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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _ TO _
COMMISSION FILE NUMBER: 0-20735
RESTRAC, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 04-2935271
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
91 HARTWELL AVENUE 02173
LEXINGTON, MA 02173 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 869-5000
(REGISTRANT'S TELEPHONE NUMBER)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on November 21,
1997, as reported on NASDAQ National Market System was approximately
$28,900,000. Shares of Common Stock held by each executive officer and director
and by each person who owned 5% or more of the outstanding Common Stock as of
such date have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the registrant's $0.01 par value Common Stock
outstanding on December 12, 1997, was 8,209,350.
Part III incorporates by reference from the definitive proxy statement for the
registrant's fiscal 1997 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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RESTRAC, INC.
FORM 10-K
TABLE OF CONTENTS
PART 1
ITEM PAGE
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1. Business...................................................................... 2
2. Properties.................................................................... 14
3. Legal Proceedings............................................................. 14
4. Submission of Matters to a Vote of Securities Holders......................... 14
PART II
5. Market for Registrant's Common Stock and Related Stockholder Matters.......... 15
6. Selected Consolidated Financial Data.......................................... 16
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 17
8. Financial Statements and Supplementary Data................................... 26
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 26
PART III
10. Directors and Executive Officers of the Registrant............................ 27
11. Executive Compensation........................................................ 27
12. Security Ownership of Certain Beneficial Owners and Management................ 27
13. Certain Relationships and Related Transactions................................ 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 28
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PART I
STATEMENTS MADE OR INCORPORATED IN THIS FORM 10-K INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD
LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS
"ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS OF SIMILAR
IMPORT WHICH EXPRESS MANAGEMENT'S BELIEFS, EXPECTATIONS OR INTENTIONS REGARDING
THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED
"FACTORS AFFECTING FUTURE OPERATING RESULTS" WHICH BEGINS ON PAGE 21 OF THIS
FORM 10-K.
ITEM 1. BUSINESS
OVERVIEW
Restrac, Inc. ("the Company"), designs, develops, markets, implements and
supports HR staffing software and services to automate the recruitment,
selection and placement of an organization's workforce. The Company's staffing
solutions enable organizations to strategically manage their human capital by
reducing hiring and placement costs, decreasing time to fill positions and
providing more effective skills management and worker deployment. The Company's
principal products -- Restrac Hire and Restrac Resume Reader for
PeopleSoft -- provide HR departments with client/server solutions to quickly and
efficiently build and search comprehensive "pools" of resume skills data to find
the workers they need, while also managing the workflow of the staffing process.
These products are primarily licensed by large corporate employers experiencing
accelerated growth, a scarcity of skilled labor, significant reorganization or
downsizing, or by companies reengineering their HR function to reduce costs. In
November, 1997, the Company introduced Restrac WebHire, an Internet-based
service which is accessed via the world-wide web. This service makes it possible
for smaller companies, that typically cannot justify the larger investment in
client/server applications, to gain access to the candidate management
functions.
The Company's software offerings are open, client/server applications that
utilize standard industry communications protocols, such as TCP/IP, allowing for
high performance, scaleable implementations across local area networks, wide
area networks, the Internet and intranets. The Company's software supports
industry standards, such as Microsoft Windows and most leading relational
databases (including Oracle, Microsoft SQLServer and Sybase), database server
platforms (including Windows NT and many UNIX variants), e-mail systems
(including Microsoft Mail and Lotus cc:Mail) and desktop productivity tools
(including Lotus Notes and Microsoft Word). This open architecture has
facilitated integration with other systems providing customers with integrated,
multi-vendor solutions to meet their specific needs.
The Company was incorporated in 1982 as a Massachusetts corporation and was
reincorporated as a Delaware corporation in 1994. Restrac Securities
Corporation, a wholly-owned subsidiary of Restrac, Inc., was incorporated in
September, 1996 as a Massachusetts securities corporation for the purpose of
holding and managing certain of the Company's cash and investments.
INDUSTRY BACKGROUND
The strategic management of workforce skills, or "human capital", is
increasingly viewed as a business opportunity and has emerged in recent years as
a key element of corporate strategy. Recruiting and deploying the most qualified
employees is now being recognized as critical to an organization's long-term
success. In addition, intensifying global competition, shortened product
lifecycles and the need to improve operating efficiencies have caused
organizations to search for more efficient ways to employ and deploy a more
dynamic and skilled workforce. As a result, HR
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departments have come under increasing pressure to improve the quality of the
candidates they hire, to shorten the time to fill open positions and to reduce
the costs associated with staffing.
Historically, the recruitment, hiring and deployment of an organization's
workforce has been an inefficient, expensive and time-consuming process. These
costs and inefficiencies are due in large part to the difficulty that
organizations have in managing data on workers' skills and to a complex staffing
process which typically involves significant data collection, numerous manual
functions and the coordination of activities among many participants both within
and outside the organization. Organizations need to collect and manage extensive
skills data on their own employees and on a large applicant pool in order to
manage hiring, redeployment, attrition, turnover and growth. Historically,
organizations seeking to fill a position would receive numerous applications and
resumes that were, once the position had been filled, either discarded or stored
in a manner that did not allow the organization to effectively access and search
this data when it sought to fill additional positions in the future.
In order to address the challenges of hiring and deploying workers, HR
departments have begun to automate the staffing process. Until recently, the
only staffing software applications available were applicant tracking systems,
which were primarily designed to perform record-keeping functions and did not
offer automated workflow or resume searching capabilities. These applicant
tracking applications traditionally operated on centralized mainframe or
mini-computer systems, although such applications today are also being deployed
with client/server-based human resource information systems. These applications,
however, are ill-suited for capturing and managing the vast amount, variety and
diverse formatting of skills, experience and education information supplied by
candidates. Coding this information is generally a manual process which is
cumbersome, time-consuming and costly. Moreover, because the candidate
information is recorded in an oversimplified format, searches of this
information typically yield poor results. A more effective solution would allow
organizations to easily collect and manage large amounts of unstructured skills
and experience data on both job candidates and their current workforce and
perform sophisticated structured searches on this data to select the best
candidates.
The development of distributed client/server computing and enabling
technologies such as document scanning, optical character recognition (OCR) and
concept-based text searching created a technological framework for the efficient
collection of staffing information and its dissemination among recruiters,
managers and, with the emergence of the Internet and corporate intranets, other
members of the extended enterprise. Client/server technology not only permits
any member of the organization to effectively collect information relating to a
particular job, applicant or employee, but also gives other members of the
organization in geographically dispersed locations rapid access to that
information and enables them to participate in the hiring process. In addition,
the proliferation of Internet career sites is a dramatic recent development
which creates a significant new forum for the exchange of candidate and job
information. These new technologies, together with the increased emphasis on the
strategic management of human capital, have created a demand for a new
generation of human resource staffing systems.
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THE RESTRAC SOLUTION
The Company's staffing solutions enable organizations to strategically
manage their human capital by reducing hiring and placement costs, decreasing
the time it takes to fill positions and providing more effective skills
management and worker deployment. The Company's enterprise software provides HR
departments with client/server solutions that quickly and efficiently build and
search comprehensive electronic pools of resume skills data to find the workers
they need, while also managing the workflow of the staffing process. In
November, 1997, the Company introduced a service which provides candidate
management functions via the Internet and the world-wide-web. Key attributes of
the Restrac solutions are as follows:
Comprehensive, Reusable Candidate Pools. The Company's software uses
resume scanning and integrated e-mail input from intranets or the Internet to
create consolidated, reusable candidate pools that can be shared throughout the
organization. Manual input is virtually eliminated, allowing organizations to
collect and store skills and experience data on hundreds of thousands of
candidates. The Company's software is designed to provide a shared, re-useable
pool of candidates, limiting the need for organizations to use employment
agencies and advertising to source candidates.
Sophisticated Skills Management and Selection. The Company's software uses
a sophisticated search process to rapidly identify and rank qualified candidates
based on skills criteria determined by the user. User searches are enhanced by
the Company's integrated skills library, which translates high-level job
requirements into the words and synonyms commonly used by candidates on resumes.
These same capabilities facilitate the quick and efficient management and
redeployment of an organization's existing workforce in response to job
openings, downsizings and restructurings.
Open, Rapidly Deployable and Scaleable Technology. The Company's software
is based on open, client/server and Internet architectures that support industry
standards, such as Microsoft Windows and most leading relational databases,
server platforms, e-mail systems and desktop productivity tools. The Company's
software is scaleable from the departmental level to multi-site, enterprise-wide
implementations and is designed to easily incorporate new technologies as they
become available.
Reduced Costs. By providing an easily-accessible, shared, re-useable pool
of candidates, the Company's software allows organizations to significantly
reduce recruitment advertising costs and employment agency fees. In addition,
the Company's software is designed to reduce HR headcount and increase recruiter
productivity through the elimination of manual entry of resume information and
by increasing the efficiency of the hiring process.
More Efficient Staffing Process. The Company's client/server software
incorporates a user-friendly, process-oriented GUI and is designed to reduce the
time required to fill positions by prompting users to advance candidates through
the staffing process. Such automatic workflow notifications reduce delays
typical to the staffing process and eliminate redundancies. The Company's
software also integrates with e-mail to facilitate access to and participation
in the staffing process. The Company's client/server software can be easily
adapted by the customer to its own staffing requirements without extensive
customization.
STRATEGY
The Company's objective is to maintain its leadership position as a
provider of automated human resource staffing solutions. The Company's Restrac
Hire product has achieved a leading market position among large organizations
(2,500+ employees), which are estimated to represent over 15,000 companies in
the United States alone. Much of the research and development invested by the
Company in fiscal 1997 and ongoing is intended to expand the markets for the
Company's software. Self-service solutions, such as Restrac Workbench for
Managers which was released in
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fiscal 1997, broaden the user base within a customer beyond the HR department to
line managers, employees and job candidates. The introduction of Restrac WebHire
is intended to make the Company's solutions available to smaller organizations
with 100 to 2,500 employees (of which there are estimated to be over 100,000 in
the United States). Further, the Company believes that the growing globalization
of the workforce combined with the increasing standardization of regulations
across the European Community will provide it with significant opportunities to
continue its international expansion. The Company currently markets its software
in Canada and the United Kingdom.
The Company has established a number of relationships both to leverage
marketing channels and complementary technologies and to meet customer demands
for open, integrated, multi-vendor solutions. The Company's partners include
leading technology vendors such as Verity, Inc. which, as part of an OEM
relationship, provides its text search software for integration with the
Company's internally-developed skills library. The Company also has a
relationship with PeopleSoft, a leading HR management system vendor. The Company
believes that its strategic relationships allow it to bring products to market
more quickly and enhance its image as a provider of industry standard automated
staffing products. The Company intends to continue to pursue the establishment
of such relationships to take advantage of emerging technologies and marketing
opportunities.
PRODUCTS
The Company's principal products have been Restrac Hire and Restrac Resume
Reader for PeopleSoft, which is sold in conjunction with PeopleSoft's HRMS
product. The Company released Restrac Workbench for Managers and Restrac Hire
Link for PeopleSoft during fiscal 1997, and invested a significant portion of
its research and development efforts during fiscal 1997 on the November, 1997
release of Restrac WebHire and the planned fiscal 1998 release of Restrac Hire
for Intranet.
RESTRAC HIRE
The Company's primary product, Restrac Hire, automates the applicant
sourcing and selection functions in the staffing process and supports industry
standards such as Microsoft Windows and most leading relational databases
(including Oracle, Microsoft SQLServer and Sybase), server platforms (including
Windows NT and many UNIX variants), e-mail systems (including Microsoft's Mail
and Lotus cc:Mail) and desktop productivity tools (including Microsoft Excel and
Microsoft Word). System prices vary based on a customer's configuration and
range from approximately $60,000 to $1 million. Implementation services, which
are not included in the license fee, generally amount to an additional 20% - 25%
of the license fee. Maintenance for the first year is included in the license
fee and is renewable on an annual basis thereafter, at approximately 15% of the
license fee.
Restrac Hire is comprised of three bundled functional modules: Skill
Server, Candidate Finder and Recruiting Workbench.
Skill Server. The Company's Skill Server module automates the collection
of worker skills data by integrating scanning and OCR technologies for the
processing of paper or faxed resumes. Using Skill Server, electronic resumes can
also be received and input through e-mail, commonly available World-Wide Web
("web") browsers and PC-based kiosk stations. Skill Server retains an electronic
image of the original resume as well as a text file which is made available for
searching the candidate pool. Managers can conduct a comprehensive search of
this candidate pool by using Candidate Finder before seeking candidates from
external sources.
Candidate Finder. The Company's Candidate Finder module provides users
with a search capability to rapidly identify and rank qualified job candidates
based upon skills criteria determined by the user, using the Company's extensive
skills library and Verity's text search software. Candidate Finder presents
users with an intuitive, flexible GUI for defining job requirements by
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clicking on relevant skills from the Company's extensive skills library and
reviewing selected candidates' resumes and skills. Once a candidate is selected,
Candidate Finder can initiate the workflow tracking process in the Recruiting
Workbench module.
