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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2002 or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________
Commission File Number 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)
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
As of August 5, 2002 there were 13,822,486 shares of the Registrant's Common
Stock outstanding.
Exhibit Index is on page 23.
TALX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2002 and June 30, 2002........................... 3
Consolidated Statements of Earnings for the Three Months Ended June 30, 2001 and 2002........ 4
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2001 and 2002...... 5
Notes to Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 20
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings............................................................................... 21
Item 2. Changes in Securities and Use of Proceeds....................................................... 21
Item 3. Defaults Upon Senior Securities................................................................. 21
Item 4. Submission of Matters to a Vote of Securities Holders........................................... 21
Item 5. Other Information............................................................................... 21
Item 6. Exhibits and Reports on Form 8-K................................................................ 21
Signatures................................................................................................ 22
2
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
MARCH 31, JUNE 30,
2002 2002
--------- ---------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 21,431 $ 9,631
Accounts receivables, net 12,469 11,462
Inventories 104 73
Work in progress, less progress billings 2,595 2,817
Prepaid expenses and other current assets 2,917 3,344
Deferred tax assets, net 70 122
--------- ---------
Total current assets 39,586 27,449
Property and equipment, net 11,357 11,254
Capitalized software development costs, net 3,262 3,399
Goodwill 102,564 104,753
Other intangibles, net 19,174 19,473
Other assets 3,158 3,047
--------- ---------
$ 179,101 $ 169,375
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations $ 156 $ 158
Current portion of long term debt 8,000 8,500
Accounts payable 1,200 1,080
Accrued expenses and other liabilities 20,455 8,499
Dividends payable 413 417
Income taxes payable 814 927
Progress billings in excess of work in progress 377 348
Deferred revenue 2,239 2,855
--------- ---------
Total current liabilities 33,654 22,784
Deferred tax liabilities, net 371 978
Capitalized lease obligations 152 111
Long term debt 22,000 19,500
Other long term liabilities 2,417 2,442
--------- ---------
Total liabilities 58,594 45,815
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares and
no shares issued or outstanding at March 31, and June 30, 2002 -- --
Common stock, $.01 par value; authorized 30,000,000 shares,
issued and outstanding 13,909,714 shares at March 31, 2002
and 13,942,553 shares at June 30, 2002 139 139
Additional paid-in capital 162,058 162,588
Accumulated deficit (39,628) (39,118)
Accumulated other comprehensive income:
Unrealized loss on interest rate swap contract, net of tax of $32 -- (48)
Treasury stock, at cost, 120,951 shares at March 31, 2002 and
56 shares at June 30, 2002 (2,062) (1)
--------- ---------
Total shareholders' equity 120,507 123,560
--------- ---------
$ 179,101 $ 169,375
========= =========
See accompanying notes to consolidated financial statements.
3
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except share information)
(unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2001 2002
------------ ------------
Revenues:
The Work Number services $ 6,072 $ 7,804
Unemployment cost management services -- 18,039
Human resources and benefits application services 2,580 2,097
Customer premises systems 1,030 587
Maintenance and support 988 933
------------ ------------
Total revenues 10,670 29,460
------------ ------------
Cost of revenues:
The Work Number services 1,884 2,836
Unemployment cost management services -- 9,260
Human resources and benefits application services 1,853 1,608
Customer premises systems 1,093 339
Maintenance and support 311 196
------------ ------------
Total cost of revenues 5,141 14,239
------------ ------------
Gross margin 5,529 15,221
------------ ------------
Operating expenses:
Selling and marketing 2,260 4,918
General and administrative 1,493 5,854
------------ ------------
Total operating expenses 3,753 10,772
------------ ------------
Operating income 1,776 4,449
------------ ------------
Other income (expense), net:
Interest income 112 24
Interest expense -- (355)
Other, net 11 --
------------ ------------
Total other income (expense), net 123 (331)
------------ ------------
Earnings before income tax expense 1,899 4,118
Income tax expense 750 1,585
------------ ------------
Net earnings $ 1,149 $ 2,533
============ ============
Basic earnings per share $ 0.11 $ 0.18
============ ============
Diluted earnings per share $ 0.11 $ 0.18
============ ============
Weighted average number of shares outstanding - basic 10,374,156 13,862,717
============ ============
Weighted average number of shares outstanding - diluted 10,918,592 14,166,757
============ ============
See accompanying notes to consolidated financial statements.
