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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 December 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
1850 BORMAN COURT, ST. LOUIS, MO 63146
(Address of principal executive offices) (Zip Code)
(314) 214-7000
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
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 January 23, 2004 there were 13,640,785 shares of the Registrant's Common
Stock outstanding, net of treasury shares held by the Company.
Exhibit Index is on page 27.
TALX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2003....................... 3
Consolidated Statements of Earnings for the Three and Nine Months Ended
December 31, 2002 and 2003................................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 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...................................... 23
Item 4. Controls and Procedures......................................................................... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 25
Item 2. Changes in Securities and Use of Proceeds....................................................... 25
Item 3. Defaults Upon Senior Securities................................................................. 25
Item 4. Submission of Matters to a Vote of Securities Holders........................................... 25
Item 5. Other Information............................................................................... 25
Item 6. Exhibits and Reports on Form 8-K................................................................ 25
Signatures ........................................................................................... 26
2
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
MARCH 31, DECEMBER 31,
2003 2003
--------- ---------
(restated) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,409 $ 4,329
Short term investments -- 2,275
Accounts receivable, net 18,082 15,744
Work in progress, less progress billings 1,115 1,037
Prepaid expenses and other current assets 4,122 4,586
Deferred tax assets, net 598 --
--------- ---------
Total current assets 33,326 27,971
Property and equipment, net 10,315 10,277
Capitalized software development costs, net 3,804 2,027
Goodwill 105,469 106,732
Other intangibles, net 18,450 17,747
Net assets of business held for sale -- 491
Other assets 1,431 1,258
--------- ---------
$ 172,795 $ 166,503
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,560 $ 1,185
Accrued expenses and other current liabilities 11,473 12,163
Dividends payable 542 679
Current portion of capitalized lease obligations 130 12
Current portion of long term debt 10,000 11,253
Income taxes payable 482 --
Deferred tax liabilities, net -- 461
Deferred revenue 7,523 3,497
--------- ---------
Total current liabilities 31,710 29,250
Deferred tax liabilities, net 3,372 4,492
Capitalized lease obligations, less current portion 22 --
Long term debt, less current portion 12,000 --
Other non-current liabilities 2,508 2,630
--------- ---------
Total liabilities 49,612 36,372
--------- ---------
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 December 31, 2003 -- --
Common stock, $.01 par value; authorized 30,000,000 shares, issued
13,948,542 shares at March 31, 2003 and December 31, 2003 140 140
Additional paid-in capital 162,773 163,090
Accumulated deficit (34,721) (28,830)
Accumulated other comprehensive income:
Unrealized loss on interest rate swap contract, net of tax of $99
at March 31, 2003 and $44 at December 31, 2003 (158) (70)
Treasury stock, at cost, 409,231 shares at March 31, 2003 and
322,540 shares at December 31, 2003 (4,851) (4,199)
--------- ---------
Total shareholders' equity 123,183 130,131
--------- ---------
$ 172,795 $ 166,503
========= =========
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 DEC. 31, NINE MONTHS ENDED DEC. 31,
------------------------------- -------------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
(restated) (restated)
Revenues:
The Work Number services $ 9,011 $ 10,028 $ 25,200 $ 32,597
Unemployment cost management services 18,879 18,356 54,857 55,241
Customer premises systems 408 -- 1,507 --
Maintenance and support 908 1,060 2,756 3,295
------------ ------------ ------------ ------------
Total revenues 29,206 29,444 84,320 91,133
------------ ------------ ------------ ------------
Cost of revenues:
The Work Number services 2,912 3,106 8,745 9,531
Unemployment cost management services 9,697 9,289 28,468 29,048
Customer premises systems 338 -- 915 --
Maintenance and support 173 390 548 1,050
------------ ------------ ------------ ------------
Total cost of revenues 13,120 12,785 38,676 39,629
------------ ------------ ------------ ------------
Gross margin 16,086 16,659 45,644 51,504
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 4,589 5,558 13,487 17,481
General and administrative 6,837 6,678 18,939 19,317
------------ ------------ ------------ ------------
Total operating expenses 11,426 12,236 32,426 36,798
------------ ------------ ------------ ------------
Operating income 4,660 4,423 13,218 14,706
------------ ------------ ------------ ------------
Other income (expense), net:
Interest income 21 14 84 51
Interest expense (362) (205) (1,128) (740)
Other, net 2 -- (4) 4
------------ ------------ ------------ ------------
Total other income (expense), net (339) (191) (1,048) (685)
------------ ------------ ------------ ------------
Earnings from continuing operations before
income tax expense 4,321 4,232 12,170 14,021
Income tax expense 1,669 1,693 4,681 5,485
------------ ------------ ------------ ------------
Earnings from continuing operations 2,652 2,539 7,489 8,536
Discontinued operations:
Earnings (loss) from discontinued operations, net
of income taxes 1,591 28 1,422 127
------------ ------------ ------------ ------------
Net earnings $ 4,243 $ 2,567 $ 8,911 $ 8,663
============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 0.19 $ 0.19 $ 0.54 $ 0.63
Discontinued operations 0.12 0.00 0.11 0.01
------------ ------------ ------------ ------------
Net earnings $ 0.31 $ 0.19 $ 0.65 $ 0.64