Recruiting Workbench. The Company's Recruiting Workbench, which provides
database management and workflow functionality, automates the staffing process,
including: requisition management for job openings, job advertising, candidate
screening, interview scheduling, reference checking, correspondence, cost
tracking and government compliance reporting. Recruiting Workbench is designed
to guide users through each step in the staffing process. Activity history,
current status and pending actions are displayed for each candidate. Integrated
business rules and workflow processes help prevent common errors and delays
which can often result in poor selection results and extended placement times.
Recruiting Workbench also contains a report writer which allows users to
generate management reports, including standard reports used to benchmark
effectiveness or demonstrate compliance with Equal Employment Opportunity (EEO)
requirements.
RESTRAC RESUME READER FOR PEOPLESOFT
The Company's open architecture, which accommodates integration with other
HR software solutions, has allowed the Company to create a plug-in product that
offers high volume resume-scanning, skills management and search capabilities to
users of PeopleSoft's HRMS product. Restrac Resume Reader for PeopleSoft
incorporates the Skill Server and Candidate Finder modules of Restrac Hire.
RESTRAC HIRE LINK FOR PEOPLESOFT
Restrac Hire Link for PeopleSoft is an add-on module that integrates the
full functionality of Restrac Hire with the PeopleSoft HRMS application suite.
Restrac Hire Link for PeopleSoft eliminates the need to re-key data when a
candidate is hired from within the Restrac system or if an existing employee is
proposed for an internal position. The data is shared seamlessly between the two
systems. The link also synchronizes the common tables individually maintained
within each system to ensure data integrity and significantly reduce the
administrative burden of maintaining two systems.
RESTRAC WORKBENCH FOR MANAGERS
This product, introduced during fiscal 1997, was developed in response to
the increasing dispersion of the staffing process outside of HR departments.
With Restrac Workbench for Managers, hiring managers in companies using Restrac
Hire can use Lotus Notes or a web browser to participate directly in certain
functions of the staffing process, including opening a requisition, reviewing
resumes online, managing team interviews and initiating a job offer. Such
self-service solutions should significantly expand the Company's potential user
base while further reducing the administrative demand on HR departments.
RESTRAC WEBHIRE
Restrac WebHire is an Internet-based candidate management service
introduced by the Company in November, 1997. The Company performs all resume
processing and scanning, hosting and administration, and system maintenance at
its Restrac WebHire data centers. The Company maintains a private applicant
database with resumes it receives from the customer or directly from applicants
on the customer's behalf. Using passwords, recruiters will access their private,
continuously updated applicant pool via the Internet from a world-wide web
browser to perform candidate searches. Restrac WebHire employs the same powerful
concept-based searching as Restrac Hire. After selecting a short list of
candidates, recruiters will monitor the progress of applicants for status
reports, annotate individual resumes and forward resumes to colleagues via
electronic mail.
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Restrac WebHire is intended to allow smaller, rapidly-growing organizations
to take advantage of the Company's technologies without the associated
infrastructure investment necessary to support a client/server application.
Restrac WebHire will be priced based on a service model and is expected to
approximate $20,000 to $40,000 per year.
RESTRAC HIRE FOR INTRANET
Among the Company's current development projects is Restrac Hire for
Intranet, a product based on three-tier client/server architecture which will
enable deployment over a corporate intranet. This product, scheduled for release
in the first half of calendar 1998, builds on the functionality of Restrac Hire.
The new three-tier technical architecture is designed for easier access, easier
extension, open connectivity, and convenient Internet integration. Restrac Hire
for Intranet is also explicitly designed for internationalization.
INTERLYNX INTERACTION FOR RESTRAC
Through an alliance with Interlynx Technology, a leading provider of
self-service applications for human resources, the Company plans to offer an
interactive kiosk user interface that transfers information entered by
applicants directly into Restrac Hire. This web-based self-service solution is
expected to be released in the first half of fiscal 1998.
CUSTOMER SERVICES
The Company believes that superior customer service and support are
critical to customer satisfaction. As of September 30, 1997, the Company's
customer service organization included 49 employees, providing Account
Management, Professional Services, Technical Support and Outsourced Services.
Account Management. Account Managers are responsible for coordinating the
corporate resources necessary to ensure customer satisfaction. An Account
Manager is assigned to each new Restrac enterprise customer and oversees all
aspects of the customer relationship. The Company believes that its Account
Manager program has helped it establish a high degree of customer satisfaction.
Professional Services. The Professional Services Group manages system
implementation, provides additional services such as process design and system
tailoring and provides basic and advanced training both on-site during system
implementation and at the Company's Corporate Training Centers throughout the
year.
Technical Support. The Technical Support Group provides daily assistance
to customers with maintenance agreements through the Company's support help
line. More than 95% of customers who have purchased the Company's client/server,
Windows-based products since their introduction are currently under maintenance
agreements. The Company provides support Monday through Friday from 8:30
a.m.-8:00 p.m. Eastern Time as well as 8:30 a.m.-5:00 p.m. Greenwich Mean Time
to support the Company's European customers.
Outsourced Services. Outsourced Services were introduced by the Company in
July, 1996 and, to date, consist primarily of scanning services provided
principally through third-party arrangements. The Company has extended these
services to include correspondence generation.
TECHNOLOGY
In 1993, the Company introduced Restrac Hire, the industry's first
Windows-based client/server staffing system. The Company's Restrac Hire software
is based on the Company's unique client/server development platform, which can
accommodate changing customer needs and technical infrastructure, simplify the
deployment of the Company's client/server software, and enable the
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rapid integration of leading edge technologies and other innovations. Key
aspects of the Restrac Hire platform are as follows:
Development Toolset. The Company's development platform includes a unique
application toolset which allows it to create and change its interfaces through
high level "screen painting" rather than low level programming. This toolset
also accommodates the creation and editing of business and workflow rules.
Applications developed with the Company's toolset inherit its full
functionality, including features critical to sophisticated, mission-critical,
enterprise-wide applications. The Company also includes in its software a
scaled-down version of the Company's application development tool, which allows
customers to make interface changes to accommodate their specific staffing
processes without compromising the integrity of the system.
Data Model. The Company's software includes an open, flexible and
extensible model for enterprise staffing that can operate in multiple standard
SQL databases. The model incorporates the Company's expertise in staffing
process modeling and allows for effective workflow and third-party integration.
Centralized Administration and Security. The Company's development
platform includes functionality for application deployment and version control,
reducing costs through centralized management by allowing the application to be
configured and updated automatically from a central location. The Company's
products also include security features to control user access. Access to
information and functionality is configured based on the user's login, allowing
users to access their recruiting desktop from anywhere in the system and further
securing against unauthorized access.
Support for Heterogeneous Computing Environments. The Company's
development platform is designed to enable applications developed on the
platform to operate in diverse computing environments. The platform supports
Microsoft Windows on the client as well as leading relational databases (Oracle,
Microsoft SQLServer and Sybase) and server platforms (including Windows NT and
many UNIX variants). The Company's products use the industry-standard TCP/IP
protocol, which allows the Company to develop applications which operate over
local area networks, wide area networks, intranets and the Internet.
Advanced Technology Integration. The Company has designed its development
platform to facilitate the integration of advanced technologies while insulating
the user from the complexities associated with multiple interfaces,
import/export utilities and switching between different applications.
RESTRAC WEBHIRE
Restrac WebHire, the Company's Internet-based service offering, is based on
open, extensible Internet development tools. It makes wide use of standard
Microsoft technologies, including Microsoft foundation classes, ActiveX,
distributed common object model (DCOM), Microsoft Internet Information Server,
Microsoft SQL Server and Microsoft Windows NT Server. This adherence to standard
Microsoft technologies ensures that Restrac WebHire can be scaled as demand for
the service increases. Client access to the WebHire system is provided through
either Microsoft or Netscape world-wide web browsers.
RESTRAC HIRE FOR INTRANET
Restrac Hire for Intranet, which is scheduled for release in the first half
of the 1998 calendar year, is a Microsoft Windows-based application which
operates over a standard TCP/IP intranet connection. The application server
component of the product utilizes Microsoft Windows NT Server and Microsoft
Internet Information Server. Client access will be provided via both a Windows
application and a browser interface which is compatible with Microsoft Windows
95 or Microsoft Windows NT. The Company believes that this innovative
architecture combines the functionality of a traditional client/server
application with the easy deployability of an intranet application.
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PRODUCT DEVELOPMENT
The Company believes that its future success will depend upon its ability
to enhance its existing software and develop and introduce new products and
functions which keep pace with rapid changes in the marketplace. The Company has
made increasing investments in its engineering and quality groups to broaden its
product and service offerings, enhance product functionality, improve
performance and expand the ability of its software to interoperate with
third-party software. Research and development expenses totaled (in thousands)
$5,446, $2,341 and $1,365 for fiscal years 1997, 1996, and 1995, respectively.
While the Company expects that certain of its new products and functions will be
developed internally, the Company may, based on timing and cost considerations,
expand its product offerings through acquisitions or strategic relationships.
Software products as complex as those currently under development by the Company
are subject to frequent delays and there can be no assurance that the Company
will not encounter difficulties that could delay or prevent the successful and
timely development, introduction and marketing of these potential new products.
SALES AND MARKETING
The Company markets its enterprise products and services through a direct
sales force in North America and the United Kingdom. The Company supports its
sales force through comprehensive marketing programs which include public
relations, direct mail, advertising, seminars, trade shows, ongoing customer
communication programs and strategic relationships. While the sales cycle varies
from customer to customer, it typically spans four to nine months from
generation of a lead from one of these sources to execution of a license
agreement. The Company's direct sales force is structured regionally and is
managed through sales and service offices in Lexington, Massachusetts, Foster
City, California and Reading, England and through sales personnel located in
Chicago, Dallas, New Jersey, Atlanta, Seattle, Denver and Toronto.
The Company expects to market WebHire through telesales representatives
and, potentially, joint marketing arrangements with certain strategic partners.
The average sales cycle for this service is expected to be substantially shorter
than that experienced for the Company's enterprise products.
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CUSTOMERS
Since the introduction of Restrac Hire in 1993, the Company has licensed
its client/server, Windows-based staffing software to over 300 customers. The
following is a partial listing of the Company's customers as of September 30,
1997:
FINANCIAL SERVICES HEALTHCARE/PHARMACEUTICALS Cray Research
Aim Management Group Abbott Laboratories EMC
American Express Baxter International Genentech
Bank of America Bristol Myers Squibb Hewlett-Packard
BankBoston Johnson & Johnson Lockheed
Fleet Bank The Mayo Clinic Lucent Technologies
Merrill Lynch Memorial Sloan Kettering Microsoft
M&T Bank PacifiCare Sequent Computers
Putnam Investments Pfizer Stratus Computers
Union Bank SmithKline Beecham U.S. Robotics
Visa USA
The World Bank INSURANCE CONSUMER
Aetna Life and Casualty Anheuser-Busch
PUBLISHING/ENTERTAINMENT Blue Cross/Blue Shield British Airways
Blockbuster Entertainment Cigna Campbell Soup
Conde Nast Publications John Hancock Canadian Tire
Gannett Nationwide Cargill
The New York Times Occidental Insurance Delco
Paramount Pictures Phoenix Home Life Levi Strauss
Random House Prudential Mattel Toys
The Washington Post Nabisco
TECHNOLOGY/COMMUNICATIONS Overnite Transportation
ENGINEERING/CONSULTING AT&T Reebok
CH2M Hill Amdahl Staples
Logica The Boeing Company Starbucks
Mason & Hanger British Broadcasting the good guys!
Modern Engineering Corporation Toys R' Us
British Telecom Westin Hotel
Cellular One
STRATEGIC RELATIONSHIPS
The Company has established a number of relationships both to leverage
marketing channels and complementary technologies and to meet customer demands
for open, integrated, multi-vendor solutions. Strategic partners are categorized
into four groups: Technology Partners, who provide the Company with innovative
technologies that are integrated into the Company's products; Applications
Partners, who provide the Company's customers with value-added software,
consulting or other services that are complementary to the Company's software
and services and that enable the Company's customers to better utilize the
Company's software; Service and Implementation Partners, who extend the
Company's support, implementation and service offerings by delivering the
specialized services our customers need; and Internet/Information Partners, who
provide the Company's customers with the ability to access and distribute
crucial staffing information, including job postings, candidate information, and
resumes, often via the Internet. Examples of the Company's strategic partners
include:
Verity, Inc. The Company's software incorporates the text search software
tools developed by Verity, Inc., a Technology Partner, which allows Restrac
clients to search through vast amounts of candidate and job data, delivering
only the most relevant information directly to the desktop.
