510,987 7,958,450 $ -- $ 519,741 $ (193,387) $1,837,341
Exercise of common
stock options........ 468,500 312,958 468,500 -- -- -- 312,958
Issuance of common
stock to new
stockholders......... 530,550 1,619,876 586,100 200,000 -- -- 1,819,876
Repurchase and
retirement of shares
of common stock...... (97,900) (145,654) (97,900) -- -- -- (145,654)
Issuance of common
stock in connection
with business
acquisitions......... 1,532,000 1,342,912 1,532,000 -- -- -- 1,342,912
Change in notes due on
common stock......... -- -- -- -- -- (1,333,259) (1,333,259)
Net income............ -- -- -- -- 455,732 -- 455,732
Distributions to
stockholders......... -- -- -- -- (330,000) -- (330,000)
---------- ---------- ---------- -------- ----------- ----------- ----------
Balance, December 31,
1997................... 10,391,600 4,641,079 10,447,150 200,000 645,473 (1,526,646) 3,959,906
Exercise of common
stock options........ 152,550 150,044 152,550 -- -- -- 150,044
Repurchase and
retirement of shares
of common stock...... (313,900) (781,980) (313,900) -- -- -- (781,980)
Issuance of common
stock in connection
with business
acquisitions......... 221,650 239,382 302,750 87,588 -- -- 326,970
Change in notes due on
common stock......... -- -- -- -- -- 455,514 455,514
Net loss.............. -- -- -- -- (4,541,869) -- (4,541,869)
Distributions to
stockholders......... -- -- -- -- (150,000) -- (150,000)
---------- ---------- ---------- -------- ----------- ----------- ----------
Balance, December 31,
1998................... 10,451,900 $4,248,525 10,588,550 $287,588 $(4,046,396) $(1,071,132) $ (581,415)
========== ========== ========== ======== =========== =========== ==========
</TABLE>
See notes to combined financial statements.
F-28
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC. AND
INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss).................................. $(4,541,869) $ 455,732
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 1,353,651 597,247
Imputed interest................................. 162,929 130,710
Nonrecurring charges............................. -- 172,197
Stock-based compensation......................... -- 92,545
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable............................ (1,959,319) (1,399,662)
Prepaid expenses and other current assets...... (78,618) 3,454
Other assets................................... 42,941 (151,674)
Accounts payable............................... 1,503,128 (412,609)
Accrued compensation and other accrued
liabilities................................... 1,668,725 143,504
Commissions payable............................ (341,951) 280,061
Unearned revenue............................... 1,173,822 263,150
Other liabilities.............................. -- 139,459
----------- -----------
Net cash provided by (used in) operating
activities.................................. (1,016,561) 314,114
----------- -----------
Investing activities:
Property and equipment acquired - net of
retirements....................................... (976,055) (1,047,125)
Purchase of companies, net of cash acquired........ (921,690) 229,553
----------- -----------
Net cash used in investing activities........ (1,897,745) (817,572)
----------- -----------
Financing activities:
Net borrowings under line of credit................ 4,290,605 1,011,421
Repayments of notes payable........................ (675,720) (335,704)
Proceeds from the sale of common stock............. 258,428 286,686
Proceeds from the exercise of common stock
options........................................... 47,992 110,413
Repurchase and retirement of common stock.......... (87,281) (145,654)
Distributions to stockholders...................... (150,000) (330,000)
Payments on capital lease obligation............... (470,034) (177,942)
----------- -----------
Net cash provided by financing activities.... 3,213,990 419,220
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 299,684 (84,238)
Cash and cash equivalents, beginning of year......... 219,875 304,113
----------- -----------
Cash and cash equivalents, end of year............... $ 519,559 $ 219,875
=========== ===========
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS
Years ended December 31, 1998 and 1997
1. ORGANIZATION
International Holding Company, Inc. ("IHC") and Insurance Services, Inc.
("ISI") and subsidiaries (collectively, the "Company") includes the combined
entities of IHC and ISI. IHC, an S corporation, and its wholly owned
subsidiaries and ISI, a C corporation, provide human resource and information
technology services and solutions to its corporate clientele, including
permanent placement, temporary staffing, information technology and human
resource consulting and training.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination--The combined financial statements of the Company
include the accounts of IHC, its wholly owned subsidiaries and ISI. All
significant intercompany accounts and transactions have been eliminated in
combination. The combined financial statements of the Company have been
prepared to give retroactive effect to the acquisition of Software Support
Services, Inc. ("SSSI") on December 31, 1998 which was accounted for using the
pooling-of-interests method of accounting (see Note 4).
Cash and Cash Equivalents--Cash and cash equivalents consist of highly
liquid investments with remaining maturities of three months or less at the
time of purchase.
Prepaid Expenses and Other Current Assets--Prepaid expenses and other
current assets consist primarily of prepaid software maintenance agreements,
rent, insurance and other current assets.
Property and Equipment--Property and equipment are stated at cost or
respective fair market value at the date of acquisition. Equipment under
capital lease is stated at the lower of the fair market value at the date of
acquisition in the case of business combinations or net present value of the
minimum lease payments at inception of the lease. Depreciation and amortization
is provided on the straight-line basis over the assets' estimated useful lives
or, if shorter, the lease terms for leasehold improvements and equipment under
capital lease. The estimated useful life is 7 years for office furniture, 5
years for computer equipment and 3 to 5 years for software. Costs of
maintenance and repairs are charged to expense as incurred. Gains and losses on
sales and retirements of assets are reflected in the results of operations.
Intangibles--Intangible assets are comprised of excess purchase price over
net assets acquired (goodwill) and intellectual property. Goodwill is amortized
on a straight-line basis over twenty years. Included in intangibles is
approximately $758,000 of intellectual property (which is net of accumulated
amortization) as of December 31, 1998. Intellectual property is amortized on a
straight-line basis over 7 years.
Revenue Recognition--Revenue from contingent search engagements is
recognized upon the applicant's start of employment. Revenue from retained
search engagements is recognized ratably as follows: one-third of the initial
retainer upon the execution of the contract and one-third upon 30 days from the
execution date with the remaining balance recognized upon completion of the
contract, typically 60 to 90 days from the execution date. Reserves are
established to estimate losses due to placed candidates not remaining in
employment for the Company's guarantee period, typically 90 days. Fee revenue
is presented net of adjustments to original billings. Revenues from temporary
and contract personnel are recognized concurrently with the performance of
services. Revenues from information technology, training, bench marking and
assessments are recognized when earned.
Unearned revenue represents payments received from the Company's customers
for services not completed, and amounts billed under contracts in advance of
project completion.
