UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 2002
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
WEBHIRE, INC.
(Exact name of Registrant as specified in its charter)
------------------
Delaware 04-2935271
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
91 Hartwell Avenue
Lexington, MA 02421
(Address of principal executive offices) (zip code)
(781) 869-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Title of each class
-------------------
Common stock, $.01 par value, shares outstanding at August 14, 2002:
4,522,871 shares.
WEBHIRE, INC.
Index
Page
----
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2002 (unaudited)
and September 30, 2001 ............................................................. 3
Consolidated Statements of Operations (unaudited) for the three
and nine months ended June 30, 2002 and 2001 ....................................... 4
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended June 30, 2002 and 2001 ................................................ 5
Notes to Consolidated Financial Statements (unaudited) ............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................ 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk .......................... 24
Part II - Other Information
Item 1. Legal Proceedings .................................................................. 25
Item 2. Changes in Securities .............................................................. 25
Item 3. Defaults upon Senior Securities .................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ................................ 25
Item 5. Other Information .................................................................. 25
Item 6. Exhibits and Reports on Form 8-K ................................................... 25
Part III - Signatures ....................................................................... 26
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
WEBHIRE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, September 30,
--------- -------------
2002 2001
--------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 4,874 $ 2,982
Short-term investments .................................................................. -- 695
Restricted cash ......................................................................... 1,500 1,500
Accounts and installments receivable, less allowance for doubtful accounts
of $650 and $484 at June 30, 2002 and September 30, 2001, respectively ............... 501 2,041
Other current assets .................................................................... 944 1,822
------------- -------------
Total current assets ............................................................ 7,819 9,040
Long-term installments receivable, net .................................................... -- 63
Property and equipment, net ............................................................... 1,308 2,518
Acquired technologies, net of accumulated amortization of $6,687 and $5,068 at
June 30, 2002 and September 30, 2001, respectively ..................................... 1,179 826
Other intangible assets, net of accumulated amortization of $4,272 and $3,928 at
June 30, 2002 and September 30, 2001, respectively ..................................... 1,707 3,246
Other assets .............................................................................. 302 398
------------- -------------
TOTAL ASSETS .................................................................... $ 12,315 $ 16,091
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 647 $ 1,930
Accrued expenses ........................................................................ 1,258 1,305
Notes payable ........................................................................... 1,500 1,500
Current portion of capital lease obligations ............................................ 64 234
Deferred revenue ........................................................................ 4,477 4,422
------------- -------------
Total current liabilities ....................................................... 7,946 9,391
------------- -------------
Other liabilities ......................................................................... 117 152
------------- -------------
Total liabilities ............................................................... 8,063 9,543
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value-- Authorized-- 5,000,000 shares,
Issued and outstanding-- none at June 30, 2002 and September 30, 2001 ................ - -
Common stock, $.01 par value-- Authorized-- 30,000,000 shares;
Issued -- 4,660,251 and 4,648,055 shares at June 30, 2002 and September 30,
2001, respectively; Outstanding - 4,522,871 and 4,510,675 shares at
June 30, 2002 and September 30, 2001, respectively ................................... 47 46
Additional paid-in capital .............................................................. 70,214 70,192
Treasury stock, at cost - 137,380 shares at June 30, 2002 and September 30,
2001, respectively ..................................................................... (831) (831)
Accumulated deficit ..................................................................... (65,178) (62,859)
-------------- -------------
Total stockholders' equity ...................................................... 4,252 6,548
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $ 12,315 $ 16,091
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
3
WEBHIRE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
-------------------------------- ------------------------------
Revenue:
Services revenue - Internet .................................. $ 3,080 $ 3,062 $ 8,660 $ 9,680
Services revenue - Enterprise ................................ 1,070 1,677 3,620 5,985
Product revenue .............................................. 43 530 163 1,325
-------------- -------------- -------------- --------------
Total revenue ........................................ 4,193 5,269 12,443 16,990
-------------- -------------- -------------- --------------
Cost of revenue:
Services revenue - Internet .................................. 1,354 2,231 4,449 7,543
Services revenue - Enterprise ................................ 326 320 967 1,101
Product revenue .............................................. - 91 51 310
Amortization of acquired technologies and
capitalized internal-use software
(relates to services revenue-internet) ..................... 727 438 2,120 2,590
Total cost of revenue ................................ 2,407 3,080 7,587 11,544
-------------- -------------- -------------- --------------
Gross profit ................................................... 1,786 2,189 4,856 5,446
-------------- -------------- -------------- --------------
Operating expenses:
Research and development ..................................... 557 1,346 1,765 5,430
Sales and marketing .......................................... 797 1,754 2,315 5,851
General and administrative ................................... 1,075 426 3,097 3,459
Amortization of other intangible assets ...................... 66 545 190 1,636
-------------- -------------- -------------- --------------
Total operating expenses ............................. 2,495 4,071 7,367 16,376
-------------- -------------- -------------- --------------
Loss from operations ........................................... (709) (1,882) (2,511) (10,930)
-------------- -------------- -------------- --------------
Other income, net:
Non-cash interest on warrants issued ......................... - - - (309)
Other income (expense), net .................................. 9 46 27 747
-------------- -------------- -------------- --------------
Total other income, net .............................. 9 46 27 438
-------------- -------------- -------------- --------------
Loss before income taxes ....................................... (700) (1,836) (2,484) (10,492)
Provision for (benefit from) income taxes ...................... 6 (69) (165) (69)
-------------- -------------- -------------- --------------
Net loss ....................................................... $ (706) $ (1,767) $ (2,319) $ (10,423)
============== ============== ============== ==============
Basic and diluted net loss per common share .................... $ (.16) $ (.39) $ (.51) $ (2.35)
============== ============== ============== ==============
Basic and diluted weighted average number
of common shares outstanding ................................. 4,522,807 4,510,624 4,518,965 4,435,419
============== ============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements
4
WEBHIRE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
June 30,
------------- -------------
2002 2001
------------- -------------
Cash Flows from Operating Activities:
Net loss .......................................... $ (2,319) $ (10,423)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization .................. 3,760 5,724