4
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2001 2002
--------- ---------
Cash flows from operating activities:
Net earnings $ 1,149 $ 2,533
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,193 2,018
Deferred taxes (3) 555
Change in assets and liabilities, excluding
those acquired:
Trade receivables (77) 1,007
Inventories 36 31
Work in progress in excess of progress billings (478) (222)
Prepaid expenses and other current assets (764) (427)
Other assets 53 8
Accounts payable (61) (2)
Accrued expenses and other liabilities (3,515) 560
Income taxes payable 693 395
Progress billings in excess of work in
progress, net (63) (29)
Deferred revenue 116 616
Other noncurrent liabilities -- 25
--------- ---------
Net cash provided by (used in) operating
activities (1,721) 7,068
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (630) (1,566)
Acquisitions, net of cash received -- (15,101)
Capitalized software development costs (801) (484)
--------- ---------
Net cash used in investing activities (1,431) (17,151)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 509 735
Repayments of capitalized lease obligations -- (39)
Repayments of long term debt -- (2,000)
Dividends paid (282) (413)
--------- ---------
Net cash provided by (used in) financing
activities 227 (1,717)
--------- ---------
Net decrease in cash and cash equivalents (2,925) (11,800)
Cash and cash equivalents at beginning of period 5,167 21,431
--------- ---------
Cash and cash equivalents at end of period $ 2,242 $ 9,631
========= =========
See accompanying notes to consolidated financial statements.
5
TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Our consolidated balance sheet at March 31, 2002 was obtained from our audited
balance sheet as of that date. All other financial statements contained herein
are unaudited and, in the opinion of management, contain all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation. Operating results for the three months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2003. Our accounting policies and certain other disclosures are set
forth in the notes to our audited consolidated financial statements as of and
for the year ended March 31, 2002.
NOTE 2 - 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. The weighted average number of shares is based on common
stock outstanding for basic earnings per share and common stock outstanding and
common stock options and warrants for diluted earnings per share in periods when
such common stock options and warrants are not antidilutive. All weighted
average share amounts include the effect of all stock dividends and splits.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended June 30, 2001 and 2002 was $1.1
million and $2.5 million, respectively. The difference between comprehensive
income and net income for the three months ended June 30, 2001 arose from
unrealized holding gains/(losses) on our debt securities portfolio. The
difference between comprehensive income and net income for the three months
ended June 30, 2002 arose from an unrealized holding loss on our interest rate
swap contract.
NOTE 4 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes totaled $58,000 and $637,000 for the three months
ended June 30, 2001 and 2002, respectively. Cash paid for interest totaled $0
and $333,000 for the three months ended June 30, 2001 and 2002.
We declared a $0.03 per share cash dividend, totaling $417,000, on June 14,
2002. The dividend was payable July 19, 2002 to shareholders of record on June
21, 2002.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
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 have adopted SFAS No.
142 effective April 1, 2002. Goodwill and intangible assets determined to have
an indefinite useful life that are acquired in 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, we believe the
impact of implementing SFAS No. 142 will not be significant to the Company.
6
TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes goodwill and other intangible asset activity for
the three months ended June 30, 2002 (dollars in thousands).