F-30
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Income Taxes--The Company's operations are principally taxed under the
provisions of Subchapter S of the Internal Revenue Code. Pursuant to Subchapter
S, all income is reported through the stockholders' individual tax returns and
the resulting tax liability is the responsibility of the individual
stockholders. Accordingly, no provision for federal and state income taxes is
recorded for the operations of the Company's S corporation. The Company
provides for federal and state income taxes of its C corporations. The Company
recognizes deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of its C corporations'
assets and liabilities and expected benefits of utilizing net operations loss
carryforwards.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk consist primarily of accounts
receivable. Credit risk arising from receivables is minimal due to the large
number of clients comprising the Company's customer base and their dispersion
across many industries. The customers are concentrated primarily in the
Company's U.S. market area.
401(k) Plan--The Company sponsors a defined contribution plan (401(k) Plan)
which is available for participation to all eligible employees. Company
contributions to the plan are based upon a percentage of each employee's
contribution to the plan to the total of all employees' contributions, subject
to management's election to make a contribution each year. Contributions
charged to operations by the Company were $0 and $236,748 for the years ended
December 31, 1998 and 1997, respectively.
Stock-Based Compensation--The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 encourages, but does not require, companies
to record compensation cost for stock-based compensation plans at fair value.
The Company has elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations, as permitted
by SFAS 123. Compensation expense for stock options is measured as the excess,
if any, of the fair value of the Company's stock over the amount an employee
must pay to acquire the stock (see Note 11).
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments--The carrying amounts of the Company's
financial assets and liabilities, including cash, accounts receivable, prepaid
expenses, employee receivables, other current assets, accounts payable, accrued
compensation and other current liabilities at December 31, 1998 approximate
fair value because of the short maturity of these instruments. The carrying
amount of the Company's long-term debt approximates fair value at December 31,
1998, based on current market rates of interest and maturities.
New Accounting Pronouncement--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for fiscal years beginning after
F-31
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
June 15, 1999. The Company is evaluating the effects that the adoption of SFAS
133 may have on its financial position and results of operations. On May 20,
1999, the FASB issued an Exposure Draft that, if approved, amends the effective
date of SFAS 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000.
Supplemental Cash Flow Information - For the years ended December 31, 1998
and 1997, the Company paid interest of approximately $815,000 and $434,000,
respectively.
For the years ended December 31, 1998 and 1997, the Company issued notes
receivable for the purchase of common stock in the amount of approximately
$300,000 and $1,922,000, respectively.
For the years ended December 31, 1998 and 1997, the Company entered into
capital lease obligations of $470,250 and$1,361,043, respectively.
For the years ended December 31, 1998 and 1997, the Company issued shares of
common stock valued at approximately $327,000 and $1,343,000, respectively, and
issued notes to sellers of approximately $3,523,000 and $827,000, respectively,
in connection with business acquisitions.
3. OPERATIONS AND FINANCING
The Company incurred a net loss of approximately $4,542,000 for the year
ended December 31, 1998, which resulted in an accumulated deficit of
approximately $4,046,000 and stockholders' deficit of approximately $581,000 at
December 31, 1998. In addition, the Company was notified in October 1999 that
on December 17, 1999 its lender will terminate the Company's loan and security
agreement and accelerate payment of the outstanding balance, as permitted under
the terms of a forbearance and amendment agreement executed on August 18, 1999
(See Note 7). As a result, all amounts outstanding under the loan and security
agreement ($7,510,000 at June 30, 1999) will become due and payable on December
17, 1999. Additionally, the Company will be required to repay in full its
unsecured loans from stockholders, plus interest, concurrently with the
repayment of all amounts outstanding under the loan and security agreement (see
Note 7).
In order to refinance the amounts outstanding under the loan and security
agreement with its lender, during October 1999 the Company signed a letter of
intent with a venture capital firm to obtain equity financing in an aggregate
amount of approximately $22,000,000, prior to payment of transaction expenses.
The consummation of the financing is subject to the venture capital firm's
satisfactory review of the Company and normal due diligence procedures and
other approvals. The financing, if approved, will be used by the Company to
repay existing debt under the Company's loan and security agreement, as
amended, repay outstanding loans from stockholders (see Note 8), repurchase
outstanding common stock and for general working capital and other general
corporate purposes. However, there can be no assurance that the financing will
be consummated.
On December 1, 1999, the Company entered into a preliminary term sheet with
a bank to obtain an aggregate $20 million credit facility. The preliminary term
sheet does not constitute a firm commitment by the bank and consummation of the
financing is subject to the bank's satisfactory review of the Company and
normal due diligence procedures and other approvals. The financing, if
consummated, will be used by the Company to repay existing debt, finance future
acquisitions and for general working capital purposes. However, there can be no
assurance that the financing will be consummated.
The accompanying combined financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
deficiency in working capital, stockholders' deficit, notification from its
lender of the
F-32
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
acceleration of the repayment on December 17, 1999 of all amounts outstanding
under the loan and security agreement and the Company's lack of available
financing raise substantial doubt about the Company's ability to operate as a
going concern.
4. BUSINESS COMBINATIONS
Merger with Software Support Services, Inc. (SSSI)--On December 31, 1998,
the Company acquired SSSI. The transaction was accounted for under the pooling-
of-interests method of accounting. In the transaction, the Company issued
500,000 shares of its common stock in exchange for all of the outstanding stock
of SSSI. The acquisition was structured as a merger of SSSI into IHC. The
combined financial statements give retroactive effect to the merger with SSSI
and include the combined operations of the Company and SSSI for all periods
presented. The following is a summary of the results of operations of the
separate entities for periods prior to the merger:
<TABLE>
<CAPTION>
Company SSSI As Reported
----------- ---------- -----------
<S> <C> <C> <C>
Year Ended December 31:
1998:
Revenue............................. $42,140,299 $4,950,263 $47,090,562
Net income (loss)................... (5,069,745) 527,876 (4,541,869)
1997:
Revenue............................. 35,513,298 2,536,916 38,050,214
Net income.......................... 329,313 126,419 455,732
</TABLE>
Other Business Acquisitions--The acquisitions described below have been
accounted for under the purchase method. The results of these acquisitions have
been included in the results of operations from the applicable acquisition
dates. The purchase price of the acquisitions has been principally allocated to
fixed assets, intellectual property and goodwill. Goodwill, which is the excess
of the purchase price over the fair value of net assets, was approximately
$8,915,000 and is being amortized on a straight-line basis over 20 years.