Amortization of stock-based consideration ...... -- 309
Provision for doubtful accounts ................ 166 --
Loss on sale of property and equipment ......... 15 (120)
Changes in operating assets and liabilities:
Accounts and installments receivable ......... 1,374 3,845
Other current assets ......................... 878 (9)
Prepaid income taxes ......................... -- (5)
Long-term installments receivable ............ 63 67
Accounts payable ............................. (1,283) 47
Accrued expenses ............................. (47) (2,960)
Deferred revenue ............................. 55 (2,502)
Other liabilities ............................ (35) (18)
------------- -------------
Net cash provided by (used in) operating
activities .............................. 2,627 (6,045)
------------- -------------
Cash Flows from Investing Activities:
Purchases of acquired technologies and
intangible assets ............................ -- (3,125)
Additions to capitalized internal-use software . (1,124) --
Purchases of property and equipment ............ (304) (335)
Deposit of restricted cash ..................... -- (1,500)
Proceeds from sale of property and equipment ... 49 223
Purchases of short-term investments ............ -- (24,370)
Proceeds from sale and maturities of short-term
investments .................................. 695 25,066
Proceeds from returns of security deposits ..... 96 111
------------- -------------
Net cash used in investing activities ..... (588) (3,930)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from line of credit ................... -- 1,500
Proceeds from issuance of common stock in
connection with private placement ............ -- 1,000
Issuance costs in connection with private
placement of common stock ................... -- (122)
Proceeds from employee stock purchase plan
stock issuance ............................... 23 67
Payments of capital lease obligations .......... (170) --
------------- -------------
Net cash (used in) provided by financing
activities .............................. (147) 2,445
------------- -------------
Net increase (decrease) in cash and cash
equivalents ....................................... 1,892 (7,530)
Cash and cash equivalents, beginning of period ...... 2,982 12,135
------------- -------------
Cash and cash equivalents, end of period ............ $ 4,874 $ 4,605
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest ....................................... $ 59 $ 226
------------- -------------
Income taxes ................................... $ 10 $ 18
------------- -------------
Supplemental Disclosure of Non-cash Financing
Activities:
Issuance of warrants in connection with financing
commitment ..................................... $ 309
-------------
The accompanying notes are an integral part of these
consolidated financial statements
5
WEBHIRE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
June 30, 2002
(1) Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Webhire, Inc. and its wholly owned subsidiaries (collectively, "the Company").
All significant intercompany transactions and balances have been eliminated in
consolidation. Certain amounts in the prior period's financial statements have
been reclassified to conform to the current period presentation.
(b) Preparation of Financial Statements
As permitted by the rules of the Securities Exchange Commission applicable
to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain
all disclosures required by generally accepted accounting principles.
The consolidated interim financial statements as of June 30, 2002 and for
the three and nine-month periods ended June 30, 2002 and 2001 are unaudited;
however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal, recurring adjustments, necessary for a
fair statement of the results for the interim period. The results for the
interim period are not necessarily indicative of the results for the entire
year. The consolidated financial statements should be read in conjunction with
the consolidated financial statements of Webhire, Inc. for the year ended
September 30, 2001 ("fiscal 2001") included in its Annual Report on Form 10-K,
filed with the Securities and Exchange Commission.
(c) Short-Term Investments
The Company classifies its short-term investments as available-for-sale. At
June 30, 2002 and September 30, 2001, the Company had $0 and $695 of
available-for-sale investments, respectively. Realized and unrealized gains and
losses for the periods presented were not material.
(d) Recent Accounting Standards
In August 2001, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 144, "Accounting for the Impairment of Disposal of Long-Lived
Assets." SFAS No. 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively. The Company will adopt the
provisions of SFAS No. 144 on October 1, 2002, the beginning of fiscal 2003. Had
the Company applied this guidance during the reported periods, it would have had
no impact on its financial statements.
6
WEBHIRE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
June 30, 2002
In June 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. In contrast to EITF
No. 94-3, under this statement, an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect that the adoption of SFAS No. 146 will
have a material impact on its financial statements.
(2) Net Loss per Share
For the three and nine-month periods ended June 30, 2002 and 2001, 709,383
and 556,860 potential common shares, respectively, from the assumed exercise of
stock options and warrants were excluded from the net loss per share
calculation, as their effect would have been anti-dilutive due to the Company's
net loss per share in those periods.
(3) Acquired Technologies and Intangibles
On December 13, 1999, the Company acquired certain assets from Human
Resources Sites International, Inc. ("HR Sites"). HR Sites was the developer of
an Internet job-posting platform that provided online job posting connections to
more than 2,000 career sites and Internet news groups. This purchase was treated
as a purchase of a collection of assets. The Company paid $1,500 in cash plus
issued two junior subordinated convertible promissory notes (the "Notes") with
face amounts totaling $3,425. The interest rate on the Notes was 5.6% per annum.
The first note had a principal amount of $2,500 and matured on December 14,
2000. The second note, totaling $925, had an original maturity date of March 14,
2001, which was subsequently restructured so that $259 was repaid in cash on
March 14, 2001, $366 was repaid with cash on April 5, 2001, and $300 was repaid
with cash on July 5, 2001. The Notes were issued with below market value
interest rates, and were issued with embedded beneficial conversion features.
The Company determined the fair value of the Notes to be $7,140, and as a
result, the total acquisition consideration amounted to $8,640. The purchase
price was allocated to identifiable and unidentifiable assets as follows:
Amount Estimated Life
------- --------------
Acquired technology ................ $ 2,069 3 years
Non-compete agreements ............. 157 3 years
Customer base ...................... 24 5 years
Property and equipment ............. 20 1 year
Excess purchase price over
identifiable assets ................ 6,370 3 years
=======
$ 8,640
7
WEBHIRE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
June 30, 2002
Beginning in fiscal 2002, the Company adopted SFAS No. 142 under which the
Company was required to reallocate the excess purchase price over identifiable
assets to the identifiable intangible assets based on their relative fair values
as of the date of reallocation. In accordance with the new pronouncement, the
Company also reassessed the useful life of each intangible asset and evaluated
the intangible assets for impairment. Based upon the forecasted use of the
Company's intangible assets and their short useful lives, no impairment of the
carrying values was recorded upon adoption of SFAS No. 142. The following
represents the gross carrying amounts and accumulated amortization of acquired
technologies and intangible assets acquired from HR Sites as of June 30, 2002,
and the estimated amortization expense for the remaining estimated useful lives:
As of June 30, 2002
-------------------------------------------------------------------------------
Gross Carrying Amount Accumulated Amortization Remaining Balance
--------------------- ------------------------ -----------------
Amortizable Intangible Assets
Acquired technologies .............. $7,866 $6,687 $1,179
Customer list ...................... 151 126 25
Non-compete agreements ............. 603 514 89
------ ------ ------
Total .............................. $8,620 $7,327 $1,293
As of June 30, 2002, other intangible assets totaled $1,707 on the
Company's balance sheet, which consisted of $25 for the customer list, $89 for
non-compete agreements, and $1,593 for capitalized internal-use software.
