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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 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 000-21465
TALX CORPORATION
(Exact name of registrant as specified in its charter)
MISSOURI 43-0988805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 BORMAN COURT, ST. LOUIS, MO 63146
(Address of principal executive offices) (Zip Code)
(314) 214-7000
(Registrant's telephone number, Including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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 for 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. [X] Yes [ ] No
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 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. [X]
As of June 3, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $234,000,000. For purpose of
this calculation only, without determining whether the following are affiliates
of the registrant, the registrant has assumed that (i) its directors and
executive officers are affiliates and (ii) entities controlled by such persons
are affiliates.
As of June 3, 2002 there were 13,909,714 shares of the registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant's 2002 Annual
Meeting of Stockholders, which definitive proxy statement will be filed within
120 days after the registrant's fiscal year end of March 31, 2002, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
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PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements. In some cases, you can
identify forward-looking statements by terms such as "may," "will," "should,"
"could," "would," "expect," "plan," "anticipate," "believe," "estimate,"
"project," "predict," "potential" and similar expressions intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties. These risks, uncertainties and other factors may cause our actual
results, performances or achievements to be materially different from those
expressed or implied by our forward-looking statements. Our forward-looking
statements in this Form 10-K include, but are not limited to, statements
relating to:
o our business strategy;
o the market opportunity for our services and products, including
anticipated growth of our industry and expected demand for our
services and products;
o the anticipated benefits of the recent acquisitions;
o our estimates regarding our capital requirements and needs for
additional financing; and
o any of our other plans, objectives, expectations and intentions
contained in this Form 10-K that are not historical facts.
Factors that may cause our actual results to differ materially from our
forward-looking statements include, among others, changes in general economic
and business conditions and the risks and other factors set forth in "Risk
Factors."
You should read this Form 10-K completely and with the understanding that our
actual results may be materially different from what we expect. We will not
update these forward-looking statements, even though our situation may change in
the future. We qualify all of our forward-looking statements by these cautionary
statements.
ITEM 1. BUSINESS
OVERVIEW
We are the leading provider of automated employment and income verification and
unemployment cost management services and a leader in providing outsourced
employee self-service applications. Our services enable mortgage lenders,
pre-employment screening companies, employers and other authorized users to
obtain employee human resources and payroll information. We also allow employees
to review and modify information in human resources, benefits and payroll
management information systems without requiring employer assistance. Further,
we provide unemployment insurance claims processing and unemployment tax
planning and management to a broad range of employers.
Our services and software use interactive web and interactive voice response
software, fax and other technologies and are designed to enhance service levels,
improve productivity and reduce costs by automating historically labor
intensive, paper-based processes and enabling users to perform self-service
transactions. We typically serve large organizations, including approximately
two-thirds of the Fortune 500 and a number of federal, state and local
government agencies.
From the early 1980s until 1993 we offered our products and services exclusively
through licensed software specifically developed for each customer, and
installed at the customer's site. We refer to this as our "customer premises
systems" business. In 1993, we began to deliver benefits enrollment and other
human resource services on an outsourced basis, allowing clients to utilize
applications and services over public or private networks without incurring the
capital expenditures and maintenance responsibilities of operating such a system
in-house. We also host many of our clients' databases at our facilities. In
1995, we introduced The Work Number, our leading service for employment and
income verification. This service is supported by a database of employment
information that we have gathered from over 800 clients and, as of March 31,
2002, contained approximately 61 million employment records.
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With the market's acceptance of our outsourced delivery method, in 1998, we
began to de-emphasize sales of customer premises systems, and in 2000
discontinued sales to new clients; however, we still have a base of clients for
whom we continue to provide maintenance and technical support services as well
as software and hardware upgrades.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Discontinued Operations" for information regarding the
divestitures of our database and document service businesses. See note 12 to the
financial statements included in this Form 10-K for financial information about
each of our segments for the last three fiscal years, which is incorporated by
reference herein.
As used in this Form 10-K, the terms "TALX," "we," "our," and "us" and other
similar terms refer to TALX Corporation, unless we specify otherwise.
TALX(R) is our registered trademark, and The Work Number For Everyone(R) and The
Work Number(R) are our registered service marks. TALXWare is our trademark and
UC eXpress, eChoice, ePayroll and W-2 eXpress are our service marks. All other
trade names, trademarks and product names in this Form 10-K are the property of
their respective owners.
We are incorporated under the laws of the state of Missouri. Our executive
offices are located at 1850 Borman Court, St. Louis, Missouri, 63146 and our
telephone number is (314) 214-7000.
Unless otherwise stated, all share and per share information in this Form 10-K
reflects all of our stock dividends and our stock split.
RECENT DEVELOPMENTS
We recently acquired three businesses. The first acquisition was of Ti3, Inc.
("Ti3"), an application service provider based in Plano, Texas, that provides
customized outsourcing solutions primarily for the staffing industry and, more
recently, for the home health care industry. Ti3 integrates interactive voice
response, fax and Internet technologies into its application services. Ti3's
primary application service allows employees to enter timecard information and
managers to approve time sheets automatically using the telephone or Internet.
Ti3 designs and develops its application services and provides consulting,
project management, demonstrations and prototypes. We believe the technologies
utilized and services provided by Ti3 are complementary to our services and we
intend to cross-sell Ti3's application services to our existing client base.
The other two acquisitions were of companies that provide unemployment cost
management services. These services include unemployment insurance claims
processing and unemployment tax management and planning to a broad range of
employers. We believe that these purchases will permit our core human resource
and payroll services business to expand to include unemployment cost management
services. We further believe the services provided by the acquired businesses
are complementary to our services and intend to cross-sell those services to our
existing client base. Since the date of the acquisitions, we have commenced an
integration strategy to consolidate the sales and customer service delivery.
Through transition teams, we are also reviewing best practices in various
operational areas. We intend to be on a single operating computer platform
within two years.
Ti3, INC.
Pursuant to an Agreement and Plan of Merger dated July 2, 2001, we completed our
acquisition of Ti3. As consideration for the acquisition, we paid the Ti3
shareholders approximately $50,000 in cash and issued to them 341,854 shares of
our common stock, for an estimated aggregate value of $11.8 million, based on
the then recent average trading prices for our common stock. Additionally, we
incurred $655,000 of costs related to the transaction, which were capitalized
into goodwill. Of the shares issued, 34,187 were placed in a one-year escrow to
support indemnification obligations. We may make additional payments in cash or
shares of our common stock to Ti3 shareholders depending upon Ti3's financial
performance in the 12 months immediately after the closing and utilization of
Ti3's tax-loss carry-forwards during such period. The share amounts discussed
above do not include the effect of the 10% stock dividend declared on September
6, 2001.
UNEMPLOYMENT COST MANAGEMENT SERVICES BUSINESS OF GATES, MCDONALD & COMPANY
Pursuant to an asset purchase agreement, dated as of March 27, 2002, our
subsidiary, Garcia Acquisition Sub, Inc. ("Garcia"), purchased certain of the
assets and assumed certain of the liabilities of the unemployment cost
management services business (the "GM Unemployment Compensation Business") of
Gates, McDonald & Company, a subsidiary of Nationwide Mutual Insurance
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Company. The GM Unemployment Compensation Business provides unemployment cost
management services to a broad range of employers.
The purchase price was $44.3 million, including transaction costs, and was paid
in cash, a portion of which was financed, as discussed below in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources. The asset purchase agreement
provides for Gates, McDonald & Company to indemnify us for certain existing
liabilities and obligations of the business, subject to certain limitations. An
escrow account, to be maintained by a bank pursuant to the terms of an escrow
agreement, is also available for a fifteen-month period following the date of
the asset purchase agreement to satisfy the indemnification obligations of
Gates, McDonald & Company under the asset purchase agreement, subject to certain
limitations contained in the asset purchase agreement. For such purposes, $4.0
million of the purchase price was paid into the escrow account. The
indemnification obligations of Gates, McDonald & Company with respect to tax and
certain employee benefit matters terminate upon the expiration of the applicable
statutes of limitation, authorization and title indemnification obligations
terminate after two years and all other indemnification obligations terminate 15
months from the date of the agreement. The parties executed several ancillary
agreements in connection with the asset purchase agreement in order to provide
for the orderly transition of the GM Unemployment Compensation Business and the
employees of such business from Gates, McDonald & Company to us. These ancillary
documents included a transition services agreement, an intellectual property
license agreement, a lease services agreement and an employee services
agreement.
THE FRICK COMPANY
Additionally, pursuant to an acquisition agreement dated as of March 27, 2002,
we purchased all of the 257,200 issued and outstanding shares of common stock of
James E. Frick, Inc., d/b/a The Frick Company, a Missouri corporation ("Frick")
from the James E. Frick Profit Sharing and Employee Stock Ownership Plan (the
"ESOP"), and options to acquire 190,500 shares of Frick's common stock held by
the four principal optionholders. Frick provides unemployment cost control,
unemployment claims handling, tax planning and related services and employment
information verification services to a broad range of clients. Frick is now our
wholly owned subsidiary.
The total purchase price for the Frick acquisition was $79.7 million, including
transaction costs, which includes amounts allocable to offer to purchase
remaining options to purchase 29,000 shares held by key employee optionholders.
The purchase price was based on a value of $162.60 per share of common stock,
less in the case of an option, the exercise price and withholding and other
applicable taxes, plus up to $16.78 from the escrow, as described below. The
purchase price was paid in cash, a portion of which was financed, as discussed
below in Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.
Subsequent to the closing, we purchased from the key employee optionholders the
remaining options to purchase 29,000 shares of Frick's common stock subject to
the same terms and conditions as, and for a price per share of underlying common
stock equal to that received by, the four principal optionholders under the
acquisition agreement. The terms of the acquisition agreement required the
sellers to enter into an escrow agreement with us. For such purpose, $8.0
million of the purchase price was deposited with a bank to be disbursed in
accordance with the escrow agreement. Of the escrow funds, $3.0 million is
available to satisfy our claims relating only to the tax and intellectual
property representations, warranties and covenants, and the remainder is
available to satisfy any type of indemnifiable claim under the acquisition
agreement. The sellers' indemnification obligations terminate, and the
undisputed escrow funds will be distributed on March 27, 2003. Except for claims
related to willful misrepresentation, our only remedy for indemnified losses is
against the escrow.
SERVICES AND PRODUCTS
We provide services and systems that enable large corporations and government
agencies to outsource operations that would otherwise be performed by their own
human resources, benefits or payroll departments. Our software uses interactive
web and interactive voice response software and other technologies to enable
mortgage lenders, pre-employment screening companies, employees and other
authorized users to obtain employee human resources and payroll information, and
allows employees and their managers to review and modify information in the
human resources benefits and payroll management information systems on a
self-service basis. Our services and products fall within four general
categories: The Work Number services, unemployment cost management services,
human resources and benefits application services and customer premises systems,
including related maintenance and support.
THE WORK NUMBER SERVICES
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Responding to inquiries to verify employment and income information, printing
and distributing pay stubs and annual W-2 forms, and updating employee personal
records are burdensome and time-consuming tasks for employers and divert
resources from managing their businesses. The Work Number employment and income
verification service and other payroll application services supported by The
Work Number's database of employee records are designed to help employers save
time and effort and reduce expenses associated with many of the administrative
tasks required to support large workforces.
The Work Number. Mortgage lenders, pre-employment screeners, social service
agencies and other information verifiers often request organizations to verify
employment and income information that has been provided by employees or former
employees. For example, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, leading purchasers of residential
mortgages in the United States, usually require independent verification of
employment and income data for the past two calendar years and a current payroll
period in connection with mortgages that they will purchase. In 1995, we
developed The Work Number as an outsourced service that enables employers to
reduce the costs and resources to respond to verification requests, while
empowering employees to control the release of personal information to third
parties.
When an employer receives a request for income and employment data regarding an
employee, the employer may direct the third-party verifier to our web site or to
a telephone number. Using the Internet or a toll-free telephone number,
verifiers who subscribe to our service can confirm the employee's employment
status and income for the past three years. Non-subscribing verifiers can
receive the same information through these methods using a credit card or
through a 1-900 telephone number. The Work Number is designed to ensure that
access to an employee's income data is available only to verifiers who have been
pre-authorized by the employee.
The Work Number can provide the following benefits to employers, employees and
third-party verifiers:
EMPLOYERS EMPLOYEES VERIFIERS
--------- --------- ---------
o reduces costs and resources otherwise o provides control over third-party o decreases the opportunity for human
spent responding to verification access to personal compensation error
inquiries information
o eases the administrative burden of o provides information without o reduces likelihood of fraud by the
human resources and payroll staff requiring the cooperation or applicant by providing independent
knowledge of co-workers evidence directly to the verifier
o lowers the risk of liability resulting o expedites the verification process, o expedites the verification process,
from providing erroneous or so that transactions may occur more so that transactions may occur more
unauthorized information to third quickly quickly
parties
We generate substantially all of The Work Number revenues from transaction-based
fees charged to mortgage lenders, pre-employment screeners, credit issuers and
other information verifiers for verification of income and employment
information. We also generate revenues from employer data conversion and ongoing
maintenance fees.
As of March 31, 2002, The Work Number database contained approximately 61
million employee records and had contracts to receive over 9 million additional
records. The 61 million records on-line represent approximately 22 million
current and 39 million former employees of over 800 large employers, including
federal, state and local government agencies. The Work Number database is
updated on an ongoing basis as employers electronically transmit data directly
to us each payroll period. Employers typically contract to provide this data for
specified periods, generally three years.
W-2 eXpress. W-2 eXpress is a suite of services relating to the printing,
distribution and correction of W-2 wage and tax statement forms that we offer to
existing clients of The Work Number and other large employers. Using data
provided by employers, we distribute original W-2 forms to employees and provide
an automated process to enable employees to request corrections to their W-2
forms and obtain additional copies via the Internet or by telephone, instead of
requiring direct interaction with the employer's payroll staff.
For employers, the primary benefits of our W-2 eXpress services include:
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o simplifying the task of generating thousands of W-2 statements within
a narrow time period each year;
o reducing staff and other resources that must be allocated to the
production and distribution of W-2 statements and the reissuance of
corrected statements; and
o automating the process for collecting correction requests.
We generate revenues from these services by charging clients a monthly fee which
is based upon the number of employees. We introduced W-2 eXpress in fiscal 2000,
and as of March 31, 2002 we held records of over five million employees of 83
employers in our database, generally pursuant to multi-year contracts.
ePayroll. ePayroll is another outsourcing service that we offer to existing
clients of The Work Number and other large employers. ePayroll is a suite of
payroll self-services applications that enable employees, via the Internet or by
telephone, to:
o receive pay statement information;
o access current and historical payroll information; and
o review and change direct deposit account information.
Employers that send us electronic transmissions of their employees' pay stubs
and direct deposit data can reduce the amount of staff required to process
routine employee payroll requests. Prior to the end of our fiscal year 2003, we
plan to introduce additional employee self-service functions, such as the
ability to complete and revise W-4 withholding allowance forms and to manage
personal information files.
We began offering ePayroll in November 2000, and our first clients began using
the service in August 2001. We charge ePayroll clients on a per-employee
per-month basis, plus an initial set-up fee, generally pursuant to multi-year
contracts.
FasTime. FasTime is a service that we offer to temporary staffing agencies.
FasTime allows employees, via the Internet or by telephone, to enter time and
payroll information. FasTime also allows the employees' manager to review and
approve time in an automated fashion. We charge FasTime clients on a
per-transaction basis, plus an initial application development fee, generally
pursuant to multi-year contracts.
UNEMPLOYMENT COST MANAGEMENT
As a result of our recent acquisitions, we provide unemployment cost management
services under the name UC eXpress(SM). UC eXpress is a complete suite of
services designed to reduce the cost of processing unemployment claims by human
resource departments and better manage the tax rate that employers are assessed
for unemployment taxes. UC eXpress utilizes document imaging and web access to
speed the processing of unemployment claims with the goal of uncovering
inaccuracies in claims that have been filed with the states by separated
employees. UC eXpress services are aimed at relieving HR departments of the
administrative burden of managing unemployment claims.
Following an employee separation, UC eXpress services respond to unemployment
claims on the behalf of our clients. This includes reviewing employment records
to preserve the clients' right as an employer. If an unemployment hearing is
required, UC eXpress services include client conferences with UC eXpress hearing
consultants/attorneys and, upon client request, attendance at the hearing with
the employer's representative. In addition, the UC eXpress field-based account
management team and hearing consultants bring state-specific unemployment tax
knowledge to the client.
UC eXpress also offers comprehensive employer tax services that encompass five
service areas:
o Unemployment tax services
o Employment tax research and recovery
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o Unemployment tax planning
o Tax registrations
o Employment tax consulting (withholding and unemployment)
Clients who choose UC eXpress for tax services collaborate with a UC eXpress tax
analyst to monitor the clients' unemployment tax accounts, verify tax rates and
contribution reports, and identify voluntary contribution opportunities. Since
UC eXpress offers a choice of employer tax services, clients can take advantage
of the services that are most effective in reducing their employment tax costs.
We charge clients fees on an annual contractual basis, generally billed monthly
or quarterly, pursuant to multi-year contracts. Certain contracts allow for
additional charges if transaction activity exceeds a certain threshold. Certain
unemployment tax planning contracts call for contingent fees based upon actual
tax savings realized.
HUMAN RESOURCES AND BENEFITS APPLICATION SERVICES
For many human resources departments, benefits enrollment is a burdensome
administrative task. Employees are generally permitted to enroll in or make
changes to many types of benefit plans only at particular times during the year.
As a result, during such enrollment periods, a considerable amount of human
resources and benefits department efforts are directed toward plan
administration. Processing employee changes to information recorded under
multiple providers' benefits plans can require the completion, verification and
handling of numerous paper-based forms. Many companies find it necessary to hire
temporary workers to manage the increased workload during these periods.
We offer our clients outsourcing solutions designed to reduce the resources and
expenses associated with enrolling employees and administering ongoing
participation in employee benefits programs. Our services include processing
enrollments, producing personalized worksheets and confirmations, and delivering
completed enrollments to employers and insurance carriers. We support both open
and ongoing enrollments year-round. To reach the growing number of Internet
users, our applications enable employees to complete enrollments via the
Internet, corporate portals and corporate intranets. For those employees who
prefer or need to use the telephone, options are available for processing
enrollments via interactive voice response.
Historically, we offered customer premises-based software systems that were
tailored to meet the needs of a particular employer. Since 1993, we have been
providing customized benefits enrollment services using the application service
provider model. In 2000, we introduced eChoice, our advanced benefits enrollment
service combining the most popular features of our various customized benefits
enrollment offerings that we can configure to meet each employer's particular
needs.
We market eChoice to organizations employing at least 5,000 people. Through
eChoice, employees can enroll in an employer's medical, dental and other health
and welfare benefits programs and can make changes to their personal information
and benefits elections, all by means of the Internet or by telephone. eChoice
enables employers to remove many of the time-consuming aspects of administering
their benefits programs, while providing benefits managers with an automated
means of monitoring the enrollment process and performing certain plan
management functions. Additionally, eChoice allows employees to make enrollment
decisions privately and assures that their elections will not be subject to
human transcription error.
We generate revenues from eChoice by charging clients on a per-employee basis,
generally pursuant to multi-year contracts. We generate revenues from our other
human resources and benefits application services by charging clients an initial
set-up and development fee and monthly hosting and transactions fees, generally
pursuant to multi-year contracts.
CUSTOMER PREMISES SYSTEMS AND RELATED MAINTENANCE AND SUPPORT
From the early 1980s until 1993 we offered our products and services exclusively
through licensed software specifically developed for each customer, and
installed these systems at the customer's site. In 1993 we began to deliver
benefits enrollment services as an application services provider. In 1998 we
began to de-emphasize sales of customer premises systems, and in 2000 we
discontinued sales to new customers. We provide system enhancements to these
customers and customer support 7-days per week, 24-hours per day, through a
toll-free hotline, email and our website. We sold these systems under licenses
and generate additional revenues by providing ongoing maintenance and support.
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SALES AND MARKETING
We employ a direct sales force in conjunction with strategic marketing
alliances. We use our direct sales force and strategic alliances to develop
relationships with large employers, typically having over 5,000 employees. In
addition, we use our strategic alliances to help us to identify potential
clients for The Work Number services among mid-sized employers, typically having
between 1,000 and 5,000 employees. In our unemployment cost management business,
our direct sales force sells to employers typically having over 1,000 employees.