============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations $ 0.19 $ 0.18 $ 0.53 $ 0.60
Discontinued operations 0.11 0.00 0.10 0.01
------------ ------------ ------------ ------------
Net earnings $ 0.30 $ 0.18 $ 0.63 $ 0.61
============ ============ ============ ============
Weighted average number of shares outstanding - basic 13,680,303 13,566,750 13,776,675 13,534,278
============ ============ ============ ============
Weighted average number of shares outstanding - diluted 14,107,896 14,311,935 14,248,357 14,212,126
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
NINE MONTHS ENDED DEC. 31,
--------------------------
2002 2003
---------- -----------
(restated)
Cash flows from operating activities:
Net earnings $ 8,911 $ 8,663
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,083 6,048
Deferred taxes 2,516 1,718
Net assets of business held for sale -- (117)
Change in assets and liabilities, excluding those acquired:
Accounts receivable, net (2,936) 2,504
Work in progress, less progress billings (233) (421)
Prepaid expenses and other current assets (1,674) (1,850)
Other assets 9 (10)
Accounts payable 375 (375)
Accrued expenses and other current liabilities 4,802 566
Income taxes payable 662 (43)
Deferred revenue 938 (400)
Other non-current liabilities 70 122
-------- --------
Net cash provided by operating activities 19,523 16,405
-------- --------
Cash flows from investing activities:
Additions to property and equipment (3,564) (4,202)
Acquisitions, net of cash received (20,052) (1,734)
Purchases of short-term investments (4,000) (3,975)
Proceeds from sale of short-term investments 4,000 1,700
Capitalized software development costs (1,577) (605)
-------- --------
Net cash used in investing activities (25,193) (8,816)
-------- --------
Cash flows from financing activities:
Issuance of common stock 1,349 1,785
Purchase of common stock (3,449) (1,795)
Repayments of capitalized lease obligations (116) (140)
Repayments under long-term debt facility (6,000) (10,763)
Dividends paid (1,239) (1,756)
-------- --------
Net cash used in financing activities (9,455) (12,669)
-------- --------
Net decrease in cash and cash equivalents (15,125) (5,080)
Cash and cash equivalents at beginning of period 21,431 9,409
-------- --------
Cash and cash equivalents at end of period $ 6,306 $ 4,329
======== ========
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, as set forth in our Form 10-K/A for the year
ended March 31, 2003. 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 nine months ended December 31, 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. Certain historical financial information has
been restated as previously disclosed in our Form 10-K/A 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 DEC. 31, NINE MONTHS ENDED DEC. 31,
------------------------------- -------------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
BASIC EARNINGS (LOSS) PER SHARE:
Net earnings (loss):
Continuing operations .............................. $ 2,652,000 $ 2,539,000 $ 7,489,000 $ 8,536,000
Discontinued operations ............................ 1,591,000 28,000 1,422,000 127,000
------------ ------------ ------------ ------------
Net earnings ..................................... $ 4,243,000 $ 2,567,000 $ 8,911,000 $ 8,663,000
============ ============ ============ ============
Weighted average number of common shares outstanding .. 13,948,542 13,948,542 13,938,019 13,948,542
Less: weighted average number of treasury shares ...... (268,239) (381,792) (161,344) (414,264)
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding .................... 13,680,303 13,566,750 13,776,675 13,534,278
============ ============ ============ ============
Basic earnings (loss) per common share:
Continuing operations .............................. $ 0.19 $ 0.19 $ 0.54 $ 0.63
Discontinued operations ............................ 0.12 0.00 0.11 0.01
------------ ------------ ------------ ------------
Net earnings ..................................... $ 0.31 $ 0.19 $ 0.65 $ 0.64
============ ============ ============ ============
6
THREE MONTHS ENDED DEC. 31, NINE MONTHS ENDED DEC. 31,
------------------------------- -------------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss):
Continuing operations ............................... $ 2,652,000 $ 2,539,000 $ 7,489,000 $ 8,536,000
Discontinued operations ............................. 1,591,000 28,000 1,422,000 127,000
------------ ------------ ------------ ------------
Net earnings ...................................... $ 4,243,000 $ 2,567,000 $ 8,911,000 $ 8,663,000
============ ============ ============ ============
Weighted average number of common shares outstanding ... 13,948,542 13,948,542 13,938,019 13,948,542
Weighted average of shares issuable under employee
stock plans ......................................... -- 7,392 -- 9,762
Dilutive effect of the exercise of stock options ....... 400,260 700,998 442,266 633,142
Dilutive effect of the exercise of warrants ............ 27,333 36,795 29,416 34,944
Less: weighted average number of treasury shares ....... (268,239) (381,792) (161,344) (414,264)
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding ..................... 14,107,896 14,311,935 14,248,357 14,212,126
============ ============ ============ ============
Diluted earnings (loss) per common share:
Continuing operations ............................... $ 0.19 $ 0.18 $ 0.53 $ 0.60
Discontinued operations ............................. 0.11 0.00 0.10 0.01
------------ ------------ ------------ ------------
Net earnings ...................................... $ 0.30 $ 0.18 $ 0.63 $ 0.61
============ ============ ============ ============
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 December 31, 2002 and 2003 was
$4.3 million and $2.6 million, respectively, and for the nine months ended
December 31, 2002 and 2003 was $8.7 million and $8.8 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 $4.5 million for the nine
months ended December 31, 2002 and 2003, respectively. Cash paid for interest
totaled $1.0 million and $625,000 for the nine months ended December 31, 2002
and 2003, respectively.