OTHER INTANGIBLE ASSETS
----------------------------------------------------------------------------------
CUSTOMER CUSTOMER NON- GROSS ACCUM NET
GOODWILL BASE SOFTWARE RECORDS COMPETE TOTAL AMORT TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
MARCH 31, 2002 ..................... $ 102,564 $ 16,904 $ 153 $ 2,200 $ -- $ 19,257 $ (83) $ 19,174
Adjust intangibles to final
valuations ....................... (619) 679 (153) (16) 109 619 -- 619
Adjust acquired assets to
final valuations ................. 422 -- -- -- -- -- -- --
Transaction costs .................. 118 -- -- -- -- -- -- --
Ti3 acquisition additional
consideration .................... 2,268 -- -- -- -- -- -- --
Amortization ....................... -- -- -- -- -- -- (320) (320)
--------- --------- --------- --------- --------- --------- --------- ---------
JUNE 30, 2002 ...................... $ 104,753 $ 17,583 $ -- $ 2,184 $ 109 $ 19,876 $ (403) $ 19,473
========= ========= ========= ========= ========= ========= ========= =========
Weighted average lives (in years) 14.92 15.00 3.00 14.86
========= ========= ========= =========
Amortization of other intangible assets was $320,000 for the three months ended
June 2002, and is currently projected to be $1.3 million for the fiscal year
ended March 31, 2003, $1.4 million for the fiscal year ended March 31, 2004 and
$1.3 million for each of the fiscal years ended March 31, 2005 through 2007.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENT
On March 27, 2002, we entered into a $30 million variable rate term loan. This
loan, which accrues interest based upon certain LIBOR indexes, will amortize
over three years with a maturity of February 27, 2005. As a condition of our
Term Loan Agreement, we were required to enter into a hedge contract for 50% of
our outstanding term loan as a means of reducing our interest rate exposure.
Pursuant to this requirement, we entered into an interest rate swap contract on
June 26, 2002 for a notional amount of $14 million, which represented 50% of our
outstanding term loan balance on that date. Under this contract, we pay a fixed
rate of 3.45% and receive a variable rate of LIBOR, which is equal to the LIBOR
rate utilized on our term loan. The notional amount of our interest rate swap
contract steps down according the same schedule as our term loan, maintaining a
50% hedged position. All payment dates and maturity dates are the same as our
term loan. This strategy effectively converts 50% of our term loan into a fixed
rate instrument.
The interest rate swap and related gains and losses arising on the contract are
accounted for as a cash flow hedge in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Specifically, changes in the fair value of derivative
instruments designated as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are recognized in income
when the transactions being hedged are completed. The ineffective portion, if
any, of these hedges is recognized in income currently.
As of June 30, 2002, the fair value of the interest rate swap in the amount of
$80,000 is included in accrued expenses and other liabilities. Interest expense
accrued on the swap contract was $3,000 for the first quarter of fiscal 2003.
We do not use financial instruments for trading or speculative purposes.
NOTE 7 - 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.
7
TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAYROLL-BASED SERVICES AND SOFTWARE: This segment includes the following:
o The Work Number Services - The Work Number(R), W-2
eXpress(sm), ePayroll and FasTime(R);
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(sm) services suite.
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.
Summarized financial information concerning our reportable operating segments
are shown in the following table for the periods indicated, in thousands:
Payroll-Based Unemployment
Services and Cost Management
Software Services Total
-------- -------- -----
THREE MONTHS ENDED JUNE 30, 2001
Revenues .............................. $10,670 $ -- $ 10,670
Income from operations ................ 1,776 -- 1,776
Total assets .......................... 32,531 -- 32,531
THREE MONTHS ENDED JUNE 30, 2002
Revenues .............................. $11,421 $ 18,039 $ 29,460
Income from operations ................ 1,807 2,642 4,449
Total assets .......................... 42,461 126,914 169,375
NOTE 8 - COMMITMENTS AND CONTINGENCIES
We are a defendant from time to time in routine lawsuits incidental to our
business. Except to the extent described below, based on information currently
available, we believe that no current proceedings, individual or in the
aggregate, will have a material adverse effect upon us.
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.
8
TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
were filed on July 9, 2002. The parties are awaiting the Court's ruling on the
motion.
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.
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.
9
TALX CORPORATION AND SUBSIDIARIES
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-Q and in our Annual Report on
Form 10-K for the year ended March 31, 2002.