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PeopleSoft, Inc. PeopleSoft, Inc., a leading worldwide provider of human
resource software, is an Applications Partner. The Company's Restrac Resume
Reader for PeopleSoft product integrates the Company's high-volume
resume-scanning, skills management and search technology with PeopleSoft's HRMS
product, while Restrac Hire Link for PeopleSoft integrates the full
functionality of Restrac Hire with the PeopleSoft HRMS product suite. Both
Restrac Hire and Restrac Hire Link for PeopleSoft have formally received the
PeopleSoft Partner Integration Team certification.
Criterion, Inc. The Company has a cooperative marketing and development
alliance with Criterion, Inc., a leading client/server provider of career
development and organizational planning software, to provide customer solutions
that help human resources organizations better integrate their recruiting and
staffing workflow with their career/succession planning and
diversity/affirmative action planning.
SAZTEC International. SAZTEC International, a leading provider of
information management services, is a certified Restrac scanning partner. As
such, SAZTEC provides the Company with additional capacity and technical
expertise in outsourced document conversion to support this growing component of
the Company's business.
COMPETITION
The marketplace for staffing solutions is intensely competitive and is
rapidly changing. The Company encounters direct competition from a number of
companies providing human resource staffing solutions, including (i) other human
resource staffing software companies, (ii) providers of general human resource
information systems, (iii) agencies providing or sourcing full-time, contract
and temporary labor, (iv) information systems departments of potential prospects
that develop custom software, and (v) providers of other client/server
application software or document management systems.
The Company's primary direct competitor in the enterprise market is
Resumix, Inc., which was acquired by Ceridian, Inc. in 1995. The Company also
competes directly against other providers of human resource staffing software,
most of which are small privately held companies providing less functional
products at lower prices. In addition, vendors of general human resource
information systems generally include applicant tracking modules in their
offerings which can compete with the Company's products. Moreover, there can be
no assurance that such vendors will not develop and market products in direct
competition with the Company. Some of the Company's current and many of the
Company's potential competitors, including PeopleSoft, IBM and many other
providers of general human resource information systems, are large, publicly
traded organizations with long operating histories and access to significantly
greater financial, technical, marketing and other resources. As a result, they
may be able to respond to market changes, emerging technologies or changes in
customer requirements more rapidly and devote more resources to the development,
marketing and sales of their products than the Company. Competition may increase
from new market entrants or through consolidations in the software industry
and/or cooperative relationships among companies or with third parties.
The Company believes that the principal competitive factors affecting its
market include product functionality, breadth, ease of use, scaleability and
flexibility, integration and interoperability with standard platforms and
operating systems and other software products, price, product reputation,
customer service and support, sales and marketing effectiveness and company
reputation. Although the Company believes it competes favorably with respect to
such factors, there can be no assurance that the Company can maintain this
position against current and potential competitors.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company believes that, due to the rapid pace of
technological innovation within its industry, the Company's
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ability to establish and maintain a position of technology leadership in the
industry is dependent more upon the skills of its development personnel and its
existing skills library than upon the legal protections afforded its existing
technology.
The Company's success is dependent in part upon its proprietary software.
There can be no assurance that the Company's agreements with employees,
consultants and others who participate in the development of its software will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known. Furthermore,
there can be no assurance that the measures taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology.
The Company is not aware of any patent infringement charge or any violation
of other proprietary rights claimed by any third party relating to the Company
or the Company's products. However, the computer technology market is
characterized by frequent and substantial intellectual property litigation.
Intellectual property litigation is complex and expensive, and the outcome of
such litigation is difficult to predict.
The Company relies on certain technology which it licenses from third
parties. The Company's success will depend in part on its continued ability to
obtain and use licensed technology that is important to the functionality of its
products. An inability to continue to procure or use such technology would
likely have a material adverse effect on the Company's business, financial
condition and operating results.
EMPLOYEES
As of September 30, 1997, the Company had 159 full time employees
consisting of 42 in sales and marketing, 50 in product development, 49 in client
services and 18 in corporate operations. The Company's employees are not
represented by any collective bargaining organizations, and the Company has
never experienced any work stoppages. The Company considers its relations with
its employees to be good.
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
------------------------------- ---- ----------------------------------------------------
Lars D. Perkins................ 38 Chief Executive Officer and Chairman of the Board
Martin J. Fahey................ 43 President, Chief Operating Officer and Director
Thomas F. Brady................ 45 Vice President of Client Services
Raymond M. Desrochers.......... 30 Vice President of Product Development & Quality
Cynthia G. Eades............... 41 Chief Financial Officer, Vice President of Finance,
Treasurer and Secretary
Robert F. Kuhne................ 62 Vice President of Sales
Robert J. Lederman, Jr......... 40 Vice President of Human Resources
Timothy J. McManus............. 44 Vice President of Internet Products
Robert J. Perry................ 40 Vice President of Marketing
Russell J. Campanello.......... 41 Director
J. Paul Costello............... 58 Director
A. Bruce Johnston.............. 38 Director
Lars D. Perkins, co-founder of the Company, has served as Chief Executive
Officer and Chairman of the Board of the Company since 1986. Mr. Perkins served
as President of the Company from 1986 to 1997.
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Martin J. Fahey, was elected President of the Company and as a member of
the Board of Directors in July 1997. Mr. Fahey joined the Company as Vice
President and Chief Operating Officer in May 1996. From January 1995 to May
1996, Mr. Fahey was an independent consultant for a variety of software
companies. From July 1991 to December 1994, he was Chief Executive Officer of
Vertigo Development, a multimedia company which Mr. Fahey co-founded. Mr. Fahey
was employed by Lotus Development Corporation, a software company, from January
1983 to June 1991, most recently as the Director of Spreadsheet Marketing.
Thomas F. Brady joined the Company as Vice President of Client Services in
October 1997. From May 1995 to October 1997, he served as Vice President of
Services of Kronos, Inc., a leading provider of labor management software. Prior
to joining Kronos, Inc., Mr. Brady was employed at Digital Equipment Corporation
from 1977 to 1995 in various operations and business development management
positions.
Raymond M. Desrochers was elected Vice President of Product Development and
Quality of the Company in October 1995. From April 1995 to October 1995, he
served as the Company's Director of Product Development and from October 1994 to
March 1995, he served as the Company's Manager of Software Development. Mr.
Desrochers was a senior software engineer for the Company from July 1992 to
September 1994. Prior to joining the Company in July 1992, he had been Software
Project Manager for New England Business Service, Inc., a company that provides
accounting software solutions to both small and medium-sized businesses, from
October 1991 to June 1992.
Cynthia G. Eades joined the Company as Chief Financial Officer, Vice
President of Finance and Treasurer in December 1994. In May 1997, Ms. Eades was
elected to the office of Secretary to the Company. From February 1993 to
February 1994, she was Vice President and Chief Financial Officer of Virtual
World Entertainment, a developer and operator of virtual reality entertainment
centers. Prior to such time, Ms. Eades was employed by Dun & Bradstreet Software
Services, Inc., a business applications software company, as Controller from
October 1991 to February 1993 and Director of Finance from June 1990 to October
1991. Ms. Eades is a Certified Public Accountant and was employed by Price
Waterhouse from June 1978 to June 1990.
Robert F. Kuhne joined the Company in July 1997 as the Vice President of
Sales. From July 1990 to July 1997, Mr. Kuhne was an independent sales and
marketing consultant specializing in emerging corporations. Prior to his work as
a consultant, Mr. Kuhne was the General Manager and Senior Vice President of
Productivity Products Company, a division of Pansophic Systems, Inc., where he
managed a 400-person organization responsible for worldwide development,
marketing, customer support and sales.
Robert J. Lederman, Jr. joined the Company as Vice President of Human
Resources in January 1997. From June 1994 to January 1997, Mr. Lederman was
employed by Fidelity Investments as the Director of Human Resources. From June
1992 to June 1994 Mr. Lederman was Director of Employment and Employee Relations
for Clean Harbors Environmental Services Company.
Timothy J. McManus joined the Company as Vice President of Internet
Products in November 1997. From January 1997 to October 1997, Mr. McManus was
the founder of Calendarcast, Inc., a development stage company evaluating
applications of Internet-based push technologies. From March 1996 to January
1997, Mr. McManus was Vice President of Product Management and Development at
Corechange LLC, a spin-off of Cambridge Technology Partners, Inc. From October
1987 to March 1996, Mr. McManus was employed at Lotus Development Corporation
where he managed a number of key product and business development functions
within both the Communications Products Division and the Desktop Products
Organization.
Robert J. Perry assumed operational responsibility for the marketing
organization in November 1996 and was elected to the office of Vice President,
Marketing effective as of January 1, 1997. Mr. Perry joined the Company in May
1996 as Director of Product Management. From November
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1995 through May 1996, Mr. Perry was an independent marketing and product
management consultant. From October 1983 to November 1995, Mr. Perry was
employed by Lotus Development Corporation, most recently as Director of Advanced
Corporate Technology Liaisons. He had previously served as Director of Product
Management for Notes, Director of Product Management for Graphical Spreadsheets
and Group Product Manager for Spreadsheets.
Russell J. Campanello was elected as a director of the Company in October
1994. Currently, Mr. Campanello is an independent HR Strategy Consultant. From
February 1996 to August 1997, Mr. Campanello was Vice President of Human
Development and Organizational Productivity at Nets Inc. (formerly
Industry.Net), a facilitator of electronic commerce on the Internet. Prior to
joining Nets Inc., Mr. Campanello spent eight years as the Vice President of
Human Resources of Lotus Development Corporation.
J. Paul Costello, co-founder of the Company and member of the Board of
Directors of the Company since its founding in 1982. Mr. Costello has served as
President of J. Paul Costello Associates, Inc., a consulting company, since 1969
and of Costello & Company, Inc., a contract recruiting company, since 1979. In
December 1992, he also was named President of Corporate Staffing Center, Inc., a
provider of outsourced staffing services to large corporate clients. Mr.
Costello has been a human resource management consultant for over thirty years.
A. Bruce Johnston was elected as a director of the Company in January 1994.
Since January 1996, Mr. Johnston has been a Principal of TA Associates, Inc., a
private equity firm. From June 1992 to January 1996, Mr. Johnston was a Vice
President of TA Associates. Prior to such time, Mr. Johnston was a General
Manager of Lotus Development Corporation from June 1988 to June 1992. Mr.
Johnston also serves on the Boards of Directors of Expert Software, Inc. and
Trident International, Inc., both NASDAQ-traded public companies, as well as on
the Boards of Directors of several private companies.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Lexington,
Massachusetts, where it occupies approximately 60,000 square feet of office
space under a lease expiring in December 2003. In addition, the Company has
regional sales and service offices in Foster City, California, Chicago and the
United Kingdom under leases expiring in January and February of 2002 and October
of 1998, respectively. The Company also leases office space for its sales
representatives in Atlanta, Dallas, Denver, Seattle and Toronto.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE OF COMMON STOCK
The Company's common stock (NASDAQ symbol RTRK) began trading publicly in
the over-the-counter market through the NASDAQ National Market System on July
23, 1996. The following table sets forth, for the period indicated, the high and
low closing prices of the common stock as reported on the NASDAQ National Market
System. These prices do not include retail markups, markdowns, or commissions.
Common Stock Price
PERIOD HIGH LOW
- --------------------------------------------------------------------------- ------ ------
July 23, 1996 - September 30, 1996......................................... $21.00 $10.00
October 1, 1996 - December 31, 1996........................................ $17.00 $ 4.44
January 1, 1997 - March 31, 1997........................................... $ 5.00 $ 2.88
April 1, 1997 - June 30, 1997.............................................. $ 4.69 $ 2.50
July 1, 1997 - September 30, 1997.......................................... $ 7.75 $ 4.25
The closing sale price of the Common Stock on September 30, 1997 was $6.25.
On December 12, 1997 the closing price reported on the NASDAQ National Market
System for the Common Stock was $6.13.
The market price of the Company's Common Stock has fluctuated significantly
and is subject to significant fluctuations in the future.
HOLDERS OF COMMON STOCK
As of December 12, 1997, there were approximately 45 shareholders of record
of the Company's Common Stock and 8,209,350 shares of common stock outstanding.