We declared a $0.05 per share cash dividend, totaling $679,000, on November 21,
2003. The dividend was payable January 16, 2004 to shareholders of record on
December 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
7
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. 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 during our fourth fiscal
quarter as of December 31.
The following table summarizes goodwill and other intangible asset activity for
the nine months ended December 31, 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 ... 1,169 255 -- 103 358
-------- -------- -------- -------- --------
December 31, 2003 .................... $106,732 $ 17,838 $ 2,184 $ 212 $ 20,234
======== ======== ======== ======== ========
ACCUMULATED AMORTIZATION:
March 31, 2003 ....................... $ -- $ 1,215 $ 147 $ 64 $ 1,426
Amortization ....................... -- 899 109 53 1,061
-------- -------- -------- -------- --------
December 31, 2003 .................... $ -- $ 2,114 $ 256 $ 117 $ 2,487
======== ======== ======== ======== ========
Weighted average lives (in years) ....... 14.85 15.00 2.51 14.74
======== ======== ======== ========
Amortization of other intangible assets was $1.1 million for the nine months
ended December 31, 2003 and is projected to be $1.4 million for 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
8
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 three quarters 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, 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, which 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 as
an excess cash flow payment 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 December 31,
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 Loan Agreement, we
9
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
the Term Loan. The notional amount of our interest rate swap contract steps down
according to the same schedule as the 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 December 31, 2003, the fair value of the interest rate swap in the amount
of $114,000 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."
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 DEC 31, NINE MONTHS ENDED DEC 31,
-------------------------- -------------------------
2002 2003 2002 2003
--------- ----------- ----------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings, as reported .............................. $ 4,243 $ 2,567 $ 8,911 $ 8,663
Stock-based employee compensation cost, net of taxes ... 353 318 1,065 1,157
------- --------- --------- ---------
Net earnings, pro forma ............................. $ 3,890 $ 2,249 $ 7,846 $ 7,506
======= ========= ========= =========
Basic earnings per share:
As reported ......................................... $ 0.31 $ 0.19 $ 0.65 $ 0.64
======= ========= ========= =========
Pro forma ........................................... $ 0.28 $ 0.17 $ 0.57 $ 0.55
======= ========= ========= =========
Diluted earnings per share:
As reported ......................................... $ 0.30 $ 0.18 $ 0.63 $ 0.61
======= ========= ========= =========
Pro forma ........................................... $ 0.28 $ 0.16 $ 0.55 $ 0.53
======= ========= ========= =========
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 nine month periods
ended December 31, 2002 and December 31, 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 nine
month periods ended December 31, 2002 and December 31, 2003; risk-free interest
rate of 3.50% and 3.25% for the three and nine month periods ended December 31,
2002 and December 31, 2003, respectively; expected life of 7.5 years for the
three and nine month periods ended December
10
31, 2002 and December 31, 2003, respectively; and an expected dividend yield of
1.20% and 0.90% for the three and nine month periods ended December 31, 2002 and
December 31, 2003, respectively.
NOTE 11 - BUSINESS SEGMENTS
SFAS 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 eXpressSM 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 us.
On December 26, 2001, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of Missouri (Civil Action No.
4:01CV02014DJS) by Matt L. Brody, an alleged shareholder of the Company, against
the Company, certain of its executive officers and directors (William W.
Canfield, Craig N. Cohen and Richard F. Ford) (collectively, the "Individual
Defendants"), and two underwriters (Stifel, Nicolaus & Company, Incorporated and
A.G. Edwards & Sons, Inc.) in our 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. On or about April 14, 2002,
a Consolidated Complaint was filed. 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 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 May 20, 2002, we and the Individual Defendants filed a motion to dismiss the
lawsuits, and the underwriter
11
defendants filed a separate motion to dismiss. The plaintiffs filed their
opposition to the motions to dismiss on June 19, 2002. The defendants' reply
memoranda in support of the motions to dismiss were filed on July 9, 2002. The
District Court issued a Memorandum and Order on March 31, 2003 granting in part
and denying in part the motion to dismiss. The Court's Order dismissed the
plaintiffs' claims under Section 10(b) and 20(a) of the Exchange Act of 1934.
The plaintiffs were granted leave to file an amended Consolidated Complaint on
or before May 30, 2003.
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.
On October 29, 2003, defendants filed their reply in support of the motion to
dismiss. The Court has not yet ruled on the motion.
We intend to defend vigorously against the plaintiffs' claims, although we are
currently engaged in settlement negotiations. 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 disclosed, 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 (who recently resigned) 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 our prior restatement, as disclosed in our Form 10-K/A for the year
ended March 31, 2002. We and the individuals have filed separate responses to
the Wells letter. Since the time of the Wells submissions, the Commission is
continuing its investigation of our accounting for certain items, including
those which were the subject of the restatements discussed below. 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 us and/or the individuals. The application of any of the
foregoing remedies, or the commencement of any regulatory proceeding or
enforcement action, could harm our business and financial condition.