1998 Acquisitions--During 1998 the Company acquired three companies
("sellers") operating in the human resource outsourcing, information technology
services or temporary staffing industries. The acquisitions were funded by
approximately $1,068,000 in cash, the issuance of approximately $3,523,000 in
notes payable to the sellers and the issuance of 257,050 shares of the
Company's common stock, valued at approximately $277,614 at the respective
dates of acquisition. The excess of the aggregate purchase price over the fair
value of net assets acquired of approximately $5,538,000 was allocated to
goodwill. The acquisitions included substantially all of the non-current
assets, certain current assets and the assumption of certain liabilities of the
sellers in the amount of approximately $314,000. Additionally, certain purchase
agreements included provisions whereby additional purchase price may be
required if the sellers attain certain financial results during a specified
period. Accordingly, approximately $1,221,000, of which approximately $616,000
will be paid in 1999, is included in the line item, other accrued liabilities
on the accompanying combined balance sheet at December 31, 1998, which
represents the probable amount due under the terms of the agreements. The
remaining noncurrent portion of $605,000 is included in the line item, other
liabilities, on the accompanying combined balance sheet at December 31, 1998.
1997 Acquisitions--During 1997 the Company acquired three companies
operating in the human resource outsourcing and permanent placement industries.
The acquisitions were funded by approximately $250,000 in cash, the issuance of
approximately $827,000 in notes payable to the sellers and the issuance of
1,420,500 shares of the Company's common stock, valued at approximately
$1,245,000 at the respective dates
F-33
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
of acquisition. The excess of the aggregate purchase price over the fair value
of net assets acquired of approximately $1,471,000 was allocated to goodwill.
The acquisitions included substantially all of the non-current assets, certain
current assets and the assumption of certain liabilities of the sellers in the
amount of approximately $114,000. In connection with an acquisition, the
Company issued 45,700 shares of common stock during 1998 to the former owner of
the acquired company at a value of approximately $49,000 on the date of
issuance. Goodwill was increased by that amount in 1998.
In connection with an acquisition in 1996, the Company issued 111,500 shares
of common stock during 1997 to employees of the acquired company at a value of
approximately $92,545 on the date of issuance. This amount was recorded as
compensation expense in 1997.
5. EMPLOYEE ADVANCES AND LOANS
Included in employee advances as of December 31, 1998 were commissions
advanced in the amount of approximately $176,000. In addition, the balances
included loans to Company shareholders aggregating approximately $12,000 as of
December 1998. Employee advances and loans bear no interest.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment and related accumulated depreciation as
of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Equipment...................................................... $3,923,318
Software....................................................... 864,488
Office furniture and fixtures.................................. 379,682
Leasehold improvements......................................... 198,779
Construction in process........................................ 216,601
----------
5,582,868
Less accumulated depreciation.................................. 1,506,754
----------
$4,076,114
==========
</TABLE>
Equipment includes capital leases of approximately $1,831,000 as of December
31, 1998. Depreciation expense, including amortization of assets under capital
leases, was approximately $856,000 for the year ended December 31, 1998.
7. LINE OF CREDIT
On June 15, 1998, the Company entered into a loan and security agreement
("Agreement") with a financial institution ("Lender"). The Agreement provides
for a maximum $10,000,000 facility available to fund general working capital
requirements and acquisitions. The maximum amount available to the Company to
fund general working capital requirements is 85% of the Company's net accounts
receivable, plus $750,000 (referred to as an "overformula advance"). The
maximum amount available to the Company to fund acquisitions is $2,500,000. The
amount advanced under the Agreement to fund working capital requirements,
approximately $6,493,000 as of December 31, 1998, bears interest at the bank's
prime rate (7.75% at December 31, 1998). The amount advanced under the
Agreement to fund acquisitions, approximately $1,583,000 as of December 31,
1998, bears interest at the base rate plus .75% (8.50% at December 31, 1998).
Interest on all advances is
F-34
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
payable monthly. Either party may terminate the Agreement after giving the
other party 60 days prior written notice. All amounts immediately become due
and payable upon termination of the Agreement. Principal amounts advanced for
acquisitions convert to term loans and are payable over a period not to exceed
18 months. Overformula advances are due and payable at the earlier of 15 days
from the advance date or at the end of each month. Advances under the Agreement
are collateralized by the Company's accounts receivable, cash balances
maintained in bank accounts, general intangibles, intellectual property and
certain books and records.
The Agreement contains various terms and covenants which provide for certain
restrictions on the Company's indebtedness, disposition of assets, investments
and acquisitions and require the Company, among other things, to maintain
minimum levels of net worth and certain minimum financial ratios. At December
31, 1998 and at various times during the year then ended, the Company was in
default of various provisions under the Agreement. More specifically, the
Company has not maintained minimum net worth, current ratio and debt service
coverage ratio, has not submitted various financial information to the Lender,
has not made scheduled principal payments on acquisition advances and has not
repaid the overformula advance, has incurred indebtedness not permitted under
the Agreement and has exceeded the limit on capital expenditures.
As a result of the events of default, the Company and the Lender entered
into the Forbearance and Amendment Agreement ("Forbearance Agreement") dated
July 23, 1999, and executed on August 18, 1999. The Forbearance Agreement
reserved the rights and remedies of the Lender in connection with the existing
defaults, but the Lender agreed to forbear from exercising its rights until
August 20, 2000 or the occurrence of any event of default under the Forbearance
Agreement. Additionally, the payment due under the acquisition advance was
rescheduled to be due and payable upon the earlier of August 1, 1999 or the
occurrence of an event of default under the Forbearance Agreement. The
Forbearance Agreement continues to provide the Company with the ability to
receive up to $750,000 as overformula advances so long as the total amount
outstanding under all advance options does not exceed $10,000,000. The
Forbearance Agreement requires the Company to maintain compliance with the
following financial covenants; limit on annual capital expenditures and
cumulative monthly EBITDA, fixed change coverage and total interest coverage.
Also, the Forbearance Agreement requires the Company to proceed in good faith
to obtain an investment banker in order to seek and close a debt or equity
financing transaction by October 31, 1999 in an amount sufficient to repay in
cash all amounts outstanding under the Agreement, as amended, related to
acquisitions and overformula advances. The Company's failure to close such a
transaction by October 31, 1999, will not result in an event of default under
the Forbearance Agreement (see Note 13).
The Company was notified in October 1999 that on December 17, 1999 its
Lender will terminate the Company's Agreement and accelerate payment of the
outstanding balance, as permitted under the terms of the Forbearance Agreement.
As a result, all amounts outstanding under the Agreement will become due and
payable on December 17, 1999 (see Note 3).
8. LONG-TERM DEBT
In connection with various acquisitions (see Note 4), the Company issued
interest and non-interest bearing notes to sellers of the businesses. Principal
and interest on the interest-bearing notes are payable semi-annually and
annually. Maturity dates on these notes vary from October 30, 1999 through July
1, 2001. As of December 31, 1998, the non-interest bearing notes are presented
at their estimated net present value based on imputed interest rate at 8%. The
unamortized discount based on imputed interest for all non-interest-bearing
notes was $329,631 and $192,503 as of December 31, 1998 and 1997, respectively.