Estimated Amortization Expense
------------------------------
For the year ending September 30,
2002 (remaining) ....................................... $ 583
2003 ................................................... 687
2004 ................................................... 18
2005 ................................................... 5
Total estimated amortization expense ................... $1,293
8
WEBHIRE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
June 30, 2002
The amortization expense related to intangible assets purchased from HR
Sites was $2,157 for the nine months ended June 30, 2002. Had the provisions of
SFAS No. 142 been applied in fiscal 2001, there would not have been a material
change in amortization expense or the net loss reported for those periods.
(4) Business Segment Information
The Company has two reportable segments: 1) Internet and transaction-based
solutions and 2) Enterprise software solutions, the former of which began to
emerge in fiscal 1997 with the offering of outsourced services (e.g., resume
scanning, acknowledgement letters). The Internet and transaction-based solutions
segment provides outsourced management of private candidate pools via Webhire
Recruiter, subscription services to public resume pools and job-posting sites,
resume scanning, reference checking and other fee-based staffing functions. The
enterprise software solutions segment provides perpetual licenses to the
Company's software products and the related maintenance, training,
implementation and consulting services in support of such licenses.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K. Expenses such as depreciation, rent and utilities are allocated to
the reportable segments based on relative headcount as a basis of relative
usage. The Company has no intersegment sales and transfers, and does not
allocate assets to the operating segments.
The Company's reportable segments are strategic business units that offer
different solutions tailored to a customer's needs.
Three months ended June 30, 2002:
--------------------------------------------
Internet and Enterprise Total
Transactions Software Company
------------ ---------- ----------
Revenue ................................. $3,080,000 $1,113,000 $ 4,193,000
Gross profit ............................ 999,000 787,000 1,786,000
Loss from operations .................... (709,000)
Other income (expense), net ............. 9,000
-----------
Loss before income taxes ................ $ (700,000)
===========
Three months ended June 30, 2001:
--------------------------------------------
Internet and Enterprise Total
Transactions Software Company
------------ ---------- ----------
Revenue ................................. $3,062,000 $2,207,000 $ 5,269,000
Gross profit ............................ 393,000 1,796,000 2,189,000
Loss from operations .................... (1,882,000)
Other income (expense), net ............. 46,000
-----------
Loss before income taxes ................ $(1,836,000)
===========
9
WEBHIRE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
(unaudited)
June 30, 2002
Nine months ended June 30, 2002:
---------------------------------------------
Internet and Enterprise Total
Transactions Software Company
------------ ----------- -----------
Revenue .................................. $8,660,000 $3,783,000 $12,443,000
Gross profit ............................. 2,091,000 2,765,000 4,856,000
Loss from operations ..................... (2,511,000)
Other income (expense), net .............. 27,000
-----------
Loss before income taxes ................. $(2,484,000)
===========
Nine months ended June 30, 2001:
---------------------------------------------
Internet and Enterprise Total
Transactions Software Company
------------ ----------- ------------
Revenue .................................. $9,680,000 $7,310,000 $ 16,990,000
Gross (loss) profit ...................... (453,000) 5,899,000 5,446,000
Loss from operations ..................... (10,930,000)
Other income (expense), net .............. 438,000
------------
Loss before income taxes ................. $(10,492,000)
============
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
WEBHIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED JUNE 30, 2002
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.
Consolidated Results of Operations
(in thousands)
Revenue
Total revenue for the three and nine-month periods ended June 30, 2002 was
$4,193 and $12,443, respectively, compared with $5,269 and $16,990 for the three
and nine-month periods ended June 30, 2001, respectively.
Services Revenue.
Services revenue - Internet remained flat at $3,080 for the three months
ended June 30, 2002 compared to $3,062 for the three months ended June 30, 2001.
For the nine months ended June 30, 2002, services revenue - Internet decreased
11% to $8,660 from $9,680 for the comparable 2001 period. The flat revenue is a
result of higher average selling prices offsetting the loss of customers due to
the impact of adverse economic conditions on technology and other growth
companies that were early users of the Company's services. The decrease for
these periods reflects the loss of customers due to adverse economic conditions.
Services revenue - Enterprise decreased 36% to $1,070 for the three months
ended June 30, 2002 from $1,677 for the three months ended June 30, 2001. For
the nine months ended June 30, 2002, services revenue - Enterprise decreased 40%
to $3,620 from $5,985 for the nine months ended June 30, 2001. The decreases are
primarily attributable to a reduction in maintenance revenues as contracts
expired relating to product licenses.
Product Revenue. Product revenue, which relates to the enterprise software
solutions segment, was $43 and $163 for the three and nine-month periods ended
June 30, 2002 as compared with $530 and $1,325 for the three and nine-month
periods ended June 30, 2001. The 92% decrease for the comparable
11
three month periods and the 88% decrease for the comparable nine month periods
are attributable to the Company's evolution away from selling software licenses
to providing Internet-service products.
Cost of Revenue
Cost of Services Revenue.
Cost of services revenue - Internet was $1,354 and $2,231 for the three
months ended June 30, 2002 and June 30, 2001, respectively. For the nine months
ended June 30, 2002 and June 30, 2001, cost of services revenue - Internet was
$4,449 and $7,543, respectively. The decrease in absolute dollars is principally
attributable to a reduction in headcount, process improvements and cost
efficiencies in resume processing and hardware hosting. Internet gross margins,
excluding amortization of acquired technologies of $727, improved to 56% for the
third quarter of fiscal 2002 from 27% for the comparable fiscal 2001 period. For
the nine months ended June 30, 2002, Internet gross margin, excluding
amortization of acquired technologies of $2,120, was 49% as compared to 22% for
the nine months ended June 30, 2001. These increases in Internet gross margins
are the result of the Company providing services at a lower incremental cost per
customer and billing efficiencies.