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock and does
not anticipate paying dividends in the foreseeable future. The Company intends
to retain any future earnings for use in the Company's business. The payment of
any future dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in financing agreements, business
conditions and other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for the three fiscal years ended September 30, 1997,
1996 and 1995 and the balance sheets at September 30, 1997 and 1996 are derived
from the consolidated financial statements of the Company included elsewhere in
this Form 10-K. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenue..................................... $22,048 $21,592 $15,014 $9,737 $5,670
Cost of revenue............................. 7,061 6,312 4,409 2,939 2,081
Research and development.................... 5,446 2,341 1,365 1,343 674
Sales and marketing......................... 8,703 8,004 5,978 3,335 1,553
General and administrative.................. 3,541 2,610 1,714 1,249 1,190
Non-recurring charge........................ -- -- 1,011 -- --
------- ------- ------- ------ ------
Income (loss) from operations............... (2,703) 2,325 537 871 172
Other income, net........................... 671 326 138 73 24
------- ------- ------- ------ ------
Income (loss) before provision (benefit) for
income taxes............................. (2,032) 2,651 675 944 196
(Benefit) provision for income taxes........ (752) 1,167 274 338 107
------- ------- ------- ------ ------
Net income (loss)........................... $(1,280) $ 1,484 $ 401 $ 606 $ 89
======= ======= ======= ====== ======
Net income (loss) per common and common
equivalent share......................... $ (.16) $ .21 $ .06
Weighted average number of common and common
equivalent shares outstanding............ 8,056 7,212 6,949
SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
(IN THOUSANDS)
Balance Sheet Data:
Cash, cash equivalents and short term
investments.............................. $15,155 $20,368 $ 2,967 $2,735 $ 200
Working capital............................. 14,684 17,418 2,079 2,466 (315)
Total assets................................ 27,053 26,310 9,139 6,150 2,609
Total liabilities........................... 8,513 7,337 9,498 6,629 2,430
Stockholders' equity (deficit).............. 18,540 18,973 (359) (479) 179
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report contains forward looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Forward looking statements include, without
limitation, statements containing the words "Anticipates", "Believes",
"Expects", "Intends", "Future", and words of similar import which express
management's belief, expectations or intentions regarding the Company's future
performance. All forward looking statements included in this report are based on
information available to the Company on the date hereof, and the Company has no
obligation to update any such forward looking statements. The Company's actual
results could differ materially from its historical operating results and from
those anticipated in these forward looking statements as a result of certain
factors, including, without limitation, those set forth below, under "Factors
Affecting Future Operating Results" and elsewhere in this report.
OVERVIEW
The Company's products and services and the markets it serves have evolved
and expanded in concert with the rapid advancements in technology and the
elevated focus on human resource management. From its inception in 1982 through
the first half of fiscal 1993, the Company's product revenue consisted primarily
of DOS-based applicant tracking and succession planning systems. In June, 1993,
the Company introduced a new generation of Windows-based, client/server staffing
software, which incorporates high-volume resume-scanning, skills management and
search capabilities. In November, 1997, the Company broadened its offerings with
the introduction of Restrac WebHire, a service which provides candidate
management functions via the Internet and the world-wide web.
At September 30, 1997, the Company had approximately 300 licensed customers
using its client/server, Windows-based software. To date, revenue from outside
of North America has not exceeded 4% of total revenue for any fiscal year.
Total revenue consists of product revenue and services revenue. Product
revenue is primarily derived from perpetual end-user licenses to use the
Company's products. Through September 30, 1995, the Company's product revenue
included revenue from the resale of third-party scanning hardware. In October
1995, the Company effectively stopped serving as a reseller of hardware.
Scanning hardware resale revenue represented 0%, 3% and 21% of total product
revenue for fiscal 1997, 1996 and 1995, respectively.
Product revenue from software license fees is recognized upon delivery,
provided there are no significant Company obligations remaining and
collectibility of the revenue is probable. Services revenue from customer
maintenance fees for postcontract support is recognized ratably over the
maintenance term, which is typically 12 months. When customer maintenance fees
are included in an initial software license fee, the Company allocates
approximately 15% of the software license fee to the first year's maintenance.
The amount allocated to customer maintenance fees for the first year is
comparable to customer maintenance fees charged separately by the Company. Other
services revenue from training, installation, consulting and scanning is
recognized as the related services are performed.
During fiscal 1997 the Company increased the size of its operating
facilities by over 100% and entered into new leases for its corporate
headquarters, its Chicago office and its West Coast office. The direct increase
in facilities costs associated with these leases will approximate $1.4 million
per year as compared to fiscal 1996. The increase for fiscal 1997 was
approximately $1.0 million. Facilities costs are allocated among income
statement expense categories based principally on functional headcount.
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RESULTS OF OPERATIONS
(IN THOUSANDS)
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item reflected in the Company's
Consolidated Statements of Operations.
FISCAL YEAR ENDED
------------------------
AS A PERCENTAGE OF TOTAL REVENUE: 1997 1995 1996
- -------------------------------------------------------------------- ---- ---- ----
Revenue:
Product revenue................................................... 49% 61% 67%
Services revenue.................................................. 51 39 33
--- --- ---
Total revenue............................................. 100 100 100
--- --- ---
Cost of revenue:
Product revenue................................................... 3 7 9
Services revenue.................................................. 29 22 20
--- --- ---
Total cost of revenue..................................... 32 29 29
Gross margin........................................................ 68 71 71
--- --- ---
Operating expenses:
Research and development.......................................... 25 11 9
Sales and marketing............................................... 39 37 40
General and administrative........................................ 16 12 11
Non-recurring charge.............................................. -- -- 7
--- --- ---
Total operating expenses.................................. 80 60 67
--- --- ---
Income (loss) from operations....................................... (12) 11 4
Other income, net................................................... 3 2 1
--- --- ---
Income (loss) before provision (benefit) for income taxes........... (9) 13 5
(Benefit) provision for income taxes................................ (3) 6 2
--- --- ---
Net income (loss)................................................... (6)% 7 % 3 %
=== === ===
REVENUE
Product Revenue. Product revenue was $10,716, $13,265 and $10,024 in
fiscal 1997, 1996 and 1995, respectively, representing a decrease of 19% from
fiscal 1996 to fiscal 1997 and an increase of 32% from fiscal 1995 to fiscal
1996. Over 75% of the reduction in product revenue in fiscal 1997 is
attributable to smaller sales transactions as compared to fiscal 1996. The
remaining reduction is due to lower shipment volumes in fiscal 1997. Because the
Company's product revenue consists of a relatively small number of large dollar
transactions, the average sales price and number of units shipped can fluctuate
widely from period to period. Such fluctuations are not necessarily indicative
of future results. Hardware resales contributed $358 to the first fiscal 1996
quarter. (The Company no longer serves as a reseller of hardware). Further, in
fiscal 1996 as compared to fiscal 1997, more customers chose to license a large
number of users with their initial system deployment, resulting in a
significantly higher average sales price for fiscal 1996. Some customers
initially deploy the product on a selective, divisional or business unit basis
and later license additional users. This latter pattern accounts for 57% of the
growth in product revenue for fiscal 1996 over fiscal 1995. The remainder of the
increase in product revenue for fiscal 1996 is attributable to a combination of
price increases and larger sales transactions as compared to fiscal 1995. Sales
to existing customers represented approximately 25%, 26% and 11% of total
software licenses in fiscal years 1997, 1996 and 1995, respectively.
Services Revenue. Services revenue was $11,332, $8,327 and $4,990 in
fiscal 1997, 1996 and 1995, respectively, representing an increase of 36% from
fiscal 1996 to fiscal 1997 and 67% from fiscal 1995 to fiscal 1996. Increased
maintenance revenue, generated by the continued growth in the
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Restrac Hire and Resume Reader for PeopleSoft installed base, accounts for 70%
and 49% of the total increase in services revenue for fiscal 1997 and fiscal
1996, respectively. The remaining increases are attributable to the Company's
continued enhancements of its services offerings, with the addition of
outsourced scanning services late in fiscal 1996 and the introduction of
standardized training and education programs throughout fiscal 1995. There can
be no assurances that the Company will sustain these levels of services revenue
growth.
COST OF REVENUE
Cost of Product Revenue. Cost of product revenue includes royalty payments
for third-party software embedded in the Company's products, third-party
hardware costs (1995 only) and costs of documentation and shipping. Cost of
product revenue decreased 53% to $704 for fiscal 1997 from $1,485 for fiscal
1996. Cost of product revenue increased 4% to $1,485 for fiscal 1996 from $1,425
for fiscal 1995. Cost of product revenue decreased as a percentage of product
revenue to 7% for fiscal 1997 from 11% for fiscal 1996 and 14% for fiscal 1995.
The percentage decrease for fiscal 1997 as compared to fiscal 1996 is due
primarily to favorable rate revisions in the royalties due under third-party
licensing arrangements. The percentage decrease for fiscal 1996 from fiscal 1995
is primarily attributable to the Company's decision to discontinue reselling
scanning hardware, which represented 58% of cost of product revenue for fiscal
1995.
Cost of Services Revenue. Cost of services revenue includes all costs of
maintaining the client services organization, including salaries and
personnel-related expenses, travel, outside consulting services, facilities cost
and, to a lessor extent, third party scanning services and royalty payments for
software maintenance. Cost of services revenue increased 32% to $6,357 for
fiscal 1997 from $4,827 for fiscal 1996. Cost of services revenue increased 62%
to $4,827 for fiscal 1996 from $2,984 for fiscal 1995. The increases in absolute
dollars for each of the years are principally attributable to increased
personnel and associated costs in the client services organization to support a
larger client base and proportionately higher services revenue. Cost of services
revenue decreased as a percentage of services revenue to 56% for fiscal 1997
from 58% for 1996 and 60% for 1995.
The higher mix of services revenue in fiscal 1997 as compared to fiscal
1996 is reflected in the slight decrease in gross margin to 68% from 71%.
OPERATING EXPENSES
Research and Development. Research and development expenses include all
costs associated with the product engineering and quality functions, including
salaries and personnel-related expenses, travel, outside consulting services and
facilities costs. Research and development expenses were $5,446 or 25% of total
revenue for fiscal 1997 as compared to $2,341 or 11% of total revenue for fiscal
1996 and $1,365 or 9% of total revenue for fiscal 1995. These significant
increases in both absolute dollars and as a percentage of total revenue for the
years presented are primarily due to increases in both personnel and consulting
expenses in support of the Company's new and existing product development
initiatives and its quality assurance programs. The Company had 50 employees
dedicated to research and development efforts at the end of fiscal 1997 as
compared to 29 employees at the end of fiscal 1996 and 17 employees at the end
of fiscal 1995. The Company considers continued investment in research and
development to be integral to its future success. However, research and
development spending is expected to decline as a percentage of total revenue in
fiscal 1998 as compared to fiscal 1997. All of the Company's research and
development costs have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses include promotional
costs and trade shows and costs associated with personnel involved in sales and
marketing functions, including salaries, commissions and other personnel-related
expenses, travel, outside consulting services and facilities costs. Sales and
marketing expenses were $8,703 or 39% of total revenue for fiscal 1997 as
compared to $8,004 or 37% of total revenue for fiscal 1996 and $5,978 or 40% of
total revenue for fiscal 1995. The Company continued to make significant
investments in its sales
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organization in fiscal 1997, adding personnel and expanding its West Coast and
Central U.S. facilities to accommodate the geographic distribution of sales and
services personnel and to better support the customer base. The increase in
absolute dollars in fiscal 1996 from fiscal 1995 related to increased marketing
program costs in support of the Company's sales efforts and an increase in the
number of sales and marketing personnel. The Company expects that sales and
marketing expenses will continue to increase in absolute dollars; however, such
expenses may vary from year to year as a percentage of total revenue.
General and Administrative. General and administrative expenses consist
principally of costs for corporate operations personnel (executive, finance and
accounting, information technology, human resources, legal and administrative),
professional fees and other general corporate expenses. General and
administrative expenses were $3,541 or 16% of total revenue for fiscal 1997 as
compared to $2,610 or 12% of total revenue for fiscal 1996 and $1,714 or 11% of
total revenue for fiscal 1995. The increase for fiscal 1997 as compared to
fiscal 1996, both in absolute dollars and as a percentage of total revenue, is
largely the result of personnel increases in support of the Company's
infrastructure, increased costs associated with the Company's having gone public
in fiscal 1996, investments in internal systems and a one-time charge in 1997
related to the move of the Company's corporate headquarters. The increases for
fiscal 1996 as compared to fiscal 1995 were principally due to increased
personnel. General and administrative expenses are expected to decline as a
percentage of total revenue in fiscal 1998 as compared to fiscal 1997.
Non-recurring Charge. On January 1, 1991, the Company acquired certain of
the assets of Borwick International, Inc. (Borwick), an international consulting
firm which developed and marketed software known as SuccessPlan (the Product).
As part of this 1991 agreement, Borwick was granted the exclusive right to
distribute the Product outside of North America, and the Company was prohibited
from selling any competitive products in these territories. On September 30,
1995, the Company entered into an agreement that terminated certain distribution
rights of Borwick to the Product and removed any restrictions on the Company's
ability to sell competitive products. In conjunction therewith, the Company
recorded a non-recurring charge to operations of $1,011 in the fiscal year ended
September 30, 1995, representing the present value of payments made and payable
under the terms of this agreement.
OTHER INCOME, NET
Other income increased to approximately $671 in fiscal 1997 from $326 in
fiscal 1996 and $138 in fiscal 1995. These increases are due to higher average
cash and cash equivalents and short-term investment balances during each
respective year, representing the proceeds raised from the Company's initial
public offering in July, 1996. The Company expects to continue to yield
investment income on its average balance of combined cash and cash equivalents
and short-term investments at an average rate comparable to that experienced for
fiscal 1997.
