Back to GetFilings.com
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, 2004 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________
Commission File Number 000-21465
TALX CORPORATION
(Exact name of registrant as specified in its charter)
MISSOURI 43-0988805
(State or other jurisdiction of incorporation or (I.R.S. Employer
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 February 2, 2004 there were 13,839,063 shares of the Registrant's Common
Stock outstanding, net of treasury shares held by the Registrant.
Exhibit Index is on page 31.
TALX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2004............... 3
Consolidated Statements of Earnings for the Three and Nine Months Ended
December 31, 2003 and 2004........................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 2003 and 2004........................................................... 5
Notes to Unaudited Consolidated Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................. 25
Item 4. Controls and Procedures ................................................................ 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ............................ 26
Item 5. Other Information ...................................................................... 26
Item 6. Exhibits ............................................................................... 29
Signatures ........................................................................................ 30
2
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
MARCH 31, DECEMBER 31,
2004 2004
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 8,568 $ 8,231
Short term investments 1,475 7,615
Accounts receivable, less allowance for doubtful accounts of $1,096 at
March 31, 2004 and $2,974 at December 31, 2004 15,456 19,474
Work in progress, less progress billings 1,714 1,814
Prepaid expenses and other current assets 10,406 4,520
Deferred tax assets, net 30 580
--------- ---------
Total current assets 37,649 42,234
Restricted cash 38,645 -
Property and equipment, net of accumulated depreciation of $13,044 at
March 31, 2004 and $17,059 at December 31, 2004 8,966 11,254
Capitalized software development costs, net 3,186 3,293
Goodwill 106,739 133,896
Other intangibles, net 17,387 47,023
Other assets 1,418 1,187
--------- ---------
$ 213,990 $ 238,887
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,374 $ 3,086
Accrued expenses and other current liabilities 16,794 16,925
Dividends payable 682 829
Current portion of long term debt 10,000 11,800
Deferred revenue 2,803 4,673
--------- ---------
Total current liabilities 31,653 37,313
Deferred tax liabilities, net 5,912 7,213
Long term debt, less current portion 40,000 48,650
Other non-current liabilities 2,608 2,410
--------- ---------
Total liabilities 80,173 95,586
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares and no
shares issued or outstanding at March 31, 2004 and December 31, 2004 - -
Common stock, $.01 par value; authorized 30,000,000 shares, issued
13,948,542 shares at March 31, 2004 and December 31, 2004 140 140
Additional paid-in capital 163,190 164,197
Deferred compensation - (244)
Accumulated deficit (25,536) (18,856)
Accumulated other comprehensive income:
Unrealized loss on interest rate swap contract, net of tax of $33
at March 31, 2004 and $73 at December 31, 2004 (51) (112)
Treasury stock, at cost, 301,041 shares at March 31, 2004 and
133,590 shares at December 31, 2004 (3,926) (1,824)
--------- ---------
Total shareholders' equity 133,817 143,301
--------- ---------
$ 213,990 $ 238,887
========= =========
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,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ------------- ----------- -------------
Revenues:
The Work Number services $ 10,028 $ 15,558 $ 32,597 $ 44,163
Tax management services 18,356 23,605 55,241 66,167
Maintenance and support 1,060 677 3,295 2,201
----------- ------------- ----------- -------------
Total revenues 29,444 39,840 91,133 112,531
----------- ------------- ----------- -------------
Cost of revenues:
The Work Number services 3,106 4,186 9,531 12,309
Tax management services 9,289 11,260 29,048 33,267
Maintenance and support 390 253 1,050 717
----------- ------------- ----------- -------------
Total cost of revenues 12,785 15,699 39,629 46,293
----------- ------------- ----------- -------------
Gross profit 16,659 24,141 51,504 66,238
----------- ------------- ----------- -------------
Operating expenses:
Selling and marketing 5,558 6,965 17,481 20,603
General and administrative 6,678 8,460 19,317 23,909
----------- ------------- ----------- -------------
Total operating expenses 12,236 15,425 36,798 44,512
----------- ------------- ----------- -------------
Operating income 4,423 8,716 14,706 21,726
----------- ------------- ----------- -------------
Other income (expense), net:
Interest income 14 66 51 122
Interest expense (205) (827) (740) (2,110)
Reserve for contingent claim - - - (3,000)
Other, net - 1 4 -
----------- ------------- ----------- -------------
Total other income (expense), net (191) (760) (685) (4,988)
----------- ------------- ----------- -------------
Earnings from continuing operations before
income tax expense 4,232 7,956 14,021 16,738
Income tax expense 1,693 3,143 5,485 7,797
----------- ------------- ----------- -------------
Earnings from continuing operations 2,539 4,813 8,536 8,941
Discontinued operations, net of income taxes:
Earnings from discontinued operations, net 28 8 127 15
Gain on disposal of discontinued operations, net - 145 - 425
----------- ------------- ----------- -------------
Earnings from discontinued operations 28 153 127 440
----------- ------------- ----------- -------------
Net earnings $ 2,567 $ 4,966 $ 8,663 $ 9,381
=========== ============= =========== =============
Basic earnings per share:
Continuing operations $ 0.19 $ 0.35 $ 0.63 $ 0.65
Discontinued operations - 0.01 0.01 0.03
----------- ------------- ----------- -------------
Net earnings $ 0.19 $ 0.36 $ 0.64 $ 0.68
=========== ============= =========== =============
Diluted earnings per share:
Continuing operations $ 0.18 $ 0.33 $ 0.60 $ 0.62
Discontinued operations - 0.01 0.01 0.03
----------- ------------- ----------- -------------
Net earnings $ 0.18 $ 0.34 $ 0.61 $ 0.65
=========== ============= =========== =============
Weighted average number of shares outstanding - basic 13,566,750 13,774,937 13,534,278 13,725,965
=========== ============= =========== =============
Weighted average number of shares outstanding - diluted 14,311,935 14,542,469 14,212,126 14,393,656
=========== ============= =========== =============
See accompanying notes to consolidated financial statements.
4
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2003 2004
---------- --------
Cash flows from operating activities:
Net earnings $ 8,663 $ 9,381
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,048 7,874
Deferred compensation - 14
Deferred taxes 1,718 751
Net assets of business held for sale (117) -
Change in assets and liabilities, excluding those acquired:
Accounts receivable, net 2,504 (2,746)
Work in progress, less progress billings (421) (100)
Prepaid expenses and other current assets (1,968) 6,316
Other assets (10) 122
Accounts payable (375) 1,493
Accrued expenses and other current liabilities 523 (485)
Deferred revenue (400) (70)
Other non-current liabilities 100 (251)
---------- --------
Net cash provided by operating activities 16,265 22,299
---------- --------
Cash flows from investing activities:
Additions to property and equipment (4,202) (4,709)
Decrease in restricted cash - 38,645
Acquisitions, net of cash received (1,734) (59,285)
Purchases of short-term investments (3,975) (6,140)
Proceeds from sale of short-term investments 1,700 -
Capitalized software development costs (605) (1,538)
---------- --------
Net cash used in investing activities (8,816) (33,027)
---------- --------
Cash flows from financing activities:
Issuance of common stock 1,785 2,132
Purchase of common stock (1,795) -
Borrowings under long-term debt facility - 18,000
Repayments under long-term debt facility (10,763) (7,550)
Dividends paid (1,756) (2,191)
---------- --------
Net cash provided by (used in) financing activities (12,529) 10,391
---------- --------
Net decrease in cash and cash equivalents (5,080) (337)
Cash and cash equivalents at beginning of period 9,409 8,568
---------- --------
Cash and cash equivalents at end of period $ 4,329 $ 8,231
========== ========
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, 2004 was obtained from our audited
balance sheet as of that date, as set forth in our Annual Report on Form 10-K
for the year ended March 31, 2004. 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,
2004 are not necessarily indicative of the results that may be expected for the
year ending March 31, 2005. 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, 2004.