Cost of services revenue - Enterprise was $326 and $320 for the three
months ended June 30, 2002 and June 30, 2001, respectively. For the nine months
ended June 30, 2002 and June 30, 2001, cost of services revenue - Enterprise was
$967 and $1,101 respectively. The decreases for both the three and nine month
periods is primarily due to a reduction in headcount assigned to this product
line and a shift of the Company's resources towards an Internet and
transaction-based solutions segment.
Cost of Product Revenue. Cost of product revenue was $0 and $91 for the
three months ended June 30, 2002 and June 30, 2001, respectively. For the nine
months ended June 30, 2002 and June 30, 2001, cost of product revenue was $51
and $310, respectively. The decrease in cost of product revenue is due primarily
to the Company's transition towards an Internet and transaction-based solutions
segment as well as the decrease in the Company's royalty payments.
Amortization of Acquired Technologies and Capitalized Internal-Use
Software. Amortization of acquired technologies and capitalized internal-use
software was $727 and $438 for the three months ended June 30, 2002 and 2001,
respectively. For the nine-month periods ended June 30, 2002 and 2001,
amortization of acquired technologies and capitalized internal-use software was
$2,120 and $2,590, respectively. The increase for the comparable three-month
periods is attributed to the amortization of internally developed internal-use
software costs that the Company did not begin to capitalize until the third
quarter of fiscal 2002. The increase is also attributed to an increase in
amortization based on the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, which required the Company to reallocate the purchase price
in excess of identifiable intangible assets purchased from HR Sites to the
acquired technologies and other identifiable intangible assets purchased, based
on their relative fair values. The decrease for the comparable nine-month
periods is primarily attributed to the Company fully amortizing the assets
purchased from Amazon.com and HireWorks, Inc. during fiscal 2001, offset by the
adoption of SFAS No. 142 and the amortization of internally-developed
internal-use software costs which are being amortized over a five-year estimated
life.
Operating Expenses
Research and Development. Research and development expenses were $557 or
13% of total revenue for the three months ended June 30, 2002 as compared with
$1,346 or 26% of total revenue for the comparable fiscal 2001 period. For the
nine months ended June 30, 2002, research and development
12
expenses were $1,765 or 14% of total revenue as compared to $5,430 or 32% for
the comparable fiscal 2001 period. The decreases in absolute dollars and as a
percentage of revenue are the result of a reduction in headcount, lower
developmental consulting fees, and certain costs in fiscal 2002 that qualified
for capitalization as internal-use software.
Sales and Marketing. Sales and marketing expenses were $797 or 19% of total
revenue for the three months ended June 30, 2002 as compared with $1,754 or 33%
of total revenue for the comparable fiscal 2001 period. For the nine months
ended June 30, 2002, sales and marketing expenses were $2,314 or 19% of total
revenue as compared to $5,851 or 34% for the comparable fiscal 2001 period. The
decreases in absolute dollars and as a percentage of revenue are primarily due
to reduced spending on specific marketing and sales programs. The Company
expects that sales and marketing expenses may vary from quarter to quarter as a
percentage of total revenue.
General and Administrative. General and administrative expenses were $1,075
or 26% of total revenue for the three months ended June 30, 2002 as compared
with $426 or 8% of total revenue for the comparable three-month period of fiscal
2001. The fiscal 2001 expense is lower than the fiscal 2002 as a result of
reduction of $485 in the bad debt allowance in June 2001 due to significant
improvements in collections of past due accounts. For the nine months ended June
30, 2002, general and administrative expenses were $3,097 or 25% of total
revenue as compared to $3,459 or 20% of total revenue for the comparable fiscal
2001 period. The decreases in absolute dollars for the nine-month period of
fiscal 2002 as compared with fiscal 2001 and the decrease as a percentage of
revenue for the nine-month period is primarily the result of reduced headcount
in the Human Resources, Finance and Accounting and Corporate IT organizations.
Amortization of Other intangible Assets. Amortization of intangible assets
decreased to $66 and $190 for the three and nine months ended June 30, 2002 as
compared with $545 and $1,636 for the three and nine months ended June 30, 2001.
The decrease is a result of the Company adopting SFAS No. 142, Goodwill and
Other Intangible Assets. The $66 for the three months ended June 30, 2002 is
expected to remain consistent in future quarters until all remaining intangible
assets are fully amortized, which is expected to occur during fiscal 2003.
Other Income, net
Other income, net decreased to $9 and $27 for the three and nine-month
periods ended June 30, 2002 from $46 and $438 for the comparable fiscal 2001
periods. Other income generally consists of interest earned on investments
offset by interest paid on the outstanding note under the bank line of credit.
For the period ended June 30, 2001, other income, net included $309 in non-cash
expense for warrants issued during the second quarter of fiscal 2001 in
consideration of a written commitment by a related party to support the
Company's cash liquidity requirements. For the three and nine-month periods
ended June 30, 2001, other income, net also includes a gain of $120 on a sale of
assets and technology as well as a gain of $300 from the settlement of a joint
venture agreement.
Provision for (Benefit from) Income Taxes
For the three-month period ended June 30, 2002, a provision for income
taxes of $6 was recorded compared with a benefit from income taxes of $69 for
the comparable fiscal 2001 period. This increase in fiscal 2002 was the result
of minimum state income tax payments made to various states in which the Company
does business versus the fiscal year 2001 benefit for the Company's overpayment
of past state income taxes. For the nine-month period ended June 30, 2002, a
benefit from income taxes of $165 was recorded compared with a benefit of $69
for the comparable fiscal 2001 period. This increase is principally the result
of refunds received in fiscal 2002 related to federal income taxes paid in a
past period.
13
Liquidity and Capital Resources
(in thousands)
At June 30, 2002, the Company had cash and cash equivalents of $4,874, an
increase of $1,197 from $3,677 at September 30, 2001.
Cash provided by operating activities was $2,627 during the nine-month
period ended June 30, 2002. Operating activities generated cash primarily
through a reduction of net loss. The cash effects of changes in working capital
accounts primarily offset each other.
Net cash used in investing activities was $587 during the nine-month period
ended June 30, 2002, which consisted primarily of proceeds received from the
sale and maturities of short-term investments of $695 and proceeds from the
return of security deposits of $96 offset by the payments for capitalized
internal-use software of $1,125 and the purchase of new software of $304.
Net cash used in financing activities for the nine-month period ended June
30, 2002 was $148, which consisted of payments on the Company's capital lease
obligations offset by proceeds from the employee stock purchase plan.