DIRECT SALES FORCE
Our sales and marketing effort has representatives located in 36 U.S. cities.
Our sales and marketing effort relies on a team approach consisting of
approximately 143 professionals, including business development representatives,
regional sales managers, product managers, account managers, product consultants
and marketing personnel. Our business development representatives qualify
companies as viable potential clients and establish appointments for our
regional sales managers. Our regional sales managers are responsible for
presenting our service offerings to prospective clients and negotiating for the
sale of our services. Our product managers oversee product direction and provide
sales assistance. Our account managers service existing clients and product
consultants provide technical assistance to regional sales managers and
prospective clients during the sales process. Our marketing personnel support
the sales force at all levels.
STRATEGIC MARKETING ALLIANCES
We have established alliances with leading providers of related human resources
outsourcing services to build the database of records for The Work Number
services relating to employees of mid-sized employers and to increase our
eChoice client base. These alliances include:
o Hewitt Associates LLC: Hewitt Associates is a global management
consulting firm specializing in human resource services that has
agreed to make The Work Number available to its clients. For example,
The Work Number is directly accessible by employees of Hewitt's
clients via a link to our website. In exchange, we have agreed, among
other things, to share revenue with Hewitt resulting from its
referrals.
o Unifi Network, a division of PricewaterhouseCoopers: Unifi Network
provides integrated consulting and human resource services and has
agreed to make available The Work Number to its clients in exchange
for a share of the revenue generated by such activities.
o Ceridian Corporation: Ceridian is a national human resource
outsourcing company that has agreed to make The Work Number and
unemployment cost management services available to its clients in
exchange for a share of the revenue generated by such activities.
o PeopleSoft, Inc.: PeopleSoft, a leading provider of enterprise
application software for use throughout large and mid-sized
organizations, has agreed to make The Work Number accessible to users
of certain of its Internet-based business applications in exchange for
a fixed fee and transaction-based royalties.
These and other strategic marketing alliances such as Towers Perrin, Convergys
Corporation and Fringe Benefits Management Company are generally reflected by
non-exclusive contractual arrangements that remain in effect for specified
periods. The success of these alliances will generally depend on the interest
and commitment of these companies to promote and coordinate product development
and marketing efforts with us, which is entirely at their discretion. Some of
these companies maintain similar relationships with some of our competitors and
compete directly with us in certain applications.
COMPETITION
We believe the principal competitive factors in our markets include:
o service and product quality, reliability and performance;
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o functionality and ease of use;
o company reputation for integrity and confidentiality;
o company financial strength; and
o cost of the service or product.
Our primary competitors relating to The Work Number services and unemployment
cost management services are Jon-Jay Associates and The Sheakley Group of
Companies, which are unemployment cost management companies that also offer
employment and income verification services and Employers Unity, which offers
unemployment cost management services. Our human resources and benefits
application services business competes with benefits consulting firms, including
Towers Perrin LLP and Watson Wyatt & Company, which provide comprehensive
packages including benefit plan design, administration and consulting services,
and automated enrollment services. We also compete with providers of employee
self-service applications, including Workscape, Inc., Automatic Data Processing,
Inc., PeopleSoft, Inc., and ProAct Technologies Corp. Additionally, we are aware
of a number of employers who have established similar systems for their internal
use and believe additional competitors may emerge.
We believe that we compete favorably in the key competitive factors that affect
our markets for The Work Number services, our unemployment cost management
services and our human resources and benefits application services. However, our
markets are still evolving and we may not be able to compete successfully
against current or future competitors. Many of our existing and potential
competitors have significantly greater financial, marketing, technical and other
resources than we do. In addition, many of our competitors have well-established
relationships with our current and potential clients and extensive knowledge of
our markets. It is possible that new competitors or alliances among competitors
will emerge and rapidly acquire market share. Moreover, our competitors may
consolidate with each other, or with other companies, giving them even greater
capabilities with which to compete against us.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Each of our business lines is based on databases we construct and applications
we build to access and manipulate data. Our unemployment cost management
services are run on industry standard databases and applications. All of our
other services use a proprietary integrated visual development environment and
software system known as TALXWare to build our applications for The Work Number
and human resources and benefits applications services. TALXWare is based on a
Microsoft Windows NT operating system and is designed to support the creation
and management of self-service solutions.
We also license and integrate complementary technologies into our products
including:
o speech recognition;
o text-to-speech;
o facsimile;
o terminal emulation; and
o client/server database interfaces to be used in creating self-service
solutions.
We license these technologies from third-party suppliers pursuant to
non-exclusive license or resale agreements or purchase under open market
arrangements and then integrate into our products. For example, we make
quarterly royalty payments under a license agreement for various interactive
voice response technologies in our application services businesses.
We have directed our development efforts toward enhancing and developing new
offerings for The Work Number services and our human resources and benefits
application services. The most recent enhancements include extending the
features and capabilities of
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The Work Number database, through our W-2 eXpress and ePayroll paystub/direct
deposit services, as well as our eChoice benefits enrollment offering.
We incurred product development costs of $1.8 million in fiscal 2000, $2.2
million in fiscal 2001 and $2.0 million in fiscal 2002. As of March 31, 2002,
our total product development staff consisted of 22 full-time employees. We
believe that significant investments in product development are required to
remain competitive.
PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our ability to
protect and maintain our proprietary rights to our intellectual property. We
regard our trademarks, and our other intellectual property, as having
significant value and being an important factor in the development and marketing
of our products.
We currently rely on a combination of trademark, trade secret and copyright laws
and restrictions on disclosure to establish and protect our intellectual
property. We have obtained a trademark registration for the name TALX and
service mark registrations for The Work Number For Everyone and The Work Number
with the United States Patent and Trademark Office. TALXWare is one of our
trademarks, and eChoice, UC eXpress, ePayroll and W-2 eXpress are some of our
service marks.
We generally enter into confidentiality agreements with our officers, employees
and consultants. We also generally limit access to and distribution of our
source code and the disclosure and use of other proprietary information.
However, these measures provide only limited protection of our intellectual
property rights. In addition, we may not have signed agreements containing
adequate protective provisions in every case, and the contractual provisions
that are in place may not provide us with adequate protection in all
circumstances.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain or use technology that we regard as
proprietary. We cannot assure you that the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop techniques
that are similar or superior to our technology. Any failure to adequately
protect our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of competitive advantage and decreased
revenues. In addition, litigation may be necessary to enforce our intellectual
property rights or to determine the validity and scope of the proprietary rights
of others. Litigation of this type could result in substantial costs and
diversion of resources and could significantly harm our business.
The interactive voice response industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. Third parties have asserted in the past and, from time to time,
may assert in the future, patent, copyright, trademark and other intellectual
property rights to technologies that are important to our business. In one case,
we entered into a license agreement to use various interactive voice response
and computer telephony integration technologies under which we made an initial
payment and will pay future royalties. Further, we have not conducted a search
to determine whether the technology included in our products infringes or
misappropriates intellectual property held by other third parties. In addition,
because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which could relate
to our products. Any claims asserting that our systems infringe or may infringe
proprietary rights of third parties, if determined adversely to us, could
significantly harm our business.
BACKLOG
We include in backlog executed contracts that require us to install and deliver
either human resources and benefits application services or customer premises
systems in a future period. We had a total backlog in these businesses of
approximately $7 million at March 31, 2000, $18 million at March 31, 2001 and
$13 million at March 31, 2002, with a one-year backlog of approximately $7
million at March 31, 2000, $9 million at March 31, 2001 and $7 million at March
31, 2002. Substantially all of our backlog is attributable to human resources
and benefits application services. Generally, contracts for delivery of human
resources and benefits application services have terms ranging from one to three
years and are not cancelable without payment of a specified termination penalty.
Customer premises systems contracts are generally not cancelable at will.
Backlog is not necessarily indicative of past or future operating results.
10
CLIENTS
As of March 31, 2002, The Work Number database contained employee records from
over 800 clients, representing approximately 61 million present and former
employees. Additionally, as of that date, we had contracts with new clients to
provide records of over 9 million present and former employees in backlog. These
clients typically employ over 5,000 employees. Our clientele includes
approximately two-thirds of the Fortune 500 companies and a number of federal,
state and local government agencies. Our clients operate in a wide variety of
industries, including financial services, telecommunications services, retail,
consumer products, health care, temporary services and government. As of March
31, 2002, our unemployment cost management business had over 6,000 clients of
various sizes and operated in a broad range of industries. No client accounted
for more than 10% of total revenues in any of the fiscal years 2000, 2001 or
2002.
EMPLOYEES
As of March 31, 2002, we employed 878 full-time and 48 part-time employees.
Additionally, we leased 354 full-time and 18 part-time employees from Gates
McDonald. In conjunction with our acquisition of the unemployment compensation
business of Gates McDonald, we entered into an Employee Services Agreement
whereby Gates McDonald agreed to lease their employees to us for a 90 day period
beginning March 27, 2002. We anticipate at the expiration of this agreement,
substantially all employees will become employees of our company.
We have never had a work stoppage, and no employees are represented by a labor
organization. We consider our employee relations to be good.
RISK FACTORS
You should carefully consider the following factors and other information in
this Form 10-K in evaluating our company:
OUR FUTURE GROWTH WILL DEPEND ON OUR ABILITY TO EFFECTIVELY INTEGRATE
ACQUIRED COMPANIES AND CAPITALIZE ON ANTICIPATED CROSS-SELLING
OPPORTUNITIES
On March 27, 2002, we acquired Frick and the GM Unemployment Compensation
Business, in each case with the expectation that the transactions will result in
certain benefits, including, without limitation, cost savings, operating
efficiencies, cross-selling opportunities, revenue enhancements and other
synergies. Additionally, on July 2, 2001, we acquired Ti3, Inc., an application
service provider primarily for the staffing industry utilizing interactive voice
response and Internet technologies, with the expectation that the acquisition
would expand and complement our application services business, enhance our
revenues and increase market opportunities. Achieving the benefits of these
transactions will depend in part upon the integration of the business of Frick
and the GM Unemployment Compensation Business together with each other and The
Work Number line of products and services in an efficient manner, and there can
be no assurance that this will occur. Further, the acquisition of Ti3 was our
first business acquisition as a public company, and the acquisitions of The
Frick Company and the unemployment cost management business of GatesMcDonald are
significantly larger than the Ti3 acquisition. The consolidation of operations
will require substantial attention from management. The diversion of management
attention and any difficulties encountered in the transition and integration
processes could have a material adverse effect on the revenues, levels of
expenses and operating results of the combined companies. There can be no
assurance that the combined companies will realize any of the anticipated
benefits.
OUR FUTURE PERFORMANCE WILL BE DEPENDANT ON SUCCESSFUL INTEGRATION OF
ACQUISITIONS.
We expect a major portion of our growth to come from business acquisitions which
we have recently consummated or which we may consummate in the future. Such
acquisitions involve certain operational, legal and financial risks. Operational
risks include the possibility that an acquisition does not ultimately provide
the benefits originally anticipated by our management, while we continue to
incur operating expenses to provide the services formerly provided by the
acquired company. Legal risks involve contract and regulatory issues - that some
employers may not consent to the transfer of ownership of their contracts by
which the unemployment cost management services are provided, and that some
states' unemployment compensation commissions may require changes to powers of
attorney by which the employer authorizes processing of claims. In the event of
any loss of employer - customers or our inability to appear before state
unemployment commissions, our business and results of operations may be
materially adversely affected. Financial risks involve the incurrence of
indebtedness as a result of the acquisition and the consequent need to service
that indebtedness. In addition, the issuance of stock in connection with
acquisitions dilutes the voting power and may dilute the economic interests of
existing shareholders. In carrying out our acquisition strategy, we attempt to
minimize the risk of unexpected liabilities and contingencies associated with
acquired
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businesses through planning, investigation and negotiation, but there can be no
assurance that we will be successful in doing so, nor can there be any assurance
that we will be successful in identifying attractive acquisition candidates or
completing additional acquisitions on favorable terms.
OUR FUTURE GROWTH IS SUBSTANTIALLY DEPENDENT ON OUR ABILITY TO INCREASE THE
SIZE AND RANGE OF APPLICATIONS FOR THE WORK NUMBER DATABASE.
In order to successfully grow our business, we will have to make The Work Number
and related application services increasingly attractive to a greater number of
large organizations, their employees and third-party information verifiers. To
achieve this goal, we believe that we will need to increase the number of
employee records contained in The Work Number database, the amount and type of
information contained in those records and the number of applications that make
use of those records. Our strategy for increasing the size of The Work Number
database is based in part on strategic alliances with several providers of human
resources outsourcing services. Our success will depend on the interest and
commitment of these providers, which is entirely at their discretion. Some of
these companies compete with us in certain applications. Our strategy is also
based in part on strategic acquisitions of businesses with databases of employee
information, such as our recent acquisitions of Frick and the GM Unemployment
Compensation Business. If we are unable to attract and retain a sufficient
number of employer clients, if we cannot persuade them to include a greater
amount of information in the employee records they provide us, or if we fail to
develop additional applications to use this information, we may not achieve our
growth objectives.
OUR REVENUES FROM THE WORK NUMBER MAY FLUCTUATE IN RESPONSE TO CHANGES IN
THE LEVEL OF RESIDENTIAL MORTGAGE ACTIVITY AND INTEREST RATES.
A significant portion of our revenues from The Work Number depends on
residential mortgage activity and interest rates. We charge a fee for each
request from mortgage lenders to verify employment and income information.
Therefore, a decrease in residential real estate mortgage activity would reduce
the number of transactions per record, which could adversely affect our
revenues. If residential mortgage activity declines, whether due to increases in
mortgage interest rates or otherwise, our revenues and profitability could be
harmed.
THE MARKET FOR THE WORK NUMBER DEPENDS IN PART ON THE REQUIREMENTS
ESTABLISHED BY PURCHASERS IN THE SECONDARY MORTGAGE MARKET, AND OUR
REVENUES AND PROFITABILITY WOULD BE SIGNIFICANTLY HARMED IF THESE
REQUIREMENTS WERE RELAXED OR ELIMINATED.
We believe that residential mortgage lenders are among the most active users of
The Work Number. They utilize our services to verify employment, income and
related information. The demand for this verification is driven in part by the
requirements of the Federal National Mortgage Association, which is also known
as Fannie Mae, and the Federal Home Loan Mortgage Corporation, which is also
known as Freddie Mac, leading purchasers of residential mortgages in the United
States. These agencies currently require specific information, including
independent verification of employment and income data for the past two calendar
years and a current payroll period in connection with mortgages they purchase
having a loan-to-value in excess of 75%. Accordingly, most lenders seek this
information from mortgage applicants. If Fannie Mae or Freddie Mac were to
further reduce the requirement for employment and income data or eliminate the
requirement for independent verification thereof, our revenues and profitability
would be significantly harmed.
IF WE ARE UNABLE TO MAINTAIN THE ACCURACY AND CONFIDENTIALITY OF EMPLOYEE
INFORMATION IN THE WORK NUMBER AND OUR OTHER DATABASES, WE MAY FACE
SIGNIFICANT CLAIMS AND OUR REPUTATION WOULD BE HARMED.
The Work Number services and our human resources and benefits application
services depend on the accuracy of highly confidential employment and income
history and other information which employers provide to us and which we convert
for use in The Work Number and our other services. Although we have a number of
protective measures in place, any inaccuracies in such information - whether in
the recording of such information, the unauthorized access to information, or
otherwise - or our inability to keep such information confidential, may give
rise to claims against us and adversely affect market acceptance of The Work
Number and our other services. Our financial condition, results of operations
and reputation may be significantly harmed if any asserted claims were
ultimately decided against us.
IF THE FAIR CREDIT REPORTING ACT APPLIES TO THE WORK NUMBER SERVICES, OUR
BUSINESS AND REVENUES WILL BE HARMED.
12
The Fair Credit Reporting Act, which we refer to as the FCRA, may apply to The
Work Number services, which would have an adverse impact on us. The FCRA applies
to "consumer reporting agencies" that engage in the practice of "assembling or
evaluating" consumer credit information. We believe The Work Number services do
not cause us to be a consumer reporting agency and that the FCRA does not apply
to The Work Number services. Unlike consumer reporting agencies, we receive all
of the information in The Work Number database regarding an employee from one
source - the employer - and we do not evaluate an employee's creditworthiness.
Further, when contracting for The Work Number services, employers name us as
their agent. The FCRA exempts from its reach communications of a party solely
related to experiences of the consumer and the person making the report, such as
an employer's report on its experience with its employee. We believe that as an
agent of employers, we are not a consumer reporting agency. Further, some
rulings on the application of FCRA have exempted businesses which, like The Work
Number services, simply pass along information gathered.
While we believe no controlling legal precedent exists, consumers or the Federal
Trade Commission, which enforces the FCRA, could take the position that the FCRA
does apply to us and seek to require us to comply with the FCRA and seek
penalties and damages. Among other provisions, the FCRA requires that a consumer
reporting agency determine that there be a "permissible purpose" before
disclosing a consumer report and furnish certain notices and information in
writing to consumers as consumer reports are used. If required, we would have
difficulty complying with these procedures; The Work Number services are
designed to operate via interactive voice response and the Internet, instead of
paper. Further, we might have to eliminate certain types of transactions,
resulting in loss of revenue. As a result, it is difficult to estimate the
ultimate impact on us in the event the FCRA were deemed to apply to The Work
Number services.
PRIVACY LEGISLATION OR INTERPRETATIONS OF EXISTING LAWS COULD RESTRICT OUR
BUSINESS.
Personal privacy has become a significant issue in the United States. Some
commentators, privacy advocates and government bodies have recommended
limitations on, or taken actions to limit, the use of personal information by
those collecting this information. For example, in 1999, Congress enacted the
Gramm-Leach-Bliley Act, which contains provisions protecting the privacy of
consumer non-public personal information collected by financial institutions.
This legislation may limit our ability to disclose data received from financial
institutions for The Work Number services. Additionally, federal privacy
regulations relating to the use and disclosure of individually identifiable
health information were recently issued by the Department of Health and Human
Services pursuant to the Health Insurance Portability and Accountability Act of
1996. These privacy regulations could impose additional costs and could limit
our use and disclosure of information in connection with our benefits enrollment
and similar services. Some states have also enacted consumer and health
information privacy protection laws.
Although we release income information only when authorized by the employee, if
new statutes or regulations were adopted that restricted our business, or
existing statutes or regulations were deemed to apply to us, we may be required
to change our activities and revise or eliminate our services, which could
significantly harm our revenues and operations.
INTERRUPTIONS TO OUR COMPUTER NETWORK OR TELEPHONE OPERATIONS COULD
SIGNIFICANTLY HARM OUR REVENUES AND INDUSTRY REPUTATION.
Significant portions of our operations depend on our ability to protect our
computer equipment and the information stored in our data processing center
against damage from fire, power loss, telecommunications failures, unauthorized
intrusion and other events. We have data processing centers located in St.
Louis, Missouri; Columbus, Ohio and Plano, Texas which areas have historically
been vulnerable to natural disasters and other risks, such as floods,
earthquakes and tornadoes. We back-up software and related data files regularly
and store the back-up files off-site nearby. We cannot assure you that these
measures will eliminate the risk of extended interruption of our operations. We
also rely on local and long-distance telephone companies to provide dial-up
access, Internet and corporate intranet access to our services. We have not
established an alternative disaster recovery facility, which would serve to
protect us from losses of employee record information due to damage to our data
storage facilities. Any damage or failure that interrupts our operations or
destroys some or all of our database of employee records could have a material
adverse effect on our revenues, profitability and industry reputation.
OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY.
13
Our revenues, margins and operating results have fluctuated in the past, and may
continue to fluctuate in the future due to a number of factors.
For The Work Number, these factors include residential mortgage activity and
interest rate levels. We expect revenues generated from our new W-2 eXpress
service will be particularly affected by seasonality, as revenues relating to
the implementation and use of these services will primarily be earned in our
fourth fiscal quarter. Similarly, revenues from our benefits enrollment services
tend to be greater in the last two quarters of each calendar year, which
correspond to our second and third fiscal quarters.