As previously disclosed, we have filed restated financial statements for the
fiscal years ended March 31, 1999 through March 31, 2003 and for the first two
quarters of fiscal 2004. In December 2002, we filed restated financial
statements for each of the quarters ended June 30, 2000 through June 30, 2002
and for the fiscal years ended March 31, 2001 and 2002. As a result of this new
restatement, we could become subject to additional litigation or regulatory
proceedings or both. As of the date hereof, we are not aware of any litigation
having been commenced against us related to this new restatement. However, such
litigation could be commenced against us in the future
12
and the plaintiffs who have filed lawsuits against us previously could amend
their complaints to include claims related to this new 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
below 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 restatements discussed above
or the SEC investigation discussed below 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 materially 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 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 $750,000 of principal and $79,000 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.
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 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/A 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 use web access,
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
allow employees and their managers to review and modify information in the human
resources and payroll management information systems on a self-service basis.
Further, we provide unemployment insurance claims processing and unemployment
tax planning and management services to a broad range of employers. We typically
serve large organizations, including approximately two-thirds of Fortune 500
companies and a number of federal, state and local government agencies. Our
strategy is to position TALX with a suite of services that either deliver or use
payroll data. We describe these services as payroll-data-centric, and we believe
that we are well positioned in the market with those capabilities. We interact
with various payroll systems and payroll services, but are virtually independent
of the payroll solutions our clients select. We believe that our expanded suite
of payroll-data-centric services positions us well for future revenue and
earnings growth.
We achieved third quarter fiscal 2004 revenues of $29.4 million. The Work Number
services revenue increased 11% as compared to the comparable period in fiscal
2003 and our core services - The Work Number services and unemployment cost
management services - increased at a combined rate of 2%. Our gross margin grew
150 basis points to 56.6% as compared to the comparable period in fiscal 2003.
Earnings from continuing operations were $2.5 million, or 18 cents per diluted
share, and included a $0.03 per share charge for incremental legal, accounting
and severance costs.
Our fiscal 2004 third quarter benefited from the performance of The Work Number
services and improved margin performance in our unemployment cost management
business. However, revenues from The Work Number services have been adversely
affected by a slowdown in the refinancing segment of the mortgage loan market.
Additionally, we continued to experience lower revenue levels in our
unemployment cost management services business.
SERVICES AND PRODUCTS
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. We discontinued the operation of our
human resources and benefits application services business in the first fiscal
quarter, retaining certain contracts to administer other human resources
services for three clients, which we expect will either terminate or be assigned
within the next 9 months. See Note 13 in our Notes to Unaudited Consolidated
Financial Statements for more information regarding this business.
THE WORK NUMBER SERVICES
The Work Number. Mortgage lenders, pre-employment screeners, credit issuers,
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. The Work Number is an outsourced service that
enables employers to direct the third-party verifier to our web site or to a
toll free telephone number to confirm the employee's employment status and
income for the past three years. Currently, verifiers can also access this
information through a 1-900 telephone number. We have been notified by AT&T, the
carrier for this service, that they will discontinue providing 1-900 services
during February 2004. We are currently considering whether it is feasible to
move this
14
service to another 1-900 service provider. If we determine that this is not a
viable alternative, we will discontinue the 1-900 service during the month of
February 2004.
We generate substantially all of The Work Number revenues from transaction-based
fees charged to 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.
During the quarter ended December 31, 2003, revenues for The Work Number
services have been adversely affected by a slowdown in the refinancing segment
of the mortgage loan market.
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. The majority of W-2 eXpress clients are billed based upon
either the number of unique W-2s or the number of employees, 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 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 review and change W-4 information.
Additionally, during fiscal 2004, ePayroll has been expanded to allow employees
to enroll in a paycard service selected by their employer, which allows
employees to eliminate paper checks and receive their payroll through direct
deposits to their paycard.
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.
FasTime. FasTime services are integrated time capture and reporting solutions
that work from any phone or the Internet and are used by large employers and the
temporary staffing industry. 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
We also 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, web access, fax and interactive voice response 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. Following an
employee separation, UC eXpress services respond to unemployment claims on
behalf of our clients.
UC eXpress also offers comprehensive employer tax services. 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. 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, which were
designed to provide 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.
15
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.
In the third fiscal quarter of 2004, we continued to experience lower revenue
levels in our employment cost management service business. The UC eXpress
revenue stream is characterized by annual retainers that provide a solid revenue
base with upside potential through contingency billings from tax consulting or
through additional billings if claims processed, or other performance measures,
exceed contractually set levels. During fiscal 2004, uncertain economic
conditions have reduced activity in our unemployment tax consulting business and
current claims activity has been less than expected and we did not realize the
anticipated additional billings.
CUSTOMER PREMISES SYSTEMS AND RELATED MAINTENANCE AND SUPPORT
We previously offered our products and services exclusively through licensed
software specifically developed for each customer, and installed these systems
at the customer's site. In 2000 we discontinued sales to new customers. Today,
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.
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. See Item 7 of our Annual Report on Form 10-K/A for the year ended
March 31, 2003 for a discussion of these estimates and judgments.
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
and cash flows. 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 matters related to our
recent financial statement restatements;
(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 breaches of
confidentiality as we initiate large-scale processing of
verifications;
16
(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 or
re-instate 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 loss of revenue associated with the discontinuance of 900
number telephone service.