The Company has a $3,000 line of credit from Citizens Bank of Massachusetts
("the bank"). The Company is required to maintain deposits with the bank in an
amount at least sufficient to satisfy its obligations under this line of credit.
As of June 30, 2002, the line of credit had an outstanding balance of $1,500 and
$1,500 in cash was pledged under this arrangement and has been reflected as
restricted cash.
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. Any such transactions consummated may use a portion of the
Company's working capital and/or require the issuance of equity or debt.
The Company believes that its current cash and cash equivalent balances in
conjunction with its forecast of operating cash flows will be sufficient to meet
its liquidity expenditure requirements for the foreseeable future.
Critical Accounting Policies and Judgments
We have identified the policies and judgments below as critical to our
business operations and the understanding of our results of operations. The
impact and any associated risks related to these policies and judgments on our
business operations is discussed throughout this section where such policies
affect our reported and expected financial results. For a detailed discussion on
the application of all accounting policies, see Note 2 in the Notes to the
Consolidated Financial Statements included in our Annual Report filed on Form
10-K. Note that the preparation of our Consolidated Financial Statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of our financial statements, and the reported amounts of
14
revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ significantly from those estimates.
The accounting policies and judgments most important to the portrayal of
our financial condition and results, and those that require the highest degree
of management judgment, relate to revenue recognition, accounts receivable, the
allowance for doubtful accounts, software development costs, internal-use
software and intangible assets, and deferred income taxes.
(a) Revenue recognition, accounts receivable and allowance for doubtful
accounts
The Company recognizes revenue under arrangements when the arrangement fee
is fixed or determinable and collection of the amounts is reasonably assured. At
the time of the transaction, we assess whether the fee associated with our
revenue transaction is fixed or determinable based principally on the terms of
the transaction. If a significant portion of a fee is due after our normal
payment terms, which are 30 to 60 days from invoice date, we account for the fee
as not being fixed or determinable. In these cases, we recognize revenue as the
fee becomes due. Revenue from resellers of the Company's services is recognized
in the same manner as revenue generated from direct customers, since the Company
does not give resellers a right of return or refund for services or products
purchased. The Company makes judgments concerning collectability of accounts
that impact the recognition of revenue and the net realizable value of accounts
receivable. The Company calculates the allowance for doubtful accounts based on
historical collection experience, credit policy and the evaluation of aging
categories. Collection history is evaluated based on write-off experience and
based on current accounts that have been specifically identified as being in
dispute, referred to a collection agency or in bankruptcy. The Company uses the
same information to determine whether payments on revenue derived from a
particular customer or class of customer is reasonably assured. If the Company
notes a high level of write-offs for a particular customer or class of customer,
or where there is no collection history for a particular customer, the Company
defers recognition of revenue until payment is reasonably assured. Had the
Company estimated collectability of its accounts receivable using different
judgments, the revenue and accounts receivable recorded would have been
different at each period end. If the Company used a more conservative
interpretation of when payment is reasonably assured, less revenue would have
been recognized upon shipment, or upon performance of services. If the Company
used a less conservative definition of reasonable assurance of payment, more
revenue would have been recognized on the date of shipment or upon performance
of services.
(b) Software development costs
Research and software 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. Judgment is used
in determining when technological feasibility is reached for Enterprise software
licenses to be sold. Based on our product development process, technological
feasibility is established upon completion of a working model. We have
determined costs incurred by the Company between the completion of the working
model and the point at which the product is ready for general release to be
immaterial. A different judgment about when technological feasibility is reached
could result in more software development costs being capitalized.
15
(c) Internal-use software and intangible assets
The Company capitalizes certain software development costs related to its
Internet product line in accordance with the American Institute of Certified
Public Accountants (AICPA) Statement of Position 98-1 ("SOP 98-1"), Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use.
Judgment is used to determine the useful lives and impairment of capitalized
software and intangible assets. Capitalized internal-use software costs are
being amortized over a period of five years commencing in the period in which
the software is placed into use. The Company assigned a useful life of five
years to capitalized software based on the Company's planned use of that
software and historical experience of technological obsolescence. Use of a
shorter life for capitalized software would result in more amortization expense
being recognized each year, resulting in higher costs of revenues. Use of a
longer life for capitalized software would result in less amortization expense
being recorded during each year, resulting in lower costs of revenues.
Intangible assets include principally acquired technologies purchased from
HR Sites. Acquired technologies are being amortized over three years from the
date of purchase, which management determined to be the remaining useful life of
the technology on the date of purchase. The Company intends to use the acquired
technology through its remaining useful life.
The Company is required to evaluate each long-lived asset for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In the Company's judgment, there have been no
such events or changes in circumstances that would require an evaluation of
impairment, since the acquired technologies and capitalized software continue to
be used for the provision of Internet service offerings, the Company continues
to derive revenue from the customers included in the customer list and the
non-compete agreement continues to be enforceable. If the Company had determined
that there was a significant event or change in circumstances indicating that
there may be impairment to the long-lived assets, the Company would have
performed an analysis of impairment and as a result may have reduced the
carrying value of those assets or reduced their estimated useful lives.
(d) Deferred 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 currently enacted tax rates applied to the
differences between the financial statement and tax bases of assets and
liabilities. Under SFAS 109, we are required to evaluate the likelihood that
benefits will be realized from deferred tax assets and record a valuation
allowance against the deferred tax asset if it is more likely than not that the
Company will not recognize the benefits of those deferred tax assets. As a
result of our evaluation of deferred tax assets, we concluded that it is more
likely than not that the Company will not realize the benefit of the deferred
tax assets, and as a result, we have provided a valuation allowance for the full
amount of those deferred tax assets. Our evaluation took into consideration the
Company's recurring losses from operations and current temporary differences
that are expected to reverse.
Factors Affecting Future Operating Results
An investment in our common stock involves various risks. Before investing
in our common stock, you should carefully consider the following risk factors.
These risk factors are not exhaustive and should be read together with the other
reports and documents that we file with the Securities and Exchange Commission,
which may include additional or more current information that should be
considered in making an investment in us.
16
If we are unable to obtain additional capital as needed in the future, our
business may be adversely affected.