Other factors that can cause our operating results to fluctuate include:
o new product introductions or announcements by us or our competitors;
o market acceptance of new services;
o the hiring and training of additional staff;
o the length of the sales cycle and the timing of transactions with
clients; and
o general economic conditions.
We cannot assure you that we will be able to sustain our level of total revenue
or our historical rate of revenue growth on a quarterly or annual basis. It is
likely that, in some future quarters, our operating results will fall below our
targets and the expectations of stock market analysts and investors. In such
event, the price of our common stock could decline significantly.
OUR FUTURE GROWTH ALSO DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND
MARKET CURRENT AND FUTURE HUMAN RESOURCES AND BENEFITS APPLICATION
SERVICES.
The market for human resources and benefits application services is still
evolving. Our success will depend upon our ability to develop applications that
provide attractive outsourcing opportunities and to successfully market these
products to large employers. There are numerous other companies, including
traditional consulting firms and other application service providers, that
provide outsourcing services in these areas. Prior to contracting for services,
employers typically consider several types of human resources and benefits
services, as well as whether to outsource at all.
Additionally, general and company-specific economic conditions, internal
policy-making procedures and other factors can delay and add uncertainty to the
process of marketing to potential clients. If we are unable to develop and sell
human resources and benefits application services on an ongoing basis, our
revenues and results of operations may suffer.
IF WE ARE UNABLE TO SUCCESSFULLY INTRODUCE NEW APPLICATION SERVICES AND
ENHANCED FUNCTIONALITY TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES THAT
CHARACTERIZE OUR MARKETS, OUR RESULTS OF OPERATIONS WOULD BE SIGNIFICANTLY
HARMED.
The application services industry is characterized by rapidly changing
technology and our future success will depend upon our ability to keep pace with
technological developments. In particular, the market for self-service
applications through the Internet and corporate intranets using browser software
is rapidly evolving.
To remain competitive, we must continually change and improve our services and
products in response to changes in operating systems, application software,
computer and telephony hardware, communications, database and networking
systems, programming tools and computer language technology. Additionally, we
must also introduce new application services and add functionality to existing
services in response to changing market conditions and client demand,
particularly as benefit plan designs change and new types of plans are
introduced.
The development of new, technologically advanced services and products is a
complex and uncertain process requiring high levels of innovation and highly
skilled engineering and development personnel, as well as the accurate
anticipation of technology and market trends.
14
If we are unable, for technical or other reasons, to develop and market new
application services or enhancements to existing services in a timely and
cost-effective manner, or if new application services do not achieve market
acceptance, we could lose revenues and our competitive position could suffer.
WE DEPEND ON THIRD-PARTY SOFTWARE AND HARDWARE, WHICH EXPOSES US TO
DISRUPTION IF THOSE PRODUCTS ARE NO LONGER SUPPORTED OR DEVELOP DEFECTS.
Our services and products involve integration with both operating systems and
products developed by others. If any third-party software or hardware, such as
Microsoft Windows NT or Oracle database software, becomes unavailable for any
reason, fails to integrate with our products or fails to be supported by their
respective vendors or to operate properly, we would have to redesign our
products. We cannot assure you that we could accomplish any redesign in a
cost-effective or timely manner. Further, if third parties release new versions
of these systems or products before we develop products compatible with such new
releases, demand for our services and products might decline, thereby harming
our revenues and profitability.
We believe that if any supplier agreement expires or is canceled or otherwise
terminated, or if a third-party supplier refuses to sell to us, we could locate
any number of different suppliers. However, it would require a significant
amount of time to integrate the relevant technology from the new supplier, which
would result in a significant delay in our ability to offer the particular
enhancement. We could also experience difficulties integrating the new
supplier's technology with our products. We cannot assure you we could
accomplish any such integration in a cost-effective manner. Significant delays
in the offering of service or produce enhancements due to integration of
technology from new suppliers could significantly harm our revenues and
profitability.
OUR SERVICES AND PRODUCTS MAY CONTAIN DEFECTS OR LACK ADEQUATE SECURITY
WHICH MAY CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT OUR ATTENTION FROM
PRODUCT DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF CUSTOMERS.
As a result of their complexity, application services and hardware and software
products may contain undetected errors or failures when first introduced or as
new versions are released. We cannot assure you that, despite testing by us and
our clients, errors will not occur in services and systems after implementation.
The occurrence of such errors could result in loss or delay in market acceptance
of our services or products, which could significantly harm our revenues and our
reputation.
Internet or other users could access without authorization or otherwise disrupt
our Internet and corporate intranet applications. Such unauthorized access and
other disruptions could jeopardize the security of information stored in and
transmitted through the computer systems of our clients, which could result in
significant liability to us, could cause the loss of existing clients and could
discourage potential new clients.
BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE
TO RECRUIT OR RETAIN NECESSARY PERSONNEL ON A COST-EFFECTIVE BASIS.
Our success depends in large part upon our ability to identify, hire, retain and
motivate highly-skilled employees. Competition for highly-skilled employees in
our industry is intense, particularly in our geographic area. In addition,
employees may leave our company and subsequently compete against us. Our failure
to attract and retain these qualified employees could significantly harm our
ability to develop new products and maintain customer relationships.
Moreover, companies in our industry whose employees accept positions with
competitors frequently claim that those competitors have engaged in unfair
hiring practices. We may be subject to such claims as we seek to retain or hire
qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur
substantial costs in defending ourselves against these claims, regardless of
their merits. Such claims could also discourage potential employees who
currently work for our competitors from joining us.
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD
RESULT IN SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR
PRODUCTS.
Other parties have asserted in the past, and may assert in the future, patent,
copyright, trademark and other intellectual property rights to technologies that
are important to our business. For example, we recently entered into a license
to use various interactive voice response and computer telephony technologies
that required us to make an initial payment and pay future royalties. Further,
15
we have not conducted a search to determine whether the technology we have in
our products infringes or misappropriates intellectual property held by other
third parties. We cannot provide assurance that others will not claim that we
are infringing their intellectual property rights or that we do not in fact
infringe those intellectual property rights.
Any claims asserting that our products infringe or may infringe proprietary
rights of third parties, if determined adversely to us, could significantly harm
our results of operations. Any claims, with or without merit, could:
o be time-consuming;
o result in costly litigation;
o divert the efforts of our technical and management personnel;
o require us to develop alternative technology, thereby resulting in
delays and the loss or deferral of revenues;
o require us to cease marketing application services containing the
infringing intellectual property;
o require us to pay substantial damage awards;
o damage our reputation; or
o require us to enter into royalty or licensing agreements which may not
be available on acceptable terms, if at all.
In the event a claim against us were successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our revenues, results
of operations and competitive position would be harmed.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
RESULTS OF OPERATIONS AND REPUTATION.
Our success and ability to compete is dependent in part on our ability to
protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of trade secret, trademark and copyright laws to
establish and protect our intellectual property. To date, we have relied
primarily on trade secret laws to protect our proprietary processes and
know-how.
We generally enter into confidentiality agreements with our officers, employees
and consultants. We also generally limit access to and distribution of our
source code and the disclosure and use of our other proprietary information.
However, these measures provide only limited protection of our intellectual
property rights. In addition, we may not have signed agreements containing
adequate protective provisions in every case, and the contractual provisions
that are in place may not provide us with adequate protection in all
circumstances. Further, we have not included copyright notices on all of our
copyrightable intellectual property. Any infringement of our proprietary rights
could result in significant litigation costs, and any failure to adequately
protect our proprietary rights could result in our competitors offering similar
products, potentially resulting in the loss of one or more competitive
advantages and decreased revenues.
Despite our efforts to protect our proprietary rights, existing trade secret,
copyright, patent and trademark laws afford us only limited protection. Others
may attempt to copy or reverse engineer aspects of our products or to obtain and
use information that we regard as proprietary. Accordingly, we may not be able
to prevent misappropriation of our technologies or to deter others from
developing similar technologies. Further, monitoring the unauthorized use of our
products and other proprietary rights is difficult. Litigation may be necessary
to enforce our intellectual property rights or to determine the validity and
scope of the proprietary rights of others. Litigation of this type could result
in substantial costs and diversion of resources and could significantly harm our
results of operations and reputation.
WE FACE COMPETITION FROM A BROAD RANGE OF COMPANIES, INCLUDING LARGE AND
WELL-ESTABLISHED FIRMS.
The markets for our services and products are extremely competitive and subject
to rapid technological change.
16
We consider the primary competitors to The Work Number and the unemployment cost
management business to be Jon-Jay Associates and The Sheakley Group of
Companies, which are unemployment cost management providers offering employment
and income verification services, and Employers Unity, which offers unemployment
cost management services. Additionally, we are aware of a number of employers
who have established similar systems for their internal use and believe
additional competitors may emerge. Our human resources and benefits application
services business competes with benefits consulting firms, including Towers
Perrin LLP and Watson Wyatt & Company, which provide comprehensive packages
including benefit plan design, administration and consulting services and
automated enrollment services, and with providers of employee self-service
applications, including Workscape, Inc., Automatic Data Processing, Inc.,
PeopleSoft, Inc. and ProAct Technologies Corp.
Many of these companies and other potential competitors have greater name
recognition, larger installed client bases and significantly greater financial,
technical, marketing and other resources than us. Any such competitor could use
those resources to compete effectively against us.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any of which could significantly harm our results of
operations. Additionally, we may be required to increase spending in response to
competition in order to pursue new market opportunities or to invest in research
and development efforts, and, as a result, our operating results in the future
may be adversely affected. We cannot assure you that we will be able to compete
successfully against current and future competitors or that competitive
pressures we face will not significantly harm our results of operations.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND MISSOURI LAW MAY
MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE
BENEFITS TO OUR SHAREHOLDERS.
A number of provisions of our articles of incorporation and bylaws and Missouri
law could make it difficult for a third party to acquire, or discourage a third
party from attempting to acquire, control of us. These provisions:
o provide for a classified board of directors;
o limit the right of shareholders to remove directors or change the size
of the board of directors;
o limit the right of shareholders to fill vacancies on the board of
directors;
o limit the right of shareholders to act by written consent and to call
a special meeting of shareholders or propose other actions;
o provide that the bylaws may be amended only by the majority vote of
the board of directors and shareholders will not be able to amend the
bylaws without first amending the articles of incorporation;
o require a higher percentage of shareholders than would otherwise be
required to amend, alter, change or repeal certain provisions of our
articles of incorporation and bylaws;
o authorize the issuance of preferred stock with any voting rights,
dividend rights, conversion privileges, redemption rights and
liquidation rights, and other rights, preferences, privileges, powers,
qualifications, limitations or restrictions as may be specified by our
board of directors, without shareholder approval; and
o restrict specified types of "business combinations" and "control share
acquisitions," as well as regulate some tender offers.
These provisions may:
o have the effect of delaying, deferring or preventing a change in our
control despite possible benefits to our shareholders;
o discourage bids at a premium over the market price of our common
stock; and
o harm the market price of our common stock and the voting and other
rights of our shareholders.
17
OUR STOCK PRICE IS HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY.
The market price of our common stock has been highly volatile, ranging from a
high of $35.14 per share to a low of $14.11 during the 12 months ended June 13,
2002. The price could continue to be subject to wide fluctuations due to factors
including:
o actual or anticipated variations in our operating results;
o announcements of technological innovations or new services or
contracts by us or our competitors;
o developments with respect to patents, copyrights or proprietary
rights;
o changes in financial estimates by securities analysts;
o conditions and trends in outsourcing of unemployment cost management,
human resources, benefits and payroll services; and
o general economic and market conditions.
The stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
companies. Often these fluctuations have been unrelated or disproportionate to
the operating performances of those companies.
Broad market and industry factors may significantly affect the market price of
our common stock, regardless of our actual operating performance. Declines in
the market price of our common stock could also harm employee morale and
retention, our access to capital and other aspects of our business.
BECAUSE OUR SHARE PRICE IS VOLATILE, WE MAY BE THE TARGET OF SECURITIES
LITIGATION, WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND.
In the past, following periods of volatility in the market price of a company's
securities, shareholders have often instituted class action securities
litigation against those companies. We are currently defending against such a
claim. See "Item 3 - Legal Proceedings." Such litigation could result in
substantial costs and a diversion of management attention and resources, which
would significantly harm our profitability and reputation. These market
fluctuations, as well as general economic, political and market conditions such
as recessions or international currency fluctuations, may adversely affect the
market price of our common stock.
ITEM 2. PROPERTIES
We currently occupy approximately 280,000 square feet of office space in 47
buildings across the country. All of our facilities are leased and are utilized
primarily for general administrative, data processing and sales purposes. We
believe our facilities have been generally well maintained, are in good
operating condition and are adequate for our current requirements. Additionally,
we have approximately 27 sales employees working out of their homes. The
following table includes descriptions of our significant facilities.
ADDRESS CITY AND STATE FACILITY TYPE SQUARE FOOTAGE
------- -------------- ------------- --------------
1850 Borman Court St. Louis, MO Corporate Headquarters - Executive, Administrative, 40,000
Data Processing and Sales
3455 Mill Run Drive Hilliard, OH Administrative, Data Processing and Sales 46,000
(Unemployment Cost Management Services segment)
10101 Woodfield St. Louis, MO Administrative, Data Processing and Sales 80,000
(Unemployment Cost Management Services segment)
11828 Borman Drive St. Louis, MO Administrative and Data Processing 23,000
(Payroll-Based Services and Software segment)
1195 Corporate Lake St. Louis, MO Administrative and Data Processing 15,000
(Unemployment Cost Management Services segment)
18
ITEM 3. LEGAL PROCEEDINGS
On December 26, 2001, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of Missouri (Civil Action No.
4:01CV02014DJS) by Matt L. Brody, an alleged shareholder of the Company, against
the Company, certain of its executive officers and directors (William W.
Canfield, Craig N. Cohen and Richard F. Ford) (collectively, the "Individual
Defendants"), and two underwriters (Stifel, Nicolaus & Company, Incorporated and
A.G. Edwards & Sons, Inc.) in the Company's August 2001 secondary common stock
offering ("Secondary Offering"). The case purportedly is brought on behalf of
all persons who purchased or otherwise acquired shares of the Company's common
stock between July 18, 2001 and October 1, 2001 ("Putative Class Period"),
including as part of the Secondary Offering. The complaint alleges, among other
things, that certain statements in the registration statement and prospectus for
the Secondary Offering, as well as other statements made by the Company and/or
the Individual Defendants during the Putative Class Period, were materially
false and misleading because they allegedly did not properly account for certain
software and inventory, did not reflect certain write-offs, and did not
accurately disclose certain business prospects. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against the Company and the Individual Defendants,
violations of Section 11 of the Securities Act of 1933 against the Company, the
Individual Defendants and the underwriters, and violation of Section 15 of the
Securities Act of 1933 against Mr. Canfield.
Three additional purported class action lawsuits were filed in the same court,
against the same defendants and making substantially the same allegations: on
January 8, 2002 by Donald Metzger (Civil Action No. 4:02CV00031DJS); on January
9, 2002 by Anna Goodman (Civil Action No. 4:02CV00033DJS); and on January 30,
2002 by Al Hinton (Civil Action No. 4:02CV00168DJS) each of whom allegedly were
shareholders of the Company during the Putative Class Period. On February 15,
2002, these three lawsuits were consolidated with and into the Brody lawsuit
(Civil Action No. 4:01CV02014DJS) for all purposes, which currently is pending
before the Honorable Donald J. Stohr, United States District Judge.
The consolidated litigation seeks, among other things, an award of unspecified
money damages, including interest, for all losses and injuries allegedly
suffered by the putative class members as a result of the defendants' alleged
conduct and unspecified equitable/injunctive relief as the Court deems proper.
On May 20, 2002, the Company and the Individual Defendants filed a motion to
dismiss the lawsuits, and the underwriter defendants filed a separate motion to
dismiss. The plaintiffs filed their opposition to the motions to dismiss on June
19, 2002. The defendants' reply memoranda in support of the motions to dismiss
are due on July 9, 2002.
The Company believes the plaintiffs' claims are without merit and intends to
defend vigorously against them. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of the
litigation. An unfavorable outcome could have a material adverse impact on the
Company's business, financial condition and results of operations.
Additionally, we are required to indemnify each of the Individual Defendants, as
officers and/or directors of the Company, in connection with the above matters,
provided they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the Company. Stifel, Nicolaus &
Company and A.G. Edwards & Sons, Inc., have made demand on the Company to
indemnify them in connection with these matters.
The Company has provided notice of the consolidated litigation to its directors
and officers liability insurance carriers.
We are a defendant from time to time in routine lawsuits incidental to our
business, which based on information currently available, we believe,
individually or in the aggregate, will not have a material adverse effect upon
us.
The Securities and Exchange Commission is conducting an investigation into our
August 2001 secondary offering of common stock and second fiscal quarter 2001
financial results. We are cooperating fully with the investigation, and have
voluntarily produced documents requested by the Commission and have made our
employees available for interviews or testimony upon request. We believe that
there is no basis for any action by the Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock trades on the Nasdaq National Market under the symbol "TALX."
The following table sets forth the high and low sales prices of our common stock
(as adjusted for stock dividends and splits) as reported by the Nasdaq National
Market for each of the quarters since the beginning of fiscal 2001 through the
end of fiscal 2002.
HIGH LOW
---- ---
FISCAL 2001:
First quarter................................... $ 11.55 $ 6.95
Second quarter.................................. 15.76 8.21
Third quarter................................... 25.50 11.56
Fourth quarter.................................. 29.65 16.80
FISCAL 2002:
First quarter................................... $ 37.85 $ 19.70
Second quarter.................................. 35.14 17.02
Third quarter................................... 25.36 14.11
Fourth quarter.................................. 25.60 15.50
On June 3, 2002, the last reported sale price on the Nasdaq National Market for
our common stock was $17.61 per share. As of June 3, 2002, there were
approximately 136 holders of record of our common stock.
During fiscal 2001, we began paying dividends on our common stock on a quarterly
basis. The following table sets forth dividends declared per share of common
stock for the periods indicated:
DIVIDEND
--------
FISCAL 2001:
Second Quarter......................................... $ 0.02
Third Quarter.......................................... $ 0.03
Fourth Quarter......................................... $ 0.03
FISCAL 2002:
First Quarter.......................................... $ 0.03
Second Quarter......................................... $ 0.03
Third Quarter.......................................... $ 0.03
Fourth Quarter......................................... $ 0.03
Any future determination to pay dividends will be at the discretion of our board
of directors and will depend upon our earnings, capital requirements and
operating and financial condition and such other factors as the board may deem
relevant.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our selected historical financial data and certain
additional information. You should read carefully the financial statements
included in this Form 10-K, including the notes to the financial statements, in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The selected data in this section is not intended to
replace the financial statements.
We derived the financial data presented below for, and as of the end of, each of
the years in the five-year period ended March 31, 2002 from our consolidated
financial statements and the related notes, which have been audited by KPMG LLP,
independent accountants. The financial information set forth below reflects the
classification of the database and document services businesses as discontinued
operations.