NOTE 2 - EARNINGS PER SHARE AND STOCK-BASED COMPENSATION
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 DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
---------------------------------- ----------------------------------
2003 2004 2003 2004
--------------- --------------- --------------- ---------------
BASIC EARNINGS PER SHARE:
Net earnings:
Continuing operations ............................. $ 2,539,000 $ 4,813,000 $ 8,536,000 $ 8,941,000
Discontinued operations ........................... 28,000 153,000 127,000 440,000
--------------- --------------- --------------- ---------------
Net earnings .................................. $ 2,567,000 $ 4,966,000 $ 8,663,000 $ 9,381,000
=============== =============== =============== ===============
Weighted average number of common shares outstanding... 13,948,542 13,948,542 13,948,542 13,948,542
Less: weighted average number of treasury shares ...... (381,792) (173,605) (414,264) (222,577)
--------------- --------------- --------------- ---------------
Weighted average number of common and common
equivalent shares outstanding ................. 13,566,750 13,774,937 13,534,278 13,725,965
=============== =============== =============== ===============
Basic earnings per common share:
Continuing operations ............................. $ 0.19 $ 0.35 $ 0.63 $ 0.65
Discontinued operations ........................... -- 0.01 0.01 0.03
--------------- --------------- --------------- ---------------
Net earnings .................................. $ 0.19 $ 0.36 $ 0.64 $ 0.68
=============== =============== =============== ===============
6
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
2003 2004 2003 2004
---------- ----------- ------------ -----------
DILUTED EARNINGS PER SHARE:
Net earnings:
Continuing operations...................................... $2,539,000 $ 4,813,000 $ 8,536,000 $ 8,941,000
Discontinued operations.................................... 28,000 153,000 127,000 440,000
---------- ----------- ------------ -----------
Net earnings........................................... $2,567,000 $ 4,966,000 $ 8,663,000 $ 9,381,000
========== =========== ============ ===========
Weighted average number of common shares outstanding............ 13,948,542 13,948,542 13,948,542 13,948,542
Weighted average number of shares issuable under employee
stock plans................................................ 7,392 7,270 9,762 7,270
Weighted average number of restricted shares outstanding........ -- 7,174 -- 2,400
Dilutive effect of the exercise of stock options................ 700,998 715,771 633,142 621,665
Dilutive effect of the exercise of warrants..................... 36,795 37,317 34,944 36,356
Less: weighted average number of treasury shares................ (381,792) (173,605) (414,264) (222,577)
---------- ----------- ------------ -----------
Weighted average number of common and common
equivalent shares outstanding.......................... 14,311,935 14,542,469 14,212,126 14,393,656
========== =========== ============ ===========
Diluted earnings per common share:
Continuing operations...................................... $ 0.18 $ 0.33 $ 0.60 $ 0.62
Discontinued operations.................................... -- 0.01 0.01 0.03
---------- ----------- ------------ -----------
Net earnings........................................... $ 0.18 $ 0.34 $ 0.61 $ 0.65
========== =========== ============ ===========
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 Financial Accounting Standards Board Statement of Financial
Accounting Standards ("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 on 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 DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2003 2004 2003 2004
----------- ----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings, as reported................................... $ 2,567 $ 4,966 $ 8,663 $ 9,381
Stock-based employee compensation cost, net of taxes........ 310 415 1,125 1,136
-------- ------- ------- -------
Net earnings, pro forma................................ $ 2,257 $ 4,551 $ 7,538 $ 8,245
======== ======= ======= =======
Basic earnings per share:
As reported............................................ $ 0.19 $ 0.36 $ 0.64 $ 0.68
Pro forma.............................................. 0.17 0.33 0.56 0.60
Diluted earnings per share:
As reported............................................ $ 0.18 $ 0.34 $ 0.61 $ 0.65
Pro forma.............................................. 0.16 0.31 0.53 0.57
No options were granted in the third quarter of fiscal 2005. The fair value of
options granted in the first quarter of fiscal 2005 was estimated on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 65%, risk-free interest
rate of 3.75%, expected life of 7.0 years, and an expected dividend yield of
0.90%. The fair value of option grants for the three- and nine-month periods
ended December 31, 2003 was estimated on the date of the grant using the
Black-Scholes option-pricing
7
model with the following weighted-average assumptions: expected volatility of
80%, risk-free interest rate of 3.25%, expected life of 7.5 years, and an
expected dividend yield of 0.90%.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised), "Share-Based Payment", effective for our fiscal quarter ended
September 30, 2005. This statement requires companies to recognize over the
vesting period compensation cost for employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award.
While we are currently evaluating the impact of the adoption of SFAS No. 123(R),
we expect that the adoption of this statement could have a material impact on
our net earnings.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended December 31, 2003 and 2004 was
$2.6 million and $5.1 million, respectively, and for the nine months ended
December 31, 2003 and 2004 was $8.8 million and $9.3 million, respectively. The
difference between comprehensive income and net income arose from unrealized
holding gains (losses) on our interest rate swap contract.
NOTE 4 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes totaled $4.5 million and $4.9 million for the nine
months ended December 31, 2003 and 2004, respectively. Cash paid for interest
totaled $625,000 and $1.9 million for the nine months ended December 31, 2003
and 2004, respectively.
We declared a $0.06 per share cash dividend, totaling $829,000, on October 26,
2004. The dividend was payable January 14, 2005 to shareholders of record on
December 17, 2004.
NOTE 5 - ACQUISITIONS
Effective April 1, 2004, we acquired substantially all of the assets and assumed
certain liabilities of the unemployment compensation, employment verification
and applicant screening businesses (collectively, the "Sheakley Businesses") of
Sheakley-Uniservice, Inc. and its wholly owned subsidiary, Sheakley Interactive
Services, LLC, for approximately $40 million, including transaction costs,
subject to certain post-closing adjustments. The purchase price was determined
based on arms'-length negotiations and was paid in cash. In order to finance the
acquisition, we borrowed approximately $40 million under our Term Loan A, as
further discussed in Note 7 below. As a result of this transaction, the Sheakley
Businesses were consolidated with TALX effective April 1, 2004.
On October 15, 2004, we closed on the acquisition of the stock of TBT
Enterprises, Incorporated and UI Advantage, Inc., headquartered in Gaithersburg,
Maryland, which we collectively refer to as "TBT Enterprises". On October 25,
2004, we closed on the acquisition of Net Profit, Inc., headquartered in
Greenville, South Carolina. The acquisitions were structured as stock purchases
for cash. The purchase prices for the acquisitions were determined based on
arms'-length negotiations and totaled approximately $19 million. Additionally,
the TBT Enterprises and Net Profit, Inc. acquisition agreements include
provisions for potential earn-out payments if certain future financial
performance measures are achieved before October 31, 2005 and October 31, 2006,
respectively. The acquisitions were financed through $18.0 million in borrowings
under Term Loan A and Term Loan B pursuant to our amended and restated loan
agreement and the remainder in cash. These acquisitions enhance our existing tax
management services offerings by allowing us to offer clients expanded services
in connection with processing of the federally reinstated work opportunity
("WOTC") and welfare to work ("WTW") tax credits, as well as assisting clients
in calculating certain other federal and state tax credits which were not
previously a part of our service offerings. As a result of these transactions,
TBT Enterprises and Net Profit, Inc. were consolidated with TALX effective
October 15, 2004 and October 25, 2004, respectively.
The following table summarizes the preliminary purchase price allocations of the
estimated fair values of the assets acquired and liabilities assumed for the
acquired businesses as of the effective dates of the acquisitions.
8
SHEAKLEY TBT
BUSINESSES ENTERPRISES NET PROFIT, INC.
---------- ----------- ----------------
(IN THOUSANDS)
Cash and cash equivalents.............. $ -- $ 311 $ 239
Accounts receivable, net............... 1,304 87 115
Other current assets................... 17 19 160
Property and equipment, net............ 665 -- 930
Goodwill and intangible assets......... 40,193 9,063 9,128
Other non-current assets............... 75 -- --
------- -------- --------
Total assets acquired............. 42,254 9,480 10,572
------- -------- --------
Deferred revenue....................... 1,920 20 --
Current liabilities.................... 393 316 380
Other non-current liabilities.......... 53 -- --
------- -------- --------
Total liabilities assumed......... 2,366 336 380
------- -------- --------
Net assets acquired............... $39,888 $ 9,144 $ 10,192
======= ======== ========
The table below reflects unaudited pro forma combined results of TALX and the
acquired businesses as if the acquisitions had occurred on April 1, 2003:
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2003 2004 2003 2004
---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma revenues.......................... $ 35,890 $ 39,840 $ 111,454 $ 115,284
Pro forma net earnings...................... 2,739 4,966 10,274 8,991
Pro forma basic earnings per share.......... 0.20 0.36 0.76 0.66
Pro forma diluted earnings per share........ 0.19 0.34 0.72 0.62
These unaudited pro forma amounts are not necessarily indicative of what the
actual combined results of operations might have been if the acquisitions had
been effective at the beginning of fiscal year 2004.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the acquisitions of the Sheakley Businesses, TBT Enterprises,
and Net Profit, Inc., as discussed in Note 5 above; Ti3, Inc.; Johnson &
Associates; the unemployment cost management services business (the "GM
Unemployment Compensation Business") of Gates, McDonald & Company, a subsidiary
of Nationwide Mutual Insurance Company; and James E. Frick, Inc., d/b/a The
Frick Company, TALX acquired certain identifiable intangible assets. These
assets were recorded in accordance with the Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations."
The following table summarizes goodwill and other intangible asset activity for
the nine months ended December 31, 2004 (dollars in thousands).
9
OTHER INTANGIBLE ASSETS
-----------------------------------------------------------------
CUSTOMER CUSTOMER TRADE NON-
GOODWILL RELATIONSHIPS RECORDS NAME COMPETE TOTAL
--------- ------------- -------- ------- --------- --------
GROSS CARRYING VALUES:
March 31, 2004.............................. $ 106,739 $ 17,838 $ 2,184 $ -- $ 212 $ 20,234
Acquisition of the Sheakley Businesses.... 17,432 22,100 -- -- 700 22,800
Acquisition of TBT Enterprises............ 4,423 4,290 -- -- 350 4,640
Acquisition of Net Profit, Inc............ 4,688 3,800 -- 140 500 4,440
Adjustment of prior acquisition costs..... 614 -- -- -- -- --
--------- ------------- -------- ------- --------- --------
December 31, 2004........................... $ 133,896 $ 48,028 $ 2,184 $ 140 $ 1,762 $ 52,114
========= ============= ======== ======= ========= ========
ACCUMULATED AMORTIZATION:
March 31, 2004.............................. $ -- $ 2,415 $ 293 $ -- $ 139 $ 2,847
Amortization.............................. -- 1,976 109 12 147 2,244
--------- ------------- -------- ------- --------- --------
December 31, 2004........................... $ -- $ 4,391 $ 402 $ 12 $ 286 $ 5,091
========= ============= ======== ======= ========= ========
Weighted average lives (in years).............. 16.2 15.0 2.0 5.7 15.8
============= ======== ======= ========= ========
Amortization of other intangible assets was $2.2 million for the nine months
ended December 31, 2004 and is projected to be $3.1 million, $3.6 million, $3.5
million, $3.4 million, and $3.2 million for the fiscal years ended March 31,
2005 through 2009, respectively.