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.
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.
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
Responding to inquiries to verify employment and income information, printing
and distributing pay stubs and annual W-2 forms, and updating employee personnel
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.
10
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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.
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.
We generate revenues from these services by charging clients a monthly fee which
is based upon the number of employees, 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 receive pay statement information, access current and historical
payroll information and 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.
11
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNEMPLOYMENT COST MANAGEMENT
As a result of our recent acquisitions, we provide unemployment cost management
services under the name UC eXpress. 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 behalf of our clients. This includes reviewing employment records
to preserve the clients' rights 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:
- Unemployment tax services
- Employment tax research and recovery
- Unemployment tax planning
- Tax registrations
- 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. Some contracts allow for
additional charges if transaction activity exceeds a certain threshold. Some
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
12
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
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
13
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, Inc.;
the unemployment cost management services business of Gates, McDonald & Company,
a subsidiary of Nationwide Mutual Insurance Company; and James E. Frick, Inc.,
d/b/a The Frick Company, 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.
Effective April 1, 2002, we have adopted the Financial Accounting Standards
Board SFAS No. 142, "Goodwill and Other Intangible 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 purchase business combinations will not be amortized, but instead
tested for impairment on an annual basis.
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 accounting principles generally accepted
in the United States of America, 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 our annual
report on Form 10-K for the year ended March 31, 2002 which contains accounting
policies and other disclosures required by accounting principles generally
accepted in the United States of America.
14
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain statements regarding future results, performance,
expectations, or intentions that may be considered forward-looking statements
("forward-looking statements") within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements relate to, among other things,
business trends and prospects, potential future profitability, revenue growth,
positive cash flows, anticipated improvements in gross margin and general and
administrative expense as a percentage of revenues of the unemployment cost
management business. All statements other than statements of historical facts
included in the corporate report are forward-looking statements. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to be
correct. Actual results could differ materially from those projected in the
forward-looking statements as a result of risks facing us. Such risks include,
but are not limited to,
(1) our ability to effectively integrate acquired companies and
capitalize on cross-selling opportunities,
(2) our ability to successfully integrate acquisitions, including,
without limitation, managing contingent liabilities and retaining
employer-customers,
(3) our ability to increase the size and range of applications for The
Work Number database and successfully market current and future
human resources and benefits application services,
(4) fluctuations in The Work Number revenue due to changes in the level
of residential mortgage activity and interest rates,
(5) changes in mortgage documentation requirements in the secondary
market,
(6) our ability to maintain accurate and confidential data,
(7) future challenges to applicability of the Fair Credit Reporting Act
or any new privacy legislation or interpretation of existing laws,
(8) risk of interruption of computer network and telephone operations,
and
(9) risks surrounding class action litigation and SEC investigation.
See the Company's Annual Report on Form 10-K for the year ended March 31, 2002,
for a complete description of risk factors. You should read this report
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.
