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UNITED STATES
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 September 30, 2003 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 incorporation (I.R.S. Employer
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [x] Yes [ ]No
As of October 27, 2003 there were 13,565,319 shares of the Registrant's Common
Stock outstanding, net of treasury shares held by the Company.
Exhibit Index is on page 31.
TALX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2003 and September 30, 2003................ 3
Consolidated Statements of Earnings for the Three and Six Months Ended
September 30, 2002 and 2003............................................................ 4
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2002 and 2003............................................................ 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 28
Item 4. Controls and Procedures.................................................................. 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 29
Item 2. Changes in Securities and Use of Proceeds................................................ 29
Item 3. Defaults Upon Senior Securities.......................................................... 29
Item 4. Submission of Matters to a Vote of Securities Holders.................................... 29
Item 5. Other Information........................................................................ 29
Item 6. Exhibits and Reports on Form 8-K......................................................... 29
Signatures .................................................................................... 30
2
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
MARCH 31, SEPTEMBER 30,
2003 2003
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,409 $ 3,654
Short term investments - 2,275
Accounts receivable, net 18,082 16,558
Work in progress, less progress billings 1,091 1,054
Prepaid expenses and other current assets 4,122 3,164
Deferred tax assets, net 556 620
------------- -------------
Total current assets 33,260 27,325
Property and equipment, net 10,315 9,524
Capitalized software development costs, net 3,804 2,330
Goodwill 105,469 106,624
Other intangibles, net 18,450 18,107
Net assets of business held for sale - 475
Other assets 1,431 1,313
------------- -------------
$ 172,729 $ 165,698
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,560 $ 933
Accrued expenses and other current liabilities 11,478 11,801
Dividends payable 542 676
Current portion of capitalized lease obligations 130 35
Current portion of long term debt 10,000 11,000
Income taxes payable 482 543
Deferred revenue 7,537 3,605
------------- -------------
Total current liabilities 31,729 28,593
Deferred tax liabilities, net 3,372 4,369
Capitalized lease obligations, less current portion 22 -
Long term debt, less current portion 12,000 2,753
Other non-current liabilities 2,508 2,553
------------- -------------
Total liabilities 49,631 38,268
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares and no
shares issued or outstanding at March 31, 2003 and September 30, 2003 - -
Common stock, $.01 par value; authorized 30,000,000 shares, issued
13,948,542 shares at March 31, 2003 and September 30, 2003 140 140
Additional paid-in capital 162,773 162,930
Accumulated deficit (34,806) (30,348)
Accumulated other comprehensive income:
Unrealized loss on interest rate swap contract, net of tax of $99
at March 31, 2003 and $65 at September 30, 2003 (158) (103)
Treasury stock, at cost, 409,231 shares at March 31, 2003 and
402,906 shares at September 30, 2003 (4,851) (5,189)
------------- -------------
Total shareholders' equity 123,098 127,430
------------- -------------
$ 172,729 $ 165,698
============= =============
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 SEPT. 30, SIX MONTHS ENDED SEPT. 30,
--------------------------------- ---------------------------------
2002 2003 2002 2003
-------------- -------------- -------------- --------------
Revenues:
The Work Number services $ 8,573 $ 11,627 $ 16,189 $ 22,570
Unemployment cost management services 17,939 18,701 35,978 36,885
Customer premises systems 313 - 900 -
Maintenance and support 916 1,198 1,849 2,251
-------------- -------------- -------------- --------------
Total revenues 27,741 31,526 54,916 61,706
-------------- -------------- -------------- --------------
Cost of revenues:
The Work Number services 3,018 3,093 5,833 6,426
Unemployment cost management services 9,511 10,035 18,771 19,759
Customer premises systems 237 - 576 -
Maintenance and support 179 328 376 659
-------------- -------------- -------------- --------------
Total cost of revenues 12,945 13,456 25,556 26,844
-------------- -------------- -------------- --------------
Gross margin 14,796 18,070 29,360 34,862
-------------- -------------- -------------- --------------
Operating expenses:
Selling and marketing 4,160 5,894 8,883 11,924
General and administrative 6,247 6,623 12,102 12,639
-------------- -------------- -------------- --------------
Total operating expenses 10,407 12,517 20,985 24,563
-------------- -------------- -------------- --------------
Operating income 4,389 5,553 8,375 10,299
-------------- -------------- -------------- --------------
Other income (expense), net:
Interest income 31 13 55 37
Interest expense (409) (239) (765) (534)
Other, net - 1 - 4
-------------- -------------- -------------- --------------
Total other income (expense), net (378) (225) (710) (493)
-------------- -------------- -------------- --------------
Earnings from continuing operations before
income tax expense 4,011 5,328 7,665 9,806
Income tax expense 1,534 2,078 2,940 3,800
-------------- -------------- -------------- --------------
Earnings from continuing operations 2,477 3,250 4,725 6,006
Discontinued operations:
Earnings (loss) from discontinued operations, net
of income taxes 1 22 (172) 100
-------------- -------------- -------------- --------------
Net earnings $ 2,478 $ 3,272 $ 4,553 $ 6,106
============== ============== ============== ==============
Basic earnings (loss) per share:
Continuing operations $ 0.18 $ 0.24 $ 0.34 $ 0.44
Discontinued operations 0.00 0.00 (0.01) 0.01
-------------- -------------- -------------- --------------
Net earnings $ 0.18 $ 0.24 $ 0.33 $ 0.45
============== ============== ============== ==============
Diluted earnings (loss) per share:
Continuing operations $ 0.17 $ 0.23 $ 0.33 $ 0.42
Discontinued operations 0.00 0.00 (0.01) 0.01
-------------- -------------- -------------- --------------
Net earnings $ 0.17 $ 0.23 $ 0.32 $ 0.43
============== ============== ============== ==============
Weighted average number of shares outstanding - basic 13,787,004 13,528,326 13,824,861 13,518,042
============== ============== ============== ==============
Weighted average number of shares outstanding - diluted 14,237,195 14,300,567 14,318,587 14,162,222
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
4
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
SIX MONTHS ENDED SEPT. 30,
---------------------------------
2002 2003
-------------- --------------
Cash flows from operating activities:
Net earnings $ 4,553 $ 6,106
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,951 4,012
Deferred taxes 895 933
Net assets of business held for sale - (101)
Change in assets and liabilities, excluding those acquired:
Accounts receivable, net 529 1,690
Work in progress, less progress billings 161 (462)
Prepaid expenses and other current assets (640) (428)
Other assets 11 (3)
Accounts payable 268 (627)
Accrued expenses and other current liabilities 2,751 145
Income taxes payable (435) 27
Deferred revenue 1,293 (306)
Other non-current liabilities 49 45
-------------- --------------
Net cash provided by operating activities 13,386 11,031
-------------- --------------
Cash flows from investing activities:
Additions to property and equipment (2,634) (2,242)
Acquisitions, net of cash received (19,937) (1,626)
Purchases of short-term investments (4,000) (3,975)
Proceeds from sale of short-term investments 4,000 1,700
Capitalized software development costs (948) (501)
-------------- --------------
Net cash used in investing activities (23,519) (6,644)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock 1,099 1,113
Purchase of common stock (3,449) (1,795)
Repayments of capitalized lease obligations (77) (117)
Repayments under long-term debt facility (4,000) (8,263)
Dividends paid (830) (1,080)
-------------- --------------
Net cash used in financing activities (7,257) (10,142)
-------------- --------------
Net decrease in cash and cash equivalents (17,390) (5,755)
Cash and cash equivalents at beginning of period 21,431 9,409
-------------- --------------
Cash and cash equivalents at end of period $ 4,041 $ 3,654
============== ==============
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, 2003 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 and six months ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending March 31, 2004. 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, 2003.
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.