See Item 1 "Business-Risk Factors" in our Annual Report on Form 10-K/A 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/A 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.
17
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 NINE MONTHS ------------------------------
ENDED DEC. 31, ENDED DEC. 31, THREE MONTHS NINE MONTHS
---------------------- ---------------------- ENDED DEC. 31, ENDED DEC. 31,
2002 2003 2002 2003 2003 OVER 2002 2003 OVER 2002
--------- --------- --------- --------- -------------- --------------
(RESTATED) (RESTATED)
(IN THOUSANDS)
(UNAUDITED)
REVENUES AND GROSS MARGIN:
Revenues:
The Work Number services ............... $ 9,011 $ 10,028 $ 25,200 $ 32,597 11.3% 29.4%
Unemployment cost management services .. 18,879 18,356 54,857 55,241 (2.8) 0.7
Customer premises systems .............. 408 -- 1,507 -- * *
Maintenance and support ................ 908 1,060 2,756 3,295 16.7 19.6
--------- --------- --------- ---------
Total revenues ................ $ 29,206 $ 29,444 $ 84,320 $ 91,133 0.8 8.1
========= ========= ========= =========
Gross margin:
The Work Number services ............... $ 6,099 $ 6,922 $ 16,455 $ 23,066 13.5% 40.2%
Unemployment cost management services .. 9,182 9,067 26,389 26,193 (1.3) (0.7)
Customer premises systems .............. 70 -- 592 -- * *
Maintenance and support ................ 735 670 2,208 2,245 (8.8) 1.7
--------- --------- --------- ---------
Total gross margin ............ $ 16,086 $ 16,659 $ 45,644 $ 51,504 3.6 12.8
========= ========= ========= =========
GROSS MARGIN PERCENTAGE BY REVENUE CATEGORY:
The Work Number services ........................ 67.7% 69.0% 65.3% 70.8%
Unemployment cost management services ........... 48.6 49.4 48.1 47.4
Customer premises systems ....................... 17.2 -- 39.3 --
Maintenance and support ......................... 80.9 63.2 80.1 68.1
PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services ............... 30.9% 34.1% 29.9% 35.8% 11.3% 29.4%
Unemployment cost management services .. 64.6 62.3 65.1 60.6 (2.8) 0.7
Customer premises systems .............. 1.4 -- 1.7 -- * *
Maintenance and support ................ 3.1 3.6 3.3 3.6 16.7 19.6
--------- --------- --------- ---------
Total revenues ................ 100.0 100.0 100.0 100.0 0.8 8.1
Cost of revenues ................................ 44.9 43.4 45.9 43.5 (2.6) 2.5
--------- --------- --------- ---------
Gross margin .................................... 55.1 56.6 54.1 56.5 3.6 12.8
--------- --------- --------- ---------
Operating expenses:
Selling and marketing .................. 15.7 18.9 16.0 19.2 21.1 29.6
General and administrative ............. 23.4 22.7 22.5 21.2 (2.3) 2.0
--------- --------- --------- ---------
Total operating expenses ...... 39.1 41.6 38.5 40.4 7.1 13.5
--------- --------- --------- ---------
Operating income ................................ 16.0 15.0 15.6 16.1 (5.1) 11.3
Other income (expense), net ..................... (1.2) (0.6) (1.2) (0.7) (43.7) (34.6)
--------- --------- --------- ---------
Earnings from continuing operations
before income tax expense ........... 14.8 14.4 14.4 15.4 (2.1) 15.2
Income tax expense .............................. 5.7 5.8 5.5 6.0 1.4 17.2
--------- --------- --------- ---------
Earnings from continuing operations .... 9.1 8.6 8.9 9.4 (4.2) 14.0
Earnings (loss) from discontinued operations,
net of tax ............................. 5.4 0.1 1.7 0.1 (98.3) (91.1)
--------- --------- --------- ---------
Net earnings .................................... 14.5% 8.7% 10.6% 9.5% (39.5)% (2.8)%
========= ========= ========= =========
* - not meaningful
18
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE AND NINE MONTHS
ENDED DECEMBER 31, 2002
Revenues. Total revenues increased 0.8% to $29.4 million in the third quarter of
fiscal 2004 from $29.2 million in the third quarter of fiscal 2003. Total
revenues increased 8.1% to $91.1 million in the first three quarters of fiscal
2004 from $84.3 million in the first three quarters of fiscal 2003.
Revenues from The Work Number services increased 11.3% to $10.0 million in the
third quarter of fiscal 2004 from $9.0 million in the third quarter of fiscal
2003. Revenues for the first three quarters of fiscal 2004 increased 29.4% to
$32.6 million from $25.2 million in the first three quarters of fiscal 2003. The
increases were 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 and the impact of former 1-900 users moving to other
means of access. Also, we experienced increased transaction volumes due to an
increase in the number of employers and related employment records in the
database. Additionally, growth in The Work Number services revenues was offset
by a slowdown in the mortgage loan market. The third fiscal quarter is
historically our lowest revenue quarter due to the seasonal nature of our
business. However, we also began to experience the impact of the slowdown in the
refinancing segment of the mortgage loan market. We saw declines in our
transaction levels from The Work Number services. While we would normally expect
to see pre-employment screening transactions increase during an economic
recovery, this particular recovery is experiencing a lag in employment.