NOTE 7 - LONG-TERM DEBT
During the quarter ended September 30, 2004, we amended our amended and restated
loan agreement to increase the amount of cash dividends we are permitted to pay,
to allow for the SEC settlement discussed below, and to extend the availability
of term loan funds to finance our acquisitions of TBT Enterprises and Net
Profit, Inc., as discussed in Note 5 above. Among other things, the amendments
increased the maximum amount of permitted cash dividends to six cents per share
per calendar quarter, up to the annual maximum permitted amount of $3.5 million
per fiscal year. The amendments also extended the period of time during which we
could make additional draws under Term Loan A and Term Loan B from September 30,
2004 to December 31, 2004. Following the acquisitions of TBT Enterprises and Net
Profit, Inc., unless we further amend our loan agreement, we no longer will have
any availability under either of Term Loan A or Term Loan B. We have not
borrowed under our $15.0 million revolving credit facility and it remains
available.
As discussed in Note 9 below, the SEC has investigated certain of our prior
financial statements, which previously have been restated. The amendments to our
loan agreement permit us to make payment of up to $3.0 million in settlement of
the SEC investigation. Due to the inherent uncertainties of matters of this
nature, we cannot predict the ultimate outcome of the SEC investigation. If we
are not able to reach a settlement, the SEC could initiate regulatory
proceedings or an enforcement action against us. An unfavorable outcome could
trigger an event of default under our loan agreement and could have a material
adverse impact on our business, consolidated financial condition, liquidity and
results of operations.
NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENT
We have entered into two interest rate swap agreements designed to effectively
fix the interest rate on $20.5 million of borrowings of the $60.5 million
borrowed under our loan agreement. Under these agreements, we pay a fixed rate
of 3.45% as to $1.5 million of borrowings and 3.72% as to $19.0 million of
borrowings and receive a variable
10
rate of LIBOR, which is designed to equal the LIBOR rate that applies to
borrowings under our loan agreement. The notional amounts of our interest rate
swap agreements step down according to the same schedule as payment obligations
under our loan agreement. All payment dates and maturity dates in the swap
agreements are the same as our loan agreement.
The interest rate swaps and related gains and losses arising on the contracts
are accounted for as cash flow hedges in accordance with 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, 2004, the fair value of the interest rate swaps in the amount
of $185,000 is included in accrued expenses and other liabilities.
We do not use financial instruments for trading or speculative purposes.
NOTE 9 - 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 or our consolidated subsidiaries.
As previously disclosed in our Annual Report on Form 10-K for the year ended
March 31, 2004 and in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, 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
TALX, against TALX, certain of our 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 us 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 TALX and the Individual Defendants, violations of
Section 11 of the Securities Act of 1933 against TALX, 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 TALX 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 ("Consolidated Complaint").
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 5, 2004 we reached an agreement with the plaintiffs to settle all pending
class action lawsuits. The settlement called for payment of $5.75 million, which
was made by our insurance carriers and did not impact earnings. As of the year
ended March 31, 2004, we recorded a liability for $5.75 million in accrued
expenses and
11
other liabilities representing the amount we owed under the settlement
agreement. Additionally, we recorded $5.75 million in prepaid expenses and other
current assets representing the amount we expected to receive from our insurance
companies. On May 28, 2004, we received $5.75 million from our insurance
companies, and on June 1, 2004, we paid the $5.75 million settlement.
On October 6, 2004, the Court entered a Final Judgment and Order of Dismissal
with Prejudice, approving the proposed settlement in all respects. The Court
simultaneously issued an Order Approving Allocation of Settlement Proceeds. The
Court's Final Judgment provides that the claims of the named plaintiffs and all
members of the class are dismissed with prejudice; that any claims that were or
could have been alleged by the named plaintiffs or members of the class are
released and forever discharged; and that the action is dismissed subject to the
Court's continuing jurisdiction with regard to implementation of the settlement
and distribution of the settlement fund to the class.
As previously disclosed, the Securities and Exchange Commission, which we refer
to as the "Commission" or the "SEC", initially commenced an investigation into
our financial results for the 2001 and 2002 fiscal years. 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 has resigned from the Company) 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 Annual Report on Form 10-K/A for the year
ended March 31, 2002. We and the individuals filed separate responses to the
Wells letter. Since the time of the Wells submissions, the Commission
investigated our accounting for other items, including those which were the
subject of the restatements discussed in our Annual Report on Form 10-K for the
year ended March 31, 2004 and in our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004. 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.
In anticipation of a settlement with the SEC, we recorded a reserve of $3.0
million in the first quarter of fiscal year 2005. This charge was included in
"other income (expense), net" in the consolidated statement of earnings for the
quarter ended June 30, 2004. On August 12, 2004, we announced that we have made
an offer of settlement to the Enforcement Division of the SEC, under which we
would pay a fine of $2.5 million and would consent, without admitting any
wrongdoing, to the entry of an SEC order prohibiting us from violating certain
securities laws in the future. The SEC staff has indicated its willingness to
recommend our offer to the Commission in Washington, D.C. Our offer of
settlement does not constitute an offer of settlement from the Commission, and
the SEC staff is unable to make any assurances regarding the Commission's
consideration or determination of any offer of settlement.
Due to the inherent uncertainties of matters of this nature, we cannot
accurately predict the ultimate outcome of the SEC investigation and have not
adjusted our reserve. If the SEC decides not to finally approve the offer of
settlement, it could initiate regulatory proceedings or an enforcement action
against us. An unfavorable outcome could trigger an event of default under our
loan agreement and could have a material adverse impact on our business,
consolidated financial condition, liquidity and results of operations.
Separately, William W. Canfield, our president and chief executive officer, has
advised us that he made an offer of settlement that the SEC staff has indicated
it is prepared to recommend be approved by the Commission in Washington, D.C. to
settle an ongoing investigation that includes him. The terms of the offer
include the payment of a civil penalty and the disgorgement of certain amounts.
In connection with the offer, he also expects to consent, without admitting or
denying any wrongdoing, not to violate certain specified provisions of U.S.
securities laws in the future. The offer of settlement made by Mr. Canfield does
not constitute an offer of settlement from the Commission, and the SEC staff is
unable to make any assurances regarding the Commission's consideration or
determination of any offer of settlement.
In the settlement of the civil suit referred to above, we released our insurance
providers from related claims against our applicable insurance policies. Any
fines or penalties assessed by the SEC against us, along with any further
defense costs incurred by us in connection with the SEC investigation, either on
our own behalf or as
12
indemnification on behalf of William W. Canfield or Craig N. Cohen, and any
future related litigation will be borne by us and will not be covered by
insurance. In addition, to the extent that we are required to indemnify Messrs.
Canfield or Cohen against any fines or penalties assessed against either of
them, those amounts will be borne by us and will not be covered by insurance.
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 each of 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 required under our articles of incorporation, we are obligated to indemnify
and advance expenses of William W. Canfield, a current officer, and Craig N.
Cohen, a former officer, 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.
Regardless of the outcome of any litigation or regulatory proceeding, litigation
and regulatory proceedings of these types are expensive and, until settled or
otherwise resolved, will require that we devote substantial resources and
executive time to defend these proceedings.
In addition to matters set forth above, we are also party to other lawsuits and
claims that arise in the ordinary course of conducting our business. In the
opinion of management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims are not likely to have a material
adverse effect on our consolidated financial position or results of operations.
NOTE 10 - 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. 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 $2.0 million and $6.0 million. While the contract did not specify a
minimum guaranteed amount, we secured a $2.0 million note from Workscape, Inc.,
and as of January 22, 2005 we had received $1.8 million of principal and
$132,000 of interest payments in connection with the note.
All assets and liabilities of this business, both the portion of the business
transferred under contract to Workscape, Inc. (approximately 90% of the assets)
and the portion that has not yet been sold, along with related transaction
costs, were recorded on our consolidated balance sheet as net assets of business
held for sale. We first recorded cash received under the asset purchase
agreement to reduce the recorded value of net assets of business held for sale.
All subsequent cash received under the asset purchase agreement has been
recorded as a gain on the sale of the business.
In connection with the transfer, we are providing 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, were 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.
13
The historical results of operations for this business have been reclassified to
earnings from discontinued operations on our consolidated statement of earnings.
The results of operations for this business for the three and nine months ended
December 31, 2003 and 2004 were as follows:
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2003 2004 2003 2004
-------------- ------------- ------------- -------------
(IN THOUSANDS)
Revenues ......................................... $ -- $ -- $ -- $ --
============== ============= ============= =============
Earnings from discontinued operations ............ $ 45 $ 13 $ 212 $ 24
Gain on disposal of discontinued operations ...... -- 240 -- 703
-------------- ------------- ------------- -------------
Earnings from discontinued operations ......... 45 253 212 727
Income tax expense ............................... 17 100 85 287
-------------- ------------- ------------- -------------
Net earnings from discontinued operations ..... $ 28 $ 153 $ 127 $ 440
============== ============= ============= =============
NOTE 11 - SUBSEQUENT EVENTS
On January 5, 2005, our Board of Directors declared a 3-for-2 stock split, to be
effected in the form of a 50 percent stock dividend, payable February 17, 2005,
to shareholders of record on January 20, 2005. The stock split will require
retroactive restatement of all historical per share data in our fiscal fourth
quarter ending March 31, 2005. The table below reflects unaudited pro forma
earnings per share as if the 3-for-2 stock split had been effected in the
financial statements included in this Form 10-Q:
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2003 2004 2003 2004
------------- --------------- -------------- -------------
Net earnings:
Continuing operations....................................... $ 2,539,000 $ 4,813,000 $ 8,536,000 $ 8,941,000
Discontinued operations..................................... 28,000 153,000 127,000 440,000
------------- --------------- -------------- -------------
Net earnings............................................. $ 2,567,000 $ 4,966,000 $ 8,663,000 $ 9,381,000
============= =============== ============== =============
Pro forma basic earnings per common share:
Continuing operations....................................... $ 0.13 $ 0.23 $ 0.42 $ 0.44
Discontinued operations..................................... -- 0.01 0.01 0.02
------------- --------------- -------------- -------------
Net earnings............................................. $ 0.13 $ 0.24 $ 0.43 $ 0.46
============= =============== ============== =============
Pro forma diluted earnings per common share:
Continuing operations....................................... $ 0.12 $ 0.22 $ 0.40 $ 0.41
Discontinued operations..................................... -- 0.01 0.01 0.02
------------- --------------- -------------- -------------
Net earnings............................................. $ 0.12 $ 0.23 $ 0.41 $ 0.43
============= =============== ============== =============
Pro forma weighted average number of shares outstanding
- basic.................................................... 20,350,125 20,662,405 20,301,417 20,588,947
============= =============== ============== =============
Pro forma weighted average number of shares outstanding
- diluted.................................................. 21,467,902 21,813,705 21,318,189 21,590,484
============= =============== ============== =============
14
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 Quarterly Report on Form 10-Q and in our
Annual Report on Form 10-K for the year ended March 31, 2004.
