Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended March 31, 1997
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
(State or other jurisdiction of incorporation or organization)
43-0988805
(I.R.S. Employer Identification No.)
1850 BORMAN COURT, ST. LOUIS, MO 63146
(Address of principal executive offices) (Zip Code)
(314) 434-0046
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
- ------------------------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 18, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $14,399,096. For purpose of
this calculation only, without determining whether the following are affiliates
of the Registrant, the Registrant has assumed that (i) its directors and
executive officers are affiliates and (ii) no party who has filed a Schedule 13D
or 13G is an affiliate.
As of June 18, 1997 there were 5,271,508 shares of the Registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive Proxy Statement
for the Registrant's 1997 Annual Meeting of Stockholders to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by
this Form.
PART I
This Form 10-K (including, without limitation, Item 1 -- "Business" and Item 7
- -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations") includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical facts included herein
are "forward-looking statements." Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Factors that
have affected, and in the future could affect, the Company's actual results and
could cause such results during fiscal 1998 and beyond to differ materially from
those expressed in any forward-looking statements made by or on behalf of the
Company include, but are not limited to, those discussed under Item 1 --
"Business -- Risk Factors" hereinbelow.
ITEM 1. BUSINESS
GENERAL
TALX Corporation ("TALX" or the "Company") designs and implements interactive
communications solutions using technology such as interactive web and
interactive voice response, primarily for many Fortune 500 and other large
organizations other than telephone service providers. The Company's interactive
communications solutions enable an organization's employees, customers, vendors
and business partners ("Users") to access, input and update information without
human assistance. The Company's solutions enhance service levels, improve
productivity and reduce costs by enabling Users to perform self-service
transactions using interactive communications technologies that employ computer
telephony to integrate technologies such as interactive voice response ("IVR"),
facsimile, e-mail, Internet and corporate Intranet. Historically, the Company
has designed and implemented "tailored" systems that provide an organization's
Users with access to databases of information relating to that organization.
In early 1995, the Company introduced a "branded" service, The Work Number for
Everyone(R) ("The Work Number"), which is a national service providing automated
access to information from multiple organizations. The Work Number provides
automated employment verification to mortgage lenders and other verifiers. Using
The Work Number, verifiers are able to confirm employment information regarding
participating employers' current and former employees, including their past
three years of salary history. The Work Number reduces an employer's cost of
providing this information and at the same time increases the timeliness and
accuracy of the delivery of such information to mortgage lenders and other
verifiers.
Tailored interactive communications solutions are offered by TALX to its
customers either as systems for installation on customers' premises or on an
outsourced services basis. The Company has provided tailored interactive
communications systems for installation at customers' premises since the early
1980s and has shipped over 650 systems to over 375 customers during the last six
years. In 1993, the Company introduced its outsourced services business which
allows a customer to realize the benefits of an interactive communications
system without incurring the administrative or maintenance responsibilities of
operating such a system. For outsourced services customers, the Company
maintains the customer's database on a system at the Company's facilities, where
incoming requests for access to the information are received.
In addition to providing interactive communications systems, the Company has
historically provided database and document services. In August 1996, the
Company determined to pursue the divestiture of the database and document
services businesses and, accordingly, has reflected the results of operations of
such businesses as discontinued operations. Database services include providing
sales leads and pre-press services for directory publishers, and document
services include the preparation and mailing of invoices, statements and
confirmation letters for organizations with high volume requirements. In January
1997, the document services business was sold.
The Company was incorporated under Missouri law in 1973. Following the purchase
of a 20% interest in the Company by Intech Group Inc. ("Intech Group") in 1987,
the Company became primarily involved in designing and implementing interactive
communications solutions. At the time of Intech Group's initial purchase of TALX
capital stock, the
1
Company's only other shareholders were MiTek, Inc. ("MiTek") and Gateway Venture
Partners II, L.P. ("Gateway"). In fiscal 1994, the Company acquired from Intech
Group and its affiliates, on a pooling-of-interests basis, TALX Information
Services Corporation, formerly known as EKI, Incorporated, which was engaged in
the business of providing database and document services. As indicated above,
these operations have been divested or identified for divestiture, and the
results of these operations are reflected as discontinued operations. In July
1996, at which time Intech Group's only asset was TALX capital stock, the
Company acquired Intech Group in a merger transaction, the practical effect of
which was a tax-free distribution of Intech Group's holdings of TALX capital
stock to Intech Group's shareholders. Immediately prior to such merger, Intech
Group owned approximately 31.46% of the outstanding TALX capital stock. At such
time, the Company had 21 other shareholders, three of whom, Gateway, MiTek and
Intech Partners, L.P. ("Intech Partners"), each beneficially owned more than ten
percent of the outstanding TALX capital stock.
SERVICES AND PRODUCTS
The Work Number
In early 1995, the Company introduced a "branded" service, The Work Number for
Everyone(R) ("The Work Number"), which is a national service providing automated
access to information from multiple organizations. The Work Number provides
automated employment verification to mortgage lenders and other verifiers. Using
The Work Number, verifiers are able to confirm employment information regarding
participating employers' current and former employees, including their past
three years of salary history. The Work Number reduces an employer's cost of
providing this information and at the same time increases the timeliness and
accuracy of the delivery of such information to mortgage lenders and other
verifiers. For most organizations, the process of handling these requests is
cumbersome and requires implementation of procedures unrelated to an employer's
line of business. In addition, requests can be disruptive and divert employer
resources in order to respond to telephone calls and written requests for
employment information. The Work Number reduces an employer's cost of providing
this information.
For mortgage lenders and other verifiers, The Work Number represents a fast and
accurate way to verify both employment and salary information in one telephone
call, thereby accelerating their underwriting process and reducing their
verification cost. Additionally, The Work Number reduces the opportunity for
fraud in the loan application process, as the applicant's employment and salary
information is provided to verifiers by a source less susceptible to fraud. The
traditional employment verification process requires the employee to provide a
verifier with paper documents such as W-2 forms, tax returns or paycheck stubs,
which in the era of desktop publishing and high quality laser printers may be
susceptible to forgery, thus increasing the risk of fraud. However, the Company
believes The Work Number reduces this risk by removing the need to rely on
documents that may be supplied directly or indirectly by the employee. Verifiers
using The Work Number receive employment verification directly from an
electronic database which contains records provided by the employer. Due to the
national scope of The Work Number, mortgage lenders can obtain employment
information from a standard source as opposed to a number of different sources,
with respect to employees of participating employers.
Utilizing a 1-800 telephone number, subscribing verifiers can choose to hear the
verification information voiced back immediately, have the complete set of
information faxed directly to them at their office or have an electronic data
interchange ("EDI") transaction sent. For non-subscribing verifiers,
verification information is available through an AT&T business 1-900 telephone
number. An employee's salary information is designed to be available for access
only to those who have been preauthorized by such employee.
The Work Number provides revenues primarily from fees charged to mortgage
lenders and other verifiers for verification of employment history and salary
information and, to a lesser extent, from employer conversion and ongoing
maintenance fees.
As of March 31, 1997, 139 employers had contracted for specified terms,
generally three years, to provide approximately 10.6 million employment records
of current and former employees. The Company's objective is to expand its
existing database of employment records by marketing to the approximately 910
private sector employers with 10,000 or more employees (based on Hunt-Scanlon's
Select Guide to Human Resource Executives 1997). These employers have an
2
aggregate of over 30 million current employees (representing an estimated 50
million total employment records, including those of former employees). See
"Risk Factors -- Certain Risks Associated with The Work Number" and "-- Risks
Related to Use of Confidential Information With The Work Number."
The following table reflects the approximate total number of employment records
which employers have contracted to provide for The Work Number as of the end of
each fiscal quarter since its introduction.
Total Number of
Employment Records(1)
(000's)
--------------------------------
Total
Number of
Fiscal Quarter Employers On-line Backlog(2)
---------------- --------------- --------------- ---------------
1st Quarter 1996 5 273 181
2nd Quarter 1996 15 348 2,621
3rd Quarter 1996 40 2,378 1,486
4th Quarter 1996 61 3,237 2,130
1st Quarter 1997 69 4,034 1,705
2nd Quarter 1997 93 5,061 3,000
3rd Quarter 1997 117 5,682 4,250
4th Quarter 1997 139 7,017 3,621
---------------
(1) Employment records include records of current and former
employees (covering the past three years of employment history).
(2) Represents employment records under contract but not yet on-line.
In late calendar 1996, the Company established a pilot program in the State of
Texas, to provide automated public assistance verifications, as an extension of
The Work Number. The Company has begun to market this extension of The Work
Number to states and employers on a national basis.
Tailored Solutions
Tailored solutions are offered by TALX to its customers, primarily Fortune 500
and other large organizations, either as systems for installation on customers'
premises or on an outsourced services basis. The Company has established the
broad utility of its interactive communications solutions for complex business
problems in a wide variety of industries. The Company believes it is a leader in
providing such solutions for human resource applications, which include 401(k)
plan administration, benefit plan enrollment and modification, staffing,
scheduling and payroll. The Company has targeted two additional applications
categories usable by a broad range of businesses regardless of the industry in
which they operate (i.e., horizontal application segments): financial
applications (e.g., status inquiry for accounts payable or accounts receivable)
and distribution/logistics applications (e.g., order entry and inventory
status). The Company is pursuing each of these horizontal marketing initiatives
both through direct sales and through strategic marketing alliances with
providers of enterprise software applications. TALX entered into such an
alliance with PeopleSoft, Inc. ("PeopleSoft") in 1993. More recently, it has
entered into similar alliances with Oracle Corporation ("Oracle") and SAP AG
("SAP"). All three are leading providers of enterprise-wide client/server
business applications, with PeopleSoft, similarly to the Company, being
particularly well established in human resource applications. The Company has
also developed and markets specialized implementations of its products targeted
at specific industries (i.e., vertical market segments) such as health care
(e.g., prescription refill and appointment scheduling and cancellation) and
financial services (e.g., account balance inquiry, funds transfer and credit
card balance inquiry).