The mortgage industry and pre-employment screeners are the two primary revenue
generators for The Work Number. During the third quarter of fiscal 2004, the
balance between mortgage-related and pre-employment-related verification
revenues continued to shift back from its widest spread in the first quarter of
fiscal 2004 towards a more traditional balance. Pre-employment activity has
increased principally as a result of increasing volumes with specific verifiers,
and not as a result of a change in general economic conditions. The table below
indicates the percentage of The Work Number revenues contributed by
pre-employment screeners, mortgage/credit businesses, social services and other
businesses during fiscal year 2003 and the first three quarters of fiscal year
2004.
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR
VERIFIER FY 03 FY 03 FY 03 FY 03 FY 04 FY 04 FY 04
------------------------------- ----- ----- ----- ----- ----- ----- -----
Pre-Employment.................. 41% 41% 35% 31% 31% 35% 38%
Mortgage/Credit................. 41% 49% 55% 56% 57% 50% 44%
Social Services................. 7% 5% 6% 7% 7% 8% 10%
Other........................... 11% 5% 4% 6% 5% 7% 8%
During the third fiscal quarter of 2004, we added 4.7 million live records to
the database for The Work Number. As of the end of the third fiscal quarter of
2004, we had 87.4 million records live on the service, a 21% increase from the
third quarter of fiscal 2003. Our live and backlog accounts total 93.2 million
records as of December 31, 2003. As a result of conversions in the third fiscal
quarter of 2004, we have reduced our backlog to 5.8 million records.
Revenue from the "Paperless Pay" and FasTime services has increased and we
expect it should continue to grow as several large clients are coming on line.
New contracts signed during fiscal year 2003 contributed to a 50% growth in
FasTime revenues in the first three quarter of fiscal 2004 as compared to the
comparable period in fiscal 2003. In "Paperless Pay", both contracted business
and the sales pipeline have gained momentum and current indications lead us to
believe that the revenue run-rate may increase over the next six to nine months.
Surveys of major employers indicate that they are focused on eliminating
pay-stubs and paper checks and replacing them with web-based pay-statements and
paycards. We believe we are well positioned to play a key role in that trend. We
have experienced a strong selling season for our W-2 eXpress services. We expect
to have 8.5 million W-2s live on our system for fiscal 2004, representing an
increase of 52% over fiscal 2003. The majority of the revenue for this service
is realized in our fourth fiscal quarter ending March 31st.
19
Revenues from unemployment cost management services decreased 2.8% to $18.4
million in the third quarter of fiscal 2004 from $18.9 million in the third
quarter of fiscal 2003, due primarily to a reduced level of tax consulting
contracts, some pricing pressure in the claims processing business and the loss
of some smaller clients last year as we instituted certain minimum pricing
policies, partially offset by the addition of revenues from our acquisition of
Johnson and Associates and new sales. Revenues from unemployment cost management
services increased 0.7% to $55.2 million in the first three quarters of fiscal
2004 from $54.9 million in the first three quarters of fiscal 2003, due
primarily to the addition of revenues from our acquisition of Johnson and
Associates and new sales, partially offset by a reduced level of tax consulting
contracts, some pricing pressure in the claims processing business and the loss
of some smaller clients last year as we instituted certain minimum pricing
policies.
Revenues from maintenance and support increased 16.7% to $1.1 million in the
third quarter of 2004 from $0.9 million in the third quarter of fiscal 2003.
Revenues from maintenance and support increased 19.6% to $3.3 million in the
first three quarters of 2004 from $2.8 million in the first three quarters of
fiscal 2003. These increases were 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 3.6% to $16.7 million in the third
quarter of fiscal 2004 from $16.1 million in the third quarter of fiscal 2003.
As a percentage of total revenues, gross margin increased to 56.6% in the third
quarter of fiscal 2004 from 55.1% in the third quarter of fiscal 2003. Total
gross margin increased 12.8% to $51.5 million in the first three quarters of
fiscal 2004 from $45.6 million in the first three quarters of fiscal 2003. As a
percentage of total revenues, gross margin increased to 56.5% in the first three
quarters of fiscal 2004 from 54.1% in the first three quarters of fiscal 2003.
The Work Number services gross margin increased 13.5% to $6.9 million, or 69.0%
of corresponding revenue, in the third quarter of fiscal 2004 from $6.1 million,
or 67.7% of corresponding revenue, in the third quarter of fiscal 2003. The Work
Number services gross margin increased 40.2% to $23.1 million, or 70.8% of
corresponding revenue, in the first three quarters of fiscal 2004 from $16.5
million, or 65.3% of corresponding revenue, in the first three quarters of
fiscal 2003. The increases in gross margin and gross margin percentage were 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 decreased 1.3% to $9.1
million, or 49.4% of corresponding revenue, in the third quarter of fiscal 2004
from $9.2 million, or 48.6% of corresponding revenue, in the third quarter of
fiscal 2003. This decrease in gross margin is due primarily to revenue
decreases. The increase in gross margin percentage is due to cost savings
realized through our consolidation of the operational infrastructure.