OVERVIEW
We are the leading provider of automated employment and income verification and
tax management services and a leader in providing payroll and human resources
business process outsourcing. Our services use web access, interactive voice
response, fax, document imaging and other technologies to enable mortgage
lenders, pre-employment screeners, credit issuers, social service agencies and
other information verifiers to obtain payroll and human resources information
and to allow employees and their managers to review and modify information in
payroll and human resources management information systems on a self-service
basis. Further, we provide unemployment insurance claims processing,
unemployment tax planning and management services, and assistance in obtaining
hiring tax credits and other federal, state and local tax credits and incentives
to a broad range of employers. We provide services that enable both large and
mid-size corporations, including approximately two-thirds of the Fortune 500
companies, as well as government agencies, to outsource the performance of
payroll and human resources business processes that would otherwise be performed
by their own payroll or human resources department. Our focus is on eliminating
paper and manual steps from routine payroll and human resources-related
processes. We interact with various payroll and human resources systems and
payroll services, but are virtually independent of the solutions our clients
select.
As discussed in Note 5 of Notes to Unaudited Consolidated Financial Statements,
effective April 1, 2004, we acquired substantially all of the assets and assumed
certain liabilities of the unemployment compensation, employment verification
and applicant screening businesses of Sheakley-Uniservice, Inc. and its wholly
owned subsidiary, Sheakley Interactive Services, LLC, which we refer to
collectively as the "Sheakley Businesses". Additionally, on October 15, 2004, we
closed on the acquisition of the stock of TBT Enterprises, Incorporated and UI
Advantage, Inc., headquartered in Gaithersburg, Maryland, which we collectively
refer to as "TBT Enterprises". On October 25, 2004, we closed on the acquisition
of Net Profit, Inc., headquartered in Greenville, South Carolina. These
acquisitions enhance our existing tax management services offerings by allowing
us to offer clients expanded services in connection with processing of the
federally reinstated work opportunity ("WOTC") and welfare to work ("WtW") tax
credits, as well as assisting clients in calculating certain other federal and
state tax credits which were not previously a part of our service offerings.
As a result of these acquisitions, in the third quarter of fiscal 2005, we
renamed as "Tax Management Services" our service offerings we previously
referred to as "Unemployment Cost Management Services". We believe that this new
name better represents the breadth of services we now offer in the tax
management field, and we have not reclassified or changed our operating
segments.
We recognized third quarter fiscal 2005 revenues of $39.8 million, a 35.3%
increase over the $29.4 million in revenue reported in the comparable period in
fiscal 2004. The Work Number services revenue increased 55.1% as compared to the
comparable period in fiscal 2004, while revenues in our tax management services
business increased 28.6% compared to the comparable period. Our gross profit
grew to $24.1 million, or 60.6% of revenues, compared to $16.7 million, or 56.6%
of revenues, in the comparable period in fiscal 2004. Earnings from continuing
operations grew 89.6 percent to $4.8 million, or 33 cents per diluted share,
compared to $2.5 million, or 18 cents per diluted share, in the comparable
period in fiscal 2004.
For the nine months ended December 31, 2004, we recognized revenues of $112.5
million, a 23.5% increase over the $91.1 million in revenue reported in the
comparable period in fiscal 2004. The Work Number services revenue increased
35.5% as compared to the comparable period in fiscal 2004, while revenues in our
tax management services business increased 19.8% compared to the comparable
period. Our gross profit grew to $66.2 million, or 58.9% of revenues, compared
to $51.5 million, or 56.5% of revenues in the first nine months of fiscal 2004.
15
Earnings from continuing operations were $8.9 million, or 62 cents per diluted
share, including a $3.0 million non-operating charge recognized in the fiscal
2005 first quarter related to the potential SEC settlement. Excluding this
non-operating charge, earnings from continuing operations would have been $11.9
million, or 83 cents per diluted share, representing a 39.9 percent increase
compared to $8.5 million, or 60 cents per diluted share in the first nine months
of fiscal 2004. See "Non-GAAP Financial Measures" below for a reconciliation of
differences from the comparable GAAP measure.
SERVICES AND PRODUCTS
Our services and products fall within three general categories: The Work Number
services, tax management services and maintenance and support related to our
former customer premises systems business. We discontinued the operation of our
human resources and benefits application services business in the first fiscal
quarter of 2004, retaining certain contracts to administer other human resources
services for three clients, which we expect will either terminate or be assigned
to another service provider within the next 6 months. See Note 10 of Notes to
Unaudited Consolidated Financial Statements for more information regarding this
business.
THE WORK NUMBER SERVICES
The Work Number. 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. For example, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, leading purchasers of residential
mortgages in the United States, usually require independent verification of
employment and income data for the past two calendar years and a current payroll
period in connection with mortgages they will purchase. The Work Number is an
outsourced service that enables employers to direct the third-party verifiers to
our website or to a toll-free telephone number to confirm the employee's
employment status and income for the most recent past three years of employment.
Additionally, we maintain a 1-900 service with MCI for the small customer base
that prefers the 1-900 number method of access.
We generate substantially all of The Work Number revenues from transaction-based
fees charged to lenders, pre-employment screeners, credit issuers, social
service agencies and other information verifiers for verification of income and
employment information. Revenue is recognized on these transaction-based fees in
the period that the transactions occur and are billed. We also generate revenues
from employer data conversion, employer transaction fees and ongoing maintenance
fees, and record this revenue on a monthly basis as billed. Lastly, we derive
revenues from one-time, up-front set-up fees. These fees are recognized as
revenue on a straight-line basis over the initial contract period, beginning on
the date the client's employee information is available for use by TALX clients,
or "live," on our system.
W-2 eXpress. W-2 eXpress is a suite of services relating to the initial
distribution (either printed or electronic), reissue and correction of W-2 wage
and tax statement forms that we offer to existing clients and other large
employers. Using data provided by employers, we distribute original W-2 forms
(both electronically and in paper form through business alliances) to the
employees of our clients and provide an automated process to enable these
employees to request corrections to their W-2 forms and obtain additional copies
via the web, telephone or direct download into their tax software. Through our
T4 eXpress service, we offer similar initial distribution and reissue
functionality for Canadian employees of our W-2 eXpress clients. 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 our clients through the end of the service period. Additionally, we have
some W-2 eXpress clients that are billed on a transactional basis. For these
clients, we recognize revenue on a monthly basis, as transactions occur.
ePayroll. ePayroll (or Paperless Pay) is a suite of payroll self-service
applications that enables employees, via the web or by telephone, to receive pay
statement information, access current and historical payroll information, review
and change direct deposit account or paycard information, review and change W-4
information, update personal information, and enroll in selected paycard
services chosen by their employer.
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
set-up fees is recognized on a straight-line basis over the initial contract
16
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 web and are used by employers within the
temporary staffing industry and other large employers. 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 set-up and maintenance fees
and as services are performed for transaction-based fees.
HireXpress. The HireXpress service was added to our portfolio of services
through our acquisition of the businesses from Sheakley-Uniservice, Inc., as
noted above. HireXpress is an applicant screening and automated hiring work flow
service that is designed to electronically provide clients a steady stream of
qualified job candidates. Job candidates provide their responses to job
requirements over the web or telephone. Using HireXpress, employers can specify
job requirements, screen potential workers, schedule candidate interviews,
capture candidate responses, automate the hiring process work flow and maintain
all required documentation. We believe this service is particularly valuable to
our clients in high turnover industries. HireXpress clients are billed for
initial set-up fees and per transaction fees or monthly fees. 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 set-up fees and as
services are performed for transaction-based or monthly fees.
TAX MANAGEMENT SERVICES
We also provide tax management services under the names UC eXpress and TALX
Employer Services (through our recent acquisition of the Sheakley Businesses).
UC eXpress offers a broad suite of services designed to reduce the cost of
processing unemployment claims by human resource departments and to better
manage the tax rate that employers are assessed for unemployment taxes. UC
eXpress services utilize document imaging, web access, fax and interactive voice
response to speed the processing of unemployment claims, with the goal of
resisting unmeritorious or illegitimate claims for unemployment compensation
that have been filed with state agencies by separated employees. These services
are aimed at relieving human resource departments of the administrative burden
of managing unemployment claims. Following an employee separation, UC eXpress
services respond on behalf of our client to an unemployment claim filed by the
separated employee. This includes reviewing employment records to preserve the
clients' rights as an employer. If an employment hearing is required, these UC
eXpress services include client conferences with our hearing
consultants/attorneys and, upon client request, attendance at the hearing with
the employer's representative. In addition, our UC eXpress services field-based
account management team and hearing consultants bring state-specific
unemployment tax knowledge to the client.
UC eXpress also offers comprehensive employer tax services. 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 WOTC
and WtW tax credits, which are 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 applicants and employees who are potential qualifiers for
hiring tax credits. Effective in the fiscal 2005 third quarter, through the
acquisition of Net Profit, Inc. and TBT Enterprises, Inc., we have expanded our
existing tax services offerings, including the expansion of our capabilities to
process WOTC/WtW credits, as well as assisting clients in calculating certain
other federal and state tax credits which were not previously a part of our
service offerings, such as enterprise zone credits and training credits.