(BENEFIT) PROVISION FOR INCOME TAXES
The Company's effective tax rate was (37%), 44% and 41% for the fiscal
years ended 1997, 1996 and 1995, respectively. The decrease in the effective
rate for fiscal 1997 as compared to fiscal 1996 was due primarily to the net
loss in fiscal 1997 compared to the taxable income in prior periods. The benefit
generated from the net loss in fiscal 1997 related primarily to the federal tax
benefit and was partially offset by minimum taxes due in certain state
jurisdictions. The increase in the effective tax rate to 44% in fiscal 1996 from
41% in fiscal 1995 was due primarily to equity related compensation not
benefitted for financial statement purposes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations and
capital expenditures through internally generated cash flow. Additional
financing which has been secured by the
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Company includes $3,200 of net proceeds from the issuance of Convertible
Preferred Stock in January 1994 and $14,500 of net proceeds from the Company's
initial public offering in July, 1996.
At September 30, 1997, the Company had cash and cash equivalents and
short-term investments of $15,155, a decrease of $5,213 from $20,368 at
September 30, 1996. Working capital was $14,684 at September 30, 1997 as
compared to $17,418 at September 30, 1996, a decrease of $2,734.
Cash used in operating activities was $2,141 during the year ended
September 30, 1997. Use of cash in operating activities consisted mainly of the
net loss for the fiscal year of $1,280, the offsetting effects of depreciation
and amortization of $1,245, growth in deferred revenue of $943 and the timing of
receipts and disbursements, resulting in prepayment of certain expenses,
increases in accounts receivable and fluctuations in certain liabilities.
The Company used $13,030 in investing activities during the year ended
September 30, 1997. Investing activities consisted principally of the net
purchase of short-term investments of $9,410; the purchase of property and
equipment (primarily computer and networking equipment, peripherals and
software) which approximated $2,877 to support the corporate infrastructure and
the launch of Restrac WebHire; and a cash deposit of $720 for the Company's new
lease for its corporate headquarters. This lease deposit (included in Other
Assets) is interest-bearing and its investment can be directed by the Company.
Net cash provided by financing activities for the year ended September 30,
1997 was $548. Financing activities consisted of proceeds and tax benefit from
the exercise of stock options and proceeds from the issuance of stock under the
employee stock purchase plan.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Cash has
been, and the Company contemplates that it will continue to be, invested in
interest-bearing, investment grade securities.
From time to time, the Company may evaluate potential acquisitions of
products, businesses and technologies that may complement or expand the
Company's business. The Company currently does not have any understandings,
commitments or agreements with respect to any such acquisitions. Any such
transactions consummated may use a portion of the Company's working capital or
require the issuance of equity or debt.
The Company believes that its current cash and cash equivalent and
short-term investment balances and cash provided by future operations will be
sufficient to meet its working capital expenditure requirements for at least the
next twelve months. Although operating activities may provide cash in certain
periods, operating and investing activities may use cash in other periods.
Consequently, any future growth may require the Company to obtain additional
equity or debt financing.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company operates in a dynamic and rapidly changing environment that
involves risks and uncertainties. The following section lists some, but not all,
of these risks and uncertainties which may have a material adverse effect on the
Company's business, financial condition or results of operations. This section
should be read in conjunction with the audited Consolidated Financial Statements
and Notes thereto, and Management's Discussions and Analysis of Financial
Condition and Results of Operations for the years ended September 30, 1997,
1996, and 1995.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's results of operations have been, and may in the future be,
subject to significant quarterly fluctuations, due to a variety of factors,
including the relatively lengthy sales cycle for the Company's products, the
relatively large size of a typical product sale, the timing of contracts, the
introduction of new products by the Company or its competitors, capital spending
patterns of
21
23
customers, the Company's sales incentive strategy (which is based in part on
annual sales targets) and general economic conditions. Historically, revenue in
each of the first two fiscal quarters has been lower than in the preceding
fourth fiscal quarter (which typically has the highest revenue and net income),
due largely to sales incentive programs. A substantial portion of the Company's
revenue often occurs during the last few weeks of each quarter; therefore, any
delays in orders or shipments are more likely to result in revenue not being
recognized until the following quarter. The Company's current expense levels are
based in part on its expectations of future revenue and, as a result, net income
for a given period could be disproportionately affected by any reduction in
revenue. There can be no assurance that the Company will be able to achieve
significant revenue, that the level of revenue in the future will not decrease
from past levels or that in some future quarter the Company's revenue or
operating results will not be below the expectations of stock market securities
analysts and investors. In such event, the Company's profitability and price of
its Common Stock would likely be materially and adversely affected.
EMERGING MARKETS
The Company's future success is substantially dependent on broader
recognition of the potential benefits afforded by automated staffing software
and services and the growth in demand for such solutions. Because the market for
such software is developing, it is difficult to assess the size of the market,
the customer demands that will evolve, and the competition that may emerge.
There can be no assurance that the market for automated staffing software and
services will continue to grow or that the introduction of new technologies or
services will not render the Company's existing software and services obsolete
or unmarketable.
The market for automated staffing solutions is undergoing rapid changes
including continuing advances in technology and changes in customer requirements
and preferences. These market dynamics have been amplified by the emergence of
the Internet as a communications medium for staffing solutions. The Company's
future success will depend in significant part on its ability to continually
improve the performance, features and reliability of its software and services
in response to the evolving demands of the marketplace and competitive product
offerings, and there can be no assurance that the Company will be successful in
doing so. In addition, an element of the Company's business strategy is the
introduction of new products, functionalities and other staffing solutions that
capitalize on the increasing use of the Internet and corporate intranets. There
can be no assurance that the Company will be successful in developing and
marketing products that will keep pace with technological changes in the market
or new technologies introduced by competitors or that it will satisfy evolving
consumer preferences. Development of Internet and intranet-based products,
functionalities and other staffing solutions will also depend on increased
acceptance of the Internet for staffing solutions and the development of the
necessary infrastructure to facilitate commercial applications on the Internet.
There can be no assurance of such acceptance or infrastructure development.
Failure to develop and introduce new products, functionalities and other
staffing solutions in a timely fashion could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON PRINCIPAL PRODUCT
The Company currently derives most of its revenue from its Restrac Hire
product. As a result, any factor adversely affecting sales of this product would
have a material adverse effect on the Company. The future success of the Company
also depends, in part, on achieving broader market acceptance of Restrac Hire,
as well as the ability to continue to enhance Restrac Hire to meet the evolving
needs of its customers. Moreover, the Company anticipates that its existing and
new competitors will introduce additional competitive products. This competition
may reduce future market acceptance of Restrac Hire. The market acceptance of
the Company's software is difficult to estimate due in large measure to the
effect of new products, applications or product enhancements, technological
changes in the marketplace for staffing solutions and future competition. There
can be no assurance that the Company will maintain and expand acceptance of
Restrac Hire. The failure of
22
24
the Company to maintain and expand its market acceptance as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's business, financial condition and results of operations.
MANAGEMENT OF CHANGE
The evolution of the Company's business and expansion of the Company's
customer base has resulted in substantial growth in the number of its employees,
the scope of its operation and financial systems and the geographic area of its
operations, resulting in increased responsibility for management personnel. The
Company's future results of operations will depend on the ability of its
officers and other key employees to continue to implement its operational,
customer support, and financial control systems and to expand, train, and manage
its employee base. Although the Company currently has no agreements,
commitments, or understandings relating to any acquisitions, the Company may
undertake acquisitions in the future. Any such transactions would place
additional strains upon the Company's management resources. There can be no
assurance that the Company will be able to manage any future expansion
successfully, and any inability to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
COMPETITION
The marketplace for staffing solutions is intensely competitive and is
rapidly changing. The Company encounters direct competition from a number of
companies providing staffing solutions, including (i) other human resource
staffing software companies, (ii) providers of general human resource
information systems, (iii) agencies providing or sourcing full-time, contract
and temporary labor, (iv) information systems departments of potential prospects
that develop custom software, and (v) providers of other client/server
application software or document management systems.
The Company's primary direct competitor is Resumix, Inc., which was
acquired by Ceridian, Inc. in 1995. The Company also competes directly against
other providers of human resource staffing software, most of which are small
privately held companies providing less functional products at lower prices. In
addition, vendors of general human resource information systems generally
include applicant tracking modules in their offerings which can compete with the
Company's products. Moreover, there can be no assurance that such vendors will
not develop and market products in direct competition with the Company. Some of
the Company's current and many of its potential competitors, including
PeopleSoft, IBM and many other providers of general human resource information
systems, are large, publicly traded organizations with access to significantly
greater financial, technical, marketing, and other resources. As a result, they
may be able to respond to market changes, emerging technologies or changes in
customer requirements more rapidly and devote more resources to the development,
marketing, and sales of their products than the Company. Competition may
increase from new market entrants (particularly if the market for automated
staffing solutions continues to develop) or through consolidations in the
software industry and/or cooperative relationships among companies. Although the
Company believes that at the present time its products are competitively priced,
an increase in competition could result in price reductions and loss of market
share. Such competition and any resulting price reductions could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
DEPENDENCE ON THIRD PARTIES
A key element of the Company's business strategy is to develop
relationships with leading industry organizations in order to increase the
Company's market presence, expand distribution channels and broaden the
Company's product line. The Company believes that its continued success depends
in large part on its ability to maintain such relationships and cultivate
additional relationships. There can be no assurance that the Company's existing
strategic partners such as
23
25
PeopleSoft or future strategic partners will not develop and market products in
direct competition with the Company or otherwise discontinue their relationships
with the Company, or that the Company will be able to successfully develop
additional strategic relationships.
In addition, certain technology incorporated in the Company's software is
licensed from third parties on a nonexclusive basis. The termination of any of
such licenses, or the failure of the third party licensers to adequately
maintain or update their products, could result in delay in the Company's
ability to ship certain of its products while it seeks to implement technology
offered by alternative sources. In addition, any required replacement licenses
could prove more costly than the Company's current license relationships and
might not provide technology as powerful and functional as the third-party
technology currently licensed by the Company. Also, any such delay, to the
extent it becomes extended or occurs at or near the end of a fiscal quarter,
could have a material adverse effect on the Company's results of operations for
that quarter. While it may be necessary or desirable in the future to obtain
other licenses relating to one or more of the Company's products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms or at all.
RELIANCE ON SINGLE CLIENT INTERFACE AND SINGLE SERVER PLATFORM
At the present time, the Company supports client (workstation) platforms
utilizing Microsoft's Windows family of software products, including Windows
3.1, Windows NT and Windows 95. If Microsoft were to fundamentally change the
architecture of its software product such that users of the Company's software
applications experienced significant performance degradation or were rendered
incompatible with future versions of Microsoft's Windows Operating System, the
Company's business, financial condition and results of operations could be
materially adversely affected. If a new client platform or other interface were
to gain broad acceptance in the marketplace, there can be no assurance that the
Company's architecture would be compatible with such an interface.
Certain products planned for release in fiscal 1998 will operate
exclusively on Microsoft's NT Server and Internet Information Server (IIS)
platforms. If Microsoft were to fundamentally change the architecture of its
server product such that users of the Company's software applications
experienced significant performance degradation or were rendered incompatible
with future versions of Microsoft's NT Server or IIS, the Company's business,
financial condition and results of operations could be materially adversely
affected. If a new type of server were to gain broad acceptance in the
marketplace, there can be no assurance that the Company's architecture would be
compatible with such a server.
RISK OF NEW PRODUCT INTRODUCTIONS; RISK OF PRODUCT DEFECTS
As the marketplace for staffing solutions continues to evolve, the Company
plans to develop and introduce new products and services to enable it to
effectively address the changing needs of that market. There is no guarantee
that the Company will be able to develop new products or services or that such
solutions will achieve market acceptance or, if market acceptance is achieved,
that the Company will be able to maintain such acceptance for a significant
period of time. Any inability of the Company to quickly develop products and
services that address changes in technology or customer demands may require the
Company to substantially increase development expenditures or result in loss of
market share to a competitor.
Products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. The Company has
in the past discovered software errors in certain of its product offerings after
their introduction. There can be no assurance that, despite testing by the
Company, errors will not occur in new products or releases after commencement of
commercial shipments, resulting in adverse publicity, in loss of or delay in
market acceptance, or in claims by the customer against the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
24
26
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on its senior
management and other key employees. The Company also believes that its future
success will depend in large part on its ability to attract and retain
additional key employees. Competition for such personnel in the computer
software industry is intense, and there can be no assurance that the Company
will be successful in attracting and training such personnel. Furthermore,
although the Company is a party to non-competition agreements with each of its
senior executives, the laws governing such agreements are in continual flux and
the enforceability of such agreements in each jurisdiction in which enforcement
might be sought is uncertain. The Company's inability to attract and retain
additional key employees or the loss of one or more of its current key employees
could materially adversely affect the Company's business, financial condition
and results of operations.