THREE MONTHS ENDED SEPT. 30, SIX MONTHS ENDED SEPT. 30,
--------------------------------- ---------------------------------
2002 2003 2002 2003
-------------- -------------- -------------- --------------
BASIC EARNINGS (LOSS) PER SHARE:
Actual shares outstanding - beginning of period .. 13,942,553 13,948,542 13,909,714 13,948,542
Weighted average number of common shares issued,
net of treasury stock .......................... (155,549) (420,216) (84,853) (430,500)
-------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding - end of period .................... 13,787,004 13,528,326 13,824,861 13,518,042
============== ============== ============== ==============
Net earnings (loss):
Continuing operations .......................... $ 2,477,000 $ 3,250,000 $ 4,725,000 $ 6,006,000
Discontinued operations ........................ 1,000 22,000 (172,000) 100,000
-------------- -------------- -------------- --------------
Net earnings ................................. $ 2,478,000 $ 3,272,000 $ 4,553,000 $ 6,106,000
============== ============== ============== ==============
Basic earnings (loss) per common share:
Continuing operations .......................... $ 0.18 $ 0.24 $ 0.34 $ 0.44
Discontinued operations ........................ 0.00 0.00 (0.01) 0.01
-------------- -------------- -------------- --------------
Net earnings ................................. $ 0.18 $ 0.24 $ 0.33 $ 0.45
============== ============== ============== ==============
DILUTED EARNINGS (LOSS) PER SHARE:
Actual shares outstanding - beginning of period .. 13,942,553 13,948,542 13,909,714 13,948,542
Weighted average number of common shares issued,
net of treasury stock .......................... 294,642 352,025 408,873 213,680
-------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding - end of period .................... 14,237,195 14,300,567 14,318,587 14,162,222
============== ============== ============== ==============
Net earnings (loss):
Continuing operations .......................... $ 2,477,000 $ 3,250,000 $ 4,725,000 $ 6,006,000
Discontinued operations ........................ 1,000 22,000 (172,000) 100,000
-------------- -------------- -------------- --------------
Net earnings ................................. $ 2,478,000 $ 3,272,000 $ 4,553,000 $ 6,106,000
============== ============== ============== ==============
Basic earnings (loss) per common share:
Continuing operations .......................... $ 0.17 $ 0.23 $ 0.33 $ 0.42
Discontinued operations ........................ 0.00 0.00 (0.01) 0.01
-------------- -------------- -------------- --------------
Net earnings ................................. $ 0.17 $ 0.23 $ 0.32 $ 0.43
============== ============== ============== ==============
6
NOTE 3 - RECLASSIFICATIONS
Certain balances as of March 31, 2003 have been reclassified to conform with the
current period presentation.
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended September 30, 2002 and 2003 was
$2.3 million and $3.3 million, respectively, and for the six months ended
September 30, 2002 and 2003 was $4.3 million and $6.2 million, respectively. The
difference between comprehensive income and net income arose from unrealized
holding gains (losses) on our interest rate swap contract.
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes totaled $2.5 million and $2.9 million for the six
months ended September 30, 2002 and 2003, respectively. Cash paid for interest
totaled $708,000 and $467,000 for the six months ended September 30, 2002 and
2003, respectively.
We declared a $0.05 per share cash dividend, totaling $676,000, on September 4,
2003. The dividend was payable October 17, 2003 to shareholders of record on
September 19, 2003.
NOTE 6 - ACQUISITION
On June 30, 2003 we announced the acquisition of Johnson & Associates, L.L.C.,
an Omaha, Nebraska-based company specializing in unemployment cost management
("UCM") and employment tax credit administration services. We funded the
acquisition on June 30, 2003, and the effective date was July 1, 2003. As
consideration for the acquisition, we paid $1.5 million in cash at closing,
including transaction costs. We may make additional payments in cash to Johnson
& Associates shareholders depending upon the acquired company's performance in
the 12 months immediately following closing. Goodwill of $1.1 million resulting
from this acquisition is not being amortized, but will be reviewed for
impairment on an annual basis. We expect that the full amount of goodwill will
be deductible for tax purposes. See also Note 7 below.
In addition to its UCM services, Johnson & Associates provides employment tax
credit services, which we have not previously provided. This service allows
clients to take advantage of federal tax incentive programs for hiring
individuals who have traditionally faced difficulties in securing employment. We
intend to cross-sell this complementary service into our existing client base.
Operations of this business are included in our unemployment cost management
services revenue line and are marketed as part of UC eXpress.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
TALX acquired certain identifiable intangible assets in connection with the
acquisitions of Ti3, Inc.; the unemployment cost management services business
(the "GM Unemployment Compensation Business") of Gates, McDonald & Company, a
subsidiary of Nationwide Mutual Insurance Company; James E. Frick, Inc., d/b/a
The Frick Company; and Johnson & Associates. These assets were recorded in
accordance with the Financial Accounting Standards Board SFAS No. 141, "Business
Combinations."
Effective April 1, 2002, we 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. Through the use of an independent business appraiser,
we reviewed our goodwill and intangible assets as of December 31, 2002 and
determined that no impairment existed. We anticipate future assessments will be
conducted on an annual basis as of the end of our third fiscal quarter.
7
The following table summarizes goodwill and other intangible asset activity for
the six months ended September 30, 2003 (dollars in thousands).
OTHER INTANGIBLE ASSETS
-------------------------------------------------------------------
CUSTOMER CUSTOMER NON-
GOODWILL RELATIONSHIPS RECORDS COMPETE TOTAL
-------- ------------- ------- ------- -------------
GROSS CARRYING VALUES:
March 31, 2003 ....................... $ 105,469 $ 17,583 $ 2,184 $ 109 $ 19,876
Additional acquisition costs ........ 94 -- -- -- --
Johnson & Associates acquisition .... 1,061 255 -- 103 358
------------- ------------- ------------- ------------- -------------
September 30, 2003 ................... $ 106,624 $ 17,838 $ 2,184 $ 212 $ 20,234
============= ============= ============= ============= =============
ACCUMULATED AMORTIZATION:
March 31, 2003 ....................... $ -- $ 1,215 $ 147 $ 64 $ 1,426
Amortization ........................ -- 597 73 31 701
------------- ------------- ------------- ------------- -------------
September 30, 2003 ................... $ -- $ 1,812 $ 220 $ 95 $ 2,127
============= ============= ============= ============= =============
Weighted average lives (in years) ....... 14.85 15.00 2.51 14.74
============= ============= ============= =============
Amortization of other intangible assets was $701,000 for the six months ended
September 30, 2003 and is projected to be $1.4 million each of the fiscal years
ended March 31, 2004 through 2008.
NOTE 8 - LONG-TERM DEBT
In connection with the acquisitions of The Frick Company and the GM Unemployment
Compensation Business on March 27, 2002, pursuant to a loan agreement dated as
of March 27, 2002 (as amended by that certain First Amendment to Loan Agreement
dated as of July 29, 2002, as further amended by that certain Second Amendment
to Loan Agreement dated as of January 27, 2003 and as further amended by that
certain Third Amendment to Loan Agreement dated as of June 30, 2003 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, unless
certain tests are met. We made an excess cash flow principal payment of $3.3
million during the first half of fiscal 2004. 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 bore interest at the applicable eurodollar rate plus 2.25% and base
rate loans bore interest at the applicable base rate. Commencing March 28, 2003,
the applicable margin for eurodollar rate loans varies from 1.75% to 2.25%, and
the applicable margin for base rate loans remains at 0.00%, in each case based
upon our ratio of total indebtedness to EBITDA. We may make prepayments under
the Term Loan and Revolving Credit Facility without penalty. 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 loan
obligations (Term Loan and Revolving Credit Facility).
The Loan Agreement is secured by security interests in substantially all of the
assets of our company and of our two wholly-owned subsidiaries, Ti3, Inc. and
TALX UCM Services, Inc. (the "Subsidiaries"), the guarantees of the
Subsidiaries, and a pledge of the stock of each of the 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 Frick Company and the GM
Unemployment Compensation Business. The proceeds of loans made under the
Revolving Credit Facility may be used solely for working capital,
8
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, to finance certain permitted acquisitions and to finance
treasury stock repurchases. The Loan Agreement also requires compliance with
certain financial covenants based on our minimum net worth, minimum EBITDA, our
ratio of total indebtedness to EBITDA and our ratio of EBITDA to fixed charges.
The Loan Agreement further requires compliance with certain operating and other
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, impose restrictions on distributions to shareholders, change of
control of TALX, investments, acquisitions and liens, and which require
compliance, in all material respects, with material laws. The Loan Agreement
generally prohibits the payment of cash dividends, except for cash dividends not
in excess of $3.0 million per fiscal year so long as we are not in default at
the time of the declaration. The Loan Agreement also contains various
representations and warranties, including among other things, the accuracy of
financial statements and other information delivered to the Lenders, the absence
of changes which would have or would reasonably be likely to have a material
adverse effect (as customarily included in secured credit facilities of this
nature).