15
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, our (1) revenues and
gross margin, (2) gross margin percentage by revenue category, and (3) certain
items from our statements of earnings as a percentage of revenues:
THREE MONTHS PERCENTAGE CHANGE
ENDED JUNE 30, THREE MONTHS
----------------------- ENDED JUNE 30,
2001 2002 2002 OVER 2001
--------- --------- -----------------
(Dollars in thousands)
REVENUES AND GROSS MARGIN:
Revenues:
The Work Number services ........................ $ 6,072 $ 7,804 28.5%
Unemployment cost management services ........... -- 18,039 *
Human resources and benefits application services 2,580 2,097 (18.7)
Customer premises systems ....................... 1,030 587 (43.0)
Maintenance and support ......................... 988 933 (5.6)
--------- ---------
Total revenues ................................ $ 10,670 $ 29,460 176.1
--------- ---------
Gross margin:
The Work Number services ........................ $ 4,188 $ 4,968 18.6%
Unemployment cost management services ........... -- 8,779 *
Human resources and benefits application services 727 489 (32.7)
Customer premises systems ....................... (63) 248 *
Maintenance and support ......................... 677 737 8.9
--------- ---------
Total gross margin ............................ $ 5,529 $ 15,221 175.3
--------- ---------
GROSS MARGIN PERCENTAGE BY REVENUE CATEGORY:
The Work Number services ........................... 69.0% 63.7%
Unemployment cost management services .............. -- 48.7
Human resources and benefits application services .. 28.2 23.3
Customer premises systems .......................... (6.1) 42.2
Maintenance and support ............................ 68.5 79.0
PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services ........................ 56.9% 26.5% 28.5%
Unemployment cost management services ........... -- 61.2 *
Human resources and benefits application services 24.2 7.1 (18.7)
Customer premises systems ....................... 9.6 2.0 (43.0)
Maintenance and support ......................... 9.3 3.2 (5.6)
--------- ---------
Total revenues ................................ 100.0 100.0 176.1
Cost of revenues ................................... 48.2 48.3 177.0
--------- ---------
Gross margin ....................................... 51.8 51.7 175.3
--------- ---------
Operating expenses:
Selling and marketing ........................... 21.2 16.7 117.6
General and administrative ...................... 14.0 19.9 292.1
--------- ---------
Total operating expenses ...................... 35.2 36.6 187.0
--------- ---------
Operating income ................................... 16.6 15.1 150.5
Other income, net .................................. 1.2 (1.1) *
--------- ---------
Earnings before income tax ...................... 17.8 14.0 116.9
Income tax expense ................................. 7.0 5.4 111.3
--------- ---------
Net earnings ....................................... 10.8% 8.6% 120.5%
========= =========
* - not meaningful.
16
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenues. Total revenues increased 176.1% to $29.5 million in the first quarter
of fiscal 2003 from $10.7 million in the first quarter of fiscal 2002.
Revenues from The Work Number services increased 28.5% to $7.8 million in the
first quarter of fiscal 2003 from $6.1 million in the first quarter of fiscal
2002, 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 preceding year.
Revenues from unemployment cost management services for the first quarter of
fiscal 2003 of $18.0 million represent revenues from The Frick Company and the
unemployment cost management business of Gates, McDonald & Company, which we
acquired on March 27, 2002. This represents an increase of approximately 1.7% on
a pro-forma basis compared to the first quarter of fiscal 2002.
Revenues from human resources and benefits application services decreased 18.7%
to $2.1 million in the first quarter of fiscal 2003 from $2.6 million in the
first quarter of fiscal 2002, due to normal client attrition not being replaced
by new sales, due to the poor economic conditions which began affecting our
performance in the second quarter of fiscal 2002.
Revenues from customer premises systems decreased 43.0% to $587,000 in the first
quarter of fiscal 2003 from $1.0 million in the first quarter of fiscal 2002.
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 5.6% to $933,000 in the first quarter of fiscal 2003 from $988,000 in
the first quarter of fiscal 2002, reflecting the support provided to a shrinking
installed base as we shift our strategy towards providing similar solutions
through application services.
We anticipate revenues from customer premises systems and maintenance and
support will continue to decrease from current quarter results as we have
discontinued 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 175.3% to $15.2 million in the first
quarter of fiscal 2003 from $5.5 million in the first quarter of fiscal 2002. As
a percentage of total revenues, gross margin decreased slightly to 51.7% in the
first quarter of fiscal 2003 from 51.8% in the first quarter of fiscal 2002.
The Work Number services gross margin increased 18.6% to $5.0 million, or 63.7%
of corresponding revenue, in the first quarter of fiscal 2003 from $4.2 million,
or 69.0% of corresponding revenue in the first quarter of fiscal 2002. The
increase in gross margin was due primarily to revenue increases. The gross
margin percentage decreased slightly due to the addition of Ti3, which has a
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.
Unemployment cost management services gross margin was $8.8 million, or 48.7% of
corresponding revenue in the first quarter of fiscal 2003. We believe that this
gross margin percentage is consistent with the comparable year-ago period for
these businesses on a stand-alone basis. We expect to realize improvements in
the gross margin percentage throughout the fiscal year as we continue to
consolidate the cost structure of the acquired businesses.