Unemployment cost management services gross margin decreased 0.7% to $26.2
million, or 47.4% of corresponding revenue, in the first three quarters of
fiscal 2004 from $26.4 million, or 48.1% of corresponding revenue, in the first
three quarters 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 during the first
half of the year. Our efforts to consolidate our operational infrastructure were
substantially concluded in the second quarter of fiscal 2004. We expect to
continue to realize improvements in the gross margin percentage of this line of
business.
Maintenance and support gross margin decreased 8.8% to $670,000, or 63.2% of
corresponding revenue, in the third quarter of fiscal 2004, from $735,000, or
80.9% of corresponding revenue, in the third quarter of fiscal 2003. The
decreases in gross margin and gross margin percentage are due to the fixed
nature of personnel and infrastructure costs even as our installed base
continues to shrink. Maintenance and support gross margin increased 1.7% to
$2.25 million, or 68.1% of corresponding revenue, in the first three quarters of
fiscal 2004, from $2.21 million, or 80.1% of corresponding revenue, in the first
three quarters 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.
20
Selling and Marketing Expenses. Selling and marketing expenses increased 21.1%
to $5.6 million in the third quarter of fiscal 2004 from $4.6 million in the
third quarter of fiscal 2003. As a percentage of revenues, such expenses
increased to 18.9% in the third quarter of fiscal 2004 from 15.7% in the third
quarter of fiscal 2003. Selling and marketing expenses increased 29.6% to $17.5
million in the first three quarters of fiscal 2004 from $13.5 million in the
first three quarters of fiscal 2003. As a percentage of revenues, such expenses
increased to 19.2% in the first three quarters of fiscal 2004 from 16.0% in the
first three quarters 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
third quarter of fiscal 2004 as we increased our efforts to market to high
volume verifiers of The Work Number.
General and Administrative Expenses. General and administrative expenses
decreased 2.3% to $6.7 million in the third quarter of fiscal 2004 from $6.8
million in the third quarter of fiscal 2003. The decrease in such expenses is
due primarily to the amount of incremental legal, accounting and severance costs
related to our ongoing SEC investigation and financial statement restatements
recorded in each period. For the third quarter of fiscal 2004, we incurred
approximately $650,000 of incremental costs compared to $800,000 in the third
quarter of fiscal 2003. General and administrative expenses increased 2.0% to
$19.3 million in the first three quarters of fiscal 2004 from $18.9 million in
the first three quarters 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 21.2% in the first three
quarters of fiscal 2004 from 22.5% in the first three quarters 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 third quarter of fiscal 2004 from $0.3
million in the third quarter of fiscal 2003. Other income (expense), net
decreased to $0.7 million of net other expense in the first three quarters of
fiscal 2004 from $1.0 million in the first three quarters of fiscal 2003. The
decreases were 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 40.0% in the third quarter
of fiscal 2004 compared to 38.6% in the third quarter of 2003, and 39.1% in the
first three quarters of fiscal 2004 compared to 38.5% in the first three
quarters of 2003 due principally to an increase in our federal rate and higher
state income tax rates.
Earnings (Loss) From Discontinued Operations, Net of Income Taxes. We realized
net earnings of $28,000 for the third quarter of fiscal 2004 and $0.1 million
for the first three quarters of fiscal 2004 related to the operation of the
remainder of 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, and we anticipate that it will be disposed of within
the next 9 months. The net earnings of $1.6 million for the third quarter of
fiscal 2003 and $1.4 million for the first three quarters of fiscal 2003
represents the net earnings realized during the periods for our human resource
and benefits application services business.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed our operations through cash flows from
operations, except as described below. In addition to cash provided by
operations, we have access to a revolving credit facility.
Net cash provided by operating activities decreased to $16.4 million in the
first three quarters of fiscal 2004 from $19.5 million in the first three
quarters of fiscal 2003. This decrease was primarily due to our significant
payment of current liabilities in the first three quarters 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 $8.8 million in the first
three quarters of fiscal 2004 from $25.2 million in the first three quarters of
fiscal 2003. This decrease was primarily due to $20.1 million of payments made
in the first three quarters of fiscal 2003 related to our March 2002
acquisitions. Uses of cash for investing activities during the first three
quarters of fiscal 2004 include the acquisition of Johnson and Associates for
$1.7 million and capital expenditures of $4.2 million. These capital
expenditures were principally for computer equipment. At
21
December 31, 2003, we had no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and operating leases.
Net cash used in financing activities increased to $12.7 million in the first
three quarters of fiscal 2004 from $9.5 million in the first three quarters of
fiscal 2003. This increase was primarily due to the additional $3.3 million
"excess cash flow" payment made during the second quarter of fiscal 2004 as
required under our Loan Agreement referred to below. Additional uses of cash for
financing activities during the first three quarters of fiscal 2004 include
scheduled debt retirement payments of $7.5 million, the repurchase of stock for
$1.8 million and dividend payments of $1.8 million.
Our working capital was $1.6 million at March 31, 2003 and $(1.3) million at
December 31, 2003. Total working capital decreased primarily due to cash
utilized during the first three quarters 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 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 $15.7
million at December 31, 2003, due primarily to a higher level of billings during
the last quarter of fiscal 2003 compared to the third quarter of fiscal 2004.