The weighted average
F-35
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
interest rate of all notes payable was 6.6% at December 31, 1998. Maturities of
notes outstanding, less unamortized discounts and excluding capital leases, as
of December 31, 1998 for each of the next five years is as follows (see Note 13
for subsequent events that modify the maturity of long-term debt):
<TABLE>
<CAPTION>
Description 1999 2000 2001 2002 2003 Total
----------- ---------- ---------- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Docker note.............. $ 86,806 $ 86,806
ACI note................. 138,889 $ 138,889 277,778
HRT note................. 115,741 125,000 240,741
SDA note................. 370,371 -- 370,371
ECI note................. 971,833 971,833 1,943,666
Morestaff note........... 500,274 915,966 $163,234 1,579,474
Stockholder notes........ 56,138 114,047 -- 170,185
---------- ---------- -------- ---- ---- ----------
$2,240,052 $2,265,735 $163,234 $-- $-- $4,669,021
========== ========== ======== ==== ==== ==========
</TABLE>
9. INCOME TAXES
The provision (benefit) for income taxes of the Company's C corporations for
the years ended December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current:
Federal.............................................. $ -- $ 33,506
State and local...................................... -- 4,927
-------- --------
-- 38,433
-------- --------
Deferred:
Federal.............................................. (9,168) (22,350)
State and local...................................... (1,078) (1,786)
-------- --------
(10,246) (24,136)
-------- --------
Income tax provision (benefit)..................... $(10,246) $ 14,297
======== ========
</TABLE>
Significant components of the Company's net deferred tax assets
(liabilities) as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Deferred Tax Assets:
Accounts receivable........................................... $ 40,629
Net operating loss carryforwards.............................. 238,788
Less valuation allowance...................................... (120,000)
---------
159,417
---------
Deferred Tax Liabilities:
Property and equipment........................................ (29,275)
Prepaid assets................................................ (95,760)
---------
(125,035)
---------
Net deferred tax asset...................................... $ 34,382
=========
</TABLE>
F-36
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, the Company had net operating loss carryforwards for
federal and state purposes of approximately $633,000 and $582,000,
respectively, which expire in 2018 and 2003, respectively. The Company's
valuation allowance reduces the gross deferred tax assets to the level where
management believes that it is more likely than not that the tax benefit will
be realized.
10. COMMITMENTS AND CONTINGENCIES
Leasing Arrangements--The Company leases certain of its facilities and
equipment under various operating and capital leases. Future minimum lease
payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
1999................................................. $ 635,929 $1,038,480
2000................................................. 524,476 923,824
2001................................................. 93,774 813,901
2002................................................. -- 396,264
2003 and thereafter.................................. -- 422,214
---------- ----------
Total minimum lease payments....................... 1,254,179 $3,594,683
==========
Less amount representing interest.................... 121,679
Present value of net minimum payments under capital
leases.............................................. 1,132,500
Less current portion................................. 548,193
----------
$ 584,307
==========
</TABLE>
Rent expense was approximately $1,362,000 and $974,000 for the years ended
December 31, 1998 and 1997, respectively.
Deferred Compensation--In 1997, the Company entered into an unfunded
deferred compensation contract with an employee/stockholder of the Company.
Under the terms of the contract, the stockholder or his beneficiary is entitled
to retirement benefits upon reaching the Company's normal retirement date. The
retirement benefits under the plan provide for 120 monthly installments to be
paid to the stockholder or his beneficiary.
At December 31, 1998 the liability under the deferred compensation plan was
approximately $320,000. Deferred compensation expense was $163,000 and $157,000
for the years ended December 31, 1998 and 1997, respectively. The present value
of the estimated liability, which is included in other liabilities, was
determined by calculating the net present value of the retirement benefits
expected to be earned by the stockholder from the effective date of the
agreement through the stockholder's expected retirement date using a discount
rate of 8%.
Litigation--The Company is a party to certain legal actions arising in the
ordinary course of business. While it is not possible to determine with
certainty the outcome of these matters, in the opinion of management the
eventual resolution of these claims and actions outstanding will not have a
material adverse effect on the Company's combined financial position, results
of operations or liquidity.
F-37
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
11. STOCK OPTION PLAN
In accordance with the bylaws of IHC and ISI, the Company may grant options
at the discretion of the Board of Directors. The purpose of the options is to
recognize past services rendered and to provide additional incentive in
furthering the continued success of the Company. Vesting of the stock options
is at the discretion of the Board of Directors and generally occurs on the
first anniversary date from the date of grant. The price of the incentive stock
options issued to employees under the plan is not less than 100% of the fair
market value of the common shares at the date of grant.
Options expire three years from the date of grant through January 2001. Upon
an employee's termination, the unexercised portion of incentive stock options
expire. Options granted by the Company entitle the employee to receive, when
exercised, one share of common stock in each of IHC and ISI. Presented below is
the activity in the plan for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Number of Price Per Weighted Average
Options Share Exercise Price
--------- ------------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1997......... 938,800 $0.67 - $1.43 $1.03
Exercised...................... (403,500) 0.67 0.67
Granted........................ 338,400 2.09 2.09
-------- -------------
Balance, December 31, 1997....... 873,700 $0.98 - $2.09 1.61
Exercised...................... (152,550) 0.98 0.98
Granted........................ -- -- --
Cancelled...................... (53,650) $1.43 - $2.09 1.78
-------- -------------
Balance, December 31, 1998....... 667,500 $1.43 - $2.09 1.74
======== =============
Exercisable at December 31,
1998........................ 667,500 $1.43 - $2.09 1.74
======== =============
</TABLE>
Because the Company accounts for the plan under APB 25, no compensation cost
has been recognized in the financial statements for stock options issued under
the plan. Had compensation expense for the plan been determined based on the
fair value at the grant dates under the provisions of SFAS 123, the Company's
pro forma net income would not have been materially different. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model, with a risk-free interest rate of 6.5% and 5.875% for
1998 and 1997, respectively, no expected dividend yield and an expected life of
three years.
12. STOCKHOLDERS' EQUITY (DEFICIT)
All stockholders have entered into stockholder agreements that define and
provide for, among other things, the purchase, sale and transfer of shares in
accordance with the agreements. Stockholders are required to enter into
separate stockholder agreements for both IHC and ISI. Certain stockholders have
purchased shares of common stock using notes. Subscriptions receivable consist
of the portion of notes due on common stock of IHC that have been received by
the Company in 1999. Certain employees have elected to purchase stock in
accordance with provisions under the IHC stock purchase agreement that permit
an initial 25% cash payment at the time of purchase with the remainder due in
equal annual installments each January 15 of the next three years. The
subscriptions bear no interest to the employee. The unpaid portion of
subscriptions receivable has been classified as contra-equity, notes due on
common stock.