RISK OF INTERNATIONAL EXPANSION
Although international sales have not been significant to date, an element
of the Company's business strategy is the expansion of its existing
international operations and entry into additional international markets, which
will require significant management attention and financial resources. To the
extent that the Company is unable to make the investments required to expand in
a timely manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, there can be no
assurance that the Company will be able to maintain or increase international
market demand for its products. Additional risks inherent in the Company's
international business activities generally include currency fluctuations,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and difficulties associated with localizing products for foreign
countries, lack of acceptance of localized products in foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, potentially adverse tax consequences, restrictions on the
repatriation of earnings, the burdens of complying with a wide variety of
foreign laws and political and economic instability. There can be no assurance
that such factors will not have a material adverse effect on the Company's
future international sales or the Company's overall business, financial
condition and results of operations.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND DEPENDENCE ON PROPRIETARY
RIGHTS; RISK OF LITIGATION
The Company relies on a combination of copyright and trade secret laws,
employee and third party non-disclosure agreements and other methods to protect
its proprietary rights. There can be no assurance that the measures taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or independent development by others of
similar technology. In addition, the Company may be subject to additional risk
as it enters into transactions in countries where intellectual property laws are
not well developed or are poorly enforced. The Company's inability to protect
its proprietary rights would have a material adverse effect on the Company's
business, financial condition and results of operations.
As the number of human resource application software products and services
in the industry increases and the functionality of these solutions further
overlaps, software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. Although the Company is not currently the subject of
any intellectual property litigation, there has been substantial litigation
regarding copyright, patent and other intellectual property rights involving
computer software companies. Any claims or litigation, with or without merit,
could be costly and could result in a diversion of management's attention, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such claims or
litigation may require the Company to obtain a
25
27
license and/or pay damages, which could also have a material adverse effect on
the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
As is frequently the case with stock of high technology companies, the
market price of the Company's stock has been and may continue to be quite
volatile. Factors such as quarterly fluctuations in results of operations,
announcements of technological innovations by the Company or its competitors or
the introduction of new products by the Company or its competitors, and
macroeconomic conditions in the computer software industries generally, may have
a significant impact on the market price of the stock of the Company. If revenue
or earnings in a quarter fail to meet expectations (published or otherwise) of
the investment community, there could be an immediate impact on the Company's
stock price. Furthermore, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market price for many high technology companies and which, on occasion, have
been unrelated to the operating performance of those companies. These broad
market fluctuations may materially adversely affect the market price of the
stock of the Company.
PRODUCT LIABILITY
Although the Company has not experienced any product liability claims to
date, the sale and support of products by the Company and the incorporation of
products from other companies may entail the risk of product liability claims.
The Company's license agreements with its customers typically contain provisions
intended to limit the Company's exposure to such claims, but such provisions may
not be effective in limiting the Company's exposure. A successful product
liability action brought against the Company could adversely affect the
Company's business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to the text appearing under Part I, Item 1 -- Business under the
caption "Executive Officers and Directors" in this Report, and by reference to
the information included under the headings "Information Regarding Directors",
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders to be filed by the Company within 120 days after close
of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the information under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders
to be filed by the Company within 120 days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Principal And Management
Stockholders" in the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders to be filed by the Company within 120 days after the
close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the information under the heading "Certain Relationships and
Related Transactions", if any, in the Company's definitive Proxy Statement for
the 1997 Annual Meeting of Stockholders to be filed by the Company within 120
days after the close of its fiscal year.
27
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
1. Report of Arthur Andersen LLP dated October 23, 1997 (See Page F-2
hereof).
2. Consolidated Balance Sheets as of September 30, 1997 and 1996. (See Page
F-3 hereof).
3. Consolidated Statements of Operations for the years ended September 30,
1997, 1996 and 1995 (See Page F-4 hereof).
4. Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended September 30, 1997,
1996 and 1995. (See Page F-5 hereof).
5. Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995. (See Page F-6 hereof).
6. Notes to Consolidated Financial Statements. (See pages F-7 through F-16
hereof).
(a)(2) FINANCIAL STATEMENT SCHEDULES
DESCRIPTION SCHEDULE NO.
- ------------- ------------------------------------
Schedule II. Valuation and Qualifying Accounts
Other schedules are not provided because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
(a)(3) EXHIBITS
(a) Exhibits. The following is a complete list of Exhibits filed as part of
this Form 10-K.
EXHIBIT NO. DESCRIPTION
------------ ------------------------------------------------------------------------------
*3.1 Form of Third Amended and Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated By-laws of the Company
*4.1 Specimen certificate for shares of Common Stock, $.01 par value, of the
Company
*10.1 Stock Purchase Agreement dated January 5, 1994, as amended, by and between the
Company and the Purchasers identified therein
*10.2 Stock Redemption Agreement dated January 5, 1994 between the Company and J.
Paul Costello, Lars D. Perkins and John P. Jopling
*10.3 Registration Rights Agreement dated January 5, 1994 between the Company and
Lars D. Perkins, J. Paul Costello and John P. Jopling
*10.4 Restrac, Inc. 1994 Stock Option Plan
*10.5 Restrac, Inc. 1996 Stock Option and Grant Plan
**10.6 Restrac, Inc. 1996 Employee Stock Purchase Plan
*10.7 Paid-up Software License dated as of January 1, 1993 by and between the
Company and Costello and Company, Inc.
*+10.8 VAR Agreement dated November 27, 1991 between the Company and Verity, Inc. and
all amendments thereto -- see 10.25 below
*+10.9 Value Added Reseller License Agreement dated August 31, 1992 by and between
The Analytic Sciences Corporation and the Company and all amendments thereto
*10.12 Form of Director's Indemnification Agreements
*10.13 Form of Employment Agreement with Senior Management
*10.14 Form of Addendum to Employment Agreement with Senior Management
*10.15 Agreement Pertaining to the Election of Directors dated January 5, 1994 by
Lars D. Perkins, J. Paul Costello and the Purchasers identified therein
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30
EXHIBIT NO. DESCRIPTION
------------ ------------------------------------------------------------------------------
*10.16 Shareholder Agreement dated January 5, 1994 by and among the Company and the
Shareholders identified therein
*10.17 Agreement Pertaining to Certain Activities dated January 5, 1994 by and
between Lars D. Perkins and the Company
*10.18 Termination Agreement dated September 30, 1995 by and among the Company and
Borwick International, Inc. and Irving P. Borwick
*10.19 Finder's Fee and Non-Competition Agreement dated September 30, 1995 between
the Company and Irving P. Borwick
**10.22 Lease agreement dated November 12, 1996 between Boston Properties, Inc. and
the Company
+10.24 Amendment #3 to VAR Agreement dated November 27, 1991, between the Company and
Verity, Inc.
11.1 Schedule regarding computation of earnings per share
**21.1 Subsidiaries of registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule.
- ---------------
* Incorporated by reference to the specified exhibit with the corresponding
numbers in the Company's Registration Statement on Form S-1, as amended (No.
333-03521), declared effective on July 22, 1996.
** Incorporated by reference to the specified exhibit with the corresponding
numbers in the Company's Annual Report on Form 10-K, filed with the
Commission on December 27, 1996.
+ Confidential treatment requested as to portions of this document.
(b) Report on Form 8-K.
The Company has not filed any Form 8-K's during the fourth quarter of 1997.
29
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 22nd day of
December 1997.
By: /s/ LARS D. PERKINS
-------------------------------------------
Lars D. Perkins, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------- ---------------------------------------- ------------------
/s/ LARS D. PERKINS Director, Chief Executive Officer December 22, 1997
- --------------------------------- (Principal Executive Officer)
Lars D. Perkins
/s/ MARTIN J. FAHEY Director, President and Chief Operating December 22, 1997
- --------------------------------- Officer
Martin J. Fahey
/s/ CYNTHIA G. EADES Chief Financial Officer (Principal December 22, 1997
- --------------------------------- Financial Officer and Principal
Cynthia G. Eades Accounting Officer)
/s/ RUSSELL J. CAMPANELLO Director December 22, 1997
- ---------------------------------
Russell J. Campanello
/s/ J. PAUL COSTELLO Director December 22, 1997
- ---------------------------------
J. Paul Costello
/s/ A. BRUCE JOHNSTON Director December 22, 1997
- ---------------------------------
A. Bruce Johnston
30
32
RESTRAC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of September 30, 1997 and 1996......................... F-3
Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and
1995................................................................................ F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit) for the Years Ended September 30, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and
1995................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
F-1
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Restrac, Inc.:
We have audited the accompanying consolidated balance sheets of Restrac,
Inc., as of September 30, 1997 and 1996, and the related consolidated statements
of operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
September 30, 1997. These consolidated financial statements and schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Restrac, Inc. as of September 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 23, 1997
F-2
34
RESTRAC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
--------------------
1997 1996
------- -------
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 5,745 $20,368
Short-term investments............................................ 9,410 --
Accounts receivable, less allowance for doubtful accounts of $320
and $350 at September 30, 1997 and 1996, respectively.......... 5,130 3,387
Other current assets.............................................. 780 229
Refundable income taxes........................................... 948 --
Deferred income taxes............................................. 881 771
------- -------
Total current assets...................................... 22,894 24,755
Property and equipment, net....................................... 3,383 1,521
Other assets, net................................................. 776 34
------- -------
TOTAL ASSETS.............................................. $27,053 $26,310
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations...................... $ 144 $ 5
Accounts payable.................................................. 1,459 570
Accrued expenses.................................................. 2,523 3,453
Deferred revenue.................................................. 4,084 3,141
Accrued income taxes.............................................. -- 168
------- -------
Total current liabilities................................. 8,210 7,337
------- -------
Deferred rent..................................................... 172 --
------- -------
Capital lease obligations......................................... 131 --
------- -------
Commitments (note 3)
Stockholders' Equity:
Preferred stock, $.01 par value -- Authorized -- 5,000,000
shares, Issued and outstanding -- none........................ -- --
Common stock, $.01 par value -- Authorized -- 30,000,000
shares, Issued -- 8,852,303 shares at September 30, 1997,
8,569,711 shares at September 30, 1996........................ 89 86
Additional paid-in capital........................................ 19,067 18,223
Treasury stock, at cost........................................... (831) (831)
Retained earnings................................................. 215 1,495
------- -------
Total stockholders' equity................................ 18,540 18,973
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $27,053 $26,310
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
35
RESTRAC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------
Revenue:
Product revenue...................................... $ 10,716 $ 13,265 $ 10,024
Services revenue..................................... 11,332 8,327 4,990
--------- --------- ---------
Total revenue................................ 22,048 21,592 15,014
--------- --------- ---------
Cost of Revenue:
Product revenue...................................... 704 1,485 1,425
Services revenue..................................... 6,357 4,827 2,984
--------- --------- ---------
Total cost of revenue........................ 7,061 6,312 4,409
--------- --------- ---------
Gross margin........................................... 14,987 15,280 10,605
--------- --------- ---------
Operating Expenses:
Research and development............................. 5,446 2,341 1,365
Sales and marketing.................................. 8,703 8,004 5,978
General and administrative........................... 3,541 2,610 1,714
Non-recurring charge (note 2)........................ -- -- 1,011
--------- --------- ---------
Total operating expenses..................... 17,690 12,955 10,068
--------- --------- ---------
Income (loss) from operations........................ (2,703) 2,325 537
Other income, net.................................... 671 326 138
--------- --------- ---------
Income (loss) before provision (benefit) for income
taxes............................................. (2,032) 2,651 675
(Benefit) provision for income taxes................. (752) 1,167 274
--------- --------- ---------
Net income (loss).................................... $ (1,280) $ 1,484 $ 401
========= ========= =========
Net income (loss) per common and common equivalent
share............................................. $ (.16) $ 0.21 $ 0.06
========= ========= =========
Weighted average number of common and common
equivalent shares outstanding..................... 8,056,272 7,212,171 6,949,273
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
36
RESTRAC, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
REDEEMABLE
CONVERTIBLE COMMON STOCK
PREFERRED STOCK ---------------------- TREASURY STOCK TOTAL
--------------------- $.01 ADDITIONAL ----------------- RETAINED STOCKHOLDERS'
NUMBER CARRYING NUMBER PAR PAID-IN NUMBER EARNINGS EQUITY
OF SHARES VALUE OF SHARES VALUE CAPITAL OF SHARES COST (DEFICIT) (DEFICIT)
---------- -------- --------- ---------- ---------- --------- ----- -------- -------------
Balance,
September 30,
1994.......... 556 $ 3,562 4,500 $ 45 $ 161 630 $(805) $ 120 $ (479)
Accretion of
dividends..... -- 280 -- -- -- -- -- (280) (280)
Net income...... -- -- -- -- -- -- -- 401 401
---- ------- ----- ---- -------- --- ----- ------- -------
Balance,
September 30,