Outsourced Services
The Company's outsourced services business provides tailored offsite interactive
communications services to Fortune 500 and other large organizations. In 1993,
the Company introduced its outsourced services business, which allows a customer
to realize the benefits of an interactive communications system without
incurring the administrative or maintenance
3
burdens of operating such a system. Using a 1-800 telephone number, Users are
able to perform self-service transactions, access information and manipulate
data stored in the Company's interactive communications systems located at the
Company's headquarters in St. Louis. Customers are charged a one-time set up fee
as well as availability and transaction-based fees.
Examples of the applications provided by the outsourced services business
include: benefit plan enrollment, receipt and validation of voting with respect
to employee benefit plan amendments, job posting and self-nomination process and
collection of time, attendance and labor data.
Customer Premises Systems
The Company has provided tailored interactive communications solutions for
installation at customers' premises since the early 1980s, and has shipped over
650 systems to over 375 customers during the last six years. TALXWare is the
Company's integrated visual development environment and software system that has
been designed to support the creation and management of self-service interactive
communications solutions. TALXWare runs on Intel-based hardware platforms using
International Business Machine Corporation's ("IBM's") OS/2 operating system.
The Windows NT operating system will be supported beginning in fiscal 1998. The
software supports both Natural MicroSystems, Inc. ("NMS") and TALX computer
telephony ("CT") processing hardware. See "--Technology and Product
Development."
TECHNOLOGY AND PRODUCT DEVELOPMENT
Fundamental to all of the Company's solutions is the integration of
"best-of-class" technologies as such technologies become available. This open
architecture approach enables TALXWare to include popular interactive features
such as voice recognition, text-to-speech, facsimile, e-mail and client/server
database interfaces to be used in creating interactive communications solutions.
The Company's interactive communications product strategy emphasizes the
development of software rather than hardware.
TALXWare
TALXWare is an integrated visual development environment and software system
that has been designed to support the creation and management of self-service
interactive communications solutions. TALXWare currently runs on IBM's OS/2
operating system. The Windows NT operating system is expected to be supported
beginning in fiscal 1998. The two main components of TALXWare are EasyScript and
TALXWare Runtime.
EasyScript. EasyScript is the object-oriented visual development environment
used by the Company and its licensed customers to create, modify and maintain
interactive communications applications. EasyScript's object-oriented approach
to software development allows application designers to position icons on the
workspace grid to define application logic, business rules, computational
functions, telephony integration, database access, and host application screens,
and then automatically generate the underlying computer code. EasyScript
incorporates advanced editing, self-documenting, testing, and code-sharing
capabilities to expedite the development of tailored interactive communications
solutions. By providing developers the ability to cut and paste sections of one
application into another application or copy an application so it can be
modified to create a new application, EasyScript facilitates the use of reusable
software modules. The self-documenting features of EasyScript automatically
create specifications, documentation, and test plans from the applications
themselves. Included with EasyScript is the EasySim testing tool, which enables
developers to test EasyScript applications from a PC keyboard. Another key
feature of EasyScript is that it permits a single application to provide
database access to users with multiple types of self-service access devices such
as the telephone, facsimile, e-mail, telephone device for the deaf ("TDD"),
Internet, corporate Intranet and other interactive communications technologies.
Allowing all devices to share a common set of centralized business rules can
leverage software development across the enterprise, reduce development time and
simplify making changes or adding enhancements. EasyScript is optional and
licensed on a per server basis.
TALXWare Runtime. The TALXWare Runtime software is licensed on a concurrent user
basis and is a required component of each TALX interactive communications
solution. The functions incorporated into the TALXWare Runtime software include
the management of interactive communications applications, physical resources
and network connections,
4
as well as tracking and compiling operating statistics, facilitating operations
and storing configuration settings. These features simplify the development of
interactive communications solutions by eliminating the need to include such
functions within each application and allow system administrators to effect
changes without modifying the application software.
Hardware
In addition to software, the Company provides a hardware platform as part of a
total interactive communications solution. TALXWare runs on open, standard
Intel-based PCS and uses both NMS and TALX proprietary CT processing hardware
(the "VP/2000"). The VP/2000 uses industry standard components such as Intel
processors and Texas Instrument digital signal processors ("DSPs") and is
capable of supporting 48 simultaneous users ("lines") in a single system and
being networked to support over 240 lines. The NMS hardware is capable of
supporting 24 lines in a single system.
The Company does not manufacture or perform significant modifications on any
hardware components. Rather, the Company's hardware production consists
primarily of final assembly and quality-control testing of materials,
components, subassemblies and systems.
Product Development
The Company's current development efforts are directed with a view to enhancing
its current products, providing a Microsoft Windows NT version of its TALXWare
software and developing new products. The new products are directed at the
markets served by the Company's strategic marketing allies as well as offering
enhanced functionality to its existing human resources, benefits and payroll
markets. Anticipated future enhancements include extending the features and
capabilities of the Company's interactive web software solutions and introducing
a kiosk-based product. The Company also anticipates further enhancing its
computer telephony integration ("CTI") capabilities for call centers. For the
markets served by the Company's strategic marketing allies who offer
enterprise-wide client/server applications, the Company plans to continue to
introduce complementary product suites to more tightly integrate and facilitate
interaction between the TALX solution and the allies' business applications.
More specifically, for distribution to PeopleSoft customers, the Company has
recently developed financial applications (e.g., accounts payable and accounts
receivable) and for SAP customers, intends to develop distribution/logistic
applications (e.g., order entry, order status and product information). In
particular, the Company intends to develop a suite of applications to integrate
with SAP's oil and gas industry solution called "IS/Oil." The Company intends to
develop similar offerings for distribution to PeopleSoft, SAP and Oracle
customers. There can be no assurance that these new enhancements or products
will progress beyond their current state of development or be successfully
marketed.
The Company licenses and integrates complementary enhancement technologies into
the products it develops and seeks to provide "best-of-class" technologies to
its customers. Some of the interactive features which are licensed from third
party suppliers by the Company pursuant to non-exclusive license or resale
agreements ("Supplier Agreements") or purchased under open market arrangements
and then integrated into the Company's products are voice recognition,
text-to-speech, facsimile, e-mail and client/server database interfaces to be
used in creating interactive communications solutions. In fiscal 1997, the
Company became a reseller for IBM's CallPath and TADS CTI server software. See
"Risk Factors -- Risks Associated with Technological Change" for additional
risks associated with the Supplier Agreements.
Product development costs incurred were $1.5 million in fiscal 1995, $1.9
million in fiscal 1996 and $2.0 million in fiscal 1997. The total product
development staff consisted of 25 full-time employees as of March 31, 1997. The
Company believes that significant investments in product development are
required to remain competitive.
See "Risk Factors -- Risks Associated with Rapid Technological Change."
5
MARKETING
The Company's marketing strategy is to focus on targeted markets through a
direct sales force in conjunction with strategic marketing alliances. The
Company's direct sales force is based in St. Louis with representatives also
located in Atlanta, Bethesda, Chicago, Massachusetts, New Jersey, Phoenix, San
Francisco, and London, England and is organized into two sales regions. The
sales force for each region is comprised of sales managers who are supported by
product consultants, client service representatives and business development
representatives. Historically, the direct sales force was responsible for
selling all of the Company's interactive communications product lines. Beginning
in late fiscal 1997, the Company designated certain members of the sales force
to focus solely on selling The Work Number service. The Company's sales force is
supported by a product management group which identifies and develops target
markets, manages product direction, directs marketing efforts and provides sales
assistance.
To complement its direct sales efforts, the Company has established a
distributor relationship with Kronos Incorporated ("Kronos"). Kronos engineers,
manufactures and distributes integrated hardware and software systems that
process information designed to increase productivity in the workplace. Kronos
products that are applicable to the Company are centered on the capturing and
processing of time and attendance information. The Company provides a packaged
interactive communications solution to Kronos for resale.
The Company believes an opportunity exists to expand sales and marketing efforts
in certain international markets. See "Risk Factors -- Risks Associated with
Increased International Sales." The Company has established strategic marketing
alliances with worldwide providers of client/server business application
software, which include PeopleSoft, Oracle and SAP. See "-- Strategic Marketing
Alliances." Further, the Company recently introduced its new TALXWare platform
(NMS-based) to include support for an internationally available CT board.
STRATEGIC MARKETING ALLIANCES
An integral part of the Company's interactive communications strategy is to
develop and maintain alliances with companies producing complementary software
products in order to obtain customer referrals and introductions, increase
market exposure and reduce delivery time and costs. These companies generally
represent major software suppliers that offer enterprise-wide business
application software to the Company's markets. The Company's most established
enterprise-wide alliance is with PeopleSoft. In the last year, the Company has
entered into similar relationships with SAP and Oracle.