Most recently, we entered into a Third Amendment to Loan Agreement effective as
of June 30, 2003 (the "Third Amendment"). The Subsidiaries consented to the
Third Amendment, as guarantors. Among other things, the Third Amendment
increased the amount of dividends we are permitted to make during any fiscal
year, modified the eurodollar margins, modified the maximum ratio of total
indebtedness to EBITDA and modified the minimum EBITDA covenant for the quarters
ended June 30, 2003 through the maturity of the Loan Agreement. The Third
Amendment further modified the definition of excess cash flow such that treasury
stock repurchases are included as a fixed charge in the calculation of excess
cash flow, as defined, which required us to pay to the Lenders $3.3 million by
July 31, 2003. The Third Amendment further modified the definition of "Use of
Proceeds" to clarify the permitted use of the Revolving Credit Facility for such
treasury stock repurchases. Lastly, the Third Amendment increased the amount of
purchase price and other expenses permitted to be incurred for certain
acquisitions during any fiscal year. As of September 30, 2003, we believe we
were in material compliance with all covenants under the Loan Agreement, after
giving effect to the Third Amendment.
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENT
On March 27, 2002, we entered into the Term Loan which accrues interest based
upon certain LIBOR indexes and will amortize over three years with a maturity of
February 27, 2005. As a condition of the 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 to the
same schedule as our term loan. All payment dates and maturity dates are the
same as our term loan. This strategy effectively converts a portion 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.
As of September 30, 2003, the fair value of the interest rate swap in the amount
of $168,000 is included in accrued expenses and other liabilities.
We do not use financial instruments for trading or speculative purposes.
NOTE 10 - STOCK-BASED COMPENSATION
We have historically accounted for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, as
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation."
9
Since all of our options are granted with an option price equal to the market
price at the time of grant, we have not recognized any stock-based employee
compensation cost under our stock option plans. SFAS No. 123 requires pro forma
disclosure of the impact on earnings as if the compensation expense for these
plans had been determined using the fair value method. Compensation cost is
calculated under a straight line basis. The following table presents our net
earnings and earnings per share as reported and the pro forma amounts that would
have been reported using the fair value method under SFAS 123 for the periods
presented:
THREE MONTHS ENDED SEPT 30, SIX MONTHS ENDED SEPT 30,
--------------------------- -------------------------
2002 2003 2002 2003
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings, as reported..................................... $ 2,478 $ 3,272 $ 4,553 $ 6,106
Stock-based employee compensation cost, net of taxes.......... 30 2 683 368
-------- -------- -------- --------
Net earnings, pro forma.................................... $ 2,448 $ 3,270 $ 3,870 $ 5,738
======== ======== ======== ========
Basic earnings per share:
As reported................................................ $ 0.18 $ 0.24 $ 0.33 $ 0.45
======== ======== ======== ========
Pro forma.................................................. $ 0.18 $ 0.24 $ 0.28 $ 0.42
======== ======== ======== ========
Diluted earnings per share:
As reported................................................ $ 0.17 $ 0.23 $ 0.32 $ 0.43
======== ======== ======== ========
Pro forma.................................................. $ 0.17 $ 0.23 $ 0.27 $ 0.41
======== ======== ======== ========
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 the three and six month periods
ended September 30, 2002 and September 30, 2003 is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 80% for the three and six
month periods ended September 30, 2002 and September 30, 2003; risk-free
interest rate of 3.50% and 3.25% for the three and six month periods ended
September 30, 2002 and September 30, 2003, respectively; expected life of 7.5
years for the three and six month periods ended September 30, 2002 and September
30, 2003, respectively; and an expected dividend yield of 1.20% and 0.80% for
the three and six month periods ended September 30, 2002 and September 30, 2003,
respectively.
NOTE 11 - 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. During our prior fiscal year, we had identified two
reportable segments: Payroll-Based Services and Software (which included The
Work Number Services, Human Resources and Benefits Application Services and
Customer Premises Systems and the related Maintenance and Support) and
Unemployment Cost Management Services (which included our UC eXpress(SM)
services suite).
Effective April 1, 2003, we consolidated our sales and services team into
regional territories. Each territory is responsible for selling all services,
and we no longer have any teams or individuals dedicated to just one service
offering. Further, management does not evaluate any of our businesses on a
regional basis, other than sales team performance. Additionally, we consolidated
all back-office general and administrative groups by function, as opposed to
service line. Therefore, effective April 1, 2003, management has determined that
we have only one reportable segment.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
We are a defendant from time to time in lawsuits. Except to the extent described
below, based on information currently available, we believe that no current
proceedings, individually or in the aggregate, will have a material adverse
effect upon the Company.
10
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 our 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. In October 2002, the case
was transferred from the Honorable Donald J. Stohr, United States District
Judge, to the Honorable Henry E. Audrey, 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. On March 31, 2003, the Court granted defendants' motion in part,
dismissing plaintiffs' claims under Section 10(b) of the Exchange Act and Rule
10b-5 thereunder, without prejudice. The Court granted plaintiffs sixty
additional days to file an amended consolidated complaint, and defendants sixty
days thereafter to respond to the amended complaint.
On May 29, 2003, plaintiffs in the several pending securities lawsuits filed an
Amended Consolidated Complaint ("Amended Complaint"). The Amended Complaint
amends the original Complaint by adding allegations pertaining to our December
2002 restatement of financials and expanding the Putative Class Period to
include all persons who purchased or otherwise acquired shares of our common
stock between April 25, 2001 and November 14, 2002 ("Amended Putative Class
Period"). The Amended Complaint alleges, among other things, that certain
statements in the registration statement and prospectus for our August 2001
secondary common stock offering, as well as other statements made by us and/or
the Individual Defendants during the Amended Putative Class Period, were
materially false and misleading because we capitalized instead of expensed $1.6
million related to a patent technology license agreement executed in March 2001;
expensed approximately $158,000 in bonus payments to executive officers in the
first quarter of fiscal 2002 instead of the fourth fiscal quarter of 2001;
improperly recognized revenue and expenses during the Amended Putative Class
Period; and miscalculated diluted earnings per share during the Amended Putative
Class Period. All of these matters were the subject of our 2002 restatement of
financials described in our Form 10-K/A for the year ended March 31, 2002. The
Amended Complaint also alleges, as did the original Complaint, that we did not
properly account for certain software and inventory, did not reflect certain
write-offs, and did not accurately disclose certain business prospects. The
Amended Complaint 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 July 30,
2003, the defendants filed a motion to dismiss the Amended Complaint. On
September 26, 2003, plaintiffs filed their opposition to the motion to dismiss.
The Court has not yet ruled on the motion.
11
We intend to defend vigorously against the plaintiffs' claims. However, due to
the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of the litigation. An unfavorable outcome could have a material
adverse impact on our business, financial condition and results of operations.
As previously reported, the Securities and Exchange Commission initially
commenced an investigation into our second fiscal quarter 2001 financial
results. We are cooperating fully with the investigation. On November 12, 2002,
the staff of the Central Regional Office of the Commission sent us a "Wells
letter" indicating the staff's plans to recommend to the Commission that it
institute an enforcement action against us and two of our executive officers,
William Canfield and Craig Cohen, related to two matters, and requesting that we
and such executive officers submit responses to the letter. The Wells letter
states that the SEC staff will allege, among other things, that our financial
statements were misleading as a result of capitalizing instead of expensing $1.6
million related to a patent technology license agreement executed in March 2001
and expensing approximately $158,000 in bonus payments to executive officers in
the first quarter of fiscal 2002 instead of the fourth fiscal quarter of 2001.
Those items are among those that are the subject of the restatement as disclosed
on our Form 10-K/A for the year ended March 31, 2002. The remedies the
Commission may consider, if appropriate, include an injunction against us and
the individuals and an officer and director bar and disgorgement and civil money
penalties against the individuals. The Company and the individuals have filed
separate written responses to the Wells letter setting forth the reasons why the
proposed enforcement action should not be instituted by the Commission.