YEARS ENDED MARCH 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
The Work Number services.......................... $ 4,270 $ 9,109 $ 12,328 $ 19,094 $ 27,412
Unemployment cost management services............. -- -- -- -- 848
Human resources and benefits application services. 2,925 5,126 7,993 10,694 10,797
Customer premises systems......................... 9,886 10,948 10,835 6,882 2,870
Maintenance and support........................... 4,192 4,920 4,876 4,417 3,893
------- -------- -------- -------- --------
Total revenues.................................. 21,273 30,103 36,032 41,087 45,820
------- -------- -------- -------- --------
Cost of revenues:
The Work Number services.......................... 1,807 3,138 3,973 6,179 9,403
Unemployment cost management services............. -- -- -- -- 450
Human resources and benefits application services. 2,010 3,225 4,460 6,956 7,610
Customer premises systems......................... 5,967 7,874 8,388 5,790 2,652
Maintenance and support........................... 1,325 1,545 1,367 1,275 1,028
Inventory write-down.............................. -- -- -- -- 307
------- ------- -------- -------- --------
Total cost of revenues.......................... 11,109 15,782 18,188 20,200 21,450
------- -------- -------- -------- --------
Gross margin......................................... 10,164 14,321 17,844 20,887 24,370
------- -------- -------- -------- --------
Operating expenses:
Selling and marketing............................. 7,952 8,339 7,820 8,542 8,596
General and administrative........................ 3,496 4,853 5,477 5,609 7,612
Restructuring charges............................. -- 496 -- -- 2,627
------- -------- -------- -------- --------
Total operating expenses........................ 11,448 13,688 13,297 14,151 18,835
------- -------- -------- -------- --------
Operating income (loss).............................. (1,284) 633 4,547 6,736 5,535
Other income, net.................................... 158 8 82 562 1,567
Income tax expense (benefit)......................... (416) 239 1,862 2,990 2,612
------- -------- -------- -------- --------
Earnings (loss) from continuing operations........... (710) 402 2,767 4,308 4,490
------- -------- -------- -------- --------
Discontinued operations:
Gain (loss) on operations and disposal of
discontinued operations, net.................. (374) -- 117 37 --
------- -------- -------- -------- --------
Net earnings (loss)............................. $(1,084) $ 402 $ 2,884 $ 4,345 $ 4,490
======= ======== ======== ======== ========
Net earnings (loss) per common share(1):
Basic:
Continuing operations........................... $ (0.07) $ 0.04 $ 0.28 $ 0.42 $ 0.36
Discontinued operations, net.................... (0.04) -- 0.01 -- --
------- -------- -------- -------- --------
Net earnings (loss)........................... $ (0.11) $ 0.04 $ 0.29 $ 0.42 $ 0.36
======= ======== ======== ======== ========
Diluted:
Continuing operations........................... $ (0.07) $ 0.04 $ 0.27 $ 0.41 $ 0.34
Discontinued operations, net.................... (0.04) -- 0.01 -- --
------- -------- -------- -------- --------
Net earnings (loss)........................... $ (0.11) $ 0.04 $ 0.28 $ 0.41 $ 0.34
======= ======== ======== ======== ========
Cash dividends declared per common share............. $ -- $ -- $ -- $ 0.08 $ 0.12
======= ======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic(1).......................................... 9,603,857 9,803,440 10,091,349 10,255,928 12,622,689
Diluted(1)........................................ 9,603,857 10,017,774 10,268,565 10,527,172 13,021,313
21
MARCH 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 2,879 $ 267 $ 6,291 $ 9,725 $ 21,431
Working capital....................................... 9,079 8,316 15,158 16,387 5,932
Net assets of business held for sale.................. 1,157 859 -- -- --
Total assets.......................................... 24,121 24,564 30,133 33,995 179,101
Long-term debt plus capital leases.................... -- -- -- -- 30,152
Shareholders' equity.................................. 19,508 20,095 23,308 26,145 120,507
ADDITIONAL INFORMATION:
Employment records in The Work Number database........ 13,115 18,285 30,298 43,005 60,700
Employment records under contract(2).................. 17,134 25,831 36,089 52,000 70,200
- ----------
(1) Basic and diluted earnings (loss) per share have been computed using the
number of shares of common stock and common stock options and warrants
outstanding. The weighted average number of shares was based on common stock
outstanding for basic earnings (loss) per share and common stock outstanding
and common stock options and warrants for diluted earnings (loss) per share
in periods when such common stock options and warrants are not antidilutive.
(2) Represents aggregate employment records included in The Work Number
database and employment records under contract that have not yet been
converted to the database.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read this discussion together with the financial statements and other
financial information included in this Form 10-K.
OVERVIEW
Our software and services consist of The Work Number services, unemployment cost
management services, human resources and benefits application services, the sale
of customer premises systems, and maintenance and support services related to
those systems. The technologies we use include both interactive web and
interactive voice response.
The Work Number services include:
o The Work Number, our leading employment and income verification
service;
o W-2 eXpress, our suite of W-2 payroll services;
o ePayroll, our suite of payroll self-service applications; and
o FasTime, our automated timesheet collection and approval services.
We derive substantially all our revenues from The Work Number from fees charged
to mortgage lenders and other verifiers for verification of employment history,
including the past three years of income history of participating employers'
current and former employees. We derive additional revenues from ongoing
maintenance fees charged to employers and one-time conversion fees from new
employers. Our revenues from W-2 eXpress and ePayroll represent fees charged to
clients on a monthly fee basis which is based upon the number of employees. We
first introduced W-2 eXpress in fiscal 2000, with no meaningful revenues
generated until the fourth quarter of fiscal 2001. Our first clients began using
ePayroll in our second fiscal quarter of 2002. Our revenues from FasTime include
fees from establishment of the service and fees based on the number of
transactions. Costs of revenues related to The Work Number services consist of
telecommunications services, personnel, equipment and capitalized software
amortization.
As a result of our recent acquisitions, we provide unemployment cost management
services under the name UC eXpress. These services include unemployment
insurance claims processing and unemployment tax planning and management to a
broad range of
22
employers. We charge clients fees on an annual contractual basis, generally
billed monthly or quarterly, pursuant to multi-year contracts. Certain contracts
allow for additional charges if transaction activity exceeds a specified
threshold. Certain unemployment tax planning contracts call for contingent fees
based upon actual tax savings realized. Costs of revenues related to UC eXpress
consist primarily of personnel and equipment.
Our human resources and benefits application services business consists
principally of benefits enrollment services that offer employers and employees a
broad range of automated features. In 2000, we began offering eChoice, our
advanced benefits enrollment service that provides these features in a
standardized package. We maintain a system on our premises that contains a
customer database and receives incoming requests for access to the information.
Revenues from human resources and benefits application services include fees
derived from establishment of the service and fees based on the number of
employees or transactions. Costs of revenues related to our human resources and
benefits application services consist of personnel, equipment,
telecommunications services and capitalized software amortization.
Our customer premises systems business provides interactive web, interactive
voice response and computer telephony integration software and services that
enable an organization's users to access, input and update information without
human assistance. We recognize revenue from hardware sales and software licenses
upon shipment. Revenues from implementation services relating to our customer
premises systems are recognized by the contract method of accounting using
percentage of completion for larger, more complex systems and the completed
contract method for smaller systems. With the market's acceptance of our
application services delivery method, in fiscal 1998 we began to de-emphasize
sales of customer premises systems and in fiscal 2000 discontinued sales to new
clients. However, we continue to provide maintenance and support services with
respect to installed customer premises systems. Revenues from maintenance and
support are recognized ratably over the term of the maintenance agreement. Costs
of revenues related to our customer premises systems consist of personnel,
capitalized software amortization and hardware costs of goods sold. Costs of
revenues related to maintenance and support consist primarily of personnel
costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On a periodic basis, we evaluate our estimates, including those
related to revenue recognition, intangible assets, capitalized software and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
We believe that the following critical accounting policies include our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION: Revenues from The Work Number are recognized in the period
that they are earned, from transaction fees charged to users for verifications
of employment history and income, and from monthly maintenance and employer
conversion fees. Revenues from our unemployment cost management services, called
UC eXpress, are recognized in the period that they are earned, evenly over the
life of the contract. Transaction fees are recorded as the services are
provided. Revenue which is contingent upon achieving certain performance
criteria is recognized when those criteria are met. We recognize hardware and
software license revenue upon shipment based on vendor-specific objective
evidence. Application services revenue is recognized as the services are
provided. Revenues for customization services are recognized by the contract
method of accounting using percentage of completion for larger, more complex
systems and the completed contract method for smaller systems. Revenue from
maintenance contracts is deferred and recognized ratably over the maintenance
period. Deferred revenue represents the unearned portion of UC eXpress and
maintenance fees.
INTANGIBLE ASSET VALUATIONS: In connection with the acquisitions of Ti3, Frick
and the GM Unemployment Compensation Business, TALX acquired certain
identifiable intangible assets. These assets were recorded in accordance with
the Financial Accounting Standards Board SFAS No. 141, "Business Combinations".
See "Recently Issued Accounting Pronouncements" for more information about SFAS
No. 141. We have adopted the provisions of SFAS No. 141 related to all three of
our acquisitions during fiscal 2002.
Effective April 2, 2002, we will adopt the Financial Accounting Standards Board
SFAS No. 142, "Goodwill and Other Intangible
23
Assets." SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. Under the
provisions of SFAS No. 142, any impairment loss identified upon adoption of this
standard will be recognized as a cumulative effect of a change in accounting
principle. Goodwill and intangible assets determined to have an indefinite
useful life that are acquired in a purchase business combinations will not be
amortized, but instead tested for impairment on an annual basis.
The acquired identifiable intangible assets of approximately $19.3 million
include software, customer base and covenant not to compete. Software of
$153,000 has an estimated useful life of three years. Customer base acquired in
the Ti3 acquisition of $417,000 have an estimated useful life of ten years and
customer base of $16,487,000 acquired in the Frick and GM Unemployment
Compensation Business acquisitions have an estimated useful life of 15 years.
Customer records of $2,200,000 have an estimated useful life of 20 years. We are
currently in the process of obtaining third-party valuations of identifiable
intangible assets; thus the values ascribed to these assets are subject to
refinement.
CAPITALIZED SOFTWARE: Software development costs are expensed as incurred until
technological feasibility is achieved, after which they are capitalized on a
product-by-product basis. Amortization of capitalized software development costs
is computed using the straight-line method over the remaining estimated economic
life of the product, generally three years. Amortization of capitalized software
development costs starts when the product is available for general release to
clients. All capitalized software assets are reviewed as of each balance sheet
date for impairment. Upon determination of any impairment, the asset is
written-down to the appropriate value in the period that the impairment is
determined.
INCOME TAXES: We record income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. In assessing the
realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not we will realize the benefits of these deductible differences. If management
were to determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See our
consolidated financial statements and notes thereto contained in this Annual
Report on Form 10-K which contain accounting policies and other disclosures
required by generally accepted accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. Under the provisions of SFAS No. 142, any impairment
loss identified upon adoption of this standard is recognized as a cumulative
effect of a change in accounting principle. Any impairment loss incurred
subsequent to initial adoption of SFAS No. 142 is recorded as a charge to
current period earnings. We have adopted the provisions of SFAS No. 141 related
to all three of our acquisitions during fiscal 2002, and will have adopted SFAS
No. 142 effective April 1, 2002. Goodwill and intangible assets determined to
have an indefinite useful life that are acquired in a purchase business
combinations will not be amortized, but instead tested for impairment on an
annual basis. Because we did not have goodwill prior to the Ti3 acquisition, the
impact of implementing SFAS No. 142 will not be significant to the Company.
24
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires businesses to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. We are required to
adopt SFAS No. 143 for our fiscal year beginning April 1, 2003. We are currently
assessing the impact, if any, of SFAS No. 143 on our financial position and
results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supercedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 144 addresses the accounting and reporting for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS No. 144
is effective April 1, 2002 for the Company. We are reviewing the provisions of
SFAS No. 144 and do not anticipate that the adoption will have a material impact
on our financial condition or results of operations.
RESULTS OF OPERATIONS
The following tables set forth (1) revenues and gross margin, (2) the gross
margin percentage by revenue category, and (3) certain items from our statement
of operations as a percentage of revenues for the periods indicated:
YEARS ENDED MARCH 31,
-----------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Revenues:
The Work Number services............................................ $ 12,328 $ 19,094 $ 27,412
Unemployment cost management services............................... -- -- 848
Human resources and benefits application services................... 7,993 10,694 10,797
Customer premises systems........................................... 10,835 6,882 2,870
Maintenance and support 4,876 4,417 3,893
-------- -------- ----------
Total revenues.................................................... $ 36,032 $ 41,087 $ 45,820
-------- -------- ----------
Gross margin:
The Work Number services............................................ $ 8,355 $ 12,915 $ 18,009
Unemployment cost management services............................... -- -- 398
Human resources and benefits application services................... 3,533 3,738 3,187
Customer premises systems........................................... 2,447 1,092 218
Maintenance and support 3,509 3,142 2,865
Inventory write-down ............................................. -- -- (307)
-------- -------- -----------
Total gross margin................................................ $ 17,844 $ 20,887 $ 24,370
-------- -------- ----------
YEARS ENDED MARCH 31,
-----------------------------------------
2000 2001 2002
---------- ---------- ----------
Gross margin percentage by revenue category:
The Work Number services............................................ 67.8% 67.6% 65.7%
Unemployment cost management services............................... -- -- 46.9
Human resources and benefits application services................... 44.2 35.0 29.5
Customer premises systems........................................... 22.6 15.9 7.6
Maintenance and support............................................. 72.0 71.1 73.6
25
YEARS ENDED MARCH 31,
-----------------------------------------
2000 2001 2002
---------- ---------- ----------
PERCENTAGE OF TOTAL REVENUES
Revenues:
The Work Number services............................................ 34.2% 46.5% 59.8%
Unemployment cost management services............................... -- -- 1.9
Human resources and benefits application services................... 22.2 26.0 23.5
Customer premises systems........................................... 30.1 16.7 6.3
Maintenance and support............................................. 13.5 10.8 8.5
------ ------ -----
Total revenues.................................................... 100.0 100.0 100.0
Cost of revenues....................................................... 50.5 49.2 46.8
------ ------ -----
Gross margin........................................................... 49.5 50.8 53.2
------ ------ -----
Operating expenses:
Selling and marketing............................................... 21.7 20.8 18.8
General and administrative.......................................... 15.2 13.6 16.6
Restructuring charge................................................ -- -- 5.7
----- ----- -----
Total operating expenses.......................................... 36.9 34.4 41.1
------ ------ -----
Operating income....................................................... 12.6 16.4 12.1
Other income, net...................................................... 0.2 1.4 3.4
------ ------ -----
Earnings from continuing operations before income tax expense.......... 12.8 17.8 15.5
Income tax expense..................................................... 5.1 7.3 5.7
------ ------ -----
Earnings from continuing operations.................................... 7.7 10.5 9.8
Discontinued operations, net........................................... 0.3 0.1 --
------ ------ -----
Net earnings........................................................... 8.0% 10.6% 9.8%
====== ====== =====
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001
Revenues. Total revenues increased 11.5% to $45.8 million in fiscal 2002 from
$41.1 million in fiscal 2001. Revenues from The Work Number services increased
43.6% to $27.4 million in fiscal 2002 from $19.1 million in fiscal 2001, due to
an increase in the number of employment records in the database and related
transaction volume, new clients gained from continued marketing to employers and
verifiers, the inclusion of revenues from our acquisition of Ti3 in the second
quarter of fiscal 2002 and, to a lesser extent, an increase in pricing during
the year. Revenues from unemployment cost management services for fiscal 2002
includes five days of revenue from our March 27, 2002 acquisitions of The Frick
Company and the unemployment cost management business of GatesMcDonald. Revenues
from human resources and benefits application services increased 1.0% to $10.8
million in fiscal 2002 from $10.7 million in fiscal 2001, due to the addition of
new clients seeking to outsource their non-core functions, offset by client
attrition. This growth was less than planned, due the poor economic conditions
experienced during the second and third quarters of fiscal 2002. Revenues from
customer premises systems decreased 58.3% to $2.9 million in fiscal 2002 from
$6.9 million in fiscal 2001. This decrease is due to a shift in our focus away
from selling in-house systems to our human resources and benefits application
services. Revenues from maintenance and support related to the customer premises
systems decreased 11.9% to $3.9 million in fiscal 2002 from $4.4 million in
fiscal 2001, reflecting the support provided to a shrinking installed base as we
shifted our strategy toward providing similar solutions through application
services. We anticipate revenues from customer premises systems and maintenance
and support will continue to decrease from current year results as we
discontinue sales to new clients and continue to emphasize The Work Number
services, unemployment cost management services and human resources and benefits
application services.
Gross Margin. Gross margin increased 16.7% to $24.4 million in fiscal 2002 from
$20.9 million in fiscal 2001. As a percentage of total revenues, gross margin
increased to 53.2% in fiscal 2002 from 50.8% in fiscal 2001. The Work Number
services gross margin increased 39.4% to $18.0 million in fiscal 2002 from $12.9
million in fiscal 2001, but as a percentage of corresponding revenue, decreased
to 65.7% in fiscal 2002 from 67.6% in fiscal 2001. The increase in gross margin
is due primarily to revenue increases. The gross margin percentage decreased
slightly due to the addition of Ti3, which has a slightly lower gross margin
than our traditional The Work Number services. Also, costs related to personnel
and infrastructure increased slightly to accommodate possible future electronic
payroll services clients. Human resources and benefits application services
gross margin decreased 14.7% to $3.2 million, or 29.5% of corresponding revenue,
in fiscal 2002 from $3.7 million, or 35.0% of corresponding revenue, in fiscal
2001. This decrease in gross margin and gross margin percentage is principally
due to a higher level of fixed personnel costs
26
in place for additional revenue growth that did not occur because of the poor
economic conditions experienced in the second and third quarters of fiscal 2002.
Customer premises systems gross margin decreased 80.0% to $218,000, or 7.6% of
corresponding revenue, in fiscal 2002 from $1.1 million, or 15.9% of
corresponding revenue, in fiscal 2001, as revenues declined. The decrease in
gross margin percentage is due to certain fixed costs that remained as we
shifted our business focus to The Work Number services and human resources and
benefits application services. Maintenance and support gross margin decreased
8.8% to $2.9 million, or 73.6% of corresponding revenue, in fiscal 2002, from
$3.1 million, or 71.1% of corresponding revenue, in fiscal 2001 due to lower
revenues caused by a shrinking client base. The gross margin percentage
increased due to a lower level of third-party hardware support costs and
improved leveraging of personnel costs.
Selling and Marketing Expenses. Selling and marketing expenses increased 0.6% to
$8.6 million in fiscal 2002 from $8.5 million in fiscal 2001. As a percentage of
revenues, such expenses decreased to 18.8% in fiscal 2002 from 20.8% in fiscal
2001. The decrease in percentage of revenues is due to the greater rate of
increase in our revenues as compared to personnel and related costs.
Additionally, we anticipate these costs will generally decrease as a percentage
of revenues as our revenue mix shifts more to The Work Number Services which
have lower sales maintenance costs.
General and Administrative Expenses. General and administrative expenses
increased 35.7% to $7.6 million in fiscal 2002 from $5.6 million in fiscal 2001.
The increase in such expenses reflected the increased infrastructure costs of a
growing business and workforce, including the inclusion of costs related to our
acquisitions during fiscal 2002. As a percentage of revenues, such expenses
increased to 16.6% in fiscal 2002 from 13.6% in fiscal 2001. The increase in
general and administrative expenses as a percentage of revenues is due to
revenue growth rates, particularly in human resources and benefits application
services, that were lower than anticipated.
Restructuring and Inventory Write-Down. During the second quarter of fiscal
2002, we reorganized our sales and delivery operations and refocused our product
lines related to our human resources and benefit applications and customer
premises systems businesses. In conjunction with the reorganization, we reduced
our workforce by approximately 17%, closed certain regional sales offices and
wrote-down hardware inventory and capitalized software. As a result of these
actions, we incurred restructuring charges of $1.9 million associated with the
write-off of capitalized software, $349,000 related to employee severance costs
and $337,000 related to office closing costs. These items are reflected in the
line item "restructuring charge" on the statement of earnings and $240,000 is
reflected in accrued expenses on the balance sheet. Additionally, we incurred a
charge of $307,000 related to the write-down of certain hardware inventory
items. This charge is reflected as a separate component of cost of goods sold on
the statement of earnings.
Other Income, Net. Other income increased to $1.6 million in fiscal 2002 from
$562,000 in fiscal 2001, due to interest income earned on a higher level of
invested funds. Invested funds increased due to the receipt of the proceeds from
our secondary common stock offering during the second quarter of fiscal 2002 and
cash flow from operations
Income Tax Expense. Our effective income tax rate was 36.8% in fiscal 2002 and
41.0% in fiscal 2001. The decrease is due to tax-exempt interest earned on state
and federal tax free municipal securities during the last eight months of fiscal
2002, and to a lesser extent, a lower effective state income tax rate. As we
continue to move our business to an application services model, we have reduced
the amount of taxes paid on hardware and software sales in states with higher
income tax rates.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
Revenues. Total revenues increased 14.0% to $41.1 million in fiscal 2001 from
$36.0 million in fiscal 2000. Revenues from The Work Number services increased
54.9% to $19.1 million in fiscal 2001 from $12.3 million in fiscal 2000, due to
an increase in the number of employment records in the database and related
transaction volume, new clients gained from continued marketing to employers and
verifiers and, to a lesser extent, an increase in pricing during the year.