PeopleSoft, Inc.: As one of the leading companies that has designed
enterprise-wide client/server business applications, PeopleSoft markets
worldwide client/server applications for human resources, payroll,
financials, manufacturing and distribution through industry business units
such as federal government, health care, financial services and retail.
Focusing on the human resources, benefits and payroll markets, TALX entered
into a cooperative marketing relationship with PeopleSoft. TALX creates
interactive application suites that tie directly to PeopleSoft's core
business applications. The first suite focused on the PeopleSoft human
resources, benefits and payroll applications. PeopleSoft has followed with
client/server applications for other areas of the enterprise. Similar to
the human resources suite, TALX has introduced a financial suite and plans
to introduce a distribution suite, for implementation at PeopleSoft
clients.
SAP AG: As a leading global provider of client/server business application
solutions, SAP is one of the largest and fastest growing enterprise-wide
software application suppliers of products for financial accounting, human
resources and manufacturing. The Company intends to develop a suite of
applications to integrate with SAP's oil and gas industry solution called
"IS/Oil."
Oracle Corporation: One of the world's largest suppliers of database
software, Oracle offers a multimedia relational database and client/server
application products for financial accounting, human resources and
manufacturing.
Future customer premises systems revenues will be dependent to a significant
extent on the market success of companies
6
with which the Company maintains strategic market alliances and the
effectiveness of the alliances. These strategic marketing alliances are
generally reflected by non-exclusive contractual arrangements that are
terminable at will. The success of the Company is dependent on the interest and
commitment of these companies to promote and coordinate product development and
marketing efforts with the Company, which is entirely at the discretion of these
companies. These companies maintain similar relationships with certain of the
Company's competitors. See "Risk Factors -- Dependence on Strategic Marketing
Alliances."
CUSTOMERS
Application solutions are tailored to meet specific customer needs for
interactive communications services. The Company's strategy focuses on specific
interactive applications within large corporations and institutions. Since 1992,
the Company has installed over 650 systems for over 375 customers, many of which
are Fortune 500 firms. No single customer of the Company represented 10% or more
of the Company's interactive communications business revenues in fiscal 1995.
One customer, Kaiser Permanente, represented approximately 14% and 12% of
revenues in fiscal 1996 and 1997, respectively.
PROFESSIONAL SERVICES AND SUPPORT
The Company believes that achieving a high level of customer satisfaction is
critical to its long-term success. The Company delivers its interactive
communications solutions, both outsourced services and customer premises
systems, through an organization comprised of trained professionals who define
specific customer requirements and, utilizing EasyScript, tailor a solution for
each customer. In addition, the Company offers training and education for
customers, representatives of its strategic marketing allies and distributors.
The Company also maintains a comprehensive maintenance and support program,
providing 7-day, 24-hour per day support through a toll-free hotline.
COMPETITION
The markets in which the Company sells its interactive communications solutions
are rapidly evolving, extremely competitive and subject to rapid technological
change. The Company expects competition to increase in the future from existing
competitors and from companies that may enter the Company's existing or future
markets with similar or substitute solutions that may be less costly or provide
better performance or functionality than the Company's products. Many of the
Company's current and potential competitors have greater name recognition,
larger installed customer bases and significantly greater financial, technical,
marketing and other resources than the Company. To be successful in the future,
the Company must continue to respond promptly and effectively to the challenges
of changing customer requirements, technological change and competitors'
innovations. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, financial condition, results of operations and business
prospects. Additionally, the Company may be required to reduce prices or
increase spending in response to competition in order to pursue new market
opportunities or to invest in research and development efforts and, as a result,
the Company's operating results in the future may be adversely affected. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not materially adversely affect the Company's business,
financial condition, results of operations and business prospects.
The Company competes in its markets with CT system hardware suppliers and
systems integrators assembling systems from available components. Companies
offering competing CT systems include Computer Communications Specialists, Inc.,
Edify Corporation, InterVoice, Inc., Lucent Technologies, Inc. and Periphonics
Corporation. The Company's interactive communications business is heavily
dependent on sales to the human resources departments of large organizations. In
fiscal 1997, sales to human resources departments represented approximately 45%
of customer premises systems revenues. In response to customers' desires to
outsource certain aspects of database access functionality, the Company provides
interactive communications services to organizations which choose not to
purchase customer premises systems. This outsourced service business competes
with employee benefit plan consulting firms and accounting firms, including
Hewitt Associates LLC, Towers, Perrin, Forster & Crosby, Inc., William M. Mercer
Companies, Inc., and Watson Wyatt & Company, which provide comprehensive
packages of plan design, administration and consulting
7
services, including automated access services. See "Risk Factors -- Intense
Competition."
At present there are no significant competitors of the service provided by The
Work Number. However, there are no significant barriers to entry in this area
and, thus, there can be no assurance that other companies will not choose to
create similar employee database verification systems. The Company is aware of
one other company which is marketing a similar service. Additionally, the
Company is aware of a number of employers who have established similar systems
for their internal use. The Company anticipates that additional competitors will
emerge, but is unable to predict what its relative competitive position will be
in a more mature market. See "Risk Factors -- Certain Risks Associated with The
Work Number."
PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
Although the Company copyrights certain elements of its products, the primary
means of protecting its interactive communications products and services is
through non-disclosure agreements, which provide only limited protection. As
part of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and allies, subject
to certain exceptions, and limits access to and distribution of its software,
documentation and other proprietary information. The Company also seeks to
protect its software, documentation and other written materials through trade
secret and copyright laws. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use the Company's products or technology that the Company considers
proprietary, and third parties may attempt to develop similar technology
independently. In particular, the Company provides its existing and potential
distribution partners with access to its product architecture and other
proprietary information underlying the Company's licensed software. In addition,
effective protection of intellectual property rights may be unavailable or
limited in certain countries. Accordingly, there can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
In the past, the Company has received and may in the future receive
communications from third parties asserting that the Company's products,
trademarks or other proprietary rights require a license of intellectual
property rights or infringe, or may infringe, on their proprietary rights. Based
on the information currently available, the Company does not believe there are
any valid claims of which it is aware which it is infringing or which, if
infringed, would result in any material adverse effect to the Company's
financial condition or results of operations. On August 16, 1996, Elk
Industries, Inc. filed an action in the United States District Court for the
Southern District of Florida against the Company. The action alleged patent
infringement by the Company in connection with the Company's making, selling and
using an audio storage and distribution system allegedly covered under a patent
held by Elk. The Company resolved the matter with Elk during the fourth quarter
of fiscal 1997. As the number of software products in the industry increases,
and the functionality of these products further overlaps, the Company believes
that software developers may become increasingly subject to infringement claims.
Any such claims, with or without merit, could be time consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation to determine the validity of any claims
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is determined in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. The failure of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, financial condition, results of operations and business prospects.
The Company has obtained trademark registrations for the names TALX and
EasyScript and a service mark registration for The Work Number For Everyone(R)
with the United States Patent and Trademark Office. TALXWare is a trademark of
the Company. The Work Number and TALX OnLine are service marks of the Company.
The Company regards its trademarks, as well as its other intellectual property,
as having significant value and being an important factor in the
8
development and marketing of its products. See "Risk Factors -- Limited
Intellectual Property Protection."
DATABASE AND DOCUMENT SERVICES BUSINESSES
In addition to providing interactive communications solutions, the Company, in
1994, acquired its database and document services businesses. These businesses
have been operated on a stand-alone basis. Further, the majority of the
operations of such businesses are located in a building which is separate from
the interactive communications operations of the Company. See Item 2 --
"Properties."
In August 1996, the Company determined to pursue the divestiture of the database
and document services businesses and, accordingly, has reflected the results of
operations of such businesses as discontinued operations. The primary reason for
divesting these businesses was to enable the Company to focus its management and
financial resources towards its core interactive communications business. On
January 31, 1997, the Company sold substantially all of the assets of the
document services business to Sterling Direct, Inc., the largest customer of the
division. The Company is actively pursuing the divestiture of the database
services business. See Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discontinued Operations" and
Note 2 of the Notes to Consolidated Financial Statements contained in Item 8
herein.
The database services business offers a broad range of services to franchise and
independent directory publishers, with an emphasis on publishers who seek to use
a single service supplier for both yellow and white pages. These services
include providing sales leads, sales campaign organization and sales management
tools for use during the advertising sales process. Additionally, the database
services business offers pre-press production capabilities that aid in
constructing a telephone directory. The database services business also provides
to university and private libraries and library automation vendors, specialized
database services including review and correction of automated library files,
text conversion, database design, construction and maintenance. In performing
these services, the database services business utilizes internally developed
proprietary software.
The database services business operates in a highly competitive market and any
of its competitors could use its superior financial resources, market power and
installed base of customers to compete effectively against it. Further,
competition for the customers of the database services businesses may increase
as a result of the Company's determination to pursue the divestiture of such
business. There can be no assurance that the database services business can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources. Such competition could materially
adversely affect its ability to sustain current pricing levels and could have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects.
EMPLOYEES
As of March 31, 1997, the Company employed 162 full-time and 7 part-time
employees in addition to the 64 full-time and 57 part-time employees which are
employed by the database services business. The Company has never had a work
stoppage and no employees are represented by a labor organization. The Company
considers its employee relations to be good.
The Company's future performance depends to a significant degree upon the
continued contributions of its officers and key management, sales and technical
personnel, many of whom would be difficult to replace. The loss of any of these
individuals could have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects. In addition,
the Company's future success and ability to manage growth will be dependent upon
its ability to hire additional highly skilled employees for a variety of
management, engineering, technical and sales and marketing positions. The
competition for such personnel is intense, however, and there can be no
assurance that the Company will be able to attract, assimilate or retain
sufficient qualified personnel to achieve its future business objectives. The
failure to do so could have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects. See "Risk
Factors -- Dependence on Key Personnel."