As previously reported, we have restated our financial statements for each of
the quarters ended June 30, 2001 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, plaintiffs who
have filed lawsuits against us previously have amended their complaints to
include claims related to this restatement, as described above. We cannot
predict the outcome of any such litigation at this time. Additionally, the
lenders under the Loan Agreement, which is described above in Note 6, could seek
to exercise remedies which may be available to them, such as acceleration of our
loans, in the event they determine that, as a result of the restatement
discussed above or the SEC investigation discussed above or otherwise, we have
breached a covenant or representation and warranty in the Loan Agreement. If an
unfavorable result occurred in any such action, our business and financial
conditions could be harmed.
As of the date hereof, the SEC is investigating our accounting for certain
items, including those which were the subject of the restatement. At this time,
we cannot predict whether or not any additional regulatory investigation related
to this restatement or any other matter will be commenced, or if it is, the
outcome of any such investigation. However, if any such investigation were to
result in a regulatory proceeding or action against us, our business and
financial condition could be harmed.
As required under our articles of incorporation, we are obligated to indemnify
and advance expenses of each of the Individual Defendants, as officers and/or
directors of the Company to the fullest extent permitted by Missouri law, in
connection with the above matters, subject to their obligations to repay amounts
advanced under certain circumstances. Stifel, Nicolaus & Company and A.G.
Edwards & Sons, Inc. have made demands on the Company to indemnify and advance
expenses to them in connection with these matters.
Our directors' and officers' liability insurance carriers have received notice
of the consolidated litigation and SEC investigation.
Regardless of the outcome of any litigation or regulatory proceeding, litigation
and regulatory proceedings of these types are expensive and will require that we
devote substantial resources and executive time to defend these proceedings.
NOTE 13 - DISCONTINUED OPERATIONS
On April 21, 2003, the board of directors granted management the authority to
dispose of the human resources and benefits application services business.
Accordingly, it was determined that this business met the requirements to be
presented as a discontinued operation.
On April 22, 2003 we transferred substantially all of the assets of our human
resources and benefits application services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce
12
management solutions. The primary product of this line of services, the benefits
enrollment business, provides a customized solution for clients' employees to
enroll in an employer's benefits programs and make changes to their personal
information and benefits elections, all by means of the Internet or by
telephone. Workscape, Inc. has hired all of the employees directly related to
the benefits enrollment business.
The transaction was structured as a transfer of assets under contract for sale
with no initial down-payment and the purchase price to be paid over a three-year
period, based on a client retention formula. Proceeds are anticipated to be
between $2 million and $6 million, with no minimum guaranteed amount. We have
received $500,000 of principal and $56,000 of interest to date in connection
with this transaction.
All assets and liabilities of this business, both the portion of the business
transferred under contract (approximately 90%) and the portion remaining to be
sold, along with related transaction costs, have been recorded on our
consolidated balance sheet as net assets of business held for sale. We record
cash received under the asset purchase agreement first to reduce the recorded
value of net assets of business held for sale and then to reflect gain on the
sale of the business.
In connection with the transfer, we will provide Workscape, Inc., for
agreed-upon fees, with various transition services related to the operation of
the benefits enrollment business until December 31, 2005, or until certain
transferred client contracts have expired or been terminated. These fees, offset
by costs related to deliver the service, will be recorded first to reduce the
recorded value of net assets of business held for sale and then to reflect gain
on the sale of the business.
The historical results of operations for this business have been reclassified to
earnings (loss) from discontinued operations on our consolidated statement of
earnings.
13
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, 2003.
OVERVIEW
We are the leading provider of automated employment and income verification and
unemployment cost management services and a leader in providing human
resources/payroll business process outsourcing. Our services enable mortgage
lenders, pre-employment screening companies, employees, 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 and
payroll management information systems without requiring employer assistance.
Further, we provide unemployment insurance claims processing and unemployment
tax planning and management services to a broad range of employers.
Our services use interactive web, interactive voice response, 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 Fortune 500
companies 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 outsourced 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. During 2003, we notified our maintenance
clients of our intention to discontinue all support services effective June
2005.
On April 22, 2003 we transferred substantially all of the assets of our human
resources and benefits application services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone. Workscape,
Inc. has hired all of the employees directly related to the benefits enrollment
business.
The transaction was structured as a transfer of assets under contract for sale
with no initial down-payment and the purchase price to be paid over a three-year
period, based on a client retention formula. Proceeds are anticipated to be
between $2 million and $6 million, with no minimum guaranteed amount.
All assets and liabilities of this business, both the portion of the business
transferred under contract (approximately 90%) and the portion remaining to be
sold, along with related transaction costs, have been recorded on our
consolidated balance sheet as net assets of business held for sale. We will
record cash received under the asset purchase agreement first to reduce the
recorded value of net assets of business held for sale and then to reflect gain
on the sale of the business.
14
In connection with the transfer, we will provide Workscape, Inc., for
agreed-upon fees, with various transition services related to the operation of
the benefits enrollment business until December 31, 2005, or until certain
transferred client contracts have expired or been terminated.
SERVICES AND PRODUCTS
We provide services that enable both large and mid-size corporations, as well as
government agencies, to outsource the performance of human resources/payroll
business processes that would otherwise be performed by their own human
resources or payroll departments. Our services use interactive web, interactive
voice response, fax and other technologies to enable mortgage lenders,
pre-employment screening companies, employees, employers 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 and payroll management information systems on a self-service basis.
Our services and products fall within three general categories: The Work Number
services, unemployment cost management 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-related business process outsourcing
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.
Non-subscribing verifiers also have the option to use a 1-900 telephone number.
We have been migrating verifiers away from the 1-900 telephone number and will
discontinue this method by December 31, 2003. 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. Revenue is recognized on these transaction-based fees in the period
that the transactions occur and are billed. We also generate revenues from
employer data conversion and ongoing maintenance fees, and record this revenue
on a monthly basis as billed. Lastly, we derive revenues from one-time up-front
setup fees. These fees are recognized as revenue on a straight-line basis over
the initial contract period, beginning with the date the client is live on our
system.
W-2 eXpress. W-2 eXpress is a suite of services relating to the initial
distribution (either printed or electronic), reissue 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 (both electronically and in paper form) to employees and provide an
automated process to enable employees to request corrections to
15
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.
The majority of W-2 eXpress clients are billed based upon the number of unique
W-2s, generally pursuant to multi-year contracts. Revenue is recognized on a
straight-line basis from the time the service is available for use by TALX
clients through the end of the service period. Additionally, we have some
clients that are billed on a transactional basis. For these clients, we
recognize revenue on a monthly basis, as transactions occur.
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-service applications that enable employees, via the Internet or by
telephone, to receive pay statement information, access current and historical
payroll information, review and change direct deposit account information and
maintain their federal W-4 forms. Additionally, during fiscal 2004, ePayroll has
been expanded to allow employees to enroll in a paycard service. This service
allows employees who are unable to maintain bank accounts to eliminate paper
checks and receive their payroll through direct deposits to their paycard.
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 as well as reduce the cost to produce and
distribute paper pay advices.
We charge ePayroll clients on a per-employee per-month basis, plus an initial
set-up fee, generally pursuant to multi-year contracts. Revenue for the initial
setup fees is recognized on a straight-line basis over the initial contract
period, beginning with the date the client is live on our system. Per-employee
per-month fees are recognized as revenue in the months billed. Paycard revenue
is recognized on a monthly basis as transactions occur.
FasTime. FasTime services are integrated time capture and reporting solutions
that work from any phone or the Internet. For large employers, FasTime collects
hours worked and exception time codes providing a user-friendly online approval
and reporting for managers. FasTime is customized according to a company's
business rules and processes. For the temporary staffing industry, FasTime
provides a comprehensive, paperless system for time, expenses and availability,
including manager approvals and the reporting and management tools for branch
offices as well as automated notification of available jobs.
FasTime clients are billed for initial set up fees, monthly maintenance fees and
per transaction fees, generally pursuant to multi-year contracts. Revenue is
recognized on a straight-line basis from the time the service is available for
use by our clients through the end of the service period for setup and
maintenance fees and as services are performed for transaction-based fees.