We charge clients fees pursuant to multi-year contracts, generally billed
monthly or quarterly. Many contracts allow for additional charges if transaction
activity exceeds a certain threshold. Some tax management services 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 that is contingent upon achieving certain performance
criteria, including our hiring tax credit consulting and administration
business, is recognized when those criteria are met.
17
MAINTENANCE AND SUPPORT SERVICES RELATED TO OUR FORMER CUSTOMER PREMISES
SYSTEMS BUSINESS
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 existing 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. In the second quarter of fiscal 2005, as a result of
requests from a number of our clients, we agreed to extend these support
services until December 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 for the year ended
March 31, 2004 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 Quarterly Report on 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) 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 and our dependence on third party
providers to do so;
(2) the risk that our revenues from The Work Number may fluctuate in
response to changes in certain economic conditions such as
residential mortgage activity and employment trends;
(3) 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 would be significantly
harmed if those requirements were relaxed or eliminated;
(4) risks associated with our ability to prevent breaches of
confidentiality as we perform large-scale processing of
verifications;
(5) risks associated with our ability to maintain the accuracy, privacy
and confidentiality of our clients' employee data;
(6) risks associated with changes in economic conditions or unemployment
compensation laws;
(7) the risk to our future growth due to our dependence on our ability
to effectively integrate acquired companies and capitalize on
cross-selling opportunities;
(8) risks associated with future challenges regarding applicability of
the Fair Credit Reporting Act or any new privacy legislation or
interpretation of existing laws;
(9) risks relating to the applicability of the SUTA Dumping Prevention
Act of 2004 to our tax planning services; and
(10) 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.
See "--Risk Factors" in our Form 10-Q for the period ended September 30, 2004
for a more detailed description of many of these and other risk factors. You
should read this report completely and with the understanding that our actual
results may be materially different from what we expect. We 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.
18
RESULTS OF OPERATIONS
The following tables set forth (1) revenues and gross profit, (2) the gross
margin percentage by revenue category, and (3) certain items from our
consolidated statements of operations as a percentage of revenues for the
periods indicated:
THREE MONTHS NINE MONTHS
ENDED DEC. 31, ENDED DEC. 31,
---------------------------- --------------------------------
2003 2004 2003 2004
------------ ----------- -------------- -------------
(IN THOUSANDS)
(UNAUDITED)
(RESTATED FOR ALL PERIODS PRESENTED)
REVENUES AND GROSS PROFIT:
Revenues:
The Work Number services.............................. $ 10,028 $ 15,558 $ 32,597 $ 44,163
Tax management services............................... 18,356 23,605 55,241 66,167
Maintenance and support............................... 1,060 677 3,295 2,201
------------ ----------- -------------- -------------
Total revenues..................................... $ 29,444 $ 39,840 $ 91,133 $ 112,531
============ =========== ============== =============
Gross profit:
The Work Number services.............................. $ 6,922 $ 11,372 $ 23,066 $ 31,854
Tax management services............................... 9,067 12,345 26,193 32,900
Maintenance and support............................... 670 424 2,245 1,484
------------ ----------- -------------- -------------
Total gross profit................................. $ 16,659 $ 24,141 $ 51,504 $ 66,238
============ =========== ============== =============
GROSS MARGIN PERCENTAGE BY REVENUE CATEGORY:
The Work Number services................................. 69.0% 73.1% 70.8% 72.1%
Tax management services.................................. 49.4 52.3 47.4 49.7
Maintenance and support.................................. 63.2 62.6 68.1 67.4
PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services.............................. 34.1% 39.1% 35.8% 39.2%
Tax management services............................... 62.3 59.2 60.6 58.8
Maintenance and support............................... 3.6 1.7 3.6 2.0
------------ ----------- -------------- -------------
Total revenues..................................... 100.0 100.0 100.0 100.0
Cost of revenues......................................... 43.4 39.4 43.5 41.1
------------ ----------- -------------- -------------
Gross profit............................................. 56.6 60.6 56.5 58.9
------------ ----------- -------------- -------------
Operating expenses:
Selling and marketing................................. 18.9 17.5 19.2 18.3
General and administrative............................ 22.7 21.2 21.2 21.3
------------ ----------- -------------- -------------
Total operating expenses........................... 41.6 38.7 40.4 39.6
------------ ----------- -------------- -------------
Operating income......................................... 15.0 21.9 16.1 19.3
Other income (expense), net.............................. (0.6) (1.9) (0.7) (4.4)
------------ ----------- -------------- -------------
Earnings from continuing operations before
income tax......................................... 14.4 20.0 15.4 14.9
Income tax expense....................................... 5.8 7.9 6.0 7.0
------------ ----------- -------------- -------------
Earnings from continuing operations................... 8.6 12.1 9.4 7.9
Earnings from discontinued operations, net of tax........ 0.1 0.4 0.1 0.4
------------ ----------- -------------- -------------
Net earnings............................................. 8.7% 12.5% 9.5% 8.3%
============ =========== ============== =============
PERCENTAGE CHANGE
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DEC. 31, DEC. 31,
2004 OVER 2003 2004 OVER 2003
------------------ -----------------
REVENUES AND GROSS PROFIT:
Revenues:
The Work Number services.............................. 55.1% 35.5%
Tax management services............................... 28.6 19.8
Maintenance and support............................... (36.1) (33.2)
Total revenues..................................... 35.3 23.5
Gross profit:
The Work Number services.............................. 64.3% 38.1%
Tax management services............................... 36.2 25.6
Maintenance and support............................... (36.7) (33.9)
Total gross profit................................. 44.9 28.6
GROSS MARGIN PERCENTAGE BY REVENUE CATEGORY:
The Work Number services.................................
Tax management services..................................
Maintenance and support..................................
PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services.............................. 55.1% 35.5%
Tax management services............................... 28.6 19.8
Maintenance and support............................... (36.1) (33.2)
Total revenues..................................... 35.3 23.5
Cost of revenues......................................... 22.8 16.8
Gross profit............................................. 44.9 28.6
Operating expenses:
Selling and marketing................................. 25.3 17.9
General and administrative............................ 26.7 23.8
Total operating expenses........................... 26.1 21.0
Operating income......................................... 97.1 47.7
Other income (expense), net.............................. 297.9 628.2
Earnings from continuing operations before
income tax......................................... 88.0 19.4
Income tax expense....................................... 85.6 42.2
Earnings from continuing operations................... 89.6 4.7
Earnings from discontinued operations, net of tax........ 446.4 246.5
Net earnings............................................. 93.5% 8.3
19
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE AND NINE MONTHS
ENDED DECEMBER 31, 2003
Revenues. Total revenues increased 35.3% to $39.8 million in the third quarter
of fiscal 2005 from $29.4 million in the third quarter of fiscal 2004. Total
revenues increased 23.5% to $112.5 million in the first nine months of fiscal
2005 from $91.1 million in the first nine months of fiscal 2004.
Revenues from The Work Number services increased 55.1% to $15.6 million in
the third quarter of fiscal 2005 from $10.0 million in the third quarter of
fiscal 2004. Revenues from The Work Number services increased 35.5% to $44.2
million in the first nine months of fiscal 2005 from $32.6 million in the first
nine months of fiscal 2004. The increases were due primarily to an increase in
transaction volume resulting from marketing efforts directed to verifiers and
employers and additional records added to the database. Additionally, fiscal
2005 includes revenues related to the acquisition of the employment verification
business and the applicant screening and automated hiring work flow business
(which we call "HireXpress") from Sheakley-Uniservice, Inc., as described in
Note 5 of Notes to Unaudited Consolidated Financial Statements.
The mortgage industry, pre-employment screeners, and consumer finance businesses
are the primary revenue generators for The Work Number. The balance between
mortgage-related and pre-employment-related verification revenues began to shift
back from its widest historical spread in the first quarter of fiscal 2004
toward a more traditional balance near the end of fiscal 2004 and into fiscal
2005. Additionally, beginning in fiscal 2004, we gradually increased revenues
from social services agencies. The table below indicates the percentage of The
Work Number revenues contributed by pre-employment screeners, mortgage
businesses, consumer finance businesses, social services, other businesses, and
other Work Number services during the last eight quarters.
FISCAL
2003 FISCAL 2004 FISCAL 2005
------- ------------------------------------ ---------------------------
REVENUE SOURCE 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR
- --------------------- ------- ------- ------- ------- ------- ------- ------- -------
Pre-Employment....... 19% 20% 21% 22% 17% 18% 19% 18%
Mortgage............. 33 41 40 34 29 35 34 35
Consumer Finance..... 16 15 16 16 17 16 21 21
Social Services...... 5 6 7 10 8 13 8 8
Other................ 3 5 5 5 4 5 5 5
Other Work Number
Services....... 24 13 11 13 25 13 13 13
As of the end of the third fiscal quarter of 2005, we had 104.1 million records
"live" on The Work Number service, a 19.1% increase from the third quarter of
fiscal 2004. Our "live" and backlog accounts totaled 109.2 million records as of
December 31, 2004.
Revenue from the ePayroll service increased 73.2% in the third quarter of fiscal
2005 compared to the third quarter of fiscal 2004, as several large clients have
begun using this service in the last year. Revenue from the ePayroll service
increased 55.8% in the first nine months of fiscal 2005 compared to the first
nine months of fiscal 2004. During the first nine months of fiscal 2005, both
contracted business and the sales pipeline appeared to have gained momentum. We
believe that the revenue run-rate will continue to increase over the next six to
nine months. Our 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 expected trend.