9
RISK FACTORS
In addition to the other information included or incorporated by reference in
this Form 10-K, the following factors should be considered carefully.
HISTORY OF NET LOSSES
The Company has incurred net losses in each of the last three fiscal years. In
fiscal 1995, the Company incurred net losses from continuing operations and
discontinued operations of $754,000 and $410,000, respectively. In fiscal 1996
and fiscal 1997, the Company incurred losses only from discontinued operations
of $703,000 and $1,064,000, respectively. The Company's accumulated deficit as
of March 31, 1997 was $2,686,000. Future operating results will depend on many
factors, including the demand for the Company's services, software and hardware
products, the level of product and price competition, the Company's success in
expanding its sales and distribution channels, the Company's success in
attracting and retaining motivated and qualified personnel, the ability of the
Company to develop and market new products and services and control costs, the
acceptance and the profitability of The Work Number and other branded services
the Company may introduce, and general economic conditions. Operating results
for future periods are subject to numerous uncertainties, and there can be no
assurance that the Company will return to or sustain profitability on an annual
or quarterly basis or otherwise be successful in addressing such uncertainties.
See "--Certain Risks Associated with Divestiture of the Database Services
Business" and Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues, margins and operating results have fluctuated in the
past, and are expected to continue to fluctuate in the future, on an annual and
quarterly basis as a result of a number of factors. These factors include the
length of the sales cycle, the timing of orders from and shipments to customers,
delays in development and customer acceptance of custom software applications,
new product introductions or announcements by the Company or its competitors,
levels of market acceptance for new products and the hiring and training of
additional staff, as well as general economic conditions. In particular, the
Company plans to continue to increase its operating expenses to expand its sales
and marketing efforts, expand its distribution channels in both domestic and
international markets and fund greater levels of product development. A
relatively high percentage of the Company's expenses are fixed in the short term
as the Company's expense levels are based, in part, on its expectations as to
future revenues. If revenues fall below expectations, expenditure levels could
be disproportionately high as a percentage of total net revenues, and operating
results would be immediately and adversely affected. As a result, the Company's
results of operations for any quarter may not be indicative of results for any
future period.
The Company historically has operated with little backlog because its customer
premises systems are generally delivered shortly after orders are received. As a
result, customer premises systems revenues, which have represented the largest
percentage of the Company's total revenues, in any quarter depend on the volume
and timing of, and the Company's ability to fill, orders received in that
quarter. Individual orders for the Company's customer premises systems typically
are for relatively large dollar amounts. The Company believes the purchase of
its customer premises systems is relatively discretionary. Therefore, any
downturn in any potential customer's business, or any loss or delay of
individual orders for any reason, would have a significant impact on the
Company's revenues and quarterly results. In addition, because the Company
typically recognizes a substantial portion of its customer premises systems
revenue from transactions booked and shipped in the last weeks, or even days, of
the quarter, the magnitude of quarterly fluctuations may not become evident
until very late in a particular quarter. The Company's customer premises systems
sales cycle, including initial order, provision of services and follow-on sales,
varies substantially from customer to customer. There can be no assurance that
the Company will be able to sustain its level of total revenue or its rate of
revenue growth on a quarterly or annual basis. It is likely that, in some future
quarters, the Company's operating results will be below the Company's targets
and below the expectations of stock market analysts and investors. In such
event, the price of the Company's Common Stock could be materially adversely
affected. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
10
CERTAIN RISKS ASSOCIATED WITH THE WORK NUMBER
In 1995, the Company began marketing The Work Number, which provides automated
responses to requests by lenders and other verifiers for employment
confirmation, employment history and salary history. Although, as of March 31,
1997, 139 employers had contracted to provide approximately 10.6 million
employment records of current and former employees, there can be no assurance
that additional employers will contract with the Company to provide employment
records, or that existing employers will renew their contracts with the Company.
The ultimate demand for, and market acceptance of, The Work Number by lenders
and other verifiers is unproven and therefore subject to a high level of
uncertainty. Additionally, there are no significant barriers to entry in this
area and, thus, there can be no assurance that other companies will not choose
to create similar employee database verification systems. The Company is aware
of at least one other company which is marketing a similar service.
Additionally, the Company is aware of at least one other company which is
marketing, and a number of employers who have established, similar systems for
the internal use of such employers. The Company anticipates that additional
competitors will emerge, but is unable to predict what its relative competitive
position will be in a more mature market. In addition, revenues are dependent on
the cooperation of contracting employers in converting employment records to The
Work Number format and referring verification requests to The Work Number. If
the relatively new market for The Work Number fails to develop or be sustained,
develops slowly or becomes subject to significant competition, the Company's
business, financial condition, results of operations and business prospects
would be materially adversely affected.
RISKS RELATED TO USE OF CONFIDENTIAL INFORMATION WITH THE WORK NUMBER
The Work Number depends on the accuracy of highly confidential information
regarding employment and salary history provided to the Company by employers and
converted by the Company for use as part of The Work Number. Although the
Company has certain protective measures in place, any inaccuracies in such
information (whether in the recording of such information or due to the
unauthorized access of information, or otherwise) or the inability by the
Company to keep such information confidential, may give rise to potential claims
against the Company and adversely affect market acceptance of The Work Number.
If any claims should be asserted which are ultimately decided adversely to the
Company, the Company's business, financial condition, results of operations and
business prospects may be materially adversely affected. See "Business --
Services and Products --The Work Number."
CERTAIN RISKS ASSOCIATED WITH DIVESTITURE OF THE DATABASE SERVICES BUSINESS
In August 1996, the Company decided to pursue the divestiture of the database
and document services businesses and, accordingly, has reflected the results of
operations of such businesses as discontinued operations. A provision of
$350,000 was recorded as of June 30, 1996 to reflect the anticipated loss from
operations until the time of disposal. On January 31, 1997, the Company sold
substantially all of the assets of the document services business. As of March
31, 1997, the Company provided an additional provision for loss in the amount of
$550,000. The Company has estimated that the proceeds from such divestiture of
the database business will approximate the net assets held for sale as of March
31, 1997. However, if the proceeds from the divestiture are insufficient to
cover the costs of the divestiture, or if the costs of the divestiture are
significant, such events could have a material adverse effect on the Company's
results of operations and financial condition. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 8 -- Note 2 of the Notes to Consolidated Financial Statements.
INTENSE COMPETITION
The markets in which the Company sells its interactive communications solutions
are rapidly evolving, extremely competitive and subject to rapid technological
change. The Company expects competition to increase in the future from existing
competitors and from companies that may enter the Company's existing or future
markets with similar or substitute solutions that may be less costly or provide
better performance or functionality than the Company's products. To be
successful in the future, the Company must continue to respond promptly and
effectively to the challenges of changing customer requirements, technological
change and competitors' innovations. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, financial condition, results
of operations and business prospects. Additionally, the Company may
11
be required to reduce prices or increase spending in response to competition in
order to pursue new market opportunities or to invest in research and
development efforts, and, as a result, the Company's operating results in the
future may be adversely affected. There can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not materially adversely
affect the Company's business, financial condition, results of operations and
business prospects.
The Company competes in its markets with CT system hardware suppliers and
systems integrators assembling systems from available components. Companies
offering competing CT systems include Computer Communications Specialists, Inc.,
Edify Corporation, InterVoice, Inc., Lucent Technologies, Inc. and Periphonics,
Inc. The Company's interactive communications business is heavily dependent on
sales to the human resources departments of large organizations. In fiscal 1997,
sales to human resources departments represented approximately 45% of customer
premises systems revenues. In response to customers' desires to outsource
certain aspects of database access functionality, the Company provides
interactive communications services to organizations which choose not to
purchase customer premises systems. This outsourced services business competes
with employee benefit plan consulting firms and accounting firms, including
Hewitt Associates LLC, William M. Mercer Companies, Inc., Towers, Perrin,
Forster & Crosby, Inc. and Watson Wyatt & Company, which provide comprehensive
packages of plan design, administration and consulting services, including
automated access services.
Many of the Company's current and potential competitors have greater name
recognition, larger installed customer bases and significantly greater
financial, technical, marketing and other resources than the Company. Any such
competitor could use its superior financial resources, market power, service or
technical resources and installed base of customers to compete effectively
against the Company. Such competition could materially adversely affect the
Company's ability to sustain current pricing levels and could have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects. Further, competition for the customers of the
database services businesses may increase as a result of the Company's
determination to pursue the divestiture of such businesses. See "Business --
Competition" and "Business -- Database and Document Services Businesses."
DEPENDENCE ON STRATEGIC MARKETING ALLIANCES
An integral part of the Company's growth strategy is to develop and utilize
alliances with companies producing complementary software products in order to
obtain introductions or referrals to potential customers, as well as to
coordinate the development of the Company's complementary software products
directly with such companies to enhance interoperability and performance. Future
customer premises systems revenues will be dependent to a significant extent on
the market success of such companies and the effectiveness of the alliances.