F-38
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
13. SUBSEQUENT EVENTS
Stock Repurchases
In January 1999, the Company entered into three separate stock repurchase
agreements with former principal/shareholders of the Company. The Company
acquired a total of 937,750 shares in these transactions for total
consideration of approximately $2,522,000 and the cancellation of a secured
note related to the purchase of stock options in the amount of $8,350. The
Company funded these transactions by cash in the amount of approximately
$217,000 and the issuance of promissory notes in the amount of approximately
$2,085,000, of which $120,000 has been repaid in 1999. The remaining promissory
notes are payable as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1999............................................................ $ 92,000
2000............................................................ 756,000
2001............................................................ 562,000
2002............................................................ 555,000
</TABLE>
Also, two stock repurchase agreements require the Company to repay all
amounts outstanding under the note following the completion of an initial
public offering.
Sale of Businesses
Morestaff Sale
Effective April 30, 1999, the Company sold its entire interest in Morestaff,
a temporary staffing company, to the previous owners of Morestaff ("Morestaff
Buyers"). Morestaff Buyers received net assets of approximately $362,000 that
consisted of cash, accounts receivable, other current assets, fixed assets and
current liabilities. In return, Morestaff Buyers forgave the Company of
approximately $1,579,000 in notes payable due Morestaff Buyers as a result of
the Company's acquisition of Morestaff on July 15, 1998. The transaction
resulted in a $513,000 loss from disposal primarily due to the write-off of net
goodwill in the amount of approximately $1,937,000. Included in the Company's
combined statement of operations for the year ended December 31, 1998 were the
following amounts related to the Morestaff operation:
<TABLE>
<S> <C>
Revenue.................................................... $1,639,000
Income from operations..................................... 88,000
Net income................................................. 73,000
</TABLE>
F-39
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Temporary Staffing Business
Effective October 29, 1999, the Company sold a portion of its temporary
staffing business to two former shareholders of the Company ("Temp Staff
Buyers") who previously managed this portion of the business (the "Temp Staff
Sale"). The Temp Staff Buyers received net assets that consisted of fixed
assets of $5,500 and a note receivable of $322,000. The Temp Staff Buyers
returned 198,250 shares of IHC and 198,250 shares of ISI to the Company in
connection with this transaction for an aggregate value of approximately
$595,000. Included in the Company's consolidated income statement for the six
months ended June 30, 1999 were the following amounts related to the Temp Staff
Sale operation:
<TABLE>
<CAPTION>
(Unaudited)
-----------
<S> <C>
Revenue................................................... $1,328,000
Loss from operations...................................... (141,000)
Net loss.................................................. (141,000)
</TABLE>
Modification of Note Payable
On May 14, 1999, the Company entered into an amendment to a promissory note
("Note") issued in connection with the Company's May 1, 1998 acquisition of
Enhanced Communications, Inc. and Enhanced Courseware, Inc. ("ECI"). Under the
Note, the Company was required to pay the former owner of ECI an aggregate of
approximately $1,944,000 in two equal payments of approximately $972,000, plus
all accrued and unpaid interest, on April 30, 1999 and April 30, 2000. The
Company and ECI agreed to modify the terms of the Note so that in lieu of the
first payment of $972,000 due on April 30, 1999, the Company would pay
approximately $1,127,000 in four equal installments on May 4, 1999, June 4,
1999, July 6, 1999 and August 4, 1999. The terms of the Note for the second
payment of $972,000 due on April 30, 2000 were not modified. In addition, the
Company will pay ECI approximately $42,000 ("Late Payment") in three equal
installments on June 4, 1999, July 6, 1999 and August 4, 1999. Interest on the
amount outstanding from the April 30, 1999 payment and the Late Payment accrues
at a rate of 16% per annum.
Notes Payable to Stockholders
In May 1999, certain of the Company's stockholders contributed approximately
$1,100,000 to the Company in exchange for unsecured notes payable. The
unsecured notes payable are subordinated to the amounts advanced under the
Company's Agreement (see Note 7), and accrue interest at a rate of 15% per
annum, payable upon maturity. The unsecured notes are scheduled to mature on
the later of December 1, 1999 or the date when full repayment is made of the
amounts due under the Agreement, as amended. Under the terms of the unsecured
notes and related subordination agreements dated July 23, 1999, and executed on
August 18, 1999, the Company is prohibited from repaying the principal and/or
interest on the unsecured notes when the Company is in default or has an
overformula advance and the acquisition advance has not been paid in full, in
cash. Additionally, the Company may not repay any amount of principal or
interest on the unsecured notes, if such payments create a default or
overformula advance under the Forbearance Agreement. Management asserts that
the Company will not make any payment of principal or interest on the unsecured
notes before August 20, 2000, unless such payments are from available proceeds
of a debt and/or equity financing transaction.
The Company has received a commitment from a stockholder for an additional
$1,000,000 in cash to fund general working capital requirements.
F-40
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Debt Financing
In July 1999, the Company entered into a preliminary term sheet and a letter
of intent with two separate investment entities to obtain senior secured
financing and subordinated financing. The preliminary term sheet and the letter
of intent do not constitute firm commitments by the investment banks and
consummation of the financings is subject to the investment banks' satisfactory
review of the Company and normal due diligence procedures and other approvals.
The financings, if consummated, will be used by the Company to repay existing
debt under the Company's loan and security agreement, as amended, and for
general working capital and other general corporate purposes. However, there
can be no assurance that the financings will be consummated.
Corporate Reorganization and Stock Split
Effective December 16, 1999, under an Agreement and Plan of Merger, IHC and
ISI were merged with and into Raymond Karsan Associates, Inc., renamed
TalentPoint Technologies, Inc. ("TalentPoint"). In connection with this
reorganization, each share of IHC and ISI common stock issued and outstanding
immediately prior to the merger was converted into one-half a share of
TalentPoint Class A common stock. Additionally, each option to purchase a share
of IHC and ISI's common stock was converted into the right to receive and
option to purchase one-half a share of TalentPoint Class A common stock at two
times the exercise price in effect immediately prior to the consummation of
this reorganization. The shareholders of IHC and ISI maintained their same
ownership percentages in TalentPoint after the merger.
On June 6, 2000, TalentPoint declared a 50 for 1 stock split of its Class A
common stock. As a result of IHC and ISI being companies under common control
and the shareholders of IHC and ISI maintaining their ownership percentages
immediately prior to and after the merger, all common shares and options
reflected in these financial statements have been adjusted for this
reorganization and stock split for all periods presented.