Revenues from tax management services increased 28.6% to $23.6 million in the
third quarter of fiscal 2005 from $18.4 million in the third quarter of fiscal
2004. Revenues from tax management services increased 19.8% to $66.2 million in
the first nine months of fiscal 2005 from $55.2 million in the first nine months
of fiscal 2004. The increases were due primarily to the acquisitions described
in Note 5 of Notes to Unaudited Consolidated Financial Statements. In
particular, as a result of the reauthorization of certain tax credits included
in The Working Families Tax Relief Act of 2004, which became effective in
October, many states processed a large portion of the backlog built up by the
delay in reauthorization of the tax credits. This resulted in higher revenues
than would otherwise have been expected from the WOTC and the WtW tax credit
areas during the third quarter of fiscal 2005.
20
As expected, revenues from maintenance and support decreased 36.1% to $677,000
in the third quarter of 2005 from $1.1 million in the third quarter of fiscal
2004. Revenues from maintenance and support decreased 33.2% to $2.2 million in
the first nine months of 2005 from $3.3 million in the first nine months of
fiscal 2004. The decreases were primarily a result of lower standard maintenance
revenues caused by a shrinking client base as supported systems approach the end
of their life cycles. During 2003, we notified our maintenance clients of our
intention to discontinue all support services effective June 2005. In the second
quarter of fiscal 2005, as a result of requests from a number of our clients, we
agreed to extend these support services through December 2005. We anticipate
revenues from maintenance and support will continue to decrease over time from
current quarter levels.
Gross Profit. Total gross profit increased 44.9% to $24.1 million in the third
quarter of fiscal 2005 from $16.7 million in the third quarter of fiscal 2004.
Gross margin increased to 60.6% in the third quarter of fiscal 2005 from 56.6%
in the third quarter of fiscal 2004. Total gross profit increased 28.6% to $66.2
million in the first nine months of fiscal 2005 from $51.5 million in the first
nine months of fiscal 2004. Gross margin increased to 58.9% in the first nine
months of fiscal 2005 from 56.5% in the first nine months of fiscal 2004.
The Work Number services gross profit increased 64.3% to $11.4 million, or 73.1%
of corresponding revenue, in the third quarter of fiscal 2005 from $6.9 million,
or 69.0% of corresponding revenue, in the third quarter of fiscal 2004. The Work
Number services gross profit increased 38.1% to $31.9 million, or 72.1% of
corresponding revenue, in the first nine months of fiscal 2005 from $23.1
million, or 70.8% of corresponding revenue, in the first nine months of fiscal
2004. The increases in gross profit were due primarily to revenue increases.
Additionally, more transactions were performed over the web, which has a lower
average transaction cost compared to transactions performed through either our
900 or toll-free telephone services.
Tax management services gross profit increased 36.2% to $12.3 million, or 52.3%
of corresponding revenue, in the third quarter of fiscal 2005 from $9.1 million,
or 49.4% of corresponding revenue, in the third quarter of fiscal 2004. Tax
management services gross profit increased 25.6% to $32.9 million, or 49.7% of
corresponding revenue, in the first nine months of fiscal 2005 from $26.2
million, or 47.4% of corresponding revenue, in the first nine months of fiscal
2004. The increases in gross profit were due primarily to higher revenues. The
increases in gross margin were due to cost savings realized through our
consolidation of the operational infrastructure, partially offset by a lower
gross margin in the Sheakley Businesses. We expect to continue to realize
improvements in the gross margin of this line of business over the next six to
nine months as we continue to identify and implement process improvement
initiatives.
Maintenance and support gross profit decreased 36.7% to $424,000, or 62.6% of
corresponding revenue, in the third quarter of fiscal 2005, from $670,000, or
63.2% of corresponding revenue, in the third quarter of fiscal 2004. Maintenance
and support gross profit decreased 33.9% to $1.5 million, or 67.4% of
corresponding revenue, in the first nine months of fiscal 2005, from $2.2
million, or 68.1% of corresponding revenue, in the first nine months of fiscal
2004. The decreases in gross profit were due to the decline in revenues. The
decline in gross margin was due to the fixed nature of personnel and
infrastructure costs even as our installed customer base for this discontinued
business continues to shrink.
Selling and Marketing Expenses. Selling and marketing expenses increased 25.3%
to $7.0 million in the third quarter of fiscal 2005 from $5.6 million in the
third quarter of fiscal 2004. As a percentage of revenues, such expenses
declined to 17.5% in the third quarter of fiscal 2005 from 18.9% in the third
quarter of fiscal 2004. Selling and marketing expenses increased 17.9% to $20.6
million in the first nine months of fiscal 2005 from $17.5 million in the first
nine months of fiscal 2004. As a percentage of revenues, such expenses declined
to 18.3% in the first nine months of fiscal 2005 from 19.2% in the first nine
months of fiscal 2004. The increases in expenses were primarily due to increased
commissions and incentives, which resulted from our higher revenues. Selling and
marketing expenses as a percentage of revenues improved as a result of the
higher revenue levels, improved leveraging of our selling and marketing
infrastructure and our continued focus on expense control.
General and Administrative Expenses. General and administrative expenses
increased 26.7% to $8.5 million in the third quarter of fiscal 2005 from $6.7
million in the third quarter of fiscal 2004. As a percentage of revenues, such
expenses decreased to 21.2% in the third quarter of fiscal 2005 compared to
22.7% in the third quarter of fiscal 2004. General and administrative expenses
increased 23.8% to $23.9 million in the first nine months of fiscal 2005
21
from $19.3 million in the first nine months of fiscal 2004. As a percentage of
revenues, such expenses remained steady at 21.2% in the first nine months of
fiscal 2005 compared to the first nine months of fiscal 2004. The increased
expenses resulted primarily from additional amortization from our three
acquisitions and the expansion of our infrastructure to accommodate our growing
business and the financial consolidation of the acquisitions described in Note 5
of Notes to Unaudited Consolidated Financial Statements.
Other Income (Expense), Net. Other income (expense), net decreased to $760,000
of net other expense in the third quarter of fiscal 2005 from $191,000 in the
third quarter of fiscal 2004. Other income (expense), net decreased to $5.0
million of net other expense in the first nine months of fiscal 2005 from
$685,000 in the first nine months of fiscal 2004. Interest expense increased in
fiscal 2005 due to higher outstanding borrowings to fund the acquisitions
described in Note 5 of Notes to Unaudited Consolidated Financial Statements. In
the first quarter of fiscal 2005, we recorded a $3.0 million charge related to a
potential SEC settlement, as discussed in Note 9 of Notes to Unaudited
Consolidated Financial Statements.
Income Tax Expense. Our effective income tax rate was 39.5% in the third quarter
of fiscal 2005 compared to 40.0% in the third quarter of fiscal 2004. Our
effective income tax rate in the first nine months of fiscal 2005 was 46.6%
compared to 39.1% in the year-earlier period. The $3.0 million charge related to
a potential SEC settlement, as discussed in other income (expense), net, above,
is not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed our operations through cash flows from
operating activities, except as described below. In addition to cash provided by
operating activities, we have access to our $15.0 million revolving credit
facility.
Net cash provided by operating activities increased to $22.3 million in the
first nine months of fiscal 2005 compared to $16.3 million in the first nine
months of fiscal 2004. The increase in cash provided by operating activities was
primarily due to improved operating results, as well as changes in working
capital.
Net cash used in investing activities increased to $33.0 million in the first
nine months of fiscal 2005 from $8.8 million in the first nine months of fiscal
2004. As discussed in Note 5 of Notes to Unaudited Consolidated Financial
Statements, in the nine months ended December 31, 2004, we acquired three
businesses, at a total cash outlay of approximately $59 million. In the first
nine months of fiscal 2005, our restricted cash balance of $38.6 million was
used to fund the approximately $40 million acquisition of the Sheakley
Businesses. Capital expenditures and capitalized software development costs
totaled $6.2 million in the first nine months of fiscal 2005, compared to $4.8
million in the first nine months of fiscal 2004. These capital expenditures were
principally for computer equipment and software. At December 31, 2004, we had no
significant capital spending or purchase commitments other than normal purchase
commitments and commitments under facilities and operating leases.
Net cash provided by financing activities increased to $10.4 million in the
first nine months of fiscal 2005 compared to net cash used in financing
activities of $12.5 million in the first nine months of fiscal 2004. The
increase in cash provided by financing activities in fiscal 2005 is primarily
due to increased borrowings as a result of the acquisitions, as discussed in
Note 5 of Notes to Unaudited Consolidated Financial Statements. Additionally, in
the first nine months of fiscal 2004, we repurchased $1.8 million in stock.
Our working capital was $4.9 million at December 31, 2004 compared to $6.0
million at March 31, 2004. Working capital decreased in the first nine months of
fiscal 2005 primarily due to the $3.0 million accrual for the potential SEC
settlement, as described in Note 9 of Notes to Unaudited Consolidated Financial
Statements.
Our accounts receivable increased to $19.5 million at December 31, 2004 from
$15.5 million at March 31, 2004 due primarily to a higher level of billings
during the third quarter of fiscal 2005 compared to the fourth quarter of fiscal
2004.
As discussed in Note 9 of Notes to Unaudited Consolidated Financial Statements
above, the SEC has investigated certain of our prior financial statements, which
have previously been restated. We have been in discussions with the SEC
regarding a potential settlement. On August 12, 2004, we announced that we have
made an offer of settlement
22
to the Enforcement Division of the Securities and Exchange Commission, under
which we would pay a fine of $2.5 million and would consent, without admitting
any wrongdoing, to the entry of an SEC order prohibiting us from violating
certain securities laws in the future. The SEC staff has indicated its
willingness to recommend our offer to the Commission in Washington, D.C. Our
offer of settlement does not constitute an offer of settlement from the
Commission, and the SEC staff is unable to make any assurances regarding the
Commission's consideration or determination of any offer of settlement. We
recorded a reserve of $3.0 million related to the potential SEC settlement in
the first fiscal quarter of 2005. Due to the inherent uncertainties of matters
of this nature, we cannot accurately predict the ultimate outcome of the SEC
investigation. If we are not able to reach a final settlement, the SEC could
initiate regulatory proceedings, an enforcement action, or other remedies
against us. An unfavorable outcome could trigger an event of default under our
loan agreement and could have a material adverse impact on our business,
consolidated financial condition, liquidity and results of operations.