Days sales outstanding in accounts receivable were 50 days at December 31, 2003
compared to 45 days at the end of the last fiscal year. Days sales outstanding
has increased due to economic conditions causing certain customers to pay slower
than normal.
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 December 31, 2003, 306,211
shares have been repurchased under this plan, including 131,211 shares
repurchased during the nine month period ended December 31, 2003 for $1.8
million. Except for the 322,540 shares remaining in the treasury at December 31,
2003, all shares repurchased have been reissued in connection with employee
stock option exercises and employee stock purchase plan purchases.
During the quarter ended December 31, 2003, we continued our quarterly dividend
program, declaring a $0.05 per share cash dividend, totaling $679,000, on
November 21, 2003. The dividend was paid on January 16, 2004 to shareholders of
record on December 19, 2003.
We are a party to a Loan Agreement, described more fully in Note 8 to our Notes
to Unaudited Consolidated Financial Statements. 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. As of December 31, 2003, the fair value of the interest rate swap in
the amount of $114,000 is included in accrued expenses and other liabilities.
The interest rate swap is described more fully in Note 9 to our Notes to
Unaudited Consolidated Financial Statements.
We do not use financial instruments for trading or speculative purposes.
22
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 announced on January 5, 2004 that we were restating
financial statements for the fiscal years ended March 31, 1999 through March 31,
2003 and for the first two quarters of fiscal 2004. In December 2002, 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 this new restatement, we could become subject to additional
litigation or regulatory proceedings or both. As of the date hereof, we are not
aware of any litigation having been commenced against us related to this new
restatement. However, such litigation could be commenced against us in the
future and the plaintiffs who have filed lawsuits against us previously could
amend their complaints to include claims related to this new restatement. We
cannot predict the outcome of any such litigation at this time. If an
unfavorable result occurred in any such action, our business and financial
condition could be materially harmed. Additionally, the lenders under our March
27, 2002 Loan Agreement, which is described more fully in Note 8 to our Notes to
Unaudited Consolidated Financial Statements, 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 restatements discussed above or the SEC
investigation discussed above or otherwise, we have breached a covenant or
representation and warranty in the Loan Agreement, which would materially harm
our business and financial condition.
Further, it is possible that the SEC would begin a regulatory proceeding or
enforcement action against us. The commencement of any such proceeding or
action, or the application of any remedies, could materially harm our business
condition and financial condition.
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.
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 December 31, 2003, we had $11.3 million principal outstanding on the Term
Loan, of which $7.3 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 $40,000 change to our annual interest expense, based on net variable
borrowings of $4.0 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 the
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.
23
Except as described below, there was no change in our internal control over
financial reporting during the quarter ended December 31, 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 the Chief Financial Officer and Assistant
Secretary, believes 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.
In January 2004, we announced that we were restating certain historical
financial statements as a result of adjustments related to our customer premises
systems business. The restatement is necessary because a recent internal
accounting review showed that certain revenues for customer premises systems
contracts were recorded earlier than was appropriate under the percentage of
completion methodology used for this line of business. Although we ultimately
realized the revenues from the transactions under review, our financial results
were not accurately presented, requiring the restatement. The resulting
restatement affects fiscal years ended March 31, 1999 through 2003 and the first
two quarters of fiscal 2004.
Additionally, we corrected three errors related to bill and hold arrangements on
hardware and software transactions arising out of the customer premises systems
line of business during the fiscal years ended March 31, 2000 and 2001. The
impact of these corrections resulted in revenues and related costs during fiscal
2000 and 2001 being recognized in different quarters than originally reported.
However, such adjustments had no impact on the fiscal 2000 or 2001 results.
Our review focused on contracts in which revenue was realized in fiscal 2000 and
subsequent periods as reliable historical data was not available for earlier
periods. Accordingly, our review included contracts for which services were
initiated in periods prior to fiscal 2000. The review of certain contracts
resulted in cumulative adjustments for periods prior to fiscal 2000 which have
been attributed to fiscal 1999, the earliest fiscal period presented for
financial disclosure purposes. While it is possible that certain of these
adjustments related to periods prior to fiscal 1999, data was not available to
accurately support the specific allocation to such prior periods. Such data was
not available as we had modified our systems during fiscal 1999 and have not
retained sufficient comparable data for contracts entered into prior to the
modification. While further review may have resulted in adjustments to increase
revenue in 2000 by decreasing revenues in prior periods, based on the review
performed, management believes that further adjustments were not supportable.
In addition, we announced the resignation of Executive Vice President Craig N.
Cohen. Mr. Cohen had previously served as chief financial officer from January
1994 to May 2003 and as vice president of application services and software from
May 1999 to May 2003.
24
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) Reports on Form 8-K
(i) On October 30, 2003, we filed a Current Report on Form 8-K,
furnishing under Items 9 and 12, our results of operations for the
three and six month periods ended September 30, 2003 and guidance
for revenues and earnings per share for fiscal 2004.
25
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: February 2, 2004 By: /s/ WILLIAM W. CANFIELD
--------------------------------------------
William W. Canfield
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 2, 2004 By: /s/ L. KEITH GRAVES
--------------------------------------------
L. Keith Graves
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting Officer)
26
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 Agreement dated December 31, 2003 by and between TALX Corporation and Craig N. Cohen +
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
27