14. BUSINESS SEGMENT INFORMATION
The Company's businesses are organized, managed and internally reported as
two segments: human capital management and ebusiness. These segments are based
on products or services provided. The human capital management consulting
segment includes talent acquisition, on-site and off-site human resource
department consulting and support, sales force solutions, retention strategies,
employee surveys and training services. The ebusiness technologies services
segment includes the design and implementation of comprehensive electronic
commerce solutions, including communication of web sites to existing front
office and back-end applications and enterprise solutions for business
processes such as financial accounting, manufacturing, project accounting,
strategic procurement and customer relationship management.
F-41
<PAGE>
INTERNATIONAL HOLDING COMPANY, INC.
AND INSURANCE SERVICES, INC. AND SUBSIDIARIES
(d/b/a Raymond Karsan Associates)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The Company's management evaluates performance of each segment primarily
based on revenues and operating income or loss (before interest and income
taxes). The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies (see Note 2). The information
in the following table is derived directly from the segments' internal
financial reporting used for corporate management purposes. Operating income or
losses of these segments include an allocation of general corporate expenses.
<TABLE>
<CAPTION>
HCM eBusiness
Consulting Technology
Services(1) Services Other(2) Total
----------- ---------- -------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue............................ $32,964 $14,127 $ -- $47,091
Gross Profit....................... 22,572 6,736 -- 29,308
Operating income (loss)............ (2,904) 1,331 (2,009) (3,582)
Year ended December 31, 1997
Revenue............................ 31,408 6,642 -- 38,050
Gross Profit....................... 21,505 1,554 -- 23,059
Operating income .................. 426 307 180 913
</TABLE>
---------------------
(1) HCM consulting services includes operations of discontinued lines of
business.
(2) Other consists primarily of unallocated corporate expenses.
The Company has no single customer representing greater than 10% of
revenues. Revenues in the United Kingdom were approximately $1.1 million for
the year ended December 31, 1998. There were no sales for the year ended
December 31, 1997 in the United Kingdom.
F-42
<PAGE>
[LOGO OF TALENTPOINT, INC.]
TalentPoint, Inc.
<PAGE>
PART II
Item 13. Other Expenses of Issuance and Distribution
The expenses of the issuance and distribution, all of which are payable by
us, will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fees.................. $ 22,770
NASD fees and expenses................................................ 9,125
Blue Sky fees......................................................... 5,000
Nasdaq National Market listing, entry and annual fee.................. 113,755*
Transfer agents' fees and expenses.................................... 5,000*
Legal fees and expenses............................................... 275,000*
Accounting expenses................................................... 150,000*
Printing and engraving expenses....................................... 75,000*
Directors and officers insurance...................................... 140,000*
Miscellaneous......................................................... 4,350*
--------
Total expenses........................................................ 800,000
========
</TABLE>
---------------------
* Estimated.
Item 14. Indemnification of Directors and Officers
The Pennsylvania Business Corporation Law, our charter and our bylaws limit
the monetary liability of our directors to us and to our shareholders and
provide for indemnification of our executive officers and directors for
liabilities and expenses that they may incur in such capacities.
Our bylaws provide that none of our directors will be personally liable to
us or our shareholders for monetary damages for any action taken or failure to
take any action, unless:
. such director has breached or failed to perform the duties of his or her
office under Pennsylvania law; and
. the breach or failure to perform constitutes self-dealing willful
misconduct or recklessness.
In addition, our bylaws provide that we shall indemnify our directors and
executive officers for expenses, attorneys' fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with such action, suit or proceeding, if he or she has acted in good faith and
in a manner he or she believed to be in our best interest, or in the case of a
criminal proceeding that he or she had no reasonable cause to believe his or
her conduct was unlawful. Our bylaws also provide that we may advance expenses
to any director or officer upon our receipt of an undertaking by the director
or officer to repay those amounts if it is finally determined that he or she is
not entitled to indemnification.
We maintain directors and executive officers liability insurance to provide
directors and executive officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, error and other wrongful
acts. Prior to the completion of the offering, we will amend our policy to
include coverage against liabilities with respect to the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this registration
statement provides for indemnification by the underwriters of the registrant
and its executive officers and directors severally, but not jointly, and by the
registrant and the selling shareholders of the underwriters for certain
liabilities, including liabilities arising under the Securities Act and affords
certain rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of all the sales of our securities since we were
recapitalized in December 1999 to continue the business of the two corporations
under which we previously did business. All share amounts are adjusted to
reflect the 50-for-1 split of our Class A common stock that occurred on June 6,
2000.
II-1
<PAGE>
On December 15, 1999, we issued 8,601,350 shares our Class A common stock to
our founding officers, directors and employees in exchange for their shares in
the companies under which we operated prior to our recapitalization. In
addition, previously issued options in the companies under which we operated
prior to our recapitalization were converted into options to purchase 234,550
shares of our Class A common stock at an exercise price of $2.0854, and options
to purchase 288,200 shares of our Class A common stock at an exercise price of
$3.50 per share.
On December 16, 1999, we issued an aggregate of 98,948 shares of our Class B
common stock, warrants to purchase in the aggregate 495,250 shares of Class A
common stock at an exercise price of $0.01 per share and warrants to purchase
an aggregate of 894,400 shares of our Class A common stock at an exercise price
of $16.70 per share to Parthenon Investors, L.P., PCIP Investors, JMH Partners
Corp., Shad Run Investments, L.P. and TSG Co-Investors, LLC for an aggregate
purchase price of $22.0 million. We issued warrants to purchase in the
aggregate 495,250 shares of our Class A common stock at an exercise price of
$0.01 per share to certain of our founding officers, directors and employees.
In addition, we issued warrants to purchase in the aggregate 198,100 shares of
our Class A common stock at an exercise price of $3.34 per share and warrants
to purchase in the aggregate 16,400 shares of our Class A common stock for
$16.70 per share to our placement agent and its affiliates.
On January 13, 2000, we issued 10,800 shares of our Class A common stock to
Mr. William Griffin for a $40,000 promissory note.
On January 15, 2000, we issued 54,050 shares of our Class A common stock to
Mr. Scott Schultz for $200,000 paid in cash and promissory notes. In addition,
on January 15, 2000, we issued, in the aggregate, 234,550 shares of our Class A
common stock to some of our officers and employees pursuant to their exercise
of stock options at an exercise price of $2.09 per share.
On January 19, 2000, we issued an aggregate of 54,050 shares of our Class A
common stock to Mr. Charles K. Dawson, Ms. Frances E. Vaughn and Mr. John W.
Hess for aggregate purchase price of $200,000, paid in cash and promissory
notes.
On January 31, 2000, we issued 32,450 shares of our Class A common stock to
Ms. Karin Gellen for $120,000, paid in cash and a promissory note.