Factors that adversely affect the revenues of these companies, such as
competition, technological changes or product failures, may have a substantial
adverse effect upon the Company's financial results. These strategic marketing
alliances are generally reflected by non-exclusive contractual arrangements that
are terminable at will. The success of the Company is dependent on the interest
and commitment of these companies to promote and coordinate product development
and marketing efforts with the Company, which is entirely at the discretion of
these companies. The Company's strategic marketing allies maintain similar
relationships with certain of the Company's competitors. There is intense
competition by other companies to establish such relationships, and there can be
no assurance that the Company will be able to maintain or expand its network of
strategic marketing alliances in the future, or that such companies will
continue to support the Company or not choose to favor one of the Company's
competitors. Additionally, there can be no assurance that the companies with
which the Company maintains such alliances will not decide to enter into the
same business as, and compete directly against, the Company. The loss of any of
these relationships, or the inability of the Company to attract and develop new
strategic marketing alliances with other leading software companies, or adverse
developments affecting the business or prospects of such companies, could have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects. See "Business -- Technology and Product
Development," "Business -- Marketing" and "Business -- Strategic Marketing
Alliances."
12
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The markets for the Company's interactive communications solutions are
characterized by rapid technological advancement, changes in customer
requirements, frequent new product introductions and enhancements and emerging
industry standards. The Company must continually change and improve its products
and services in response to changes in operating systems, application software,
computer and telephony hardware, communications, database and networking
systems, programming tools and computer language technology. The introduction of
products or services embodying new technologies and the emergence of new
industry standards can render existing products and services obsolete and
unmarketable. In particular, the market for self-service applications through
the Internet's World Wide Web, corporate Intranets, and dial-up browser software
has only recently begun and is rapidly developing. The Company's success will
depend upon its ability to enhance, on a timely and cost-effective basis, its
current products and services (e.g., to effectively add new Internet and
corporate Intranet capabilities) and to develop new products and services that
meet changing market conditions, which include changing customer needs, new
competitive product and service offerings, emerging industry standards and
changing technology. There can be no assurance that the Company will be
successful in developing and marketing, on a timely and cost-effective basis or
at all, fully functional and integrated product enhancements or new products or
services that respond to technological change, updates or enhancements to third
party products or services used in conjunction with the Company's products or
services, changes in customer requirements or emerging industry standards, or
that the Company's enhanced or new products and services will be accepted by
customers. Any failure by the Company to anticipate or respond adequately to
changing market conditions, or any significant delays in product or service
development or introduction, could have a material adverse effect on the
Company's business, financial condition, results of operations and business
prospects.
The current version of the Company's TALXWare software runs on IBM's OS/2
operating system and the Company is therefore dependent upon the continued
viability of the OS/2 operating system and upon IBM's continuing support for the
OS/2 operating system. However, the Company believes that some potential
customers will not purchase the Company's product unless and until it runs on an
alternative operating system. Accordingly, the Company has begun to devote
significant engineering and product development resources to design and develop
a fully functional version of its TALXWare software to run on the Microsoft
Windows NT operating system. Towards this end, several modules of TALXWare are
available for Windows NT. The Company has also licensed a base Windows NT
product which is expected to be incorporated into TALXWare. Although such
product will not immediately offer customers the full range of features
currently available for the OS/2 operating system, the Company has directed
development efforts towards integrating additional features, including
EasyScript, into such base product during fiscal 1997 and commercial release of
such base product is expected to occur during fiscal 1998; however, due to
uncertainties with software development, no assurance can be given that such
release will occur. Additionally, as part of the process of making TALX products
compatible with the Windows NT operating system, the Company has developed
conversion utilities to allow the same digitized voice messages to be used with
both the OS/2 and Windows NT operating systems, has begun the process of porting
licensed technologies from the OS/2 operating system to the Windows NT operating
system and is proceeding with the design and development of a graphical user
interface for system administration functions for both the OS/2 and Windows NT
operating systems. Further, it is the Company's strategy that new TALX products
will be developed to run on the Windows NT operating system. Thus, the Company
has been developing software using cross-platform software development tools
that allow software developed for the OS/2 operating system to also run on the
Windows NT operating system.
These projects are intended to expand market acceptance of the Company's
products and to limit the market and technical risks associated with the
Company's dependence on a single operating system. It is possible that the
Company's intention to develop a fully functional Windows NT-based version of
its TALXWare software will cause potential customers to defer or forgo purchases
of current or future versions of the TALXWare software until it is available on
the Windows NT operating system, which could have a material adverse effect on
the Company's business, financial condition, results of operations and business
prospects. Failure by the Company to develop a Windows NT-based version of the
TALXWare software successfully and in a timely and cost effective manner may
have a material adverse effect on the Company's business, financial condition,
results of operations and business prospects. Further, when the Company markets
a Windows NT-based version of its TALXWare software, the Company will be
dependent upon the viability of that operating environment.
13
The Company's products not only involve integration with operating systems but
also with products developed by others. For example, the Company has recently
introduced a lower cost version of the TALX system utilizing NMS standards-based
computer telephony hardware boards and software drivers. The Company believes
that marketing this product as an alternative to the VP/2000-based TALX system
may provide a means to gain increased access to international markets, as well
as to more price sensitive U.S. domestic market segments. Currently, this
product is available only in a form with reduced performance and functionality
compared to the VP/2000-based TALX system. Although the Company is devoting
significant resources to enhance this new product to be a fully functional
counterpart to the VP/2000-based TALX system, this project could take a year or
longer. There can be no assurance that delays in increasing the functionality of
this product will not adversely affect sales opportunities, as customers may
purchase competitive standards-based systems. Such delays would have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects.
If any of these third-party products, including IBM OS/2, Microsoft Windows NT
or the NMS boards and drivers, should become unavailable for any reason, fail in
their operation with the Company's products or fail to be supported by their
respective vendors, it would be necessary for the Company to redesign its
products. There can be no assurance that any redesign could be accomplished in a
cost-effective or timely manner. The Company or its customers could also
experience difficulties integrating the Company's products with other hardware
and software. Further, should new releases of these operating systems, computer
telephony hardware boards and software drivers, remote communications software,
database connectivity software or facsimile hardware boards and software drivers
occur before the Company develops products compatible with such new releases, if
ever, any resulting decline in demand for the Company's products could have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects.
Additionally, the Company licenses and integrates complementary enhancement
technologies into the systems it develops and seeks to provide the
"best-of-class" technologies to its customers. Some of the interactive features
which are licensed from third party suppliers by the Company pursuant to
non-exclusive license or resale agreements (the "Supplier Agreements") or
purchased under open market purchase arrangements and then integrated into the
Company's products are voice recognition, text-to-speech, facsimile, e-mail and
client/server database interfaces used in creating interactive communications
solutions. The Company believes that if any Supplier Agreement expires or is
canceled or otherwise terminated, or if a third party supplier refuses to sell
to the Company pursuant to the existing open market purchase arrangements, as
the case may be, and the existing third party supplier refuses to enter into a
subsequent agreement or other arrangement, the Company could enter into a
similar agreement or arrangement with any number of different suppliers.
However, if a new supplier is necessary, the integration of the relevant
technology from the new supplier would require a significant amount of time,
resulting in a meaningful delay in the Company's ability to offer the particular
enhancement currently being purchased under Supplier Agreements or pursuant to
open market purchase arrangements. The Company could also experience
difficulties integrating the new supplier's technology with all of its products.
Additionally, there can be no assurance that any such integration could be
accomplished in a cost-effective manner. Significant delays in the offering of
product enhancements due to integration of technology from new suppliers could
have a material adverse effect on the Company's business, financial condition,
results of operations and business prospects. See "Business -- Services and
Products" and "Business -- Technology and Product Development."
LENGTHY SALES CYCLE
Purchases of TALX interactive communications solutions are often the result of a
multi-department decision by prospective customers and generally require the
Company to engage in a lengthy sales cycle to provide a significant level of
education to prospective customers regarding the use and benefits of the TALX
interactive communications solutions. Due in part to the mission-critical nature
of certain of the TALX interactive communications solutions applications and the
associated investment in hardware, software and consulting expenditures,
potential customers tend to be cautious in making product acquisition decisions.
For these and other reasons, the sales cycle for the Company's products and
services can range from one month to over one year and is subject to a number of
significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which the Company has little or no control.
Consequently, if sales anticipated from specific customers for a particular
quarter are not realized in that quarter, the Company is unlikely to be able to
generate revenue from alternative sources in time to compensate for the
shortfall. As a result, lost or delayed sales could have a material adverse
effect on the Company's quarterly operating results. Moreover, to the
14
extent that significant sales occur earlier than expected, operating results for
subsequent quarters may be adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends to a significant degree upon the
continued contributions of its officers and key management, sales and technical
personnel, many of whom would be difficult to replace. The loss of any of these
individuals could have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects. The Company
has entered into employment agreements with William W. Canfield, its Chairman,
President and Chief Executive Officer, and certain other senior management
members. See Item 10 -- "Directors and Executive Officers of the Registrant" and
Item 11 -- "Executive Compensation." In addition, the Company's future success
and ability to manage growth will be dependent upon its ability to hire
additional highly skilled employees for a variety of management, engineering,
technical and sales and marketing positions. The competition for such personnel
is intense. Further, the Company anticipates that retention of existing
personnel of its database services business may become more difficult as a
result of the Company's determination to pursue the divestiture of such
business. There can be no assurance that the Company will be able to attract,
assimilate or retain sufficient qualified personnel to achieve its future
business objectives. The failure to do so could have a material adverse effect
on the Company's business, financial condition, results of operations and
business prospects.