1995.......... 556 3,842 4,500 45 161 630 (805) 241 (358)
Exercise of
common stock
options....... -- -- 67 1 38 -- -- -- 39
Purchase of
treasury
stock......... -- -- -- -- -- 57 (26) -- (26)
Accretion of
dividends..... -- 230 -- -- -- -- -- (230) (230)
Tax benefit from
stock options
exercised..... -- -- -- -- 35 -- -- --
Effect of
preferred
stock
conversion.... (556) (4,072) 2,503 25 3,479 -- -- -- 3,504
Public offering
proceeds,
net........... -- -- 1,500 15 14,496 -- -- -- 14,511
Compensation
expense on
warrant
grants........ -- -- -- -- 14 -- -- -- 14
Net income...... -- -- -- -- -- -- -- 1,484 1,484
---- ------- ----- ---- -------- --- ----- ------- -------
Balance,
September 30,
1996.......... -- -- 8,570 86 18,223 687 (831) 1,495 18,973
Exercise of
common stock
options....... -- -- 265 3 208 -- -- -- 211
Tax benefits
from options
exercised..... -- -- -- -- 285 -- -- -- 285
Employee stock
purchase plan
stock
issuance...... -- -- 17 -- 79 -- -- -- 79
Compensation
expense on
warrant
grants........ -- -- -- -- 99 -- -- -- 99
Compensation
expense on
stock
options....... -- -- -- -- 173 -- -- -- 173
Net loss........ -- -- -- -- -- -- -- (1,280) (1,280)
---- ------- ----- ---- -------- --- ----- ------- -------
Balance,
September 30,
1997.......... -- $ -- 8,852 $ 89 $ 19,067 687 $(831) $ 215 $18,540
==== ======= ===== ==== ======== === ===== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
37
RESTRAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- ------- -------
Cash Flows from Operating Activities:
Net (loss) income................................................ $ (1,280) $ 1,484 $ 401
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities --
Depreciation and amortization................................. 1,245 861 430
Provision for doubtful accounts............................... 15 201 317
Deferred income taxes, net.................................... (110) (70) (448)
Loss on disposal of property and equipment.................... -- -- 9
Compensation expense on stock options......................... 173 -- --
Compensation expense on warrant grants........................ 99 14 --
Changes in assets and liabilities --
Accounts receivable......................................... (1,758) (102) (1,650)
Other current assets........................................ (482) 225 (297)
Refundable income taxes..................................... (948) -- --
Accounts payable............................................ 888 (15) 45
Accrued expenses............................................ (930) 589 1,475
Deferred revenue............................................ 943 615 1,530
Other liabilities........................................... 172 (45) (64)
Accrued income taxes........................................ (168) 41 (334)
-------- ------- -------
Net cash (used in) provided by operating activities...... (2,141) 3,798 1,414
-------- ------- -------
Cash Flows from Investing Activities:
Purchases of property and equipment.............................. (2,877) (928) (1,115)
Proceeds from sale of property and equipment..................... -- -- 8
Purchase of short-term investments............................... (9,410) -- --
Increase in other assets......................................... (743) (19) (1)
-------- ------- -------
Net cash used in investing activities.................... (13,030) (947) (1,108)
-------- ------- -------
Cash Flows from Financing Activities:
Payments of capital lease obligations............................ (27) (9) (27)
Payments of bank notes payable................................... -- -- (47)
Net proceeds from initial public offering of common stock........ -- 14,511 --
Proceeds from exercise of common stock options................... 211 38 --
Proceeds from employee stock purchase plan stock issuance........ 79 -- --
Tax benefit of stock options exercised........................... 285 35 --
Purchase of treasury stock....................................... -- (25) --
-------- ------- -------
Net cash provided by (used in) financing activities...... 548 14,550 (74)
-------- ------- -------
Net (decrease) increase in Cash and Cash Equivalents............... (14,623) 17,401 232
Cash and Cash Equivalents, beginning of period..................... 20,368 2,967 2,735
-------- ------- -------
Cash and Cash Equivalents, end of period........................... $ 5,745 $20,368 $ 2,967
======== ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest...................................................... $ 5 $ 16 $ 10
-------- ------- -------
Income taxes.................................................. $ 442 $ 893 $ 1,280
-------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
38
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company designs, develops, markets, implements and supports human
resource staffing software to automate the recruitment, selection and placement
of an organization's workforce. The Company's staffing software enables
organizations to strategically manage their human capital by reducing hiring and
placement costs, decreasing time to fill positions and providing more effective
skills management and worker deployment. The Company's products provide human
resource departments with client/server solutions to quickly and efficiently
build and search comprehensive "pools" of resume skills data to find the workers
they need, while also managing the workflow of the staffing process.
In 1982, the Company was incorporated under the laws of the Commonwealth of
Massachusetts. On January 5, 1994, the Company was reincorporated as a Delaware
corporation. On June 15, 1995, the Company amended its Certificate of
Incorporation to effect a name change from MicroTrac Systems, Inc. to Restrac,
Inc.
The accompanying consolidated financial statements include the accounts of
Restrac, Inc. and its wholly-owned subsidiary, Restrac Securities Corporation,
collectively referred to in these Notes to Consolidated Financial Statements as
"the Company." All intercompany accounts and transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the Notes to Consolidated Financial Statements.
(a) Revenue Recognition
Product revenue includes software license fees, and prior to fiscal 1997,
third-party scanning hardware and royalty revenue. Services revenue includes
customer maintenance fees, training, installation, consulting and scanning. The
Company recognizes product and services revenue in accordance with the
provisions of Statement of Position (SOP) No. 91-1, Software Revenue
Recognition.
Product revenue from software license fees is recognized upon delivery,
provided there are no significant Company obligations remaining and
collectibility of the revenue is probable. If an acceptance period is allowed,
revenue is recognized upon the earlier of the acceptance or the expiration of
the acceptance period, as defined in the applicable software license agreement.
Services revenue from customer maintenance fees for postcontract support is
recognized ratably over the maintenance term, which is typically 12 months. When
customer maintenance fees are included in an initial software license fee, the
Company allocates approximately 15% of the software license fee to the first
year's maintenance. The amount allocated to customer maintenance fees for the
first year is comparable to customer maintenance fees charged separately by the
Company. Other services revenue from training, installation, consulting and
scanning is recognized as the related services are performed.
Deferred revenue represents payments received by the Company in advance of
product delivery or service performance.
SOP 97-2, Software Revenue Recognition, issued in October 1997, is
effective for transactions entered into in fiscal years beginning after December
15, 1997. This statement supersedes
F-7
39
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
SOP 91-1 and provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The Company's
management anticipates that the adoption of this statement will not have a
material impact on its financial condition or results of operations.
(b) Research and Development Costs
Research and development costs are generally charged to operations as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86, Accounting
for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have not
been material. For the years ended September 30, 1997, 1996 and 1995, all
research and development costs have been expensed.
(c) Cash and Cash Equivalents
Cash equivalents are recorded at amortized cost and consist of highly
liquid investments with original maturities of three months or less. At
September 30, 1997 and 1996, cash and cash equivalents consisted of the
following:
SEPTEMBER 30,
-----------------
1997 1996
------ -------
Cash and money market funds............................ $1,595 $ 5,368
Municipal securities................................... 3,950 --
Overnight treasury investment.......................... 200 --
Security purchased under agreement to resell........... -- 15,000
------ -------
$5,745 $20,368
====== =======
The "Security Purchased Under Agreement to Resell" at September 30, 1996
consisted of a United States Government agency security acquired to facilitate
the transfer of funds from Restrac, Inc. to Restrac Securities Corporation upon
the latter's incorporation.
(d) Short-term Investments
Short-term investments of $9,410 consist of municipal debt securities with
original maturities between three and twelve months. The Company classifies
these short-term maturities as held-to-maturity, and accordingly, they are
carried at amortized cost, which approximates market.
(e) Other Current Assets
Other current assets primarily consist of prepaid operating expenses. The
Company capitalizes prepaid expenses and amortizes them over the applicable
period of their use. Prepaid expenses amounted to $721 and $229 at September 30,
1997 and 1996, respectively.
F-8
40
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(f) Property and Equipment
The Company records property and equipment at cost and provides for
depreciation and amortization on a straight-line basis over the estimated useful
lives of the assets, as follows:
SEPTEMBER 30,
ESTIMATED ----------------
ASSET CLASSIFICATION USEFUL LIFE 1997 1996
------------------------------------------------- ----------------- ------ ------
Office equipment................................. 3 -- 5 Years $5,117 $2,684
Furniture and fixtures........................... 3 -- 7 Years 610 406
Leasehold improvements........................... Life of Lease 358 133
Equipment under capital lease.................... 3 Years 369 123
------ ------
6,454 3,346
Less -- Accumulated depreciation and
amortization................................... 3,071 1,825
------ ------
$3,383 $1,521
====== ======
Depreciation and amortization expense for the years ended September 30,
1997, 1996, and 1995 amounted to approximately $1,245, $861 and $431,
respectively.
(g) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or
liability is measured by the enacted tax rates expected to be in effect when the
differences between the financial statement and tax bases of assets and
liabilities reverse.
(h) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(i) Concentration of Credit Risk
The Company has no significant off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. The Company places its cash, cash equivalents and
short-term investments in highly rated institutions or securities. The Company's
accounts receivable credit risk is not concentrated within any geographical
area, and no single customer accounts for greater than 10% of total revenue or
represents a significant credit risk to the Company.
(j) Postretirement Benefits
The Company offers no postretirement benefits.
(k) Net Income per Common and Common Equivalent Share
For the fiscal year ended September 30, 1997, net income per common and
common equivalent share was based on the weighted average number of common
shares outstanding during the period. Common equivalent shares outstanding
during the period, computed in accordance with the treasury stock method, were
not used as their inclusion would have been anti-dilutive. For the fiscal
F-9
41
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
years ended September 30, 1996 and 1995, net income per common and common
equivalent share was based on the weighted average number of common and common
equivalent shares outstanding during the period, computed in accordance with the
treasury stock method, plus the number of shares of common stock issuable upon
conversion of the redeemable convertible preferred stock and the number of
shares of common stock issued pursuant to the initial public offering sufficient
to generate proceeds for the payment of $569 and $339, respectively, of
estimated accumulated redeemable convertible preferred stock dividends payable
upon the closing of the initial public offering. The weighted average number of
common and common equivalent shares assumes that common stock options granted
and shares issued one year prior to the initial filing of the registration
statement for the Company's initial public offering are outstanding for the
periods presented, computed in accordance with the treasury stock method.
In March of 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
pronouncement is effective for fiscal years ending after December 15, 1997. One
of the more significant changes is the replacement of primary earnings per share
with "basic" earnings per share. Basic earnings per share is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding, with no consideration given for any potentially dilutive
securities. Fully diluted earnings per share, now called "diluted" earnings per
share, is still required. As a net loss was incurred during fiscal 1997, the pro
forma loss per share for fiscal 1997, computed under the new statement, is the
same as the loss per share presented. The computational differences in the fully
diluted earnings per share under the new pronouncement would have no impact on
earnings per share for the fiscal 1996 and 1995 periods.
(l) Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company determined that it will continue to account for
employee stock-based compensation under Accounting Principles Board Opinion No.
25 and, pursuant to SFAS 123, has disclosed the pro forma effect on net income
or loss and per share amounts in the notes to the financial statements using the
fair value-based method for the fiscal year ended September 30, 1997, with
comparable disclosures for the fiscal year ended September 30, 1996.
(m) New Accounting Standards
In June 1997, the FASB issued SFAS No.131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual interim basis for each
reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. Unless impracticable, companies would be
required to restate prior period information upon adoption. The Company has not
yet determined the impact of this pronouncement on its disclosure.
(n) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, short-term investments and accounts receivable,
approximates their carrying value.
(o) Noncash Investing and Financing Activities
Noncash investment and financing activities include a $246 increase in
equipment under capital leases for the fiscal year ended September 30, 1997 and
tax benefit of stock options exercised of
F-10
42
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
$285 and $35 for the years ended September 30, 1997 and 1996, respectively.
Noncash investment and financing activities for the fiscal year ended September
30, 1996 include conversion of redeemable convertible preferred stock into
common stock of $3,504. Additional noncash investment and financing activities
included the issuance of warrants of $99, $14 and $0 and dividend accretion in
the amount of $0, $229 and $280 for the years ended September 30, 1997, 1996 and
1995, respectively.
(p) Reclassifications
Certain reclassifications have been made to the fiscal 1996 and 1995
consolidated financial statements to conform to the fiscal 1997 presentation.
Such reclassifications have no effect on previously reported net income.
(2) BUYOUT OF DISTRIBUTION RIGHTS
On January 1, 1991, the Company acquired certain of the assets of Borwick
International, Inc. (Borwick), an international consulting firm which developed
and marketed software known as SuccessPlan (the Product). As part of this 1991
agreement, Borwick was granted the exclusive right to distribute the Product
outside of North America, and the Company was prohibited from selling any
competitive products in these territories. On September 30, 1995, the Company
entered into an agreement that terminated certain distribution rights of Borwick
to the Product and removed any restrictions on the Company's ability to sell
competitive products. In conjunction therewith, the Company recorded a
non-recurring charge to operations of $1,011 in the fiscal year ended September
30, 1995, representing the present value of payments made and payable under the
terms of this agreement.