UNEMPLOYMENT COST MANAGEMENT
As a result of acquisitions we made during our 2002 fiscal year, we provide
unemployment cost management services under the name UC eXpress, through our
wholly-owned subsidiary TALX UCM Services, Inc. UC eXpress is a comprehensive
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 state agencies by
separated employees. UC eXpress services are aimed at relieving human resource
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 or, in some cases, 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.
16
UC eXpress also offers comprehensive employer tax services that encompass six
service areas:
- unemployment tax services
- employment tax research and recovery
- unemployment tax planning
- tax registrations
- employment tax consulting (withholding and unemployment)
- hiring tax credit consulting and administration (new service
offering July 2003)
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.
Following the acquisition of Johnson and Associates, which was effective July 1,
2003, our UC eXpress tax services offerings were expanded to include processing
of the work opportunity ("WOTC") and welfare to work ("WtW") tax credits. These
federal programs are designed to provide tax credit incentives to employers for
hiring individuals who have traditionally faced difficulties in securing
employment. Our services include assisting employers with integrating WOTC/WtW
processing into the current hiring process as well as processing all necessary
forms to identify all potential qualifiers for hiring tax credits.
We charge clients fees pursuant to multi-year contracts, generally billed
monthly or quarterly. Most 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. Revenues from
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, including our new hiring tax credit consulting and administration
business, is recognized when those criteria are met.
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.
During 2003, we notified our maintenance clients of our intention to discontinue
all support services effective June 2005.
HUMAN RESOURCES AND BENEFITS APPLICATION SERVICES
As discussed above, on April 22, 2003 we transferred substantially all of the
assets of our human resources and benefits application services business,
retaining certain contracts to administer other human resources services for
three clients, which we expect will either terminate or be assigned within the
next 12 months.
We formerly offered our clients outsourcing solutions designed to reduce the
resources and expenses associated with enrolling employees and administering
ongoing participation in employee benefits programs. In 2000, we introduced
eChoice, our advanced benefits enrollment service combining the most popular
features of our various customized benefits enrollment offerings that we
configured to meet each employer's particular needs.
We generated revenues from eChoice by charging clients on a per-employee basis,
generally pursuant to multi-year contracts. We generated 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. Revenue was primarily recognized on a
straight-line basis from the time the service was available for use by our
clients through the end of the service period.
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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. Additionally, revenue for set up fees, monthly
maintenance and employer conversion fees are recognized on a straight-line basis
from the time the service is available to be used by our clients through the end
of the service period.
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, including our
new hiring tax credit consulting and administration business, 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 of
customer premises systems which are outside of our standard maintenance
agreements are recognized by the completed contract method. Revenue from
maintenance contracts is deferred and recognized ratably over the maintenance
period.
Deferred revenue represents the unearned portion of The Work Number setup fees,
UC eXpress and maintenance fees.
Commissions are paid based upon successful efforts and are deferred and expensed
over the related service period.
INTANGIBLE ASSET VALUATIONS: TALX acquired certain identifiable intangible
assets in connection with the acquisitions of Ti3, Inc., the GM Unemployment
Compensation Business, The Frick Company and Johnson and Associates. These
assets were recorded in accordance with the Financial Accounting Standards Board
SFAS No. 141, "Business Combinations".
Effective April 1, 2002, we 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. Through the use of an independent business appraiser,
we reviewed our goodwill and intangible assets as of December 31, 2002 and
determined that no impairment existed. We anticipate future assessments will be
conducted on an annual basis as of the end of our third fiscal quarter.
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.
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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 against earnings 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, 2003 which contains accounting
policies and other disclosures required by accounting principles generally
accepted in the United States of America.
RECENT ACCOUNTING PRONOUNCEMENT
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF No. 00-21 provides guidance on how
to account for certain arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
No. 00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company believes that the adoption of EITF
No. 00-21 will not have a significant impact on its results of operations or
financial position.
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,
cash flows and 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 this Form 10-Q 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) the risks associated with pending litigation, investigations,
and possible future proceedings as a result of our recent
financial statement restatement;
(2) the risk to our future growth due to our dependence on our
ability to effectively integrate acquired companies and
capitalize on cross-selling opportunities;
(3) risks related to our ability to increase the size and range of
applications for The Work Number database and successfully
market current and future services;
(4) risks associated with our ability to maintain the accuracy and
confidentiality of our clients' employee data;
(5) the risk that our revenues from The Work Number may fluctuate
due to changes in the level of residential mortgage activity
and interest rates;
(6) risks associated with our ability to prevent breach of
confidentiality as we initiate large-scale processing of
verifications;
19
(7) risks relating to the dependence of the market for The Work
Number on mortgage documentation requirements in the secondary
market and the risk that our revenues and profitability could
be significantly harmed if those requirements were relaxed;
(8) risks associated with any modifications to or failures to
extend WOTC or WtW tax credit laws;
(9) risks associated with any interpretation of laws prohibiting
the unauthorized practice of law to include the unemployment
cost management or tax services that we provide;
(10) risks associated with future challenges regarding
applicability of the Fair Credit Reporting Act or any new
privacy legislation or interpretation of existing laws;
(11) risks associated with changes in economic conditions or
unemployment compensation laws;
(12) the risk of interruption of our computer network and telephone
operations, including potential slow-down or loss of business
as potential clients review our operations; and
(13) the risk of discontinuance of 900 number telephone service.
See Item 1 "Business-Risk Factors" in our Annual Report on Form 10-K for the
year ended March 31, 2003, for a more detailed description of many of these and
other risk factors. You should read this report and the risk factors in our
Annual Report on Form 10-K completely and with the understanding that our actual
results may be materially different from what we expect. We do not undertake any
obligation to 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.
20
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:
PERCENTAGE CHANGE
THREE MONTHS SIX MONTHS ---------------------------------
ENDED SEPT. 30, ENDED SEPT. 30, THREE MONTHS SIX MONTHS
------------------- ------------------- ENDED SEPT. 30, ENDED SEPT. 30,
2002 2003 2002 2003 2003 OVER 2002 2003 OVER 2002
-------- -------- -------- -------- --------------- ---------------
(IN THOUSANDS)
(UNAUDITED)
REVENUES AND GROSS MARGIN:
Revenues:
The Work Number services........................ $ 8,573 $ 11,627 $ 16,189 $ 22,570 35.6% 39.4%
Unemployment cost management services........... 17,939 18,701 35,978 36,885 4.2 2.5
Customer premises systems....................... 313 -- 900 -- * *
Maintenance and support......................... 916 1,198 1,849 2,251 30.8 21.7
-------- -------- -------- --------
Total revenues.............................. $ 27,741 $ 31,526 $ 54,916 $ 61,706 13.6 12.4
======== ======== ======== ========
Gross margin:
The Work Number services........................ $ 5,555 $ 8,534 $ 10,356 $ 16,144 53.6% 55.9%
Unemployment cost management services........... 8,428 8,666 17,207 17,126 2.8 (0.5)
Customer premises systems....................... 76 -- 324 -- * *
Maintenance and support......................... 737 870 1,473 1,592 18.0 8.1
-------- -------- -------- --------
Total gross margin.......................... $ 14,796 $ 18,070 $ 29,360 $ 34,862 22.1 18.7
======== ======== ======== ========
GROSS MARGIN PERCENTAGE BY REVENUE CATEGORY:
The Work Number services............................ 64.8% 73.4% 64.0% 71.5%
Unemployment cost management services............... 47.0 46.3 47.8 46.4
Customer premises systems........................... 24.3 -- 36.0 --
Maintenance and support............................. 80.5 72.6 79.7 70.7
PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services........................ 30.9% 36.9% 29.5% 36.6% 35.6% 39.4%
Unemployment cost management services........... 64.7 59.3 65.5 59.8 4.2 2.5
Customer premises systems....................... 1.1 -- 1.6 -- * *
Maintenance and support......................... 3.3 3.8 3.4 3.6 30.8 21.7
-------- -------- -------- --------
Total revenues.............................. 100.0 100.0 100.0 100.0 13.6 12.4
Cost of revenues.................................... 46.7 42.7 46.5 43.5 3.9 5.0
-------- -------- -------- --------
Gross margin........................................ 53.3 57.3 53.5 56.5 22.1 18.7
-------- -------- -------- --------
Operating expenses:
Selling and marketing........................... 15.0 18.7 16.2 19.3 41.7 34.2
General and administrative...................... 22.5 21.0 22.0 20.5 6.0 4.4
-------- -------- -------- --------
Total operating expenses.................... 37.5 39.7 38.2 39.8 20.3 17.1
-------- -------- -------- --------
Operating income.................................... 15.8 17.6 15.3 16.7 26.5 23.0
Other income (expense), net......................... (1.4) (0.7) (1.3) (0.8) (40.5) (30.6)
-------- -------- -------- --------
Earnings from continuing operations before
income tax.................................. 14.4 16.9 14.0 15.9 32.8 27.9
Income tax expense.................................. 5.5 6.6 5.4 6.2 35.5 29.3
-------- -------- -------- --------
Earnings from continuing operations............. 8.9 10.3 8.6 9.7 31.2 27.1
Earnings (loss) from discontinued operations,
net of tax -- 0.1 (0.3) 0.2 * *
-------- -------- -------- --------
Net earnings........................................ 8.9% 10.4% 8.3% 9.9% 32.0% 34.1%
======== ======== ======== ========
* - not meaningful
21
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Revenues. Total revenues increased 13.6% to $31.5 million in the second quarter
of fiscal 2004 from $27.7 million in the second quarter of fiscal 2003.