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, hardware and software products may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
systems after implementation. The occurrence of such errors could result in loss
or delay in market acceptance of the Company's products or services, which could
have a material adverse effect on the Company's business, financial condition,
results of operations and business prospects. The Company's Internet and
corporate Intranet applications, which were recently introduced or are under
development, may result in unauthorized access and similar disruptive problems
caused by Internet or other users. Such unauthorized access and other
disruptions could jeopardize the security of information stored in and
transmitted through the computer systems of the Company's customers, which may
result in significant liability to the Company and deter potential customers.
The Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective under the laws of
certain jurisdictions. Although the Company has not experienced any product
liability claims to date, the sale and support of the Company's products or
services may entail the risk of such claims. While the Company maintains
insurance for product liability risks, there can be no assurance the Company's
insurance will be adequate in the event of a material product liability claim.
Furthermore, litigation to determine the validity of any product liability
claims could result in significant expense to the Company and divert the efforts
of the Company's technical and management personnel from productive tasks,
whether or not such litigation is determined in favor of the Company. A
successful product liability claim in excess of the Company's insured limits
brought against the Company could have a material adverse effect on the
Company's business, financial condition, results of operations and business
prospects.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is heavily dependent upon its proprietary technology.
Although the Company copyrights certain elements of its products, the primary
means of protecting its interactive communications products and services is
through non-disclosure agreements, which provide only limited protection. As
part of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and strategic
marketing allies, subject to certain exceptions, and limits access to and
distribution of its software, documentation and other proprietary information.
The Company also seeks to protect its software, documentation and other written
materials through trade secret and copyright laws. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use the Company's products or technology that the Company
considers
15
proprietary, and third parties may attempt to develop similar
technology independently. In particular, the Company provides certain
distributors with access to its product architecture and other proprietary
information underlying the Company's licensed software. In addition,
effective protection of intellectual property rights may be unavailable or
limited in certain countries. Accordingly, there can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
In the past, the Company has received and may in the future receive
communications from third parties asserting that the Company's products,
trademarks or other proprietary rights require a license of intellectual
property rights or infringe, or may infringe, on their proprietary rights. Based
on the information currently available, the Company does not believe there are
any valid claims of which it is aware which it is infringing or which, if
infringed, would result in any material adverse effect on the Company's
financial condition or results of operations. On August 16, 1996, Elk
Industries, Inc. ("Elk") filed an action in the United States District Court for
the Southern District of Florida against the Company. The action alleged patent
infringement by the Company in connection with the Company's making, selling and
using an audio storage and distribution system allegedly covered under a patent
held by Elk. The Company resolved the matter with Elk in the fourth quarter of
fiscal 1997. As the number of software products in the industry increases, and
the functionality of these products further overlaps, the Company believes that
software developers may become increasingly subject to infringement claims. Any
such claims, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation to determine the validity of any claims
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is determined in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. The failure of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, financial condition, results of operations and business prospects. See
"Business -- Proprietary Rights."
RISKS ASSOCIATED WITH INCREASED INTERNATIONAL SALES
Since its inception, the Company has derived less than 2% of its total revenues
in any year from sales to customers outside of the United States. The Company
intends to expand its interactive communications operations outside of the
United States and enter additional international markets, which will
correspondingly reduce management attention and financial resources otherwise
available for domestic markets. The Company's ability to expand its business
internationally is limited by the general acceptance of interactive
communications in other countries and ability to obtain appropriate regulatory
approval of the third party telephony and connectivity hardware supported by
TALXWare, and potentially reduced needs for employee benefit applications. The
Company expects to commit additional time and development resources to
customizing its products for selected international markets and to developing
international sales and support channels. There can be no assurance that such
efforts will be successful.
International operations are subject to a number of risks, including costs of
customizing products for foreign countries, dependence on independent resellers,
multiple and conflicting regulations regarding communications, use of data and
control of Internet access, longer payment cycles, unexpected changes in
regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, greater difficulty or
delay in accounts receivable collection, potentially adverse tax consequences,
the burdens of complying with a variety of foreign laws, the impact of possible
recessionary environments in economies outside the United States, and political
and economic instability. In addition, the Company's ability to expand its
interactive communications business in certain countries will depend upon the
certification of third party hardware compatible with the TALX system. Because
the Company will depend on third party suppliers to certify such telephony and
connectivity hardware and obtain regulatory approval on a country by country
basis, there can be no assurance that such approval will exist or continue to
exist in the future.
16
Further, the Company's export sales are currently denominated predominately in
United States dollars. An increase of the United States dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. As, and if, the
Company increases its international sales, its total revenue may also be
affected to a greater extent by seasonal fluctuations resulting in lower sales
that typically occur during the summer months in Europe and other parts of the
world. See "Business -- Technology and Product Development," "Business --
Marketing" and "Business -- Strategic Marketing Alliances."
COMPUTER NETWORK AND TELEPHONE OPERATIONS; RISK OF INTERRUPTION
Significant portions of the Company's operations are dependent on the Company's
ability to protect its computer equipment and the information stored in its data
processing centers against damage that may be caused by fire, power loss,
telecommunications failures, unauthorized intrusion and other events. The
Company's data processing centers are located in St. Louis, Missouri. Software
and related data files are backed-up regularly and stored off-site. There can be
no assurance that these measures are sufficient to eliminate the risk of
extended interruption in the Company's operations. The Company also relies on
local and long-distance telephone companies to provide dial-up access, Internet
and corporate Intranet access to the Company's services. The Company is
currently in the process of creating an alternate disaster recovery facility.
Any damage or failure that interrupts the Company's operations could have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects.
SIGNIFICANT SHARE OWNERSHIP; CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's directors, officers and principal (5% or more) shareholders, taken
as a group, beneficially own in the aggregate approximately 33.0% of the
Company's outstanding Common Stock, based on their holdings as of June 18, 1997.
Certain principal shareholders and their representatives are directors or
executive officers of the Company. As a result of such ownership, these
shareholders can influence matters requiring approval by the shareholders of the
Company, including the election of directors, and the management and affairs of
the Company. In addition, certain provisions of Missouri law and of the
Company's Restated Articles of Incorporation, as amended ("Articles"), and
Bylaws ("Bylaws") could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could also limit or depress the price
that certain investors might be willing to pay in the future for shares of the
Company's Common Stock. The Company is also authorized to issue preferred stock
with rights senior to, and that may adversely affect, the Common Stock, without
the necessity of shareholder approval and with such rights, preferences and
privileges as the Company's Board of Directors may determine. The Company,
however, has no present plans to issue any shares of preferred stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as actual
or anticipated variations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, changes in financial estimates by securities analysts, conditions and
trends in the software and other technology industries, adoption of new
accounting standards affecting the software industry, general market conditions
and other factors. Further, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
or disproportionate to the operating performance of such companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs and
a diversion of management attention and resources, which would have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects. These market fluctuations, as well as general
economic, political and market conditions such as recessions or international
currency fluctuations, may adversely affect the market price of the Common
Stock.
17
NO DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock for the
foreseeable future. The Company anticipates that it will reinvest its net
income, if any, in its businesses. See Item 5 -- "Market for the Registrant's
Common Stock and Related Stockholder Matters."
ITEM 2. PROPERTIES
The Company's headquarters and executive offices are located in a 38,000 square
foot office building located at 1850 Borman Court, St. Louis, Missouri 63146
pursuant to a lease expiring in 2002 with annual base rental of $412,848,
subject to increases for taxes, insurance and operating expenses. The Company
also leases office space in Atlanta, Bethesda, Chicago, Massachusetts, New
Jersey, Phoenix, and London, England for sales representatives. The Company
believes its facilities have been generally well maintained, are in good
operating condition and are adequate for its current requirements.
The Company's database services business currently occupies a portion of
approximately 38,000 square feet of an office facility located at 1633 Des Peres
Road, St. Louis, Missouri 63131 pursuant to a lease (the "Des Peres Lease")
expiring in 2002 with annual base rental of $453,870, with periodic increases up
to $573,610, subject to certain increases for operating expenses. The Company
has subleased approximately 21,500 square feet of the facility, through the end
of the lease term. In connection with the divestiture of the database business,
the Company may desire to sublease its rights and obligations under the
remaining space of the Des Peres Lease. Although the Company believes it will
not be difficult to enter into a sublease with respect to the remaining Des
Peres Lease space, there can be no assurance that the Company will be able to
enter into such sublease.
Significant portions of the Company's operations are dependent on the Company's
ability to protect its computer equipment and the information stored in its data
processing centers against damage that may be caused by fire, power loss,
telecommunications failures, unauthorized intrusion and other events. The
Company's data processing centers are located in St. Louis, Missouri. Software
and related data files are backed-up regularly and stored off-site. There can be
no assurance that these measures are sufficient to eliminate the risk of
extended interruption in the Company's operation. The Company also relies on
local and long-distance telephone companies to provide dial-up access and
Internet and corporate Intranet access to the Company's services. The Company is
currently in the process of creating an alternate disaster recovery facility.
Any damage or failure that interrupts the Company's operations could have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in routine lawsuits incidental to
its business. Based on the information currently available, the Company believes
that none of such current proceedings, individually or in the aggregate, will
have a material adverse effect upon the Company. See also Item 1 -- "Risk
Factors -- Limited Intellectual Property Protection" and "Business --
Proprietary Rights."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol "TALX." The table below sets forth the high and low prices of the Common
Stock during the period subsequent to the Company's initial public offering.