We currently anticipate that our available cash and cash equivalents will
be sufficient to meet our anticipated working capital and capital expenditure
requirements through the near term. We may need to raise additional capital in
the long term to fund more rapid expansion, to develop new services, to enhance
existing services in response to competitive pressures, and to acquire
complementary services, businesses or technologies. In the event our operations
are not profitable or do not generate sufficient cash to fund the business, or
if we fail to receive money to meet our obligations, we may have to cut back our
level of operations. These reductions could, in turn, affect our relationships
with our strategic partners and customers and threaten our ability to continue
as an ongoing concern. If we raise additional funds through issuances of equity
or convertible debt securities, the percentage of ownership of our current
stockholders will be reduced and such securities may have rights, preferences
and privileges senior to those of our current stockholders. In addition, we may
not be able to obtain such financing on terms favorable to us, if at all. If
adequate funds are not available or are not available on terms favorable to us,
our business, financial condition and results of operations could be materially
and adversely affected.
To compete effectively, we must adapt quickly to advances in technology and
changes in customer requirements.
The market for automated recruiting products and services is undergoing
rapid changes, including continuing advances in technology and changes in
customer requirements and preferences. Our future success will depend in
significant part on our ability to continually improve the performance, features
and reliability of our software and services in response to the evolving demands
of the marketplace and competitive product offerings. Any failure on our part to
quickly develop products and services that address changes in technology or
customer demands will likely result in loss of market share to a competitor.
Our business model is not yet fully proven.
In fiscal 1998, we expanded our technology into products and services that
could be offered over the Internet to foster long-term growth. Since that time,
revenue from Internet-based transactions has grown in relation to revenue from
our software licensing and maintenance business, becoming a majority of our
total revenue for the first time in the first quarter of fiscal 2001. We expect
our reliance on Internet-based transactions for revenue to continue to increase
in the future, and we expect product revenue from software license sales and
maintenance to continue to become a smaller component of our revenue over time.
Our long-term business model and profit potential are not yet fully proven. To
be successful, we must develop and market online recruitment offerings that
achieve broad market acceptance by employers, job seekers and interactive media
companies. It is possible that we will be required to further adapt our business
model in response to additional changes in the online recruitment market or if
our current business model is not successful. If we are not able to anticipate
changes in the online recruitment market or if our business model is not
successful, our business, financial condition and results of operations will be
materially and adversely affected.
17
We may be unable to continue to build customer awareness.
We believe that continuing to build brand recognition is critical to
achieving widespread acceptance of our online recruitment offerings. Brand
recognition is a key differentiating factor among providers of online
recruitment offerings and we believe it could become more important as
competition in the online recruitment market increases. We may find it necessary
to accelerate expenditures on our sales and marketing efforts or otherwise
increase our financial commitment to creating and maintaining brand awareness
among potential customers. If we fail to successfully promote and maintain our
brand or incur significant expenses in promoting our brand, our business,
financial condition and results of operations could be materially and adversely
affected.
The demand for automated recruiting software and services may fail to grow and
generate business.
Our future success substantially depends on broader recognition of the
potential benefits of automated recruiting software and services and the growth
in demand for these products and services. It is difficult to assess the size of
the market that will develop and the rate at which it will develop. If the
market does not develop as we anticipate, or if it develops more slowly than we
expect, our business, financial condition and results of operations will be
materially and adversely affected.
Our business is dependent on the continued development and maintenance of the
Internet infrastructure.
Our success will depend, in large part, upon the continued development and
maintenance of the Internet infrastructure as a reliable network backbone with
the necessary speed, data capacity and security, and timely development of
enabling products, such as high-speed modems, for providing reliable Internet
access and services. We cannot assure you that the Internet infrastructure will
continue to effectively support the demands placed on it as the Internet
continues to experience increased numbers of users, greater frequency of use or
increased bandwidth requirements of users. Even if the necessary infrastructure
or technologies are developed, we may have to spend considerable resources to
adapt our offerings accordingly. Furthermore, in the past, the Internet has
experienced a variety of outages and other delays. Any future outages or delays
could affect the Internet sites on which our customers' job advertisements are
posted and the willingness of employers and job seekers to use our online
recruitment offerings. If any of these events occur, our business, financial
condition and results of operations could be materially and adversely affected.
Our business is dependent on the continued development of the Internet as a
recruiting medium.
Our future is highly dependent on the continuing increase in the use of the
Internet as a recruiting medium. The online recruitment market is rapidly
evolving, and we cannot yet gauge its effectiveness as compared to traditional
recruiting methods. As a result, demand and market acceptance of online
recruitment offerings are uncertain. The adoption of online recruiting,
particularly by those entities that have historically relied upon traditional
methods of recruiting, requires the acceptance of a new way of conducting
business, exchanging information and advertising for jobs. We cannot assure you
that the online recruitment market will continue to emerge or become
sustainable. If the online recruitment market develops more slowly than we
expect, our business, financial condition and results of operations will be
materially and adversely affected.
18
Our computer systems could fail or overload.
The success of our online recruitment offerings depends highly on the
efficient and uninterrupted operation of our computer and communications
systems. Power loss, telecommunications failures, computer viruses, electronic
break-ins or other similar disruptive problems could damage or cause
interruptions in these systems. If our systems are affected by any of these
occurrences, our business, financial condition and results of operations could
be materially and adversely affected. Our insurance policies may not cover, or
if covered, may not adequately compensate us for, any losses that may occur due
to any failures or interruptions in our systems. We currently have a redundant
system capability to deal with a service emergency, but we do not presently have
a formal rollover disaster recovery plan.
In addition, we must accommodate a high volume of traffic and deliver
frequently updated information. Our web sites have in the past and may in the
future experience slower response times or decreased traffic for a variety of
reasons. In addition, our users depend on Internet service providers and other
Internet site operators for access to our web sites. Many of the Internet
service providers have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
If we experience any of these problems, our business, financial condition
and results of operations could be materially and adversely affected.
Our new product and service introductions may have defects which could result in
adverse publicity or have other negative effects.
As the marketplace for recruiting solutions continues to evolve, we plan to
develop and introduce new products and services to enable us to effectively meet
the changing needs of the market. Products as complex as the ones that we offer
may contain undetected errors when first introduced or when new versions are
released. In the past, despite prior testing, we have discovered software errors
in some of our products after their introduction. Defects in product and
services may result in adverse publicity, loss of or delay in market acceptance,
injury to our reputation and brand awareness, or claims against us, any one of
which could have a material adverse effect on our business, financial condition
and results of operations.
We have significant competition from a variety of sources.