Human resources and benefits application services gross margin decreased 32.7%
to $489,000, or 23.3% of corresponding revenue, in the first quarter of fiscal
2003 from $727,000, or 28.2% of corresponding revenue in the first quarter of
fiscal 2002. This decrease in gross margin and gross margin percentage is
principally due to a higher level
17
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of fixed personnel costs in place for additional revenue growth that did not
occur because of the poor economic conditions which began in the second quarter
of fiscal 2002.
Customer premises systems gross margin increased to $248,000, or 42.2% of
corresponding revenue, in the first quarter of fiscal 2003 from ($63,000), or
(6.1)% of corresponding revenue in the first quarter of fiscal 2002. The
increase in gross margin and gross margin percentage is due to the elimination
of certain fixed costs, principally amortization of capitalized software, that
remained during the first quarter of fiscal 2002 as we were shifting our
business focus to The Work Number services and human resources and benefits
application services. During fiscal 2003, we were able to size this
infrastructure to a more appropriate level.
Maintenance and support gross margin increased 8.9% to $737,000, or 79.0% of
corresponding revenue, in the first quarter of fiscal 2003, from $677,000, or
68.5% of corresponding revenue, in the first quarter of fiscal 2002. The
increase in gross margin and gross margin percentage is due to a lower level of
third-party hardware support costs and improved leveraging of personnel costs,
offset by lower revenues caused by a shrinking client base.
Selling and Marketing Expenses. Selling and marketing expenses increased 117.6%
to $4.9 million in the first quarter of fiscal 2003 from $2.3 million in the
first quarter of fiscal 2002. Of this increase, $2.7 million is due to the
addition of our newly acquired unemployment cost management services businesses.
After excluding the results of this addition, our selling and marketing expenses
related to our traditional businesses were consistent with the year-ago period.
As a percentage of revenues, such expenses decreased to 16.7% in the first
quarter of fiscal 2003 from 21.2% in the first quarter of fiscal 2002. The
decrease in percentage of revenues is 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 292.1% to $5.9 million in the first quarter of fiscal 2003 from $1.5
million in the first quarter of fiscal 2002. Of this increase, $3.7 million is
due to the addition of Ti3 and our newly acquired unemployment cost management
services businesses. After excluding the results of these additions, our general
and administrative expenses related to our traditional businesses increased
approximately $700,000, due to the increased infrastructure costs of a growing
business and workforce. As a percentage of revenues, such expenses increased to
19.9% in the first quarter of fiscal 2003 from 14.0% in the first quarter of
fiscal 2002. This increase is due primarily to the newly acquired unemployment
cost management services businesses historically having higher general and
administrative expenses as a percentage of revenue compared to our traditional
businesses. We expect to see this percentage improve throughout the fiscal year
as we continue to consolidate the cost structure of the acquired businesses.
Additionally, the increase in general and administrative expenses in our
traditional businesses as a percentage of revenues is due to revenue growth
rates, particularly in human resources and benefits application services, that
were lower than anticipated.
Other Income, Net. Other income decreased to $331,000 of net other expense in
the first quarter of fiscal 2003 from $123,000 of net other income in the first
quarter of fiscal 2002, due to a shift from a net investing position to a net
borrowing position. This is due to the financing related to our acquisitions of
the unemployment cost management services businesses.
Income Tax Expense. Our effective income tax rate was 38.5% in the first quarter
of fiscal 2003 and 39.5% in the first quarter of fiscal 2002. The decrease is
due to a lower effective state income tax rate. As we continue to move our
business to an application services model, we are reducing the amount of taxes
paid on hardware and software sales in states with higher income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed our operations through cash flows from
operations, except as described below.
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
18
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $5.9 million at March 31, 2002 and $4.7 million at June
30, 2002. Total working capital decreased during the three months ended June 30,
2002 due principally to payments made related to our March 27, 2002
acquisitions.