Currently, based on cash and cash equivalents on hand, together with anticipated
cash flows from operating activities, 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 or
engage in other financing transactions. Following the completion of the recent
acquisitions as discussed in Note 5 of Notes to Unaudited Consolidated Financial
Statements, unless we further amend our loan agreement, we no longer will have
any availability under either of Term Loan A or Term Loan B. We cannot assure
you that additional credit would be available on acceptable terms. Any such
additional credit would increase the risks associated with leverage, including
our ability to service indebtedness and volatility of interest rates. We have
not borrowed under our $15.0 million revolving credit facility and it remains
available.
On January 10, 2005, we filed a universal shelf registration statement on Form
S-3 with the Securities and Exchange Commission ("SEC") covering a variety of
equity and debt securities. After the registration statement is declared
effective by the SEC, we will be able to offer and sell up to $125 million of
our securities from time to time in one or more public offerings. The terms of
any future offerings would be established at the time of the offerings. The
registration statement has not yet become effective. These securities may not be
sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This report shall not constitute an offer to sell
or the solicitation of an offer to buy, nor shall there be any sale of these
securities in any state in which such offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state.
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. Under this plan, we have
repurchased a cumulative total of 306,211 shares of our common stock. Except for
the 133,590 shares remaining in the treasury at December 31, 2004, 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, 2004, we continued our quarterly dividend
program, declaring a $0.06 per share cash dividend, totaling $829,000, on
October 26, 2004. The dividend was paid on January 15, 2005 to shareholders of
record on December 17, 2004. We have amended our loan agreement to increase the
maximum amount of permitted cash dividends to six cents per share per calendar
quarter, up to the annual maximum permitted amount of $3.5 million per fiscal
year.
We are a party to a loan agreement, described in Note 7 to our audited financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2004 and in Note 7 of Notes to Unaudited Consolidated Financial
Statements in this report. We have entered into two interest rate swap
agreements totaling $20.5 million of the $60.5 million outstanding under our
loan agreement as a means of reducing our interest rate exposure. As of December
31, 2004, the fair value of the interest rate swaps in the amount of $185,000 is
included in accrued expenses and other liabilities. The interest rate swaps are
described more fully in Note 8 of Notes to Unaudited Consolidated Financial
Statements.
We do not use financial instruments for trading or speculative purposes.
23
OTHER MATTERS
We are cooperating with a pending SEC investigation and are a defendant in
pending lawsuits which are described in Note 9 of Notes to Unaudited
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. As a result of this
restatement, we could become subject to additional litigation. 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.
Regardless of the outcome of any litigation, litigation matters of this type are
expensive and, until settled or otherwise resolved, will require that we devote
substantial resources and executive time to defend these proceedings.
On October 4, 2004, President Bush signed the Working Families Tax Relief Act of
2004, which extended the provisions for the WOTC and the WtW tax credits
available to employers through December 31, 2005. The companies that we acquired
in October 2004, as discussed in Note 5 of Notes to Unaudited Consolidated
Financial Statements, specialize in obtaining federal and state tax credits and
incentives for their clients. We expect our expanded tax service capabilities,
now that we have completed these acquisitions, to help employers obtain credits
under these reauthorized programs. See "Risk Factors - Risks Related to Our
Business - Changes in tax laws could adversely impact our business and results
of operations" in our second quarter 2005 Form 10-Q for more information about
these programs.
NON-GAAP FINANCIAL MEASURES
We sometimes use information derived from consolidated financial information but
not presented in our financial statements prepared in accordance with generally
accepted accounting principles ("GAAP"). Specifically, in this Quarterly Report
on Form 10-Q we have used non-GAAP financial measures to eliminate the effect on
earnings from continuing operations and diluted earnings per share of a $3.0
million charge we recorded in connection with the potential SEC settlement
described above.
The following table presents a reconciliation of earnings from continuing
operations and diluted earnings per share, which exclude a non-operating charge
related to the potential SEC settlement, to the comparable GAAP measures for the
nine months ended December 31, 2004:
Reconciliation of Adjusted Earnings from Continuing Operations to GAAP Earnings
from Continuing Operations:
Adjusted earnings from continuing operations $ 11.9 million
Less: Reserve for contingent claim 3.0 million
--------------
GAAP earnings from continuing operations $ 8.9 million
==============
Reconciliation of Adjusted Diluted Earnings Per Share to GAAP Diluted Earnings
Per Share:
Adjusted diluted EPS from continuing operations $ 0.83
Less: Reserve for contingent claim 0.21
-------
GAAP diluted EPS from continuing operations $ 0.62
=======
Non-GAAP financial measures should not be considered as a substitute for, or
superior to, measures of financial performance prepared in accordance with GAAP.
We use these non-GAAP measures internally to evaluate the performance of our
business, including allocation of assets and resources, planning, comparison of
financial performance between historical periods and evaluation and compensation
of management and staff. We believe that presentation of these non-GAAP
financial measures provides useful information to investors because these
measures
24
exclude elements that we do not consider to be indicative of our results from
operations and allow for an equivalent comparison to prior period results.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised), "Share-Based Payment", effective for our fiscal quarter ended
September 30, 2005. This statement requires companies to recognize over the
vesting period compensation cost for employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award.
See Note 2 of Notes to Unaudited Consolidated Financial Statements for current
disclosures under SFAS No. 123. While we are currently evaluating the impact of
the adoption of SFAS No. 123(R), we expect that the adoption of this statement
could have a material impact on our net earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Amounts borrowed pursuant to our loan agreement bear interest at rates we select
under the terms of the loan agreement, including a base rate or eurodollar rate,
plus an applicable margin. The applicable margin for eurodollar rate loans under
our loan agreement varies from 1.75% to 3.75%, and the applicable margin for
base rate loans under our loan agreement varies from 0.00% to 0.75%, in each
case based upon our ratio of total indebtedness to EBITDA (earnings before
interest, taxes, depreciation and amortization).
As of December 31, 2004, we had $60.5 million principal outstanding on our loan
agreement, of which $20.5 million was hedged with interest rate swap contracts.
On an annual basis, a 100 basis point change in interest rates would result in
an approximate $400,000 change to our annual interest expense, based on net
variable borrowings of $40.0 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 we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms.
There was no change in our internal control over financial reporting during the
quarter ended December 31, 2004 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.
25
TALX CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 9 of Notes to Unaudited Consolidated Financial
Statements is incorporated by reference herein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases of our Company or any
affiliated purchasers during the quarter ended December 31, 2004 of equity
securities that are registered by us pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED OF SHARES THAT
AS PART OF MAY YET BE
TOTAL NUMBER PUBLICLY PURCHASED UNDER
OF SHARES AVERAGE PRICE ANNOUNCED PLANS THE PLANS OR
PERIOD PURCHASED (1) PAID PER SHARE OR PROGRAMS (1) PROGRAMS
- ---------------------------------------- ------------- -------------- ---------------- ---------------
October 1, 2004 to October 31, 2004..... -- -- -- 693,789
November 1, 2004 to November 30, 2004... -- -- -- 693,789
December 1, 2004 to December 31, 2004... -- -- -- 693,789
------------- -------------- ----------------
Total.............................. -- -- -- 693,789
============= ============== ================
(1) On September 5, 2002, our Board of Directors authorized us to repurchase up
to one million shares of our common 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. Under this plan, no
shares were repurchased during the quarter ended December 31, 2004. Cumulative
shares repurchased under this plan as of December 31, 2004 amount to 306,211.
ITEM 5. OTHER INFORMATION
(a) 2006 Annual Base Salaries and Stock Option Grants
On January 27, 2005, the Compensation Committee of our Board of
Directors approved annual base salaries for our 2006 fiscal year ending March
31, 2006 for each of our executive officers. Effective April 1, 2005, base
salaries will be: $450,000 for William W. Canfield, President and Chief
Executive Officer, compared to his current base salary of $385,000; $231,000 for
L. Keith Graves, Chief Financial Officer, compared to his current base salary of
$210,000; $214,500 for Michael E. Smith, Vice President, Marketing, compared to
his current base salary of $195,000; and $198,000 for Edward W. Chaffin,
President-UC eXpress, compared to his current base salary of $180,000.
Effective January 27, 2005, we granted options to some of our employees
to purchase common stock under our 1994 Amended and Restated Stock Option Plan
for an exercise price equal to $30.96, the fair market value of the underlying
common stock on the date of grant, subject to antidilution adjustments in
accordance with the terms of the plan. In connection with this annual grant to
our employees, Messrs. Smith and Graves received 10,000 options each, and Mr.
Chaffin received 5,000 options. Some of the options are intended to qualify for
treatment as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, and all of the options vest annually on the anniversary of the
date of grant in equal parts over a five-year period and expire on the tenth
anniversary of the date of grant, if not earlier exercised or canceled. We
described the material terms of awards under our 1994 plan in the proxy
materials for our 2004 annual meeting of shareholders under the caption,
"Shareholder-Approved Equity Compensation -- 1994 Stock Option Plan" and have
filed the forms of awards as exhibit 10.4 to our registration statement on Form
S-1 (File No. 333-10969) and exhibit 10.9 to this quarterly report.
Employment Agreement
In connection with our continued annual review of executive officer
compensation, we expect to modify the terms of Mr. Chaffin's employment
agreement to reflect his September 2004 promotion to President -- UC eXpress,
but such new terms, if any, have not yet been determined. The material terms of
his existing employment agreement are described below.