Fiscal
1997
--------------
Period High Low
- ---------------------------------------------------------------- ------ ------
Third Quarter (since October 17, 1996) $ 9.50 $ 5.75
Fourth Quarter $ 9.88 $ 7.38
The approximate number of holders of record of the Company's Common Stock at
June 18, 1997 was 95. This number does not include shareholders for whom shares
are held in a "nominee" or "street" name.
The Company has not paid any cash dividends and does not anticipate that it will
do so in the foreseeable future. The Company currently intends to retain future
earnings, if any, to provide funds for the growth and development of the
Company's business. Any future determination to pay dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's earnings, capital requirements and operating and financial condition,
and such other factors as the Board of Directors may deem relevant.
19
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements, and the notes thereto.
Years Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Revenues
The Work Number .............................................. $ 1,642 $ 453 $ 74 $ -- $ --
Outsourced services .......................................... 2,173 998 515 776 60
Customer premises systems .................................... 11,013 9,442 6,957 8,497 6,868
Maintenance and support ...................................... 3,559 2,624 2,310 1,949 1,530
---------- ---------- ---------- ---------- ----------
Total revenues ........................................... 18,387 13,517 9,856 11,222 8,458
---------- ---------- ---------- ---------- ----------
Cost of revenues
The Work Number .............................................. 678 429 48 -- --
Outsourced services .......................................... 941 493 260 190 22
Customer premises systems .................................... 5,560 4,489 4,143 3,902 3,175
Maintenance and support ...................................... 1,025 619 793 767 558
---------- ---------- ---------- ---------- ----------
Total cost of revenues ................................... 8,204 6,030 5,244 4,859 3,755
---------- ---------- ---------- ---------- ----------
Gross margin ..................................... 10,183 7,487 4,612 6,363 4,703
---------- ---------- ---------- ---------- ----------
Operating expenses
Selling and marketing ........................................ 5,902 4,084 2,854 2,700 2,332
General and administrative ................................... 2,613 2,828 2,556 2,268 1,611
---------- ---------- ---------- ---------- ----------
Total operating expenses ................................. 8,515 6,912 5,410 4,968 3,943
---------- ---------- ---------- ---------- ----------
Operating income (loss) .......................... 1,668 575 (798) 1,395 760
Other expense, net ............................................. 409 395 284 153 140
Income tax expense (benefit) ................................... 466 57 (328) 7 235
---------- ---------- ---------- ---------- ----------
Earnings (loss) from continuing operations ..................... 793 123 (754) 1,235 385
---------- ---------- ---------- ---------- ----------
Discontinued operations:
Earnings (loss) from operations of discontinued
operations, net ............................................ (164) (703) (410) 474 575
Loss on disposal of discontinued operations, net ............. (900) -- -- -- --
---------- ---------- ---------- ---------- ----------
Earnings (loss) from discontinued operations, net .............. (1,064) (703) (410) 474 575
---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary item and cumulative
effect of change in accounting principle ..................... (271) (580) (1,164) 1,709 960
Extraordinary item ............................................. (971) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss) before cumulative effect of change in
accounting principle ......................................... (1,242) (580) (1,164) 1,709 960
Cumulative effect of change in accounting principle ............ -- -- -- -- 461
---------- ---------- ---------- ---------- ----------
Net earnings (loss) ............................................ $ (1,242) $ (580) $ (1,164) $ 1,709 $ 1,421
========== ========== ========== ========== ==========
Net earnings (loss) per share (1):
Earnings from continuing operations .......................... $ .18 $ .04
Loss from discontinued operations ............................ (.25) (.21)
Extraordinary item ..................................... (.22) --
---------- ----------
Net loss ................................................. $ (.29) $ (.17)
========== ==========
Weighted average number of shares outstanding (1) .............. 4,330,239 3,391,621
20
As of March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
BALANCE SHEET DATA:
Cash and short-term investments .................................. $ 5,801 $ 56 $ 27 $ 145 $ 258
Working capital .................................................. 13,351 (1,261) 183 2,449 1,582
Net assets of business held for sale ............................. 707 -- -- -- --
Total assets ..................................................... 24,072 15,844 14,476 12,824 10,103
Notes payable to bank ............................................ -- 4,243 2,654 1,100 757
Current installments of long-term debt and obligations
under capital leases ........................................... 36 726 722 602 499
Long-term debt and obligations under capital leases, less
current installments ........................................... -- 630 1,318 620 750
Stockholders' equity ............................................. 20,403 5,038 5,610 6,774 4,365
- ---------------
(1) Net earnings (loss) per share has been computed using the number of shares of common stock and common stock equivalents
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares issued at prices below the
initial public offering price of $9.00 per share and stock options and warrants granted with exercise prices below the initial
public offering price during the twelve-month period preceding the date of the initial filing of the Company's registration
statement have been included in the calculation of Common Stock equivalent shares, using the treasury stock method, as if such
shares, options and warrants were outstanding for all of fiscal 1996 and the first three quarters of fiscal 1997. Subsequent to
this period, the weighted average number of shares was based on common stock and common stock equivalents.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues are derived from interactive communications, which
consist of The Work Number, outsourced services, the sale of customer premises
systems, and maintenance and support services related to those systems.
The Work Number service is still in the early stage of its life cycle.
Accordingly, no meaningful relationship can be drawn between revenues recognized
to date, or in a given quarter, and the corresponding number of employers that
have contracted for the service or the number of employment records covered by
the service. Revenues derived from The Work Number include fees charged to
mortgage lenders and other verifiers for verification of employment history,
including the past three years of salary history of participating employers'
current and former employees, ongoing maintenance fees charged to employers and
one-time conversion fees from new employers. The lag between the time an
employer enters into an agreement with the Company for The Work Number and the
time the employer converts its records to the service and begins to routinely
refer inquiries to The Work Number can distort normal quarter to quarter revenue
comparisons early in the service's life cycle. Further, revenues to date reflect
the relatively large percentage of conversion fees recognized early in the
service's life cycle as compared to fees from verifications, which can also
distort normal quarter to quarter revenue comparisons at this stage of the
service's life cycle. The Company expects that over time fees from verifications
will be a greater percentage of The Work Number revenues than they have been
historically. Additionally, due to the early stage of the service and the
attendant start-up costs, no meaningful relationship can be drawn between
historical gross margins and gross margins that may be realized in the future.
The future success of this branded service is contingent upon a number of
factors, including, without limitation, increased acceptance and usage of the
service.
The Company's customer premises systems business designs and implements customer
premises systems with interactive communications capabilities using computer
telephony to integrate technologies such as interactive voice response,
facsimile, e-mail, Internet and corporate Intranet. The Company's interactive
communications solutions enable an organization's users to access, input and
update information without human assistance. Revenues from customer premises
systems are derived from the license or sale of software, related hardware and
custom applications and are generally recognized upon shipment of the system.
Sales are effected through a direct sales force and in conjunction with
strategic marketing alliances (including third party resellers). The typical
size of a system ranges from $35,000 to $200,000 or more and averages
approximately $90,000. In the case of a third party reseller, revenues are
recognized at the time of shipment to the reseller; however, the Company does
not have any future obligations related to these types of sales. The Company
provides maintenance and support services with respect to installed customer
premises systems. These services include a 24-hour per day, 7-day a week
toll-free customer service line. Revenues from maintenance and support are
recognized ratably over the term of the maintenance agreement.
The Company's outsourced services business provides interactive communication
services to organizations that choose not to purchase a customer premises
system. The Company maintains a system on its premises that contains a customer
database and receives incoming requests for access to the information. Revenues
from outsourced services include fees derived from establishment of the service
and transaction-based fees.
In addition to providing interactive communication systems, the Company has
historically provided database and document services. Database services include
sales leads and pre-press services for directory publishers, and document
services include the preparation and mailing of invoices, statements and
confirmation letters for organizations with high volume requirements. Revenues
from database and document services are recognized as the services are performed
through progress billings. These customers' contracts cover periods generally
from one to six months and progress billings are made in accordance with
individual customer contract terms. In August 1996, the Company determined to
pursue the divestiture of the database and document services businesses and,
accordingly, has reflected the results of operations of such businesses as
discontinued operations. In January 1997, the document services business was
sold.
22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations, expressed as a percentage
of total revenues, and the percentage change in the dollar amount of such items
compared to the prior comparable period.