The market for recruitment solutions is intensely competitive and highly
fragmented. There are a large number of job boards, search firms, and Internet
portal sites that are vying for a share of companies' corporate recruiting
budgets. We expect to face additional competition as other established and
emerging companies including print media companies and employee recruiting
agencies with established brands, enter the online recruitment market.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than we do. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships to expand their offerings and to offer more
comprehensive solutions.
We believe that there will be rapid business consolidation in the online
recruitment industry. Accordingly, new competitors may emerge and rapidly
acquire significant market share. In addition, new technologies will likely
increase the competitive pressures that we face. The development of competing
technologies by market participants or the emergence of new industry standards
may adversely affect our competitive position. An increase in competition could
result in price reductions, limitations of access to
19
key content on the Internet, render our existing software and services obsolete
or unmarketable and/or result in loss of market share.
The successful operation of our business depends in large part on our
relationships with third parties.
A key element of our business strategy is to develop relationships with
leading industry organizations in order to increase our market presence, expand
distribution channels and broaden our product line. We believe that our
continued success depends in large part on our ability to maintain such
relationships and cultivate additional relationships. There can be no assurance
that our existing strategic partners will not discontinue their relationships
with us, or that we will be able to successfully develop additional strategic
relationships.
In addition, certain technology incorporated in our software is licensed
from third parties on a nonexclusive basis. The termination of any of these
licenses, or the failure of the third-party licensors to adequately maintain or
update their products, could result in a delay in our ability to ship certain of
our products while we seek to implement technology offered by alternative
sources. In addition, any required replacement licenses could prove more costly
than our current license relationships and might not provide technology as
powerful and functional as the third-party technology we currently license.
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 our 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 our products or
relating to current or future technologies, we may not be able to do so on
commercially reasonable terms or at all.
Our operating results may be subject to significant quarterly fluctuations.
Our results of operations have been, and may in the future be, subject to
significant quarterly fluctuations. Such fluctuations could be due to a variety
of factors, including the following:
o the introduction of new products by us or our competitors;
o the spending patterns of our customers;
o our sales incentive strategy which is based in part on annual sales
targets;
o the fact that a substantial portion of our revenue often occurs during the
last few weeks of each quarter and, as a result, any delays in orders are
more likely to result in revenue not being recognized until the following
quarter; and
o our current expense levels are based in part on our expectations of future
revenue and, as a result, net income for a given period could be
disproportionately affected by any reduction in revenue.
To the extent our level of revenue in the future decreases from past levels
or in some future quarter our revenue or operating results are below the
expectations of stock market securities analysts and investors, our
profitability and the price of our common stock is likely to be materially and
adversely affected.
20
Our business may continue to experience negative effects from a slowdown in the
U.S. and/or global economies.
Over the past year the U.S. economy has experienced a significant slowdown.
As a result of this decline, our business was adversely affected. A continuation
of this economic trend could have a material adverse effect on our business,
financial condition, results of operations or prospects.
Affiliates of SOFTBANK Corp. beneficially own approximately 34% of our
outstanding stock, are represented on our Board of Directors and have rights to
participate in certain of our transactions. SOFTBANK's interests could conflict
with other stockholders' interests and significant sales of stock held by it
could have a negative effect on our stock price.
Affiliates of SOFTBANK Corp. currently beneficially own approximately 34%
of our outstanding common stock. As a result of their stock ownership, SOFTBANK
and its affiliates have significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, and their interests could conflict with
those of other stockholders. Such concentration of ownership may also have the
effect of delaying or preventing a change in control of our Company. In
addition, sales of significant amounts of shares held by these entities, or the
prospect of these sales, could adversely affect the market price of our common
stock.
SOFTBANK has the right to nominate two members of our Board of Directors,
which currently consists of six members (one of whom is a SOFTBANK
representative), and for so long as SOFTBANK or its affiliates continues to hold
at least 10% of our outstanding common stock, it is entitled to nominate one
director each time a class of directors in which one of its representatives
serves is subject to election. Further, one of SOFTBANK's directors is entitled
to serve as a member of the audit committee and compensation committee of the
Board of Directors. As a result, SOFTBANK has significant influence on all
matters requiring the approval of the Board of Directors.
In addition, in the event we propose to enter into a joint venture for
operations in the United Kingdom, continental Europe or Japan or a business
transaction with any competitor of SOFTBANK's affiliate ZDNet, we are required
by the terms of the stock purchase agreement pursuant to which SOFTBANK acquired
our common stock to offer SOFTBANK or one of its affiliates the opportunity to
participate in the transaction on terms and conditions mutually acceptable to us
and them. As a result of these contractual obligations, third parties may be
reluctant to negotiate joint ventures or business transactions with us because
they know SOFTBANK and its affiliates will be given the opportunity to
participate in such transactions.
Korn/Ferry beneficially owns approximately 15% of our outstanding stock, is
represented on our Board of Directors and has rights with respect to certain of
our transactions. Korn/Ferry's interests could conflict with other stockholders'
interests and significant sales of stock held by it could have a negative effect
on our stock price.
Korn/Ferry International currently beneficially owns approximately 15% of
our outstanding common stock. As a result of its stock ownership, Korn/Ferry has
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
and its interests could conflict with those of our other stockholders. In
addition, under the terms of the stock purchase agreement pursuant to which
Korn/Ferry acquired our common stock, for so long as Korn Ferry continues to
hold at least 5% of our common stock, we are required to first negotiate with
Korn/Ferry in the event of a potential sale or acquisition of our Company or a
substantial stock issuance by us. Such concentration of ownership and such
contractual obligation may also have the effect of delaying or preventing a
change in control of our Company. In addition, sales of significant amounts of
shares held by Korn/Ferry, or the prospect of these sales, could adversely
affect the market price of our common stock.
21
Korn/Ferry has the right to nominate one member of our Board of Directors,
which currently consists of six members (one of whom is a Korn/Ferry
representative), and for so long as Korn/Ferry continues to hold at least 5% of
our outstanding common stock, it is entitled to nominate one director each time
the class of directors in which its representative serves is subject to
election. As a result, Korn/Ferry has significant influence on all matters
requiring the approval of the Board of Directors.
We depend on key personnel who may not continue to work for us.
Our future success depends to a significant extent on our senior management
and other key employees, many of whom have acquired specialized knowledge and
skills with respect to our operations. As a result, if any of these individuals
were to leave our Company, we could face substantial difficulty in hiring
qualified successors and could experience a loss of productivity while any such
successor obtains the necessary training and experience. We also believe that
our future success will depend in large part on our ability to attract and
retain additional key employees. Competition for qualified personnel in the high
tech industry is intense. If we do not succeed in attracting new personnel, or
retaining and motivating existing personnel, our business will be adversely
affected.