On February 29, 2000, we granted options to approximately 400 employees to
purchase in the aggregate 398,850 shares of our Class A common stock at an
exercise price of $3.70 per share.
On March 31, 2000, we issued an aggregate of 392,200 shares of our Class A
common stock to the shareholders of Know It All, Inc., in connection with our
acquisition of Know It All, Inc. through a stock-for-stock merger.
On June 16, 2000, we issued an aggregate of 116,210 shares of our Class A
common stock to Parthenon Investors, L.P. and PCIP Investors upon their
exercise of 116,210 warrants at an exercise price of $16.70 per share.
On June 23, 2000, we issued an aggregate of 454,653 shares of our Class A
common stock to Parthenon Investors, L.P., PCIP Investors, JMH Partners Corp.,
Shad Run Investments, L.P. and TSG Co-Investors, LLC upon conversion of 19,208
shares of our Class B common stock.
Immediately prior to the completion of the offering, assuming an initial
public offering price of $ share, we will issue an aggregate of
shares of our Class A common stock to Parthenon Investors, L.P., PCIP
Investors, JMH Partners Corp., Shad Run Investments, L.P. and TSG Co-Investors,
LLC upon conversion of 79,740 shares of our Class B common stock.
II-2
<PAGE>
The sales of the securities listed above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or, with respect to
issuances to employees, Rule 701 promulgated under Section 3(b) of the
Securities Act, as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the instruments
representing such securities issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statements
(a) The following exhibits are filed herewith or incorporated herein by
reference:
Exhibit
No. Description
------- -----------
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger by and Among RKH, RKA, IHC and ISI, dated
November 29, 1999
2.2 First Amendment to the Agreement and Plan of Merger by and among RKH,
RKA, IHC and ISI, dated December 8, 1999
3.1 Amended and Restated Articles of Incorporation of TalentPoint, Inc.
*3.2 Form of Amended and Restated Articles of Incorporation of TalentPoint,
Inc. (to become effective immediately prior to completion of the
offering)
3.3 Bylaws of TalentPoint, Inc.
3.4 Form of Bylaws of TalentPoint, Inc. (to become effective immediately
prior to completion of the offering)
4.1 Specimen Stock Certificate of TalentPoint, Inc.
*5.1 Opinion of Pepper Hamilton LLP
10.1 Class B Common Stock and Warrant Purchase Agreement, dated as of
December 16, 1999, by and among Raymond Karsan Holdings, Inc. and the
Investors, and forms of Class A-1, A-2, B, C-1, C-2, D and E Common
Stock Purchase Warrants
10.2 Stockholders Agreement, dated December 16, 1999
10.3 Registration Rights Agreement, dated December 16, 1999, by and among
Raymond Karsan Holdings, Inc. and the Holders
10.4 Loan Agreement, dated December 27, 1999, by and between Raymond Karsan
Associates, Inc. and Fleet National Bank
10.5 Guaranty, dated December 27, 1999, by and between Raymond Karsan
Holdings, Inc. and Fleet National Bank
10.6 Management Agreement, dated December 16, 1999, by and between Raymond
Karsan Holdings, Inc. and Parthenon Capital, Inc.
10.7 Employment Agreement Relating to Business Information, Trade Secrets
and Noncompetition by and between TalentPoint, Inc. and Nooruddin S.
Karsan dated September 3, 1991 (Pursuant to instruction 2 to Item 601
of Regulation S-K, agreements substantially identical in all material
respects except as to the parties thereto, between the Company and each
of Elliot H. Clark and P. Grant Parker, are not being filed)
II-3
<PAGE>
<TABLE>
<S> <C>
10.8 Employment Agreement Relating to Confidential Business Information, Trade Secrets
and Noncompetition by and between TalentPoint, Inc. and Bill L. Erickson dated June
1, 1997 (Pursuant to instruction 2 to Item 601 of Regulation S-K, agreements
substantially identical in all material respects except as to the parties thereto,
between the Company and each of Troy A. Kanter, Donald F. Volk and Anita Sakuru,
are not being filed)
10.9 Bonus and Severance Agreement dated as of June 22, 2000 by and between the Company
and Donald F. Volk
10.10 2000 Stock Option Plan
10.11 Exchange and Conversion Agreement, dated June 16, 2000, by and among TalentPoint,
Inc. and the holders of the Company's Class B common stock
10.12 Securities Purchase Agreement, dated June 16, 2000, by and among TalentPoint, Inc.,
Parthenon Investors, L.P. and PCIP Investors
10.13 Senior Subordinated Note dated June 16, 2000 issued by TalentPoint, Inc. to
Parthenon Investors, L.P. in the principal amount of $9,659,436 (Pursuant to
instruction 2 to Item 601 of Regulation S-K, a Senior Subordinated Note in the
principal amount of $340,546 and substantially identical in all material respects
except as to the parties thereto, issued by the Company to PCIP Investors is not
being filed)
16.1 Letter from Deloitte & Touche LLP, re: Change in Certifying Accountant
21 TalentPoint, Inc.'s Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
*23.3 Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included in the signature page to the registration statement)
27.1 Financial Data Schedule
</TABLE>
---------------------
* To be filed by amendment
II-4
<PAGE>
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Schedule S-3
</TABLE>
Schedule II -- Valuation and Qualifying Accounts
Item 17. Undertakings
1. 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.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, executive 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 SEC, such
indemnification is against public policy as expressed in the Securities 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 Securities Act and will be governed
by the final adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act, 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
the registration statement as of the time it was declared effective.
(b) For purposes of determining any liability under the Securities Act,
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant had duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on the
23rd day of June, 2000.
TALENTPOINT, INC.
/s/ Nooruddin S. Karsan
By: _________________________________
Nooruddin S. Karsan
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Nooruddin S. Karsan and Eliot Chack, and each or
either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and other
registration statements and amendments thereto relating to the offering
contemplated by this registration statement (including registration statements
under Rule 462 promulgated under the Securities Act), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
SEC, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their, his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nooruddin S. Karsan Chairman of the Board and June 23, 2000
______________________________________ Chief Executive Officer
Nooruddin S. Karsan (principal executive
officer)
/s/ Bill L. Erickson Vice Chairman of the Board June 23, 2000
______________________________________ and Executive Vice
Bill L. Erickson President - HCM
Consulting, Deployment
and Retention
Services and TalentPoint
Portfolio
/s/ Eliot Chack Chief Operating Officer, June 23, 2000
______________________________________ Secretary, Treasurer and
Eliot Chack Director
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald F. Volk Chief Financial Officer June 23, 2000
______________________________________ (principal financial and
Donald F. Volk accounting officer)
/s/ John C. Rutherford Director June 23, 2000
______________________________________
John C. Rutherford
/s/ Archie L. Jones, Jr. Director June 23, 2000
______________________________________
Archie L. Jones, Jr.