Revenues from human resources and benefits application services increased 33.8%
to $10.7 million in fiscal 2001 from $8.0 million in fiscal 2000, due to the
addition of new clients seeking to outsource their non-core functions and to
some extent our introduction in April 2000 of eChoice, our advanced benefits
enrollment service. Revenues from customer premises systems decreased 36.5% to
$6.9 million in fiscal 2001 from $10.8 million in fiscal 2000. This decrease was
due to a shift in both our focus and the market from purchasing in-house systems
to utilizing our human resources and benefits application services. Revenues
from maintenance and support related to the customer premises systems decreased
9.4% to $4.4 million in fiscal 2001 from $4.9 million in fiscal 2000, reflecting
the support provided to a shrinking installed base as we shifted our strategy
toward providing similar solutions through application services. We anticipated
revenues from customer premises systems and maintenance and support would
continue to decrease from current year results as we
27
discontinue sales to new clients and continue to emphasize The Work Number
services and human resources and benefits application services.
Gross Margin. Gross margin increased 17.1% to $20.9 million in fiscal 2001 from
$17.8 million in fiscal 2000. As a percentage of total revenues, gross margin
increased to 50.8% in fiscal 2001 from 49.5% in fiscal 2000. The Work Number
services gross margin increased 54.6% to $12.9 million, or 67.6% of
corresponding revenue, in fiscal 2001 from $8.4 million, or 67.8% of
corresponding revenue in fiscal 2000. The increase in gross margin was due
primarily to revenue increases. The gross margin percentage was maintained as
costs related to personnel and infrastructure increased in conjunction with
increased revenue during fiscal 2001. Human resources and benefits application
services gross margin increased 5.8% to $3.7 million in fiscal 2001 from $3.5
million in fiscal 2000, but as a percentage of corresponding revenue, decreased
to 35.0% in fiscal 2001 from 44.2% in fiscal 2000. This decrease in gross margin
percentage is principally due to costs associated with transitioning personnel
from our customer premises systems business in anticipation of possible future
growth in human resources and benefits application services. Customer premises
systems gross margin decreased 55.4% to $1.1 million, or 15.9% of corresponding
revenue, in fiscal 2001 from $2.4 million, or 22.6% of corresponding revenue, in
fiscal 2000, as revenues declined. The decrease in gross margin percentage is
due to certain fixed costs that remained as we shifted our business focus to The
Work Number services and human resources and benefits application services.
Maintenance and support gross margin decreased 10.5% to $3.1 million, or 71.1%
of corresponding revenue, in fiscal 2001, from $3.5 million, or 72.0% of
corresponding revenue, in fiscal 2000 due to lower revenues caused by a
shrinking client base and slightly higher personnel costs.
Selling and Marketing Expenses. Selling and marketing expenses increased 9.2% to
$8.5 million in fiscal 2001 from $7.8 million in fiscal 2000. The increase in
expense reflected the expansion of our sales and marketing efforts. As a
percentage of revenues, such expenses decreased to 20.8% in fiscal 2001 from
21.7% in fiscal 2000. The decrease in percentage of revenues was due to the
greater rate of increase in our revenues as compared to personnel and related
costs.
General and Administrative Expenses. General and administrative expenses
increased 2.4% to $5.6 million in fiscal 2001 from $5.5 million in fiscal 2000.
The increase in such expenses reflected the increased infrastructure costs of a
growing business and workforce. As a percentage of revenues, such expenses
decreased to 13.6% in fiscal 2001 from 15.2% in fiscal 2000. The decrease in
general and administrative expenses as a percentage of revenues was due to the
greater operating efficiencies resulting from higher revenues.
Other Income, Net. Other income increased to $562,000 in fiscal 2001 from
$82,000 in fiscal 2000, due to interest income earned on a higher level of
invested funds.
Income Tax Expense. Our effective income tax rate was 41.0% in fiscal 2001 and
40.2% in fiscal 2000. The increase in effective tax rate was due to higher state
tax rates and the expiration of certain tax credit carryforwards.
DISCONTINUED OPERATIONS
In August 1996, we determined to divest our database and document services
businesses and, accordingly, reflected the results of operations of such
businesses as discontinued operations. A provision of $350,000 was made as of
June 30, 1996, to reflect the anticipated loss from operations until the time of
disposal. On January 31, 1997, we sold substantially all of the assets of the
document services business to Sterling Direct, Inc., the largest customer of the
division. The sales price, after giving effect to the post-closing adjustments,
was $1,241,000. The net assets sold totaled approximately $566,000. As of March
31, 1997 and 1998, we provided additional provisions for loss, net of tax, in
the amount of $550,000 and $374,000, respectively.
Effective March 31, 2000, we sold substantially all of the assets, net of
liabilities, of the database services business to WPZ Holdings, Inc., the parent
company of one of the division's largest customers. The sales price was
$1,273,000. We realized pre-tax and after-tax gains of $187,000 and $117,000,
respectively.
During the quarter ended September 30, 2000, we concluded all transition-related
activity for the database services business. Completing this transition ahead of
schedule resulted in a savings of $61,000 of the transition reserve. Therefore,
we realized pre-tax and after-tax gains of $61,000 and $37,000, respectively.
28
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth (1) specified unaudited statement of operations
data for each of the four quarters in fiscal 2001 and 2002, (2) the gross margin
percentage for each of our revenue categories, and (3) operating data expressed
as a percentage of our total revenues. The unaudited financial statements have
been prepared on the same basis as the audited financial statements contained
herein and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information when read in conjunction with our financial statements and related
notes included elsewhere in this Form 10-K. We believe that quarter-to-quarter
comparisons of our financial results should not necessarily be relied upon as an
indication of future performance.
QUARTERS ENDED
------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
2000 2000 2000 2001 2001 2001 2001 2002
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
The Work Number services........... $4,132 $ 4,531 $ 4,635 $ 5,796 $ 6,072 $6,666 $7,186 $7,488
Unemployment cost management
services........................... -- -- -- -- -- -- -- 848
Human resources and benefits
application services............... 2,061 2,806 3,490 2,338 2,580 2,924 3,416 1,878
Customer premises systems.......... 2,127 2,347 1,558 849 1,030 978 604 257
Maintenance and support............ 1,142 1,113 1,070 1,091 988 978 978 949
------ -------- -------- -------- -------- ------- ------- -------
Total revenues................... 9,462 10,797 10,753 10,074 10,670 11,546 12,184 11,420
------ -------- -------- -------- -------- ------- ------- -------
Gross margin:
The Work Number services........... 2,841 2,991 3,183 3,900 4,188 4,198 4,830 4,793
Unemployment cost management
services........................... -- -- -- -- -- -- -- 398
Human resources and benefits
application services............... 756 885 1,481 618 727 936 1,130 394
Customer premises systems.......... 177 906 489 (482) (63) 415 179 (313)
Maintenance and support............ 802 778 751 810 677 705 751 732
Inventory write-down............... -- -- -- -- -- (307) -- --
------- -------- -------- -------- -------- -------- ------- -------
Total gross margin............... 4,576 5,560 5,904 4,846 5,529 5,947 6,890 6,004
------ -------- -------- -------- -------- ------- ------- -------
Operating expenses:
Selling and marketing.............. 2,055 2,144 2,249 2,094 2,260 2,447 2,007 1,882
General and administrative......... 1,368 1,500 1,566 1,175 1,493 2,029 1,992 2,099
Restructuring charge............... -- -- -- -- -- 2,627 -- --
------- -------- -------- -------- -------- ------- ------- -------
Total operating expenses......... 3,423 3,644 3,815 3,269 3,753 7,103 3,999 3,981
------ -------- -------- -------- -------- ------- ------- -------
Operating income...................... 1,153 1,916 2,089 1,577 1,776 (1,156) 2,891 2,023
====== ======== ======== ======== ======== ======== ======= =======
Gain from discontinued operations, net -- 36 -- -- -- -- -- --
====== ======== ======== ======== ======== ======= ======= =======
Net earnings.......................... $ 741 $ 1,248 $ 1,321 $ 1,035 $ 1,149 $ (422) $ 2,210 $ 1,552
====== ======== ======== ======== ======== ======== ======= =======
Basic and diluted earnings per share:
Earnings from continuing operations $ 0.07 $ 0.11 $ 0.13 $ 0.10 $ 0.11 $ (0.03) $ 0.16 $ 0.11
Gain from discontinued operations,
net................................ -- 0.01 -- -- -- -- -- --
------ -------- -------- -------- -------- ------- ------- -------
Net earnings..................... $ 0.07 $ 0.12 $ 0.13 $ 0.10 $ 0.11 $ (0.03) $ 0.16 $ 0.11
====== ======== ======== ======== ======== ======== ======= =======
QUARTERS ENDED
------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
2000 2000 2000 2001 2001 2001 2001 2002
-------- --------- -------- --------- -------- --------- -------- ---------
Gross margin percentage by revenue
category:
The Work Number services............. 68.8% 66.0% 68.7% 67.3% 69.0% 63.0% 67.2% 64.0%
Unemployment cost management
services........................ -- -- -- -- -- -- -- 46.9
Human resources and benefits
application services............ 36.7 31.5 42.4 26.4 28.2 32.0 33.1 21.0
Customer premises systems............ 8.3 38.6 31.4 (56.8) (6.1) 42.4 29.6 (121.8)
Maintenance and support.............. 70.2 69.9 70.2 74.2 68.5 72.1 76.8 77.1
29
QUARTERS ENDED
------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
2000 2000 2000 2001 2001 2001 2001 2002
-------- --------- -------- --------- -------- --------- -------- ---------
PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services........... 43.7% 42.0% 43.1% 57.5% 56.9% 57.7% 59.0% 65.6%
Unemployment cost management
services....................... -- -- -- -- -- -- -- 7.4
Human resources and benefits
application services........... 21.8 26.0 32.5 23.3 24.2 25.3 28.0 16.4
Customer premises systems.......... 22.4 21.7 14.4 8.4 9.6 8.5 5.0 2.3
Maintenance and support............ 12.1 10.3 10.0 10.8 9.3 8.5 8.0 8.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues...................... 51.6 48.5 45.1 51.9 48.2 48.5 43.5 47.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin.......................... 48.4 51.5 54.9 48.1 51.8 51.5 56.5 52.6
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling and marketing.............. 21.7 19.9 20.9 20.8 21.2 21.2 16.5 16.5
General and administrative......... 14.5 13.9 14.6 11.6 14.0 17.5 16.3 18.4
Restructuring charge............... -- -- -- -- -- 22.8 -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses......... 36.2 33.8 35.5 32.4 35.2 61.5 32.8 34.9
----- ----- ----- ----- ----- ----- ----- -----
Operating income...................... 12.2 17.7 19.4 15.7 16.6 (10.0) 23.7 17.7
===== ===== ===== ===== ===== ===== ===== =====
Gain from discontinued operations, net -- 0.3 -- -- -- -- -- --
===== ===== ===== ===== ===== ===== ===== =====
Net earnings.......................... 7.8% 11.5% 12.3% 10.3% 10.8% (3.7)% 18.1% 13.6%
===== ===== ===== ===== ===== ===== ===== =====
Our revenues, margins and operating results have fluctuated in the past, and are
likely to continue to fluctuate in the future, on an annual and quarterly basis,
as a result of a number of factors, most of which are outside of our control, as
discussed in "Risk Factors--Our quarterly and annual operating results may
fluctuate significantly, which could cause our stock price to decline
significantly."
Revenues from human resources and benefits application services are seasonally
higher during the second and third quarters of our fiscal year due to the nature
of the services being provided. Our second and third fiscal quarters correspond
to the third and fourth calendar quarters. We believe many of our clients permit
employees to update their benefit choices only annually, in most cases during
the last calendar quarter. Revenues generated from our W-2 eXpress service are
particularly affected by seasonality and are principally earned in our fourth
fiscal quarter. Our revenues have increased on a quarter-by-quarter comparison
in fiscal 2002 over fiscal 2001 due to the addition of new clients seeking to
outsource non-core functions.
Revenues from our Ti3 subsidiary have historically been reported within our
human resources and benefits application services revenue line since their
acquisition date of July, 2002. We have reclassified this revenue into The Work
Number Services revenue line retroactively to July, 2002 in the above table, and
in our consolidated statement of earnings included in this Annual Report on Form
10-K.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed our operations through cash flows from
operations.
On August 8, 2001 we completed a secondary stock offering of 2,950,000 shares of
our common stock, including 200,000 shares of a selling shareholder, resulting
in gross proceeds to the Company of $83.1 million. Additionally, we incurred
$644,000 of costs related to the transaction which were offset against the
proceeds. The share amounts discussed above do not include the effect of the 10%
stock dividend declared on September 6, 2001.
Our working capital was $16.4 million at March 31, 2001 and $5.9 million at
March 31, 2002. Total working capital decreased in fiscal 2002 due principally
to utilizing cash for our March 27, 2002 acquisitions.
Our accounts receivable increased from $7.4 million at March 31, 2001 to $12.5
million at March 31, 2002. The increase was due to the addition of accounts
receivable related to our March 27, 2002 acquisitions.
Our capital expenditures, principally purchases of computer equipment, were $1.6
million in fiscal 2002. At March 31, 2002, we had no significant capital
spending or purchase commitments other than normal purchase commitments and
commitments under facilities and operating leases, but would expect capital
expenditures to increase during the next two fiscal years, as we integrate the
operations of our acquisitions.
30
In November 2000, our board of directors authorized us to repurchase up to
400,000 shares of our stock in the open market, or through privately negotiated
transactions over the following two-year period. In November 2001, this plan was
extended to November 2004, and the number of shares was increased to one
million. We repurchased 287,500 shares for $5.5 million during fiscal 2002.
Cumulative shares repurchased amount to 297,500. Share amounts are reported on a
pre-dividend basis. Except for the 120,951 shares remaining in the treasury at
March 31, 2002, all shares repurchased have been reissued in connection with
employee stock option exercises and employee stock purchase plan purchases.
During fiscal 2002, we paid quarterly dividends on our common stock, declaring a
total of $0.03 in dividends during each quarter of fiscal 2002.
We believe that our working capital, together with our anticipated cash flows
from operations should be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months.
In connection with the acquisitions of the GM Unemployment Compensation Business
and Frick, on March 27, 2002, pursuant to a loan agreement dated as of March 27,
2002, (the "Loan Agreement"), we obtained secured financing consisting of a
$30,000,000 term loan (the "Term Loan") and a $10,000,000 revolving credit
facility (the "Revolving Credit Facility") from LaSalle Bank National
Association, as administrative agent and lender, and Southwest Bank of St.
Louis, as lender, and any other lenders that may become party to the Loan
Agreement (collectively, the "Lenders"). We used the proceeds of the Term Loan
to pay a portion of the purchase price for the acquisitions; however, we have
not borrowed under the Revolving Credit Facility. We must repay principal of the
Term Loan in quarterly installments, with the final installment due on February
27, 2005. In addition, principal payments are required out of excess cash flow.
The Revolving Credit Facility also matures on February 27, 2005.
The Term Loan and advances under the Revolving Credit Facility bear interest at
rates we select under the terms of the Loan Agreement, including a base rate or
eurodollar rate, plus an applicable margin. Until March 27, 2003, eurodollar
rate loans will bear interest at the applicable eurodollar rate plus 2.25% and
base rate loans will bear interest at the applicable base rate plus 0.00%. After
that, the applicable margin for eurodollar rate loans will vary from 2.00% to
2.25%, and the applicable margin for base rate loans will remain at 0.00%, in
each case based upon our ratio of total indebtedness to EBITDA. We may make
prepayments under the Term Loan during the first twelve months after the closing
date without penalty, except that we will be obligated to pay a $600,000
prepayment premium under certain limited circumstances. In addition, if William
W. Canfield ceases serving as our chief executive officer during the first 24
months after closing, and we do not retain a substitute satisfactory to the
Lenders within 120 days, then we are required to repay all outstanding loans,
including both the Term Loan and Revolving Credit Facility.
The Loan Agreement is secured by security interests in substantially all our
assets and the assets of our three subsidiaries (Ti3, Garcia and Frick), the
guarantees of our three subsidiaries, and a pledge of the stock of each of those
subsidiaries.
The Loan Agreement includes certain covenants, including, without limitation,
restrictions on the use of proceeds of the Term Loan and loans made under the
Revolving Credit Facility. The Term Loan was to be used solely to pay a portion
of the purchase price for the acquisitions of the GM Unemployment Compensation
Business and Frick. The proceeds of loans made under the Revolving Credit
Facility may be used solely for working capital, permitted capital expenditures,
as the source for payment of our obligations with respect to certain existing
letters of credit, to pay the transaction cost of the Loan Agreement, and to
finance certain permitted acquisitions. The Loan Agreement also requires
compliance with certain financial covenants based on our minimum net worth,
minimum EBITDA, its ratio of total indebtedness to EBITDA and its ratio of
EBITDA to fixed charges. The Loan Agreement further requires compliance with
certain operating covenants which limit, among other things, the incurrence of
additional indebtedness by us and our subsidiaries, the amount of capital
expenditures to be made by us and our subsidiaries, sales of assets and mergers
and dissolutions, and impose restrictions on distributions to shareholders,
change of control of TALX, investments, acquisitions and liens.
31
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed above under Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources,
our Term Loan and advances under our Revolving Credit Facility bear interest at
rates we select under the terms of the Loan Agreement, including a base rate or
eurodollar rate, plus an applicable margin. Until March 27, 2003, eurodollar
rate loans will bear interest at the applicable eurodollar rate plus 2.25% and
base rate loans will bear interest at the applicable base rate plus 0.00%. After
that, the applicable margin for eurodollar rate loans will vary from 2.00% to
2.25%, and the applicable margin for base rate loans will remain at 0.00%, in
each case based upon our ratio of total indebtedness to EBITDA.
As of March 31, 2002, we had $30 million principal outstanding on our term loan.
On an annual basis, a 100 basis point change in interest rates would result in
an approximate $300,000 change to our annual interest expense.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
TALX CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:
Report of KPMG LLP, Independent Auditors..................................................... 35
Consolidated Balance Sheets as of March 31, 2001 and 2002.................................... 36
Consolidated Statements of Earnings for the years ended March 31, 2000, 2001 and 2002........ 37
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years
ended March 31, 2000, 2001 and 2002.......................................................... 38
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002...... 40
Notes to Consolidated Financial Statements................................................... 41
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
TALX Corporation:
We have audited the accompanying consolidated balance sheets of TALX Corporation
and subsidiaries as of March 31, 2001 and 2002, and the related consolidated
statements of earnings, shareholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended March 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of TALX Corporation and
subsidiaries as of March 31, 2001 and 2002, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
St. Louis, Missouri
April 24, 2002
34
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
MARCH 31,
--------------------------
2001 2002
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 5,167 $ 21,431
Short-term investments................................................................ 4,558 --
Accounts receivable, net.............................................................. 7,407 12,469
Inventories........................................................................... 627 104
Work in progress, less progress billings.............................................. 2,905 2,595
Prepaid expenses and other current assets............................................. 2,313 2,917
Deferred tax assets, net.............................................................. 159 70
---------- ----------
Total current assets................................................................ 23,136 39,586
Property and equipment, net.............................................................. 5,160 11,357
Capitalized software development costs, net of amortization
of $5,620 in 2001 and $966 in 2002.................................................... 4,007 3,262
Goodwill................................................................................. -- 102,564
Other intangibles, net................................................................... -- 19,174
Other assets............................................................................. 1,692 3,158
---------- ----------
$ 33,995 $ 179,101
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations...................................... $ -- $ 156
Current portion of long term debt..................................................... -- 8,000
Accounts payable...................................................................... 495 1,200
Accrued expenses and other liabilities................................................ 4,670 20,455
Dividends payable..................................................................... 282 413
Income taxes payable.................................................................. 24 814
Progress billings in excess of work in progress....................................... 403 377
Deferred revenue...................................................................... 875 2,239
---------- ----------
Total current liabilities........................................................... 6,749 33,654
Deferred tax liabilities, net............................................................ 1,101 371
Capitalized lease obligations, less current portion...................................... -- 152
Long term debt, less current portion..................................................... -- 22,000
Other long term liabilities.............................................................. -- 2,417
---------- ----------
Total liabilities................................................................... 7,850 58,594
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares and
no shares issued or outstanding at March 31, 2001 and 2002.......................... -- --
Common stock, $0.01 par value; authorized 30,000,000 shares, issued and outstanding
9,404,439 shares at March 31, 2001 and 13,909,714 shares at March 31, 2002.......... 94 139
Additional paid-in capital............................................................ 34,288 162,058
Accumulated deficit................................................................... (8,205) (39,628)
Accumulated other comprehensive income:
Unrealized gain on securities classified as available for sale, net of tax of $22... 35 --
Treasury stock, at cost, 3,251 shares at March 31, 2001 and 120,951
shares at March 31, 2002............................................................ (67) (2,062)
---------- ----------
Total shareholders' equity.......................................................... 26,145 120,507
---------- ----------
$ 33,995 $ 179,101
========== ==========
See accompanying notes to consolidated financial statements.