Mr. Chaffin, who is expected to be one of our four most highly
compensated executive officers for our 2005 fiscal year, has an employment
agreement dated April 1, 2004. Mr. Chaffin formerly served as our Vice
President, Midwest and Southeast Regions and is currently earning a base salary
of $180,000 per year. His employment agreement had a six-month term commencing
July 1, 2004, which automatically extended for an additional six-month period on
January 1, 2005. The employment agreement will automatically extend for
additional six-month periods on each successive July 1 and January 1, unless
prior written notice is delivered to Mr. Chaffin or us by the other 60 days
prior to an applicable semi-anniversary date. Under the terms of his employment
agreement, Mr. Chaffin is entitled to participate in our annual incentive
compensation program, which is described in more detail below. The employment
agreement contains confidentiality provisions that extend indefinitely after
termination of employment as well as non-solicitation and non-competition
provisions that extend for one year after termination of employment. The
employment agreement also contains an arbitration provision.
26
If the employment agreement is terminated by us without "cause" (as
defined in the agreement, but including, without limitation, a material breach
by Mr. Chaffin of the employment agreement that is not cured within 10 days'
written notice from us, crimes against moral turpitude, willful violation of the
employment agreement or willfully engaging in conduct that damages our business
or reputation or materially injures us), or by Mr. Chaffin for "good reason" (as
defined in the agreement, but including, without limitation, material breach by
us of the employment agreement that is not cured within 10 days' written notice
from Mr. Chaffin, the reduction of salary, benefits or other perquisites
provided to Mr. Chaffin under the agreement, failure by us to obtain a
successor's commitment to perform our obligations under the employment agreement
and failure by us to agree to an extension of the employment agreement), we
would be obligated to pay Mr. Chaffin his base salary plus incentive
compensation (based on the estimated targeted incentive compensation for the
year of termination) over the six-month period (the "Continuation Period") that
commences on the date of early termination, and such amount shall be payable
ratably over such Continuation Period, as well as to continue his employee
benefits over such Continuation Period; however, if his employment agreement is
terminated for Cause, Mr. Chaffin is only entitled to be paid through the date
of his early termination. Further, if within six months of a "Change of Control"
of TALX, Mr. Chaffin, under certain circumstances, is terminated or resigns, he
will be entitled to (i) a lump-sum cash payment equal to his six-month base
salary plus, (ii) a lump-sum cash payment equal to one-half of his anticipated
incentive compensation (based on the estimated incentive compensation for the
year of termination), (iii) the continuation of certain health insurance and
other employee benefits through the end of the Continuation Period and (iv)
payment for certain outplacement services. Additionally, we have agreed to make
certain "gross-up" payments in the event any excise taxes are imposed pursuant
to Section 4999 of the Internal Revenue Code of 1986, as amended or replaced,
related to the employment agreement.
The term "Change of Control," as used in the employment agreement,
means (i) a change of control of a nature that would be required to be reported
in response to Item 5.01 of the Current Report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, or any comparable successor provisions. Without limiting the foregoing, a
"Change of Control" includes, without limitation, (i) the purchase or other
acquisition by any person or group of beneficial ownership of 25% or more of
either the then outstanding shares of common stock or the combined voting power
of our then outstanding voting securities entitled to vote in the election of
directors, (ii) when individuals who, as of the date of the employment
agreement, constitute our board of directors cease for any reason to constitute
at least two-thirds of the board, provided that generally persons who are
approved by at least three-quarters of the incumbent board will be deemed a
member thereof, and (iii) approval by our shareholders of a reorganization,
merger, or consolidation, in each case, with respect to which persons who were
TALX shareholders immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than 50% of the combined
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated company's then outstanding voting
securities, or a liquidation or dissolution of TALX or of the sale of all or
substantially all of our assets.
Adjustment to our 2005 EPS Goal
We have an annual incentive compensation plan, in which some of our
employees, including the named executive officers, participate. Under the plan,
employees receive cash compensation in
27
an amount equal to a specified percentage of their annual base salary (or of
specified amounts in the case of other specified performance-based criteria set
forth in an applicable award) if we approach, meet or exceed our annual earnings
per share ("EPS") goal, which is annually determined by our board of directors,
typically in the first fiscal quarter. For the 2005 fiscal year, Mr. Canfield is
entitled to receive an annual incentive bonus ranging from 45%-112% of his base
salary, and each of Messrs. Graves and Smith is entitled to receive an annual
incentive bonus ranging from 30-75% of his base salary in each case, if our
actual earnings per share approaches or exceeds the annual EPS goal by specified
percentage amounts.
In connection with our continued annual review of executive officer
compensation, we expect to modify the terms of Mr. Chaffin's incentive
compensation award to reflect his September 2004 promotion to President -- UC
eXpress, but such new terms, if any, have not yet been determined. In addition
to an EPS goal, which could result in Mr. Chaffin receiving from 7%-17% of his
base salary as a component of his incentive compensation, Mr. Chaffin's current
incentive compensation award contains divisional sales-based criteria, as well
as gross profit margin and revenue targets for our UC eXpress division, with
specified adjustments related to acquisitions.
At its January 27, 2005 meeting, the Compensation Committee decided to
adjust the 2005 EPS goal to exclude projected increases in earnings from the
October 2004 acquisitions of TBT Enterprises, Inc. and Net Profit, Inc. In
addition, the Compensation Committee decided to adjust the basis on which it
determines our performance relative to our EPS goal for all employees by
excluding the effect on GAAP earnings of results from discontinued operations
and, for all employees other than Mr. Canfield, by excluding the effect on GAAP
earnings of a previously-disclosed $3.0 million charge that we recorded in
connection with a potential settlement with the SEC.
We believe that these changes to the EPS goal and to the basis on which
performance to the EPS goal is measured provide a better evaluation of the
performance of our business between historical periods, allow for equivalent
comparisons to previous periods and retain for our employees incentive
compensation that is comparable to their anticipated potential benefits, based
on our planned performance for our employees when we completed our initial
annual budgeting process for fiscal year 2005.
2004-2006 Long-Term Incentive Plan
Mr. Canfield participates in our 2004-2006 Long Term Incentive Plan for
Selected Key Executives, which we refer to as the "LTIP." The LTIP is designed
to attract and motivate key employees toward long-term profit improvement and to
permit them to earn additional compensation in the event that the profitability
and asset productivity goals are achieved over the three-year term of the plan.
Under the terms of the plan, our Compensation Committee determines the
identities of the officers of TALX and our affiliates who are eligible to
participate and generally has conclusive discretion with respect to other
matters under the LTIP. Each participant must remain our employee for the entire
term of the LTIP award, and no partial awards will be granted in the event of a
participant's termination prior to the completion of the final plan year,
subject to the next sentence, unless the Compensation Committee authorizes a
partial award. Awards will vest and become payable in part if termination occurs
as a result of a participant's death, disability or retirement before the
completion of the term. Cash awards are determined as a percentage of a
28
participant's base salary for the final year of the plan. The LTIP commenced on
April 1, 2003. Currently, Mr. Canfield is the only employee designated by the
Compensation Committee to participate in the LTIP, as follows:
- --------------------------------------------------------------------------------
TALX Corporation 2004-2006 Long-Term Incentive Plan for Selected Key Executives
- --------------------------------------------------------------------------------
Estimated Future
Performance Or Payouts Under
Number of Other Period Non-Stock
Performance Until Maturation Price-Based Plans
Name Units (1) Or Payout Target/Maximum
---- --------------- ------------ --------------
- ----------------------------------------------------------------------------------------------------------------------
William W. Canfield................... N/A 2004-2006 $450,000/$787,500 (1)
- ----------------------------------------------------------------------------------------------------------------------
(1) In the event that we meet or exceed the award criteria, and the other
conditions under the LTIP are satisfied, we will pay Mr. Canfield an amount
ranging from 100%-175% of his 2006 base salary pursuant to his award under the
LTIP.
A copy of the LTIP was filed as exhibit 10.1 to our quarterly report on
Form 10-Q for the quarter ended September 30, 2003.
On January 27, 2005, the Compensation Committee exercised its
discretion under the plan and adjusted Mr. Canfield's goals under the plan by
excluding the effects of projected increases in operating income attributable to
acquired companies during the life of the plan, as determined at the time of
each of the Johnson & Associates, Sheakley Businesses, TBT Enterprises, Inc. and
Net Profit, Inc. acquisitions. The effect of this adjustment is to remove the
benefit of up-front expected performance improvement attributable to
acquisitions, which has the effect of raising the goal for Mr. Canfield.
Perquisites
We have filed a description of the perquisites that we provide to our
named executive officers as Exhibit 99.1 to this quarterly report.
We intend to provide additional information regarding the compensation
awarded to our named executive officers in respect of and during the year ending
March 31, 2005, in the proxy statement for our 2005 annual meeting of
shareholders, which is expected to be filed with the Securities and Exchange
Commission in July 2005.
ITEM 6. EXHIBITS
See Exhibit Index.
29
TALX CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TALX CORPORATION
Date: February 4, 2005 By:/s/ WILLIAM W.CANFIELD
-----------------------------------
William W. Canfield
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 4, 2005 By: /s/ L.KEITH GRAVES
--------------------------------------------
L. Keith Graves
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting Officer)
30
TALX CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to our Form 10-K for the fiscal year
ended March 31, 1997 (File No. 000-21465)
3.2 Bylaws, as amended and restated, incorporated by reference to
Exhibit 3.2 to our Quarterly Report on Form 10-Q for the period
ended December 31, 2001 (File No. 000-21465)
10.5 Form of Restricted Stock Award*
10.6 FY05 Incentive Bonus Plan Policy*
10.7 Form of Incentive Bonus Plan Agreement for corporate officers*
10.8 Form of Incentive Bonus Plan Agreement for salespeople*
10.9 Form of Incentive Stock Option Agreement*
11 Computation of Earnings 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
99.1 Description of officer perquisites*
- -------------------
* Indicates a compensatory plan or arrangement.
31