Revenues from The Work Number services increased 35.6% to $11.6 million in the
second quarter of fiscal 2004 from $8.6 million in the second quarter of fiscal
2003, due primarily to an increase in transaction volume resulting from
marketing efforts directed to verifiers and employers, partially offset by lower
average transaction fees due to the increase in transactions from users with
volume pricing discounts. Also, we experienced increased transaction volumes due
to an increase in the number of employers and related employment records in the
database.
Revenues from unemployment cost management services increased 4.2% to $18.7
million in the second quarter of fiscal 2004 from $17.9 million in the second
quarter of fiscal 2003, due primarily to the addition of revenues from our
acquisition of Johnson and Associates and new sales, partially offset by the
loss of some smaller clients last year as we instituted certain minimum pricing
policies.
Revenues from customer premises systems decreased to $0 in the second quarter of
fiscal 2004 from $0.3 million in the second quarter of fiscal 2003. We are no
longer selling these systems.
Revenues from maintenance and support increased 30.8% to $1.2 million in the
second quarter of 2004 from $0.9 million in the second quarter of fiscal 2003
due to additional revenue generated through services provided to clients that
were outside of our standard maintenance agreements. This increase was partially
offset by lower standard maintenance revenues caused by a shrinking client base.
We anticipate revenues will decrease over time from current quarter levels as
our installed base continues to shrink as supported systems approach the end of
their life cycle.
Gross Margin. Total gross margin increased 22.1% to $18.1 million in the second
quarter of fiscal 2004 from $14.8 million in the second quarter of fiscal 2003.
As a percentage of total revenues, gross margin increased to 57.3% in the second
quarter of fiscal 2004 from 53.3% in the second quarter of fiscal 2003.
The Work Number services gross margin increased 53.6% to $8.5 million, or 73.4%
of corresponding revenue, in the second quarter of fiscal 2004 from $5.6
million, or 64.8% of corresponding revenue, in the second quarter of fiscal
2003. The increase in gross margin and gross margin percentage was due primarily
to revenue increases and improved leveraging of our operational infrastructure.
Additionally, more transactions were performed over the Internet, which has a
lower average transaction cost compared to transactions performed through either
our 900 or 800 telephone services.
Unemployment cost management services gross margin increased 2.8% to $8.7
million, or 46.3% of corresponding revenue, in the second quarter of fiscal 2004
from $8.4 million, or 47.0% of corresponding revenue, in the second quarter of
fiscal 2003. This increase in gross margin is due primarily to revenue
increases. The decrease in gross margin percentage is due primarily to temporary
incremental costs related to our efforts to consolidate the UCeXpress
operational infrastructure. These efforts have been substantially concluded and
we do not expect these incremental costs to continue. During the last half of
the fiscal year, we expect to realize improvements in the gross margin
percentage as we continue to consolidate the cost structure of the acquired
businesses.
Customer premises systems gross margin decreased to $0 in the second quarter of
fiscal 2004 from $0.1 million, or 24.3% of corresponding revenue, in the second
quarter of fiscal 2003. We are no longer selling these systems.
Maintenance and support gross margin increased 18.0% to $0.9 million, or 72.6%
of corresponding revenue, in the second quarter of fiscal 2004, from $0.7
million, or 80.5% of corresponding revenue, in the second quarter of fiscal
2003. The increase in gross margin is due principally to the increase in
revenues. The decrease in gross margin percentage is due to the fixed nature of
personnel and infrastructure costs even as our installed base continues to
shrink. Also, we incurred incremental personnel costs related to providing
services outside of our standard maintenance agreement.
22
Selling and Marketing Expenses. Selling and marketing expenses increased 41.7%
to $5.9 million in the second quarter of fiscal 2004 from $4.2 million in the
second quarter of fiscal 2003. As a percentage of revenues, such expenses
increased to 18.7% in the second quarter of fiscal 2004 from 15.0% in the second
quarter of fiscal 2003. These increases are due to increased costs related to
our recent reorganization of the sales and services teams. In addition to
realigning our sales and service teams into regions, we added personnel and
related costs. Additionally, marketing costs increased in the second quarter of
fiscal 2004 as we increased our efforts to market to high volume verifiers of
The Work Number. We expect to see selling and marketing expenses, as a
percentage of revenues, decrease slightly from current levels throughout the
year as we continue to consolidate the sales and service teams.
General and Administrative Expenses. General and administrative expenses
increased 6.0% to $6.6 million in the second quarter of fiscal 2004 from $6.2
million in the second quarter of fiscal 2003. The increase in such expenses
reflects the increased infrastructure costs of a growing business and workforce.
As a percentage of revenues, such expenses decreased to 21.0% in the second
quarter of fiscal 2004 from 22.5% in the second quarter of fiscal 2003. This
decrease is due primarily to improved leveraging of personnel and infrastructure
costs. Also, we experienced cost savings as we consolidated certain back office
functions related to our acquisitions from March 2002.
Other Income (Expense), Net. Other income (expense), net decreased to $0.2
million of net other expense in the second quarter of fiscal 2004 from $0.4
million in the second quarter of fiscal 2003, due to a lower level of
outstanding borrowings throughout the current period compared to the year-ago
period.
Income Tax Expense. Our effective income tax rate was 39.0% in the second
quarter of fiscal 2004 compared to 38.2% in the second quarter of 2003, due
principally to higher state income taxes.
Earnings (Loss) From Discontinued Operations, Net of Income Taxes. The net
earnings of $1,000 for the second quarter of fiscal 2003 represents the net
earnings realized during the period for our human resource and benefits
application services business. The majority of this business was sold April 22,
2003. The remainder of the business is currently held for sale. We anticipate
that this remaining business will be disposed of within the next 12 months. We
realized net earnings of $22,000 for the second quarter of fiscal 2004 related
to the operations of the remaining business.
SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2002
Revenues. Total revenues increased 12.4% to $61.7 million in the first half of
fiscal 2004 from $54.9 million in the first half of fiscal 2003.
Revenues from The Work Number services increased 39.4% to $22.6 million in the
first half of fiscal 2004 from $16.2 million in the first half of fiscal 2003,
due primarily to an increase in transaction volume resulting from marketing
efforts directed to verifiers and employers, partially offset by lower average
transaction fees due to the increase in transactions from users with volume
pricing discounts. Also, we experienced increased transaction volumes due to an
increase in the number of employers and related employment records in the
database.
Revenues from unemployment cost management services increased 2.5% to $36.9
million in the first half of fiscal 2004 from $36.0 million in the first half of
fiscal 2003, due primarily to the addition of revenues from our acquisition of
Johnson and Associates and new sales, partially offset by the loss of some
smaller clients last year as we instituted certain minimum pricing policies.
Revenues from customer premises systems decreased to $0 in the first half of
fiscal 2004 from $0.9 million in the first half of fiscal 2003. We are no longer
selling these systems.
Revenues from maintenance and support increased 21.7% to $2.3 million in the
first half of 2004 from $1.8 million in the first half of fiscal 2003 due to
additional revenue generated through services provided to clients that were
outside of our standard maintenance agreements. This increase was partially
offset by lower standard maintenance revenues caused by a shrinking client base.