35
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
YEARS ENDED MARCH 31,
----------------------------------------------
2000 2001 2002
----------- ----------- -----------
Revenues:
The Work Number services........................................ $ 12,328 $ 19,094 $ 27,412
Unemployment cost management services........................... -- -- 848
Human resources and benefits application services............... 7,993 10,694 10,797
Customer premises systems....................................... 10,835 6,882 2,870
Maintenance and support......................................... 4,876 4,417 3,893
----------- ---------- ----------
Total revenues................................................ 36,032 41,087 45,820
----------- ---------- ----------
Cost of revenues:
The Work Number services........................................ 3,973 6,179 9,403
Unemployment cost management services........................... -- -- 450
Human resources and benefits application services............... 4,460 6,956 7,610
Customer premises systems....................................... 8,388 5,790 2,652
Maintenance and support......................................... 1,367 1,275 1,028
Inventory write-down............................................ -- -- 307
----------- ----------- ----------
Total cost of revenues........................................ 18,188 20,200 21,450
----------- ---------- ----------
Gross margin.................................................. 17,844 20,887 24,370
----------- ---------- ----------
Operating expenses:
Selling and marketing........................................... 7,820 8,542 8,596
General and administrative...................................... 5,477 5,609 7,612
Restructuring charge............................................ -- -- 2,627
----------- ---------- ----------
Total operating expenses...................................... 13,297 14,151 18,835
----------- ---------- ----------
Operating income.............................................. 4,547 6,736 5,535
----------- ---------- ----------
Other income, net:
Interest income................................................. 85 539 1,493
Interest expense................................................ (4) -- (18)
Other, net...................................................... 1 23 92
----------- ---------- ----------
Total other income, net....................................... 82 562 1,567
----------- ---------- ----------
Earnings from continuing operations before income tax
expense..................................................... 4,629 7,298 7,102
Income tax expense................................................. 1,862 2,990 2,612
----------- ---------- ----------
Earnings from continuing operations............................. 2,767 4,308 4,490
----------- ---------- ----------
Discontinued operations:
Gain on operations and disposal of discontinued
operations, net............................................... 117 37 --
----------- ---------- ----------
Net earnings.................................................. $ 2,884 $ 4,345 $ 4,490
=========== ========== ==========
Basic earnings per share:
Earnings from continuing operations............................. $ 0.28 $ 0.42 $ 0.36
Gain on disposal of discontinued operations, net................ 0.01 -- --
----------- ---------- ----------
Net earnings.................................................. $ 0.29 $ 0.42 $ 0.36
=========== ========== ==========
Diluted earnings per share:
Earnings from continuing operations............................. $ 0.27 $ 0.41 $ 0.34
Gain on disposal of discontinued operations, net................ 0.01 -- --
----------- ---------- ----------
Net earnings.................................................. $ 0.28 $ 0.41 $ 0.34
=========== ========== ==========
Weighted average number of common shares outstanding:
Basic........................................................... 10,091,349 10,255,928 12,622,689
Diluted......................................................... 10,268,565 10,527,172 13,021,313
See accompanying notes to consolidated financial statements.
36
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2000, 2001, AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME
--------- ---------- ------------ --------------
BALANCE AT MARCH 31, 1999........... $ 55 $ 23,478 $ (3,432) $ --
Net earnings and total
comprehensive income............. -- -- 2,884 --
Repurchase of 58,500 shares of
common stock..................... -- -- -- --
Issuance of 61,065 shares of
common stock and 41,598 share of
treasury stock upon exercise of
stock options.................... 1 271 (143) --
Issuance of 29,959 shares of
common stock and 17,850 share of
treasury stock under employee
stock purchase plan.............. -- 229 (35) --
Issuance of 20,407 shares of
common stock upon exercise of
warrants......................... -- -- -- --
----- -------- -------- -----
BALANCE AT MARCH 31, 2000........... 56 23,978 (726) --
Net earnings........................ -- -- 4,345 --
Net unrealized gain on marketable
equity securities................ -- -- -- 35
Total comprehensive income..........
Repurchase of 112,500 shares of
common stock..................... -- -- -- --
Issuance of 42,293 shares of
common stock and 90,867 share of
treasury stock upon exercise of
stock options.................... 1 193 (1,167) --
Issuance of 13,316 shares of
common stock and 19,286 share of
treasury stock under employee
stock purchase plan.............. -- 218 (34) --
Issuance of 39,895 shares of
common stock upon exercise of
warrants......................... -- -- -- --
Issuance of 563,935 shares of
common stock and 838 shares of
treasury stock upon 10% stock
dividend......................... 6 9,863 (9,869) --
Issuance of 3,128,552 shares of
common stock and 66 shares of
treasury stock upon 3-for-2 stock
split............................ 31 (31) -- --
Income tax benefit from stock
options exercised................ -- 67 -- --
Cash dividends ($0.08 per share).... -- -- (754) --
----- -------- -------- ------
BALANCE AT MARCH 31, 2001........... $ 94 $ 34,288 $ (8,205) $ 35
===== ======== ========= ======
TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME EQUITY
--------- -------------- -------------
BALANCE AT MARCH 31, 1999........... $ (6) $ 20,095
Net earnings and total
comprehensive income............. -- $ 2,884 2,884
========
Repurchase of 58,500 shares of
common stock..................... (481) (481)
Issuance of 61,065 shares of
common stock and 41,598 share of
treasury stock upon exercise of
stock options.................... 329 458
Issuance of 29,959 shares of
common stock and 17,850 share of
treasury stock under employee
stock purchase plan.............. 158 352
Issuance of 20,407 shares of
common stock upon exercise of
warrants......................... -- --
----- --------
BALANCE AT MARCH 31, 2000........... -- 23,308
Net earnings........................ -- $ 4,345 4,345
Net unrealized gain on marketable
equity securities................ -- 35 35
--------
Total comprehensive income.......... $ 4,380
========
Repurchase of 112,500 shares of
common stock..................... (1,928) (1,928)
Issuance of 42,293 shares of
common stock and 90,867 share of
treasury stock upon exercise of
stock options.................... 1,560 587
Issuance of 13,316 shares of
common stock and 19,286 share of
treasury stock under employee
stock purchase plan.............. 301 485
Issuance of 39,895 shares of
common stock upon exercise of
warrants......................... -- --
Issuance of 563,935 shares of
common stock and 838 shares of
treasury stock upon 10% stock
dividend......................... -- --
Issuance of 3,128,552 shares of
common stock and 66 shares of
treasury stock upon 3-for-2 stock
split............................ -- --
Income tax benefit from stock
options exercised................ -- 67
Cash dividends ($0.08 per share).... -- (754)
------ --------
BALANCE AT MARCH 31, 2001........... $ (67) $ 26,145
======== ========
(continued)
37
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(CONTINUED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME
--------- ---------- ------------ --------------
BALANCE AT MARCH 31, 2001........... $ 94 $ 34,288 $ (8,205) $ 35
Net earnings........................ -- -- 4,490 --
Net unrealized loss on marketable
equity securities................ -- -- -- (35)
Total comprehensive income..........
Repurchase of 287,500 shares of
common stock..................... -- -- -- --
Issuance of 74,109 shares of
common stock and 95,742 shares of
treasury stock upon exercise of
stock options.................... 1 373 (1,785) --
Issuance of 8,019 shares of
common stock and 28,683 shares of
treasury stock under employee
stock purchase plan.............. -- 182 (66) --
Issuance of 67,667 shares of
common stock and 45,375 shares of
treasury stock upon exercise of
warrants......................... -- -- (667) --
Issuance of 1,263,626 shares of
common stock upon 10% stock
dividend......................... 13 31,831 (31,868) --
Issuance of 341,854 shares of
common stock upon acquisitions... 3 11,746 -- --
Issuance of 2,750,000 shares of
common stock upon secondary
stock offering................... 28 82,373 -- --
Income tax benefit from stock
options exercised................ -- 1,265 -- --
Cash dividends ($0.12 per share).... -- -- (1,527) --
------ --------- -------- ----
BALANCE AT MARCH 31, 2002........... $ 139 $ 162,058 $ (39,628) $ --
====== ========== ========= =====
TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME EQUITY
--------- -------------- --------------
BALANCE AT MARCH 31, 2001........... $ (67) $ 26,145
Net earnings........................ -- $ 4,490 4,490
Net unrealized loss on marketable
equity securities................ -- (35) (35)
---------
Total comprehensive income.......... $ 4,455
========
Repurchase of 287,500 shares of
common stock..................... (5,486) (5,486)
Issuance of 74,109 shares of
common stock and 95,742 shares of
treasury stock upon exercise of
stock options.................... 2,125 714
Issuance of 8,019 shares of
common stock and 28,683 shares of
treasury stock under employee
stock purchase plan.............. 524 640
Issuance of 67,667 shares of
common stock and 45,375 shares of
treasury stock upon exercise of
warrants......................... 842 175
Issuance of 1,263,626 shares of
common stock upon 10% stock
dividend......................... -- (24)
Issuance of 341,854 shares of
common stock upon acquisitions... -- 11,749
Issuance of 2,750,000 shares of
common stock upon secondary
stock offering................... -- 82,401
Income tax benefit from stock
options exercised................ -- 1,265
Cash dividends ($0.12 per share).... (1,527)
------- -------
BALANCE AT MARCH 31, 2002........... $(2,062) $ 120,507
======= ==========
See accompanying notes to consolidated financial statements.
38
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
--------------------------------------------
2000 2001 2002
---------- ---------- ----------
Cash flows from operating activities:
Net earnings.......................................................... $ 2,884 $ 4,345 $ 4,490
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization....................................... 4,145 4,615 3,911
Inventory write-down................................................ -- -- 307
Capitalized software write-down..................................... -- -- 1,941
Discontinued operations, net........................................ 859 -- --
Deferred taxes...................................................... 1,800 398 (472)
Change in assets and liabilities, net of acquisitions:
Accounts receivable............................................... (1,428) 573 1,699
Inventories....................................................... 430 205 216
Work in progress, less progress billings.......................... 486 (221) 720
Prepaid expenses and other current assets......................... (1,105) 91 (183)
Other assets...................................................... (68) (1,552) (774)
Accounts payable.................................................. (272) (308) (188)
Accrued expenses and other liabilities............................ 1,056 1,933 (1,934)
Income taxes payable.............................................. 87 (18) 2,082
Progress billings in excess of work in progress................... 343 (528) (141)
Deferred revenue.................................................. (26) (224) (328)
------- ------- ---------
Net cash provided by operating activities....................... 9,191 9,309 11,346
------- ------- ---------
Cash flows from investing activities:
Additions to property and equipment................................... (1,678) (1,819) (1,606)
Acquisitions, net of cash acquired.................................... -- -- (102,477)
Capitalized software development costs................................ (1,818) (2,766) (2,357)
Proceeds from maturity of short-term investments...................... -- 3,000 5,365
Proceeds from sale of short-term investments.......................... -- -- 233,097
Purchases of short-term investments................................... (3,015) (4,505) (234,126)
------- ------- ---------
Net cash used in investing activities............................... (6,511) (6,090) (102,104)
------- ------- ---------
Cash flows from financing activities:
Dividends paid........................................................ -- (472) (1,396)
Borrowings under long-term debt facility.............................. -- -- 30,000
Issuance of common stock.............................................. 810 1,072 83,904
Repurchase of common stock............................................ (481) (1,928) (5,486)
------- ------- ---------
Net cash provided by (used in) financing activities................. 329 (1,328) 107,022
------- ------- ---------
Net increase in cash and cash equivalents........................... 3,009 1,891 16,264
Cash and cash equivalents at beginning of year........................... 267 3,276 5,167
------- ------- ---------
Cash and cash equivalents at end of year................................. $ 3,276 $ 5,167 $ 21,431
======= ======= =========
See accompanying notes to consolidated financial statements.
39
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
We are the leading provider of automated employment and income verification and
unemployment cost management services and a leader in providing outsourced
employee self-service applications. Our services enable mortgage lenders,
pre-employment screening companies, employers and other authorized users to
obtain employee human resources and payroll information. We also provide
unemployment insurance claims processing and unemployment tax planning and
management to a broad range of employers. Further, we allow employees to review
and modify information in human resources, benefits and payroll management
information systems without requiring employer assistance.
Our services and software use interactive web and interactive voice response
software, fax and other technologies and are designed to enhance service levels,
improve productivity and reduce costs by automating historically labor
intensive, paper-based processes and enabling users to perform self-service
transactions. We typically serve large organizations, including approximately
two-thirds of the Fortune 500 and a number of federal, state and local
government agencies.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of TALX Corporation
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three
months or less to be cash and cash equivalents.
(d) Short-term Investments
Short-term investments at March 31, 2001 consist of U.S. government agency debt
instruments. We classify our debt and marketable equity securities in one of two
categories: available-for-sale or held-to-maturity. Held-to-maturity securities
are those securities which we have the ability and intent to hold until
maturity. All other securities are classified as available-for-sale. All of our
securities were classified as available-for-sale at March 31, 2001. Interest
income is recognized when earned. Debt securities classified as
available-for-sale are stated at market value.
(e) Inventories
Inventories are stated at the lower of cost (average) or market. Inventories
consist primarily of hardware and spare parts.
(f) Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the assets. Amortization of leasehold
improvements is computed using the straight-line method over the lesser of the
useful life of the asset or lease term.
(g) Product Development and Capitalized Software Development Costs
Product development costs are charged to operations as incurred. Software
development costs are expensed as incurred until technological feasibility is
achieved, after which they are capitalized on a product-by-product basis.
Amortization of capitalized software development costs is computed using the
straight-line method over the remaining estimated economic life of the product,
40
which is typically three years. Amortization of capitalized software development
costs starts when the product is available for general release to clients.
(h) Goodwill and Other Intangible Assets
The Company has adopted the provisions of the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," and will adopt SFAS No. 142, "Goodwill and Other
Intangible Assets" as of April 1, 2002. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values.
(i) Revenue Recognition, Work in Progress and Progress Billings
Revenues from The Work Number are recognized from transaction fees charged to
users for verifications of employment history and income, and from monthly
maintenance and employer conversion fees. Revenues from ePayroll and W-2 eXpress
are recognized from monthly fees charged to clients. Fees are based upon the
number of employees. Revenues from our unemployment cost management services,
called UC eXpress, are recognized in the period that they are earned, evenly
over the life of the contract. Transaction fees are recorded as the services are
provided. Revenue which is contingent upon achieving certain performance
criteria is recognized when those criteria are met. We recognize hardware and
software license revenue upon shipment based on vendor-specific objective
evidence. Revenues for customization services are recognized by the contract
method of accounting using percentage of completion for larger, more complex
systems and the completed contract method for smaller systems. Application
services revenue is recognized as the services are provided. Revenue from
maintenance contracts is deferred and recognized ratably over the maintenance
period. Deferred revenue represents the unearned portion of UC eXpress and
maintenance fees.
(j) Concentration of Credit Risk
We sell our services and software in a variety of industries. No client
represented over 10% of revenues in fiscal 2000, 2001 or 2002. We perform
periodic credit evaluations of our clients' financial condition and generally do
not require collateral; however, we maintain a security interest in hardware
until payment is received. Credit losses from clients have been within
management's expectations, and management believes the allowance for doubtful
accounts adequately provides for any expected losses.
(k) Income Taxes
We record income taxes under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(l) Fair Value of Financial Instruments
We disclose estimated fair values for our financial instruments. A financial
instrument is defined as cash or a contract that both imposes on one entity a
contractual obligation to deliver cash or another financial instrument to a
second entity and conveys to that second entity a contractual right to receive
cash or another financial instrument from the first entity. Our financial
instruments include long-term debt and a revolving line of credit facility. The
carrying value of these commitments approximate fair value due to their stated
interest rates approximating market rates. These estimated fair value amounts
have been determined using available market information or other appropriate
valuation methodologies.
(m) Stock Option Plans
We record stock-based compensation over the vesting period for the difference
between the quoted market price of an award at the date of grant and the
exercise price of the option, if any. We provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and later years as if the fair-value-based method had been applied.
41
(n) Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 materially from those
estimates.
(o) Net Earnings Per Share
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
incremental increase in common shares outstanding assuming the exercise of all
employee stock options and warrants that would have had a dilutive effect on
earnings per share.
(p) Reclassifications
Certain balances in prior fiscal years have been reclassified to conform to the
presentation adopted in the current fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
MARCH 31,
-------------------------
2001 2002
---------- ---------
(IN THOUSANDS)
Accounts receivable.......................................... $ 7,632 $ 13,011
Less allowance for doubtful accounts......................... 225 542
-------- --------
$ 7,407 $ 12,469
======== ========
Billings to customers are made in accordance with the terms of the individual
contracts.
The following table represents activity within our allowance for doubtful
accounts for the years ended March 31, 2000 and 2001:
(IN THOUSANDS)
--------------
Balance at March 31, 1999 ............................. $ 155
Additions.......................................... 346
Write-offs......................................... (131)
--------
Balance at March 31, 2000 ............................. 370
Additions.......................................... 462
Write-offs......................................... (607)
--------
Balance at March 31, 2001.............................. 225
Acquisitions....................................... 362
Additions.......................................... 505
Write-offs......................................... (550)
--------
Balance at March 31, 2002.............................. $ 542
========
42
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
RANGE OF
ESTIMATED MARCH 31,
USEFUL LIVES ----------------------
(IN YEARS) 2001 2002
-------------- --------- ---------
(IN THOUSANDS)
Computer equipment............................................... 3-5 $ 5,611 $ 13,404
Office furniture and equipment................................... 5-10 970 1,315
External software................................................ 3-5 1,303 2,074
Leasehold improvements........................................... 3-10 3,667 3,882
---------- ----------
11,551 20,675
Less accumulated depreciation and amortization................... 6,391 9,318
---------- ----------
$ 5,160 $ 11,357
========== ==========
(4) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Product development costs and amortization of capitalized software development
costs for the years ended March 31, 2000, 2001 and 2002 were as follows:
MARCH 31,
-------------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
Product development costs charged to general and
administrative expenses......................................... $ 369 $ 405 $ 381
======== ========= =========
Amortization of capitalized software development costs
charged to cost of revenues..................................... $ 2,239 $ 2,159 $ 1,161
======== ========= =========
Write-offs of capitalized software development costs............... $ -- $ -- $ 1,941
========= ========= =========
(5) ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
We acquired three businesses during fiscal 2002.
On July 2, 2001, we completed our acquisition of Ti3, Inc. ("Ti3"). As
consideration for the acquisition, we paid the Ti3 shareholders approximately
$50,000 in cash and issued to them 341,854 shares of our common stock, for an
estimated aggregate value of $11.8 million, based on the then recent average
trading prices for our common stock. Additionally, we incurred $655,000 of costs
related to the transaction, which were capitalized into goodwill. Of the shares
issued, 34,187 were placed in a one-year escrow to support indemnification
obligations. We may make additional payments in cash or shares of our common
stock to Ti3 shareholders depending upon Ti3's financial performance in the 12
months immediately after the closing and utilization of Ti3's tax-loss
carry-forwards during such period. This acquisition was accounted for under the
purchase method, and is included in our results of operations for the period
beginning July 2, 2001 and ending March 31, 2002. None of the goodwill recorded
with this transaction will be deductible for tax purposes. The share amounts
discussed above do not include the effect of the 10% stock dividend declared on
September 6, 2001.