</TABLE>
II-7
<PAGE>
ACKNOWLEDGMENT BY AGENTS
We, Nooruddin S. Karsan and Eliot Chack, have read the above power of
attorney and are the persons identified as the attorneys-in-fact and agents for
the principals whose signatures appear above. We hereby acknowledge that in the
absence of a specific provision to the contrary in the power of attorney or in
the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa. C.S.) when
either of us acts as an attorney-in-fact and agent:
We shall exercise the power for the benefit of the principals.
We shall keep the assets of the principals separate from our assets.
We shall exercise reasonable caution and prudence.
We shall keep a full and accurate record of all actions, receipts and
disbursements on behalf of the principals.
<TABLE>
<S> <C> <C>
/s/ Nooruddin S. Karsan
______________________________________ Attorney-in-fact June 23, 2000
Nooruddin S. Karsan
/s/ Eliot Chack
______________________________________ Attorney-in-fact June 23, 2000
Eliot Chack
</TABLE>
II-8
<PAGE>
Board of Directors and Shareholders of
Talentpoint, Inc.:
Our audit of the consolidated financial statements of Talentpoint, Inc.
referred to in our report dated March 21, 2000, except for paragraph 1 of Note
10, for which the date is June 6, 2000, appearing in this Form S-1 also
included an audit of the financial statement schedule for the year ended
December 31, 1999 on page S-3 of this Form S-1. In our opinion, the financial
statement schedule presents fairly, in all material respects, the information
for the year ended December 31, 1999 set forth therein when read in conjunction
with the related financial statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 21, 2000
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
International Holding Company, Inc. and Insurance Services, Inc. and
subsidiaries:
We have audited the combined financial statements of International Holding
Company, Inc. and Insurance Services, Inc. and subsidiaries (d/b/a Raymond
Karsan Associates) as of December 31, 1998 and for each of the two years in the
period ended December 31, 1998 and have issued our report thereon dated
November 19, 1999, except for Note 3 as to which the date is December 1, 1999
and except for the effects of the reorganization and stock split described in
Note 13 as to which the date is June 6, 2000 (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Company's ability to continue as a going concern); such financial statements
and report are included herein on Form S-1. Our audits also included the
financial statement schedule of International Holding Company, Inc. and
Insurance Services, Inc. and subsidiaries (d/b/a Raymond Karsan Associates),
listed in Item 14. This financial statement schedule is the responsibility of
the Corporation's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic combined financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 19, 1999
S-2
<PAGE>
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Charged to
beginning costs and other Balance at
of period expenses accounts Deductions end of period
---------- ---------- ---------- ---------- -------------
December 31, 1997
-----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... $1,152,367 $ -- $ -- $256,675 $ 895,692
Deferred tax valuation
allowance.............. 120,000 -- -- -- 120,000
<CAPTION>
December 31, 1998
-----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... 895,692 126,986 -- -- 1,022,678
Deferred tax valuation
allowance.............. 120,000 -- -- -- 120,000
<CAPTION>
December 31, 1999
-----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... 1,022,678 -- -- 263,973 758,705
Deferred tax valuation
allowance.............. 120,000 (120,000) -- -- --
</TABLE>
S-3
<PAGE>
Exhibit Index
Exhibit
No. Description
------- -----------
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger by and Among RKH, RKA, IHC and ISI,
dated November 29, 1999
2.2 First Amendment to the Agreement and Plan of Merger by and among
RKH, RKA, IHC and ISI, dated December 8, 1999
3.1 Amended and Restated Articles of Incorporation of
TalentPoint, Inc.
3.3 Bylaws of TalentPoint, Inc.
3.4 Form of Bylaws of TalentPoint, Inc. (to become effective immediately
prior to completion of the offering)
4.1 Specimen Stock Certificate of TalentPoint, Inc.
10.1 Class B Common Stock and Warrant Purchase Agreement, dated as of
December 16, 1999, by and among Raymond Karsan Holdings, Inc. and the
Investors, and forms of Class A-1, A-2, B, C-1, C-2, D and E Common
Stock Purchase Warrants
10.2 Stockholders Agreement, dated December 16, 1999
10.3 Registration Rights Agreement, dated December 16, 1999, by and among
Raymond Karsan Holdings, Inc. and the Holders
10.4 Loan Agreement, dated December 27, 1999, by and between Raymond Karsan
Associates, Inc. and Fleet National Bank
10.5 Guaranty, dated December 27, 1999, by and between Raymond Karsan
Holdings, Inc. and Fleet National Bank
10.6 Management Agreement, dated December 16, 1999, by and between Raymond
Karsan Holdings, Inc. and Parthenon Capital, Inc.
10.7 Employment Agreement Relating to Business Information, Trade Secrets
and Noncompetition by and between TalentPoint, Inc. and Nooruddin S.
Karsan dated September 3, 1991 (Pursuant to instruction 2 to Item 601
of Regulation S-K, agreements substantially identical in all material
respects except as to the parties thereto, between the Company and
each of Elliot H. Clark and P. Grant Parker, are not being filed)
10.8 Employment Agreement Relating to Confidential Business Information,
Trade Secrets and Noncompetition by and between TalentPoint, Inc. and
Bill L. Erickson dated June 1, 1997 (Pursuant to instruction 2 to Item
601 of Regulation S-K, agreements substantially identical in all
material respects except as to the parties thereto, between the
Company and each of Troy A. Kanter, Donald F. Volk and Anita Sakuru,
are not being filed)
10.9 Bonus and Severance Agreement dated as of June 22, 2000 by and
between the Company and Donald F. Volk
10.10 2000 Stock Option Plan
10.11 Exchange and Conversion Agreement, dated June 16, 2000, by and among
TalentPoint, Inc. and the holders of the Company's Class B common
stock
10.12 Securities Purchase Agreement, dated June 16, 2000, by and among
TalentPoint, Inc., Parthenon Investors, L.P. and PCIP Investors
<PAGE>
<TABLE>
<S> <C>
10.13 Senior Subordinated Note dated June 16, 2000 issued by TalentPoint, Inc. to
Parthenon Investors, L.P. in the principal amount of $9,659,436 (Pursuant to
instruction 2 to Item 601 of Regulation S-K, a Senior Subordinated Note in the
principal amount of $340,546 and substantially identical in all material respects
except as to the parties thereto, issued by the Company to PCIP Investors is not
being filed)
16.1 Letter from Deloitte & Touche LLP, re: Change in Certifying Accountant
21 TalentPoint, Inc.'s Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney (included in the signature page to the registration statement)
27.1 Financial Data Schedule
</TABLE>