(3) LEASE COMMITMENTS
The Company's corporate headquarters are located in Lexington,
Massachusetts, where it currently occupies approximately 60,000 square feet of
office space under a lease expiring in December 2003. The Company also has
regional sales and service offices in Foster City, California and Chicago, where
it occupies approximately 6,000 square feet in both locations, under leases
expiring in January and February of 2002, respectively. In addition, the Company
leases office space for its sales representatives in Atlanta, Dallas, Denver,
Reading, U.K. and Toronto, Ontario.
Capital lease obligations consist of amounts due under an equipment lease
agreement expiring in July 1999. At September 30, 1997, the cost and accumulated
depreciation of the related equipment was $246 and $14, respectively.
F-11
43
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
Future minimum rental payments as of September 30, 1997 under both the
operating and capital leases, are shown in the following table:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1998................................................. $163 $ 1,701
1999................................................. 137 1,739
2000................................................. -- 1,773
2001................................................. -- 1,776
2002................................................. -- 1,601
Thereafter........................................... -- 2,128
---- --------
300 10,718
Less -- sublease rental income.................. -- 468
Less -- amounts representing interest........... 25 --
---- --------
Present value of minimum lease payments.............. 275 $ 10,250
========
Less -- current portion......................... 144
----
$131
====
Aggregate net rental expense included in the accompanying statements of
income for the fiscal years ended September 30, 1997, 1996 and 1995 is
approximately $1,496, $542 and $330, respectively.
Leases with escalating rents or free rent periods are expensed on a
straight-line basis over the fixed term of the lease. Deferred rent of
approximately $172 and $0 is included in other liabilities in the accompanying
consolidated balance sheets at September 30, 1997 and 1996, respectively.
(4) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On January 5, 1994, the Company amended its Certificate of Incorporation to
authorize the issuance of 1,000,000 shares of preferred stock with a par value
of $1.00 per share and issued 556,155 shares of redeemable convertible preferred
stock (Preferred Stock) for a purchase price of $6.30 per share for proceeds of
$3,234, net of $270 of issuance costs. On July 26, 1996, as a result of the
initial public offering, the Company converted the 556,155 shares of Preferred
Stock into 2,502,696 shares of common stock.
During the fiscal years ended September 30, 1996 and 1995, the carrying
value of the Preferred Stock was increased by accreted dividends of $230 and
$280, respectively. Accreted dividends were charged to retained earnings in the
accompanying consolidated financial statements. Upon the closing of the initial
public offering of common stock, accumulated dividends of $569 remained
outstanding and are included in accrued expenses as of September 30, 1996. In
October 1996, the company paid these dividends to the preferred stockholders.
(5) STOCKHOLDERS' EQUITY
(a) Authorized Capital Stock
On June 5, 1996, the Company filed a Second Amended and Restated
Certificate of Incorporation, which provided for, among other things (i) an
increase in the number of authorized shares of Common Stock, par value $.01 per
share of the Corporation, to 30,000,000 shares, par value $.01 per share, (ii)
the authorization of 556,155 shares of Convertible Preferred Stock, par value
$.01 per share, and 5,000,000 shares of undesignated preferred stock, par value
$.01 per share.
F-12
44
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
On July 26, 1996, the Company filed a Third Amended and Restated
Certificate of Incorporation, which provided for the elimination of the
Company's authority to issue Convertible Preferred Stock and a prohibition on
action by written consent of stockholders.
(b) Stock Dividends
On May 22, 1995, the Company's Board of Directors declared a three-for-one
stock split, effected in the form of a stock dividend, payable on May 22, 1995.
On May 8, 1996, the Board of Directors approved a three-for-two stock split,
effected in the form of a stock dividend. Accordingly, all shares of common
stock, options to purchase common stock and the conversion ratio of the
Preferred Stock have been retroactively adjusted to reflect these stock splits
for all periods presented in the accompanying consolidated balance sheets and
consolidated statements of changes in redeemable convertible preferred stock and
stockholders' equity (deficit).
(c) Initial Public Offering
On July 26, 1996, the Company completed its initial public offering of
common stock. The Company sold 1,500,000 shares of common stock at $11.00 per
share, which generated proceeds of $14,511, net of issuance costs of $834.
(d) Employee Stock Purchase Plan
On May 8, 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan (the Employee Plan). Under the Employee Plan, the Company may
issue up to an aggregate of 150,000 shares of common stock to employees at 85%
of the lower of the fair market value of the common stock on the first or last
day of each six-month purchase period. During fiscal 1997, 17,126 shares were
issued pursuant to the plan. On October 1, 1997, 30,164 shares of common stock
were issued pursuant to the plan.
(e) Stock Option Plans
All of the outstanding options under the 1990 Stock Option Plan (the 1990
Plan) were exercised prior to the establishment of the 1994 Stock Option Plan
(the 1994 Plan). The 1994 and 1996 Plans enable the Company's Board of Directors
to grant nonqualified and incentive stock options (ISOs) and shares of common
stock. ISOs are granted at the then fair market value. On May 8, 1996, the 1994
Plan was amended to decrease the maximum number of shares reserved for issuance
of statutory and nonstatutory options to 641,844 shares of common stock.
On May 8, 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1996 Stock Option and Grant Plan (the 1996 Plan),
which provides for the issuance of options to purchase 958,156 shares of Common
Stock. The 1996 Plan permits the grant of (i) options to purchase shares of
Common Stock intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended, (ii) options that do not so
qualify and (iii) shares of Common Stock. The 1996 Plan is administered by the
Compensation Committee as appointed by the Board of Directors from time to time.
Under the terms of the 1994 and 1996 Plans, options generally vest over
four years and expire ten years after the date of grant.
In connection with a software development agreement, the Company granted to
a third party warrants to purchase 66,000 shares of common stock in July 1996 at
$11.00 a share. The warrants
F-13
45
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
vest upon completion of certain events. At the time of issuance, the fair value
of the warrants was estimated at approximately $85. For fiscal 1996, $14 was
charged to cost of product revenue and additional paid in capital. The warrants
were canceled and reissued at a price of $4.38 per share in January 1997. The
Company recorded a charge of $99 in fiscal 1997, representing the revised fair
market value of the warrants, as calculated using the Black-Scholes option
pricing model in accordance with SFAS No. 123.
Stock option activity for the 1994 and 1996 Plans are as follows:
WEIGHTED
NUMBER OF OPTION PRICE AVERAGE
SHARES PER SHARE PRICE PER SHARE
--------- ------------ ----------------
Outstanding, September 30, 1995......... 601,368 $0.44-$ 2.00 $ 0.82
Granted............................... 347,280 2.00- 19.75 9.52
Exercised............................. (67,015) 0.44- 2.00 1.45
Canceled.............................. (79,342) 0.44- 2.00 4.15
--------- ------------ ------
Outstanding, September 30, 1996......... 802,291 0.44- 19.75 4.59
--------- ------------ ------
Granted............................... 1,116,725 2.88- 17.00 4.75
Exercised............................. (265,466) 0.44- 3.88 0.81
Canceled.............................. (650,427) 0.44- 19.75 7.57
--------- ------------ ------
Outstanding, September 30, 1997......... 1,003,123 $0.44-$17.00 $ 3.87
========= ============ ======
Vested, September 30, 1997.............. 154,657 $0.44-$11.00 $ 2.42
========= ============ ======
The weighted-average fair value of the options granted was $3.09 and $6.21
for the years ended September 30, 1997 and 1996, respectively.
On October 10, 1997 the Company issued 65,900 and 50,000 options under the
1996 Plan and 1994 Plan, respectively, to purchase common stock at $6.13 per
share.
The following table summarizes significant ranges of outstanding and
exercisable options at September 30, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGES OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ------------ ------------ --------------- ------------ ---------------
$0.00 -- $ 1.97 91,440 7.2 $ 0.44 62,019 $ 0.44
1.98 -- 3.95 481,958 9.0 3.56 67,289 3.35
3.95 -- 5.93 418,958 9.6 4.68 24,256 4.47
9.88 -- 11.85 3,500 8.6 11.00 1,093 11.00
$ 5.80 -- $17.78 7,500 9.0 $ 17.00 0 $ 0.00
The weighted-average fair value of the shares issued under the Employee
Plan was $3.49 for the year ended September 30, 1997. No shares were issued
under the Employee Plan for the year ended September 30, 1996.
F-14
46
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
The fair value of the stock awards, including the options granted under the
1994 Plan and the 1996 Plan, and the shares issued under the Employee Plan, were
estimated using the Black-Scholes model with the following weighted average
assumptions:
1997 1996
-------- --------
Expected life...................................... 6 years 6 years
Risk free interest rate............................ 6.30 6.31
Volatility......................................... 65.0% 65.0%
Dividend yield..................................... 0.0% 0.0%
Stock-based compensation expense would have increased net loss and
decreased net income by $220 and $0 in 1997 and 1996, respectively ($.03 and
$.00 per share, respectively) if the fair values of the options granted and
stock issued had been recognized as compensation expense. The pro forma effect
on net loss and income for 1997 and 1996 is not representative of the pro forma
effect on net income in future years, because it does not take into
consideration pro forma compensation expense related to grants made prior to
fiscal year 1996.
(6) INCOME TAXES
The (benefit) provision for income taxes in the accompanying statements of
income consists of the following for the fiscal years ended September 30, 1997,
1996 and 1995:
1997 1996 1995
----- ------ -----
Current --
Federal..................................... $(658) $ 969 $ 541
State....................................... 16 267 181
----- ------ -----
(642) 1,236 722
----- ------ -----
Deferred --
Federal..................................... (85) (50) (354)
State....................................... (25) (19) (94)
----- ------ -----
(110) (69) (448)
----- ------ -----
Total (benefit) provision........... $(752) $1,167 $ 274
===== ====== =====
The deferred tax amounts as of September 30, 1997 and 1996 are as follows:
1997 1996
------ ------
Deferred tax asset --
Nondeductible reserves............................ $ 385 $ 334
Deferred revenue.................................. 347 434
Buyout of distribution rights..................... 174 188
Research and development credit................... 160 0
------ ------
Total gross deferred tax asset............... 1,066 956
Less -- Valuation allowance.......................... 185 185
------ ------
Net deferred tax asset....................... $ 881 $ 771
====== ======
The Company had a valuation allowance of $185 against its gross deferred
tax asset at September 30, 1997 and 1996. The valuation allowance at September
30, 1997 and 1996 was established due to management's estimate that it was more
likely than not that a benefit of certain
F-15
47
RESTRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
deferred tax assets would not be realized in the future. At September 30, 1997
and 1996, the valuation allowance related primarily to the buyout of
distribution rights. As of September 30, 1997, the Company had refundable income
taxes of $948 related to the carryback of taxable losses to prior periods.
The (benefit) provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate as follows:
1997 1996 1995
----- ---- ----
(Benefit) provision at federal statutory
rate......................................... (34.0)% 34.0% 34.0%
State income tax, net of federal benefit....... (6.3) 6.3 6.3
Tax effect of equity transaction (Note 5(e))... -- 3.0 --
Other, net..................................... 3.3 .2 .3
----- ---- ----
Effective tax rate................... (37.0)% 43.5% 40.6%
===== ==== ====
(7) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan (the Benefit Plan) under
Section 401(k) of the Internal Revenue Code. The Benefit Plan is available to
all full-time U.S. employees. The Benefit Plan allows for employees to make
contributions up to a specified percentage of their compensation. Under the
Benefit Plan, the Company makes discretionary contributions, which for the
fiscal years ended September 30, 1996 and 1995 was a match of 20% of the
employees' contributions up to a maximum annual match of 5% of each employee's
salary. In September 1997, the Company's discretionary contribution was amended
to a match of 50% of the employees' contributions up to a maximum annual match
of 3% of each employee's salary. The Company contributed approximately $85, $53
and $33 during the fiscal years ended September 30, 1997, 1996 and 1995,
respectively.
(8) ACCRUED EXPENSES
Accrued expenses at September 30, 1997 and 1996 consist of the following:
1997 1996
------ ------
Payroll and payroll-related costs........................ $1,029 $1,063
Accumulated Redeemable Convertible Preferred Stock
Dividend Payable....................................... -- 569
Buyout of distribution rights (Note 2)................... 176 176
Other accrued expenses................................... 1,318 1,645
------ ------
$2,523 $3,453
====== ======
(9) OTHER INCOME
Other income consists of the following:
1997 1996 1995
---- ---- ----
Interest income.................................... $677 $331 $163
Interest expense................................... (5) (16) (10)
Other.............................................. (1) 11 (15)
---- ---- ----
$671 $326 $138
==== ==== ====
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48
SCHEDULE II
RESTRAC, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, 1995
BALANCE,
BEGINNING OF CHARGED BALANCE,
ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR TO EXPENSE WRITE-OFFS END OF YEAR
- ------------------------------------------------ ------------ ---------- ---------- -----------
Year ended September 30, 1997................... $350 $ 15 $ 45 $ 320
Year ended September 30, 1996................... $300 $201 $151 $ 350
Year ended September 30, 1995................... $ 17 $317 $ 34 $ 300