Our accounts receivable decreased from $12.5 million at March 31, 2002 to $11.5
million at June 30, 2002, due primarily to improved collections of accounts
receivable within our unemployment cost management services segment.
Our capital expenditures, principally computer equipment, were $1.6 million
during the three months ended June 30, 2002. At June 30, 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.
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. No shares were repurchased during the three months ended June 30, 2002.
Cumulative shares repurchased amount to 297,500. Share amounts are reported on a
pre-dividend basis. Except for the 56 shares remaining in the treasury at June
30, 2002, all shares repurchased have been reissued in connection with employee
stock option exercises and employee stock purchase plan purchases.
During the quarter ended June 30, 2002, we continued our quarterly dividend
program, declaring a $0.03 dividend on our common stock.
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 unemployment cost management business
of Gates, McDonald & Company and The Frick Company, 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. 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 guarantees and stock pledges of our
subsidiaries and security interests in substantially all of our, and our
subsidiaries, assets.
19
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 unemployment cost management
business of Gates, McDonald & Company and The Frick Company. 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.
As a condition of our Term Loan Agreement, we were required to enter into a
hedge contract for 50% of our outstanding term loan as a means of reducing our
interest rate exposure. Pursuant to this requirement, we entered into an
interest rate swap contract on June 26, 2002 for a notional amount of $14
million, which represented 50% of our outstanding term loan balance on that
date. Under this contract, we pay a fixed rate of 3.45% and receive a variable
rate of LIBOR, which is equal to the LIBOR rate utilized on our term loan. The
notional amount of our interest rate swap contract steps down according the same
schedule as our term loan, maintaining a 50% hedged position. All payment dates
and maturity dates are the same as our term loan. This strategy effectively
converts 50% of our term loan into a fixed rate instrument.
The interest rate swap and related gains and losses arising on the contract are
accounted for as a cash flow hedge in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Specifically, changes in the fair value of derivative
instruments designated as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are recognized in income
when the transactions being hedged are completed. The ineffective portion, if
any, of these hedges is recognized in income currently.
As of June 30, 2002, the fair value of the interest rate swap in the amount of
$80,000 is included in accrued expenses and other liabilities. Interest expense
accrued on the swap contract was $3,000 for the first quarter of fiscal 2003.
We do not use financial instruments for trading or speculative purposes.
The Company is a defendant in pending lawsuits which are described in note 8 of
our Notes to Unaudited Consolidated Financial Statements, which is incorporated
by reference herein.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed above, 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. 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 June 30, 2002, we had $28 million principal outstanding on our term loan,
of which $14 million was hedged with an interest rate swap contract. On an
annual basis, a 100 basis point change in interest rates would result in an
approximate $140,000 change to our annual interest expense, based on net
variable borrowings of $14 million.
20
TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 8 of our Notes to Unaudited Consolidated
Financial Statements is incorporated by reference herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated March 27, 2002 and filed
April 2, 2002 to report under Item 2 the acquisitions of the
unemployment cost management business of Gates, McDonald &
Company and James E. Frick, Inc. and the related financing
thereof.
(ii) Current Report on Form 8-K/A dated March 27, 2002 and filed
June 25, 2002 under Item 7 to file the historical financial
statements of the unemployment cost management business of
Gates, McDonald & Company and James E. Frick, Inc. and
related pro-forma financial statements of the Company.
21
TALX CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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
Date: August 14, 2002 By: /s/ WILLIAM W. CANFIELD
----------------------------------------------
William W. Canfield
Chairman, President and
Chief Executive Officer
Date: August 14, 2002 By: /s/ CRAIG N. COHEN
----------------------------------------------
Craig N. Cohen
Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
22
TALX CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Restated Articles of Incorporation, as amended, incorporated
by reference from Exhibit 3.1 to our Form 10-K for the
fiscal year ended March 31, 1997 (File No. 000-21465)
3.2 Bylaws, as amended and restated, 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)
11 Computation of Earnings Per Share
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23