On March 27, 2002, our subsidiary, Garcia Acquisition Sub, Inc. (Garcia),
purchased certain of the assets and assumed certain of the liabilities of the
unemployment cost management services business (the "GM Unemployment
Compensation Business") of Gates, McDonald & Company, a subsidiary of Nationwide
Mutual Insurance Company. The GM Unemployment Compensation Business provides
unemployment cost management services to a broad range of employers.
The cost of the acquisition was $44.3 million, including transaction costs and
was paid in cash, a portion of which was financed with borrowing under our term
note agreement (see Note 7). The asset purchase agreement provides for Gates,
McDonald & Company to indemnify us for certain existing liabilities and
obligations of the business, subject to certain limitations. An escrow account,
to be maintained by a bank pursuant to the terms of an escrow agreement, is also
available for a fifteen-month period following the date of the asset purchase
agreement to satisfy the indemnification obligations of Gates McDonald & Company
under the asset
43
purchase agreement, subject to certain limitations contained in the asset
purchase agreement. For such purposes, four million dollars ($4,000,000) of the
purchase price was paid into the escrow account. The indemnification obligations
of Gates, McDonald & Company with respect to tax and certain employee benefit
matters terminate upon the expiration of the applicable statutes of limitation,
authorization and title indemnification obligations terminate after two years
and all other indemnification obligations terminate 15 months from the date of
the asset purchase agreement. The parties executed several ancillary agreements
in connection with the asset purchase agreement in order to provide for the
orderly transition of the GM Unemployment Compensation Business and the
employees of such Business from Gates McDonald & Company to us. These ancillary
documents included a transition services agreement, an intellectual property
license agreement, a lease services agreement and an employee services
agreement. This acquisition was accounted for under the purchase method, and is
included in our results of operations for the period beginning March 27, 2002
and ending March 31, 2002. We expect that 100% of the goodwill recorded with
this transaction will be deductible for tax purposes.
On March 27, 2002, we also purchased all of the 257,200 issued and outstanding
shares of common stock of James E. Frick, Inc., d/b/a The Frick Company, a
Missouri corporation ("Frick") from the James E. Frick Profit Sharing and
Employee Stock Ownership Plan (the "ESOP"), and options to acquire 190,500
shares of Frick's common stock held by the four principal optionholders. Frick
provides unemployment cost control, unemployment claims handling, tax planning
and related services and employment information verification services to a broad
range of clients. Frick is now our wholly owned subsidiary.
The total purchase price for the Frick acquisition was $79.7 million, including
transaction costs, which includes amounts allocable to offer to purchase
remaining options to purchase 29,000 shares held by key employee optionholders.
The purchase price was based on a value of $162.60 per share of common stock,
less in the case of an option, the exercise price and withholding and other
applicable taxes, plus up to $16.78 from the escrow, as described below. The
purchase price was paid in cash, a portion of which was financed with borrowing
under our term note agreement (see Note 7). Subsequent to the closing, we
purchased from the key employee optionholders the remaining options to purchase
29,000 shares of Frick's common stock subject to the same terms and conditions
as, and for a price per share of underlying common stock equal to that received
by, the four principal optionholders under the acquisition agreement. We expect
that 100% of the goodwill recorded with this transaction will be deductible for
tax purposes.
The terms of the acquisition agreement required the sellers to enter into an
escrow agreement with us. For such purpose, $8,000,000 of the purchase price was
deposited with a bank to be disbursed in accordance with the escrow agreement.
Of the escrow funds, $3,000,000 is available to satisfy our claims relating only
to the tax and intellectual property representations, warranties and covenants,
and the remainder is available to satisfy any type of indemnifiable claim under
the acquisition agreement. The sellers' indemnification obligations terminate,
and the undisputed escrow funds will be distributed on March 27, 2003. Except
for claims related to willful misrepresentation, our only remedy for indemnified
losses is against the escrow. This acquisition was accounted for under the
purchase method, and is included in our results of operations for the period
beginning March 27, 2001 and ending March 31, 2002.
44
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed for each of our three acquisitions as of the date of
each acquisition. We are currently in the process of obtaining third-party
valuations of certain intangible assets; thus, the following allocations of
purchase price are subject to refinement.
(IN THOUSANDS)
GM UNEMPLOYMENT
COMPENSATION
TI3 FRICK BUSINESS TOTALS
---------- ---------- --------------- ----------
Cash and cash equivalents...................................... $ 569 $ 2,681 $ -- $ 3,250
Accounts receivable, net....................................... 373 3,291 3,097 6,761
Other current assets........................................... 21 810 -- 831
Property and equipment, net.................................... 213 6,286 595 7,094
Goodwill....................................................... 10,994 62,205 29,365 102,564
Other intangibles.............................................. 570 7,358 11,329 19,257
Other assets................................................... 388 173 518 1,079
---------- ---------- ---------- ----------
Total assets acquired....................................... 13,128 82,804 44,904 140,836
---------- ---------- ---------- ----------
Current liabilities............................................ 454 2,567 601 3,622
Other long term liabilities.................................... -- 569 -- 569
---------- ---------- ---------- ----------
Total liabilities assumed................................... 454 3,136 601 4,191
---------- ---------- ---------- ----------
Net assets acquired........................................ $ 12,674 $ 79,668 $ 44,303 $ 136,645
=========== =========== ========== ===========
The following table summarizes other intangible asset activity for fiscal 2002.
We are currently in the process of obtaining third-party valuations of certain
intangible assets; thus, the following amounts are subject to refinement.
(IN THOUSANDS)
CUSTOMER CUSTOMER
BASE SOFTWARE RECORDS TOTALS
------------ ----------- ----------- -----------
Balance at March 31, 2001..................................... $ -- $ -- $ -- $ --
Amounts acquired.............................................. 16,904 153 2,200 19,257
Amortization.................................................. 44 38 1 83
----------- ----------- ---------- ----------
Balance at March 31, 2002.................................. $ 16,860 $ 115 $ 2,199 $ 19,174
=========== =========== ========== ===========
Weighted Average Lives........................................ 14.82 3.00 20.00
=========== =========== ==========
The following unaudited pro forma summarized results of operations for the
annual periods ended March 31, 2001 and 2002 for TALX and Ti3, Inc. and December
31, 2000 and 2001 for The Frick Company and the GM Unemployment Compensation
Business. These financial statements were prepared as though all three
acquisitions occurred on April 1, 2000 (in thousands, except per share amounts):
MARCH 31,
-------------------------
2001 2002
----------- -----------
Total revenue............................................................ $ 110,714 $ 118,931
=========== ===========
Operating income......................................................... 10,776 10,118
============ ===========
Net earnings............................................................. 5,553 5,500
=========== ===========
Earnings per share:
Basic.................................................................. $ 0.52 $ 0.44
Diluted................................................................ 0.51 0.42
Weighted average number of shares outstanding:
Basic.................................................................. 10,632 12,623
Diluted................................................................ 10,903 13,021
45
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results and do not reflect
any synergies that might have been achieved from combining the operations.
(6) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities for the years ended March 31, 2001 and
2002 consist of the following:
MARCH 31,
------------------------
2001 2002
--------- ----------
(IN THOUSANDS)
Accrued acquisition costs....................................... $ -- $ 17,298
Accrued compensation and benefits............................... 2,500 2,032
Accrued license costs........................................... 1,512 --
Other........................................................... 658 1,125
--------- ---------
$ 4,670 $ 20,455
========= =========
(7) LONG-TERM DEBT
Long-term debt at March 31, 2001 and 2002 consisted of:
MARCH 31,
------------------------
2001 2002
--------- ----------
(IN THOUSANDS)
Borrowings under term note........................................ $ -- $ 30,000
Less current portion......................................... -- 8,000
--------- ---------
Long-term debt.................................................... $ -- $ 22,000
========= =========
In connection with the acquisitions of the GM Unemployment Compensation Business
and Frick, on March 27, 2002, pursuant to a loan agreement dated as of March 27,
2002, (the "Loan Agreement"), we obtained secured financing consisting of a
$30,000,000 term loan (the "Term Loan") and a $10,000,000 revolving credit
facility (the "Revolving Credit Facility") from LaSalle Bank National
Association, as administrative agent and lender, and Southwest Bank of St.
Louis, as lender, and any other lenders that may become party to the Loan
Agreement (collectively, the "Lenders"). We used the proceeds of the Term Loan
to pay a portion of the purchase price for the acquisitions; however, we have
not borrowed under the Revolving Credit Facility. We must repay principal of the
Term Loan in quarterly installments, with the final installment due on February
27, 2005. In addition, principal payments are required out of excess cash flow,
as defined in the Term Loan agreement. The Revolving Credit Facility also
matures on February 27, 2005.
The Term Loan and advances under the Revolving Credit Facility bear interest at
rates we select under the terms of the Loan Agreement, including a base rate or
eurodollar rate, plus an applicable margin. Until March 27, 2003, eurodollar
rate loans will bear interest at the applicable eurodollar rate plus 2.25% and
base rate loans will bear interest at the applicable base rate plus 0.00%. After
that, the applicable margin for eurodollar rate loans will vary from 2.00% to
2.25%, and the applicable margin for base rate loans will remain at 0.00%, in
each case based upon our ratio of total indebtedness to EBITDA. We may make
prepayments under the Term Loan during the first twelve months after the closing
date without penalty, except that we will be obligated to pay a $600,000
prepayment premium under certain limited circumstances. In addition, if William
W. Canfield ceases serving as our chief executive officer during the first 24
months after closing, and we do not retain a substitute satisfactory to the
Lenders within 120 days, then we are required to repay all outstanding loans
(Term Loan and Revolving Credit Facility).
The Loan Agreement is secured by security interests in substantially all the
assets of us and of our three subsidiaries (Ti3, Garcia and Frick), the
guarantees of our three subsidiaries, and a pledge of the stock of each of those
subsidiaries.
The Loan Agreement includes certain covenants, including, without limitation,
restrictions on the use of proceeds of the Term Loan and loans made under the
Revolving Credit Facility. The Term Loan was to be used solely to pay a portion
of the purchase price for the acquisitions of the GM Unemployment Compensation
Business and Frick. The proceeds of loans made under the
46
Revolving Credit Facility may be used solely for working capital, permitted
capital expenditures, as the source for payment of our obligations with respect
to certain existing letters of credit, to pay the transaction cost of the Loan
Agreement, and to finance certain permitted acquisitions. The Loan Agreement
also requires compliance with certain financial covenants based on our minimum
net worth, minimum EBITDA, its ratio of total indebtedness to EBITDA and its
ratio of EBITDA to fixed charges. The Loan Agreement further requires compliance
with certain operating covenants which limit, among other things, the incurrence
of additional indebtedness by us and our subsidiaries, the amount of capital
expenditures to be made by us and our subsidiaries, sales of assets and mergers
and dissolutions, and impose restrictions on distributions to shareholders,
change of control of TALX, investments, acquisitions and liens.
At March 31, 2002 our outstanding borrowings carried an interest rate of 4.29%.
Scheduled minimum long-term debt repayments are $8 million, $10 million and $12
million in fiscal years 2003, 2004 and 2005, respectively. Payments are due in
equal quarterly amounts. We may accelerate credit facility repayments, depending
on available operating cash flow.
(8) LEASES
We have non-cancelable operating leases, primarily for office space and office
equipment, that expire through fiscal 2009 and provide for purchase or renewal
options. Total rent expense for operating leases, including contingent rentals,
was $1,063,000, $1,360,000 and $1,494,000 in 2000, 2001 and 2002 respectively.
The following is a schedule, by year, of the future minimum payments under
capital and operating leases, together with the present value of the net minimum
payments as of March 31, 2002.
(IN THOUSANDS)
CAPITAL OPERATING
LEASES LEASES
------- --------
Fiscal Year:
2003......................................................... $ 172 $ 5,074
2004......................................................... 131 4,415
2005......................................................... 24 3,733
2006......................................................... -- 3,546
2007......................................................... -- 1,680
Thereafter................................................... -- 486
------- --------
Total minimum lease payments.................................... 327 $ 18,934
========
Less amount representing interest............................ 19
-------
Total present value of minimum capital lease payments........... 308
Less current portion......................................... 156
-------
Long-term capital lease obligations............................. $ 152
=======
(9) INCOME TAXES
Income tax expense consists of the following:
MARCH 31,
-----------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal......................................................... $ 52 $ 2,188 $ 2,318
State and local................................................. 11 404 756
Deferred:
Federal......................................................... 1,510 336 (348)
State and local................................................. 289 62 (114)
-------- -------- ---------
Income tax expense before discontinued operations............. 1,862 2,990 2,612
Discontinued operations............................................ 70 24 --
-------- -------- --------
Total income tax expense........................................ $ 1,932 $ 3,014 $ 2,612
======== ======== ========
47
Income tax expense differed from the amounts computed by applying the federal
income tax rate of 34% to earnings from continuing operations before income tax
expense as a result of the following:
MARCH 31,
-----------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
Computed "expected" tax expense.................................... $ 1,574 $ 2,481 $ 2,415
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of federal income tax benefit. 198 308 424
Travel and entertainment........................................ 29 30 60
Tax exempt interest............................................. -- -- (300)
Other, net...................................................... 61 171 13
-------- -------- --------
$ 1,862 $ 2,990 $ 2,612
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 2001 and
2002 are presented below:
MARCH 31,
----------------------
2001 2002
--------- --------
(IN THOUSANDS)
Deferred tax assets:
Allowance for doubtful accounts............................................... $ 87 $ 54
Valuation allowance on inventory.............................................. 24 --
Accrual for compensated absences.............................................. 71 94
Deferred revenue.............................................................. -- 38
Net operating loss carryforwards.............................................. -- 542
Differences in depreciation and amortization.................................. 442 635
Tax credit carryforwards...................................................... 176 --
------ ------
Total deferred tax assets................................................... 800 1,363
------ ------
Deferred tax liabilities:
Differences in capitalized software development cost
methods..................................................................... 1,543 1,256
Differences in intangible asset amortization methods.......................... -- 193
Differences in expense recognition methods.................................... 199 215
------ ------
Total deferred tax liabilities.............................................. 1,742 1,664
------ ------
Net deferred tax liabilities................................................ $ (942) $ (301)
====== ======
We acquired a net operating loss carryforward of approximately $1.4 million in
the acquisition of Ti3. This net operating loss carryforward is available to
offset our consolidated future earnings, subject to certain limitations.
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Our taxable income for
the years ended March 31, 2000, 2001 and 2002 was $5,860,000, $6,400,000, and
$7,102,000 respectively. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not we will
realize the benefits of these deductible differences.
(10) RESTRUCTURING CHARGES AND INVENTORY WRITE-DOWN
During the quarter ended September 30, 2001, we reorganized our sales and
delivery operations and refocused our product lines related to our human
resources and benefit applications and customer premises systems businesses. In
conjunction with the reorganization, we reduced our workforce by approximately
17%, closed certain regional sales offices and wrote-down hardware inventory and
capitalized software. As a result of these actions, we incurred restructuring
charges of $1.9 million associated with the write-off of capitalized software,
$349,000 related to employee severance costs and $337,000 related to office
closing costs. These items are reflected in the line item "restructuring
charges" on the statement of earnings and $240,000 is reflected in accrued
expenses on the balance sheet as of March 31, 2002. Additionally, we incurred a
charge of $307,000 related to the write-down of certain hardware inventory
items. This charge is reflected as a separate component of cost of goods sold on
the statement of
48
earnings.
(11) SHAREHOLDERS' EQUITY
TALX has adopted a stock option plan for employees that provides for the
issuance of a maximum of 3,049,200 shares of common stock pursuant to incentive
or non-qualified options. Options are granted by the Board of Directors at
prices not less than fair market value as of the date of the grant. Options vest
20% per year and expire six to ten years after the date of the grant.
TALX has adopted a stock option plan for outside directors that provides for the
issuance of a maximum of 145,200 shares of common stock. Options are granted in
the amount of 2,500 shares each to outside directors at prices not less than
fair market value as of the date of the grant, which is April 1 of each year.
The options vest one year from the date of grant. Options outstanding amount to
43,560 and 54,568 at March 31, 2001 and 2002, respectively.
Activity under the plans for the three years ended March 31, 2002 is as follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- --------------
Outstanding at March 31, 1999................................. 998,621 2.87
Granted-- 2000................................................ 343,398 4.61
Cancelled-- 2000.............................................. (63,830) 3.67
Exercised-- 2000.............................................. (181,151) 2.45
------------
Outstanding at March 31, 2000................................. 1,097,038 3.43
Granted-- 2001................................................ 321,303 8.51
Cancelled-- 2001.............................................. (56,858) 5.35
Exercised-- 2001.............................................. (229,075) 2.56
------------
Outstanding at March 31, 2001................................. 1,132,408 4.98
Granted-- 2002................................................ 446,502 23.25
Cancelled-- 2002.............................................. (6,029) 17.16
Exercised-- 2002.............................................. (175,038) 4.03
------------
Outstanding at March 31, 2002................................. 1,397,843 10.88
===========
No compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been recognized for
awards in fiscal 2000, net earnings would be reduced by $156,000 or $0.02 per
share, based on the weighted average fair value of options granted of $4.61 per
option. The effect for fiscal 2001 would be to reduce net earnings by $394,000
or $0.04 per share, based on the weighted average fair value of options granted
of $8.51 per option. The effect for fiscal 2002 would be to reduce net earnings
by $839,000 or $0.06 per share, based on the weighted average fair value of
options granted of $23.25 per option.
The full impact of calculating compensation cost for stock options under SFAS
No. 123 was not reflected in the determination of the impact, because
compensation cost is reflected over the options' vesting period of six to ten
years and compensation cost for options granted prior to April 1, 1995 is not
considered. The fair value of option grants for fiscal 2000, 2001 and 2002 is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: expected volatility of 86%, 62%
and 59% in fiscal 2000, 2001 and 2002, respectively; risk-free interest rate of
6.00%, 4.91% and 4.81% in fiscal 2000, 2001 and 2002, respectively; expected
life of 4.5, 5.0 and 5.0 years in fiscal 2000, 2001 and 2002, respectively; and
an expected dividend yield of 0.00%, 3.50% and 3.50% in fiscal 2000, 2001 and
2002, respectively.
49
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER OF CONTRACTUAL LIFE AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE PRICE SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
--------------------------- ---------- ------------------- -------------- ------------- --------------
$ 0.00-- 3.12........ 267,374 5.5 $ 2.83 130,921 $ 2.80
3.12-- 6.23........ 393,325 5.9 4.14 174,575 4.04
6.23-- 9.35........ 227,275 8.1 8.28 41,646 8.28
9.35-- 12.46........ 10,892 4.0 10.47 10,892 10.47
12.46-- 18.69........ 30,000 9.6 16.90 -- --
18.69-- 21.81........ 10,325 9.3 19.91 1,265 19.43
21.81-- 24.92........ 287,651 8.9 22.90 -- --
24.92-- 28.04........ 110,001 9.1 25.20 -- --
28.04-- 31.15........ 11,000 9.3 31.15 -- --
----------- ----------
1,397,843 359,299
=========== ==========
During fiscal 1997, shareholders approved the TALX Corporation 1996 Employee
Stock Purchase Plan (ESPP), which was amended in 1998 and 2000 and amended and
restated in 2001. The ESPP allows eligible employees the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at the
beginning or end of each three-month offering period. Of the 907,500 shares of
common stock shares reserved for the ESPP, there were 553,476 shares remaining
at March 31, 2002.
During fiscal 2001, we began paying dividends on our common stock on a quarterly
basis. Dividends of $0.08 and $0.12 per share were paid to shareholders during
fiscal years 2001 and 2002, respectively. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend
upon our earnings, capital requirements and operating and financial condition
and such other factors as the board may deem relevant.
(12) BUSINESS SEGMENTS
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments. We have two reportable segments: Payroll-Based Services and
Software and Unemployment Cost Management Services.
PAYROLL-BASED SERVICES AND SOFTWARE: This segment includes the following:
o The Work Number Services - The Work Number, W-2 eXpress, ePayroll and
FasTime;
o Human Resources and Benefits Application Services; and
o Customer Premises Systems and Related Maintenance and Support
UNEMPLOYMENT COST MANAGEMENT SERVICES: This segment includes our UC eXpress
services suite.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Interest income and
expense and income taxes are not reported on an operating segment basis because
they are not considered in the performance evaluation by our chief operating
decision-maker, our chairman and CEO.