Percentage
Increase (Decrease)
------------------------
Fiscal 1997 Fiscal 1996
over over
Years Ended March 31, Fiscal 1996 Fiscal 1995
---------------------------- ----------- -----------
1997 1996 1995
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
The Work Number ....................... 8.9% 3.3% 0.8% 262.5% 518.9%
Outsourced services ................... 11.8 7.4 5.2 117.7 93.9
Customer premises systems ............. 59.9 69.9 70.6 16.6 35.7
Maintenance and support ............... 19.4 19.4 23.4 35.6 13.6
-------- -------- --------
Total revenues .................... 100.0 100.0 100.0 36.0 37.2
-------- -------- --------
Cost of revenues:
The Work Number ....................... 3.7 3.2 0.5 58.0 796.5
Outsourced services ................... 5.1 3.6 2.6 90.9 89.5
Customer premises systems ............. 30.2 33.2 42.0 23.9 8.4
Maintenance and support ............... 5.6 4.6 8.1 65.6 (22.0)
-------- -------- --------
Total cost of revenues ........... 44.6 44.6 53.2 36.1 15.0
-------- -------- --------
Gross margin ............................ 55.4 55.4 46.8 36.0 62.4
-------- -------- --------
Operating expenses:
Selling and marketing ................. 32.1 30.2 29.0 44.5 43.1
General and administrative ............ 14.2 20.9 25.9 (7.6) 10.6
-------- -------- --------
Total operating expenses .......... 46.3 51.1 54.9 23.2 27.8
-------- -------- --------
Operating income (loss) ................. 9.1 4.3 (8.1) 190.1 *
Other income (expense), net ............. (2.3) (2.9) (2.9) 3.5 38.9
-------- -------- --------
Earnings (loss) from continuing
operations before income tax
expense (benefit) ..................... 6.8 1.4 (11.0) 599.4 *
Income tax expense (benefit) ............ 2.5 0.5 (3.3) 717.5 *
-------- -------- --------
Earnings (loss) from continuing
operations ............................ 4.3 0.9 (7.7) 544.7 *
Discontinued operations, net .......... (5.8) (5.2) (4.1) * *
Extraordinary item ..................... (5.3) -- -- * *
-------- -------- --------
Net loss ................................ (6.8)% (4.3)% (11.8)% (114.1) *
======== ======== ======== =========== ===========
* Not meaningful.
23
Fiscal Years Ended March 31, 1997 and 1996
Revenues. Total revenues increased by 36.0%, from $13.5 million in fiscal 1996
to $18.4 million in fiscal 1997. Revenues from The Work Number increased by
262.5%, from $453,000 in fiscal 1996 to $1.6 million in fiscal 1997, due to the
expansion of marketing on a nationwide basis and an increase in the number of
employment records on the system. Revenues from outsourced services increased by
117.7%, from $1.0 million in fiscal 1996 to $2.2 million in fiscal 1997, due to
the Company capitalizing on the trend of some corporations to outsource their
non-core functions. Revenues from customer premises systems increased by 16.6%,
from $9.4 million in fiscal 1996 to $11.0 million in fiscal 1997. This revenue
growth is due to increases in sales and marketing resources, reflecting the
Company's efforts to increase historic revenue generation. The continuing
development of strategic marketing alliances also contributed to increased
revenues. Revenues from maintenance and support related to the customer premises
systems increased by 35.6%, from $2.6 million in fiscal 1996 to $3.6 million in
fiscal 1997, reflecting the support provided to an increased installed base of
customer premises systems.
Cost of Revenues. Total cost of revenues increased by 36.1%, from $6.0 million
in fiscal 1996 to $8.2 million in fiscal 1997. Cost of revenues from The Work
Number increased 58.0%, from $429,000 in fiscal 1996 to $678,000 in fiscal 1997,
due to the revenue growth, offset by a reduction in start-up costs. Due to the
relatively early stage of the service in its life cycle, no meaningful
relationship can be drawn between historical gross margins and gross margins
that may be realized in the future. Cost of revenues from outsourced services
increased by 90.9%, from $493,000 in fiscal 1996 to $941,000 in fiscal 1997, due
to the revenue growth described above. Cost of revenues from customer premises
systems increased by 23.9%, from $4.5 million in fiscal 1996 to $5.6 million in
fiscal 1997. This increase is due to the increase in customer premises systems
revenue. Cost of revenues for customer premises systems as a percentage of
customer premises systems revenue increased from 47.5% in fiscal 1996 to 50.5%
in fiscal 1997. This increase is due to an increase in fixed labor costs as the
Company continued to increase staffing to support possible future increases in
revenue. Cost of revenues from maintenance and support related to customer
premises systems increased by 65.6%, from $619,000 in fiscal 1996 to $1.0
million in fiscal 1997, due to the revenue growth and an increase in personnel
costs to provide a higher level of customer service.
Selling and Marketing Expenses. Selling and marketing expenses increased 44.5%
from $4.1 million in fiscal 1996 to $5.9 million in fiscal 1997. As a percentage
of revenues, such expenses increased from 30.2% in fiscal 1996 to 32.1% in
fiscal 1997. These increases reflect continuing expansion of the Company's sales
and marketing efforts, including development of distribution channels both in
domestic and international markets.
General and Administrative Expenses. General and administrative expenses
decreased 7.6% from $2.8 million in fiscal 1996 to $2.6 million in fiscal 1997.
As a percentage of revenues, such expenses decreased from 20.9% in fiscal 1996
to 14.2% in fiscal 1997. The decrease reflects the expansion of the Company's
infrastructure to respond to increased levels of revenues, offset by cost
control efforts implemented by the Company throughout fiscal 1996. The Company
anticipates that general and administrative expenses will increase in dollar
amount and decrease as a percentage of revenues in future periods.
Other Income (Expense),net. Interest expense, which is the primary component of
other income (expense), net, increased from $343,000 in fiscal 1996 to $438,000
in fiscal 1997. This increase is due principally to a higher average level of
borrowings caused by financing the net losses in fiscal 1995 and 1996 with
additional borrowings. The Company repaid most of its outstanding borrowings on
October 22, 1996, with the proceeds of its initial public offering. Interest
income on the invested net proceeds amounted to $151,000 during fiscal 1997.
Income Tax Expense. The Company's effective income tax rate was 31.7% in fiscal
1996 and 37.0% in fiscal 1997. See Note 9 of the Notes to Consolidated Financial
Statements.
Fiscal Years Ended March 31, 1996 and 1995
Revenues. Total revenues increased by 37.2%, from $9.9 million in fiscal 1995 to
$13.5 million in fiscal 1996. Revenues from The Work Number increased from
$74,000 in fiscal 1995 to $453,000 in fiscal 1996, due to the completion
24
of the pilot phase and commencement of marketing on a nationwide basis. Revenues
from outsourced services increased by 93.9%, from $515,000 in fiscal 1995 to
$1.0 million in fiscal 1996, due to the Company capitalizing on the trend of
some corporations to outsource their non-core functions. Revenues from customer
premises systems increased by 35.7%, from $7.0 million in fiscal 1995 to $9.4
million in fiscal 1996. This revenue growth is due to increases in sales and
marketing resources effected in fiscal 1996, reflecting the Company's efforts to
increase historic revenue generation. Additionally, revenue growth also
benefited from the replacement of a regional sales manager who left the Company
in September 1994 and the addition of another sales manager in the same
territory. The continuing development of strategic marketing alliances also
contributed to increased revenues. Revenues from maintenance and support related
to the customer premises systems increased by 13.6%, from $2.3 million in fiscal
1995 to $2.6 million in fiscal 1996, reflecting the support provided to an
increased installed base of customer premises systems.
Cost of Revenues. Total cost of revenues increased by 15.0%, from $5.2 million
in fiscal 1995 to $6.0 million in fiscal 1996. Cost of revenues from The Work
Number increased from $48,000 in fiscal 1995 to $429,000 in fiscal 1996, due to
increased costs incurred with respect to this service as it moved from the pilot
phase to a national service. Due to the early stage of the service in its life
cycle and the attendant start up costs, no meaningful relationship can be drawn
between historical gross margins and gross margins that may be realized in the
future. Cost of revenues from outsourced services increased by 89.5%, from
$260,000 in fiscal 1995 to $493,000 in fiscal 1996, due to the revenue growth
described above. Cost of revenues from customer premises systems increased by
8.4%, from $4.1 million in fiscal 1995 to $4.5 million in fiscal 1996. This
increase is due to the increase in customer premises systems revenue. However,
cost of revenues for customer premises systems as a percentage of customer
premises systems revenue decreased from 59.6% in fiscal 1995 to 47.5% in fiscal
1996. This decrease is due to the lower levels of revenues in the second half of
fiscal 1995 and the relatively fixed nature of the Company's labor costs, which
resulted in higher than normal cost of revenue percentage in fiscal 1995. Cost
of revenues from maintenance and support related to customer premises systems
decreased by 22.0%, from $793,000 in fiscal 1995 to $619,000 in fiscal 1996,
principally due to better leveraging of personnel costs in fiscal 1996 and
reductions in the costs of contracted third-party maintenance services.
Selling and Marketing Expenses. Selling and marketing expenses increased 43.1%
from $2.9 million in fiscal 1995 to $4.1 million in fiscal 1996. As a percentage
of revenues, such expenses increased from 29.0% in fiscal 1995 to 30.2% in
fiscal 1996. These increases reflect continuing expansion of the Company's sales
and marketing efforts, including development of distribution channels both in
domestic and international markets.
General and Administrative Expenses. General and administrative expenses
increased 10.6% from $2.6 million in fiscal 1995 to $2.8 million in fiscal 1996.
As a percentage of revenues, such expenses decreased from 25.9% in fiscal 1995
to 20.9% in fiscal 1996. The increase in dollar amount reflects the expansion of
the Company's infrastructure to respond to increased levels of revenues, offset
by cost control efforts implemented by the Company throughout fiscal 1996.
Other Income (Expense), net. Interest expense, which is the primary component of
other income (expense), net, increased from $212,000 in fiscal 1995 to $343,000
in fiscal 1996. This increase is due principally to a higher average level of
borrowings caused by financing the net losses in fiscal 1995 and 1996 with
additional bank borrowings.
Income Tax Expense. The Company's effective income tax rate was 30.3% in fiscal
1995 and 31.7% in fiscal 1996. See Note 9 of the Notes to Consolidated Financial
Statements.
DISCONTINUED OPERATIONS
In August 1996, the Company determined to pursue the divestiture of the database
and document services businesses and, accordingly, has reflected the results of
operati