Our stock price may experience extreme price and volume fluctuations and our
stockholders may not be able to resell their shares at or above their purchase
price.
We cannot predict the extent to which investors' interest in us will lead
to a stable trading market or how liquid the market might become. The stock
market in general and the market prices of shares in technology companies,
particularly those such as ours that offer Internet-based products and services,
have been extremely volatile and have experienced fluctuations that have often
been unrelated or disproportionate to the operating performance of such
companies. The market price of our common stock could be highly volatile and
subject to wide fluctuations in response to many factors, including the
following:
o quarterly variations in our results of operations;
o adverse business developments that have an impact on our business;
o changes in financial estimates by securities analysts;
o investor perception of our Company and online recruitment services in
general;
o announcements by our competitors of new products and services;
o fluctuations in our common stock price, which may affect our visibility and
credibility in the online recruitment market; and
In the event of broad fluctuations in the market price of our common stock,
purchasers of our common stock may be unable to resell their shares at or above
their purchase price.
Our stock may not continue to meet applicable requirements for listing on the
Nasdaq SmallCap Market.
The closing bid price for our common stock has been less then $1.00 for more
than 30 consecutive trading days, and we are thus not in compliance with the
requirements for continued listing on the
22
Nasdaq SmallCap Market. We have been in communication with the staff of the
Nasdaq Stock Market regarding the matter, and have been notified that our
securities may be subject to delisting unless we achieve compliance with the
$1.00 minimum bid price requirement for a least 10 consecutive trading days
prior to January 6, 2003 .
If our common stock is no longer listed on the Nasdaq SmallCap Market, it
would likely be traded either on the OTC Bulletin Board or "pink sheets," and
the liquidity of the market for our shares would be adversely affected.
It is difficult to protect our intellectual property rights.
We regard our intellectual property rights as critical to our success and
rely on a combination of copyright and trade secret laws, employee and
third-party non-disclosure agreements and other methods to protect these rights.
We cannot be assured that the measures we have taken to protect our proprietary
rights will be adequate to prevent misappropriation of our technology or
independent development by others of similar technology. Our inability to
protect our proprietary rights would have a material adverse effect on our
business, results of operations and financial condition.
We may be subject to costly intellectual property infringement claims.
As the number of products and services in our industry increases and as
recruiting solutions further overlap, the likelihood that our current or future
products may become subject to intellectual property infringement claims
increases. Although we are not currently the subject of any intellectual
property litigation, there has been substantial litigation in our industry
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 divert management's attention, which could have a
material adverse effect on our business, financial condition and results of
operations. Adverse determinations in such claims or litigation may require us
to obtain a license and/or pay damages, which could also have a material adverse
effect on our business, financial condition and results of operations.
We may be subject to product liability claims.
Although we have not experienced any product and service liability claims
to date, the sale and support of our products and the incorporation of products
from other companies may entail the risk of product liability claims. Our
license agreements with our customers typically contain provisions intended to
limit our exposure to such claims. There can be no guarantee, however, that such
provisions will be effective in limiting our exposure. A successful product
liability action brought against us could adversely affect our business,
financial condition and results of operations.
Anti-takeover provisions could make it more difficult for a third party to
acquire us.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock may be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. We
have no present plans to issue shares of preferred stock. Further, certain
provisions of our charter documents, including
23
provisions providing for a staggered board of directors and limiting the ability
of stockholders to raise matters at a meeting of stockholders without giving
advance notice, may have the effect of delaying or preventing changes in control
or management of the Company, which could have an adverse effect on the market
price of our common stock.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no significant changes in the Company's market risks since
the year ended September 30, 2001. For more information please read the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2001.
24
WEBHIRE, INC.
Part II - OTHER INFORMATION:
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
those arising in the ordinary course of the Company's business. Management
believes that the resolution of these matters will not materially affect the
Company's business or the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
NASDAQ Marketplace Rule 4350(d)(2)(A) generally requires that an audit
committee be composed of at least three directors, all of whom are "independent"
as defined in Marketplace Rule 4200(a)(14). NASDAQ Marketplace Rule
4350(d)(2)(B) allows an audit committee to have one director who is not
independent if the Board of Directors determines, in exceptional and limited
circumstances, that such director's membership on the audit committee is
required by the best interests of the Company and its shareholders.
On April 18, 2002, the Company's Board of Directors adopted a resolution
determining that the continued membership of director Charles R. Lax on the
Audit Committee of the Board of Directors is required by the best interests of
the Company and its shareholders. This determination was made notwithstanding
the fact that Mr. Lax is not "independent," as defined by NASDAQ Marketplace
Rule 4200, by virtue of his being a general partner of SOFTBANK Capital Partners
LLP ("SOFTBANK") which, together with its affiliates, owns approximately 34% of
the Company's outstanding capital stock. The reasons for such determination were
that Mr. Lax, who has been appointed under a contractual arrangement with
SOFTBANK as SOFTBANK's representative on the Board of Directors and Audit
Committee, is experienced and very knowledgeable with respect to financial
matters, and his input is greatly valued. It is believed, moreover, that
SOFTBANK's significant ownership position in the Company does not create a
conflict of interest between SOFTBANK and the other shareholders, but rather
creates an identity of interest which makes Mr. Lax an appropriate
representative for the Company's shareholders in general.
NASDAQ Marketplace Rule 4450(a)(2) requires that for continued listing on
the NASDAQ National Market, a company maintain a minimum market value of its
publicly held shares (shares held by persons other than directors, officers and
major stockholders) of at least $5,000,000. The Company is not in compliance
with that requirement. Accordingly, the Company applied to transfer listing of
its securities from the NASDAQ National Market to the NASDAQ SmallCap Market
which application was approved effective May 23, 2002.
25
Item 6. Exhibits and Reports on Form 8-K
Exhibit No. Description
----------- -----------
(a) None
(b) No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2002.
WEBHIRE, INC.
Part III - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WEBHIRE, INC.
/s/ MARTIN J. FAHEY
-----------------------
Martin J. Fahey
Chief Executive Officer
/s/ STEPHEN D. ALLISON
-----------------------
Stephen D. Allison
Chief Financial Officer
Date: August 14, 2002
26