50
Summarized financial information concerning our reportable operating segments
are shown in the following table for the periods indicated:
PAYROLL-BASED UNEMPLOYMENT COST
SERVICES AND MANAGEMENT
SOFTWARE SERVICES TOTAL
-------------- ----------------- ----------
(IN THOUSANDS)
MARCH 31, 2000
Revenues........................................ $ 36,032 $ -- $ 36,032
Income from operations.......................... 4,547 -- 4,547
Total assets.................................... 30,133 -- 30,133
Depreciation and amortization................... 4,145 -- 4,145
Capital expenditures............................ 1,678 -- 1,678
MARCH 31, 2001
Revenues........................................ $ 41,087 $ -- $ 41,087
Income from operations.......................... 6,736 -- 6,736
Total assets.................................... 33,995 -- 33,995
Depreciation and amortization................... 4,615 -- 4,615
Capital expenditures............................ 1,819 -- 1,819
MARCH 31, 2002
Revenues........................................ $ 44,972 $ 848 $ 45,820
Income from operations.......................... 5,381 154 5,535
Total assets.................................... 51,466 127,635 179,101
Depreciation and amortization................... 3,801 110 3,911
Capital expenditures............................ 1,606 -- 1,606
(13) DISCONTINUED OPERATIONS
Effective March 31, 2000, we sold all of the assets, net of liabilities, of the
database services business to WPZ Holdings, Inc., the parent company of one of
the division's largest customers. The sales price was $1,273,000, which
represented the current book value of the net assets sold. We realized pre-tax
and after-tax gains of $187,000 and $117,000, respectively. While the effective
date of the transaction was March 31, 2000, cash settlement occurred April 5,
2000. At March 31, 2000, the receivable for the sales price is included in
prepaid expenses and other current assets.
During the quarter ended September 30, 2000, we concluded all transition-related
activity for the database services business. Completing this transition ahead of
schedule resulted in a savings of $61,000 of the transition reserve. Therefore,
we realized pre-tax and after-tax gains of $61,000 and $37,000, respectively.
The results of operations for the database business for the years ended March
31, 2000, 2001 and 2002 were as follows:
MARCH 31,
--------------------------------------
2000 2001 2002
--------- --------- ----------
(IN THOUSANDS)
Revenues....................................... $ 4,800 $ -- $ --
========= ======== ========
Gain on disposal............................... 187 61 --
Income tax expense.......................... 70 24 --
--------- -------- --------
Gain on disposal, net....................... 117 37 --
--------- -------- --------
Net earnings................................... $ 117 $ 37 $ --
========= ======== ========
As of March 31, 2000, 2001 and 2002 there were no assets or liabilities related
to the database business on the balance sheets.
51
(14) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for our cash and cash equivalents, short-term investments,
trade receivables, accounts payable, accrued expenses and income taxes payable
approximate fair value because of the short-term maturity of these instruments.
The carrying value of long-term debt and borrowings under our revolving line of
credit facility approximate fair value due to their stated interest rates
approximating market rates. These estimated fair value amounts have been
determined using available market information or other appropriate valuation
methodologies.
(15) EMPLOYEE BENEFIT PLAN
We sponsor a profit-sharing/401(k) plan. The plan covers substantially all of
our employees. We make contributions to the plan, subject to ERISA limitations,
up to 2.4% of employees' earnings. Total expense under the plan for the years
ended March 31, 2000, 2001 and 2002 was $219,000, $305,000 and $322,000,
respectively.
(16) COMMITMENTS AND CONTINGENCIES
On December 26, 2001, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of Missouri (Civil Action No.
4:01CV02014DJS) by Matt L. Brody, an alleged shareholder of the Company, against
the Company, certain of its executive officers and directors (William W.
Canfield, Craig N. Cohen and Richard F. Ford) (collectively, the "Individual
Defendants"), and two underwriters (Stifel, Nicolaus & Company, Incorporated and
A.G. Edwards & Sons, Inc.) in the Company's August 2001 secondary common stock
offering ("Secondary Offering"). The case purportedly is brought on behalf of
all persons who purchased or otherwise acquired shares of the Company's common
stock between July 18, 2001 and October 1, 2001 ("Putative Class Period"),
including as part of the Secondary Offering. The complaint alleges, among other
things, that certain statements in the registration statement and prospectus for
the Secondary Offering, as well as other statements made by the Company and/or
the Individual Defendants during the Putative Class Period, were materially
false and misleading because they allegedly did not properly account for certain
software and inventory, did not reflect certain write-offs, and did not
accurately disclose certain business prospects. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against the Company and the Individual Defendants,
violations of Section 11 of the Securities Act of 1933 against the Company, the
Individual Defendants and the underwriters, and violation of Section 15 of the
Securities Act of 1933 against Mr. Canfield.
Three additional purported class action lawsuits were filed in the same court,
against the same defendants and making substantially the same allegations: on
January 8, 2002 by Donald Metzger (Civil Action No. 4:02CV00031DJS); on January
9, 2002 by Anna Goodman (Civil Action No. 4:02CV00033DJS); and on January 30,
2002 by Al Hinton (Civil Action No. 4:02CV00168DJS) each of whom allegedly were
shareholders of the Company during the Putative Class Period. On February 15,
2002, these three lawsuits were consolidated with and into the Brody lawsuit
(Civil Action No. 4:01CV02014DJS) for all purposes, which currently is pending
before the Honorable Donald J. Stohr, United States District Judge.
The consolidated lawsuit seeks, among other things, an award of unspecified
money damages, including interest, for all losses and injuries allegedly
suffered by the putative class members as a result of the defendants' alleged
conduct and unspecified equitable/injunctive relief as the Court deems proper.
On May 20, 2002, the Company and the Individual Defendants filed a motion to
dismiss the lawsuits, and the underwriter defendants filed a separate motion to
dismiss. The plaintiffs filed their opposition to the motions to dismiss on June
19, 2002. The defendants' reply memoranda in support of the motions to dismiss
are due on July 9, 2002.
The Company believes the plaintiffs' claims are without merit and intends to
defend vigorously against them. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of the
litigation. An unfavorable outcome could have a material adverse impact on the
Company's business, financial condition and results of operations.
Additionally, we are required to indemnify each of the Individual Defendants, as
officers and/or directors of the Company, in connection with the above matters,
provided they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the Company. Stifel, Nicolaus &
Company and A.G. Edwards & Sons, Inc. have made demands on the Company to
indemnify them in connection with these matters.
The Company has provided notice of the consolidated litigation to its directors
and officers liability insurance carriers.
We are a defendant from time to time in routine lawsuits incidental to our
business, which based on information currently available, we believe,
individually or in the aggregate, will not have a material adverse effect upon
us.
The Securities and Exchange Commission is conducting an investigation into our
August 2001 secondary offering of common stock and second fiscal quarter 2001
financial results. We are cooperating fully with investigation, and have
voluntarily produced documents requested by the Commission and have made our
employees available for interviews or testimony upon request. We believe that
there is no basis for any action by the Commission.
52
(17) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest totaled $4,000 for the year ended March
31, 2000 and $0 for the years ended March 31, 2001 and 2002. Cash paid during
the year for income taxes totaled $13,000, $2,653,000 and $1,003,000 for the
years ended March 31, 2000, 2001 and 2002, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is
contained under the caption "Nominees and Continuing Directors," "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" included
in the Proxy Statement for the 2002 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is contained under the caption
"Executive Compensation," "Compensation Committee Interlocks and Insider
Participation," "Shareholder Approved Equity Compensation," "Non-Shareholder
Approved Equity Compensation," "Equity Compensation Plan Information,"
"Employment Agreements" and "Director Compensation" included in the Proxy
Statement for the 2002 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and
management and related stockholder matters is contained under the captions
"Shareholder Approved Equity Compensation," "Non-Shareholder Approved Equity
Compensation," "Common Stock Ownership of Directors, Nominees, and Officers,"
"Common Stock Ownership of Certain Beneficial Owners," and "Equity Compensation
Plan Information" included in the Proxy Statement for the 2002 Annual Meeting of
Stockholders, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
contained under the caption "Certain Relationships and Related Transactions"
included in the Proxy Statement for the 2002 Annual Meeting of Stockholders,
which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Item 8 -- Index to Consolidated Financial Statements
(2) Financial Statement Schedules
None; such schedules have been omitted because of the absence of
conditions under which they are required or because the information
is included in the financial statements or notes thereto.
(3) Exhibits
See Exhibit Index for the exhibits filed as part of or incorporated
by reference into this report.
(b) Reports on Form 8-K
Current Report on Form 8-K filed by the Company on April 2, 2002, relating
to the acquisition of the unemployment cost management businesses of Gates,
McDonald & Company and The Frick Company, as amended by Form 8-K/A filed by
the Company on June 25, 2002.
54
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.
TALX CORPORATION
By: /s/ WILLIAM W. CANFIELD
-----------------------
Chairman, President and Chief
Executive Officer
Date: June 28, 2002
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/ WILLIAM W. CANFIELD Chairman, President, Chief Executive Officer and Director June 28, 2002
- -----------------------
William W. Canfield (Principal Executive Officer)
/s/ RICHARD F. FORD Director June 28, 2002
- -------------------
Richard F. Ford
/s/ CRAIG E. LABARGE Director June 28, 2002
- --------------------
Craig E. LaBarge
/s/ EUGENE M. TOOMBS Director June 28, 2002
- --------------------
Eugene M. Toombs
/s/ M. STEVE YOAKUM Director June 28, 2002
- -------------------
M. Steve Yoakum
/s/ CRAIG N. COHEN Vice President - Application Services and Software, Chief June 28, 2002
- ------------------
Craig N. Cohen Financial Officer and Secretary (Principal Financial Officer
and Principal Accounting Officer)
55
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Asset Purchase Agreement between Gates, McDonald & Company and Garcia
Acquisition Sub, Inc. dated as of March 27, 2002, incorporated by
reference to Exhibit 2.1 to our Current Report on Form 8-K filed April
2, 2002+
2.2 Escrow Agreement by and among Garcia Acquisition Sub, Inc., Gates,
McDonald & Company and LaSalle Bank National Association dated as of
March 27, 2002, incorporated by reference to Exhibit 2.2 to our
Current Report on Form 8-K filed April 2, 2002
2.3 Acquisition Agreement by and among the James E. Frick Profit Sharing
and Employee Stock Ownership Plan and the principal holders of options
to acquire capital stock of James E. Frick, Inc. and TALX Corporation
dated as of March 27, 2002, incorporated by reference to Exhibit 2.3
to our Current Report on Form 8-K filed April 2, 2002+
2.4 Escrow Agreement by and among TALX Corporation, Falcon, LLC and UMB
Bank, N.A. dated as of March 27, 2002, incorporated by reference to
Exhibit 2.4 to our Current Report on Form 8-K filed April 2, 2002
2.5 Lease Services Agreement by and between Gates, McDonald & Company and
Garcia Acquisition Sub, Inc. dated as of March 27, 2002, incorporated
by reference to Exhibit 2.5 to our Current Report on Form 8-K filed
April 2, 2002
2.6 Employee Services Agreement by and between Nationwide Mutual Insurance
Company and Garcia Acquisition Sub, Inc. dated as of March 27, 2002,
incorporated by reference to Exhibit 2.6 to our Current Report on Form
8-K filed April 2, 2002
2.7 Master Transition Services Agreement by and between Gates, McDonald &
Company and Garcia Acquisition Sub, Inc. dated as of March 27, 2002,
incorporated by reference to Exhibit 2.7 to our Current Report on Form
8-K filed April 2, 2002
2.8 Intellectual Property License Agreement by and between Gates, McDonald
& Company and Garcia Acquisition Sub, Inc. dated as of March 27, 2002,
incorporated by reference to Exhibit 2.8 to our Current Report on Form
8-K filed April 2, 2002
3.1 Restated Articles of Incorporation of TALX Corporation, as amended,
incorporated by reference to Exhibit 3.1 to our Annual Report on Form
10-K for the year ended March 31, 1997 (File No. 000-21465)
3.2 Bylaws of TALX Corporation, incorporated by reference to Exhibit 3.2
to our Quarterly Report on Form 10-Q for the period ended December 31,
2001 (File No. 000-21465)
4.1 See Exhibit 3.1
4.2 Warrant Agreement dated as of October 22, 1996 among TALX Corporation,
First Albany Corporation and Principal Financial Securities, Inc.,
incorporated by reference to Exhibit 4.2 to our Annual Report on Form
10-K for the year ended March 31, 1997 (File No. 000-21465)
10.1 Form of Incentive Stock Option Agreement, incorporated by reference to
Exhibit 10.2 to our Registration Statement on Form S-1 (File No.
333-10969) ++
10.2 TALX Corporation Amended and Restated 1994 Stock Option Plan,
incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-1 (File No. 333-10969) ++
10.3 Form of Non-Qualified Stock Option Agreement, incorporated by
reference to Exhibit 10.4 to our Registration Statement on Form S-1
(File No. 333-10969) ++
10.4 TALX Corporation Outside Directors' Stock Option Plan, incorporated by
reference to Exhibit 10.6 to our Registration Statement on Form S-1
(File No. 333-10969) ++
10.4.1 Amendment to TALX Corporation Outside Directors' Stock Option Plan,
incorporated by reference to Exhibit 10.6.1 to our Annual Report on
Form 10-K for the year ended March 31, 2001 (File No. 000-21465) ++
10.5 Form of Director Stock Option Agreement, incorporated by reference to
Exhibit 10.7 to our Annual Report on
56
Form 10-K for the year ended March 31, 1998 (File No. 000-21465) ++
10.6 Lease dated March 28, 1996 by and between TALX Corporation and Stephen
C. Murphy, Thomas W. Holley, Arthur S. Margulis and Samuel B. Murphy,
Trustee of the Samuel B. Murphy Revocable Living Trust UTA 1/9/91, dba
"Adie Road Partnership," incorporated by reference to Exhibit 10.10 to
our Registration Statement on Form S-1 (File No. 333-10969)
10.7 Lease dated August 23, 1993 by and between Prudential Insurance
Company of America, a New Jersey corporation and EKI Incorporated,
incorporated by reference to Exhibit 10.11 to Amendment No. 1 to our
Registration Statement on Form S-1 (File No. 333-10969)
10.8 Amended and Restated Preferred Stock Purchase Agreement dated December
23, 1988 among TALX Corporation, MiTek Industries, Inc., Intech Group,
Inc., Gateway Venture, Zinsmeyer Trusts Partnership, and Missouri
Venture Partners, L.P., incorporated by reference to Exhibit 10.13 to
Amendment No. 1 to our Registration Statement on Form S-1 (File No.
333-10969)
10.9 Securities Purchase Agreement dated November 28, 1990 among TALX
Corporation, MiTek Industries, Inc., Intech Group, Inc., Gateway
Venture Partners II, L.P. and Zinsmeyer Trusts Partnership,
incorporated by reference to Exhibit 10.14 to Amendment No. 1 to our
Registration Statement on Form S-1 (File No. 333-10969)
10.10 Amendment and Waiver Agreement dated as of July 28, 1996 between TALX
Corporation, Intech Group, Inc., Intech Partners, L.P., MiTek
Industries, Inc., Gateway Venture Partners II, L.P., Zinsmeyer Trusts
Partnership and the Missouri State Employee's Retirement System,
incorporated by reference to Exhibit 10.15 to our Registration
Statement on Form S-1 (File No. 333-10969)
10.11 Debenture Purchase Agreement dated May 11, 1990 among TALX
Corporation, Intech Group, Inc., MiTek Industries, Inc., Gateway
Venture Partners II, L.P., Zinsmeyer Trusts Partnership, H. Richard
and Gloria Grodsky, W. Gary and Debra Lowe, Michael and Della Smith
and John E. and Janet B. Tubbesing, incorporated by reference to
Exhibit 10.19 to our Registration Statement on Form S-1 (File No.
333-10969)
10.12 Employment Agreement between TALX Corporation and Mr. Canfield,
incorporated by reference to Exhibit 10.21 to Amendment No. 2 to our
Registration Statement on Form S-1 (File No. 333-10969) ++
10.13 Employment Agreement between TALX Corporation and Mr. Smith,
incorporated by reference to Exhibit 10.23 to Amendment No. 2 to our
Registration Statement on Form S-1 (File No. 333-10969) ++
10.14 Employment Agreement between TALX Corporation and Mr. Cohen ++
10.15 License Agreement by and between A2D, L.P. and TALX Corporation, dated
as of April 1, 2001, incorporated by reference to exhibit 10.26 to our
Annual Report on Form 10-K for the year ended March 31, 2001 (File No.
000-21465) *
10.16 Loan Agreement among LaSalle Bank National Association, Southwest Bank
of St. Louis and TALX Corporation dated as of March 27, 2002,
incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed April 2, 2002+
10.17 Security Agreement executed and delivered by TALX Corporation in
favor of LaSalle Bank National Association dated as of March 27,
2002, incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K filed April 2, 2002
10.18 Security Agreement executed and delivered by Ti3, Inc. in favor of
LaSalle Bank National Association dated as of March 27, 2002,
incorporated by reference to Exhibit 10.3 to our Current Report on
Form 8-K filed April 2, 2002
10.19 Security Agreement executed and delivered by Garcia Acquisition Sub,
Inc. in favor of LaSalle Bank National Association dated as of March
27, 2002, incorporated by reference to Exhibit 10.4 to our Current
Report on Form 8-K filed April 2, 2002
10.20 Security Agreement executed and delivered by James E. Frick, Inc. in
favor of LaSalle Bank National Association dated as of March 27, 2002,
incorporated by reference to Exhibit 10.5 to our Current Report on
Form 8-K filed April 2, 2002
57
10.21 Collateral Assignment of Asset Purchase Agreement executed and
delivered by Garcia Acquisition Sub, Inc. in favor of LaSalle Bank
National Association dated as of March 27, 2002, incorporated by
reference to Exhibit 10.6 to our Current Report on Form 8-K filed
April 2, 2002
10.22 Collateral Assignment of Asset Purchase Agreement executed and
delivered by TALX Corporation in favor of LaSalle Bank National
Association dated as of March 27, 2002, incorporated by reference to
Exhibit 10.7 to our Current Report on Form 8-K filed April 2, 2002
10.23 Stock Pledge of Ti3 Stock executed and delivered by TALX Corporation
in favor of LaSalle Bank National Association dated as of March 27,
2002, incorporated by reference to Exhibit 10.8 to our Current Report
on Form 8-K filed April 2, 2002
10.24 Stock Pledge of Garcia Stock executed and delivered by TALX
Corporation in favor of LaSalle Bank National Association dated as of
March 27, 2002, incorporated by reference to Exhibit 10.9 to our
Current Report on Form 8-K filed April 2, 2002
10.25 Stock Pledge of Frick Stock executed and delivered by TALX Corporation
in favor of LaSalle Bank National Association dated as of March 27,
2002, incorporated by reference to Exhibit 10.10 to our Current Report
on Form 8-K filed April 2, 2002
10.26 Guaranty executed and delivered by Ti3, Inc. in favor of LaSalle Bank
National Association dated as of March 27, 2002, incorporated by
reference to Exhibit 10.11 to our Current Report on Form 8-K filed
April 2, 2002
10.27 Guaranty executed and delivered by Garcia Acquisition Sub, Inc. in
favor of LaSalle Bank National Association dated as of March 27, 2002,
incorporated by reference to Exhibit 10.12 to our Current Report on
Form 8-K filed April 2, 2002
10.28 Guaranty executed and delivered by James E. Frick, Inc. in favor of
LaSalle Bank National Association dated as of March 27, 2002,
incorporated by reference to Exhibit 10.13 to our Current Report on
Form 8-K filed April 2, 2002
10.29 Form of Warrant to Purchase Common Stock dated as of May 7, 1999
issued by TALX Corporation to AGE Investments, Inc. (incorporated by
reference from Exhibit 10.1 to our Registration Statement on Form S-3
(File No. 333-63690))
11.1 Statement regarding computation of Per Share Earnings
21.1 Subsidiaries of TALX Corporation
23.1 Consent of KPMG LLP
- ----------
+ TALX Corporation undertakes to furnish supplementally a copy of any
schedule to the Securities Exchange Commission upon request.
++ Represents management contract or compensatory plan or arrangement.
* Certain portions of this agreement have been omitted pursuant to a
confidential treatment request and filed separately with the Securities
and Exchange Commission.
58