We anticipate revenues will decrease over time from current period levels as our
installed base continues to shrink as supported systems approach the end of
their life cycle.
23
Gross Margin. Total gross margin increased 18.7% to $34.9 million in the first
half of fiscal 2004 from $29.4 million in the first half of fiscal 2003. As a
percentage of total revenues, gross margin increased to 56.5% in the first half
of fiscal 2004 from 53.5% in the first half of fiscal 2003.
The Work Number services gross margin increased 55.9% to $16.1 million, or 71.5%
of corresponding revenue, in the first half of fiscal 2004 from $10.4 million,
or 64.0% of corresponding revenue, in the first half of fiscal 2003. The
increase in gross margin and gross margin percentage was due primarily to
revenue increases and improved leveraging of our operational infrastructure.
Additionally, more transactions were performed over the Internet, which has a
lower transaction cost compared to transactions performed through either our 900
or 800 telephone services.
Unemployment cost management services gross margin decreased 0.5% to $17.1
million, or 46.4% of corresponding revenue, in the first half of fiscal 2004
from $17.2 million, or 47.8% of corresponding revenue, in the first half of
fiscal 2003. This decrease in gross margin and gross margin percentage is due
primarily to temporary incremental costs related to our efforts to consolidate
the UCeXpress operational infrastructure. These efforts have been substantially
concluded and we do not expect these incremental costs to continue. During the
last half of the fiscal year, we expect to realize improvements in the gross
margin percentage as we continue to consolidate the cost structure of the
acquired businesses.
Customer premises systems gross margin decreased to $0 in the first half of
fiscal 2004 from $0.3 million, or 36.0% of corresponding revenue, in the first
half of fiscal 2003. We are no longer selling these systems.
Maintenance and support gross margin increased 8.1% to $1.6 million, or 70.7% of
corresponding revenue, in the first half of fiscal 2004, from $1.5, or 79.7% of
corresponding revenue, in the first half of fiscal 2003. The increase in gross
margin is due principally to the increase in revenues. The decrease in gross
margin percentage is due to the fixed nature of personnel and infrastructure
costs even as our installed base continues to shrink. Also, we incurred
incremental personnel costs related to providing additional services outside of
our standard maintenance agreement.
Selling and Marketing Expenses. Selling and marketing expenses increased 34.2%
to $11.9 million in the first half of fiscal 2004 from $8.9 million in the first
half of fiscal 2003. As a percentage of revenues, such expenses increased to
19.3% in the first half of fiscal 2004 from 16.2% in the first half of fiscal
2003. These increases are due to increased costs related to our recent
reorganization of the sales and services teams. In addition to realigning our
sales and service teams into regions, we added personnel and related costs.
Additionally, marketing costs increased in the first half of fiscal 2004 as we
increased our efforts to market to high volume verifiers of The Work Number
database. We expect to see selling and marketing expenses, as a percentage of
revenues, decrease slightly from current levels throughout the year as we
continue to consolidate the sales and service teams.
General and Administrative Expenses. General and administrative expenses
increased 4.4% to $12.6 million in the first half of fiscal 2004 from $12.1
million in the first half of fiscal 2003. The increase in such expenses reflects
the increased infrastructure costs of a growing business and workforce. As a
percentage of revenues, such expenses decreased to 20.5% in the first half of
fiscal 2004 from 22% in the first half of fiscal 2003. This decrease is due
primarily to improved leveraging of personnel and infrastructure costs. Also, we
experienced cost savings as we consolidated certain back office functions
related to our acquisitions from March 2002.
Other Income (Expense), Net. Other income (expense), net decreased to $0.5
million of net other expense in the first half of fiscal 2004 from $0.7 million
in the first half of fiscal 2003, due to a lower level of outstanding borrowings
throughout the current period compared to the year-ago period.
Income Tax Expense. Our effective income tax rate was 38.8% in the first half of
fiscal 2004 compared to 38.4% in the first half of 2003, due principally to
higher state income taxes.
Earnings (Loss) From Discontinued Operations, Net of Income Taxes. The loss of
$0.2 million for the first half of fiscal 2003 represents the net loss realized
during the period for our human resource and benefits application services
business. The majority of this business was sold April 22, 2003. The remainder
of the business is currently held for sale. We anticipate that this remaining
business will be disposed of within the next 12 months. We realized net earnings
of $0.1 million for the first half of fiscal 2004 related to the operations of
the remaining business.
24
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed our operations through cash flows from
operations, except as described below.
Net cash provided by operating activities decreased to $11.0 million in the
first half of fiscal 2004 from $13.4 million in the first half of fiscal 2003.
This decrease was primarily due to our significant payment of current
liabilities in the first half of fiscal 2004, the largest being our payment of
accrued incentive compensation related to year end fiscal 2003.
Net cash used in investing activities decreased to $6.6 million in the first
half of fiscal 2004 from $23.5 million in the first half of fiscal 2003. This
decrease was primarily due to $19.9 million of payments made in the first half
of fiscal 2003 related to our March 2002 acquisitions. Additional uses of cash
for investing activities during the first half of fiscal 2004 include the
acquisition of Johnson and Associates for $1.5 million and capital expenditures
of $2.2 million. These capital expenditures were principally for computer
equipment and integrating the operational infrastructure for our unemployment
cost management services business. At September 30, 2003, 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 12 to 18 months, as we continue to
integrate the operations of our acquisitions.
Net cash used in financing activities increased to $10.1 million in the first
half of fiscal 2004 from $7.3 million in the first half of fiscal 2003. This
increase was primarily due to the additional $3.3 million "excess cash flow"
payment made during the first half of fiscal 2004 as required under our Loan
Agreement referred to below. Additional uses of cash for financing activities
during the first half of fiscal 2004 include scheduled debt retirement payments
of $5.0 million, the repurchase of stock for $1.8 million and dividend payments
of $1.1 million.
Our working capital was $1.5 million at March 31, 2003 and $(1.3) million at
September 30, 2003. Total working capital decreased primarily due to cash
utilized during the first half of the year for the repurchase of stock and the
acquisition of a small unemployment cost management company. Also, our long term
debt facility required a $3.3 million "excess cash flow" payment, over and above
our normal scheduled principal payments. This resulted in a reduction to working
capital and non-current liabilities. Based on cash and cash equivalents on hand,
together with anticipated cash flows from operations, we believe we have
sufficient liquidity to pay our obligations as they become due, for at least the
next 12 months. Our strategy contemplates that we will consider acquisitions
from time to time. We expect that such acquisitions may require that we access
additional credit. We cannot assure you that we will make any such additional
acquisitions, that additional credit would be available on acceptable terms, or
that any such acquisitions would be successful. Any such additional credit would
increase the risks associated with leverage, including our ability to service
indebtedness and volatility of interest rates.
Our accounts receivable decreased from $18.1 million at March 31, 2003 to $16.6
million at September 30, 2003, due primarily to a higher level of billings
during the last quarter of fiscal 2003 compared to the second quarter of fiscal
2004.
On September 5, 2002, our board of directors authorized us to repurchase up to
one million shares of our stock in the open market, or through privately
negotiated transactions, during the 36 month period ending September 30, 2005,
subject to market conditions and other factors. As of September 30, 2003,
306,211 shares have been repurchased under this plan, including 131,211 shares
repurchased during the six month period ended September 30, 2003 for $1.8
million. Except for the 402,906 shares remaining in the treasury at September
30, 2003, all shares repurchased have been reissued in connection with employee
stock option exercises and employee stock purchase plan purchases.
During the first half of fiscal 2004, we continued our quarterly dividend
program, declaring a $0.05 per share cash dividend, totaling $676,000, on
September 4, 2003. The dividend was payable October 17, 2003 to shareholders of
record on September 19, 2003.
In connection with the acquisitions of The Frick Company and the unemployment
cost management services business (the "GM Unemployment Compensation Business")
of Gates, McDonald & Company, a subsidiary of
25
Nationwide Mutual Insurance Company, on March 27, 2002, pursuant to a loan
agreement dated as of March 27, 2002 (as amended by that certain First Amendment
to Loan Agreement dated as of July 29, 2002, as further amended by that certain
Second Amendment to Loan Agreement dated as of January 27, 2003 and as further
amended by that certain Third Amendment to Loan Agreement dated as of June 30,
2003 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, unless certain tests are met. We made an excess cash flow principal
payment of $3.3 million during the first half of fiscal 2004. 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 bore interest at the applicable eurodollar rate plus 2.25% and base
rate loans bore interest at the applicable base rate. Commencing March 28, 2003,
the applicable margin for eurodollar rate loans varies from 1.75% to 2.25%, and
the applicable margin for base rate loans remains at 0.00%, in each case based
upon our ratio of total indebtedness to EBITDA (earnings before interest, taxes,
depreciation and amortization). We may make prepayments under the Term Loan and
Revolving Credit Facility without penalty. 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 loan obligations (Term
Loan and Revolving Credit Facility).
The Loan Agreement is secured by security interests in substantially all of the
assets of our company and of our two wholly-owned subsidiaries, Ti3, Inc. and
TALX UCM Services, Inc. (the "Subsidiaries"), the guarantees of the
Subsidiaries, and a pledge of the stock of each of the 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 Frick Company and the GM
Unemployment Compensation Business. 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, to finance certain permitted acquisitions and to finance treasury
stock repurchases. The Loan Agreement also requires compliance with certain
financial covenants based on our minimum net worth, minimum EBITDA, our ratio of
total indebtedness to EBITDA and our ratio of EBITDA to fixed charges. The Loan
Agreement further requires compliance with certain operating and other 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, impose
restrictions on distributions to shareholders, change of control of TALX,
investments, acquisitions and liens, and which require compliance, in all
material respects, with material laws. The Loan Agreement generally prohibits
the payment of cash dividends, except for cash dividends not in excess of $3.0
million per fiscal year so long as we are not in default at the time of the
declaration. The Loan Agreement also contains various representations and
warranties, including among other things, the accuracy of financial statements
and other information delivered to the Lenders, the absence of changes which
would have or would reasonably be likely to have a material adverse effect (as
customarily included in secured credit facilities of this nature).
Most recently, we entered into a Third Amendment to Loan Agreement effective as
of June 30, 2003 (the "Third Amendment"). The Subsidiaries consented to the
Third Amendment, as guarantors. Among other things, the Third Amendment
increased the amount of dividends we are permitted to make during any fiscal
year, modified the eurodollar margins, modified the maximum ratio of total
indebtedness to EBITDA and modified the minimum EBITDA covenant for the quarters
ended June 30, 2003 through the maturity of the Loan Agreement. The Third
Amendment further modified the definition of excess cash flow such that treasury
stock repurchases are included as a fixed charge in the calculation of excess
cash flow, as defined, which required us to pay to the Lenders $3.3 million by
July 31, 2003. The Third Amendment further modified the definition of "Use of
Proceeds" to clarify the
26
permitted use of the Revolving Credit Facility for such treasury stock
repurchases. Lastly, the Third Amendment increased the amount of purchase price
and other expenses permitted to be incurred for certain acquisitions during any
fiscal year. As of September 30, 2003, we believe we were in material compliance
with all covenants under the Loan Agreement, after giving effect to the Third
Amendment.
As a condition of our Loan Agreement, we were required to enter into an interest
rate swap agreement 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 to the
same schedule as our Term Loan. All payment dates and maturity dates are the
same as our Term Loan. This strategy effectively converts a portion 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.
As of September 30, 2003, the fair value of the interest rate swap in the amount
of $168,000 is included in accrued expenses and other liabilities.
We do not use financial instruments for trading or speculative purposes.
OTHER MATTERS
We are cooperating with a pending SEC investigation and are a defendant in
pending lawsuits which are described in Note 12 of our Notes to Consolidated
Financial Statements.
As previously reported, we restated our financial statements for each of the
quarters ended June 30, 2001 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, plaintiffs who
have filed lawsuits against us previously have amended their complaints to
include claims related to this restatement. We cannot predict the outcome of any
such litigation at this time. Additionally, the lenders under our March 27, 2002
Loan Agreement, which is described more fully above under Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources, could seek to exercise remedies which may be
available to them, such as acceleration of our loans, in the event they
determine that, as a result of the restatement discussed above or the SEC
investigation discussed above or otherwise, we have breached a covenant or
representation and warranty in the Loan Agreement. If an unfavorable result
occurred in any such action, our business and financial conditions could be
harmed.
Further, we cannot predict at this time whether or not any additional regulatory
investigation by the SEC or otherwise related to the restatement or any other
matter will be commenced, or if it is, the outcome of any such investigation.
However, if any such investigation were to result in a regulatory proceeding or
action against us, our business and financial condition could be harmed.
Regardless of the outcome of any litigation or regulatory proceeding, litigation
and regulatory proceedings of these types are expensive and will require that we
devote substantial resources and executive time to defend these proceedings.
27
ITEM 3. 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 bore 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 varies from 1.75% to
2.25%, and the applicable margin for base rate loans remains at 0.00%, in each
case based upon our ratio of total indebtedness to EBITDA.
As of September 30, 2003, we had $13.8 million principal outstanding on our term
loan, of which $8.5 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 $53,000 change to our annual interest expense, based on net variable
borrowings of $5.3 million.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, including our
Chairman, President and Chief Executive Officer and our Chief Financial Officer
and Assistant Secretary, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures with respect to the information
generated for use in this Quarterly Report. Based upon, and as of the date of
that evaluation, the Chairman, President and Chief Executive Officer and Chief
Financial Officer and Assistant Secretary concluded that the disclosure controls
and procedures were effective to provide reasonable assurance that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms.
There was no change in our internal control over financial reporting during the
quarter ended September 30, 2003, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
It should be noted that while our management, including the Chairman, President
and Chief Executive Officer and Chief Financial Officer and Assistant Secretary,
believe our disclosure controls and procedures provide a reasonable level of
assurance, they do not expect that our disclosure controls and procedures or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
28
TALX CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 12 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
(a) The annual meeting of shareholders of the Company was held at
2:00 p.m., local time, on Thursday, September 4, 2003, in St.
Louis, Missouri.
(b) The Company's stockholders voted on the following matters:
Election of Director - Eugene M. Toombs, a nominee of the
Board of Directors, was elected as director at the annual
meeting. The number of votes cast for the election of the
nominee were 11,815,933, and the number of votes withheld were
222,947.
Election of Director - M. Stephen Yoakum, a nominee of the
Board of Directors, was elected as director at the annual
meeting. The number of votes cast for the election of the
nominee were 11,804,570, and the number of votes withheld were
234,310.
Ratification of Selection of Independent Auditors - The
shareholders ratified the appointment of KPMG LLP as the
Company's independent auditors to perform the audit of the
Company's financial statements for the year ending March 31,
2004. The number of votes cast in favor of the appointment
were 11,522,627, the number of votes against were 334,392 and
the number of votes abstaining were 181,861.
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) On July 31, 2003 we filed a Current Report on Form
8-K furnishing, under Items 9 and 12, our results of
operations for the three months ended June 30, 2003
and guidance for revenues and earnings per share for
fiscal year 2004.
(ii) On September 4, 2003 we filed a Current Report on
Form 8-K furnishing, under Item 9, certain operating
results for the first two months of the second fiscal
quarter and guidance for revenues and earnings per
share for fiscal year 2004.
29
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: October 31, 2003 By: /s/ WILLIAM W. CANFIELD
-------------------------------
William W. Canfield
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: October 31, 2003 By: /s/ L. KEITH GRAVES
-----------------------------
L. Keith Graves
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting Officer)
30
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)
10.1 + TALX Corporation 2004-2006 Long-Term Incentive Plan
10.2 + First Amendment to and Complete Restatement of Split-Dollar
Agreements and Related Insurance Agreements, dated March 31,
1999, by and among TALX Corporation, William W. Canfield, and
Thomas M. Canfield and James W. Canfield, Trustees of the
Canfield Family Irrevocable Insurance Trust U/A March 31, 1993
11 Computation of Earnings (Loss) Per Share
31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
32.1 Chief Executive Officer Certification pursuant to Rule
13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
32.2 Chief Financial Officer Certification pursuant to Rule
13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
- --------
+ Represents management contract or compensatory plan or arrangement
31